Authored By: Aarti
Shree Guru Gobind Singh Tricentenary University
Case Name – Oil and Natural Gas Corporation Ltd v. Afcons Gunanusa JV
Citation: [2022] 10 S.C.R. 660
Date: 30 August, 2022
In the case of ONGC v. Afcons Gunanusa, the Supreme Court of India issued a significant ruling that explored the regulation of arbitrators’ fees.
Parties Involved – Oil and Natural Gas Corporation Ltd. (Petitioner) Versus Afcons Gunanusa JV (Respondent)
Bench Composition (Judges’ Names) – The majority opinion was articulated by Justices DY Chandrachud and Surya Kant, with Justice Sanjiv Khanna presenting a separate judgment.
Facts of the Case – A Lump Sum Turnkey Contract was established between ONGC and Afcons Gunanusa. Afcons initiated arbitration due to various disputes. A three-member panel of arbitrators was formed. During an initial meeting, the Tribunal indicated that the Fourth Schedule of the Arbitration and Conciliation Act of 1996 recommends a fee of ₹30 lakhs for each arbitrator when the disputed amount is over ₹20 crore, which renders the contractually agreed fee of ₹12 lakhs per arbitrator unreasonable. The dispute involved ₹900 crores. While the Tribunal viewed the ₹30 lakh fee as modest, they accepted it along with reading fees of ₹6 lakhs and ₹1.5 lakhs for each three-hour session. Afcons agreed to this fee adjustment, but ONGC refused, insisting that the contractually stipulated fee was valid. The Tribunal rejected ONGC’s claim, explaining that since the dispute arose before the amendment that introduced the Schedule, the ₹30 lakh cap in the Fourth Schedule did not apply. However, the Tribunal reduced the sitting fee to ₹1 lakh, leaving the reading fees for future determination. Still contesting this, ONGC approached the Supreme Court under Sections 14 and 15 of the Arbitration Act, seeking to revoke the tribunal’s jurisdiction and establish a new panel of arbitrators.
Issues –
- Arbitrators’ Expenses and Fees:
- The ruling underlines that arbitrators cannot unilaterally adjust their fees without reaching an agreement with the parties. If fees remain unpaid, arbitrators could develop a bias against public sector projects.
- The principle of party autonomy, a key aspect of arbitration, prevents arbitrators from determining their own fees under the Arbitration Act.
- The Terms of Reference, which serve as a tripartite understanding among the parties and the arbitrators, must explicitly outline the fee components.
- Set-off Versus Counter-claim:
- A distinction is drawn between a set-off and a counterclaim. A counterclaim arises from the same issue and can be presented as an adjustment to the main lawsuit without incurring additional costs.
- Applicability of the Arbitration Act:
- The Arbitration Act refers to claims and counterclaims explicitly in various sections, such as 2(9), 23(2A), 31A, and 38.
- The Act ensures that arbitrators are compensated fairly based on the time spent and the complexity of the case.
- Court’s Role in Arbitration Fees:
- If the fee agreement with arbitrators or an arbitral institution lacks clarity, the court may evaluate whether the charges are reasonable.
- The “loser pays” principle promotes compliance with contracts and deters frivolous disputes.
Discussion on:
The distinction between fees and costs was noted by the Apex Court, which stated, “The functional roles of costs and fees are different.” Fees are the payments made to arbitrators, while costs encompass all expenses associated with arbitration that must be split between the parties after the tribunal or court sets specific parameters. According to the Court, “the arbitral Tribunal cannot enforce any binding orders regarding their remuneration when determining cost allocations under Sections 31(8) with 31A or advance costs under Section 38.” This would violate the theory against arbitrators judging their own compensation claims and the principle of party autonomy. Since these costs only reimburse the legitimate expenses of the winning party in the arbitration, the arbitral Tribunal is not restricted from allocating costs (including the arbitrator(s) fees) based on these principles. The tribunal may also require deposits, including additional ones, since these are temporary measures. Nevertheless, the Court decided that “findings regarding arbitrators’ fees made by the arbitral Tribunal, in the absence of an agreement, while determining costs or deposits cannot be enforced for the benefit of the arbitrators.” A party contesting the arbitrators’ fees can appeal to the court.
Directives for Ad Hoc Fees in Arbitrations:
The Supreme Court issued a directive on setting fees for ad hoc arbitrations—where courts select the arbitrators—stating the need to uphold the model fee schedule’s goals since: (i) arbitration should proceed efficiently; (ii) court involvement should be limited; and (iii) some litigants might object to a just and equitable arbitration fee. If an agreement on fees cannot be reached among the parties or between the parties and the tribunal, the tribunal may impose the fee laid out in the Fourth Schedule, which serves as a binding guideline. Thus, decisions regarding fees made by the arbitral tribunal according to the Fourth Schedule should not be contestable. This standard fee can only be modified through mutual consent of the parties.
How to Interpret “Sum in Dispute”: The interpretation of “sum in dispute” in ONGC v. Afcons by the majority will not align with the Bombay Rules for specific reasons:
(a) As per Section 11(14) of the Arbitration Act, the High Court is permitted to establish rules “after considering” the Fourth Schedule’s rates. The Bombay High Court has done this, aligning the Fourth Schedule’s fee structure with the Bombay Rules Schedule. Additionally, the legislature does not prevent or mandate High Courts to strictly follow the Fourth Schedule or to adopt rules beyond its scope, such as an interpretation of “sum in dispute.” Moreover, in a separate context, the Full Bench of the Calcutta High Court ruled in Manickchand Durgaprasad v. Pratabmull Rameswar that “as far as possible” in the proviso to Clause 37 of the Letters Patent Act of 1865 should be seen as a guideline. The Clause 37 provision limits the Court’s authority but suggests that rules in that clause must comply reasonably with the Code of Civil Procedure. If a rule established by the High Court conflicts with the Code’s provisions or grants extra authority, it will supersede those specific provisions. In Iridium India Telecom Ltd. v. Motorola Inc., the Supreme Court upheld the Calcutta High Court’s decision. Thus, applying similar reasoning, if there is a discrepancy between the Fourth Schedule and Bombay Rules, the Bombay Rules will prevail. Also, arbitrators appointed by the Bombay High Court will not be bound to the Fourth Schedule or its interpretations once the Bombay Rules take effect.
(b) Justice Chandrachud has not indicated that High Courts which established guidelines for regulating arbitrators’ fees prior to his ruling would need to re-evaluate the interpretation of “sum in dispute.” His ruling under Article 142 of the Constitution does not address this, even as he indicated that the Fourth Schedule is “not mandatory on court-appointed arbitrators.” When there is a lack of legal guidance, the Supreme Court may give directives under Article 142 (refer to Pravasi Bhalai Sangathan v. Union of India). Thus, Chandrachud’s guidance intends to fill any gaps. The Supreme Court likely has not issued directives on this issue since the Bombay Rules clearly state that “sum in dispute” encompasses both the claim and counterclaim. Furthermore, there is clarity regarding the compensation for arbitrators designated by the Bombay High Court.
Supreme Court’s Observation –
The Court felt it pertinent to review the processes utilized by national and international organizations, recognizing that the question of whether the parties or the arbitrators should determine the arbitrator’s compensation remains unresolved in India.
A Detailed Review of the Majority Opinion in ONGC v. Afcons Gunanusa JV
The public sector companies appealing before the Supreme Court voiced similar concerns. They disputed the specified amounts owed to each arbitrator. Among the key questions addressed in the majority opinion was whether the term “sum in dispute” in the Fourth Schedule of the Arbitration Act denotes the total of the claim and counterclaim amounts. The majority stated the Fourth Schedule “was intended to guide various High Courts in establishing rules for determining arbitrator fees” and noted compliance with guidelines set by the Rajasthan and Bombay High Courts, which “only apply to arbitrators appointed by the courts.” The majority concluded by noting that most High Courts had not prescribed rules for establishing fees for arbitrators. Hence, they determined that “the Fourth Schedule is not mandatory for court-appointed arbitrators in the absence of rules established by the relevant High Court. “Subsequently, the majority ruling proceeded to issue “certain directives” concerning ad hoc arbitrators’ fees “where the court appoints the arbitrators,” as outlined in Section C.2.4 of their judgment, pursuant to Article 142 of the Indian Constitution. The majority issued eight directives, including (5), which asserts that when the Court appoints arbitrators, “the Court’s order must explicitly state the fee that the Arbitral Tribunal can charge.” If the Court allows the Arbitral Tribunal to decide this, then the Tribunal and the parties “must come to an agreement” specified in directive (1). The Arbitral Tribunal alongside the parties must delineate the details of the Tribunal’s remuneration as per Direction (1). All High Courts are also mandated by Direction (7) to formulate regulations governing arbitrators’ fees under Section 11(14). Ultimately, the majority ruled that arbitral tribunals should receive distinct fees for both “the claim” and “the counterclaim.”
Analysis of Justice Khanna’s Separate Opinion in ONGC v. Afcons Gunanusa JV
In his separate opinion, Justice Sanjiv Khanna disagreed with Justice Chandrachud on two significant aspects:(a) He contested the assertion that the Arbitral Tribunal does not have the authority to set fees without a court order, an agreement between the parties, or a contract settling the fee. Khanna, J. argued that “an Arbitral Tribunal can set a reasonable fee” under the provisions of the Arbitration Act and “by the implied terms of the contract.”(b) Justice Khanna defined the “sum in dispute” as “the total of all the disputed amounts without differentiation.” He asserted that “sum in dispute,” borrowed from the Delhi High Court International Arbitration Centre, should be interpreted to mean the entire amount or total concerning the arbitration disputes, covering both claims and counterclaims. The Fourth Schedule does not differentiate between claim and counterclaim for setting the fee owed to the Arbitral Tribunal. To support the notion that “the arbitrator’s fee shall be calculated on the total of the claim and the counterclaim,” he referenced Article 2(f) of the UNCITRAL Model Law, which clarifies that a claim also applies to a counterclaim. He further cited rules from various arbitration bodies such as the European Court of Arbitration, the Singapore International Arbitration Centre, the Hong Kong International Arbitration Centre, the Stockholm Chamber of Commerce, and several Indian High Courts, including the Bombay Rules. Justice Khanna concluded that if claims and counterclaims were treated separately in determining the arbitrator’s fee, the rules set by various High Courts “would need to be revised, leading to confusion, especially in ongoing cases.”
Helding: Since the parties and arbitrators could not agree on a fee, the Supreme Court invoked its authority under Section 142 of the Constitution to establish a new tribunal following the guidelines of the arbitration agreement. However, the bench specified that the fees for the earlier tribunal would have been determined following the Fourth Schedule of the Arbitration Act based on their findings. The Court concluded that despite the Fourth Schedule not being applicable to international commercial arbitrations, ONGC could not demand a reduced fee in the arbitration agreement since it had already agreed to compensate as per the Fourth Schedule
Reference(S):
ONGC v. Afcons Gunanusa JV, 2022 SCC Online SC
Arbitration and Conciliation Act, 1996
Arbitration and Conciliation Act, 1996, Sch 4
Arbitration and Conciliation Act, 1996, S. 11(14)
Constitution of India, Art. 142
Civil Procedure Code, 1908
UNCITRAL Model Law on International Commercial Arbitration, 1985, Art. 2(f) — where a provision of this law, other than in Arts. 25(a) and 32(2)(a), refers to a claim, it also applies to a counterclaim, and where it refers to a defence, it also applies to a defence to such counterclaim
