Op EdsOP. ED.

In its judgment in Union of India v. Singh Builders Syndicate,[1] the Indian Supreme Court flagged the indiscriminately high arbitrator fees as a major challenge to the growth of arbitration in the country. It was stated that contrary to legislative intent, arbitration proceedings had become disproportionately expensive, and needed to be “saved from arbitration costs.” Consequently, the Law Commission recommended a rationalised fee structure based on a model schedule of fees,[2] which was duly incorporated through the 2015 Amendment as the Fourth Schedule to the Arbitration and Conciliation Act, 1996[3] (“the Act”). Subsequent amendments brought about in 2019[4], although not yet notified, sought to further streamline the issue of arbitral fees under the Act. This post is an attempt to examine the law as aforesaid, in practice, and analyse the underlying issues that parties, as well as arbitrators, continue to face, in the above context.

Determination of Fees

Section 31(8) of the Act empowers arbitral tribunals to fix the costs of arbitration, subject to the regime stipulated under Section 31-A. Sub-section (1) of Section 31-A vests discretion in the tribunal to determine –

  1. whether costs are payable by a party;
  2. the amount(s) of such costs; and
  3. the time of payment.

Interestingly, while the term “costs” is defined to include, inter alia, the fees and expenses of arbitrators, the same has specifically been confined only to the said sub-section. As a result, subsequent provisions under Section 31-A, which contain internationally recognised principles to ascertain such costs (including the loser pays principle), are seemingly inapplicable in determining arbitral fees and expenses. Instead, Section 11(14) of the Act empowers the High Courts to frame rules for the same, taking the Fourth Schedule into account. However, the same being merely an enabling provision, many High Courts have not issued any such rules, effectively rendering the provision redundant. Although the courts in some cases[5] have nonetheless applied the Fourth Schedule, there are decisions[6] that have explicitly held that the same is merely indicative and is not binding on the parties.

Therefore, in the absence of a conclusive judicial finding and sans any other provision in the Act on the applicability of the Fourth Schedule, it would appear that the arbitral tribunals continue to have unfettered discretion to fix their fee, at least in non-institutional/ad hoc arbitration proceedings. While the parties may, by prior agreement, fix a fee schedule, the practice is relatively uncommon in arbitrations to which the Act applies. In fact, even the question of party autonomy with respect to determining the fee had remained contentious for a long time until the Supreme Court finally settled the matter in Gammon Engineers v. NHAI.[7] The Court affirmed that a prior fee structure agreed to by the parties would be binding upon the tribunal, notwithstanding the provisions of the Act.

Resultantly, unless the parties contractually agree to a prior fee structure, or the proceedings are governed by institutional rules prescribing the same, there is little to guide or regulate arbitrators in the determination of their fee. In such situations, one or all parties may be constrained to agree to whatever fee is decided, lest the tribunal gets prejudiced against them. Alternatively, the parties may refuse to pay such fee and mount a challenge in court, or lead the arbitrators to simply resign – both of which can significantly derail arbitral proceedings. In empowering a graded arbitral institution to determine the fees subject to the Fourth Schedule,  the 2019 Amendment Act has seemingly rectified this concern. However, almost a year since its enactment, the said change is yet to be notified, and it is unclear whether even the new sub-sections (3-A) and (14) to Section 11 would apply to party-appointed arbitrators in ad hoc proceedings.

Payment of Fees

Once determined, the form and payment of a tribunal’s fee present problems of its own. While most institutional rules provide for simplified and streamlined processes for the deposit and payment of the arbitrators’ fees, the same is not the case with ad hoc arbitration proceedings, where there is considerable scope for ambiguity and resulting arbitrariness in the process.

As per Section 38 of the Act, a tribunal can fix the amount of deposit (or supplementary deposit) as an advance for costs, including its fees. Sub-section (2) states that such a deposit is to be paid by the parties in equal shares, or that one party may pay the entire amount if the other fails to pay. In the eventuality where even the other party refuses or is unable to pay the entire share of the deposit, the Act empowers the tribunal to suspend or terminate such proceedings.

Interestingly, while the Model Law (on which the Act is based) does not contain any such provision, similar clauses do exist in various institutional rules (including the SIAC and LCIA). Consequently, arbitrations to which the Act applies but which are not backed by any institutional framework, face challenges in the effective application of the provision. Unlike institutions, who hold such deposits in trust for the parties, arbitrators in ad hoc arbitration proceedings often demand complete and often an unconditional payment of fees upfront. Further, there is neither any remedy available to a party justifiably not willing to pay the fee, nor does the Act give power to the tribunal to enforce compliance should a party do so.

While broad powers of contempt have been judicially read into the Act by the Supreme Court in Alka Chandewar v. Shamshul Ishrar Khan,[8] the same may not hold in such situations in light of the statutory alternative under Section 38(2). Even justification for non-payment of fee may be for a number of reasons, but the Act does not spell out any such condition under which a party may refuse to pay the deposit. For instance, the parties challenging the composition or jurisdiction of an arbitral tribunal, or raising questions about arbitrators’ independence, might refuse to pay any sum that may have the potential to become frustrated costs later.

What is thus needed is a uniform system and procedure that protects the legitimate interests of the parties and the requirements of the arbitrators without compromising on the efficiency of the arbitral process itself. The fee rules of the Delhi International Arbitration Centre,[9] for instance, are a good example, which explicitly provide for specific percentages of fee to be released depending on the stage of the arbitration proceedings. It is expected that the Arbitration Council of India, proposed to be set up under the new Part I-A of the Act will be able to address and better regulate these issues, once the amendment is notified.

Refund/Reimbursement of Fees

Questions have also been raised as to how under the scheme of the Act, substantial losses are suffered even by successful parties towards costs incurred for arbitral proceedings, of which the arbitral fee forms a substantial part. In practice, where a party is successful in its challenge to the arbitral tribunal, or even to the award, the fee paid by it to the tribunal often becomes an irrecoverable, frustrated cost. The unresolved dispute will still need to be settled, not to mention the time already spent in the exercise.

Section 38(3) of the Act provides that upon termination of proceedings, an arbitral tribunal shall render an accounting of the deposits received from the parties and “shall return any such unexpended balance”. A statutory onus has thus been cast on the arbitrators to be accountable for the deposits (including fees) received from the parties. However, the Act provides for no recourse whatsoever to the parties in case the tribunal fails in this obligation, as is usually the case. There is also no mention of whether the same would amount to misconduct. Instead, in stark contrast, the newly added Section 42-B grants protection to the arbitrators for all acts done in good faith. Thus, even where proceedings are terminated for want of jurisdiction, or a patently illegal award is set aside, or when an arbitrator resigns, it may not necessarily mean the tribunal acted without due care and caution. Effectively, the parties appear to have been deprived of their recovery rights in such situations under general civil law as well.

However, reimbursement of arbitral fee still remains an issue yet to be decided by Indian courts, despite a number of awards being set aside and the mandate of tribunals being terminated for various reasons. Interestingly, along similar lines, the Austrian Supreme Court, in 2014, had rejected the request of a claimant for reimbursement of a portion of fees advanced to the arbitrator whom it had successfully challenged during ongoing proceedings. The Court held that the services provided by the arbitrator up to that point were not entirely worthless, and since those proceedings were not required to be repeated, the arbitrator was found entitled to half his fee.

In Hungary, Act LX of 2017 on Arbitration contains an explicit provision disentitling arbitrators to any fee should their award be annulled. While this may be unduly harsh and even deter competent arbitrators to agree to being appointed, parties must have some enforceable remedy to recover at least the justifiable costs expended by them. Reports of arbitrators charging unduly high fees and/or resigning are not uncommon, with parties left with no choice but to replace them, but with the entire fee being paid again.

 Conclusion

Given that India is perhaps one of the few jurisdictions where ad hoc proceedings are largely preferred over institutional arbitrations, efficiency and cost effectiveness of the arbitral process are important factors to consider if the country aims to become a global arbitration hub. It is imperative to mandatorily cap arbitrators’ fee by law and allow a rationalised, transparent system of payment to be introduced that will effectively hold the parties as well as the arbitrators to account.

The new amendment enacted in 2019 with the stated objective “to promote institutional arbitration” does seem to provide some of these solutions, but these will only be assessed once the changes are notified and actually adopted in practice.


*Authors are practising commercial lawyers and represent both public and private parties in commercial arbitration proceedings.

[1](2009) 4 SCC 523

[2] Report No. 246 on the Amendments to the Arbitration and Conciliation Act, Law Commission of India (August, 2014).

[3] Fourth Schedule, Arbitration and Conciliation Act, 1996

[4] The Arbitration and Conciliation (Amendment) Act, 2019

[5] Kumar & Kumar Associates v. Union of India, 2016 SCC OnLine Pat 9476.

[6] Paschimanchal Vidyut Vitran Nigam Limited v. IL&FS Engineering & Construction Company Limited, 2018 SCC OnLine Del 10831

[7] 2019 SCC OnLine SC 906

[8](2017) 16 SCC 119

[9]The Delhi International Arbitration Centre (Administrative Cost and Arbitrators’ Fees) Rules, 2018.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Ranjan Gogoi, CJ and Deepak Gupta and Sanjiv Khanna, JJ has held that the power of a police officer under Section 102 of the Criminal Procedure Code, 1973 to seize any property, which may be found under circumstances that create suspicion of the commission of any offence, would not include the power to attach, seize and seal an immovable property. Khanna, J, writing the judgment for the bench, however, clarified,

“This, however, would not bar or prohibit the police officer from seizing documents/ papers of title relating to immovable property, as it is distinct and different from seizure of immovable property.”

The verdict came in a reference made by a Division Bench of Jagdish Singh Khehar and Arun Mishra, JJ vide order dated November 18, 2014, noticing that the issues that arise have far reaching and serious consequences.

Interpreting Section 102, the bench said that the language of Section 102 of the Code does not support the interpretation that the police officer has the power to dispossess a person in occupation and take possession of an immovable property in order to seize it. Section 102 is not, per se, an enabling provision by which the police officer acts to seize the property to do justice and to hand over the property to a person whom the police officer feels is the rightful and true owner.

It further explained that the expression ‘circumstances which create suspicion of the commission of any offence’ in Section 102 does not refer to a firm opinion or an adjudication/finding by a police officer to ascertain whether or not ‘any property’ is required to be seized. The word ‘suspicion’ is a weaker and a broader expression than ‘reasonable belief’ or ‘satisfaction’. The police officer is an investigator and not an adjudicator or a decision maker. This is the reason why the Ordinance was enacted to deal with attachment of money and immovable properties in cases of scheduled offences.

“In case and if we allow the police officer to ‘seize’ immovable property on a mere ‘suspicion of the commission of any offence’, it would mean and imply giving a drastic and extreme power to dispossess etc. to the police officer on a mere conjecture and surmise, that is, on suspicion, which has hitherto not been exercised.”

It was further held that the disputes relating to title, possession, etc., of immovable property are civil disputes which have to be decided and adjudicated in Civil Courts. The Court said,

“We must discourage and stall any attempt to convert civil disputes into criminal cases to put pressure on the other side.”

Gupta, J wrote a separate concurring verdict where he highlighted that the Code of Criminal Procedure itself the Legislature has in various provisions specifically used the words ‘movable’ and ‘immovable’ property as opposed to the words ‘any property’ under in Section 102, hence, the phrase ‘any property’ in Section 102 will only cover moveable property and not immovable property.

[Nevada Properties Pvt. Ltd. State of Maharashtra, 2019 SCC OnLine SC 1247, decided on 24.09.2019]

Case BriefsHigh Courts

Bombay High Court: Rohit B. Deo, J. allowed a criminal appeal filed against the judgment of the Additional Sessions Judge whereby the appellant was convicted for the offence of committing rape repeatedly on the same woman punishable under Section 376(1)(n) IPC along with the offence punishable under Section 506 (criminal intimidation).

The case against the appellant was that he abducted the victim and subjected her to forcible intercourse multiple times. He was convicted as aforesaid and sentenced to suffer rigorous imprisonment for a term of 10 years. Aggrieved thereby, the appellant filed the present appeal.

F.N. Haidri, Advocate representing the appellant contended that even if it is assumed that there was sexual intercourse, it was consensual. Per contra, TA Mirza, APP appearing for the State submitted that the defence of consent must be rejected because the statutory presumption under Section 114-A of the Evidence Act is not rebutted.

On perusal, the High Court was satisfied that evidence of the victim was not of such sterling quality as would obviate the need to seek corroboration. Perusing further the facts and the medical and forensic evidence, the Court was of the opinion that there were many holes grey areas and it would be absolutely unsafe to base the conviction on victim’s testimony which was not corroborated. As far as defence of consent was concerned, the Court observed that the prosecution failed to prove the foundational facts. It was said: “The legislative intent is not that the accused must disprove the absence of consent beyond a reasonable doubt. It would not be necessary for the accused to adduce direct evidence to prove that there was consent or to disprove the absence of consent. The accused can rely on material brought on record in the cross-examination of the victim and the evidence of the other prosecution witnesses. In the present case, enough material is brought on record in the cross-examination of the victim and the evidence of the other prosecution witnesses to lend credibility to the alternate defence theory that the sex was consensual.”

The Court held that the prosecution failed to prove the offence beyond reasonable doubt and the gulf between suspicion and proof was not bridged. Consequently, the Court acquitted the appellant of all the offence and directed his release. [Mohan v. State of Maharashtra, 2019 SCC OnLine Bom 1407, decided on 30-07-2019]

Case BriefsHigh Courts

Bombay High Court: A Single Judge Bench comprising of Rohit B. Deo, J. quashed the order of the trial court whereby plaintiff’s application under Order XVIII Rule 3-A CPC seeking permission to examine his power of attorney (his son) he himself steps into the box.

The petitioners were the defendants in the special civil suit instituted by the respondent-plaintiff seeking a decree of damages for defamation. The application was predicated on the assertion that the power of attorney holder was personally acquainted with the facts. The averment in the application was that the plaintiff was aged 80 years and suffering from various ailments. It was also averred that no prejudice would be caused to the defendants if the son of the plaintiff is examined before the plaintiff. The defendants opposed the application, inter alia, denying that the plaintiff was suffering from various ailments. However, by the order impugned, the trial court allowed the plaintiff’s application under Order XVIII Rule 3-A. Aggrieved thereby, the instant petition was filed by the defendant.

The High Court, after considering the facts and circumstances of the case, observed that the legislative mandate is that ordinarily where a litigant himself wishes to appear as a witness, he shall so appear before any other witness in his behalf has been examined. Rule 3-A confers a discretion on the Court to permit, for reasons to be recorded, the plaintiff to appear as his own witness at a later stage. However, implicit in the statutory scheme is the rider that the normal rule may be deviated from only in exceptional circumstances and for reasons recorded which must sustain judicial review. “The legislative object of bringing on statute Rule 3-A was to ensure that a litigant should not be permitted to bide his time and to fill in the lacuna or cover the loopholes after the other witnesses are examined.” In the matter at hand, the Court found it difficult to believe that the plaintiff was suffering from various ailments to such an extent that he was not in a position to step into the witness box. Therefore, the Court held that the order impugned militate against the object and intendment of Order XVIII Rule 3-A, which was accordingly quashed. [Sanj Dainik Lokopchar v. Gokulchand Govindlal Sananda,2018 SCC OnLine Bom 3336, decided on 11-10-2018]

Case BriefsSupreme Court

Supreme Court: The bench of Ranjan Gogoi and Navin Sinha, JJ held the exercise of revisional power under Section 40 of the Haryana General Sales Tax Act, 1973 after its repeal on 1.4.2003, by the Haryana Value Added Tax, 2003, is not sustainable.

It was held that any interpretation saving the revisional power under Section 40 of the Act of 1973, without any proceedings pending on the relevant date, by resort to Section 4 of the Punjab General Clause Act, 1858 would render the amendment redundant, and an exercise in futility, something which the legislature never intended to do. It was held that the legislature, in its wisdom having noticed the limitation and constraints under Section 61 of the Act of 2003, made necessary amendments to the same by Act No. 3 of 2010 on 02.04.2010. Hence, such an incongruous interpretation leading to absurdity has to be avoided.

It was further explained that Section 4 of the Punjab General Clauses Act, 1858 will have no application in view of the contrary intendment expressed in Section 61 of the repealing Act. Had a contrary intention not been expressed, the issues arising for consideration would have been entirely different.

In the present case, where here were no proceedings pending against the respondent under the Act of 1973 when the new Act came into force on 01.04.2003, the Court held that the assessment under the Act of 1973 having been completed and refund ordered, the exercise of suo-moto revisional powers under Section 40 of the same after repeal was clearly unsustainable in view of the contrary intention expressed under Section 61 of the Act of 2003, saving only pending proceedings. [State of Haryana v. Hindustan Construction Company Ltd.,  2017 SCC OnLine SC 1110, decided on 15.09.2017]

Case BriefsSupreme Court

Supreme Court:  In the matter where the first proviso to Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005 was being interpreted to facilitate the determination of taxable turnover as defined in Section 2(34) of the Karnataka Value Added Tax Act, 2003 in interface with Section 30 of the Act and Rule 31 of the Rules, the Court said that the interpretation to be extended to the proviso involved has to be essentially in accord with the legislative intention to sustain realistically the benefit of trade discount as envisaged. Any exposition to probabilise exaction of the levy in excess of the due, being impermissible cannot be thus a conceivable entailment of any law on imperative impost.

The Court further said that to insist on the quantification of trade discount for deduction at the time of sale itself, by incorporating the same in the tax invoice/bill of sale, would be to demand the impossible for all practical purposes and thus would be ill-logical, irrational and absurd. Trade discount though an admitted phenomenon in commerce, the computation thereof may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory. While, devious manipulations in trade discount to avoid tax in a given fact situation is not an impossibility, such avoidance can be effectively prevented by insisting on the proof of such discount, if granted.

The bench of Dipak Misra and Amitava Roy, JJ said that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to them original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid. The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. [Southern Motors v. State of Karnataka, 2017 SCC OnLine SC 42, decided on 18.01.2017]

 

Case BriefsSupreme Court

Supreme Court: In a petition highlighting the plight of the members of Scheduled Castes and Scheduled Tribes, the Court noticed that there has been a failure in complying with the provisions of the Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act, 1989 as the laudable object with which the Act had been made is defeated by the indifferent attitude of the authorities.

Stating the legislative intent behind the enactment of the Act, the Court noted that  Parliament acknowledged that the Scheduled Castes and Scheduled Tribes were subject to various offences, indignities, humiliations and harassments perpetually. Numerous incidents of brutalities and atrocities depriving the Scheduled Castes and Scheduled Tribes of their life and property were a cause of concern for Parliament.

Regarding the contention of the Union of India that the State Governments are responsible for carrying out the provisions of the Act, the Court said that the Central Government also has an important role to play in ensuring the compliance of the provisions of the Act. Section 21(4) of the Act provides for a report on the measures taken by the Central Government and State Governments for the effective implementation of the Act to be placed before  Parliament every year. The constitutional goal of equality for all the citizens of this country can be achieved only when the rights of the Scheduled Castes and Scheduled Tribes are protected.

The 3-Judge Bench of T.S. Thkur, CJ and Dr. D.Y. Chandrachud and L. Nageswararao, JJ directed the Central Government and State Governments to strictly enforce the provisions of the Act and also directed the National Commissions to discharge their duties to protect the Scheduled Castes and Scheduled Tribes. The Court also asked the National Legal Services Authority to formulate appropriate schemes to spread awareness and provide free legal aid to members of the Scheduled Castes and Scheduled Tribes. [National Campaign on Dalit Human Rights v. Union of India, 2016 SCC OnLine SC 1488, decided on 15.12.2016]