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You are here: BAILII >> Databases >> The Dubai International Financial Centre >> ARB 011/2024 Nazeer v Noah [2024] DIFC ARB 011 (15 August 2024) URL: http://www.bailii.org/ae/cases/DIFC/2024/DARB_011.html Cite as: [2024] DIFC ARB 11, [2024] DIFC ARB 011 |
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ARB 011/2024 Nazeer v Noah
August 15, 2024 Arbitration - Orders
Claim No: ARB 011/2024
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
ARBITRATION DIVISIONBETWEEN
NAZEER
Claimant
and
NOAH
Defendant
ORDER WITH REASONS OF JUSTICE RENE LE MIERE
UPON the Claimant’s application by Arbitration Claim Form dated 27 May 2024 seeking an order to set aside the arbitral award pursuant to Article 41(2) (b)(iii) of the DIFC Arbitration Law (DIFC Law No. 1 of 2008) (the “Application” or “Claim”)
AND UPON the Defendant’s Acknowledgement of Service dated 13 June 2024
AND UPON hearing counsel for the Claimant and counsel for the Defendant at a hearing held on 29 July 2024 (the “Hearing”)
AND PURSUANT TOthe rules of the DIFC Courts (the “RDC”)
IT IS HEREBY ORDERED THAT:
1. The Claimant’s Claim is dismissed.
2. The Claimant shall pay the Defendant’s costs of the Claim in the sum of USD 132,000.
Issued by:
Delvin Sumo
Assistant Registrar
Date of issue: 15 August 2024
At: 3pmSCHEDULE OF REASONS
Summary
1. The Claimant is Nazeer (“Nazeer” or the “Claimant”), which is a company incorporated in the Kingdom of Saudi Arabia. Nazeer is the owner of two hotels in Saudi Arabia – the Nestor (the “Nestor”) and the Naayil (“Naayil”).
2. The Defendant is Noah (“Noah” or the “Defendant”), which is incorporated in Hong Kong. Noah is part of a global hospitality management group managing hotels worldwide.
3. A material third party is Nadeem (“Nadeem”), a travel agency specialising in pilgrimages to the Holy Sites in Saudi Arabia.
4. The dispute arises in connection with two separate hotel operation and management agreements (“OMAs”) in respect of the two hotels:
a) an OMA for the Nestor entered into by the parties on 30 November 2014 and amended on 11 April 2019 (the “Nestor OMA”); and
b) an OMA for the Naayil entered into by the parties on 30 November 2014 and amended on 11 April 2019 (the “Naayil OMA”, collectively the “OMAs”)
5. Nazeer claimed that Noah entered into a fraudulent arrangement with Nadeem comprising a sham agreement (the “Allotment Agreement”) and two extensions respectively dated 17 and 24 December 2019 for the allocation of rooms at the Nestor. Nazeer claimed that the Allotment Agreement was created for the purpose of falsely inflating Noah's performance so that it could achieve its performance targets under the Nestor OMA. Nazeer claimed that Noah’s conduct was dishonest and entitled Nazeer to terminate the OMAs.
6. Nazeer commenced arbitration pursuant to an arbitration agreement in the OMAs.
7. Noah denied the Allotment Agreement was a sham or made dishonestly to mislead Nazeer. Noah counter- claimed for damages for Nazeer having wrongly terminated the OMAs.
8. The evidential hearing before the arbitral tribunal (the “Tribunal”) took place over five days commencing on 24 April 2023.
9. The Tribunal found that the Allotment Agreement was an agreement that was intended to create reciprocal rights and obligations and therefore not a sham in the sense that it did not create any legal rights and obligations. The making of the Allotment Agreement did not justify immediate termination of the OMAs on the basis that it was a sham transaction. Nazeer’s claim failed.
10. The Tribunal upheld Noah’s counterclaim.
11. The Tribunal made the following award:
a) Nazeer shall pay the sum of SAR 49,041,954 to Noah in respect of the counterclaim.
b) Noah shall pay the sum of AED 116,312.80 to Nazeer in respect of Nazeer’s contribution to the Arbitration Costs as determined by the LCIA Court.
c) Nazeer shall pay the sum of USD 1,446,063 to Noah in respect of Noah’s Legal Costs.
d) All other requests and claims are rejected.
e) This Award is final.
(the “Award”).
12. The Claimant commenced this case in the Court of Arbitration on 27 May 2024. The Claimant seeks an order setting aside the Award pursuant to Article 41(2)(b)(iii) of the DIFC Arbitration Law on the ground that the Award is fundamentally flawed as a result of the Tribunal's failure to consider critical matters of Saudi law, in particular in relation to the validity and enforceability of the Allotment Agreement. Nazeer contends that the Award breaches fundamental principles of justice and, therefore, is in conflict with the public policy of the UAE.
13. For the reasons that follow the Court will order:
a) The Claimant’s claim be dismissed.
b) The Claimant shall pay the Defendant’s costs of the case in the sum of USD 132,000.
The arbitration
14. In the Award, the Tribunal stated that Nazeer 's initial case in its request for arbitration was that the Allotment Agreement was a fraudulent arrangement with Nadeem for the allocation of rooms at the Nestor. Nazeer claimed that the Allotment Agreement was created for the purpose of falsely inflating Noah’s performance so that it could achieve its performance targets under the Nestor OMA.
15. Clause 25.6 of the OMAs provides that Nazeer has the right to terminate the OMAs if Noah for any consecutive two operating years after the third year fails to achieve specified key performance indicators (KPIs) concerning operating profit and annual revenue per available room (“RevPAR”). Nazeer asserted that Noah 's management and performance was so poor that it was failing to achieve the KPI's and risked losing the right to operate the hotel. For this reason, Noah orchestrated fraudulent accounting practises concerning the Allotment Agreement with Nadeem in order to avoid the consequences of clause 25.6 and losing the right to operate the hotel.
16. In its statement of claim, Nazeer submitted as follows. The Allotment Agreement was a sham transaction and making the agreement was dishonest and intentionally done for the sole purpose of misleading Nazeer into believing Noah was meeting performance targets. Noah’s actions were a material breach of the OMAs and breach of its duties to Nazeer as its agent. Noah’s material breaches entitled Nazeer to terminate those agreements not pursuant to the express termination provisions provided for in the OMAs but pursuant to Nazeer’s right to terminate at common law.
17. In addition, Nazeer claimed that Noah’s dishonest scheme initially involved the implementation of systems which amounted to financial irregularities that were contrary to industry and accounting standards, all of which were designed to overstate revenue.
18. By its statement of defence and counterclaim, Noah asserted as follows. Noah entered the Allotment Agreement in good faith and for the benefit of the Hotels. Nazeer was looking for ways to end its various commercial agreements with Noah. Noah did not dishonestly enter into the Allotment Agreement as part of a sham transaction designed to fool Nazeer into thinking that Noah had met its performance targets. Nazeer wrongfully terminated the OMAs, entitling Noah to damages.
19. There were other pleadings with allegations and counter allegations.
20. The Tribunal said that in broad summary Nazeer makes four claims. The first three are said to justify the summary termination of the OMAs on the basis that they constitute fundamental repudiatory breaches of the OMAs and entitle Nazeer to consequential damages, namely that Noah:
a) concluded a “sham” transaction with Nadeem through three agreements - the Allotment Agreement 11 December 2019, the First Extension 17 December 2019 and the Second Extension 24 December 2019 (“the Allotment Agreement Claim”);
b) improperly transferred payroll expenses for 14 employees from the Nestor to the Naayil for the months of November 2019 and December 2019 (“the Payroll Transfer Claim”); and
c) improperly recategorized food and beverage rates used at the Nestor whereby a portion of food and beverage revenue was inappropriately reallocated to room revenue during the course of December 2019 and early 2020 (“the F&B Recategorization Claim”).
21. Nazeer’s fourth claim is a freestanding claim giving rise to a separate claim for damages and is not relevant to this case.
22. Noah denied that it was guilty of a sham transaction or fraudulent accounting practises. It asserted that the Allotment Agreement with Nadeem was made in good faith and the allocation of employment expenses between the two hotels and revenues between F&B and rooms were matters properly undertaken in the exercise of its discretion under the OMAs. In so far as the management of the Nestor may have acted improperly, Noah says they were Nazeer’s employees and therefore Noah is not liable for their actions, and in any event, Nazeer affirmed the OMAs after discovering the alleged breaches. Accordingly, Noah asserted that Nazeer 's termination of the OMAs was a wrongful repudiation of the OMAs entitling Noah to damages.
23. The parties agreed that the OMAs contain an implied term that Noah should act with honesty. The Tribunal considered that was sufficient. All the other implied terms - good faith, integrity, not to breach fiduciary duty, not to mislead -say the same thing in different ways. The case as argued was that the sole issue is whether the Allotment Agreement and Addenda were a sham and ex hypothesi dishonest.
24. The Tribunal found that the Allotment Agreement was not a genuine agreement in the sense that Nadeem neither needed nor intended to sell the December 2019 rooms. It was a risky and artificial agreement the sole purpose of which was to satisfy the RevPAR KPI. Nevertheless, the Tribunal found that, notwithstanding the defects in the agreement, the Allotment Agreement was a genuine agreement in the sense that Nadeem was obliged to pay for the December 2019 rooms, albeit it was to be compensated by the 2020 Hajj discounts thereby accelerating the 2020 revenue into 2019.
25. The Tribunal found that the Allotment Agreement, while questionable in many ways, was an agreement that was intended to create reciprocal rights and obligations and therefore not a sham in the sense that it did not create any legal rights and obligations -which was Nazeer’s case. Therefore, the Allotment Agreement claim must fail. In other words, the making of the Allotment Agreement does not justify immediate termination of the OMAs at common law on the basis that it was a sham transaction.
26. In relation to the Payroll Transfer Claim, the Tribunal found that the transfer was not dishonest, and accordingly the Payroll Transfer Claim failed.
27. The Tribunal found that the recategorizing of food and beverage rates used at the Nestor was at worst not best accounting practise, but it was not dishonest.
28. The Tribunal found that each of the Allotment Agreement Claim, the Payroll Transfer Claim and the F&B Recategorization Claim had not been established. It followed that Nazeer was not entitled to terminate the OMAs summarily at common law. The Tribunal found it unnecessary to consider Noah’s alternative case on affirmation.
29. The Tribunal found that Nazeer had not established its entitlement to rescind the OMAs and consequently the counterclaim must succeed. The Tribunal then assessed the damages to which Noah was entitled. The Tribunal found that Nazeer should pay Noah SAR 49,041,954 in respect of the counterclaim.
Legal framework of Nazeer’s case
30. Article 41(1) of the Arbitration Law provides that recourse to a Court against an arbitral award made in the seat of the DIFC may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of Article 41.
31. Nazeer brings its claim to set aside the Award under Article 41(2) (b)(iii) which provides that an arbitral award may be set aside by the DIFC Court if the DIFC Court finds that the award is in conflict with the public policy of the UAE.
32. Nazeer says the Tribunal was bound to, but failed to, consider and apply Saudi law to the issue of whether Noah breached the Allotment Agreement, and the Tribunal thereby contravened Article 35(1) of the Arbitration Law which provides that the arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute.
33. Party autonomy is a central principle in arbitration. Parties must accept the consequences of the choices they have made. The courts do not and must not interfere in the merits of an arbitral award and, in the process, bail out parties who have made choices that they might come to regret, or offer them a second chance to canvass the merits of their respective cases. There is no right of appeal from arbitral awards. The grounds for court intervention are narrowly circumscribed. The parties to an arbitration do not have a right to a “correct” decision from the arbitral tribunal that can be vindicated by the courts. Instead, they only have a right to a decision that is within the ambit of their consent to have their dispute arbitrated, and that is arrived at following a fair process.
34. Under an application to set aside an award under Article 41(2) the Court will not address itself to the substantive merits of the dispute, or to the correctness or otherwise of the award. An error of law or error in factual findings does not provide a ground for setting aside the award - these are matters which would otherwise be relied upon in mounting an appeal on the merits, a merit review which is not open under Article 41. See eg PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR® 597; PT Central Investindo v Franciscus Wongso [2014] SGHC 190, BLC v BLB [2014] SGCA 40, Sino Dragon Trading Ltd v Noble Resources International Ltd [2016] FCA 1131, [70]-[74] in relation to the corresponding provisions of the Model Law.
35. Article 41 does not provide an opportunity for a party to seek to cure failure or unfairness which follows from the conduct of that party’s forensic or strategic decisions. The task of the Tribunal was to decide the case presented to them by the parties.
36. Article 9 is also relevant because Noah submits that Nazeer waived any right to object to the Tribunal not considering the law of Saudi Arabia by informing the Tribunal that the law of Saudi Arabia was not relevant to the issues before the Tribunal. Article 9 provides that a party who knows that any provision of the Arbitration Law, including one from which the parties may derogate, or any requirement under the Arbitration Agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance shall be deemed to have waived his right to object.
Nazeer’s case to set aside the Award
37. Nazeer’s case is based on clauses 6.2 and 30.1 of the OMAs.
38. Clause 6.2 provides:
“Subject to the provisions of clause 6.1 [the operator will operate the hotel to the Standard] … the general style of operation and standard of the Hotel will conform to … accepted shariah principles and Laws of the Kingdom of Saudi Arabia.”
39. Clause 30.1 provides:
“The Operator [Noah] covenants that it shall comply with any Applicable Laws in relation to the Site, the Project, Hotel and its operation except to the extent that any such noncompliance arises out of any act or omission of the Owner [Nazeer ].”
40. Applicable Laws is defined to mean, in effect, any law, or requirement in effect in the Kingdom of Saudi Arabia from time to time.
41. Clause 41 of each of the OMAs contain the following arbitration agreements:
"Any and all Disputes arising out of or in connection with this Agreement… including any question regarding its existence, validity or termination shall be referred to and finally resolved by Arbitration under the Arbitration rules of the Dubai-International Finance Centre - London Court of International Arbitration Centre, DIFC, Dubai, UAE which Rules are deemed to be incorporated by Reference into this clause…”
42. Clause 52 of each of the OMAs provides that:
"This [sic] validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the Parties shall be governed by the English laws.”
43. In its skeleton argument the Claimant summarised its case as follows:
a) The OMAs are contracts governed by the law of England and Wales: but what they agree is that the Defendant will, in performing its obligations thereunder, comply with the law of Saudi Arabia;
b) Whether or not the Defendant’s conduct in entering into the Allotment Agreement breached that obligation is fundamentally a question of Saudi law: if it was contrary to Saudi law it was a breach of the OMA: if it was not a breach of Saudi law it was not;
c) Indeed, the Tribunal itself appeared to recognise that;
d) However, the Tribunal approached the question of whether the Defendant’s conduct in entering into the Allotment Agreement breached that obligation as if the obligation was one to comply with the law of England and Wales: it judged for example whether that conduct was dishonest by applying the English law test;
e) That was a fundamentally wrong approach: it meant that the Tribunal failed to comply with Article 35 of the Arbitration Law: and that it breached a fundamental Public Policy of the UAE;
f) It does not matter whether one of the reasons why the Tribunal fell into error is because the parties did not flag up clearly enough and/or properly that the Tribunal should apply the law of Saudi Arabia and not the law of England and Wales in that regard:
i) It is clear that the Tribunal did not need the parties to tell it that: it appreciated the point; and
ii) The Tribunal was obliged to reach the correct decision, applying the correct law; and
iii) In any event the Tribunal did not follow the lead of the parties: instead it fell into error in failing to properly deal with the point “one way or another.
44. In his oral submissions senior counsel for Nazeer , Mr Napoleon, said that Nazeer’s case raises three issues:
a) Was the law of Saudi Arabia relevant and central to whether Noah had breached the OMAs?
b) If yes, is Nazeer precluded from complaining of the Tribunal’s failure to consider the law of Saudi Arabia because it informed the Tribunal that Saudi law was not relevant to the issues which the Tribunal was required to consider?
c) If Nazeer is not precluded from complaining of the Tribunal’s failure to consider Saudi law, is the Award in conflict with the public policy of the UAE because the Tribunal failed to consider Saudi law when it was obliged to?
Was law of Saudi Arabia central to the dispute?
45. Nazeer submits that under the OMAs, Noah agreed that in operating the hotel it would conform to and comply with the requirements of Saudi Law and Shariah rules and principles. The question of whether or not Noah’s conduct of agreeing the Allotment Agreement (and how it was agreed by Noah) was a breach of the OMAs therefore required the Tribunal to make a finding as to whether or not that conduct breached Saudi law and therefore breached clauses 6.2 and/or 30.1 of the OMAs.
46. Nazeer submits Article 35(1) of the Arbitration Law obliged the Tribunal to consider whether Noah’s conduct breached Saudi law, irrespective of the parties’ submissions to the Tribunal.
47. Nazeer submits that the Tribunal failed to do so, it made no finding as to whether the Allotment Agreement had been breached according to Saudi law and instead determined whether Noah had breached the Allotment Agreement according to English law.
48. Nazeer submits that had the Tribunal applied a Saudi law analysis there is at least a good chance it would have reached a different view. Nazeer relies on the witness statement of Mr. Nelson dated 9th July 2024 in which Mr Nelson discusses various aspects of the underlying facts and how those facts appear to violate and / or should be dealt with under the new (and retrospective) Saudi Civil Transactions Law. I pause to observe that that evidence was not presented to the Tribunal.
49. I do not agree that whether Noah breached Saudi law by entering into the Allotment Agreement or whether the Allotment Agreement was contrary to Saudi law or was unenforceable under Saudi law were issues before the Tribunal.
50. Those matters were not part of Nazeer’s case before the Tribunal.
51. On the fifth and final day of the evidential hearing the Tribunal Chair discussed Nazeer’s case with counsel for Nazeer, Mr Ned. The exchange is at pages112 – 115 of the transcript. The Chair said:
“ … we have been through the pleadings, and we would definitely state that we would not intend to go outside the pleadings in this case, unless we were persuaded to do so by very strong submissions which we can't anticipate at the moment, but if we go to the statement of claim, could we just begin at … paragraph 93 of the statement of claim? So, what are pleaded there are the applicable legal principles, and "sham transaction" there is defined by reference to what is said to be the classic formulation. There are highlighted words there: "... acts done, or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create". Then:" ... for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating". That authority is picked up in the pleading, if we run forward, … and this is, perhaps, the most important, at least for us, paragraph in the pleading, paragraph 128, it says: "Applying the legal principles set out above, it is clear that the Allotment Agreement, the first AA Extension and Second AA Extension were sham arrangements. In particular: "128.1 The Allotment Agreement (as amended) was executed solely for the purpose of giving the appearance of creating between the Respondent and Nadeem legal rights and obligations different from the actual legal rights and obligations the parties intended to create". So that's quite a wide pleading, it seems to us, but then it gets narrower in the next two subparagraphs: "There was a common intention between the Respondent and Nadeem that the Allotment Agreement (as amended) would not create any actual legal rights or obligations and that neither party would honour the obligations provided for in the agreement. The common intention of the Respondent and Nadeem was that the Allotment Agreement (as amended) would be created for the ’Respondents 'internal procedures', which for the Respondent would assist it to falsely overstate the room revenues for the Nestor for 2019". Then 128.3: "The Respondent and Nadeem by executing the Allotment Agreement (as amended) and knowing that Nadeem would never be bound by its terms deliberately intended to give a false impression of the rights and obligations referred to in the Allotment Agreement (as amended) to the Claimant and other third parties".
52. The Chair then asked Mr Ned if that analysis was a fair summary of Nazeer’s case:
“So, Mr Ned, of course, anything we say is provisional at this stage, but it does appear that by your pleading you've nailed your colours pretty firmly to the mast that the Allotment Agreement was a sham agreement creating no legal obligations whatsoever. Is that a fair summary of your case?”
53. Mr Ned confirmed it was:
“It is, and that has been the case that we've set out in the pleadings, Mr Chairman.”
54. The Chair then sought further confirmation that that was Nazeer’s case:
“Okay. So we have that as a common ground?”
55. Mr Ned confirmed it was:
“Yes.”
56. Later the Chair raised matters on which the Tribunal would be assisted by submissions from the parties. One matter related to Saudi law:
“ … we would also be grateful for guidance as to how the tribunal is to address the meaning and enforceability of the allotment agreement and the addenda when we don't have the assistance of any Saudi law submissions or evidence as to how those documents may be interpreted, because they are clearly Saudi law agreements, and I know I chided Mr Ned at one point for looking at the documents from an English lawyer's point of view, because they are, obviously, Saudi law documents, so I would be grateful for some thoughts on that.”
57. After the evidential hearing, but before submitting written closing submissions the parties corresponded about the Saudi law issue. Nazeer put its position in a letter of 15 June 2023 from its lawyers, Baker McKenzie, to Noah’s lawyers, White & Case LLP:
“1. … We further refer to the Tribunal's request during the Final Hearing for the submissions to include "guidance as to how the tribunal is to address the meaning and enforceability of the allotment agreement and the addenda when [it doesn't] have the assistance of any Saudi law submissions or evidence as to how those documents may be interpreted, because they are clearly Saudi law agreements" (the "Tribunal's Request").
2. …
3. As to the enforceability of the Allotment Agreement and Addenda, we understand the Tribunal to have meant by this whether the Allotment Agreement and Addenda are unenforceable for failing to meet formalities required under Saudi law (as opposed to whether the Allotment Agreement and Addenda are unenforceable as a sham transaction, in respect of which issue it is common ground that the applicable law is English law). On that assumption, the Claimant’s position is as follows:
a. Neither the Claimant nor the Respondent has pleaded, sought to make submissions or adduced any evidence that the Allotment Agreement and Addenda are (either) enforceable or unenforceable pursuant to formalities under Saudi law. Further, it is difficult to see how the Tribunal might be required to reach a view on that in determining the substantive issues between the parties. We therefore consider that the enforceability of the Allotment Agreement and Addenda under Saudi law is not in issue and need not be determined by the Tribunal.
b. For the avoidance of doubt, this is separate, and without prejudice, to the Claimant’s pleaded case (which has been the subject of submissions and evidence, including at the Final Hearing) that the execution of the Allotment Agreement was, as a matter of fact, highly unusual in nature (for example, because it was not signed by Nadeem ), which reinforces that the Allotment Agreement formed part of a sham transaction.
4. We invite your client to confirm that it agrees with the above approach to the interpretation and enforceability of the Allotment Agreement and Addenda …” (emphases added)
58. By email of 19 June 2023 to Nazeer’s lawyers, Noah’s lawyers confirmed that Noah agreed to the approach regarding the interpretation and enforceability of the Allotment Agreement and addenda set out in Nazeer’s letter of 15 June 2023.
59. Nazeer confirmed its position in its written closing submissions to the Tribunal:
“[98] As to the enforceability of the Allotment Agreement and Addendums, it is understood between the parties that by ‘enforceability’ the Tribunal meant whether the Allotment Agreement and Addendums are unenforceable for failing to meet formalities required under Saudi law (as opposed to whether the Allotment Agreement and Addendums are unenforceable as a sham transaction, in respect of which issue it is common ground that the applicable law is English law). On that assumption:
(1) Neither the Claimant nor the Respondent has pleaded, sought to make submissions or adduced any evidence that the Allotment Agreement and Addendums are (either) enforceable or unenforceable pursuant to formalities under Saudi law. Further, it is difficult to see how the Tribunal might be required to reach a view on that in determining the substantive issues between the parties. The parties therefore agree that the enforceability of the Allotment Agreement and Addendums under Saudi law is not in issue and need not be determined by the Tribunal.” (emphasis added)
60. At Award, [301] the Tribunal again confirmed that in relation to the Allotment Agreement Claim, “the sole issue is whether the Allotment Agreement and Addenda were a sham and ex hypothesi dishonest”. The Tribunal said any other obligations were irrelevant because the allegation made was one of dishonesty. It was conceded that the OMAs contain an implied term not to act dishonestly.
61. Nazeer’s case on termination, affirmation and causation was premised on the notion that entering a sham transaction was a dishonest way of breaching the OMAs. This is confirmed in the Award where the Tribunal concluded that only one implied term was needed, namely the implied term that the parties would not act dishonestly, since the allegation that the Allotment Agreement was a sham, as well the Payroll Transfer Issue and F&B Issue, had “from the outset been put as fraudulent claims involving dishonest conduct”.
62. Nazeer never argued that it could terminate the OMAs because the Allotment Agreement did not meet Saudi law requirements nor, more generally, that something less than a dishonest sham would be sufficient. Nazeer sought to justify termination on the sole basis (for these purposes) that the Allotment Agreement was dishonest.
63. Article 35(1) of the Arbitration Law provides that the arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. The law governing the substance of the dispute is the law governing the contract out of which the dispute arises. The applicable substantive law determines the legal rights and obligations of the parties.
64. The dispute in the arbitration arises out of the OMAs. Nazeer pleaded that terms were to be implied into the OMAs including that Noah would carry out its obligations and responsibilities as operator of the hotels and towards Nazeer honestly and with integrity and that Noah would not engage in dishonest and fraudulent conduct to meet its contractual performance targets including that it would not enter into a sham transaction for the purposes of giving the appearance that the KPI's had been met. The Tribunal characterised these implied terms as implied terms that Noah would not act dishonestly. Nazeer pleaded that Noah breached those implied terms of the OMAs by its dishonest conduct in entering into a sham transaction, that is the Allotment Agreement, to mislead Nazeer. Nazeer pleaded that Noah’s dishonest conduct in breaching the implied terms of the OMAs entitled it to terminate the OMAs at common law.
65. The contract, or contracts, out of which the dispute arises are the OMAs. The relevant legal rights and obligations of the parties arise from the OMAs.
66. The OMAs provided that the validity of the agreement, the construction of its terms and the interpretation of the rights and duties of the parties shall be governed by the English laws.
67. The parties confirmed to the Tribunal that the law governing the dispute referred to arbitration is the law of England and Wales.
68. There was no obligation on the Tribunal to consider the content of any relevant Saudi law and whether it rendered the Allotment Agreement invalid or unenforceable. That was not part of the case referred to it for arbitration. The rules of law chosen by the parties as applicable to the substance of the dispute was the law of England and Wales. The Tribunal made no error by not considering Saudi law and whether it rendered the Allotment Agreement invalid or unenforceable.
Is Nazeer precluded from objecting to the Tribunal not considering the law of Saudi Arabia?
69. Nazeer submits that, regardless of whether the parties submitted that the Allotment Agreement was invalid and unenforceable under Saudi law, the Tribunal had to consider whether Noah’s conduct breached Saudi law because it was its mandatory obligation to do so by reason of Article 35 of the Arbitration Law.
70. Article 35 (Rules applicable to substance of dispute) provides:
“(1) The Arbitral Tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State or jurisdiction shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State or jurisdiction and not to its conflict of laws rules.
. …
(4) In all cases, the Arbitral Tribunal shall make determinations in accordance with the terms of the contract and applicable law, and shall take into account the usages of the trade applicable to the transaction.”
71. Nazeer submits the fact that the parties “did not flag up” the need for the Tribunal to consider the Saudi law issue is irrelevant and does not relieve the Tribunal of the obligation to do so.
72. Article 9, like Article 4 of the Model Law, relates to non-compliance of those provisions of the Arbitration Law which are of a non-mandatory nature as well as to all contractual requirements set out in the arbitration agreement.
73. For the reasons already stated the rules of law as chosen by the parties as applicable to the substance of the dispute is the law of England and Wales.
74. In any event, Article 35 is a non-mandatory provision. It emphasizes the primacy of party autonomy in choosing the applicable law for the substance of the dispute. It would be inconsistent with that purpose to allow a party to acquiesce in the arbitral tribunal applying a law to determine the rights of the parties and then object if it is dissatisfied with the resulting award.
75. Nazeer submitted to the Tribunal that the law of Saudi Arabia was not relevant to the dispute. Nazeer must have known that the Tribunal was not applying the law of Saudi Arabia.
76. 2 A party who has knowledge that any non-mandatory provision of the Arbitration Law has not been complied with must raise an objection without undue delay before it proceeds with the arbitration. Any objection which is raised at a later stage of the proceedings is regarded as inconsistent with its previous behaviour because, given that party's knowledge of the non-compliance, its silence is regarded as a waiver of his right to object.
77. Nazeer is precluded by Article 9 of the Arbitration Law from challenging the Award on the ground that by failing to apply Saudi law to determine the validity and enforceability of the Allotment Agreement. The Tribunal proceeded with the arbitration by making submissions to the Tribunal after it had submitted to the Noah that the law of Saudi Arabia was irrelevant to the dispute and obtained Noah’s agreement to that proposition.
78. Nazeer is precluded from seeking an order setting aside the Award on the ground that the Award is fundamentally flawed as a result of the Tribunal's failure to consider critical matters of Saudi law, in particular in relation to the validity and enforceability of the Allotment Agreement as a result of which the Award breaches fundamental principles of justice and, therefore, is in conflict with the public policy of the UAE, because Nazeer proceeded with the arbitration when it knew that the Tribunal was not applying Saudi law as Nazeer now contends it should.
Is the Award in conflict with the public policy of the UAE?
79. Nazeer contends that the Tribunal failed to apply Saudi law to determine whether Noah breached Saudi law by entering into the Allotment Agreement or whether the Allotment Agreement was contrary to Saudi law or was unenforceable under Saudi law, when Article 35 of the Arbitration Law required it to do so, the Tribunal failed to comply with Article 35 of the Arbitration Law: and thereby breached a fundamental public policy of the UAE. Accordingly, Nazeer contends, the Award breaches fundamental principles of justice and, therefore, is in conflict with the public policy of the UAE and should be set aside pursuant to Article 41(2)(b)(iii) of the Arbitration Law which provides that the Court may set aside an award if it finds that the award is in conflict with the public policy of the UAE.
80. I have found that Nazeer’s contentions fail at the first hurdle because Article 35 does not require the Tribunal to determine whether Noah breached Saudi law by entering into the Allotment Agreement or whether the Allotment Agreement was contrary to Saudi law or was unenforceable under Saudi law.
81. However, even if the Tribunal erred by applying the wrong law in the way contended by Nazeer, that would not result in the Award being in conflict with the public policy of the UAE.
82. Article 41(2)(b)(iii) was considered by the DIFC Court of Appeal in Lachesis v Lacrosse [2021] DIFC CA 005 (29 December 2021). The Court of Appeal said at [37] that particular caution is required before an international court such as the DIFC Court can pronounce on issues of UAE public policy. The Court of Appeal referred with approval to the observation of His Excellency the Deputy Chief Justice Omar Al Mheiri in Case No. ARB-009-2019, at [24] that, “…this commercial and civil Court will rarely be in a position to make findings related to the public policy of the UAE without the assistance of expert evidence….”.
83. No evidence has been adduced by Nazeer that failure to comply with Article 35 of the DIFC Arbitration Law in the way alleged by Nazeer contravenes the public policy of the UAE. Therefore, the Appellant has failed to make good its case that the Award is in conflict with the public policy of the UAE for the purposes of Art. 41(2)(b)(ii) of the Arbitration Law.
84. However, the matter does not stop there. The application by the Tribunal of the wrong law, if, contrary to my findings, it did apply the wrong law, does not raise any question of conflict with the public policy of the UAE. The Court of Appeal in Lachesis v Lacrosse referred with approval to the statement of His Excellency the Deputy Chief in Case No. ARB-009-2019, in which the Deputy Chief Justice said that the public policy exception is reserved for exceptional circumstances, the standard of proof required for it to be established is very high and refusals under the exception are accordingly rare. Indeed, His Excellency the Deputy Chief Justice was unaware of an occasion when this Court refused to recognise or enforce an arbitral award for public policy reasons.
85. The Court of Appeal in Lachesis v Lacrosse observed that the Arbitration Law is based on the UNCITRAL Model Law (the “Model Law”), and neither errors of law nor errors of fact by the Tribunal, if there were any, disclose a ground upon which the Award could be set aside under the Model Law.
86. The ‘UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)’ (2016 edition) provides the following helpful observations and guidance:
“Invoking the public policy exception is a safety valve to be used in those exceptional circumstances when it would be impossible for a legal system to recognize an award and enforce it without abandoning the very fundaments on which it is based.” (page 240)
“In the words of the often-quoted judgment of the Second Circuit of the United States Court of Appeals in Parsons, ‘[e]nforcement of foreign arbitral awards may be denied on [the basis of public policy] only where enforcement would violate the forum state’s most basic notions of morality and justice.’ (page 240)
“… most jurisdictions recognize that a mere violation of domestic law is unlikely to amount to a ground to refuse recognition or enforcement on the basis of public policy.” (page 243)
“… most courts ascribe a narrow interpretation to public policy. It is thus not surprising that applications to refuse recognition and enforcement of a foreign arbitral award made under article V (2)(b) of the New York Convention have rarely been successful.” (page 248)
“courts have generally taken a restrictive interpretation of public policy and implemented a high standard of proof in that respect” (page 256)
“the fact that [courts] place the burden of proof on the party opposing recognition and enforcement as well as the heightened standard of proof demonstrate an international consensus as to the pro-enforcement bias of the New York Convention and the conservative manner in which the public policy defence should be employed.” (page 260)
87. InLachesis v Lacrosse, the Chief Justice referred to the ‘UNCITRAL 2012 Digest of Case Law on the Model Law on International Commercial Arbitration (the “Digest”) to support the proposition that courts operating under legislation that implements or reflects the Model Law do not review the merits of an arbitral award. Article 41(2)(b)(iii) reflects Article 36(1)(b)(ii) of the Model Law. At pages 183-184, the Digest notes:
“Not every infringement of mandatory law amounts to a violation of public policy.
The mere fact that the arbitral award violated certain laws or regulations of the enforcement State was not sufficient to constitute a violation of public policy.”
88.In Muzama v Mihanti[2022] DIFC ARB 004 at [95] H.E. Justice Shamlan Al Sawalehi held that to meet the test in Article 41(2)(b)(iii), the applicant must show that the award fundamentally offends the most basic and explicit principles of justice and fairness in the UAE.
89. Errors of law are not sufficient to justify setting aside an award under Article 41(2)(b)(ii) of the Arbitration Law. In CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 3 V K Rajah JA delivering the judgment of the Singapore Court of Appeal said: at [33]:
“it is trite that mere errors of law or even fact are not sufficient to warrant setting aside an arbitral award under Art 34(2)(a)(iii) of the Model Law”.
90. Nazeer has not established any basis for setting aside the Award on public policy grounds and cannot meet the high threshold required.
91. There is no evidence that the public policy which arises under the law of the UAE precludes the enforcement of an arbitral award on the ground that the arbitral tribunal did not comply with Article 35 of the DIFC Arbitration Law. There is no evidence that the law of the UAE in relation to arbitration contains a provision similar to Article 35 of the DIFC Arbitration Law.
92. There is no evidence of any legal provision, regulation, or principle of public policy which the Award is said to have violated by not considering the Allotment Agreement’s enforceability under Saudi law. Indeed, it is very difficult to understand what aspect of UAE public policy the Award could have violated by not considering this point.
Application must be dismissed
93. For all the reasons stated, Nazeer’s Application to set aside the Award must be dismissed.
Costs
94. The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. Nazeer is the unsuccessful party. There is no reason to make a different order.
95. Noah seeks an order for indemnity costs because:
a) Pursuant to PD1/2017, at [3], unmeritorious attempts to set aside arbitral awards will generally be met with indemnity costs. And see the cases cited at footnote 2 to PD1/2017;
b) This claim is wholly without merit;
c) The Defendant’s presentation was misleading in its failure to explain that the parties had agreed that Saudi law was irrelevant; and
d) The Defendant’s approach is wholly unacceptable in raising serious allegations of fraud in a casual manner in reply evidence, from a witness with no apparent knowledge of the underlying facts. This is compounded by the oblique reference to this evidence in the Claimant’s Skeleton at [31(b)].
96. RDC 38 gives the Court discretion as to whether costs are payable by one party to another and the amount of those costs. In deciding what order (if any) to make about costs, the Court must have regard to all the circumstances, including, amongst other things, the conduct of all the parties, which includes whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue. The Court is to assess the amount of costs on the standard basis or on the indemnity basis.
97. The RDC do not prescribe criteria for determining whether to order costs be assessed on the standard basis or the indemnity basis. However, Practice Direction 5 of 2014 provides that in determining whether costs should be assessed on the indemnity basis as opposed to the standard basis the Judge is to take into consideration, amongst other things,
“circumstances where the facts of the case and/or the conduct of the paying party are/is such as to take the situation away from the norm; for example where the Court has found deliberate misconduct in breach of a direction of the Court or unreasonable conduct to a high degree in connection with the litigation”.
98. The exercise of discretion may be informed by the category of case in question. For example, contempt proceedings are an example of a category of case where indemnity costs orders are more frequently made.
99. Practise Direction 1 of 2017, paragraph (3) provides:
“When the Court is exercising its discretion as to costs under Part 38 of the RDC, the principle of awarding indemnity costs may also be invoked for other unsuccessful applications to Court relating to arbitration, [ie other than for applications for ratification of arbitral awards] such as (by way of example only) unsuccessful applications for setting aside of arbitral awards and unmeritorious challenges to remove arbitrators.”
100. Footnote 2 to [3] is:
“See by way of example the decision of the Hong Kong Court of First Instance in Peter Cheung & Co v. Perfect Direct Limited & Yu Guolin (HCMP 2493/2012) and New Heaven Investments Limited & Rondo Development Limited v. Yu Guolin (HCA 115/2013), judgment of 25 April 2016, where costs were awarded on the indemnity basis where a party had engaged in “unmeritorious” behaviour in attempting to delay the enforcement of an arbitral award; Exfin Shipping (India) Ltd Mumbai v Tolani Shipping Co Ltd Mumbai, [2006] EWHC (Comm): 17 May 2006, where indemnity costs were awarded by the English Commercial Court following a “wholly unmeritorious” application to set aside an arbitral award; and DigiTelCom Ltd. v. Tele2 Sverige AB (1:12-cv-03082), 16 November 2012, where the District Court for the Southern District of New York imposed costs sanctions on a party for making a “frivolous” application to vacate an arbitral award.”
101. The Practice Direction read with the footnote identifies circumstances where the court will award indemnity costs. One circumstance is where the party applying to set aside the award does so for a collateral purpose such as to delay the enforcement of the award and payment of the sum awarded.
102. Senior counsel for Nazeer, Mr Napoleon, submitted that if the Court dismisses Nazeer’s Application, the Court should not order costs to be assessed on an indemnity basis. Mr Napoleon submitted that he did not criticise Nazeer s previous legal representatives but one circumstance that would justify the Application would be for Nazeer to exhaust all remedies to set aside the Award before seeking redress against its previous legal representatives for failing to “flag up” that the Tribunal should apply the law of Saudi Arabia and not the law of England and Wales as Nazeer now contends.
103. If that was the reason for Nazeer bringing the Application, and Mr Napoleon did not submit it was, that would be a circumstance justifying an award of indemnity costs if the application was otherwise unmeritorious. In such circumstances the cost to an applicant making an unmeritorious application should be to pay all of the costs of the respondent, reasonably incurred and in a reasonable amount.
104. Another circumstance identified by the Practice Direction where indemnity costs should be awarded is where the application is hopeless to the point of being frivolous. Such a situations may well be a good reason for awarding indemnity costs against a party bringing unsuccessful applications other than an application to set aside an award.
105. Another circumstance identified by the Practice Direction to justify an award of indemnity costs is where the application is “wholly unmeritorious”. When a court describes an application as “wholly unmeritorious,” it means that the application lacks any merit whatsoever. In other words, the application is completely without justification or basis in law or fact. This term is often used to indicate that the application was frivolous or groundless and had no reasonable chance of success.
106. The Court should consider Article 41 proceedings (and the costs consequences that should attend them) by reference to public policy considerations. Public policy considerations underlie costs principles including indemnity costs. Indemnity costs questions in the context of Article 41(2) proceedings and what the justice of the case requires in litigation of this type should be informed by:
a) the overriding objective;
b) the limited grounds for challenge under article 41(2);
c) the fact that the parties’ dispute has been resolved under contract with the arbitral award being the contractually provided for outcome (see eg Ye v Zeng (No 5) [2016] FCA 850 at [23] per Allsop CJ); and
d) the public policy of discouraging article 41(2) challenges that have no real prospects of success, particularly where it may be said that such challenges that do not have such prospects are inconsistent with the agreed contractual dispute resolution mechanism.
107. A category of circumstances justifying an order for indemnity costs is where an unsuccessful Article 41(2) challenge is made which has been found not to have real prospects of success, whether or not the unsuccessful party knew or ought to have known this at the inception of the challenge. Of course, if the unsuccessful party knew at inception that it had no reasonable prospects of success, then an indemnity costs order may be justified as falling within a pre-existing category in any event. It is not necessary that the unsuccessful party “ought to have known” at inception that its application had no real prospects of success to justify an indemnity costs order. A party bringing an Article 41(2) challenge should take positive steps to ensure that at inception it does have real prospects of success taking into account both the law and the evidentiary foundation available to it. It should bear the risk accordingly, whatever actual or constructive knowledge it has at inception.
108. In my view, the grounds of challenge did not have real prospects of success. The Application is wholly unmeritorious. The challenge is made on a confected public policy issue when in reality it is an attempt to run a different case than the case Nazeer submitted to the Tribunal in accordance with different rules of law than the parties chose as applicable to the substance of the dispute.
109. Nazeer’s arguments were wrong. But in any event, there was no free-standing ground of challenge to the Award based on legal error available to Nazeer. Further, and critically, there was no evidence of any relevant public policy of the UAE with which the Award is in conflict.
110. Nazeer raised a further argument against the award of indemnity costs – that the Defendant failed to file and serve its Statement of Costs (“SOC”) 24 hours prior to the Hearing of the set aside Application. In breach of RDC 38.36 Noah sent that schedule in an email to the Claimant half an hour before the Hearing. RDC 38.36 is a mandatory provision RDC 38.37 stipulates that the failure of a party, without reasonable excuse to comply with RDC 38.36 is a factor which shall be taken into account by the Court in making cost orders.
111. Nazeer submits that the failure of Noah to file the SOC in time prejudiced Nazeer as it gave an unfair advantage to Noah by allowing it sight of Nazeer’s costs, which were filed in time under RDC 38.36, before it offered its own.
112. Senior counsel for Noah, Mr Norwood, accepted that Noah had failed to file its statement of costs in accordance with the Rules and on behalf of Noah apologised for that failure.
113. In my view, the purpose of the rule is to enable the parties to make submissions to the Court on the Hearing of the Application about the costs claimed and for the Court to be able to assess the costs at the Hearing. To address any prejudice to Nazeer, I gave permission to Nazeer to make submissions in relation to the costs claimed by Noah in writing after the Application. Consequently, Nazeer has not been relevantly prejudiced. The Court determined to reserve its decision in any event, so the quantum of costs would not in any event have been determined by the Court at the Hearing of the Application.
114. There is no basis for Court to find that the statement of costs filed by Noah is influenced by Nazeer’s statement of costs or is otherwise anything other than an honest and proper statement of the costs it incurred.
115. In all the circumstances, I consider that the justice of the case requires that Nazeer should pay Noah’s costs on an indemnity basis.
Quantum of costs
116. Noah’s statement of costs states its costs to be USD 135,582.50 which includes USD58,000.00 for professional fees of Norwood and USD 9,000.00 professional fees of junior counsel, Nashville
117. Those fees are not disproportionate to the matter in dispute. The Application is a heavy Application. The Application seeks to set aside an award, which including costs, is in the order of USD 14m.
118. Nazeer submits that Noah’s costs in the SOC are ‘unreasonably incurred’ and ‘unreasonable in amount’ and should not be allowed on an indemnity basis, for three reasons.
119. First, Nazeer submits that the hours spent by the fee earners are substantially high given that they had represented Noah in the arbitration proceedings (in contrast to Nazeer’s current attorneys and counsel) and are well acquainted with the entire background and facts of the case.
120. In particular, the hourly rate of Nadia, Associate (having only 4 years’ experience) is USD 720 which is higher than the average hourly rate of USD 651 provided for lawyers up to 5 years of experience in the Registrar’s Direction No. 1 of 2023 (“RD”). As she has less than 5 years’ experience and spent 44 hours in the case, there is at least an additional unreasonable USD 69 cost per hour (total additional cost of USD 3,036) which is being fastened on the Claimant and should be removed.
121. The RD sets out the results of a survey of the average hourly charge out rates ascribed to varying levels of experience and seniority of practitioners in law firms in Dubai in order to provide a benchmark to the Courts in assessing costs. The RD states that these rates should be taken as a guidance when considering the rates likely to be acceptable to the Courts when assessing costs. The average hourly rate for a lawyer of up to 5 years’ experience is USD 651. The average rate for a lawyer of 6 – 10 years’ experience is USD 809.
122. I would expect the average charge out rate for newly qualified lawyers to be less than USD 651 and the average charge out rate for lawyers of 5 years’ experience to be more than USD 651. Nevertheless, a charge out rate of USD 720 for a lawyer of 4 years’ experience is higher than the benchmark used by the Court to assess costs in respect of a 4 year qualified lawyer.
123. Noah’s lawyers spent about 92 hours on the Application, including more than 78 hours working on the documents, of which Ms Nadia spent about 40 hours. Nazeer’s lawyers spent about 122 hours working on the documents and 134 hours on the Application. Nazeer says the difference is because Noah’s lawyers had represented Noah in the arbitration proceedings (in contrast to Nazeer’s current attorneys and counsel) and are well acquainted with the entire background and facts of the case. That may be, but it does not necessarily follow Noah’s lawyers spent an unreasonable number of hours on the Application.
124. I deduct approximately USD 3,582.50 in respect of the work done by Ms Nadia on the Application on the basis that, having regard to the RD and the circumstances of the case, those costs were incurred unreasonably or in an unreasonable amount.
125. Nazeer’s third submission is that Mr. Norwood has also represented the Defendant in the arbitration and is well acquainted with the dispute. In these circumstances, Nazeer submits, Mr. Nashville’s additional fees of USD 9,000 is unreasonably incurred given that a partner, associate and paralegal are sufficient as a team to assist Mr. Norwood for the work undertaken in these set aside proceedings without the requirement of a junior barrister.
126. A party is generally entitled to the costs of two counsel when it is deemed reasonable and necessary for the complexity and importance of the case. Having regard to the complexity of the legal and factual issues involved and the significance of the case, reflected in the value of the Award, it is not unreasonable for Noah to incur the costs of two counsel.
127. Nazeer must pay Noah s costs of the Application in the sum of USD 132,000.