Arbitrators Fixing Their Own Fee Would Amount To Misconduct; PSUs Can't Meet Exorbitant Fee Demand As They Are Answerable To CAG : Attorney General Tells Supreme Court

Earlier, the bench had pondered on solutions such as - (a) parties indicating to the arbitrator the estimated number of sittings before the commencement of proceedings and fixing the fees accordingly; (b) allowing the arbitrator to increase the fees beyond the agreed scale to a certain percentage (say 10%) of the sittings exceed the estimate; (c) allowing the arbitrator to approach the Court for increasing fee beyond the allowable percentage; (d) stopping the practice of splitting a day into different hearings and applying Fourth Schedule scale day wise.

In the hearing today, Attorney General for India KK Venugopal made his submissions on behalf of ONGC.

PSU's Not Only Answerable To Department But Also CAG; Issue Pertaining To Public Interest; All Aspects Of Arbitration Including Arbitrator's Fees Should Be Arbitration Friendly

When the matter was called for hearing, Attorney General for India KK Venugopal at the outset, apprised the bench with regards to the issues related to fixation of fees by the Arbitrator in the ONGC Arbitration.

"Before the arbitrator was appointed, an arbitration agreement containing also the fees capped at 10 lakh was sent to each one of them and accepted with open eyes. In the 1st sitting, the arbitrator said that the fees are not realistic and the next sitting fixed the wrong fees by asking us to deposit 25% of the 4th schedule. We then proceeded. When the 1st witness called for an examination- the arbitrator said we'll fix 1.5 lakh per sitting and each day was for 2 sitting and this took us by surprise," submitted AG.

Terming the issue as public interest which would affect all the PSU's, AG continued to argue that as a PSU, it was not only answerable to the Department but the CAG. He  added that all the facets of arbitration including the aspect of fixation of fees should be made arbitration friendly.

In this regards, AG KK Venugopal further said, "As PSU we are not only answerable to the department but CAG this will affect all PSU. This is happening in NHAI also. Therefore it is really a public interest issue. People are forced to opt for arbitration for simple reasons because if you go by way of suit it takes 8 years. HC 8 years, SC 8 years and total 25 to 26 years. Corporation prefers arbitrations and therefore arbitration should be treated as an alternative of choice with all its facets being made arbitration friendly and fees is one of the aspects which has to be arbitration friendly"

AFCON's Contention That Supreme Court Does Not Have Jurisdiction U/S 14 To Terminate The Mandate Of Arbitrator Leaves ONGC "Remediless"

It was also his contention that on ONGC's objection, the arbitrators reduced the fees to Rupees 1 lakh per sitting and despite ONGC filing a protest, there was no response which forced them to approach the Court u/s 14 of the Arbitration Act for terminating the mandate of Arbitrator.

Attorney further said ONGC was remediless since the Bombay High Court did not entertain the plea saying that it had "no jurisdiction" and when they approached the Supreme Court, the respondents raised an objection that the Supreme Court does not have jurisdiction.

Against this backdrop, he further said that the issue of "fixation of fees" by the Arbitrator was a matter of significance so far as PSU's were concerned.

"This is ad hoc international arbitration so part 1 would not apply right?," asked Justice Chandrachud.

"Since the seat is in India, part 1 will apply," responded the AG.

Arbitrator Asking Claimants To Deposit Enhanced Fees & Later Recover Is "Humiliating"

Another concern which AG raised during the course of hearing was related to the humiliation which PSUs had to face on Arbitrator's directing the claimant to deposit the increased fee and then recover it from the other party later.

To further substantiate his contention, AG said, "What one finds is the claimant willingly agrees because they believe to be on the right side of arbitrators would be to their advantage when they are asking for claims which are exaggerated. In this case, when it has increased to 1.5 per sitting, parties were asked to deposit for the previous sittings as well as 26 sittings. We were not prepared and we protested. They direct the claimant to deposit not only his arrear for sitting but also fees which I was supposed to deposit. This was very humiliating. We had already protested and it was in this background that Section 14 was invoked."

AG referred to "Russells" book to contend that arbitrators fixing their own fees would amount to misconduct. He relied on Gary Born to argue that fixing of Arbitrator's fees was a "Tripartite Agreement" between the "Arbitrators" and "Parties" and that this would affect the independence and impartiality of Arbitrator. He further argued that fixation of fees by arbitrator unilaterally would result in the arbitrator being a judge in one's own cause. Reliance was also placed on the judgment in Union of India v. Singh Builders.

Arbitrators Should Fix Their Fees Upfront Subject To Hearing The Other Side

Laying emphasis on the issue of the fixation of fees in the present case, the Attorney General contended that unilateral fixation of fees by the arbitrator would be wrong and should always be fixed "upfront" subject to hearing from the other side.

"Unilateral fixation of fees by an arbitrator would be wrong since the fees have to be fixed and contested by the parties. Arbitrators cannot demand a fee and by demanding the fee you will be a judge in your own case where you have pecuniary fees. ONGC stipulated fees but the arbitrator says this was fixed earlier, and they say it's more you may leave. Subject to hearing the other side, the arbitrator must fix their fee upfront and the parties must have a choice to agree or not. And if it's not workable for them they may walk out. But suppose the arbitration drags on interminably then they can be upfront that this fee will be valid for limited sitting and after that they may upfront say that there may be an increase of 10%. If parties do not agree, the arbitrator may say that I am not willing to continue the arbitration at all," argued AG.

Considering a situation wherein an arbitration goes on interminably for a long period of time, Justice Chandrachud asked AG with regards to the mechanism that the Court should consider evolving to determine the reasonableness of the enhanced fees demanded by the arbitrator.

"Suppose the arbitration has interminably gone on and on and on, should there not be any mechanism by which virtue of which they can approach the court to determine the reasonableness of demand of fees of the arbitrator? How would it really work, what direction should we consider to ensure sanctity of the arbitration? What sort of safeguard should we really impose? What kind of mechanism should we evolve to deal with this kind of situation? It will not be in the interest of anybody if the arbitrator walks out, " Justice DY Chandrachud asked AG.

Answering the question posed by the Judge, AG said that to not leave the arbitrators "High and Dry", the arbitrator could ask the parties to approach the Court by way of an application with regards to determining the reasonableness of the increased fees.

"Arbitrators can ask the parties to apply to the court under inherent power to entertain the application. They can then give notice to parties and arbitration also and there could be a mechanism. So that arbitrators themselves are not left high and dry. They could approach the court and the court can look into the matter," submitted AG.

On AG submissions of the Top Court exercising its inherent powers, Justice Sanjiv Khanna asked, "We can exercise inherent powers, does that not fall foul of section 5?"

It may be noted that, section 5 of the Arbitration and Conciliation Act states that judicial intervention can be possible only when it is expressly allowed under the Act.

"The Court always has Article 142, that is moulding," AG replied.

"Why is the public sector always on the receiving side? Are you losing the matters? If you are not losing the matters, then this statement may not come. Malady is somewhere else," replied Justice Khanna.

Responding to Justice Khanna, AG said, "We are afraid of the bias which may arise. There need not be bias but likelihood of bias."

Justice DY Chandrachud at this juncture referred to the situation of arbitrators passing an order of recovering enhanced fees from the other parties in case of defendants agreeing to fixation of fees but later not cooperating. The judge further said that the arbitration in such a case may order for payment of fees and then impose a cost within the arbitral award.

With regards to the issue of cost, AG referred to section 31(8) of the Arbitration and Conciliation Act which deals with costs of an arbitration shall be fixed by the arbitral tribunal in accordance with section 31A.

He further said, "Condition is that they should have agreed for a particular fee. Nothing in the Act which authorizes the arbitrator to fix their own fees. Far cry from the arbitrator saying that we are not satisfied by the fees that you have agreed to. Can't be that after the arbitration is over, the fees will be fixed by the arbitrator as new and fixed fees. He can't add to the fees if the structure has been agreed by the parties and consent of the parties is required at all times."

PSU's Want Some Sort Of Orderliness In Fixation Of Fees; Days Should Be 7 Days A Week & Not 14 Days In One Week; Each Session Could Be For 4 Hours; We Are Being Driven Into The Arbitral Fees Due To Pendency Of Delay At Court Level

"Clients are prepared in all future cases to amend the fee structure and consider the 4th schedule. They want some sort of orderliness in the fixation of fees and the day should be a week of 7 days and not a week of 14 days. Parties are prejudice of the prayers of the arbitrators because they fix whatever they say. That is why so far as ONGC is concerned it wants your lordships to decide the issues which have been placed so that in future all arbitrations are subject to same uniform guidelines and each sessions should be for at least 4 hours during lunch break," AG said.

"How do we regulate it, ultimately," asked Justice Chandrachud.

"Your lordships are sitting for 4 hours, SC and HC judges are sitting for 4 hours. It should be a session for at least 4 hours," replied AG.

Responding to AG, Justice Chandrachud said, "Yes but they are not drawing salaries from the government. They are private arbitrators. What we're trying to say is well you are in the market now just like best lawyers. I'm not on the morality of it at all. The point of the matter is that there are few people who can command exceptional fees at the bar."

AG at this juncture urged the bench to reorganize the court system in the country and devising the system to end the litigation within 1 to 1.5 years. He further argued that this would result in fizzling out the arbitration.

"3 months salary is being acquired in 1 day. If your lordships are able to reorganize the court system in the country and devise the system to end the litigation within 1 to 1 year, arbitration will fizzle out. Nobody can wait for 20 to 25 years. We are being driven into the arbitral fees due to pendency of delay at the court level. This needs to be tackled," contended AG.

The judge before adjourning the matter for April 7, 2022 suggested for the government to coming out with an arbitral institution which would enable the PSU's to route their arbitration through an arbitral institution. He also pointed out that the problem arises due to not setting up the see upfront.

"Equally, we must be conscious of the fact that you can't shut out market forces completely in arbitration you know. Institutional arbitrations resolve most issues and the problem arises in ad hoc arbitration. If the government comes out with an arbitral institution so that all PSU's will route their arbitration through arbitral institutions, then it'll resolve a lot of issues which we are facing," said Justice Chandrachud.

Case Title: Oil And Natural Gas Corporation Ltd. Vs. Afcons Gunanusa | Arbitration Case No.5/2022

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