Enforceability of unilateral option arbitration agreements in onshore Dubai - the Court of Cassation finally adjudicates

Introduction

Although not commonly adopted in GCC construction contracts, commercial instruments sometimes include a unilateral option arbitration agreement (‘UOAA’). The UOAA essentially allows one party to decide at the time a dispute arises whether it should be resolved through court litigation or arbitration. There may be practical reasons for including a UOAA, or it might be imposed by a party possessing stronger bargaining power seeking to ‘hedge its bets’ against being tied to one dispute resolution method if a dispute occurs.

The enforceability of arbitration agreements forming part of these UOAAs has recently been considered by the Dubai Court of Cassation, itself a rare instance of the senior UAE onshore courts addressing this topic, ruling in certain terms that such arbitration agreements are not binding under UAE law.  

In this Law Now, following the judgment in Dubai Court of Cassation Case No. 735 of 2024 (Commercial) issued in October 2024, we outline the key factors UAE contracting parties should now be aware resultant of this onshore judgment.    

Unilateral option arbitration agreements

UOAAs customarily empower (among other things) one of the contracting parties with exclusive discretion to decide how a dispute is to be resolved upon its occurrence. In particular, whether it should be determined by litigation or arbitration. 

The parties might decide at the contract drafting stage that it would be helpful for one party to unilaterally elect what specific mode of dispute resolution procedure is best suited, depending on the given dispute characteristics, the underlying technical / factual matrix and the disputants’ overriding objectives at that particular juncture. The likely hope being that the party authorised to determine the dispute resolution forum will act in good faith based on the facts of the dispute existent at the time, without taking advantage of its discretionary power.

However, it is far more likely the party with the benefit of greater bargaining power will insist on including the UOAA to seize the autonomy to decide between litigation or arbitration to best suit its own dispute positioning.

The background

In October 2024, the Dubai Court of Cassation issued a judgment in Case No. 735 of 2024 (Commercial), which included commentary on a UOAA forming part of two construction contracts for projects in Dubai. Whilst there is a corpus of DIFC and ADGM judgments on the usage and enforceability of UOAAs, instances of curial interventions by any senior onshore courts are hitherto seldom.

The dispute concerned two construction contracts, the subject of Dubai Court proceedings, between a claimant subcontractor and defendant main contractor. Under the terms of the contracts, the subcontractor agreed to supply and install waterproofing works and suspended ceilings across various projects of the main contractor, which were located in Dubai. The claimant started proceedings in the onshore Dubai Courts to recover payments it claimed were due under the contracts.

The dispute resolution clause in both contracts provided that: 

“In the event of a dispute arising from the interpretation or implementation of any of the provisions of this agreement, such dispute shall be settled by amicable agreement between the two parties, and in the event that this is not done, the dispute shall be referred either to (a) arbitration at the Dubai Chamber of Commerce or (b) to the local court in the United Arab Emirates. The method to be used shall be decided by the contractor.”

This clause conferred upon the main contractor exclusive power to decide whether disputes between the parties should be resolved by arbitration in private or litigation in the UAE courts.  

The main contractor asserted that the Dubai Court proceedings should be dismissed because the contracts contained an arbitration agreement. However, the Court of First Instance rejected this argument. The main contractor appealed to the Dubai Court of Appeal, contending again that the two contracts granted it the sole option to determine the entity or forum entrusted with resolving any disputes under their respective terms. Since the main contractor wanted to resolve the dispute through arbitration, it argued that the subcontractor should not be allowed to bring a claim in the UAE courts.

The Dubai Court of Appeal rejected the main contractor’s contentions, and so it lodged another appeal to the Dubai Court of Cassation.

The Dubai Court of Cassation ruling

The Dubai Court of Cassation concluded that the UOAA contained in the parties’ contracts was not binding. In its judgment, the Court commented that different jurisdictions take different approaches to UOAAs. Some judicial systems recognise the validity of such agreements by applying the principle that the parties are free to agree the terms of their contract i.e. ‘freedom of contract’. Other judicial systems consider them to be “an arbitrary condition or one that violates the principle of equality between the parties.” This is on the basis that a UOAA has the effect of “granting an advantage to one party over the other in the right to choose the method and place of resolving disputes…”

The Court ruled that the UOAA did not constitute a binding agreement to resort to arbitration as to prevent the state courts from considering the dispute. Crucially, the Court commented that “one of the conditions for implementing the arbitration clause is that the agreement be clear and explicitly indicate the desire of the contracting parties to withhold jurisdiction from the regular courts and place it with the arbitration authority.”

As the dispute resolution provision included the option between resorting to arbitration or litigation, the court did not waive its existing jurisdiction under the contract.

Key take-aways

The key take-away from this judgment is that UOAAs are unlikely to be considered binding in the onshore Dubai Courts. We would therefore anticipate other UAE onshore courts adopting a similar approach. This essentially means that where a disputant under a contract containing a UOAA elects proceedings in the onshore courts, it is now highly probable the local courts will accept jurisdiction.

There may be some limited exceptions to this. For example, where the dispute clause is drafted to make it clear that arbitration is the agreed primary dispute resolution forum to finally settle disputes, but a specified party can in its sole discretion refer certain disputes to the UAE onshore courts. In other words, the dispute resolution clause clearly records the arbitration agreement first before empowering one party with a sole entitlement to seek curial relief. Such a dispute clause creates significant pitfalls and would need very careful drafting, or else risking unnecessary confusion, delay and expense.

To avoid disputes on proper jurisdiction and the binding nature of an arbitration agreement, contracting parties should err with caution by ensuring the dispute clause unequivocally provides for all controversies being resolved exclusively through court litigation or arbitration. In particular, arbitration agreements must be drafted clearly, explicitly and unambiguously to be considered valid and binding by the UAE onshore courts.  

Article co-authored by Abbas Yusuf, Trainee Solicitor at CMS in Dubai.