MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

INTERNATIONAL COMMERCIAL ARBITRATION

FINAL PROJECT

COST OF ARBITRATION IN INDIAN LAW

Submitted to:
Prof. Chirag Balyan

Submitted by:
Vidit Harsulkar (2015-021)
IV Year, VIII Semester
CONTENTS

1. INTRODUCTION ............................................................................................ 3

2. COST OF ARBITRATION IN INDIA ............................................................ 5

2.1 STATUTORY PROVISIONS .................................................................................. 6

2.2 MEANING OF WORD COST ................................................................................ 6

3. PARTY AUTONOMY ..................................................................................... 8

3.1 FIXATION OF THE FEES OF THE ARBITRATOR BY THE CHIEF JUSTICE IS NOT

BINDING ................................................................................................................. 8

4. ARBITRATION –IS IT REALLY CHEAP ................................................... 10

5. CONCLUSION ............................................................................................... 11
1. INTRODUCTION
Litigation has been the traditional method of settling disputes, including disputes arising both
from domestic and international commercial transactions. Before the inception and
development of arbitration, litigation has been the only formal way of resolving disputes when
two or more interests are in disagreement. Arbitration is a consensual method of settling
disputes which was seen to have more advantages and more desirable characteristics than
litigation especially in business transactions that have crossed borders and involving huge
capital. Though in some cases arbitration is seen to have certain similarities with litigation, one
of the areas where arbitration has been widely acknowledged to have outwitted litigation is the
areas of cost.

The government of India enacted the Arbitration and Conciliation Act, 1996 in an effort to
modernize the outdated Act of 1940. The present Act of 1996 was modelled on the lines of the
UNCITRAL Model Law. The primary purpose of this Act was to encourage arbitration as a
cost-effective and quick mechanism for the settlement of commercial disputes. The 1996 Act
covers both domestic arbitration and international commercial arbitration.

The 'object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal
without unnecessary delay and expense'.1 While most arbitration specialists will readily agree
that increasing costs in arbitration is a serious concern and that cost effectiveness is a desirable
goal, insufficient work has been done in the past to address these issues. Discussion has tended
to centre on fees of the arbitrators and of the arbitral institutions, without focusing on the
underlying causes for the high cost of arbitration proceedings.

There was no specific provision in the Arbitration Act 1940, with respect to awarding costs by
the arbitral tribunal. The cost used to be awarded on the general principle of law. Even in
UNCITRAL Model law, there is no provision for awarding costs. However, the English
Arbitration Act 1996 contains in Sec. 59 to Sec. 65, an elaborate code relating to costs.2 Article
38 of the UNCITRAL Arbitration Rules requires the arbitral tribunal to fix the costs of
arbitration in its award and defines the term “costs‟3. Likewise, Art. 31 of the ICC Rules of

1
David Hacking, Michael E Schneider, Towards -More Cost-effective Arbitration
2
MUSTILL AND BOYD, COMMERCIAL ARBITRATION 1652-53 (12th ed. 2001)
3
The term 'costs' includes only: (a) The fees of the arbitral tribunal co be stated separately as co each arbitrator
and to be fixed by the tribunal itself in accordance with art 39; (b) The travel and other expenses incurred by the
arbitrators; (c) The costs of expert advice and of other assistance required by the arbitral tribunal; (d) The travel
Arbitration 1998 provides for decision by the arbitrator as to the costs of arbitration. besides,
there are AAA Rules, ICIA rules and WIPO rules, which authorize the arbitral tribunal to fix
the cost of arbitration.

and other expenses of witnesses to the extent such expenses are approved by the arbirra1 tribunal; (e) The costs
for legal representation and assistance of the successful party if such costs were claimed during the arbitral
proceedings and only to the extent th.lt the arbitral tribunal determines that the amount of such costs is reasonable;
(f) Any fees and expenses of the appointing authority as well as the expenses of the Secretary-General of the
Permanent Court of Arbitration at the Hugue.
2. COST OF ARBITRATION IN INDIA
Arbitration is generally considered cheaper over traditional litigation, and is one of the reasons
for parties to resort to it. However, the ground realities show that arbitration in India,
particularly ad hoc arbitration, is becoming quite expensive vis-à-vis traditional litigation. A
cost analysis on arbitration vis-à-vis litigation will throw light on the higher cost of arbitration
over litigation. This is a crucial factor which weighs against developing a cost effective quality
arbitration practice in India.4

The Cost of Arbitration incurred by the parties may include the arbitrator’s fees, rent for
arbitration venues, administrative/clerical expenses, and professional fees for the
representatives of the parties (which may include lawyers and expert witnesses). The sum of
these fees may differ significantly between ad hoc and institutional arbitrations. There is no
regulated fee structure for arbitrators in an ad hoc arbitration. The arbitrator’s fees are decided
by the arbitrator with the consent of the parties.

The fee varies approximately from INR 1000.00 to INR 50,000.00 per hearing for an arbitrator,
depending upon the professional standing of the arbitrator and the size of the claim. The number
of hearings required and the cost of the arbitral venue vary widely. In contrast, most
institutional arbitration bodies in India, such as the Indian Council of Arbitration (ICA) or the
Construction Industry Arbitration Council (CIAC), have their own schedules for arbitrators‟
fees and administrative fees, based on claim amounts. They also charge a nominal non-
refundable registration fee on the basis of the claim amount. For example, the ICA‟s
arbitrators‟ fees vary from INR 30,000.00 to INR 315,000.00 for claim amounts upto INR
10,000,000.00, while administrative fees vary from INR 15,000.00 to INR 160,000.00 for
claim amounts upto INR 10,000,000.00. For the CIAC, the arbitrators‟ fees varies from INR
5,000.00 to INR 260,000.00 per arbitrator for claim amounts upto INR 100,000,000.00, and
administrative fees varies from INR 2,750.00 to INR 62,000.00 for claim amounts upto INR
100,000,000.00.5

4
O.P.MALHOTRA, LAW AND PRACTICE OF ARBITRATION 1038 (2nd ed., 2006)
5
Momota Oinam, Angshuman Kaushik, Development and Practice of Arbitration in India –Has it Evolved as an
Effective Legal Institution
(http://iis-db.stanford.edu/pubs/22693/No_103_Sarma_India_Arbitration_India_509.pdf)
2.1 STATUTORY PROVISIONS
Sub-section (8) of Section 31 provides, for payment of costs. It provides that the costs of
Arbitration shall be fixed by the Arbitral Tribunal and it shall be specified, as to the party
entitled to such costs and the party who shall pay the costs as well as amount of costs and
method of determination of costs and the manner of the payment. For payment of costs,
following provisions have been made in sub-section (8): (i) The costs of arbitration shall be
fixed by the arbitral tribunal; (ii) The arbitrator shall specify the party liable to pay the costs
and the party entitled to such costs; (iii) The amount of costs and the method of determination
of such costs; (iv) The order shall also provide the manner of payment of costs.

The Explanation appended to subsection (8) provides that for the purposes of clause (a) of the
sub· section the costs mean reasonable costs and relate to the following items: (i) The fees and
expenses of the arbitrators and witnesses; (ii) Legal fees and expenses; (iii) Administration fees
of the institution, if any; and arbitral (iv) Other expenses incurred in connection with
proceedings and the arbitral award. Prior to the 1996 Act the arbitrators had powers and
jurisdiction to award costs of the litigation. As the CPC was made applicable vide Section 41
of 1940 Act, the arbitrators and the Courts dealing with the arbitration matters applied the
principles incorporated in that code for the grant of costs. Even in the absence of statutory
provisions, the costs being the incident of litigation were awarded by the arbitrators. Regarding
costs Russell has stated “a distinction has traditionally been drawn between costs of the
reference and costs of the award, the former being in broad terms the costs incurred by the
parties in putting their respective cases in the arbitration and the latter being the administration
costs in the arbitration and the latter being the administrative costs of the reference, including
the tribunal’s fees”.6

2.2 MEANING OF WORD COST

Costs are the expenses incurred by a party in prosecuting or defending a cause before the
arbitrator or the Court. The normal rule is that the costs are allowed to the successful party; the
costs are awarded to compensate a successful party and are not a bonus to it or a punishment
to a losing party.7 This Act uses the compendious phrase “Cost of an arbitration‟
comprehending both the 'costs of the award' as well as “Cost of the reference‟

6
Russell on Arbitration, 21st Edition page 155 ¶ 6
7
Anandfi Haridas v. State of Gujarat, AIR 1977 Guj 140.
2.2.1) Cost of the Award

The costs of the award are the expenses incurred for setting up and administration of the
arbitration. By and large, these expenses are incurred for payment of the fees and expenses of
the arbitrator and witness. They also include any other expenses incurred in connection with
the arbitral proceedings and the arbitral award. These are termed as the „costs of the award‟
and are tribunal related costs.

2.2.2) Cost of the reference

The “Cost of the reference” comprise of the expenses incurred for legal fees payable by the
parties to their lawyers, other professionals and experts. They also include any fee payable to
an arbitral institution for administration and supervision of the arbitration. These are the
expenses incurred by the parties for the preparation and presentation of their respective cases
before the tribunal, generally termed as costs of the reference. These are party related costs.

It is relevant to note that the arbitral tribunal can ward costs only in respect of the proceedings
arising out of the terms of the agreement, or arising out of the matter submitted to arbitration,
In "other words it has no jurisdiction to award costs in respect of the proceedings which do not
arise out of the terms of the agreement or which are not a matter of submission to the
arbitration.”8

8
Re Walker and Brown [1882] 9 QBD 434.
3. PARTY AUTONOMY
The parties are at liberty to agree upon the quantum, apportionment and determination of the
mode and manner of payment of costs. An agreement between the parties with respect to
payment of costs, even if not communicated to the tribunal, will prevail over the award ordering
that each party should bear his own cost.9 In ad hoc arbitration, the parties may include the
mode and manner of assessment and payment of cost of arbitration, which may either be
included in the arbitration clause or even in the submission agreement. However, if the
administration of the arbitration is entrusted to an arbitral institution, the problems relating to
such arbitration will be dealt with according to the rules of the institution. Section 31(8)
provides that in the absence of an agreement between the parties to the contrary, the costs of
arbitration shall be fixed by the “arbitral tribunal”. Accordingly, the tribunal has jurisdiction to
determine the costs on such basis as it thinks fit. However, it must specify:

(i) The party entitled to costs;

(ii) The party who shall pay the costs;

(iii) The amount of costs or method of determining that amount, and

(iy) The manner in which the costs shall be paid.

The arbitral tribunal has the discretion to award the cost of arbitration as between the parties,
albeit, subject to agreement by the parties to the contrary the discretion exercised by the arbitral
tribunal is not amenable to interference by the court,10 merely because the court would itself
have exercised that jurisdiction differently.11

3.1 FIXATION OF THE FEES OF THE ARBITRATOR BY THE CHIEF JUSTICE IS NOT BINDING
Ordinarily the fee of the arbitrator should be fixed by an agreement between the parties and the
arbitrator. Such an agreement should preferably in writing. 12 Even where no agreement is
Arrived at between the parties and the arbitrator, the arbitral tribunal has the power and
jurisdiction to fix his fees preferably with the consent of the parties and refused to work without
being paid such fee. Even if his fee is not paid, the same can be recovered in execution
proceedings under Section 36 of the Act. in a case where at the time of appointment of the
arbitrator by the Chief Justice or his nominee, if the fee of the arbitrator is fixed, there is no bar

9
Masfield v. Robinson [1928] 2 KB 353
10
The Arbitration and Conciliation Act 1996, S 34
11
Channel Islnad Ferries Ltd v. Cenargo Navigation Ltd [1994] 2 Lloyd‟s Rep. 161
12
Jeevan Industries Pvt Ltd v. Haji Bashiruddin Madhusudan Dayal, AIR 1975 Del. 215.
for the arbitrator to fix his own fee thereafter particularly with the consent of the parties. The
fees so fixed by the arbitrator shall be the fees for the purpose of explanation to sub-section (8)
of Section 31 . In a case where the fee of the arbitrator was fixed initially at Rs. 30,000/· by the
designate of the Chief Justice, the learned arbitrator during the proceeding fixed his fee after
consulting the parties at Rs. 2 lakhs which was to be shared by both sides equally. Aggrieved
by the action of the arbitrator in fixing his fee one of the parties thereafter filed a petition in the
High Court with a prayer setting aside the same. After referring to various provisions of the
Act and the judicial pronouncements on the point the Court held. A close reading of the said
subsection (8) makes it clear that it does not, in arty manner, empower the Chief Justice or his
designate to fix the remuneration of the arbitrator, but only specifies the factors to which they
should have due regard for securing the appointment of a qualified, independent and impartial
arbitrator.
4. ARBITRATION –IS IT REALLY CHEAP
Although arbitration is considered to be a cheaper mechanism for the settlement of disputes,
there is a growing concern in India that arbitration has become a costly affair due to the high
fee of the arbitrators and liberal adjournments.13 This is particularly true for ad hoc arbitrations.
Arbitration is more cost-effective than litigation only if the number of arbitration proceedings
is limited. The prevalent procedure before the arbitrators is as follows - at the first hearing, the
claimant is directed to file his claim statement and documents in support thereof; at the second
hearing, the opposing parties are directed to file their reply and documents; at the third hearing,
the claimant files his rejoinder. At each of these stages, there are usually at least two or three
adjournments. Sometimes, applications for interim directions are also filed by either party,
which increases the number of arbitration sittings for deciding such interim applications. The
first occasion for considering any question of jurisdiction does not normally arise until the
arbitral tribunal has issued at least six adjournments.14 If the respondent is the State or a public
sector undertaking, the number of adjournments is higher as it takes more time for these parties
in internally finalizing pleadings and documents that are to be filed before the arbitral tribunal.
Parties pay a fee to the arbitrators for each hearing and thus spend a substantial amount of
money. This is in addition to the other costs involved. In contrast, law suits, if admitted, are
certainly cheaper, even though they take substantial amounts of time to resolve. This is because
lawyers‟ fees are the only major expenditure in litigation, and lawyers usually charge the same,
if not more, as per litigation hearing.

13
Samar Bhoite, „Mediation, a process less practiced in India in Business Disputes Resolution‟ published in the
website www.manupatra.com.
14
Law Commission of India, 176th Report on Arbitration and Conciliation (Amendment) Bill, 2001 at p 68.
5. CONCLUSION
Arbitration is generally considered cheaper over traditional litigation, and is one of the reasons
for parties to resort to it. However, the ground realities show that arbitration in India,
particularly ad hoc arbitration, is becoming quite expensive vis-à-vis traditional litigation. A
cost analysis on arbitration vis-à-vis litigation will throw light on the higher cost of arbitration
over litigation. This is a crucial factor which weighs against developing a cost effective quality
arbitration practice in India.

The Cost of Arbitration incurred by the parties may include the arbitrator‟s fees, rent for
arbitration venues, administrative/clerical expenses, and professional fees for the
representatives of the parties (which may include lawyers and expert witnesses).

To determine totally the cost of arbitration or whether a particular arbitration process is

expensive or cheap as compared to litigation, many factors are always considered. These
factors include the rules that govern such arbitration, the weight of the case involved, the cost
of initiating the arbitration and the type of hearing requested by the parties. The number of
arbitrators the parties put on request and also issues such as the status of the parties, (whether
the party is either an individual or a business entity) the terms of the agreement as well as
whether the parties requested extra arbitrators are always considered.

While most arbitration specialists will readily agree that increasing costs in arbitration is a
serious concern and that cost effectiveness is a desirable goal, insufficient work has been done
in the past to address these issues. Discussion has tended to centre on fees of the arbitrators and
of the arbitral institutions, without focusing on the underlying causes for the high cost of
arbitration proceedings. Some recent legislative enactments and the revisions in the principal
rules for institutional arbitration are moving in the right direction. Powers of the arbitrators
have been strengthened and their responsibility for an efficient conduct of the proceedings has
been underlined.