The Supreme Court of India delivered a landmark judgement that analysed the legal position on fixing the Arbitrators' Fees in the case titled ONGC v. Afcons Gunanusa. The bench comprising Justice DY Chandrachud and Justice Surya Kant delivered the majority view, while Justice Sanjiv Khanna delivered a separate judgement.
Brief Facts:
ONGC and Afcons Gunanusa had entered into a Lump Sum Turnkey Contract. Due to certain disputes, Afcons invoked arbitration. A three-arbitrator panel was constituted. In a preliminary meeting, the Tribunal shared that the fee schedule prescribed in the contract (₹12 lakhs per arbitrator) seemed unrealistic as the Fourth Schedule to the Arbitration and Conciliation Act 1996 recommends the fee of ₹30 lakhs for each arbitrator when the amount in dispute exceeds ₹20 crore. In the present case, the sum in dispute was ₹900 crores. The Tribunal stated that even though they consider a fee of ₹30 lakhs to be low, considering the massive sum in dispute and the voluminous nature of documents, they are ready to accept it along with reading fees of ₹6 lakhs and ₹1.5 lakhs for every three-hour sitting for each of the arbitrators.
Afcons agreed to the revision of fees, but ONGC didn’t. ONGC contented that the fee schedule in the contract was binding. The Tribunal rejected ONGC’s contention and observed that the ceiling of ₹30 lakhs in the Fourth Schedule is not even applicable to the present dispute since it arose before the amendment which added the Schedule. However, the Tribunal agreed to reduce the fee for sittings to ₹1 lakh and reading fees were kept open to be decided later.
ONGC still didn’t agree to it and filed a petition before the Supreme Court under Sections 14 and 15 of the Arbitration Act to terminate the mandate of the arbitral Tribunal and substitute a fresh set of arbitrators.
Supreme Court’s Observations:
Noting that the question as to whether the remuneration of arbitrators has to be decided by the parties or by the arbitrators has not been exhaustively addressed in India, the apex court considered it imperative to have a look at the practices adopted by international organisations and national jurisdictions.
Practice followed by Arbitral Institutions
After considering the arbitration rules of major arbitral institutions worldwide, the Supreme Court observed that fees payable to the arbitrators are generally fixed by the institution itself. However, some institutions allow certain level negotiations between parties and arbitrators, upholding the principle of party autonomy. Meanwhile, UNCITRAL Rules 2013 enable arbitrators to determine their fees, which can be reviewed and revised by the appointing authority or the Secretary-General of the Permanent Court of Arbitration if they are not reasonable.
Legal Position adopted in Foreign National Legislations
The Supreme Court undertook a comparative study of various national legislations as well to arrive at the following conclusion,
“Arbitrator(s) do not possess an absolute or unilateral power to determine their own fees. Parties are involved in determining the fees of the arbitrator(s) in some form. It could be by: (i) determining the fees at the threshold in the arbitration agreement; or (ii) negotiating with the arbitrators when the dispute arises regarding the fees that are payable; or (iii) by challenging the fees determined by the Tribunal before a court.”
The current position in India
Coming to the analysis of the Indian legal scenario, the Supreme Court observed that before the insertion of the Fourth Schedule through the Arbitration Amendment Act 2015, the practice that was being followed in ad-hoc arbitrations was that arbitrators used to unilaterally and, in some cases, arbitrarily fix excessive fees for themselves.
Post amendment, the situation has changed for the better. The Court observed that the Fourth Schedule is mandatory unless the parties specify in their agreement the fees payable to the arbitrators or modalities for determining the arbitrator’s fees. The Court stated,
“A harmonious reading of the first proviso to sub-Section (3A) of Section 11 and sub-Section (14) of Section 11 indicate that the Fourth Schedule shall have a mandatory effect on the stipulation of fees for arbitrator(s) appointed by arbitral institutions designated for such purpose in terms of Section 11 of the Arbitration Act in the absence of an arbitration agreement governing the fee structure.”
However, since most of the High Courts haven’t framed rules for determining arbitrators' fees by considering the Fourth Schedule, the Schedule is not mandatory for court-appointed arbitrators in those states, rendering it “nugatory, and the court-appointed arbitrator(s) are continuing to impose unilateral and arbitrary fees on parties.”
The distinction between Cost and Fees
Analysing the distinction between costs and fees, the Apex Court stated, “We can see that the functional role of costs and fees is different. While fees represent the payment of remuneration to the arbitrators, costs refer to all the expenses incurred in relation to arbitration that are to be allocated between the parties upon the assessment of certain parameters by the arbitral Tribunal or the Court.”
The Court expounded that “the arbitral Tribunal, while deciding the allocation of costs under Sections 31(8) read with 31A or advance of costs under Section 38 cannot issue any binding or enforceable orders regarding their own remuneration. This would violate the principle of party autonomy and the doctrine of prohibition of in rem suam decisions, which postulates that the arbitrators cannot be the judge of their own claim against parties regarding their remuneration. The principles of party autonomy and the doctrine of prohibition of in rem suam decisions do not restrict the arbitral Tribunal from apportioning costs between the parties (including the arbitrator(s) remuneration) since this is merely a reimbursement of the expenses that the successful party has incurred in participating in the arbitral proceedings. Likewise, the arbitral Tribunal can also demand deposits and supplementary deposits since these advances on costs are merely provisional in nature.”
However, the Court held that “If while fixing costs or deposits, the arbitral Tribunal makes any finding relating to arbitrators‘ fees (in the absence of an agreement), it cannot be enforced in favour of the arbitrators. The party can approach the court to review the fees demanded by the arbitrators.”
Directive on Fees in Ad hoc Arbitrations
The Supreme Court issued the following directive for fixing of fees in ad hoc arbitrations, where the courts appoint the arbitrators,
“Conscious and aware as we are that (i) Arbitration proceedings must be conducted expeditiously; (ii) Court interference should be minimal; and (iii) Some litigants would object to even a just and fair arbitration fee, we would like to effectuate the object and purpose behind enacting the model fee schedule. 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. Consequently, when an arbitral tribunal fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object the fee fixation. It is the default fee, which can be changed by mutual consensus and not otherwise.”
Interpretation of “Sum in dispute”
The term “sum in dispute” is the second header of the Fourth Schedule. The case required determining whether arbitrators would charge one common fee for hearing both the claim and counter-claim and the ceiling prescribed in the Fourth Schedule would apply to their cumulative total or the individual sums in dispute in the claim and counter-claim.
The Court reached the following conclusions,
“(i) Claims and counter-claims are independent and distinct proceedings;
(ii) A counter-claim is not a defence to a claim and its outcome is not contingent on the outcome of the claim;
(iii)Counter-claims are independent claims which could have been raised in separate proceedings but are permitted to be raised in the same proceeding as a claim to avoid a multiplicity of proceedings; and
(iv)The dismissal of proceedings in relation to the original claim does not affect the proceedings in relation to the counter-claim.”
Thus, the apex court held that “the ‘sum in dispute’ in the Fourth Schedule of the Arbitration Act shall be considered separately for the claim amount in dispute in the claim and counter-claim. Consequently, the arbitrators‘ fee will be calculated separately for the claim and counter-claim, and the ceiling on the fee will also be applicable separately to both.”
The bench further held that “the ceiling of Rs 30,00,000 in entry at Serial No 6 of the Fourth Schedule is applicable to the sum of base amount and the variable amount, and not just the variable amount.”
Is the ceiling applicable to individual arbitrators?
The Court observed that, firstly, there is nothing in the language of Fourth Schedule which would lead to interpretation that the model fee is in respect of the whole Tribunal. Secondly, such an interpretation would be absurd and unconceivable as it leads to disparity. Thirdly, the note to the Fourth Schedule clearly states that sole arbitrator shall be entitled to an additional amount of twenty-five per cent on the fee payable as per the above.
Thus, the Court held that, “The corollary of this is that the fee provided in Fourth Schedule is for each individual arbitrator, regardless of whether they are a member of a multimember tribunal or a sole arbitrator.”
Held:
Since there was no consensus between the parties and the arbitrators regarding the fee that was to be paid to the arbitrators, the Supreme Court exercised its powers under Section 142 of the Constitution and directed the constitution of a new tribunal in accordance with the arbitration agreement. However, the bench also held that in consonance with their findings, the fee payable to the earlier tribunal would have been in terms of the Fourth Schedule of the Arbitration Act. Although the schedule is not applicable to international commercial arbitrations, the Court stated that since ONGC had agreed to payment of fees in accordance with the Fourth Schedule, it cannot be allowed to go back to arbitration agreement to press for payment of a lesser fee.
Justice Khanna's Separate view:
In his separate judgement, Justice Khanna agreed with view expressed by Justice Chandrachud that
(a) 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.
(b) Where the court, while appointing an arbitrator, fixes the fee, the arbitral tribunal cannot ask for supplementary or higher fees.
(c) In both cases, the fee payable to the arbitral tribunal may be enhanced either by a written agreement between the parties or by a court order.
However, Justice Khanna differed on the point that in absence of any agreement between the parties, or between the parties and the arbitral tribunal or by a court order fixing the fee, the arbitral tribunal cannot itself fix a reasonable fee. He opined that in such a situation arbitral tribunal should be able to fix a reasonable fee as per the implied terms of the contract and provisions of the Arbitration and Conciliation Act, 1996.
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