In a recent judgment, the United States District Court for the Eastern District of Louisiana refused to enforce an arbitration agreement whereby parties had agreed to resolve their disputes under the DIFC-LCIA Arbitration Rules. 

Arbitration under the DIFC-LCIA Arbitration Rules is administered by the DIFC-LCIA Arbitration Centre.

The DIFC-LCIA Arbitration Centre is a concept established by agreement between the London Court of International Arbitration (“LCIA”) and, in essence, the Government of Dubai with the Dubai International Financial Centre Arbitration Institute (the “DAI”) employing the centre’s secretariat in charge of locally administrating arbitration cases subject to the DIFC-LCIA Arbitration Rules.  The DAI also performs other administrative functions in connection with the administration of cases under the DIFC-LCIA Arbitration Rules. 

On 20 September 2021 Dubai Decree 34 of 2021 Concerning the Dubai International Arbitration Centre (the “Decree”) came into force. The Decree abolished the DAI (and gave effect to other changes).

Article 6(a) of the Decree provided that the DAI would be replaced by the Dubai International Arbitration Centre (“DIAC”) and that an agreement to arbitrate administered by the DAI would be deemed valid.

On 29 March 2022, the DIAC and the LCIA issued the following joint press release concerning DIFC-LCIA Arbitration:

“The Dubai International Arbitration Centre (DIAC) and the London Court of International Arbitration (LCIA) are pleased to announce that they have agreed terms consistent with Decree No. (34) of 2021 of the Government of Dubai by which the LCIA will administer all existing DIFC-LCIA cases (i.e. those commenced and registered by the DIFC-LCIA under a designated case number on or before 20 March 2022) from London. The DIAC and the LCIA have agreed a mechanism for the orderly management of funds paid by parties into bank accounts previously held on behalf of DIFC-LCIA and now owned by DIAC, pursuant to which the DIAC shall transfer such casework related payments to the LCIA to be disbursed to the respective beneficiaries by the LCIA directly. The LCIA will communicate with parties and tribunals as soon as practicable. All enquiries regarding cases commenced and formally registered on or before 20 March 2022 should be emailed to: DIFC-LCIAcasework@lcia.org 

All arbitrations, mediations and other alternative dispute resolution proceedings referring to the respective rules of the DIFC-LCIA, including ad hoc proceedings where the DIFC-LCIA is requested to act as appointing authority or administrator, commenced on or after 21 March 2022 (or commenced before 21 March 2022 but not registered by the DIFC-LCIA under a designated case number) shall be registered by DIAC and administered directly by its administrative body in accordance with the respective rules of procedure of DIAC, including the tables of fees and costs in force from time to time, through DIAC’s own case management systems, unless otherwise agreed by the parties. Payments made by the parties to arbitration in respect of the arbitration costs of cases to be commenced on or after 21 March 2022 shall be paid into accounts owned by DIAC. All enquiries regarding cases commenced on or after 21 March 2022 should be addressed to: ArbitrationCentre@DIAC.ae”

It appears from the above press release that DIAC and the LCIA have agreed that any arbitration commenced on or after 21 March 2022 under a contract that provides for arbitration under the  DIFC-LCIA Rules “shall be registered by DIAC and administered directly by its administrative body in accordance with the respective rules of procedure of DIAC, including the tables of fees and costs in force from time to time, through DIAC’s own case management systems, unless otherwise agreed by the parties.”   In other words, it appears that the DIAC and the LCIA have agreed that an arbitration that would previously have been conducted under the DIFC-LCIA Arbitration Rules is now to be conducted under the DIAC Arbitration Rules. 

In Baker Hughes Saudi Arabia Co. Ltd. v. Dynamic Industries, Inc. et al. (Civil Action No. 2:23-cv-1396 (E.D. La. Nov. 6, 2023)) (“Baker Hughes”), the plaintiff commenced proceedings in US Federal Court in Louisiana seeking damages for breach of contract. The defendant filed a motion to dismiss the proceedings relying on forum non conveniens grounds. The contract in dispute contained an arbitration clause which provided:

“the dispute shall be referred by either Party to and finally resolved by arbitration under the Arbitration Rules of the DIFC LCIA (the “Rules”) from time to time in force, which Rules are deemed to be incorporated by reference herein (save for Article 5.6 which is hereby expressly excluded). The Seat, or legal place, of the arbitration shall be the DIFC, Dubai, United Arab Emirates.”

US District Judge Guidry found that as the DIFC-LCIA Arbitration Centre no longer existed, the arbitration clause was invalid. According to the judge:

“Whatever similarity the DIAC may have with the DIFC LCIA, it is not the same forum in which the parties agreed to arbitrate. That forum is no longer available, and this Court thus cannot compel Plaintiff to arbitrate. Accordingly, no enforceable forum selection clause compels the dismissal of this case on the ground of forum non conveniens.”

While the case was decided as a matter of US law, it is unlikely that its reasoning would be followed in other common law jurisdictions (including the DIFC and ADGM) or otherwise in the United Arab Emirates.  

In Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 (“Enka”), the United Kingdom Supreme Court endorsed the “validation principle” which provides that national courts should interpret arbitration clauses in a manner which renders them valid. According to the joint opinion of Lord Hamblen and Lord Leggatt:

"The principle that contracting parties could not reasonably have intended a significant clause in their contract, such as an arbitration clause, to be invalid is a form of purposive interpretation, which seeks to interpret the language of the contract, so far as possible, in a way which will give effect to - rather than defeat - an aim or purpose which the parties can be taken to have had in view. " 

The justices went on to endorse the passage in International Commercial Arbitration, 2nd ed. (2014) which states:

“In a substantial majority of all jurisdictions, national law provides that international arbitration agreements should be interpreted in light of a ‘pro-arbitration’ presumption. Derived from the policies of leading international arbitration conventions and national arbitration legislation, and from the parties’ likely objectives, this type of presumption provides that a valid arbitration clause should generally be interpreted expansively and, in cases of doubt, extended to encompass disputed claims.”

In Baker Hughes it appears that the court did not consider whether the validity of the arbitration agreement should be assessed as matter of US law or as a matter of the law of the seat of arbitration agreed by the parties, namely DIFC law. In Enka, the Supreme Court found that:

“In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.”

Given the terms of the Decree, there is little doubt as to the validity of the arbitration agreement under DIFC law.  

Baker Hughes sounds the alarm as to foreseeable jurisdictional issues arising from the Decree and the potential for inconsistent outcomes arising from challenges to the enforceability of DIFC-LCIA arbitration agreements. 

Whilst difficulties with enforcing DIFC-LCIA arbitration agreements are likely to be enhanced when brought before courts that do not apply the “validation principle” or DIFC law, Baker Hughes is an opportunity to engage in meaningful reflection as to whether Article II(3) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards commits the court of a Contracting State such as the United States District Court for the Eastern District of Louisiana to give effect to an arbitration agreement with reference to a transnational test.  The test set out in Article II(3) of the convention requires the court of a Contracting State to refer the parties to arbitration unless it finds that underlying arbitration agreement is “null and void, inoperative or incapable of being performed”.  By that measure, it would be difficult to ignore that Article 6(a) of the Decree expressly declares DIFC-LCIA arbitration agreements valid, and capable of being performed as DIAC administered arbitrations.        

For further information, please contact Nassif BouMalhab and William Prasifka.