Incorporation of an arbitration clause by reference to FIDIC Conditions of Contract in UAE-seated arbitration: a trap for the wary to heed?

In a recent judgment, the Dubai Court of Cassation (the highest court in the Emirate of Dubai) ruled that incorporating the 1987 FIDIC Red Book General Conditions of Contract (the “Red Book Conditions”) by reference into a contract does not necessarily bind the parties to the arbitration clause found in the Red Book Conditions. The Dubai Court of Cassation reasoned that because there was no explicit reference in the contract to the arbitration clause in the Red Book Conditions, the contract could not be interpreted to mean the parties had explicitly agreed to its inclusion.

However, in another recent judgment the same Court determined that an arbitration clause was validly incorporated by reference from a FIDIC standard form contract leaving the law on this point somewhat unclear.

The FIDIC suite of contracts (or variants of them) are often used in the UAE and incorporation of arbitration clauses by reference has been the subject of numerous cases before the Dubai Court of Cassation. This judgment sheds light on the application of Article 7(2)(b) of UAE Federal Arbitration Law No 6 of 2018 (the “New Arbitration Law”) and the risk of incorporating an arbitration clause from a model contract by reference.

Dubai Court of Cassation Judgment No 1308/2020, 3 March 2021

The contract and the dispute

The dispute relates to the construction of a villa, which involved issues related to variation, site discharge and termination for convenience, for an amount of about AED 20m.

The parties agreed that the Red Book Conditions would govern their contract. Clause 67 of the Red Book Conditions contains a multi-tiered dispute resolution clause which requires that all disputes be referred to the Engineer in the first instance for a final and binding decision, unless and until the dissatisfied party proceeds to arbitration under the International Chamber of Commerce (“ICC”) Rules.

The employer sued the contractor before the Dubai Court of First Instance, which found it had jurisdiction over the dispute and ruled in favor of the employer.

The contractor appealed the decision to the Dubai Court of Appeal, which overturned the first instance judgment, finding that the Dubai courts had no jurisdiction over the dispute due to the arbitration clause incorporated in the contract by reference from the Red Book Conditions, and that general reference to the same was sufficient to bind the parties to that arbitration clause.

The employer challenged the decision before the Dubai Court of Cassation.

Decision of the Dubai Court of Cassation and analysis

The Dubai Court of Cassation overturned the Dubai Court of Appeal judgment and found that the arbitration clause was not enforceable and that the Dubai courts had jurisdiction to hear the dispute.

The Dubai Court of Cassation restrictively interpreted Article 7(2)(b) of the New Arbitration Law, which allows arbitration clauses to be incorporated by reference, and reasoned that even though the parties had agreed to be bound by the Red Book Conditions, they had not explicitly agreed to be bound by the arbitration clause included therein. This is because the contract did not itself contain an arbitration clause or explicitly refer to the arbitration clause included in the Red Book Conditions.

The Dubai Court of Cassation adopted the Dubai Court of First Instance’s reasoning and held:

An agreement to arbitrate shall be considered where the referral in a written contract concluded between two parties to another contract including an arbitration clause is clear and explicit in adopting such condition, and the effect of the referral is only achieved if it includes specific reference to the arbitration clause included in the contract referred to. However, where such reference is a mere general reference to the content of such contract, without specific reference to the aforementioned arbitration clause establishing the parties’ knowledge of its existence, the referral shall not extend to the arbitration clause and arbitration will not be deemed to have been agreed upon by the parties. (emphasis added)

Implications

The UAE, being a civil law jurisdiction, does not recognize the doctrine of stare decisis and case law does not create binding precedent. This notwithstanding, this decision provides useful insight as to the application of Article 7(2)(b) of the New Arbitration Law by UAE courts and their position as to the incorporation of an arbitration clause by reference.

The New Arbitration Law repealed the provisions of the UAE Arbitration Chapter (Articles 203 through to 218 and 236 of the UAE Civil Procedures Code), which governed UAE-seated arbitrations. Article 7(2)(b) specifically allows for the incorporation of an arbitration clause by reference to a model contract, international instrument or any such document including an arbitration clause, a plain reading of which may suggest that simple reference to the FIDIC suite of contracts would be sufficient to bind parties to arbitration.

Although this recent decision comes in the wake of prior decisions that have taken the same restrictive stance (including Dubai Court of Cassation Judgment No 261/2009, 28 June 2010, Commercial Appeal), there seems to be a conflict in authorities on this point.

While the Dubai Court of Cassation’s restrictive interpretation of Article 7(2)(b) in this case suggests that a simple reference to a contract including an arbitration clause may mean the contract will be held not to include an arbitration clause and the Dubai courts will uphold their jurisdiction, other decisions suggest otherwise.

In a judgment rendered earlier this month, the Dubai Court of Cassation reached the opposite conclusion, ruling that in muqawala contracts, a simple reference that disputes arising between the employer and contractor with regard to the performance of the works would be resolved by reference to FIDIC standard forms was sufficient to bind the parties to arbitration (Dubai Court of Cassation, Judgment No 141/2021, 6 June 2021).

There is therefore a risk that an arbitration clause that has been incorporated by reference would not be upheld. To avoid challenges to the validity of any arbitration clause, parties should clearly and expressly refer in the contract to the procedural provisions they wish to incorporate by reference, ideally under a dispute resolution or arbitration heading in the main contract. Better yet, parties could set out the arbitration clause in full in their contract to limit ambiguity.

Given these conflicting authorities, parties in the UAE (and more broadly in the region) would be well-advised to take a cautious approach to incorporation of arbitration clauses by reference.