A recent judgment of the Dubai Court of Cassation partially nullifying an arbitral award is likely to have important implications for the recoverability of legal costs in arbitration in Dubai.1
The parties in this case had been involved in an arbitration under the Dubai International Arbitration Centre ("DIAC") Arbitration Rules 2007 (the "DIAC Rules") in which the Claimant sought an award for the payment of unpaid fees from the Respondents.
During the arbitration, the parties' legal representatives executed terms of reference (the "TOR"), pursuant to which the parties expressly authorized the sole arbitrator to assess and award fees and costs – including legal costs – of the arbitration.
The sole arbitrator appointed by DIAC issued a final award in which the Claimant was only partly successful on its claim for unpaid fees. Importantly, however, as part of the final award, the sole arbitrator ordered the Claimant to pay the Respondents' legal costs, totaling in excess of AED 4 million (approx. USD 1.09 million).
The Claimant subsequently filed proceedings in the Dubai Court of Appeal seeking nullification of the award on the basis that its legal representatives were not themselves authorized to agree to grant the sole arbitrator authority to award legal costs in the TOR. On this basis, the Claimant argued, the sole arbitrator was not authorized to award the Respondents their legal costs.
The Court of Appeal issued a judgment agreeing with the Claimant and, insofar as it related to the award of legal costs, partially nullified the final award.2
The Respondents appealed this judgment to the Dubai Court of Cassation.
Ultimately, the Court of Cassation rejected the Respondents' appeal and upheld the Court of Appeal's judgment.
In making its judgment, the Court of Cassation began by noting that arbitration is an exceptional dispute resolution procedure that involves the parties waiving their rights of recourse to the courts. For that reason, the UAE Arbitration Law requires that an arbitration agreement is made by a person specifically authorized to arbitrate.3 Similarly, parties' legal representatives in arbitration are only able to exercise powers and duties properly conferred on them (usually through a power of attorney) – they cannot exceed those powers and duties.
The Court of Cassation went on to note that legal fees are governed under the retainer between a party and its legal representatives, which is completely separate from the contract underlying the dispute.
Against that background, the Court of Cassation held that a lawyer's authority to represent a party in arbitration does not extend to an authority to agree to grant an arbitral tribunal authority to award legal costs. This is the case even if the legal costs relate to the arbitration in question.
Rather, the Court of Cassation held, for a legal representative to agree for an arbitral tribunal to award legal costs, they require a power of attorney granting them the authority to make such an agreement.
In this case, the Claimant's legal representatives were not, under the power of attorney appointing them to act in the arbitration, authorized to agree to grant the sole arbitrator authority to award legal costs. The Claimant's legal representatives therefore exceeded their powers in agreeing to grant the sole arbitrator authority to award legal costs in the TOR.
Accordingly, the Court of Cassation upheld the Court of Appeal's decision to nullify the award in part and dismissed the Respondents' appeal.
Why is this important?
The outcome of this case is important for arbitrations conducted under the DIAC Rules.
Under the DIAC Rules,4 the "costs" of the arbitration are defined to include "the [DIAC's] administrative Fees for the claim and any counterclaim and the fees and expenses of the Tribunal [...] and shall include any expenses incurred by the Tribunal". The DIAC Rules do not expressly include legal costs within the definition of arbitration "costs".
However, despite this inclusive definition, the Dubai courts have held that parties' legal costs are not included within the costs of the arbitration, which the arbitral tribunal can assess and award under the DIAC Rules. Accordingly, under the DIAC Rules, the Dubai courts have held that tribunals are not authorized to award legal costs, unless the parties agree otherwise.5
Parties have typically sought to overcome this limitation in DIAC arbitrations by expressly agreeing to authorize the tribunal to award legal costs in the TOR, which are usually agreed and signed on behalf of the parties by their legal representatives. Indeed, this has become "standard practice" in DIAC arbitrations over the last several years.
This decision therefore has the potential to affect parties' ability to recover their legal costs even when they have agreed to grant the tribunal authority to award such costs in the TOR.
What should you be doing?
Although this is an important and significant decision, there are steps parties can take to ensure that they are able to recover their legal costs in arbitration.
Parties negotiating contracts, and arbitration agreements within them, may wish to re-consider arbitrating their disputes under the DIAC Rules. Instead, they may agree to arbitrate their disputes under other institutional rules, which expressly provide for the recovery of legal costs (such as, for example, the ICC Arbitration Rules and DIFC-LCIA Arbitration Rules). Alternatively, parties choosing to submit disputes to arbitration under the DIAC Rules should expressly grant the tribunal authority to award legal costs in their arbitration agreements.
For parties in pending or future DIAC arbitration proceedings under an existing arbitration agreement, it is essential that the power(s) of attorney appointing their legal representatives expressly grant the authority in turn to agree to grant the tribunal authority to award legal costs.
Parties currently involved in DIAC arbitrations should check the powers of attorney for both parties to ensure that their legal representatives are duly authorized to agree to grant the tribunal authority to award legal costs. In the absence of such an authority, parties should work together, and with the tribunal, to ratify any agreement made by their legal representatives that exceeds the powers granted in their powers of attorney.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.