24 March 2022 4:24 PM GMT
The Supreme Court on Thursday considered issues relating to the fixation of the arbitrators fees, especially in arbitrations involving Public Sector Undertakings.The bench of Justices DY Chandrachud, Sanjiv Khanna and Surya Kant was considering arbitration petition filed by the Oil and Natural Gas Corporation (ONGC) on the issue related to the mandatory nature of the 'model' fee scale...
The Supreme Court on Thursday considered issues relating to the fixation of the arbitrators fees, especially in arbitrations involving Public Sector Undertakings.
The bench of Justices DY Chandrachud, Sanjiv Khanna and Surya Kant was considering arbitration petition filed by the Oil and Natural Gas Corporation (ONGC) on the issue related to the mandatory nature of the 'model' fee scale for arbitrators prescribed under the Fourth Schedule of the Arbitration and Conciliation Act 1996.
During the hearing, the bench 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.
It may be noted that the Chief Justice of India NV Ramana on March 8, 2022 agreed to constitute a bench to hear the Special Leave Petitions which raise the issue relating to the interpretation of the Fourth Schedule. This was after the Attorney General for India KK Venugopal raised concerns about the "exorbitant and arbitrary" fee charged by the arbitrators and pressed that the Court should lay down uniform standards.
In the hearing today, Attorney General for India KK Venugopal made his submissions on behalf of ONGC.
Arbitrator's Fees : Supreme Court To Hear Issues Relating To 4th Schedule Of Arbitration Act
Claimants Always Ready & Willing To Pay Fees Fixed By Arbitrators But PSU's Have Concerns; No Commonality In Fixing The Fees; PSU's Have A Feeling That Their Reluctance Would Result In Arbitrators Being Biased Against Them : AG
AG KK Venugopal commenced his arguments by submitting that ONGC as well as Public Sector Undertakings ("PSU's") were quite concerned on the issue related to fees which resulted in putting PSU'S in a difficult position.
There are three methods of fixing the fee :
" Firstly, wherein the parties enter into an agreement contract as part of the arbitration clause wherein they say that this will be the fees- and intimate the fees to the arbitrator and if they accept or reject it.
The second alternative is the Law Commission recommending in the Arbitration Act, 4th Schedule relating which recommended the rates.
Thirdly, arbitrators fixing their own fees will be highly anomalous. They say either 1 lakh per sitting. 1.5, 2.5 or even higher. Sitting is not even one but 2 sittings. Secondly, as far as they are concerned, they ask for a reading fee and conference fee as well as a fee for preparing the award," AG submitted.
Against this backdrop, he submitted that this had put PSU's in a difficult position.
"All this has put PSU in a difficult position. We always find that so far as claimants are concerned, and there are huge contractors- they are always willing to pay whatever fees are fixed but the PSU's have concerns. Therefore they are always reluctant and they show the reluctance openly and this results in them having a feeling that so far as arbitrators are concerned, they will be biased against them. This is the problem and that is where we are asking to consider as to what should be the alternative between these alternative- contractual fees, 4th schedule fee or fees of arbitrators. There is no commonality in fixing the fees," submitted AG.
Justice Sanjiv Khanna at this juncture asked AG the stance before the 4th Schedule coming into existence(it was introduced as per the 2015 amendment).
"Many of the contracts will be prior to the 4th schedule? After the 4th schedule has been introduced, are they following the 4th schedule? In PSU's if they don't prefer institutionalized arbitration they always prefer ad hoc arbitration," said. Justice Khanna.
The AG said that in the instant case, the Tribunal, in the midst of the cross examination, decided to revise the fees after accepting the fees as per the Fourth Schedule. He further added the Tribunal passing an order of directing the claimant to pay the fees and later recover it from the respondent was "humiliating".
"Having accepted the fees they contractually agreed to they said that the fees are unrealistic but they should have rejected the same. We are constrained by the fact that we are PSU and this is public money which we have to par treat. They believe that its their right to fix and they see whatever is reasonable," AG submitted.
AG also submitted that the Tribunal had also kept the perusal fee opened and when ONGC informed the Tribunal that the management did not approve the Higher Fees, the tribunal did not respond to the same which forced ONGC to approach Bombay High Court.
"Now they kept the perusal fee open. ONGC informed the tribunal that higher fees are not approved by petitioner's management and this was not responded to. ONGC thereafter approached the Bombay High Court," AG argued.
Justice Chandrachud at this juncture asked AG as to whether the proceedings before the Tribunal were stayed.
"They are continuing," AG responded.
He further submitted that the following questions arose for consideration
Are the arbitrators legally entitled to fix their own fees without the consent of one of the other parties?
What should be the standard of fees? Could there be a limit and will the 4th schedule be an appropriate standard for the fees.
What would be the stand that a party who declines to pay the fees would have to take? Can he seek termination of the mandate on the basis that there is no agreement on the fees which arbitration cannot continue?
If the 4th schedule as well as the contract does not provide for reading fee then conference fees between the arbitrator and the writing of award fee, can that be added on upon the parties?
AG on a lighter note told that bench that when the matter came before the CJI, the CJI was surprised that AG was coming up with such a matter.
"When the matter came before the CJI, he was rather surprised that AG should come up with some sort of application for reducing the fees of the arbitrators but I was coming for PSU's who find it difficult in cases of arbitration," submitted Attorney General KK Venugopal.
To substantiate his contention as to whether arbitrators are entitled to fix their own fee without the consent of the other parties, AG drew the court's attention to the judgment rendered by the Top Court bench of Justices RF Nariman and Surya Kant in 2019 in the case National Highways Authority of India v Gayathri Jhansi Roadways Ltd and Gammon Engineers And Contractors Pvt. Ltd. v. National Highways Authority Of India. In the judgment referred, it was observed that Section 31(8) and 31A of the Arbitration and Conciliation Act 1996 will not apply to arbitral fee if a fee structure has already been laid down in the agreement between parties.
Justice Chandrachud added that the judgment was also an indicator that there is no unbridled authority on the Arbitral Tribunal to fix his own fees and while referring to the facts of the case referred by AG, the judge said,
AG then referred to a paragraph from the "Russel on Arbitration" by Francis Russles dealing with "no express right to increase" to lay emphasis on the submission that the arbitrator is not usually entitled to increase his fees and expenses. He also quoted Gary Born to argue that fixation of remuneration is a matter of contract between the parties and the arbitrators.
"Appointing authority may make an adjustment and the arbitrator has to consult with the appointing authority and the appointing authority will have to make the adjustment which will reduce the fee, that is what the next says," said Justice Chandrachud while AG was referring to Gary Born.
Party Autonomy Binds Both Parties; There Was Specific Clause In Contract Whereby Parties Agreed To Only Appoint Arbitrators Who Accepted The Clause
Responding to the remarks posed by the judge, AG submitted that the amendment of 2016 provided for an institutional body to govern the arbitration but the same was not brought into force.
"If it is ICC Arbitration or LCIA there would be no problem and the amendment brought about in 2016 provided for an institutional body which will govern the arbitration but unfortunately the section has not been brought into force which is in the schedule," AG submitted.
Attorney General further added that "Here so far as the contract is concerned party autonomy binds both the parties. The only requirement being that you should put it to arbitrators before accepting. It is the duty of arbitrators. Here we had this specific clause that parties agreed that they would only appoint those persons who will accept the arbitration clause. They accepted it and then all these problems which resulted in our losing faith because we believe that we are the bad guys and we are people who are being very unfair. We have to lay down something certain which is applicable in all the arbitration,"
"There is an agreement b/w the parties, the agreements must bind. If there is agreement in the form of a written contract like in this case then the fees of the arbitrator will have to be as per the consent of the parties," remarked Justice Chandrachud.
AG then proceeded to request the bench to make a provision with regards to the revision of fees based on a number of hearings.
"Suppose the arbitration drags on and on and on.. Some provision may be made and has to be made that there would be a revision depending upon the number of hearings but here they are counting 2 sitting separately as 2 days. In another arbitration there are 3 sittings and 2.5 lakhs per arbitrator per sitting therefore 7.5 lakh per day per arbitrator."
In this regards, AG referred to the excerpts of the 246th report of the Law Commission relating to Amendments in the Arbitration and Conciliation Act related to Fees of Arbitrators wherein the Commission had focused on the need of a mechanism to rationalize the fee structure for arbitrations.
He further added that Schedule 5 sets of the Arbitration and Conciliation Act, 1996 sets out 34 different grounds which gives rise to justifiable doubts as to the independence or impartiality of arbitrators.
The bench at this juncture opined that one of the issue which required contemplation was with regards to a mechanism related to the fees of an arbitrator in cases wherein the proceedings are prolonged due to the conduct of the parties.
Expressing its concern on parties rendering the arbitration as "dsyfunctional" due to one of the party wanting to conducting cross examination at length due to complexity or increase in the number of witnesses, the Justice Chandrachud said,
"We will have to look from an aspect as to what may happen. Suppose parties agree to a schedule of fees of the Arbitrator, either in the contract or when they have the first preliminary hearing but for some reason the arbitration is throttled not necessary because of the Arbitrator but may be because one of the parties who wants to conduct cross examination at length, greater complexity, the number of witnesses just keeps on, now one of the parties says wants to obstruct the arbitration and that party says that I won't pay more than something that was fixed as something has gone on due to conduct of the parties.
One way is that the arbitrator will not unilaterally increase the fees but then we must contemplate that there will have to be some mechanism. Otherwise what will happen is because the party will render the arbitration dysfunctional."
"It's very unnatural. 1 witness was cross examined for 18 sessions. But this was an Indonesian party and all the questions that were put to him had to be translated and then typed out. Therefore each question took a very long time," AG responded.
Objecting that the same was not true in the case related to AFCONS, Senior Advocate Dr AM Singhvi said,
"Not in my matter. It was international arbitration all in English. There was no translation, nothing. 20 sittings for witness 1 examined by him. 23 sittings of witness 2 examined by him. 7 sittings for witness 3 going on still. Their witnesses are still to come their Advocate appearing for ONGC makes a statement on May 3, 2019 said that 70/80 sittings are required. Arbitrators had said that if you apply the caps, its 30k per day. Cap of 30 lakhs divided by 100 sittings. I request the same to take it case by case, the law can apply later. Mine is an abuse by ONGC. Clause in the contract which says how so much is the delay, no interest is payable. These are realities. Your lordships are not sitting in ivory towers."
"We have taken instructions, everything was in English," AG responded.
"Supposed arbitration drags on and the parties have agreed at some point, if there is no mechanism for revising fees of an arbitral tribunal in a situation where parties are not agreeable you can't prevent the arbitrators from throwing up their hands and saying that sorry we are out of this," remarked Justice Chandrachud.
Requesting the bench to consider the aspect related to the same in the judgement and contending that there had to be some cushion on the same, AG submitted that, "If the number of sittings exceeds, the fees should be fixed in advance with the consent of both the parties. Then a separate fee will have to be paid, which your lordships could put in the judgment so that this dragging of the case. I'm looking at it from both points of view. The counsel goes on cross examining and this is what my friend is right, then so far as this is concerned, there has to be some cushion. We want your lordship's to be put into the judgment because your lordships are entitled to say."
Recalling an incident related to arbitration when Justice Chandrachud was a young junior, the judge said,
"I was a young junior of the bar and we had a Solicitor General on the other side and Justice Lentin was the Arbitrator, the SG on the other side was conducting his own case. He would fight with the arbitrator even on a comma a colon and all of us would sort of break our heads and there was nothing that we could do because it was an arbitration. The Judge has no authority which the court has. We would spend hours in the arbitration just trying to correct the evidence that there has to be a comma here and it went on interminably."
"So you know there are parties and parties as well so that there are some mechanisms by which. Also otherwise a good arbitrator what he would do is say sorry this one party has now dragged on the proceedings and I'll just let go. That may not also serve the interest of the process. Should the arbitrator be required to apply to the Court for a revision of the fees which he or she considers reasonable and the court will decide as to whether it is reasonable," the judge further added.
Arbitrator Can Fix The Fees For A Given Number Of Sittings With Consent Of Parties & In Case Parties Do Not Agree For Revision Of The Fees, Then They Could Seek Judicial Intervention For Determination Of "Reasonableness In The Increase Of The Fees": Supreme Court Suggests
Responding to the remarks posed by the bench, AG urged the bench to also include in the judgment the maximum number of sittings for an arbitration.
"At the beginning of the arbitration supposed the parties have agreed to a particular fees and the arbitrator accepts it but he accepts it on the basis that the entire arbitration is upto a time limit. Therefore the number of sittings perhaps becomes the basis of fees. The Trial court if it's conducting a very big trial then it would have sittings. Therefore if your lordship fixes 25 or 50 sittings and thus say that thereafter there would be revision" AG said.
Justice Sanjiv Khanna at this juncture said, "There would be a slight problem. What do you feel that is maximum number of sittings for 30 lakhs? That will depend upon the facts. They also increase the fee after the first 18 hearings. After 18 sittings that's when they came in. 18 sittings means 9 days hearing? Are you sure on that? You used the term hearing and not the term sitting."
"It would be difficult for us to lay down in our judgment a reasonable parameter of these are the reasonable number of sittings as that depends upon the complexity of the case," added Justice Chandrachud.
Suggesting a solution to the problem, Justice Chandrachud further said that one way could be for the Arbitrator to fix the fees for a given number of sittings with the consent of the parties and in case the parties did not agree for revision of the fees, then they could seek judicial intervention for determination of "reasonableness in the increase of the fees".
"One way to do this is that arbitrators at the outset after consulting the parties should fix that this is our fee which will operate for a given number of sittings of the 4th schedule. Because the 4th schedule has not been enforced and we are in ad hoc international arbitration. So this will operate for a number of sittings which the arbitrator can fix after consulting the parties. Thereafter if the parties don't agree to revision of fees then some judicial intervention to adjudicate the reasonableness of the increase in the fees of the arbitrator, so that the parties do not feel that they do not have some recourse. You are not told that if you cannot pay, they will pay and then you can recover the same. Suppose, this arbitration is of ONGC or NHAI, we are fixing this on the basis that this fee would be valid for 1 year and for 50 sittings. Thereafter there has to be a revision, then some recourse to court because there are no Arbitral Institutions Involved. But I don't know if going to court will be efficacious, " Justice Chandrachud said.
Claimant Paying Revised Fees Determined By Arbitrator & Thereafter Recovering From Respondent Would Set A "Very Bad Precedent": Supreme Court
The judge at this juncture further remarked that the Single Judge of Bombay High Court was overburdened with hearing arbitration matters and questioned as to whether going to Courts will be efficacious. He further added that even if the Arbitrator determined the revised fees the claimant would anyway agree to pay and thereafter recover from the respondent which would set a "very bad precedent".
"In Bombay High Court the single judge hearing arbitration matters is so overburdened. AG has made a valid point. What happens is, if the arbitrator says that this is what we are fixing and this is our revised fee and if the respondent does not pay, the claimant will pay and the claimant will, regardless of the outcome, recover it from the respondent. This also sets a very bad precedent. This results in the implicit element of bias on the respondent which is more often a Public Sector Corporation. Private parties will never say no, because nobody wants to bell the cat. Private parties are always ready and willing. We also have to keep that in view," Justice Chandrachud further said.
He further said that there was a need to also regulate the process related to revision in fixation of fees even in case of two private parties.
Posing a question to AG, Justice Chandrachud asked AG, as to whether the freeze in the number of sittings should be left to the arbitrator or on the parties.
The bench at this juncture, after concurring amongst themselves suggested that the parties at the outset could tell the arbitrators as to what would be the estimated number of sittings that would be taken and the 4th schedule which suggests a cap of Rs 30 lakhs would continue to operate till the sittings determined by the parties. Court further added that upto a specific percentage for example 10%, there was no judicial oversight required but in case the increase was beyond the specified percentage, then the parties had the liberty to approach the Commercial Appellate Division of the High Court for determination of reasonable fees.
"We can do something like this, the default position is 4th schedule- that is you're governed by the 4th schedule fee & Parliament has mandated it as a reasonable fixation. At the outset in an arbitration the parties must tell the arbitrators what is the estimate of evidence of the number of sittings that would be taken. The 4th schedule fee which is laid down but has not been enforced still will continue to operate for that sittings which the arbitrator has made a determination namely 50 sittings. Thereafter if the arbitrator has to increase the fees upto 10%, it may not be necessary and 10%, we're throwing it in the ballpark figure.
Upto 10% you don't need to get judicial oversight. But beyond 10% if you are increasing then the arbitral tribunal can approach the commercial appellate division of the High Court for determination of a reasonable fee and any charge in excess of 10% of the 4th schedule determination would be approved only to subject to approval of the Commercial Appellate Division of the High Court which will be the "Division Bench".
With regards to the issue of the arbitrators counting more than 2 sittings in a particular day as separate and charging fees accordingly, the bench said that the 4th schedule fee would be paid for 1 day or the part thereof and the day may not be broken up . He further added that parties approaching the Commercial Appellate Jurisdiction of the High Court for enhancement would not result in stalling of arbitral proceedings.
"Then other very important issue- should we allow this practice of having more than 1 sitting in a day like in the sense that you say that you're going to sit in morning and afternoon so there are 2 sittings a day? So basically the 4th schedule fee would be for 1 day or a part thereof and the day may not be broken up. It might also result in that arbitration will say that i will not sit for 3 hours and take another arb after 3 hours. So that's fair enough. So day or part thereof this is the fee- they will sit for 3 hours or 5 hours you will not charge separately for the portion of the day which is one more thing which we can possibly consider.
If parties go to the commercial appellate jurisdiction for the enhancement, the arbitral proceedings will not be stalled. We're just creating some structure for discussion. We have not fixed our mind for this and it's only for discussion."
The bench asked the Attorney General, Senior Advocates Huzefa Ahmadi and Dr AM Singhvi and other lawyers in the matter to respond to these suggestions.
During the post- lunch session, the AG drew Court's attention to Section 14 of the Arbitration and Conciliation Act, 1996 which deals with "Failure or Impossibility to Act" to submit that if the compensation with regards to fixation of fees is not decided by the parties and the arbitrators, then the arbitrator will have to withdraw. He also referred to the Australian judgement in Sea Containers Ltd V. ICT Pty Ltd.
"If this happens for example I offer to the arbitrator contractual fees that are binding and he declines, then we will have to go to some other arbitrator. Then the same situation arises, if after the completion of pleadings, fees have to be fixed and the fees would be fixed so far as the sittings are concerned. Suppose a situation arises, wherein the number of hearings are prolonged, then are they not entitled to compensation? If the compensation is not agreed b/w the parties and the arbitrators then the arbitrators will have to be dropped. But no hearing has taken place, except on the question of fees. So if there is no agreement b/w the parties and the arbitrators, then they will have to withdraw," submitted AG.
The bench this juncture while referring to Section 14(2) of the Arbitration and Conciliation Act, 1996 asked which gives the Court power to decide on the termination of the mandate asked as to whether the Court can go into the reasonableness of the arbitrator demanding an increased fees.
"Whether it would not be better to allow the efficacy of determination? That way no party will be subjected to cost which are unreasonable and at the same time there would be some control by the Court on the Arbitrators as well as the Parties," bench remarked.
The bench would now continue the hearing on Thursday ie March 31, 2022.
Case Title: OIL AND NATURAL GAS CORPORATION LTD. vs. AFCONS GUNANUSA JV| Arbitration Case No.5/2022
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