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Real estate arbitration at risk in Dubai

Court of Cassation nullified an arbitral award as the subject matter was of public policy nature

  • By Habib Al Mulla, Special to Gulf News
  • Published: 21:00 September 24, 2012
  • Gulf News

  • Image Credit: Niño Jose Heredia/©Gulf News

The Dubai Court of Cassation (the Supreme Court) has issued a both surprising and at the same time shocking ruling that may have far-reaching implications on the arbitration of real estate matters in the emirate.

In Cassation Appeal No 14 Year 2012 Real Estate, the court ruled that rules relating to registration of properties in the real estate registry in the emirate are matters of public policy and, thus, may not be subject to arbitration.

The case involves a dispute between a developer and a purchaser of a number of units. The purchaser instituted arbitration proceedings before the Dubai International Arbitration Centre (DIAC) against the developer for failing to meet its obligations, inter alia, of registering the units in the real estate registry and demanded a refund. The developer brought a counterclaim and an award was issued granting the purchaser part of his claims.

The purchaser sought to enforce the award before the Dubai Court of First Instance which granted exequatur of the Award. The Court of Appeal affirmed the exequatur order of the Court of First Instance in similar terms and the developer lodged a further appeal to the Court of Cassation.

The Court of Cassation ruled that a court before which an application for enforcement of an arbitration award is brought is not bound in examining the validity of the award by the conditions listed in Article 216 of the UAE Civil Procedures Code. The court continued to explain the importance of the notion of public policy and then went on to rely on Article 3 of the UAE Civil Code 1985 which provides that “[p]ublic order shall be deemed to include matters relating to personal status such as marriage, inheritance, and lineage, and matters relating to sovereignty, freedom of trade, the circulation of wealth, rules of private ownership and the other rules and foundations upon which society is based, in such a manner as not to conflict with the definitive provisions and fundamental principles of the Islamic Sharia.”

Wide interpretation

The court accorded a very wide interpretation to the concepts of “wealth” and “rules relating to personal ownership” and provided that the regulation of wealth and personal ownership with respect to possession, the rights thereof, the nature of such rights, their scope, means of owning them and their termination, including rules of registration, are matters of public policy. Accordingly, the court ruled that these are matters that cannot be subject to arbitration and denied the enforcement of the award.

This court finding suffers from a main flaw. There is no authority or law that provides that matters of public policy cannot be subject to arbitration. Arbitration awards can be denied enforcement when they conflict with a matter of a public policy and not merely because the subject matter of the arbitration is of the nature of a public policy. One can see this confirmed by reference to the practice of enforcement under Article 235(2)(e) of the UAE Civil Procedures Code which relates to the enforcement of foreign judgments and foreign arbitration awards. Nullifying an arbitral award for the reason that the subject matter thereof is of public policy nature is unheard of in comparative jurisprudence whether in the Arab world or otherwise.

The other flaw of this ruling is that courts in general tend to resort to public policy to deny the enforcement of an award when they cannot find other reasons to deny enforcement. In order to do so, courts may need to provide a wide interpretation of the notion of public policy. In Cassation Appeal 14, the Dubai Cassation Court gave a very wide interpretation to the notion of public policy while at the same time giving a very limited interpretation to the concept of “wealth” contained in Article 3 of the UAE Civil Code. One may find it difficult to digest the court’s interpretation of the term “properties” as being part of public policy when foreigners are, in actual fact, allowed to purchase properties. If all matters relating to ownership of real estate were indeed a matter of public policy, the law could not have allowed foreigners to own properties.

The ruling will have far-reaching implications. It puts at risk all arbitration proceedings that are currently being conducted as well as all awards that are pending confirmation by the Dubai Courts. It also casts doubts on the validity of the terms and condition of contracts related to real estate projects. This is so because, if one concurs with the outcome of this ruling and finds that real estate is a matter of public policy, then the natural conclusion would be that parties cannot determine the terms and conditions upon which they wish to contract. Taken to its logical consequence, this may ultimately culminate with a prohibition of wills whereby foreigner seek to pass on properties they own in Dubai. Since these wills relate to real estate, parties may not contract out of the supreme law of the land, i.e. the Sharia.

This ruling by the Court of Cassation violates the principle of the freedom of parties to draft their contractual relationships and choose their dispute resolution mechanism. However, the more worrisome result is that it jeopardises Dubai’s position as an arbitration centre in the region in favour of other competing centres where more legal certainty, respect of parties’ freedom to contract and a more arbitration-friendly atmosphere exists.

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