How much does Arbitration Costs

Arbitration is a popular ADR method for timely dissolution of disputes.

Cost of Arbitration is much less and is cost effective than Litigation

The reason is simple as there are no Appeals to an Arbitration award. The main grievance concerning Arbitration over the past two decades, has been its cost. 

Breakup of Cost of Arbitration

1. Cost of Arbitral Tribunal;
2. Cost of Expert Witness;
3. Cost for Legal Fees of Legal Teams of both disputing Parties;
4. Cost of Physical space at the seat of Arbitration;
5. Cost of secretarial services for Arbitration;
6. Travel expenses incurred in Arbitration and
7. Administrative Fees by Institutional Arbitration Centres

Cost od Ad-hoc Arbitration vs Institutional Arbitration 

There is a huge variation in the Cost of Arbitration in Ad-hoc Arbitrations depending upon the profile of the Arbitrator and Lawyers representing the disputing Parties.

In case the Arbitral Tribunal is presided over by a former Chief Justice of India, former Supreme Court Judge, former High Court Judge then the Cost can esclate substantially. 

Likewise in high stake cases Parties engage the services of designated Senior Advocates, then also cost can reach in several Lakh of Rupees for each hearing. 

Other expenses as detailed above can have spiralling effect on the Arbitration. What add to the woes of the Parties is the tendency of prolonging the Arbitration when the payments are to be made for each hearing.

Whereas in Institutional Arbitration, majority of Cost components are easily taken care of in so far as the Fee of Arbitration is calculated on ad valorem basis. The tolal Cost of Arbitral Tribunal and Venue etc are pre-fixed and there is no element of surprise.

Rather the Institutional System that Arbitrators get their Fees only after they deliver the Award results in lesser adjournments and timely termination of Proceedings.

Cost of Domestic Arbitration 

Section 31A(1) of Arbitration and Conciliation Act, 1996 provides that in relation to any arbitration proceeding, the arbitral tribunal has discretion to determine:

• whether costs are payable by one party to another;
• the amount of such costs; and
• when such costs are to be paid.

Section 31A(2) of Arbitration and Conciliation Act, 1996 provides that if a tribunal decides to make an order as to the payment of costs, the general rule is that the unsuccessful party will be ordered to pay the successful party's costs. In alternative, an Arbitral tribunal may make a different order for reasons which must be recorded in writing.

In exercising their powers under Section 31A of the act, tribunals must consider certain factors provided for in Section 31(A)(3) – namely:

• the conduct of all parties;
• whether a party has partly succeeded in the case;
• whether a party made a frivolous counterclaim which delayed the disposal of the arbitral proceedings; and
• whether any reasonable offer to settle the dispute has been made by one party and refused by another.

What can be added in Arbitration Cost

In accordance with the explanation to Section 31A(1) Arbitration and Conciliation Act, 1996, 'costs' covers:

• the fees and expenses of the arbitrators, courts and witnesses;
• legal fees and expenses;
• the administrative fees of the arbitral institution; and
• any other expenses incurred in connection with the arbitral or court proceedings and the arbitral award.

Notably, Section 31A(1) allows only for reasonable costs to be recovered (and not actual costs). Therefore, the test of reasonableness must be met and the tribunal must consider the reasonableness of the costs claimed. The factors which may be taken into consideration to determine reasonableness vary and such an assessment is not straightforward. The problems in determining reasonable costs are further compounded by the significant costs imposed on parties by their solicitors and counsel, which, along with the manner of billing, vary.

Cost of International Arbitration 

the CIArb Costs of International Arbitration Survey, based on 254 arbitrations conducted between 1991 and 2010, contained perhaps the most extensive analysis of the cost of international arbitration to date. The survey included data from ICC, LCIA, LMAA, AAA, SCC, ad hoc and other types of arbitrations, finding the overall average cost of international arbitration to be approximately GBP 1,580,000 (USD 2.6 million or EUR 2 million using historical exchange rates roughly equivalent to Rs.15 Crore) for claimants, and approximately 10% less for respondents. These figures remained similar in later surveys, although the cost of investment arbitration was higher and individual disputes could cost significantly less.

It was found that Claimants spend 12% more than the Respondent.

Supreme Court of India on Cost of Arbitration

The Supreme Court recently in the matter of National Highways Authority of India and Ors. v. Gayatri Jhansi Roadways Limited and Ors. 2019 SCC OnLine SC 906 settled the position on the issue regarding arbitrator’s fee in cases where the parties had agreed to a schedule of fees in the arbitration agreement. It held that the Fourth Schedule of the Arbitration and Conciliation Act, 1996 is not mandatory in determining the fees where the fees has been fixed by agreement between the parties and overruled the judgment of the Delhi High Court.

Statutory cap on the Cost of Arbitration

This was done by inclusion of Schedule IV in the Arbitration and Conciliation Act, 1996. 

The Fourth Schedule of Arbitration and Conciliation Act, 1996

[See section 11 (3A)]

Note. - In the event, the arbitral tribunal is a sole arbitrator, he shall be entitled to an additional amount of twenty-five per cent. on the fee payable as per the table set out above.

 

Likewise the Institutions have their own Fees Schedule viz IDRC has its own Fee Schedule as under -

SCHEDULE II

ARBITRAL TRIBUNAL’S FEES, EXPENSES, TERMS AND CONDITIONS

Effective 2nd October 2019

1. Scope of Application and Interpretation

1.1 Subject to any variations agreed by all parties or changes the Council considers appropriate, this Schedule shall apply to arbitrations in which the arbitral tribunal's fees and expenses are to be determined in accordance with Article 10 of the Rules and to the appointment of an emergency arbitrator.

1.2 The Council may interpret the terms of this Schedule as well as the scope of application of the Schedule as it considers appropriate.

2. Payments to Arbitral Tribunal

2.1. Payments to the arbitral tribunal shall generally be made by the Councilfrom funds deposited by the parties in accordance with Article 41 of the Rules.

2.2. Payments to the arbitral tribunal shall be made in Indian Rupees.

2.3. The parties are jointly and severally liable for the fees and expenses of an arbitrator, irrespective of which party appointed the arbitrator.

3. Arbitral Tribunal's Expenses

3.1. The arbitral tribunal shall be reimbursed for its reasonable expenses, in accordance with the Practice Note, if any, referred to at paragraph 1.3.

3.2. The expenses of the arbitral tribunal shall not be included in the arbitral tribunal's fees charged by reference to Schedule II and III..

4. Miscellaneous Expenses

The parties shall be responsible for expenses incurred and relating to arrangement of support services engaged for the purposes of the arbitration including, but not limited to, the cost of hearing rooms, interpreters and transcription services. Such expenses may be paid directly from the deposits referred to in Article 41 of the Rules as and when they are incurred.

5. Cancellation Fees

If a scheduled arbitral tribunal hearing is cancelled at the request of parties or their counsel than the concerned party can be burdened with cost which can either be deposited with IDRC or can be paid in part to the opposite party as ordered by the tribunal.

Where hearing days are cancelled or postponed other than by agreement of all parties or request of the arbitral tribunal, this may be taken into account when considering any subsequent apportionment of costs.

SCHEDULE III

ARBITRAL TRIBUNAL'S FEES, EXPENSES, TERMS AND CONDITIONS

Note -

• In addition to the Arbitrator's Fee and the Administrative Charges referred to hereinabove, the parties shall also deposit in advance any applicable taxes thereon including requisite stamp duties.

• Each Member of the tribunal is entitled to be paid as per the Schedule above. Sole Arbitrator the arbitral tribunal’s Fees shall be paid 25% more in addition to what is provided in the Schedule

• Air fare and cost of stay in hotel of the member(s) of the Arbitral Tribunal are excluded, which are to be borne equally by the parties.

• In case of bulk filing the rates payable under the Schedule can be suitably adjusted by the Council.

• The initial valuation of claim/counterclaim done by the parties shall be provisional and the final valuation shall be decided by the IDRC for calculation of fees as per the Schedule.

 

But as far as its cost is concerned several questions arise in the mind of disputing Parties to an Arbitration which includes

How costly is the Arbitration Process

How to calculate cost of Arbitration

Is Arbitration expensive

Is Arbitration cost effective

Who bears cost of Arbitration

Does both Parties share Arbitration Cost

Is arbitration expensive in India

Cost of Domestic Arbitration

Cost of International Arbitration

How much does Arbitrators earn

Which is more costly the Institutional Arbitration or Ad-hoc Arbitration

How much fee do Arbitrators charge

Effect or consequences of non payment of Arbitration fees