Headnote

Arbitration – Public policy – Real estate contracts – Validity of award – Arbitrability of disputes relating to real estate contracts

Summary of facts

The Petitioner had filed a claim with ADCCAC to cancel a sale and purchase agreement between him and the Respondent. The arbitrator issued his award terminating the contract, which was for a residential unit on Al Reem Island, Abu Dhabi, and also for an amount representing the payments already made under the contract. The Petitioner filed an action to recognise his award which was granted at First Instance. However, on appeal by the Respondent, the Court of Appeal overturned the judgment of the Court of First Instance on the basis that Article 3 of the Civil Transactions Law views the circulation of wealth and the rules of individual ownership as matters of public policy which cannot be the subject of conciliation and cannot therefore be a matter for arbitration. The Petitioner appealed to the Abu Dhabi Court of Cassation.

Held

The Court of Appeal’s decision was overturned.

Foreign nationals are allowed freehold ownership and usufruct rights in investment zones under Article 4 of Law No. (19) of 2005 concerning property ownership. Moreover, HH Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE and Ruler of the Emirate of Abu Dhabi, issued Law No. (2) of 2007 giving foreigners the right to own surface property without any ownership of underlying land in investment zones and the right of usufruct and musataha over property located inside investment zones under a long-term usufruct contract of 99 years. Accordingly, the arbitrator correctly applied the law in declaring his jurisdiction and taking up the application filed for termination of the sale and purchase agreement and recovery of payments made to the Respondent. Such rights can be the subject of conciliation. This dispute was not about the mandatory provisions concerning the registration of property (which would be subject to public policy and could not be arbitrated) but about the termination of a contract for a freehold unit and a claim for the recovery of payments already made due to breach of contract. The latter is not a public policy issue.

Judgment

The Petitioner appealed on the basis of error of law, misapplication of the law, insufficient reasoning, and inequality of arms. In dismissing the action to recognise the arbitral award, the Court of Appeal relied on Article 3 of the Civil Transactions Law which views the circulation of wealth and the rules of individual ownership as matters of public policy which cannot be subject to conciliation and cannot, therefore, be a subject matter for arbitration.

However, foreign nationals are allowed freehold ownership and usufruct rights in investment zones under Article 4 of Law No. (19) of 2005 concerning property ownership. Moreover, HH Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE and Ruler of the Emirate of Abu Dhabi, issued Law No. (2) of 2007 giving foreigners the right to own surface property without any ownership of underlying land in investment zones and the right of usufruct and musataha over property located inside investment zones under a long-term usufruct contract of 99 years. Accordingly, the arbitrator correctly applied the law in declaring his jurisdiction and taking up the application filed for termination of the sale and purchase agreement and recovery of payments made to the Respondent. Such rights can be the subject of conciliation. The dispute is about the termination of a contract for a freehold unit and a claim for [Page124:] the recovery of payments already made due to breach of contract which is not a public policy issue. In seeing things differently, the Court of Appeal has erred in law and its decision is flawed and ought to be vacated with remand.

The Court of Cassation considers that it is well settled according to Article 216 of the Civil Procedure Law that the parties may, while the award is being reviewed by the court for the purpose of being confirmed, seek to have it set aside in any of the circumstances specifically outlined in that article which have to do with procedure or terms of reference while the court’s jurisdiction would not extend to reviewing the merits of the arbitral award or addressing the extent of its conformity to the law. However, if the arbitrator has exceeded the bounds of his authority and resolved an issue relating to public policy that is outside the realm of conciliation, the court must intervene to investigate the irregularity in the light of the rules of law of the country of the judge even if the irregularity is not one of the grounds for setting aside the arbitral award under Article 216. Public policy is a set of guidelines for taking decisions and pursuing action that are of fundamental concern to society and the basis for the social, political, economic, or ethics laws of the state. Where a mandatory rule of law does not relate to public policy, or its purpose is the protection of private rights and interests, there would be no justification for invoking a public policy exception.

The effect of Article 3 of the UAE Civil Transactions Law is that provisions relating to the circulation of wealth and rules of individual ownership are rules and principles upon which society is based. A rule of law enacted to regulate the circulation of wealth and individual ownership in the State in terms of possession and the acquisition of rights in rem and the nature and scope of such rights and the means by which they are acquired and extinguished, including rules pertaining to their registration on the property register in Abu Dhabi, are all provisions relating to the monetary system of the State which are essentially public policy. As such, they cannot be a subject matter for arbitration and any related dispute would fall under the jurisdiction of the courts and not the arbitration forum agreed upon in the contract.

Conciliation is not permitted in matters of public policy and according to paragraph 4 of Article 203 of the Civil Procedure Law, arbitration is not permissible in matters in which conciliation is not allowed. Hence, there can be no arbitration for dispositions of Abu Dhabi property involving existing rights or creating new ones if a mandatory provision (Article 6 of Law No. 19 of 2005 concerning property ownership in Abu Dhabi, as amended by Law No. 2 of 2007) has not been complied with in terms of registering the property on the register specified in Law No. 3 of 2005 regulating property registration in the Emirate of Abu Dhabi since this would be contrary to public policy.

An arbitration clause in a contract for the sale of a property unit shall not be recognised if the claimant is seeking to confirm the sale contract as valid and enforceable or void the same due to non-registration which is an issue related to the circulation of wealth and public policy that cannot be subject to conciliation and cannot, therefore, be a subject matter for arbitration. However, if the claimant’s action strictly seeks to terminate the sale contract due to non-performance or breach by the seller or developer of their obligation to construct the unit or achieve timely handover, the arbitration clause in the contract shall be valid and shall be recognised and any arbitral award declaring the termination of the contract in an arbitration conducted pursuant to such clause shall not be void.

The subject matter of the arbitral award to be confirmed is a claim for termination of a contract to reserve and purchase a residential unit in Al Reem Island, Abu Dhabi and for the Respondent to refund the sum of AED 590,169.50 due to breach of their obligation to achieve timely handover of the residential unit under the contract, [Page125:] subject of the termination request. The arbitrator proceeded to determine the dispute, declaring his jurisdiction, and ruling that the contract would be terminated and the parties restored to the status quo ante by requiring the Respondent to refund the payments they had received. The arbitral award is thus valid due to the determination of a matter which does not involve the circulation of wealth or public policy, as explained above, given that its purpose is the protection of private rights and interests. There is no justification for invoking public policy grounds to apply this mandatory rule of law which, being unrelated to public policy, can be the subject of conciliation and, in turn, a subject matter for arbitration.

In taking a different view and vacating the Court of First Instance’s ruling and dismissing the action, the Court of Appeal has erred in law and its decision is flawed and will be overturned.