India – How The Penny Drops– An Examination Of The Bombay High Court’s New Rules On Arbitral Tribunal Fees

The provisions for appointment of an arbitrator, under Section 11 of the Arbitration and Conciliation Act, 1996 (Act), underwent a sea change with the 2015 amendments. A notable amendment was in relation to setting fees for arbitrators appointed by a court under the Act, for the purpose of which, the new Section 11 (14) and Fourth Schedule were introduced.

 

Under these provisions and for the purpose of determination of the fees of the arbitral tribunal and the manner of their payment, the High Court was empowered to frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.

 

Years after the amendments kicked in (on and from October 23, 2015), the Bombay High Court issued the Bombay High Court (Fee Payable to Arbitrators) Rules, 2018, pursuant to Section 11 (14) and the Fourth Schedule (the Rules).[1]

 

Salient Features of the Rules

 

The salient features of the Rules, read in conjunction with the provisions of Section 11(14) are:

 

1. As explained in the Explanation to Section 11(14), the fees set out in the Fourth Schedule and the Rules do not apply to international commercial arbitrations and to institutional arbitrations where parties have agreed to a different determination of fees.This is one more instance of reverse discrimination against purely domestic arbitrations. While it is understandable that the fee rates should not be applied to institutional arbitrations as most institutions already have a fixed schedule of fees, there is no cogent reason why an ad hoc international arbitration seated in India and governed by Part I of the Act, should be treated differently from an ad hoc totally domestic arbitration seated in India and governed by Part I of the Act. It suggests that the mere existence of a foreign party to the arbitration, would ensure a better governed arbitration or acceptable (higher) rate of fees. (The other instance in which such arbitrations are treated differently, is in the availability of a patent illegality challenge to purely domestic arbitrations, which is not available to international arbitrations.)The Law Commission, in its 246th report, noted the rationale for the difference of application between domestic and international commercial arbitration as being that in the latter, foreign parties are involved who may have different values and standards for fees. The same explanation has been provided for institutional rules where institutions may have their own schedule of fees where greater deference may be required to be given to party autonomy. This explanation however does not explain why party autonomy should be given by-passed a go-by in ad-hoc domestic arbitrations, or why an arbitrator in an ad hoc domestic arbitration should be constrained by a lower rate of fees, merely because a court appoints an arbitrator.The Rules apply to all arbitrations under the Act where the arbitral tribunal has been appointed by the Bombay High Court, i.e. by virtue of an application for appointment under Section 11 and also to other appointments, say during the course of a suit, where parties have agreed to arbitrate their disputes (albeit only for ad hoc domestic arbitrations).
2. The Rules issued by the Bombay High Court mirror the provisions and rates set out in the Fourth Schedule.
3. As is the standard process across institutions, the Rules also provide that the “sum in dispute” would be calculated by including both the claim and counterclaim amounts.
4. The interesting consequence of these provisions in the Act and the Rules is that while parties to an ad hoc arbitration who are able to co-operate with each other for the appointment of an arbitral tribunal would not be bound by the fee rates set out in the Rules / Fourth Schedule, merely by virtue of the appointment by a court under Section 11 or otherwise, the parties and more crucially, the arbitrators, would have their fees circumscribed by these caps.It may also be argued that parties may be able to vary the fees payable to an arbitral tribunal after its appointment through court by way of mutual consent on the basis of the principle of party autonomy. Certainly it would be a perverse situation where a court appoints one or two arbitrators to a three member tribunal, and the fees of the appointed arbitrators are capped by the Rules / Fourth Schedule, while the party appointed arbitrator, or presiding arbitrator appointed by the two arbitrators, is able to charge a higher fee (or is also circumscribed by a lower fee cap).  It remains to be seen how Courts interpret this provision in the future.
5. While the Act recognises the principle of costs following the event, initially, the arbitrators’ fees are to be shared equally between parties.
6. Interestingly, the Rules / Fourth Schedule reduce the fees payable to the tribunal on account of an early ‘mutual settlement’, by providing for a percentage of fees being paid should the arbitration be terminated for such settlement. Note that they do not account for termination for other reasons. The percentages payable are as below:

   – 40% if pleadings are complete.
   – 60% if hearing has commenced.
   – 80% if hearing is completed but award is yet to be issued.

7. The schedule of fees is shown below:

Note also that the prescribed fees are for a three member tribunal. In the case of a sole arbitrator an additional 25% is payable.

 

A Comparison with Fees of Some Relevant Arbitral Institutions  

 

We assume for the sake of comparison, a claim of INR 200 million and a three-member tribunal to which the schedule of fees would apply. In such a case, the maximum fund outlay would be up to INR 3 million per arbitrator, i.e. a total of INR 9 million (approximately USD 131,367). The fees payable to arbitral institutions in similar cases would be (approximately):

 

• Singapore International Arbitration Centre (SIAC): About SGD 370,846 (INR 18,731,447) i.e. USD 273,411, which includes SIAC’s administrative fees of SGD 27,479 (INR 13, 87,999), i.e. USD 20,259.[2]
• International Chamber of Commerce (ICC): About USD 242,329 (INR 16,602,028), which includes ICC’s administrative fees of USD 35,443 (INR 2,428,268).[3]
• Mumbai Centre for International Arbitration (MCIA): INR 14,451,250 i.e. USD 210,936, which includes the maximum administrative cost of INR 1,050,000 i.e. USD 15,326.[4]
• Hong Kong International Arbitration Centre (HKIAC): About HKD 1,958,810 (INR 17,201,328,72 / USD 251,077), which includes the Administrative fees of HKD 113,562.76 (INR 997,174 / USD 14,555).[5]
• The London Court of International Arbitration (LCIA): About GBP: 178000 (INR 15,299,100 / USD 223,311), which includes the Administrative fees of GBP 22,000 (INR 1,890,900 / USD 27,600).[6]
• The ad hoc fee rates of an arbitrator fluctuate between INR 300,000 to INR 500,000 per hearing. Assuming that there are 20 hearings, the arbitrators fees would be INR 6 to 10 million, i.e. USD 87,578 – 145,964.

 

Note that the above does not include registration fees, legal fees per party, expert costs or witness and other external costs.

 

Conclusion

 

It is evident that an arbitrator appointed through the schedule will have fees capped at a lower rate than an institutional or ad-hoc arbitrator. This may discourage arbitrators from accepting appointments given the fee cap (which although lower is competitive). On the other hand, it will encourage the reduction of costs even by institutions in arbitrations, especially where claims are small. This will also encourage arbitrations by smaller players, arbitrations where the government is the opposite party and in matters that are standard claims or in volume claims such as by banks.