Risen From the Dead? Whether the New UAE Agency Law Validates Legacy Arbitration Clauses

When the UAE Federal Law No. 3 of 2022 ("New Agency Law") introduced the possibility of submitting commercial agency disputes to arbitration, it marked a small revolution. Historically, the laws governing commercial agency in the United Arab Emirates (“UAE”) did not permit commercial agency related disputes to be arbitrated. Previously, the UAE courts have interpreted Article 6 of the erstwhile Federal Law No. 18 of 1981 ("Old Agency Law") in a restrictive manner wherein the UAE courts had exclusive jurisdiction in respect of agency disputes, not allowing to submit them to arbitration. This was also covered earlier in a blog post. The rationale was that only the courts could reliably enforce the Old Agency Law that protected the rights of the agent. Article 26(1) of the New Agency Law changed this position, by providing that: "The provisions of this Law shall not prejudice any agreement between the Agent and the Principal to refer any dispute arising between them to arbitration". Since its publication in the Official Gazette on December 15, 2022, agency disputes may now be submitted to arbitration.

But does this also apply to disputes arising from agency agreements that predate the enactment of the New Agency Law? This is a question that arises often in respect of agency disputes in the UAE. Many legacy agency agreements contain arbitration clauses, either because parties were unaware of local law or, for strategic reasons, because an international party sought to reduce the risk of a UAE judgement being enforced abroad (in many jurisdictions a court decision that was rendered in violation of an arbitration will not be recognized and enforced – so the arbitration clause, albeit not being upheld in the UAE courts, would prevent the enforcement of the court decision against the principal in the principal’s jurisdiction).

In this post, we examine the effect of the New Agency Law on arbitration agreements which predate its enactment. In our view, the New Agency Law validates and gives full force to the legacy arbitration clauses contained in commercial agency agreements which were earlier subject to the Old Agency Law.

The Contractual Perspective

An arbitration clause is a contract. Accordingly, if the arbitration agreement was null and void at the time it was concluded because it infringed public policy of the applicable law, it should remain as such. It cannot prospectively become effective merely because the restriction was later removed. This position would be consistent with Articles 129(c) and 205 of the Federal Law No. 5 of 1985 ("UAE Civil Transactions Law"). Article 129(c) stipulates that the obligations arising from the contract must have a lawful cause. Moreover, further to Article 205, the subject matter must be capable of being governed by the contract. If the contract’s subject matter is contrary to public order or morality, the contract shall be null and void. This probably would be the position in most civil law jurisdictions when it comes to the contracts infringing public policy.

But is it appropriate to treat an arbitration clause that disregards the limits on arbitrability in the same way as an illegal/void contract concluded for an illicit cause or an incriminated object? Should contractual clauses which violate competition law, trade sanctions, or anti-bribery laws, not be distinguished from an arbitration clause, that relates to a non-arbitrable subject matter?

An arbitration clause vests the arbitral tribunal with jurisdiction, thereby excluding the jurisdiction of the state courts. This means that the arbitration clause has a dual nature. It is an agreement that generates both substantive and procedural effects. This dual nature suggests that an arbitration clause should be treated differently from an ordinary contractual term. In procedural law, it is a general principle that the law in force at the time of the hearing applies. This principle is reflected in Article 1(1) of the Federal Law No. 42 of 2022, also known as the UAE Civil Procedure Code. This is different from the contract law perspective. The normal contract law rules on nullity thus do not apply to the procedural rights.

Absolute and Relative Invalidity

Against this background, it is helpful to consider the distinction between “absolute” and “relative” invalidity, a concept that is prominent in French arbitration law and also widely accepted in international arbitration practice.1

Under French law - namely the Code of Civil Procedure (Book IV, Articles 1442–1527), the Civil Code, and the Law on New Economic Regulations ("NRE") of 15 May 2001, certain arbitration clauses are deemed absolutely null and void where the subject matter is inherently non-arbitrable due to considerations of public order (ordre public). This applies, for example, to disputes involving criminal sanctions, the validity of administrative acts, or fiscal matters, which are reserved exclusively for state courts. In such cases, the arbitration clause is void erga omnes and cannot be upheld by any party, regardless of consent. Absolute nullity means that the agreement does not take effect because it contravenes the law and the parties do not have the power to validate it.

In contrast, relative invalidity arises where the law prohibits arbitration in order to protect one of the parties, typically the weaker party in a contractual relationship (and not because of the very nature of the dispute). In such cases, the clause may be considered invalid only vis-à-vis the protected party, and its enforceability depends on whether that party invokes or waives the protection. The agreement shall be considered null and void only if the nullity is invoked by one of the parties. This situation may arise, for instance, in consumer or employment contracts, where public policy is aimed at preserving access to state courts for individuals at a structural disadvantage.

While absolute nullity reflects a structural prohibition and is immutable, relative nullity may be remedied or waived. The clause, for instance, can take effect if it subsequently is ratified by the parties or if the legislator later lifts the respective prohibition. In the event of relative nullity, the agreement becomes enforceable if a subsequent legislative amendment abrogates the prohibition that rendered the matter non-arbitrable. 

In our view, Article 6 of the Old Agency Law falls into the latter category. This is because the purpose of the provision is to protect the agent, based on the assumption that only the UAE courts would reliably apply the Old Agency Law. It was a protective provision in favor of one party, i.e., the agent, and should not be considered as an absolute bar on the arbitrability of the subject matter. It follows that in such cases that absolute nullity is not the proper remedy, instead, the arbitration clause should be considered valid once the restriction on arbitrability is lifted, i.e., upon the enactment of the New Agency Law.

A Conflict With the Principle of Non-Retroactivity of Laws?

In our view, the short answer is that there is no conflict with the principle of non-retroactivity of law. The principle is featured prominently in Article 112 of the UAE Constitution (1971): "A Law shall only apply from the date it comes into force and shall not apply regressively." This principle, however, is subject to exceptions. Article 112 includes an important caveat which states that: "In non-criminal matters, a Law may, when necessary, provide otherwise." This means that in non-criminal matters, the UAE Constitution does not prohibit retrospective effect of a legislation.

Whether the revival of legacy arbitration clauses conflicts with the principle of the non-retroactivity of a legislation at all is questionable. In this instance, one should consider the distinction between “true” and “quasi” retroactivity. True retroactivity is a situation where a law treats a set of facts concluded in the past differently in the present. A typical example would be a criminal act that was committed and allowed in the past but is forbidden today. Here, most jurisdictions in the world will agree that it is not right to impose a punishment. Quasi-retroactivity, in contrast, changes the law in relation to a factual situation that arose in the past and persists today. One example would be introducing additional termination rights to a long-term contractual relationship that was concluded in the past and continues to be in force today. In that case, the retroactive effect of the law (i.e., its application to a contract that was concluded in the past) can be acceptable, considering what the legislator intended when amending the law, and potentially considering the parties’ legitimate expectations. In the event of quasi-retroactivity, the change in law would typically be permissible, as long as it is in line with the parties’ legitimate expectations, that is an integral component of the doctrine of good faith that guides the execution of contracts (Article 246(1) UAE Civil Transactions Law: "The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith").

The New Agency Law applies to all agency agreements in force from its publication in the Official Gazette. Pursuant to Article 9 of the New Agency Law,  the principal’s ability to terminate an agency agreement was expanded, which was restrictive in the past, providing for generous grandfathering provisions for legacy agreements according to Article 30(2) New Agency Law (and exempting them from termination for up to 10 years). There is no comparable grandfathering provision applicable to Article 26(1) New Agency Law. From this it follows – conversely - that Article 26(1) the New Agency Law applies to all agency agreements presently in force, hereby including legacy agency agreements. There is no reason to exempt legacy agency agreements from the application of Article 26(1) New Agency Law.  This interpretation further is underscored by Federal Law No. 6 of 2018,(also known as the "UAE Arbitration Law") which did not limit its application to the arbitration agreements executed only after its enactment. It also conforms with the general principles of UAE procedural law (Article 1(1) of the UAE Civil Procedure Code: "The provisions of this Code shall apply to all legal proceedings that have yet to be adjudicated on, as well as all procedures that have yet to be implemented, prior to the date of entry into force of this Code […]") that the validity of an arbitration clause is subject to the law as in force when the proceedings are brought, and not the time when the agreement to arbitrate was concluded.

In view of the foregoing, it can be strongly contended that an arbitration clause which was void under the Old Agency Law but was not given effect to or invoked, should be considered valid under the New Agency Law. Accordingly, any invocation of the arbitration agreement under the legacy agreement during the operation of the New Agency Law should be considered valid. This is because, further to the principles of quasi-retroactivity, the New Agency Law does not protect a party who submitted to arbitration in the expectation that the arbitration clause would be unenforceable.

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  Cf. e.g. (with a discussion of French case law) Boisséson/Fouchard/Madesclair, Le droit francais de l’arbitrage (2023) p. 135 sequitur.