The fee structure contractually determined for the arbitral tribunal prevails over the fee structure provided under the Arbitration Act August 21, 2019
Published in: Between The Lines
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Mr. Arpit Sinhal
Ms. Batul Barodawala
Mr. Mahim Sharma
Mr. Drushan Engineer
Ms. Ishita Mishra
The Supreme Court in the case of National Highways Authority of India v. Gayatri Jhansi Roadways Limited with Gammon Engineers and Contractors Private Limited v. National Highways Authority of India (decided on July 10, 2019) held that the fee structure for the arbitral tribunal previously agreed between the parties under the arbitration agreement, in case of a domestic arbitration, would prevail over the fee structure provided under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).
National Highways Authority of India (“Respondent”) and Gammon Engineers and Contractors Private Limited (“Appellant”) entered into a contract dated February 07, 2006. The arbitration clause of the contract fixed the fees for the arbitral tribunal as per a policy decision of the Respondent dated May 31, 2004. Disputes arose between the parties on May 23, 2017 and the arbitration clause was invoked by the Appellant. Once the arbitral tribunal was constituted and the matter with respect to the fees of the arbitrators came up before the arbitral tribunal, it was decided that the fees would be regulated as per provisions of the Fourth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015 (“Arbitration Amendment Act”).
The Respondent, against this order, moved an application dated October 13, 2017 before the arbitral tribunal in which it sought to remind that the fees for the arbitrators had been fixed by the agreement and that, therefore, should be fixed in terms of the circular dated July 01, 2017 of the Respondent and not as per the Fourth Schedule of the Arbitration Act. The arbitral tribunal deliberated on the matter and decided that in view of the latest provisions of the Arbitration Amendment Act, the arbitral tribunal was competent to fix the fees regardless of the agreement between the parties. This was as per the judgment dated September 11, 2017 of the Delhi High Court in the matter of National Highways Authority of India v. Gayatri Jhansi Roadways (“NHAI Judgment”).
Respondent thereafter made an application to the Delhi High Court under Section 14 of the Arbitration Act, to terminate the mandate of the arbitrators. According to the Respondent, the arbitrators had wilfully disregarded the agreement between the parties and were, therefore, unable to act any further in the proceedings. Meanwhile, the arbitral tribunal passed another order in which it stated that it had no objection to payment of any fees as would be decided in the pending proceedings by the Delhi High Court. The Delhi High Court stated that the Fourth Schedule of the Arbitration Act not being mandatory, whatever terms were laid down as to arbitrator’s fees in the agreement, must be followed. In so doing, it disagreed with the NHAI judgment, wherein, it was held that Section 31(8) (Costs of an arbitration to be fixed by the arbitral tribunal) and Section 31A (Regime for costs) of the Arbitration Act would govern the aforesaid matters.
Further, since the expression ‘unless otherwise agreed by the parties’ had been omitted from Section 31A by the Arbitration Amendment Act, arbitrator’s fees would have to be fixed in accordance with the Fourth Schedule of the Arbitration Act instead of the agreement between the parties. The Delhi High Court vehemently disagreed with this view holding the said judgment per incuriam stating that the deletion of words “unless otherwise agreed by the parties” in Section 31A only signifies that the parties, by an agreement, cannot contract out of payment of ‘costs’ and deprive the arbitral tribunal a right to award ‘costs’ of arbitration in favour of the successful party. The decision of the Delhi High Court in NHAI judgment was challenged before the Supreme Court and a special leave petition was filed. The present matter as well as the special leave petition were clubbed and heard together by the Supreme Court.
Whether the fees to be paid to the arbitral tribunal should be as per the contract entered into between the parties or as per the Fourth Schedule of the Arbitration Act?
FINDINGS OF THE SUPREME COURT
The Supreme Court took note of the fact that a fee schedule for the arbitral tribunal was, in fact, fixed by the agreement between the parties. This fee schedule, based on an earlier circular of 2004 of the Respondent, was now liable to be amended from time to time in view of the long passage of time that has ensued between the date of the agreement and the date of the disputes that arose under the agreement. The Supreme Court accordingly held that the fee schedule that was contained in the circular dated July 01, 2017, substituting the earlier fee schedule, would now operate and the arbitrators should be entitled to charge their fees in accordance with this schedule and not in accordance with the Fourth Schedule to the Arbitration Act.
The Supreme Court further stated that the application that was filed before the Delhi High Court to remove the arbitrators stating that their mandate must terminate, was wholly disingenuous and would not lie. The reason is that an arbitrator does not become unable to perform his functions if by an order passed by such arbitrator(s), all that they have done is state that the agreement does govern the arbitral fees to be charged. The arbitrator(s) were bound to follow the NHAI judgment which clearly mandated that the Fourth Schedule and not the agreement would govern the arbitral fees.
The arbitrators merely followed the law laid down in NHAI judgment and cannot be said to have done anything wrong so that their mandate may be terminated as if they have now become de jure unable to perform their functions. The Supreme Court agreed with the conclusion of the Delhi High Court that the change in language of Section 31(8) read with Section 31A of the Arbitration Act which deals only with the costs generally and not with arbitrator’s fees is correct in law. The arbitrator’s fees may be a component of costs to be paid but it is a far cry to state that Section 31(8) and 31A of the Arbitration Act would directly govern contracts in which a fee structure has already been laid down.
DECISION OF THE SUPREME COURT
The Supreme Court held that the fee schedule agreed as per the arbitration agreement would prevail over the schedule provided under the Arbitration Act. The Supreme Court also held that the mandate of the arbitral tribunal would not be terminated merely because it passed an order following a previous judicial precedent which was not been held to be per incuriam on the date when such an order was passed.
Vaish Associates Advocates View
Party autonomy has been the bedrock of the Arbitration Amendment Act which has been upheld in several judicial decisions since then. Section 11(14) of the Arbitration Act provides that “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. Explanation- For the removal of doubts, it is hereby clarified that this sub-section shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution.” This provision was inserted in the Arbitration Act on the recommendation of the Law Commission of India Report No. 246 (“Law Commission Report”) for the purpose of addressing the issue of high costs associated with ad hoc arbitrations including the arbitrary, unilateral and disproportionate fixation of fees by several arbitrators. It does not in any way put a restriction on the right of the parties to agree to a fee structure contractually in advance.
Further, the Law Commission Report acknowledges that international commercial arbitrations, which involve foreign parties, may have different values and standards for fees for arbitrators; similarly, institutional rules might have their own schedule of fees; and in both cases greater deference must be accorded to party autonomy. It would be an absurd reading of the provision if in international commercial arbitrations parties would be free to choose the fees to be paid to the arbitral tribunal in advance but not in case of domestic arbitrations. This judgement rightly upholds the intent of the legislature while giving the parties the elbow room to determine the fees of the arbitral tribunal in accordance with their financial capacity.
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