Introduction
In India, arbitration has become a preferred dispute resolution mechanism for commercial matters. Its key advantages—neutrality, efficiency, and cost-effectiveness—enhance its appeal, especially when compared to potentially lengthy court litigation. A common question from clients is: what is the actual cost of arbitration in India?
The common perception is that arbitration is always less expensive than litigation. This view, however, should be taken with caution. The total cost is influenced by several factors, including the choice between ad hoc and institutional arbitration, the profile of the arbitrators, the monetary value of the dispute, and its complexity. These are key determinants of the cost. This article breaks down the costs of arbitration in India, discusses emerging trends, and offers practical tips for businesses budgeting for arbitration proceedings.
Understanding the Key Cost Drivers
The overall cost of arbitration in India generally includes the following components:
- Tribunal Fees: This is often the largest single component of the cost. In ad hoc proceedings, these fees are typically negotiated between the parties and the arbitrators, sometimes guided by the Fourth Schedule to the Arbitration and Conciliation Act, 1996 (the “Act”). In institutional arbitration, the arbitrators’ fees are determined by the institution’s published schedule.
- Administrative Charges: Institutional arbitration centers like the Mumbai Centre for International Arbitration (MCIA), the Indian Council of Arbitration (ICA), the International and Domestic Arbitration Centre (IDRC), and the Delhi International Arbitration Centre (DIAC) levy administrative charges, which are usually based on the value of the claim.
- Legal Fees: These are the costs for legal representation. In complex matters, briefing a senior counsel can result in costs that exceed the tribunal’s fees.
- Expert Witness Fees: These include fees for technical experts and forensic accountants, which are common in disputes related to construction, energy, or finance.
- Venue and Logistics: These costs relate to booking hearing rooms, stenographers, interpreters, and secretarial services. While virtual hearings have reduced these charges, hybrid hearings have become common.
- Travel and Accommodation: These costs are relevant when parties, arbitrators, or witnesses are from different cities than the seat of arbitration.
Ad Hoc vs. Institutional: The Cost Differential
This choice is one of the most significant factors affecting the overall cost.
- Ad Hoc Arbitration: In ad hoc arbitration, fees are negotiated directly and often depend on the arbitrator’s stature; a retired Chief Justice or senior Supreme Court judge can command substantial fees, often calculated per hearing. The absence of a fixed fee schedule means costs can escalate if proceedings are prolonged. Parties are also directly responsible for arranging and paying for the venue and administrative support.
- Institutional Arbitration: This offers greater cost predictability. Institutions like the MCIA, ICA, and IDRC provide clear fee schedules. These ad valorem (value-based) fee structures make costs more predictable. Institutions also help ensure proceedings are concluded in a timely manner, as arbitrator fees are often tied to the delivery of the award. While administrative fees are an upfront cost, they help prevent uncontrolled or escalating expenses.
Domestic Arbitration vs. International Engagements
The cost is also shaped by whether the arbitration is domestic or international.
a. Domestic Arbitration (India-seated, Indian parties):
- This is governed by the Arbitration and Conciliation Act, 1996.
- The Fourth Schedule of the Act provides a model fee structure, with a fee cap for a sole arbitrator in the highest claim bracket, plus an additional percentage of the fee amount.
- Section 31A of the Act empowers the tribunal to allocate costs. Costs are typically awarded to the successful party (the “costs follow the event” principle), unless the tribunal directs otherwise for stated reasons.
b. International Arbitration (involving a foreign party or a foreign seat with an Indian connection):
- Costs can rise considerably if the arbitration is conducted under the rules of international institutions like the ICC, SIAC, or LCIA.
- Even for India-seated international arbitrations, costs under institutions like MCIA or ICA are generally higher than for purely domestic cases, though they remain competitive compared to international norms.
- The involvement of cross-border legal teams, foreign law firms, and international experts can significantly increase expenses.
The Legal Framework on Costs in India
The 2015 amendments to the Act introduced Section 31A, which formally empowers tribunals to make awards on costs. Key features include:
- The “costs follow the event” principle is the general rule, meaning the unsuccessful party pays the successful party’s reasonable costs.
- The tribunal must apply a test of reasonableness, awarding only reasonable costs, not necessarily the entirety of the actual expenses incurred.
- Factors considered in awarding costs include the conduct of the parties, frivolous claims or counterclaims, and the refusal of a reasonable settlement offer.
- The Supreme Court held in National Highways Authority of India v. Gayatri Jhansi Roadways Ltd. (2019) that the Fourth Schedule is not mandatory and parties are free to agree on a different fee structure for the arbitrator.
Current Market Trends for Arbitration Fees (2024 – 2025)
Recent industry data indicates the following trends:
- Arbitrator Fees: For domestic arbitrations guided by the Fourth Schedule, fees typically range from INR 10 to INR 30 lakhs per arbitrator, depending on the claim value. For high-value claims, ad hoc fees for senior arbitrators can exceed INR 50 lakhs per arbitrator.
- Institutional Arbitration: For a dispute valued at INR 10 crore, the total cost (arbitrator and administrative fees) at an institution like MCIA is approximately INR 25-30 lakhs. IDRC and DIAC have similar models, often in slightly lower ranges.
- Legal Fees: For mid-sized disputes, corporate legal departments report budgets of INR 40-60 lakhs. High-stakes, “bet-the-company” cases involving senior advocates can push legal fees beyond INR 2-3 crores.
- Virtual Hearings: The post-pandemic trend of hybrid hearings continues, reducing venue charges by up to 40%, though this is partially offset by new costs for transcription services and technology platforms.
- Cost Recovery: Tribunals are increasingly awarding costs to the successful party, which incentivizes efficient conduct and discourages delaying tactics.
Budgeting Tips for Businesses
Companies can manage arbitration costs by considering the following:
- Select the Right Forum: While institutional arbitration offers predictability for high-value disputes, ad hoc arbitration can be cost-effective for smaller matters if arbitrators are selected carefully.
- Budget for Legal Fees Separately: Legal fees often exceed tribunal fees. It is crucial to budget for these separately, potentially using phased or staged retainer agreements.
- Use Technology Efficiently: Utilize virtual or hybrid hearings to minimize travel and venue costs.
- Assess the Need for Experts Early: Determine if technical or financial experts are needed in the early stages, as their fees can significantly impact the budget.
- Agree on Fee Caps: In ad hoc arbitration, it is wise to agree on a fee structure with the arbitrators in advance to avoid future disputes.
Conclusion
While arbitration in India presents a viable and efficient alternative to litigation, it is not inherently inexpensive. The costs are driven by a combination of tribunal fees, legal representation, and administrative charges, with a significant difference between ad hoc and institutional routes.
The legal framework provides principles for cost allocation, but proactive management by the parties is key. By understanding the cost drivers and adopting smart budgeting strategies, such as selecting the appropriate forum, leveraging technology, and agreeing on fees upfront, businesses can navigate the process effectively and manage their financial exposure.
— Team AMLEGALS
Please reach out to us at rohit.lalwani@amlegals.com in case of any query.