The issue concerning legal capacity has caused much consternation in the UAE due to the fact that UAE legislation requires a special authorization for arbitration and thus losing the right to litigate disputes in the UAE courts.   Therefore, it is fairly commonplace in the UAE to see a challenge to jurisdiction based on an alleged lack of authority, of the signatory, to bind the company to arbitration.

In a recent case in the DIFC Courts [Ginette Pjsc v (1) Geary Middle East FZE (2) Geary Limited [2016] DIFC CA-005] the DIFC Court of Appeal had the opportunity to grapple with the application of both DIFC Law and UAE law in relation to the issue of Legal Capacity.  The case concerned an application to set aside a DIFC-LCIA arbitral award.  In its application to set aside the arbitral award, the award debtor raised UAE procedural and substantive law in order to support its argument regarding legal capacity.

The DIFC Court of First Instance (“CFI”) held that DIFC law governed the Arbitration Agreement, however, the Judge considered the issue of legal capacity under UAE law, in any event, and found that under both DIFC law and UAE law that the Arbitral Agreement was valid.  The judge found that even if the signatory lacked actual authority, the arbitration agreement was binding upon the appellant under the principles of apparent authority under DIFC law and that these principles would also apply under UAE law.

On appeal by the award debtor to the DIFC Court of Appeal (“CoA”) the CoA dismissed the appeal after a consideration of both DIFC and UAE law, taking the view that consideration of Legal Capacity is a factual rather than a legal consideration.

Brief Background Facts

The dispute between the parties was in regards to a Settlement Agreement dated 21 May 2009 which included an arbitration clause that any dispute be finally resolved by arbitration under the Arbitration Rules of the DIFC-LCIA Arbitration Centre.

An Award was issued on 17th November 2014 by the sole arbitrator under the DIFC-LCIA Rules which ordered the Award Debtor to pay the sum of AED 31,500,000 plus accrued interest and costs.

The Award Creditor sought recognition and execution of the arbitral award and the Award Debtor made an application to set aside the award.  Both matters were consolidated and heard in the CFI on 13th March 2016.  Judgment was received on 7th April 2016 in the Award Creditor’s favour and the Award Debtor appealed the judgment to the DIFC Court of Appeal who upheld the decision of the CFI in a judgment dated 9th October 2016.

The proceedings before the DIFC CFI

The Award Debtor argued that the Arbitration Agreement was not valid as the Settlement Agreement in which it was contained was signed without the requisite authority, thus should be set aside under Article 41 (2)(a)(i) of the Arbitration Law.

The Award Debtor was a Private Joint Stock Company (“PJSC”) and according to Article 103 of the UAE Companies Law an arbitration agreement could only be authorized by a resolution of the General Assembly or Board of Directors of a PJSC.  Whilst the Articles of Association granted its Board of Directors authority to enter into arbitration agreements, the actual signatory to the Settlement Agreement was not a member of the Board and therefore the arbitration agreement was invalid.

The Award Creditor argued that the doctrine of ‘Apparent Authority’, contained in Articles 130 and 131 of the DIFC Contract Law, No. 6 of 2004 was engaged:

Article 130.  Apparent Authority

Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s conduct towards such third persons.

Article 131.  Creation of Apparent Authority

Except for the conduct of transactions required by statute to be authorized in a particular way, apparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.

The Award Creditor submitted that if there was no ‘express authority’ to enter into the arbitration agreement on behalf of the Award Debtor that it can, nonetheless, be found to have apparent authority under the DIFC law

Findings under DIFC Law

Central to the Award Debtor’s argument was that the Arbitration Agreement was not valid and should be set aside under Article 41(2)(a)(i) of the Arbitration Law.  However the burden of proving that the signatory was not an authorized signatory was placed on the Award Debtor.  Whilst accepting that there was no evidence of express authority the Court noted that there was no evidence provided that the signatory was not, in fact, authorized.

The Court found that the signatory “clearly held himself out as having the requisite authority to sign the Settlement Agreement as Executive Managing Director and the Award Debtor appears to accept that [the signatory] was authorized to sign the Settlement Agreement but asserts that this authority did not extend to the Arbitration Agreement contained in Clause 18.  However, no evidence has been furnished on this Court to support the position that [the signatory] had only limited authority as signatory to the Settlement Agreement.”

In any event the CFI Judge was satisfied that the signatory had ‘apparent authority’ under the Doctrine of Apparent authority, as set out in Articles 130 and 131 of the DIFC Law, which can be found if the Court is satisfied that the conduct of the Award Debtor reasonably interpreted caused the Award Creditor to believe that the company consented to the agreement.  even if actual authority was lacking.

Findings on UAE Law

The learned judge went on to consider the issue under UAE law stating that “[i]n any event, if it was UAE law that governed the Arbitration Agreement, the Doctrine would still apply.  The recent judgment of the Dubai Court of Cassation in Case 547 of 2014, issued on 21 October 2015 sets a precedent which is in line with the Doctrine:

This Court has also decided that if a specific company’s name was listed in the preamble or introduction of a contract and was signed by another person at the foot of the page a presumption is established that the signatory has signed the contract in the name of and on behalf of the company.  As a result, the rights and obligations of the mentioned contract are attributed to the company, in view of the signatory acting on behalf of the company.  It is also decided that a personal signature, seal or fingerprint is the only source of authentication of a document.”

The CFI also considered Article 25 of Federal Law No. 2 of 2015 (“UAE Companies Law”) which states:

“Protection of Those Dealing with the Company

  1. The company shall not claim lack of liability towards those dealing with it, on the ground that the management authority was not duly appointed in accordance with the provisions of this Law or the Articles of Association of the company, so long as the acts of such authority is within the usual limits with respect to persons in the same position in companies that conduct the same type of activity as the company.
  2. To protect a person dealing with the company, he shall be a bona fide party.  A person shall not be deemed as acting in good faith if he actually knows or could have known, based on his relationship with the company, the aspects of deficiency in the act or work proposed to be held thereto against the company.”

CFI Conclusions

The CFI found that the Award Creditors were the innocent party; that there was no evidence that they knew or could have known that the signatory did not have the requisite authority.  Thus the DIFC Court found that even on a consideration of UAE law that the Arbitration Agreement was valid

DIFC Court of Appeal

The CoA did not address the question as to whether the DIFC law or UAE Law governed the validity of the arbitration agreement.  However, the CoA chose to ‘assume in the appellant’s favour that the validity of the arbitration agreement is governed by UAE law.’

The CoA noted that no evidence was provided to give evidence of the Board’s consideration or lack of consideration of the settlement agreement; that the settlement agreement included the parent company’s guarantee; that the appellant accepted that it was bound by the settlement agreement.  That “[i]t is likely to the point of near certainty that the settlement agreement was put before the Board for its consideration and approval and that entry into it was approved, and there was no evidence to the contrary”.

The CoA noted that the award debtor conceded that the settlement agreement (containing the arbitration agreement) which involved the payment of a substantial sum was valid.  Therefore, the Court found that, as a consequence, the Board had also approved the arbitration agreement.

The CoA took the view, having considered numerous authorities from the UAE Courts, presented in support of the need for specific authority, that the issue of legal capacity involved an analysis of factual evidence.

It would appear that in order to rely on this defence, that absent specific authority an arbitration agreement was necessarily invalid, requires cogent factual evidence in support.

If you need further assistance on Arbitration law in the the UAE, contact us on +971 44358 577.

DIFC Court rules on Arbitration Agreements was last modified: February 13th, 2018 by Fichte Legal