This article analyses a significant ruling issued by the Dubai Court of Cassation in Case No. 445 / 2024 / 208, which involved a financial claim arising from a subcontract dispute. The case sheds light on the need for clarity in drafting arbitration clauses in commercial contracts and the requirement for such clauses to exclude the jurisdiction of courts.

Factual background

The dispute arose between a subcontractor (Plaintiff) and a contractor (Ddefendant) over the execution of a project involving the supply and installation of safety and fire-fighting equipment at Atlantis, The Palm, specifically for Phases M2 and M3. The subcontractor filed a lawsuit against the contractor, demanding payment of AED 2,086,852.96 plus legal interest at 5%, citing unpaid dues for works completed under the subcontract. The contractor had terminated the subcontract after the main contractor ended its contract with the defendant.

The contractor, in response, raised a procedural defence arguing that the lawsuit was inadmissible due to the existence of an arbitration clause in the subcontract agreement.

Key Issues Raised

Existence of an Arbitration Clause

The primary defence raised by the contractor was the arbitration clause in the subcontract agreement. Specifically, Clause 36-2 stipulated that any disputes arising between the parties should be resolved through arbitration. The contractor contended that this clause precluded the court’s jurisdiction and mandated arbitration as the exclusive method of dispute resolution.

Errors in the Expert Report

The contractor also challenged the expert reports submitted during the proceedings, arguing that they contained errors and were flawed, thereby undermining the basis of the court’s decision.

Court Proceedings and Judgment

Court of First Instance

The Dubai Court of First Instance appointed an expert to assess the claims and evidence presented by both parties. Following the submission of the original and supplementary expert reports, the court ruled in favour of the subcontractor, rejecting the contractor’s argument regarding the arbitration clause and obligating the contractor to pay AED 2,086,852.96 with 5% legal interest.

Appeal

Dissatisfied with the judgment, the contractor appealed to the Dubai Court of Appeal, arguing once again that the arbitration clause in the subcontract barred court jurisdiction. The Court of Appeal dismissed the appeal and upheld the lower court’s judgment, affirming that the expert reports were valid and that the arbitration clause did not preclude judicial recourse.

Cassation Appeal

The contractor subsequently filed a cassation appeal before the Dubai Court of Cassation, seeking annulment of the appellate court’s decision. The cassation appeal was premised on two main arguments:

• The arbitration clause in Clause 36 of the subcontract required disputes to be resolved through arbitration, thereby rendering the lawsuit inadmissible.
• The expert reports were erroneous and should not have been relied upon by the lower courts.

Court of Cassation’s Analysis

The Court of Cassation dismissed the cassation appeal, providing a detailed rationale for its decision:

Arbitration Clause Interpretation

The court noted that while Clause 36 of the subcontract contained an arbitration clause, it was not an exclusive and binding arbitration clause. Instead, it provided that arbitration would be pursued only after amicable solutions through mediation had failed. The clause also allowed for disputes to be brought before Dubai courts if arbitration was not pursued. Consequently, the court held that the presence of an arbitration clause did not bar the subcontractor from seeking judicial recourse in the present case.

Validity of Expert Reports

Regarding the expert reports, the court found that they were based on sound grounds and thorough evaluation of the evidence. It rejected the contractor’s argument that the reports were flawed, affirming that the reports sufficiently supported the subcontractor’s claim for payment.

Discussion

This case highlights a recurring issue in commercial disputes within the UAE—inadequate drafted arbitration clauses. It is common for arbitration clauses in contracts to be ambiguously worded, leaving room for interpretation.

UAE courts have adopted a strict approach when interpreting such clauses, with litigation being the default route if the clause does not unequivocally mandate arbitration as the exclusive method of dispute resolution.

The courts require arbitration clauses to be clear, binding, and explicitly state arbitration as the only means of resolving disputes. This strict stance ensures that parties do not lose their right to judicial recourse due to vague contractual language.

Key Takeaways

• Arbitration clauses must be explicit and mandatory to exclude court jurisdiction.
• Courts retain jurisdiction where arbitration clauses are non-binding or allow for alternative means of dispute resolution.

This ruling underscores important legal principles regarding arbitration clauses and the admissibility of claims in commercial disputes. It clarifies that the mere reference to arbitration as an option does not automatically preclude court jurisdiction unless the clause explicitly mandates arbitration as the sole means of dispute resolution.