Arbitral Fee Under The Fourth Schedule Of A&C Act, Supreme Court Settles The Issue

The Court determined the following issues:

• (i)Whether arbitrator(s) are entitled to unilaterally determine their own fees;
• (ii)Should claims and counterclaims be considered jointly to determine the 'sum in dispute';
• (iii)Does the 30 lakhs limit on fee under the Fourth Schedule apply to the variable amount or the entire fee amount;
• (iv)Whether the Fourth Schedule prescribes fee for individual members or the whole arbitral tribunal.

With regard to issue (i) above, after a detailed analysis of the positions taken in foreign jurisdictions and institutions, the Court held that "arbitrator(s) do not possess an absolute or unilateral power to determine their own fees." The Court elucidated that parties are involved in determining fees either at the threshold level; or negotiating with arbitrators when a dispute arises regarding fees; or by challenging fees determined by the arbitral tribunal before a court.

The Court upheld party autonomy as the cardinal principal of arbitration in India, which is reflected in several provisions^[2] of the Act and significant rulings^[3] of the apex court. The Court sighted the 246^th Law Commission Report ('LC Report') wherein the Commission recommended a model schedule of fees and sections 11(3A) and 11(14) of the Act and held that on a conjoint reading of the provisions, in the absence of an agreement between parties in fixing fees, the Fourth Schedule has a mandatory effect in determining fees of an arbitral tribunal appointed by an arbitral institution.

Furthermore, the Court relied on National Highways Authority of India v Gayatri Jhansi Roadways Ltd^[4] and the party autonomy principle, and held that the Fourth Schedule is not mandatory, and it is open to parties, by their agreement, to specify fees payable, or the modalities for determination of the same. With regard to court appointed arbitrators, the Court held that, in the absence of rules framed by the High Court for fixing fees in ad hoc arbitrations, the Fourth Schedule is by itself not mandatory.

The Court interpreted the LC Report and the relevant provisions pertaining to costs under the Act^[5] and held that an arbitral tribunal cannot issue any binding or enforceable order regarding their own remuneration as it violates the principle of party autonomy and the doctrine of prohibition of in rem suam.

The Court exercised its powers under Article 142 of the Constitution and directed adoption of the following key guidelines for conducting ad hoc arbitrations in India:

• At the beginning of the proceedings, parties and the arbitral tribunal must finalise the terms of reference containing components of its fee, and this would serve as a tripartite agreement. Similar principle applies for Court appointed arbitrators, where fees is not fixed.
• In case of revision of fixed fees, the terms of reference should contain a provision in this regard upon completion of a specific number of sittings. The quantum and stage of revision must be specifically mentioned.
• Once the terms of reference are finalized, the arbitral tribunal cannot vary fees and any deviation, requires parties' consent.
• In cases where arbitrators are appointed as per the agreement, their fees would also be as per the agreement. If the contractual fees are unacceptable, the arbitral tribunal must propose a revised fee at the preliminary stage itself and becomes payable only if all the parties are agreeable. If not, then the arbitral tribunal should decline the assignment.
• The fees stipulated under the Fourth Schedule are default fees when either one or both parties, or the parties and the arbitral tribunal are unable to reach a consensus.
• The Fourth Schedule cannot be static and deserves to be revised periodically and therefore, the Bench directed the Union of India to suitably modify the fee structure and continue to do so at least once every three years.

With regard to issue (ii) above, the Court observed the interplay between sections 31A, 31(8) and 38(1) of the Act and held that since separate deposits are required for a claim and counter-claim and these deposits are related to the costs of arbitration which also includes fees of arbitrators, the determination of the fee under the Fourth Schedule should be calculated separately for a claim and counterclaim, i.e., the term 'sum in dispute' refers to independent claim amounts. The bench elucidated that the ceiling on the fee will also be applicable separately to both.

With regard to issues (iii) and (iv) above, the Court, while dealing with the ceiling of Rs. 30 lakh as contemplated under the 6^th entry to the Fourth Schedule, held that Rs. 30 lakhs is the maximum payable to an arbitrator, and the ceiling is therefore applicable cumulatively, including the base (i.e., Rs.19,87,500) and the variable amount. The Court further held that the said ceiling is applicable to each arbitrator's fees and not the consolidated fees of the tribunal.

The judgment gives utmost importance to party autonomy as the cardinal principle and provides guidelines to ensure that arbitration proceedings are conducted in a cost-effective manner. It also provides guidelines to be followed in different situations by parties and the arbitral tribunal to fix the arbitral fee and leaves no room for any pitfall in this regard.

Author: Aashna Jain, Associate at Pioneer Legal. Views are personal.