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Madras HC Affirms: Unconditional Acceptance of Arbitrator Fees Cannot Later Be Challenged

In a recent and consequential ruling, the Madras High Court reaffirmed a fundamental legal principle regarding arbitrator fees. The court unequivocally held that once a party unconditionally accepts the fees determined by the arbitral tribunal during the arbitration process, they are precluded from subsequently challenging the fees as unreasonable. This landmark decision arises from a petition filed under Section 39(2) of the Arbitration and Conciliation Act (A&C Act).
Understanding the Complex Dispute

The case at hand involved a contentious dispute between two parties, necessitating the court's appointment of an arbitrator under the provisions of Section 11 of the A&C Act. The court vested the arbitrator with the authority to establish his fees after consulting all the involved parties. Notably, the arbitrator's fees were determined based on the number of hearings conducted, without specifying a fixed monetary amount.

During the arbitration proceedings, both parties encountered difficulties in making timely payments for the arbitrator's fees. This predicament prompted the arbitrator to rightfully exercise a lien on the award, a prerogative sanctioned by Section 39(1) of the Act. While one party managed to clear their dues and receive the award, the other party opted to file an application under Section 39(2) to challenge the fees and sought the release of the lien.

Grounds for Contesting the Fees

The party filing the application contended that the arbitrator had levied exorbitant fees, surpassing the permissible amount outlined in Schedule IV of the Act. Additionally, they argued that their admittance into insolvency and the subsequent imposition of a moratorium excused them from this financial obligation.

In response, the arbitrator presented a robust counterargument, emphasizing that the fees were mutually agreed upon. He stressed that the applicant had never contested the amount during the arbitration proceedings.

A Comprehensive Legal Analysis

The Madras High Court conducted an exhaustive analysis of the legal aspects surrounding the arbitrator's fee determination. Citing a precedent set by the Supreme Court, the court highlighted that the fee schedule in Schedule IV of the A&C Act is not obligatory. This flexibility allows parties to mutually agree upon an alternative fee structure for the arbitrator.

The court emphasized that both parties had willingly consented to the fee arrangement with the arbitrator. This consent was affirmed in various orders during the arbitration. Consequently, the court ruled that a party cannot later challenge the fees after wholeheartedly accepting them during the arbitration process.

Moreover, the court underscored the paramount importance of honoring the agreed fees, acknowledging the arbitrator's experience and effort in reaching the award. The court firmly stated that the applicant's challenge was an afterthought, which undermined the integrity of the legal process.

Upholding the Arbitrator's Dues amidst Insolvency Proceedings

Addressing the issue of fee payment during insolvency proceedings, the court clarified that fees related to an arbitration concluded before the moratorium date were not affected by the insolvency restrictions.

The court reiterated the significance of honoring the arbitrator's fees, treating them on par with a liquidator's fees, and according them a preferential status in terms of priority of dues. It firmly stated that the initiation of insolvency proceedings should not deprive the arbitrators of their rightful fees, which are crucial for the smooth functioning of the arbitration process.

Court's Definitive Verdict and Directives

The Madras High Court dismissed the application and directed the applicant to remit the outstanding fees to the arbitrator. Additionally, it imposed a cost of Rs. 5 lakhs on the applicant for abusing the legal process and directed the said amount to be remitted to the arbitrator.

This groundbreaking judgement solidifies a precedent that upholds the sanctity of agreed-upon fees in arbitration, ensuring fairness and adherence to legal processes, even in the context of insolvency proceedings.

Case Title: EDAC Engineering v. Industrial Fans (India) Pvt Ltd, Application Nos 2080 and 4609 of 2021