DIFC-LCIA no more: where next for arbitration in Dubai?

On 14 September 2021, Dubai’s Decree No. 34 of 2021 (the Decree) was published, signaling significant changes to Dubai’s dispute resolution landscape. This legislative surprise abolished the Dubai International Financial Centre (DIFC) Arbitration Institute (DAI), which had operated the DIFC-LCIA Arbitration Centre (DIFC-LCIA), the leading MENA arbitral institution, through an agreement with the LCIA.

The Decree took effect on 24 September 2021, the date on which it was gazetted. The Decree also abolished the Emirates Maritime Arbitration Centre (EMAC), which was likewise based in the DIFC. It instead established a single unified arbitration institution for Dubai, the restructured Dubai International Arbitration Centre (DIAC). The restructured DIAC will be based in onshore Dubai and have a branch in the DIFC, but otherwise much is unknown about how it will operate. These changes were unexpected, not only for the international arbitration community but also for the LCIA, and have certainly sparked concern over the status of current arbitrations under the DIFC-LCIA Rules.

There will clearly be a number of potential practical implications for parties currently arbitrating under the DIFC-LCIA Rules. An immediate and pressing practical issue is access to parties’ deposits, which have been held in bank accounts in DAI’s name. Until that issue is resolved, arbitral tribunals may be cautious about continuing proceedings.

While Article 6(B) of the Decree provides that DIFC-LCIA arbitral tribunals will continue to hear and determine cases before them under the DIFC-LCIA Rules, Article 6(B) proposes that the new DIAC will supervise these cases. There was significant disquiet about this among users, given the inherent complexities in the DIAC taking over from the DIFC-LCIA, not least the numerous references to the functions of the LCIA Court in the DIFC-LCIA Rules.

On 7 October 2021 there was perhaps something of a u-turn on the approach to existing cases, with both the DIFC and the LCIA announcing that the existing caseload will be administered by the casework team from the DIFC-LCIA. This is likely to provide a degree of reassurance to parties concerned about the potential for attempted challenges to enforcement of future DIFC-LCIA awards, given the proposed change in institutional oversight to the DIAC. Importantly, however, the DIFC-LCIA team will only be managing cases filed before the date of the decree and the LCIA’s statement makes it clear that urgent clarification is required in relation to “the current status of the DIFC-LCIA casework team, their ability to access the funds held by DAI on behalf of the parties to existing DIFC-LCIA cases and the way in which the authorities intend to equip DIAC to perform its new functions.”

Many parties to existing contracts containing DIFC-LCIA clauses will also be troubled about the potential impact of the changes on future disputes. Article 6(A) of the Decree provides that existing agreements of this kind remain valid and that DIAC will simply be substituted for the DIFC-LCIA unless the parties agree otherwise (retaining some role for party choice). One issue, which could give rise to tensions, is whether the LCIA Court might exercise its right under DIFC-LCIA Rules, art 32.4 to step in to administer a DIFC-LCIA arbitration directly if it deems this appropriate.

In addition, Article 9 of the Decree states that the new DIAC will have effected the transition detailed in the Decree by 20 March 2022. However, there will continue to be uncertainty about the likely timing and content of the new DIAC Rules. The current DIAC Rules are 14 years old and not aligned with the updated rules introduced by the leading international arbitration institutions. While revised DIAC Rules were announced in 2017, these are yet to be adopted. Many parties are likely to question the shift to DIAC administration of these cases since the previous incarnation of DIAC had not achieved unqualified acceptance among MENA arbitration users and the composition of the new DIAC arbitration court is not yet known. There is the potential for attempts to challenge enforcement of future awards issued by DIAC in arbitrations under DIFC-LCIA clauses. In light of these concerns, many parties will now be seeking to rewrite DIFC-LCIA clauses to substitute another institution, provided that this can be agreed.

In the short term the Decree is likely to adversely impact Dubai’s reputation as an arbitral centre. The abolition of EMAC is not likely to be particularly significant, given that EMAC did not appear to have a high number of cases and in fact had not produced any recent caseload figures. By contrast, the DIFC-LCIA was the most successful international arbitration institution in the region, supported by its association with the LCIA. The LCIA connection allowed DIFC-LCIA users to arbitrate under trusted rules which were very close to the LCIA Rules and with the knowledge that arbitrators would be appointed by the well-respected LCIA Court, which would also handle arbitrator challenges. DIAC’s track record is not the same and there has been a long wait since the redrafting of the DIAC Rules was first mooted. It is not known exactly when the new DIAC Rules will come into effect and to what extent (if at all) any provisions of the DIFC-LCIA rules will be incorporated into the new rules. There are also uncertainties around how DIAC arbitrator appointments will be made in future and how challenges to arbitrators will be handled.

It is accordingly unlikely that all parties currently favouring the DIFC-LCIA will transfer their allegiances across to DIAC. Instead we may increasingly see parties drafting in a choice of DIFC seat and venue but selecting other leading international institutions to administer their arbitrations, such as the LCIA or ICC. Other seats in the UAE may also become attractive. The ICC recently converted its representative office in the Abu Dhabi Global Market (ADGM) into a case management office.

In light of the recent ICC MOU with the Union of Arab Banks to promote arbitration to banks in the region, it may be that increasing numbers of MENA banking contracts ultimately take this route. This approach will allow parties the enforcement advantages of the Riyadh Convention, which allows awards converted into court judgments made in arbitrations seated in signatory states to be easily enforced in other signatory states. It will also mean that parties can benefit from a combination of valuable local knowledge together with trusted international standard institutional rules and administration. The Decree may also provide some impetus to other arbitral institutions in the MENA region, such as CRCICA in Egypt. Other MENA centres have been gaining traction in recent years and the changes in Dubai may intensify this trend.  

Having said that, there are many positives for the future of Dubai arbitration, including the DIFC’s modern arbitration legislation and a supportive court system, with a pattern of good recent decisions. These include the first anti-suit injunction against onshore Dubai court proceedings granted in 2020 and more recently the court’s decision in Lahela v Lameez that under the Riyadh Convention the DIFC Court can order alternative service or dispense with service on a party domiciled in a Convention State. The Riyadh Convention is a potentially powerful tool, allowing an award in a DIFC-seated arbitration to be turned into a Dubai court judgment which can then be enforced throughout the UAE and users will continue to wish to take advantage of this. The region offers a talented pool of both counsel and arbitrators and there is also an increasing appetite to arbitrate in the region, particularly among MENA parties.

In the longer term, the volume of arbitration seated in the DIFC may well continue to grow given the clear advantages of arbitrating there. It is accordingly likely that Dubai will remain an important centre for international arbitration in coming years, even without the DIFC-LCIA. The consolidation and simplification of the DIFC-LCIA and EMAC into the DIAC may well in the longer term enhance this. That said, there are undoubtedly significant obstacles for the DIAC to overcome in order to gain the trust of the international arbitration community, certainly in the short term. While the DIAC may not initially find favour, there are many other good institutional options for those drafting clauses for DIFC-seated arbitration. This is likely to see caseload move from the DIFC-LCIA to other institutions both inside and outside the region, with many users moving to the LCIA and ICC.

This piece first appeared on the LexisNexis Dispute Resolution Blog.