Arbitrator Fee Disputes: Supreme Court Upholds Tribunal’s Mandate in Chennai Metro Rail vs. Transtonnelstroy (2023)

Date of the Judgment: 19 October 2023
Citation: 2023 INSC 932
Judges: S. Ravindra Bhat, J. and Aravind Kumar, J.

Can an arbitral tribunal’s mandate be terminated if it unilaterally increases its fees, despite one party’s objection? The Supreme Court of India recently addressed this question in a case between Chennai Metro Rail Limited and M/S Transtonnelstroy Afcons (JV) & Anr. This judgment clarifies the circumstances under which an arbitrator’s mandate can be terminated due to a perceived lack of impartiality. The bench comprised of Justice S. Ravindra Bhat and Justice Aravind Kumar.

Case Background

Chennai Metro Rail Limited (Chennai Metro), a joint venture between the Central Government and the Government of Tamil Nadu, awarded a project contract worth ₹1566 crores to M/S Transtonnelstroy Afcons (JV) (Afcons) on 31 January 2011. Disputes arose, and Afcons initiated arbitration proceedings on 15 April 2021. By 29 April 2021, both parties agreed to refer specific disputes and Chennai Metro’s counterclaims to a three-member arbitral tribunal under the Arbitration and Conciliation Act, 1996.

Timeline

Course of Proceedings

Chennai Metro filed an application before the Madras High Court on 10 August 2022, under Section 14 of the Arbitration and Conciliation Act, 1996, seeking termination of the tribunal’s mandate. Chennai Metro argued that the tribunal’s unilateral increase of fees, and the fact that Afcons had paid the revised fee, created a reasonable apprehension of bias. The High Court initially stayed the proceedings but later dismissed Chennai Metro’s application. The High Court held that since the tribunal members had reverted back to the original fee, the apprehension of bias was a temporary phenomenon. This led to the appeal before the Supreme Court.

Legal Framework

The Supreme Court considered the following sections of the Arbitration and Conciliation Act, 1996:

• Section 12: Grounds for challenge.—[(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, — (a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject -matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and (b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months. Explanation1. —The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Explanation 2. —The disclosure shall be made by such person in the form specified in the Sixth Schedule.] (3) An arbitrator may be challenged only if — (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or (b) he does not possess the qualifications agreed to by the parties. (4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made. (5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject -matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may , subsequent to disputes having arisen between them, waive the applicability of this sub -section by an express agreement in writing. This section deals with the disclosure requirements and grounds for challenging an arbitrator’s appointment. It emphasizes the importance of independence and impartiality.
• Section 13: Challenge procedure. —(1) Subject to sub -section (4), the parties are free to agree on a procedure for challenging an arbitrator. (2) Failing any agreement referred to in sub -section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub -section(3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal. (3) Unless the arbitrator challenged under sub -section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge. (4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub – section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award. (5) Where an arbitral award is made under sub -section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34. (6) Where an arbitral award is set aside on an application made under sub -section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees. This section outlines the procedure for challenging an arbitrator, including the timeline and the tribunal’s role in deciding the challenge.
• Section 14: Failure or impossibility to act .—(1) [The mandate of an arbitrator shall terminate and he shall be substituted by another arbitrator, if] — (a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and (b) he withdraws from his office or the parties agree to the termination of his mandate. (2) If a controversy remains concerning any of the grounds referred to in clause (a) of sub -section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate. (3) If, under this section or sub -section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub -section(3) of section 12. This section specifies the circumstances under which an arbitrator’s mandate can be terminated, including when they become unable to perform their functions.
• Section 15: Termination of mandate and substitution of arbitrator .—(1) In addition to the circumstances referred to in section 13 or section 14,the mandate of an arbitrator shall terminate — (a) where he withdraws from office for any reason; or (b) by or pursuant to agreement of the parties. (2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. This section outlines the ways in which an arbitrator’s mandate can be terminated and how a substitute arbitrator is appointed.

These provisions ensure fairness, impartiality, and efficiency in arbitration proceedings, aligning with the principles of the Constitution.

Arguments

Chennai Metro’s Submissions:

• The tribunal’s unilateral increase of fees, despite Chennai Metro’s objections, is impermissible and creates a reasonable apprehension of bias.
• Reliance was placed on the judgment of the Supreme Court in ONGC v. AFCONS Gunasa JV [2022 (10) SCR 660], which emphasized party autonomy in fixing arbitrator fees.
• Any deviation from the original fee agreement requires the consent of all parties and cannot be unilateral.
• The tribunal’s insistence on the higher fee, despite resistance, led to a reasonable apprehension that the proceedings would not be conducted impartially.
• The tribunal suppressed the fact that it had received payment of the revised fee from Afcons.
• The reversal of its earlier position by the tribunal did not remove Chennai Metro’s apprehensions that the proceedings would not be conducted in an impartial manner.
• The decisions in HRD Corporations v. Gas Authority of India Ltd [2017 (11) SCR 857] and Bharat Broadband Network Limited v. United Telecoms Ltd [2019 (6) SCR 97], which state that an application under Section 14 is not maintainable unless the party applies to the Tribunal in the first instance, are inapplicable in this case.

Afcons’ Submissions:

• The application under Section 14 is not maintainable.
• Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996, provides a comprehensive framework for addressing specific instances of ineligibility.
• If an arbitrator is challenged on grounds of ineligibility under Section 12(5), the parties can directly approach the court under Section 14.
• Other circumstances of justifiable reason to doubt the tribunal’s impartiality fall within the ambit of Section 12(3), and the remedy is to approach the tribunal under Section 13(2).
• The observations in HRD Corporations v. Gas Authority of India Ltd [2017 (11) SCR 857] and Bharat Broadband Network Limited v. United Telecoms Ltd [2019 (6) SCR 97] support the contention that Section 12(5) renders an arbitrator ineligible, and in such cases, it is de jure unable to perform its functions under Section 14(1)(a).
• Bias is synonymous with partiality, and both are opposed to the concept of impartiality.
• The threshold for establishing bias is extremely high, and there must be a real likelihood of bias, not mere suspicion. Reliance was placed on International Airport Authority v. K.D. Bali & Another [1988 (3) SCR 370].

Summary of Arguments

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the unilateral increase of fee by the tribunal, despite the protest of one of the parties, is impermissible in law, which renders the tribunal being exposed to the charge that justifiable grounds about their continuing to be impartial, arises?
2. Whether the conduct of the tribunal’s members had terminated their mandate, both de facto and de jure?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

On Bias and Impartiality:

• G. Sarana v University of Lucknow & Ors. [1977 (1) SCR 64] – Defined bias as a predisposition to decide for or against one party without proper regard to the merits of the dispute.
• G.N. Nayak v Goa University [2002 (1) SCR 636] – Defined bias as partiality or preference, emphasizing the need for impartial action in judicial or quasi-judicial matters.
• S. Parthasarathi v. State of Andhra Pradesh [1974 (1) SCR 697] – Established that a reasonable man must infer a real likelihood of bias based on the whole evidence.
• Kumaon Vikas Mandal v Girija Shankar Pant [2000 Supp (4) SCC 248] – Reiterated the need for circumstances from which reasonable men would think it probable that the inquiring officer will be prejudiced.
• Ranjit Thakur v Union of India [1988 (1) SCR 512] – Stated that the test of real likelihood of bias is whether a reasonable person would think that bias was likely.
• R. v. Bow Street Metropolitan Stipendiary Magistrate, ex p Pinochet Ugarte (No. 2) [2000] 1 AC 119 – Emphasized that there must be a real danger of bias, not mere apprehension.

On Arbitration and Fee Disputes:

• M/s. Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd. [2017 (1) SCR 798] – Highlighted the objective of neutrality of arbitrators, especially their independence and impartiality.
• HRD Corporations v. Gas Authority of India Ltd. [2017 (11) SCR 857] – Differentiated between ineligibility under Section 12(5) and justifiable doubts under Section 12(3), emphasizing that ineligibility leads to direct court intervention under Section 14(1)(a).
• Bharat Broadband Network Limited v. United Telecoms Ltd. [2019 (6) SCR 97] – Recognized Section 12(5) as a new provision.
• ONGC v. AFCONS Gunasa JV [2022 (10) SCR 660] – Stressed that arbitrator fees are based on party autonomy and that any revision requires the consent of all parties.
• National Highways Authority of India & Ors. vs. Gayatri Jhansi Roadways Limited & Ors. [2019 (9) SCR 1001] – Held that an arbitrator does not become de jure unable to perform their functions if they state that the agreement governs the arbitral fees.
• Halliburton Company v Chubb Bermuda Insurance Ltd [2021] 2 All E.R. 1175 – Discussed the duty of disclosure for arbitrators under English law.

Other Cases:

• State of West Bengal vs. Shivanand Pathak [1998 (5) SCC 513] – Addressed judicial obstinacy as a form of bias.
• N.K. Bajpai vs. Union of India [2012 (4) SCC 653] – Elaborated on various forms of bias.
• State of Punjab vs. Devenderpal Singh Bhuller [2011 (14) SCC 770] – Discussed different heads of bias.
• Supreme Court Advocates on record Association vs. Union of India [2016 (5) SCC 808] – Elaborated on various forms of bias.
• International Airport Authority v. K.D. Bali & Another [1988 (3) SCR 370] – Underlined that there must be a real likelihood of bias and not mere suspicion of bias.
• Manak Lal v Dr. Prem Chand [1957 (1) SCR 575] – Highlighted the need to raise the issue of bias at the earliest opportunity.
• Union of India v Hindustan Development Corporation [1993 (3) SCR 108] – Discussed the applicability of the doctrine of legitimate expectation.

Judgment

How each authority was viewed by the Court?

The Supreme Court’s view on the authorities cited:

• ONGC v. AFCONS Gunasa JV [2022 (10) SCR 660]: The Court affirmed the principle of party autonomy in fixing arbitrator fees and reiterated that any revision requires the consent of all parties.
• HRD Corporations v. Gas Authority of India Ltd [2017 (11) SCR 857]: The Court followed the distinction made between ineligibility under Section 12(5) and justifiable doubts under Section 12(3). It clarified that ineligibility under Section 12(5) leads to direct court intervention under Section 14(1)(a), while other challenges must first be raised before the tribunal.
• Bharat Broadband Network Limited v. United Telecoms Ltd [2019 (6) SCR 97]: The Court acknowledged the recognition of Section 12(5) as a new provision.
• National Highways Authority of India & Ors. vs. Gayatri Jhansi Roadways Limited & Ors. [2019 (9) SCR 1001]: The Court distinguished the facts and held that an arbitrator does not become de jure unable to perform their functions if they state that the agreement governs the arbitral fees.
• Halliburton Company v Chubb Bermuda Insurance Ltd [2021] 2 All E.R. 1175: The Court used the English law to explain the importance of disclosure for arbitrators.
• Other cases on bias: The Court used these cases to define bias and explain the test for determining a reasonable apprehension of bias.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily influenced by the need to maintain the integrity of the arbitration process while respecting the statutory framework. The Court emphasized the following points:

• Statutory Compliance: The Court stressed adherence to the specific provisions of the Arbitration and Conciliation Act, 1996, particularly Sections 12, 13, and 14.
• Party Autonomy: The Court reiterated the importance of party autonomy in fixing arbitrator fees, as established in the ONGC case.
• Procedural Correctness: The Court highlighted that challenges to an arbitrator’s impartiality must first be raised before the tribunal unless the grounds fall under Section 12(5).
• Avoiding Unnecessary Intervention: The Court aimed to prevent unnecessary court intervention in the arbitration process, which could lead to delays and uncertainty.
• Balance: The Court sought to balance the need for impartiality with the need to ensure the smooth functioning of arbitration proceedings.

Fact:Law Ratio

The Court’s decision was more influenced by legal considerations (70%) than factual aspects of the case (30%).

Logical Reasoning

Judgment

The Supreme Court held that while the tribunal’s unilateral increase of fees was not permissible, it did not automatically terminate the tribunal’s mandate. The Court emphasized that fee increases require the agreement of all parties, as per the ONGC case. However, a breach of this rule does not amount to a per se ineligibility that voids the tribunal’s appointment.

The Court clarified that for a tribunal’s mandate to be terminated de jure, the grounds must fall under Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996. The Court found that the circumstances of this case did not meet those criteria. The Court also stated that the issue of bias should be raised before the same tribunal at the earliest opportunity.

The Court’s reasoning was based on the following key points:

• The Arbitration and Conciliation Act, 1996, provides a specific framework for challenging an arbitrator’s appointment or conduct.
• Section 12(5) read with the Seventh Schedule outlines specific grounds for ineligibility, which, if present, can lead to the termination of the mandate.
• Other grounds for challenging an arbitrator’s impartiality must first be raised before the tribunal under Section 13(2).
• The principle of party autonomy in fixing arbitrator fees is paramount, but a breach of this principle does not automatically lead to the termination of the mandate.

The Court also noted that the tribunal members had filed affidavits agreeing to revert to the original fee, which further reduced the apprehension of bias. The Court thus upheld the High Court’s order and directed the arbitrators to resume the proceedings.

The Court quoted the following from the judgment:

“The ruling in ONGC (supra) is undoubtedly clear that fee increase can be resorted to only with the agreement of parties; in the event of disagreement by one party, the tribunal has to continue with the previous arrangement, or decline to act as arbitrator.”

“The attempt by Chennai Metro to say that the concept of de jure ineligibility because of existence of justifiable doubts about impartiality or independence of the tribunal on unenumerated grounds [or other than those outlined as statutory ineligibility conditions in terms of Sections 12 (5)], therefore cannot be sustained.”

“In other words, the de jure condition is not the key which unlocks the doors that bar challenges, mid-stream, and should “not to unlock the gates which shuts the court out” from what could potentially become causes of arbitrator challenge, during the course of arbitration proceedings, other than what the Act specifically provides for.”

Practical Implications

The Supreme Court’s judgment in Chennai Metro Rail vs. Transtonnelstroy has several practical implications for arbitration proceedings in India:

• Fee Agreements: Arbitrators must adhere to the fee agreements made with the parties. Any revision of fees requires the explicit consent of all parties involved. Unilateral fee increases are impermissible and can lead to challenges to the tribunal’s impartiality.
• Challenge Procedures: Parties seeking to challenge an arbitrator’s impartiality must follow the procedures outlined in the Arbitration and Conciliation Act, 1996. Challenges based on grounds other than those specified in Section 12(5) must first be raised before the tribunal itself under Section 13(2).
• De Jure Ineligibility: The concept of de jure ineligibility is limited to the specific grounds outlined in Section 12(5) read with the Seventh Schedule. Other circumstances that may raise doubts about an arbitrator’s impartiality do not automatically render them de jure unable to perform their functions.
• Early Objections: Parties must raise objections to an arbitrator’s conduct or impartiality at the earliest opportunity. Failure to do so may weaken their case for challenging the arbitrator’s mandate.
• Tribunal’s Role: Arbitral tribunals must act fairly and impartially. They should not unilaterally alter fee agreements or engage in conduct that could reasonably raise doubts about their impartiality.
• Court Intervention: Courts should be cautious in intervening in arbitration proceedings. Intervention is primarily reserved for cases where the arbitrator is de jure ineligible under Section 12(5) or where the tribunal has failed to address a challenge under Section 13(2).

Key Takeaways

The key takeaways from the Supreme Court’s judgment in Chennai Metro Rail vs. Transtonnelstroy can be summarized as follows:

• Party Autonomy in Fees: Arbitrator fees are based on party autonomy and any revision requires the consent of all parties.
• Limited Scope of Section 14: The termination of an arbitrator’s mandate under Section 14 is limited to specific grounds of ineligibility under Section 12(5) read with the Seventh Schedule.
• Procedural Compliance: Challenges to an arbitrator’s impartiality must follow the procedures outlined in the Arbitration and Conciliation Act, 1996.
• Real Likelihood of Bias: The test for bias is whether a reasonable person would think that there is a real likelihood of bias, not mere suspicion.
• Importance of Early Objections: Parties must raise objections at the earliest opportunity.