Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV, Arbitration Petition (Civil) No. 05 of 2022: Supreme Court of India (pronounced on 30 August 2022)

Relevant Facts:

The present proceedings arose out of 4 different matters. However, the main matter related to the arbitration between Oil and Natural Gas Corporation Limited (“ONGC”) and Afcons Gunanusa JV (“Afcons”). Therefore, the factual summary in the present case brief is restricted to that arbitration only.

• On 29 May 2009, the petitioner, ONGC, and the respondent, Afcons, entered into a Lump Sum Turnkey Contract (“LSTK Contract”) for the construction of an ICP-R Platform.
• Certain disputes arose between the parties and Afcons invoked arbitration on 20 July 2015 in accordance with Clause 1.3 of the Contract.
• The agreement also provided a schedule of fees for the arbitrators. However, during the preliminary meeting on 25 November 2015, the arbitral tribunal observed that the fee schedule in the LSTK contract was unrealistic.
• While Afcons agreed to revise the fees, ONGC expressed its disagreement. The tribunal directed ONGC to consider revising the fees. On 16 April 2016, the arbitral tribunal informed ONGC that it would no longer bargain on the amount of fees if ONGC was agreeable to the fee provided in the Fourth Schedule to the Arbitration & Conciliation Act 1996 (“Arbitration Act”), along with a reading fee of Rs 6 lakhs for each arbitrator.
• By its letter dated 22 April 2016, ONGC indicated that it was agreeable to revising the fees in terms of the Fourth Schedule. It only objected to the reading fee.
• Subsequently, the arbitral tribunal passed a procedural order dated 4 August 2016 directing the parties to deposit 25 per cent of the arbitrators’ fee, which was recorded as Rs 30 lakhs. A ceiling of Rs 30 lakhs was determined following the Fourth Schedule to the Arbitration Act.
• The arbitral tribunal then decided to revise the fees and passed a procedural order fixing a fee of Rs 1.5 lakhs for each arbitrator for every sitting of three-hour duration. The tribunal also indicated it may also charge a reading or conference fee, which would be decided at a later stage.
• By its letter dated 21 August 2020, ONGC informed the arbitral tribunal that the revised fee was not approved by its higher management. Thereafter, ONGC filed a petition under Section 14 read with Section 15 of the Arbitration Act before the Bombay High Court for the termination of the mandate of the arbitral tribunal and the substitution of a fresh set of arbitrators.
• The petition was dismissed by the Bombay High Court on the ground of a lack of jurisdiction since the arbitration was an international commercial arbitration. However, ONGC was granted liberty to approach the Hon’ble Supreme Court and all its contentions were kept open.

Issues:

The following questions with respect to arbitrators’ fees required determination by the Court:

• Whether the arbitrator(s) are entitled to unilaterally determine their own fees?
• Whether the term ‘sum in dispute’ in the Fourth Schedule to the Arbitration Act means the cumulative total of the amounts of the claim and counter-claim?
• Whether the ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule of the Arbitration Act is applicable only to the variable amount of the fee or the entire fee amount; and
• Whether the ceiling of Rs 30,00,000 applies as a cumulative fee payable to the arbitral tribunal or it represents the fee payable to each arbitrator?

Judgment:

Hon’ble Justice D.Y. Chandrachud wrote for himself and Hon’ble Justice Surya Kant, whereas, Hon’ble Justice Sanjiv Khanna authored a separate judgment.

• Judgment authored by Hon’ble Justice D.Y. Chandrachud

In carrying out his analysis, Justice Chandrachud referred to the rules of many international organizations such as the UNCITRAL, Permanent Court of Arbitration, London Court of International Arbitration, Singapore International Arbitration Centre, etc. Justice Chandrachud also analyzed the foreign jurisprudence relating to arbitrators’ fees. Some of the notable findings from his judgment are as follows:  

• Fourth Schedule to the Arbitration Act not mandatory: The Fourth Schedule is not mandatory and it is open to parties by their agreement to specify the fees payable to the arbitrator(s) or the modalities for determination of arbitrators’ fees. Since most High Courts have not framed rules for determining arbitrators’ fees, taking into consideration Fourth Schedule of the Arbitration Act, the Fourth Schedule is by itself not mandatory on court-appointed arbitrators in the absence of rules framed by the concerned High Court.
• Difference between Costs and Fees: It was held that the functional role of costs and fees is different. While fees represent the payment of remuneration to the arbitrators, costs refer to all the expenses incurred in relation to arbitration that are to be allocated between the parties upon the assessment of certain parameters by the arbitral tribunal or the court. Costs usually accommodate the principle of “loser pay”.
• Arbitrators cannot unilaterally determine their Fees: The Court held that the Arbitrators do not have the power to unilaterally issue binding and enforceable orders determining their own fees. A unilateral determination of fees violates the principles of party autonomy. However, the arbitral tribunal has the discretion to apportion the costs (including arbitrators’ fee and expenses) between the parties in terms of Section 31(8) and Section 31A of the Arbitration Act and also demand a deposit (advance on costs) in accordance with Section 38 of the Arbitration Act. If while fixing costs or deposits, the arbitral tribunal makes any finding relating to arbitrators’ fees (in the absence of an agreement between the parties and arbitrators), it cannot be enforced in favor of the arbitrators.
• Interpretation of the term “sum in dispute”: The Court ruled that the term “sum in dispute” in the Fourth Schedule of the Arbitration Act refers to the sum in dispute in a claim and counter-claim separately, and not cumulatively. As such, arbitrators shall be entitled to charge a separate fee for the claim and the counter-claim in an ad hoc arbitration proceeding.
• Ceiling of Rs. 30,00,000: It was held that the ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule is applicable to the sum of the base amount (of Rs 19,87,500) and the variable amount over and above it. Consequently, the highest fee payable shall be Rs 30,00,000. Furthermore, this ceiling is applicable to each individual arbitrator, and not the arbitral tribunal as a whole, where it consists of three or more arbitrators.

The Court also laid down some very important directives governing fees of arbitrators in ad hoc arbitrations. These are:

• The stage of having a preliminary hearing should be adopted in the process of conducting ad hoc arbitrations in India as it will provide much needed clarity on how arbitrators are to be paid and reduce conflicts and litigation on this issue.
• These preliminary hearings should also be conducted when the fees are specified in the arbitration agreement.
• It is quite possible that at the time when the disputes between the parties arise, the fees stipulated in the arbitration agreement may have become an unrealistic estimate of the remuneration that is to be offered for the services of the arbitrator due to the passage of time. In the preliminary hearings, if all the parties and the arbitral tribunal agree to a revised fee, then that fee would be payable to the arbitrator(s). However, if any of the parties raises an objection to the fee being demanded by the arbitrator(s) and no consensus can be arrived at between such a party and the tribunal or a member of the tribunal, then the tribunal or the member of the tribunal should decline the assignment.
• The parties and the arbitrator(s) should stipulate that after a certain number of sittings, the fee would stand revised at a specified rate. The number of sittings after which the revision would take place and the quantum of revision must be clearly discussed and determined during the preliminary hearings through the process of negotiation between the parties and the arbitrator(s).
• There can be no unilateral deviation from the Terms of Reference.
• When one or both parties, or the parties and the arbitral tribunal are unable to reach a consensus, it is open to the arbitral tribunal to charge the fee as stipulated in the Fourth Schedule. Consequently, when an arbitral tribunal fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object the fee fixation. It is the default fee, which can be changed by mutual consensus and not otherwise.

In view of the above findings, the Court observed that in the ONGC-Afcons Arbitration there was no consensus between the parties and the arbitrators regarding the fee that is to be paid to the members of the arbitral tribunal. Consequently, the Court directed the constitution of a new arbitral tribunal in accordance with the arbitration agreement. Lastly, the fee payable to the earlier arbitral tribunal would be the fee payable in terms of the Fourth Schedule of the Arbitration Act, since ONGC had indicated (following the suggestion of the arbitral tribunal) that it would be agreeable to pay the fee payable in terms of Schedule.

• Judgment authored by Hon’ble Justice Sanjiv Khanna

Reasons for authoring a separate judgment:

• Justice Khanna disagreed with the proposition that in the absence of any agreement between the parties, or the parties and the arbitral tribunal, or a court order fixing the fee, the arbitral tribunal is not entitled to fix the fee. Justice Khanna opined that by the implied terms of the contract and as per the provisions of the Arbitration Act, an arbitral tribunal can fix a reasonable fee, which an aggrieved party, who is not a signatory to the written agreement, can question under sub-section (3) of Section 39 of the Arbitration Act during the pendency of the arbitration proceedings.
• Justice Khanna had a different opinion with respect to the following points as well:

(i)  The interpretation of the term “sum in dispute”: According to Justice Khanna, the term “sum in dispute” means the whole/aggregate or the total amount involved in the dispute and the legislature has deliberately and consciously avoided a separate reference to the amounts stated either in the claim or the counter-claim. Justice Khanna also referred to the schedule in the Delhi International Arbitration Centre (Administrative Cost & Arbitrators’ Fees) Rules which uses the identical expression, “sum in dispute”, and provides cumulative fee of both the claim and the counter-claim.

(ii) The modification/alteration of the Fourth Schedule: Justice Khanna quoted the following example: where the sum in dispute is Rs.5,00,000/-, in case of the sole arbitrator, the amount payable to him would be Rs.56,250/-, that is, Rs.45,000/- plus 25% (Rs.11,250) of Rs.45,000/-. In case of an arbitral tribunal of three arbitrators, the fee payable would be Rs.1,50,000/-. This fee is too high and would be unacceptable to most of the litigants.

Comment:

There has been a lot of debate and discussion surrounding the issue of exorbitant arbitrator fees, in the recent times. In the present case as well, the Supreme Court referred to its previous decisions in Union of India v. Singh Builders (2009) 4 SCC 523 and Sanjeev Kumar Jain v. RS Charitable Trust (2012) 1 SCC 455, both of which recognized that arbitrary fixation of fees by the arbitrators, specifically court-appointed arbitrators, has made arbitration an expensive proposition, bringing it into disrepute. Similar observations were also made by the Law Commission of India in its 246^th Report.

Even after the addition of the Fourth Schedule to the Arbitration Act (on the recommendations of the Law Commission), the problem of unilateral determination of fees by the Arbitrators did not come to an end. The fundamental reason behind this was the lack of clarity with respect to the nature of the Fourth Schedule as well as law relating to the determination of arbitrator fees.

In that respect, the present judgment is a welcome step. It clarifies some of the most important questions with respect to arbitrators’ fees and also lays down directives governing fees of arbitrators in ad hoc arbitrations. These directives, if implemented properly, would go a long way in preventing disputes of similar nature from arising in the future.

At the same time, the author is of the opinion that Hon’ble Justice Sanjiv Khanna, in his separate opinion, has raised some very important points which merit further consideration by the Court as well as scholars.