Headnote

Arbitration – Ratification of arbitral award – Public policy grounds

Summary of facts

The Respondent brought a Commercial Action against the Petitioners to ratify an award of a Court appointed arbitrator. The award ordered the Petitioners to pay a damages plus interest and other costs to the Respondent and also confirmed the Respondent’s exit from the company in which the parties were shareholders. Counterclaims raised by the Petitioners were dismissed. The Court of First Instance ratified the award and the ratification was upheld on appeal. The Petitioners appealed to the Court of Cassation claiming that the award contradicted company regulations and the rules of exit under the Commercial Companies Law. These rules relate to public policy which cannot be the subject matter of arbitration. The Petitioners further claimed that they lacked capacity since the claims should be directed against the company. The claims were limited to sums of money and did not concern any dispute between the parties over the performance of the company’s Memorandum of Association. The Court of Appeal ignored this substantial defence.

Held

The Court of Appeal’s decision was overturned.

Article 216 of the Civil Procedure Law enumerates exhaustively the cases in which the parties may apply to set aside an arbitral award when a party seeks to ratify it, and these relate exclusively to the procedures in the arbitration or the arbitration agreement. The court does not normally address the merits of the award or the extent of its conformity with the law. But when 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 would intervene to examine the irregularity in light of the applicable law of the jurisdiction of the judge, even if the irregularity is not one of the grounds for setting aside the 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. Provisions relating to the separate legal status of a UAE limited liability company, the liability of its partners, and the regulation of partner withdrawal from a limited liability company and the payment of its debts are mandatory rules of law relating to public policy that pertain to the economic structure of the State. Accordingly, the arbitrator may not derogate from those rules and the court should deny the application to ratify the award for contradicting them.

Judgment

Article 216 of the Civil Procedure Law enumerates exhaustively the cases in which the parties may apply to set aside an arbitral award when a party seeks to ratify it, and these relate exclusively to the procedures in the arbitration or the arbitration agreement. The court does not normally address the merits of the award or the extent of its conformity with the law. But when 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 would intervene to examine the irregularity in light of the applicable law of the jurisdiction of the judge, even if the irregularity is not one of the grounds for setting aside the 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. However, where a mandatory rule of law does not relate to public policy, within the above meaning, or its purpose is the protection of private rights and interests, there would be no justification for invoking a public policy exception.

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Provisions relating to the separate legal status of a UAE limited liability company, the liability of its partners, and the regulation of partner withdrawal from a limited liability company and the payment of its debts are mandatory rules of law relating to public policy that pertain to the economic structure of the State. Accordingly, the arbitrator may not derogate from those rules and the court should deny the application to ratify the award for contradicting them.

According to Articles 222, 322 of the UAE Commercial Companies Law and the settled practice of the Court of Cassation, with a limited liability company, all shares, whether in cash or in kind, should be paid up in full at incorporation. Cash shares shall be deposited in a bank operating in the State and there is a penalty for inserting particulars which are false or inconsistent with the Companies law in the company’s Memorandum of Association. At formation, a company becomes a distinct legal entity with an independent financial liability and is considered the owner of the shares and assets making up the business.

According to Article 218 of the UAE Commercial Companies Law, a partner in a limited liability company is legally responsible for its debts only to the extent of his share in its capital, unless he has exploited this principle and the independent basis of liability of a company apart from its partners as a means or front for engaging in activities contrary to the company’s Memorandum of Association to the detriment of its partners or creditors, involving fraud or gross error.

It is clear from the arbitral award in question that the Respondent sought in the arbitration an award in his favour of AED 15,683,799 being the amount owed to him as management fees, profits, his share of the capital and statutory reserve, bonuses, salary, market value of the company’s goodwill and sums retained for the company by owner of the Silicon projects pending account settlement, plus interest on those sums. The Respondent sought, in the alternative, an order to wind up the company or dissolve his partnership once all his financial dues have been paid. The Respondent did not direct any claim against the Petitioners (partners in the company) in their personal capacities, except for the Second Petitioner from whom the Respondent claimed compensation for damages suffered as a result of criminal proceedings the Second Petitioner had pursued against the Respondent, and for profits lost by the company on account of mismanagement and for the Respondent’s share of the monies received by the Second Petitioner.

Hence, the Respondent did not direct against the First and Third Petitioners any claims in their personal capacities. Rather, the Respondent’s claim concerned his rights in the company. Therefore, it is the company that should have been sued as a legal entity that owns all of its shares and assets. Furthermore, the liability of each partner in the company (a limited liability company) is limited to the extent of his shareholding. He is not liable with his own assets except in the case of fraud or gross error. Such provisions relate to public policy as they pertain to the legal structure of a limited liability company in the UAE in respect of which no agreement to the contrary or conciliation and, in turn, arbitration is possible.

The arbitral award contradicts these rules by ordering that the Petitioners jointly pay the entitlements owed to the Respondent by the company and confirming his withdrawal from the company, without the company having been sued or any proof of fraud or gross error on the part of the Petitioners. The award contradicts legal principles related to public policy and the court may intervene to deny the application for its ratification. The Court of Appeal failed to take this approach and its ruling is flawed and will be quashed without considering the other grounds of appeal. As regard the merits of Commercial Appeal No. 1606-2013, the first instance ruling will be cancelled and the action dismissed.