SECTION 31-A AND THE DRAFT ARBITRATION BILL 2024: THE NEW COSTS REGIME IN INDIAN ARBITRATION

This post is authored by Khushi Jain, a 2nd-year student at Ram Manohar Lohiya National Law University, Lucknow

INTRODUCTION

In recent decades, arbitration as a mechanism of dispute resolution has gained global acceptability. According to the Queen Mary University of London (QMUL) Survey (2018), 97% of respondents identified international arbitration as their favoured method for resolving cross-border disputes. Building on this momentum, India’s arbitration framework has undergone a series of reforms at improving efficiency, reducing court interference, and deterring misuse of the process. Despite these reforms, concerns about frivolous claims and counterclaims persists. It undermines the objective and purpose of arbitration as a swift and cost‑effective method of dispute resolution.

Recognising the conundrum, the legislature has turned its attention to Section 31‑A of the Arbitration and Conciliation Act, 1996, (“A&C Act”) which governs the allocation of costs. Originally introduced through the 2015 Amendment to usher in a robust cost regime, Section 31‑A has had limited reach. It focuses primarily on frivolous counterclaims and requires proof of delay. The Draft Arbitration and Conciliation (Amendment) Bill, 2024 (“2024 Bill”) expands the scope of the provision to include frivolous claims while also removing the requirement that such conduct must cause delay. This proposal raises a crucial question: will stricter cost sanctions curb abuse and align India with global standards, or deter genuine claims and burden weaker parties?

The blog examines these questions by analysing the current framework, the proposed reforms, judicial trends, and their broader implications for India’s arbitration landscape. It further examines practical implications for stakeholders and offers a reasoned assessment of whether the proposed changes will advance or hinder India’s goal of becoming a preferred seat of arbitration. Towards the end, the blog proposes a structured policy framework to address the challenges posed by frivolous claims in arbitration.

SECTION 31-A: CURRENT FRAMEWORK

Section 31-A was enacted with an intent to reform India’s arbitration law bringing it closer to global standards. Indian Courts historically hesitated to impose significant costs. Token amounts were awarded by them which did not act as a deterrent against abuse of process. Section 31-A sought to effect this change.

It introduced comprehensive definitions of costs including arbitrators’ fees, legal fees, witness expenses, administrative costs and other connected expenses of the proceedings. It reaffirmed the ‘costs follow the event,’ principle where the losing party bears costs unless the tribunal or court directs otherwise.

THE PROPOSED AMENDMENT

The 2024 Bill makes two significant amendments to Section 31-A. According to the new framework, both frivolous claims and frivolous counterclaims are subject to adverse costs. It extends the jurisdiction of accountability, holding claimants and respondents to an equal standard. Adverse costs for frivolous counterclaims are dependent upon delay caused by such counterclaims. The new amendment eliminates this requirement, granting tribunals the power to impose costs regardless of delay. These reforms indicate a distinct policy direction for India towards a stricter cost culture of arbitration. It dissuades misuse of process at the claim and counterclaim levels.

The amendment aims to achieve multiple policy goals. First, it discourages abuse of process, as it recognises the purpose of arbitration to be expeditious, and speculative counterclaims or claims undermine this purpose. Second, it ensures equal accountability. Previously, sanctions were limited to counterclaims, where an imbalance in the playing field was created, but covering the regime for claims ensures both parties are equally at risk for frivolity. Third, the amendment obviates technical barriers by doing away with the ‘delay’ requirement. It prevents costs from being avoided even when a frivolous claim or counterclaim is disposed of quickly. Fourth, it harmonises India’s arbitration framework with global best practices, as jurisdictions like Singapore and England already sanction frivolous behaviour regardless of delay. In England, Section 39A of Arbitration Act 2025 equips tribunals with express powers to summarily dismiss baseless claims and award costs. Rule 29 of Singapore’s SIAC Rules 2016 provides for early dismissal and costs in cases of meritless claims irrespective of delay. By mirroring these provisions, India now discourages abuse of process, prevents technical barriers to awarding costs, and achieves substantive parity with international arbitration norms. Finally, by promoting a more disciplined culture of costs, the amendment might increase India's arbitration ecosystem and its credibility as a pro-arbitration jurisdiction that can attract international disputes.

POTENTIAL PITFALLS OF THE REFORM

The proposed amendment has triggered considerable debate. The prospect of adverse costs may deter parties from pursuing novel or complex claims, particularly in areas where the law remains unsettled. For Instance, SMEs might hesitate to challenge a large multinational corporation in arbitration over a novel contractual interpretation, fearing that an unsuccessful outcome could expose them to heavy cost sanctions. This could discourage legitimate yet complex claims that contribute to the development of arbitral jurisprudence.

Furthermore, the definition of the term ‘frivolous’ is ambiguous and unpredictable. It empowers tribunals with wide discretion in deciding the ambit of frivolous conduct. It undermines the principle of realistic costs as upheld in ONGC v. Afcons Gunanusa JV (2022), where the Supreme Court also emphasised that frivolous conduct should not go unpunished. There also exist access to justice concerns, as the burden of adverse costs may fall more heavily on resource-constrained parties, discouraging them from initiating even legitimate claims against stronger opponents. Moreover, the amendment’s potential to trigger satellite litigation is significant because disputes over whether a claim or counterclaim is frivolous could lead to additional hearings and arguments, increasing complexity and costs. This contradicts arbitration’s core purpose of efficiency by prolonging the process and diverting focus from the main dispute to ancillary procedural battles, thereby undermining the speed and cost-effectiveness that make arbitration attractive as an alternative to court litigation.

Furthermore, India’s cultural shift in costs presents a unique challenge, as the country historically lacked a strong costs culture in arbitration, often tolerating delays and procedural formalities. There is a risk of overcorrection with the new amendments, if tribunals impose harsh or disproportionate cost sanctions. Such an approach could deter parties from fully presenting their cases or lead to excessive penalisation, which contradicts the balanced, efficient, and fair arbitration process that the reforms seek to promote. This highlights the need for tribunals to exercise discretion carefully to maintain the spirit of cost-effective and just dispute resolution in India’s evolving arbitration landscape.

PRACTICAL IMPLICATIONS FOR STAKEHOLDERS

The amendment is likely to have wide-ranging consequences for all stakeholders in arbitration. It creates a heightened need to carefully evaluate the strength of their claims for claimants before initiating proceedings, as the risk of being penalised for frivolous or exaggerated claims increases. This makes pre-filing legal advice crucial and may improve the overall quality of claims, though it could also deter borderline cases.

Respondents, on the other hand, stand to benefit from a stronger safeguard against speculative or harassing claims, as Section 31-A empowers them to seek adverse costs and resist arbitration being misused as a pressure tactic. For arbitral tribunals, the amendment imposes a greater responsibility to distinguish between weak but arguable claims and truly frivolous ones, which will require clear and reasoned cost orders to avoid allegations of arbitrariness.

At a systemic level, the development has the potential to shape India’s arbitration culture by promoting efficiency and discouraging abuse of process. However, inconsistent application could foster unpredictability and reduce India’s appeal as an international arbitration seat. Moreover, while the amendment strengthens deterrence against misuse, it also raises concerns for access to justice, particularly for smaller or resource-constrained parties who may be discouraged from pursuing legitimate claims. Complementary mechanisms such as tribunal-issued guidelines or limited judicial oversight may be necessary to prevent over-deterrence and ensure fairness in the application of the cost regime.

CONCLUSION AND SUGGESTIONS

Following the analysis of enabling frameworks, there are a few observations. The access-to-justice dimension cannot be ignored. Smaller or resource-constrained parties are particularly vulnerable to the chilling effect of negative costs. A notice-and-cure requirement, carve-outs for small claims, exceptions for disputes that raise novel or public interest issues, and proportionality in quantum are essential safeguards.

Costs should not be crippling but calibrated. Tribunals can adopt a tiered approach that differentiates between routine cost shifting and punitive awards for truly frivolous conduct. Percentage limits, repeat offender multipliers, and proportionality tests in relation to claim value and party resources can deter abuse of the arbitration process without preventing legitimate access to arbitration as a dispute resolution forum.

 An analytically coherent approach in the matter of frivolous claims must follow a two-pronged test. Firstly, whether the claim is objectively devoid of foundation, having no reasonable legal or factual basis and secondly, whether it is being pursued with an ulterior motive like harassment, delay, or exercising collateral pressure. Moreover, the standard of proof for establishing frivolousness must be high, potentially beyond the balance of probabilities, to reduce the danger of chilling borderline or innovative claims. In this way, arbitration can remain a forum for litigating unresolved issues of law while also punishing behaviour that is patently abusive.

Although rare in civil litigation, certain areas of law apply heightened standards of proof for serious allegations. For instance, in cases involving fraud or dishonesty, courts often require clear and convincing evidence to prevent unjust accusations from discouraging legitimate claims as held in ICICI Bank Ltd. v. Official Liquidator (1997). Similarly, English courts recognize thresholds such as ‘clear evidence’ or a ‘strong prima facie case’ in specific contexts, including disclosure or interim relief applications, which are higher than the ordinary balance of probabilities. It promotes a careful, evidence-based exercise of discretion and guards against overzealous dismissal or sanctioning of claims.

The procedure by which tribunals assess frivolousness must also be carefully structured. A two-stage approach appears best suited. At an early screening stage, the tribunal can examine whether the claim is prima facie arguable. If not, it may either dismiss the claim outright or issue a targeted costs warning, giving the claimant a short opportunity to cure or clarify deficiencies. At the final merits stage, once evidence and submissions are complete, the tribunal should reassess whether the claim has crossed the frivolity line, and if so, impose proportionate sanctions. It permits tribunals to weigh efficiency against fairness so that good faith but poor claims are not too harshly penalized while abusive claims are deterred. It does not add procedural layers because the reassessment happens only at the final merits stage. At this point, the tribunal already has all evidence and arguments, allowing it to determine frivolity and impose sanctions without extending or complicating the proceedings.

Consistency and transparency are equally vital. Tribunals must be obligated to provide reasoned orders when granting costs, specifying the evidentiary rationale for conclusions drawn, the exercise of proportionality, and the detailed quantum awarded. Institutional guidelines, model orders, and checklists can enhance predictability and shield against arbitrariness.

India can draw from England’s Civil Procedure Rules, which allow tribunals to award costs proportionate to the conduct of parties, and from Singapore’s International Arbitration Act, which empowers tribunals to impose cost sanctions for frivolous or unmeritorious claims. These frameworks can be adapted with targeted exceptions for small enterprises, individual claimants, or novel disputes to suit India’s socio-economic context.

Finally, the success of the new cost’s regime will depend less on the words of the statute than on its application by tribunals and institutions. A phased rollout, supported by training, data collection, and periodic review, will be essential to refine practice and ensure that efficiency gains do not come at the expense of fairness. Properly implemented, Section 31-A has the potential to reshape arbitration culture in India by discouraging abuse while safeguarding legitimate access.