[Ramkishore Karanam is an Advocate practising at the Madras High Court and Akash Santosh Loya is an Advocate practising at the Bombay High Court]
Recently, the Supreme Court pulled up a Public Sector Undertaking (“PSU”) for haggling over the arbitral fees of an Arbitral Tribunal consisting of retired judges and expressed its intention to initiate contempt proceedings if the PSU continued to haggle about the arbitral fees.
This verdict raises certain interesting questions concerning the law governing fixation of arbitral fees. The authors have attempted to analyse these issues and suggest certain legislative changes to resolve them. This post does not intend to either analyse or comment upon the observations made by the Supreme Court, since the facts presented before the Court that resulted in the said observations are completely unknown.
Arbitral Fees Under The Arbitration And Conciliation Act, 1996.
The regime in relation to the fixation of arbitral fees was recommended vide the 246th Law Commission Report. The Law Commission vide its report recommended the introduction of the Fourth Schedule as a model fee structure which could be adopted and incorporated in the relevant High Court Rules. Further, the Law Commission explicitly made it clear that the recommendation in relation to fixation of fees based on the Fourth Schedule was restricted to purely domestic, ad-hoc arbitrations where the arbitral tribunal stands constituted through court intervention pursuant to Section 11 of the Arbitration and Conciliation Act, 1996.
Based on the said recommendations, section 11(14) along with the Fourth Schedule, was introduced vide the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”). Section 11(14) of the Act provided the High Courts with the discretion to frame the rules in relation to fixation of the arbitral fees and based on the model fees structure provided under the Fourth Schedule. Section 11(14) of the Act, as introduced vide the 2015 Amendment has been extracted below for ready reference:
“(14) For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.” (emphasis added)
In light of the aforesaid provision, the Delhi High Court in the cases of G.S. Developers and Contractors v. Alpha Corp., and the Bombay High Court in the case of Vestas Wind Technology v. Inox Renewables have categorically held that the model fees structure stipulated under the Fourth Schedule is only suggestive. The said fees structure becomes mandatory only when the model fees structure stipulated under the Fourth Schedule is incorporated in the High Court Rules. In fact, the Delhi High Court in the case of Paschimanchal Vidyut Vitram Nigam v. IL&FS Engineering placed reliance on the words ‘determination of fees of the Arbitral Tribunal’ and ‘the manner of its payment’, to hold that the Fourth Schedule fee model is only suggestive.
Taking it further the Bombay High Court in Vestas and the Delhi High Court in Paschimanchal correctly hinted that the Fourth Schedule had no applicability in case of suo motu constitution of the arbitral tribunal by the parties, without the intervention of the court. This is because the Fourth Schedule fee model becomes applicable in light of Section 11(14) of the Act. Therefore, since Section 11 of the Act provides for the appointment of the arbitrators through court intervention, the Fourth Schedule fee model is not applicable in case of party-appointed arbitrators. The parties are free to decide the applicable fees structure. This fee structure can be stipulated by the parties under the contract itself or can be agreed upon mutually after the dispute arises.
Therefore, the position of law in relation to fixation of fees pursuant to the 2015 Amendment stood as follows:
Firstly, the Fourth Schedule fee model is only relevant in case of domestic arbitrations. It had no application to International Commercial Arbitration.
Secondly, the Fourth Schedule fee model is not applicable when the parties suo motu appointed their arbitrators, without the intervention of the court.
Lastly, in case of arbitral tribunals constituted through court intervention, the Fourth Schedule fee model becomes mandatory only when the said model is incorporated in the High Court rules. Otherwise, it is merely suggestive.
Thereafter, there was a shift in the regime pertaining to the fixation of the arbitral fees vide the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment”). The 2019 Amendment amended section 11 of the Act to include the role of arbitral institutions in the process of the appointment of the arbitrators. Resultantly, section 11(14) of the Act also stood amended empowering the designated arbitral institution to determine the fees of the arbitral tribunal. Section 11(14) of the Act, as amended vide the 2019 Amendment has been extracted below for ready reference:
“ Section 11 – Appointment of arbitrators
(14) The arbitral institution shall determine the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal subject to the rates specified in the Fourth Schedule.” (emphasis added)
It is pertinent to state that the 2019 Amendment makes the Fourth Schedule fee structure compulsorily suggestive as:
Firstly, the 2019 Amendment leaves the wordings ‘determine the fees of the arbitral tribunal’ and ‘the manner of its payment’, unamended.
Secondly, the amended regime does away with the requirement of incorporation of the Fourth Schedule fee model in the High Court rules. This, in effect, rules out the possibility of making the Fourth Schedule fee model mandatory.
The present Indian regime in relation to fixation of the arbitral fees for ad-hoc arbitration is uncertain. Even though the Fourth Schedule fee model is detailed and clear, its suggestive/directive character does not remove the uncertainty surrounding the fixation of arbitral fees. The said uncertainty places an undue burden on the parties to the arbitration who already hold zero bargaining power with the arbitrators, the adjudicators of their case. Further, the parties intending to initiate arbitration proceedings are completely clueless about the approximate costs that it may incur for pursuing the arbitration proceedings.
This uncertainty and lack of clarity does not exist in case of institutional arbitrations where the approximate arbitral fees can be calculated by the parties to decide if the arbitration proceedings should be initiated.
In view of this, since ad-hoc arbitrations are extremely prevalent in India, the legislature may consider the following suggestions while amending the Arbitration and Conciliation Act, 1996 in the future:
Firstly, all the arbitral institutions designated by the High Courts under Section 11 of the Arbitration and Conciliation Act, 1996 should compulsorily adopt the Fourth Schedule fee model. This will also prevent forum shopping by the parties. The parties may not try to file the petition under Section 11 of the Act before the High Court whose designated arbitral institution charges lesser fees.
Secondly, in case of arbitrators mutually appointed by the parties and when there exists no prior agreement in relation to the arbitral fees, the Fourth Schedule fee model should be made mandatory. This may incidentally affect the autonomy of the parties but it should still be preferred for the certainty and clarity it gives to the parties intending to pursue arbitration proceedings about the additional costs that may stand incurred.
Thirdly, in case of arbitrators mutually appointed by the parties and where there exists an agreement in relation to the arbitral fees, the arbitral fees agreed by the parties should be adopted and followed.
Fourthly, the Fourth Schedule fee model should be revised every 3 years in accordance with the rates of inflation.
Lastly, the present Fourth Schedule fee model prescribes a common base fee for any/all disputes involving a sum above Rs. 20,00,00,000/- (Rupees Twenty Crores Only). This may not be fair base fees in case of disputes involving huge sums. This is because such high value disputes at times may either involve large volume of documents and complicated questions of fact and law. Therefore, different base fees should be provided for disputes involving higher sums.
Introduction of certainty in relation to the regime of fixation of arbitral fees may encourage parties to pursue arbitration proceedings as they may have utmost clarity about the tentative costs they may incur.
– Ramkishore Karanam & Akash Santosh Loya