Headnote

Arbitration – Grounds for annulment of award – Public order

Summary of facts

The Petitioner had instituted an earlier action against the Respondent to claim an insurance amount from the Respondent’s insurer. The Petitioner’s wife, who had held the relevant policy, had died, and the Petitioner claimed the insurance amounts as sole beneficiary. The Court did not accept this action, due to the existence of an arbitration clause in the insurance policy. Accordingly, the Petitioner commenced arbitration proceedings against the Respondent, which resulted in an award in favour of the Petitioner and an order for the Respondent to pay AED 3,500,000 plus legal interest of 9% (which totalled four times the amount of the award itself). The Respondent appealed on the grounds that the arbitrator followed rules of the Civil Procedure Code, which did not apply, in issuing his decision concerning interest, rather than the Contracts Law of 1971, and on the grounds that the Republic of Lebanon also had a share in the insurance amount, under the Decree of Distribution, so the Petitioner was not solely entitled to the insurance amount.

The Respondent submitted a motion to set aside the arbitrator’s award on the following grounds:

  1. The arbitrator’s award obliged the Respondent to pay the insurance sum as well as legal interest of 9% pursuant to the Civil Procedure Code, although the Court of Cassation stated in its judgment relating to the existence of an arbitration agreement that a disputed insurance policy and the resulting effects are not subject to the provisions of the Civil Procedure Code but rather to the Contracts Law of 1971.
  2. The arbitrator’s award ordered interest that exceeded the insurance amount by four times, in breach of the provisions of the sixth chapter of the Contracts Law of 1971 and in breach of the sixth article of the insurance policy that stated that the paid amount should not bear any interest.
  3. The arbitrator violated Islamic law by considering the Petitioner as the sole heir, as the Decree of Distribution establishes that the deceased’s estate consists of two shares: one for the Petitioner and the other for the Republic of Lebanon.
  4. The arbitrator had decided that the Petitioner had legal capacity in relation to the insurance policy despite the fact that the Petitioner had not taken any action to appoint an administrator or liquidator for the deceased’s estate under Article 17 of the Law Regulating the Lebanese Sharia Courts.
  5. The power of attorney issued by the Petitioner to his attorney was issued in the Petitioner’s capacity as the sole beneficiary of the insurance policy, making the representation invalid.
  6. The arbitrator’s award was based on a letter sent by the Respondent as an insurance policy.
  7. The arbitrator had dismissed the argument that the right to claim the value of the insurance policy had lapsed through prescription on the basis that the penal action instituted in Lebanon in which the Petitioner was accused of murdering his wife had interrupted the prescription. However, the Respondent did not use the long prescription as a defence but rather the three-year prescription in Article 1036 of the Civil Procedure Code.
  8. The arbitrator’s award was based on an invalid arbitration deed, as the Respondent had not responded to the arbitrator’s request to sign the arbitration deed.

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The court accepted the grounds to appeal and decided to set aside the arbitral award on the basis that the award was issued against the public order in allowing the Petitioner to recoup the whole insurance amount when he only had a right to part of it and for basing the decision on the wrong law. The court also dismissed the indemnification claim against the Respondent.

Subsequently, the Petitioner filed a petition to cassation to challenge the Court of Appeal’s judgment, alleging, firstly, that he was in fact the sole heir under the Decree of Distribution and, secondly, that public order is not a ground for invalidating an arbitral award under Article 216 of the UAE Civil Procedure Code.

Held

The Court of Appeal’s judgment was overturned.

It is established by this Court and under Article 216 of the Civil Procedure Code that the litigants may move to invalidate the arbitrators’ award when its endorsement is under consideration by the court in the cases listed in said article, which relate to procedural irregularities and compliance with the arbitration agreement. The original rule is that the court should not decide on the merits of the case subject to the award of the arbitrator’s award and its conformity to the law. However, by way of exception, if it is established that the arbitrator issued his award in breach of the public order rules, the court shall verify this breach in light of the applicable rules in the judge’s country alone. Although such a breach is not included in the cases listed in Article 216, this does not mean that it should not be considered as a reason for invalidating the award, given that public order is a fundamental regulation.

Judgment

The Court stated that the judgment overturning the award made no mention of the sources on which it relied in finding that the arbitrator’s award was against the principles of the Islamic Sharia (regarding inheritance rules) and against public order in the UAE (regarding the interests it awarded) because it depended on the Decree of Distribution issued by the Lebanese Sunni Endowments Department as evidence and not on the relevant legislation itself. Therefore, it had not been established that the arbitrator’s award was against the principles of Islamic Sharia regarding inheritance rules and there was no indication of any breach of the law.

It is established in the adjudication of this Court and under the Article 216 of the Civil Procedure Code that the litigants may request setting aside an arbitrator’s award when it is submitted to the court for ratification in the cases listed in said article, which relate, for example and without limitation, to procedural irregularities. The rule is that the Court may not decide on the irregularities of the arbitrator’s award or its conformity with the law.

However, by way of exception, if it is established that the arbitrator issued his award in breach of the public order rules, the court shall verify this breach in light of the applicable rules in the judge’s country and not in any other country. Although such a breach is not included in the cases set forth in Article 216, this does not mean that it should not be considered as a reason for setting aside the award, given that public order is a fundamental regulation. Hence, an arbitrator’s award that breaches public order in the country where the action to invalidate or execute the award is instituted before its courts shall be subject to invalidation or non-execution in such country even if the award is correct or applicable in any other country for not breaching its public order rules. Article 3 of the Civil Procedure Code states that all the provisions relating to personal affairs, including marriage and inheritance, and all provisions relating to the regime, freedom of trade, transfer of powers, intellectual property rules and other rules and principles on which society is based shall be deemed part of the public order unless they conflict with the conclusive provisions and principles of Islamic Sharia law.

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In the chapter relating to jurisdiction rules, Article 27 of the Civil Procedure Code stipulates that the provisions of a law laid down in accordance with the preceding texts shall not apply if those provisions conflict with Islamic Sharia law or public order rules in the UAE.

Article 409 of the Federal Penal Code provides: “Any natural person who deals in usury with another natural person in any civil or commercial transaction shall be punished with imprisonment for no less than three months and with a fine of no less than 2,000 Dirhams. This shall include any terms or conditions implying any express or implicit interest, commission or benefit of any kind by the creditor, when it is established that such interest, commission or benefit does not correspond to any lawful benefit or service rendered by the creditor. Such implicit debt or interest may be established by any means.” This means that the inheritance rules of Islamic Sharia law and the public order rules of the United Arab Emirates, including the prohibited usury transactions, falls under the public order rules that the Court shall consider when ratifying or setting aside an arbitrator’s award.

Accordingly, the Court of Appeal’s judgment is overturned, as it did not mention the sources on which it relied in deciding that the arbitrator’s award violated public order.