A Unilateral Option Clause (UOC) is an asymmetrical disputes resolution provision in which just one of the contracting parties has the option of selecting its preferred resolution forum after a dispute has arisen. That party alone can choose where to initiate such proceedings, whereas the other party must either institute its own action in the first party’s chosen forum or must proceed in one forum prescribed in the contract.

As we would expect, most disputes about UOCs are played out in the context of applications by a party to stay proceedings commenced by the other party, for lack of jurisdiction. And that was the background to an important recent decision from the Dubai Court of Cassation involving a construction contract.

UOCs are featured sometimes in subcontracts, but their true home is in lending agreements, in which the lender will commonly have the benefit of a UOC. This is justified by the fact that the most common reason for commencing formal proceedings in a lending agreement will be to recover the debt. At that point, the creditor needs flexibility to choose the forum that optimises the chances of successful enforcement of any award. That choice will be driven by an assessment of the nature and location of the debtor’s assets at the time when the recovery action is necessary.

If there is an equivalent justification in a construction subcontract, then logically the UOC should be in the subcontractor’s favour, as they will be the party most likely to be seeking payment – but I have never seen one written like that! All UOCs I have seen are in favour of the paying party, as it was in the recent case, which went like this:

A subcontractor initiated proceedings in the Dubai Courts for recovery of payment under two subcontracts. The contractor raised a jurisdictional challenge, based on the UOC in both subcontracts.

This particular UOC provided that any dispute arising under the contract, which could not be resolved amicably, would be resolved either by arbitration in the Dubai Chamber of Commerce, or in the local UAE courts – and that the contractor would decide which one it shall be.

The Dubai Court of First Instance and the Dubai Court of Appeal both rejected the contractor’s challenge but the contractor persisted and the matter came to the highest court, the Dubai Court of Cassation (CoC) which also decided against the contractor. The CoC, in its judgment No.735/2024, decided that this UOC was unenforceable. The most notable of the several listed reasons was that the parties had simply not concluded an agreement that would force the subcontractor to arbitration.

The court took the view that the UOC did not evidence a true meeting of minds between the parties. In other words, it lacked the clear common intention needed in the formation of any contract. In the CoC’s view, the subcontractor’s (alleged) advance consent to the contractor exercising a later choice of dispute forum, did not amount to a definitive agreement on the subcontractor’s part, to adhere to arbitration. The decisive factor undermining the enforceability of this UOC appears to be that it left the contractor with an option to exercise later on.

It was also noted that the parties had not set out a timetable for the exercise of that option, therefore providing no mechanism for the subcontractor to force a decision by the contractor or to take a default course of action in the absence of that decision. This also undermined the idea of certainty.

Related to this, the CoC considered that the UOC created arbitrary unfairness and inequality between the parties.

The CoC emphasised the special nature of arbitration clauses, derived from the fact that they have the effect of ousting the jurisdiction of the courts of law which would otherwise have heard any dispute. For that to be effective, such clauses need to be entirely clear and unambiguous in stating the parties’ agreement to arbitrate their disputes.

Other civil law jurisdictions have, for the most part, also refused to uphold UOCs, and for broadly the same reasons: lack of legal certainty or predictability, and inequality between the parties, according to reported judgments in Russia and continental Europe. French courts have both struck down and upheld UOCs; in one case the deciding factor having been whether a party’s options of forum are limited to those named in the contract or are unlimited.       

Common law jurisdictions share the above principles as to the special nature of agreements to arbitrate but most of them generally take a different view of the effectiveness of UOCs. English courts, for instance, see no inherent lack of clarity or “common intent” if a party agrees to cede control of the choice of forum, so long as it is drafted clearly. And both of the UAE’s “offshore” courts (DIFC and ADGM) have also upheld UOCs.      

What of the position now in Dubai? Since the onshore Dubai Courts do not set binding precedent, we cannot be certain that all UOCs will be struck down, but contract drafters should take note that the CoC’s objections were mostly aimed at the entire principle of such clauses, and not just the wording of the one in question.

* Dubai-based Stuart Jordan is the Global Head of Construction for Baker Botts, a leading international law firm.  He has extensive experience in the Middle East, Russia and the UK.