"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, October 20, 2010

Costs in Litigation and Arbitration

Sections 35, 35A and 35B of the Code of Civil Procedure, 1908 deal with the law pertaining to costs. The said sections read:

35. Costs
(1) Subject to such conditions and limitations as may be prescribed, and to the provisions of law for the time being in force, the costs of and incident to all suits shall be in the discretion of the Court, and the Court shall have full power to determine by whom or out of what property and to what extent such costs are to be paid, and to give all necessary directions for the purposes aforesaid. The fact that the Court has no jurisdiction to try the suit shall be no bar to the exercise of such powers.
(2) Where the Court directs that any costs shall not follow the event, the Court shall state its reasons in writing.

35A. Compensatory costs in respect of false or vexatious claims or defenses

(1) If any suit or other proceedings including an execution proceedings but excluding an appeal or a revision any party objects to the claim of defence on the ground that the claim or defence or any part of it is, as against the objector, false or vexatious to the knowledge of the party by whom it has been put forward, and if thereafter, as against the objector, such claim or defence is disallowed, abandoned or withdrawn in whole or in part, the Court if it so thinks fit, may, after recording its reasons for holding such claim or defence to be false or vexatious, make an order for the payment to the object or by the party by whom such claim or defence has been put forward, of cost by way of compensation.
(2) No Court shall make any such order for the payment of an amount exceeding three thousand rupees or exceeding the limits of it pecuniary jurisdiction, whichever amount is less:
Provided that where the pecuniary limits of the jurisdiction of any Court exercising the jurisdiction of a Court of Small Causes under the Provincial Small Cause Courts Act, 1887 (9 of 1887) or under a corresponding law in force in any part of India to which the said Act does not extend and not being a Court constituted under such Act or law, are less than two hundred and fifty rupees, the High Court may empower such Court to award as costs under this section any amount not exceeding two hundred and fifty rupees and not exceeding those limits by more than one hundred rupees :
Provided, further, that the High Court may limit the amount or class of Courts is empowered to award as costs under this Section.
(3) No person against whom an order has been made under this section shall, by reason thereof, be exempted from any criminal liability in respect of any claim or defence made by him.
(4) The amount of any compensation awarded under this section in respect of a false or vexatious claim or defence shall be taken into account in any subsequent suit for damages or compensation in respect of such claim or defence.”
35B. Costs for causing delay
(1) If, one any date fixed for the hearing of a suit or for taking any step therein, a party to the suit--
(a) fails to take the step which he was required by or under this Code to take on that date, or
(b) obtains an adjournment for taking such step or for producing evidence or on any other ground,
the Court may, for reasons to be recorded, make an order requiring such party to pay to the other party such costs as would, in the opinion of the Court, be reasonably sufficient to reimburse the other party in respect of the expenses incurred by him in attending the Court on that date, and payment of such costs, on the date next following the date of such order, shall be a condition precedent to the further prosecution of—
(a) the suit by the plaintiff, where the plaintiff was ordered to pay such costs,
(b) the defence by the defendant, where the defendant was ordered to pay such costs.
Explanation.--Where separate defences have been raised by the defendants or groups of defendants, payment of such costs shall be a condition precedent to the further prosecution of the defence by such defendants or groups of defendants as have been ordered by the Court to pay such costs.
(2) The costs, ordered to be paid under sub-section (1), shall not, if paid, be included in the costs awarded in the decree passed in the suit; but, if such costs are not paid, a separate order shall be drawn up indicating the amount of such costs and the names and addresses of the persons by whom such costs are payable and the order so drawn up shall be executable against such person
s.”

As interpreted by the Supreme Court in Ashok Kumar Mittal v. Ram Kumar Gupta (January 2009)], following are some of the salient features pertaining to the above provisions:
  • Awarding costs is the discretion of the court.
  • The court discretion is subject to (a) limitations imposed by laws, and (b) provisions of law in force.
  • Purpose of these provisions is to “recompense a litigant for the expense incurred by him in litigation to vindicate or defend his right.
  • When the plaintiff has already paid the prescribed court fee, it is doubtful if costs should be imposed in favour of the state in litigation between two private parties.
  • The law on costs so far as civil procedure is concerned is contained in Ss 35 and 35A. Hence, the inherent power of the court cannot be exercised to grant costs contrary to the said provisions.
Finally, the court lamented that the law on costs was “wholly unsatisfactory” as it does not deter vexatious litigation. The court held:
 
Whether we should adopt suitably, the western models of awarding actual and more realistic costs is a matter that requires to be debated and should engage the urgent attention of the Law Commission of India.”

The court is correct in pointing out that the costs issue ought to be the subject of any immediate effort at litigation reform. Curiously, the National Litigation Policy (June 2010) of the Ministry of Law and Justice did not address this aspect. Perhaps the Ministry thought the issue was fit for the Law Commission to deal with. The Law Commission has, so far, not addressed this issue (atleast there is no report on this issue in the recent past).

This post is intended to identify a few of the many aspects that might have to be addressed to formulate a proper costs policy.

Awarding Costs is Discretionary: The courts have been consistent in maintaining that awarding of costs as per S 35 is at the discretion of the courts. [Ashok Kumar Mittal v. Ram Kumar Gupta]

S 35(2) is crucial in the interpretation of S 35. Though S 35(1) states that costs are subject to court discretion, S 35(2) seems to state that awarding costs ought to be the norm, and when the court digresses from the said norm, reasons should be given. [Disclaimer: I not sure if the drafting history of this provision supports this interpretation but there is no reason for the drafters to provide for this requirement unless they feel that awarding costs should be the rule.] There is nothing novel in this interpretation. In United Commercial Bank v. Satish Chandra Ghosh (AIR 1991 Gau 59), for instance, Justice BP Saraf, stated:

Section 35 of the Civil Procedure Code deals with the power of the Court to award costs. Under the said section, the award of the cost is within the discretion of the Court. But the discretion must be exercised judicially on the basis of the well established legal principles. The Court cannot just refuse to award costs on its whim. The normal rule is that costs shall follow the event. Where a departure is to be made from the said rule, there must be good reasons. Sub-section (2) of Section 35 of the Civil Procedure Code specifically provides that where the Court directs that any costs shall not follow the event, it should state its reason in writing. From a conjoint reading of Sub-sections (1) and (2) of Section 35, it is clear that discretion of the Court in the matter of awarding of costs is very limited. In the normal course… the liability to pay the costs normally follow the event. There must be reasons to deviate from this normal rule.”

A random survey of Supreme Court cases in 2010 revealed that in many cases, the court  has not complied with the requirement of Section 35(2). Some of them are listed below:

Case
Bench
Court
G.S. Singhvi and Asok Kumar Ganguly, JJ.
Supreme Court of India
Aftab Alam and R.M. Lodha, JJ.
Supreme Court of India
G.S. Singhvi and Asok Kumar Ganguly, JJ.
Supreme Court of India

Courts should ensure compliance with S 35(2) and provide cogent reasons for not awarding costs. Courts, at times, provide vague and inadequate reasons (such as “in view of the facts and circumstances there shall be no order as to costs”) for not awarding costs. Such practice should be stopped. The discretion to disallow costs must be, as Justice Saraf would say, based on “good reasons”.

Part II to follow

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