"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, August 21, 2014

Part IV of the Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996"

In the last three posts on the topic (here here and here), we had discussed certain amendments proposed by the Law Commission on Indian Arbitration Law. In this post, we analyse the amendments pertaining to costs in arbitral proceedings.

In fact, we have been proposing change in the law on costs since 2008 (See, for instance, Public Policy and Setting Aside Patently Illegal Arbitral Awards in India (2008), Appeal Against the Order of the Chief Justice Under Section 11 of the Arbitration and Conciliation Act, 1996: An Empirical Analysis(2012)). In the 2012 paper, the lack of the power of the tribunal to award costs in respect of court proceedings in support of arbitration was noted:

"There is no provision in the Act for awarding costs in favour of the party successful in an application under section 11 of the Act. Although the arbitral institution appointing the tribunal would award costs in relation those commercial disputes of designated value, costs expended in proceedings under section 11 in cases that are not commercial disputes of designated value do not come within the purview of section 31(8). Therefore, the arbitral tribunal does not have the power to take such expenditure into consideration while awarding costs."

Therefore, it was suggested that courts should award costs in such proceedings before the Court. The Law Commission's notice was also drawn in a subsequent communication to these aspects. 

The Commission has proposed detailed provisions concerning Costs in the form of Section 6A. Following are the proposals:

1. Deletion of most of Section 31(8) except to state: "Unless otherwise agreed by parties the costs of an arbitration shall be fixed by the arbitral tribunal in accordance with Section 6A of this Act."

2. Inclusion of Section 6A primarily for two purposes: one, to provide expressly for allocation of costs depending upon the parties' relative sucess and failure in the arbitration; two, to make such regime applicable for both arbitration and arbitration related court litigation.

3. Section 6A provides that notwithstanding the CPC, the tribunal or the court in arbitration related court proceedings has the discretion to determine the costs and the party which must bear such costs.The new definition of costs is virtually lifted from the old definition under Section 31(8) except that costs shall also include "fees and expenses... of the courts...". This is a new addition but what does fees and expenses of the court? This may refer to court fee and other expenses but how would "expenses of the court" be determined. I think a new clause should be added to state that "fees and expenses incurred in court proceedings including court fee". The definition as is proposed may require slight modifications.

4. S. 6A(2) is proposed to provide that the unsuccessful party is liable to pay costs unless specified in writing otherwise supported by reasons. S. 6A(3) is proposed to provide an inclusive list of circumstances to be considered while passing an award/ order on costs. S. 6A(4) provides an inclusive list of possible variants of a cost award/ order.

5. S. 6A(5) is very interesting. It provides that a prior agreement that one party has to bear all or some of the costs is void if made prior to the dispute. The possibile justification to this amendment is that by agreement (especially agreements in which one party has an unequal bargaining provision) one party should not be saddled with the costs in the arbitration. There are two sides to this provision. The supporters of the amendment would say that it is necessary to protect a weaker party from being saddled with the arbitration costs. On the other hand, it would also be argued that such an amendment infringes on the contractual freedom of the parties. Naysayers to the amendment may argue that such costs agreement may be reached in consideration for another clause in the contract such as for having agreed to a seat proposed by the other party. There are two sides to this issue having valid arguments.

There is another possible justification for this provision- This clause seeks to do away with such a party's tactic of circumventing the costs follow the event provision and thereby circumventing the objective of the provision- to disincentivize frivilous litigation. If this is the objective, the clause may not seem to achieve its ends because the clause covers an agreement only on the "costs of the arbitration" and not of arbitration related litigation.

We are not entirely comfortable with having such a provision that seeks to interfere with the contractual freedom of the parties. But this is not to say that inclusion of such a provision will not have benefits.

Also, why has this provision been placed between Sections 6 and 7?

More on the other amendments in subsequent posts. 

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