Supreme Court on parties fixing the fees by Agreement of the members of the arbitral Tribunal

Updated: Aug 21, 2019

- Gautam Mohanty and Gaurav Rai

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5383 OF 2019

(Arising out of SLP (C)No. 3211 of 2018)


NATIONAL HIGHWAYS AUTHORITY OF INDIA Appellant(s)

VERSUS

GAYATRI JHANSI ROADWAYS LIMITED Respondent(s)

WITH

CIVIL APPEAL NO. 5384 OF 2019

(Arising out of SLP (C) No. 22099 of 2018)


GAMMON ENGINEERS AND CONTRACTORS PVT. LTD. Appellant(s)

VERSUS

NATIONAL HIGHWAYS AUTHORITY OF INDIA Respondent(s)



On 10th July 2019, the Supreme Court of India gave its judgment in two connected matters on a similar issue regarding the status of an agreement between the parties on the arbitral fee in future arbitration cases.


(Link to the Judgment of NHAI v. Gayatri Jhansi Roadway and Gammon Engineers v. NHAI

https://sci.gov.in/supremecourt/2017/40194/40194_2017_5_5_15008_Order_10-Jul-2019.pdf)


The issue which arose for the adjudication of the Supreme Court of India was due to two conflicting judgments of the single bench of the Delhi High Court. In the case of NHAI v. Gayatri Jhansi Roadways Limited in an appeal against the order of the arbitral Tribunal fixing its fees in variance to the NHAI policy circular, the Delhi High Court had held that due to removal of the phrase ‘unless otherwise agreed’ in Section 31(8) and the newly introduced 31A of the Arbitration and Conciliation Act, 1996 vide the 2015 amendment, the parties could no longer fix fees of the Tribunal in their agreement. Since the arbitral Tribunal had fixed the fees in accordance with the 4th Schedule, the Delhi High Court dismissed the appeal. Applying this judgment in another arbitration, the arbitral Tribunal had fixed fees in variance with the NHAI Policy Circular on fees which was incorporated by agreement between the parties in the case of Gammon Engineers v. NHAI. NHAI moved the Delhi High Court to terminate the mandate of the arbitral Tribunal as their action of fixing fees without regard to the policy circular was beyond the agreement between the parties. The Delhi High Court in this case disagreed with the co-ordinate bench in NHAI v. Gayatri Jhansi and terminated the mandate of the arbitral Tribunal for fixing fees beyond what was agreed between the parties as per their executed agreement.


The Supreme Court dealt with Gammon Engineers v. NHAI matter on facts. A Contract dated 07.02.2006 was entered into between the Appellants and Respondents. Owing to certain disputes which arose thereafter, the disputes were referred to arbitration under the Arbitration Clause stipulated in the Contract on 23.05.2017. Notably, the aforesaid contract contained Paragraph 5 which reads as follows:


“5. The parties are desirous that the remuneration and other expenses payable to the Arbitrators as per arbitration clause for referring the dispute between the parties arising out of the said Contract to the Arbitral Tribunal for resolution in accordance with the procedure laid down therein, shall be as follows:
I. That the maximum limit for fee payable to each Arbitrator per day shall be Rs.5000/- subject to a maximum of Rs.1.5 lakh per case.
II That each Arbitrator shall be paid a reading fees of Rs.6000/- per case.
III That each Arbitrator shall be paid Rs.5000/- by way of secretarial assistant per case.
IV. That each Arbitrator shall be paid Rs.6000/- per case towards incidental charges like telephone, FAX, postage etc.
V. That other expenses based on actual against presentation of bills, shall also be reimbursed to each Arbitrator subject to the following ceiling (applicable for the days of hearing only)
(a) Travelling expenses – Economy class (By Air), First class AC (By train) and AC car (By road).
(b) Lodging and boarding – Rs.8000/- per day in Metro cities (Delhi, Mumbai, Chennai & Kolkata), Rs.5000/- per day in other cities OR Rs.2000/- per day if any Arbitrator makes his own arrangement.
(c) Local travel – Rs.700/- per day VI Charges for publishing the Award Maximum of Rs.10,000/-;
VII That in exceptional cases, such as cases involving major legal implication/wider ramification/higher financial stakes etc. a special fees structure could be fixed in consultation with the Contractor/Supervision consultant and with the specific approval of the Chairman, NHAI before appointment of the Arbitrator.”

The fee schedule as postulated in the Arbitration Clause was fixed under a policy decision dated 31.05.2004 of National Highways Authority of India. The policy circular dated 31.05.2004 was subsequently replaced by policy circular of NHAI dated 01.06.2017 whereby “the arbitrators would now get for any claim under Rs.100 crores, Rs.25,000 per day together with enhanced other charges or a lumpsum fee of Rs.5 lakhs per case which includes counter claims, in place of the original fee structure”.


Decision of the Supreme Court

The Supreme Court of India after having heard both Parties, remarked that the fee schedule contained in the policy circular dated 01.06.2017 substituting the earlier circular of 2004 was to be adhered to and not the Fourth Schedule of the Act, 1996. With regard to the application filed before the High Court to remove the arbitrators, the Apex Court while dismissing the application observed that an arbitrator does not become de jure unable to perform his functions if, by an order passed by such arbitrator(s), they have stated that the agreement does not govern the arbitral fees to be charged following the principle laid down by the Delhi High Court in Gayatri Jhansi Roadways Limited case(Supra) which clearly mandated that the Fourth Schedule and not the agreement would govern.


Following the decision of the Supreme Court of India, the position has been made clear i.e. when there is a fee schedule agreed upon by the Parties and the same is stipulated in a contract the same is to be necessarily adhered to.


Practical effects of the Judgment


The authors have seen various other cases as well in which NHAI seeks to impose the circular as the guide for the fees of the arbitral Tribunal. However, in many of the cases the NHAI circular on fees of the arbitral Tribunal do not form part of the agreement between the parties. The Supreme Court has made it clear that the there needs to be an agreement between the parties for the fee structure to be applicable. Hence due caution should be exercised while drafting arbitration clauses in contracts as to whether there exists a fee schedule for the arbitrators. In case the said schedule prescribes a very low fee, there could be a possibility that many good arbitrators might not accept a nomination.


Further in the opinion of the authors, there are several arbitration clauses which provide for institutional arbitrations and rules of such institutions to be followed. The Delhi International Arbitration Centre (DIAC) also prescribes the fee structure along with its rules and hence such an arbitration clause which decides to be governed by the DIAC rules even if not governed by the arbitration centre itself falls under thee bracket of an agreement between the parties to use a particular fee structure for arbitrations.


DIAC Fee rules are very similar to the Fourth Schedule but most importantly they also clarify a major issue on which the Fourth Schedule is silent. The DIAC Fee Rules, updated in the year 2018, clarify that the fees mentioned in the rules is to be given to each arbitrator of a three-member arbitral Tribunal and not to be split between the three. The silence of the Fourth Schedule of the Arbitration and Conciliation Act, 1996 on this aspect has caused several parties to not accept the interpretation of the arbitral Tribunals that the fees is to be payable to each arbitrator. In such a situation incorporating the DIAC rules and arbitration clause in agreements would give more clarity to the parties regarding the fees to be payable to the members of the arbitral Tribunal.


(Link to THE DELHI INTERNATIONAL ARBITRATION CENTRE (DIAC) (ADMINISTRATIVE COST AND ARBITRATORS FEES) RULES- 2018

http://www.dacdelhi.org/topics.aspx?mid=75)


In case the parties want their arbitration to be governed by the institution itself it becomes even easier to implement the rules as Section 11(14) makes it clear that the when the arbitration is being conducted by an arbitral institution, the fee rules of such arbitral institutions shall apply instead of any rules made in consonance of the Fourth Schedule by the High Court. This make the case of parties adopting to resolve their arbitration through DIAC even stronger especially when the Act itself specifies that arbitration institutions can have their own fee structure and that the fee structure of DIAC although similar to the Fourth Schedule does not suffer from the lacunae plaguing the Fourth Schedule as explained above.


(Link to The Arbitration and Conciliation, Act 1996 amended by the Arbitration and Conciliation (Amendment) Act, 2015

https://indiacode.nic.in/bitstream/123456789/1978/1/199626.pdf)

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