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Report No. 240

8.11 In Sanjeev Kumar Jain's case also, the Supreme court noticed in para 8 that Section 35 starts with the words "subject to such conditions and limitations as may be prescribed, and to the provisions of law for the time being in force" and then observed: "Therefore, if there are any conditions or limitations prescribed in the Code or in any rules, the Court, obviously, cannot ignore them in awarding costs."

8.12 The amount that could be awarded to a party to the litigation under Section 35A has no particular relation to the actual expenses incurred by that party. The expression "compensatory" is not, in fact, appropriate. These costs are related to the false and frivolous nature of the plea raised in the proceeding by a party. In effect, it penalizes the conduct of the party who has set up a false or frivolous claim/plea and awards an additional amount under the head of costs.

Viewed from another angle, the amount so awarded partakes the character of non-pecuniary damages as it provides some recompense for the time and energy spent and mental agony suffered by the party who is dragged to the Court unnecessarily. In that sense, it could be said that the costs are compensatory. However, costs contemplated by Section 35-A are of greater amplitude. It would, therefore, be more appropriate to describe the costs under Section 35-A as 'exemplary costs.- an expression used by Supreme Court in Sanjiv Jain's case.

Punitive costs is another expression that can be used in view of the amendments we are suggesting. It may be stated that in the context of damages, the expressions "punitive damages" and "exemplary damages" are used as synonymous terms. Punitive damages are damages over and above such sums as will compensate a person for his actual loss.

On the same analogy, punitive or exemplary costs are not to be correlated to the expenses incurred by a party to litigation. In fact, costs are considered to be in the nature of incidental damages allowed to the successful party to indemnify him against the litigation expenses incurred. In that sense, it would be apposite to borrow the descriptive terminology applied to damages.

8.13 At this juncture, we may reiterate the pertinent observations of Supreme Court in Sanjeev Kumar Jain's case at para 15:

"We may also note that the description of the costs awardable under Section 35A 'as compensatory costs' gives an indication that it is restitutive rather than punitive. The costs awarded for false or vexatious claims should be punitive and not merely compensatory. In fact, compensatory costs is something that is contemplated in Section 35B and Section 35 itself. Therefore, the Legislature may consider award of 'punitive costs' under section 35A."

8.14 Apart from awarding additional costs in the nature of exemplary costs to the party succeeding, the Courts should also be empowered to impose punitive costs for wasting court's time and resources by filing a frivolous or vexatious suit/proceeding or taking up a defence of the same character.

The amount so realized should appropriately go to "Judicial Infrastructure Fund" to be created for this purpose. Thus while raising the ceiling limit under section 35A, there shall be a combination of two factors, that is to say, the punitive element and the compensatory element in awarding costs subject to the overall ceiling prescribed. Accordingly, the Commission suggests the recasting of Section-35A.

8.15 The Supreme Court, in Vinod Seth v. Devinder Bajaj 2010 (8) SCC 1, observed in paragraph 52 that the ceiling of Rs. 3,000/requires a realistic revision. The reason obviously is that the said amount would hardly act as a deterrent against false and vexations suits and defences. The ceiling amount prescribed more than three decades back has lost its relevance and purpose. In Sanjeev Kumar Jain, the Supreme Court observed that the ceiling of Rupees one lakh appears to be reasonable.

In the written submissions of Law Commission of India filed before the Court in that case, the same suggestion was made and the Hon'ble Court has apparently endorsed it. This suggestion, therefore, deserves to be acted upon and section 35-A has to be suitably amended. Curbing frivolous litigation by imposition of heavy costs is a well-recognized norm and there should be adequate legislative support for it.

8.16 It may be mentioned that at the conference of Judl. Officers and lawyers held at various places, the subject of costs also came up for discussion. There was unanimous opinion that the ceiling prescribed by S,35-A has to be raised substantially and further the quantum of costs should be realistic.

8.17 As the Section stands at present, compensatory costs under Section 35-A is awardable only if a party raises an objection that the claim or defence or any part of it, is false and vexatious to the knowledge of the party, after recording its reasons. The provision needs to be suitably amended to additionally empower the Court on its own to award exemplary costs if the Court is satisfied that the claim or defence is false or vexatious to the knowledge of the party, irrespective of the other party making a specific claim in this regard.

8.18 In light of the foregoing discussion, the Commission is of the view that Section 35-A has to be amended to provide for the following:

(1) Ceiling limit of Rs. 3,000/- prescribed in the year 1976 needs to be enhanced to Rs. 1,00,000/-.

(2) Out of the costs awarded under Section 35-A (maximum being Rs. 1,00,000/-), part of the costs should be allowed in favour of the party who has been subjected to frivolous or vexatious litigation and a part of the amount of costs should be directed to be deposited in the Judicial Infrastructure Fund to be created by each High Court;

(3) The expression 'exemplary' should be substituted for the word 'compensatory' wherever it occurs in Section 35-A.

(4) Every Court, on its own, even without an application from one of the parties, shall be empowered to award exemplary costs under section 35-A if the Court is satisfied that the claim or defence is false or vexatious to the knowledge of the party. However, before passing such order, opportunity of hearing shall be given to the party against whom such order is proposed to be passed on the date of pronouncement of judgment.

8.19 Accordingly, Section 35-A to be recast as follows:

(i) In the title portion, the word 'compensatory' to be substituted by the words 'additional and exemplary'. The last words in sub-section (1) i.e., "by way of compensation" to be deleted and instead, the words "additional and exemplary costs subject to the limit specified in sub-clause (2)" to be substituted;

(ii) The following Sub-sections to be added after subsection(1)

1-A: The Court, irrespective of any objection taken or application made by the party may, subject to the same conditions as laid down in sub-section (1) and after giving an opportunity of hearing to the party affected, pass an order awarding additional and exemplary costs subject to the ceiling specified in the sub-section (2),

Provided that the party's adverse socio-economic condition and the hardship that may be caused by imposing the costs under this sub-section should be taken into account by the Court while determining the quantum of costs.

1-B: Out of the costs so awarded, part of the costs shall be ordered to be paid to the party against whom the claim or defence of false or vexatious nature has been set up and part of it shall be ordered to be deposited in the Judicial Infrastructure Fund created under the orders of the High Court;

1-C: High Courts may frame Rules for the creation and administration of Judicial Infrastructure Fund and notwithstanding that such Fund is not created, the Court may award costs under sub-section (1) to the party subject to frivolous or vexatious claim or defence.

(iii) Instead of "three thousand rupees" in sub-section(2) "rupees one lakh" to be substituted.

(iv) The first Proviso to sub-section may be omitted as it is no longer necessary.

(v) In Sub-section (4), for the expression ' compensation', the word 'costs' to be substituted.

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