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‘Conflict at later stage, no unilateral power’ — why SC ruled arbitrators can’t alter fees midway

Bench delivered verdict on petition by ONGC that sought to terminate tribunal arbitrating commercial dispute between the public sector undertaking and construction company Afcons.

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New Delhi: In a judgment that’s likely to curtail the practice of arbitrators unilaterally modifying their charges while arbitration proceedings are on, the Supreme Court has ruled that arbitrators can’t deviate from the fee fixed at the beginning of the arbitration.

A three-judge bench led by Justice D.Y. Chandrachud delivered the verdict Tuesday on a petition filed by the Oil and Natural Gas Corporation (ONGC) to terminate the existing tribunal arbitrating a commercial dispute between the public sector undertaking and a construction company, Afcons.

ONGC claims the arbitrators had unilaterally hiked their fees, deviating from what was fixed in the work contract between the two companies and accepted by the arbitrators when they were approached to arbitrate.

The terms of the arbitrators’ fees between ONGC and Afcons were fixed under the fourth schedule of the Arbitration and Conciliation Act, 1996. The fourth schedule fixes a ceiling for an arbitrator’s fees.

The claim in the case was Rs 679 crore and the counter-claim was Rs 407 crore.

Under the fourth schedule, the arbitration fee for a dispute of over Rs 20 crore is “Rs 19,87,500 plus 0.5 per cent of the claim amount over and above Rs 20,00,00,000 with a ceiling of Rs 30,00,000”.

Ruling on the petition, the top court declared that the arbitrators do not have the power to issue “binding and enforceable orders” determining their own fees. Such a determination, it added, would violate the principles of party autonomy.

The court, however, refused to accept the ONGC’s argument that the Rs 30 lakh ceiling mentioned in the Act was for the entire tribunal. Instead, the court said that each member of the tribunal — in this case, two former Supreme Court judges and one high court judge — was individually entitled to Rs 30 lakh.

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The dispute

In its petition filed before the SC in March, the ONGC claimed the arbitrators increased the fee in the middle of the arbitration proceedings.

The petition said the new fee scale was not just against the contract terms, but also “far from the fees” fixed for the arbitrators under the fourth schedule of the 1996 Act, which guides proceedings when disputes arise between contracting parties.

According to the contract between ONGC and Afcons, the upper ceiling for an arbitrator’s fee is Rs 10 lakh, with a time limit prescribed to end the arbitration, the petition said.

However, the arbitrators fixed Rs 1 lakh per arbitrator for every sitting as the fee and each sitting was for a duration of three hours, the petition added.

In its order Tuesday, the Supreme Court also issued directives that will govern fees of arbitrators in ad-hoc arbitrations — that is, the ones that are not administered by any institution. It added that arbitrators must stick to the fees decided at the start of the proceedings to avoid “unnecessary litigation and conflicts” between parties and arbitrators at a later stage.

According to the court directives, the arbitral tribunal must hold preliminary hearings with a maximum of four hearings in order to finalise the issues that need to be adjudicated. The components set out must include the fee structure for arbitrators as well, the court said.

If the proposed fee structure is not acceptable to the tribunal, the latter must state it clearly during the preliminary hearings, the SC said in its directives.

Arbitrators would be paid the revised fee that all parties involved agree to. But if there are objections by the parties, the tribunal or the member making them should decline the assignment, the judgement said.

The parties and arbitrators also can jointly agree to revise the fee upon the completion of a specific number of sittings, the court said. But the quantum of revision and the stage at which such a revision must be clearly spelled out in the agreement.

The court further said that the terms of the agreement should also include the number of sittings required for the final adjudication of the dispute. If a court appoints an arbitrator, the order should stipulate the conditions and fee for the arbitration proceeding.

The judgment touched upon the fee structure in the fourth schedule and said the same can’t be static and deserves to be revised periodically. The court said in its order that if there was only one arbitrator appointed under the schedule, that person should be paid 25 per cent over and above the Rs 30 lakh amount.

The judgment also said that arbitrators could charge a separate fee for counter-claims. The court held that claims and counter-claims made in a commercial dispute are two distinct proceedings and arbitrators are entitled to raise a separate bill to decide a counter-claim.

(Edited by Uttara Ramaswamy)

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