Clarifying Contractual Intentions: The Role of Arbitration Clauses in UAE’s Construction Sector Judgments

The Dubai Court of Cassation recently issued two judgments on the applicability of arbitration clauses in contracts between parties in the construction sector. Both judgments involved disputes over payment obligations and security cheques, but reached different conclusions based on the wording and scope of the arbitration clauses in the respective contracts. These judgments illustrate the importance of drafting clear and consistent arbitration clauses that reflect the parties’ intentions and cover all potential disputes arising from their contractual relationship.

In the first case Cassation No. 828-2023 – Commercial, the appellant was a subcontractor who provided supplies, equipment, manpower and works to the respondent, a main contractor, for a project in Dubai. The parties entered into a contract dated July 22, 2018, which contained an arbitration clause. Subsequently, the parties issued several purchase orders for additional works related to the same project. The appellant claimed payment for the works under the contract and the purchase orders, but the respondent defaulted. The appellant filed a lawsuit against the respondent, seeking AED 149,094.456 plus interest.

The Court of First Instance appointed an engineering expert, who filed a report confirming the appellant’s claim. However, the court partially dismissed the appellant’s action, holding that the dispute over the contract was subject to the arbitration clause, while the dispute over the purchase orders was not. The court ordered the respondent to pay the appellant AED 148,855.809 plus interest for the purchase orders. The appellant and the respondent both appealed to the Court of Appeal, which set aside the first instance judgment and dismissed the entire action, finding that the arbitration clause covered both the contract and the purchase orders, as they related to the same project. The appellant then appealed to the Court of Cassation, arguing that the Court of Appeal erred in its reasoning and application of the law.

The Court of Cassation dismissed the appellant’s appeal, affirming the Court of Appeal’s judgment. The court held that the arbitration clause in the contract was clear and comprehensive, and that it extended to any dispute arising from the contract or any subsequent agreement related to the same project. The court reasoned that the purchase orders were part of the contractual relationship between the parties, and that they did not constitute separate or independent contracts that would exclude the arbitration clause. The court concluded that the appellant’s action was barred by the arbitration clause, and that the courts had no jurisdiction to hear the dispute.

In the second case Cassation No. 618-2023 – Commercial, the respondent was a subcontractor who provided electrical works to the appellant, a main contractor, for a project in Dubai. The parties entered into a letter of acceptance (LoA) dated March 7, 2020, which incorporated the respondent’s offer dated January 26, 2020, and which contained an arbitration clause. Later, the parties signed an addendum dated September 16, 2021, which included approved variation works and a clause giving jurisdiction to the Dubai Courts for any dispute arising from the addendum. The respondent claimed payment for the works under the LoA and the addendum, but the appellant defaulted. The respondent obtained a payment order against the appellant for AED 3,604,060 plus interest, and also sought the return of two security cheques for AED 856,000 and AED 428,000 that the appellant had issued as security for advance payment and to be returned upon completion of the works. The appellant failed to satisfy the payment order, so the respondent filed a lawsuit against the appellant, requesting the relief.

The Court of First Instance dismissed the appellant’s plea that the action was barred by the arbitration clause in the LoA, and ordered the appellant to return the security cheques to the respondent. The court held that the addendum superseded the LoA, and that the clause giving jurisdiction to the Dubai Courts in the addendum amounted to a waiver of the arbitration clause in the LoA. The appellant appealed to the Court of Appeal, which affirmed the first instance judgment, finding no error in its reasoning or application of the law. The appellant then appealed to the Court of Cassation, arguing that the Court of Appeal erred in its interpretation and enforcement of the arbitration clause in the LoA.

The Court of Cassation granted the appellant’s appeal, setting aside the Court of Appeal’s judgment, and reversing the first instance judgment. The court held that the action was barred by the arbitration clause in the LoA, and that the courts had no jurisdiction to hear the dispute. The court held that the addendum did not supersede the LoA, but rather complemented it, and that the clause giving jurisdiction to the Dubai Courts in the addendum was limited to disputes arising from the addendum only, not from the LoA. The court reasoned that the arbitration clause in the LoA was clear and valid, and that it covered any dispute arising from the LoA or any subsequent agreement related to the same project. The court concluded that the respondent’s claim was based on the LoA, not the addendum, and that the respondent did not waive the arbitration clause in the LoA by signing the addendum.

These recent judgments by the Dubai Court of Cassation underscore the United Arab Emirates’ robust commitment to arbitration as a preferred method for dispute resolution, especially in the construction sector. The meticulous examination of arbitration clauses in these cases highlights the UAE’s legal system’s capacity to balance the intricate dynamics of contractual agreements with the principles of arbitration. The UAE, through such decisions, reinforces its position as a pro-arbitration jurisdiction, emphasizing the importance of clear, consistent, and comprehensive arbitration clauses. This stance not only provides parties with a reliable and efficient mechanism for resolving disputes but also strengthens the country’s reputation as a conducive environment for international business and investment. In light of these developments, parties engaged in contractual relationships in the UAE, particularly in sectors like construction, are encouraged to seek expert legal advice when drafting and reviewing arbitration clauses. This approach ensures that their rights and intentions are accurately represented and protected, aligning with the UAE’s legal framework that firmly supports arbitration as a fair and effective dispute resolution avenue.