Section 31(8) of the Arbitration & Conciliation Act 1996 was enacted to deal with the costs involved in the arbitration.
However, with an increase in complex infrastructure contracts, the entire arbitration management became fraught with delay, escalation in cost and increased judicial interference mirroring the procedure of the courts. The investment and the business climate in India suffered a huge setback when the international fraternity did not perceive India as a favourable country for investment.
Many arbitral tribunals were failing to allocate costs adequately and this leads to the winning party losing a significant amount of money due to the costs incurred in the arbitral proceedings. The winning party was also not compensated for the expenses it had incurred relating to the appointment of arbitrators, application for interim measures etc.
Therefore, after numerous calls on reform, the Law Commission of India in its 246th Report sought an overhaul of the existing provision on costs. Based on the said Report, Section 31(8) stood replaced by a new costs mechanism in Section 31A.
The early attempts at reforming the 1996 Act, such as the Law Commission’s 176th Report, the Parliamentary Standing Committee Report, the Saraf Committee Report, did not recommend amending Section 31(8) of the 1996 Act. Recently in 2014, the Law Commission of India came with its 246th report to bring amendments in the Arbitration & Conciliation Act 1996. The law commission in its report then finally suggested to amend Section 31(8) of the Act. The commission after stating the reasons by citing the cases like A.L. Arora and its conflict with the decision of two-judge benches of the Supreme Court in ONGC v. M.C. Clelland Engineers S.A and UP Cooperative Federation Ltd v. Three Circles came to a conclusion that the cost regime in the arbitration act needs to be amended.
Under the Arbitration and Conciliation (Amendment) Act, 2015 Section 6A was proposed to be added to determine the cost regime. The principle ensured that the “costs follow the event” regime governs all arbitrations/ arbitration-related court litigation. Such a regime would disincentivize frivolous proceedings and inequitable conduct. The basis of the above provisions in Rule 44 of the Civil Procedure Rules of England.
The amended Section 31A gives a detailed provision on costs. Section 31A(1) allows the arbitral tribunal or the court, in relation to proceeding under the 1996 Act, to award costs on the parties. It states that while deciding on the costs, the court or the arbitral tribunal has the power to determine (i) whether costs are payable by one party to another (ii) the amount of cost payable (iii) time of the payment of such costs.
Another important aspect of the Section is that it clarifies that the power to award costs is independent of the Code of Civil Procedure, 1908. Hence, these issues relating to costs are to be decided notwithstanding provisions in the Code of Civil Procedure, 1908 which may go against Section 31A. As stated previously, there was some confusion on whether the principles relating to costs under the Code of Civil Procedure, 1908 would apply equally to arbitral proceedings. By including the provision that the costs regime would be notwithstanding the Code of Civil Procedure, 1908, the legislature perhaps intends to adopt the international standard regarding the determination and award of costs in arbitral proceedings. This gives some discretion to the arbitral tribunals and court to award costs on an indemnity basis.
One significant provision of Section 31A (1) is that it recognises that the costs in any arbitration related court proceeding such as an application for appointment of arbitrator, application for interim measures, etc. should be governed by the law of costs as provided in the 1996 Act as opposed to any other law such as the Code of Civil Procedure, 1908. To illustrate, under Section 11 of the Act talks about the appointment of arbitrators and in relation to this, the costs can be determined only with respect to Section 31A and not any other law. Therefore, the courts are required to determine the costs even in case of appointment of arbitrators due to Section 31A(1) of the 1996 Act.
Coming to Section 31A(2), the wording of the section is such that begins with the phrase “if the Court or arbitral tribunal decides to make an order as to payment of costs”. This suggests that making an order as to the payment of the costs should be the choice of the arbitral tribunal or the court. The wordings could be interpreted to mean that the arbitral tribunal or the court has the option to choose not to pass any order on costs. However, this interpretation will be inconsistent with the purpose of introduction of this new regime of costs, as was also noted by the Law Commission.
The structure of Section 31A(2) also seems to be a cause for concern. It is suggested for the courts to interpret Section 31A(2) to mean: The Court of the tribunal shall make an order as to the payment of costs, the court or the tribunal should follow the general rule that the unsuccessful party should be ordered to pay the costs to the successful party. However, the courts or tribunals can depart from this general rule if proper reasons are recorded.
Another aspect that would require the courts or tribunals to pay attention is that the present amendment lets go of the necessity that costs should be awarded only if the conduct of the other party is not proper. Rather, the principle is that costs should be awarded to the winning party, and in a case, the costs at actuals (indemnity costs) should be awarded if the conduct is reprehensible.
There haven’t been a lot many cases dealing with the aspect since October 2015 when the Amendment Act came into force. Nevertheless, there have been some decisions which dealt with the matter, especially those dealing with the appointment of the arbitrators which throw some light on whether the courts have changed their course in the practical application of the amended section.
In the case of Sheetal Maruti Kurundwade v. Metal Power Analytical (I) Pvt. Ltd. and Ors (2017), a petition was filed by one of the parties under Section 9, 12(3) and 12(5) while alleging that the presiding arbitrator appointed was previously briefed by the counsel of the other side in a different case, and so the appointment was contrary to the 1996 Act. The Bombay High Court did not entertain the petition and dismissed it on the basis of there being no “foundation in fact or law”. The High court stated that the petitioner completely ignores Section 31A and so failed to award the costs on the respondent to the petition. The court could not have left the parties to bear their own costs without recoding reasons therefore as required under Section 31A(2)(b).
In Salma Dam Joint Venture v. Wapcos Limited (2017), the petition was with respect to failure on the part of the respondent to appoint an arbitrator. The court found that the objection of the respondent for not filing an arbitrator was not tenable. Despite this, the court did not order any costs. Both the parties had appointed senior advocates to argue their cases so maybe they did expect huge amounts towards resolving the issue of the appointment of arbitrators. The court did not give reasons in this case too.
In the case of National Highways Authority of India v. Gayatri Jhansi Roadways Limited with Gammon Engineers and Contractors v. National Highways Authority of India (2019), the Supreme Court got the issue that whether the courts can enforce an agreement which contains a fee schedule for arbitrator which is not in compliance with the Fourth Schedule of the Arbitration & Conciliation Act. The Supreme Court held that Section 31(8) and Section 31A of the Arbitration & Conciliation Act does not preclude the parties from agreeing on a fee structure for the arbitrators.
Even though the amendment has been made, there has not been a significant change with the way the courts are awarding costs or following the principle. In order for India to establish a costs regime equivalent to the international standard and to become a prominent global centre for dispute resolution, it is of great importance that the arbitral tribunals or the courts allocate the costs in accordance with the best practices under the international law.
Such international practices give the view that the arbitral tribunals award reasonable costs in favour of the successful party. As pointed out earlier, in some countries, the courts award the costs to the winning party on an indemnity basis in cases where there have been unsuccessful challenges to arbitration agreements and in other cases where there have been unsuccessful petitions for refusal to acknowledge or enforce the awards. To indemnify the successful party in this case makes sense. In words of a Hong Kong judge,
“If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.”
However, the sad reality is that the Indian courts and tribunals have not only failed to award indemnity costs in deserved cases but they don’t even award reasonable costs in the favour of the successful party as has now been provided in the 1996 Act. Hence, they need to change the approach and implement the changes brought in by the 2015 amendment in awarding costs.