Kuwait Implications on the Dissolution of the DIFC Arbitration Institute
Pursuant to the Government of Dubai’s issuance of Decree No. 34 of 2021 (the “Decree”), the Dubai International Financial Centre (the “DIFC”) Arbitration Institute, which includes the DIFC-LCIA Arbitration Center, and the Emirates Maritime Arbitration Center, were to be dissolved and merged with the Dubai International Arbitration Center (the “DIAC”).
Subsequently, DIAC and the London Court of International Arbitration (the “LCIA“) have announced in a joint press release on 28 March 2022 that the LCIA will administer all existing DIFC-LCIA cases (matters that have already been initiated) under the DIFC-LCIA Rules from London. However, any agreements that selected DIFC-LCIA Rules for dispute resolutions and which are commenced on or after 21 March 2022 will be registered by DIAC and administered directly by its administrative body in accordance with the 2022 DIAC rules, unless agreed otherwise by the parties.
Kuwait Implications Regarding the Decree
Over the last 15-20 years DIFC-LCIA Rules became a favorite dispute resolution clause in any major transaction involving Kuwaiti and international parties, whether corporate or finance. The reasons for the same were easy. It provided a regional option in which foreign companies could feel comfortable about securing a top arbitral tribunal that would offer professional arbitration services in English with both Arab Civil Law and English Common Law expert arbitrators in a neutral setting without any home-field advantages. In addition, Kuwaiti companies were more likely to accept such an arbitration provision, whose venue was still in the GCC as opposed to using LCIA in London or ICC in Paris. It was also perceived to be easier to enforce essentially a UAE arbitral award in Kuwait as opposed to a UK or French award given that UAE judgments are easily enforceable in Kuwait while UK and French court judgments are generally unenforceable in the same.
Kuwait’s enforcement of foreign arbitral awards starts with a review of Kuwait’s adherence to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “Convention”). In addition, for a foreign arbitration clause to be valid under Kuwait law, it must comply with the guidelines provided under Article 173 of the Kuwaiti Civil and Commercial Procedures Law (the “KCCPL”). In summary, Article 173 of the KCCPL provides that:
- Arbitration may be agreed upon in respect of a particular dispute, and likewise, in respect of all disputes arising from the execution of a specific agreement.
- Arbitration shall not be provided except in writing.
- Arbitration shall not be permissible in respect of matters where conciliation is not permitted and arbitration shall not be valid except in respect of a party who has the capacity to dispose of the litigated right.
- The subject matter of the dispute must be determined in the arbitration agreement, or during the proceedings, even if the arbitrator is authorized to act as amiable compositor, otherwise arbitration shall be void.
- Courts shall not assume jurisdiction over the disputes which were agreed to be referred to arbitration. The plea for lack of jurisdiction maybe relinquished, either expressly or implicitly.
- Arbitration shall not include summary matter unless otherwise expressly agreed upon.
Accepting arbitration is not considered to be a normal act of management under Kuwait law as hinted to under item (iii) above. Pursuant to Article 184 of Kuwait Law No.1 of 2016 as amended (the “Companies Law”), a Kuwaiti company’s governing document must expressly provide the scope of the board of directors’ authority to validly accept arbitration and bind the company. This principle is further echoed in the restriction on a manager’s authority under Article 46 of the Companies Law in relation to limited liability companies. Special authorization – whether by resolution or a power of attorney – is considered valid capacity and authority for an individual to accept an arbitration clause. Ensuring that valid capacity and authority exist within the local party’s authorized signatory is vital to the enforcement of the arbitration clause by the Kuwait Courts. This would also prohibit the local party from raising a future claim that its own authorized signatory lacked the authority and capacity to bind it to the arbitration clause. Hence, it has become standard Kuwait practice to require a Kuwaiti company to provide a board resolution that specifically authorizes the specific arbitration provision (which would have referenced DIFC-LCIA Rules) with respect to the relevant agreement so that there can be no doubt as to authority and capacity.
Now that the DIFC-LCIA Arbitration Center and its rules have been abolished, the door is open for many complications in relation to Disputes commenced on or after 21 March 2022. In the event that the parties do not agree on a new arbitration clause, a local Kuwaiti party may choose to bring a Dispute to a Kuwait Court under the justification that the original binding arbitration clause of the agreement is null and void because it no longer complies with Article 173(iii) of the KCCPL and Article 184 of the Companies Law given the Decree. The local party may attempt to make this argument because the agreed-upon arbitration rules and/or center no longer exist, and the parties never intended for DIAC to govern their disputes. We obviously have no precedent yet from the Kuwait Court of Cassation on how they would rule on this issue, which has predictably sowed some confusion in the market.
Assuming that a foreign party prevails against a Kuwaiti entity in arbitration, the next step would be to enforce the award in Kuwait to attach assets and collect on the same. Prior to the Decree, as Kuwait legal counsel, we have generally been very successful in said enforcement actions. Enforcement of foreign arbitral awards (those issued outside Kuwait) is governed by Articles 199 and 200 of the KCCPL and the Convention. Article 199 of the KCCPL, which provides the requirements for a foreign judgment to be enforced by a Kuwait Court without examining the merits, states as follows:
- The courts of the jurisdiction in which the judgment was issued must afford reciprocal treatment to judgment issued by Kuwaiti courts.
- The judgment was issued by a court of competent jurisdiction according to the law of the jurisdiction in which it was issued.
- The parties were duly summoned to appear and were duly represented at the proceeding.
- The judgment is res judicata according to the law of the jurisdiction in which it was issued.
- The judgment does not contradict any prior judgment or order rendered by Kuwaiti courts.
- The judgment does not contain anything in conflict with general morals or public order of Kuwait.
Article 200 of the KCCPL states that the provisions applicable to enforcement of foreign judgments under Article 199, also apply to foreign arbitral awards. Additionally, the foreign party would need to submit specific documents to the Kuwait Courts in accordance with Article 4 of the Convention. Providing these documents would create a legal presumption that the award should be enforceable under Article 5 of the Convention. Nonetheless the local party, who the award is being enforced against, will have an opportunity to rebut this presumption by providing evidence showing any of the following in accordance with Article 5 of the Convention:
- The parties to the arbitration agreement (according to the governing law therein) lacked capacity, or said agreement is not valid under its governing law or, under the law of the country where the award was rendered.
- The party against whom the award is being enforced was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case.
- The award deals with a different issue not contemplated by or not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration.
- The composition of the tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, with the law of the country in which the arbitration took place.
- The award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.
Based upon the above, we can expect local parties to raise the earlier aforementioned defenses as well as an Article 5(i) argument stating that the local party never agreed to DIAC as an arbitration clause and hence the Kuwait enforcement of the DIAC award must necessarily fail. It is unclear on how the Courts will react to such an argument. Given the uncertainty, we would recommend to foreign principals to attempt to re-negotiate the arbitration clause while the parties are still on good terms whether they wish to amend to DIAC, ICC or LCIA Rules. In the event that the same is not possible, the foreign principal will need to prepare a strong counter-argument that it is immaterial whether the arbitral body has changed as the Kuwait side did accept arbitration in Dubai to start with. The final decision on which direction the Kuwait Courts take on this matter will affect a vast majority of the major transactions that have closed in country over the past two decades. At GLA & Co, we would welcome the opportunity to audit any transaction documents containing the old DIFC-LCIA arbitral rules and assist with strategies and discussion points on how to handle the same going forward.
Author: Asad Ahmad, Senior Associate