Every arbitration runs on money long before it produces an award: arbitrators' fees, institutional charges, venue costs, transcription. The Arbitration and Conciliation Act, 1996 deals with this unglamorous machinery in two provisions most parties never read until they bite — Section 38, which governs deposits, and Section 39, which gives the tribunal a lien on its own award for unpaid costs. Both reward parties who plan their arbitration budget, and punish those who treat fee demands as negotiable afterthoughts.
Section 38: the advance on costs
Section 38(1) empowers the arbitral tribunal to fix the amount of the deposit — or a supplementary deposit, as the case may be — as an advance for the costs of the arbitration which it expects to be incurred in respect of the claim submitted to it. Where a counterclaim has been submitted, the tribunal may fix separate amounts of deposit for the claim and the counterclaim. In institutional arbitrations the same function is performed through the institution’s schedules: bodies such as the Delhi International Arbitration Centre collect deposits against their published fee structures, and the tribunal’s Section 38 power operates within that framework.
The default trap — especially for counterclaimants
Because deposits can be fixed separately for claim and counterclaim, the sanction for non-payment is severable. A respondent that raises an ambitious counterclaim but declines to fund the deposit referable to it exposes only the counterclaim to suspension or termination; the claimant’s case continues. Conversely, a claimant who stops funding leaves the respondent with a choice: pay both shares and press for recovery later, or let the reference stall. Parties sometimes assume non-payment is costless leverage in a fee dispute with the tribunal — in fact it is the claim itself that is placed at risk.
Section 39: the lien on the award
Section 39(1) states that, subject to any provision to the contrary, the arbitral tribunal has a lien on the arbitral award for any unpaid costs of the arbitration. The signed award may lawfully be withheld until the outstanding costs are paid. The provision protects arbitrators — who cannot sue conveniently for fees reference by reference — but it also creates an obvious pressure point at the most sensitive moment of the case: a party eager to enforce, or to start its limitation clock for a challenge, cannot obtain the award without clearing the demand.
The balance is restored by Section 39(2). Where the tribunal refuses to deliver the award except on payment of the costs demanded, the court may, on an application, order the tribunal to deliver the award to the applicant on payment into court of the costs demanded. The court then conducts an inquiry and directs that the tribunal be paid such costs as the court considers reasonable, with the balance refunded to the applicant. The award is thus released immediately, while the reasonableness of the fee is fought out separately — the fee dispute no longer holds the award hostage. An application under this provision lies at the instance of a party, but not where the fees were fixed by a written agreement between that party and the arbitrators: a party that contracted for the fee cannot later invoke the court to re-price it.
| Situation | Statutory answer |
|---|---|
| Tribunal needs funds to proceed | Deposit in equal shares — Section 38(1) and (2) |
| One party defaults | Other party may pay that share — Section 38(2) |
| Both default on a claim or counterclaim | Suspension or termination of that claim or counterclaim |
| Costs unpaid at award stage | Tribunal’s lien on the award — Section 39(1) |
| Fee demand disputed | Deposit in court, award released, court fixes reasonable costs — Section 39(2) |
Frequently Asked Questions
Who pays the deposit fixed by the arbitral tribunal?
Section 38 directs that the deposit — an advance towards the costs of the arbitration — is payable in equal shares by the parties. Where a counterclaim is on record, the tribunal may fix separate deposits for the claim and the counterclaim, so each side effectively funds the advance on its own cause.
What happens if the other side refuses to pay its share?
The Act lets the willing party pay the defaulter's share to keep the reference alive. If that share too remains unpaid, the tribunal may suspend or terminate the arbitral proceedings in respect of the claim or counterclaim concerned — so a counterclaimant who stops funding its counterclaim risks losing that counterclaim alone, while the main claim proceeds.
Can the tribunal refuse to release the award until fees are paid?
Yes. Section 39(1) gives the arbitral tribunal a lien on the award for any unpaid costs of the arbitration, subject to any provision to the contrary. The practical consequence is that a signed award can lawfully be withheld from the parties until the outstanding costs are cleared.
What if the fees demanded appear excessive?
Section 39(2) provides the safety valve: a party may apply to the court, which can direct the tribunal to deliver the award on the applicant paying the demanded costs into court. The court then inquires, pays the tribunal only such costs as it finds reasonable, and refunds the balance. The remedy is not available where the fees were fixed by written agreement with the arbitrators.