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UAE case law update – recent Dubai court of cassation judgment on recovery of legal costs in arbitration5 April 2024

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The Dubai Court of Cassation recently issued Judgment 821/2023 (Commercial Appeal), which relates to the recovery of lawyers’ fees awarded in an arbitration governed by the International Chamber of Commerce (“ICC”) Arbitration Rules (“ICC Rules”). The judgment has attracted considerable attention within the arbitration community in the Gulf region in view of its impact on the enforcement of costs awards in the UAE.

"The case involved an ICC arbitration award which provided for the unsuccessful party to make payment of the successful party’s fees."

Background

The case involved an ICC arbitration award which provided for the unsuccessful party to make payment of the successful party’s fees. The party against which the award was made filed a case in the Dubai courts asking that the costs provision in the arbitration award be annulled by the court such that the successful party’s legal fees be excluded from the awarded quantum. They argued that the tribunal had ordered legal costs regardless of the fact that the parties had not expressly agreed that the tribunal should have power to do so.

The key issue addressed by the Court of Cassation in Judgment 821/2023 was essentially whether an arbitral tribunal has authority to make an award which includes recovery of the successful party’s legal fees.

The Court’s Decision

The Court of Cassation found in favour of the applicant and decided to exclude the successful party’s legal fees from the award made by the ICC arbitration tribunal. In reaching its decision, the most important factor considered by the Court was the relationship between Article 46 of the Federal Law No. 6 of 2018 on Arbitration Law (“Arbitration Law”) and Article 38 of the ICC Rules.

Analysis

Article 46 of the Arbitration Law provides that:

“1. Unless the parties agree otherwise, the arbitral tribunal shall be allowed to evaluate the arbitration expenses, including the fees and expenses incurred by any member of the Arbitral Tribunal in order to carry out his duties and the expenses of appointment of experts by the Arbitral Tribunal.
2. The Arbitral Tribunal may inflict all or part of such fees and expenses provided for in Clause (1) of this Article on one of the parties. The court may, at the request of one of the parties, amend the arbitrators’ valuation of their fees or the expenses so as to compensate the effort done, the nature of the dispute and the experience of the arbitrator”.

Article 38.1 of the ICC Rules state:

“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”.

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"In order to adjudicate on the recovery of legal costs, a tribunal must be specifically empowered by the relevant legislative or procedural provisions."

The Court’s judgment held that, in order to adjudicate on the recovery of legal costs, a tribunal must be specifically empowered by the relevant legislative or procedural provisions. In this case, the court identified that neither of the above articles explicitly mention the parties’ legal fees in relation to costs.

Whilst Article 46 of the Arbitration Law does not expressly authorise tribunals to rule on legal costs, Article 38.1 is clear that the costs of arbitration include “the reasonable legal and other costs incurred by the parties for the arbitration”.

The judgment, although not binding precedent, provides a degree of uncertainty regarding the enforcement of costs awards for ICC arbitrations (and other arbitration centres without express provisions dealing with legal costs) in the UAE. The Court’s judgment is surprising in light of the reference to “legal costs” in the ICC Rules.

A Point of Comparison

Like the ICC Arbitration Rules, the latest 2022 Dubai International Arbitration Centre (“DIAC”) Rules now expressly provide that the tribunal has the power to award legal fees. Article 36.1 provides:

“The costs of the arbitration shall include amongst other things any registration fees under the Rules, the Centre’s administrative fees, the fees and expenses of the Tribunal and any experts (whether appointed by the parties and/or the Tribunal), the fees of the legal representatives and any expenses incurred by those representatives, together with any other party’s costs as assessed and determined by the Tribunal”.

The previous version of the DIAC Rules did not include an express reference to the tribunal’s power to award parties’ costs including legal costs. This clarification in the latest version of the DIAC Rules is a welcome development.

"Parties should ensure that the terms of reference clearly set out and describe the various parties’ costs that the tribunal has authority to award."

Why does Judgment 821/2023 matter and what happens next?

The Court of Cassation’s judgment has implications in the UAE in relation to arbitral practice and legislative interpretation in general. Within the arbitration sphere, the judgment has sparked debate surrounding the interpretation and application of provisions regarding the recovery of a successful party’s legal costs. The court’s strict interpretation of the Arbitration Law and ICC Rules may impact the enforcement of arbitral costs awards going forwards.

To mitigate the risks of annulment of cost awards in ICC arbitrations, if the arbitration agreement does not include express wording empowering the tribunal to award lawyer’s fees, then parties should ensure that the terms of reference clearly set out and describe the various parties’ costs that the tribunal has authority to award.