By Hruthika Addlagatta
Hruthika Addlagatta is a second-year B.A. LL.B. (Hons). student at NALSAR University of Law.
The Supreme Court’s decision in Harshbir Singh Pannu v. Jaswinder Singh addresses an important issue by establishing that termination of arbitration for non-payment of fees under Section 38 of the Arbitration Act operates through Section 32(2) and must be challenged first via recall before the tribunal, then through Section 14(2) court proceedings. This piece examines the decision’s consolidation of termination power, recognition of procedural review authority, and construction of Section 14(2) as the judicial review mechanism. Through comparative analysis of institutional arbitration rules and critical examination of the framework’s application to the case facts, the article evaluates whether the framework achieves optimal balance between arbitrator compensation and access to justice for parties, while identifying unresolved questions regarding recall standards, review scope, and the urgent need for legislative reform.
Keywords: Arbitration termination, Section 38, arbitral fees, procedural review, Section 14(2)
How to ensure arbitrators receive reasonable compensation while preventing fee disputes from becoming barriers to justice? The Indian arbitration landscape has long grappled with this question, and the same was answered by the Supreme Court in Harshbir Singh Pannu v. Jaswinder Singh, which held that termination of arbitral proceedings for non-payment of fees under Section 38 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) carries the same legal status as termination under Section 32. Consequently, aggrieved parties must first seek recall before the tribunal and only thereafter challenge the termination before courts under Section 14(2).
This however raises a question whether insulating fee-related termination from immediate judicial scrutiny transforms arbitral fees into a gatekeeping mechanism that privileges those with deeper pockets. This article critically examines whether the Supreme Court’s framework strikes an appropriate balance, evaluating the Indian approach against institutional arbitration models.
The Arbitration Act structures fee payments through interconnected provisions. Section 31(8) enables tribunals to fix costs including arbitrators’ fees. Section 38 authorises tribunals to require the parties to deposit the fees. Schedule IV prescribes fees calibrated to the sum in dispute, ONGC v. Afcons, upheld its constitutional validity while mandating party consent for fee determination.
The dispute in Harshbir arose from a partnership healthcare venture. The P&H High Court appointed a sole arbitrator, directing fees be determined per Schedule IV or by mutual agreement. The arbitrator initially fixed fees at Rs. 17.01 lakhs based on the appellant’s Rs. 13.65 crore claim. When the respondent filed an Rs. 82.78 crore counterclaim, the arbitrator revised total fees to Rs. 37.5 lakhs using Schedule IV ceiling.
Both parties objected. The appellant argued that the counterclaim was inflated and claimed financial incapacity. The respondent contended it should pay only 25% matching its partnership share. The arbitrator rejected both positions, holding Section 38 requires equal fee-sharing. After the appellant declared inability to pay and the respondent refused to cover the appellant’s share under Section 38(2)’s first proviso, the arbitrator terminated proceedings.
A fresh Section 11 application seeking substitute arbitrator appointment was dismissed, with the High Court holding the proper remedies were recall or Section 14(2) challenge.
The Supreme Court held that Section 32(2) constitutes the exclusive source of tribunals’ power to terminate proceedings. Sections 25(a), 30(2), and 38(2) enumerate circumstances triggering that power but do not themselves authorise termination orders. This reading draws from the UNCITRAL Model Law’s legislative history, where the Working Group deliberately rejected automatic termination, requiring formal tribunal orders under Article 32.
Section 32(1) supports this: “The arbitral proceedings shall be terminated by the final arbitral award or by an order of the arbitral tribunal under sub-section (2).”
The Court observed that the common thread across Sections 25, 30, 32 and 38 is that “although the arbitral proceedings may get terminated for varied reasons, yet the consequence of such termination remains the same i.e., the arbitral reference stands concluded, and the authority of the tribunal stands extinguished.” This eliminates arguments that Section 38 terminations permit simple re-initiation of arbitration.
Following SREI Infrastructure Finance Ltd. v. Tuff Drilling Pvt. Ltd., the Court distinguishes procedural review (inherent in quasi-judicial bodies) from merits review (unavailable absent statutory authorization). Termination orders fall within procedural authority, making them subject to recall if grounded in manifest error. A tribunal considering whether a party showed sufficient cause for fee default exercises legitimate procedural review. This creates a sequenced remedy: parties must first seek recall, affording tribunals opportunity to self-correct. Only after recall denial may parties approach courts.
Following Lalitkumar Sanghavi v. Dharamdas Sanghvi, the Court construes Section 14(2) expansively. Though Section 14(2) addresses arbitrator withdrawal or inability to perform, the Court reads “termination of mandate” to encompass situations where the mandate ends consequent to proceedings terminating under Section 32(3).
This responds to a statutory gap. Section 37 provides appeals from specified orders but not termination orders. Section 34 permits challenges to awards, but termination orders are not awards. Without Section 14(2), parties would resort to Article 227 challenge (foreclosed by SBP & Co. v. Patel Engg. Ltd.), or be left with no remedy.
The courts thus examine under Section 14 whether tribunals properly exercised Section 32(2) power. If termination was procedurally defective, courts may set aside the order and remand or appoint substitute arbitrators under Section 15.
The Court recognises that tribunals may recall where parties show “sufficient cause” for fee default but provides no guidance on the standard. Is the test subjective (this party cannot pay) or objective (a reasonable party could not pay)? Does good-faith dispute over fee reasonableness qualify? The present case illustrates the gap acutely: the arbitrator dismissed the appellant’s financial incapacity claim without examining financial records, and the Court does not resolve whether initial consent to Schedule IV methodology extends to revisions triggered by a subsequent counterclaim.
Section 14(2) review of “whether the mandate stood legally terminated” could mean procedural regularity (did the tribunal follow Section 38’s requirements?) or substantive correctness (was the incapacity claim credible?). Afcons forecloses substantive fee review, suggesting Section 14(2) is cabined to procedural compliance. Yet if termination is procedurally flawless but recall was denied without examining financial evidence, it remains unclear whether the court may review the reasonableness of that denial; the boundary between reviewing justification and reviewing fee substance is one the Court leaves unresolved.
The Court emphasises that termination carries permanent consequences absent successful recall or Section 14(2) challenge. Yet absolute finality may prove too rigid when parties genuinely dispute fee calculations or face temporary payment obstacles.
The present case illustrates this. The appellant claimed the Rs. 82 crore counterclaim was inflated to weaponize fees. The respondent was willing to pay its own share but refused to subsidize. The tribunal had no tools to assess whether the appellant’s incapacity was credible or strategic, whether counterclaim valuation was reasonable, or whether severing the proceedings, continuing on the original claim while suspending adjudication of the disputed counterclaim, might serve justice better than total termination. Two years of proceedings were extinguished because neither party would fund fees inflated by a counterclaim the appellant contested as tactical.
Leading arbitral institutions offer instructive contrasts. The SIAC Rules 2025 consolidate all termination scenarios within Rule 43, explicitly mapping each ground for termination, whether arising from procedural default, party withdrawal, or fee non-payment, to a single consolidated rule, eliminating interpretive disputes about which provision governs. Rule 56.5 separately distinguishes suspension from termination: the Registrar may suspend proceedings upon deposit default, setting a cure deadline after which the claim is deemed withdrawn “without prejudice,” preserving the claimant’s right to re-initiate if circumstances change. This structural separation, one rule for termination triggers, another for the suspension-to-termination sequence, provides the clarity that the Indian framework currently lacks.
The LCIA Rules 2020 centralise termination power in Article 22.1(xi) while Article 24.8 treats persistent deposit defaults as potential claim withdrawals but permits tribunals to set reinstatement terms. A party that later tenders fees may have claims revived if appropriate.
These models suggest two specific refinements, each of which the Indian framework currently lacks. First, termination decisions are placed with the institution rather than the arbitrator. The Indian framework however through Sections 38 and 32, vests termination authority exclusively in the tribunal itself. There is no institutional body empowered to intervene, no secretariat with independent oversight, and no mechanism to remove the conflict, which is a deficiency equally acute in ad hoc proceedings, where the absence of any institution at all means the sole arbitrator is simultaneously the creditor, the adjudicator of the default, and the decision-maker on termination.
Second, graduated remedies treat suspension as the mandatory first response to deposit default, with termination arising only after a specified cure period expires unfulfilled. The LCIA and SIAC frameworks operationalise this through explicit timelines. The Indian framework contains no such sequencing: Section 38(2) grants the tribunal a binary choice to suspend “or” terminate, and nothing mandates a cure period before termination. The Harshbir recall mechanism does not fill this gap. It operates post-termination, thus requiring the defaulting party to re-approach the same tribunal without any statutory standard for “sufficient cause,” time limit, or obligation to hold a hearing. A mandatory pre-termination suspension period would keep proceedings alive during hardship without subjecting the party to an undefined threshold before a potentially unsympathetic tribunal.
The Court grounds its framework in self-responsibility: parties choosing arbitration assume funding responsibility. Section 38’s equal-sharing requirement operationalizes this regardless of claim/counterclaim dynamics or merits success.
Yet self-responsibility has limits the framework does not address. It assumes equivalent party resources (when significant asymmetries render equal fee-sharing regressive); it presumes fair fee determinations (when fees driven by contested counterclaims may resemble procedural coercion); and it may conflict with access-to-justice in contracts where arbitration clauses are non-negotiable.
The framework’s limits are starkest precisely where self-responsibility rhetoric is most strained: where fee quantum is disputed, financial incapacity is genuine, and the claim driving costs is itself contested. The recall mechanism nominally permits tribunals to consider hardship but imposes no standard for evaluation. Section 14(2) review is capped by Afcons’ prohibition on fee reasonableness review.
For arbitrators, the decision necessitates developing explicit recall procedures: preliminary notices identifying grounds, hearings on termination, reasoned orders addressing sufficient cause, and clear specification of jurisdiction retention during recall periods. For parties, payment under protest combined with Section 34 fee objections is safer than outright refusal; arbitration agreements should specify fee caps, staged deposit schedules, and suspension rather than termination as the primary remedy.
Critical unresolved questions persist:
The Court’s critique of the Arbitration and Conciliation Bill 2024 deserves emphasis. After thirty years under the 1996 Act and persistent litigation over termination procedures, the Bill replicates problematic provisions verbatim. The Court observed it is “indeed very sad” that procedural issues of this kind have continued to plague India’s arbitration regime, and specifically recommended that the Bill explicitly provide for the nature and effect of termination insofar as the tribunal’s recall authority is concerned. The Bill’s silence perpetuates the very interpretive gaps this judgment laboured to fill through creative construction, gaps that could be remedied directly by codifying recall procedures with time limits and substantive standards, specifying the scope of Section 14(2) review, mandating graduated remedies, and expressly recognising conditional reinstatement authority.
Harshbir Singh Pannu constructs a coherent remedial framework by consolidating termination power in Section 32(2), recognizing inherent procedural recall authority, and channelling judicial review through Section 14(2). It harmonizes India’s regime with UNCITRAL Model Law history, balances arbitrator protection against party excess, respects tribunal autonomy while maintaining oversight, and forecloses strategic manipulation.
Yet the framework’s reliance on implied powers and expansive construction exposes systemic gaps the Court itself acknowledges. The recall mechanism operates without statutory foundation, time limits, or substantive standards. Section 14(2) extends beyond its original scope, creating uncertainty about review parameters. The absolute finality principle, while preventing strategic manipulation, may prove too rigid where financial hardship is genuine, fee calculation is disputed, or circumstances change after termination.
The decision crystallizes an enduring policy tension: balancing arbitrators’ compensation expectations against parties’ access to resolution. The Court’s answer gives primacy to procedural discipline while preserving safety valves for procedural unfairness. Yet as the present case illustrates, these safety valves may prove inadequate when fee disputes have arguable merit, when counterclaims allegedly inflate sums in dispute, or when financial incapacity claims require investigation the framework does not accommodate.
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