Fate of Arbitral Tribunal in case of unilateral fee hike: Analysis of Chennai Metro Rail case

The Supreme Court of India (Supreme Court) in Chennai Metro Rail Ltd. v. Transtonnelstroy Afcons (JV)¹ noted that the only circumstances under which an Arbitral Tribunal can be deemed to be ineligible are the grounds laid down in the Seventh Schedule of the Arbitration and Conciliation Act, 1996 (Act). Despite noting that the ruling in ONGC v. Afcons Gunanusa JV² (ONGC) is clear that Arbitral Tribunal can increase its fees only after consultation and agreement of both contesting parties.It was held that the concept of de jure ineligibility because of justifiable doubts as to independence or impartiality of an Arbitral Tribunal on grounds not specifically provided in Section 12(5) read with the Seventh Schedule of the Act (i.e. in view of objections to a unilateral increase in fees by an Arbitral Tribunal) as unsustainable. Thus, a unilateral increase in fees by an Arbitral Tribunal, not being specifically provided for in Section 12(5) read with the Seventh Schedule of the Act, does not render the Arbitral Tribunal as ineligible, and thus would not terminate the mandate of the Arbitral Tribunal.

Background facts

During an ongoing arbitration between one Chennai Metro Rail Limited (Chennai Metro) and Transtonnelstroy Afcons (JV) (Afcons), one of the members of the Arbitral Tribunal passed away and was substituted, and the proceedings continued with the reconstituted Arbitral Tribunal. Thereafter, during the pendency of the proceedings the Arbitral Tribunal unilaterally increased the fee payable for each session from INR 1,00,000 i.e. the originally agreed fee to INR 2,00,000. While Chennai Metro objected to such revision, Afcons, despite its objections, deposited the increased fee amount. Apprehending that the payment by Afcons would cause the Arbitral Tribunal to treat it partially, Chennai Metro filed an application under Section 14 of the Act before the High Court seeking inter alia termination of the mandate of the Arbitral Tribunal (Section 14 application). Subsequently, the High Court dismissed the Section 14 application. Hence, Chennai Metro filed the present petition.

Chennai Metro contentions

While relying on the finding in ONGC³, which bars unilateral revision of fee by an Arbitral Tribunal, Chennai Metro⁴ contended that since the entire premise of arbitration is based on party autonomy, the parties to an arbitration are at liberty to fix the fees payable to the Arbitral Tribunal and any alterations to the previously agreed fee could only be done with the consent of the parties. It was also submitted that the insistence on charging the revised fee by the Arbitral Tribunal, despite objections by Chennai Metro, would attract the principle of “bias” and as such, the proceedings would not be conducted or concluded with an impartial mind against the party that objected to such unilateral increase.

Afcons contentions

Afcons⁵, while refuting the maintainability of Section 14 application and relying upon HRD Corpn. v. GAIL⁶, highlighted that such an application could be maintainable only when the eligibility of the Arbitral Tribunal is challenged on the grounds enumerated in Section 12(5) read with the Seventh Schedule of the Act. In contrast, for all other circumstances of justifiable doubt, challenges to an Arbitral Tribunal’s independence or impartiality should first be addressed to the Arbitral Tribunal and not directly to the court. Afcons further contended that in case of circumstances of justifiable reason to doubt the Tribunal’s impartiality (including the circumstances enumerated in the Fifth Schedule of the Act (except the 19 entries which overlap with Seventh Schedule), the party must raise such grounds before the Arbitral Tribunal in the first instance. If the party is unsuccessful before the Arbitral Tribunal, that would become grounds for a challenge to the award, by virtue of Section 13(5).

While placing reliance on International Airports Authority of India v. K.D. Bali⁷, Afcons⁸ also argued that the threshold for exercising bias was extremely high and that there must be a real likelihood of bias as opposed to a mere suspicion of the same.

The Supreme Court’s ruling

At the outset, the Supreme Court while analysing Sections 12, 13, 14 and 15 of the Act pointed out that the use of the term “bias” has been deliberately avoided in the Act and the expression such as “justifiable doubts about the … impartiality” of an Arbitral Tribunal has been used instead.

The Supreme Court clarified that: 35. … However, when the grounds enumerated in the Seventh Schedule occur or are brought to the notice of one party unless such party expressly waives its objections, it is ipso facto sufficient for that party, to say that the Tribunal’s mandate is automatically terminated.⁹ and as such, an aggrieved party can directly challenge the mandate of the Arbitral Tribunal before the courts under Section 14 of the Act. In the event a party raises claims of justifiable doubts with respect to the independence or impartiality of an Arbitral Tribunal on grounds enumerated in the Fifth Schedule, the remedy then available with a party is to first apply to the Arbitral Tribunal as per Section 13(2) of the Act. In the event such party is unsuccessful, the Arbitral Tribunal is duty-bound to continue the proceedings, and only once the award is made, the aggrieved party can challenge the award under Section 34 of the Act.

While referring to the judgment in ONGC¹⁰, the Supreme Court reiterated that undoubtedly the Arbitral Tribunal’s fee cannot be revised unless the parties have agreed to such revision; and in the event that there is an objection by either party, the Arbitral Tribunal ought to either revert to the previously agreed fee or decline to act as the Arbitral Tribunal. That being said, the Supreme Court took into consideration the principles laid down in ONGC¹¹, and noted that the insistence of retaining the revised fee, however, would not render the Arbitral Tribunal as ineligible, and thus would not terminate the mandate of the Arbitral Tribunal.

In conclusion and while dismissing the present appeal by Chennai Metro¹², the Supreme Court noted that the de jure ineligibility because of existence of justifiable doubts on unenumerated grounds [or other than those specifically provided in Section 12(5)] could not be a gateway to allow challenges against the Arbitral Tribunal, during the course of the proceedings. The Supreme Court recognised that the consequences of granting any exception to Chennai Metro’s plea in the present case could “well be an explosion in the court docket” and could lead to other unforeseen results. The Supreme Court also noted that any deviation from the strictly prescribed statutory route with respect to the grounds laid down in the Fifth and Seventh Schedules, could “cast yet more spells of uncertainty upon the arbitration process”.

Takeaways

While the Supreme Court has noted the importance of party autonomy in relation to settling of fees, the Supreme Court underscores the importance of the framework provided in Sections 12 and 13 of the Act for challenging Arbitral Tribunal’s eligibility. As such, except for grounds on ineligibility, specifically provided in the Seventh Schedule, a challenge in relation to independence and impartiality will at the first instance have to be raised before the Arbitral Tribunal. It is thus made clear that the only instances where the Arbitral Tribunal would be ineligible to be appointed, are those that are laid down in the Seventh Schedule, and not others which are otherwise not specifically laid down in the Seventh Schedule. In such cases, if the challenge on ground of independence and impartially fails, the party can only challenge the award under Section 34 of the Act.

It is noteworthy that in this case, the Arbitral Tribunal, in Section 14 application agreed to revert to the originally agreed fees; but if not agreed, parties must have been compelled to pay an increased (unilateral) fee until the end of the arbitration. The strict interpretation of and adherence to the relevant sections and schedules by the Supreme Court, demonstrates that the Supreme Court avoided stepping into the shoes of the legislature and upheld the policy of minimal interference by courts in arbitral proceedings. This is yet another example of the pro-arbitral stance taken by the Supreme Court.