The Supreme Court has observed that arbitrators must fixed upfront fees and there should be no re-fixation of fees in the middle of an arbitration proceeding while hearing a plea filed by the Oil and Natural Gas Corporation (ONGC) against the fixation of high fees by arbitrators during arbitration proceedings with the Afcons.
A three-judge bench of Justices D.Y. Chandrachud, Sanjiv Khanna and Surya Kant was hearing the matter.
On behalf of ONGC, Attorney General K.K. Venugopal submitted that before the arbitrators were appointed, they accepted the fees which was fixed.
“On first sitting, they said fees is not realistic. At the next sitting, they fixed the fees themselves as per the fourth schedule. We proceeds thereafter, on the date when witnesses called the arbitrator, and said we will fix fees at Rs 1.5 lakh per day. In public sector, we are answerable to CAG. If this happens then it will happen in all of the public sector. It is really a public interest issue. In appeal, it takes eight years and then in high court, then in Supreme Court. Therefore, arbitration is preferred. As a alternative of choice and all its facets may be made arbitration friendly. If arbitrator fix their own fees, it will be a judge of its own choice.”
Venugopal said,
“Milord, what has been done here it’s not correct. We have objected thorough an application which was reduced to Rs 1 lakh per seating. We have again filed a protest. Which was had no response. Then we take a action to terminate the mandate as per Section 14. Bombay High Court said it had no jurisdiction. Now ground that Section 14 doesn’t give any jurisdiction to the Supreme Court. The seat of the arbitration is in India. This is an international commercial arbitration. “
Justice Chandrachud: “Show me the Section.”
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Attorney General replied: “It has become a matter of significance so far as public sector is concerned. In private sector, the management is able to take a decision. In this case, what happens is when they increase to Rs 1.5 lakh per sitting the parties were asked to deposit. When you increased to Rs 1.5 lakh per sitting, they have asked to pay for previous 26 sittings. This was very humiliating and we have already protested and therefore we have invoked Section 14. If arbitrator increased their own fees it would lead to bias. It’s a contract which is between the two parties and the arbitrator. “
SC says unilateral fixation of fees may be wrong
Justice Chandrachud pointed out that unilateral fixation of fees may be wrong.
“Well if it’s upfront there will be a different situation. Now ONGC agreed to the fourth schedule fees. If the parties are paying the fees then it’s okay otherwise they can walk out of the arbitration, in case where the arbitration in not ending and running uniformly.”
SC observes arbitration should not end up treating PSUs like a milking cow
Justice Chandrachud observed, “Suppose the arbitration interminably gone on and on, should there not be any mechanism where a party should have a right to approach in case of unreasonableness of the party. The arbitration should not be made a milking cow from the public sector undertaking as they also less resources, what should be a mechanism to be adopted.”
AG agreed with the opinion of Bench saying there could be a mechanism. So that arbitrators themselves are not left high and dry.
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The bench said, “We are looking at it from a broader perspective.”
Meanwhile, Justice Sanjiv Khanna opined that Section 5 of the (Arbitration and Conciliation Act, 1996), is very clear and how can the Court enter the dispute.
Section 5 of the Arbitration and Conciliation Act, 1996 says extent of judicial intervention: Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.
The AG replied that the SC can do so under Article 142.
Justice Khanna asked, if you succeed in those arbitration then these statements may not come. Therefore, the malady is somewhere else.
AG replied, “We are afraid that the bias is there. There is a bias which can be seen.”
Justice Chandrachud pointed out, that here the arbitrator order is that the fees which the ONGC has not paid, should be paid by the defendant.
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Justice Chandrachud asked, “What happens in a case where a defendant has not come up or is not appearing in the case? Then the fees should be settled in the final order. We will deal with the amendments. It’s says the fees should be fixed by the Arbitrator Tribunal. Therefore, the Tribunal has been given a power to fix the fees. It has the power to fix the reasonableness of the fees.”
At this point, the AG referred to the judgment in case of National Highways Vs Gayatri, a judgment passed by former Justice RF Nariman. He read the judgment. “They can’t change fee structure once consent is there among the parties,” he said.
The Court asked what happens when there is no agreement between parties ?
AG answered, the fees should be reasonable and not be unreasonable. A counterclaim or claim under Delhi High Court rules or in Bombay High Court rules to be treated as one. They fix whatever they say. Arbitrators should not be allowed to set the fees. Each session should be of 4 hours, lunch included a day.
The bench said, “One of the arbitrators is a member of our bar. In case of a lawyer, I am not on morality at all.”
AG said, “I want to reorganise the judicial system , from higher courts to lower court. We are driven into arbitration fee, because of pendency of cases in courts. Corporates are driven into arbitration because their team is growing.”
Justice Chandrachud said, “One way of charging is hourly, many of the UK arbitrators charge hourly. On the other hand, the three sessions what do you say, Rs 2.5 lakh. So it’s Rs 7.5 lakh. Suppose an arbitrator tribunal says my fees is Rs 1 lakh per hour. The problems is that fees is not set upfront. There should be no objections if it’s agreed upfront. If you say upfront then it can’t be changed midway. In arbitration, if suppose for example, if arbitrator says I will charge this much for 50 sittings, and on the top this much will be the charge. If party agrees to it, then okay otherwise not.”
AG replied, “It is solved by the recommendation of the Law Commission that there should be a lump-sum fee. Hourly rate may not be considered here.”
Justice Chandrachud said, “Suppose there is a very sensitive arbitration and a party want to go to AG, I want to go before Tushar Mehta, and if the party want to pay, agree to pay.”
AG replied that the Delhi Arbitration Centre and the Bombay Arbitration Centre have fixed the fees.
Justice Chandrachud opined, “Mr AG, If with your intervention a government sets up the arbitration institution from where all PSUs should come. Arbitrators must be fixed upfront fees. No re-fixation of fees in the mid-way. Suppose in case of unforeseen development, there must be some mechanism.”
AG said the court has the power to revise the arbitral fees. Section 29 has the power.
As per Section 29A: The Tribunal shall ensure speedy completion of Arbitration proceedings and pass the award within a period of twelve months from the date when the arbitral tribunal enters upon the reference. However, the parties may extend such period for a further period not exceeding six months. If the award is made within a period of six months, the arbitral tribunal shall be entitled to receive additional fees as the parties agree. If the award is not made within specified period or extended period, the mandate of the arbitrator shall terminate unless the time is extended by the court. Insertion of a new provision- Section 29B: This Section provides for a fast track procedure for conducting arbitral proceedings, in cases where the parties mutually agree for such procedure. In such cases, the arbitral tribunal consisting of a sole arbitrator shall decide the dispute on the basis of written pleadings, documents and written submission and shall not hold oral hearing. The award is to be made within a period of six months from the date the arbitral tribunal enters upon the reference.
The bench said, “We also want to give some sanctity to the Arbitration Centre.”
“We will hear this on Wednesday,” said the bench while adjourning the matter.
The court had on March 8, 2022, issued notice and tagged the matter along with SLP Civil 13426/2021 & SLP Civil 10358/2020.
The ONGC has sought the directions to terminate the existing tribunal and substitute it with a new one. In its petition before the Supreme Court, the ONGC has claimed that the arbitrators, two former judges of the Supreme Court and one judge of the High Court had increased the fees mid-way, while the arbitration was going on.
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ONGC said that 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 Arbitration and Reconciliation Act, 1996 (A&RA), which guides proceedings when disputes arise between contracting parties.
Under the fourth schedule of Arbitration and Conciliation Act 1996, there is a ceiling of Rs 30 lakh per arbitrator, if the dispute between two parties is worth more than Rs 20 crore. As per the contract between the 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 Centre contented that the arbitrators fixed Rs 1 lakh per arbitrator for every sitting as the fee and each sitting was for a duration of three hours. Therefore, it has been submitted that there should be some uniformity or certainty in the fees to be paid to the arbitrators, and asked the court to settle and fix a fee scale for the arbitrators.
Case Name- ONGC Vs Afcons Gunanusa JV