“Cost Of Arbitration In India Affordability Concerns For Small And Medium Disputes”

Abstract

Arbitration was conceived as a beacon of hope for commercial dispute resolution in India—a swift, efficient, and cost-effective alternative to the overburdened and dilatory traditional court system. The Arbitration and Conciliation Act, 1996, and its subsequent amendments in 2015, 2019, and 2021, were legislative testaments to this ambition, aiming to position India as a premier hub for international and domestic arbitration. However, a chasm has emerged between this legislative ideal and the ground reality. This article posits that the escalating cost of arbitration in India has fundamentally undermined its core promise of accessibility, particularly for small and medium-value disputes. For such disputes, arbitration is increasingly becoming a prohibitively expensive luxury, often more financially draining than the subject matter of the dispute itself. This article undertakes a meticulous deconstruction of the cost components inherent in modern Indian arbitration, including arbitrator fees, institutional costs, and legal counsel expenses. It examines how practices such as "paper hearings," frequent procedural hearings, and the adoption of international billing models have inflated costs. The analysis further explores the failure of statutory cost-control mechanisms, such as the Fourth Schedule of the Act, and the cultural reluctance to use a "costs follow the event" principle stringently. The consequences are severe: denial of justice for SMEs and individuals, a defeat of the object of the Act, and the perpetuation of a system that favors deep-pocketed entities. The article concludes by proposing a multi-pronged solution, advocating for the robust promotion of fixed-fee, fast-track, and online dispute resolution (ODR) mechanisms, coupled with stronger judicial oversight to recalibrate arbitration towards its original ethos of affordability and efficiency, thereby ensuring it remains a viable forum for disputes of all magnitudes.

1. Introduction: The Promise and the Paradox

The Indian judiciary, lauded for its depth and independence, is simultaneously crippled by a monumental backlog of cases. As of recent estimates, over 50 million cases are pending across various tiers of the Indian judicial system. Commercial litigation, trapped in this quagmire, can take a decade or more to reach a conclusive resolution. This systemic delay is not merely an inconvenience; it is a fundamental impediment to economic growth, ease of doing business, and access to justice. It erodes the value of claims, escalates legal expenses, and creates crippling uncertainty for businesses, especially Small and Medium Enterprises (SMEs), which form the backbone of the Indian economy.

It was against this bleak backdrop that the Arbitration and Conciliation Act, 1996 (the "Act") was enacted, based on the UNCITRAL Model Law. The Act promised a paradigm shift. Arbitration was envisioned as a consensual, party-driven process that would be:

» Faster: With strict timelines for the completion of proceedings and the rendering of awards.

» Efficient: Free from the procedural rigmarole and adjournment culture of traditional courts.

» Confidential: Keeping sensitive commercial information out of the public domain.

» Expert-Driven: Allowing parties to appoint arbitrators with specific technical or commercial expertise relevant to their dispute.

» Cost-Effective: Theoretically cheaper due to its expedited nature and streamlined procedures.

For a nation eager to attract foreign investment and foster a pro-business environment, this was a welcome reform. The subsequent amendments in 2015 and 2019, driven by the recommendations of the High-Level Committee under Justice B.N. Srikrishna, sought to strengthen this framework further by curtailing judicial intervention, introducing strict timelines for arbitral proceedings, and establishing an independent body, the Arbitration Council of India, to promote and regulate arbitration.

However, a profound paradox has materialized. While arbitration has indeed become the preferred mode of resolution for high-stakes, corporate disputes involving large corporations and public sector undertakings, it has largely failed the very constituency that needed it the most: the parties involved in small and medium-sized disputes. For an SME with a claim of ₹50 lakhs or an individual in a construction dispute over a ₹1 crore contract, the dream of arbitration has turned into a financial nightmare. The "cost-effective" alternative has become, in many instances, more expensive than pursuing a lawsuit in a commercial court.

This article delves deep into this crisis of affordability. It seeks to dissect the anatomy of arbitration costs in India, identify the key drivers of this inflation, analyze the failure of legislative and judicial checks, and assess the profound consequences for access to justice. Finally, it will propose a concrete roadmap to reclaim arbitration's soul, making it a genuinely accessible forum for disputes of all sizes.

2. The Anatomy of Arbitration Costs: Deconstructing the Financial Burden

To understand the affordability crisis, one must first break down the total cost of an arbitration. The financial burden is not a single entity but an amalgamation of several significant, and often escalating, components.

2.1. Arbitrator’s Fees

This is often the most substantial and most variable cost component. Unlike a judge, whose salary is paid by the state, an arbitrator is a private individual, typically a retired judge or a senior lawyer, who charges a fee for their services. The fee structure is a major point of contention.

» Retired Judges as Arbitrators: A prevalent trend in India is the appointment of retired Supreme Court and High Court judges as arbitrators. While they bring immense legal acumen, their fee expectations are often aligned with their stature and the high earnings they could command in their post-retirement legal practices. It is not uncommon for a sole arbitrator, especially a retired judge, to charge between ₹2 to ₹5 lakhs (or even more) per hearing. For a case requiring 15-20 hearings, the arbitrator's fee alone can run into tens of millions of rupees, swiftly eclipsing the value of a small or medium dispute.

» Lack of Standardization: In ad-hoc arbitrations (those not administered by an institution), the fee is often a matter of negotiation, leading to unpredictability and potential for exorbitant demands.

2.2. Institutional Costs

When arbitration is conducted under the aegis of an institution like the MCIA (Mumbai Centre for International Arbitration), DIAC (Delhi International Arbitration Centre), or ICADR (International Centre for Alternative Dispute Resolution), the institution charges administrative fees. These fees cover the costs of providing infrastructure, case management, and administrative support. While institutions bring professionalism and efficiency, their fee schedules are often based on a ad-valorem sliding scale—a percentage of the amount in dispute. For a large claim, this percentage is manageable, but for a medium-sized claim, the absolute number can be substantial. For instance, an institution's administrative fee for a ₹5 crore dispute could be several lakhs of rupees, which is a significant upfront cost for an SME.

2.3. Legal Fees and Representation

Arbitration, particularly in its current form in India, has become as legalistic as court litigation. Parties feel compelled to engage senior counsel to match the expertise of the opposing side. The billing models for senior counsel—hourly rates or hefty brief fees—have been directly imported from complex, high-value international arbitrations. A team of two senior counsel and a few junior counsel billing hourly can easily accumulate legal fees running into lakhs of rupees per month. The pressure to "keep up with the Joneses" in terms of legal firepower forces even the smaller party to incur unsustainable legal costs.

2.4. Infrastructure and Administrative Expenses

This includes the cost of hiring a venue for hearings (especially for long-drawn proceedings), court reporters for transcripts, and refreshments. While seemingly minor, in a protracted arbitration, the cost of renting a five-star hotel conference room for weeks on end can become a considerable expense.

2.5. "Paper Hearing" Costs and Procedural Complexity

Modern arbitrations have developed a complex procedural calendar mirroring court litigation. This includes:

» Multiple Pleadings: Statement of Claim, Statement of Defence, Rejoinder, Sur-Rejoinder, each requiring extensive legal drafting.

» Document Discovery: Extensive and often fishing expeditions for document production, leading to disputes and additional hearings.

» Preliminary Hearings: Hearings solely to decide on procedural calendars, jurisdiction, and interim measures.

» Evidentiary Hearings: The main trial-like proceedings, which can span days or weeks.

Each of these stages requires extensive preparation by legal teams, resulting in higher legal fees and more hearing days, which in turn increases the arbitrator's fees and administrative costs.

3. Key Drivers of the Cost Inflation

Several interconnected factors have conspired to drive the cost of arbitration to its current prohibitive levels.

3.1. The "Court-ification" of Arbitration

Perhaps the most significant driver is the gradual transformation of arbitration into a mirror image of the court litigation it was meant to replace. Parties and their lawyers, steeped in the culture of adversarial litigation, transplant its procedures and tactics into the arbitral forum. This includes excessive applications for adjournments, filing of innumerable interim applications, and engaging in protracted cross-examinations. The informality and flexibility that were the hallmarks of arbitration are often sacrificed at the altar of procedural thoroughness, leading to delay and cost escalation.

3.2. The "Panel of Arbitrators" Phenomenon

It is common practice to appoint a tribunal of three arbitrators—one appointed by each party and a presiding arbitrator. While this ensures neutrality, it triples the single largest cost component: arbitrator fees. The cost of maintaining three highly remunerated individuals, often retired judges, for the duration of the proceedings is a financial burden that makes arbitration unviable for all but the highest-value disputes.

3.3. Ineffective Statutory Cost Control: The Fourth Schedule and its Limitations

Recognizing the problem of exorbitant arbitrator fees, the 2015 Amendment to the Act introduced the Fourth Schedule. This schedule provides a model fee structure based on the sum in dispute. For example, for a claim of ₹50 lakhs, the suggested fee for a sole arbitrator is capped at ₹6 lakhs plus GST. For a claim of ₹5 crores, the cap is ₹19.25 lakhs.

However, this provision has critical flaws:

» Non-Mandatory Nature: The Fourth Schedule is only a guideline. It is not mandatory. The language of the Act states that parties and the arbitrator may agree to fees as per the Schedule. In practice, eminent potential arbitrators often refuse appointments if their fee demands, which are significantly higher than the Schedule, are not met.

» Lack of Enforcement: There is no effective mechanism to compel an arbitrator to adhere to the Schedule. The courts have been reluctant to interfere in the fee-setting process at the appointment stage, often taking a hands-off approach.

3.4. The "Costs Follow the Event" Principle: A Deterrent in Theory, Not in Practice

The principle that the losing party should bear the legal costs of the successful party (known as "costs follow the event" or the "English Rule") is embedded in Section 31(8) of the Act. In theory, this should deter frivolous claims and defenses. However, Indian arbitral tribunals have been notoriously conservative in applying this principle. They often award only a fraction of the actual costs incurred by the successful party, sometimes citing vague notions of "balancing interests" or the "conduct of the parties." This failure to award full costs removes a critical deterrent against parties who adopt a strategy of protracting proceedings to force a settlement from a financially weaker opponent.

3.5. Delay Begets Cost

Time is money, and this is starkly true in arbitration. The 2015 Amendment introduced a 12-month timeline for making the arbitral award. However, this timeline is routinely extended by courts under Section 29A, often on mere requests from the parties or the tribunal. A one-year arbitration that stretches into three or four years sees a commensurate explosion in legal fees, arbitrator fees, and administrative expenses.

4. The Consequences: A System in Crisis

The cumulative impact of these cost drivers is a system in crisis, with dire consequences.

4.1. Denial of Access to Justice for SMEs and Individuals

This is the most profound consequence. When the cost of pursuing a legitimate claim of ₹1 crore through arbitration is ₹30-40 lakhs, it ceases to be a rational economic decision. SMEs are forced to either abandon their claims or settle for a pittance, effectively being "priced out" of justice. This undermines the rule of law and erodes confidence in the commercial dispute resolution framework.

4.2. Defeat of the Object and Purpose of the Arbitration Act

The preamble of the Act emphasizes the need for an efficient and cost-effective process. The current reality of high-cost arbitration is a direct repudiation of this legislative intent. The system now primarily serves a small, elite group of large corporations and legal professionals, creating a justice system for the wealthy.

4.3. The Justice-Deficit and the Power Imbalance

Prohibitive costs create a severe power imbalance. A large corporation, with its deep pockets, can easily outspend and outlast a smaller entity. They can use the cost of the process itself as a weapon, knowing that the financial strain will eventually force the smaller party to capitulate. This turns arbitration from a tool for resolving disputes into a tool for suppressing claims.

4.4. Continued Burden on the Traditional Court System

The failure of arbitration to serve as a genuine alternative for small and medium disputes means that these cases continue to flood the already overburdened civil courts. The very objective of decongesting the courts remains unfulfilled for a vast category of disputes.

5. The Path to Reform: Recalibrating Arbitration for Affordability

Addressing this crisis requires a concerted, multi-stakeholder effort involving the legislature, the judiciary, arbitral institutions, and the legal community.

5.1. Legislative and Judicial Intervention: Making Cost Control Mandatory

» Amend the Fourth Schedule: The Fourth Schedule should be made mandatory for all domestic arbitrations where the sum in dispute is below a certain threshold (e.g., ₹20 crores). Courts, while appointing arbitrators under Section 11, must insist on adherence to the Schedule.

» Stringent Application of Section 31(8): The judiciary, through pronouncements, must guide arbitral tribunals to apply the "costs follow the event" principle more rigorously. Tribunals should be encouraged to award actual, reasonable costs to the successful party as a rule, not an exception.

» Strict Scrutiny of Timelines: Courts should be more circumspect in granting extensions under Section 29A, demanding compelling reasons and a clear plan for expeditious completion.

5.2. Promoting Institutional Arbitration with Tailored Rules

Arbitral institutions must take the lead in developing and aggressively promoting specialized rules and fee schedules for small and medium-value claims.

» Fast-Track Arbitration Rules: Most institutions have fast-track procedures, but they are underutilized. These should be the default for disputes below a certain value, with strict page limits for pleadings, limited documentary evidence, and a requirement for awards to be based primarily on written submissions with minimal oral hearings.

» Fixed-Fee Models: Institutions should offer fixed-fee packages for arbitrations up to a certain value, covering both institutional administrative fees and arbitrator fees. This provides predictability and certainty for parties.

» Promoting Sole Arbitrators: For disputes below a threshold (e.g., ₹5 crores), institutional rules should strongly advocate for, or even mandate, a sole arbitrator to control costs.

5.3. The Emergence of Online Dispute Resolution (ODR)

ODR presents a revolutionary opportunity to drastically reduce costs. By leveraging technology, ODR platforms can automate case management, facilitate virtual hearings (eliminating venue and travel costs), and utilize neutrals from across the country who may charge lower fees. The government and institutions should actively collaborate with credible ODR providers to create a robust ecosystem for resolving small and medium disputes online.

5.4. Cultural Shift: Embracing the Ethos of Arbitration

Finally, a cultural shift is imperative. Lawyers and clients need to recalibrate their approach.

» Counsel's Duty: Lawyers must advise clients on cost-effective strategies, resisting the temptation to litigate every minor point and focusing on the core issues.

» Arbitrator's Duty: Arbitrators must proactively manage cases, curb unnecessary procedures, and control the conduct of the parties to ensure efficiency. They must lead by example in agreeing to reasonable, schedule-based fees.

» Party Autonomy: Parties must use their autonomy to agree on cost-effective procedures at the outset, such as limiting the number of pleadings, document production, and hearing days.

6. Conclusion: Reclaiming the Soul of Arbitration

Arbitration in India stands at a crossroads. It has proven its worth in resolving complex, high-value international and domestic disputes. However, its soul—the promise of a speedy, affordable, and accessible justice—is being lost. The metastasis of costs has alienated the very parties for whom an alternative to courts is most desperately needed: those with small and medium-sized disputes.

The affordability crisis is not an incurable malady. It is a man-made problem, born from the transplantation of a litigation-centric mindset into a forum designed for flexibility and efficiency. The solutions—mandatory cost schedules, robust institutional fast-track mechanisms, the embrace of ODR, and a fundamental cultural shift—are within reach. They require not just legislative tinkering but a collective will from the entire legal fraternity to recommit to the original vision of the Arbitration Act.

The true test of a justice system is not how it handles billion-dollar corporate battles, but how it serves the small business owner fighting for a legitimate payment, or the homeowner seeking redress for a construction defect. For India to truly become a hub of arbitration and a nation with ease of doing business, it must first ensure that the doors of this alternative forum are open, not just to the corporate giants, but to every citizen and enterprise that seeks justice. Reforming the cost structure of arbitration is not merely a legal reform; it is a necessary step towards securing economic justice and reinforcing the foundations of a robust, inclusive democracy.

Here are some questions and answers on the topic:

1. What was the original promise of arbitration for commercial disputes in India, and how has the reality diverged from this promise, particularly for small and medium-sized enterprises (SMEs)?

The original promise of arbitration in India was to serve as a swift, efficient, and cost-effective alternative to the overburdened and slow-moving traditional court system. Enacted through the Arbitration and Conciliation Act of 1996, it was envisioned as a mechanism that would resolve disputes faster, with less procedural complexity, and at a lower overall cost, thereby boosting ease of doing business. However, the reality has starkly diverged from this ideal, especially for SMEs. Instead of being an accessible forum, arbitration has become a prohibitively expensive process. For a small or medium-value dispute, the cumulative costs of arbitrator fees, institutional charges, and legal representation often rival or even exceed the value of the claim itself. This has created a situation where arbitration, meant to be a beacon of hope, has become a luxury that only large corporations can afford, effectively denying SMEs a viable path to justice.

2. What are the key components that make arbitration in India so expensive, and which one is often the most significant?

The high cost of arbitration in India is not due to a single factor but is an amalgamation of several significant components. These primarily include the fees charged by the arbitrators, the administrative costs of arbitral institutions, and the legal fees for representation. Among these, the arbitrator's fees are often the most substantial and variable cost driver. This is especially true when retired judges, who are frequently appointed as arbitrators, command fees that are aligned with their high professional stature, sometimes charging several lakhs of rupees per hearing. When this is multiplied over numerous hearings and potentially a three-member tribunal, the cost becomes astronomical. Coupled with the ad-valorem sliding scale of institutional fees and the high hourly rates of senior legal counsel, the total financial burden escalates quickly, rendering the process unaffordable for smaller disputes.

3. How has the "court-ification" of arbitration contributed to its rising costs?

The "court-ification" of arbitration refers to the gradual and pervasive adoption of the procedures, formalities, and adversarial tactics of traditional court litigation into the arbitral process. This has been a major contributor to rising costs. Instead of embracing the flexibility and informality that arbitration was designed for, parties and their lawyers now often engage in extensive procedural wrangling, file multiple interim applications, seek frequent adjournments, and conduct protracted cross-examinations. The process becomes burdened with extensive document discovery, numerous rounds of pleadings, and lengthy evidentiary hearings, mirroring the very delays and complexities of court cases it was meant to avoid. Each of these steps requires more time from the arbitrators and legal teams, leading directly to higher fees and administrative expenses, thereby defeating the core purpose of a streamlined and efficient alternative.

4. Why have the statutory measures, like the Fourth Schedule of the Arbitration Act, failed to control arbitrator fees effectively?

The Fourth Schedule of the Arbitration Act, introduced by the 2015 amendment, was a legislative attempt to provide a model fee structure and curb exorbitant arbitrator fees. Its failure stems from two fundamental flaws. Firstly, it is non-mandatory in nature. The language of the Act states that parties and the arbitrator may "agree" to fees as per the Schedule, but it does not compel them to do so. In practice, eminent individuals, particularly retired judges, often refuse appointments unless their fee demands, which are frequently much higher than the Schedule's suggestions, are met. Secondly, there is a lack of a strong enforcement mechanism. Courts have been generally reluctant to interfere at the appointment stage to compel an arbitrator to adhere to the Schedule. This combination of non-mandatory language and weak enforcement has rendered the Fourth Schedule largely ineffective in practice.

5. What are the potential solutions to make arbitration in India more affordable for small and medium disputes?

Making arbitration affordable for small and medium disputes requires a multi-pronged approach involving legislative, institutional, and cultural changes. A key solution is to promote institutional arbitration with tailored, cost-effective rules, such as making fast-track procedures the default for lower-value claims, which limit pleadings and evidence to essential matters. Arbitral institutions could also offer fixed-fee packages that provide cost certainty. Legislative intervention to make the Fourth Schedule's fee structure mandatory for disputes below a certain value would directly control the largest cost component. Furthermore, a robust embrace of Online Dispute Resolution (ODR) can drastically reduce costs by eliminating venue and travel expenses and streamlining the process. Finally, a cultural shift is needed where lawyers advise on cost-effectiveness, arbitrators proactively manage cases to prevent delay, and tribunals rigorously apply the "costs follow the event" principle to deter frivolous and protractive tactics.

Disclaimer: The content shared in this blog is intended solely for general informational and educational purposes. It provides only a basic understanding of the subject and should not be considered as professional legal advice. For specific guidance or in-depth legal assistance, readers are strongly advised to consult a qualified legal professional.