The DIFC Court as a "conduit jurisdiction" - new development

Litigation Alert

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Update: read the latest development regarding the DIFC's conduit jurisdiction.

The power of the Dubai International Financial Centre (DIFC) Court to act as a so-called "conduit" jurisdiction for the enforcement of arbitral awards rendered in mainland Dubai (Onshore Dubai) has been severely restricted by the first decision of the new judicial committee recently established to adjudicate conflicts of jurisdiction or judgments between the DIFC Court and the mainland, Arabic-language Dubai Courts (Onshore Courts).

When enforcing against award debtors based in Onshore Dubai, domestic award creditors are now unlikely to be able to take advantage of the significantly more efficient and reliable enforcement regime available in the DIFC until the award has been finally ratified by the Onshore Courts (which is generally a time-consuming process).

It is important to note that this decision only affects arbitral awards rendered in Onshore Dubai. It remains possible for parties seeking enforcement of foreign awards and judgments to use the DIFC Court as a conduit jurisdiction for enforcement against parties and assets located in Onshore Dubai. However, the judicial committee is presently considering these categories of "conduit" cases as well.

Background to the establishment of the new Dubai Judicial Committee

In a series of much-publicised recent judgments, the DIFC Court confirmed that DIFC law permits the use of the DIFC Court as a "conduit" to enforce foreign court judgments; and both foreign and domestic arbitral awards against award/judgment debtors located in Onshore Dubai, even in circumstances where the award/judgment debtor has no connection with the DIFC whatsoever.

This series of judgments is generally regarded as being of great legal and commercial significance to award/judgment creditors seeking to enforce against assets in Onshore Dubai and the wider Middle East, as it potentially offers a shortcut to enforcement whereby the Onshore enforcement regime could effectively be bypassed.

However, in a move which caught the entire Dubai legal market by surprise (including, it seems, the DIFC Court itself) late last year Dubai Decree No. 19 of 2016 was published, establishing a new judicial committee in Dubai. The Committee is empowered to:

  • Determine conflicts of jurisdiction between the Onshore Courts and the DIFC Courts
  • Rule on conflicting judgments between the Onshore Courts and the DIFC Courts
  • Propose new rules necessary to avoid such conflicts

The Committee is comprised of seven members: three judges from the DIFC Courts, three judges from the Dubai Courts and the Secretary General of Dubai's Judicial Council, with the President of the Dubai Court of Cassation (one of the three Dubai Court judges) having the casting vote.

Litigants are entitled to submit applications to the Committee to give rulings on conflicts of jurisdiction and/or conflicting judgments. The Committee's decisions, which are final, binding and un-appealable, are required to be given within 30 days of the date of filing the application (although we are aware that this deadline is not being adhered to).

The Decree itself is surprisingly short on detail, and was not accompanied by any commentary, guidance or procedural rules. It has therefore created significant and unwelcome uncertainty, with fears expressed that the Committee has effectively been established to rein in the DIFC Court's jurisdiction.

The Judicial Committee hands down its first decision

The Committee has now handed down its first decision in the case of Daman Real Capital Partners Company LLC v. Oger Dubai LLC, Cassation No. 1/2016).

In brief, the case involved a dispute flowing out of the construction of Daman Tower, a high-rise building in the DIFC. Oger prevailed in the subsequent DIAC arbitration, which was seated in Onshore Dubai, and thereafter sought enforcement of the award against Daman (a DIFC company) in the DIFC Court. Daman thereafter commenced annulment proceedings in the Onshore Courts, which were the courts with supervisory jurisdiction over the arbitration.

In the DIFC Court proceedings, the DIFC Court ordered a stay of the enforcement action pending the outcome of the annulment action in the Onshore Courts, but (applying its own law and procedures) only on condition that Daman paid security into court. When Daman failed to comply with this order, the DIFC Court proceeded to recognise and enforce the award, and (following a further application) ordered that Daman be wound up.

Meanwhile, in the Onshore Courts, the Court of First Instance and the Court of Appeal, hearing Daman's annulment case, held that they had no jurisdiction to do so as the DIFC Court had already determined that the award was enforceable.

Daman applied to the Committee on the grounds that a conflict of jurisdiction had arisen between the Dubai Courts and the DIFC Courts.

In its decision, which was handed down in mid-December last year, the Committee agreed with Daman that there was a conflict of jurisdiction between the two courts and ordered (by majority) that:

  • The case be remitted for trial to the Dubai Courts
  • The DIFC Courts "should cease from entertaining the case"

It is worth noting that the Committee stated in its decision that "There is no similarity between this case and the case when it's sought to enforce or annul a foreign arbitral award in several jurisdictions pursuant to the New York Convention 1958", which may indicate that it will take a different approach when considering the enforcement of arbitral awards rendered outside of Dubai.

All three of the DIFC Court judges sitting on the Committee dissented from the ruling that the DIFC Courts should cease from entertaining the case. In a brief dissenting opinion dated 25 January 2017, the DIFC Court judges set out the following views:

  1. At all stages it has been accepted by the DIFC Courts (DIFCC) that the courts of the arbitral seat are the Dubai Courts and that only Dubai Courts have jurisdiction to annul the award.
  2. The DIFCC has compulsory and exclusive jurisdiction to entertain an application for recognition and enforcement within the DIFC.
  3. There are therefore two competent courts to decide this case, each court deciding the matters concerning this case within its jurisdiction according to the relevant laws governing its jurisdiction.
  4. Pursuant to Article 44(2) of the DIFC Arbitration Law the application by Oger to enforce the award was adjourned on condition that Daman posted appropriate security and Daman failed to comply with such condition.
  5. The Committee should only have considered a stay order against the continuation of the DIFCC proceedings if security were furnished for at least 50% of the claim.

Conclusions

The decision by the Committee has generated considerable debate in Dubai's legal community. On the surface, the decision represents a setback for those parties seeking to exploit the conduit jurisdiction of the DIFC Court to enforce arbitral awards rendered in Onshore Dubai.

In reality, this is not a true "conduit jurisdiction" case, as Oger's intention was to enforce the award against Daman and its assets in the DIFC itself (and not to take the resulting DIFC judgment back to the Onshore Courts for enforcement). However, it is plain (for the reasons explained above) that the Committee's decision will adversely affect such cases.

Given the lack of precision in the Committee's ruling that the DIFC Court "should cease from entertaining the case", it is presently difficult to form a definitive view as to the appropriateness of its decision (indeed, the DIFC Court has itself requested the parties' submissions on the effect of the decision).

If the Committee intended that the DIFC Court should dismiss the proceedings before it, then that would be a very surprising (and indeed alarming) result in circumstances where the DIFC Court clearly had exclusive jurisdiction to recognise and enforce the award in the DIFC under its own arbitration law; not least since Daman is a DIFC-based defendant with assets located in the DIFC.

If, however, the Committee has ordered the DIFC Court to stay its proceedings pending the outcome of the annulment proceedings in the Onshore Courts (which have now reached the Dubai Court of Cassation), it is at least arguable that this is the correct result.

The legal analysis underpinning the Committee's decision is far from detailed, and the decision itself is regrettably short of defined principles to guide parties and legal practitioners. Certainly, no "new rules" are set down to avoid such conflicts in the future, which is unfortunate.

However, it is arguably proper, in light of the unique relationship between these two Dubai-based sister courts, that the DIFC Court should stay (without condition) proceedings to enforce awards rendered in Onshore Dubai pending the outcome of any annulment action commenced in the Onshore Courts. In short, it would be a strange result if the Emirate's laws permitted one court to order the winding-up of an award debtor when a sister court with supervisory jurisdiction over the arbitration is still deciding whether the award on which the winding up order is based should be annulled. If, for example, the Onshore Courts were now to set aside the award, the efficacy of the DIFC Court's rulings would be called seriously into question.

We will have to wait for the publication of further decisions to see what approach the Committee will take to the other categories of conduit jurisdiction cases, in particular those related to the enforcement of foreign awards and court judgments. However, as highlighted above, the brief caveat in the Committee's decision certainly gives rise to some optimism in this regard.