By Harshit Meena and Kalpesh Bhagat
The Authors are the students at NLU Jodhpur
Introduction
The undisputed principles underlying the dispute resolution process of arbitration are to allow a speedy redressal mechanism in a cost-effective manner to heal the agonizing wounds of parties across the table. But in recent times, the cost-effective principle, which makes arbitration an attractive and most sought-after dispute resolution mechanism, has taken a toll. The exuberant amount of fees charged by arbitrators have eyebrows raising as to the validity of the principles being upheld by such appalling acts. Fees charged, if disproportionate and arbitrary, invite a quick appraisal of the institutional fallacies with regard to the conduct of the arbitrators. The aim of this blog, therefore, is to understand the existing framework governing the arbitrators’ abrupt charging of fees and the judicial scrutiny of such practices. Later, suggestions have been drawn on the issue by encapsulating the framework present in various jurisdictions.
Challenges in Arbitrator Fees in India
One of the first few instances of exorbitant fees being charged by the arbitrator and its impact on the health of the overall arbitration process was noted in the case of Union of India v. Singh Builders Syndicate. In this case, the Supreme Court (‘SC’) highlighting the idea of “self-regulation” by the arbitrators, acknowledged the lack of any ceiling being imposed on the fees being charged and that the parties should not be burdened with hefty costs in the form of arbitrator fees. In doing so, the SC enlisted certain suggestions to curb the arbitrary charging of fees:
Institutional arbitration bodies setting fixed and uniform arbitrator rates;
The Court, with the consent and consultation of the parties, can fix the fees at the time of appointing of the arbitrator; and
The arbitrators’ offering their services should specify their charges to the respective High Court Registry, to help parties choose the one that fits their range of affordability.
The same principles have been underlined in the case of Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust. Hence, it can be understood that the SC had a clear intention to disallow arbitrary fixing of fees by the arbitrators. To further the sentiment of the SC, the Law Commission of India, in its 246th Report (‘Report’) gravitated attention towards the urgency of amending the Arbitration and Conciliation Act, 1996 (‘the Act’). The basis of such recommendations was to bring consistency to the area governing ‘fees charged by arbitrators’ as the Report called the then existing system as “arbitrary, unilateral and disproportionate”. It sought to reform the regimes of arbitrators appointed by the Court, independent arbitrators, and ad hoc arbitrators.
The Report had a significant impact and this is evident from the series of amendments introduced to the Act in consonance to reform the arbitrator’s fee framework. The 2015 amendment introduced Section 11 (14), which allows for the determination of fees by the High Courts after assessing the rates stipulated in the Fourth Schedule (the ‘Schedule’). It is pertinent to note that this section does not apply to international arbitrations and institutional arbitrations.
The 2015 amendment also curbed party autonomy to the extent of fixing arbitration fees by parties in an arbitral tribunal. A combined reading of Section 31 (8) and Section 31A, by deleting the phrase ‘unless otherwise agreed by the parties’ in the former and implying costs to be reasonable costs in the latter, provides us with an idea of ‘loser pays’ or ‘cost follow the event principle’ as recommended by the Report.
The Act was further amended in 2019 (‘the 2019 amendment’) wherein Section 11 (3A) was introduced. The Act granted the power to the High Courts and the SC to appoint arbitrators through the designation of an arbitral institution. Further, the fees of the appointed arbitrator would be fixed by the such arbitral institution as per the fees specified under the Schedule.
Secluding Schedule
As for the nature of the Schedule, the relevance of it by virtue of whether or not it holds binding powers is undetermined. For instance, in the case of Delhi High Court in DSIIDC Ltd. v. Bawana Infra Development (P) Ltd. observed that:
“Even where the Arbitral Tribunal is appointed by the Court under Section 11 of the Act, in absence of rules framed under Section 11 (14) of the Act, it is not in every case that the Arbitral Tribunal has to fix its fee in accordance with the Fourth Schedule to the Act.”
In another case, Kumar & Kumar Associates v. Union of India, the Patna High Court held that:
“The fees of the learned Arbitrator shall abide by the Fourth Schedule to the Act, which shall be borne equally by the parties.”
In Pashchimanchal Vidyut Vitran Nigam Limited v. IL & FS Engineering and Construction Company Limited, the appointment of the arbitrator was done at the discretion of the parties, in this regard the Delhi High Court held that the Court in such circumstances cannot fix the fees of an Arbitral Tribunal as it wields no such powers and ruled that:
“The fact that the fees prescribed in the Fourth Schedule is suggestive, is clearly, evident on account of use of the expression "determination of fees of the Arbitral Tribunal" and "the manner of its payment".”
Through the lens of these cases, it becomes evident that the nature of the Schedule is ill-defined in governing the fee charged by arbitrators. The Courts have unanimously decided on the contrary, by interpreting the Schedule to be either binding or suggestive/directory, thus weakening the scope to regulate the arbitrary charging of fees by arbitrators. This has further strengthened the case for regulating certain types of arbitrators more than others. The existing framework is more inclined towards standardizing the fee structures for Court-appointed and institutional arbitrators but has remained silent in circumscribing the fees charged by ad hoc arbitrators.
The case of Ad Hoc Arbitration
The peculiarity of ad hoc arbitration lies in party autonomy. The parties are at free will to decide on an arbitrator, their fees, and the applicable rules, which allows for increased procedural freedom to the parties involved on both sides.
In PASL Wind Solutions Private Limited v. GE Power Conversion, The SC enunciated the importance of party autonomy and stated that –
“The decks have now been cleared to give effect to party autonomy in arbitration. Party autonomy has been held to be the brooding and guiding spirit of arbitration”.
Under National Highways Authority of India and Ors. v. Gayatri Jhansi Roadways Limited and Ors., the SC kept in regard the exercise of party autonomy through fixation of arbitrator fees under the contract and held that instead of the Schedule, the fees schedule agreed upon by the parties will govern the arbitrators’ fees.
The charging of high fees does not make ad hoc arbitration bad in and of itself. The intention of the arbitrator defines the nature of fees being charged. With increased procedural freedom, the arbitrators tend to misuse such freedom by increasing the costs of arbitration. The arbitrators, by demanding more hearings and by posing as authoritative champions in such proceedings, spike the fees to unwarned heights. Thus, such mala fide intentions of arbitrators make ad-hoc arbitration, indeed, an expensive and questionable practice.
Not all the high fees charged by ad hoc arbitrators are unjust. Factors such as issue complexity and level of expertise can be justifiable grounds for demanding higher fees. This is the reasoning adopted by affluent parties in appointing industry-leading arbitrators.
The sentiment raised in the Singh Builders Syndicate case attests to the fact that a financially weaker party with a lower bargaining position shall be at risk of greater loss if be made to pay hefty fees to an expensive arbitrator. This would also further undermine the principle of party autonomy.
If ad hoc arbitrators are brought under the purview of the Schedule, then the renowned and expert professionals shall be unwilling to partake in appointments. This in turn would call for the demise of ad hoc arbitration proceedings.
Hence, in order to regulate the arbitrators’ fees in ad-hoc proceedings, two crucial interests need to be catered –
Party autonomy
Protection of interests of the weak negotiating party to the arbitration.
A solution needs to be devised for ad hoc proceedings that address the unjustified fees charged by the arbitrator while upholding the spirit and level of competency that are at issue in such proceedings. Multiple countries have addressed such issues in a very efficient manner through the inclusion of the principle of judicial review of arbitrator’s fees under their specific arbitration laws.
Judicial review of arbitrator fees: A Global Perspective
Judicial review of fees of arbitrators is a trend that is followed by multiple nations across the world. It can be defined as the opportunity provided to the parties to challenge the fees issued by arbitrators before the Court. In such cases, the Courts review the fees and, if necessary, adjust them on a case-by-case basis.
In Sweden, The Swedish Arbitration Act governs the arbitration regime. Among the numerous provisions of the Act, Article 37 and Article 41 play a crucial role. Article 37 mandates the parties to the arbitration to pay “reasonable compensation” to the arbitrators. Further, under Article 41, the principle of judicial review of the arbitrator’s fees is encompassed, wherein the parties can approach the Courts and challenge the fees.
In the case of Soyak Int’l Constr. & Investment Inc. v. Hobér, Kraus & Melis, The Supreme Court of Sweden has established that it possesses the power to review and revise the arbitrator’s fees.
Denmark also allows for judicial review of arbitrator fees. Under Section 34(3) of The Danish Arbitration Act 2005, the parties can approach the Court for a review of the arbitrator’s fees and their reduction.
Further examples of such countries include:
India and the judicial review of arbitrator’s fees
Currently, the Act is not equipped with the tools to allow judicial review of arbitrator’s fees. Under Section 34 of the act, specific grounds have been provided for the challenge of an arbitral award. Such grounds include –
The composition of an arbitral tribunal is not in compliance with the arbitration agreement.
An arbitral award is granted for a dispute which falls outside the terms of submission of arbitration.
The subject-matter of the dispute is non-arbitrable.
The arbitral award is against the public policy of India.
Existence of patent illegality on the face of the award.
Public morality has been defined under the section as –
The arbitral award that breaches Section 75 or Section 81 of the act.
The arbitral award is in breach of the fundamental policy of Indian law.
The arbitral award is in breach of basic notions of morality or justice.
It can be concluded that arbitration law in India does not contain any grounds that allow for the challenge of arbitrator’s fees. In order to address the high fees of arbitration in ad hoc arbitration as well as uphold the principle of party autonomy, India can take up inspiration from the countries that have enshrined the principle of judicial review for arbitrator fees. India, under the Act, can include provisions that provide the parties to arbitration, a reasonable opportunity to challenge the fees issued by the arbitrator before the Courts wherein the Courts can adjust the fees if are found to be charged arbitrarily.
Judicial review of arbitrator fees under the Act will ensure that the financially weaker party can easily challenge an unjust fee issued by the arbitrator. This will also help protect the equality of negotiation powers among the parties. Such a provision also does not put a ceiling over the arbitrator’s fees, which in turn upholds the party autonomy as the parties can continue to appoint renowned and expert arbitrators for complex matters as per their financial capabilities.
Conclusion
The 2019 amendment and the Schedule have been botched up in their practical application. These provisions fail to address the issue of unjust high fees extracted by arbitrators in ad hoc arbitrations. Aggrieved parties must be given the opportunity, wherein they can approach the Courts to review and adjust the fees.
India, while adopting the provision of judicial review of arbitrator fees, can further establish criteria over which the fees of an arbitrator can be reviewed, such as the complexity of the disputed matter, the sum in dispute, the total time involved in such arbitration proceedings, and so on. Such adoption will only improve the status of ad hoc arbitration in India and make it more appealing as a form of alternative dispute resolution.
For the time being, parties can take numerous steps to ensure that arbitration proceedings do not turn into an expensive dispute resolution for them. Institutional Arbitration can opt expressly via an arbitration clause in the contract to ensure fees of the arbitrators are fixed and cost-effective. Fees of arbitrators can also be fixed under the arbitration agreement entered between the parties as per their suitable financial capabilities. The parties can also approach the Courts for the appointment of arbitrators since the 2019 amendment, the Court appointed arbitrators shall charge fees as per the Schedule. In light of that, the Schedule should be declared as a mandatory pre-requisite in the calculation of the total fees.
In the end, the effect of amendments and putting in place institutional frameworks for ad hoc arbitration is bound to be successful if the professionals participating in such arbitration proceedings take the onus upon themselves to act in a fair and ethical manner. Accountability on the part of ad hoc arbitrators is better destined to resolve the inherent shortcomings in the system and make it resilient against criticism. It is therefore the need of the hour to regulate the functioning of ad hoc arbitrations to reinstate the trust of every stakeholder involved.