[The Viewpoint] Arbitration- A costly branded product

The long pending undercurrent amongst the Jurists, lawyers, litigating parties, and lawmakers has finally started to surface in the form of anguish and concerns being expressed by the Apex judicial body i.e,. Supreme Court of India. The reference here is made to the high cost of arbitrations prevailing in the country. The intellects, the jurists and lawmakers have always desired India to develop as an arbitration friendly nation. This assumes significance in the light of the fact that our conventional judicial system is clogged and choked with long pendencies. The ratio of judges vis-à-vis the population and pending cases is nowhere near to the standards. Therefore, it becomes important that an alternate method of adjudication is adopted in the country. The conundrum has been getting attention of the concerns for the last many decades. The country adopted the UNCITRAL model law on Arbitration and thus got the Arbitration and Conciliation Act, 1996.

As the process of adjudicating mechanism through arbitration started growing in the country, practical difficulties related and attached with this alternate mechanism also started surfacing. In the present article we are only dealing with the high cost of arbitrations, especially ad hoc ones. Usually when arbitration clauses are inserted in any agreement, the fee of Arbitrator’s are not fixed at that stage. The arbitral tribunal is either constituted with the consent of the parties or by way of intervention of courts under section 11. It is seen that at that stage also usually the practice is to leave the fixation of their fee to the discretion of the arbitral tribunal. In order to regulate this practice, in the year 2015 amendments were introduced in the Act wherein Fourth Schedule was attached to provide guidance to the Arbitral tribunal while fixing their fees. However, the ironical and concerning part is that even with this guidance being available, in the ad hoc arbitration’s, tribunals are fixing their fee as per their own schedule, and commercial wisdom, at times charging for two hourly session wise. The parties at that stage are hardly having any negotiating on bargaining power. At times it is not even realized that the matter would remain pending and the cost of litigation would become unbearable. There is no mechanism in the Act for the parties to renegotiate the fee fixed by the Arbitral tribunal after having accepted once. Thus, Court has held that in order to anticipate such contingencies, during the preliminary hearings, the parties and the arbitrator(s) should stipulate that after a certain number of sittings, the fee would stand revised at a specified rate.

These concerns were taken note of Hon’ble Supreme Court of India in the judgment of ONGC v Afcons Gunanusa JV. It is a welcome in step wherein highest judicial body is showing that they are alive to the issues and aware of the practical difficulties being faced by the parties and litigation lawyers. The Court has highlighted the concept of Party autonomy and noted that fee cannot be imposed by the tribunals without consent of the parties. The relationship between parties and arbitrator(s) is contractual in nature. The Court held that,

“To conclude, the arbitral tribunal while deciding the allocation of costs under Sections 31(8) read with 31A or advance of costs under Section 38 cannot issue any binding or enforceable orders regarding their own remuneration. “

A lot of reliance and dependability is provided to the Fourth schedule. Most importantly, court has interpreted the fourth schedule to hold that maximum fee payable to an arbitrator is ₹30,00,000/- based on the sum of base amount and the variable amount. However, while resolving the controversy related to the fee payable on claims and counter claims, the Court held that,

“In such cases, we hold that the ―sum in dispute in the Fourth Schedule of the Arbitration Act shall be considered separately for the claim amount in dispute in the claim and counter-claim. Consequently, the arbitrators‘ fee will be calculated separately for the claim and counter-claim, and the ceiling on the fee will also be applicable separately to both. “

The Court has also desired all High Courts shall frame the rules governing arbitrators' fees for the purposes of Section 11(14) of the Arbitration and Conciliation Act, 1996 and to device a mechanism to revise it periodically, desirably once in three years.

Thus, it can be seen that this bold judgment has sought to bring a balance between high cost arbitrations, party autonomy and effective adjudication of disputes. We can hope that the Arbitral Tribunals will take this guiding principle in true letter & spirit so as to achieve the ultimate objective of making Country a cost-effective arbitration center.  

Ateev Mathur is a Partner at SNG & Partners.