Arbitration costs, whether in ad hoc or Institutional arbitrations, can be very substantial and sometimes prohibitive. Typically, arbitration costs include administrative and secretarial fees, arbitrators' fees, counsel fees, venue rental, expert fees, witness costs, and even catering costs. A significant contributor to the escalation of arbitration costs is inefficient hearing management. Adjournments at last minute or under-utilisation of hearing days to accommodate the convenience of counsel or other participants; repeated filing of documents in a piecemeal manner; filing voluminous and irrelevant documents; frequent amendments to pleadings; discovery requests resembling fishing expeditions; non-production despite directions; listing too few witnesses or issues for a hearing session; producing an excessive number of fact witnesses whose evidence is repetitive; appointment of multiple experts on overlapping issues; excessive interruptions significantly increases the arbitration costs.

Adjudication of arbitration costs involves, therefore, basically two stages i.e (i) quantifying the costs of arbitration (ii) determining the liability of a party/ apportionment of the costs. Unfortunately, very often the Arbitral Tribunals in India do not lay focus on the adjudication of costs, which is a very important stage in the proceedings. Most Tribunals very casually follow the traditional way of granting costs by Indian Courts, which generally either ask the parties to bear their own costs or grant a nominal costs to a successful party without recording any reasons.

The Indian Parliament had brought two significant changes in the Arbitration and Conciliation Act, 1996 on recommendations of the Law Commission of India in its 246^th Report. First, the Arbitration Amendment Act 2015 introduced the Fourth Schedule to the Arbitration Act as a model schedule of fees for the Arbitrators. The Fourth Schedule has to be read along with the provisions of Section 11(4), which came to be further amended vide the amendments introduced to Section 11 by the Arbitration Amendment Act 2019. The resultant position in law on the Arbitrators´ fees is declared by the Supreme Court in Oil and Natural Gas Corporation Ltd. (ONGC) v. Afcons Gunanusa JV^[1].

The second significant amendment brought by the Arbitration Amendment Act 2015 is the statutory introduction of the principle of “Loser pays” on recommendation of the Law Commission of India. The 246^th Report contained the following observations:

“70. Arbitration, much like traditional adversarial dispute resolution, can be an expensive proposition. The savings of a party in avoiding payment of court fee, is usually offset by the other costs of arbitration – which include arbitrator's fees and expenses, institutional fees and expenses, fees and expenses in relation to lawyers, witnesses, venue, hearings etc. The potential for racking up significant costs justify a need for predictability and clarity in the rules relating to apportionment and recovery of such costs. The Commission believes that, as a rule, it is just to allocate costs in a manner which reflects the parties' relative success and failure in the arbitration, unless special circumstances warrant an exception or the parties otherwise agree (only after the dispute has arisen between them).

71. The loser-pays rule logically follows, as a matter of law, from the very basis of deciding the underlying dispute in a particular manner; and as a matter of economic policy, provides economically efficient deterrence against frivolous conduct and furthers compliance with contractual obligations.”

The Arbitration Amendment Act 2015 deleted the phrase ― “unless otherwise agreed by the parties” from s.31(8) and the arbitral tribunal has been given the power to fix costs in terms of s.31A of the Arbitration Act. S.31A(1) provides that the arbitral tribunal or the court has the discretion to determine costs of arbitration which includes, inter alia, reasonable costs relating to the fees and expenses of the arbitrators, courts and witnesses; legal fees and expenses; any administration fees of the institution supervising the arbitration; and any other expenses incurred in connection with the arbitral or Court proceedings and the arbitral award.

S.31A(2)(a) provides the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party. S.31A(2)(a) incorporates the principle that costs should ordinarily follow the event, requiring the unsuccessful party to pay the costs of the successful party. The use of the word "shall" makes this the mandatory general rule. As per S.31A(2)(b), any departure from this rule is permissible for reasons to be recorded in writing. Since exception to the statutory mandate in s.31A(2)(a) requires recording of reasons, it must be strictly complied with. Accordingly, an award on costs that does not conform to s.31A(2)(a) may be susceptible to challenge on the ground of patent illegality. Sub-sections (3) and (4) outline how an arbitral tribunal or court evaluates and structures cost awards. S. 31A(3) identifies the factors that should guide the Tribunal in determining and apportioning costs. Though the factors listed are not exhaustive, they provide a statutory framework for the exercise of the Tribunal's discretion in awarding costs. S. 31A(4) confers wide discretion on the Court or arbitral tribunal in relation to costs. It authorises the award of costs in a variety of forms. The provision enables a nuanced and tailored approach to cost allocation, ensuring that costs are awarded in a manner that reflects the circumstances of each case. Sub-section (5) of Section 31A provides that any agreement between the parties regarding the apportionment of costs is valid only if it is entered into after the dispute has arisen. The provision is intended to protect parties, particularly those with weaker bargaining power, from being bound by pre-dispute arbitration clauses that require each party to bear its own costs or otherwise predetermine the allocation of costs. S. 31A, therefore, warrants careful consideration by the arbitral tribunal and requires a conscious application of mind while determining and apportioning costs.

It is noteworthy that the Supreme Court in Aslam Ismail Khan Deshmukh v. ASAP Fluids (P) Ltd.,^[2] has held that if a party takes undue advantage of the limited scope of judicial interference of the referral Courts and force other parties to the agreement into participating in a time-consuming and costly arbitration process, the Arbitral Tribunal may direct that the costs of the arbitration shall be borne by the party which the Tribunal ultimately finds to have abused the process of law and caused unnecessary harassment to the other party to the arbitration.

Both the Union and State Governments, as well as the judiciary, have a huge stake in creating a robust and efficient arbitration ecosystem. It would greatly benefit both the economy and the justice delivery system if a DIAC-style institutional framework attached to the High Court, is established with centres in all major cities offering modern facilities and administrative support for conducting arbitrations at reasonable cost. Such institutions should adopt comprehensive rules governing the determination and allocation of arbitration costs including costs towards counsel fees, with clearly defined parameters that minimise arbitral discretion and promote consistency. The rules should also require parties and their counsel to maintain systematic records of fees, expenses, and other arbitration-related costs, thereby enabling tribunals to make realistic and transparent cost awards. Unless arbitration costs are meaningfully awarded, arbitration will remain an expensive alternative to litigation rather than the efficient dispute resolution mechanism it was intended to be.

1. (2024) 4 SCC 481; 2022 LiveLaw (SC) 723 ↑

2. (2025) 1 SCC 502 ↑