We are living in the modern era of upcoming legal jurisprudence and growing commercial disputes. 'Arbitration' is a form of Alternative Dispute Resolution that comes with any form of a commercial contract in this era. The increased penchant for arbitration has shored up the dubiety for the traditional method of litigation. One of the main aspects that attract parties towards the arbitration process is the cost advantage and the superiority of 'party autonomy'. Litigations and the entirety of the cou rt admini s tration are cons ide red cumbersome and expensive for commercial contractors. On the other hand, arbitrations are believed to be more economical. Nonetheless, recent years have seen this notion to prove a modern myth rather than a conscious reality. One of the biggest contributors to the same appears to be focused on the Arbitrator's Fees.
The process of determining a dispute via arbitration involves submitting to an Arbitral Tribunal which constitutes a panel of arbitrators or a sole arbitrator. Such an arbitrator is freely appointed by the parties as an independent 1 adjudicator. It is stated that arbitration is governed by the principle of party autonomy – where the parties are free to exercise their choice and agree over the quintessential aspects of the application of laws, which decide their contractual relationship.
A concerning theme surrounding arbitrations in India and the following disrepute that goes with it relates to the high fees charged by arbitrators who are more often than not ex-Judges.
This article will shed light on the facets of Arbitrator's Fees as decided by the Apex Court in this case. The Supreme Court of India however has recently shed light on the matter in Oil and Natural Gas Corporation v. Afcons Guanasa JV.2
BRIEF FACTS OF THE CASE:
The disputes between the parties were referred to an Arbitral Tribunal of three arbitrators over a construction agreement in 2015. The agreement signed between the parties already provided for a stipulated fee schedule for the Arbitrators which was Rs. 10 Lakhs each where the claim and counterclaim amount in dispute was estimated over Rs. 10 Crores. The tribunal was of the opinion that the agreement between the parties provided for 'unrealistic' fee. Therefore, the parties agreed to revise the fee in alignment with the provisions of Schedule IV of the Arbitration and Conciliation Act, 1996 ("1996 Act"). However, when the tribunal in 2018 decided to revise its fee once again, citing the complexity of issues and large volume of documents attached with it, the ONGC refused to provide approval for the same.
The tribunal temporarily exempted ONGC from submitting the revised fees which was followed by a Bombay High Court petition under Section 14 read with Section 15 of the 1996 Act filed by the Public Sector Undertaking. However, the petition was dismissed leading to the current case before the Apex Court.
POINTS OF DETERMINATION:
This article will discuss the following issues placed before the Bench:
- Whether the arbitrator(s) are entitled to unilaterally determine their fees?
- Whether the ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule of the Arbitration Act applies only to the variable amount of the fee or the entire fee amount; and
- Whether the ceiling of Rs 30,00,000 applies as a cumulative fee payable to the arbitral tribunal or it represents the fee payable to each arbitrator?
EVOLUTION OF SCHEDULE IV:
Before analyzing the Court's guidelines, let us first look at the history of the Fourth Schedule, which was inserted into the 1996 Act via the 2015 Amendment. It was to provide a model for the fixation of fees of the arbitrator. Before the insertion, when the contract lacked such a stipulation, the Arbitral Tribunal itself could decide upon its fees.3
The problem with this earlier provision was that it restricted the autonomy of the parties. Even when the fee for the arbitrators is provided for in the agreement, due to a lapse of time between the reference and the date of the agreement, the fee that is provided in the agreement might become insu
On another tangent, the tribunal was acting as a judge in its own cause while deciding its own fees. In the case of Vijya Minerals v. Bikash Chandra Deb4, Calcutta High Court had observed that unilateral negotiation by arbitrator for fixation of his own fees goes against the principle of "Nemo judex in causa sua." Also any reference made to a Tribunal is a tripartite agreement between the arbitrator and the parties involved and hence they must have equal negotiating power while fixing the fees for the Tribunal.
In Union of India v. Singh Builders Syndicate5, the Supreme Court expressed its apprehension that refusal to pay an exorbitant fee by one of the parties might lead to prejudice against them. The court also made remarks regarding the absence of any ceiling for fixing the fee of arbitrators and exorbitant amounts charged by some ex-judges acting as arbitrators.
High fee charged by arbitrators who are mostly ex-judges has brought disrepute to the entire arbitration ecosystem in India and also led to the repulsion of arbitration in India to a more favorable jurisdiction. Thereby, the new schedule was inserted with the intention to rectify such issues as elaborated above.
GUIDELINES LAID DOWN BY THE APEX COURT IN ONGC V. AFCONS GUANUSA JV:
In a welcome step, the Bench held that the fee for the arbitrators has to be decided mutually by all parties. It was held that "arbitrator(s) do not possess an absolute or unilateral power to determine their own fees". Reference was made th to the 246 Law Commission Report and the 2015 Amendment which inserted Schedule IV. The Bench reaffirmed that 'party autonomy is a cardinal principle of arbitrations'6
The parties are thus free to adhere to Schedule IV of the 1996 Act or decided among themselves what fee is to be paid. This is in line with the Delhi High Court ruling in NHAI v. Gayatri Jhansi Roadways Limited7, where it was unequivocally held that Schedule IV is not mandatory in determining the fee structure where the fee structure has been agreed to in the agreement between the parties. However, if the parties have not been able to agree on a fee, the Fourth Schedule will function as a default option. This in turn ensures that Arbitrators do not take advantage of the oversight made during the drafting of the terms of a contract to benefit themselves by demanding exorbitant fees.
The parties can also agree to a fee according to Schedule IV initially subject to a revision of the fee after a fixed number of proceedings (Example – Schedule IV to be followed for 15 hearings after which a fee of 2 lakhs per hearing per arbitrator will be charged). Such revision in fee must be pre-decided and fixed in the preliminary hearing itself so as not to prejudice the parties at a later point in the proceedings.
Once the terms of reference have been finalized and the fee schedule agreed upon in the preliminary hearing, the tribunal cannot tinker with the amount so fixed or the heads it would be charged under. The fee schedule is final for all purposes. This ensures the primacy of contractual relations which is one of the most attractive features of arbitrations for commercial entities.
Apart from these guidelines, the Supreme Court has instructed a periodic revision of Schedule IV of the Arbitration Act every 3 years so that the model fee reflects the changing needs of the arbitration ecosystem in India. The same, in our opinion, would be quintessential in ensuring that arbitrations remain cost-e
The Apex Court has also been conscious of not allowing for absurd conclusions from the reading of the Fourth Schedule. It is now settled that the ceiling of Rs 30,00,000 applies to the sum of the base and the variable amount. This gives way to the legislative intent of the lawmakers by not allowing excessive fees amounts in arbitrations. Furthermore, the Bench clarified that the ceiling of Rs 30,00,000 is for each Arbitrator of the Arbitral Tribunal and not just the entire Tribunal so that there isn't an abnormal profit in tribunals comprising Sole Arbitrators.
The judgement goes a long way in making certain how the Arbitrators should proceed, however, the periodic revision that has been suggested by the Apex Court might die a slow death in the red tape laden Goliath of Indian Executive.
The Arbitration Council of India, which the policymakers thought would be a ground-breaking step to strengthen the Arbitration Ecosystem in India is yet to see the light of day. Non-revision of Schedule IV on regular basis would render it useless. It is thus suggested that the courts must lay down a formula (for example linking it to WPI) for regular revision of Schedule IV.
With the new guidelines in place, there is a lot more clarity on the matter of fixation of the Arbitrator's fee now. In addition, the Apex Court had given a lot of flexibility to both Arbitrators as well as the parties in dispute to fix the fee according to their convenience. A forced ceiling on the Arbitrator's fee would only be problematic for the budding ADR ecosystem of India. There is a possibility of disputes requiring an extended number of hearings to resolve the dispute wherein, the ceiling provided in Schedule IV would have dissuaded any qualified Arbitrator to take up the matter. The Supreme Court has granted more autonomy to parties, which is a positive step towards attracting more arbitration matters to India.
1 Arbitration and Conciliation Act 1996, No. 26, Acts of Parliament, 1996 (India) §10.
2 Oil and Natural Gas Corporation v. Afcons Guanasa JV, Petition for Arbitration (Civil) No.5/2022.
3 Arbitration and Conciliation Act 1996, No. 26, Acts of Parliament, 1996 (India) § 31(8).
4 Vijya Minerals v. Bikash Chandra Deb, AIR 1996 Cal 67.
5 Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523.
6 Bharat Aluminium Co. v. Kaiser Aluminium Technical Services, (2016) 4 SCC 126; Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd (2017) 2 SCC 228.
7 NHAI v. Gayatri Jhansi Roadways Limited, (2020) 17 SCC 626.
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