Learn about the effects of foreign law applications in Bahrain.
Hatem ElkatanSenior Associate,Dispute Resolution
Bradley PriceAssociate,Dispute Resolution
Given the ongoing trend of globalisation, coupled with the concerted effort of all of the members of the GCC to realise their respective goals and visions for 2030, we have seen a significant increase in international entities joining forces with locally based role-players to take advantage of the considerable growth in a number of industries.
When considering the contractual relationship in such multi-jurisdictional collaborations, it is necessary to carefully the consequences of how possible disputes will practically be resolved.
In this article, our focus is predominantly on the parties’ election regarding the governing law of such contracts and the practical implications and consequences that such elections may have.
Most, if not all, contracts between parties domiciled in difference jurisdictions will contain a governing law (the “Governing Law”) clause which allows the parties to make election as to which laws will be applicable in the event of a dispute. For example, in a contract between an entity from the United Kingdom and an entity from the Kingdom of Bahrain, the parties may elect to have the agreement governed by the laws of England and Wales.
The intention of the parties in this instance is clear, in the event of a dispute the relevant court is required to apply the laws of England and Wales. However, in practice this is not necessarily so straightforward.
All civil disputes which are adjudicated before Bahrain civil courts will be subject to the legal framework founded upon Bahrain’s Legislative Decree No. 19 of 2001 (the “Civil Code”). The Civil Code forms the bedrock of Bahraini Jurisprudence, and it is through the lens of the Civil Code that all other legislation must be interpreted.
The framework which governs the application of foreign laws in Bahrain is Law No. 6 of 2015 on Conflict of Laws in Civil and Commercial Matters with a Foreign Element (the “Conflict Law”). Through this law, Bahrain adopted a much-needed legal framework for the resolution of conflicts of law in civil and commercial matters involving a foreign element. The Law specifically addresses conflict rules relating to, among others, status and capacity of natural and juristic persons, ownership of immovable and movable property and contracts in Bahrain.
However, it must always be considered that as Bahrain is a civil law jurisdiction, legal precedents are not considered binding. Consequently, the application of the codified laws is applied as interpreted by the presiding Judge, whose discretion must also be exercised in accordance with Sharia Law. This discretion is especially relevant when the court is called upon to deal with the Conflict Law.
Article 1 of the Conflict Law states that “[r]ules of this law shall apply to all disputes related to civil and commercial matters with a foreign element involving conflict of laws”. In this instance, it is clear that this legislation must be applied in all circumstances where an agreement comes before the Bahraini Courts which is governed by any law other that that of the Kingdom of Bahrain.
Article 4 of the Conflict Law expressly provides parties with a freedom of choice of Governing Law as this provision provides “[p]arties may agree to choose the applicable law”.
Accordingly, it would appear relatively clear to that under the above provisions, parties have a complete freedom in electing whichever Governing Law they wish to regulate the contractual relationship and in the event of a dispute, the courts will be bound to the law agreed to in the contract.
Unfortunately, the Conflict Law also provides the following discretion to the courts in Article 3 “When jurisdiction for Bahraini courts is established, Bahraini law shall determine all matters related to characterization of legal positions and relations in order to decide the applicable law to the subject-matter of the dispute”. Further, Article 5 provides that the application of the foreign law should not be contrary to public order in Bahrain.
Therefore, the position is not so straight-forward as the courts are afforded a discretion to decide the applicable law to be considered by the court in the resolution of the dispute.
We have seen multiple instances where parties have come before the courts with disputes arising from contracts which have foreign governing laws.
In most instances, the courts have found that in exercising their discretion the Bahraini courts will not choose to apply the contractually agreed choice of law as the Governing Law of the contract. Instead, the court will likely elect to apply Bahraini law applied. Therefore, the validity and effect of the terms of the contract will be determined in accordance with Bahraini law rather than the chosen law.
Despite the promulgation of the Conflict Law, which was intended to provide the courts and practitioners with a clear guidance when dealing with a dispute which was subject to foreign law, in practice the courts have in most instances elected rather to disregard the parties’ election and decide the dispute on its merits in accordance with Bahrain Law.
Therefore, it is essential that parties take cognisance of choice of forum and choice of law in when contracting in Bahrain, and the care that must be taken over these clauses, despite the temptation to treat them as part of the boilerplate. In light of the practical application of the Conflict Law, an alternative to might be to conclude an arbitration agreement, providing for arbitration in a different jurisdiction and then attempt to enforce the award in Bahrain.
As Bahrain is a party to the New York Convention, arbitral awards are generally enforced by the courts without the awards being specifically interrogated. However, the courts are at liberty to set aside awards, as seen above, in relation to liquidated damages if the award:
contradicts public policy;
is contrary to good morals;
has been obtained despite procedural irregularities; or
if there was no binding arbitration agreement between the parties.
However, when contracting with state-owned, or state-governed, entities there has been a practice which requires to insist that all arbitration agreements concluded with such entities must refer any disputes involving them to the Bahrain Chamber for Dispute Resolution (“BCDR”). The Court of Cassation has ruled that should the arbitration agreement not make the necessary referral to the BCDR, then the validity of the agreement can be attacked. This may result in the award being overturned when attempts are made to enforce the award.
Finally, should the parties elect to arbitrate before the BCDR, parties need not be concerned that the chosen Governing Law will not be applicable as this election forms the tenants of international arbitration and no discretion is afforded to either the BCDR, or the chosen arbitrators in this regard.
For further information,please contact Hatem Elkatan and Bradley Price.
Published in September 2023
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