Arbitration Costs – Loser has to Pay: SC

Following on the previous article, wherein the Supreme Court (SC) in the case Oil and Natural Gas Corporation ... vs Afcons Gunanusa Jv, 2022, had made it definitive that the fees for arbitration must be reasonable based on Schedule Four given in the Act, it is noteworthy that the Supreme Court also ruled that the costs incurred for the conduct of the Arbitration must be borne by the loser. Those who have been following up court judgements would be familiar that in many cases the court would state that each party will bear their own costs or in rare cases the court would fasten the loser with nominal costs. Such actions gave rise to plaintiffs filing frivolous cases and making courts lose time and also making the opposite parties run up huge costs.

In Arbitration cases the same was happening. This had come to the notice of the Law Commission (LCI) and the amendment to the Arbitration Act 2015 had changed the whole tenor of how to award costs. The SC noted that prior to the 2015 amendment, the Arbitration Act allowed the arbitral tribunal to fix the costs, unless otherwise agreed by the parties. A process of reform was started by the Law Commission of India in their 256th Report which recommended the recognition of the “loser pays” principle for costs to reflect the relative success and failure of the parties, because the “loser pays” principle serves as a deterrent against frivolous invocation of disputes and incentivises contractual compliance.

In line with the LCI report the Arbitration Amendment Act 2015 deleted the phrase “unless otherwise agreed by the parties” from sub- Section 31(8) and the arbitral tribunal was given the power to fix costs in terms of Section 31A of the Arbitration Act. The SC explained that Section 31A provided that the arbitral tribunal or the court has the discretion to determine costs of arbitration which includes, inter alia, reasonable costs relating to the fees and expenses of the arbitrators, courts and witnesses. Sub-Section (5) of Section 31A specifies that an agreement between parties apportioning costs was only valid if it is made after the dispute has arisen. The provision has an effect of limiting party autonomy in the case of an agreement regarding apportioning of costs.

The Supreme Court stated that “costs are typically compensation payable by the losing party to the winning party for the expenses the latter incurred by participating in the proceedings”. In the case In Salem Advocate Bar Assn. (II) v. Union of India (2005) 6 SCC 344, the Supreme Court had pointed out that “37. Judicial notice can be taken of the fact that many unscrupulous parties take advantage of the fact that either the costs are not awarded or nominal costs are awarded against the unsuccessful party. Unfortunately, it has become a practice to direct parties to bear their own costs.” The judgement further said: “The costs have to be actual reasonable costs including the cost of the time spent by the successful party, the transportation and lodging, if any, or any other incidental costs besides the payment of the court fee, lawyer's fee, typing and other costs in relation to the litigation.”

The SC quoted from well-known authorities that “The purpose of awarding costs is to indemnify the winning party. The “loser pays” principle apportions the costs between the parties through the costs follow the event (CFE) method. The primary purpose of the CFE method is to “make the claimant whole”.

Section 31A (3) provides that an arbitral tribunal or the court has to take into account the following factors for determining costs: “(a) the conduct of all the parties; (b) whether a party has succeeded partly in the case; (c) whether the party had made a frivolous counter claim leading to delay in the disposal of the arbitral proceedings; and (d) whether any reasonable offer to settle the dispute is made by a party and refused by the other party.”

This is accompanied by the general rule under Section 31A (2) that the unsuccessful party has to bear the costs of arbitration.

What is the meaning of costs?

The Act stipulates that “costs” means reasonable costs relating to (i) the fees and expenses of the arbitrators, courts and ‘witnesses; (ii) legal fees and expenses; (iii) any administration fees of the institution supervising the arbitration; and (iv) any other expenses incurred in connection with the arbitral or court proceedings and the arbitral award.

In every Arbitration case, the parties or where they fail or come up with issues that lack clarity, the Tribunal determines issues to which the parties agree. At the end of the process of the Arbitration, the Tribunal passes the award based on the issues and determines, who succeeded in proving the matter as per the issues and to what extent. It may be seen that when a party has failed in proving in their favour any issue, and that their conduct has been counterproductive to the smooth running and early resolution of the case, it is for the Tribunal to order costs where the loser is made to pay the entire costs of the Arbitration. The costs will be a proportionate in case both parties are successful, the plaintiff in some issues and the defendant in the other issues.

This situation, if understood properly will make insurers reflective about the manner in which they settle the quantum issues in a claim and how they will be able to defend the grounds which may be raised by the insured as being unfair and not in line with the indemnity offered in the policy. Similarly, the insured also need to be prudent in their expectations when filing arbitration cases, because if the grounds are found to be frivolous and the quantum claimed is grossly exaggerated, they would have to pay the costs in line with their failure to prove their case.