Access to justice has become slow, expensive and complex due to overburdened courts, cumbersome procedures and obsolete statutes which undermine the sanctity of the courts, leading to frustration among litigants. As such, litigants have welcomed changes to the alternative dispute resolution (ADR) mechanism, which provide for less cumbersome, more cost effective, efficient and expeditious dispute resolution.
The Arbitration Act, 1940 failed to reflect changing attitudes and was largely viewed as outdated and inconsistent with the arbitration mechanisms available in many developed countries. For instance, the act gave no statutory recognition to conciliation as an ADR mechanism. In light of this, the act was repealed and the Arbitration and Conciliation Act, 1996 was enacted. The 1996 act consolidated and amended the laws relating to domestic arbitration and the enforcement of foreign arbitral awards. The 1996 act also redefined the role of arbitral tribunals, giving them more authority and power in an attempt to increase efficiency.
However, in practice, arbitration as a ADR mechanism still proved unsuccessful due to inherent drawbacks and shortcomings in the legislation which not only undermined the process, but also increased the burden on the courts, as parties often filed applications to:
Due to a large number of pending cases, these applications could not be disposed of expeditiously, which significantly hampered the progress of arbitral proceedings. This resulted in the promulgation of the Arbitration and Conciliation (Amendment) Ordinance, 2015 on October 23 2015. The 2015 amendment has amended the 1996 act in order to provide for cost-effective and efficient arbitration and reduce judicial interference. This update analyses the provisions relating to the appointment of arbitral tribunals and the fee structure for arbitral tribunals under Section 11, Section 11A and Section 29B of the 2015 amendment.
Applications under Section 11
Previously, under Section 11 of the act, the parties to an arbitration agreement could (and still can under the 2015 amendment) request the appointment of arbitrators by filing an application before the appropriate court (ie, the Supreme Court for international commercial arbitration, as per Section 11(12) of the 2015 amendment, and the high court for domestic arbitration), if:
- a party failed to appoint an arbitrator within 30 days of receipt of a request to do so (where three arbitrators were to be appointed due to the absence of an agreed procedure for the appointment of arbitrators);(4)
- the parties failed to agree to an arbitrator within 30 days of receipt of a request to do so (where a sole arbitrator was to be appointed due to the absence of an agreed procedure for the appointment of arbitrators);(5)
- a party failed to act as required under the agreed appointment procedure;(6) or
- the parties failed to reach an agreement as per the agreed appointment procedure.(7)
If the parties failed to follow their agreed appointment procedure (if any) or the default appointment procedure provided under Section 11, an application could be filed. Parties thus preferred to appoint arbitrators in good faith, as litigation was often lengthy and expensive.
Impact of Sections 11(13) and (14), read with Fourth Schedule
In light of the 2015 amendment, the main question is now whether parties may deliberately fail to follow their agreed procedure or the default appointment procedure in order to ensure expeditious and economic arbitration.
The new Section 11(13) provides that applications to appoint arbitrators must be disposed of as "expeditiously as possible", and that "an endeavour shall be made to dispose of the matter within a period of 60 days from the date of service of notice on the opposite party". Hence, parties no longer need to worry that filing a Section 11 application will cause inordinate delays and will thus be incentivised to have the court (or its designated person or institution) appoint the arbitral tribunal.
Further, the new Section 11(14) provides that "for the purpose of determination of Fee of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame rules as may be necessary, after taking into consideration the rates specified in the fourth schedule".
The Fourth Schedule provides model fees payable to arbitrators based on the corresponding sum in dispute.
Sum in dispute
Up to Rs500,000
From Rs500,000 to Rs2 million
Rs45,000, plus 3.5% of the claim amount over Rs500,000
From Rs2 million to Rs10 million
Rs97,500, plus 3% of the claim amount over Rs2 million
From Rs10 million to Rs100 million
Rs337,500, plus 1% of the claim amount over Rs10 million
From Rs100 million to Rs200 million.
Rs1,237,500, plus 0.75% of the claim amount over Rs10 million
Above Rs200 million
Rs1,987,500, plus 0.5% of the claim amount over and above Rs200 million, with a cap of Rs3million(8)
Parties (at least in ad hoc arbitration) will welcome the use of the model fees set out in the Fourth Schedule or the High Court Rules, as they will no longer need to agree to any fee quoted by the arbitrator(s) at the first procedural hearing.
Therefore, a party or the parties to an arbitration agreement are likely to fail to follow the relevant appointment procedure deliberately so that they can apply to appoint arbitrators under the new Section 11 (including Section 11(14), read with the Fourth Schedule). Consequently, the volume of Section 11 applications is likely to increase, which will defeat the goal of ADR of reducing the burden on the courts.
The Fourth Schedule, read with Section 11(14), must be examined closely – in particular, in relation to:
- its applicability;
- the high courts' discretion to frame rules after considering the Fourth Schedule; and
- the gaps in the Fourth Schedule.
There is some ambiguity regarding the extent to which the Fourth Schedule applies to arbitration. Section 11(14) seems misplaced in the absence of an additional explanation in Section 11. Before parties can benefit from the model fees, clarity on their applicability is needed. The Fourth Schedule and the High Court Rules (if any) framed under Section 11(14) may apply to:
- all arbitrations (domestic and international) in India, regardless of whether the parties have agreed to refer to institutional rules that have their own fee structure for arbitrators; however, the legislature cannot seek to override or negate such an understanding or agreement;
- arbitration initiated pursuant to the appointment of arbitrators under Section 11. This interpretation appears to be the most sound, as the Fourth Schedule is referred to in Section 11(14) (and not as an independent provision) and it falls within the principle of contextual interpretation; or
- all arbitration initiated pursuant to the appointment of arbitrators under Section 11 – except for fast-track arbitration by a sole arbitrator, as the fee there will be decided by the arbitrator and the parties as envisaged under Section 29B(6). This interpretation seems sound in light of the statutory interpretation principle of harmonious construction.
The discretion afforded to the high courts to make rules on fees and the manner of payment to arbitral tribunals under Section 11(14) presents the following problems:
- If the high court chooses not to exercise its discretion, or if during the intervening period the high court exercises its discretion but the rules are not yet in force, it is unclear whether the Fourth Schedule will apply.
- In the case of international commercial arbitration, where a Section 11 application is made to the Supreme Court (which has no power to make rules, unlike the high courts under Section 11(14)), it is unclear whether the Fourth Schedule will apply.
The basis of the Fourth Schedule is unclear and, interestingly, the model fees envisaged under it appear to correspond to one main criterion: the sum in dispute. This oversimplification fails to consider the following:
- The term 'sum in dispute' is undefined and open to interpretation. Arguably, the 'sum in dispute' is defined as the amount claimed by the claimant. However, it is unclear whether an amount counterclaimed by the respondent would also form part of this sum or be excluded for the purpose of identifying the corresponding model fee payable to the arbitrator(s).
- Other factors must be considered before arriving at the arbitrators' fee, including:
- the subject area of the dispute;
- the level of complexity of the dispute (including extensive evidence);
- the number of parties; and
- the volume of documents.
Thus, the parties to arbitration agreements face challenges due to the uncertainty surrounding how the high courts will frame rules and consider relevant factors and the gaps in the Fourth Schedule. However, if parties use the machinery of the 2015 amendment wisely, they can take full advantage of the benefits of cost-effective arbitral tribunals and expeditious arbitration.
Arguably, by using the new legal framework and a combination of Section 11 and Section 29B, parties will be able to achieve cost-effective and timely arbitration.
Section 29B provides that the parties to an arbitration agreement may agree at any stage either before or at the time of appointment of the arbitral tribunal to use the fast-track arbitration procedure envisaged under Section 29B(3). Under this procedure, awards will be granted within six months on the basis of written pleadings and an oral hearing, where this is requested by all of the parties. All parties may consider using the fast-track procedure (ie, arbitration by a sole arbitrator or an arbitral panel) in order to save time.
Section 29B(6) provides that "the fee payable to the arbitrator and the manner of payment of the fee shall be such as may be agreed between the arbitrator and the parties". Hence, it appears that by choosing the fast-track procedure, parties surrender the benefits of the model fees under the Fourth Schedule, as no application under Section 11 (including Section 11(14)) could be maintained in light of the exception created under Section 29(B)(6).
However, the use of the word 'arbitrator' instead of 'arbitral tribunal' (ie, a sole arbitrator or a panel of arbitrators) in Section 29(B)(6) clearly indicates that the fee payable in a fast-track procedure presided over by a sole arbitrator will be decided between the arbitrator and the parties. Thus, if the parties agree to the fast-track procedure using a three-person arbitral tribunal, they may still use the prescribed fee structure through a deliberate or genuine failure under Section 11(4)(a), Section 11(5) or Section 11(6)(a)(b) of the 1996 act. That said, the rationale behind the omission of three-person arbitral tribunals from the scope of Section 29B(6) is unclear.
As such, even though it seems that parties must choose between saving time or saving on arbitral fees, this is incorrect. Parties that agree to fast-track arbitration held by a panel of arbitrators can still file an application to appoint arbitrators under the new Section 11.
In light of the above, parties to arbitral agreements and arbitration are likely to proceed as follows.
The parties to an arbitration agreement will now welcome intentional and genuine failures to appoint an arbitral tribunal in order to avail of the judicial interference under the new Section 11, as this will prevent excessive arbitral fees and protracted arbitration.
Further, in cases where the parties choose a three-person arbitral tribunal, they will be able to achieve cost-effective and timely arbitration if they use both Section 29B and the new Section 11 by:
- agreeing to fast-track arbitration by a three-person arbitral tribunal, as envisaged under the new Section 29B (as opposed to fast-track arbitration by a sole arbitrator); and
- filing an application under the new Section 11 to appoint an arbitral tribunal (on the grounds of a genuine or deliberate failure to appoint an arbitral tribunal), as the model fees will arguably apply.
Arbitrators may be inclined to ensure expeditious arbitration, as the duration of arbitral proceedings no longer relates directly to their fees and, to the contrary, may lead to a reduction in their fees, as envisaged under the newly inserted Section 29(A).
Further, arbitrators may self-impose model fees as evidence of their respect for the spirit of the law and to secure appointments as party-nominated arbitrators.
The burden on the courts will increase, as parties will file applications to appoint arbitral tribunals under the new Section 11, which in turn will defeat the legislative intentions behind the 1996 act to limit judicial interference in arbitration and encourage expeditious dispute resolution. Hence, the courts may begin to designate institutions for the purpose of appointing arbitral tribunals in order to reinforce the 1996 act's objectives.
Judicial pronouncements from a pro-arbitration Indian judiciary will be welcome and are eagerly awaited in order to clarify the ambiguities in the new Section 11 – in particular, in relation to the scope and applicability of the Fourth Schedule and the model fee structure payable to arbitrators.
For further information on this topic please contact Vanita Bhargava, Jeevan Ballav Panda or Kudrat Dev at Khaitan & Co by telephone (+91 22 6636 5000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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