This article is written by Aanya Kameshwar, pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.The article has been edited by Aatima Bhatia (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
In August 2014, through the 246th Report, the Law Commission of India recognised that one of the complications associated with arbitration, especially in ad hoc arbitration in India is the hefty fees charged by arbitrators in spite of the fact that arbitration evolved as an expeditious, cost-effective, simple and fair alternative dispute resolution to litigation. However, over time, Arbitration became expensive. The Report announced the fees charged to be “arbitrary, unilateral and disproportionate”. Therefore, pursuant to the recommendations of the 246th Report, the Indian legislature enacted the 2015 Amendment Act, attempting to update the law on costs in line with the best international practices, and replaced Section 31(8) with a new provision on costs in the form of Section 31A.
Section 31A deals with the costs to be awarded in relation to arbitral or court proceedings. It recommended following the ‘loser-pays rule’, and justified it on the ground that it “provides economically efficient deterrence against frivolous conduct and furthers compliance with contractual obligations.” The intent of the legislation behind Section 31A was to discourage frivolous conduct and dilatory practices through an award on costs. Three rules are followed around the world for cost allocation:
- ‘Loser pays’, also known as the ‘English rule’;
- ‘Pay your own way’, also known as the ‘American rule’; and
- Apportionment of costs or Proportional Allocation also known as ‘Pro rata’ approach.
This article addresses the problems on the law of costs that the latest amendments sought to overcome and whether arbitral tribunals and courts justifiably allocate costs in the arbitral proceedings or the arbitration-related court proceedings.
Pre-amendment position on costs allocation
Salient features of Section 31(8)
- In the absence of any agreement to the contrary, Section 31(8)(a) imposed a positive duty on the arbitral tribunal to fix costs of arbitration.
- Section 31(8)(b) mandated the tribunal to specify the party entitled to costs, the party which shall pay the costs, the quantum or the method of determination of the amount and the way in which it shall be paid.
- Section 31(8) also contains an Explanatory Clause which defines “costs” and qualified “costs” as “reasonable” costs and is still subsisting.
Section 31(8) of the Arbitration Act was originally enacted to deal with costs in arbitration. It lays down a default rule which meant that the parties could contract around it the manner in which they deemed chose. However, in the absence of any agreement regarding the cost of the arbitration, it is the duty of the arbitral tribunal to fix costs. But, in practice, arbitral tribunals failed to exercise their duty in allocating costs in a manner conducive to prevent frivolous conduct of a party. Another pre-amendments problem with the regime on costs was that there was no clarity as regards awarding costs in arbitration-related court proceedings related to Arbitration.
It was noted that the arbitral tribunal is not empowered to award pre-arbitration costs. Proceedings under Section 11, appeals under Article 136 of the Constitution of India, and appeals from the order of the designate are pre-arbitration proceedings. Given that the courts did not award costs in such proceedings, an amendment to the Arbitration Act empowering the courts to award costs reasonably compensating the “winning party” in all arbitration-related court proceedings as required. This dissatisfactory state of the law and its application led to a call for reforms.
Recommendation of the law commission
It was the Law Commission of India’s 246th Report that recommended amending Section 31(8) of the Act. The said report specifically pointed out the need for a difference in treatment of costs as compared to traditional litigation. The Commission recommended that the loser-pays principle shall be followed by the tribunals and courts while allocating costs. The Law Commission recommended the English Rule also known as the loser-pays principle. As per this approach, the winning party gets indemnified by the losing party for the entire legal cost incurred. Many institutional rules include the provision specifying this approach as a rebuttable presumption (e.g., LCIA, CIETAC, PCA, UNCITRAL, and DIS).
The commission recommended it for two reasons:
- To punish the losing party who frivolously drags the other party to court/ arbitration or who sets up inequitable arguments to avoid compensating the winning party for the losses incurred in resolving the dispute in courts or before the Arbitral tribunal.
- The loser-pays principle provides indemnity to the winning party.
Post-amendments position on costs allocation
Salient features of Section 31A
- Section 31A(1) clarifies that the regime of costs under the 1996 Act shall be notwithstanding the Code of Civil Procedure, 1908. It empowers the court or arbitral tribunal, to award costs in proceedings under the Arbitration Act and shall have the discretion to determine—
- Whether costs are payable by one party to another;
- The amount of such cost; and
- When such costs are to be paid.
- Section 31A(2) lays down two rules regarding arbitral cost—
- That the losing party should be ordered to pay the costs of the party who has won the case.
- The Court or the tribunal shall make a speaking order for departing from the general rule provided.
- Section 31A(3) provides the circumstances to consider while determining the cost.
- Section 31A(4) says that a tribunal or court may make any order under this section determining the amount of costs, the proportion of the cost, the interest on cost etc.
- Section 31A(5) lays down that an agreement related to who will bear the costs of the arbitration shall be only valid if such agreement is made after the dispute in question has arisen.
Section 31A was introduced with the objective of introducing a new costs regime in arbitration, in line with the judgment in the Salem Advocate Bar Association case (2005). In this case, the court lamented the fact that in most cases, parties are made to bear their own costs, and recommended imposing “heavy costs” if a party delays the process. Furthermore, the very objective of the 2015 amendments, which inserted Section 31A, was to make India more arbitration-friendly.
Through the 2015 Amendment Act, Section 11(14) was also added, which empowered High Courts to make such rules for determining the fees of a tribunal and the manner of its payment, after taking into consideration the rates specified under the fourth Schedule of the Arbitration Act. The provision is reproduced here under-
“(14) For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.”
However, given the ambiguities in the 2015 Amendment, In 2019, the Arbitration and Conciliation (Amendment) Act, 2019 substituted section 11(14) which was inserted by the 2015 Amendment Act. The provision is reproduced here under-
“(14) The arbitral institution shall determine the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal subject to the rates specified in the Fourth Schedule.”
At Present, Section 11(14) lays down that the arbitral institution shall decide upon the emolument of the arbitral tribunal and the method of its payment to the arbitral tribunal subject to the rates specified in the Fourth Schedule of the Arbitration Act. It has to be noted as explained in the explanation to Section 11(14) that, this subsection does not apply to international commercial arbitrations and neither to domestic ad hoc arbitrations where the emolument of the arbitral tribunal has been agreed upon by the parties as per the rules of an arbitral institution.
The Hon’ble High Court of Delhi, in the year 2017, held in the case of National Highways Authority of India v. Gayatri Jhansi Roadways Limited (Gayatri Roadways), that, that the arbitral tribunal is empowered to fix its fees on its own discretion but it’s only possible in cases of ad hoc domestic arbitrations. However, a year later i.e., in 2018, the Hon’ble High Court of Delhi, held in the case of National Highways Authority of India v. Gammon Engineers and Contractor Pvt. Ltd (Gammon Engineering Cases), that, that the word “costs” under Section 31(8) and section 31A of the Act are the costs that are awarded by an arbitral tribunal as part of its award in favour of the winning party and against the losing party. Omission of the words “unless otherwise agreed by the parties” signifies that the parties, through an agreement, cannot pre-determine the “costs” and “denude” the arbitral tribunal of its power to award “costs” of arbitration in favour of the winning party. Furthermore, in regards to determining the “fees” by the arbitral tribunal, the Hon’ble High Court held that an arbitral tribunal is bound by the arbitration agreement between the parties, which is the source of its power.
The Supreme Court of India, in the year 2019, overruled the decision of the Delhi High Court in the Gayatri Roadways Case. The Apex Court through the case of National Highways Authority of India and Ors. v. Gayatri Jhansi Roadways Limited and Ors, upheld the decision of the High Court of Delhi in the Gammon Engineers Case related to the interpretation of sub-sections 11(14), 31(8), and Section 31A of the Arbitration Act.
The Supreme Court of India settled the position on the issue regarding the fees of the arbitrator(s) in cases where the parties had pre-determined the fees in the arbitration agreement. It was held that Schedule four provided in the Arbitration Act is ‘not mandatory’ in determining the fees where the fees have been pre-decided by an agreement between the parties. Unfortunately, the court did not decide upon instances where the parties have not agreed to the fees of the arbitrator(s).
Conclusion
The new amendment enacted in 2019 with the objective “to promote institutional arbitration” does seem to provide some of these solutions but when it comes to ad-hoc arbitrations, there is no interference by the court or arbitral institutions and the parties in most of the cases do not pre-decide the fees of the arbitrator. In such circumstances, arbitrators are laying down their own fee structure. Now, the question which remains is whether the Fourth Schedule is applicable in cases of ad-hoc arbitration and if so, is it mandatory or directory in nature.
In respect of the 2019 Amendment, the High Court is now expected to designate arbitral institutions to discharge all the proper and necessary functions which will include appointing arbitral tribunal and determining the fees of the arbitrator(s). However, it leaves an ambiguity on whether the law and the intention of the legislature behind making schedule four will be followed because not all arbitral institutions follow it. It is extremely necessary that the courts and the arbitral tribunals allocate costs in accordance with best international practices if India wants to achieve the goal of becoming a prominent global centre for arbitration.
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