Supreme Court of India: Whether the Fee Arrangement Agreed Between the Parties Prevails Over the Fee Schedule provided under the Arbitration Act?

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In Gammon Engineers and Contractor Pvt Ltd v. National Highways Authority of India decided on 10 July 2019, the Supreme Court addressed the issue of whether the arbitrator’s Fee Schedule (Fourth Schedule) provided under the Arbitration and Conciliation Act, 1996 (as amended in 2015) (‘Act’) will override the fee arrangement agreed between the parties under their arbitration agreement. The Court upheld the principle of party autonomy and inter-alia held that the arbitrators will be entitled to charge their fees in accordance with the fee arrangement fixed between the parties in the arbitration agreement and not in accordance with the Fourth Schedule to the Act. Detailed case analysis given below:

Factual Matrix

The dispute arose between the parties in relation with a highway construction contract awarded by the Respondent to the Appellant. Under the arbitration clause, the parties had prescribed the fees that shall be payable to the Arbitral Tribunal.

However, the Appellant, being a government agency, thereafter, issued a Circular whereby it amended the fee structure payable to the Arbitral Tribunal. The fees stipulated in the Circular were higher than those stipulated in the arbitration clause.

As disputes arose between the parties, arbitration was invoked by the Appellant. In the letter appointing the Arbitral Tribunal, the Appellant informed the Tribunal that the fee applicable is to be considered as per the Circular of the Appellant. Thereafter, during a hearing on this issue, the Arbitral Tribunal passed an order in which it was inter-alia held that the fees shall be payable as per the Fourth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment Act’).

Against this order, the Respondent moved an application before the Arbitral Tribunal reminding the Tribunal that the arbitral fees have been fixed by the parties in arbitration clause and therefore, they may be fixed as per the Circular and not as per the Fourth Schedule of the 2015 Amendment Act. The Arbitral Tribunal rejected this application and maintained its earlier order while holding that in view of the 2015 Amendment Act, the Arbitral Tribunal is competent to fix the fees regardless of the agreement between the parties. The Arbitral Tribunal substantiated this view with a judgement passed by the Hon’ble Delhi High Court in National Highways Authority Of India vs Gayatri Jhansi Roadways Limited2017 SCC OnLine Del 10285.

Based on this decision, the Respondent moved an application under Section 14 of the Act before the Delhi High Court seeking termination of the mandate of the Arbitral Tribunal, inasmuch as, according to the Respondent, the Arbitral Tribunal had wilfully disregarded the agreement between the parties and were, therefore, de jure unable to act any further in the proceedings.

The Delhi High Court inter-alia held that the Fourth Schedule of the 2015 Amendment Act not being mandatory, whatever terms are laid down as to arbitrator’s fees in the agreement, must needs be followed. In so doing, the Delhi High Court disagreed with the earlier decision of its Coordinate Bench in National Highways Authority of India v. Gayatri Jhansi Roadways Limited 2017 SCC OnLine Del 10285 in which, it was held that Section 31(8) [Arbitrator’s power to award cost] and Section 31A [Regime of Cost] of the 2015 Amendment Act would govern matters such as this and since the expression ‘unless otherwise agreed by the parties’ had been omitted from Section 31A by the 2015 Amendment Act, Arbitral Tribunal’s fees would have to be fixed in accordance with the Fourth Schedule of the 2015 Amendment Act dehors the agreement between the parties. Thus, the Delhi High Court terminated the mandate of the Arbitral Tribunal.

This decision of the Delhi High Court is challenged before the Supreme Court in the present proceedings.

Applicable Legal Principles

2 (2)

Parties Contentions

The Appellant contended that as the Arbitral Tribunal has fixed its fees in accordance with the Fourth Schedule of the 2015 Amendment Act and the same cannot be termed as unreasonable. This was buttressed by Section 31A read with Section 31(8) of the Act, which, as per Appellant, empowers the Arbitral Tribunal to fix its own fee as held in National Highways Authority of India vs. Gayatri Jhansi Roadways Limited, 2017 SCC OnLine Del 10285.

Per contra, the Respondent contended that the fee schedule fixed by the agreement between the parties and as amended by the Circular will operate and the Arbitral Tribunal will be entitled to charge their fees in accordance with the Circular and not in accordance with the Fourth Schedule to 2015 Amendment Act.

Judgement

After considering the rival contentions, the Court held as under:

  • In the facts of this case, the fee schedule was fixed by the agreement as amended by the Circular between the parties which will be operative and the Arbitral Tribunal will be entitled to charge their fees in accordance with it and not in accordance with the Fourth Schedule to the 2015 Amendment Act.
  • However, the application to remove the arbitrators stating that their mandate must terminate, is wholly disingenuous and would not lie for the simple reason that an arbitrator does not become de jure unable to perform his functions if, by an order passed by such arbitrator(s), all that they have done is to state that, in point of fact, the agreement does govern the arbitral fees to be charged, but that they were bound to follow the Delhi High Court in Gayatri Jhansi Roadways Limited case which clearly mandated that the Fourth Schedule and not the agreement would govern.
  • The arbitrators merely followed the law laid down by the Court and cannot, on that count, be said to have done anything wrong so that their mandate may be terminated as if they have now become de jure unable to perform their functions. Therefore, the decision of the High Court qua termination of the mandate of the Arbitration Tribunal is set aside.
  • The change in language of section 31(8) read with Section 31A of the Act deals only with the costs generally and not with arbitrator’s fees.
  • It is true that the arbitrator’s fees may be a component of costs to be paid but it is a far cry thereafter to state that section 31(8) and 31A would directly govern contracts in which a fee structure has already been laid down by the parties.
  • The declaration of law by the Delhi High Court in National Highways Authority of India vs. Gayatri Jhansi Roadways Limited, 2017 SCC OnLine Del 10285 is not a correct view of the law.

My Comments

In my view, there is a fundamental error in the application of law in National Highways Authority of India vs. Gayatri Jhansi Roadways Limited, 2017 SCC OnLine Del 10285 which remained unnoticed throughout the proceedings. Albeit the Supreme Court has set aside this judgement, one crucial question of law slipped the notice of every forum.

The question is whether the Court has the powers and jurisdiction to review a procedural order passed by the Arbitral Tribunal fixing its fees?

To answer this question, one needs to see what orders of an Arbitral Tribunal are appealable under the Act. Section 37 of the Act deals with appealable orders and provides an exhaustive list of orders which are appealable. The term “and from no others” makes the list exclusive and limited. It is pertinent to note that an order of the Arbitral Tribunal fixing its fees is not appealable under Section 37 of the Act. This itself makes any such appeal infructuous before the Court. [Obiter from S.N. Sunderson and Company vs. Chandok Machineries Arb. Pet. No. 365/2015 and IA 2408/2017]

Further, under Section 5 of the Act, the extent of judicial intervention is limited. Section 5 is categorical that “no judicial authority shall intervene except where so provided in this part”. In other words, unless there is specific provision in the Act, permitting judicial intervention, the jurisdiction of the Court to interfere with the procedural orders passed by the Arbitral Tribunal cannot be presumed to exist as an inherent power of the Court or exercised even suo motu. In other words, there are no inherent powers of the Court to exercise jurisdiction under the Act to interfere with such procedural orders of the Arbitral Tribunal.

On Fourth Schedule to 2015 Amendment Act, it is imperative to look into Report No. 246 of the Law Commission of India which recommended amendments to the Act in this regard. The relevant part of the report reads as under:

“(xiv) after sub-section (13), add sub-section “ (14) In determining the fees of the arbitral tribunal in the case of arbitrations other than international commercial arbitrations and the schedule for its payment to the arbitral tribunal, the High Court is empowered to frame necessary rules, and for which purpose the High Court may look to the Sixth Schedule of the Act.

Explanation: For the removal of doubt, it is hereby clarified that this subsection (14) of section 11 shall not apply in case where parties have agreed for determination of fees as per the rules of an arbitral institution.

[NOTE: There have been instances where arbitrators are known to charge excessive fees. An indicative fee schedule is therefore provided in the 6th Schedule. The High Courts are given liberty to frame their own rules in this regard.]”

In light of the above paragraph, following observations can be drawn

  • The Commission recommended that for the purpose of determining the fee of the Arbitrators, the High Court can make its own rules and for this purpose, the Court ‘may’ look into Sixth Schedule [which became Fourth Schedule in the 2015 Amendment Act]. This itself shows that Fourth Schedule was not intended to be imposed over parties’ specific agreement in this regard.
  • The Fourth Schedule was not intended to apply in cases where parties have agreed for determination of fees as per the rules of an arbitral institution. On purposeful interpretation of this term, it is reasonable to infer that the Law Commission has given due weightage to party autonomy in deciding the Arbitrator’s fee, of course, by choosing the Arbitral Institution which in turn, generally, prescribes a fee schedule in this regard. Thus, this logical reasoning should apply for the fee arrangement agreed upon between the parties in their arbitration agreement as well. Therefore, imposing the Fourth Schedule against an express agreement between the parties is not only against the aims and objectives of 2015 Amendment Act but it will also be violative of the principle of party autonomy.
  • The word ‘indicative’ in the last line corroborates that the Schedule is nothing but a template for the High Courts to draft their own rules for determining the fee of the Arbitral Tribunal and therefore, cannot be fastened upon parties against their express agreement.

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