The fees that an arbitrator or an arbitral tribunal is entitled to charge under the provisions of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) has caused some confusion in the past in Indian arbitration circles. Such confusion prevailed even after the introduction of the Fourth Schedule to the Arbitration Act, which provided for a model schedule of fees chargeable by an arbitrator or arbitral tribunal.
Initially, before the timelines for making an arbitral award became a statutory mandate there were examples of arbitration proceedings almost taking the shape of a full-fledged trial with lengthy cross examinations of witness and multiplicity of pleadings in the form filing of rejoinders, sur-rejoinders etc. This not only lead huge time being expended owing to many sittings but also meant the recurring expense of making payment to the arbitral tribunal for each sitting.
The issue was significantly raised by the Law Commission of India in their 246th report published in August 2014 where it was recognised that the high costs associated with arbitration in India is a major complaint of parties and further, in an attempt, to resolve the same recorded in the said report that:
“11.In order to provide a workable solution to this problem, the Commission has recommended a model schedule of fees and has empowered the High Court to frame appropriate rules for fixation of fees for arbitrators and for which purpose it may take the said model schedule of fees into account. The model schedule of fees are based on the fee schedule set by the Delhi High Court International Arbitration Centre, which are over 5 years old, and which have been suitably revised. The schedule of fees would require regular updating, 12 and must be reviewed every 3-4 years to ensure that they continue to stay realistic.”
However, litigation arising out of disagreement over arbitrators’ fee continued to take place. This was despite the insertion of the aforementioned Fourth Schedule into the Arbitration Act.
However, there was no judicial consensus as to whether or not the Fourth Schedule is mandatory or directory. Arbitrators are generally appointed either by agreement between the parties or by the court and in both scenarios, there have been contradicting judgments where on one hand court have held that Fourth Schedule is directory (DSIIDC Limited v. Bawana Infra Development (P) Limited, 2018 SCC OnLine Del 9241; NHAI v. Gayatri Jhansi Roadways Limited, ARB A No. 1/2017, IAs Nos.8086/2017 & 9441/2017, judgment dated September 11, 2017) and on the other hand have held that Fourth Schedule is mandatory (Kumar & Kumar Associates v. Union of India, 2016 SCC OnLine Pat 9476). Further, there was also the stifling issue where arbitrators, despite having agreed to an initial fee, during the course of the arbitration would unilaterally increase their fees and party opposing the same or unable to afford the same would be in a difficult position before the arbitral tribunal.
The Supreme Court Ruling:
Recently the issues with regard to the arbitrator’s fees came up for consideration before the Hon’ble Supreme Court and in the matter of Oil and Natural Gas Corporation Limited v. Afcons Gunanusa JV, (Arbitration Petition (Civil) No. 05 of 2022, decided on August 30, 2022) (“Afcons Judgment”), where the Supreme Court sought to lay the prevailing confusion in this regard to rest.
The brief factual background of the issue which led to the proceedings are that the arbitral tribunal in its first sitting (on July 12, 2018) had decided that the fees payable to the tribunal shall be as per the Fourth Schedule of the Arbitration Act. Thereafter, once a counter claim was filed the tribunal fixed separate fees for both the claim and the counter claim – the dissenting party to this, namely NTPC Limited, filed an application praying that the claim and counter claim be taken cumulatively to arrive at the “sum in dispute” as provided in the Fourth Schedule. However, the arbitral tribunal decided that the application against NTPC Limited and also observed that if the payments are not made by NTPC Limited, their counter claim might be considered as suspended.
After a long hearing and consideration of the aforesaid issues, the Supreme Court has held and clarified that:
(i) Arbitrators do not have the power to unilaterally issue binding and enforceable orders determining their own fees – The parties and the arbitrator would be governed by the fees as stipulated in the arbitration agreement and in the event the tribunal is of the opinion that the fee needs to be revised, the same has to be decided at the preliminary hearing itself.
(ii) If there is no consensus as to the fees payable to the arbitrator between the parties to the arbitration and the arbitrator then in such event the arbitrator(s) should turn down the assignment. However, if the arbitrators agree to the fees then the fees cannot be revised at a later stage;
(iii) Further, the parties and the arbitrators are free to agree to a scheme where after a fixed number of sitting the fees can be revised. The number of sitting after which the revision would be done also has to be decided by the parties at the preliminary hearing itself;
(v) It has been clarified that the term “sum in dispute” in the Fourth Schedule of the Arbitration Act refers to the sum in dispute in a claim and counter-claim separately, and not cumulatively. Consequently, arbitrators shall be entitled to charge a separate fee for the claim and the counter-claim in an ad hoc arbitration proceeding, and the fee ceiling contained in the Fourth Schedule will separately apply to both, when the fee structure of the Fourth schedule has been made applicable to the ad hoc arbitration;
(iv) The ceiling of Rs. 30,00,000 in the entry at Serial No 6 of the Fourth Schedule is applicable to the sum of the base amount (of Rs 19,87,500) and the variable amount over and above it. Consequently, the highest fee payable shall be Rs 30,00,000; and
(v) 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 per cent over and above this amount in accordance with the Note to the Fourth Schedule.
Applicability of the Fourth Schedule:
With respect to the applicability of the Fourth Schedule the court has observed that, “When one or both parties, or the parties and the arbitral tribunal are unable to reach a consensus, it is open to the arbitral tribunal to charge the fee as stipulated in the Fourth Schedule, which we would observe is the model fee schedule and can be treated as binding on all. Consequently, when an arbitral tribunal fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object the fee fixation. It is the default fee, which can be changed by mutual consensus and not otherwise.”
However, this observation comes with a further observation that the fee structure in Fourth Schedule cannot be static and a direction has been issued to the Union of India to suitably modify the fee structure contained in the Fourth Schedule and the same should be done so once in every 3 (three) year
The judgment of the Supreme Court is a welcome step in making India a more arbitration friendly country specially with regard to ad-hoc arbitrations. The Hon’ble Supreme Court on a previous occasion in Union of India v. Singh Builders Syndicate, [(2009) 4 SCC 523] (and the same had been considered in the 246th Law Commission Report), had categorically observed that large number of sittings coupled with the fact that the per sitting fees can be very high has many a times resulted in the arbitration cost approaching or even exceeding the amount involved in the dispute or the amount of the award. Such issue has now largely been addressed – First, by insertion of Section 29A of the Arbitration Act by which it is now mandated that award shall be made by the arbitral tribunal within a period of 12 months from the date of completion of pleadings this 12 months period can be extended initially for a period of 6 months by consent of the parties and thereafter the mandate of the arbitral tribunal shall stand terminated unless the court – with supervisory jurisdiction – has extended the mandate of the tribunal; secondly, now the Supreme Court in the Afcons Judgment has laid down that in ad hoc arbitrations that the fees of the arbitral tribunal has to be decided at the preliminary sitting and that the fees of each arbitrator cannot exceed Rs. 30,00,000 (Rupees thirty lac). It has further been clarified that the cap is for a single arbitrator and not the entire tribunal and also that the phrase, ‘sum in dispute’ in Schedule IV would apply separately to the claim and counter claim filed by the parties.
Therefore, the Supreme Court has not only ensured that the parties to the arbitration at the outset itself would have clarity on arbitration cost but even the arbitrators’ fees are kept realistic – from the arbitrator’s perspective - by clarifying that the phrase ‘sum in dispute’ would not include both claim and counterclaim and therefore the interest of the arbitrators too have been well protected. The interest of the arbitrators are further protected (or attempted to be protected) by issuing a direction to the Union of India to update the fee structure in the Fourth Schedule once every 3 (three) years.
Such an approach from the Supreme Court is not only welcome but was much needed given the fact that outrageously expensive fees charged by arbitrators needed to be addressed at some point and also at the same time it was required to be ensured that the arbitrators are sufficiently remunerated especially in complicated matters where there are claims and counter claim by the parties and the Afcons judgments seems to have done just that.
The Afcons judgment even in this regard has provided a clarification that – “When one or both parties, or the parties and the arbitral tribunal are unable to reach a consensus, it is open to the arbitral tribunal to charge the fee as stipulated in the Fourth Schedule, which we would observe is the model fee schedule and can be treated as binding on all. Consequently, when an arbitral tribunal fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object the fee fixation. It is the default fee, which can be changed by mutual consensus and not otherwise”. Therefore, the judgments also protect party autonomy to the extent that if both parties consent, they can opt out of the mandate of schedule IV. This would be particularly relevant for complicated arbitrations where the mandate of schedule IV might be insufficient and/ or not commensurate with the work that is required to be put in by the arbitrators.
The judgment, therefore, other than being clarificatory also ensures that litigation arising out of discontent with the arbitrators’ fee would be greatly reduced and this could be yet another steppingstone in making India more arbitration friendly as any party to an arbitration would really benefit if the cost of the same is decided right the time of appointment of the arbitrator or even at the preliminary sitting of the tribunal.
Please find attached a copy of the judgment.
This update has been contributed by Somdutta Bhattacharyya (Partner) and Prithwish Roy Chowdhury (Senior Associate).
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