How expensive will be your arbitration now? Unearthing the 'Cost' and 'Fees' conundrum in an Indian-Ad hoc Arbitration.
HOW EXPENSIVE WILL BE YOUR ARBITRATION NOW? UNEARTHING THE 'COST' AND 'FEES' CONUNDRUM IN AN INDIAN-AD HOC ARBITRATION.
The rationale behind vesting the arbitral tribunal with the power to determine the costs is not to trample party autonomy, but to ensure that the dominating party does not incorporate any unconscionable terms in the contract that the costs would entirely be borne by one party.
'Arbitration' is progressively becoming the preferred mode of 'Dispute Resolution', especially for resolution of commercial disputes. However, many parties have been faced with the dilemma regarding the invocation of arbitration, given the ambiguities around arbitral tribunal's expenses in an ad-hoc arbitration. The legislature by an amendment tried to address this concern in 2015, however, the said amendment opened doors for many different interpretations. Finally, the Indian Supreme Court vide its judgment dated 30 August 2022 in the matter of ONGC v. Afcons Gunanusa JV has finally given clarity on the regime of chargeability of an arbitrator's fees under the provisions of the Arbitration and Conciliation Act, 1996 (the "Act"). Given that expenses to be incurred in an arbitration is one of the determining factors for invoking the arbitration, parties desirous of proceeding with ad hoc arbitrations, needed clarity on several aspects, including (i) how much fees would an arbitral tribunal duly constituted under the Act would charge; (ii) how can a party recover 'costs' involved in an arbitration; (iii) what would be included in the 'costs' of an arbitration; and (iv) whether a successful party can claim post award interest as 'costs' for recovering the fruits of an arbitral award, or losses for not being able to enjoy the said fruits. In this article, we intend to highlight and unearth the said issues, discuss the position settled by the Hon'ble Supreme Court on such issues and resolve the conundrum regarding the regime of 'costs' and 'fees' in an Indian ad hoc arbitration.
Before dealing with the latest position taken by Supreme Court ("Court") in relation to how much fees an 'arbitral tribunal' can charge under the Fourth Schedule to the Act, it is important to note the relevance of having such a schedule in the first place.
The 246th Law Commission Report ("the Commission" or "Commission Report"), in Chapter II paragraph 10, noted,
"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 of several arbitrators."
Therefore, to provide "a workable solution to this problem", the Commission recommended a model schedule of fees based on the fee schedule set by the Delhi High Court International Arbitration Centre, now known as the Delhi International Arbitration Centre ("DIAC"). To give teeth to the said recommendation of the Commission, the legislature, vide the Arbitration and Conciliation (Amendment) Act 2015 ("2015 Amendment") inserted the 'Fourth Schedule' to the Act. However, the said Fourth Schedule was not made applicable to 'international commercial arbitrations', or where parties have agreed to the determination of fees according to the rules of an arbitral institution.
The fourth schedule and party autonomy:
As we all know, party autonomy is the backbone of the concept of arbitration. In Bharat Aluminium Co. v. Kaiser Aluminium Technical Services , the Supreme Court observed that party autonomy is the "brooding and guiding spirit of arbitration". Therefore, this principle has its importance in all layers of an arbitration including determination of fee, which cannot be in violation of the said principle, given arbitration is a creation of an inter-se agreement between parties.
In line with the said principle, the division bench of the Court comprising of Hon'ble Mr Justice R F Nariman and Hon'ble Mr Justice Surya Kant, in its judgment dated 10 July 2019 in Gammon Engineers and Contractors Pvt Ltd v National Highways Authority of India, held that if the parties to an arbitration have agreed to a fee schedule for arbitrators, then the arbitrators will be entitled to charge their fees in accordance with this agreed schedule and not in accordance with the Fourth Schedule of the Act. This was later woven into the law vide the 2019 amendment which revamped Section 11(14) of the Act and includes an explanatory note as follows:
"(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 sub-section 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."
'Cost' and 'Fees' - Decoded:
Prior to the 2015 Amendment, Section 31(8) stated "unless otherwise agreed by parties, the cost of an arbitration shall be fixed by the arbitral tribunal". An element of doubt was introduced with the 2015 amendment which replaced Section 31(8) of the Act with "the costs of an arbitration shall be fixed by the arbitral tribunal in accordance with Section 31A". As a result, "agreement between parties" did not find any mention in the amended section. Furthermore, Section 31A included an explanation which stated that costs would mean "the reasonable costs relating to the fees and expenses of the arbitrators". Since a combined reading of Sections 31A and 31(8) appeared to leave no room for party autonomy as far as "fees" of arbitrators are concerned, arbitrators began imposing their own fee structures, despite the existence of agreement between parties on questions of fees. The question before the courts then came to be whether arbitrators could disagree with the fees stipulated by the parties in their agreement. Given the divergent stance taken by two single judges of the Delhi High Court, the question was eventually clarified by the Supreme Court in NHAI v. Gayatri Jhansi Roadways wherein R F Nariman, J. observed as follows:
"However, the learned Single Judge's conclusion that the change in language of Section 31(8) read with Section 31-A which deals only with the costs generally and not with arbitrator's fees is correct in law. It is true that the arbitrator's fees may be a component of costs to be paid but it is a far cry thereafter to state that Sections 31(8) and 31-A would directly govern contracts in which a fee structure has already been laid down."
It has therefore been made abundantly clear that the terms "unless otherwise agreed by parties" is read into the provision as far as determination of fees is concerned. Arbitrators cannot strong arm parties into applying the fees as prescribed in the Fourth Schedule, or any other fee structure, when parties have already decided on the same. Owing to many confusions and different interpretations taken by High Courts, it became incumbent on the part of the Apex Court to decide and settle these issues. Few of the ambiguities that the Fourth Schedule gave rise to are as follows:
a) Whether the arbitrator(s) are entitled to unilaterally determine their own fees;
b) Whether the term "sum in dispute" in the Fourth Schedule means the cumulative total of the amounts of under the 'claim' and 'counter-claim';
c) Whether the ceiling of Rs. 30,00,000 in the entry at Serial No. 6 of the 'Fourth Schedule' of the Act is applicable only to the variable amount of the fee or the entire fee amount; and
d) 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.
Finally, in ONGC (supra), the Court has given much needed clarity on the above issues and held that:
a) arbitrators are not entitled to unilaterally determine their own fees as it would be violative of the principle of party autonomy and the doctrine of the prohibition of in rem suam decisions, meaning, arbitrators cannot be a judge of their own cause.
b) Further, the Court held that the term "sum in dispute" shall be considered separately for the amount in dispute in the claim and counter-claim. As a result, arbitrators would be entitled to charge separate fees for the claim and counter-claim.
c) On the INR 30,00,000 ceiling, the Court held that the ceiling is applicable to the cumulative amount of the base and variable amount, and in case of a sole arbitrator it would be INR 37,50,000/- (including the additional component prescribed in the Act). This would mean that the highest fee to be charged by an arbitral tribunal (except in case of a sole arbitrator) shall be INR 30,00,000/-, which is in line with the legislative intent, which was also indicated in the Commission Report.
d) Lastly, the Court held that the ceiling is applicable to each individual arbitrator, and any other interpretation would lead to absurd consequences.
'Cost' and 'fees' – the distinction:
The purpose of paying fees is to provide remuneration to the arbitrator in return for performance of their mandate, and the purpose of awarding costs is to "indemnify" the winning party. The Court in ONGC noted the difference between these two terms in the following manner:
"While fees represent the payment of remuneration to the arbitrators, costs refer to all the expenses incurred in relation to arbitration that are to be allocated between the parties upon the assessment of certain parameters by the arbitral tribunal or the court."
Another point of distinction is the nature of claims. A claim for costs is similar to any other claim of a party, as opposed to fee, which cannot be considered a part of an award as it does not resolve a claim between parties. Moreover, fees are typically determined at the beginning of the arbitration, whereas costs are quantified at the end of the proceedings. The rationale behind vesting the arbitral tribunal with the power to determine the costs is not to trample party autonomy, but to ensure that the dominating party does not incorporate any unconscionable terms in the contract that the costs would entirely be borne by one party. However, an exception to this rule is captured in Section 31A(5) which states that any agreement relating to bearing of costs that are entered into by the parties after the dispute has arisen shall be valid.
Further, as a pro-arbitration step, the Court vide its judgment dated 1 September 2022 in the matter of Morgan Securities and Credits Pvt. Ltd. v. Videocon Industries Ltd. has inter-alia held n view of Section 31(7)(b) that, if the arbitrator does not grant post-award interest, the award holder is entitled to post-award interest at the rate of 18%. It was further held that Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator has the discretion to award post-award interest on a part of the sum. Reference is drawn to the following paragraph for reasoning of the Court:
"19. Section 31(7)(a) confers a wide discretion upon the arbitrator in regard to the grant of pre-award interest. The arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made – whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award. When a discretion has been conferred on the arbitrator in regard to the grant of pre-award interest, it would be against the grain of statutory interpretation to presuppose that the legislative intent was to reduce the discretionary power of the arbitrator for the grant of post-award interest under clause (b). Clause (b) only contemplates a situation where the arbitration award is silent on post-award interest, in which event the award-holder is entitled to a post-award interest of eighteen percent."
Principles of 'Awarding costs':
When it comes to costs, the "loser pays principle", meaning the unsuccessful party has to bear the costs of the arbitration and the "cost follows the event" method, meaning the calculation of costs at the conclusion of the proceedings, have been incorporated in laws across jurisdictions, including the laws of India. More often than not, costs are awarded in full to the award creditor. However, some tribunals follow a nuanced approach and award costs basis the relative success and failure of parties. In the case of Swiss Singapore Overseas Enterprises Pte Ltd. v. Sara International Pvt. Ltd , the Court discussed the costs awarded in a SIAC arbitration, wherein both, the claim and counterclaim were defeated, the costs were apportioned between parties in proportion of the costs of making the claim and counterclaim. The Respondent was awarded 70% costs of the arbitration, which was arrived at by the tribunal by awarding the respondent 85% of the costs less the notional recovery by the claim of 15%.
So finally, how much fees?
The question of quantum of fee payable to the arbitrators can be broadly divided into three categories: (i) institutionalised arbitration where the fee payable to the arbitrator is governed by the prescribed fee schedule; (ii) ad hoc arbitrations where (a) the fee is prescribed in the agreement between the parties, (b) where the fee is fixed by the court while appointing the arbitral tribunal, (c) where no fee is prescribed in the agreement between the parties, or where the court while appointing the arbitral tribunal does not fix the fee or permits the arbitral tribunal to fix the fee; and (iii) where the arbitration fee is prescribed and governed by the Fourth Schedule to the Act.
Given the interpretation of the Fourth Schedule is now in place and unambiguous, it would be beneficial to populate an indicative rate/fees card to compare the fees chargeable in an Indian ad hoc arbitration vis-a-vis renowned arbitral institutions. Usually while making choice of which arbitral institution should administer the arbitration, the parties focus on cost and time saving-considerations. A party would have to compare various institutional rules on the basis of their fee schedule as well as understand the steps taken to increase efficiency both before and during the arbitration proceedings (such steps could include provisions for consolidation of arbitrations, joinder of parties, electronic communication and filing, among others).
For the benefit of the readers, see below a comparative chart on fees chargeable on different platforms such as: (1) THE ICC ARBITRATION RULES 2021; (2) THE SIAC ARBITRATION RULES, 2016; (3) THE LCIA ARBITRATION RULES, 2020; (4) THE MCIA RULES, 2016 AND (4) FOURTH SCHEDULE UNDER THE ACT.
*The conversion rates mentioned in the table above are as on 19 September 2022.
The number of sittings after which the revision would take place and the quantum of revision must be clearly discussed and determined during the preliminary hearings through the process of negotiation between the parties and the arbitrator(s).
The relationship between parties and arbitrator(s) is purely contractual in nature. Upon that relationship, the law superimposes a duty upon the arbitrator(s) to act as an impartial and independent adjudicator. Party autonomy is the overarching principle of the arbitration and is enshrined in inter-alia Section 2(6) of the Act as it allows the parties not only to choose the applicable law but also the procedure that will govern the arbitration and thereby limits the court intervention. It is therefore implied, that the said principle of party autonomy will extend to parties' freedom to decide the fees payable to the arbitrator(s). While certain foreign jurisdictions enable the arbitral tribunal to fix the fees typically subject to review by courts, there are jurisdictions which continue to give value to parties' consent in determining renumeration for arbitrators. In certain jurisdictions like Germany, arbitrators are prohibited from unilaterally fixing their fees because it violates the doctrine of the prohibition of in rem suam decisions, i.e., arbitrators cannot give an enforceable ruling on their own fees. Austria and Switzerland also do not allow arbitrators to issue binding and enforceable orders regarding fixation of their own fees. In Italy, while the arbitrators can determine fees in absence of an agreement between parties, such fees become binding only once the parties' consent to it. In Singapore, in absence of a written agreement, a party may approach the Registrar of the Supreme Court within the meaning of the Supreme Court of Judicature Act 1969 for the assessment of fees. Ideally, in ad hoc arbitrations, the fees payable to the arbitrator(s) should be decided through an arrangement between the parties and the arbitrator(s). In an ad hoc arbitration where arbitrator(s) are appointed by parties in the manner set out in the arbitration agreement, upon constitution of the arbitral tribunal, it is highly recommended that the parties and the arbitral tribunal shall hold a preliminary meeting to finalize the terms of reference (and fees chargeable) which would serve as a tripartite agreement between the parties and the arbitral tribunal and may include the component of fees chargeable (with stages of payment). It is possible that during such preliminary hearings, the parties and the arbitral tribunal may be unsure about the extent of time that needs to be invested by the arbitrator(s) and the complexity of the dispute. It is also possible that the arbitral proceedings may continue for much longer time than was expected. In order to anticipate such contingencies, during the preliminary hearings, the parties and the arbitrator(s) should stipulate that after a certain number of sittings, the fee would stand revised at a specified rate. The number of sittings after which the revision would take place and the quantum of revision must be clearly discussed and determined during the preliminary hearings through the process of negotiation between the parties and the arbitrator(s). The fixation of arbitral fees at the threshold will obviate the grievance that the arbitrator(s) are arm-twisting parties at an advanced stage of the dispute resolution process. In such a situation, a party who is not agreeable to a unilateral revision of fees demanded by the arbitral tribunal in the midst of the proceedings has a real apprehension that its refusal may result in embarrassing consequences bearing on the substance of the dispute.
Further, as good practices for getting a full reimbursement for costs parties should ensure that they keep accurate records of their expenses. Arbitrators do not entertain a claim for costs without adequate supporting documents. Therefore, keeping true copies and/or originals of invoices, lawyer's engagement letter, etc. are very important.
Disclaimer: "The views of the authors in this article are personal and do not constitute legal / professional advice of Khaitan & Co. For any further queries or follow up please contact us at firstname.lastname@example.org".
1 Petition for Arbitration (Civil) No.5/2022 2 Delhi State Industrial Infrastructure Development Corporation Ltd. v. Bawana Infra Development (P) Ltd [2018 SCC OnLine Del 9241] 3 2010 1 SCC 72. 4 2018 SCC OnLine Del 10183. 5 2017 SCC OnLine Del 10285 6 Civil Appeal No. 5437 of 2022 7 2018 SCC OnLine Del 7916 8 For the purposes of this comparison, the amount in dispute has been taken to be approximately USD 20 million with a sole arbitrator forming the arbitral tribunal. 9 https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/#article_c3 10 https://siac.org.sg/siac-schedule-of-fees 11 https://www.lcia.org/Dispute_Resolution_Services/schedule-of-costs-lcia-arbitration-2020.aspx