In 2011, an arbitration case was raised by a Limited Liability Company (LLC) based in Dubai involving a contract it had entered into when it was a sole establishment. The defendant argued its contractual relationship had been with the sole establishment rather than the LLC and as the UAE Companies Law does not recognise a conversion from a sole establishment to a LLC, they argued the LLC was not a party to the contract and the company could not bring a claim against them.
What was the legal issue?
The question was whether the Court under Article 216 of Federal Law No. 11/1992 (the UAE Civil Procedures Law) had the right to consider the validity of conversion of a sole establishment to an LLC. What was decided? The Arbitrator rejected the defendant’s argument, and on 16 February 2015 the Dubai Court of First Instance ratified the final arbitral award in favour of the claimant. The Court held that when an arbitration agreement takes the form of an arbitration clause in a contract, it is permissible for a party to the contract to assign its rights to a third party and when this assignment is accepted, the arbitration clause becomes binding and effective. The claimant appealed to the Dubai Court of Appeal which found in their favour, that the LLC was not a party to the arbitration agreement because there could not have been a valid assignment of rights from the sole establishment to the LLC. As a result, the original claimant before the Court of First Instance (the claimant in the arbitration) appealed to the Dubai Court of Cassation in September 2015 and argued, among other things, that as the grounds for setting aside under Article 216 of Federal Law No. 11/1992 are listed exclusively, they should not be widely interpreted. These grounds do not cover the capacity matter which was raised in this case. The original claimant added that the question of capacity was a substantive matter which the court did not have jurisdiction to consider under Article 216 and it was consistent with the principle of Jurisdiction-Jurisdiction to uphold the Arbitrator’s decision that concluded the arbitration case had been correctly raised. On 25 February 2016, the Court of Cassation found the Court of Appeal should not have looked into the argument as to whether the conversion from the sole establishment to the LLC was valid, regardless of its own opinion on the validity or invalidity of this argument, because this was a substantive matter which was not within their jurisdiction under Article 216 of the Law.
Why’s it Significant?
The Dubai Court of Cassation has dispelled doubts on whether the court’s supervision during setting aside proceedings extends to include the capacity of an LLC to raise an arbitration case based on an arbitration clause which it agreed on previously when it was a sole establishment.
The Court’s decision deserves support not only because the capacity matter which was raised is really a substantive issue which is outside Article 216 of the Civil Procedures Law, but also because the decision accords with the internationally recognised principle of Jurisdiction-Jurisdiction. The decision is also in line with the international trend to limit a Court’s supervision on arbitral awards to the extent possible.