3 October, 2019
The Law Commission of India, in its 246th report, noted that one of the problems associated with arbitration in India (especially ad hoc arbitrations) is the high quantum of fees charged by arbitrators.[1] The Report went so far as to call the fees “arbitrary, unilateral and disproportionate”. The Commission recommended the adoption of a model schedule of fees for Courts to consider while framing rules for fixing of the fees of arbitrators appointed in accordance with Section 11 of the Arbitration and Conciliation Act, 1996 (the Act). The Commission restricted its suggestions to ad hoc domestic arbitrations, noting that different standards may apply in institutional arbitrations and in international commercial arbitrations (where the Commission recommended greater deference to party autonomy).
In 2015, in accordance with the recommendations of the Law Commission, the Act was amended to include sub-section 11(14), which gives High Courts the power to frame rules for determining the fees of an arbitral tribunal and the manner of its payment, after taking into consideration the rates specified in the model Schedule of Fees set out in the Fourth Schedule to the amended Act. The Explanation to the sub-section clarifies that it would not apply to international commercial arbitrations or institutional arbitrations.
The Act, as it stood prior to the 2015 amendment, empowered arbitral tribunals to fix the costs of the arbitration, unless otherwise agreed by the parties. The Law Commission, in its 246th report, recommended statutory recognition of the “loser pays” or “costs follow the event” principle. Pursuant to the recommendation, sub-section 31(8) of the Act was amended in 2015. The phrase “unless otherwise agreed by the parties” was deleted from sub-section 31(8) and arbitral tribunals were given the power to fix arbitration costs in accordance with the newly introduced Section 31A. It was clarified that for the purposes of Section 31A, “costs” would inter aliamean reasonable costs relating to the fees and expenses of the arbitrators.
In 2017, the Delhi High Court in the case of National Highways Authority of India v. Gayatri Jhansi Roadways Limited[2] (Gayatri Roadways Case), interpreted sub-section 11(14) of the Act and the effect of the specific deletion of the expression “unless otherwise agreed by the parties” from sub-section 31(8) of the amended Act. The Court held that the legislature had specifically taken away the power of the parties to enter into an agreement with regard to fixing of the arbitral tribunal’s fees. The Court further held that, in light of the explanation to sub-section 11(14), the right of the parties to enter into an agreement with regard to determination of arbitrator fees has been restricted to international commercial arbitrations and arbitrations (other than international commercial arbitrations) where parties have agreed for determination of fees as per the rules of an arbitral institution.
In 2018, the Delhi High Court in the case of National Highways Authority of India v. Gammon Engineers and Contractor Pvt. Ltd.[3] (Gammon Engineers Case) once again interpreted sub-section 31(8) of the amended Act and this time held that “costs” under sub-section 31(8) and Section 31A of the Act are the costs that are awarded by an arbitral tribunal as part of its award in favour of one party to the proceedings and against the other. Deletion of the words “unless otherwise agreed by the parties” was found to only signify that the parties, by an agreement, cannot contract out of payment of “costs” and “denude” the arbitral tribunal of its power to award “costs” of arbitration in favour of the successful party. With respect to fixing of fees by the arbitral tribunal, the Court held that an arbitral tribunal is bound by the arbitration agreement between the parties, which is the source of its power. Similar findings were arrived at by the Bombay High Court in Transocean Drilling Services (India) Pvt. Ltd. v. Oil and Natural Gas Corporation Ltd.[4].
Essentially, the Delhi High Court in the case of Gayatri Roadways held that the tribunal was free to fix its own fees but could do so only in cases of ad hoc domestic arbitrations. However, a year later, the Delhi High Court in the case of Gammon Engineers held that the tribunal would be bound by the parties’ agreement as to the tribunal’s fees.
Special Leave Petitions were filed challenging the orders passed by the Delhi High Court in the Gayatri Roadways and Gammon Engineering Cases. The Supreme Court observed that the arbitrator’s fees may be a component of “costs” to be paid but it is a “far cry” to state that sub-section 31(8) and Section 31A of the Act would “directly” govern contracts in which a fee structure has already been laid down. The Supreme Court overruled the decision of the Delhi High Court in the Gayatri Roadways Case and upheld the decision of the Delhi High Court in the Gammon Engineers Case(insofar as it pertained to the interpretation of sub-sections 11(14), 31(8) and Section 31A).[5]
The 2019 amendment to Section 11 of the Act (which is yet to be notified) makes it mandatory for the appointing authority (a designated arbitral institution) to fix arbitrator fees subject to the rates stipulated in the Fourth Schedule to the Act. This provision does not apply to international commercial arbitrations or to institutional arbitrations. It also does not seem to apply to domestic ad hoc arbitrations where the tribunal is appointed by the parties without recourse to Section 11 of the amended Act.
The rationale for the distinction drawn between an ad hoc domestic arbitration and an institutional arbitration or an international commercial arbitration, insofar as fixing of arbitrator fees is concerned, is unclear. For example, the maximum fees payable to an arbitrator under the Fourth Schedule to the Act is INR 30 Lakhs (with a further 25% or INR 7.5 lakhs if the arbitration is conducted by a sole arbitrator), whereas the maximum arbitrator fees payable under the Schedule of Fees of the Mumbai Centre for International Arbitration is INR 8.5 Crores.
Consider a situation where arbitrator ‘X’ is empaneled with an institution and also accepts appointments by Courts (or designated arbitral institutions) in ad hocdomestic arbitrations. Under the present arbitration regime, depending on whether or not parties have agreed to resolve their disputes through institutional arbitration, arbitrator ‘X’ will be paid higher fees (if he is appointed by an institution such as the MCIA) or lower fees (if he is appointed under Section 11 in an ad hoc arbitration) for deciding the same dispute. Similarly, parties may well have stipulated the arbitral tribunal’s fees in the arbitration agreement. Given that the judiciary has fiercely protected party autonomy, can such an agreement between parties simply be ignored when appointments are made under Section 11? These and other concerns have already been raised in our previous blog on arbitral tribunal fees.
Unqualified deference to party autonomy in fixing of tribunal fees is also not without its challenges. Contracts involving the state or state-owned entities, for example, are often standard form contracts that prescribe unreasonably low arbitrator fees. In other cases, parties may have agreed to arbitrator fees decades in advance of disputes actually arising. Insistence on adherence to party autonomy and consequently adherence to unreasonably low rates of arbitrator fees would result in a leaner pool of experienced arbitrators willing to adjudicate the dispute. This may result in stonewalling the arbitral process, with the arbitrators most competent to adjudicate such disputes refusing to do so since adjudication would require extensive time and effort and would simply not be commercially feasible for them.
Another problem with absolute deference to party autonomy in the matter of fixing of tribunal fees is that pre-dispute agreements on tribunal fees rarely account for how complex disputes referred to arbitration can be. Even agreements that prescribe an ad valorem basis for calculation of the tribunal fees cannot fully account for the complexities involved in future disputes. It does not necessarily follow that a dispute involving a larger claim will be more complex, nor that a dispute involving a smaller claim will be less complex. Institutional rules (which often prescribe tribunal fees on an ad valorem basis) account for this by stipulating that variation in the fees may be allowed depending on the circumstances of the case. The Act, as it stands, unfortunately does not assuage these concerns.
Conclusion
While party autonomy is the bedrock of arbitration, a more nuanced approach to determining arbitrator fees may be necessary. The fixing of fees may best be left to discussions between the parties and the tribunal after the dispute has arisen. Perhaps any pre-dispute agreement in relation to arbitrator fees or the fees prescribed under the Fourth Schedule to the Act (whichever is higher) could serve as a starting point for discussions between the parties and the arbitral tribunal.
For further information, please contact:
Indranil Deshmukh, Partner, Cyril Amarchand Mangaldas
indranil.deshmukh@cyrilshroff.com
[1] Law Commission of India, Report No. 246, “Amendments to the Arbitration and Conciliation Act, 1996”, (August 2014).
[2] 2017 SCC OnLine Del 10285.
[3] 2018 SCC OnLine Del 10183.
[4] Commercial Arbitration Application No. 131 of 2018, Order dated 8th October 2018.
[5] 2019 SCC OnLine SC 906.
