A recent ruling of the Dubai Court of Cassation (the highest Court in the Emirate, against whose rulings there lies no further appeal) raises serious concerns as to whether the unruly horse of public policy that became infamous in the early nineteenth century in the common law world and in particular along the shorelines of the British Isles has now bridged the gulf between the common and civil law world, made its way across the Persian Gulf and - washed ashore in the Emirate of Dubai – has turned into a camel. By way of reminder, the unruly horse was borne to English law with the assistance of Mr Justice Burrough in 1824, when he described the doctrine of public policy in the following terms: “It is a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from sound law.” (Richardson v. Mellish [1824] 2 Bing 229, 252) In its ruling of 16 September 2012 in Baiti Real Estate Development v. Dynasty Zarooni Inc. (Appeal No. 14/2012, Real Estate Cassation), the Dubai Court of Cassation has, in reliance on the principle of public policy, set aside an order for enforcement of a domestic arbitration award initially made by the Dubai Court of First Instance and subsequently affirmed by the Dubai Court of Appeal. On that occasion, the Court of Cassation gave an unprecedentedly wide interpretation to the concept of public policy as understood in the UAE, without, however, taking account of the particular conceptual and procedural nuances commonly attributed to public policy in an arbitration context. This said, Dubai Court case law on public policy is underdeveloped and does not provide much valuable guidance for the interpretation of the public policy concept in domestic arbitration. Irrespectively, the Dubai Court of Cassation’s sweeping approach in Baiti may set a worrisome, if not dangerous precedent, for the interpretation of public policy as understood in the UAE for purposes of both domestic and international arbitration going forward.

In brief, the dispute dealt with a DIAC arbitration in relation to an off-plan property transaction whereby Dynasty Zarooni had purchased an entire building from and to be developed by Baiti in Dubai. The resulting arbitration award declared the sale and purchase agreement between the parties null and avoid and hence automatically terminated on the basis that the agreement was in violation of Article 3 of Law No. 13 of 2008 Regulating the Interim Real Estate Register in the Emirate of Dubai (“Law No. 13 of 2008”). Article 3 provides for the mandatory registration of any sale and purchase of properties in Dubai in the Real Estate Register through the Dubai Lands Department. Any sale and purchase not so registered is null and void under the terms of that Article. As Baiti had failed to register the transfer of the off-plan property to Dynasty, the Sole Arbitrator considered the transaction between the Parties null and void and ordered Baiti to reimburse to Dynasty the entire purchase price.

In the view of the Dubai Court of Cassation, the Sole Arbitrator did not have the power to adjudicate matters under Article 3 of Law No. 13 of 2008 given that “such dispute [i.e. the registration vel non of a property under Article 3] is considered to be related to public order for being related to the rules of private ownership and the circulation of wealth …”. To arrive at this conclusion, the Court of Cassation relied on the definition of public policy contained in Article 3 of the UAE Civil Transactions Code, which provides in part:

“Public order shall be deemed to include matters relating to personal status such as marriage, inheritance, and lineage, and matters relating to systems of government, freedom of trade, the circulation of wealth, rules of individual ownership and the other rules and foundations upon which society is based …”

On this basis, the Court of Cassation concluded verbatim:

“Considering that public order is one of the basic controls that must have the priority of respect in all actions and judgments relating to the supreme interest of society and the social or political or economic or moral foundations upon which the State is founded. … Moreover, pursuant to Article 3 of the [UAE] Civil Transactions Code, the provisions related to the circulation of wealth and rules of private ownership are within the rules and foundations upon which society is based. The legislator’s interference in deciding a legal principle regulating the terms and conditions for the circulation of such wealth and private ownership inside the State in terms of possession and rights in rem and the nature and scope of these rights as well as the methods of their acquisition and termination, including the rules and regulations relating to its registration in the Real Estate Register of the Emirate of Dubai, are all considered as part of the provisions related to the funds system within the State which is regarded as public order by nature, which in turn falls outside the scope of arbitration … and instead lies within the competence of the courts.” (author’s translation)

It can hardly be denied that the wording of the Court of Cassation’s ruling is extremely wide, essentially capturing as “public policy” the application of any rules that relate to the circulation of wealth and private ownership. On a literal reading, therefore, the Court of Cassation appears to be saying that any issues in relation to the proper ownership of e.g. any real estate in the Emirate of Dubai are to be considered public policy. With all due respect to the Dubai judiciary, this interpretation of the public policy concept by reference to Article 3 of the UAE Civil Transactions Code cannot be correct. What the Court of Cassation has completely ignored in its interpretation of public policy is the statutory limit expressly imposed on the scope of public policy by the wording of Article 3 itself. Importantly, in its full text, Article 3 qualifies the true scope of public policy to be confined to matters of personal status, freedom of trade, individual ownership etc. “in such a manner as not to conflict with the definitive provisions and fundamental principles of the Islamic Shari’a”. In other words, only to the extent that any of the aforementioned matters are in conflict with the Islamic Shari’a are they to be considered public policy. This in turn means that it is the ingredient of the Islamic Shari’a in a disputed issue that elevates it to the status of public policy. At the risk of over-simplification, what this truly appears to mean is that within the meaning of Article 3 of the UAE Civil Transactions Code, the Islamic Shari’a is regarded as public policy and is co-incidential or even identical therewith. The Islamic Shari’a, in turn, arguably articulates itself in a number of specific ways that have little bearing on the majority of commercial and real estate arbitration, e.g. the award of specific types of damages, the nature and level of interest etc.

On a literal reading of the excerpted sections of the ruling, the Dubai Court of Cassation’s conclusions appear to be based on the erroneous assumption that matters of public policy are by definition unarbitrable. This, we would like to believe, could only hold true to the extent that the UAE understanding of public policy within the meaning of Article 3 of the UAE Civil Transactions Code was correctly confined to the Islamic Shari’a, which may arguably fall within the exclusive jurisdictional competence of the UAE courts. A similar approach in this context was taken by the same Court in a previous ruling of 12 February 2012 in a similar case (Case No. 181/2011, Real Estate Cassation). There, the Court established an express link between Article 203(4) of the UAE Civil Procedures Code, which provides that arbitration shall not be permissible in matters that cannot be resolved by settlement, and Article 3 of Law No. 13 of 2008. In the terms of the Dubai Court of Cassation’s ruling in that case:

“It is also established that reconciliation is not permissible in matters which relate to public order. Further, Article 203(4) of the Code of Civil Procedure provides that arbitration shall not be permissible in matters where reconciliation is not possible.

Accordingly, the disposition of units sold off-plan without compliance with Article 3 of Law No. 13 of 2008 … which provides that these units must be registered in the Interim Real Estate Register may not be the subject matter of arbitration simply because this [i.e. the disposition without registration] contravenes public order. As such, if a dispute that is subject to Article 3 of Law No. 13 of 2008 … is brought before an arbitrator and if the arbitrator issues an award in that dispute, such award is null and void, therefore the Court shall decide on the same [issue in dispute], at its own discretion, as [it is a matter that] relates to public order.” (author’s translation)

The Dubai Court of Cassation’s reasoning in this ruling departs from the erroneous premise that settlement is not permissible in matters which touch on public policy within the meaning attributed to it by the Court by reference to Article 3 of the UAE Civil Transactions Code. Doing so, the Court of Cassation ignores Article 733 of the UAE Civil Transactions Code, which provides an express list of matters that cannot be settled. In the terms of Article 733,

“[i]t shall not be permissible to enter into an accord [i.e. a settlement] if it includes any of the following impediments:

  1. The cancellation of a debt by another debt.

  2. The sale of food by way of commutative contract prior to delivery.

  3. The deferred exchange of gold against silver and vice versa.

  4. Riba al-nasi’a (usurious interest in consideration of the deferment of the payment of a debt).

  5. Reducing part of a deferred debt owed by a debtor in consideration of accelerating the date of payment.

  6. Reducing the amount of a guarantee on a deferred debt owed by a debtor in consideration of accelerated payment with an increase.

  7. An advance involving a benefit.”

Taking into account the wording of Article 733, there clearly does not appear to be any equation between public policy on the one hand and the purported impermissibility to enter into a settlement on the other. To the contrary, if there was any, it would be in relation to the public policy concept as defined by reference to the Islamic Shari’a as suggested above (which in turn would confirm the more restricted interpretation of public policy within the meaning of Article 3 of the UAE Civil Transactions Code). In practical terms, it would appear that the inarbitrability of Article 3 of Law No. 13 of 2008 is based on the fact that a decision on the registration vel non of a property in accordance with the terms of that Article falls within the exclusive competence of the Dubai Lands Department, which is a public authority. Read in context with Article 203(4) of the UAE Civil Transactions Code, registration is a matter for the Dubai Lands Department, parties cannot contract out of the registration of a property, which is a mandatory obligation under UAE law, and hence cannot arbitrate the specific issue of the registration. Equally, to the extent that the UAE courts have exclusive jurisdiction over a matter and the private parties cannot contract out of the Court’s jurisdiction, such matter cannot be subjected to arbitration. This said, there is no reason to believe that under UAE law, there is no room to request an arbitrator to draw the civil law consequences from e.g. a dispute arising from a developer’s failure to register a property in accordance with Article 3 of Law No. 13 of 2008 provided the Dubai Lands Department has decided the issue of registration in the individual case, e.g. an investor’s claim for loss of opportunity to sell a property to a third party due to the developer’s late registration. Also, under UAE law, to the best of our knowledge, there is no provision that prohibits the partition of jurisdiction between the competent public authorities/courts and arbitration tribunals depending on the choice of remedy, i.e. whether it is a public law remedy (such as a fine e.g. against the developer for failure to register, which would be administered by the competent public authority) or a civil law remedy (such as an award of damages to repair the private law consequences of the developer’s contractual default, which would fall within the natural jurisdiction of an arbitration tribunal). These remedies are complementary and can therefore apply cumulatively.

Importantly in this context, in its ruling of 16 September 2012, the Dubai Court of Cassation, correctly to our mind (provided the interpretation of the meaning of public policy in our own terms above), conceded that “when the legal rule [to be applied] is not related to public order [as previously defined (i.e. within the meaning of Article 3 of the UAE Civil Transactions Code)] or where its purpose is the protection of rights and private interests, it shall not be permissible to present public order as a basis [for setting aside]’. Private interests, i.e. those which relate to disposable individual rights, are of course arbitrable, both in the UAE and in other leading arbitration jurisdictions around the world. Their purported inarbitrability can therefore not be adduced as a ground for setting aside.

It is our view that the Dubai Court of Cassation’s two recent rulings of 12 February and 16 September 2012 must remain confined to their specific context, to wit the application of Article 3 of Law 13 of 2008. The UAE and more specifically the Dubai judiciary, astride the unruly camel of public policy, would be best advised to hold the reins tightly and test the vagaries of public policy on a case-by-case basis in order to keep under control the unforeseen consequences that too far-reaching a concept of public policy may entail for Dubai and the UAE more generally as a place of arbitration. To embrace a notion of public policy that may put at risk entire specialist areas of arbitration, such as real estate arbitration, that have formed in Dubai over the past decade or so and that have become an important cornerstone of the DIAC, one of the leading arbitration centres in the region, would be entirely counterproductive and would adversely affect the slow but steady recovery of investment after the economic downturn and the continued development of commercial arbitration in the region.

© Habib Al Mulla & Company 2012

This material is intended for general information only and should not be considered as legal advice. For further information, please contact us.