US court refuses to enforce DIFC-LCIA arbitration clause

Disputes about jurisdiction or the right forum for the dispute can significantly increase costs and time for dispute resolution. They also give room to guerilla tactics employed by a recalcitrant party to undermine swift dispute resolution. For this reason, clear and enforceable dispute resolution agreements are imperative. But what happens if an arbitration clause was valid at the time it was drafted – and now no longer is?

In a recent decision dated 6 November 2023, the United States District Court of the Eastern District of Louisiana (2:23-cv-01396-GGG-KWR) had to deal with such a question. The court found the arbitration agreement in question to be unenforceable since it referred to the former Dubai arbitration institute that no longer exists.

Dubai arbitration institutions

In 2021, the government of Dubai issued a decree abolishing the DIFC Arbitration Institute. The DIFC Arbitration Institute (or DAI) was a joint venture between the London Court of International Arbitration (LCIA) and the Dubai International Financial Centre (DIFC). The DIFC Arbitration Institute had an operating agreement with the LCIA to administer arbitrations in the DIFC free zone under an adapted version of the LCIA rules known as the DIFC-LCIA rules.

In 2021, all assets of the abolished institute were transferred by decree to the Dubai International Arbitration Centre (DIAC). The transfer also included selected staff and cases. Since the abolition of the DIFC Arbitration Institute, the DIAC has continued to administer cases based on existing DIFC-LCIA arbitration agreements. The government of Dubai and the DIAC deems existing DIFC-LCIA clauses to remain valid.

Background of the Louisiana court decision

The plaintiff is a Saudia Arabian company that supplied materials, products and services for an oil and gas project in Saudi Arabia. In the Louisiana litigation, the plaintiff claimed payment in the amount of USD 1.355 million from three U.S. affiliates of its Saudia Arabian contract partner, which it claims is merely a shell company.

The defendants filed a motion to dismiss the payment claim based on the doctrine of forum non conveniens or, in the alternative, to compel the plaintiff to arbitrate its claim. The defendants argued that the parties had chosen Dubai as the forum for their disputes in the contract. The arbitration clause contained in the contract states that any dispute between the parties is to be “referred by either Party to and finally resolved by arbitration under the Arbitration Rules of the DIFC LCIA.”

Court decision: The DIAC is not the same forum as the former DIFC Arbitration Institute

The court denied the defendants’ motion to dismiss the claim and compel arbitration for the following reasons:

• The court found that it could not compel arbitration “when the agreed upon arbitration tribunal is unavailable or no longer exists”. The court stressed that the contractual choice of forum was an integral part of the agreement to arbitrate, rather than an “ancillary logistical concern”.
• The court emphasized the fundamental principle that arbitration is a matter of contract and consent. It held that neither the court nor the Dubai government has the authority to “rewrite” the arbitration agreement and change the forum contractually agreed to by the parties.
• The court found that “Whatever similarity the DIAS may have with the DIFC LCIA, it is not the same forum in which the parties agreed to arbitrate.” Since the agreed upon forum is no longer available, the court could not compel the plaintiff to arbitrate.

Arbitration agreements in contracts pre-dating 2022 referring to arbitration in Dubai likely require amendment

Companies that are active on an international level would do well to check the arbitration clauses contained in their “older” contracts that pre-date 2022. Any arbitration agreement that refers disputes to arbitration under the DIFC-LCIA rules and/or the DIFC Arbitration Institute likely require amendment.

The decision by the Eastern District Court of Louisiana also illustrates why it is important that companies seek legal advice during contract negotiations to decide which dispute resolution mechanism to incorporate into their agreement. This especially applies when the contract partner proposes smaller, industry specific or local arbitration institutions.