U.S. Court Declines to Enforce Arbitration Clause Referring to DIFC-LCIA Arbitration
In late 2023, the Eastern District of Louisiana declined to enforce a DIFC-LCIA arbitration agreement, holding that it will not compel Baker Hughes Saudi Arabia Co. to arbitrate its breach of contract claim with Dynamic Industries, Inc. et al. under the auspices of DIAC because it is not a valid replacement for the defunct DAI, the administering institution of DIFC-LCIA arbitration rules.
The dispute concerned a materials and services contract relating to an oil and gas project in Saudi Arabia. Baker Hughes initiated litigation against Dynamic for its alleged failure to pay under that contract. In response, Dynamic sought to compel arbitration pursuant to the contract’s arbitration clause referring disputes to be “finally resolved by arbitration under the Arbitration Rules of the DIFC LCIA.” Defendant’s Memorandum in Support of Motion to Dismiss for Forum Non Conveniens or to Compel Arbitration and Stay Pending Arbitration, Baker Hughes Saudi Arabia Co. v. Dynamic Indus., Inc., No. 2:23-cv-1396, 7 (E.D. La., filed May 24, 2023). However, Baker Hughes refused on the basis that this arbitration agreement is unenforceable because the selected forum, the DAI, was abolished.
Based on Dubai’s Decree No. 34 and the subsequent agreement between DIAC and LCIA, Dynamic relied on Decree No. 34 to argue that DIFC-LCIA arbitrations were to be transferred to DIAC and arbitrated under DIFC-LCIA arbitration rules agreed upon by the parties in their contract. Id. at 10. Baker Hughes countered that the Dubai government “does not have the authority . . . to unilaterally change the arbitration forum agreed to by the parties.” Opposition to Motion to Dismiss for Forum Non Conveniens or to Compel Arbitration and Stay Pending Arbitration, Baker Hughes Saudi Arabia Co. v. Dynamic Indus., Inc., No. 2:23-cv-1396, 11 (E.D. La., filed July 5, 2023).
Citing the Federal Arbitration Act (FAA), the court acknowledged that the agreement to arbitrate is ultimately contractual, an important element of which is consent. Citing Fifth Circuit precedents that declined to enforce clauses referring to arbitral fora that no longer existed, the court ruled that neither the U.S. district court nor the Dubai government could “rewrite the agreement of the parties and order the arbitration proceeding to be held in a forum to which the parties did not contractually agree.” Order and Reasons, Baker Hughes Saudi Arabia Co. v Dynamic Indus., Inc., No. 2:23-cv-1396, 5 (E.D. La., ordered Nov. 6, 2023). The court therefore rejected Dynamic’s bid to refer the dispute to arbitration.
This decision has been appealed to the Fifth Circuit. Oral arguments were heard on August 7, 2024. A decision from the Fifth Circuit is forthcoming, which we will report on.
Singapore Court Agrees with U.S. Court But Enforces Arbitral Award Based on Waiver
In March 2024, the General Division of the High Court of Singapore enforced a DIAC award resulting from an arbitration clause referring disputes to arbitration under the DIFC-LCIA arbitration rules. This arbitration was commenced in April 2022, after the DAI was abolished by decree in 2021. Citing the U.S. court’s decision in Baker Hughes v. Dynamic, the high court agreed that the parties “cannot be compelled to submit to arbitration under a set of rules that they did not agree to.” DFL v. DFM [2024] SGHC 71, ¶ 21. It further agreed that Dubai’s Decree No. 34 “could not force an arbitration under the DIAC Rules on the respondent without his agreement.” Id. However, the high court ultimately enforced the resulting arbitral award because the respondent had failed to contest jurisdiction of the arbitral tribunal formed under the auspices of DIAC, which in the court’s view constituted an “unequivocal, clear and consistent intention to submit to the tribunal’s jurisdiction.” Id.
Abu Dhabi Court Disagrees with U.S. and Singapore Courts
Shortly after the Singapore High Court decision, in April 2024 the Abu Dhabi Commercial Court of Appeal affirmed a lower court’s finding that a clause referring to DIFC-LCIA arbitration is binding on the parties, despite the abolition of DAI, the administering institution. Case No. 2024-449, [2024] Abu Dhabi Commercial Court of Appeal, 4.
There, the claimant relied on the U.S. district court decision in Baker Hughes v. Dynamic and argued before the Abu Dhabi Court of First Instance that abolition of the DAI made the contractual arbitration clause impossible to implement and thus the agreement was no longer valid. But the Court of First Instance rejected that argument, noting that United Arab Emirates (UAE) law required that arbitration agreements be interpreted “from a broad perspective.” Case No. 2023-1046, [2023] Abu Dhabi Court of First Instance, 6. The court found that despite the DAI abolition, the parties intended to arbitrate disputes between them, and that the “absence of any agreed procedural element, such as the later cancellation of the arbitration institution, [did] not render [the agreement] unenforceable.” Id. at 7. The Court of First Instance also found that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) does not contemplate abolition of an arbitral institution as grounds to invalidate an arbitration agreement. It also recognized that the U.S. court has found a similar arbitration clause unenforceable but disagreed with it, noting that “UAE Arbitration Law . . . embodies the commitment to enhance the field of arbitration in the country and consolidate its role as a center for arbitration in the region.” Id. at 9.
Key Takeaway
The abolition of the DAI has implications for arbitration clauses in contracts requiring disputes to be arbitrated under the DAI’s auspices or under the DIFC-LCIA arbitration rules. If parties’ contracts contain such arbitration agreements, it is advisable to assess how the abolition of the DAI and related court decisions impact their enforceability.
