No Fees, No Arbitration: When Claimant Default Triggers Termination under Section 38(2) of The Arbitration and Conciliation Act, 1996

Arbitration, as an alternative dispute resolution mechanism, is fundamentally premised on party autonomy coupled with procedural efficiency. However, such autonomy is not unqualified and is subject to statutory obligations, particularly those concerning the payment of arbitral costs. One of the most critical provisions governing this aspect is Section 38 of the Arbitration and Conciliation Act, 1996 (“the Act”), which deals with deposits towards costs.

A recurring practical issue arises where arbitration is invoked by a claimant, the respondent enters appearance file statement of defence and may or may not file counter claim, and the arbitral tribunal proceeds to fix its fees and costs to be borne equally by both parties. The question that then arises is: what is the legal consequence where the claimant, despite invoking arbitration, refuses to pay its share of the arbitral fees?

Statutory Framework under Section 38

Section 38 empowers the Arbitral Tribunal to fix deposits towards the costs of arbitration and mandates that such deposits are payable in equal shares by the parties. Importantly, the provision contemplates a situation where one party defaults.

The statutory scheme operates in three stages viz. fixation of deposit, default by one party, and consequences of continued default. 

Thus, Section 38(2) creates a structured mechanism that balances fairness vis-à-vis procedural continuity.

Effect of Claimant’s Refusal to Pay Fees

Where the claimant itself defaults in payment of arbitral fees, the situation assumes greater significance. The claimant, having initiated the arbitral process, carries a primary obligation to prosecute its claim diligently, which necessarily includes compliance with financial obligations imposed by the tribunal.

In such a scenario:

• The arbitral tribunal, upon fixation of fees, directs both parties to deposit their respective shares.
• The claimant refuses to pay its share of the deposit.
• The tribunal, in terms of Section 38(2), offers the respondent an opportunity to deposit not only its own share but also that of the claimant.

At this stage, the respondent is not under a mandatory obligation to bear the claimant’s burden. The statutory language uses the expression “may pay that share”, thereby preserving the respondent’s discretion.

Refusal by Respondent and Consequence Thereof

If the respondent also declines to pay both its own share and the claimant’s share, the statutory consequences follow. Section 38(2) explicitly provides that in such circumstances, the arbitral tribunal may suspend or terminate the arbitral proceedings.

This provision must be understood in light of the broader scheme of arbitration:

• Arbitration is a party-driven process, not a state-funded adjudicatory mechanism.
• The tribunal cannot be compelled to proceed without remuneration.
• Continuation of proceedings without payment would defeat the efficiency and viability of arbitration.

Therefore, the refusal by both parties, first by the claimant and subsequently by the respondent, creates a situation where the arbitral tribunal is left with no effective alternative but to terminate the proceedings.

Termination vis-à-vis Abandonment of Claim

The ter mination of proceedings under Section 38(2), particularly where the claimant defaults, operates in substance as an abandonment of the claim. This is because:

• The claimant fails to take necessary steps to prosecute its own case.
• The arbitral process cannot be sustained unilaterally.
• The tribunal’s jurisdiction, though validly invoked, cannot be exercised in the absence of compliance with statutory cost requirements.

Thus, termination under Section 38(2) is not merely procedural but carries substantive consequences vis-à-vis the claimant’s right to pursue the claim in arbitration.

This position finds judicial support in Harshbir Singh Pannu & Anr. v. Jaswinder Singh 2025 SCC OnLine SC 2742, where the Hon’ble Supreme Court of India upheld termination of proceedings due to the claimant’s refusal to pay arbitral fees. It was observed by the Hon’ble court that:

“424    In the present case, since the appellants herein refused to pay the requisite fees for their own claims, the arbitral tribunal was left with no other alternative but to terminate the proceedings. Without the requisite deposits being made, there was no possible way for the arbitral tribunal to effectively conduct the hearings. We, therefore, find no infirmity in the order passed by the arbitral tribunal terminating the proceedings.”

Such termination reflects a logical balance between party autonomy vis-à-vis procedural discipline, ensuring that arbitration remains an efficient and viable dispute resolution mechanism.

Conclusion

The statutory scheme under Section 38 clearly establishes that arbitration is contingent upon compliance with financial obligations by the parties. Where a claimant initiates arbitration but subsequently refuses to pay arbitral fees, and the respondent also declines to assume that burden, the arbitral tribunal is fully justified in terminating the proceedings under Section 38(2).

Authors: Dr. Vipin Wason, Ms. Stuti Wason & Mr. Saawarni Sharma