Failing to prepare for the eventuality of disputes can cost organisations significant time and money, with the risk that the outcome will not profit any of the parties. In contrast, agreeing to a well thought-out process before disputes arise will increase the chances of a speedy and effective resolution.
The starting point to effective dispute management is to use dispute resolution clauses tailored to the particular transaction. These should include alternative dispute resolution (ADR) processes that can limit the need for expensive and time-consuming court litigation or arbitration.
The legal framework of the United Arab Emirates (UAE) has positively evolved to embrace ADR methods. As a result, disputes there are increasingly resolved by some form of ADR procedure between the parties, rather than by a court or other tribunal.
This article discusses the importance of drafting robust dispute resolution clauses and explores some considerations for organisations selecting a form of ADR when doing business in the UAE.
START AT THE CONTRACT
The overriding objective of a dispute resolution clause is to provide certainty to the parties, with a clear roadmap for the effective administration of a dispute that may arise, which may often take the form of escalation clauses or multi-tiered dispute resolution clauses. This is a critical consideration at the time of contracting because, once a dispute arises, parties are unlikely to reach an agreement on anything, let alone a mechanism to resolve the dispute.
In escalation clauses, parties agree to a series of steps, usually one or more ADR procedures, before resorting to litigation or arbitration. Each step is designed to handle the dispute if it has not been resolved by the previous step, and each step escalates the dispute to a level above the previous step. An escalation clause generally requires each step of the process to be completed before the parties can move to the next.
Effectively incorporating an escalation process is largely contingent on the proper drafting of the dispute resolution clause in contracts. It should be concise, comprehensive and tailored to the needs of the parties. However, parties may make imprudent concessions or fail to properly draft a tailored dispute resolution process if:
- They wrongly perceive dispute resolution clauses as a boilerplate provision;
- They are unaware of the importance of the wording of a dispute resolution agreement; and
- They are blinded by the so-called “honeymoon phase” when creating their contracts, and don’t properly consider that their relationship might break down.
As a result, “pathological” dispute resolution agreements are more common than they ought to be. Defective clauses may give rise to parallel or satellite litigation over the meaning and effect of the ADR provisions, delaying resolution. More importantly, poorly drafted agreements may result in one party being unable to compel the other to engage in the ADR processes because the escalation clause is insufficiently certain for it to be enforceable.
MAIN ADR PROCEDURES
The most popular forms of ADR in the UAE are direct negotiations and mediation. There is also a growing trend in the construction industry to use expert determinations and dispute boards. These types of ADR procedures are explained below.
Negotiation is the most flexible ADR process and involves meetings among generally high-level representatives of each party to discuss amicable resolutions. Usually, there is no neutral third party.
Negotiations are most effective if protected by confidentiality provisions, to encourage the parties to freely make offers and concessions without the risk that such discussions will later be used against them. In many countries, settlement communications are deemed privileged and cannot be used in later proceedings to prove liability or the amount of a claim.
However, the concept of “without prejudice” communications is generally not recognised in the UAE. Consequently, admissions and concessions made in the settlement process can be used against the parties during proceedings.
Therefore, it is especially important for projects in the UAE to contractually limit the risk that settlement correspondence is relied on in legal proceedings. These strategies include, among others: entering into a confidentiality agreement to avoid disclosure; marking settlement communications with wording to the effect that any offer or communication does not constitute an admission of liability; and agreeing to an undertaking that the records of the settlement discussions will not be used as evidence in proceedings.
Mediation sees a neutral third party assisting disputing parties to a resolution, which is then recorded in a binding settlement agreement. Mediation has a high rate of success globally but relatively few commercial mediations take place in the UAE. Common impediments in the UAE include:
- First, mediation is often mistakenly equated with negotiation. Thus, parties that have engaged in failed negotiations might believe that they have exhausted the mediation avenue, causing them to refer their dispute to the costlier, more time consuming and riskier alternatives of litigation or arbitration;
- Second, due to a lack of understanding as to the process and outcome, mediation may be perceived to be a sign of weakness; and
- Third, multi-tiered dispute resolution clauses in standard contracts are often amended by deleting mediation (and other ADR provisions).
That said, recent legislative developments indicate that mediation may become more common in the UAE. In 2021, the UAE introduced a law on mediation in civil and commercial disputes, and the Emirate of Dubai introduced a law regulating conciliation. Among other things, the UAE mediation law provides for two types of mediation:
- Judicial mediation. Competent courts can refer disputes to mediation at any stage, provided the parties consent; and
- Non-judicial mediation. Parties with a mediation agreement may directly resort to a mediation and conciliation centre before commencing court or arbitration proceedings. The courts will prevent either party from commencing court or arbitration proceedings, unless the mediation agreement is invalid or impossible to implement.
The mediation law implements international best practices likely to encourage mediation in commercial disputes. These include the protection of “without prejudice” discussions in mediations (not previously recognised), freedom to select and appoint a private mediator, and a registration regime to ensure suitably qualified mediators.
Expert determination sees parties appoint an independent expert, with specialist or technical knowledge, to determine issues in dispute. Parties generally refer to expert determinations for specific categories of disputes (e.g. prolongation costs on a project). Parties may agree that the determination is binding or non-binding.
Unless otherwise agreed, the expert determination process is usually binding on the parties and can only be challenged on limited grounds such as fraud and partiality. However, there is some uncertainty on whether an expert determination is binding in the UAE. In a relatively recent judgment, for example, the Court of Cassation of the UAE determined that an expert determination cannot adjudicate a dispute and, as such, refused to give it a binding effect.
Dispute boards are typically found in standard form construction contracts such as the FIDIC (Fédération Internationale Des Ingénieurs Conseils) “rainbow suite” of contracts. Dispute boards are either one person or a panel of three who, under a contract, either:
- Provide non-binding recommendations to the contracting parties (dispute review board); or
- Make binding decisions (dispute adjudication board).
Despite the resounding success of dispute boards globally, their adoption in the Middle East remains low. Perhaps for cultural reasons, employers often delete the DAB clauses. In doing so, an opportunity to resolve disputes effectively and economically may be lost.
Further, there is some uncertainty on how dispute board decisions are dealt with in the local courts, which may lead to ancillary litigation and wasted time and costs.
The legal framework of the UAE is embracing the culture of ADR to limit the disruptive effects of disputes on organisations doing business in the country.
While these developments are encouraging, parties should nonetheless spend time and resources to devise sound plans for the successful management of disputes.
The relatively little time that is required to draft an effective and enforceable escalation clause will avoid time-consuming battles and resultant costs. Further, the plan should account for the particular advantages and pitfalls of certain forms of ADR, as applied in the UAE.