Not so Ad-Hoc!

Arbitration proceedings between the Oil and Natural Gas Corporation Ltd. (ONGC) and Afcons Gunanusa (AFCONS) commenced in 2015. There was a disagreement about the fee that should be paid to the arbitrators and who would be deciding the issue. According to the parties' agreement, if the total of the disputed claims and counterclaims exceeded Rs. 10 Crores, each arbitrator would be entitled to Rs. 10 Lakhs. After the constitution of the tribunal, the parties accepted their request to modify the fee structure in 2016 in terms of the Fourth Schedule introduced by way of the 2015 amendment to the Arbitration and Conciliation Act, 1996 ("Act"). Even after this modification, the arbitrators once again insisted on an increased fees in 2018, claiming the complexity of the issue as the justification. As a consequence, thereof, ONGC petitioned the Bombay High Court under Section 14 and 15 of the Act for the constitution of a new tribunal which was denied.

Proceedings before Supreme Court of India:
It was urged before the SC that the fee charged was not only more than the fee specified in the contract between ONGC and Afcons Gunanusa but was also higher than what was outlined in the Fourth Schedule. ONGC argued that as Public Sector Undertakings (PSU), it was subject to intense scrutiny by the Comptroller and Auditor General of India and that they were unable to defend extravagant expenditures on arbitration. On the other hand, Afcons, emphasized that the Fourth Schedule prescribed a maximum fee of Rs. 30 lakhs which if broken down, would only be Rs. 60,000/- 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 not mandatory in nature and subject to parties' discretion.

Final Judgement:
In its judgment, the Supreme Court held that arbitrators do not have the power to unilaterally fix their fees. The court also issued directives governing fees of arbitrators in ad hoc arbitrations. The bench observed 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 fixation of arbitral fees at the threshold obviates the grievance that the arbitrators are arm-twisting parties at an advanced stage of the dispute resolution process. The court also 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. Accepting the suggestions made by the amicus curiae, specific directives have been issued which read as below:

  1. In cases where the arbitrators are appointed by parties in the manner set out in the arbitration agreement, the fees payable to the arbitrators would be by the arbitration agreement. However, if the arbitral tribunal considers that the fee stipulated in the arbitration agreement is unacceptable, the fee proposed by the arbitral tribunal must be indicated with clarity in the course of the preliminary hearings.
  2. In the preliminary hearings, if all the parties and the arbitral tribunal agree to a revised fee, then that fee would be payable to the arbitrators. However, if any of the parties objects to the fee proposed by the arbitrators and no consensus can be arrived at between such a party and the tribunal or a member of the tribunal, then the tribunal or the member of the tribunal should decline the assignment.
  3. Once the Terms of Reference have been finalised and issued, it would not be open for the arbitral tribunal to vary either the fee fixed or the heads under which the fee may be charged.
  4. The parties and the arbitral tribunal may carve-out in the Terms of Reference during the preliminary hearings that the fee fixed therein may be revised upon completion of a specific number of sittings. The quantum of revision and the stage at which such revision would take place must be specified. The parties and the arbitral tribunal may hold another meeting at the stage specified for revision to ascertain the additional number of sittings that may be required for the final adjudication of the dispute which number may then be incorporated in the Terms of Reference as an additional term.
  5. In cases where the arbitrators are appointed by the Court, the order of the Court should expressly stipulate the fee that the arbitral tribunal would be entitled to charge. However, where the Court leaves this determination to the arbitral tribunal in its appointment order, the arbitral tribunal and the parties should agree upon the Terms of Reference as specified in the manner set out in the draft practice direction above.
  6. There can be no unilateral deviation from the Terms of Reference. The Terms of Reference being a tripartite agreement between the parties and the arbitral tribunal, any amendments, revisions, additions or modifications may only be made to them with the consent of the parties.
  7. All High Courts shall frame the rules governing arbitrators' fees for Section 11(14) of the Arbitration and Conciliation Act, 1996.

The Supreme court also added that the fee structure laid out in the Fourth Schedule cannot be static and deserves to be revised periodically. Thus, it directed the Union of India to suitably modify the fee structure contained in the Fourth Schedule and continue to alter it every three years. The court further stated that 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 is essentially 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 to the fee fixation. It is the default fee only that can be changed by mutual consensus.

More than 95% of arbitrations in India are ad-hoc and the issue of arbitrator's fee has been left to unregulated discretion for far too long. This judgment respects the contours of party autonomy as well as the guidelines in the fourth schedule (which have been made dynamic and inflation sensitive). This judgment is surely a step in the right direction and adds a much needed clarity to the costs associated with arbitration proceedings thereby making ad-hoc arbitrations, not so ad-hoc!

By - Arush Khanna & Pranav Sethi