Does The Winner-Take-All In Arbitration? Understanding The Regime Of Costs Under Arbitration And Conciliation Act, 1996

In recent times, alternative dispute resolution (ADR) mechanisms have become far more popular than the traditional methods of litigation. ADR mechanisms include arbitration, mediation, conciliation, negotiation, etc. Parties prefer ADR mechanisms because of their flexibility of procedure yet time bound approach, and as they are less expensive, less cumbersome and more result-oriented.

Arbitration is one of the most attractive forms of ADR mechanism. It permits parties to resolve their disputes through a structured albeit informal process by experienced eminent retired judges and advocates. Arbitration is supposed to be flexible, less expensive and more informal form of traditional litigation.

In 2015, the Indian Legislature brought sweeping changes to Arbitration and Conciliation Act, 1996 (Arbitration Act) and such the arbitral regime through the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment) with an aim to reduce judicial intervention in the arbitral proceedings. Further, the 2015 Amendment aimed at expediting the process, increase effectiveness and efficiency of arbitration, build provisions to ensure fairness in the conduct of arbitral proceedings and as such bring the Arbitration Act in conformity with international best practices.

Amongst the many changes brought in the arbitral landscape by the 2015 Amendment, the Indian legislature also incorporated Section 31A in the Arbitration Act dealing with the regime of costs in arbitral proceedings. Section 31A of the Arbitration Act puts in place a methodology for determining the costs to be imposed upon parties, taking into account several factors such as, the fees and expenses of the arbitrator, administration fee for institutional arbitration, expenses associated with the arbitral proceedings, etc. In addition to the actual costs of the foregoing, the Section also requires taking into account the following circumstances, so that reasonable costs may be ascertained and fastened upon the appropriate party:

1. Conduct of the parties;
2. Parties' relative success and failure in establishing their claims;
3. Existence of frivolous counterclaims if any; and
4. Whether any reasonable offer to settle the dispute was made by the party and refused by the other party.

The only exception to the cost regime provided in Section 31A of the Arbitration Act is in cases where the parties have entered into an agreement regarding costs after the disputes have arisen.^[1]

The regime of costs has a significant importance among the disputing parties as it impacts the overall justice delivery system. In this regard, it may be noted that it is unfair for an innocent party, being compelled by the conduct of the other party, to come for arbitration in order to vindicate his/her legal rights. The need to invoke arbitration would not have arisen if those legal rights had been respected from the beginning. In a similar vein, a party cannot be forced to suffer a proceeding in order to defend an otherwise justified position and also bear the cost of such proceedings. Thus, there is recognizable nexus between the costs which have been incurred and the underlying merits of the legal claim. Pressing this reasoning into action, non-awarding of costs at the end of the arbitral proceedings may be in violation of widely recognized standards of justice and fairness. The delivery of justice merits awarding of costs to the successful party against the unsuccessful party.

The Supreme Court has held that awarding of costs must be a matter of rule, to prevent parties from agitating unmeritorious claims or unreasonably protracting the legal proceedings.^[2] However, the Supreme Court^[3] has also cautioned against parties pressing for pre-deposit of anticipated costs relying on a corresponding provision in the arbitration agreement, as this could repel the parties from alternate dispute resolution mechanism altogether.

Over the last 20 years, arbitration has elicited criticism for being prohibitory to less fortunate parties with valid claims, due to the costs associated with it. Arbitration has become an expensive proposition, growing even costlier with time. Due to the complexity of the disputes, the fees of the arbitral tribunal and the professional fees of the lawyers have soared significantly. In fact, all parties incur heavy cost in order to get the best representation, which comes at a heavy cost. Similarly, the time and length of the proceedings result in significant cost towards the fee of the arbitral tribunal. Considering the fees of arbitrators, fees of professionals involved in the proceedings, fee for venue and arrangements, etc., the cumulative costs of arbitral proceedings put a significant dent on the pocket of the parties to the arbitration proceedings, independent of the fault of the party.

In curtail the growing costs for arbitration, the Indian legislature introduced Schedule IV in the Arbitration Act in 2015, placing a cap on the fees to be paid to the members of an arbitral tribunal in proportion to the claims. In line with the same, the Supreme Court recently held that the arbitrators do not have the power to unilaterally issue binding and enforceable orders determining their own fees. It was held that a unilateral determination of fees violates the principles of party autonomy and the doctrine of prohibition of in rem suam decisions.^[4]

The Schedule IV in the Arbitration Act prescribes reasonable fee for the arbitral tribunal. In other jurisdictions which have popular arbitration institutions, the arbitral tribunal's can run into exorbitant and unpredictable numbers based on the claims. As per 2015 News Report of the London Court of International Arbitration (LCIA)^[5], the average cost of arbitral tribunal under LCIA comes to INR 1.60 Crores (approximately). Further, the costs of arbitral tribunals under International Chamber of Commerce (ICC) and Singapore International Arbitration Centre (SIAC) is far higher than LCIA. These institutions also require advance deposit of arbitration costs, resulting in making the overall process even more expensive right from the stage of commencement.

Therefore, the decision to award costs goes to the root of the arbitration proceedings and as such plays a pivotal role in the justice delivery system in India and abroad.

There is and cannot be any straight jacket formula for the award of the costs. The Indian Legislature was conscious of the inherent shortcomings in the concept of awarding costs and therefore, left the award of costs to the wisdom/discretion of the arbitral tribunal, while laying down the factors to be taken into account. Even though the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party, the Indian legislature has left room for the arbitral tribunal to pass a different order for reasons to be recorded in writing. Therefore, the arbitral tribunals should carefully consider the factors enumerated in Section 31A(3) of the Arbitration Act while passing the award on costs. Appropriate consideration of the factors will ensure that the award of costs is not made to unduly burden a party, who may have had a legitimate claim, but was unsuccessful (partially or otherwise) due to legitimate interpretational issue brought on by poor contractual drafting and not due to the fault of any party.

In light of the broad spectrum of cases where the outcome may depend on variety of facts, awarding of costs should be justified on the basis of facts of each case and should not be awarded/ not awarded in a casual manner. In fact, the non-awarding of costs in legitimate cases where parties should be compensated for costs, would adversely impact their choices in future to adopt the arbitration process instead of traditional litigation methods. At the same time, awarding of unjustified exorbitant costs could also cause a trend reversal, discouraging people from arbitrating their conflicts and forcing them to return to the traditional litigation methods.

Therefore, a balanced approach with complete application of mind by the arbitral tribunal, as mandated under Section 31A of the Arbitration Act, should be followed, which not only secures the right interest in the arbitration process but also encourages the parties to adopt arbitration as a preferred mode of ADR mechanism. As a sequitur, a significant responsibility is bestowed upon the arbitral tribunal to decide on the award of costs. In order to discharge this significant responsibility, the arbitral institutions such as Delhi International Arbitration Centre, etc., must conduct mandatory seminars to ensure that the arbitrators understand the regime of costs and pass responsible awards with regard to the same.

Authors are practicing advocates, views are personal. 

1. Union of India v. Om Vajrakaya Construction Company, 2021 SCC OnLine Del 5434. ↑

2. Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust, (2012) 1 SCC 455. ↑

3. Lombardi Engineering Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd., 2023 SCC OnLine SC 1422. ↑

4. Oil and Natural Gas Corporation Ltd. vs. Afcons Gunanusa JV, (2024) 4 SCC 481 ↑

5. https://www.lcia.org/News/lcia-releases-costs-and-duration-data.aspx ↑