Arbitration, Mediation and Conciliationare alternate dispute resolution mechanisms which are preferred over litigation for they are cost effective and time saving. Keeping in mind the high pendency of cases, arbitration and mediation are encouraged by the judiciary as it shares the burden of the courts in winding up the matter in a time-bound manner. The bench of the Tribunal comprises...
Arbitration, Mediation and Conciliationare alternate dispute resolution mechanisms which are preferred over litigation for they are cost effective and time saving. Keeping in mind the high pendency of cases, arbitration and mediation are encouraged by the judiciary as it shares the burden of the courts in winding up the matter in a time-bound manner. The bench of the Tribunal comprises of an officer of the court who is well versed with the domain knowledge. The designated arbitrators have their own rate of compensation that they charge for rendering their services, which is subject to negotiation.
Legislative Framework
India
Section 31(8) of the Arbitration and Conciliation Act, 1996 ("the Act") empowers the arbitral tribunal to decide the costs of the arbitration as per the particulars of Section 31A.
Section 31A of the Act gives the discretion to the Court as well as to the arbitral tribunal to determine the amount, manner and time of costs to be paid for the arbitration.
Fourth Schedule to the Act lays down the model fee to be paid to the arbitrator(s) depending upon the sum in dispute. It is pertinent to note that if the arbitral tribunal is a sole arbitrator, an additional amount of twenty-five percent (25%) is to be paid to the arbitrator on the fee payable as per the Schedule.
Delhi International Arbitration Centre (DIAC) (Administrative Cost Arbitrators' Fees) Rules, 2018 (DIAC Rules 2018) lay down the amount of fee payable to the arbitrator in different types of arbitrations like, international, emergency, summary, domestic and international commercial arbitrations.
The United Kingdom
Under Section 61(2) of the Arbitration and Conciliation Act, 1996 ("UK Act"), the general principle is that costs shall follow the event, i.e., the successful party will be awarded its costs, unless the circumstances depict otherwise.
Section 63 of the UK Act lays down the manner in which the recoverable costs of the arbitration may be decided. It says that the said costs may be decided either as per the agreement or in case no such agreement exists then the tribunal may decide so. Further in case the tribunal does not take a decision, either party may apply to the court for the same. Sub-section 6 provides that the contents of section 63 are subject to section 64 of the UK Act.
As per Section 64, the recoverable costs include fees and expenses of the arbitrators, that shall be reasonable and appropriate.
Section 65 says that the above-mentioned costs shall be limited to a specified amount.
Schedule II refers to the powers of the judge-arbitrators with respect to consideration and adjustment of liability of a party for the fees of an arbitrator.
Article 28.1 of London Courts of International Arbitration Rules, 2014 ("LCIA Rules 2014") makes the parties jointly and severally liable for bearing the costs of arbitration, which are specified in the LCIA Schedule of Costs.
The United States Of America
Federal Arbitration Act, first enacted in 1925, is the governing law for arbitration proceedings in the United States. American Arbitration Association ("AAA") regulates the administration of the matters that come for arbitration and decides the arbitrator's compensation. As per AAA, there are two kinds of fee that is to be paid for arbitral proceedings- Administrative fee and Arbitrator Compensation. There are several rules, separate for each domain, that discuss the arbitrator's fee. The Rules are as follows:
a. Commercial Arbitration Rules and Mediation Procedures: Rule 57 lays down the procedure as to how the arbitrator's compensation shall be determined.
b. Construction Industry Arbitration Rules and Mediation Procedures: Rule 57 of these Rules is similar to the above-mentioned Rules.
c. Consumer Arbitration Rules: Arbitrator's compensation shall be paid in accordance with the Costs of Arbitration section provided in the Rules[1].
d. Employment Arbitration Rules and Mediation Procedures: Arbitrator compensation shall be borne in accordance with the Costs of Arbitration section.
e. Labor Arbitration Rules: The arbitrator's fee under these Rules must be borne by the parties equally.
f. International Dispute Resolution Procedures: The costs of arbitration shall be set by the Tribunal and such costs shall include the arbitrator's fee[2]. Further, this fee shall be reasonable in amount considering the time spent by the arbitrator and the size and complexity of the case. It would be the duty of the Administrator to designate an hourly or daily compensation of the arbitrator with the agreement of the parties and the arbitrator[3].
g. Optional Appellate Arbitration Rules: These Rules do not specifically talk about the arbitrator's fee. But it does lay down a mandate for the parties to pay a deposit covering all the anticipated costs of the proceedings within 7 days[4], failing which, the non-paying party's appeal automatically stands in abeyance for another 7 days[5]. In case the deposits are not made within the given grace period, the non-paying party's appeal stands dismissed.
Arbitrator's Fee
India
A fixed amount of money is to be paid towards the fee of the arbitrator for rendering their services. The Division Bench of Delhi High Court held that this cost can be fixed by the mutual consent of the parties. The parties could either agree on the costs given under the Fourth Schedule to the Act or they can fix any other amount. It is pertinent to note that where the fee of the arbitral tribunal has been fixed by agreement between the parties, be it as per the fourth schedule or otherwise, sections 31(8) and 31A will have no application.[6]
The arbitration is a creature of a consensus. It is completely dependent on party autonomy and the intention expressed in the agreement[7]. In its landmark judgment, the Apex court in Oiland Natural Gas Corporation Ltd. V. Afcons Gunanusa JV[8] has made certain observations that have answered the questions around the arbitrator's fee. Four main issues were raised in the said case. They are as follows:
a. Can the arbitrators decide their fee unilaterally during the arbitration proceedings?
b. Whether the 'sum in dispute' refer to both claim and counter claim cumulatively?
c. Whether the cap of INR 30 lakhs under the Fourth Schedule applies to the individual arbitrators or to the arbitral tribunal as a whole?
d. What is the correct procedure to be followed by the arbitrators to increase the pre-decided fee?
Answering the above issues, the Hon'ble Supreme Court held that the party autonomy is paramount in arbitration and therefore the fee cannot be decided by the arbitrator unilaterally. "Arbitrators do not have the power to unilaterally issue binding and enforceable orders determining their own fees as it violates the principle of in rem suam[9] decisions." Further, the court interpreted the 'sum in dispute' in the Fourth Schedule of the Act as separate sum for claim and counterclaim. The Hon'ble court went a mile and held that the cap of INR 30,00,000 for the amount payable as fee to the arbitrator is applicable to each individual arbitrator and not the arbitral tribunal as a whole. The court also issued certain directions to govern proceedings in ad hoc arbitrations.
The United States Of America
Since both parties must pay the cost of arbitration in advance, the dispute often arises when one party refuses to pay the cost. In such cases, the burden of paying for both sides falls upon the paying party. Since non-payment of costs leads to dismissal of the arbitral proceedings, the paying party may either pay the entire cost of the arbitration or allow the termination of proceedings and move the court claiming that the non-paying party has waived the right to arbitrate by failing to pay.
In Cinel v. Christopher[10], the parties selected three arbitrators. The arbitrator's advance fee deposit was allocated on pro rata basis between seven parties (1 plaintiff and 6 defendants). When several defendants denied paying their share of the fee, the proceedings were suspended. In any event, when the fee deposit was not fully paid, the panel terminated the arbitration for non-payment of fees under the AAA Commercial Rules.
Similarly, in Cinel v. Barna[11], the non-payment of arbitrator's compensation led to the dismissal of the arbitral proceedings. The Court of Appeal observed that "By failing to come to an agreement that would permit them to proceed with the arbitration, the parties have collectively waived their right to arbitrate."
The United Kingdom
The UK Act 1996 specifically empowers the tribunal to limit the recoverable costs of the arbitration, or any part of the arbitral proceedings, to a specified amount[12].
"Such a power, properly used, could prove to be extremely valuable as an aid to reducing unnecessary expenditure… It enables the tribunal to put a ceiling on costs, so that while a party can continue to spend as much as it likes on an arbitration it will not be able to recover more than the ceiling limit from the other party."
In Essar Oilfields Services Ltd v. Norscot Rig Management PVT Ltd[13], the parties entered into an arbitration agreement incorporating International Chamber of Commerce Rules "ICC Rules"). The claimant funded its case through a third-party litigation funding agreement. The award was in favour of the claimant therefore he sought recovery of the costs of arbitration including the litigation funding costs. The Tribunal granted the relief and interpreted the power of the arbitral tribunal under the UK Act[14] and the ICC Rules[15] as inclusive of the arbitrators' fees and expenses, the fees and expenses of any arbitral institution concerned and litigation funding costs. This principle was reiterated in Tenke Fungurume Mining S.A. v. Katanga Contracting Services[16].
Takeaway
- Party autonomy is the most important aspect in arbitration; therefore, arbitrators cannot decide their fees unilaterally.
- The cap on the fee payable to the arbitrator is of INR 30,00,000.
- The above-mentioned cap is for each individual arbitrator and not the arbitral tribunal as a whole.
- The 'sum in dispute' refers to the sum for claim and counter claim separately.
- The costs or rate of compensation of an arbitrator is fixed by the governing authority or the Association which is subject to negotiation depending upon the time spent by the arbitrator, size and complexity of the case.
- The arbitrator's compensation is to be pre-deposited, failing which the matter stands suspended and even dismissed before it even begins.
- In UK, the costs of arbitration are recoverable from the losing party.
- An arbitral tribunal seated in London has the power to give an award allocating third-party funding costs to a successful party.
The author is an Advocate practicing at Delhi High Court , District Courts & Gurugram District Court. Views are personal.
[1] Rule 14.
[2] Article 37.
[3] Article 38.
[4] Rule A-12(c).
[5] Rule A-12(f).
[7] Vidya S Darolia vs. Vidya Trading Corporation, https://www.livelaw.in/top-stories/allegations-of-fraud-arbitrable-civil-disputes-supreme-court-167225
[8] https://www.livelaw.in/top-stories/supreme-court-to-fix-standards-for-arbitrators-fees-reserves-judgment-4th-schedule-arbitration-conciliation-act-198873.
[9] Arbitrators cannot be the judge of their own private claim against the parties regarding their remuneration.
[10] 203 Cal. App. 4th 759 [Court of Appeals, Second District, Division 1, California, 2012].
[11] 206 Cal.App.4th 1383 [Court of Appeals, Second District, Division 1, California, 2012].
[12] Supplementary report on the Arbitration Act 1996 dated January 1997 by Departmental Advisory Committee on Arbitration.
[13] [2016] EWHC 2361 (Comm).
[14] Section 59(1)(c); Section 61(1).
[15] Article 38(1).
[16] [2021] EWHC 3301 (Comm).