Dubai's Highest Onshore Court Rules Unilateral Option Clause Unenforceable

Split or “asymmetric” arbitration clauses, commonly referred to as “unilateral option clauses” (“UOCs”), provide one party (or a group of parties, but not all the parties) with the exclusive option to elect between arbitration or litigation to resolve their disputes. Typically (but not always) there is then a default dispute resolution method for all parties providing for a different forum (arbitration or litigation).  In the finance context, the party provided with the option is usually the lender and the party required to bring proceedings in accordance with the default mechanism (only) is usually the borrower. 

On 29 October 2024, the Dubai Court of Cassation (the "COC") issued an important judgment finding that a UOC was not binding under UAE law and did not prevent the case from proceeding through Dubai courts. This decision is significant as it highlights the risks with these clauses and reflects the varied approach adopted by different courts as to their enforceability.

In this Legal Insight, we analyse the COC’s decision and its implications for parties to UOCs within the "onshore" and "offshore" jurisdictions in the UAE. Given the enforceability concerns with UOCs worldwide, we also compare how a handful of jurisdictions approach UOCs to help parties assess risks when drafting commercial contracts with an international dimension. 

UOCs: USE AND RISKS

UOCs are not regularly negotiated in general commercial contracts. However, UOCs are popular in the banking and finance sector, particularly for loan agreements, since they offer lenders flexible decision-making fora when disputes arise (the point at which they are most informed about their borrowers' finances and assets).  Despite their utility, such clauses can however lead to:

• arguments as to whether there is an effective agreement to arbitrate;
• a forum race and the risk of parallel proceedings; and
• the inability to enforce an arbitral award rendered by virtue of such a clause.

BACKGROUND TO THE COC’S DECISION

A subcontractor commenced proceedings against a main contractor in the Dubai Court of First Instance (the "CFI"), seeking payment of sums due under two subcontracts, which contained identical UOCs. Under both subcontracts, the contractor had the option to choose whether any dispute was to be referred to arbitration or to the local courts in the UAE:

"In case of a dispute arising from the interpretation or execution of any of the terms of this agreement, this dispute shall be settled amicably between the parties, and if not, the dispute shall be referred either to (a) arbitration in the Dubai Chamber of Commerce or (b) to the local court in the United Arab Emirates. The method to be used will be decided by the contractor" (unofficial translation).

The contractor raised a jurisdictional objection based on the UOC, which was rejected by the CFI. The contractor appealed to the Dubai Court of Appeal, which upheld the decision of the CFI. Subsequently, the contractor appealed to the COC, arguing that, under the subcontracts, it had sole authority to select the forum for the resolution of the parties' dispute.

COC’S RULING

The COC noted that an arbitration agreement cannot exist without the parties' consent, i.e., the meeting of parties' two matching wills to resort to arbitration in order to resolve their dispute. The COC confirmed that if one party expresses its wish to resolve the dispute through arbitration, the other party's acceptance must be definitive and effective to produce its effects so that there is a true meeting of the parties' wills.

The COC therefore concluded that the UOC (cited above) in the subcontracts did not constitute a binding arbitration agreement since it only contained the "principle of resorting to arbitration without definitely agreeing on arbitration alone and adhering to its binding force". It was the elective nature of the reference to arbitration that deprived the UOC of its binding force.  In reaching this conclusion, the COC took into consideration the fact that, under both subcontracts, the subcontractor was prevented from referring the parties' dispute to any authority for resolution until the contractor had selected the relevant forum.

RAMIFICATIONS OF THE DECISION

It remains to be seen whether the COC considers all UOCs – however drafted – to be unenforceable or whether its conclusion was influenced by the specific wording of the parties' clause in this case.  But, considering the COC decision, there is a high risk that UOCs (regardless of whether the default mechanism is litigation or arbitration) will not be enforced by the onshore UAE courts.

Further, even if the UOC itself was to be expressly governed by DIFC law (for example), if the matter came before onshore UAE courts, it is not clear if they would respect and uphold the UOC even though the DIFC courts have, to date, upheld their validity (see below).

UOCs – A GLOBAL VIEW

As the approach to UOCs varies across jurisdictions, the risk of a UOC being deemed invalid or unenforceable needs to be assessed on a jurisdiction-by-jurisdiction basis and parties need to consider their particular level of risk based on the likely place(s) of award challenge and enforcement at the case outset.  Below we provide a flavour of the contrasting approaches adopted around the world.

(1) JURISDICTIONS WHICH ENFORCE UOCs

Within the UAE, the "offshore" courts of the Dubai International Financial Centre ("DIFC") and the Abu Dhabi Global Market ("ADGM"), two common law free zones in the UAE, appear to recognise the validity of UOCs, favouring the principle of freedom of contract. Examples include:

• In A3 v B3 [2019] ADGM CFI 0004, the ADGM Court of First Instance considered valid a clause, which provided one of the parties the unilateral option to either commence an Abu Dhabi-seated arbitration under the rules of the Abu Dhabi Commercial Conciliation and Arbitration Centre or an ADGM-seated arbitration under the rules of the International Chamber of Commerce. Since then, the ADGM Arbitration Regulation 2015 (“Regulations”) were also amended in December 2020; new Article 14(6) confirms that an arbitration agreement offering one party with a unilateral right to refer a dispute to arbitration or to court does not contravene those Regulations.
• In Lara Basem Musa Khoury v Mashreq Bank Psc [2022] DIFC CA 007, the DIFC Court of Appeal upheld the decision of the DIFC Court of First Instance, confirming the validity of a clause, which provided a bank with the unilateral option to bring a parties' dispute to the DIFC Courts rather than to onshore Dubai Courts. This ruling suggests that the DIFC Courts are likely to uphold the validity of UOCs.

The approach of the UAE offshore courts, inspired by common law, is not surprising given the common law courts' inclination to enforce UOCs.  Outside the UAE:

• The English courts have consistently upheld the validity of, and enforced, UOCs (giving one party the option to arbitrate or to litigate) in relation to arbitral proceedings seated in England and Wales. In a 2022 decision, the High Court also clarified that the election to arbitrate could be exercised by an unequivocal statement requiring the other party(ies) to arbitrate an identified dispute. The party seeking arbitration did not itself have to commence arbitration or give an undertaking to that effect.
• In Singapore, the courts have upheld the validity of UOCs, an approach blessed by the Singapore Court of Appeal in Wilson Taylor Asia Pacific Pte Ltd v. Dyna-Jet Pte Ltd [2017] SGCA 32 which concerned the enforcement of an UOC that granted one party the right to compel arbitration.
• In Germany, while UOCs are typically considered to be enforceable, one exception is where the UOC is classified as a standard business term, in which case stricter requirements apply to UOCs in favour of respondents and, accordingly, there is an increased risk of the UOC being held invalid.

(2) Jurisdictions WHERE THERE IS A RISK that UOCs MAY BE UNENFORCEABLE

Certain jurisdictions have refused to enforce UOCs in certain circumstances and by reference to various grounds. By way of example:

• In France, the courts have struck down asymmetrical jurisdiction clauses (which provide for the exclusive jurisdiction of particular courts, but one party has the right to take proceedings to any other courts with jurisdiction) based on them creating an imbalance of power which results in a “potestative” right.
• In Bulgaria, the Bulgarian Supreme Court of Cassation has issued decisions that awards rendered on the basis of UOCs should be set aside.
• In Russia and Poland, the courts have held that UOCs violate the parties’ equality of arms and their procedural rights. The Russian Supreme Court has stated that, in Russia, a UOC will be treated as a bilateral option clause i.e., each contractual party is deemed to have equal rights to choose a forum agreed in the option dispute resolution clause.

(3) JURISDICTIONS IN WHICH THE POSITION IS UNCERTAIN

In other jurisdictions, like the PRC and Brazil, the position remains uncertain and there is limited or no relevant jurisprudence.

In the United States, there is no uniform approach to UOCs, with the position varying across states (since the enforceability of arbitration agreements is governed by state rather than federal law); UOCs have been upheld in some states (such as New York) but not in others.

CONCLUDING COMMENT

In light of the COC’s decision, parties contracting within the UAE are advised to exercise caution and consider refraining from including UOCs in their contracts because, even if clearly drafted, such clauses risk being unenforceable under UAE law.

Alternatively, to have a better chance of enforcement, such parties may consider choosing DIFC or ADGM law – or another suitable jurisdiction whose law has consistently recognised the validity of UOCs, such as English law – specifically to govern their UOC. However, this approach still engenders risks and further considerations would come into play. For example, if the law governing the UOC differs from the law of the seat, they will need to carefully consider the interplay between the different governing laws and obtain local advice about what complications (if any) may arise from having non-aligned governing laws.

For parties contracting outside of the UAE, since the approach to UOCs varies significantly across jurisdictions, and given that the invalidity and non-enforceability of an UOC can have adverse repercussions for parties, specialist advice should always be sought on a case-by-case basis focused on all relevant jurisdictions where the UOC may be challenged or enforced. 

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Mayer Brown's International Arbitration teams in Dubai, London, Paris, Germany, Singapore, Brazil and throughout the United States are available for further clarifications, or tailored advice, regarding this topic.