The Arbitration Practitioner’s Series by MKBAC: Anomalies in the Fourth Schedule of the Arbitration Act

Pursuant to the  recommendation of the Report of the Expert Committee to Examine the Working of the Arbitration Law and Recommend Reforms in the Arbitration and Conciliation Act 1996 (“Viswanathan Report”), the Fourth Schedule of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) is sought to be deleted by the Arbitration and Conciliation (Amendment) Bill, 2024. The Fourth Schedule was incorporated within the contours of the Arbitration Act to serve as a model fee schedule for Arbitral Tribunals (“Tribunal” or “Arbitrator”). While the Fourth Schedule has to a significant extent streamlined and systemised the method by which Tribunal’s charge fee particularly after the timely assistance by the Supreme Court in ONGC v. Afcons Gananusa JV (“ONGC v. Afcons”), it hasn’t proved to be the “gold standard” of model fee schedules. The jury is still out on whether the Fourth Schedule will survive a nuclear winter in the arbitration landscape.

Be that as it may, through this column, I address two glaring issues which have been touched upon in the Viswanathan Report in part 3.10 on the Fourth Schedule and after addressing these issues, I proceed to suggest that the Fourth Schedule be retained by the legislature with certain caveats.

The Fourth Schedule does contain Fee Schedule for arbitrable disputes where there are no monetary claims. A classic example of such disputes are ones under a Family Arrangement or a Partnership Deed in which a Tribunal is constituted by an order of a Court or by consent of parties. In such cases, the reliefs sought by parties before a Tribunal may not be monetary but are rather declaratory, or injunctive in nature, such as division of assets or preventing a party from parting with a portion of a property. In such cases, the Fourth Schedule does not provide any assistance to a Tribunal, in which case the Tribunal is left with no option but to adopt other methods of being compensated for its services such as a per sitting fee or fee based on an estimation of the amount of work done. In such cases it is not possible for a Tribunal to ascertain the fee at a preliminary hearing/s as per the directions set out in paragraph 104 of the majority opinion by the Supreme Court in ONGC v. Afcons. The majority opinion states that such preliminary hearings should not be more than four. A Tribunal would only be able to assess the quantum of work once the parties’ complete pleadings and opposing positions are ascertained. Some Tribunals could also consider charging a fee based on the value of the property. Such a valuation is not possible until and unless parties agree of the value of the property in dispute or jointly consent to an individual valuation. When the parties first approach a Tribunal, tempers are often high, and egos are as fragile as the straw house of the three little pigs. It would seem offending to the parties at that nascent stage for a big bad wolf of a Tribunal to tell them to value their own straw houses. In such a case, the Tribunal would really be left with no option but to leave the issue of its fee open to be decided at an appropriate stage. How can it, at the first instance ascertain the quantum of work required to be undertaken for the assignment however experienced it may be? The Fourth Schedule does not assist a Tribunal in this regard. One may argue that at the outset itself the Tribunal should insist on parties informing it on nature of the claims or the number of witnesses that will depose on their behalf. But such an approach does not bear much fruit particularly on account of the fluidity of opposing positions. For instance, if party A files a monetary claim, after examining the Statement of Claim, the opposing party B may choose to then file a monetary claim in the Counterclaim or may even choose to not file a monetary claim but a Counterclaim for declaratory relief or specific performance with several witnesses deposing on its behalf. Take another case, where party A files a Statement of Claim without a monetary claim and the opposing party B files an application challenging the jurisdiction of the Tribunal under Section 16 of the Arbitration Act and the application succeeds, then how is the Tribunal to be compensated for ousting itself?

Another situation that often arises is when an arbitrator/s, is/are ‘late to the party’. In the sense when they take the place of a substituted arbitrator due to reasons set out in Sections 12, 14, 15 or any other provision of the Arbitration Act. In such a situation, an arbitrator is unaware of what transpired before its arrival. The stage of the proceeding may be at completion of pleadings, evidence, final hearing or pre-pleadings. In a situation, if there is a monetary claim and the arbitrator charges its fee as per the Fourth Schedule, a party may often pick a bone with the arbitrator on account of charging the entire fee under the Fourth Schedule rather a proportion of the fee based on the stage when the substituted arbitrator last let off. The Fourth Schedule does not contemplate such a situation. A Tribunal would be justified in charging the entire fee under the Fourth Schedule even if it is substituted because it will have to spend an arm and a leg of its time just to familiarize itself with the record, opposing positions, the procedures adopted by the previous arbitrator and superimposing such procedures with its own method of madness. Further, parties who are no apostles of peace themselves, may take advantage of such a substitution and try and put a spoke or several spanners in the wheel by filing frivolous applications to set aside procedural orders passed by previous substituted arbitrators particularly when they have recused on account of unsavory allegations. Such a Tribunal would then have to invest far more time in separating the corn from the chaff as it has not controlled the way the proceedings have been conducted from inception. Therefore, the Fourth Schedule does not provide any provision for such a situation. While the Bombay High Court (Fee Payable to Arbitrators) Rules, 2018 that has modeled itself on the Fourth Schedule does provide a stage wise determination of fee of the Tribunal if proceedings are “terminated on account of mutual settlement”, such stage wise determination is not contemplated for substituted Tribunals. 

A simple solution for the legislature would be to retain the Fourth Schedule and confine its application only for disputes where there are monetary claims. After all, the Fourth Schedule has largely remedied the arbitrary method of fee fixation. However, amendments should be made to the Fourth Schedule to provide for situations where substituted arbitrators are appointed to take over an assignment from a previous arbitrator. The legislature could also suitably amend the Fourth Schedule to have an “opt out clause” by consent of parties and the Tribunal with a caveat: if the parties and Tribunal opt out of the fee scales in the Fourth Schedule, the fee of the Tribunal cannot be less than the scales set out in the Fourth Schedule or the corresponding High Court Rules framed under Section 11 (14) of the Arbitration Act until and unless the Tribunal expressly waives this right.

Such a waiver may prove beneficial to the parties in cases where the Tribunal is of the view that the parties are not required to remit the entire fee as per the scales set out in the Fourth Schedule, if it is of the opinion that the issue/dispute is narrow and can be resolved without much effort. Such an approach is not alien to the Arbitration Act as Section 29-B, which provides for adoption of fast track procedures, clearly contemplates in sub-section 6 that if a fast track procedure is adopted to adjudicate a dispute, the fees payable to the arbitrator and the manner of payment of the fee shall be such as may be agreed between the arbitrator and the parties. Therefore, a structured, yet nuanced approach, if adopted would balance the interests of all concerned in the arbitration landscape.

Dormaan Jamshid Dalal is an Arbitrator and a practicing Advocate at the Bombay High Court.