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Arbitration Agreement in Construction Contracts

June 2009 The UAE construction industry is currently rife with disputes. When disputing parties fail to amicably resolve their dispute, the next step is for either party to initiate the contractual mechanism in the contract for resolving disputes. In relation to the FIDIC1 based conditions of contract, which is the prevalent form of conditions of contracts in the UAE construction industry, arbitration is the standard alternative dispute resolution method for parties to finally resolve any dispute between them under the contract. The provisions for arbitration can be found in sub-clauses 67.3 and 20.6 of the 1987-4th edition and 1999-1st edition of the FIDIC Red Book respectively. It is anticipated the UAE will soon ratify a new Federal Arbitration Law. Pending the enactment of the new Federal law, arbitration agreements are currently governed by the UAE Civil Procedure Law No.11 of 1992 (the Civil Procedure Code). Article 203 of the Civil Procedure Code allows parties to provide in their contract or by subsequent agreement that any dispute between them in relation to the contract shall be referred to arbitration for resolution. The same article also makes it mandatory that any such agreement for arbitration must be in writing in order for the arbitration provision to be enforceable. The question that arises in the case below which forms the subject matter of this case note, where there was a verbal agreement to undertake services, is whether an arbitration clause can be implied and enforced (simply because previously agreed written contracts contained an arbitration provision). The Court held there was no arbitration agreement between the parties on the basis that there was no writing. Accordingly, the Claimant was entitled to be paid a reasonable amount for the value of the services and materials furnished, in the absence of an agreement. Case Summary of Dubai Court Of Appeal No. 44/2008 Dated 22nd April 2008 In an action filed by a contractor (the "Claimant") against his employer (the "Defendant"), the Claimant sought to claim outstanding payments for work it undertook for the Defendant (installing interior fittings) amounting to AED 2, 364,188 plus interest. The Claimant and Defendant had entered into an agreement for the Defendant's villas, numbered 1 and 3. During the execution of the works, the Defendant requested the Claimant to undertake additional work for the interior works for Villa 2 (which was not included in the written contract) for the amount of AED 1,500,000. During the performance of the works, the Defendant directed variations to the works. Following handover of Villa 2, the Claimant had carried out additional works at the request of the Defendant. The total value of the works including additional works and variations on villa 2 amounted to AED 3,409,188, out of which, only AED 1,045,000 was paid to the Claimant. The Defendant failed to pay the

3,409,188, out of which, only AED 1,045,000 was paid to the Claimant. The Defendant failed to pay the balance of the outstanding amount and the Claimant subsequently filed a case with the Court of First Instance. The Defendant argued that the court did not have jurisdiction on the grounds the written agreement between the parties contained an arbitration clause. The Court of First Instance appointed an expert to assess the value of the completed work. Based on the reports, the Court ordered the Defendant to pay the Claimant an amount of AED 777,544 plus interest. The Defendant appealed the decision and argued that the lower Court erred in dismissing the Defendant's plea that the action should not be entertained due to the arbitration clause. The basis of the argument is notwithstanding the fact that a written contract in respect of Villas No.'s 1 & 3, which contains the arbitration clause, is independent of the verbal contract concerning Villa No. 2, it is still an integral part of the Project comprising Villas 1, 2 and 3 and, therefore, the agreement respecting Villa No. 2 is subject to the obligations and conditions set forth in the contract filed in the proceedings, including the arbitration clause and the penalty clauses agreed upon by the parties in respect of Villas No.'s 1 and 3. The lower Court further held that since the agreement in respect of Villa No. 2 was verbal, this did not preclude a verbal agreement on the arbitration clause. The Court of Appeal dismissed the Defendant's argument. It is well established that as an alternative method of dispute resolution, voluntary arbitration may not be assumed but has to be agreed upon in writing in accordance with Article 203 (2) of the Civil Procedure Law, since it is a deviation from the normal dispute settlement process and the assurances it offers the parties. An agreement to refer to arbitration any dispute that may arise between parties with respect to the performance of their contract does not extend to other contracts between the parties unless an arbitration clause is expressly set out in such contracts. Whether a subsequent contract is governed by the arbitration clause contained in earlier contracts is a question of fact. In dismissing the plea that the action should not be entertained due to the arbitration clause, the lower Court held that: "The Defendant failed to prove that the works carried out on Villa No. 2 are covered by the arbitration clause. He may prove this only in writing. If he and the Claimant did agree to an arbitration clause with respect to the works on other villas in the same project, then legal analogy may not be used to prove that the arbitration clause applies also to the works on Villa No. 2, which is the subject of the present dispute. Therefore, the ground of appeal concerning the arbitration clause should be dismissed." This decision applied strictly the requirement for an agreement to refer any dispute to arbitration to be in writing. The question then arises, in the context of a construction contract, whether a reference in the contract to a standard FIDIC Conditions of Contract would be sufficient to amount to an agreement in writing by the parties to refer any dispute under the contract to arbitration? This is an important question given that simple letters of award or letters of intent are often the only written agreement between the parties, and often such letters do not expressly set out the parties' intention in relation to arbitration. Invariably they make reference to a particular set of conditions of contract with a view of incorporating them into the underlying contract on a wholesale basis. It is submitted that the principle set out in this decision does not prevent the incorporation of arbitration clauses by way of reference in construction contracts and is in line with a previous case decision where the Court held that a reference to the FIDIC conditions of contract was an evidence of the parties' agreement to resort to arbitration as a method of resolving any dispute under their contract.

In contrast with Article 203 of the Civil Procedure Code, Article 12 of the Dubai International Financial Centre (DIFC) Arbitration Law No.1 of 20082 also stipulates that an arbitration agreement must be in writing. However, it further provides that a reference in a contract to any document containing an arbitration clause making such clause part of the contract will qualify as an arbitration agreement made in writing. Arguably, such provision would resolve the question relating to the validity of incorporation of arbitration clauses by way of reference. With regards to the proposed new Federal Arbitration Law, the UAE Ministry of Economy has since circulated the new law in draft form for public comments. It was also reported that similar to the DIFC Arbitration Law, the new law is also based on the UNCITRAL Model Law. Therefore the same question raised above should no longer be an issue if similar provisions to Article 12 of the DIFC law are adopted in the new Federal law. By Zane Anani & Eric Teo - Dubai International Financial Centre Office Al Tamimi & Company 2009 Article originally published by Al Tamimi & Company 24-Jun-09

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