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08 August 2019
On 10 July 2019 the division bench of the Supreme Court (comprising Justice R F Nariman and Justice Surya Kant) held that if the parties to an arbitration have agreed to an arbitrators' fee schedule, the arbitrators must charge their fees in accordance with this agreed schedule and not in accordance with the Fourth Schedule of the Arbitration and Conciliation (Amendment) Act 2015 (Gammon Engineers and Contractors Pvt Ltd v National Highways Authority of India).
Section 31(8) of the Arbitration and Conciliation Act 1996 (Arbitration Act) provided that "unless otherwise agreed by the parties", the costs of an arbitration, including the costs to which one party is entitled and the arbitrators' fees and expenses, must be fixed by the arbitral tribunal.
Section 31(8) was amended in 2015 to state that the costs of an arbitration must be fixed by the arbitral tribunal in accordance with Section 31(A), which was inserted into the Arbitration Act by way of the 2015 amendment. Under Section 31A, arbitral tribunals have the discretion to determine the costs of an arbitration, which include costs payable by one party to another and the arbitrators' fees and expenses. However, following the 2015 amendment, the expression "unless otherwise agreed by the parties" included in Section 31(8) of the Arbitration Act was removed.
On 11 September 2017 the Delhi High Court interpreted the removal of the expression "unless otherwise agreed by the parties" in Section 31A of the Arbitration Act to mean that arbitrators' fees must be fixed in accordance with the Fourth Schedule of the amended Arbitration Act, notwithstanding an agreement between the parties fixing the arbitrators' fee schedule (National Highway Authority of India v Gayatri Jhansi Roadways Limited). In other words, it was interpreted that arbitral tribunals were competent to fix their fees regardless of an agreement between the parties.
In the present case, the parties entered into a contract with an arbitration clause. The contract also contained a clause wherein the parties agreed the arbitral fees and other expenses. When the matter came up before the appointed arbitral tribunal, it was directed that in view of Section 31(A) of the amended Arbitration Act and Gayatri Jhansi, the tribunal was competent to fix its fees as per the Fourth Schedule of the amended Arbitration Act, regardless of the parties' agreement. One of the parties challenged this view in an application filed with the Delhi High Court under Section 14 of the amended Arbitration Act.
The Delhi High Court disagreed with the earlier view taken in Gayatri Jhansi. It held that the Fourth Schedule of the Arbitration Act is not mandatory and that arbitral tribunals should follow the terms on arbitrators' fees set out in an agreement between the parties. It was observed that 'costs' under Section 31(8) read with Section 31(A) of the amended Arbitration Act are those awarded by an arbitral tribunal as part of its award in favour of one party against the other. As such, the rationale behind the deletion of the expression "unless otherwise agreed by the parties" was to ensure that parties cannot, by agreement, contract out of paying costs and prevent the arbitral tribunal from awarding the costs of the arbitration in favour of the successful party. Accordingly, it was held that Gayatri Jhansi was per incuriam and the application under Section 14 was allowed. The Delhi High Court's decision was challenged before the Supreme Court.
The Supreme Court agreed with the Delhi High Court insofar as it held that if parties to an arbitration have agreed an arbitrators' fee schedule, the arbitrators must charge their fees in accordance with said schedule and not in accordance with the Fourth Schedule to the amended Arbitration Act.
The Supreme Court also held that the Delhi High Court's interpretation in the present case regarding the change in the language of Section 31(8) read with Section 31(A) was correct in law. That is, Section 31(8) read with Section 31A governs the costs of arbitration in general and not arbitrators' fees. However, it was held that the Delhi High Court had erred insofar as it had terminated the arbitrators' mandate by allowing the application under Section 14, as the arbitrators had merely followed the law as set out in Gayatri Jhansi. The Delhi High Court's decision was accordingly set aside.
In view of the above reasons, the Supreme Court held that the declaration of law in Gayatri Jhansi was an incorrect interpretation of the law. As such, the decision was set aside.
The Supreme Court's decision clarifies that in such cases, arbitrators' fees are strictly governed by an agreement between the parties. While this decision gives credence to party autonomy and may thus be hailed as pro-arbitration, it specifies no limits and provides no other directions for parties to bear in mind while fixing a fee schedule. As such, it remains to be seen whether this wide discretion given to parties will be misused to the disadvantage of arbitrators. Further, where a fixed fee is disagreeable to arbitrators whose mandate is consequently rejected, the entire proceedings are likely to be delayed, thereby rendering the expeditious nature of arbitration proceedings moot.
For further information on this topic please contact Kathleen Lobo or Saasha Malpani at Khaitan & Co by telephone (+91 11 4151 5454) or email (email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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