India: Towards A New Costs Regime

Last Updated: 12 October 2016
Article by Ananya Kumar and Divyam Agarwal

"The suggestion to the legislature is to formulate a mechanism that anyone who initiates and continues a litigation senselessly, pays for the same. It is suggested that the legislature should consider the introduction of a "Code of Compulsory Costs.... The effort is only to introduce consequences, if the litigant's perception was incorrect, and if his cause is found to be, not fair and legitimate, he must pay for the same" Subrata Roy Sahara v Union of India, (2014) 8 SCC 470.

Cost has been defined by Halsbury's Laws of England, as the sum of money which the court orders one party to pay to another party in respect of the expenses of litigation incurred. Awarding costs of a proceeding, unless limited by statute or rule of law, are within the discretion of the court / tribunal hearing a matter.

For the last 39 years, Sections 35 and 35-A of the [Indian] Code of Civil Procedure, 1908 ("CPC") have capped costs that can be awarded in favour of a successful party to Rs.3,000/-.While the unamended Arbitration & Conciliation Act, 1996 did not provide for a ceiling on costs, arbitral tribunals were ordinarily guided in this regard by the provisions of the CPC.

As any litigant would affirm,and as pointed out by Justice (Retd.) A.P. Shah in the 246th Law Commission Report,a ceiling of this nature bears no relation to the actual expenses incurred by a party in litigation. As a result, the cost regime in our legal system has neither proved to be a deterrent for vexatious litigations, nor has it come to the aid of innocent litigants, who are forced to incur heavy expenditure to prosecute or defend a case.

The archaic nature of the costs regime was adversely commented on in various decisions of the Supreme Court, which expressed a need for urgent review of the legislative provisions qua award of costs in civil matters.

Following there from, in May 2012, the 240th Report of the Law Commission of India, titled 'Costs in Civil Litigation', proposed amendments to various provisions of the CPC, including Section 35- A.The Law Commission opined that costs in civil proceedings should be realistic and such that they curb frivolous and protracted litigation. Despite the recommendations of the Law Commission, Section 35- A was not amended.

However, two recently promulgated legislations, viz., the Arbitration & Conciliation (Amendment) Act, 2015 ("AA Act") and the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 ("CC Act"), both of which came into force on 23 October 2015, have attempted to remedy this position.

Amendment to Arbitration costs regime The 246th Report, while noting that arbitration, much like traditional adversarial dispute resolution, can be an expensive proposition, observed that: "The loser-pays rule logically follows, as a matter of law, from the very basis of deciding the underlying dispute in a particular manner; and as a matter of economic policy, provides economically efficient deterrence against frivolous conduct and furthers compliance with contractual obligations."

Accordingly, the 246th Report suggested insertion of provisions detailing the costs to be awarded in proceedings under the Arbitration & Conciliation Act, 1996 ("Arbitration Act").The suggested amendments were intended to replace the existing Section 31(8), where the tribunal's power to award costs was found. Based on the recommendations contained in the 246th Report, the AA Act has amended Section 31(8) and inserted Section 31-A in the Arbitration Act, which gives the Tribunal the power to determine whether costs are payable by one party to another and the quantum of such costs. The explanation to Section 31-A (1) reiterates the preamendment position that "costs" would include the fees and expenses of the arbitrators, Courts and witnesses, legal fees and expenses, administration fees and any other expenses incurred in connection with the arbitration, court proceedings or the award. Section 31- A (2), which is an addition, thereafter stresses on the "loser pays" principle. Section 31-A (3) sets out the circumstances that the tribunal/court is required to keep in mind while awarding costs, including factors such as conduct of the parties, the frivolity of the respective cases put forward by the litigants and whether a reasonable settlement offer has been refused.

Insertion of the latter two provisions is an attempt to toughen the existing costs regime and bring it in line with international practices.

Costs in Commercial Matters Section 2(1)(c) of the CC Act has classified disputes arising out of 22 distinct kinds of transactions (including such further transactions that the Central Government may notify) as "commercial disputes", and has provided for the constitution of a Commercial Division and a Commercial Appellate Division in every High Court to deal with matters falling in these categories, and having a subject value of more than a specified value, which is to be at least One Crore Rupees.

The CC Act also amends various provisions of the CPC,insofar as they apply to commercial matters, which includes Sections 35 and 35-A. These changes are based on the 253rd Law Commission Report, which in turn referred to and relied upon the 246th Report. The 253rd Report recommended that the law should be amended to ensure that costs necessarily follow the event in all cases, except where the court gives reasons in writing. It also recommended that the legislature should amend Sections 35 and 35-A of the CPC by adopting the model of costs proposed in the amendments to the Arbitration Act. These recommendations have been accepted by the legislature in the CC Act.

The CC Act seeks to provide a remedy to the bona fide litigant by incorporating a 'cost to follow the event' regime under Section 2 of its Schedule. This Section provides a replacement provision for Section 35 of CPC, which defines costs in a manner that is analogous to the newly introduced Section 31A of the Arbitration Act. Section 35-A (2), where the cap of Rs.3,000 finds place, has been specifically omitted by the CC Act. Once again, akin to Section 31-A,the conduct of parties has been made a relevant factor while deciding on the issue of costs and courts are empowered to impose costs even against the successful party for portions of the claim/defence which are found to be frivolous.


While the power to award costs in itself is not a huge departure from the earlier position, Section 31-A (2) and (3) of the Arbitration Act and Section 2 of the Schedule to the CC Act have strengthened and taken the costs regime in arbitration and arbitration related proceedings, and in commercial matters, respectively, beyond what was contemplated by the CPC, and into the realm of reality.

This new regime is akin to and inspired by Part 44 of the Civil Procedure Rules (CPR) of England and Wales, and similar to the practices followed in jurisdictions like Singapore, the United States and even the rules of certain arbitral institutions like the International Chamber of Commerce.

It is a significant and landmark step towards curbing vexatious litigation, reducing pendency of cases and also adequately compensating bona fide litigants. The 246th Report, while proposing amendments to the Arbitration Act, had stated that: "The Commission has, therefore, sought comprehensive reforms to the prevailing costs regime applicable both to arbitrations as well as related litigation in Court ... and it is hoped and expected that judges and arbitrators would take advantage of this robust provision, and explain the "rules of the game" to the parties early in the litigation so as to avoid frivolous and meritless litigation/arbitration."

The "rules of the game" appear to have changed. For these "rules" to have true meaning, though, they will need to be enforced strictly. At the same time, detailed and sufficient application of mind is a must while adjudicating on costs, so that while vexatious litigation is deterred, access to justice is not impeded or seen to be impeded. It is also high time that Sections 35 and 35-A of the CPC are amended, to apply not just to commercial matters, but to all civil litigation.

This article originally appeared in The New Statesmen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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