Headnote

Arbitration – DIAC arbitration rules - Grounds for annulment of award – Public Policy – Partial annulment – Arbitration agreement

Summary of facts

The Respondent filed a request for ratification of an award rendered in an arbitration administered under the DIAC rules of arbitration before the Dubai Court of First Instance while the Petitioner filed a counterclaim requesting the setting aside of the award. The award rendered by three arbitrators decided that the sale and purchase agreement entered into by the parties was lawfully terminated and ordered the Petitioner to pay the costs of arbitration plus 5% interest per annum on the amount awarded for the costs of arbitration.

The Petitioner argued that the award contravened articles 216(a), 216(b) and 216(c) of the UAE Civil Procedure Law in that (i) the arbitrators’ decision on the legal costs was outside of the scope granted to them under the rules of the arbitration agreed by the parties; (ii) the arbitration was void as the arbitration agreement was signed by a person who did not have the capacity to do so; and (iii) the award was issued without terms of reference as the arbitrators failed to include a copy of the submission agreement along with the award.

The Dubai Court of First Instance dismissed the request for setting aside the award and ratified it. The Petitioner appealed to the Dubai Court of Appeal which dismissed the appeal and upheld the decision of the Dubai Court of First Instance. The Petitioner filed a petition to cassation.

Held

The Court of Appeal’s ruling was overturned in part and the matter remanded to the Court of First Instance for the overturned part.

Arbitration agreements in sale and purchase agreements relating to off-plan units are considered unenforceable where an action is brought to annul the sale and purchase agreement for non-registration as the subject matter of that action is related to public policy and therefore cannot be arbitrable. However, if the party resorting to arbitration is limiting its claim to the breach of the agreement due to the late completion of the unit by the seller, the arbitration agreement is valid and the claim is arbitrable.

Article 212(5) of the UAE Civil Procedure Law provides that an arbitral award must include a copy of the arbitration agreement for the purpose of ensuring that arbitrators act within the scope of the arbitration agreement. However, that requirement does not imply that the award must include the verbatim text of the arbitration agreement.

If an arbitration clause is severable and is valid only in part to the effect that part of the award is nullified, the competent court may ratify the valid part of the award and set aside the other part as long as the two are separable.

The provisions on costs under the DIAC rules do not make express reference to the recovery of legal and/or counsel fees as a result of which these may not be recoverable in arbitrations conducted under those rules unless a specific power to award such costs has been granted to the arbitrators either in the arbitration clause or subsequently in a submission agreement such as the terms of reference.

Judgment

The Petitioner appealed seeking to overturn the Court of Appeal’s decision. The Petitioner submitted that the Court of Appeal erred because the arbitration was void. The parties had agreed to resolve any disputes between them amicably in accordance [Page77:] with DCCI Rules of Conciliation and Arbitration through a panel of three arbitrators with the arbitration being conducted in the English language in Dubai. Arbitration was conducted under the DIAC arbitration rules and an award was rendered ordering the termination of the parties’ agreement. The subject matter of that agreement is off-plan property units. The Respondent requested that the contract in question be terminated for not having been registered in the interim property register in Dubai which is a public policy issue that is outside the realm of conciliation. Hence, the entire dispute cannot be a subject matter of arbitration and the arbitration clause is unenforceable in the context of the dispute.

The Court of Cassation dismisses this argument based on an exception to the rule that an arbitration clause in an off-plan contract for the sale of a property unit is unenforceable where an action is brought to annul the sale contract for non-registration (on public policy grounds because the subject matter falls outside the realm of conciliation and is not, therefore, capable of settlement by arbitration). As to that exception, if the Claimant only sought to terminate the contract for non-performance because the Developer has failed to fulfil his obligation to build the property unit, then the arbitration clause would be valid and enforceable. An award made (for termination of the contract) pursuant to arbitration conducted on the basis of that arbitration clause is not void as would be the case if the Claimant had sought to annul the sale contract for non-registration of the off-plan sale in the interim property register. The Court of Cassation confirms the decision of the Court of Appeal which had taken this view in concurring with the Court of First Instance’s decision to confirm the arbitral award and dismiss the counterclaim on the following grounds:

It is clear from the arbitral award that the Claimant (Respondent) filed the arbitration case for breach of contract on the basis that the Defendant (Appellant) had been late in completing the project and delivering the sold units by the contractual deadline. Since the matter involves performance of the contract, it is capable of arbitration and is not contrary to public policy.

The Petitioner further submitted that the Court of Appeal erred in view of the fact that no copy of the submission agreement was included in the award in contravention of Article 212(5) of the Civil Procedure Law which requires that the arbitral award include a copy of the arbitration agreement. This is a conclusive provision which the Court of Appeal may not disregard while relying solely on an extract of the arbitration agreement. The provision clearly requires that the arbitral award includes a copy of the arbitration agreement. It does not say: “make reference to” or “according to.” The purpose of the provision is to ensure that the parties have abided by their agreement to arbitrate and to determine whether the agreement has been signed and the identity and capacity of the signatory and whether the submission agreement is separate from the main agreement as well as the terms of reference of the arbitrators. Furthermore, an arbitration agreement is not valid unless it is made in writing. The extract contained in the award does not dispense from the obligation to provide evidence of the full text of the arbitration agreement.

The Court of Cassation dismisses this argument, citing the legislative intent behind Article 212(5) which is to ensure that arbitrators act within the scope of the arbitration agreement. As such, the arbitration agreement is material information necessary for the validity of the arbitral award which if omitted would render it void. However, the requirement is not that the arbitration agreement must include the verbatim text of the arbitration agreement as it is sufficient to set forth the tenor and substance of the agreement without going beyond its plain meaning. This is to enable the court, when asked to confirm the award, to review it based on the arbitration [Page78:] agreement. The Court of Appeal had soundly applied the same line of reasoning in its opinion that paragraph 5 of the arbitral award included the text of the arbitration agreement.

The Petitioner also submitted that the Court of Appeal erred in relation to the legal costs of the arbitration. In awarding the winning party AED 110,000 as reasonable legal costs, the arbitrators have exceeded their powers beyond that granted to them by the DIAC Rules of Arbitration 2007 and UAE law. The term “costs of arbitration” appearing in Article 2(4) of the DIAC Rules is defined in Article 2(1) as covering only DIAC’s administrative fees for the claim and the counterclaim and the fees and expenses of the tribunal ascertained in accordance with the DIAC’s schedule of fees and costs in force at the time of commencement of the arbitration as well as any costs incurred by the court and the fees and expenses of court-appointed experts. Such costs do not include the legal fees incurred by the parties for the arbitration. Legal representation is optional under Article 7 of the DIAC Rules. One may well proceed without counsel but if one does opt to rely on legal counsel for representation, one does so at his/her own expense. Consequently, such costs are not included within the scope of the arbitrators’ powers which may not be broadened by conferring on them an absolute and unfettered discretion to award costs at any level and for any reason, as they consider appropriate. The fact that the arbitrators exceeded the limits of their authority invalidates their award under Article 216(1) of the Civil Procedure Law. Awarding the winning party AED 110,000 is far removed from the general practice of awarding nominal counsel fees in the range of AED 500-AED 2,000. The tribunal awarded legal costs contrary to the practice of awarding nominal fees under Article 133 of the Civil Procedure Law. There is nothing in the law that authorises arbitrators to award legal costs.

The costs, expenses and legal fees are imposed on the parties only by law, general rules or if provided for expressly and clearly in the arbitration agreement given that an arbitral award is a contractual decision in relation to which the arbitrator’s jurisdiction is based on an arbitration clause contained in the agreement concluded between both parties. Article 2 of the DIAC Rules provides:

  1. Where the parties have agreed in writing to submit their future or existing disputes to arbitration under the DIAC Rules they shall be deemed to have submitted to arbitration in accordance with the following rules being those in effect on the date of commencement of the arbitration proceedings or such amended rules as may have been adopted hereafter, unless they have expressly agreed to submit to the rules in effect on the date of their arbitration agreement.
  2. These Rules shall govern the arbitration and shall be considered as supplementary to any agreement in writing referred to in Article 2 (1) above, except that, where any of these Rules are in conflict with a provision of the law applicable to the arbitration from which the parties cannot derogate, that provision shall prevail.

Article 17(1) of the DIAC Rules provides

The proceedings before the Tribunal shall be governed by these Rules and, where these Rules are silent, by any rules which the parties or, failing them, the Tribunal may determine.

Article 30(6) of the DIAC Rules provides

The fees and expenses of any expert appointed by the Tribunal under this Article shall be paid out by the parties in accordance with the Appendix — Costs of Arbitration.

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Article 2(1) of that Appendix defines the costs of arbitration as including the administrative fees for the claim and any counterclaim and the fees and expenses of the tribunal fixed by the DIAC in accordance with the schedule of fees and costs in force at the time of commencement of the arbitration, as well as any expenses incurred by the tribunal, and the fees and expenses of any experts appointed by the tribunal. Paragraph 4 of said Article provides:

The advance on costs fixed by the DIAC shall be payable in equal shares by claimant and the respondent.

Paragraph 6 of said Article provides:

Where the DIAC has fixed separate advances on costs, each of the parties shall pay the advance on costs corresponding to its claim.

Paragraph 10 of Article 37 of the DIAC Rules of Arbitration states:

The arbitration costs and fees, in accordance with appendix — Costs of Arbitration, and their apportionment between the parties shall be fixed in the award or other order by which the arbitral proceedings are terminated. An award may be rendered solely for costs.

All these provisions imply that in an arbitration conducted under the DIAC Rules, the arbitration costs decided by the arbitrator are in particular those related to the administrative fees of the claim and counterclaim, the tribunal’s fees and expenses over the course of the arbitration, ascertained in accordance with the DIAC’s schedule of fees & costs as well as the fees and expenses of tribunal’s appointed experts. Such costs do not include the legal costs paid by the parties to their attorneys representing them in the arbitration proceeding or whoever prepares the claim or advises the parties before initiating the arbitration process. Where the law is silent, fees and expenses that are not clearly and expressly referenced in the arbitration clause are not recoverable as incidental costs directly related to the award but dealt with separately from the merits.

If an arbitration clause is severable and is valid only in part, the competent court would affirm only the valid part and set aside the other part so long as the two parts are separable.

The arbitral award terminated the contract for non-performance. The Court of Appeal upheld the Court of First Instance’s decision to confirm the award. However, the arbitral award had included an order to pay AED 110,000 in counsel fees in an institutional arbitration administered under the DIAC Rules when its Rules do not grant arbitrators the power to award counsel fees. In awarding the fees, the arbitrators have acted outside of their authority and their award will be set aside in pertinent part. In upholding the Court of First Instance’s decision to confirm the arbitral award with respect to the Respondent’s costs, the Court of Appeal has misapplied the law although it has not erred in confirming the arbitral award with respect to the termination of the contract and its consequences.

Since these two decisions are severable, the Court of Cassation reverses the part of the Court of Appeal’s decision confirming the Court of First Instance’s judgment ratifying the decision of the award related to the counsel’s fees as well as the part of the Court of Appeal’s decision that ratifies the part of the award related to the counsel’s fees.