BSA Ahmad Bin Hezeem & Associates

Awarding legal costs in arbitration: A UAE perspective

Awarding legal costs in arbitration: A UAE perspective

January, 2016
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One of the most attractive benefits in resorting to arbitration is a tribunal’s power to award costs. These would normally include the tribunal’s fees and expenses as well as those of any arbitral institution involved. However, as is now widely known in UAE legal circles, the parties must specifically empower the tribunal to award legal fees, usually by way of signed Terms of Reference, making a specific provision for this option. At the same time, exercising the power to award costs is often a challenging task for a tribunal. Below we examine the tendencies and practices as commonly experienced in UAE domestic arbitration proceedings.

Tribunal’s discretion on awarding legal costs

Normally, just before closure of arbitral proceedings, parties will make post-hearing costs submissions and will seek an award against the unsuccessful party for payment of the costs incurred.

In a UAE domestic arbitration, where specific powers to award legal costs have been granted by both parties, the discretion afforded to the tribunal is usually very wide. Having said this, tribunals generally seek to apply certain principles so that the allocation on costs seems as reasonable as possible.

In doing so, the tribunal is not bound by any rules that would apply to UAE Federal Court litigation, where only a nominal fraction of actually incurred legal costs are awarded to the successful litigant[1].

The way the tribunal’s discretion is often applied depends on the practices that have influenced its members. Most arbitrators stemming from Common Law jurisdictions for example would tend to faithfully adopt the widely known principle of costs following the event[2].

Members of an arbitral tribunal that predominantly stem from the Middle East are often reluctant to award legal costs, even when empowered to do so and even when a party has been successful in the majority of its claims.

Unlike other jurisdictions where the tribunal’s discretion to award costs (including legal) is regulated[3], in the UAE, the arbitral tribunal has a wider measure of freedom to decide how such cost will be assessed.

Despite this, tribunals empowered to award legal costs in the UAE would still have to address the challenges of how to allocate the costs of the arbitration between the parties and how to determine their reasonableness and proportionality to the amounts claimed.

Parties’ express agreement for a costs award

Whether the tribunal can award legal costs in the UAE is governed by the parties’ express agreement. This was expressly held in a recent Dubai Court of Cassation judgment that clarified what was until then a grey area in arbitration practice that left this important aspect of claim determination to the discretion of the tribunal.

The most common rules adopted by arbitrating parties in the UAE are the DIAC[4] and ADCCAC [5]Rules, none of which give the tribunal an express power to award legal costs. By contrast, the less used DIFC- LCIA Rules[6] do expressly empower tribunals to do so[7].

As mentioned earlier, the most common way to empower tribunals to award legal costs is through an express agreement of the parties, usually reflected in the terms of reference, a document that is not mandatory to produce, either under the DIAC or the ADCCAC Rules but that has nevertheless become common practice and the preference of most tribunals.

At the early stage of the proceedings, when most terms of reference are entered into, empowering the tribunal to award legal costs has in practice become an indication of the confidence that each party has on the merits of its position. Conversely, the option of refusing to agree to so empower a tribunal is often seen (by the party considering such option) as an undesirable sign of weakness. Therefore, although under UAE law and practice, parties must expressly agree on the specific issue of awarding legal costs, such agreement is, more often than not, part of a show of force rather than a conscious assessment of the actual consequences that such agreement would bring.

Factors influencing an award on costs

Be that as it may, once the power to award legal costs is in place, tribunals in the UAE (subject always to their own individual backgrounds and habitual practices) do tend to award legal costs on the basis of the widely applied principle of ‘costs following the event’, i.e. that the party that has been more predominantly successful, would recover the majority of its legal costs.

In doing so, tribunals are also influenced by other common factors such as:

      • the conduct of the parties, to include desperate attempts to derail proceedings, unnecessarily voluminous documentation with dysfunctional presentation of facts and random relevance of evidence,
      • whether a party has succeeded on only a small part of its case with substantial amounts of time and legal costs being spent on the unsuccessful part, and, to a lesser extent,
      • whether a settlement offer has been made during the proceedings and referred to the tribunal.

Taking the above factors in turn, it is relevant to consider how they are usually dealt with in UAE domestic arbitration proceedings.

Parties’ conduct

Most seasoned and appropriately principled arbitrators would be aware that, simply having an overall disapproving opinion on a party’s general conduct should not form a basis for them to determine their position on legal costs.

What could, to a large degree, affect a tribunal’s opinion and final determination on the issue of legal costs in a UAE domestic arbitration, is more linked to the genuineness of the parties’ actions or omissions, rather than the validity of the legal grounds upon which such actions or omissions are based. For example, an attempt to suspend proceedings on the basis of a criminal action being filed against one of the parties’ key representatives, may affect the position that a tribunal takes on legal costs. This would be so, if the motive (rather than the factual or legal basis) of such action is disingenuous and aimed more at derailing the arbitral process rather than serving justice through the Federal Criminal Courts.

Another example is a spurious challenge to jurisdiction, which would normally fall perfectly within the rights of any respondent. However there are often circumstances where it becomes obvious to the tribunal that a challenge is devoid of any sustainable argument and is motivated by a desire to delay commencement of the process on the merits. Examples include arguments that reference to “DCCI Rules” is not tantamount to a reference to “DIAC Rules” and that consequently the arbitration has been invalidly commenced on the wrong rules.

Another instance involves arguments that suggest that even the slightest disparity between the claims indicated in a notice to refer matters to arbitration and those itemised the statement of claim, should invalidate the notice of arbitration. Such instances may be considered as abusive of the right to a jurisdictional challenge and may result in the respondent being faced with the punitive effect of the claimant’s corresponding legal costs being awarded against it.

Having said this, in UAE arbitral practice, tribunals usually adopt the “costs reserved” approach, in that they do not immediately resort to a costs order following a preliminary award, whether on jurisdiction or any other interim issue. Rather, they defer such decision to a later stage of the proceedings when the tribunal may be better positioned to assess the interim issue in the context of the entire arbitral process and the conduct of both parties throughout.

Success in part

As in international practice, in the UAE too, the most complex instances of costs allocation relate to occasions where no party was entirely successful in the pursuit of its claims, counterclaims or defences. The position can become even more challenging for tribunals if the issues on which a party has failed, necessitated disproportionately high costs to be incurred by the other party. In the UAE, these instances are in practice simplified by most tribunals, by awarding to the overall successful party either a substantial portion of its legal costs, or no costs at all. As previously mentioned, whether a tribunal adopts one approach or the other is more influenced by its jurisdictional “upbringing” rather than by a complex mathematical allocation of specific amounts for corresponding phases of the proceedings where one party or the other was successful. 

Offers to settle

In the UAE, most settlement offers are made either at a very early or at a very late stage of the proceedings. The early offers are usually so far off the desired amount that they are promptly dismissed by claimants and are rarely of any relevance to the issue of awarding costs, be they legal or otherwise. Late offers are usually aimed at avoiding the very significant legal costs of a hearing, particularly if experienced advocates such as UK barristers or QCs have been engaged by both sides and are usually accepted by most claimants as they tend to be much more reasonable and a very attractive alternative to proceeding with a gruelling hearing.

One further aspect that renders settlement offers at that stage liable to being widely accepted (often without inclusion of amounts for legal costs) is that another aspect of domestic arbitration in the UAE is the often daunting prospect of having to enforce the ensuing arbitral award through the local Courts.

Whether this is attempted through Federal or DIFC Courts, the lex arbitri that would determine the procedural integrity of a domestic arbitral process conducted in a seat which is in a (non-DIFC) UAE territory, would necessarily have to be UAE Law. The instances where domestic arbitral awards have not survived the enforcement process are far too many for the average party to feel too confident about its chances of successfully enforcing an award. Therefore, a settlement offer made towards the end of the arbitral process (but before the hearing stage) has usually very good chances of being accepted.

Costs submissions

The common approach to costs submissions is that parties file their respective invoices and receipts of amounts that they have incurred in the course of pursuing their case. In the UAE, the professional fabric of legal practitioners that may be involved in an arbitral process is far more diverse than in most other jurisdictions. As a result, costs submissions can vary from:

            • a misconceived attempt to repeat a party’s position on the merits (concluding that due to its anticipated success, it should be awarded the claimed costs) to;
            • misguided perceptions that a cost submission is an opportunity to highlight to the tribunal those aspects of the arbitration that a party feels that the other party abused the process and should therefore be penalised with a costs order.

Whatever the preamble of local costs submissions, the fact remains that invoices and receipts are submitted and the next challenge that tribunals face is to decide how much of the claimed costs are to be awarded.

Whilst not always applying a precise set of rules or guidelines, most tribunals in the UAE are likely to be influenced by the principles or reasonableness and proportionality. What is reasonable or proportionate in the mind of a given tribunal however, can vary enormously and once again the jurisdictional background of the arbitrators involved comes in play.

For arbitrators stemming from the Middle East, issues of proportionality are particularly relevant. Therefore, costs substantially exceeding 10% of the claimed (and often, even the awarded) amount could be considered as disproportionate, whether they were incurred on time-spent or a lump sum basis.

For predominantly UK stemming tribunals, particularly if such tribunals consist of lawyers, even amounts of costs exceeding the awarded amount can be (and often are) awarded and accepted as reasonable. Therefore, issues of proportionality are often overlooked.

As many, if not most, disputes resolved by an arbitral process arise from the construction industry, the common factors in determining the quantum of the costs awarded are usually taken for granted. Therefore, factors that relate to:

                • the amounts claimed (usually very significant),
                • the complexity of the issues involved (almost always necessitating the appointment of experts),
                • the skill, effort, specialised knowledge and
                • the time spent,

are all factors that are considered in their fullest potential when awarding legal costs, particularly when the tribunal’s professional background is from the same industry.

Having said this, out of the usual heads of recoverable costs (arbitrators’ fees, legal fees, expert fees and various necessary disbursements) the one that is met with little sympathy from most UAE based tribunals is a party’s own internal costs. This is so, even though in construction claims specifically, the relevant department of large Government entities or major international contractors often dedicates very significant time and effort in processing, attending to the computation of complex delay and prolongation costs claims.

Conclusion

In summary, the treatment of costs in arbitrations, where the seat is in the UAE, is only very broadly compatible with that encountered in international arbitration. One step to locally bolster this important attribute of the arbitral process is a more uniform application by local arbitral institutions of the generally accepted guidelines on how costs are awarded, so that the cultural and jurisdictional background of a tribunal does not play as determining a role as it currently does.

 

[1] Article 133(1) of the Law of Civil Procedure (Federal Law No. 11 of 1992) provides “When judgment is issued at the end of the case, the court must, at its own discretion, make an order as to the costs of the action.” Article 133(2) provides that the party against whom judgment has been made shall pay the costs of the action, stipulating that costs include lawyers’ fees. However in practice the UAE Courts do not award lawyers’ fees beyond a nominal sum.

[2] As reflected in S. 61(2) of the Arbitration Act 1996 which provides “Unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.”

[3] For example in England and Wales where costs of arbitration shall be assessed in accordance with the provisions of the Arbitration Act 1996.

[4] Arbitration Rules of the Dubai International Arbitration Centre 2007

[5] Abu Dhabi Commercial, Conciliation and Arbitration Centre Rules 2013.

[6] The Dubai International Financial Centre- London Court of Arbitration Rules 2008

[7] In Rule 28.3 thereof, which states that: “The Arbitral Tribunal shall also have the power to order in its award that all or part of the legal or other costs incurred by a party be paid by another party, unless the parties agree otherwise in writing. The Arbitral Tribunal shall determine and fix the amount of each item comprising such costs on such reasonable basis as it thinks fit.”

 

Published: January 2016
Title: Awarding legal costs in arbitration: A UAE perspective
Practice Area: Construction
Author: Antonios Dimitracopoulos

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