Report No. 240

3. Principles laid down and points highlighted in the decisions of Supreme Court:

3.1 Before we advert to the more recent decisions of the Supreme Court, it is appropriate to take note of the categorical observations made by a three Judge Bench of the Supreme Court in 2005 in the case of Salem Advocate Bar Association T.N. v. Union of India, (2005) 6 SCC 344:

"Judicial notice can be taken of the fact that many unscrupulous parties take advantage of the fact that either the costs are not awarded or nominal costs are awarded on the unsuccessful party. Unfortunately, it has become a practice to direct parties to bear their own costs. In large number of cases, such an order is passed despite Section 35(2) of the Code. Such a practice also encourages filing of frivolous suits. It also leads to the taking up of frivolous defences.

Further wherever costs are awarded, ordinarily the same are not realistic and are nominal. When Section 35(2) provides for cost to follow the event, it is implicit that the costs have to be those which are reasonably incurred by a successful party except in those cases where the Court in its discretion may direct otherwise by recording reason therefor.

The costs have to be actual reasonable costs including the cost of the time spent by the successful party, the transportation and lodging, if any, or any other incidental cost besides the payment of the court fee, lawyer's fee, typing and other cost in relation to the litigation. It is for the High Courts to examine these aspects and wherever necessary make requisite rules, regulations or practice direction so as to provide appropriate guidelines for the subordinate courts to follow."

3.2 Not much of progress has been made in the revision of relevant rules and regulations in the light of the observations made by the apex court.

3.3 In the case of Ashok Kumar Mittal (supra), the Supreme Court pointed out that the present system of levying meagre costs in civil matters (or no costs) in some matters, no doubt is "wholly unsatisfactory and does not act as a deterrent to vexatious or luxury litigation" or 'buying-time tactic'. The Court called for a more realistic approach vis-à-vis award of costs. The Supreme Court referred to two competing views, to cite,

(i) the provisions in Sections 35 and 35A CPC do not affect the wide discretion vested in the High Court in exercise of its inherent power to award costs in the interests of justice, and

(ii) though award of costs is within the discretion of the Court, it is subject to such conditions and limitations as may be prescribed and subject to the provisions of any law in force and therefore, inherent powers contrary to the specific provisions of the Code viz. Section 35 and 35A etc., cannot be exercised. This latter view was considered to be a "more sound view". Having said so, the following pertinent observations were made by the learned Judges:

"Further, the provisions of section 35A seem to suggest that even where a suit or litigation is vexatious, the outer limit of exemplary costs that can be awarded in addition to regular costs, shall not exceed Rs. 3000/-. It is also to be noted that huge costs of the order of Rs. Fifty thousand or Rs. One lakh, are normally awarded only in writ proceedings and public interest litigations, and not in civil litigation to which Sections 35 and 35A are applicable. The principles and practices relating to levy of costs in administrative law matters cannot be imported mechanically in relation to civil litigation governed by the Code."

3.4 The view which was considered to be sound in the above case was reiterated by the Supreme Court in the latest case of Sanjeev Kumar Jain. Adverting to the prefacing phrase in section 3.- "subject to", the Court laid down that ("if there are any conditions or limitations prescribed in the Code or in any Rules, the Court, obviously, cannot ignore them in awarding costs".)

Further, in the same case of Sanjeev Kumar Jain, the Supreme Court, in keeping with what was said earlier in Ashok Kumar Mittal, stressed the need to develop the practice of awarding costs in accordance with section 35 i.e., costs following the event and also giving reasons for not awarding costs. Otherwise, it was pointed out, the object of the provisions for costs would be defeated. Then, it was said:

"Prosecution and defence of cases is a time consuming and costly process. A plaintiff/petitioner/appellant who is driven to the court, by the illegal acts of the defendant/respondent, or denial of a right to which he is entitled, if he succeeds, has to be reimbursed of his expenses in accordance with law. Similarly a defendant/respondent who is dragged to court unnecessarily or vexatiously, if he succeeds, should be reimbursed of his expenses in accordance with law. Further, it is also well recognized that levy of costs and compensatory costs is one of the effective ways of curbing false or vexatious litigations."

3.5 The next decision which deserves notice is the case of Vinod Seth (supra). The Court highlighted the deficiencies in the prevailing Rules and practices in regard to costs in civil matters:

"Section 35 of the Code vests the discretion to award costs in the property, and to what extent such costs are to be paid. Most of the costs taxing rules, including the rules in force in Delhi provide each party should file a bill of cost immediately after the judgment is delivered setting out:

(a) the court fee paid;

(b) process fee spent;

(c) expenses of witnesses;

(d) advocate's fee; and

(e) such courts.

It provides that normally the costs should follow the event and court shall have full power to determine by whom or out of what other amount as may be allowable under the rules or as may be directed by the court as costs. We are informed that in Delhi, the advocate's fee in regard to suits the value of which exceeds Rs. 5 lakhs is: Rs. 14,500/-plus 1% of the amount in excess of Rs. 5 lakhs subject to a ceiling of Rs. 50,000/-.

The prevalent view among litigants and members of the bar is that the costs provided for in the Code and awarded by courts neither compensate not indemnify the litigant fully in regard to the expenses incurred by him."

3.6 The Supreme Court having noted that Section 35 of the Code does not impose any ceiling on the quantum of costs to be awarded, indicated that the object of Section 35 can be achieved by the following two measures: (i) Courts levying costs following the results in all cases (non-levy of costs should be supported by reasons); and (ii) appropriate amendments to Civil Rules of practice relating to taxation of costs to make it more realistic in commercial litigation.

3.7 Further, as regards Sections 35A and 35B, the Supreme Court made the following observations in Vinod Seth's case:

"The provision relating to compensatory costs (section 35A of the Code) in respect of false or vexatious claims or defences has become virtually infructuous and ineffective, on account of inflation. Under the said Section, award of compensatory costs inflation and vexatious litigation, is subject to a ceiling of Rs. 3,000/-. This requires a realistic revision keeping in view the observations in Salem Advocate Bar Association (II) (supra). Section 35B providing for costs for causing delay is seldom invoked. It should be regularly employed, to reduce delay."

3.8 Now we shall refer to the latest decision in Sanjeev Kumar Jain (2011). In that case, the Supreme Court was concerned with the question whether a sum of Rs. 45 lakhs awarded as costs by the High Court while dismissing an appeal preferred against an order vacating temporary injunction in an Injunction Suit was sustainable.

The said Suit was in respect of some commercial litigation. The High Court took into account the Advocate's fee said to have incurred in the Appeal by the Respondent. This order of the High Court was set aside by the Supreme Court and the Hon'ble Court ordered that "the Appellant shall pay the costs of the Appeal before the High Court as per Rules plus Rs. 3000/-as exemplary costs to the Respondent." It is relevant to take stock of the principles laid down in the judgment and its ratio.

3.9 The Supreme Court held in the case of Sanjeev Kumar Jain (2011) that the order of the High Court awarding heavy costs was unsustainable in the light of the existing provisions of CPC read with the Delhi High Court Rules dealing with award of costs in Civil Suits. The Supreme Court referred to the relevant Rule that enjoins the Advocate fee to be taxed to the tune of an amount not exceeding the scale prescribed in the Schedule to Chapter XXIII. The Supreme Court then clarified the legal position as follows:

"Therefore, the Court could not have awarded costs exceeding the scale that was prescribed in the schedule to the Rules. Doing so would be contrary to the Rules. If it was contrary to the Rules, it was also contrary to Section 35 also which makes it subject to the conditions and limitations as may be prescribed and the provisions of law for the time being in force.

Therefore, we are of the view that merely by seeking a consent of the parties to award litigation expenses as costs, the High Court could not have adopted the procedure of awarding what it assumed to be the 'actual costs' nor could it proceed to award a sum of Rs.45,28,000/-as costs in an appeal relating to an interim order in a civil suit. While we would like to encourage award of realistic costs, that should be in accordance with law.

If the law does not permit award of actual costs, obviously courts cannot award actual costs. When this Court observed that it is in favour of award of actual realistic costs, it means that the relevant Rules should be amended to provide for actual realistic costs. As the law presently stands, there is no provision for award of 'actual costs' and the award of costs will have to be within the limitation prescribed by Section 35."

3.10 The Supreme Court, while pointing out that the High Court misread the observations in Salem Advocate Bar Association, observed thus:

"All that this Court stated was that the actual reasonable cost has to be provided for in the rules by appropriate amendment. In fact, the very next sentence in para 37 of the decision of this Court is that the High Courts should examine these aspects and wherever necessary, make requisite rules, regulations or practice directions. What has been observed by this court about actual realistic costs is an observation requiring the High Courts to amend their rules and regulations to provide for actual realistic costs, where they are not so provided.

The observation in Salem Advocates Bar Association is a direction to amend the rules so as to provide for actual realistic costs and not to ignore the existing rules. The decision in Salem Advocates Bar Association is therefore of no assistance to justify the award of such costs. The Rules permit costs to be awarded only as per the schedule."