Arbitration Fee Payable To Public Officials Must Be Deposited In Parent Organization’s Account: Madhya Pradesh High Court

"An officer of the Indore Development Authority, who is also acting as a Panch, would not be entitled to receive any remuneration/fee, and the amount of fees to be paid by the parties to the said officer shall be deposited in the account of the Indore Development Authority." Madhya Pradesh High Court, in a ruling dated October 7, 2026, clarified that while arbitration fees for proceedings under Section 387 of the Municipal Corporation Act, 1956, may be determined by borrowing provisions of the Arbitration and Conciliation Act, 1996, public officials serving as arbitrators are strictly prohibited from personally accepting such fees.

A division bench comprising Justice Subodh Abhyankar and Justice Alok Awasthi held that such remuneration must be deposited directly into the treasury or account of the official’s parent organization.

The dispute arose after the Indore Municipal Corporation (IMC) initiated demolition proceedings, prompting the respondent to seek compensation under Section 387 of the Municipal Corporation Act, 1956. The District Court appointed a three-member Panchayat to adjudicate the compensation claim, which subsequently fixed arbitration fees based on the Act of 1996. The IMC challenged this order before the Writ Court, questioning the applicability of the Act of 1996 and the quantum of fees fixed, which was based on an exorbitant claim of over Rs. 30 lakhs. Upon the dismissal of their petition, the IMC preferred the current appeals.

The court was primarily tasked with determining whether the fee structure prescribed under the Arbitration and Conciliation Act, 1996, could be borrowed to govern proceedings under Section 387 of the Municipal Corporation Act, 1956. Additionally, the court addressed the ethical and procedural impropriety of public officials receiving personal remuneration while acting as arbitrators in their official capacity.

The bench examined the interplay between the local municipal legislation and the central arbitration law. Relying on Section 2(4) of the Arbitration and Conciliation Act, 1996, the court observed that the Act is applicable to arbitrations under other enactments, provided there is no direct inconsistency.

Applicability of Arbitration and Conciliation Act

The court noted that since the Municipal Corporation Act, 1956, lacks specific provisions for determining the remuneration of a Panchayat, the borrowing of provisions from the Act of 1996 is legally sound. The bench emphasized that, in the absence of a conflicting provision, the 1996 Act serves as a necessary legislative framework to ensure the orderly conduct of arbitration proceedings.

"The Act of 1996 shall also be applicable to any arbitration undertaken under any other enactment and shall be governed by Part I of the Act of 1996, which governs the domestic arbitration, except insofar as the provisions of Part I are inconsistent with such enactment or with any rules made thereunder."

Regulation of Arbitrator Fees

Regarding the concerns raised by the Municipal Corporation about the quantum of fees, the court noted that the Arbitration Tribunal itself possesses the necessary authority to regulate costs under Section 31A of the Act of 1996. The bench cautioned that fees must remain reasonable and proportional to the actual work involved, rather than being solely derived from the magnitude of the claim submitted by the parties.

Prohibition on Personal Fees for Public Officials

The most significant legal directive issued by the bench concerns the conflict of interest regarding public servants acting as arbitrators. The court held that an official from a public body, such as the Indore Development Authority, cannot personally profit from an assignment undertaken as part of their official duties. By mandating that such fees be deposited into the institution's account, the court sought to maintain public trust and prevent the commercialization of judicial or quasi-judicial functions performed by state officers.

"An officer of the Indore Development Authority, who is also acting as a Panch, would not be entitled to receive any remuneration/fee, and the amount of fees to be paid by the parties to the said officer shall be deposited in the account of the Indore Development Authority."

The court ultimately dismissed the appeals, confirming the applicability of the 1996 Act while incorporating the essential caveat regarding the payment of fees to public officials. This ensures that the arbitration process under the Municipal Act remains transparent, professional, and free from potential corruption or personal gain.

Date of Decision: 07 October 2026