Parties Can Determine the Fee of the Arbitral Tribunal: Party Autonomy Reaffirmed

[Pareekshit Bishnoi is an advocate practicing in Delhi, India and a graduate of the National Law University Odisha]

Arbitration is primarily a party-designed and party-driven process. This is because the arbitration laws across jurisdictions hold party autonomy as a cardinal principle of the process. The parties are allowed to form an arbitral tribunal with members of their choice, determine their fees and powers, the seat of the arbitration, and similar matters. Thus, the principle of party autonomy allows the parties to an arbitration agreement to craft and customize rules of the arbitration best suited to their needs and capacities. The Arbitration and Conciliation Act, 1996 (the “Act”), unlike section 1(b) of the English Arbitration Act, 1996, has no specific provision in that regard but the principle of party autonomy permeates the entire fabric and structure of the Act. The Act inculcates the principle of party autonomy through the use of diverse phrases such as “unless otherwise agreed by the parties”, “parties are free to agree”, and the like.

One such reflection was explicitly found in section 31(8) of the Act before the amendment in 2015. The provision then stated: “unless otherwise agreed by the parties the cost of the arbitration shall be fixed by the arbitral tribunal.” However, the phrase “unless otherwise agreed by the parties” was omitted by an amendment in 2015 [Act 3 of 2016, S. 16(ii), for sub-section (8)].  Thus, the provision as it presently stands states that “the cost of the arbitration shall be fixed by the arbitral tribunal in accordance with section 31A”.

A literal and independent interpretation of section 31(8) first suggests that the power has now been transferred to the exclusive domain of the arbitral tribunal and is not subject to a party agreement determining its fee. Second, it suggests that the arbitral tribunal is not obliged to take the Fourth Schedule of the Act into consideration to determine fee its fee. This is because section 31 (8), section 31 (A) or clause 14 of section 11 does not refer for the arbitral tribunal to take the Fourth Schedule in consideration (for i.e. the High Court or the arbitral tribunal while determining fee under section 31(8)).

This gives rise to the question that whether with the omission of the words “unless otherwise agreed by the parties” can it be deemed that the party’s right to determine the fee of the arbitral tribunal under section 31(8) has now been taken away and is subject to the Fourth Schedule and whether, in absence of an arbitration agreement, a tribunal is bound to consider the Fourth Schedule.

The Delhi High Court in National Highways Authority of India vs. Gayatri Jhansi Roadways Limited (2017) gave a literal reading of the section 31(8) and held that “the effect of the amendment and specific deletion of the expression “Unless otherwise agreed by the parties…..” shows that the legislative intent that the power of the parties to enter into an agreement with regard to fixing of the fees has been specifically taken away” [para. 12].

The author submits that such a literal and secluded understanding of the provisions is unwarranted and unmeritorious. Only a conjoint and comprehensive understanding of these provisions can suggest proper law on the proposition. It would suggest, first, that the arbitral tribunal cannot apply the Fourth Schedule and override an agreement between the parties over the fee structure. Second, in the absence of an agreement between the parties, the power of the arbitral tribunal, like that of the High Court, is also subject to the Fourth Schedule though the relevant provisions do not make any express or implicit reference.

Both these forms of understanding are justifiable as the legislature would have never intended to take away the autonomy of the parties by insertion of the Fourth Schedule or bind only the High Court to it and give the tribunal unprecedented discretion to determine its fee. A harmonious contraction of the provisions necessitates such an understanding. Any contrary understanding would just suscitate the menace of injustice, particularly when a party has economic constraints and finds it difficult to pay a high arbitral fee. The Supreme Court has appositely noted in Union of India vs. Singh Builders Syndicate (2009) as follows:

Firstly, the parties feel constrained to agree to whatever fees is suggested by the arbitrator, even if it is high or beyond their capacity. Secondly, if a high fee is claimed by the arbitrator and one party agrees to pay such fee, the other party, which is unable to afford such fee or reluctant to pay such high fee, is put to an embarrassing position. He will not be in a position to express his reservation or objection to the high fee, owing to an apprehension that refusal by him to agree for the fee suggested by the arbitrator, may prejudice his case or create a bias in favor of the other party which readily agreed to pay the high fee…” [para. 22]. What is found to be objectionable is parties being forced to go to an arbitrator appointed by the court and then being forced to agree for a fee fixed by such arbitrator [para. 24].

Though this observation is directed to a situation where the court fails to determine fee while appointing an arbitrator, it is submitted that result will be the same menace where the arbitral tribunal is either interpreted to have been given a sole power to determine its fees over the party agreement or where it is not guided by the Fourth Schedule in absence of an agreement. Any contrary understanding of the provisions will lead to the above-quoted consequences. It is for these intrinsic reasons that the arbitration agreement cannot be subdued to the discretion of the arbitral tribunal or the Fourth Schedule and, in the absence of a party agreement, it cannot bypass the Fourth Schedule.

Thus, subsequently, a single judge of the Delhi High Court in National Highways Authority of India vs. Gammon Engineers and Contractor Pvt Ltd (2018) held the Court’s decision in Gayatri Jhansi Roadways as per incuriam [para. 26].

The Court categorically observed that the principle of party autonomy in the arbitration is “the most vital ingredient” and the parties to the arbitration agreement may “provide the expenses that they are willing to bear for the same” [para. 12]. First, the Court gave primacy to the agreement of the parties and held that “whether the Arbitrators are appointed by the parties or by the Court” (para. 14) the arbitrator cannot accept such appointment, while rejecting the other terms” stipulating terms of appointment, including fee [para. 20]. The arbitrators “cannot demand fee in supersession of the said agreement” [para. 21].

Second, the Court held that the Fourth Schedule is not mandatory, and it only “provides for a reasonable fee structure that may be adopted by the High Court.. . . and may also be used by the parties and the arbitrators” [para. 19]. In light of the 246th report of the Law Commission, the Court noted that the reason behind the insertion of the Fourth Schedule was to subdue the apprehension of prejudice caused to the economically weaker party, not capable of paying high fees [para. 10-11].

Lastly, the Court stated that the deletion of words “unless otherwise agreed by the parties” only signifies “that the parties, by an agreement, cannot contract out of payment of ‘costs’ and denude the Arbitral Tribunal to award ‘costs’ of arbitration in favor of the successful party” [para. 26]. Thus, the legislature never intended to denude parties of their right to determine the fee payable to the arbitral tribunal.

On 10 July 2019, in an appeal against the decision of the single judge, the Supreme Court of India upheld the decision and settled the arising surmises on the question. The Supreme Court held that “the learned Single Judge’s conclusion that the change in language of section 31(8) read with section 31A which deals only with the costs generally and not with arbitrator’s fees is correct in law. It is true that the arbitrator’s fees may be a component of costs to be paid but it is a far cry thereafter to state that section 31(8) and 31A would directly govern contracts in which a fee structure has already been laid down. To this extent, the learned Single Judge is correct. We may also state that the declaration of law by the learned Single Judge in Gayatri Jhansi Roadways Limited is not a correct view of the law” [page 8].

Thus, the Supreme Court confirmed the position of law that, despite the omission of the words “unless otherwise agreed by the parties”, the agreement between the parties would hold primacy over the power of the arbitral tribunal or the Fourth Schedule. The arbitrator is bound by the terms of the arbitration agreement if it determines the fee. This reaffirms that one of the old feathers of party autonomy which is the determination of fee of the arbitrators or arbitral tribunal by the parties as per their economic capacities still subsists and is untarnished by the amendment.

Pareekshit Bishnoi

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