Kanak Shukla is a B.A. LL.B. (Hons.) student with a keen interest in arbitration law, commercial litigation, and dispute resolution. The author actively undertakes legal research and writing on contemporary issues in arbitration, constitutional law, and commercial law, with a focus on analysing recent judicial developments and statutory interpretation.
Introduction
Arbitration is constantly sold as the quicker and less expensive option than litigation, however one of the unnoticed problems in arbitration is the problem of payment of costs during the process. The problem appears when there is an obligation for the tribunal to order any kind of interim measures, like preservation of evidence, asset securing, and inspection of premises in connection with the dispute before the tribunal. The straightforward but complex problem arising out of this is: Who is going to bear the cost of this urgent measure? This article discusses the reasons for the traditional rule to allocate such costs on the shoulders of the applicant and the ways how to deal with the problem through Indian arbitration law.
The Nature of the Problem
There are two types of costs, which can be found in any arbitration procedure and often confuses those parties, who have no experience in this matter. The first type is the cost, required to implement the interim measure during the course of arbitration. The second type is the cost of the whole procedure, which is assessed by the arbitral tribunal at the end of the procedure. In case when the cost of an interim measure was borne by one of the parties, there is an idea that this cost will be reimbursed to this party at the end of the procedure. However, it is a reasonable question to raise the issue of equal sharing of this cost, since the dispute is carried out between two parties.
Interim Measures Are Procedural, Not Adjudicatory
It is stated under Section 17 of the Arbitration and Conciliation Act 1996 that the arbitral tribunal has power to make orders for interim measures of protection and such interim measures would include preserving or custody or inspecting any property that forms the subject matter of the arbitration.[i] It is also stated under Section 9 of the aforementioned Act that the court has the same power to order such measure before or in connection with the arbitral proceedings including the detention, preservation or inspection of the property or entry upon the land or premises for such purposes.[ii]
Since such orders are merely preventive in nature and do not resolve the issue regarding the liability for any wrong done, the common practice would be for the person applying for such relief to pay immediately the costs of the action. It is based on the fact that interim injunctions granted by the courts in civil actions have to be immediately paid due to two reasons.
The Final Costs Regime Is a Separate Exercise
The rules concerning the apportionment of the total costs of arbitration proceedings are found in sections 31(8) and 31A of the Act, inserted by the 2015 amendment.[iii] Section 31A (2) sets out a general rule that the party who loses an arbitration bears the costs of the party who wins the arbitration, except that the tribunal may depart from the rule for any reason put in writing.[iv] In doing so, section 31A (3) requires that the tribunal takes into account the conduct of the parties, if a party has partially won his case, delay caused by frivolous claims or counterclaims, and unreasonable refusal of a reasonable offer of settlement.[v]
Cost fixing in the end is clearly dependent on the merits of the case having been decided, as it will not be known which party has succeeded until then. Intermediate costs incurred during the arbitration proceeding would remain provisional, as costs cannot be fixed without deciding the substance of the matter.
Tribunal Powers Over Deposits and Reallocation
Therefore, the Indian Arbitration Law is not wholly confined to the concept that it has to be the applicant who bears the burden of interim costs alone. Pursuant to Section 38 of the law, it is open to the arbitrator to order advance deposit towards costs[vi] and under the case of ONGC v Afcons Gunanusa JV from the Supreme Court of India, it is within the scope of the tribunal to equally share the cost amongst the parties and make the non-defaulting party to pay for the defaulting party’s share of the deposit.[vii]
Why the Default Persists
· Costs that arise from the necessity of urgency: The entity requesting urgent relief must bear such costs since this approach will curb unnecessary urgency claims by applicants.
· Maintaining neutrality before dealing with the merits of the case: The sharing of costs of the process will mean that equal responsibility is assumed by both parties of the process which will benefit only one.
· Recoverable costs rather than forfeited costs: The cost is not lost since it forms part of the total costs in the process of arbitration.
Where the Default Produces Unfair Outcomes
● Disequilibrium in cash flow: the financially weaker side lacks the ability to fund the cost of a benefit for both sides due to the inability to fund the cost of such benefit.
● An interim measure that provides benefits to both parties: when the interim measure involves protecting the value of the subject matter for both sides and not just for advancing the claim of one side, the chances of having cost sharing between the parties before the final apportionment of costs in the award will be higher.
● Late repayment: as arbitrations could take months and even years to reach an award, the applicant who would be eventually successful in his case is effectively providing a zero-interest loan to the arbitration process.
Towards a More Balanced Approach
Where tribunals find themselves dealing with this conflict, they might be wise to look first at whether the proposed interim remedy is in the mutual interest or is only advancing one party’s position, and to split the initial costs in the same way rather than relying on the automatic applicant-pays principle. The pre-existing option of making use of section 38 to require a deposit will allow tribunals an easy avenue of securing a joint deposit where an interim remedy is in their mutual interest. Tribunals may also wish to factor in some interest where there has been an extended period of time in which an applicant has incurred costs.
Conclusion
However, the conflict between provisional relief and the allocation of cost is a structural problem in arbitration law and is certainly not accidental. It is two different legal questions and consequently must have separate provisions and different approaches to them in a certain situation. The general principle regarding the immediate burden of costs of an interim measure upon the applicant is a perfectly rational one and based on sound legal reasoning. However, it is important to stress that this is merely a default principle and not a strict one. When the interim measure is equally beneficial for both parties to the dispute or when the inequality of cost makes it impossible for one party to seek such relief, there is no lack of instruments in sections 17, 38 and 31A of the Arbitration and Conciliation Act 1996.[viii]
[i] Arbitration and Conciliation Act 1996 (India), s 17 <https://www.indiacode.nic.in/handle/123456789/1978>
[ii] ibid s 9.
[iii] Arbitration and Conciliation Act 1996 (India), ss 31(8), 31A, as inserted by the Arbitration and Conciliation (Amendment) Act 2015 (India) <https://www.indiacode.nic.in/handle/123456789/1978>
[iv] ibid s 31A(2).
[v] ibid s 31A(3).
[vi] Arbitration and Conciliation Act 1996 (India), s 38 <https://www.indiacode.nic.in/handle/123456789/1978>
[vii] Oil and Natural Gas Corporation Ltd v Afcons Gunanusa JV (2022) SCC OnLine SC 1122 (Supreme Court of India) <https://indiankanoon.org/search/?formInput=ONGC v Afcons Gunanusa JV>
[viii] Arbitration and Conciliation Act 1996 (India) (n 1); ibid (n 3); ibid (n 6).
