Costs in Arbitration Under Section 31A of Arbitration and Conciliation Act, 1996

Arbitration is widely recognised as an efficient alternative to court litigation, particularly because of its flexibility and procedural autonomy. However, one persistent concern in Indian arbitration has been the high and often unpredictable cost of proceedings. Parties frequently incurred substantial expenses on arbitrator fees, legal representation, and procedural steps, without any certainty that such costs would be recoverable even upon succeeding in the dispute.

The absence of a structured statutory framework governing costs led to inconsistent approaches by arbitral tribunals and courts. To address this gap, the Arbitration and Conciliation (Amendment) Act, 2015 introduced Section 31A, which establishes a comprehensive regime for costs in arbitration and arbitration-related court proceedings. This provision aims to bring clarity, fairness, and accountability to cost allocation in arbitration.

Concept of Costs in Arbitration

In arbitration, costs represent the financial burden borne by parties in pursuing or defending a claim. These costs typically include arbitrator fees, legal expenses, institutional charges, witness expenses, and other procedural costs connected with the proceedings.

Prior to the introduction of Section 31A, arbitral tribunals often directed parties to bear their own costs, regardless of the outcome. This practice diluted the principle of fairness and allowed parties to prolong proceedings or raise unmeritorious claims without facing meaningful financial consequences.

Section 31A fundamentally alters this position by recognising costs as an integral aspect of arbitral justice rather than a peripheral issue.

Rationale Behind the Introduction of Section 31A

The Law Commission of India, in its 246th Report, highlighted the need for a clear costs regime in arbitration. It observed that the lack of cost consequences encouraged frivolous claims, unnecessary adjournments, and procedural abuse.

Section 31A was introduced to:

• Ensure that successful parties are not unfairly burdened with arbitration expenses
• Discourage dilatory tactics and frivolous counterclaims
• Promote efficiency and discipline in arbitral proceedings
• Align Indian arbitration practice with international standards

The provision reflects a policy shift towards making arbitration more credible and cost-effective.

Scope and Applicability of Section 31A

Section 31A applies to:

• Arbitral proceedings, and
• Court proceedings under the Arbitration and Conciliation Act that relate to arbitration

The provision begins with a non obstante clause, making it clear that it operates independently of the Code of Civil Procedure, 1908. This ensures that cost determination in arbitration is governed by arbitration-specific principles rather than general civil procedure norms.

Discretion of Courts and Arbitral Tribunals

Under Section 31A(1), the court or arbitral tribunal has the discretion to determine:

• Whether costs are payable
• The amount of costs
• The time at which costs are to be paid

This discretion is structured and must be exercised in accordance with the statutory principles laid down in the provision. It is not an unfettered power and is subject to judicial scrutiny.

Meaning of “Costs” Under Section 31A

Section 31A provides a detailed explanation of what constitutes “costs”. The provision clarifies that costs mean reasonable costs relating to:

• Fees and expenses of arbitrators, courts, and witnesses
• Legal fees and legal expenses
• Administrative fees of arbitral institutions
• Other expenses incurred in connection with arbitral or court proceedings and the arbitral award

The emphasis on reasonableness ensures that only necessary and proportionate expenses are recoverable.

The Principle of “Costs Follow the Event”

Section 31A(2) introduces the general rule that the unsuccessful party shall pay the costs of the successful party. This principle, commonly referred to as “costs follow the event”, represents a significant departure from earlier practice.

The Supreme Court, in Ssangyong Engineering & Construction Co. Ltd. v. NHAI, recognised that Section 31A reflects legislative intent to discourage frivolous litigation and ensure that parties bear the financial consequences of unsuccessful claims.

This rule enhances fairness and ensures that arbitration does not become financially punitive for parties asserting legitimate claims.

Departure From the General Rule

While the general rule favours the successful party, Section 31A permits courts and tribunals to depart from this rule. However, any such departure must be supported by reasons recorded in writing.

This requirement ensures transparency and prevents arbitrary cost orders. It also allows appellate courts to examine whether discretion has been exercised judiciously.

Factors Governing Determination of Costs

Section 31A(3) lays down guiding factors that must be considered while determining costs.

Conduct of the Parties

The conduct of parties throughout the proceedings is a crucial factor. Procedural delays, non-cooperation, and abuse of process may justify adverse cost orders.

Partial Success

Where a party succeeds only partly, costs may be apportioned accordingly. This ensures proportionality between success and cost liability.

Frivolous Counterclaims

Raising frivolous counterclaims merely to delay proceedings attracts cost consequences under Section 31A. This discourages tactical misuse of arbitration.

Settlement Efforts

The tribunal must consider whether reasonable settlement offers were made and refused. Unreasonable refusal of settlement may influence cost allocation.

Types of Cost Orders Permitted

Section 31A(4) empowers courts and tribunals to pass flexible and tailored cost orders, including:

• Payment of a proportion of another party’s costs
• Payment of a fixed or stated amount
• Costs limited to particular stages of proceedings
• Costs incurred prior to commencement of arbitration
• Costs relating to specific procedural steps
• Interest on costs for a specified period

This flexibility allows cost orders to reflect the realities of each dispute.

Reasonableness as a Controlling Standard

A central feature of Section 31A is the reasonableness test. The provision limits recovery to reasonable costs rather than actual expenditure. Tribunals must assess whether the claimed costs were necessary, justified, and proportionate to the dispute.

In ONGC v. Afcons Gunanusa JV, Indian courts emphasised that cost awards should not be mechanical and must reflect judicial restraint and proportionality.

Agreements on Costs and Their Validity

Section 31A(5) addresses party agreements on costs. Any agreement requiring a party to bear arbitration costs in all circumstances is valid only if entered into after the dispute has arisen.

This provision prevents imposition of one-sided cost clauses at the pre-dispute stage and preserves fairness in arbitration agreements.

Conclusion

Section 31A of the Arbitration and Conciliation Act, 1996 establishes a structured and principled regime for costs in arbitration. By defining costs, adopting the rule that costs follow the event, and introducing safeguards based on conduct and reasonableness, the provision addresses long-standing concerns regarding arbitral expenses.

The costs framework under Section 31A enhances fairness, accountability, and efficiency in Indian arbitration, reinforcing its role as a reliable alternative to traditional litigation.