When an Arbitration Clause becomes impossible to perform: is it still valid? (Dubai Court of Cassation insight)

Abdelghany Fouda, Director of Legal Affairs at Al Sondos Holding in UAE, examines a recent Dubai Court of Cassation decision that highlights a critical drafting risk: what happens when an arbitration clause refers to an institution that no longer exists.

Arbitration clauses are generally upheld by courts as a reflection of party autonomy. However, a key legal question arises when the agreed arbitration mechanism no longer exists at the time of contract execution.

In a recent case before the Dubai Court of Cassation, the court addressed an important issue: What happens if parties agree to arbitrate before a specific arbitral institution and under specific rules, but that institution and those rules had already been abolished before the contract was signed?

Facts of the case:

The dispute arose from a real estate sale agreement. The claimant sought termination of the contract and compensation for a difference in property area.

The defendant objected, arguing that the court lacked jurisdiction due to an arbitration clause referring disputes to the Dubai Chamber of Commerce and Industry under its arbitration rules.

The clause stated that any dispute arising out of or in connection with the agreement shall be resolved by arbitration under the rules of the Dubai Chamber.

Court’s reasoning:

The Court found that the agreed arbitral institution and its rules had already been abolished prior to the conclusion of the contract.

Therefore, at the time of signing, the arbitration mechanism referred to in the contract did not legally or practically exist.

As a result, the arbitration clause was considered incapable of being performed.

The Court held that agreeing to arbitrate before a non-existent institution renders the arbitration clause null and void, as no operative mechanism exists.

Legal principle:

If an arbitration institution or rules are abolished after the agreement, the law may provide a substitute mechanism.

But if the institution never existed at the time of contracting, the clause is fundamentally defective and unenforceable.

Key takeaway for in-house counsel:

This decision underscores the importance of ensuring the validity and current existence of arbitration institutions referenced in contracts.

Legal teams should carefully review dispute resolution clauses during contract drafting and avoid reliance on outdated or obsolete institutional frameworks.

Conclusion:

An arbitration clause is only as strong as the legal mechanism it relies upon. If that mechanism does not exist at the time of contracting, the clause may be treated as void, leaving jurisdiction to the national courts.

Court of Cassation – Dubai | Appeal No. 4 of 2024 (Real Estate Appeal)

In public session held on 04-03-2024 at the premises of the Dubai Court of Cassation.

After reviewing the papers in the electronic case file and hearing the report prepared and recited in the session by the reporting judge Mr. Mustafa Mahmoud El-Shorbagy, and after deliberation.

Whereas the two appeals have fulfilled their formal requirements.

Facts of the case:

The respondent in Appeal No. 956/2023 (the appellant in Appeal No. 4/2024) filed Case No. 972/2022 Real Estate Partial against the first respondent in Appeal No. 4/2024, and subsequently impleaded the appellant in Appeal No. 956/2023.

The claimant requested termination of the sale agreement and compensation of AED 1,500,000 including damages and loss of profit.

Alternatively, validation and enforcement of the contract and payment of AED 1,500,000 plus rent value and compensation.

The defendant raised an objection of non-acceptance of the case due to an arbitration clause.

Court of First Instance:

The court ruled termination of the sale agreement and ordered payment of AED 603,927 plus AED 31,628 and AED 200,000 compensation with interest.

The court rejected the arbitration objection.

Court of Appeal:

The appeal was dismissed in principle and modified partially regarding compensation amounts.

Grounds of appeal:

The appellant argued that the court erred in rejecting the arbitration jurisdiction plea based on Clause (10) of the contract.

Clause (10) provided that disputes shall be resolved by arbitration under Dubai Chamber of Commerce and Industry rules.

Court reasoning:

Arbitration is an agreement between parties to submit disputes to a neutral arbitrator instead of courts.

Arbitration must be in writing under Article 7 of Federal Law No. 6 of 2018.

The arbitration clause referred to the Dubai Chamber arbitration rules.

It was established that the Dubai Chamber arbitration center and its rules had been abolished before the contract date.

This occurred due to Decree No. 10 of 2004 and Decree No. 11 of 2007 establishing the Dubai International Arbitration Centre.

Therefore, the arbitration institution and rules did not exist at the time of contracting.

The arbitration clause is therefore void ab initio due to impossibility of performance.

Conclusion:

An arbitration clause is only as effective as the legal mechanism supporting it.

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