Deconstructing the Supreme Court’s Ruling on Arbitrators’ Fee

[By Anshritha Rai]

The author is a fifth year student at ILS Law College Pune.

In a recent landmark decision of Supreme Court in the case of Gammon Engineers and Contractors Pvt. Ltd. v. NHAI [i], it was held that where the arbitrators’ fee is already fixed by agreement, section 31(8) of the Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) is inapplicable. Section 31(8) of the Act provides power to the arbitral tribunal to fix costs of arbitration in accordance with Section 31A of the same Act.

Facts of the case

In the instant case, an arbitration clause was invoked by Gammon Engineers and Contractors Pvt. Ltd. (“Appellant”) pursuant to a contract entered into between the Appellant and NHAI (“Respondent”). Vide the contract, the parties had agreed on the fee payable to the arbitral tribunal (“Tribunal”). The fee structure was fixed as per the Respondent’s policy circulars. The Tribunal, however, passed an order stating that the fees shall be governed by the Fourth Schedule (“Fourth Schedule”) of the Arbitration and Conciliation Act, 1996.

The Respondent, against this order, filed an application before the Tribunal to review its decision. In National Highways Authority of India v. Gayatri Jhansi Roadways Limited [ii], the Delhi High Court had held that the arbitral tribunal is competent to fix the fees notwithstanding the agreement between the parties. Relying on this judgment, the Tribunal dismissed the Respondent’s application.

Aggrieved by this, the Respondent sought to terminate the mandate of the Tribunal. Accordingly, an application under section 14 of the Act was filed before the Delhi High Court (“Court”). The Court allowed the appeal, finding that the Fourth Schedule was not required to be mandatorily followed. Further, the dictum laid down in Gayatri Jhansi Roadways Limited was declared to be per incuriam. Thereafter, the Appellant challenged this decision before the Supreme Court by way of a Special Leave Petition.

Issues framed by the Court

(i) Whether the fee structure stipulated in the Fourth Schedule supersedes the fee fixed by agreement?

(ii) Whether the termination ordered by the Delhi High Court is sustainable?

Judgment

Issue (i) The Supreme Court noted that the fee structure was mutually agreed between the parties. It was further observed that considering the time gap between the date of the agreement and the date of the disputes, the fee schedule was naturally bound to be updated.

Section 31(8) of the Arbitration Act [iii] originally stated that “unless otherwise agreed by the parties”, the arbitral tribunal is competent to fix the costs of an arbitration. The Arbitration and Conciliation (Amendment) Act, 2015 omitted the expression “unless otherwise agreed by the parties” appearing in Section 31(8). The deletion of this expression was understood in Gayatri Jhansi Roadways Limited case to mean that the rates specified in the Fourth Schedule takes primacy over any agreement between the parties. However, the Court disagreed with the decision in Gayatri Jhansi Roadways Limited. The reason for this was that the judgment in that case had not taken the 246th Law Commission Report and relevant earlier decisions into due consideration. The apex court too found that the ratio laid down in Gayatri Jhansi Roadways Limited is not a correct view of the law. Accordingly, the Supreme Court overruled the judgment in the case of Gayatri Jhansi Roadways Limited.

The Court had also observed that section 31(8) of the Arbitration Act governs costs, of which the arbitrators’ fee is only a component. In other words, section 31(8) deals with costs in general, and not the fee payable to the arbitrators. It was noted that section 31(8) will not apply if the fee is already fixed by agreement. The Supreme Court concurred with these findings.

The rates stipulated in the Respondent’s circular dated 01.06.2017 was ultimately held to govern the fee schedule. Consequently, the apex court clarified that the arbitrators are entitled to charge their fees in accordance with the Respondent’s circular, and not the Fourth Schedule.

Issue (ii) The division bench of the Supreme Court found that the Delhi High Court had erroneously terminated the mandate of the tribunal. The apex court affirmed that the tribunal was required to comply with the Gayatri Jhansi Roadways Limited decision which mandated that not the agreement, but the Fourth Schedule would apply. In light of this, the Supreme Court noted that the arbitrators cannot be said to have done anything wrong. The court reasoned that an arbitrator does not become de jure unable to perform his/her functions on account of having followed the law laid down by a court. On this account, the Supreme Court quashed the termination order.

Analysis

In the past, there have been instances of placing reliance on the fee structure mentioned in the Fourth Schedule notwithstanding that the parties have agreed otherwise. Vide its judgment, the Supreme Court has provided much-needed clarity on whether the rates specified in the Fourth Schedule overrides the fee structure mutually agreed between the parties. The agreement entered into between the parties has been given utmost importance under the judgment. This decision underpins the principle of party autonomy and sanctity of the contract entered into between the parties.

In Gayatri Jhansi Roadways Limited, the Delhi High Court essentially permitted an arbitral tribunal to determine its fees irrespective of an agreement between the parties. By overruling this decision, the Supreme Court has given immense weightage to freedom of the parties. The apex court has set a precedent that the Fourth Schedule of the Act is not mandatory, but merely suggestive in nature. Arbitrators cannot demand that the Fourth Schedule shall be applicable unless the parties have mutually agreed to invoke the provision. Needless to say, the pro-arbitration approach adopted by the Supreme Court will be hailed by prospective litigants. It is now necessary for courts to set out guidelines applicable to parties when determining the fee structure. However, a matter of concern is when the agreed fee schedule is unacceptable to the arbitrator. In such a situation, the mandate is likely to be rejected by the arbitrators, thereby resulting in undue delays and frustrating the expeditious nature of arbitration proceedings. It is imperative that a framework addressing these matters are laid down at the earliest.

Endnotes

[i] Civil Appeal No. 5383 of 2019 (Arising out of SLP (C) No. 3211 of 2018) and Civil Appeal No. 5384 of 2019 (Arising out of SLP (C) No. 22099 of 2018).

[ii] ARB.A. 1/2017, I.A. NOS.8086/2017 (Stay Application) & 9441/2017 (Application for waiver of costs).

[iii] Prior to the amendment, Section 38 read as follows: “Unless otherwise agreed by the parties, the costs of an arbitration shall be fixed by the arbitral tribunal. The arbitral tribunal shall specify-

the party entitled to costs,
the party who shall pay the costs,
the amount of costs or method of determining that amount, and
the manner which the costs shall be paid”.