The Supreme Court in Oil and Natural Gas Corporation Limited (“ONGC”) Afcons Gunanusa JV (“Afcons”),[1] while deciding on four cases, inter alia held that:
(i) arbitrators cannot unilaterally decide their own fees but can exercise discretion to apportion the costs, demand deposit, and exercise lien over the delivery of the arbitral award if payments to it remain outstanding;
(ii) the fees of the arbitrator must be fixed at the inception to avoid unnecessary litigation and conflicts between parties at a later stage;
(iii) the term ‘sum in dispute’, which is the header of the first column of the Fourth Schedule to the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”), refers to the sum in dispute in a claim and counter-claim separately and not cumulatively. Consequently, arbitrators are entitled to charge separate fees for the claim and the counter-claim in an ad hoc arbitration proceeding;
(iv) the highest fee payable in an arbitration proceeding governed by the Fourth Schedule is INR 30,00,000, which is a ceiling applicable on a per-arbitrator basis and subject to a sole arbitrator’s entitlement of an additional amount of 25% on the fee payable as per the Fourth Schedule;
(v) the Fourth Schedule is to have a mandatory effect on the stipulation of fees by arbitrators appointed by arbitral institutions designated for such purpose in terms of Section 11 of the Arbitration Act in the absence of an arbitration agreement governing the fee structure; and
(vi) as regards court-appointed arbitrators, the Supreme Court held that the Fourth Schedule is by itself not mandatory in the absence of rules framed by the High Court concerned, and issued directives for fixing of fees in ad hoc arbitrations where arbitrators are appointed by courts.
The matter was considered by a bench of three judges, comprising DY Chandrachud, Surya Kant and Sanjiv Khanna, JJ. The majority opinion was authored by DY Chandrachud, J. for himself and Surya Kant, J. Through a separate opinion, Sanjiv Khanna J. concurred on most aspects with the majority opinion and dissented on a few issues.
Brief Facts of the Lead Matter
ONGC and Afcons entered into a lumpsum turnkey contract on May 29, 2009 for the construction of an offshore oil and gas process platform. The contract contained an arbitration clause prescribing a three-member arbitral tribunal in the event the claim amount is more than INR 5,00,00,000. The contract also contained a schedule setting out the fees payable to the arbitrators. As disputes arose, Afcons, on July 20, 2015, invoked the arbitration clause.
In a preliminary meeting on November 25, 2015, the arbitral tribunal sought revision of the fee schedule provided in the contract. Since ONGC was not agreeable to the revision, the arbitral tribunal asked ONGC to consider the applicability of the Fourth Schedule, along with a reading fee of INR 6,00,000 per arbitrator. ONGC agreed to consider applying the Fourth Schedule but did not agree to the reading fees proposed since the Fourth Schedule did not provide for it.
On August 4, 2016, the arbitral tribunal passed a procedural order directing the parties to deposit 25% of the arbitrators’ fee (which was recorded as INR 30,00,000).
On May 22, 2018, the arbitral tribunal passed another procedural order finalising the fee payable. This was fixed at INR 1,50,000 for each arbitrator for every sitting of a three-hour duration. Reading fee/conference fee was kept open. In this order, alluding to the order dated August 4, 2016, it was explained that, “[…] before finally fixing the remuneration to be paid to the arbitrators by the parties, 25% of Rs. 30.00 lakhs were directed to be deposited by the parties by sharing equally”. ONGC objected to this.
The arbitral tribunal, by its order dated July 25, 2019, rejected ONGC’s application seeking modification of the order dated May 22, 2018. However, the arbitral tribunal was agreeable to reducing the fee to INR 1,00,000 per arbitrator per sitting and kept open the reading fee which would be decided at a later stage. ONGC informed the arbitral tribunal that the revision in the fees was not acceptable to it, and ultimately approached the Supreme Court seeking termination of the arbitral tribunal’s mandate and substitution of a fresh set of arbitrators.
Issues
The Court had to determine the following issues:
(i) whether arbitrators are entitled to unilaterally determine their own fees;
(ii) whether the term ‘sum in dispute’ in the Fourth Schedule means the cumulative total of the amounts of the claim and counter-claim;
(iii) whether the ceiling of Rs 30,00,000 in the entry at Serial No. 6 of the Fourth Schedule is applicable only to the variable amount of the fee or the entire fee amount;
(iv) whether the ceiling of Rs 30,00,000 applies as a cumulative fee payable to the arbitral tribunal or represents the fee payable to each arbitrator.
Whether Arbitrators have the power to unilaterally fix their own fees
After noting the distinction between institution-administered arbitrations and ad hoc arbitrations, the Supreme Court considered the position vis-à-vis various institutions[2] and foreign jurisdictions. Upon a conspectus of the position in foreign jurisdictions, it summated the position as, “arbitrator(s) do not possess an absolute or unilateral power to determine their own fees”. Usually, an agreement between the parties or between the parties and the arbitrators determines the fees. In the absence of such agreements, in some jurisdictions, arbitrators could determine their own fees, which would be subject to review by courts.
Coming to the Arbitration Act, the Supreme Court observed that party autonomy is a cardinal principle of arbitration, reflected in several provisions of the Arbitration Act[3], and upheld in significant rulings[4]. The Court referred to the 246th Law Commission Report (“LC Report”) and the amendments in 2015 to the Arbitration Act, by which the Fourth Schedule and Section 11(14) were inserted.
The Court considered the decision in NHAI v. Gayatri Jhansi Roadways Ltd. (“Gayatri Jhansi”)[5] where the Supreme Court dealt with the applicability of the Fourth Schedule in cases where the arbitrators’ fees were fixed by the parties’ agreement. The Supreme Court had given primacy to the parties’ agreement in determining the arbitrators’ fees.
The Court also referred to the amendments made to the Arbitration Act in 2019, which again amended Section 11(14) and added Section 11(3A) and as per which, the Courts were conferred with the power to designate arbitral institutions, and the arbitrator’s fee was to be determined by these arbitral institutions subject to the Fourth Schedule. On a conjoint reading of the two provisions, the Court held that in the absence of an agreement between the parties fixing the arbitrators’ fees, the Fourth Schedule would mandatorily apply in determining the arbitrators’ fees for an arbitral tribunal appointed by an arbitral institution designated for such purpose in terms of Section 11.
Based on the decision in Gayatri Jhansi and the principle of party autonomy, the Court held that the Fourth Schedule was not mandatory, and parties, by their agreement, could determine the arbitrators’ fees or the modalities for determination. As regards court-appointed arbitrators, the Supreme Court held that the Fourth Schedule is by itself not mandatory in the absence of rules framed by the High Court concerned and issued directives for fixing of fees in ad hoc arbitrations where arbitrators are appointed by courts.
Costs and Fees
The Respondents argued that the issue of fee fixation was dealt with as a part of costs under Section 31(8) and Section 31A of the Arbitration Act, and that in the absence of an agreement, the arbitral tribunal could fix its fee, which was a part of the reasonable costs, under Section 31A. The Court rejected this argument, holding that the purpose of deposit of costs was only to secure future costs relating to the arbitration, including the arbitrators’ fees, and the provision could not be stretched to construe that arbitrators could unilaterally fix their own fees.
Based on the LC Report, which treated arbitrators’ fees as independent of the costs, and the provisions pertaining to costs[6], the Court observed that the two must be distinguished, with costs being expenses incurred in the facilitation of the arbitral procedure and fees being remuneration payable to the arbitrators for their professional services.
It thus held that arbitrators could not issue any binding orders regarding their fees while deciding costs under Section 31(8) read with Section 31A, as this would violate party autonomy and the doctrine of the prohibition of in rem suam decisions,e., the arbitrators could not be a judge of their own private claim against the parties regarding their remuneration. Any such order could be reviewed by the courts. At the same time, the Court held, “[t]he principles of party autonomy and the doctrine of prohibition of in rem suam decisions do not restrict the arbitral tribunal from apportioning costs between the parties (including the arbitrator(s) remuneration) since this is merely a reimbursement of the expenses that the successful party has incurred in participating in the arbitral proceedings.”
Sum in Dispute
The Court observed that as per Sections 38(1) and (2), the arbitral tribunal could fix separate amounts of deposit in cases where counter-claims have been raised. In case of default in payment of deposit for either the claim or counter claim, the arbitral tribunal could terminate those proceedings in respect of which the default occurred, and the proceedings in respect of the surviving claim (or counter claim) would continue. Based on this, the Court held that claims and counter claims are distinct, independent proceedings, and are only preferred to be raised in the same proceedings to avoid multiplicity of proceedings[7].
The Court next highlighted the interplay between Sections 31(8), 31A, and 38(1), and observed that since separate deposits are to be made for a claim and counter-claim in an arbitration proceeding and these deposits being in relation to the costs of the arbitrators (which includes the arbitrators’ fees), therefore, prima facie the determination of the fee under the Fourth Schedule for a claim and counter claim should also be calculated separately, i.e., ‘sum in dispute’ refers to the claim and counter claim independently. The Court observed that the obverse position would have “far reaching consequences in terms of procedural fairness”.
Thus, it was held that in ad hoc arbitrations, where the Fourth Schedule applied, the term ‘sum in dispute’ would be separate for the claim amount and counter claim amount. Consequently, the fee ceiling would also be separately applicable to claims and counter claims.
Fee Ceiling – applicable to the whole amount or variable amount?
As regards the ceiling amount of INR 30,00,000 in the Fourth Schedule being applicable to just the variable amount or the sum of the base and variable amount, the Court looked at the legislative intent behind the introduction of the Fourth Schedule. The LC Report had recommended the fee schedule with the intention of preventing arbitrators from fixing exorbitant fees in ad hoc Thus, the ceiling of INR 30,00,000 was held to be applicable to the sum of the base and the variable amount.
Fee Ceiling – applicable to fees of individual arbitrators or cumulative fees paid to the entire tribunal
The Court held that the ceiling of INR 30,00,000 would be applicable to each individual arbitrator, and not the arbitral tribunal as a whole. This is because application of a fee ceiling on a three-member arbitral tribunal adjudicating a claim would result in each getting a significantly lower share than what a sole arbitrator would have received for the same claim. Additionally, the sole arbitrator would get an extra 25% fees payable, as per the Note to the Fourth Schedule, resulting in an absurd situation.
The Court also directed the adoption of the following guidelines, inter alia, for the conduct of ad hoc arbitrations in India:
(i) At the start of the proceedings, the parties and the arbitral tribunal together must finalise the Terms of Reference, which would serve as a tripartite agreement between the parties and the arbitral tribunal and should contain the components of the fees of the arbitral tribunal. Similar would be the procedure in case of Court appointed arbitrators, where the Court has not fixed the arbitrators’ fees.
(ii) Once finalised, the arbitral tribunal cannot vary the fees, and any deviation from the Terms of Reference should only be made with the parties’ consent.
(iii) Where arbitrators are appointed by parties as per the arbitration agreement, then their fees would also be as per the arbitration agreement. If the arbitral tribunal deems the contractual fees unacceptable, it must propose a revised fee in the preliminary hearings. If all the parties and the arbitral tribunal agree to a revised fee, then the same would be payable to the arbitrators. However, if any party objects to the revised fee and no consensus can be arrived at, then the arbitral tribunal or member of the arbitral tribunal should decline the assignment.
(iv) The parties and the arbitral tribunal may provide that the Terms of Reference contain a provision for revision of fees upon completion of a specific number of sittings. In such a case, both the quantum and stage of the revision must be clearly specified.
However, the Court also held that the fees stipulated in the Fourth Schedule was the default fee schedule and would be resorted to when the parties or the parties and arbitral tribunal could not reach a consensus. The same would be binding on the parties as well as the arbitral tribunal, and could only be changed by mutual consensus.
On the facts of the case of the lead matter, due to the lack of consensus between the parties and the arbitrators regarding the fee of the arbitral tribunal and in exercise of its powers under Article 142 of the Constitution of India, the Court directed the constitution of a new arbitral tribunal in accordance with the arbitration agreement; for which the matter is next listed on September 21, 2022. The new tribunal would be governed by the Fourth Schedule and the reason for it is in the Court’s observation, which says, “[t]hough the Fourth Schedule is per se not applicable to an international commercial arbitration, since ONGC had indicated (following the suggestion of the arbitral tribunal) that it would be agreeable to pay the fee payable in terms of Schedule, it cannot now take recourse to the arbitration agreement between the parties to pay a lesser fee.”
Justice Sanjiv Khanna’s Opinion
Khanna, J. concurred with the majority that:
(i) the arbitral tribunal could not seek revision of the fees where the parties had by agreement fixed the tribunal’s fees, or where the court fixed the fees while appointing the arbitrator.
(ii) the arbitrators’ fees so fixed could only be enhanced by a written agreement between the parties or a court order.
However, Khanna, J. disagreed with the majority to the extent that:
(i) in the absence of any agreement between the parties, or between the parties and the tribunal, or a court order fixing the fee, the arbitral tribunal is entitled to fix reasonable fees;
(ii) the term ‘sum in dispute’ means the sum total of both the claims and counter claims.
Justice Khanna relied on Sections 19(2) and (3), and Section 2(6) of the Arbitration Act to hold that “where the parties do not agree on the fee, or the court while appointing an arbitral tribunal does not fix the fee, the arbitral tribunal by implication is authorised to fix the fee, which should be reasonable.” Khanna, J. holds that in the absence of an agreement, an arbitral tribunal could fix a reasonable fee, which could be challenged (by a person who is not a signatory to the written agreement) under Section 39(3). Further, if the parties and the arbitral tribunal fail to arrive at a consensus over fixing of fees, then too the arbitral tribunal would be entitled to fix its fees.
Sections 31(8), 31A, and 38 of the Arbitration Act were relied upon by Khanna, J. to observe that “[t]he sections are, therefore, comprehensive and all-embracing provisions that equally empower and authorise the arbitral tribunal to fix the fee in the absence of any agreement between the parties or a court order fixing the fee payable to the arbitral tribunal.” Khanna, J. observed that the legislature has deliberately avoided a separate reference to claim and counter claim in the Fourth Schedule. Further, the LC Report had stated that the Fourth Schedule was based on the fee schedule of the DIAC, as per which the term ‘sum in dispute’ referred to the cumulative sum of the claim and counter claim. Thus, as per Khanna, J., the term ‘sum in dispute’, is the cumulative sum of the claim and counter claim.
Conclusion
The majority opinion gives primacy to contractual relationships and seeks to reinstate party autonomy and ensure cost-effectiveness in arbitral proceedings. At the same time, the separate opinion is indicative of certain pitfalls that lie ahead. Khanna, J.’s opinion seeks to overcome them by adopting a separate view on the issues he was unable to concur with.
For further information, please contact:
Omar Ahmad, Partner, Cyril Amarchand Mangaldas
omar.ahmad@cyrilshroff.com
[1] Oil and Natural Gas Corporation Limited v. Afcons Gunanusa JV, dated 30 August 2022, Arbitration Petition No. 5/2022 and connected matters.
[2] Article 41, UNCITRAL Rules 2010; Article 41(3)(a), Article 43, PCA Rules 2010; Schedule of Arbitration Fees and Costs, LCIA Rules 2020; Article 38(2), ICDR Rules 2021; Article 38(1) ICC Rules 2021; Rule 36(1) SIAC Rules 2016; Article 10 The Hong Kong International Arbitration Centre Rules 2018; Regulation 14 of the ICSID
[3] Sections 2(6), 19(2), 11(2) of the Arbitration and Conciliation Act, 1996
[4] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services (2016) 4 SCC 126, paragraph 5; Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd (2017) 2 SCC 228, paragraph 38
[7] State of Goa v. Praveen Enterprises (2012) 12 SCC 581; Voltas Ltd. v. Rolta India Ltd (2014) 4 SCC 516
