Arbitration in the UAE: curbs on the awarding of legal costs

UAE

Introduction

As detailed in our previous Law Now (available here) the UAE’s new arbitration law (Federal Law No. 6 of 2018) (the “Arbitration Law”) was implemented in June 2018 and brought a degree of uncertainty on how the courts would treat certain aspects of arbitration in the UAE.

One such aspect related to the power for tribunals to award legal costs in arbitrations carried out under rules which did not expressly provide for this right. On this point, CMS was recently involved with several cases involving applications to ratify and nullify arbitration awards under the Arbitration Law. Two of these cases involved challenges against DIAC awards on the basis that the tribunal had improperly awarded legal costs; and the judgments issued in each were strikingly different.

The Dubai International Arbitration Centre (“DIAC”) Rules

Article 4.2 of the Appendix to the DIAC Rules permits tribunals to fix the costs of the arbitration and to apportion these between the parties. However, the definition of the costs of the arbitration (set out at Article 2.1 of the Appendix to the DIAC Rules) does not include lawyers’ fees. As a result, the power of tribunals to award legal costs in DIAC arbitrations is an issue which has often been hotly contested before the UAE Courts.

The position under the Civil Procedure Code

The arbitration provisions of the Civil Procedure Code[1] (which applied to UAE seated arbitrations prior to the enactment of the Arbitration Law) were silent on whether legal costs could be awarded by tribunals as a matter of UAE law.

The traditionally held view was that tribunals in DIAC arbitrations could be empowered to award legal costs if the parties agreed to this, for instance in the terms of reference.  However, the Dubai Courts ultimately rejected this assumption and determined that DIAC tribunals could not award legal costs in DIAC arbitrations even if the parties had empowered them to do so by mutual agreement.

The Arbitration Law

When the Arbitration Law was enacted, there were hopes generally in the UAE’s arbitration community that it would include express powers for tribunals in UAE seated arbitrations to award legal costs, in order to bring the issue into line with international norms.

Instead, Article 46(1) of the Arbitration Law permitted tribunals to determine the arbitration expenses and apportion these between the parties; without reference to legal costs. This left arbitration practitioners again waiting to see how the Courts would approach this issue under the Arbitration Law and whether any change of approach would occur.

The recent approach of the Dubai Courts

The Dubai Courts considered this issue in two recent cases, where in both:

  • the DIAC Rules had been selected by the parties;
  • the parties’ lawyers had signed terms of reference expressly allowing the tribunal to award legal costs;
  • the tribunal had acted under this agreed authority and had included legal costs in its award; and
  • the award debtor attempted to nullify the award on the basis that the tribunal had exceeded its powers.

In the first case, the Dubai Court of Appeal (and subsequently the Dubai Court of Cassation) held that:

  • In DIAC arbitrations, the tribunal is empowered to award the costs associated with the arbitration but not legal costs unless this power is explicitly provided for.
  • Arbitration relates to a contract between the parties who may agree on any condition that they deem appropriate, provided that it does not violate public order or morals.
  • The terms of reference set out the parties’ agreement empowering the tribunal to award legal costs.
  • The tribunal was therefore entitled to determine and apportion legal costs.
  • Accordingly, the conclusion reached by the tribunal (to award legal costs) was reasonable and in accordance with the law.

Conversely, in the second case, the Dubai Court of Appeal (which was again followed by the Dubai Court of Cassation) handed down a judgment that:

  • A lawyer’s authority to act in a dispute arising from a contractual relationship, is limited to that contractual relationship.
  • Legal costs arise from the lawyer’s contract with their client. This is separate to the contract forming the basis of the dispute.
  • When a lawyer is authorised to act in an arbitration, the authority cannot be extended to cover agreements for the awarding of legal fees (even if these relate to the arbitration).
  • For a lawyer to agree that tribunals can award legal costs, they must hold a power of attorney expressly permitting this.
  • The lawyers for the challenging party were not so authorised under their power of attorney and the part of the award dealing with legal costs was nullified.

Comment

Despite the refreshing judgment in the first case, the most recent decision by the Dubai Court of Cassation in the second case indicates that the Dubai Courts have since adopted a more restrictive attitude on this issue. That being said, due to the limited post-Arbitration Law judgments on this point, it is difficult to assess with certainty how the issue will be dealt with on a general basis.

Accordingly, where the chosen institutional rules do not contain a power for the tribunal to award legal costs (e.g. the DIAC Rules), parties will be best advised either to:

  • include the right for tribunals to award legal costs in the initial arbitration agreement; or
  • include the required powers in the terms of reference.

In either case (and to protect the parties’ positions to the fullest extent possible), the signatories used should have special powers of attorney permitting them to agree to the tribunal awarding legal costs.

Unfortunately, there will always be the possibility that uncooperative award debtors will seek to avoid the enforcement of award in respect of legal fees, regardless of whether they initially agreed to them being awarded. As such, until this issue is assessed further in the Courts, parties must ensure that all steps possible are taken to protect their agreements from the outset.



[1] Set out at Articles 203 – 218 of Federal Law No. 11 of 1992, which were repealed by Article 60 of the Arbitration Law.