Since the Decree had been enacted, a number of courts, locally and internationally, considered its effects, reaching varying conclusions. The Baker Hughes Ruling was one of such cases, where the District Court refused to consider DIFC-LCIA arbitration clauses enforceable, and refused to compel arbitration, despite the presence of an arbitration agreement.
Although the Decision is very fact-specific, it is important, as it confirms broader enforceability of the DIFC-LCIA arbitration clauses at least in the circumstances when the parties had not agreed on the DIFC-LCIA as an exclusive forum.
Background and circumstances of the case
In 2017, Baker Hughes Saudi Arabia Co. Ltd. ("Baker Hughes") and Dynamic Industries Saudi Arabia, Ltd. ("Dynamic") entered into a subcontract in furtherance of an oil-and-gas project in Saudi Arabia. The subcontract granted Dynamic the option to "demand" arbitration in Saudi Arabia, and should Dynamic not "demand" arbitration in Saudi Arabia, either party could initiate arbitration under the rules of the DIFC-LCIA.
After the Decree was adopted, Baker Hughes filed suit against Dynamic in the United States District Court for the Eastern District of Louisiana, New Orleans. Dynamic, amongst other defenses, sought to compel arbitration in accordance with the subcontract and the Decree.
In November 2023, the District Court rejected Dynamic's arguments and refused to compel arbitration, citing the unavailability of the agreed institution. More on the Baker Hughes Ruling can be read here. The Baker Hughes Ruling raised additional concerns regarding the possibility to enforce DIFC-LCIA arbitration agreements.
Other courts, including the courts in the DIFC and onshore UAE, reached opposite conclusions and consistently enforced DIFC-LCIA arbitration agreements, including with the reference to the Decree. More on this can be read here.
The Appellate Court's Decision
The Appellate Court reversed the Baker Hughs Ruling, finding that it erred in refusing to compel arbitration. In its Decision, the Appellate Court concluded the following:
- The parties' agreement that "the dispute shall be referred by either Party to and finally resolved by arbitration under the Arbitration Rules of the DIFC LCIA ("Rules")", shall be construed as the agreement to arbitrate disputes under specific rules, rather then at a specific forum. The Appellate Court noted the language of the clause that did not provide for the arbitration to be "administered by" the DIFC-LCIA.
- Courts differ on whether parties implicitly select a forum by designating that forum's rules. However, the Appellate Court expressed "lingering doubts about adopting a blanket rule that any designation of arbitral rules necessarily means selection of a forum", when depending on the content of the rules in question, a rules-selection clause may be more properly conceived of as a choice-of-law provision rather than a forum-selection clause.
- Assuming that the parties indeed selected the DIFC-LCIA as a forum, it must be considered whether this forum is available in light of the Decree. The Appellate Court took note that the DIFC-LCIA's successor institution, DIAC, is functionally identical to its predecessor in many key respects. DIAC's rules mirror those of the DIFC-LCIA as they reflect practically identical requirements for the claim and defence processes, the nominating and challenging of arbitrator appointments, and the rendering of awards.
- The Appellate Court then decided that it does not need to rule on points 2 and 3 above, because even assuming that the parties designated the DIFC-LCIA as a forum, it was not the exclusive arbitral forum contemplated by the subcontract, as the subcontract empowered Dynamic to elect to arbitrate in Saudi Arabia any dispute arising out of the subcontract as an alternative.
- Finally, the Appellate Court found that the DIFC-LCIA arbitration clause was not integral to the subcontract, as its dominant purpose was to arbitrate generally. The Appellate Court pointed out that where the parties' dominant purpose was to arbitrate generally, the designation of a particular forum is not integral to the contract, and the forum-selection clause is severable from the rest of the contract. To that end, the unavailability of the DIFC-LCIA did not invalidate the arbitration agreement, and the court is empowered to compel arbitration.
As a result, the Appellate Court instructed the District Court to reconsider whether the DIFC-LCIA rules can be applied by any other forum that may be available — including the LCIA, DIAC, or a forum in Saudi Arabia — consistent with the parties' objective intent. If so, the Appellate Court instructed the District Court to compel arbitration in that forum and, if not, to consider whether to otherwise compel arbitration in Saudi Arabia.
Practical effect of this Decision
The Appellate Court's decision is rather fact-specific, as it is highly reliant on the interpretation of the specific arbitration clause in question. However, importantly, it confirms that DIFC-LCIA arbitration agreements are enforceable as a matter of principle at least in cases when:
- The parties agreed to arbitrate disputes under DIFC-LCIA rules, rather than to refer their disputes to the DIFC-LCIA as a forum.
- Even if the parties agreed to the DIFC-LCIA as a forum, they did not designate it as an exclusive forum to the exclusion of any other, but rather the dominant purpose of the parties was to arbitrate generally.
These conclusions may be particularly important since the recommended DIFC-LCIA arbitration agreement provided that the disputes "shall be referred to and finally resolved by arbitration under the Arbitration Rules of the DIFC – LCIA Arbitration Centre, which Rules are deemed to be incorporated by reference into this clause." This language is arguably consistent with the one analyzed in the Decision in terms of opting for arbitration under the Arbitration Rules, rather than in the DIFC-LCIA as a forum. It also does not provide for any indication of the forum being exclusive. In this light, the Decision may have broader effects than on its own facts.
The Appellate Court also left an open door for the analysis of whether, even in cases where the Parties agreed to the exclusive DIFC-LCIA forum, this forum may be considered as still available in light of the Decree.
On the other hand, the Appellate Court's approach is still different from those of the courts in the UAE, as it clearly instructed the District Court to compel arbitration under the DIFC-LCIA rules, if possible and, if not, in accordance with the parties' agreement. This is different from what the Decree provides, i.e., such disputes being administered by DIAC under its rules.
It remains to be seen what the District Court will decide on remand.
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