[The Viewpoint] Arbitrator's Fee: Supreme Court Settles the Law

The Supreme Court of India in the matter of Oil & Natural Gas Corporation Ltd. vs. Afcons Gunanusa JV had resolved various issues circling around the Arbitrators’ fee. The Court while dealing with the question of Arbitrator’s fee framed certain issues, which are discussed in detail in this article.

1.1 Whether the Arbitral Tribunal Can Unilaterally determine their own fees

The 1^st question that Court decided was whether an arbitral tribunal has the power to decide its own fee unilaterally or can it be fixed by the parties to the arbitration agreement. While dealing with this issue, the Court discussed various institutional rules and the principle of party autonomy and observed the following:

a. The Court reaffirmed the importance of party autonomy and observed that the Fourth Schedule provided under the Act was not mandatory and parties were free to enter into an agreement and specify the fees payable to the arbitrator(s) or the modalities for determination of arbitrators’ fees. 

b. The Court referred to Section 11(3A) & Section 11(14) and observed that unilateral fixation of fees by an arbitrator goes against the principle of party autonomy which is central to the resolution of disputes through arbitration. Thus, it was concluded that since there is no enabling provision under the Act empowering the arbitrator(s) to unilaterally issue a binding or enforceable order regarding their fees, therefore, they cannot fix their fee unilaterally dehors the agreement between the parties.

The Court, thereafter, proceeded to examine the issue and interpretation of the two very important expressions used in the Act, i.e., “Costs” and “Fees”.

1.2 Interpretation Of “Costs” And “Fees”

a. The Court while dealing with these terms observed that the term “costs” and “fees” are two different paradigms. While fees represent the payment of remuneration for arbitrator’s time and efforts required for the matter, costs refer to all the reasonable expenses incurred in relation to arbitration that are to be allocated between the parties upon the assessment by the arbitral tribunal or the court. It is relevant to mention here that the costs also include arbitrator’s fees, as mentioned under Section 38. 

b. The Court further analysed all the provisions of the Act relating to costs and fees including Sections 31(8), 31A, 38 and 39 and concluded that the meaning and scope of the two terms are very distinct and an arbitral tribunal while deciding the amount of costs cannot pass any binding or enforceable orders regarding their own remuneration.

In other words, an arbitrator while deciding the issue of payment of costs, is not entitled to pass any binding orders with respect to its fees. Such act would violate the principle of party autonomy and the doctrine of prohibition of in rem suam decisions, which provides that an arbitrator cannot be the judge of his own claim  against the parties.

c. However, the above principles do not restrict an arbitrator from deciding the amount of costs which may become payable by one party to another party (including arbitrator(s) fee), since this is merely a reimbursement of expenses that the successful party has incurred during arbitration.

d. The Court also observed that an arbitrator can also demand deposits and supplementary deposits since these advances for costs are provisional in nature. If while fixing costs or deposits, the arbitrator makes any finding relating to arbitrators’ fees (in the absence of an agreement), they cannot enforce it. It was held that the arbitrator in terms of Section 39(1), can only exercise lien over the arbitral award, if any payment remains outstanding. A party can approach the court to review the fees demanded by the arbitrator under Section 39(2) if it believes that the fees are unreasonable.

1.3 Directives Governing Fees Of Arbitrators In Ad Hoc Arbitrations

The Court while exercising its powers under Article 142 of the Constitution of India, framed certain guidelines in relation to fees payable to arbitrators in ad hoc arbitrations in India, which are as follows:

a. Upon the constitution of the arbitral tribunal, parties and the arbitral tribunal shall hold preliminary hearings with a maximum cap of four hearings to finalise the terms of reference (“TOR”) and the arbitral tribunal must set out the components of its fees which would serve as a tripartite agreement between the parties and the arbitral tribunal.

b. Where an arbitrator is appointed by the parties in terms of the arbitration agreement, the fees payable to the arbitrator would be as per the arbitration agreement. However, where the arbitrator finds the fee stipulated therein as unacceptable, he must indicate his proposed fee with clarity in the preliminary hearings itself. In the event of any disagreement, the arbitrator(s), may decline the assignment.

c. Once the TOR have been finalised and issued, it would not be open for the arbitrator to vary either the fee fixed or the heads under which the fee may be charged.

d. The parties and the arbitrator may mention in the TOR that fees fixed therein may be revised upon completion of a specific number of sittings and the quantum of such revision should also be mentioned clearly.

e. Where the arbitrator is appointed by the Court, and the Court does not specify the arbitrator’s fee then in such case, the arbitrator and the parties should agree upon the TOR as mentioned hereinabove.

f. The Court also clarified that there can be no unilateral deviation from the TOR, which is a tripartite agreement.

Whether the term “sum in dispute” in the Fourth Schedule to the Arbitration Act, means the cumulative total of the amounts of the claim and counter-claim

While adjudicating this issue, the Court first acknowledged that the terms “claim” and “counter-claim” are not defined anywhere in the Act. Thereafter, the Court analysed various provisions of the Act, where references to claim and counter-claim are appearing, such as Section 2(7), Section 28(1), Section 2(9), Section 23(2-A), Section 25 and Section 38. The Court also referred to Order VIII Rule 6 of the CPC, and observed the following:

a. The Act treats claims and counter-claims at par and same procedure and timelines have to be followed for both;

b. The Act allows the arbitrator to fix deposit of separate costs for claims and counter-claims, considering the same to be distinct proceedings.

c. The Act considers claims and counter-claims to be independent proceedings since the counter-claim is not dependent upon adjudication of claim. Rather the Act protects the right of any Respondent to raise counter-claim, provided the same is arising out of the arbitration agreement.

d. Though a counter-claim may arise from similar facts as that of claim, however, the same is neither a set-off nor in the nature of a defence to the claim;

e. A counter-claim will survive for independent adjudication even if the claim is dismissed or withdrawn.

The Court finally concluded that in so far as institutional arbitrations are concerned, parties shall be bound by the respective rules of the institutions and arbitrator’s fee shall also be payable as per the respective rules. However, in case of an ad-hoc arbitration, where Fourth Schedule is applicable, arbitrator’s fee should be calculated separately for a claim and separately for a counter-claim and not on the cumulative value of the two.

Whether the ceiling of ₹30,00,000 in the entry at Serial No. 6 of the Fourth Schedule of the Arbitration Act is applicable only to the variable amount of the fee or the entire fee amount

While dealing with this issue, the Court held that ceiling of ₹30,00,000 in entry at Serial No. 6 of the Fourth Schedule applies to the sum of base amount and the variable amount, and not just the variable amount. Therefore, the maximum fee payable to the arbitrator shall be ₹ 30,00,000.

Whether the ceiling of ₹30,00,000 applies as a cumulative fee payable to the arbitral tribunal or it represents the fee payable to each arbitrator

The Court held that the fees provided in Fourth Schedule is for individual arbitrator, regardless of whether they are a member of a multi-member tribunal or a sole arbitrator. However, the Court clarified that a sole arbitrator would be paid 25% over and above the ceiling amount in accordance with the fourth schedule.

This judgment settled many crucial questions revolving around arbitrators’ fee and has provided very clear insight on various provisions of the Arbitration Act in this respect. The guidelines provided under the judgment shall protect the parties from being forced to accept unilateral and arbitrary fee, if any, fixed by arbitrators and at the same time has granted liberty to an arbitrator to accept or to reject any unreasonable or unconscionable fee, not commensurate with the efforts required while adjudicating disputes between the parties. This judgment has further paved the way in bringing more clarity and transparency with respect to law governing the arbitrations in India.

Abhishek Kumar is a Partner and Aditi Tayal is an Associate at Singhania & Partners.