Importance of an Arbitration Clause in an Agreement

A recent favorable judgment was issued to Al Rowaad Advocates and Legal Consultants by the Court of Cassation in Dubai in a commercial case registered before the Courts of Dubai.

The case discusses the importance and validity of an arbitration clause in any commercial agreement signed between both the parties and the authority of the courts to reject any civil claim on the grounds of the parties’ confirmation and acceptance to resolve the dispute through arbitration (as reflected in the agreement).

Facts of the Case

The plaintiff registered a commercial order against the defendant (represented by Al Rowaad Advocates) to oblige the defendant to pay AED 5.5 million (due in 2017) in exchange for the commercial transactions between the two parties, solemnly rejected by the defendant.

Nonetheless, the Court of First Instance issued a judgment against the defendant and obliged the defendant to remit the claim amount as per the commercial arrangement between the parties along with nine percent interest yearly until the full payment is submitted to the other party.

An appeal was registered by the Defendant before the Court of Appeal wherein, the defendant (appellant) requested the court to set aside the judgment of the Court of First Instance because the commercial agreement signed between the parties confirms that the parties shall refer the matter to Arbitration, in case of any dispute. Based on the said claim, the Court of Appeal accepted the case of the defendant (appellant) and set aside the judgment of the Court of First Instance, and obliged the other party to register the claim before the relevant arbitration institute.

The case was thereafter registered before the Court of Cassation by the plaintiff for challenging the judgment issued by the Court of Appeal and requesting the court to oblige the defendant to pay the claim amount. The plaintiff based his case on the following grounds:

The parties were in a long-drawn commercial relationship and were conducting works based on purchase orders issued now and then, however, later a termination agreement was signed to terminate the relationship between the parties and confirmed that the dispute between the parties (concerning termination agreement) shall be referred to the arbitration institute. In this regard, the plaintiff affirms that the arbitration clause is mentioned in the termination agreement and not mentioned in the commercial relationship or purchase orders exchanged between the parties.

Court’s Response

The court responded that it is admissible to sign the arbitration agreement without a special power of attorney, because of the law and the previous Cassation judgments, which prove that the one who signs the agreement has the power of attorney to sign this type of agreement because of good faith.

In reference to a precedent issued by the Court of Cassation in Dubai, it was opined by the court that arbitration is an agreement between the Parties to appoint the arbitration as a way to resolve disputes rather than regular courts. It is not acceptable and legal to invalidate such an arbitration clause only because the one signing the agreement does not have a specific power of attorney.

However, it is presumed that the one signing the arbitration clause has the authority to sign in good faith and it will be binding on both the parties. In furtherance, if the law obligates the signee of the arbitration clause to possess a specific power of attorney, but if the name of the company is mentioned on the agreement and another person signs the agreement, it proves that the one signing the agreement is a representative of the company.

In addition, the court confirms that if on the first page of the agreement the name of the company and the legal representative of the company is defined and some other person signs the agreement, the contract shall not be deemed valid. It subsequently authorizes the party to challenge the validity of the contract and its good faith.

In conclusion, the court confirmed that if only the name of the company is mentioned on the contract and some individual signs such contract, the company cannot challenge its validity on the ground that the individual signing the contract does not possess a specific power of attorney.

In conclusion, the court accepted the defenses submitted by the defendant and refused the case submitted before the Cassation Court. Thereby, obliging the party to adhere to the provisions of the agreement signed between the parties and register the matter before the arbitration institute.

In most circumstances of a commercial dispute, it is always advised to approach the best Commercial lawyers in Dubai to comprehend the provisions of the contract and safeguard the interest of the client in all given scenarios.

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