The validity of unilateral option clauses in the UAE

Executive summary

In the recent decision of A3 v B3 [2019] ADGMCFI 0004, the ADGM Court has confirmed the validity of unilateral option clauses and has found that a party can exercise the option not only to choose between arbitration and litigation, but also to vary the rules and seat of an arbitration after a given dispute has arisen. A full copy of the judgment can be found here.

Unilateral option clauses

Unilateral option clauses provide one party to a contract (“Party A”) with an option as to which jurisdiction or forum in which to commence a claim, whilst providing for a default jurisdiction or forum that will apply if that option is not exercised. The other party (“Party B”) will typically have no such option. Unilateral option clauses are commonly used in financial transactions for the benefit of the lender so that it can elect to arbitration or litigate in the forum best suited to making an effective recovery. In contrast, the borrower will only have the right to commence proceedings in a single forum (which is designated by the contract).

The English Courts used to be hostile to unilateral option clauses but, in recent times, have consistently confirmed their validity. They have been confirmed both in the context of: (i) Party A enjoying the option to arbitrate as an alternative to litigation (NB Three Shipping Ltd v Harebell Shipping Ltd, [2004] EWHC 2110 (Comm.)); and (ii) Party A enjoying the option to litigate as an alternative to arbitration (Law Debenture Trust Corp plc v Elektrim Finance BV and ors, [2005] EWHC 1412 (Ch.)).

The case of A3 v B3 is the first time that a unilateral option clause has been considered by the ADGM Courts.

Background facts

The dispute relates to a lease agreement entered into between A3 and B3 dated 25 October 2017 (the “Lease”). The dispute resolution provisions are contained in clause 32 of the Lease. The Lease concerned real estate located within the Abu Dhabi Global Market (the “ADGM”), a free zone within Abu Dhabi that has adopted laws based on English common law. At the time the Lease was entered into, ADGM had only recently been established and its laws and institutions were also new or in the process of being established.

Clause 32.2.3 provides that disputes shall be finally settled by arbitration in accordance with the rules of the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC). In addition, the parties agreed at clause 32.2.2 that:

“should Abu Dhabi Global Market establish an arbitration centre, in advance of the formal commencement of any relevant proceedings, [A3] may notify [B3] that the arbitration provisions set out in this clause 32 shall be replaced by reasonable alternative provisions in order to provide for jurisdiction by such newly established centre within Abu Dhabi Global Market and [B3] shall sign such documentation as may reasonably be required by [A3] to give effect to such alternative”.

A dispute arose under the Lease and A3 wrote to B3 on 25 November 2018, noting that the ADGM Arbitration Centre had been established on 17 October 2018. Exercising its right under clause 32.2.2, A3 notified B3 that the original arbitration provisions of clause 32.3.3 were replaced by an arbitration agreement which provided for an ADGM seated arbitration under the Rules of the ICC.

In accordance with the replacement arbitration agreement, A3 duly submitted its request for arbitration to the ICC on 9 December 2018. As is permitted by article 6.3 of the ICC Rules, the question of jurisdiction was referred to the ICC Court which decided that the arbitration shall not proceed and informed the parties of its decision on 18 April 2019.

In response, A3 commenced an arbitration claim before the ADGM Courts on 16 May 2019. A3 sought a declaration to the effect that there is a valid and binding arbitration agreement providing that disputes arising under the Lease are subject to arbitration under the ICC Rules with the seat or legal place of the arbitration being the ADGM.

Judgment

In his judgment, Justice Sir Andrew Smith granted the relief sought and declared that there is a valid and binding arbitration agreement providing for arbitration under the ICC Rules with the seat or legal place of the arbitration being the ADGM.

With respect to unilateral option clauses generally, it was held by Justice Sir Andrew Smith that:

“there can be no doubt that options are recognised by the English common law (which, of course, applies and has legal force in, and forms part of the law of, the Abu Dhabi Global Market)”.

Whilst this is unsurprising given that unilateral option clauses have consistently been upheld under English law, it provides welcome confirmation (for the first time) that unilateral option clauses will, in principle, be upheld as a matter of ADGM law.

The judgment went further than simply recognising the validity of unilateral option clauses generally. The option clause in the case before the court was not orthodox. Rather than providing A3 with the option to commence either litigation or arbitration proceedings, it instead provided A3 the unilateral option to commence either an Abu Dhabi seated arbitration under the ADCCAC Rules or an ADGM seated arbitration under the ICC Rules.

Justice Sir Andrew Smith found that whilst this option clause was “unusual”, “there can be no objection in principle to an option of this kind”.

This case represents an endorsement of the validity of unilateral option clauses as a matter of ADGM Law and will no doubt be welcomed by financial institutions either operating within the ADGM, or those institutions which regularly select the laws of the ADGM as the applicable governing law of their finance documents. It also underlines the extent to which the courts will uphold the principle of party autonomy if the parties decide to use unilateral option clauses in novel or fluid situations.