India: Can The Parties Restrict The Court's Power To Award Costs? The Delhi High Court Answers

INTRODUCTION

One of the main features of dispute resolution procedures is the cost and time efficiency. This has attracted large commercial disputes to opt for arbitration as a means of dispute resolution. However, large sums involved in such arbitrations also carry with them large cost implications which in turn affect the very basis on which arbitration was entered into in the first place.

Since arbitration is largely a private, mutually agreed mode of dispute resolution, the parties were usually ordered to bear their costs. It was also not very uncommon for an unsuccessful party to bear the cost of arbitration. After much deliberation¹ came a phase where the arbitrators, arbitral tribunal became empowered with the discretion to impose cost on the parties.² Section 31A empowers the arbitral tribunal to decide the cost incidence, cost quantum and the mode and time of such payment. Such discretion is, however, not absolute and the tribunal must consider factors like, inter alia, the conduct of the parties, the willingness of the parties to settle and if any delay tactics are used.³

REGIME OF COSTS UNDER A&C ACT, 1996

The 246th Report  of the Law Commission of India highlighted the need to amend the law on costs. Section 31A (regime for costs) of the Arbitration and Conciliation Act 1996⁴, which was introduced by the Arbitration and Conciliation (Amendment) Act 2015,  was thus a welcome step towards costs recoverability being based on rational and realistic criteria.

Section 31A (1) provides that in relation to any arbitration proceeding, the arbitral tribunal has discretion to determine:

• whether costs are payable by one party to another,
• the amount of such costs; and
• when such costs are to be paid,

Section 31A (2) provides that if a tribunal decides to make an order as to the payment of costs, the general rule is that the unsuccessful party will be ordered to pay the successful party's costs. Alternatively, a tribunal may make a different order for reasons which must be recorded in writing. In exercising their powers under Section 31A of the Act, tribunals must consider certain factors provided for in Section 31(A)(3) namely:

• the conduct of all parties.
• whether a party has partly succeeded in the case.
• whether a party made a frivolous counterclaim which delayed the disposal of the arbitral proceedings; and
• whether any reasonable offer to settle the dispute has been made by one party and refused by another.

POWER OF COURT TO AWARD COSTS

One of the questions that arise is that if the parties to an agreement restrict the payment of costs, or specifically mention that each party to the contract shall bear its own costs, can the arbitral tribunal or the court still use the discretionary power as vested in it under Section 31A of the Act?

It is no more res integra that the arbitral tribunal is the creation of an agreement and is thus bound by it. However, unlike the power vested in the tribunal to award interest in terms of Article 31(7) being subject to the contract between the parties⁵, the power to award costs does not have such restriction. In fact, Section 31A starts with a non-obstante clause which gives it an overriding effect over the provisions of the Code of Civil Procedure when it comes to awarding damages. The only exception to this rule is when the parties enter into an agreement vis-à-vis the costs after the disputes have arisen. But if the agreement is prior to the dispute, the same cannot restrict the court or the tribunal to award costs as per its discretion. It is pertinent to mention here that the power to award costs has been granted to both the tribunal and the court under Section 31A.

In the recent case of Union of India v. Om Vajrakaya Construction Company⁶, the Delhi High Court under Section 34 of the Act, inter alia, dealt with the issue of costs awarded by the tribunal. The parties under the contract had agreed to bear the costs on their own. However, the arbitral tribunal vide its impugned award granted costs to the construction company equivalent to the arbitration fees and the actual counsel fees. The appellant, Union of India, challenged the same on the ground that since the contract explicitly provided for the parties to bear their respective arbitration costs, the tribunal erred in awarding the same to the Respondent company. The High Court rejected these contentions on two grounds:

First, the contention that the award of costs is contrary to the contract provisions was raised for the first time before the court and the same did not find any mention in the Statement of Defence. Hence the same is liable to be rejected.

Second, by virtue of Section 31A (5) of the Act, the tribunal has the power to grant costs and since the agreement was not entered into after the disputes have arisen, the clause to bear the respective costs is not valid and cannot override the provisions of the Act.

CONCLUSION

Though the arbitral tribunal cannot go beyond the contract, the contract itself is bound by the Act. And the Act lays down the tribunals and the court's power to award costs despite any agreement to the contrary between the parties, the only exception being that contract is entered into by the parties after the disputes between them have arisen.

Costs have been one of the major contentions in the arbitral proceedings and is likely to remain as such. There is also an increasing trend of imposing cost liabilities through contract clauses or completely restricting the same. The parties may opt to settle between themselves the mechanism of costs and the maximum costs that can be imposed at the reference stage only, i.e., after the dispute has arisen but before referring the dispute to arbitration. This will ensure that the cost implications do not affect the feasibility of referring the dispute to arbitration by imposing heavy costs on either of the parties. The parties can thus divide the cost of arbitration among themselves before any contrary decision is arrived at by the tribunal. The tribunal also, while exercising its discretion, must consider factors like the intention of the parties, willingness of the parties to settle the disputes, settling and giving way to the offers of the other party, alternative arrangements suggested by the parties and future business potential. The same determining factors should also be kept in mind by the courts.

Footnotes

1. Law Commission of India 246^th report.

2. Section 31A of the Arbitration and Conciliation Act 1996.

3. Section 31A (3) of the Arbitration and Conciliation Act 1996.

4. Here in forth referred to as "the Act".

5. Union of India v Bright Power Projects India (P) Ltd, 2015 9 SCC 695; Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Ltd, 2019 17 SCC 786.

6. Union of India v. Om Vajrakaya Construction Company, OMP (Comm.) 299/2021 & I.A. 12966/2021, delivered on 20.12.2021.

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