The decision endangers not only confidence in decisions of arbitrators in the region, but will also make companies doubt the security of arbitration awards made abroad and secured in Dubai under the international enforcement rules of the New York Convention.
Dubai's highest court, the Cassation Court, overturned an arbitration award which had been backed by the court of first instance and court of appeal. It said that the arbitrator did not have jurisdiction to make the award because the issues in dispute which the arbitrator decided were matters of 'public policy' and so were therefore within the exclusive jurisdiction of the courts, not arbitrators.
The arbitrator had ordered a property developer to repay the purchaser the purchase price for a development because the Sale and Purchase Agreement had not been registered in the Real Estate Register, as is required by law and therefore the Sale and Purchase Agreement for the property was not valid.
The Court said, though, that the arbitrator did not have the power to render an award to that effect because Article 3 of the UAE Civil Transactions Code states that issues of 'public order' can only be decided by the courts.
The classification of a real estate dispute as an issue of 'public order' has caused some alarm. The Civil Transactions Code says that "public order shall be deemed to include matters relating to personal status such as marriage, inheritance, and lineage, and matters relating to systems of government, freedom of trade, the circulation of wealth, rules of individual ownership and the other rules and foundations upon which society is based".
The Court said that the dispute was to do with the circulation of wealth and private ownership, and so could only be decided by the courts system.
The problem here is that the Court did not sufficiently distinguish between the arbitrability of matters and questions of public policy. Further, to classify the failure to register the property contract as a matter of public policy is an unjustifiably broad interpretation and introduces significant uncertainty for investors.
That uncertainty could spread. The New York Convention is used as a mechanism to enforce an arbitration award made in one country in another country that is a signatory to that convention. If the United Arab Emirates (UAE) sticks to this overly-broad definition of public policy it could use that as a justification for not enforcing foreign arbitral awards under the New York Convention. This is so because Article V(2)(b) of the Convention contains an exception on which the enforcement of a foreign arbitral award can be refused if the enforcement of that award is contrary to the public policy of that country
The UAE's track record of enforcing foreign arbitral awards under the Convention is already far from perfect and this decision will raise further doubts that the Convention will take hold there.
Nobody knows if this public policy exemption from arbitration will apply to all real estate cases or just to all cases involving issues such as the law requiring the registration of deals. What Dubai and the UAE as a whole needs to do now is send clear signals that arbitration awards will be respected so that investors have the certainty that they need that certain rules will be respected.
A positive sign is that the Dubai Land Department plans to open a specialised arbitration centre just for real estate disputes. A draft law to establish this is already being considered and the aim of the centre is to save time, effort and money by using arbitration rather than court processes for real estate disputes.
This will provide an opportunity to calm the fears of investors, but if clear signals are not sent that arbitration awards will be respected then UAE real estate will become a much less attractive proposition for investors.
Björn Gehle is an arbitration and disputes specialist at Pinsent Masons, the law firm behind Out-Law.com