Costs

What is 'Costs'

According to Black’s Law Dictionary "costs is a pecuniary allowance made to the successful party (recoverable from the losing party) for his expenses in prosecuting or defending a suit or a distinct proceeding within a suit". Cost signifies the sum of money which the court orders one party to pay another party in respect of the expenses of litigation incurred. Except where specifically provided by the statute or by rule of Court, the costs of proceedings are in the Court’s discretion. These are certain allowances authorized by statute to reimburse the successful party for expenses incurred in prosecuting or defending an action or special proceeding.

Generally, The common thread running through the concept of costs is the reiteration of three salutary principles: (i) costs should ordinarily follow the event; (ii) realistic costs ought to be awarded keeping in view the ever increasing litigation expenses; and (iii) the cost should serve the purpose of curbing frivolous and vexatious litigation.

The theory on which costs are awarded to a plaintiff is that default of the defendant made it necessary to sue him, and to a defendant is that the plaintiff sued him without cause; costs are thus in the nature of incidental damages allowed to indemnify a party against the expense of successfully vindicating his rights in court and consequently the party to blame pays costs to the party without fault.

Official Definition of 'Costs'

'Costs' as defined in legislation(s)

Section 35 of CPC

Section 35 of Civil Procedure Code, 1908 defines The expression “costs” shall mean reasonable costs relating to—

(i) the fees and expenses of the witnesses incurred;

(ii) legal fees and expenses incurred;

(iii) any other expenses incurred in connection with the proceedings.

Order XXA of CPC

Order XXA of CPC says: Without prejudice to the generality of the provisions of this Code relating to costs, the Court may award costs in respect of,-

(a) expenditure incurred for the giving of any notice required to be given by law before the institution of the suit;

(b) expenditure incurred on any notice which, though not required to be given by law, has been given by any party to the suit to any other party before the institution of the suit;

(c) expenditure incurred on the typing, writing or printing of pleadings filed by any party;

(d) charges paid by a party for inspection of the records of the Court for the purposes of the suit;

(e) expenditure incurred by a party for producing witnesses, even though not summoned through Court; and

(f) in the case of appeals, charges incurred by a party for obtaining any copies of judgments and decrees which are required to be filed along with the memorandum of appeal.

Legal provision(s) relating to 'Costs'

Provisions under Civil Procedure Code, 1908

Section 35

This section says that subject to conditions and limitations as may be prescribed, and to the provisions of any law for the time being in force, the costs of an 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. If the Court decides to make an order for payment of costs, the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party.

Moreover, it elucidates the concept of costs in the following manner: In relation to any Commercial dispute, the Court, notwithstanding anything contained in any other law for the time being in force or Rule, has the discretion to determine:

(a) whether costs are payable by one party to another;

(b) the quantum of those costs; and

(c) when they are to be paid.

Section 35A

Compensatory costs in respect of false or vexatious claims or defences:

In any legal proceedings, excluding appeals or revisions, if a party contends that the opposing claim or defense is knowingly false or vexatious, and if the said claim or defense is subsequently disallowed, abandoned, or withdrawn in whole or part against the objecting party, the Court has the discretion to order the party responsible for the false or vexatious claim or defense to compensate the objecting party for costs. The Court may exercise this discretion after providing reasons for its determination that the claim or defense was false or vexatious. 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. No Court shall make any such order for the payment of an amount exceeding three thousand rupees or exceeding the limits of its pecuniary jurisdiction, whichever amount is less.

Section 35B

Costs for causing delay:

If, on any date fixed for the hearing or for taking any step, 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,  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 defendent was ordered to pay such costs.

Provisions under Arbitration and Conciliation Act, 1996

Section 31(8)

The costs of an arbitration shall be fixed by the arbitral tribunal in accordance with section 31A. “Costs” means reasonable costs relating to—

(i) the fees and expenses of the arbitrators and witnesses,

(ii) legal fees and expenses,

(iii) any administration fees of the institution supervising the arbitration, and

(iv) any other expenses incurred in connection with the arbitral proceedings and the arbitral award.

Section 31A

Regime for costs.—In relation to any arbitration proceeding or a proceeding under any of the provisions of this Act pertaining to the arbitration, the Court or arbitral tribunal, shall have the discretion to determine —

(a) whether costs are payable by one party to another;

(b) the amount of such costs; and

(c) when such costs are to be paid.

If the Court or arbitral tribunal decides to make an order as to payment of costs,—

(a) the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party; or

(b) the Court or arbitral tribunal may make a different order for reasons to be recorded in writing.

In determining the costs, the Court or arbitral tribunal shall have regard to all the circumstances, including—

(a) the conduct of all the parties;

(b) whether a party has succeeded partly in the case;

(c) whether the party had made a frivolous counterclaim leading to delay in the disposal of the arbitral proceedings; and

(d) whether any reasonable offer to settle the dispute is made by a party and refused by the other party.

An agreement which has the effect that a party is to pay the whole or part of the costs of the arbitration in any event shall be only valid if such agreement is made after the dispute in question has arisen.

Section 78

Upon termination of the conciliation proceedings, the conciliator shall fix the costs of the conciliation and give written notice thereof to the parties. The costs shall be borne equally by the parties unless the settlement agreement provides for a different apportionment. All other expenses incurred by a party shall be borne by that party.

Types of 'Costs'

Cost of Adjournment

As per order XVII rule 1 in every such case the Court shall fix a day for the further hearing of the suit, and shall make such orders as to costs occasioned by the adjournment or such higher costs as the Court deems fit. This is a general provision governing adjournments and it is complementary to section 35-B. The costs contemplated under this provision need not necessarily be confined to the expenses incurred by the party for attending the court.

General Costs

General costs in legal proceedings in India refer to the ordinary expenses and fees incurred during the litigation process. These may include court fees, legal representation fees, and other standard expenses necessary for pursuing or defending a case. General costs are typically incurred by both parties in a lawsuit.

Miscellaneous Costs

Miscellaneous costs encompass various incidental expenses that may arise during legal proceedings but do not fall under specific categories. These costs can include expenses for document preparation, service of notices, and other unforeseen charges that may arise in the course of the litigation process.

Compensatory Costs for False and Vexatious Claim or Defenses

When a party raises a claim or defense that is later found to be false or vexatious, the court in India may order compensatory costs. These costs are intended to compensate the innocent party for the expenses incurred in responding to or defending against the baseless or misleading claims or defenses. This kind of costs is laid down in section 35A of CPC.

Costs for Causing Delay

Courts in India have the authority to impose costs on parties responsible for causing unjustified delays in legal proceedings. This serves as a deterrent against tactics aimed at prolonging the litigation process without valid reasons. Such costs are intended to compensate the other party for the additional time and resources expended due to the unnecessary delays.

Exemplary Costs

Exemplary costs, also known as punitive costs, may be awarded by the court to penalize a party for egregious conduct during the legal process. These costs go beyond compensating the other party for expenses and are meant to discourage inappropriate behavior. Exemplary costs are typically imposed when a party engages in misconduct or unethical practices during the course of the litigation. This kind of cost is laid down in section 35B of CPC.

International Experience

Germany

In Germany, in criminal cases, court costs are not levied until the final sentence has been handed down. The level of the fee is determined by reference to the penalty imposed, and ranges between EUR 140 and EUR 1000 at first instance. If no agreement is reached, the fees for court representation by a lawyer are calculated on the basis of the value of the claim. The value of the claim usually corresponds to the value of the proceedings which is set in order to determine the court fees.

United States of America

In the United States, legal costs can vary depending on the nature of the legal matter, the complexity of the case, and the region where the legal services are sought. Legal costs generally encompass a variety of expenses associated with legal representation, court proceedings, and related activities.

Challenges

While the comprehensive structure outlined in the Code may seem ideal, it offers little practical assistance to courts in imposing costs. Although it establishes guidelines for awarding costs in civil litigation, the effective enforcement of these rules is often uncertain and constrained by the Code's specified limitations. Notably, despite a specific provision for compensatory costs in cases of frivolous and vexatious litigation, this provision is deemed ineffective. The Code imposes a cap of a mere INR 3000 on the total costs that a court can levy for frivolous suits, rendering this provision essentially meaningless. Courts frequently find themselves compelled to reduce higher costs to adhere to this predetermined upper limit.

Way Ahead

The overdue and eagerly anticipated legislative reforms aimed at addressing the deficiencies in the Code's costs framework are crucial. Aligning the costs regime under the Code with the analogous provisions in the Act, which lacks restrictions on the awarded costs, would be an ideal adjustment. However, until these reforms materialize, the current practice of courts routinely awarding nominal costs could represent a positive step. This approach may help mitigate frivolous litigation and contribute to decreasing case backlogs. Additionally, in line with the observation made by the highest court, courts might contemplate issuing orders for prosecution as a deterrent against unfounded delays and vexatious litigation.

Case Laws on Costs

Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust

Though, Section 35 does not impose a ceiling on the costs that could be levied and gives discretion to the Court in the matter, it should be noted 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". 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.

Ashok Kumar Mittal v. Ram Kumar Gupta

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.

Vinod Seth vs. Devinder Bajaj

In this case the court asserted the following:

(a) It should act as a deterrent to vexatious, frivolous and speculative litigations or defences. The spectre of being made liable to pay actual costs should be such, as to make every litigant think twice before putting forth a vexatious, frivolous or speculative claim or defence.

(b) Costs should ensure that the provisions of the Code, the Evidence Act and other laws governing procedure are scrupulously and strictly complied with and that parties do not adopt delaying tactics or mislead the court.

(c) Costs should provide adequate indemnity to the successful litigant for the expenditure incurred by him for the litigation. This necessitates the award of actual costs of litigation as contrasted from nominal or fixed or unrealistic costs.

(d) The provision for costs should be an incentive for each litigant to adopt alternative dispute resolution (ADR) processes and arrive at a settlement before the trial commences in most of the cases. In many other jurisdictions, in view of the existence of appropriate and adequate provisions for costs, the litigants are persuaded to settle nearly 90% of the civil suits before they come up to trial.

(e) The provisions relating to costs should not however obstruct access to courts and justice. Under no circumstances, the costs should be a deterrent, to a citizen with a genuine or bona fide claim, or to any person belonging to the weaker sections whose rights have been affected, from approaching the courts.”