Arbitration cheaper option to settle property disputes

Arbitration has become a cheaper option for property buyers in case of disputes with the final verdict having limited grounds to be challenged in the UAE courts, according to legal experts.

However, the parties must mutually consent to arbitration and the sales and purchase agreements (SPAs) need to include such a clause. Besides, under the Dubai International Arbitration Centre, parties can bring collective action, or a form of class action, allowing them to split legal costs and work in concert, experts told Emirates Business.

Raza Mithani, Senior Associate, Al Tamimi and Company, believes about 25 per cent of the SPAs in the realty sector contain an arbitration clause. Tatjana Fuhr, Legal Consultant at Fichte & Co, says about 33 per cent of the real estate cases which they are dealing with contain an arbitration clause. But Ludmila Yamalova of Al Sayyah Advocates & Legal Consultants differs slightly, saying around 10 per cent of SPAs may include an arbitration clause.


Do property buyers have the option of including an arbitration clause in their sales and purchase agreements (SPAs)?

Mithani: Majority of property developers in the UAE have standard SPAs with a dispute resolution clause. The clause will usually either provide for any dispute arising out of the SPA to be subject to the jurisdiction of the UAE courts or for arbitration under institutional rules such as those of the Dubai International Arbitration Centre. If the standard developer SPA contains the former, the developer is, absent exceptional circumstances, unlikely to agree to amend the SPA so that it contains an arbitration clause instead. As far as sales on the secondary market are concerned, there is a greater equality of bargaining power between seller and purchaser. Hence, it is easier to negotiate the insertion of an arbitration clause in any agreement between the two.

Yamalova: An arbitration clause, which is a form of alternative dispute resolution, is a contractual provision. This means that it is subject to the parties' agreement. Therefore, property buyers, being a party to a contract, have the option of including an arbitration clause in their sales and purchase agreement.

Fuhr: The parties of a contract can agree to submit a dispute arising between them concerning the implementation of a specific contract to one or more arbitrators. This so-called arbitration clause can be agreed upon in the contract itself or in a subsequent agreement. Mutual consent is required and the arbitration agreement/clause has to be in writing. The buyer can ask for such a clause to be amended in the contract, but if the seller does not agree, the UAE property court will have jurisdiction.

How can an investor or buyer include such a clause and does it cost them anything?

Mithani: It does not cost a purchaser anything to include an arbitration clause in an SPA. A number of arbitral institutions including the Dubai International Arbitration Centre and the LCIA-DIFC Arbitration Centre have model arbitration clauses that parties can use. Parties, however, should take professional advice before they include an arbitration clause in their SPAs to ensure that it meets their particular needs and circumstances. The sort of factors that will need to be considered when drafting the arbitration clause will include matters such as whether and if so which institutional rules to use, the language and seat of the arbitration, together with the number of arbitrators to be appointed (one or three).

Yamalova: Choosing an arbitration clause in a contract is subject to the parties' agreement. There is no cost to it. Investors/buyers can freely request it. A developer may not agree to it, however. Then, it is up to the parties to negotiate. In other words, a developer may request investors to give something up in exchange for agreeing to arbitration, be it on price, penalty or payment plan. Investors can always refuse to sign a contract if the developer does not agree to arbitration.

Fuhr: During the times of the enormous boom of the real estate market up to beginning of 2008, the developer drafted the contract and the buyer signed it as it was. Often buyers only signed reservation forms, which often do not contain any arbitration clause. Since nowadays the offer of available property largely exceeds the demand, the buyer has a strong bargaining power. If the contract does not contain an arbitration clause, the buyer can always insist on the same and possibly the developer will agree and amend the contract accordingly. Chances to obtain such amendments are higher with smaller developers than with the big market leaders. If the developer does not agree, there is no means for the buyer to force the seller to include an arbitration clause in the contract. The developer should not charge extra for this amendment.

How many investors or buyers, do you think, have included such an option?

Mithani: As a firm we have drafted a good proportion of the SPAs for major developers. We would estimate that approximately 25 per cent of SPAs in the market contain arbitration clauses.

Yamalova: Because most sales and purchase agreements are drafted by developers/sellers, in the past, it has been up to them to include an arbitration clause. Buyers always had a choice in requesting arbitration before signing. Majority, however, did not do so because, among other things, most developers in the past were not willing to negotiate. And investors accepted the terms of the agreements in their original form. Some developers, however, included arbitration in their sales and purchase agreement. Roughly speaking, about 10 per cent of sales and purchase agreements out there may provide for arbitration.

Fuhr: From time to time, contracts entered to in 2008 and before did contain arbitration clauses, even though back then the buyer did not have the bargaining power to ask for an arbitration clause. It was the developer's initiative to include such a clause in the contract. Lately the buyer definitely is in the position to ask for an arbitration clause. But mutual consent in writing is necessary.

Estimating the number of contracts with arbitration clause is very difficult and should be substantiated by research with developers and arbitration centres. According to our experience and communication with the arbitration centres, the numbers of pending real estate cases at Dubai International Arbitration Centre are increasing daily. We do not know their exact numbers, but out of the real estate cases which we are dealing with approximately one-thirds of them contain an arbitration clause.

How will investors or buyers benefit from arbitration? Is it a fast or lengthy process?

Mithani: Arbitration is usually an efficient process, but it can be lengthy since it is adversarial rather than inquisitorial. As such it can involve detailed and extensive cross-examination of witnesses. The length of an arbitration very much depends on factors such as the issues to be determined and the quality of the arbitrators. The advantages include the rigour of the process and that the parties have a say in who determines their dispute. In addition, once an award is made there are very limited grounds on which it can be challenged in the courts. Arbitration is well established in this jurisdiction as a method of dispute resolution.

Yamalova: There are many benefits to arbitration. By way of example, they are: One, it is a more efficient and expeditious process because, by design, it is less formal than a court proceeding. Two, arbitrators are often experienced in the area of law that is at the heart of the dispute and, therefore, can be more knowledgeable and practical about a particular issue. Also, arbitrators are often, among other things, Western educated and experienced lawyers. Three, depending on the parties' agreement, they can have a choice at appointing an arbitrator. Four, under the Dubai International Arbitration Centre (DIAC), parties can bring collective action, or a form of class action, which, among other things, allows them to split legal costs and work in concert. Five, arbitration, can be a lot cheaper than a legal action in Dubai Courts. For example, in Dubai Courts, a party must pay either 7.5 per cent of the claim value or maximum of Dh30,000 for each SPA at issue. Where parties have multiple SPAs for the same developer, the same property and even the same price, paying Dh 30,000 for each such SPA can be very costly. In arbitration, on the other hand, a party can combine all of these claims into one action.

Fuhr: The International Arbitration Centres operate on the basis of International Treaties and UAE Civil Procedure Law. Often rules and regulations from well-established European arbitration centres have been adopted, a high international and juridical standard in accordance with the rule of law is hence guaranteed. According to the rules of DIAC for example, the arbitrator should neither have the nationality of the claimant, nor of the respondent, which helps to reassure the claimant raising the question whether the arbitrator might be biased.

But arbitration can only be as good as the arbitrator himself. No doubts, the arbitrator is chosen according to a precise procedure and in respect to his expertise. But property law in Dubai is very young and so are the disputes regarding this. Cases did not yet have the time to reach the Appeal Court and the arbitrator cannot refer to final court decisions whatsoever, he will have to rely on the law alone. Arbitrators come from all over the world but do not necessarily have a profound knowledge about the Dubai property market and its particularities.

Besides being less costly and less time consuming, one of the great advantages of arbitration is that no local lawyer is required and documents do not need to be translated into Arabic if the parties contractually agreed on English as the language of arbitration. The cost for translation are approximately Dh100 per page and seen the fact that SPAs easily can comprise 50 pages and more and piles of letters have been exchanged between investor and developer, this can be an issue.

The arbitrator must render his award within six month from the date of the arbitration hearing; otherwise those litigants who wish may file the dispute with the court. The litigants may agree to extend the period fixed consensually or legally.

But in any case, before the arbitration hearing will take place, an administrational procedure within the arbitration centre has to be followed which alone can take several months. Generally speaking arbitration case should not take more than one year from commencement of arbitration till the final arbitration award.

An arbitration award is binding and no appeal is possible. In very limited cases an arbitration award can be challenged in court. But for enforcing an arbitration award a case in court has to be opened. This is why the arbitration procedure is only a faster process than a court case in uncomplicated matters.

How can the arbitration awards be enforced in the UAE? Do the UAE courts recognise such an award?

Mithani: An arbitration award may be enforced by the Dubai Courts once it is has been ratified. Not only do the UAE courts recognise such arbitration awards, but the grounds upon which the courts may refuse to enforce an award are very limited.

Yamalova: An arbitration award can be enforced easily in the UAE. The UAE courts recognise such an award as just another form of a judicial verdict. This is especially so if a particular arbitration provision expressly states that the arbitration award is not subject to appeal in Dubai courts and is an exclusive remedy to the parties' dispute. In such cases, the UAE courts will treat an arbitration award as binding and will simply enforce it. In other words, there is no need to re-argue it or re-validate it in courts.

Fuhr: An arbitration award is internationally enforceable through the court in the respective country (normally place where the assets of the respondent are situated). As in all countries the award has to be enforced by court.

To enforce an arbitration award in Dubai, the winner party shall approach Dubai court to get order for execution of arbitrium by filling an "enforcement of arbitration award". Court fees of seven per cent of the claim amount apply, the fees are capped at Dh30,000 for each claims. The UAE courts recognise the award, but an arbitration award shall only be executed if ratified by the court. The court is perusing the award and arbitration deed and is ascertaining if there is no hindrance to execute it. The court has the right to correct material errors in the arbitration award at the request of interested persons, so in very limited cases, the award can be challenged in court on initiative of one of the parties.

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