A lot of hype has surrounded the recent launch of the Dubai International Financial Centre (DIFC) Arbitration Centre in a joint venture with the London Court of international Arbitration (LCIA).
The launch was described as "historic", "revolutionary" and "exciting". There is little doubt that having an arbitration centre applying a world class arbitration law such as the Unicitral is a great achievement that the DIFC should be proud of.
However, before blowing one's trumpet one has to carefully examine the implications that this joint venture may have and what would be the outcome of the cases that will be dealt with by this marriage since a lot is at stake here.
The idea of having an arbitration centre within the DIFC is not new but has existed since the inception of the DIFC as a concept.
From the early days of the DIFC, its Regulatory Council chaired by Ian Hay Davidson was engaged in discussions with the LCIA to administer an arbitration centre within the DIFC.
It was correctly thought that entities that will be established in the DIFC will need world-class dispute resolution mechanisms. The DIFC Courts were one mechanism but not everyone would want to resort to formal channels of a court system.
Therefore, the provision of an arbitration service within the DIFC to its entities was appealing. The idea, however, did not take off at the time because the DIFC became busy pursuing the federal decree to allow it to commence its operations, and thereafter build its legal and regulatory structure. However, the idea of having an arbitration centre continued to exist. The recent launch of the DIFC Arbitration Centre is just the last link in a long chain.
What is new with this centre though is that, unlike all other DIFC bodies including the DIFC Courts, its services are not confined to the DIFC entities or activities. The new Arbitration Centre is proclaimed to be open to all parties even if they are not DIFC entities and even if the dispute in question does not arise out of DIFC activities.
Exciting as this may be, it raises serious concerns as to the enforceability of the awards that are rendered by the DIFC Arbitration Centre. At the end of the day, what matters is the enforcement of the award. If the award is not enforceable then it is of little importance to the clients if the award is rendered by a reputable centre or under world class laws. The position that is being taken that enforcement is straightforward is misleading.
Looking back
In order to understand the scale of this issue one has to look into the history behind the establishment of the DIFC. The DIFC in its current form is the outcome of a unique arrangement between the federal and the local authorities whereby the federal authorities exempted the DIFC, as a financial free zone, from being subject to the federal civil and commercial laws.
In lieu of this the DIFC, and all financial free zones, are to adhere to certain restrictions and requirements. This arrangement was not easy to reach and it took a year and a half and the involvement of various federal authorities before the concept was developed and agreed to. It merited an amendment to the constitution of the federation, a step which is not taken lightly. Any deviation from this carefully shaped balance between federal and local interests may result in far-reaching legal complications.
I am not going to dwell on the detail of what the DIFC is allowed to do and what it is not, as this is another subject. What is important in this regard is that the DIFC has two main characteristics. The first is that it is a geographical zone; i.e. it has to exist in a particular area and its activities are to be conducted within that area.
This limitation is clear from the wording of Article 2(2) of the Federal Law no 8 of 2004 in respect of financial free zones. In fact, the federal authorities were keen to keep the determination of the boundaries of financial free zones within their powers. The area and the boundaries of any financial free zone is to be determined by the Cabinet.
The concept of a virtual zone whereby the financial free zones authorities license entities to exist anywhere in an emirate, similar to the Qatar Financial Centre, was discussed but rejected. Article 4(5) of the law no 8 which requires financial free zones entities to physically exist within the boundaries of these zones is yet another example of this geocentric emphasis.
'Within limits'
The second feature of the DIFC is that the activities that may be carried out of the DIFC are exclusively the financial and ancillary activities as defined in the preamble of the Law no 8. The financial free zones ability to issue its own regulations is restricted.
Financial free zones can issue regulations solely "within the limits of the purpose of their establishment" and only those "regulations necessary for carrying out their activities" (Article 7(3) of law no 8. The permissible financial free zone activities are exhaustively listed in the preamble of the law.
These basic principles have been embodied in the local laws which were issued pursuant to the federal law. For example, Article 8(2) of Dubai Law no 9 of 2004 establishing the DIFC provides that the jurisdiction of the DIFC Courts is limited to disputes in which one of the DIFC entities is party to, or where the dispute is arising out of a transaction which was carried out in the DIFC.
This rule is reconfirmed in Article 5 (a) (1) of Law no 12 of 2004 in respect of the Judicial Authority. Thus, the DIFC Courts have no jurisdiction to entertain neither claims not involving DIFC entities nor claims that are not financial within the definition of Federal Law no 8.
The fact that the new arbitration centre is offering its services to non DIFC entities and is covering activities that are not financial and ancillary services as defined in the Federal Law no 8, such as constructions cases, is a serious deviation of the federal laws establishing financial free zones. Awards issued in such violation will certainly face enforcement challenges when enforcement is sought outside the DIFC.
It is true that Dubai Courts are not permitted to review the merits of the DIFC Courts' judgments but challenging the jurisdiction of courts and the Arbitration Centre and the grounds upon which jurisdiction was assumed will be wide open as this will not be deemed a challenge to the merits of the award.
The situation will be more challenging when the award needs enforcement outside Dubai and the UAE. Protecting the credibility of the DIFC and the reputation it has built so far is more important than venturing into areas of risk and uncertainty.
In sum, lawyers and practitioners have to be careful not to sell to their clients a bounty that does not exist. When disputes of such high value are at stake, the odds and the liabilities are equally high.
The writer is managing partner of Dubai-based Habib Al Mulla & Co law firm.
