Silence can cost: Dubai Court links the defects of the legal authority of representatives in arbitration proceedings to civil liability

In a recent judgment, the Dubai Court of Cassation upheld an award of damages in favour of a claimant whose recovery of legal costs in arbitration had been defeated because the respondent’s representative lacked the specific authority required to submit the issue of legal costs to the tribunal.

Although the respondent successfully challenged the costs portion of the arbitral award, the Court found that the respondent’s conduct could nevertheless give rise to separate civil liability. In particular, the respondent was aware that legal costs were being claimed during the arbitration but did not object until after the tribunal had issued an adverse award.

Background

The dispute arose from an arbitration administered by the Dubai International Arbitration Centre. The arbitral tribunal awarded the claimant more than AED 8 million in legal costs.

The respondent subsequently succeeded in setting aside the costs portion of the award on the basis that its representative lacked the specific authority required to submit the issue of legal costs to the tribunal. The remainder of the arbitral award remained enforceable.

Following the annulment of the costs award, the successful claimant commenced separate civil proceedings seeking compensation. It argued that the respondent’s conduct had deprived it of the benefit of the legal costs awarded in the arbitration.

The Civil Compensation Claim

The respondent argued that it should not incur civil liability merely because it had exercised its lawful right to challenge the arbitral award.

The Court rejected that argument. It found that the evidence demonstrated that the respondent:

1. had been notified that the claimant was seeking legal costs;
2. had permitted its representatives to proceed in the arbitration on that basis; and
3.  had not objected to the tribunal determining legal costs until after the adverse award was issued.

In those circumstances, the Court held that the requirements of good faith obliged the respondent to make its position clear at the appropriate time. It could not remain silent during the arbitration and then, following an adverse outcome, rely on its representative’s lack of specific authority to seek annulment of the costs award without potentially facing the civil consequences of that conduct.

Importantly, the Court found that the compensation claim was not inconsistent with the earlier annulment judgment. The two proceedings concerned distinct legal questions. The annulment proceedings addressed whether the tribunal had valid authority to award legal costs. The subsequent civil proceedings concerned the consequences of the respondent’s conduct and the loss allegedly caused by that conduct.

The Court held that the claimant’s recoverable loss comprised the loss of the opportunity to recover the legal costs awarded in the arbitration. The claimant was ultimately awarded AED 5.64 million in damages, together with interest.

The damages award did not revive or reinstate the annulled portion of the arbitral award. Rather, it was based on separate findings of fault, causation and loss under the pinciples of civil liability.

Why the Judgment Matters

The judgment illustrates that a party’s successful challenge to an arbitral award does not necessarily eliminate the risk of separate civil liability arising from the way that party conducted itself during the arbitration.

A party may be legally entitled to challenge an award because of a defect in its representative’s authority. However, where that party was aware of the relevant issue, remained silent while the arbitration proceeded and raised the objection only after receiving an adverse decision, its conduct may be examined separately through the lens of good faith and civil liability.

The judgment should not be understood as establishing a general rule that every successful challenge to an arbitral award will expose the challenging party to a claim for damages. The Court’s reasoning was closely connected to the evidence before it and its findings concerning the respondent’s knowledge, silence and conduct.

The decision nevertheless provides an important reminder for parties and their representatives to:

• ensure that representatives possess the specific authority required under applicable law;
• raise jurisdictional and procedural objections promptly;
• avoid reserving known objections for use only after the outcome of the proceedings becomes apparent; and
• consider the potential civil consequences of litigation or annulment strategies that may be viewed as inconsistent with the requirements of good faith.

For further information, please contact Sherif Maher or Hesham El Samra at Clyde & Co.