Arbitration as a dispute resolution mechanism is preferred largely over court proceedings due to its efficiency and effectiveness. It provides wide autonomy to the party in terms of deciding the seat of arbitration, place of arbitration, qualification, and the number of arbitrators. Arbitration in comparison to court proceedings is faster and more confidential. The arbitrator resolves the matter in a quick manner guided by the timeline mentioned in the Arbitration and Conciliation Act, 1996 (hereinafter, the Act).
However, often times the arbitrator does not follow the timeline prescribed in the Act and starts giving date after date on account of the complexity of the matter or awaiting expert opinion, etc. In such cases, the Arbitrator may also unilaterally decide that since the matter has been pending for over a year, the fees he is being charged will change on account of the increasing time and effort being utilized. The following questions arise, and they were considered in the case of Oil and Natural Gas Corporation v. Afcons Gunanusa JV (hereinafter, the ONGC case):
- Can arbitrators unilaterally hike their fees during the arbitration process?
- Should claims and counterclaims be considered jointly to determine the sum in dispute?
- Does the ceiling rate apply to the entire Arbitral Tribunal or an Arbitrator?
- Does the Rs.30 Lakh limit on fee under the Fourth Schedule apply to the entire fee or the variable component?
- What process must the arbitrators follow to increase a pre-decided fee?
How is the arbitrator’s fee determined?
High Court has been given the power to frame necessary rules in accordance with the rates specified in the Fourth Schedule of the Act for the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal.[1] Further, the Central Government also has the power under the Act to amend the Fourth Schedule by way of a notification in the Official Gazette.[2]
Fourth Schedule to the Act provides the chart mentioning the sum in dispute and the model fee for that. Further, in the case of an arbitral tribunal with a sole arbitrator, he shall be entitled to an additional amount of 25% on the fee payable as per the table. The highest bracket in the chart is for disputes above Rs. 20,00,00,000 wherein it is mentioned that “Rs.19,87,500 plus 0.5% of the claim amount over and above Rs. 20,00,00,000 with a ceiling of Rs.30,00,000.”
In the ONGC case, the Supreme Court has decided that party autonomy is paramount in arbitrations. Hence, the arbitrators cannot decide their fees unilaterally.
Can arbitrators unilaterally hike their fees during the arbitration process?
Parties have the autonomy to decide the fees they will be paying to the arbitrator. Further, the arbitrator is appointed after disclosing to him the fees that are pre-determined between the parties. However, in case the parties have failed to assess the fees then the Fourth Schedule will come into the picture to guide the parties. In the ONGC case, the parties had pre-decided that if the claim and counterclaim amounts were over Rs.10 crore then each arbitrator would be paid a fixed Rs.10 Lacs for the entire arbitration period and that arbitrators who agree to this stipulation would be appointed as such. The parties had appointed a High Court Judge and two Supreme Court Judges as the arbitrator in 2015. However, in 2016 they demanded a fixed fee of Rs.12,37,500 and 0.75% of the claim amount if it exceeded Rs.1 crore as per the Fourth Schedule. Both parties to the dispute had agreed to increase the fee as per the Arbitration Act.
However, in 2018 when the arbitrators put forth the demand to revise the fee again stating that the dispute was complex and required a substantial amount of time, they imposed a fee of Rs. 1.5 Lacs per sitting, per arbitrator wherein each sitting would last three hours. ONGC temporarily refrained from paying the revised fee but later the arbitral tribunal imposed a retrospective fee of Rs. 1 Lakh per arbitrator per sitting, i.e., the parties would have to pay for the 2018 proceedings at this rate as well. This was rejected by ONGC which approached the Bombay High Court seeking the constitution of the new arbitral tribunal under Sections 14 and 15 of the Act by seeking termination of an arbitrator’s mandate. This petition was dismissed by the Bombay HC after which ONGC approached the SC.
The Supreme Court held that the fee proposed in the Fourth Schedule is not mandatory and the parties are free to choose a different fee structure for the arbitrator. It is only when the parties have not decided on a structure that the fourth schedule will apply. Court also highlighted that no provision in the Act hints at the possibility of the Arbitrator(s) deciding the fee himself/themselves. As the Act provides that the Arbitrator has the power to apportion the decided fee between the parties.[3]
In this case, the Supreme Court bench comprising of Justices DY Chandrachud, Sanjiv Khanna, and Surya Kant held that an arbitrator cannot decide their own fee unilaterally without conferring with the parties.
Should claims and counterclaims be considered jointly to determine the sum in dispute?
There is a lack of clarity in the Act as to what ‘sum in dispute’ in the Fourth schedule means. This question was addressed in the ONGC case by Justices Chandrachud and Surya Kant wherein it was noted that ‘sum in dispute’ refers separately to the claim made by one party and the counterclaim made by the other party. So, the arbitrator is entitled to charge separate fees relating to both the claim and counterclaim, so a maximum of Rs. 30 Lakh can be charged for the claim and another Rs.30 Lakh for the counter. Justice Khanna has dissented here noting that the fee ceiling applied to the claim and counterclaim together.
Does the ceiling rate apply to the entire Arbitral Tribunal or an Arbitrator?
The ceiling rate applies to the individual arbitrators and not to the entire tribunal collectively. This means that if the panel has three arbitrators each is individually entitled to the ceiling amount as a fee. So individually each arbitrator will be entitled to claim Rs.30 Lakh.
Does the Rs.30 Lakh limit on fee under the Fourth Schedule apply to the entire fee or the variable component?
The fourth schedule provides the highest bracket in the chart for disputes above Rs. 20,00,00,000 wherein it is mentioned that “Rs.19,87,500 plus 0.5% of the claim amount over and above Rs. 20,00,00,000 with a ceiling of Rs.30,00,000.” The question arises whether the 30,00,000 limit is for the total amount or for the amount over and above Rs.20,00,00,000. In the ONGC case, it was noted that from the LCI 246th report it can be deduced that the legislative intent behind introducing the 4th Schedule is to put an end to the practice of arbitrators charging exorbitant fees from the parties taking their services in ad hoc arbitrations. So, the court noted that in an option to either choose between Rs.30,00,000 (ceiling applicable to the entire fee) or Rs.49,87,500 (ceiling applicable to a variable) then it would be appropriate to choose the lower amount to be in sync with the legislative intent.
What process must the arbitrators follow to increase a pre-decided fee?
An arbitrator is usually not entitled to increase his fee and expenses unless his agreement with the parties allows him to do so. So, all parties must voluntarily agree to enhancement. In case the fee is fixed by the Court then the arbitral tribunal may approach the court for modification/increase in the fee by reasons justifying the same.
This judgment brings a great deal of clarity in ascertaining the fees for arbitrators. Also, it prevents abuse at the hand of arbitrators. Further, the decision upholds the autonomy provided to the parties under the Act by preventing unilateral decision-making by the Arbitral Tribunal.
[1] Section 11(14) of the Arbitration and Conciliation Act, 1996.
[2] Section 11A of the Arbitration and Conciliation Act, 1996.
[3] Section 38 of the Arbitration and Conciliation Act, 1996.
