SC: If Arbitral Tribunal Terminates Proceedings For Not Paying Fees, Remedy Is To Seek Recall & Then Invoke S.14(2)

Summary

The Supreme Court ruling primarily addresses an important procedural issue concerning the termination of arbitral proceedings due to non-payment of arbitral fees. In this decision, the Court examined whether an arbitral tribunal is empowered to terminate proceedings under Section 38(2) of the Arbitration and Conciliation Act, 1996, and what remedies are available to an aggrieved party once such termination takes place. In doing so, the Court clarified that termination of arbitral proceedings under Section 38(2) has the same legal effect as termination under Section 32, namely that the arbitral reference stands concluded and the authority of the tribunal is extinguished.

The judgment further settles that an aggrieved party cannot seek appointment of a fresh arbitrator under Section 11 as a matter of course. Instead, the proper remedy is to first seek recall of the termination order before the arbitral tribunal itself, and only upon rejection of such recall, to approach the court under Section 14(2) for examination of the legality of the termination of the arbitrator’s mandate. The Court also highlighted the need for legislative clarity, noting that even the proposed Arbitration and Conciliation Bill, 2024 fails to address the remedial framework for termination of arbitral proceedings.

Facts

• The dispute arose out of a partnership agreement entered into between the appellants and the respondent for running a healthcare and hospitality business. The partnership deed contained an arbitration clause mandating resolution of disputes through arbitration.
• Upon disputes arising, arbitration was invoked and a Sole Arbitrator was appointed by the Punjab and Haryana High Court under Section 11 of the Act. During the course of arbitral proceedings, substantial claims and counter-claims were filed by the parties. As a consequence, the Sole Arbitrator revised the arbitral fees in accordance with the Fourth Schedule to the Act.
• The appellants expressed their inability to pay their share of the arbitral fees, while the respondent declined to bear the appellants’ share. In view of the continued non-payment by both sides, the Sole Arbitrator terminated the arbitral proceedings under Section 38 of the Act.
• The appellants challenged the termination before the High Court. The High Court dismissed the challenge and subsequently rejected a fresh petition under Section 11 seeking appointment of a new arbitrator. Aggrieved, the appellants approached the Supreme Court.

Issues

1. Whether an arbitral tribunal is empowered to terminate arbitral proceedings on the ground of non-payment of fees, and what is the statutory source of such power.
2. Whether termination of arbitral proceedings is distinct from termination of the mandate of the arbitrator.
3. What is the appropriate remedy available to a party aggrieved by an order terminating arbitral proceedings for non-payment of fees.
4. Whether termination of proceedings for non-payment of fees was contrary to the law laid down in ONGC Ltd. v. Afcons Gunanusa JV.

Judgment

• The Supreme Court held that the Act envisages multiple statutory provisions under which arbitral proceedings may be terminated, including Sections 25, 30, 32 and 38. The Court clarified that termination of proceedings for non-payment of deposits or fees under Section 38 operates as an independent statutory mechanism and need not invariably be traced to Section 32 alone.
• The Court drew a clear distinction between termination of arbitral proceedings, and termination of the mandate of the arbitral tribunal.
• It held that termination of arbitral proceedings does not automatically or in every case result in termination of the arbitrator’s mandate. The legal consequences depend upon the specific provision under which termination takes place.
• The Court further held that where arbitral proceedings are terminated for non-payment of fees under Section 38, the aggrieved party cannot seek revival of the arbitration by filing a fresh application under Section 11 of the Act for appointment of a new arbitrator. Instead, the party must pursue remedies that are expressly recognised under the statutory framework, such as seeking recall where permissible or challenging the termination in the manner provided under the Act.
• On the facts of the case, the Court upheld the termination of arbitral proceedings, noting prolonged non-cooperation by the parties and their failure to comply with directions regarding payment of arbitral fees. The appeal was accordingly dismissed.

Analysis

This judgment provides much-needed clarity on an issue that frequently arises in arbitration practice non-payment of arbitral fees as a tactical tool to delay or derail proceedings. By recognising Section 38 as an independent statutory source of power, the Supreme Court has reinforced procedural discipline in arbitral proceedings. Importantly, the Court cautioned against equating termination of proceedings with termination of mandate in all cases. This clarification prevents misuse of Section 11 proceedings to resurrect arbitrations that have validly come to an end. The decision also harmonises the Court’s earlier jurisprudence, including Lalitkumar V. Sanghavi and ONGC Ltd. v. Afcons Gunanusa JV, by placing termination of proceedings within a coherent statutory framework. The ruling is likely to have a significant impact on arbitration strategy, particularly in high-value commercial disputes where fee objections are often raised to stall proceedings. It underscores that party autonomy in arbitration carries corresponding responsibilities, including timely compliance with fee obligations.