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The Supreme Court verdict was passed by a 3-Judge-Bench of Justices DY Chandrachud, Surya Kant and Sanjiv Khanna on a set of pleas that involved fixation of fees by the arbitrators for themselves while adjudicating a dispute.
The majority of the opinion was written by Chandrachud for J Surya Kant and himself. Justice Sanjiv Khanna wrote a separate opinion where he agreed with the majority opinion that ''party autonomy and arbitration agreement are the foundation of the arbitral process; thus when the parties fix the fee payable to the arbitral tribunal, the law does not permit the arbitral tribunal to derogate and ask for additional or higher fee'', he disagreed with some part of the judgement that ''in the absence of any agreement between the parties, or the parties and the arbitral tribunal, or a court order fixing the fee, the arbitral tribunal is not entitled to fix the fee''.
Apropos to a number of petitions including that of the Oil and Natural Gas Corporation Ltd on the issue revolving around the fixation of fees by the arbitrators for themselves. The grievance regarding arbitrators unilaterally increasing the fees during the middle of the hearings was the main concern. Attorney General for India KK Venugopal, appearing for the ONGC, submitted that PSUs are bound by audits, and they are not in a position to meet such unilateral fee hikes demanded by the arbitrators. On the other hand, private claimants might be willing to meet the demands of arbitrators, and this puts PSUs at a disadvantage.
Senior Advocate Dr. Abhishek Manu Singhvi, representing the claimant, pointed out that the difficulty arises when the sittings go beyond the original schedule, and in such cases, arbitrators must be able to revise the fee scale.
While adjudicating the dispute, the SC was called to determine the following issues, stated
along with the concurrent rulings for each in relation to the arbitrators‘ fees:
1. Whether the arbitrator(s) are entitled to unilaterally determine their own fees;
The RulingThe term ―sum in dispute‖ in the Fourth Schedule of the Arbitration Act refers to the sum in dispute in a claim and counter-claim separately, and not cumulatively. Consequently, arbitrators shall be entitled to charge a separate fee for the claim and the counter-claim in an ad hoc arbitration proceeding, and the fee ceiling contained in the Fourth Schedule will separately apply to both when the fee structure of the Fourth schedule has been made applicable to the ad hoc arbitration;
The RulingThe ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule is applicable to the sum of the base amount (of Rs 19,87,500) and the variable amount over and above it. Consequently, the highest fee payable shall be Rs 30,00,000;
This ceiling is applicable to each individual arbitrator, and not the arbitral tribunal as a whole, where it consists of three or more arbitrators. Of course, a sole arbitrator shall be paid 25 percent over and above this amount in accordance with the Note to the Fourth Schedule.
The Court added that the arbitral tribunal has the discretion to apportion the costs (including arbitrators‘ fee and expenses) between the parties in terms of Section 31(8) and Section 31A of the Arbitration and Conciliation Act, 1996 and can also demand a deposit (advance on costs) in accordance with Section 38 of the Arbitration Act.
The judgement expressed that arbitrators’ fee must be decided at the inception to avoid conflict and if while fixing costs or deposits, the arbitral tribunal makes any finding relating to arbitrators' fees (in the absence of an agreement between the parties and arbitrators), it cannot be enforced in favour of the arbitrators. Further, the bench said that the arbitral tribunal could only exercise a lien over the delivery of arbitral award if the payment to it remains outstanding under Section 39(1). The party can approach the court to review the fees demanded by the arbitrators if it believes the fees are unreasonable under Section 39(2);.
The Judgement read, "when one or both parties, or the parties and the arbitral tribunal are unable to reach a consensus, it is open to the arbitral tribunal to charge the fee as stipulated in the Fourth Schedule, which we would observe is the model fee schedule and can be treated as binding on all".
The bench added that consequently when an arbitral tribunal fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object to the fee fixation as it is the default fee, which can be changed by mutual consensus and not otherwise.
A separate portion of the judgement authored by Justice Khanna said, ''"I am of the opinion that by the terms of contract and provisions of Arbitration and Conciliation Act 1996, an arbitral tribunal can fix reasonable fee which an aggrieved party who is not signatory to the written agreement can question under subsection 3 to section 39 of the act during pendency of the arbitration proceedings or in case the arbitral tribunal claims lien over the award’’. Justice Khanna further stated, ‘’At the same time, I agree with Justice Chandrachud that when an arbitral tribunal, even in absence of consent of the parties, fixes the fee in terms of the fourth schedule, the parties would not be permitted to object to the fixation of fees’’. He continued stating, ‘’Fourth schedule is the default fees declared by the legislature which can be changed by mutual consensus. After the Amendment act of 2019 on 30th of August 2019, and insertion of subsection 3A to section 11, the Proviso states that fees given in the fourth schedule is mandatory and applies to all arbitrations including ad hoc arbitration. Fees fixed by the institution subject to the rates specified in the fourth schedule would be applicable. On the interpretation of the fourth schedule, while agreeing with the view expressed by Justice Chandrachud, on the interpretation of serial number six, the fee is prescribed for each member of the arbitral tribunal. The expression sum in dispute includes both claim and counterclaim".
Since this judgment holds that the fees of the arbitrators must be fixed at the inception to avoid unnecessary litigation and conflicts between the parties and the arbitrators at a later stage, the Court issued certain directives to govern proceedings in ad hoc arbitrations keeping in mind suggestions made by Senior Advocate Huzefa Ahmedi, who aided the Court as Amicus Curiae (a person who assists the court by furnishing information or advice regarding questions of law or fact):
The SC thus directed the Union of India to suitably modify the fee structure contained in the Fourth Schedule and continue to do so at least once in a period of three years
The bench said, ''we propose that this stage of having a preliminary hearing should be adopted in the process of conducting ad hoc arbitrations in India as it will provide much- needed clarity on how arbitrators are to be paid and reduce conflicts and litigation on this issue," whilst referring to rules of certain international arbitral institutions that provide for convening a preliminary meeting or case-management conference when the fees and expenses are typically addressed at this stage.
In respect of Arbitration Petition (Civil) No 5 of 2022; ONGC v. Afcons Gunanusa, the apex court said, ‘’it is evident that there was no consensus between the parties and the arbitrators regarding the fee that is to be paid to the members of the arbitral tribunal. Allowing the continuance of the arbitral tribunal would mean foisting a fee upon the parties and the arbitral tribunal to which they are not agreeable. In view of our directives in Section C.2.4 and the facts noted earlier, we exercise our powers under Article 142 of the Constitution of India and direct the constitution of a new arbitral tribunal in accordance with the arbitration agreement’’.
Furthermore, it was stated Arbitration Petition (C) No. 5 of 2022 would be listed for directions before the SC on 21 September 2022. The directions should not be construed as a finding on the conduct of the arbitration proceedings and are an attempt to ensure that the arbitral proceedings are conducted without rancour which may derail the proceedings.