An Arbitral Tribunal’s Discretion to Award Legal Costs in Domestic Arbitrations

A significant benefit of opting for arbitration is the authority of the arbitral tribunal to award and allocate legal costs. When cases are brought before an arbitral tribunal, the issue of who bears the financial burden of legal expenses becomes a crucial consideration, especially when an adverse party raises a baseless defence and/or vexatious claims. Nevertheless, it is key for parties to exercise caution in this regard, as the arbitral tribunal’s power to allocate such costs is not arbitrary but rather derived from explicit authorisations provided by the concerned parties, as well as from institutional rules and/or legislation.

Article 46 (1) of the UAE Arbitration Law No. 6 of 2018 (“UAE Arbitration Law”) stipulates that unless otherwise provided by the agreement of the parties to arbitration, the arbitral tribunal shall assess the costs of arbitration which shall include “the fees and expenses incurred by any member of the Arbitral Tribunal in the exercise of his duties and the costs for experts appointed by the Arbitral Tribunal.” It is denoted from the UAE Arbitration Law, that the costs of arbitration that can be allocated by the arbitral tribunal, by default – unless agreed otherwise by the parties – are explicitly limited to arbitration costs (and not legal representative’s cost). The same is asserted in Case No. 749 of 2021, wherein the Dubai Court of Cassation (“DCC”) held, in reference to Article 46(1) of the UAE Arbitration Law, that arbitration costs are limited to the “fees and expenses incurred by any member of the tribunal in the performance of their duties, as well as the expenses of appointing experts by the tribunal. Therefore, these arbitration costs do not include the fees paid by the parties to their legal representatives in the arbitration proceedings, who prepare, plead the case, and provide advice to the parties before commencing the arbitration proceedings …”.

Additionally, it was held in another DCC decision[1] that the costs and legal fees can be imposed on either party to arbitration only by a legislative provision, general rule, or if provided for expressly in an agreement between the parties. The DCC ruled that “in the absence of a legal provision or an express agreement in the arbitration clause, the legal costs shall not be decided upon as an incidental matter related to or connected to what is ruled upon in the award given that legal costs are independent from the merits”.

The same is well known among legal practitioners in the UAE. For instance, the old Dubai International Arbitration Centre (“DIAC”) Rules of 2007 (“Old DIAC Rules”) did not give an arbitral tribunal the power to allocate legal costs. The Old DIAC Rules allowed the arbitral tribunal to generally allocate “Costs of Arbitration”, however, legal fees did not fall under such definition.   Article 2.1 of the Old DIAC Rules defined Costs of Arbitration as the Centre’s administrative Fees for the claim and any counterclaim and the fees and expenses of the Tribunal fixed by the Centre in accordance with the Table of Fees and Costs in force at the time of the commencement of the arbitration, and shall include any expenses incurred by the Tribunal, as well as the fees and expenses of any experts appointed by the Tribunal.” Therefore, the arbitral tribunal was not expressly empowered to allocate legal costs absent the parties’ agreement, whether in the arbitration deed (terms of reference), or the arbitration agreement itself (which would usually be found in the parties’ underlying contract).

In conformity with the above, the Dubai Court of Appeal[2] (“DCA”) has set aside an arbitration award, in part, that was issued under the auspices Old DIAC Rules due to the arbitral tribunal’s allocation of legal costs therein without a valid authorisation. In that case, the appellant argued that the arbitral tribunal allocated legal fees based on a provision in the terms of reference signed by the defendant’s lawyer, who did not have the requisite authority to agree on the allocation of legal costs in the power of attorney issued thereto. The DCA further set aside the award, in part, and emphasized that arbitration is based on the arbitration agreement and that the arbitrator’s authority to resolve the dispute is derived from the arbitration agreement itself. Additionally, the DCA determined that the arbitration agreement lacked any reference to legal costs, and the power of attorney granted to the defendant’s legal representative did not grant the defendant’s representatives the express right to agree on the arbitral tribunal’s power to allocate and award legal costs.

The new DIAC Rules of 2021 (“New DIAC Rules”) now suggest in Article 36.1 thereof that the Costs of Arbitration shall include the “fees of the legal representatives”. In addition to the New DIAC Rules, the International Chamber of Commerce (“ICC”) Rules also include the parties’ legal representatives’ fees among the costs of arbitration in Article 38 thereof.  Further, both, the New DIAC Rules and the ICC Rules provide for arbitral tribunals to 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.

Although the above rules (New DIAC Rules and ICC Rules) expressly refer to the allocation of legal costs by arbitral tribunals, and in spite of the DCC being of the view that such right can be given to the arbitral tribunal by a legislative provision and/or a general rule, the DCA, in a recent judgment[3] (“Recent DCA Decision”), has set aside an ICC award in part wherein the arbitral tribunal allocated legal costs based on Article 38 of the ICC Rules. The Recent DCA Decision’s reasoning to nullify the final award partially was that “Article 38 of the International Chamber of Commerce Rules, which the arbitrator relied upon, did not explicitly empower the arbitral tribunal to decide on the legal fees of the parties’ legal representatives in the arbitration.”

The DCA’s reasoning is quite unusual given that Article 38.1 of the ICC Rules specifically stipulates that the “costs of the arbitration shall include the fees and expenses of the arbitrators … and the reasonable legal and other costs incurred by the parties for the arbitration.” [Emphasis added]

Article 38.4 further gives the power to the arbitral tribunal to fix these costs of arbitration in the final award and “decide which of the parties shall bear them or in what proportion they shall be borne by the parties.”

In spite of this express right being granted to the arbitral tribunal by default in the ICC Rules – unless there is an otherwise agreement between the parties – the Recent DCA Decision confirms that the costs and expenses of arbitration that the arbitral tribunal can award include but are not limited to (i) the fees and expenses incurred by any member of the arbitral tribunal in the course of performing their duties, and (ii) the expenses of appointing experts by the arbitral tribunal. The DCA further added that these costs and expenses do not include legal fees that parties pay to their legal representatives during the arbitration proceedings unless the parties agreed otherwise. Thus, the Recent DCA Decision considers, quite surprisingly, that Article 38 of the ICC Rules does not expressly authorise the arbitral tribunal to allocate and award legal costs.

Given the Recent DCA Decision, it remains to be seen whether other UAE courts will follow suit. If not, it begs the question, what more could the ICC Rules stipulate, for instance, in order for the Court to be satisfied that parties have agreed to give an arbitral tribunal the power to award legal costs.

Conclusion

It is well established that arbitral tribunals have discretion to fix arbitration costs in the final award. However, in the UAE context, arbitration costs often exclude legal fees paid to legal representatives by the parties to arbitration, unless there is a specific rule of law, or an express agreement between the parties granting such power to the arbitral tribunal. In light of the Recent DCA Decision, it seems that Article 38 of the ICC granting the arbitral tribunal the power to fix legal costs in the final award requires more clarity and is not sufficient alone to establish such powers within the arbitral tribunal. It is still unknown whether the Recent DCA Decision is final or has been appealed.

In any event, it may be advisable – if at all possible – to have an express provision for the allocation of legal costs from the outset within the arbitration agreement, or thereafter, in the terms of reference (which, in light of the discussion above, must (i) either be signed by the authorized representatives of the parties or (ii) if signed by the legal representatives of the parties, then it must be ensured that they have the requisite authority to agree on the allocation of legal costs in the power of attorney issued thereto). This precautionary measure could prevent the possible annulment of the arbitration award and eliminates any potential ambiguity; especially if the UAE courts are included to follow the approach adopted by the Court in the Recent DCA Decision.

References

[1] Dubai Court of Cassation Case No. 282 of 2012 dated 3 February 2012

[2] Dubai Court of Appeal Case No. 1 of 2023 dated 30 March 2023

[3] Dubai Court of Appeal Case No. 2 of 2023 dated 27 April 2023

Disclaimer

This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Any reliance you place on such material is therefore strictly at your own risk.

Author: Roaa Abou Assy & Sara Nasser

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Executive Associate Roaa Abou Assy

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Executive Associate Roaa Abou Assy

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