India: Evolution Of Fee Regime Under The Arbitration And Conciliation Act, 1996

FEE STRUCTURE UNDER THE ARBITRATION AND CONCILIATION ACT, 1996

An arbitrator is a creature of contract, and therefore, is bound by it. The Arbitration and Conciliation Act, 1996 (hereinafter "the Act") lays down a very detailed procedure that is to be followed by parties, it also lays down the procedure that is to be followed by an Arbitrator who is adjudicating the dispute. The 246th Law Commission Report highlighted that one of the many problems associated with Ad hoc arbitrations in India is the unregulated fees of the Arbitrators which resulted in parties paying a high quantum of fees charged by the Arbitrators.¹ The report described the fees charged by Arbitrators as "arbitrary, unilateral and disproportionate." The report placed reliance on the Union of India vs. Singh Builders Syndicate,² which discussed the absence of a ceiling in the pay and also the apprehension that a party's case may be prejudiced if it refuses to pay such an exorbitant fees. The decision of Singh Builders was reiterated in Sanjeev Kumar Jain vs. Raghubir Saran Charitable Trust³ where the Court recommended the following suggestions: amended the following suggestions:

1. Reasonableness and Certainty about costs.
2. Disclosure of the fee structure before the appointment.
3. Institutional arbitration where the Arbitrator's fee is pre-fixed.
4. The High Courts to prepare a scale of Arbitrator's fee with reference to amounts involved in the dispute.⁴

The Commission then went on to recommend a model schedule of fees which the Courts could consider at the stage of determining the appointment of an Arbitrator under Section 11 of the Act and the subsequent fees to be fixed for an Arbitrator. In the 2015 amendment to the Act, Section 11(14) was added which granted powers to the High Courts to frame rules for the determination of fees of an Arbitrator while taking into consideration the Fourth Schedule. Schedule IV of the Act lays down the fees paid to the Arbitrator. The determination of such fee is done on the basis of the sum in dispute. It is pertinent to note that the said Schedule sets out different fee structures for sums of dispute starting from INR 5 lakhs to sums over INR 20 crores. It is also pertinent to note that the said Schedule does not apply to International Commercial arbitrations. However, both Section 31(8) and 38(1) grant the power to the Arbitral Tribunal to determine the amount of costs in accordance with Section 31A of the Act.

Therefore, at one point a broad power of fixing costs has been granted to the Arbitral Tribunals and on the other hand, the Schedule limits the fees. Keeping in mind the juxtaposition of these two positions, the pertinent questions that arose were whether the Schedule is binding on parties and whether an Arbitrator can decide on their own fee that goes beyond what is mentioned in the Schedule. These questions have been dealt with aptly and settled in a series of judgments by the High Court(s) and Supreme Court.

FEES OF ARBITRATOR(S) BEING APPOINTED BY COURT

When an Arbitrator is appointed by the Court under Section 11 of the Act, then the fee determination is to be done through the Fourth Schedule of the Act. In 2018, Justice Navin Chawla in the Hon'ble Delhi High Court Judgement of Delhi State Industrial Infrastructure Development Corporation Ltd. (DSIIDC) v. Bawana Infra Development (P) Ltd.⁵ held that when an Arbitrator is appointed without Court's intervention, then such an Arbitrator is free to fix its fee, however, for an Arbitrator appointed by the Court under Section 11 of the Act, the determination should be as per Schedule IV, and the determined fees cannot breach the limit imposed by the Fourth Schedule. However, later in the next year, Justice Chawla in para 15 of the judgement of G.S. Developers & Contractors Pvt. Ltd. v. Alpha Corp Development Private Limited and Ors.,⁶ held that the Fourth Schedule to the Act is merely a guiding model, and is not binding on the Arbitrator specially because the same has not been so far been adopted by this Court in its Rules. The Arbitrator was, therefore, free to determine his own fee.

PARTY APPOINTED ARBITRATOR

The Hon'ble Delhi High Court in Gammon Engineers and Contractors Pvt Ltd v National Highways Authority of India⁷ held that arbitration fees can be determined by the agreement of parties and have strengthened the concept of party autonomy as the strongest pillar in any arbitration proceeding. The issue before the Court was whether the Arbitrator's fee Schedule (Fourth Schedule) will override the fee arrangement agreed between the parties under the arbitration agreement. The Court while upholding the principle of party autonomy held that the Arbitrators will be entitled to charge fees as per the agreement of the parties.

ISSUE SETTLED BY ONGC VS. AFCONS GUNANUSA⁸

The Hon'ble Supreme Court vide its judgment dated 30th August 2022, in a 3-judges led bench, has held that the Arbitrators in an Ad Hoc proceedings do not have the power to unilaterally decide their fees. While J. Chandrachud and J. Surya Kant gave the majority opinion, J. Khanna passed a dissenting opinion on certain parts of the majority opinion.

The Court said the 4th schedule, which lays down the fees of Arbitrators, is not binding on the parties and that it is open to parties by their agreement to specify the fee(s) payable to the Arbitrator. The bench held that the unilateral determination of fees violates the principles of party autonomy. The Majority held that:

Consequently, the Supreme Court also gave certain guidelines:

1. The fees should be fixed at the beginning of the hearing to avoid unnecessary conflict between Arbitrators and parties later.
2. Arbitrators would be entitled to charge separate fees for claims and counterclaims in ad hoc arbitration and the fees given in the fourth schedule will separately apply to both. (J. Khanna took a separate view and stated that claim and counterclaim fall within the "sum in dispute")
3. The ceiling of Rs 30 lakhs in entry six of the fourth schedule applies to the sum of the base amount and the variable amount over and above it. Consequently, the highest fees payable will be 30 lakhs.
4. This ceiling is applicable to each individual Arbitrator, and not the Arbitral Tribunal as a whole, where it consists of three or more Arbitrators. Of course, a sole Arbitrator shall be paid 25 percent over and above this amount in accordance with the Note to the Fourth Schedule.
5. In cases where the Arbitrator(s) are appointed by the Court, the order of the Court should expressly stipulate the fee that the arbitral tribunal would be entitled to charge.

After several different opinions on the said issue, the Supreme Court has finally clarified the conundrum and ruled in favour of party autonomy. While it does give credence to party autonomy the Hon'ble Supreme Court has not provided any guidelines or limits for the parties to bear in mind while fixing such fees. However, this judgement is a welcome step in the road ahead.

Footnotes

1. Law Commission of India, Report No. 246, "Amendments to the Arbitration and Conciliation Act, 1996", (August 2014).

2. (2009) 4 SCC 523.

3. (2012) 1 SCC 455.

4. Ibid.

5. 2018 SCC OnLine Del 9241.

6. 2019 SCC OnLine Del 8844.

7. 2018 SCC OnLine Del 10183.

8. 2022 SCC OnLine SC 1122.

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