Interpretation of Arbitrator's Fees vis-a- vis Judicial Pronouncements

Since the past two decades, arbitration has become one of the most prominent methods used by the parties for the resolution of disputes. However, the issues surrounding the fees of the arbitrators have been clouding the adjudication of disputes through arbitration, by making the arbitration process extremely costly for the parties.

In regard to the fees, the Arbitration Act, of 1940 (1940 Act) provided that once the Award is prepared and signed, the arbitrator has to inform the parties about the fees and charges payable for the arbitration. Subsequently, the Arbitration and Conciliation Act, 1996 (1996 Act) came into force repealing the earlier Act, and the Arbitral Tribunal was given power to determine fees. A need was then observed for laying standard rules for the determination of fees, which was attempted by the Legislature vide Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment) through the introduction of the Fourth Schedule in the Act. The Act was once again amended in 2019 through the Arbitration and Conciliation Act (Amendment) Act, 2019 (2019 Amendment) for substitution of section 11 (14), but the ambiguities still persisted. Recently, the Supreme Court in ONGC vs Afcons Gunanusa JV has proceeded to lay down the procedure for removing ambiguity in the determination of arbitrators' fees.

The article aims to delve into the aspect of fees and the issues surrounding it through discussion of laws and precedents in this regard.

• Prior to the enactment of the 1996 Act

  Before the Arbitration Act, of 1996, arbitrations were governed by the 1940 Act, which though was a major step towards making comprehensive legislation with respect to all the aspects of arbitration, however, the law was acting as a hindrance in serving the purpose of resolving disputes through arbitration, as it involved interference of the courts at all stages. In so far as the fees is concerned, section 14 of the 1940 Act awarded powers to the arbitrator to fix their own fees, and inform the parties about the same, after the award has been prepared and signed. In case the party/parties dispute to the fees and/or costs payable to the Arbitrator, the same was then decided by the court, as provided under section 38 of the 1940 Act. The Supreme Court in Guru Nanak Foundations vs Rattan Singh, while focusing on the interference of the court in arbitration proceedings said that “the way in which the proceedings under the Act are conducted and without an exception challenged in Courts, has made lawyers laugh and legal philosophers weep”. Although the issues in the 1940 Act were mostly around the courts’ interference at every level, including the fees, however, the provisions clearly authorized the arbitrators’ to fix their own fees without any involvement of the parties.

• Post enactment of the 1996 Act and before the 2015 Amendment

  In 2009, the Supreme Court in the case of Union of India vs. Singh Builders Syndicate observed a need for standard rules in terms of fees payable to the Arbitrators in view of arbitrary and exorbitant fees being charged by the Arbitrators. The need was observed in view of the fact that the parties often feel constrained to agree to the fees suggested by the Arbitrator even if it exceeds their capacity to pay it. The inability to pay the suggested fees not only puts the party in an embarrassing position but also creates an apprehension in their mind that if their refusal to pay the fees may prejudice their case. Further, in 2011, the Hon’ble Supreme Court in Sanjeev Kumar Jain vs Raghubir Saran Charitable Trust & Ors., the Court once again ventured into the fee-related aspects of arbitration that make one feel that arbitration is disproportionately expensive. The Court also opined that one of the solutions to remedy the situation is that the fees of the arbitrators shall be pre-fixed so that a party who is unable/unwilling to pay the expenses can express the same.

• Post Arbitration Amendment Act, 2015 and before the amendment of 2019

  In 2015, the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), was amended and section 11 (14) was inserted granting High Courts the power to frame rules for the determination of the fees, after considering the rates as specified in the Fourth Schedule (which was also inserted by way of this amendment). The intent behind inserting this amendment was to ensure that the arbitrators do not charge exorbitant fees in ad hoc arbitrations.

• Post Arbitration Amendment Act, 2019

  Even after the amendment in 2015, the issue of exorbitant fees being charged by the Arbitrators existed, and the Arbitration Act was once again amended in 2019 for substitution of section 11 (14) which now provides for the arbitral institutions to determine the fees of the arbitral tribunal subject to the rates as specified in the Fourth Schedule. The Explanation clause further provides that sub-section (14) shall not be applicable in cases where parties have already agreed to determine fees as per the rules of an arbitral institution. So, the clause neither explicitly covers the cases where parties have already agreed to the fees, nor does it provide if the fees provided are mandatory. This question came before the Supreme Court in the case of National Highway Authority of India vs Gayatri Jhansi Roadways Limited, wherein it was held that in the cases where the fees to be paid to the Arbitral Tribunal are provided in the agreement, the Fourth Schedule shall not be applicable. However, in this case, the Court did not have an opportunity to deal with the cases where the fee is neither provided in the agreement nor is fixed by the High Court while the appointment of the Arbitral Tribunal. Thus, neither the provisions under the Arbitration Act nor the precedents had dealt with the situation where the fee structure is not agreed between parties and the Court also did not direct for applicability of Fourth Schedule.

  Among others, the issues relating to the unilateral determination of the fees and the applicability of the Fourth Schedule in the situation where the arbitration agreement is silent on the fees were finally decided by the Supreme Court in the case of ONGC vs Afcons Gunanusa JV, wherein the Court with respect to the determination of the fees in ad-hoc arbitrations held that the Arbitrators can neither unilaterally decide their own fees, and nor unilaterally issue binding and enforceable orders deciding their fees. The Court laid down that where the agreement between the parties provides for the fees, the same shall be applicable, however, the tribunal still has a right to say that the fee is not acceptable to them and propose a fee.  if there is an agreement between the parties.  It was further held that the fees of the tribunal are to be decided by the agreement of the parties as well as the tribunal by consensus.

• Post ONGC vs Afcons Gunanusa JV

  In an appeal titled “Chennai Metro Rail Limited Administrative Building vs. M/s Transtonnelstroy Afcons”, an issue as to whether increasing fees by the arbitrator unilaterally against the wishes of one of the parties lead to the likelihood of “bias” on the part of the Arbitrator against the party who is opposing the increase in fees. The Bench hearing the issue while remarking that the issue has “wider ramifications” has directed the registry to place the matter before the Special Bench constituted for taking up Arbitration matters. The Petitioner who opposed the increase is relying on the Union of India vs. Singh Builders and ONGC vs Afcons, while the Respondent states that the issue is to be considered under section 13 of the 1996 Act. The issue is yet to be considered by the court, and is indeed likely to have wider implications.

In ONGC vs Afcons, the Supreme Court has termed the aspect of Arbitrator’s fee to be contractual in nature, where the parties and the tribunal can decide the fees by mutual consent in all the situations, except where the applicability of Fourth Schedule is directed by the Court or proposed by the Arbitrator. This restricts the bindingness of Fourth Schedule only to these two situations. However, even in the situation where the fee is fixed in the contract, but is not agreeable to the Arbitrator, an option to propose a fee has been given to the Arbitrator. Thus, it can be said that although the parties to an arbitration have been given a right to negotiate the fees, and made their consent necessary for determining it, which not only gives them a say in the matter but also awards a right to apply for termination of the tribunal in case they are unable to come to a consensus. However, it does not really solve the issues as raised in Singh Builders' case. Also, the procedure as laid down in ONGC vs Afcons does not expedite the process, because it firstly provides for the holding of 4 preliminary hearings merely to decide the fees, which makes the process even lengthier. Further, if the fee is not agreeable after that, either the tribunal declines the assignment or the party applies for termination which makes the parties start the arbitration process from the very beginning, making it more time-consuming.

In 2009, the issue was raised by the Supreme Court of India in Union of India vs Singh Builders that due to lack of clarity on the fees payable to the Arbitrator(s), the parties not only feel constrained to agree to the fees suggested by the Arbitrator but also pays it even if it exceeds their capacity to pay it, and they also feel that their refusal to pay can cause prejudice to their case. Yet, even in 2023, the issue as to whether increasing fees by the Arbitrator unilaterally against the wishes of one of the parties leads to the likelihood of “bias” is pending for adjudication. In view of this, it can rightly be said that there is a need for the applicability of a standard fee structure especially in the cases where agreement is silent on the fees. It would ensure that the parties are aware beforehand about the expenses to be incurred in the process, and will expedite the process. It would also ensure that parties do not have any apprehension in their mind about prejudicing their case due to refusal/inability to pay the fees, which in turn would resolve the issues pertaining to the fees of the arbitrator(s).

Amit Meharia is the Managing Partner, Abinash Agarwal is a Senior Associate and Poonam Kanwar Shekhawat is an Associate at MCO Legals.