Arbitrators Raising Fees In The Middle Of Arbitration May Amount To Misconduct, Supreme Court Says During Hearing

The bench of Justices D. Y. Chandrachud, Sanjiv Khanna and Surya Kant were considering the issue regarding the mandatory nature of the 'model' fee scale for arbitrators prescribed under the Fourth Schedule of the Arbitration and Conciliation Act 1996.

In the hearing today, the bench, in order to render confidence in the whole process of arbitration, expressed its inclination to hold that there must be an upfront determination of fees by the arbitrator.

The bench further observed that the practice of the arbitrators demanding a raised fee in the middle should stop as this gives a very wrong name to the arbitrator.

"We're inclined to hold that there must be an upfront determination of fees by the arbitrator because that would render a lot of confidence in the whole process. This practice of demandinga raised fees in the middle should stop. That may even tantamount to misconduct. It gives a very bad name to the arbitrator," the bench remarked orally.

For Determination Of Arbitrator's Fees Claim & Counterclaim Should Be Charged Separately; Legislature Has Been Very Conscious Since Its Mindfulness To Situation That Counterclaim Puts Separate Cause Of Action; There Has To Be Overarching Dignity Which Must Encompass Arbitration Proceeding & While Keeping This Overarching Dignity, Rules Of Engagement Must Be Set At Outset. : Senior Advocate Hufeza Ahmadi

Senior Advocate Hufeza Ahmadi, appointed as Amicus Curiae in the case, submitted that interpretation of the 4th schedule suggested that the claim and counterclaim should be charged separately. In this regard, the amicus submitted that there are conflicting decisions by High Courts on whether separate fees are payable on claim and counterclaim.

To further substantiate his contention, Amicus relied on section 2(9), section 11(14), section 21 and section 38 of the Arbitration and Conciliation Act, 1996.

While reflecting on the submissions made by amicus, Justice DY Chandrachud, the presiding judge of the bench said, "38 proviso seems to suggest that when you make assessment of advance, tribunal can make separate assessment of claim and counterclaim but 38 proviso is not a mandate but it is enabling. So if the Arbitral Tribunal is of the view that it has to be earmarked separately, then only you can make determination of cost but with that the Tribunal can't say from day 1 that they will charge different amount for claim and counterclaim. If the tribunal believes that for the counterclaim the same would be argued separately then 38 is an indicator that fees can be fixed separately."

Responding to the remarks posed by the judge, Senior Advocate while drawing reference to the difference between a "Set Off" and "Counter Claim" said,

"Here we're interpreting Schedule 4 since here there is lump sum pay. Suppose you only have a claim. One is the concept of set off and one is of counter claim. Legislature has been very conscious since its mindfulness to the situation that counterclaim puts a separate cause of action.

Take it from another perspective, suppose there was only a claim- arbitrator could charge X.  Can one say that since it's only a counterclaim, it doesn't involve diff set of work? Under the schedule it may have been fair to say that if this is a counter claim you'll get a 50% set amount. Please also be mindful of one other claim, if the party chooses not to file a counter- he will have to pay a separate fee."

Cost Should Be Saddled On Parties Who Raise Frivolous Counterclaim: Supreme Court

"If you don't impose restrictions, the moment you have a claim and counterclaim- you'll have a separate set of fees for claim and counterclaim. Accepting your submission would mean that the moment there is counterclaim you will have to pay separate fees. If you raise a frivolous counterclaim, then the cost should be saddled to the party that has raised a frivolous counterclaim," Justice Chandrachud remarked.

Amicus further submitted that once a counter claim is made- it would lengthen adjudication in arbitration proceedings because the issues which arise would involve a lot of work, evidence, adjudication.

"But the fact that the legislature has included counter claims separately is very significant. Would it be fair to say that if it takes 50 hearings to wrap up the case, then the arbitrator will get the same amount?" he further added.

Where 4th Schedule Does Not Apply, You Can't Charge Ipso Facto Charge For Claim & Counterclaim: Supreme Court

During the course of hearing, the bench observed that arbitrators could not charge ipso facto for claim and counterclaim in cases where the parties do not agree for the application of the Arbitrator's fees laid down in the 4th schedule.

"Where the 4th schedule doesn't apply- then there is agreement b/w the parties and they may fix the rates. Construction of the term, "sum in dispute": whether separate fees are payable on 4th schedule for claim and counterclaim- if its stand alone reference- then separate fees will be payable. Cause of action in counter claim will always be separate and distinct. Evidence at times may be overlapping but the cause of action will always be separate," submitted Ahmadi.

"Evidence may be related, but the cause of action may be separate," remarked Justice Chandrachud.

While the bench was dealing with the submissions related to the arbitrators charging a separate fees for claim and counterclaim, Justice Chandrachud, the presiding judge of the bench said, "We're inclined to hold that there must be an upfront determination of fees by the arbitrator because that would render a lot of confidence in the whole process. This practice should stop. That may even tantamount to misconduct. It gives a very bad name to the arbitrator"

"There has to be an overarching dignity which must encompass the arbitration proceeding and while keeping this overarching dignity, the rules of engagement must be set at the outset. But as taking from what has fallen, the bitter taste which often people feel in the arbitration proceedings can be taken care of by defining the rules of engagement initially. It may lead to an initial amount of unpleasantness but it must be terminated at nascent stage but once you have done that you can't go," Ahmadi submitted.

None Of The Provisions Of Act Give Arbitrator Power To Determine His Own Fees; Fees Prescribed In 4th Schedule Is Applicable To Per Arbitrator: Senior Advocate Hufeza Ahmadi

It was also Senior Counsel's contention that the provisions of the Act do not give the arbitrator the power to determine his own fees.

"None of the provisions of the act give the arbitrator the power to determine his own fees. Review of the provision relieves that all it empowers the arbitration tribunal to do is to apportion cost which includes the arbitrator's fees. Provisions relate to the extent of the cost which is to be "apportioned". Suppose on 1 particular issue you partly decide in favor of party A and partly in favor of party B, then in this case you would apportion the cost," amicus submitted.

Senior Counsel also submitted that the fees which have been prescribed under 4th Schedule of the Act would be applicable to each member of an arbitral tribunal and is not a lump sum amount which is to be paid to the arbitral tribunal.

Absence Of Comma In The English Version In English Version Should Be Given Precedence To; Safer To Go By Substance Than By Comma: Senior Advocate Hufeza Ahmadi

On the issue of whether the ceiling of 30 lakhs in the sixth item in Schedule IV (which says that for sums in dispute of Rs. 20 crores and above, the fee will be 19,87,500 + 0.5% of claim amount over and above 20 crores subject to the ceiling of 30 lakhs), is only referable to the second part or to the total, amicus submitted that precedence will have to be given to the English version and not the Hindi version.

"So much reliance to suggest that the judgment of Justice Rekha Palli was wrong is presided on by the Comma", even assuming that the comma is that it's safer to go by substance than by comma," submitted Senior Counsel.

Once You Have Accepted A 4th Schedule Fee, You Can't Change The Fees Mid Way

Emphasizing on the prejudice caused to the parties in arbitrator's changing the fees mid way, Ahmadi said, "Once you have accepted a 4th schedule fee, you can't change the fees mid way. Parties are compelled. You can't change it mid way- you can't even leave. This practice ought to be deprecated. The parties suffer a lot of prejudice."

"You are not returning a brief but an arbitration, but there is no penalty for leaving the proceedings. It's not proper then," remarked Justice Chandrachud.

"Some expression of opinion would go a long way in ensuring an overarching dignity in arbitration. Overarching dignity of arbitration proceedings which are judicial in nature should be maintained," submitted the amicus.

With regards to the remedies that were available with the parties in case of the arbitrators demanding increased fee in the mid, amicus while referring to section 39(2) of the Act said, "There is no specific provisions in the act with regards to the same but recourse can be made u/s 39(2). It may be a bit of stretch but it can be reasonably interpreted- otherwise there is no specific remedy in the Act."

"Inferences that we can draw from the leg is not something which the leg has intended," remarked Justice Khanna.

While the bench was adjourning the matter for April 26, the bench pondered on the issue of setting up an Arbitration Council of India and also asked the Solicitor General Tushar Mehta and Attorney General for India KK Venugopal how the Central Government can put into place the periodic mechanism on the 4th schedule rates.

"The intent is to stop ad hoc arbitration. All PSU's can be brought under a particular arbitral institution. Then you have a mechanism particularly for the PSU," remarked the bench while pondering on the issue of bringing the PSU's under a particular arbitral tribunal.

Case Title: Oil And Natural Gas Corporation Ltd. v. Afcons Gunanusa JV

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