The reversal of the Baker Hughes Ruling explained

News is, the 2023 decision in Baker Hughes Saudi Arabia Co. Ltd. V. Dynamic Industries Saudi Arabia, Ltd. ruled by the United States District Court of Louisiana has been recently reversed by the United States Court of Appeals for the Fifth Circuit, and remanded for further consideration.

The news is particularly relevant for arbitration practitioners in the UAE, as the Louisiana decision has been incessantly cited on every occasion where the effects of the famous Dubai Decree No. 34/2021 were addressed, to showcase the contrast of the conclusions reached on the matter between the UAE courts on the one side (onshore and offshore) and foreign courts on the other.

While it was unequivocable for UAE local courts that, pursuant to the Decree 34/2021, arbitration clauses referring to DIFC-LCIA remain valid and disputes arising thereof shall be deemed to be administered under DIAC’s jurisdiction, the Louisiana District Court considered that DIFC-LCIA arbitration clauses are unenforceable due to the inexistence of the forum, and refused to compel arbitration. This ruling is now reversed.

The said reversal reflects in principle a wider enforceability of the DIFC-LCIA arbitration clauses- at least in their reference to arbitration as a dispute resolution mechanism. Nevertheless, the Court of Appeal decision reversing the Louisiana ruling should be read and understood in its factual context.

Facts and Background of the Case

Baker Hughes Saudi Arabia Co. Ltd. (“Baker Hughes“) and Dynamic Industries Saudi Arabia, Ltd. (“Dynamic“) were parties to a subcontract concluded in 2017, as part of an oil and gas project in Saudi Arabia. The agreement provided Dynamic with the option to “request” arbitration in Saudi Arabia. If Dynamic does not opt for this alternative, either party had the ability to initiate arbitration under the DIFC-LCIA rules.

Following the issuance of the abovementioned Decree 34/2021 abolishing the DIFC-LCIA arbitral institution, Baker Hughes filed a lawsuit against Dynamic in the United States District Court for the Eastern District of Louisiana, New Orleans. In response, Dynamic raised, among other defenses, the DIFC-LCIA arbitration clause in accordance with the subcontract and Decree 34.

In November 2023, the District Court dismissed Dynamic’s arguments and declined to mandate arbitration, advancing as a main reasoning the unavailability of the designated arbitral institution. Ever since, this ruling known as the “Baker Hughes Ruling” has been cited as an example of the resistance of foreign courts to the enforceability of DIFC-LCIA arbitration clauses pursuant to the enactment of decree 34/2021.

The reversal by the Court of Appeal

On January 27, 2025, the United States Court of Appeals for the fifth circuit (“The Court of Appeal) reversed the Baker Hughes Ruling, finding it erroneous in rejecting arbitration in its principle and relying on The New York Convention to which Saudi Arabia, the UAE, and the United States, among many other sovereign nations, are parties. The court of appeal further noted that the purpose of the New York Convention is “to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.”

The Court of Appeal has prioritized the parties’ intention to arbitrate over anything else. Nevertheless, its ruling remains rooted in the factual circumstances of the case.

In its review and analysis of the district court’s decision, the Court of Appeal considered three questions: (A) whether the arbitration clause in question stipulates a particular forum, the DIFC-LCIA, or only a set of rules, the DIFC-LCIA rules; (B) assuming the arbitration clause stipulates a particular forum—the DIFC-LCIA— whether that forum is available; and (C) assuming the arbitration clause stipulates a forum and that forum is unavailable, whether the district court erred by refusing to compel arbitration consistent with the valid terms of the subcontract.

• In addressing question (A), the Court of Appeal noted the wording used in the arbitration clause in question, notably in that it did not provide for the arbitration to be “administered by” the DIFC-LCIA but rather that “the dispute shall be referred by either Party to and finally resolved by arbitration under the Arbitration Rules of the DIFC-LCIA”. This said, the Court of Appeal’s reasoning put forward the parties’ intention to arbitrate, and noted their reference to the DIFC LCIA rules more as a choice of law rather than a choice of forum. The court further noted that even if the choice of the parties was a forum choice, that choice was not exclusive. Based on the provisions of their subcontract, the latter entitled Dynamic to elect to arbitrate in Saudi Arabia in regard to any dispute arising out of the subcontract. This alternative is indeed circumstantial and particular to the case at hand; however, it clearly reflects the intention of the parties to arbitrate in any case.
• On the second question (B) pertaining to the unavailability of the forum, the court expressed that “Here, the core dispute is novel, at least in this circuit: whether a designated forum remains available where a functionally identical successor forum exists.” The court highlighted the functional similarity 4 between the “abolished” DIFC-LCIA arbitration institution and the DIAC and emphasized in particular how DIAC Rules maintain the same claim and defence processes’ requirements provided for under the abolished DIFC-LCIA rules, as well as the principles governing the nomination and challenge of arbitrators, and rendering of awards. The court concluded on this question that “we need not decide whether the DIFC- LCIA is unavailable as a forum”. This is because the court ended up concluding, as will be detailed hereunder, that the arbitration clause in question was not integral to the parties’ subcontract.
• The court put forward the parties’ intention to arbitrate in principle and concluded, based on that as well as on the non- exclusivity of the arbitration clause previously highlighted, that the arbitration clause was not integral to the subcontract. It induced therefrom that the unavailability of the DIFC-LCIA as an arbitral institution does not invalidate the arbitration agreement. Accordingly, the Court of Appeal answered the last question (C) in the following terms: “Even assuming that the parties impliedly designated the DIFC-LCIA as the proper arbitral forum, and that said forum is unavailable, the district court should have considered whether the parties’ intent was to arbitrate generally or instead set an exclusive forum”.

Based on the foregoing, the Court of Appeal instructed the District Court to (i) reconsider whether the DIFC-LCIA rules may be applied by another available forum; this includes the LCIA, DIAC or a forum in Saudi Arabia, and if so, (ii) compel arbitration in that available forum.

“Numerous other courts have compelled arbitration, notwithstanding the nonavailability of the designated forum, where the agreement’s primary purpose was to arbitrate”.

 

The reversal’s effects

The first and direct effect of the Court of Appeal’s decision lies in the instruction given to the District Court to compel arbitration under the DIFC-LCIA rules, if possible, or otherwise in accordance with the parties’ agreement. This practically means that, the validation and enforcement by the Court of Appeal of the DIFC-LCIA clause mainly concerned the parties’ intention to arbitrate under such rules, but did not adopt the effects of Decree 34 in that the dispute be administered by DIAC and under its rules. This, in turn, brings up the question of what would the parties agree to do in this case, notably, whether ad hoc arbitrations under DIFC-LCIA rules would be opted for, beside other obvious choices such as referring the dispute to LCIA, DIAC or other institutions.

A second observation worth highlighting in the Court of Appeal’s decision is its reliance on the interpretation of the arbitration clause in question, whereby the wording of the clause played a significant role in the outcome of the decision. It is based on such wording that the Court of Appeal concluded that (i) the parties chose to arbitrate under the DIFC-LCIA rules rather than the forum, and that (ii) the choice of the forum, if any, was not exclusive.

Conclusion

This analysis can be used as such as a practical hint for the parties and their legal advisors who wish to avoid further complications in the event the arbitration forum elected at the moment of the agreement ceases to exist at the time of the dispute. It is of a great guidance to know that, what matters the most for the validity of an arbitration clause is, by order of priority: the clear intention of the parties to refer their dispute to arbitration and the rules under which the parties wish their dispute to be administered. This said, parties are invited to reflect such priorities in the wording of their arbitration clause, by refraining from linking their arbitration necessarily to a specific forum (but 6 rather to specific rules), and by avoiding any reference to unintended exclusivity.

“We—like the Ninth Circuit—have lingering doubts about adopting a blanket rule that any designation of arbitral rules necessarily means selection of a forum. After all, depending on the content of the rules in question, a rules-selection clause may be more properly conceived of as a choice-of-law provision rather than a forum-selection clause”.

Since the Court of Appeal noted the analogy between the DIFC- LCIA rules and DIAC rules, we wonder whether the forum could have been considered as valid pursuant to Decree 34 of 2021 had the forum been elected by the parties to be exclusive. In all cases, the highlight of the Court of Appeal’s decision manifests in that it upheld the parties’ agreement to arbitrate rather than allowing litigation- which aligns with the spirit of the NY Convention as well as of Decree 34 of 2021, regardless of the forum that will administer the dispute.

We look forward to reading the remand by the District court, and other similar foreign decisions to bring further enlightenment on the effects of Decree 34 of 2021 on the validity and enforcement of DIFC-LCIA clauses.

This article has been prepared by:

Cesar Ghaleb– Founding Partner, Dubai
Nour Abi Rashed– Associate, Dubai