Business Laws

Arbitral fee and costs: Rekindling the need for rationality

Harshvardhan Korada |Vasanth Rajasekaran | Updated on: Apr 04, 2022

Lawmakers and the judiciary must listen carefully to participants to sustain growth of the Indian arbitration regime 

A host of factors are taken into consideration while labelling a jurisdiction as being favourable for arbitration in the international circuit. After multiple amendments, progressive judgments, and 25 years of implementation of the Arbitration and Conciliation Act 1996 (Arbitration Act), India is still on its way to becoming a global arbitration hub of prominence.

To sustain the growth of the Indian arbitration regime, lawmakers and the judiciary should listen carefully to the voice of its participants. The issue of fixation of fees of arbitrators and allocation of costs in India is one aspect that deserves more attention than it has been given so far.

Arbitration vs litigation

Typically, arbitration across the globe is envisaged as an alternative dispute resolution mechanism that removes the inefficiencies of traditional court-based litigation, and is cheaper. However, the perception that arbitration is more reasonable in terms of the cost may no longer be correct.

In Union of India v. Singh Builders Syndicate, the Supreme Court dealt with the issue of indiscriminately high arbitrator fees. It opined that the same was a significant roadblock to the growth of arbitration in India.

This was followed by the Law Commission of India’s 246 th Report, which proposed a host of amendments to the cost regime under the Arbitration Act. Amongst other things, the Law Commission proposed the insertion of a model fee schedule which was later incorporated in the Arbitration Act as ‘Fourth Schedule’ by way of the 2015 amendment.

Further, Section 11(4) of the Arbitration Act empowers the High Courts with the discretion to frame rules concerning the fixation of arbitral fees based on the model fee structure carried under the Fourth Schedule.

Some judgments suggest that the model fee under the Fourth Schedule is a suggestive and derogable provision of law.

In the 2015 amendment, Section 31A was also inserted in the Arbitration Act, which granted the discretion of determining costs payable by parties to the court or arbitral tribunal.

In determining the costs, the court or arbitral tribunal is to look into factors including, but not limited to, the conduct of parties; whether the party succeeded partly in the matter; whether a party was delaying disposal of arbitral proceedings by filing frivolous counterclaims; and whether a reasonable offer to settle was made and refused by either party.

While the introduction of Section 31A provided a much-needed structure to India’s cost regime, it leaves the court and arbitral tribunal with an absolute jurisdiction to fix the cost of the proceedings. This is true, at least in the case of ad hoc arbitrations where more often than not, there are no formal procedural rules governing the arbitral proceedings.

A prior agreement

One way to add clarity to the cost distribution amongst the arbitrating parties is to have an agreement under Section 31A(5) which obliges the parties to pay the whole or part of the costs of the arbitration in any event shall be valid if such agreement is made after the dispute in question has arisen.

In Gammon Engineers v. NHAI, the Supreme Court acknowledged the rights of the parties to agree to a fee structure which would also be binding upon the tribunal that consents to decide upon the dispute. Much recently, the issue of unreasonably high costs of arbitrations came up for consideration again before the Supreme Court in the proceedings presently underway in the case of Oil and Natural Gas Corporation Ltd. (ONGC) v. AFCONS Gunasuna JV.

During the hearing, it was brought to the notice of the Supreme Court that public sector undertakings (PSUs) were concerned with the high costs of arbitration. It was argued that arbitrators were fixing fee under different heads such as reading fee, conference fee and fee for rendering the award etc., which raised the costs to an exorbitant level.

While contemplating the issue, the bench discussed possible solutions such as indicating the estimated number of hearings before the commencement of arbitrator and stopping the practice of splitting a day into different hearings and charging fee on a per hearing basis.

The proceedings before the Supreme Court have raised some critical questions, such as whether the arbitrators are legally entitled to fix their own fee without the consent of one or the other party.

The government is the largest litigant in India and contributes the most to the judicial burden, as the high costs of arbitration have put several PSUs in a tight spot. On one end, the government is trying to reduce the burden of the courts and make business with the government a lucrative option by offering alternate methods of dispute resolution.

However, on the other end, the dilemma for the PSUs of entering into arbitration agreements with big private entities persists. Private entities with deep pockets may not hesitate to engage in high-cost arbitrations, especially with many other variables such as market sentiments in consideration.

However, the same may not be true for PSUs that are looking to save costs. This is more so as government bodies deal with public money, and thus bringing greater scrutiny and accountability into the picture. If the issue of arbitral costs and fee is not addressed soon, then PSUs are likely to shift towards the traditional litigation route. Even if PSUs agree to arbitration, the tendency to challenge arbitral order and awards will increase because of the stakes involved in the matters.

Thus, there is a need to introduce a uniform fee regime for arbitrations with a special focus on PSUs.

In Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust, the Supreme Court discussed the issue of complaints raised about the costs of arbitration in India and how arbitration was being forced onto parties against the principle of party autonomy.

The Supreme Court observed that the remedy for the healthy development of arbitration in India is to disclose the fee structure before the appointment of arbitrators to ensure that a party not willing to bear such expenses could express its unwillingness.

Perhaps another remedy is to mirror the institutional arbitration model of fixing costs. The High Courts of India should also formulate the rules for the cost regime in a joint exercise and calibrate the fee which suits the socio-economic conditions of the regions covered by the High Court’s jurisdiction. Such methods would allow arbitration to be a preferred mode of resolving disputes amongst entities, including PSUs and allowing the Indian arbitral regime to flourish further in India.

(The authors are advocates at Phoenix Legal, a law firm)

Published on April 04, 2022
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