Headnote

Arbitration – Authority to enter into arbitration agreements – Validity of arbitration agreement – Article 58 of UAE Civil Procedure Law

Summary of facts

The Petitioner brought an Action (No. 386-2010) against the Respondents to compel them to vacate an outlet in a hotel and pay AED 1 million as compensation. The Petitioner had purchased the hotel and by way of a novation agreement replaced the previous owner in a management contract granting the First Respondent the right to manage the hotel for a 12-year period. Under the management contract, the First Respondent agreed to include, in contracts entered into with third parties for the exploitation of hotel outlets and space, a clause stating that such contracts would expire upon the expiry of the term of the management contract. The Petitioner gave notice to the First Respondent to vacate the hotel after the expiration of the management contract only to learn that the First Respondent had entered into a contract with the Second Respondent to exploit the outlet in question for a longer period. The First Respondent then ceased to manage the hotel without ensuring that the Second Respondent vacated the outlet. The Second Respondent closed down the outlet which prevented the Petitioner from exploiting the outlet (either through the Second Respondent or third parties) and caused it substantial damage. The Petitioner proceeded to court.

The Court of First Instance dismissed the action. On appeal the Court of Appeal upheld the primary ruling. The Petitioner appealed again and the Court of Cassation overturned the Court of Appeal’s ruling with remand. The Court of Appeal, on remand, quashed the primary ruling and dismissed the action due to an arbitration clause in the franchise agreement.

The Petitioner appealed to the Court of Cassation arguing that, according to Article 58, Section 2 of the UAE Civil Procedure Law, special authority shall be required to acknowledge and arbitrate claims. The Petitioner was not a party to the franchise contract whose arbitration clause binds only the parties who signed the contract. Moreover, the Petitioner did not give the First Respondent specific authority to enter into arbitration. Therefore, the arbitration agreement the First Respondent had concluded with the Second Respondent under the franchise contract without specific authority from the Petitioner is a void agreement and the Court of Appeal’s ruling is contrary to Article 58, Section 2 and ought to be set aside.

Held

The Court of Appeal decision was overturned.

Since an attorney may not arbitrate a claim without specific authorities in the power of attorney in accordance with Article 58, Section 2 of the UAE Civil Procedure Law, the arbitration agreement the Second Respondent had entered into under the franchise contract without specific authority from the Party asserting the claim (Petitioner) is void.

Judgment

Article 58, Section 2 of the UAE Civil Procedure Law provides that an attorney may not arbitrate a claim without specific authorities in the power of attorney. The previous owner of the hotel, as per clause 1 of the management contract, had appointed the First Respondent to manage the hotel on its behalf and granted the First Respondent authority under clause 12-3 of the management contract to enter into contracts with third parties for the exploitation of hotel outlets and space for a period equal to the duration of the management contract. The First Respondent was not granted the right to submit disputes over the performance of such contracts to [Page58:] arbitration. The First Respondent entered into the franchise contract with the Second Respondent as attorney for the previous owner. Therefore, when the Petitioner purchased the hotel and, by novation agreement, substituted itself for the previous owner in the management contract, the Petitioner essentially replaced the previous owner as a principal party in the franchise contract.

Since an attorney may not arbitrate a claim without specific authorities in the power of attorney in accordance with Article 58, Section 2 of the UAE Civil Procedure Law, the arbitration agreement the Second Respondent had entered into under the franchise contract without specific authority from the Party asserting the claim (Petitioner) is void.

The Court of Appeal erred in ruling otherwise and its decision will be overturned with remand for adjudication on the merits, without the need to consider the other grounds of appeal.