Are you sure its there in the JVM arguments?
Check by doing a ps -eaf | grep java | grep <YourManagedServerName> | grep HeapDumpOnOutOfMemoryError | grep -v grep
if you find some output then follow below steps else make sure you are adding the arguments to JAVA_OPTIONS parameter and try to add it in setDomainEnv.sh/bat if possible and restart the managed server and check for the above command to see if the argument came in running JVM process.
You can add it to start of setDomainEnv.sh file like follwoing:
JAVA_OPTIONS="$JAVA_OPTIONS -XX:+HeapDumpOnOutOfMemoryError -XX:HeapDumpPath=/user1/weblogic/Oracle/Middleware/"
# JAVA_OPTIONS - Java command-line options for running the server. (These
# will be tagged on to the end of the JAVA_VM and
Make sure /user1/weblogic/Oracle/Middleware path is writable by the user which starts the Java process.
If that does not solve can you please let us know which OS you are using and can you please give us your startWeblogic.sh and setDomainEnv.sh files.