Arbitration - Section 31(8), 31A Will Not Apply If Fee Structure Is Laid Down By Agreement : SC [Read Judgment]

The Supreme Court has held that Section 31(8) and 31A of the Arbitration and Conciliation Act 1996 will not apply to arbitral fee if a fee structure has already been laid down in the agreement between parties.

The bench of Justices R F Nariman and Surya Kant overruled the Delhi High Court decision in National Highways Authority of India v Gayathri Jhansi Roadways Ltd, which held that arbitral fee will be governed by Fourth Schedule of the Act superseding the fee fixed by the agreement.

The bench approved the dictum of the Delhi High Court in National Highway Authority of India vs Gammon Engineers and Contractors Pvt Ltd that Fourth Schedule of the Act was not mandatory in determining fees and that the arbitral tribunal will be bound by the fees fixed by agreement.

Section 31(8) states that costs of the arbitration shall be fixed by the arbitral tribunal in accordance with Section 31A. The general circumstances which are to be taken into account for determining costs are laid down in Section 31A.

The Fourth Schedule of the Act specifies a fee structure for the arbitral tribunal based on the claim. As per Section 11(14), the High Court can frame rules for determination of arbitral fees, after taking into account the rates specified in Fourth Schedule.

In Gayathri Jhansi, the Delhi High Court held that Fourth Schedule will override the fee structure specified in the agreement between parties. This conclusion was based on the fact that after 2015 amendment, the phrase 'unless otherwise agreed by the parties'  in the beginning of Section 31(8) has been omitted.

"The effect of the amendment and specific deletion of the expression "Unless otherwise agreed by the parties….." shows that the legislative intent that the power of the parties to enter into an agreement with regard to fixing of the fees has been specifically taken away.", held the High Court in Gayathri Jhansi case.

Following this judgment, an arbitral tribunal in the matter between Gammon Engineers and Contractors Pvt Ltd and National Highway Authority of India held that fee has to be fixed as per Fourth Schedule.

Aggrieved by this, NHAI filed application under Section 14 before the High Court for termination of the mandate of the arbitrator on the ground that arbitrator has incurred disqualification for 'wilfully disregarding the agreement between parties'.

The Delhi High Court found fault with the arbitral tribunal for following Gayathri Jhansi decision. It was held that Fourth Schedule was not mandatory.

"where an offer/request for appointment as arbitrator is made stipulating the terms of such appointment, including fee, the arbitrator cannot accept such appointment, while rejecting the other terms.", observed the High Court , while holding Gayathri Jhansi to be per incuriam decision. 

On this premise the High Court terminated the mandate of the arbitrator for going against the terms of the agreement.

Challenging this Gammon filed appeal in the Supreme Court.

The apex court agreed with the reasoning of the High Court that Section 31(8) will not apply if fee is already fixed by agreement. Section 31(8) deals with costs, of which fee is only a component, observed the Court.

"the learned Single Judge's conclusion that the change in language of section 31(8) read with Section 31A which deals only with the costs generally and not with arbitrator's fees is correct in law. It is true that the arbitrator's fees may be a component of costs to be paid but it is a far cry thereafter to state that section 31(8) and 31A would directly govern contracts in which a fee structure has already been laid down. To this extent, the learned Single Judge is correct.

We may also state that the declaration of law by the learned Single Judge in Gayatri Jhansi Roadways Limited is not a correct view of the law.",the apex court said. 

However, the SC held that the High Court erred in terminating the mandate of the arbitral tribunal for holding that fee will be governed by Fourth Schedule. The arbitral tribunal was merely following the law laid down in Gayathri Joshi, and that cannot be a reason to terminate its mandate, held the SC.

"The arbitrators merely followed the law laid down by the Delhi High Court and cannot, on that count, be said to have done anything wrong so that their mandate may be terminated as if they have now become de jure unable to perform their functions", the Court observed while setting aside the termination ordered by the High Court.

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