Arbitrators do not have the power to unilaterally fix their fees without the consent of the parties: Supreme Court

Arbitrators do not have the power to unilaterally fix their fees without the consent of the parties: Supreme Court

The Supreme Court has held that Arbitrators do not have the power to unilaterally fix their fees without the consent of the parties. The Court further held that the fee scale prescribed under the 4th schedule of the Arbitration and Conciliation Act 1996 is not mandatory.

The present issue arose in an arbitration petition filed by the ONGC, raising grievance regarding arbitrators unilaterally increasing the fees during the middle of the hearings.

Attorney General for India KK Venugopal, who appeared for the ONGC, submitted that PSUs are bound by audits and they are not in a position to meet such unilateral fee hikes demanded by the arbitrators. On the other hand, private claimants might be willing to meet the demands of arbitrators, and this puts PSUs at a disadvantage.

The operative portion of Justices D. Y. Chandrachud's judgement was as follows :

(i) Arbitrators do not have the power to unilaterally issue binding and enforceable orders determining their own fees. A unilateral determination of fees violates the principles of party autonomy and the doctrine of the prohibition of in rem suam decisions, i.e., the arbitrators cannot be a judge of their own private claim against the parties regarding their remuneration. However, the arbitral tribunal has the discretion to apportion the costs (including arbitrators' fee and expenses) between the parties in terms of Section 31(8) and Section 31A of the Arbitration Act and also demand a deposit (advance on costs) in accordance with Section 38 of the Arbitration Act. If while fixing costs or deposits, the arbitral tribunal makes any finding relating to arbitrators' fees (in the absence of an agreement between the parties and arbitrators), it cannot be enforced in favour of the arbitrators. The arbitral tribunal can only exercise a lien over the delivery of arbitral award if the payment to it remains outstanding under Section 39(1). The party can approach the court to review the fees demanded by the arbitrators if it believes the fees are unreasonable under Section 39(2);

(ii) Since this judgment holds that the fees of the arbitrators must be fixed at the inception to avoid unnecessary litigation and conflicts between the parties and the arbitrators at a later stage, this Court has issued certain directives to govern proceedings in ad hoc arbitrations in Section C.2.4;

(iii)The term ―sum in dispute‖ in the Fourth Schedule of the Arbitration Act refers to the sum in dispute in a claim and counter-claim separately, and not cumulatively. Consequently, arbitrators shall be entitled to charge a separate fee for the claim and the counter-claim in an ad hoc arbitration proceeding, and the fee ceiling contained in the Fourth Schedule will separately apply to both, when the fee structure of the Fourth schedule has been made applicable to the ad hoc arbitration;

(iv)The ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule is applicable to the sum of the base amount (of Rs 19,87,500) and the variable amount over and above it. Consequently, the highest fee payable shall be Rs 30,00,000; and

(v) This ceiling is applicable to each individual arbitrator, and not the arbitral tribunal as a whole, where it consists of three or more arbitrators. Of course, a sole arbitrator shall be paid 25 per cent over and above this amount in accordance with the Note to the Fourth Schedule.

Justice Chandrachud's judgment further observed as follows :

(i) In terms of the decision of this Court in Gayatri Jhansi Roadways Ltd (supra) and the cardinal principle of party autonomy, the Fourth Schedule is not mandatory and it is open to parties by their agreement to specify the fees payable to the arbitrator(s) or the modalities for determination of arbitrators' fees; and

(ii) Since most High Courts have not framed rules for determining arbitrators' fees, taking into consideration Fourth Schedule of the Arbitration Act, the Fourth Schedule is by itself not mandatory on court-appointed arbitrators in the absence of rules framed by the concerned High Court. Moreover, the Fourth Schedule is not applicable to international commercial arbitrations and arbitrations where the parties have agreed that the fees are to be determined in accordance with rules of arbitral institutions. The failure of many High Courts to notify the rules has led to a situation where the purpose of introducing the Fourth Schedule and sub-Section (14) to Section 11 has been rendered nugatory, and the court-appointed arbitrator(s) are continuing to impose unilateral and arbitrary fees on parties. As we have discussed in Section C.2.1, such a unilateral fixation of fees goes against the principle of party autonomy which is central to the resolution of disputes through arbitration. Further, there is no enabling provision under the Arbitration Act empowering the arbitrator(s) to unilaterally issue a binding or enforceable order regarding their fees. This is discussed in Section C.2.3 of this judgement. Hence, this Court would be issuing certain directives for fixing of fees in ad hoc arbitrations where arbitrators are appointed by courts in Section C.2.4 of this judgement (the guidelines may be read here)

Justice Sanjiv Khanna gave a separate judgment, which read out as follows:

"I am of the opinion that by the terms of contract and provisions of Arbitration and Conciliation Act 1996, an arbitral tribunal can fix reasonable fees which an aggrieved party who is not signatory to the written agreement can question under subsection 3 to section 39 of the act during pendency of the arbitration proceedings or in case the arbitral tribunal claims lien over the award.

At the same time, I agree with Justice Chandrachud that when an arbitral tribunal, even in absence of consent of the parties, fixes the fee in terms of the fourth schedule, the parties would not be permitted to object to the fixation of fees.

Fourth schedule is the default fees declared by the legislature which can be changed by mutual consensus. After the amendment act of 2019 on 30th of August 2019, and insertion of subsection 3A to section 11, the Proviso states that fees given in the fourth schedule is mandatory and applies to all arbitrations including ad hoc arbitration. Fees fixed by the institution subject to the rates specified in the fourth schedule would be applicable. On the interpretation of the fourth schedule, while agreeing with the view expressed by Justice Chandrachud, on the interpretation of serial number six, the fee is prescribed for each member of the arbitral tribunal. The expression sum in dispute includes both claim and counterclaim".

The bench comprising Justices DY Chandrachud, Sanjiv Khanna and Surya Kant had reserved the judgment in the matter on May 11, 2022, while 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.