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Restriction of DIFC courts’ jurisdiction will have impact on arbitral award enforcement

ANALYSIS: Dubai’s new judicial tribunal was established last year to deal with potential conflicts of jurisdiction between the Dubai International Financial Centre (DIFC) courts and the local Dubai courts.06 Apr 2017

The tribunal has recently issued a number of decisions addressing the competing jurisdictions of these courts which are likely to have important ramifications for the DIFC court’s recent drive to establish itself as a ‘conduit jurisdiction’ for the enforcement of domestic arbitrations in mainland Dubai, outside the DIFC.

These decisions are likely to influence the enforcement of arbitral awards in Dubai and what role the DIFC courts are likely to play.

Dubai’s two court systems

The DIFC courts have operated since 2006. They form an independent common law jurisdiction modelled on English law and court procedures which operates within the civil law system in which Dubai’s local courts function.

While the DIFC court’s jurisdiction is confined to commercial matters arising out of or in connection with the DIFC, the DIFC Judicial Authority Law facilitates enforcement of judgments beyond the DIFC in mainland Dubai through reciprocal enforcement arrangements. This means that a party can enforce a DIFC judgment against assets in mainland Dubai using the Dubai Court’s enforcement procedures, and vice versa.

In a series of decisions over the last few years the DIFC courts have confirmed that they operate as a ‘conduit’ jurisdiction for the recognition and enforcement of both foreign and domestic arbitral awards and foreign judgments for onward execution against assets in mainland Dubai via the Dubai courts – even where there is no connection with the DIFC. This has led to increasing concern about potential conflicts between the jurisdictions of the Dubai and DIFC courts.

Role of the new judicial tribunal

Dubai’s judicial tribunal was established in June 2016 to rule on conflicts of jurisdiction between the DIFC courts and the Dubai courts and to formulate rules and controls to prevent potential conflicts between the courts.

It comprises seven members: three local Dubai court judges, three DIFC court judges and the head of Dubai’s Court of Cassation as chairman. The tribunal's deliberations are private and decisions are carried by a majority, with the chairman’s vote being decisive in the event of an equal vote. Decisions are final and cannot be appealed.

The tribunal’s first decision

The judicial tribunal’s first decision arose out of a July 2015 Dubai International Arbitration Centre (DIAC) arbitration between Daman Real Estate Capital Partners Company and Oger Dubai. Daman Tower, the building the subject of the dispute, and Daman itself, were located and licensed in the DIFC.

Oger sought recognition and enforcement of the arbitral award through the DIFC courts and was successful. In parallel, Daman applied to the Dubai courts for annulment of the award. The application for annulment was dismissed by the Dubai Court of First Instance, and that dismissal was subsequently upheld by the Court of Appeal. Daman also contested the DIFC court’s enforcement order, albeit unsuccessfully, before the DIFC courts.

Oger then applied for and was successful in obtaining a winding up order against Daman from the DIFC courts, although this order was stayed when Daman referred the matter to the judicial tribunal.

The tribunal determined that there was a conflict of jurisdiction between the two courts because the annulment proceedings were ongoing, although it is not clear that Daman had appealed, or was intending to appeal, to the Dubai Court of Cassation. The tribunal considered that ‘[t]his conflict should not be resolved by permitting both courts to entertain the case’ and that, for the sake of justice and to avoid contradictory judgments, one of the two courts should decide on the annulment or recognition of the arbitral award.

On the basis of ‘general principles of law embodied in the procedural laws’, the three Dubai courts judges and the chairman agreed that the Dubai court was the competent court and that the DIFC courts should therefore ‘cease from entertaining the case’.

In reaching this decision the tribunal noted that, had the substantive dispute been raised directly before the DIFC courts, the DIFC courts would have been the only competent court to hear the case given Daman’s connection with the DIFC and fact that Daman Tower is located in the centre.

The three DIFC court judges dissented on the basis that, while it was accepted that the Dubai courts have exclusive jurisdiction to annul an award seated in Dubai, the DIFC had a compulsory and exclusive jurisdiction to hear applications for recognition and enforcement within the DIFC. The minority therefore considered that each of the courts was competent to decide the case within the bounds of its respective jurisdiction.

Further decisions

The tribunal took the same position in its second decision, which also arose out of a DIAC arbitration seated in Dubai. The circumstances in this case were similar in that the award creditor, who had obtained an arbitral award in its favour, successfully applied to the DIFC courts for the enforcement of that award. In parallel, the award debtor had applied to the Dubai courts for an annulment of the award and to the tribunal for an order directing that the Dubai courts had jurisdiction to address the enforcement of the award.

Consistent with its first decision, the Tribunal considered that a conflict of jurisdiction existed and the matter should be referred for trial by the Dubai courts. The three DIFC court judges disagreed again, on grounds similar to those set out in the first decision.

The tribunal has also heard two cases relating to the enforcement of a foreign arbitral award and a foreign court judgment. It took a consistent approach in these cases and differentiated them from cases involving enforcement of a domestic Dubai arbitral award.

In both of these cases the creditors sought recognition and enforcement of their foreign award and foreign judgment in the DIFC courts despite there being no connection with the DIFC. However, since neither case involved the commencement of parallel proceedings in the Dubai courts the tribunal determined that there was no conflict of jurisdiction and dismissed the application, allowing the respective enforcement applications to proceed in the DIFC courts.

Current situation

It is apparent from the decisions to date that there are likely to be considerable difficulties in using the DIFC courts for the enforcement of arbitral awards rendered in mainland Dubai where parallel annulment proceedings have been commenced in the Dubai courts, irrespective of whether there is a genuine connection with the DIFC or whether the ‘conduit jurisdiction’ is sought to be invoked.

Based on its decisions to date the tribunal will almost certainly refer the matter to the Dubai courts and direct the DIFC courts to ‘cease from entertaining the case’. It remains to be seen what the effect of this order is and whether the proceedings before the DIFC courts are simply stayed pending the outcome of the Dubai courts’ decision, or whether the matter can no longer come before the DIFC courts. If it is the latter, presumably this would not extend to preventing a party from applying to the DIFC courts for enforcement of a judgment of the Dubai courts against assets located within the DIFC, as that would otherwise prevent recovery against such assets altogether.

The DIFC courts’ ‘conduit jurisdiction’ may still be used for enforcing foreign arbitral awards and judgments in onshore Dubai provided that there are no parallel proceedings commenced in the Dubai courts involving the same parties and issues.

With respect to domestic awards, it remains to be seen whether the tribunal would consider a jurisdictional conflict to arise if the arbitration in question is seated in the DIFC but parallel proceedings objecting to the award or its enforcement are commenced, or sought to be commenced, improperly in the Dubai courts.

Similarly, while the ‘conduit route’ via the DIFC courts remains open for foreign awards and foreign judgments for now, the tribunal has not yet addressed what the effect would be if, despite the relevant supervisory jurisdiction being foreign, parallel proceedings are commenced in the Dubai courts objecting to the award or judgment or its enforcement.

Recent decision of the Dubai courts

A decision by the Dubai Court of First Instance sheds further light on possible future limitations on the role of the DIFC courts as a ‘conduit jurisdiction’.

One of the first decisions to confirm the DIFC court’s status as a ‘conduit jurisdiction’ related to a dispute over the termination of a services agreement between hotel companies Banyan Tree and Meydan.

The DIFC courts recognised and enforced a DIAC award seated in Dubai despite there being no obvious connection with the DIFC. Following the judicial tribunal’s decision on the case between Daman and Oger, the Dubai Court of First Instance has issued a decision that attempts to nullify the DIFC court’s decisions on Banyan Tree and Meydan.

The Dubai Court of First Instance said that the Dubai courts had ordinary or default jurisdiction whereas the DIFC court’s jurisdiction was limited to instances where there was a subject matter connection with the DIFC. On the basis that the Banyan Tree case had no connection to the DIFC, the court held that the DIFC court had operated outside its jurisdiction and its judgments were of no binding effect and no obstacle to the parties referring the matter to the courts of ordinary jurisdiction for resolution.

This decision is controversial, because Dubai’s Judicial Authority Law and the DIFC Arbitration Law provide that the DIFC courts have express jurisdiction to recognise and enforce awards within the DIFC "irrespective of the state or jurisdiction in which it was made".

It is unclear whether this decision will be upheld, but it could further limit the scope for the DIFC courts to act as a ‘conduit jurisdiction’.

Guidance

The tribunal may soon publish detailed procedures and rules to provide more guidance on the scope of the DIFC court’s conduit jurisdiction and how it is to operate alongside that of the Dubai Court’s jurisdiction.

In the meantime, there is considerable doubt as to whether the DIFC courts will prove to be an effective path for enforcement, except possibly where the award is seated in the DIFC.

For those seeking to enforce foreign awards and foreign judgments in Dubai via the DIFC courts, it appears that this remains a viable option. It is likely, however, that parties seeking to resist enforcement of a foreign award or judgment might look for ways to manufacture a conflict between the jurisdiction of the Dubai courts and the DIFC courts in an effort to delay or avoid enforcement.

It is also worth noting that parties seeking to enforce a judgement or award through the Dubai courts via the reciprocal arrangements still need the cooperation of the Dubai courts. Given the strong findings of the Dubai Court of First Instance, this may no longer be the straightforward process provided for in the reciprocal arrangements.

Dubai-based Mark Raymont and Angus Frean are construction law experts with Pinsent Masons, the law firm behind Out-Law.com.