Arbitrators can't decide their fees without consulting parties, says SC

The Supreme Court on Tuesday said arbitrators cannot decide their fees without consulting the parties in the arbitration proceedings. 

The Court said the 4th schedule, which lays down the fees of arbitrators, of the Arbitration and Conciliation Act 1996(the Act) is not binding on the parties.

“It is open to parties by their agreement to specify the fees payable to the arbitrator(s),” the court said. 

The bench comprising Justices DY Chandrachud, Sanjiv Khanna, and Surya Kant had reserved the judgment in the matter on May 11, 2022. The issue was if the fee scale for arbitrators under the Act was binding. 

The dispute arose when Oil and Natural Gas Corporation Limited(ONGC) filed a plea saying during arbitration proceedings, arbitrators on their own increased their fees in the middle of the hearings. 

ONGC is a public sector undertaking whose operations are overseen by the Ministry of Petroleum and Natural Gas.

Attorney General for India KK Venugopal, appearing for ONGC, said a public sector undertaking like theirs cannot meet the sudden fee hike of the arbitrators. However, private entities can meet such sudden increases in the fees which puts us at a disadvantage, ONGC said.

Meanwhile, Senior Advocate Dr. Abhishek Manu Singhvi, appearing for the other party and arbitrator in the case, said when case hearings get delayed and go for prolonged periods, the arbitrator should have the right to increase their fees.

Justice DY Chandrachud, on Tuesday, read out the operative portion of the judgment which is as follows :

1. The Fourth schedule of the Act is not mandatory.

2. Arbitrators cannot issue binding orders governing their fees. Unilateral determination of fees violates party autonomy and the doctrine of 'arbitrators cannot be judges of their private claims regarding the remuneration against parties'

3. Deciding arbitral fees without the agreement of the parties in the case cannot be enforced in favour of the Arbitrator. An arbitral tribunal can only exercise a lien over an award if the payment remains outstanding as per Section 39. A Lien over an award means that parties need to clear the payment of the arbitrator when the hearing is over, otherwise the arbitrator can withhold copies of the order. 

4. The fees should be fixed at the beginning of the hearing to avoid unnecessary conflict between arbitrators and parties later. 

5. Arbitrators would be entitled to charge separate fees for claim and counterclaim in ad hoc arbitration and the fees given in the fourth schedule will separately apply to both.

6. The ceiling of Rs 30 lakhs in entry six of the fourth schedule applies to the sum of the base amount and the variable amount over and above it. Consequently, the highest fees payable will be 30 lakhs.

7. This applies to individual arbitrators and not an arbitral tribunal as a whole where it consists of more than three or more arbitrators. Sole arbitrators will get 25% over and above this amount according to the 4th schedule.

Besides the mandatory nature of the 4th schedule of the Act, which prescribes the fee scale, the question of whether the claim and the counterclaim have to be bundled together for valuation also arose in the case.

The counterclaim is the claim filed by a respondent against the party initiating the case(claimant) in the arbitration proceedings after the claimant initiated arbitration proceedings.

Justice Sanjiv Khanna read out the separate portion of the judgment, “The expression ‘sum’ in dispute includes both claim and counterclaim.”

Talking about the arbitral tribunal he said, "I think that an arbitral tribunal(panel of one or more arbitrators) can fix reasonable fees which can be disputed during the arbitration proceedings,” he said.