Introduction

Arbitration evolved as an expeditious, cost-effective, simple and fair alternative to

litigation. However, over time, this method of alternative dispute resolution became
costly. Coupled with largely ineffective provisions in the Arbitration and Conciliation
Act 1996 (prior to the 2015 amendments) regarding costs allocation and
recoverability, this was considered a roadblock to the development of arbitration in
India. In domestic arbitration awards, arbitrators routinely ordered the parties to bear
their own costs. This situation was unsatisfactory, especially given the well-
established international costs regime which protected innocent parties from bearing
the legal and other costs of an unmeritorious claim. After foreign jurisdictions and
arbitral institutions acknowledged that the cost of arbitration was high and an area of
concern, techniques and strategies emerged to reduce the overall cost of arbitral
proceedings.

In its 246th report, the Law Commission of India highlighted the need to amend the
law on costs. Section 31A (regime for costs) of the Arbitration and Conciliation Act,
which was introduced by the Arbitration and Conciliation (Amendment) Act 2015,
(1)
 was thus a welcome step towards costs recoverability being based on rational and
realistic criteria.

Section 31A – new regime

Section 31A(1) provides that in relation to any arbitration proceeding, the arbitral
tribunal has discretion to determine:

 whether costs are payable by one party to another;

 the amount of such costs; and

 when such costs are to be paid.

Section 31A(2) provides that if a tribunal decides to make an order as to the payment
of costs, the general rule is that the unsuccessful party will be ordered to pay the
successful party's costs. Alternatively, a tribunal may make a different order for
reasons which must be recorded in writing. In exercising their powers under Section
31A of the act, tribunals must consider certain factors provided for in Section 31(A)(3)
– namely:

 the conduct of all parties;

 whether a party has partly succeeded in the case;

 whether a party made a frivolous counterclaim which delayed the disposal of

the arbitral proceedings; and

 whether any reasonable offer to settle the dispute has been made by one party
and refused by another.

Meaning of 'costs'

In accordance with the explanation to Section 31A(1), 'costs' covers:

 the fees and expenses of the arbitrators, courts and witnesses;

 legal fees and expenses;

 the administrative fees of the arbitral institution; and

 any other expenses incurred in connection with the arbitral or court

proceedings and the arbitral award.

Notably, Section 31A(1) allows only for reasonable costs to be recovered (and not
actual costs). Therefore, the test of reasonableness must be met and the tribunal
must consider the reasonableness of the costs claimed. The factors which may be
taken into consideration to determine reasonableness vary and such an assessment is
not straightforward. The problems in determining reasonable costs are further
compounded by the significant costs imposed on parties by their solicitors and
counsel, which, along with the manner of billing, vary.

General rule for costs awards

Under Section 31A(2)(a), the general principle of awarding costs is 'winner takes all'.
The underlying rationale for the normal rule of costs following the event was
explained in ZN (Afghanistan) v Secretary of State as follows:
 a party has been compelled by the conduct of the other party to come to court
in order to vindicate his legal rights. If those legal rights had been respected
in the first place by the other party, it should never have been necessary to
come to court. Accordingly, there will normally be a causal nexus between the
fact that costs have been incurred and the underlying merits of the legal
claim.(2)

In Veolia Water UK plc v Fingal County Council, the High Court of England and Wales
stated that:

The overriding starting position should remain that costs should follow the
event. Parties who are required to bring a case to court in order to secure
their rights are, prima facie, entitled to the reasonable costs of maintaining
the proceedings. Parties who successfully defend proceedings are, again prima
facie, entitled to the costs to which they have been put in defending what, at
the end of the day, the court has found to be unmeritorious proceedings. (3)

The application of the rule requires the identification of the event from which the
costs follow (ie, the identification of which party has won the proceedings). This may
not always be a straightforward exercise.

Departure from general rule

The general rule of awarding costs is seldom regarded as satisfactory as, in some
circumstances, the general approach may be inappropriate. Section 31A(2) recognises
this and therefore confers discretion on arbitral tribunals to make a different order as
to costs. However, arbitral tribunals must record their reasons for departing from the
general rule. Some circumstances in which an arbitral tribunal may depart from the
general rule include where:

 the claim has been grossly exaggerated;

 one of the parties has acted unsatisfactorily;

 the successful party has failed on an issue which was time consuming; or

 the proceedings were conducted in an extravagant manner.

In The London Borough of Tower Hamlets v The London Borough of Bromley,(4) the
Chancery Division of the High Court of England and Wales observed that "one should
depart from the general rule only where the needs of justice and the circumstances of
the particular case require, and a measure of caution is needed". In this case, the
Chancery Division observed that among the circumstances to be considered is whether
a party has succeeded with part of its case even if it has not been wholly successful.
The other aspect to be considered by the court is the parties' 'conduct', which
includes both:

 whether it was reasonable for a party to raise, pursue or contest any particular
issue; and

 the manner in which issues so raised were pursued.

Where a court considers that it should exercise discretion to depart from the normal
rule as to costs, it must do so on a reasoned basis and indicate the factors which
warrant such a departure. A combination of factors is usually involved and while
decided cases indicate the nature of factors which may be relevant, these will be
determined on a case-by-case basis.(5)

Courts' approach

While there are few precedents available to throw light on the courts' approach to
Section 31A, the cases decided under the old regime establish that awarding costs is
within the discretion of the arbitrator and that the courts will not question an
arbitrator's decision unless it is shown to be perverse. In Steel Authority of India v
Shyam Sundar Choudhury, the Calcutta High Court set aside a costs award in favour of
the successful party as a substantial part of the claims had been rejected. (6) In this
case, the claimant had made a claim for Rs2.3 million and was awarded Rs128,000 as
the principal sum plus Rs75,000 in interest. In Computers Unlimited v Xerox India Ltd,
under Section 34 of the act, the court modified the costs award and expenses in
proportion to the percentage of claims awarded. (7) In State of J&K v Dev Dutt Pandit,
the Supreme Court set aside a costs award, reasoning that when claims are inflated
out of all proportion, heavy costs should be awarded to the other party and the party
making such inflated claims should be deprived of costs. (8) As a separate claim for
costs had been made, the arbitrator's decision to ignore such claim was deemed
unjustified and the award was modified to include the payment of reasonable costs. (9)

Comment

The new costs regime is expected to act as a deterrent for unscrupulous claims in
arbitration. While the overriding starting position is that costs should follow the
event, arbitral tribunals have been granted wide discretion to digress from this
general rule if the circumstances so warrant. In future, there is likely to be an
increase in disputes relating to costs and litigating parties may use innovative
methods to reduce arbitration costs, including incorporating clauses which either bar
costs awards or cap costs