NPAC's Arbitration Review: Should Arbitrators reimburse their Fees if Award is set aside?

Bar & Bench October 21 2019
Nani Palkhivala Arbitration Centre (NPAC)

Rishi Kumar Dugar

Amendments are often carried out when it is better to change the law.  The 2015 and 2019 Amendments to the Arbitration and Conciliation Act, 1996 (‘1996, Act’) brought some key amendments vis-à-vis arbitrators.  

Now under the 1996 Act, guidance for independence or impartiality of arbitrators is provided in the Fifth Schedule; for determination of fees of arbitrators the Fourth Schedule; Eighth Schedule provides for qualifications and experience of an arbitrator and a specific section provides a safety net to arbitrators, protecting them from legal proceedings for anything done in good faith or under 1996 Act.

While these amendments are indeed necessary and important; what about the duty and accountability of arbitrator to render an enforceable award? Wouldn’t it enhance the attractiveness of arbitration in the eyes of the users if, there was a specific provision that made the arbitrator accountable? While this may sound radical in India, this radical change has been attempted by Hungary in the Hungarian Arbitration Act of 2017 (‘2017 Act’).

Section 57(2) of the 2017 Act, as it was introduced in Hungary, provided that in the event an award is set aside, arbitrators shall have to reimburse their fees, irrespective of the reason for setting aside.  

The obvious reasons behind the Hungarian Legislators introducing this new section were that change in the law would try to increase the accountability of arbitrators. It also meant that arbitrators shall have to reimburse their fees if the award does not stand up to scrutiny by courts. Most importantly, this rule might encourage arbitrators to render enforceable awards.

Historically, in Hungarian arbitration practice, the idea that parties should not be required to bear costs of the second proceedings if the award is set aside has long been part of the Hungarian Arbitration Act of 1994 (‘1994 Act’). 

The 1994 Act, however, did not contain rules on proceedings to be conducted following the setting aside of an award. So, taking a cue from the 2011 Rules of Arbitration of the Permanent Arbitration Court (‘HCCI Court’) attached to the Hungarian Chamber of Commerce and Industry (‘HCCI’), which provided for such disputes to be resubmitted to the same arbitral tribunal, without any fees for the second proceedings. The Hungarian Legislators codified these Rules into 2017, Act. 

Contrary to Hungary’s 1994 Act, the 2017 Act allowed parties a choice between resubmitting their dispute to the original arbitral tribunal or to a different tribunal. The new amendment further provided that arbitrators who sat on the first tribunal must reimburse their fees. This change in law was made applicable to all arbitration proceedings seated in Hungary.

The 2017 Act as introduced, was criticised as a ‘populist measure’ in Hungary. The main criticism against the introduction of Sec. 57(2) of the 2017 Act was: 

  • that in addition to reimbursement of its fees, a party could claim it is entitled to the amount granted in the annulled award;
  • obligation to reimburse fees will create tensions among arbitrators (Tribunal); leading to more and more liability actions being initiated amongst arbitrators. Similarly, the number of dissenting opinions could increase in an attempt for arbitrators to distance themselves from the content of an award that could be successfully set aside and
  • arbitrators may refuse accepting appointments to tribunals seated in Hungary.

Unfortunately, even before this new amendment could be tested in practice, in response to these criticisms, the Hungarian Legislators made a further amendment to the 2017 Act.  The revised Sec. 57(2) no longer requires arbitrators who rendered the annulled award to reimburse their fees.  However, it did not depart from its earlier position under which parties were not required to pay arbitrator fees twice to obtain a single enforceable award.

The Hungarian Legislators did not stop there; they also found a solution to fund the costs and arbitrator fees of the second arbitration.  In the revised provisions, they tasked the Presidium of the HCCI Court to establish a separate reserve fund from which arbitrator fees for the second proceedings were to be drawn and in case of insufficiency, the funds were to be provided by HCCI.  This revised provision was, however, made applicable only for arbitrations conducted under the auspices of the HCCI Court and not to ad hoc and foreign institutional proceedings seated in Hungary.

In India, there are over three crores cases pending, across the Supreme Court, the High Courts, and the subordinate courts.  A majority of these pending cases include petitions under Sec.34 (Application for setting aside an award) of 1996 Act.  There must be something fundamentally wrong in those awards, which is why all these petitions under Sec.34 were entertained in the first place.

Parties choose arbitration to avoid the long litigious court process and for a speedy and effective remedy.  However, if award passed by arbitrators does not stand up to scrutiny by the courts then the whole exercise becomes a futile attempt due to the carelessness of the arbitrator.  

International arbitral institutions like the International Chamber of Commerce (ICC), have also taken steps to make arbitrators accountable. ICC introduced negative incentives for arbitrators like the reduction of fees if award is not rendered within a stipulated time. When the next round of amendments to the 1996 Act is proposed, the Government of India should consider making arbitrators accountable, so that they are more careful and render an enforceable award. 

The author is an advocate practicing in the High Court of Madras.

Members of the Nani Palkivala Arbitration Arbitration Centre (NPAC) will be writing a weekly column for Bar & Bench analyzing the latest developments on the law of arbitration. To read last week's column, click here.

 

Bar & Bench is available on WhatsApp. For real-time updates on stories, Click here to subscribe to our WhatsApp.