Multi-member arbitral tribunals and the Fourth Schedule of the Arbitration Act: Decoding the legislative intent

In an important judgment recently delivered by the Allahabad High Court in State of UP through Principal Secretary, Medical/Health Welfare and Ors v. GVK Emri (UP) Pvt Ltd and Anr, it was that the arbitrator’s fee set out in the Fourth Schedule of the Arbitration and Conciliation Act, 1996 would apply to an arbitral tribunal as a composite amount, and the fee would not be paid separately/individually to each arbitrator of a multi-member tribunal.

The Allahabad High Court observed,

“Had the Legislature intended that the Fee as mentioned in the Fourth Schedule was to be given to each of the members of the Arbitral Tribunal individually, in case it was a multi member body, then it would have clarified the same by appending another note to the Fourth Schedule by saying that in the event the Tribunal is a multi member body each of its [sic] members would be getting the Fee as mentioned in the Schedule.”

Incidentally, the High Court also held that Section 11(14) and the Fourth Schedule is applicable to even the “Arbitral Tribunal appointed parties themselves in terms of their contract/agreement”.

This would obviously mean only domestic arbitral tribunals and would not apply to international commercial arbitration or institutional arbitration due to the explanation to Section 11(14). While the High Court’s view on the applicability of the Fourth Schedule is not free from doubt, its reasoning on the apportionment of the multi-member tribunal’s Fee is quite persuasive.

In the context of domestic arbitration, and more particularly ad-hoc domestic arbitration, this column will examine whether in a multi member arbitral tribunal, the model fee set out in the Fourth Schedule of the Arbitration Act would apply to each individual arbitrator or whether it would apply as a composite fee for the entire tribunal apportioned to each member of the tribunal.

The origins of the Fourth Schedule can be traced to the 246th report of the Law Commission of August 2014. The Law Commission, in Chapter II paragraph 10 of its report, had opined,

“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.

The Commission recommended an inclusion of a Schedule to the Arbitration Act. This Schedule recommended by the Law Commission had been lifted in its exact form by the legislature, along with the typographical error in the Schedule and incorporated it as “the Fourth Schedule” of the Arbitration Act. Under the heading ‘sum in dispute’, against the entry ‘above Rs.10,00,00,000 and up to Rs.20,00,00,000’, the model fee had been inadvertently mentioned as ‘Rs.12,37,500 plus 0.75 per cent. of the claim amount over and above Rs.1,00,00,000’ (One Crore) instead of ‘Rs.12,37,500 plus 0.75 per cent of the claim amount over and above Rs.10,00,00,000 (Ten Crore)’.

This faux pass was noticed by the Legislative Department of the Ministry of Law and Justice, which issued a notification on November 12, 2018 substituting the erroneous Fourth Schedule with the corrected Fourth Schedule with retrospective effect from October 23, 2015 i.e. the date on which the Arbitration and Conciliation (Amendment) Act, 2015 came into force. The notification also contains an “Explanatory Memorandum” explaining the mistake.

Since the Fourth Schedule of the Arbitration Act is based on the Delhi International Arbitration Center (DIAC), (Administrative Costs and Arbitrators Fees) Rules, 2018, it would be necessary to peruse these Rules that are available on the Centre’s website. Schedule B of the DIAC Rules deal with the arbitrators’ fees. Schedule B is almost identical to the Fourth Schedule of the Arbitration Act. However, the crucial difference between the two lies in the innocuous asterisks in the heading of Schedule B: - “Schedule B – Arbitrators’ fees*”. The asterisks points to an annotation/footnote which reads thus:

“*The Fee schedule indicates the fee payable to each Arbitrator comprising the Tribunal”.

Hence, it expressly clarifies that the fee schedule in Schedule B is “payable to each arbitrator” and not to the multi-member tribunal as a composite whole.

This clarification is not peculiar to the DIAC alone. Such express clarifications are also found in the Rules of the ICA on Domestic Commercial Arbitration and Conciliation, the Schedule of Fees for the Mumbai Centre for International Arbitration, the Fee Schedule of the IMC International ADR Centre, the rules of the Nani Palkhivala Arbitration Centre, the Fee Schedule of Indian Institute of Arbitration and Mediation (IIAM) Kochi, the Arbitrator’s Fee Schedule of the Gujarat Chamber of Commerce and Industry, the Fees Structure of the Arbitration and Conciliation Centre-Karnataka, the Chandigarh Arbitration Centre (CAC) Rules, 2008, and the Schedule of Fees of the Hyderabad Arbitration Centre.

The distinction between the several institutional rules set out above and the Fourth Schedule is that the latter does not contain this clarification or explanation. This is probably because the Law Commission does not clarify this issue in its 246th Report from where the Fourth Schedule has been lifted. However, it would be unfair on the part of this author to make second-guesses as this is open to conjecture. After all, as observed in Nathi Devi v. Radha Devi, if “Courts always presume that the Legislature inserted every part thereof” (and by that logic chose not to insert or omit a part or word) for a purpose and “the legislative intention is that every part of the statute should have effect”, then this author can certainly not presume otherwise.

Hence, let us presume that this omission of a clarification/explanation in the Fourth Schedule was intentional and deliberate. The legislature certainly wanted to address the grievance of high costs of domestic arbitration and therefore desired that the Fourth Schedule would remedy this mischief. If that was the case, as is evident from a reading of paragraphs 3 and 7 of the Statement of Objects and Reasons of the Arbitration and Conciliation (Amendment) Act, 2015, which had inserted the Fourth Schedule into the Arbitration Act, then the legislature intended that for multi-member arbitral tribunals, the fee in the Fourth Schedule would be a composite fee for the entire tribunal apportioned to each member of the tribunal.

In other words, 12 divided by 3 is what the legislature desired and not 12 times 3, which it wanted to obliterate. This is because in the real world, contracting parties do not negotiate on an equal footing and party autonomy is pipe dream. The negotiating power of a party determines the clauses of a contract. A stronger party, let’s say a multi-national corporation, may use its influence to draft a contract and an arbitration clause to suit its own interest. Templates with no room for negotiation are prepared for weaker parties with no options to sign; no questions asked. This is typical in contracts entered into between principal contractors, who are generally large corporations and small time or mid-size sub-contractors. In such cases, a sub-contractor may have very little or no negotiating power. To discourage a weaker party from initiating arbitration proceedings in the event of a dispute, the stronger party may insist on an arbitration clause consisting of a multi-membered arbitral tribunal rather than a sole arbitrator.

If the fee in the Forth Schedule were to apply to each member of the tribunal individually, the sub-contractor could be forced to settle the dispute on unfavourable terms because it would have a nerve-racking time trying to fund the dispute even if the cost is split 50-50 between both parties. However, if the fee in the Fourth Schedule were to apply as a composite fee to “the Tribunal” and not to “each arbitrator”, the sub-contractor may get a foot in the door and would be in a position to consider agitating its dispute. Hopefully, this is what the legislature intended.

The Allahabad High Court may have got this one at least partially right, but its judgment is always open to challenge. After all, any other High Court or the Supreme Court can take a different view on the issue. Therefore, it is imperative that the legislature breaks its silence and clarifies its position once and for all so that the clarity and uniformity it strived to achieve with the introduction of the Fourth Schedule does not lead to confusion or chaos because of its unintended silence.

Dormaan J Dalal is a practicing Advocate at the Bombay High Court. He can be contacted through his Twitter Handle @DormaanD.