Arbitration, exorbitant fees and the fear of Contempt

It is time for the arbitration community in India to discuss the elephant in the room: arbitrators charging exorbitant sums in ad hoc arbitration is a BIG problem.

The exchange earlier this week in the highest court of the country (as reported by Bar & Bench here) has the potential to significantly exacerbate this problem. There are some quick fixes, but in my view, institutional arbitration is the only credible solution.

Before I start, I make two quick observations and one disclaimer. First, there are arbitrators who have built a reputation for being fair and reasonable, including with regard to their fees. But unfortunately, there is a sizeable proportion of arbitrators who are not. Any policy decision must address both categories. Second, there are high value matters where arbitrators have every right to demand sizeable fees, especially when matters are complicated and much larger sums are being paid to lawyers arguing these matters. That is not the problem. The problem is the manner in which fees are fixed/set and the power imbalance that underlies this process.

Disclaimer: It is unclear from the report as to what fees the arbitrators proposed in the matter reported. It is entirely possible that the arbitrators involved proposed extremely reasonable fees. The discussion in this article is on policy and not with respect to the acceptability or otherwise of the fees proposed in that case.

Background

A vast majority of arbitration in India is ad hoc. In ad hoc arbitration, the arbitrator(s) determine their fees. In an overwhelming majority of cases, parties are not informed of these fees before the arbitrator enters upon reference. Once the arbitrator enters upon reference, the parties rarely have a real say in setting the fees of the arbitrator for fear of antagonizing the person who will eventually decide their case on merits. It is therefore routine for a fee proposal that comes from the arbitrator to be accepted by the parties without any contest.

Unfortunately, several arbitrators have abused this power imbalance to impose exorbitant fees on parties. Arbitration practitioners across the country can give you countless instances of each arbitrator charging several crores of rupees for a single arbitration! For context, the highest fees envisaged for an arbitrator under the Fourth Schedule of the Arbitration and Conciliation Act, 1996 is ₹30 Lakh (or ₹50 lakh as per a decision of the Delhi High Court).

What makes matters worse is that several arbitrators don’t even give parties a clear picture of their charge out rates at the start of the matte. It is increasingly common for arbitrators to spring surprises on parties by making them deposit hefty ad hoc payments mid-way through an arbitration in addition to their standard “sitting fees”.

The “sitting fees” are also charged with varying degrees of arbitrariness. For instance, it is notoriously common for arbitrators to break up a single day’s hearing into multiple shorter sittings for the purposes of charging fees. Arbitrators also routinely pass on the cost of first class flight tickets, five-star hotels and lavish meals on to parties who have little choice but to pay for these expenses.

Fear of Contempt

The already skewed power imbalance between parties and arbitrators has been further exacerbated by the observations of the Supreme Court during Wednesday's hearing. As per Bar & Bench’s report, ONGC was threatened with contempt if the fees proposed by the arbitrators was not accepted. The Supreme Court felt that a party negotiating fees with an arbitrator is “insulting” the arbitrator. The Attorney General went further and said “that he will speak to the PSU” and "see [to it that] they agree to the fee. Fee must be left to arbitrators after all."

Quick Fixes

In proceedings under Section 11 of the Arbitration and Conciliation Act, 1996, courts have traditionally restricted themselves to appointing the arbitrator and then allowing the arbitrator(s) to set their own fees with the concurrence of the parties. An exception to this rule is in cities like Delhi and Bengaluru, where courts sometimes appoint an arbitrator and refer parties to the High Court annexed arbitration centre which in turn applies its fee schedule. In cases referred to the relevant arbitration centres, the fees are transparent and predictable. This has greatly assisted in avoiding awkward conversations between parties and arbitrators and has helped rein in any excesses in fees. In my view, this practice must be followed more widely.

In circumstances where the above option is not available or feasible, High Courts should actively consider exercising the powers vested under Section 11(14) of the Arbitration and Conciliation Act, 1996 and frame necessary rules. Exceptions can be carved out allowing arbitrators to determine fees which are higher than those prescribed under the Act in cases where the situation so demands and the relevant court appointing the arbitrator can accord necessary permission. This will help achieve a good balance by providing some anchor while still allowing flexibility.

Pending such rules being formulated, parties should not be discouraged from approaching courts in the event they are unable to agree on the arbitrators’ fees. There will inevitably be situations where one or more parties are being unreasonable and require an arbitrator appointed by the court to accept fees that are abysmally low. For instance, in some situations, recalcitrant respondents who wish to scuttle arbitration proceedings raise these questions simply to delay and derail proceedings. In such situations, the courts which have appointed the arbitrators must step in to assist the conversation. The Fourth Schedule to the Arbitration and Conciliation Act, 1996 provides a useful starting point which can help the court balance competing interests and arrive at a reasonable outcome.

In all cases, (as most courts already do) a court appointing the arbitrator(s) must be mindful of the complexity and value of the dispute before appointing an arbitrator. It would greatly help if courts start expanding the pool from which they appoint arbitrators and potentially maintain separate lists for: complex/high value disputes, medium value/complex disputes and disputes of low value/complexity. This will automatically have the effect of setting expectations in the minds of both the arbitrators and parties as to the relevant fees. It would also be advisable for courts to obtain relevant conflict declarations and proposed fee arrangements from arbitrators before finalizing their appointment so that any decision in Section 11 proceedings is comprehensive.

Long Term Solution

Institutional arbitration administered by credible arbitration institutions, in my view, still presents the most viable long-term solution. In addition to having the advantage of unburdening the courts on these matters, they have the ability to be more nuanced and specific in their determinations. Parties have the advantage of having a clear picture of potential expenditure and can choose institutions that best match their expectations. Institutions in turn can take into account varying degrees of complexities and provide for mechanisms to reasonably compensate arbitrators for their efforts. They can also provide some guidance on aspects such as expenses, to ensure that there is greater predictability and clarity on these aspects as well. Institutions will also be better placed to identify arbitrators who regularly overcharge and account for this while appointing them in future cases. This brings in a greater, and necessary, degree of accountability.

Vikas Mahendra is a partner at Keystone Partners and Consultant with the Centre for Online Resolution of Disputes (CORD).