Section 31(8) of the Arbitration and Conciliation Act, 1996 as originally enacted dealt with costs in arbitration. The evolution of the law on the subject led to dissatisfaction. After numerous calls for reforms, the Law Commission of India in its 246th Report sought overhaul of the existing law on the subject. Based on the said Report, Section 31(8) stood replaced by a new provision on costs in the form of Section 31A. This paper examines if the new regime on costs allocation is satisfactory, especially in the light of objectives of the recent amendments. The paper specifically focuses on whether arbitral tribunal and courts award costs in the arbitral proceedings or in arbitration related court proceedings respectively in consonance with the objectives of the latest amendments to the Act.

1. Costs Allocation
Regime Under the
Amended Indian
Arbitration Law:
A Critique
S. Badrinath, LL.M., A.I.I.I., M.C.I.Arb.
Sr. Executive (Law), Bharat Heavy Electricals
Limited
www.practicalacademic.blogspot.in

2. Synopsis
• Allocation of costs was improper under the pre-
amendment (pre-2015) regime.
• The Law Commission (246th Report) recommended that
it was just to allocate costs in a manner which reflected
the parties’ relative success and failure in the arbitration.
• The 2015 amendments on costs allocation are in
furtherance of this aim, despite the shortcomings in the
text.
• Courts and tribunals have to change their existing
practice and pass a conscious costs order with the
general rule being the English rule.

3. Costs Allocation- Pre-
Amendment
“(8) Unless otherwise agreed by the parties,- (a) the costs
of an arbitration shall be fixed by the arbitral tribunal;
• Section 31(8)- Default rule
• Section 31(8)(a)- Positive duty on the arbitral tribunal to
fix costs
• Section 31(8)(b)- How the said duty is to be exercised
• Explanation- Definition of Costs- “reasonable”

4. Problems with Pre-Amendment
Position on Costs Allocation
• Too open textured > Enormous discretion
• No principled decision-making on costs
• Costs “imposed” and not “awarded”- costs as penalty
rather than compensation
• Failure by parties and their counsel to make
submissions on costs.
• Gave incentive for censurable tactics:
o Failure to honour arbitration agreements
o Frivolous challenges to arbitral awards
• Parties expend huge costs in arbitration related
court proceedings. e.g., Section 11 proceedings but
courts generally failed to allocate costs.

5. International Practice in
Costs Allocation
• English Rule and the American Rule
• International Practice leans in favour of the English Rule
o Art. 42(1) of the UNCITRAL Arbitration Rules, 2010 “costs.. shall … be
borne by the unsuccessful party…” [Model Law- neutral- reflects the
erstwhile Section 31(8) of the Indian 1996 Act]
o Section 61(2) of the English Act- English Rule
• American Rule- USA, Japan, Maurutius
• Indemnity Costs- Dilatory tactics- Hong Kong

6. Justification for Amendments to
Costs Allocation
o Law Commission’s Recommendations
• “just to allocate costs in a manner which reflects the parties’
relative success and failure in the arbitration,
• unless special circumstances warrant an exception or the
parties otherwise agree”
o Special circumstances should be mentioned
o Pre-Amendment Position imposed a positive duty on courts
o Current position being an improvement on the existing
provisions- costs allocation is mandatory

7. 2015 Amendments on Costs
Allocation- S 31A(1) & (2)
• Applies to Court hearing arbitration related matters and
to tribunals
• costs order is mandatory (notwithstanding the wordings
of Section 31A(2): “If the Court or the Tribunal
decides..”)
• General Rule- unsuccessful party to bear the costs of
successful party
• Deviation from general rule- reasons to be recorded
• Power is to be exercised notwithstanding the CPC, 1908

8. Textual Issues with
Sections 31A(1) & (2)
• Problems (1) Faulty Drafting, (2) Words make costs
award discretionary
• Bad Structure of Section 31A(2):
“If the Court or arbitral tribunal decides to
make an order as to payment of costs,— (a) the
general rule is that the unsuccessful party shall be
ordered to pay the costs of the successful party; or (b)
the Court or arbitral tribunal may make a different
order for reasons to be recorded in writing.
• Chapeau read with (b) makes little textual sense.
• Two different sub-sections/(b) could’ve been a proviso

9. Whether a Costs Award is
discretionary?
• Problem with the text related to this question
• Erstwhile Section 31(8): Costs Award was mandatory
(“(a) the costs of an arbitration shall be fixed by the
arbitral tribunal”& “(b) the arbitral tribunal shall
specify…”
• Law Commission’s Recommendations
• Costs Award under the New Regime is mandatory:
o Law Commission’s Recommendations
o New Regime is an improvement upon old regime
o “Nudges” Courts & Tribunals to pass proper costs awards/orders
o Heydon’s Rule of purposive construction-Evil>Remedy>Statute

10. Costs Allocation under the New
Regime
• Study on Court behaviour in cost allocation- too early.
• Tribunal behaviour- difficult to assess- data availability
either through arbitral institutions/ Section 34 petitions
• Inkling- Section 11 & Other Petitions : Whether Court
allocate costs properly?
• Courts failing to pass order on costs (instances)
o Sheetal Maruti Kurundwade v. Metal Power Analytical (I) Pvt.
Ltd. and Ors. MANU/MH/0328/2017 (Bom.HC)
o Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd
MANU/SC/0162/2017 (SCI)
o Salma Dam Joint Venture v. Wapcos Limited
MANU/DE/0703/2017 (Del.HC)

11. Indemnity Costs
• Possible balance of least litigation costs (access to
justice) and costs-as-compensation principle
• Possibility of indemnity costs for deprecatory conduct-
can be explored.

12. Conclusion
If costs are not awarded properly, it would have
the effect of winning party subsidising the
abortive attempt of the losing party at denying
the winning party of its legitimate right/ stance.
- A v. R [2009] HKCFI 342 (paraphased)

13. Thank you