Can Arbitration Agreements in the United Arab Emirates be terminated based on just nonpayment of Arbitral Costs?

The Dubai Courts have played an important role in shaping the landscape of arbitration within the United Arab Emirates (UAE). Historically, the failure of parties to pay their share of arbitration costs, particularly in Dubai International Arbitration Centre (DIAC) proceedings, was deemed sufficient grounds for the arbitration to be closed. This closure was widely considered a waiver of the right to arbitrate, making the arbitration agreement invalid and allowing parties to pursue their disputes in Dubai, through the Dubai Courts. In a 2023 significant decision, the General Assembly of the Dubai Court of Cassation (DCC 10/2023) has made amends to this approach.

Now, if parties do not fulfill their obligation to pay arbitration costs, the arbitration proceedings can remain suspended for non-payment, but this no longer invalidates the arbitration agreement nor is the case completely closed. A case matter shall only be closed once the costs owed to the Centre/Tribunal is paid completely. The obligation to resolve the dispute through arbitration remains in force. The parties are still bound by their arbitration agreement, and they cannot abandon arbitration in favor of the courts unless the arbitration agreement is found to be invalid on grounds not related to the issue of costs.

In the DIAC’s Arbitration Rules 2022, specifically APPENDIX I – COSTS OF THE ARBITRATION Article 2.6, states that any dispute regarding the determination of the advance on costs is subject to a final decision by the Arbitration Court. Furthermore, Article 3.4 states that if a party fails to meet a request for payment, the matter is referred to the tribunal, which can set a final deadline for payment. Failure to meet this deadline results in the withdrawal of the relevant claim or counterclaim, though it will be considered withdrawn, the case will not be closed from the Centre’s system until a “party” or the “parties” make payment towards the costs. 

Articles 45 and 54 of the UAE Federal Arbitration Law (Federal Law No. 6 of 2018 as amended by Federal Decree-Law No. 15 of 2023) emphasize that arbitration proceedings are not considered terminated until a final arbitral award is issued. Article 45(1) specifically states that arbitral proceedings are concluded only by an award that resolves the entire dispute. This provision ensures that non-payment does not serve as a mechanism to prematurely terminate the arbitration process.

Article 54(4) further reinforces that an arbitration agreement remains enforceable even if an arbitral award is annulled, provided the annulment is not due to the agreement being void or unenforceable. In other words, non-payment of arbitration costs does not invalidate the arbitration agreement, and parties remain obligated to resolve their dispute through arbitration. This ruling excludes the possibility of state courts stepping in to resolve the matter, reaffirming the jurisdiction of arbitration tribunals.

This recent decision represents a significant evolution in the enforceability of arbitration agreements within the UAE. For one of our clients who faced a similar situation, meant that non-payment of arbitration costs will not provide an avenue to escape arbitration or resolve the dispute in state courts. While DIAC may suspend proceedings due to non-payment, the arbitration agreement remains intact, and the dispute must ultimately be resolved through arbitration unless there is a mutual agreement to opt out or the agreement is declared void on other grounds.

Additionally, the center shall request both parties to combine and pay the costs equally however, as per Article 3.2 Appendix I of the Rules, either party “may”, at any time, make payment of the other party’s share of the advance on costs of the arbitration or any other costs, which are required to progress the arbitration. Failure to do so could result in the suspension of the proceedings, impacting the claimant’s case and in the event of counterclaims, it will impact the respondent’s case as well. As of now, there are no immediate punitive consequences on a party beyond delaying the resolution of the dispute other than a case remaining a long-pending case, without closure. Given the continued enforceability of the arbitration agreement. If a party wishes to proceed with the arbitration case, they can invoke Article 3.2 Appendix I of the Rules, and make payment of the other party’s share of the costs as well, and continue the case.

The General Assembly’s decision underscores the UAE’s commitment to upholding the sanctity of arbitration agreements, in line with international arbitration standards. It ensures that procedural challenges, such as non-payment of costs, do not undermine the fundamental obligation to arbitrate. As arbitration remains a preferred method of dispute resolution in commercial matters, this ruling enhances the security of arbitration agreements, ensuring that they cannot be easily circumvented through non-payment.

Written by

– Mr. Sanjeev Kandathil

– Dr. Sherina M. Saji

– Mrs. Rasheen Mahmodian