Arbitrary Arbitrator Fees and the Law post 2019 Amendment

Kartik Seth and Aanchal Kapoor

The Supreme Court recently in the matter of National Highways Authority of India and Ors. v. Gayatri Jhansi Roadways Limited and Ors.[1] settled the position on the issue regarding arbitrator’s fee in cases where the parties had agreed to a schedule of fees in the arbitration agreement. It held that the Fourth Schedule of the Arbitration and Conciliation Act, 1996 (Act) is not mandatory in determining the fees where the fees has been fixed by agreement between the parties and overruled the judgment of the Delhi High Court.

The Supreme Court in this was hearing two challenges with respect to fee structures imposed by arbitrators in two separate matters which were in appeal from the Delhi High Court. The first challenge came in Gayatri Jhansi[2], wherein the Delhi High Court terminated the mandate of the arbitral tribunal for holding that the fee will be governed by the Fourth Schedule and will override the fee structure specified in the agreements between the parties. The second challenge came from Delhi High Court’s order in National Highway Authority of India v. Gammon Engineers and Contractors Pvt. Ltd.[3], in which it was held that the Fourth Schedule was not mandatory in determining the fees and that the arbitral tribunal will be bound by the fees fixed by the agreement.

Most of the agreements with arbitration clauses do not prescribe any fee for the arbitrator, it is normally in government contracts such as those of the NHAI, where a fee schedule has been given and the same is revised from time to time. Typically, it is only in such contracts that one can say that the parties have mutually agreed to a fee structure.

The Act provides that an arbitral tribunal shall fix the costs of the arbitration in accordance with Section 31A.[4] The Fourth Schedule specifies a fee structure for the arbitral tribunal based on the claim. It specifies a ceiling of INR 30,00,000 each if two or more arbitrators are appointed to the tribunal and INR 37,50,000 in case the matter is being heard by a sole arbitrator.

The Supreme Court’s ruling was only to determine how the fees of the arbitrator would be fixed when the parties have agreed to the same in the arbitration agreement. The court did not have the opportunity to rule upon instances where the parties have not agreed to a fee schedule.

Given the recent developments, there is a lack of clarity on what happens in scenarios where no institutional rules govern the arbitration? Is the Fourth Schedule to be adopted? Prior to the passing of the 2019 Amendment, different High Courts had taken different views in these circumstances. The question which remains is whether in cases of ad-hoc arbitration, the Fourth Schedule is applicable, and if so, is it mandatory or directory in nature.

Intention of the legislature

A major complaint against arbitration in India, especially ad hoc arbitration, has been the high costs associated with it. Arbitrators often fix fees in an arbitrary, unilateral and disproportionate manner. The 246^th Report of the Law Commission of India made recommendations with respect to the schedule of fees for the arbitrator.[5]

The Commission in order to make arbitration a cost-effective solution suggested that there be a mechanism to rationalize the fee structure for arbitrations. Basing its reliance on Union of India v. Singh Builders Syndicate[6], it recommended a model schedule of fees and conferred powers on the High Courts to frame appropriate rules and for which purpose the High Court may look to Sixth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment). The Commission in its recommendation to amend Section 11(14) provided a small note which read that the fee schedule provided is only indicative and the High Courts were at liberty to frame their own rules. A ceiling limit was provided and these recommendations of the Commission were adopted by the legislature in 2015.

However, given the ambiguities in the 2015 Amendment, certain changes were proposed and adopted in 2019 Amendment with respect to charging of fees by arbitral tribunals.

The Law

The Act provided for a schedule of fees and High Courts were required to frame rules and notify the same. However, as per the 2019 Amendment, the High Court and Supreme Court have been conferred with powers to designate arbitral institutions that shall appoint arbitrators and determine the fees subject to rates specified in the Fourth Schedule. As regards the fees, Section 11(14) clarifies that where parties have agreed to follow institutional arbitration rules, there the schedule of fees of the institution is to be followed.

A comparison of the change in the law is as follows:

A combined reading of Section 31(8) and 31A, “costs” includes fees and expenses of arbitrators. The proviso to Section 38(1) can apply only in circumstances when the Arbitral Tribunal is not to fix its fee in terms of the Fourth Schedule to the Act.

Rulings by High Courts

Various high courts across India have interpreted the application of the Fourth Schedule differently.  For instance, Patna High Court in the matter of Kumar & Kumar Associates v. Union of India[7] clarified that arbitrator (who was appointed by the court) would have to abide with the Fourth Schedule.

The Delhi High Court in Bawana Infra[8] though dealing with the issue as to what amounts to “sums in dispute”, also stated that the Fourth Schedule cannot be breached. It categorically stated:

“Keeping the object of the amendment in view, the ceiling on fee as prescribed in the Fourth Schedule of the Act cannot be allowed to be breached.”

Contrary to the above judgment in Bawana Infra, the same Bench in the matter of GS Developers[9], noted that the court had appointed the Arbitrator and it did not mandate that the Arbitrator charge fee only in accordance with the Fourth Schedule to the Act. It held that the Fourth Schedule is merely a guiding model and is not binding on the Arbitrator as the same has not been adopted by the Delhi High Court in its Rules. In light of this, the Arbitrator was free to determine his own fee.

In another case before the Rajasthan High Court[10], a challenge was made to arbitrator’s decision to fix fee at INR 75,00,000. The Petitioner contended that the Fourth Schedule would be applicable. Even after pointing out the High Court’s notification to follow the Fourth Schedule, the arbitrator only discounted his fee and charged INR 55,00,000. In this case, apart from charging an illegal fee, the arbitrator conducted the proceedings ex-parte and posted the matter for final arguments. The court found the arbitrator guilty for his alleged acts and thus terminated his mandate under Section 14(1)(a) of the Act and allowed the petitioner to appoint a substitute arbitrator.

Interestingly, in the above-mentioned cases, the arbitrators had been appointed by the court. However, in Paschimanchal Vidyut Vitran Nigam Limited v. IL&FS Engineering & Construction Company Limited[11] it was held that since the parties had not approached the court for appointment of arbitrator in terms of the arbitration agreement and had mutually agreed on constitution of the arbitral tribunal, then the court has no rule to play in fixing fees of the arbitral tribunal. This was in tune with following the ‘party autonomy’ principle which is the cornerstone of arbitration.

Fees charged by various arbitral institutions

Arbitral institutions in India are free to prescribe their own fee structure. For example, the Delhi International Arbitration Centre follows the Fourth Schedule as is and has not made any modifications to it. The Mumbai Centre for International Arbitration has a rather comprehensive slab for arbitrator fees and it provides for a minimum fee and a maximum fee that can be charged by an arbitrator. Interestingly, for matters where the sums in dispute are above Rs. 20,00,00,000, the minimum fee payable is as per the Fourth Schedule and for the maximum fee, it has separate slabs. For instance in high stakes matters where the sums in dispute is over Rs. 5000,00,00,000 has a minimum amount of Rs 30,00,000 and a maximum of Rs. 8,50,00,000 is payable as arbitrator fees.

Nani Palkhivala Arbitration Centre and the Indian Council of Arbitration have a distinct and separate fee structure and one that is not as per the Fourth Schedule. Pertinently, the fees charged is lesser in comparison to the Fourth Schedule. Therefore, in matters being governed by rules of arbitral institutions, separate fee slabs will apply.

Analysis

Given the ambiguity in the interpretation by the various courts, we have three scenarios before us:

1. Where the fee structure for arbitration has been agreed by the parties.[12]
2. Where the fee structure has not been agreed by the parties and the court at the time of appointing the arbitrator recommends that Fourth Schedule be followed.[13]
3. Where fee structure has not been agreed and there is no direction of the court to follow the Fourth Schedule.

The first scenario is a vanilla scenario wherein, party autonomy is followed and the Fourth Schedule is not mandatory as has also been ruled by the Supreme Court recently.

In the second scenario, we have come across cases where the High Court at the time of appointing the arbitral tribunal recommends that the Fourth Schedule be followed irrespective of whether the High Court has notified the rules or not. Given the 2019 Amendment, the High Court is not required to notify the rules. The High Court will now be designating arbitral institutions to discharge all the necessary and proper functions which will include appointing arbitral tribunal and fixing its fees. Since not all arbitral institutions follow the Fourth Schedule, it leaves an ambiguity whether the law and the intention of the legislature will be followed in its letter and spirit.

The third scenario is rather problematic and different arbitrators are interpreting it differently. In ad-hoc arbitrations, there is no intervention by the court or arbitral institutions and parties in most cases do not agree to a fee schedule. In these circumstances, on the one hand arbitrators are freely adopting the Fourth Schedule, on the other hand, arbitrators are laying down their own fee structure.

GS Developers ruling gives the arbitrators freedom to depart from following the Fourth Schedule merely because the Delhi High Court at the time of appointment of the arbitrator did not prescribe any fee structure for the arbitrators. The Delhi High Court here has overlooked the intention of the legislature while providing for a model in the Fourth Schedule and providing for a ceiling limit. Through this judgment, it has given the arbitrator unfettered powers to charge fees that may be arbitrary, unreasonable and disproportionate. It is likely that even after the recent amendments, ad-hoc arbitrators may charge fees unilaterally without due regard to the Fourth Schedule.

One may argue that the intention of the legislature was only to provide for an indicative schedule as per which the High Courts were to lay down their own fee structure. However, given the recent amendments, the arbitral institutions are likely to have the last say in the schedule of fees indicating that the Fourth Schedule is not mandatory but merely a guiding principle. That said, in the absence of an agreement and where the Court/ institution does not appoint an arbitrator, there is lack of clarity whether the Fourth Schedule would be followed.

In our view, the intention of the legislature which is reflected in the 246^th Law Commission Report, was that the fees of arbitrators is to be regulated, therefore, even in ad hoc arbitrations, the arbitrator does not have the unfettered discretion to charge fees and is governed by the model structure proposed in the Act.

* Authors are a part of Chambers of Kartik Seth, a registered Advocate-on-Record firm in Supreme Court Of India which specializes in Supreme Court based Litigation and Arbitration matters. 

[1] MANU/SC/0958/2019, 2019 SCC OnLine SC 906

[2] National Highways Authority Of India v. Gayatri Jhansi Roadways Limited, MANU / DE / 5376 / 2017; 2017 SCC OnLine Del 10285

[3] National Highways Authority of India v. Gammon Engineers and Contractor Pvt. Ltd., MANU/DE/2635/2018; SCC OnLine Del 10183

[4] Section 31(8) of the Act

[5] Report No. 246, Amendments to the Arbitration and Conciliation Act 1996, Law Commission of India, August 2014

[6] (2009) 4 SCC 523

[7] 2016 SCC OnLine Pat 9476; MANU/BH/0529/2016

[8] Delhi State Industrial Infrastructure Development Corporation Ltd. (DSIIDC) v. Bawana Infra Development (P) Ltd., 2018 SCC OnLine Del 9241,

[9] G.S. Developers & Contractors Pvt. Ltd. v. Alpha Corp Development Private Limited and Ors., 2019 SCC OnLine Del 8844

[10] Doshion (P) Ltd. v. Hindustan Zinc Ltd., 2019 SCC OnLine Raj 6

[11] O.M.P. (MISC.) (COMM.) 164/2018 decided on 16.08.2018

[12] Gayatri Jhansi (supra)

[13] Sandeep Soni v. Sanjay Roy and Ors. 2018 SCC OnLine Del 11169, MANU/DE/3299/2018; Simplex Infrastructures Ltd. v. Rail Vikas Nigam Limited, MANU/DE/4756/2018, 2018 SCC OnLine Del 13122