Whether a party can recover its legal costs in civil law-governed mainland UAE litigation and arbitration (as opposed to the common law based DIFC and ADGM courts) has always been controversial.
This is because legal costs are not recoverable in mainstream Arabic-speaking UAE mainland litigation, save for a very nominal amount that is more intended to signify a victorious outcome, rather than to truly compensate a successful litigant.
The same applies to arbitration as far as the UAE Federal Arbitration law (No 6 of 2018) is concerned, in that no provisions exist therein, expressly allowing for a tribunal to award legal costs to the successful party.
Having said this, there is no express prohibition of awarding legal costs either.
The natural conclusion would be that, if the arbitral rules adopted allow for legal costs to be awarded, then this should be tolerated and accepted by the enforcing UAE courts having curial jurisdiction over a given arbitral process, as a contractual agreement between the parties.
An additional procedural hurdle to such an acceptance is slightly complicated by the requirements for a (duly notarised) Power of Attorney (a PoA) to be granted to each legal representative, just like it would be mandatory in UAE litigation.
Such PoA, would also need to expressly state that the attorney has the power to request the tribunal to award legal costs, without which power an award offering legal costs to a party that is not represented by someone that is empowered to claim them, may be nullified to the extend they are awarded.
Therefore, PoA in hand and arbitral rules allowing for the award of legal costs in place, the successful party should be relatively certain that, if its legal costs are awarded, this part of the award should survive the scrutiny of the UAE courts that would be asked to ratify and enforce the said award.
Not so, says a recent Dubai Court of Cassation judgment in Cases Nos 821 and 857 of 2023 which decided to partially annul an ICC Arbitration Award granting legal costs.
This decision has, since its publication, been met with wide criticism as being inconsistent with the parties' agreement and as incorrect and unreliable case law, which is compounded by the fact that there is no system of binding precedent in UAE legislature.
However, the rationale of the said judgment is not as unreasonable as it may seem at first glance.
Below is some insight on how UAE courts view the letter of arbitral agreements (or institutional rules) and on how crucial it is for parties to arbitral proceedings to be cognisant of the courts' perspective.
Background
The Claimant (who in this case was the award debtor) sought to set an ICC Arbitration Award aside on two grounds:
- The award was issued outside the time limit agreed between the parties and that prescribed by law.
- The award granted legal costs which was not permissible.
Taking those grounds in turn the Dubai Court of Appeal held that:
Time Limit
The award was issued approximately 30 months after arbitration proceedings had commenced and the complaint made by the Claimant was that the parties had not agreed to extend the time for the issuance of the award.
The Dubai Court of Appeal, Commercial Division, dismissed this ground and the Claimant appealed this decision further to the Dubai Court of Cassation.
Legal Costs
The ICC Award had awarded the Respondent, who was successful on the merits, its legal costs and the Dubai Court of Appeal decided to partially set aside the ICC Award to that extent.
The Award Creditor appealed this decision as well before the Dubai Court of Cassation.
Dubai Cassation court on time limit
The Dubai Court of Cassation noted that the ICC Arbitration Court had set a deadline for the issuance of the arbitration award and found that the award was in fact issued one month prior to the date stipulated by the ICC Arbitration Court.
Therefore, as the parties had agreed to arbitration under the ICC Rules, the parties had also agreed to the time by which the Arbitration Court would set as the deadline for the award to be issued.
Accordingly, that ground of the appeal was dismissed and the award was held not have been issued beyond the agreed time limit.
Dubai Court of Cassation on legal costs
It was argued by the Claimant that the ICC rules did not contain any clause empowering a tribunal to award legal costs, and the PoA issued by the Claimant also did not contain any authorisation to request the tribunal to decide on legal costs.
The Court determined that the power to award legal costs derives from the law, general rules, or from the arbitration agreement itself, which grants the tribunal its jurisdiction.
Specifically, the court held that Article 38 of the ICC Rules, the Dubai Court of Cassation decided that "since the text of Article 38 of the Rules of the International Chamber of Commerce, which the arbitrator relied on to rule on fees and expenses, did not explicitly provide for the jurisdiction of the arbitration tribunal to rule on the legal costs of the legal representatives of the parties to the arbitration, the judgment on the legal costs of the legal representative of the defendant is unfounded and must be nullified."
Article 38 of the ICC Rules from 2017 and 2021 states the following:
- The costs of the arbitration shall include the fees and
expenses of the arbitrators and the ICC administrative expenses
fixed by the Court, in accordance with the scale in force at the
time of the commencement of the arbitration, as well as the fees
and expenses of any experts appointed by the arbitral tribunal and
the reasonable legal and other costs incurred by the parties for
the arbitration.
...
- The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.
The fatal flaw in the above wording of this ICC rule is that it did not expressly allow for the awarding of costs, but merely the "fixing" of costs.
To understand this in context it is useful to compare this provision with its equivalent under the LCIA 2020 Rules, Articles 28.3 and 28.4 which state that:
"28.3 The Arbitral Tribunal shall also have the power to decide by an order or award that all or part of the legal or other expenses incurred by a party (the "Legal Costs") be paid by another party. The Arbitral Tribunal shall decide the amount of such Legal Costs on such reasonable basis as it thinks appropriate. The Arbitral Tribunal shall not be required to apply the rates or procedures for assessing such costs practised by any state court or other legal authority.
28.4 The Arbitral Tribunal shall make its decisions on both Arbitration Costs and Legal Costs on the general principle that costs should reflect the parties' relative success and failure in the award or arbitration or under different issues..."
Consequently, the Dubai Court of Cassation dismissed the appeal on the basis that:
- The UAE Arbitration Law did not give the arbitral tribunal the power to grant legal representatives' costs;
- The arbitration agreement did not confer any such power either;
- The PoA did not authorise the legal representatives to agree to authorise the tribunal to rule on legal representatives' fees; and
- Article 38 of the applicable ICC rules did not expressly permit the recovery of legal representatives' fees.
Points to note
The decision highlights a number of points that stem from the fact that the UAE is a jurisdiction where courts are not prone to award legal costs by regular judicial practice:
- Awards on legal costs can only be upheld as a result of parties' contractual agreement
- Such contractual agreement needs to be unequivocal and not subject to interpretation.
- It should state expressly that the tribunal can and shall decide on awarding legal costs.
- This can be achieved early on by opting for a set of arbitral rules that provide for such express wording.
- If a set of rules similar to the ICC rules has already been adopted, then the next opportunity to rectify the position is within the text of a tribunal's consent procedural order, signed by both parties or within the terms of reference, again signed by both parties.
To conclude, ratification and enforcement of awards by the UAE courts is not always a foregone conclusion and it pays to be aware of the type of issues that may lead to a full or partial award annulment or to its setting aside.
However, overall, the UAE Arbitration Law and its judicial interpretation is a step in the right direction and the general tendency in the UAE is that, once a certain position in law is recognised as being widely problematic, legislation adapts to best practices much faster than in other jurisdictions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
