Supreme Court directive on ad hoc arbitrator fee

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India Supreme Court directive on ad hoc arbitrator fee
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An arbitration between the Oil and Natural Gas Corporation (ONGC) and Afcons Gunanusa commenced in 2015, but a disagreement arose over the fee to arbitrators and who should decide the issue.

According to the parties’ agreement, if disputed claims and counterclaims exceeded INR100 million (USD1.2 million), each arbitrator would be entitled to INR1 million (USD12,000).

After constitution of the tribunal in 2016, the parties accepted their request to modify the fee structure in terms of the Fourth Schedule to the 2015 amendment of the Arbitration and Conciliation Act, 1996.

Even after this modification, in 2018 the arbitrators once again insisted on higher fees, claiming complexity of the issue as justification. Consequently, ONGC petitioned Bombay High Court for constitution of a new tribunal, which was denied.

On appeal before the Supreme Court, it was pointed out that the fee was not only more than specified in the ONGC-Afcons Gunanusa contract, but also higher than outlined in the Fourth Schedule. ONGC argued that as a public sector undertaking (PSU), it was subject to intense scrutiny by the Comptroller and Auditor General, and they were unable to justify extravagant expenditure on arbitration.

Afcons meanwhile emphasised that the Fourth Schedule prescribed a maximum fee of INR3 million, equivalent to INR60,000 per sitting, since more than 50 sittings were already convened. Such a low fee, according to Afcons, would not be sufficient for retired judges. It was also urged that the Fourth Schedule was subject to parties’ discretion, not mandatory.

Final judgment

In its judgment, the Supreme Court held that arbitrators do not have the power to unilaterally fix their fees, and issued directives governing fees of arbitrators in ad hoc arbitrations. Arbitrator fees must be fixed at inception to avoid unnecessary litigation and conflict at a later stage. Fixation of fees at the threshold obviates the grievance that arbitrators are arm-twisting parties at an advanced stage of dispute resolution.

The Union of India was also directed to suitably modify the fee structure in the Fourth Schedule, and continue to do so at least once every three years.

Accepting the amicus curiae suggestions, specific directives have now been issued, as follows:

(1) When arbitrators are appointed by parties, fees payable are by arbitration agreement. However, if the tribunal considers the stipulated fee is unacceptable, their proposed fee must be clearly indicated in preliminary hearings.

(2) A revised fee agreed in preliminary hearings between parties and the tribunal is payable to the arbitrators. However, if any party objects and there is no consensus, the tribunal (or member) should decline the assignment.

(3) Once the terms of reference are finalised and issued, the tribunal cannot vary either the fixed fee or the heads under which the fee may be charged.

(4) All parties may agree in preliminary hearings to revise the fixed fee on completing a specific number of sittings. The quantum of revision and stage when revision takes place must be specified, ascertaining the additional number of sittings required for final adjudication of the dispute.

(5) Where arbitrators are appointed by the court, the court order should expressly stipulate the fee the tribunal is entitled to charge. If the court leaves this determination to the arbitral tribunal in its appointment order, the tribunal and parties should agree on terms of reference as specified in the above-mentioned draft practice direction.

(6) There can be no unilateral deviation from the terms of reference. As a tripartite agreement, any amendments, revisions, additions or modifications may only be by consent of all parties.

(7) All high courts shall frame rules governing arbitrators’ fees for section 11(14) of the Arbitration and Conciliation Act, 1996.

Conclusion

The Supreme Court also noted that fee structure in the Fourth Schedule cannot be static and deserves to be revised periodically, every three years.

When parties are unable to agree, the tribunal can charge according to the Fourth Schedule, which is essentially a model fee schedule binding on all. Consequently, when a tribunal fixes the fee in terms of the Fourth Schedule, parties should not object. Only a default fee can be changed by mutual consensus.

More than 95% of arbitrations in India are ad hoc and arbitrator fees have been left to unregulated discretion for far too long. This judgment is surely a step in the right direction, adding much needed clarity to the costs of proceedings, and making ad hoc arbitrations not so ̶ ad hoc.


The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.

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