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News - 15 July 2019

The amendments brought in the Arbitration and Conciliation Act, 1996 (hereinafter referred as “the Act”) vide the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred as “the Amendment Act”), though, has dealt with the issue related to the arbitrators’ fees but has failed to address the issue of high costs of arbitration proceedings which are majorly associated with the arbitrators’ fees. The said Amendment was based on 246th report of Law Commission which very clearly recognised the issue of high fees decided by the arbitrators, terming it as arbitrary, unilateral and disproportionate. The Law Commission’s report states as follows:

“10. One of the main complaints against arbitration in India, especially ad hoc arbitration, is the high costs associated with the same - including the arbitrary, unilateral and disproportionate fixation of fees by several arbitrators. The Commission believes that if arbitration is really to become a cost effective solution for dispute resolution in the domestic context, there should be some mechanism to rationalise the fee structure for arbitrations….

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, and must be reviewed every 3-4 years to ensure that they continue to stay realistic.

12. The Commission notes that International Commercial arbitrations involve foreign parties who might have different values and standards for fees for arbitrators; similarly, institutional rules might have their own schedule of fees; and in both cases greater deference must be accorded to party autonomy. The Commission has, therefore, expressly restricted its recommendations in the context of purely domestic, ad hoc, arbitrations.”

That even the Hon’ble Supreme Court of India in its judgment Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust, (2012) 1 SCC 455, while citing its previous judgment, Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523, noted that reasonability and certainty about the total costs is the key to the development of arbitration. It also noted that arbitration in India is paralysed by the disproportionately high fees charged by the arbitrators especially in the case of Arbitral Tribunal s comprising of the retired Hon’ble Supreme Court’s judges. It also notes that the word “appoint” in the Section 11 of the Act does not only mean the nomination or designation of the person to act as an arbitrator but also includes specifying the terms and conditions which the court may deem fit as per the facts and circumstances of the case, which also includes ascertaining the fee structure of the arbitrator(s). While noting the issues related to arbitrator’s fees, the Hon’ble Supreme Court observed as follows:

“39. Arbitrators can be appointed by the parties directly without the intervention of the court, or by an Institution specified in the arbitration agreement. Where there is no consensus in regard to appointment of arbitrator/s, or if the specified institution fails to perform its functions, the party who seeks arbitration can file an application under Section 11 of the Act for appointment of arbitrators. Section 11 speaks of Chief Justice or his Designate `appointing' an arbitrator. The word `appoint' means not only nominating or designating the person who will act as an arbitrator, but is wide enough to include the stipulating the terms on which he is appointed. For example when we refer to an employer issuing a letter of appointment, it not only refers to the actual act of appointment, but includes the stipulation of the terms subject to which such appointment is made. The word `appoint' in Section 11 of the Act, therefore refers not only to the actual designation or nomination as an arbitrator, but includes specifying the terms and conditions, which the Chief Justice or Designate may lay down on the facts and circumstances of the case. Whenever the Chief Justice or his Designate appoint arbitrator/s, it will be open to him to stipulate the fees payable to the arbitrator/s, after hearing the parties and if necessary after ascertaining the fee structure from the prospective Arbitrator/s. This will avoid the embarrassment of parties having to negotiate with the Arbitrators, the fee payable to them, after their appointment.

41. There is a general feeling among consumers of arbitration (parties settling disputes by arbitration) that ad-hoc arbitrations in India - either international or domestic, are time consuming and disproportionately expensive. Frequent complaints are made about two sessions in a day being treated as two hearings for purpose of charging fee; or about a session for two hours being treated as full sessions for purposes of fee; or about non-productive sittings being treated as fully chargeable hearings. It is pointed out that if there is an arbitral tribunal with three arbitrators and if the arbitrators are from different cities and the arbitrations are to be held and the arbitrators are accommodated in five star hotels, the cost per hearing, (Arbitrator's fee, lawyer's fee, cost of travel, cost of accommodation etc.) may easily run into Rupees One Million to One and half Million per sitting. Where the stakes are very high, that kind of expenditure is not commented upon. But if the number of hearings become too many, the cost factor and efficiency/effectiveness factor is commented. That is why this Court in Singh Builders Syndicate observed that the arbitration will have to be saved from the arbitration cost.

42. Though what is stated above about arbitrations in India, may appear rather harsh, or as an universalisation of stray aberrations, we have ventured to refer to these aspects in the interest of ensuring that arbitration survives in India as an effective alternative forum for disputes resolution in India. Examples are not wanting where arbitrations are being shifted to neighboring Singapore, Kuala Lumpur etc., on the ground that more professionalized or institutionalized arbitrations, which get concluded expeditiously at a lesser cost, are available there. The remedy for healthy development of arbitration in India is to disclose the fees structure before the appointment of arbitrators so that any party who is unwilling to bear such expenses can express his unwillingness. Another remedy is Institutional Arbitration where the arbitrator's fee is pre-fixed. The third is for each High Court to have a scale of arbitrator's fee suitably calibrated with reference to the amount involved in the dispute. This will also avoid different designates prescibing different fee structures. By these methods, there may be a reasonable check on the fees and the cost of arbitration, thereby making arbitration, both national and international, attractive to the litigant public. Reasonableness and certainty about total costs are the key to the development of arbitration. Be that as it may.”

Before the amendments were brought in it was highly anticipated that it will drastically reduce the costs of arbitration, thus making arbitration a preferred mode of commercial dispute resolution. However when the amendments were finally implemented on 23rd October, 2015, the provisions of the Amendment Act created a lot of confusion regarding arbitrators’ fees and the legal position on the issue is far from being settled even after three years of implementation of the Amendment Act . Though the Amendment Act provides for Fourth Schedule on arbitrators’ fees but as per the provisions of the Amendment Act, it is quite evident that the Schedule is more suggestive than mandatory unless it is ordered specifically by the Court while appointing an arbitrator(s) under Section 11 of the Act.

Further, under Section 11 , sub-section 14, there is a power given by the legislature to the High Court that it may frame such rules as necessary for the purpose of determination of fees of the Arbitral Tribunal after taking into consideration the rules as specified in the Fourth Schedule. It is pertinent to note here that the legislation does not make it mandatory for the High Courts to frame rules for determination of fees of the Arbitral Tribunal as is evident from the use of word “may”. This clearly shows that it is well within the powers of the Hon’ble Tribunal to determine the fees of the Arbitral Tribunal at its own discretion. The above mentioned provision of the Act is reproduced below:

“11(14) For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.

Explanation.— For the removal of doubts, it is hereby clarified that this subsection shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution.”

It is further pertinent to note here that the Fourth Schedule does not apply to institutional and international commercial arbitrations as such arbitrations are guided by their own set of rules. In addition, it was held in Delhi State Industrial Infrastructure Development Corporation Ltd. v. Bawana Infra Development (P) Ltd., 2018 SCC OnLine Del 924 that the Arbitral Tribunal is free to fix its own schedule of fees in an ad-hoc arbitration which is conducted without the intervention of the court and even in cases where the Arbitral Tribunal is appointed by the court under Section 11, it is not necessary for the Arbitral Tribunal to fix the fe es as per the Fourth Schedule in the absence of rules to be framed under Section 11 sub-section 14. However, the judgment conclusively decides that in case the arbitral proceedings are conducted as per the Fourth Schedule, the Arbitrator(s) cannot charge separate fees for the claims and counter-claims and the phrase “sum in disputes” means and includes both i.e. the cla ms and the counter-claims. The relevant paras 14, 15 and 16 of the said judgment is reproduced here below:

“14. Even in the general parlance, “Sum in dispute” shall include both claim and counter claim amounts. If the legislature intended to have the Arbitral Tribunal exceed the ceiling limit by charging separate fees for claim and counter claim amounts, it would have provided so in the Fourth Schedule.

15. Proviso to Section 38(1) of the Act can only apply when the Arbitral Tribunal is not to fix its fee in terms of the Fourth Schedule to the Act. It would not have any bearing on the interpretation to be put to the Fourth Schedule. It is noted that as regards fee even under the Amended Act, the Arbitral Tribunal is free to fix its schedule of fee in an ad-hoc arbitration which is conducted without the intervention of the Court. Even where the Arbitral Tribunal is appointed by the Court under Section 11 of the Act, in absence of rules framed under Section 11(14) of the Act, it is not in every case that the Arbitral Tribunal has to fix its fee in accordance with the Fourth Schedule of the Act. Therefore, the proviso to Section 38(1) of the Act would have no bearing on the interpretation being put to the Fourth Schedule and the phrase “Sum in dispute” therein.

16. An argument was made that the adjudication of counter claim would require extra effort from the Arbitrator and therefore, the Arbitrator should be entitled to charge a separate fee for the same. I cannot agree with this argument. The object of providing for the counter claim is to avoid multiplicity of proceedings and to avoid divergent findings. Keeping the object of the amendment in the view, the ceiling on fees as prescribed in the Fourth Schedule of the Act can not be allowed to be breached.”

At this point, it is imperative to read other provisions of the Act in relation to the Arbitrator’s Fees. Section 31 sub-section 8 read with Section 31A sub-section (1) clearly demonstrates that it is the sole discretion of the Arbitral Tribunal to decide on the quantum of arbitrators’ fees and how and when such fees have to be paid by the parties to the Arbitral Tribunal. The above mentioned provision has been reproduced below for reference:

“31(8) The costs of an arbitration shall be fixed by the arbitral tribunal in accordance with section 31A.

31A. Regime for costs.—(1) In relation to any arbitration proceeding or a proceeding under any of the provisions of this Act pertaining to the arbitration, the Court or arbitral tribunal, notwithstanding anything contained in the Code of Civil Procedure, 1908 (5 of 1908), shall have the discretion to determine—

(a) whether costs are payable by one party to another;

(b) the amount of such costs; and

(c) when such costs are to be paid.

Explanation.—For the purpose of this sub-section, “costs” means reasonable costs relating to— (i) the fees and expenses of the arbitrators, Courts and witnesses;

(ii) legal fees and expenses;

(iii) any administration fees of the institution supervising the arbitration; and

(iv) any other expenses incurred in connection with the arbitral or Court proceedings and the arbitral award.”

That the words “any” and “shall” in Section 31A sub-section (1) make it substantially clear that the Arbitral Tribunal enjoys the sole authority to decide on the arbitrators’ fees in relation to any arbitration proceeding or a proceeding under any of the provisions of this Act pertaining to the arbitration.

That Section 38 sub-section (1) clearly provides that the Arbitral Tribunal may fix separate amount of deposits as advance for the claims and counter-claims. The said provision, if not anything, but quite evidently shows that it is very well within the power of the Arbitral Tribunal to determine separate advance fees for the claims and counter claims. The above mentioned provision of the Act is reproduced here below:

“38. Deposits.—(1) The arbitral tribunal may fix the amount of the deposit or supplementary deposit, as the case may be, as an advance for the costs referred to in sub-section (8) of section 31, which it expects will be incurred in respect of the claim submitted to it: Provided that where, apart from the claim, a counterclaim has been submitted to the arbitral tribunal, it may fix separate amount of deposit for the claim and counter-claim.”

That the above discussion very evidently shows that the Amendment to the Act with regard to the arbitrator’s fee has failed to achieve the desired results and the issue concerning high, arbitrary and disproportionate fees remains the same in the case of ad-hoc arbitrations and the arbitrations pursuant to appointment of the arbitrator(s) by the court but without a direction on fees of the Arbitral Tribunal. The parties to arbitrations are burdened by high arbitrator’s fees as the arbitrators are charging fees per sitting which is also divided in sessions and separate fees are charged for separate sessions. Further, though the time is fixed under the Amended Act to conclude the arbitral proceedings within a specified time limit under Section 29A, but still a large number of sittings are held within this fixed time, in which many a times fees are charged even for the unproductive sessions, and fees per sitting is proving to be a huge financial burden for the parties to arbitration. Further, the parties to arbitration generally do not prefer to object before the Arbitral Tribunal regarding high fees in the fear of upsetting the Tribunal. In addition, in cases where the members of the constituted Tribunal reside in different cities, the parties also have to bear the costs of accommodation, food and travel of the arbitrators. Further, it has become the practice by several arbitrators to charge separate fees for claims and the counter-claims which is resulting in the payment for double fees for deciding the dispute. In addition to this, the parties also have to bear the legal fees charged by the lawyers. Further, the plight of the parties in dispute does not end here, the parties have to incur other litigation costs as well i.e. in regard to Section 11 application, challenging the award under Section 34, execution petition under Section 36 and appeal under Section 37. All of this proves to be a huge financial burden especially for parties having a small quantum of dispute, who are actually left helpless because of the exorbitant and expensive access to justice which is as close to denial of justice.

Due to the above situation, it is important for the legislature to recognize and efficiently tap these loopholes in order to take a step closer to the dream of making an India a hub for arbitration globally. Effective and efficient mechanism has to be laid out t o bring down the costs associated with the arbitration and at the same time maintaining the interests of the experts/retired judiciary members to act as arbitrators. One of the efficient way is to promote institutional arbitration which have a pre-determined and transparent schedule of fees. Further, in case of ad-hoc arbitrations, pre-determinating of arbitrator’s fees should be made mandatory which may be achieved by some statutory provision, providing an upper cap to such pre-determined arbitrator’s fees. It should also become essence of Section 11 to compulsorily pass order regarding the arbitrator’s fees while appointing arbitrator(s).

Thus, unless this issue is addressed, the idea of India being a global hub for arbitration will remain unattainable and far-fetched.

Gagan Anand

Gagan Anand

Firm: Legacy Law Offices
Country: India

Practice Area: Corporate