Executive Summary
The 2019 amendment introduced Section 31A, establishing a comprehensive costs regime in Indian arbitration:
- Section 31A: Costs regime introduced in 2019
- Costs follow event: Unsuccessful party bears costs
- Tribunal discretion: Apportionment based on conduct
- Unreasonable conduct penalty: Additional costs for bad faith
- Types of costs: Arbitrator fees, legal fees, administrative costs, experts
- Section 31(8): Costs fixed by tribunal in award
- Fourth Schedule: Default fee schedule (rarely used)
This guide examines the costs framework, principles, and practical application.
1. Statutory Framework - Section 31A
Section 31A(1) - Costs Follow Event
"The costs of the arbitration shall be fixed by the arbitral tribunal, and shall follow the event except where the parties have agreed otherwise or where the arbitral tribunal determines that it is not reasonable for costs to follow the event having regard to the circumstances of the case."
| Principle | Application |
|---|---|
| Default rule | Unsuccessful party pays |
| Party agreement | Can agree different allocation |
| Tribunal discretion | Tribunal may depart if unreasonable |
Section 31A(2) - Unreasonable Conduct
"If the arbitral tribunal is of the opinion that the claim or counter-claim of a party is frivolous or vexatious, it shall award such costs not exceeding ten lakh rupees having regard to all the circumstances of the case, including the conduct of the parties, and such costs shall be payable by the party who has advanced such frivolous or vexatious claim or counter-claim."
| Conduct | Penalty |
|---|---|
| Frivolous claim/counterclaim | Up to ₹10 lakh penalty costs |
| Vexatious conduct | Up to ₹10 lakh penalty costs |
2. Types of Costs
Components of Arbitration Costs
| Cost Type | Description | Who Bears Initially |
|---|---|---|
| Arbitrator fees | Fees of arbitrators | Split between parties (usually) |
| Administrative costs | Institutional fees (DIAC, MCIA, etc.) | Claimant (filing fee) |
| Legal fees | Lawyers' fees | Each party |
| Expert fees | Expert witnesses | Party engaging expert |
| Hearing expenses | Venue, transcript, travel | Split or as incurred |
| Translation | Document translation | As incurred |
3. Costs Follow Event Principle
What Does "Event" Mean?
| Interpretation | Application |
|---|---|
| Final outcome | Winner on primary claim |
| Proportionate success | Partial success = partial costs |
| Issue-wise | Success on each issue evaluated |
Exceptions to Costs Follow Event
| Situation | Tribunal May Depart |
|---|---|
| Conduct | Winner behaved unreasonably |
| Settlement offers | Loser made reasonable offer, rejected by winner |
| Partial success | Neither party wholly successful |
| Frivolous defenses | Winner incurred unnecessary costs |
4. Unreasonable Conduct - Section 31A(2)
Frivolous Claims/Counterclaims
| Conduct | Example |
|---|---|
| No legal basis | Claim has no basis in law |
| No factual basis | Claim unsupported by facts |
| Grossly exaggerated | Claim amount inflated |
| Bad faith | Claim filed to harass |
Penalty Quantum - Up to ₹10 Lakh
| Factor | Tribunal Consideration |
|---|---|
| Degree of frivolousness | How baseless was claim? |
| Party conduct | Bad faith or good faith mistake? |
| Costs incurred | Actual costs respondent incurred |
| Deterrence | Need to deter such conduct |
5. Factors for Cost Apportionment
Tribunal Considerations
| Factor | Weight |
|---|---|
| Success ratio | Proportionate success |
| Conduct | Cooperation, delays, discovery compliance |
| Settlement offers | Reasonable offers made/rejected |
| Complexity caused | Which party caused complexity |
| Procedural compliance | Timely submissions |
| Witness credibility | False witnesses |
6. Fourth Schedule - Default Fee Schedule
Statutory Fee Schedule (Rarely Used)
Most institutional and ad hoc arbitrations do not follow Fourth Schedule.
| Claim Value | Arbitrator Fees (Per Arbitrator) |
|---|---|
| Up to ₹5 lakh | ₹30,000 |
| ₹5-10 lakh | ₹40,000 |
| ₹10-20 lakh | ₹75,000 |
| Above ₹50 crore | ₹30 lakh (max) |
Practice: Parties typically agree on fees or follow institutional schedules (higher than Fourth Schedule).
7. Institutional Fee Schedules
Sample Institutional Costs
| Institution | Fee Structure |
|---|---|
| DIAC | Registration fee + administrative fee + arbitrator fee (based on claim value) |
| MCIA | Sliding scale based on claim amount |
| ICC | Administrative expenses + arbitrator fees (percentage of claim) |
| SIAC | Case filing fee + arbitrator fees + administrative fees |
Example - DIAC (Simplified):
| Claim Value | Registration Fee | Arbitrator Fee (per arbitrator) |
|---|---|---|
| Up to ₹1 crore | ₹25,000 | ₹1.5-3 lakh |
| ₹1-5 crore | ₹50,000 | ₹3-10 lakh |
| Above ₹50 crore | ₹2 lakh | ₹25-50 lakh |
8. Legal Costs Recovery
Recoverable Legal Costs
| Cost | Recoverable? |
|---|---|
| Lawyer fees | Yes, if tribunal allows |
| Preparation time | Yes |
| Research | Yes |
| Travel for hearings | Yes |
| Expert fees | Yes |
Quantum of Legal Costs
| Approach | Application |
|---|---|
| Actual costs | Party claims actual legal fees paid |
| Reasonable costs | Tribunal awards what is reasonable |
| Tariff | Some tribunals apply court fee tariff as guide |
| Percentage | Some tribunals award % of claim value |
Practice: Tribunals often award less than actual legal costs incurred (e.g., 50-70% of claimed legal fees).
9. Cost Disclosure Requirements
Section 31A(3) - Disclosure
"The arbitral tribunal shall specify in its order or award the costs which shall be payable, the party entitled to costs and the party who shall pay the costs."
| Requirement | Application |
|---|---|
| Itemized costs | Breakdown of costs |
| Party entitled | Who gets costs |
| Party liable | Who pays costs |
| Amount | Specific quantum |
10. Security for Costs
When Ordered
| Situation | Rationale |
|---|---|
| Claimant outside India | Difficulty enforcing costs order |
| Claimant insolvent | Risk of non-payment |
| Frivolous claim | Protect respondent |
Form of Security
| Form | Application |
|---|---|
| Bank guarantee | Most common |
| Cash deposit | With tribunal or institution |
| Surety bond | Third-party guarantee |
11. Compliance Checklist
For Parties During Arbitration
- Track costs: Maintain detailed record of all costs incurred
- Legal fee agreements: Document legal fee arrangements
- Expert fee records: Keep expert invoices
- Hearing expenses: Document travel, venue, transcript costs
- Settlement offers: Make reasonable settlement offers (preserves costs position)
- Avoid frivolous conduct: Do not raise frivolous claims/defenses (Section 31A(2) penalty)
- Cooperate in proceedings: Avoid delaying tactics
- Comply with procedural orders: Timely submissions
For Tribunals Awarding Costs
- Identify successful party: Determine who won on primary issues
- Assess proportionate success: Partial success = partial costs
- Evaluate conduct: Unreasonable conduct may affect costs
- Itemize costs: Break down arbitrator fees, legal fees, other costs
- Specify amount: Exact quantum payable
- Identify payer and payee: Clarity on who pays whom
- Reasoning: Explain costs allocation in award
- Section 31A(2) penalty: If frivolous claim/conduct, impose penalty (up to ₹10 lakh)
12. Key Takeaways for Practitioners
Costs Follow Event: Default rule is unsuccessful party bears costs.
Tribunal Discretion Wide: Tribunal can depart from "costs follow event" if unreasonable.
Unreasonable Conduct Penalty: Frivolous claims/defenses attract up to ₹10 lakh penalty (Section 31A(2)).
Document All Costs: Maintain detailed records of all costs for recovery.
Settlement Offers Important: Reasonable settlement offers strengthen costs position.
Legal Costs Partially Recoverable: Tribunals typically award less than full legal costs claimed.
Fourth Schedule Rarely Used: Most arbitrations follow institutional fee schedules or party agreement.
Conclusion
Section 31A, introduced in 2019, established a clear costs regime in Indian arbitration, aligning India with international practice. The "costs follow event" principle incentivizes parties to assess claims realistically and make reasonable settlement offers. The penalty for frivolous conduct (up to ₹10 lakh) deters vexatious claims and defenses. Tribunals have wide discretion to apportion costs based on success ratio and party conduct. Practitioners should maintain detailed cost records, avoid unreasonable conduct, and make timely settlement offers to protect their costs position.