[This guest post is authored by Rahul Kumar, Advocate, Sarvada Legal; Aditya Singh, 3rd year student at Dr. Ram Manohar Lohiya National Law University, Lucknow; and Devashish Jain, 3rd year student at Hidayatullah National Law University, Raipur. The authors can be reached at firstname.lastname@example.org, email@example.com, and firstname.lastname@example.org. This post has been co-edited by our guest editor Devansh Pandit, Symbiosis Law School, Noida]
ONGC v. Afcons: A Call for Revision of Arbitrators’ Fees
Arbitration is widely accepted as one of the most viable options for parties to resolve commercial disputes. All good things, however, come with their cons. A recent trend is that of arbitrators, particularly among retired judges of Indian Courts, are the high high fees charged by arbitrators. These fees can at times be a heavy burden on the parties. The Supreme Court discussed this issue in Oil And Natural Gas Corporation v Afcons Gunanusa JV (“ONGC”) and passed directions for standardising arbitrators’ fees in ad-hoc arbitration.
Afcons Gunanusa JV (“Afcons”) and ONGC had a joint venture agreement for the development of an offshore process platform (“Agreement”). When disputes arose, Afcons invoked arbitration against ONGC. This resulted in the formation of an arbitral tribunal consisting of three members. Afcons claimed an amount in excess of 600 crores plus interest, to which ONGC replied with a counterclaim in excess of 400 crores plus interest.
The Tribunal objected to the fees stipulated in the contract, which proposed that they be paid in accordance with the Schedule IV of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), to which the parties agreed. Almost two years later, the tribunal increased the fees to INR 1.5 Lakhs per hearing, per arbitrator. Since ONGC objected, the tribunal, in 2019, subsequently decreased their fees to INR 1 Lakh. However, it is imperative to note that the tribunal imposed this fee retrospectively, forcing the parties to pay for all hearings since 2018 at the rate imposed in 2019. While Afcons consented to the revised rates, ONGC did not follow suit.
ONGC then filed a Petition in the Bombay High Court to revoke the arbitral tribunal’s authority under Sections 14 and 15 of the Arbitration Act. The Bombay High Court directed ONGC to approach the Supreme Court since the underlying arbitration was an international commercial arbitration, the jurisdiction to decide the same shall lie with the Supreme Court.
The Court ruled unambiguously that arbitrators must obtain the parties’ permission before setting their remuneration. In this case, the court exercised its authority under Article 142 of the Constitution of India by terminating the mandate of the original arbitral panel and mandating the creation of a new arbitral tribunal.
In the event the arbitrators have a problem with the stated fees, they must recommend alternative fees, and only if both parties agree to the new fees will they be binding. If significant time has passed, the arbitrators and the parties may increase the fees and determine the increased magnitude based on the directions. In addition to the same, arbitrators cannot hike their rates at will. That said, in the absence of a prior agreement between the parties, however, the Tribunal may establish fees under the Fourth Schedule of the Arbitration Act, and the parties shall have no right to challenge such amounts.
The Doctrine of Prohibition of “in rem suam” decisions
The concept of ”in rem suam” means that an agent cannot act with irrevocable authority. The Supreme Court, in the instant case, while relying on K. Bockstiegel, Stefan Kröll and Patricia Nacimiento (eds), Arbitration in Germany: The Model Law in Practice (2nd edition, 2015), Chapter VI, (Paragraph 61 of the Judgement), observed that in Germany, in the absence of an agreement in ad hoc arbitrations, the German Civil Code (Bürgerliches Gesetzbuch) governs the fees charged depending on the type of contract between the parties. Without the parties’ consent, arbitrators cannot act as judges in their actions and should not decide on their fees under the doctrine of prohibition of ”in rem suam” decisions. This idea originated so arbitrators there couldn’t decide on the amount in dispute because doing so would damage their compensation. Since the parties had agreed to have their disputes arbitrated, it would be unethical for the arbitrators to decide on the dispute.
The fees that must be paid to the arbitrator(s) are typically established by the arbitral institution itself when an arbitration is held under its auspices. However, several arbitral institutions, including the International Centre for Dispute Resolution (ICDR), Singapore International Arbitration Centre (SIAC), and Hong Kong International Arbitration Centre (HKIAC), uphold the idea of party autonomy by giving some wiggle room for negotiation between the parties and arbitrator(s) over the determination of arbitrators’ fees. For instance,
- ICDR, under article 39 of its rules, authorizes the Case Administrator to decide the fees payable to the arbitrator(s), in collaboration with both arbitrator(s) and parties.
- SIAC, under rule 34, enables parties to suggest a way to calculate the remuneration payable to the arbitrator(s), prior to the establishment of a tribunal; and
- HKIAC, under article 10, provides authority to the parties to decide the fees on the basis of the sum in the dispute or on an hourly basis
Fascinatingly, an exception can be found under the UNCITRAL Rules of 2013 where the arbitrator(s), under Article 41 have more freedom to determine their own fees, something that seems against the principle of party autonomy and is consistently missing from the rules of major institutions. Separately, under 41(4) of these rules, the specified appointing authority or the PCA Secretary-General is empowered to alter the arbitrator’s proposed compensation (s). Therefore, no international body (including arbitral institutions) grants the arbitrator(s) the unilateral authority to set their own fees. Even UNCITRAL, where arbitrators have some power to determine their compensation, has a mechanism in place to keep these demands reasonable and in check.
In ONGC, while discussing international practices, the Supreme Court considered the national scenario across various jurisdictions such as England, Italy, Sweden, and Germany. Some of the basic principles which emerge are as follows:
- The general trend is that the parties to the arbitration determine the arbitrators’ fees through an agreement well before or by a separate agreement. By submitting to the rules of an institution in advance or those of a particular jurisdiction, the parties also submit to their rules of determining the fees for the arbitrators, and in the absence of one they enter into a separate agreement to decide the fees of the arbitrators. As a consequence, the arbitrator(s) are bound to accept the fees determined by the parties.
- In cases where there is no prior agreement between the parties regarding the fees, some jurisdictions grant liberty to arbitrators to determine their own fees. However, such determination is always subject to the court’s scrutiny and review.
So, it can be concluded that no jurisdiction grants unilateral or absolute power to the arbitrator(s) to determine their fees, it’s always either decided by the parties which are in dispute, or it is settled through negotiation or is determined by courts.
Law Commission Report
In its 246th Report, The Law Commission of India lamented on the excessive quantum of fees demanded by arbitrators. According to the Report, these charges are “arbitrary, unilateral, and disproportionate.” Law Commission noted that institutional arbitrations and International Commercial Arbitration involving foreign parties may be subjected to differing norms.
Recommending greater deference to party autonomy, while strictly restricting its recommendations for ad-hoc proceedings, the Law Commission made the recommendation to introduce a model schedule of fees for arbitrators, following which the Fourth Schedule, laid out a standardised model for arbitrators’ fees in the 2015 amendment.
Prior to the 2015 amendment, in Union of India v Singh Builders Syndicate, the Supreme Court took note of how if an arbitrator is appointed by the court with no mention of the fees, at least one, if not both the parties are put at a disadvantage. The absence of a ceiling led to fees rising exorbitantly and led to an apprehension that parties not agreeing to pay the fees would be discriminated against by the arbitrators. The Hon’ble Court further highlighted how there is an urgent need to provide a solution to such problems, touting institutional arbitration as one, with the other being that the Court at the time of appointment also mentions the fees chargeable by the arbitrator in consensus with the parties to the matter and the arbitrator as well, if the need be. Another possible solution was that the retired judges who had turned arbitrators would indicate their fee structure to the registry of their respective High Courts, so that there would be no point of confusion and there would be complete transparency in the fees charged. The court even went on to say that allowing for certain levels of self-regulation would also bring about remarkable transparency.
The Supreme Court laid out some suggestive measures which were then reiterated in Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust :
- Reasonableness and certainty about costs.
- Disclosure of the fee structure before the appointment.
- Institutional arbitration where the arbitrator’s fee is pre-fixed.
- Each High Court is to have a scale of arbitrator’s fee calibrated with reference to the amount involved in the dispute to avoid different designates prescribing different fee structures.
The 2015 amendment added a model schedule under Schedule IV for fees of the arbitrators and added that the high courts may use them as the basis to frame rules for determining fees for the arbitrators appointed by it under Section 11 of the Arbitration Act.
The Supreme Court, in its landmark judgment of Gayatri Jhansi Roadways, while also deciding the appeal arising out of Delhi High Court’s judgement in Gammon Engineers held that if there is already an agreement between the parties regarding the remuneration payable to the arbitrator(s), then the agreement would be honoured and there is no statutory requirement to refer the fees under the Fourth Schedule. It further noted that the revised language of Section 31(8) read in conjunction with Section 31A, which states that the arbitral tribunal shall determine the expenses of an arbitration by Section 31A, only addresses costs generally and not the arbitrator’s fees.
In cases where the parties themselves appoint the arbitrators, such as in Paschimanchal Vidyut Vitran Nigam Limited v. IL&FS Engineering & Construction Company Limited, the Delhi High Court held that if the parties had a prior agreement about the fees of the arbitrator, then the court would have no role to fix the fees of the tribunal.
India, in its aspiration in becoming an international hub for arbitration, as mentioned by former Supreme Court Judge, Justice A.K. Sikri, must realise that such aspirations will be quickly derailed if procedural issues such as arbitrators’ fee takes centre stage and becomes barriers not worth overcoming. The main allure of various international institutions is in the professionalism that they display and the expedited nature of their proceedings. Moreover, such an issue is easily resolved by just incorporating some transparency in the entire process. If the fees structure for an arbitrator is disclosed before the commencement of the arbitration proceedings, the party that is unwilling or unable to pay those costs can express the same. Arbitrators themselves must practice disposing cases in an expedited manner rather than looking to maximise their earning potential from every case. Moreover, as suggested by the Supreme Court in Singh Builders, High Courts can maintain a registry with the detailed fee structure of the arbitrators enrolled with them to ensure that there is no element of secrecy and that the parties know what they are enrolling themselves into. Such changes can only be brought about with the collaborative efforts of experienced arbitrators, the Judiciary and most importantly, the Legislature.