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15 October 2020
Arbitration evolved as an expeditious, cost-effective, simple and fair alternative to litigation. However, over time, this method of alternative dispute resolution became costly. Coupled with largely ineffective provisions in the Arbitration and Conciliation Act 1996 (prior to the 2015 amendments) regarding costs allocation and recoverability, this was considered a roadblock to the development of arbitration in India. In domestic arbitration awards, arbitrators routinely ordered the parties to bear their own costs. This situation was unsatisfactory, especially given the well-established international costs regime which protected innocent parties from bearing the legal and other costs of an unmeritorious claim. After foreign jurisdictions and arbitral institutions acknowledged that the cost of arbitration was high and an area of concern, techniques and strategies emerged to reduce the overall cost of arbitral proceedings.
In its 246th report, the Law Commission of India highlighted the need to amend the law on costs. Section 31A (regime for costs) of the Arbitration and Conciliation Act, which was introduced by the Arbitration and Conciliation (Amendment) Act 2015,(1) was thus a welcome step towards costs recoverability being based on rational and realistic criteria.
Section 31A(1) provides that in relation to any arbitration proceeding, the arbitral tribunal has discretion to determine:
Section 31A(2) provides that if a tribunal decides to make an order as to the payment of costs, the general rule is that the unsuccessful party will be ordered to pay the successful party's costs. Alternatively, a tribunal may make a different order for reasons which must be recorded in writing. In exercising their powers under Section 31A of the act, tribunals must consider certain factors provided for in Section 31(A)(3) – namely:
In accordance with the explanation to Section 31A(1), 'costs' covers:
Notably, Section 31A(1) allows only for reasonable costs to be recovered (and not actual costs). Therefore, the test of reasonableness must be met and the tribunal must consider the reasonableness of the costs claimed. The factors which may be taken into consideration to determine reasonableness vary and such an assessment is not straightforward. The problems in determining reasonable costs are further compounded by the significant costs imposed on parties by their solicitors and counsel, which, along with the manner of billing, vary.
Under Section 31A(2)(a), the general principle of awarding costs is 'winner takes all'. The underlying rationale for the normal rule of costs following the event was explained in ZN (Afghanistan) v Secretary of State as follows:
a party has been compelled by the conduct of the other party to come to court in order to vindicate his legal rights. If those legal rights had been respected in the first place by the other party, it should never have been necessary to come to court. Accordingly, there will normally be a causal nexus between the fact that costs have been incurred and the underlying merits of the legal claim.(2)
In Veolia Water UK plc v Fingal County Council, the High Court of England and Wales stated that:
The overriding starting position should remain that costs should follow the event. Parties who are required to bring a case to court in order to secure their rights are, prima facie, entitled to the reasonable costs of maintaining the proceedings. Parties who successfully defend proceedings are, again prima facie, entitled to the costs to which they have been put in defending what, at the end of the day, the court has found to be unmeritorious proceedings.(3)
The application of the rule requires the identification of the event from which the costs follow (ie, the identification of which party has won the proceedings). This may not always be a straightforward exercise.
The general rule of awarding costs is seldom regarded as satisfactory as, in some circumstances, the general approach may be inappropriate. Section 31A(2) recognises this and therefore confers discretion on arbitral tribunals to make a different order as to costs. However, arbitral tribunals must record their reasons for departing from the general rule. Some circumstances in which an arbitral tribunal may depart from the general rule include where:
In The London Borough of Tower Hamlets v The London Borough of Bromley,(4) the Chancery Division of the High Court of England and Wales observed that "one should depart from the general rule only where the needs of justice and the circumstances of the particular case require, and a measure of caution is needed". In this case, the Chancery Division observed that among the circumstances to be considered is whether a party has succeeded with part of its case even if it has not been wholly successful. The other aspect to be considered by the court is the parties' 'conduct', which includes both:
Where a court considers that it should exercise discretion to depart from the normal rule as to costs, it must do so on a reasoned basis and indicate the factors which warrant such a departure. A combination of factors is usually involved and while decided cases indicate the nature of factors which may be relevant, these will be determined on a case-by-case basis.(5)
While there are few precedents available to throw light on the courts' approach to Section 31A, the cases decided under the old regime establish that awarding costs is within the discretion of the arbitrator and that the courts will not question an arbitrator's decision unless it is shown to be perverse. In Steel Authority of India v Shyam Sundar Choudhury, the Calcutta High Court set aside a costs award in favour of the successful party as a substantial part of the claims had been rejected.(6) In this case, the claimant had made a claim for Rs2.3 million and was awarded Rs128,000 as the principal sum plus Rs75,000 in interest. In Computers Unlimited v Xerox India Ltd, under Section 34 of the act, the court modified the costs award and expenses in proportion to the percentage of claims awarded.(7) In State of J&K v Dev Dutt Pandit, the Supreme Court set aside a costs award, reasoning that when claims are inflated out of all proportion, heavy costs should be awarded to the other party and the party making such inflated claims should be deprived of costs.(8) As a separate claim for costs had been made, the arbitrator's decision to ignore such claim was deemed unjustified and the award was modified to include the payment of reasonable costs.(9)
The new costs regime is expected to act as a deterrent for unscrupulous claims in arbitration. While the overriding starting position is that costs should follow the event, arbitral tribunals have been granted wide discretion to digress from this general rule if the circumstances so warrant. In future, there is likely to be an increase in disputes relating to costs and litigating parties may use innovative methods to reduce arbitration costs, including incorporating clauses which either bar costs awards or cap costs.
For further information on this topic please contact Ajay Bhargava, Arvind Kumar Ray or Vansha Sethi Suneja at Khaitan & Co by telephone (+91 11 4151 5454) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Khaitan & Co website can be accessed at www.khaitanco.com.
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