Reportable  IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.8610 OF 2011 [Arising out of SLP(C) No.6285 of 2010]

Sanjeev Kumar Jain .......Appellant

Versus

Raghubir Saran Charitable Trust & Ors. .....Respondents

O R D E R

R.V.  Raveendran, J.

Notice had been issued limited to the question whether a sum of        `  

45,28,000/-  could  be  awarded  as  costs  in  an  appeal  against  a  vacating  

temporary injunction in an injunction suit. Leave is granted in regard to that  

aspect only.

2. The appellant  is a tenant under the respondents in regard to a first   

floor unit  bearing No.E-67, Connaught  Place,  New Delhi.  He was also a  

tenant under the respondents in respect of a mezzanine floor unit bearing  

No.E-11 of the said building situated below the first floor tenement. When

he was a tenant of both these portions, the respondents granted permission  

on 4.7.1986 to the appellant to put up an internal staircase connecting the  

mezzanine floor with the first floor. The respondents initiated proceedings  

for eviction of the appellant in regard to mezzanine floor unit and obtained  

vacant possession thereof. Even after vacating the mezzanine floor unit, the  

appellant claimed a right to use the staircase which had been constructed in  

the mezzanine floor unit to reach the first floor unit. In that behalf, he filed a  

suit for permanent injunction to restrain the respondents from obstructing  

him  from  using  the  said  staircase  to  reach  the  first  floor  unit.  Interim  

protection was given in favour of appellant on 30.12.2003. The said interim  

order was vacated on 8.11.2004. Feeling aggrieved, the appellant filed an  

appeal.  The  appeal  was  pending  for  nearly  six  years.  During  the  final  

hearing of the appeal, the Division Bench appears to have suggested to the  

parties  that  as  the  dispute  was  purely  a  commercial  dispute,  the  party  

succeeding in the appeal should be entitled to the litigation expenses from  

the party who did not succeed. Both counsel, agreed to the said proposal in  

principle and the court made the following order on 21.12.2009:

“Arguments heard. Order reserved.

Learned counsel for the parties should give to the Court Master, statement  of the total  litigation expenses incurred in this  appeal only, within two  days.”

In  pursuance  of  it,  the  parties  filed  memos  indicating  the  respective  

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expenses  incurred  in  the  appeal.  The  appellant  filed  a  memo  dated  

22.12.2009 stating that  `25,50,000/- was incurred as advocates’ fees in the  

appeal.  The  respondents  filed  an  affidavit  dated  23.12.2009  stating  that  

`45,28,000/- was spent as advocates’ fees in regard to the appeal.  By the  

impugned judgment dated 20.1.2010, the Division Bench of the High Court,  

dismissed  the  appeal  by  the  appellant.  Taking  note  of  the  said  memos  

regarding fees, the High Court awarded to the respondents  `45,28,000/- as  

costs in respect of the appeal to be paid by the appellant within six months.   

The appellant has challenged the said order both on merits and costs. But  

leave is restricted only to the question of costs.  

3. The only question for consideration is the legality and validity of the  

order of the High Court directing the appellant to pay costs of `45,28,000/-  

to the respondents.   

4. The appellant contended that award of such costs by the High Court  

was erroneous and contrary to law. The respondents drew our attention to  

para 20 of the order of the High Court in which it has been observed that the  

learned counsel for the parties had agreed for the suggestion of the Court for  

litigation costs being payable to the succeeding party by the losing party.  

The respondents  contended that  the award of actual  costs  incurred in the  

appeal was by consent of parties; and the same being a consent order, there   

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was no question of the matter being challenged by the appellant.

5. On  a  careful  consideration,  we  find  that  the  impugned  order,  

including  the  portion  regarding  costs,  was  not  a  consent  order.   During  

hearing on merits, the division bench indicated that the losing party should  

pay the ‘litigation expenses’ relating to the appeal.  This is  nothing but a  

reiteration of what is stated in law, namely section 35 of the Code of Civil  

Procedure. The counsel naturally agreed for the suggestion. But there was  

no consent  for  `45,28,000/-  being determined or being awarded as costs.  

There was no assessment  of the costs by the Taxing Officer of the High  

Court.  We  may  therefore  examine  whether  the  award  of  such  costs  is  

contrary to law.  

Relevant provisions of the Code

6.  Section 35 of the Code of Civil Procedure, 1908, (for short 'the Code')   

relates to costs and is extracted below:

“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.”

6.1)  Section  35A  relates  to  compensatory  costs  in  respect  of  false  or  

vexatious claims and is extracted below:

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“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.”

6.2) Section 35B relates to costs for causing delay and is extracted below :

"35B. Costs for causing delay. - (1) If, on 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  

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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 persons.”      

6.3) Order XXA of the Code provides for costs being awarded in regard to  

the following six items enumerated in Rule 1:

“1.  Provisions  relating  to  certain  items.-  Without  prejudice  to  the  generality of the provisions of this Code relating to cots, 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 courts; 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.”  

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Rule 2 of Order XXA provides that award of costs under this Rule shall be  

in accordance with such rules as the High Court may make in this behalf.  

Decisions dealing with costs

7.   Sections 35 and 35A have been considered recently by this Court in  

Salem Advocates Bar Association v. Union of India  [2005 (6) SCC 344],  

Ashok Kumar Mittal Vs. Ram Kumar Gupta & Anr. [2009 (2) SCC 656] and  

Vinod Seth Vs. Devender Bajaj & Anr. [2010 (8) SCC 1]. Before referring  

to them, we may refer to the principle underlying award of costs stated in  

Manindra Chandra Nandi vs. Aswini Kumar Acharjya [ILR (1921) 48 Ca.  

427] :   

“….We must remember that whatever the origin of costs might have been,  they are now awarded, not as a punishment of the defeated party but as a  recompense to the successful party for the expenses to which he had been  subjected, or, as Lord Coke puts it, for whatever appears to the Court to be  the  legal  expenses  incurred  by the  party in  prosecuting  his  suit  or  his  defence. * * * The theory on which costs are now 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. These principles  apply, not merely in the award of costs,  but also in the award of extra  allowance or special  costs.  Courts  are authorized  to  allow such special  allowances,  not  to  inflict  a  penalty on  the  un-successful  party,  but  to  indemnify  the  successful  litigant  for  actual  expenses  necessarily  or  reasonably incurred in what are designated as important cases or difficult  and extraordinary cases.”

7.1) In Salem Advocates Bar Association, this Court held:  

“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  

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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 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  reasons  thereof. 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.”

7.2) In  Ashok Kumar Mittal,  this Court  pointed out that  present system of  

levying meagre costs in civil matters (or no costs in some matters), is wholly  

unsatisfactory  and  does  not  act  as  a  deterrent  to  vexatious  or  luxury  

litigation borne out of ego or greed, or resorted to as a ‘buying-time’ tactic  

and that a more realistic approach relating to costs may be the need of the  

hour.  This Court  had also observed that  the question  whether we should  

adopt  suitably, the western models  of  awarding actual  and more realistic  

costs  is  a  matter  that  requires  to  be  debated  and that  should  engage the  

attention of Law Commission of India. This Court also observed:  

“One view has been that the provisions of Sections 35 and 35A CPC do  not  in  any way affect  the  wide  discretion  vested  in  by High  Court  in  exercise of its inherent power to award costs in the interests of justice in  appropriate  civil  cases.  The  more  sound  view  however  is  that  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 for the time being in force; and where the issue is  governed and regulated by Sections 35 and 35A of the Code, there is no  question of exercising inherent power contrary to the specific provisions of  the  Code.  Further,  the provisions  of  Section 35A seems  to  suggest  that  even where a suit or litigation is vexatious, the outer limit of exemplary  

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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.”

7.3)   In Vinod Seth, this Court observed as under:

“48. The provision for costs is intended to achieve the following goals:

(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, 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 bonafide claim, or to any person belonging to  the weaker sections whose rights have been affected, from approaching the  courts.

At  present  these  goals  are  sought  to  be  achieved  mainly  by  sections  35,35A and 35B read with the relevant civil rules of practice relating to  taxing of costs.  

49.   Section  35 of the Code vests  the discretion  to  award costs  in  the  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 property,  and to what extent such costs are to be paid. Most of the costs taxing rules,  

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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 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  nor  indemnify  the  litigant  fully  in  regard  to  the  expenses incurred by him.

50.  The English Civil Procedure Rules provide that a court in deciding  what order, if any, to make in exercising its discretion about costs should  have regard to the following circumstances:   (a) the conduct of all the parties;  

(b) whether a party has succeeded on part of his case, even if he has not  been wholly successful; and  

(c) any payment made into court or admissible offer to settle made by a  party which is drawn to the courts attention.  

'Conduct of the parties' that should be taken note by the court includes:  

(a) conduct before, as well as during, the proceedings and in particular the  extent to which the parties followed the relevant pre-action protocol;  

(b)  whether  it  was  reasonable  for  a  party to  raise,  pursue or  contest  a  particular allegation or issue;  

(c) the manner in which a party has pursued or defended his case or a  particular allegation or issue; and  

(d) whether a claimant who has succeeded in his claim, in whole or in part,  exaggerated his claim.  

Similar provisions, with appropriate modifications may enable proper and  more realistic costs being awarded.  

51.  As Section 35 of the Code does not impose any ceiling the desired  object can be achieved by the following:  

(i) courts levying costs, following the result, in all cases (non-levy of  costs should be supported by reasons); and  

(ii)  appropriate  amendment  to  Civil  Rules  of  Practice  relating  to  taxation of costs, to make it more realistic in commercial litigation.

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52.   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 in false and vexatious litigation,  is  subject  to  a  ceiling  of  Rs.3,000/-.  This  requires  a  realistic  revision  keeping in  view, the observations  in  Salem Advocates Bar Association  (supra).  Section  35B  providing  for  costs  for  causing  delay  is  seldom  invoked. It should be regularly employed, to reduce delay.

53.  The lack of appropriate provisions relating to costs has resulted in a  steady increase in  malicious,  vexatious,  false,  frivolous  and speculative  suits, apart from rendering Section 89 of the Code ineffective. Any attempt  to  reduce  the  pendency  or  encourage  alternative  dispute  resolution  processes or to streamline the civil justice system will fail in the absence  of appropriate  provisions  relating to costs.  There is  therefore an urgent  need for the legislature and the Law Commission of India to re-visit the  provisions relating to costs and compensatory costs contained in Section  35 and 35A of the Code.”

8.   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.

9.   Chapter 11 Part C of the Delhi High Court Rules (‘Rules’ for short)  

deals  with award of costs  in civil  suits.  Chapter  XXIII of the said Rules  

deals  with  taxation  of  costs.   Rule  1  relates  to  appointment  of  Taxing  

Officer. Rule 6 provides that advocate's fee should be taxed on the basis of a  

certificate  filed  under  Rule  2  Chapter  5  but  not  exceeding  the  scale   

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prescribed in the schedule to Chapter XXIII.  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.

10.   Learned counsel for the respondents submitted that in awarding actual  

costs, the High Court was merely following the decision of a three-Judge  

Bench  of  this  court  in  Salem  Advocates  Bar  Association.  He  drew  our  

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attention to para 37 of the said decision (which is extracted in the judgment  

of  the  High Court),  in  particular,  the  observation  that  “costs  have  to  be  

actual reasonable costs including the cost of time spent by the successful  

party, the transportation and lodging, if any, and any other incidental costs  

besides the payment of the court fee, lawyer’s fee, typing and other costs in  

relation to the litigation.” The High Court has also assumed that the above  

observations of this Court in Salem Advocates Bar Association enabled it to  

award  “actual”  costs.  The  High  Court  has  opened  its  order  with  the  

following words:

“The importance of this decision lies not in any substantial question of law  having been decided – indeed, no question of law was urged before us,  only issues touching upon facts. The importance lies in the nature of the  dispute between the parties, which is a purely commercial dispute in which  litigation expenses have touched the sky. In our opinion, the only way in  which a successful litigant can be compensated financially is by awarding  actual  costs  incurred  by him in  the  litigation.  The Supreme  Court  has  recommended this course of action and we think the time has come to give  more than serious weight and respect to the views of the Supreme Court.  We have endeavoured to do just  that in this  appeal by awarding to the  respondents the actual litigation expenses incurred by them, which is  a  staggering Rs.45,00,000/.”

We are afraid that  the respondents  and the High Court  have misread the  

observations of this Court in Salem Advocates Bar Association. 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   

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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. We have noticed that section 35 does not impose a restriction  

on actual realistic costs. Such restriction is generally imposed by the rules  

made  by  the  High  Court.  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  the  awarded  only  as  per  the  

schedule.  Therefore,  as  the  Rules  presently  stand.  Whatever  may be  the  

‘actual’ expenditure incurred by a party, what could be awarded as costs is  

what is provided in the Rules.       

11. There is one more aspect which requires serious consideration. What  

is  the  meaning  of  the  words  ‘actual  realistic  costs’ assuming  that  costs  

could be awarded on such basis? Whether it can be said that  ` 45,28,000/-  

said to have been incurred (made up of ` 29,73,000/- paid to Mr. S, Senior  

Advocate, ` 14,41,000/- paid to Mr. G, Senior Advocate, ` 85,500/- paid to  

Mr.  M,  Advocate,  ` 16,750/-  paid  to  Mr.  V,  Advocate  and  ` 11,750/-  

incurred  as  miscellaneous  expenses)  was  the  ‘actual  realistic  cost’  of  an  

appeal against an interim order in a suit for injunction? The actual realistic  

cost should have a correlation to costs which are realistic and practical. It  

14

cannot obviously refer to fanciful and whimsical expenditure by parties who  

have the luxury of engaging a battery of high-charging lawyers. If the logic  

adopted by the High Court is to be accepted, then the losing party should  

pay the costs, not with reference to the subject matter of the suit, but with  

reference  to  the  fee  paying  capacity  of  the  other  side.  Let  us  take  the  

example of a suit for recovery of ` One lakh. If a rich plaintiff wants to put  

forth his case most effectively, engages a counsel who charges  ` One lakh  

per hearing and the matter involves 30 hearings, should the defendant be  

made to pay costs of ` 30 lakhs, in a suit for recovery of ` One lakh merely  

because  it  is  a  commercial  dispute?  In  a  matter  relating  to  temporary  

injunction, merely because the court adjourns the matter several times and  

one side engages a counsel by paying more than a lakh per hearing, should  

the other  side be made to bear such costs?  The costs  memo filed by the  

respondents  show that  ` 45,28,000/-   was paid to four counsel?  If a rich  

litigant engages four counsel instead of one, should the defendant pay the  

fee  of  four  counsel?  If  a  party  engages  five  senior  Advocates  and  five  

ordinary counsel because he is capable, should the losing party pay the fees  

of all these counsel? The appeal came up on several occasions, but the final  

hearing of the appeal  was only on a few days and other days were mere  

appearances.  Should  the  losing  party  pay  for  such  appearances?  If  

respondents had engaged two senior counsel who charged ` Two lakhs per  

appearance, should the other side be made liable to pay ` 1.5 crore as costs?

15

Even if actual costs have to be awarded, it should be realistic which means  

what a “normal” advocate in a “normal” case of such nature would charge  

normally in such a case. Mechanically ordering the losing party to pay costs  

of  ` 45,28,000/- in an appeal against  grant of a temporary injunction in a  

pending suit for permanent injunction was unwarranted and contrary to law.  

It cannot be sustained.  

12. Though this takes care of the actual dispute between the parties, it is  

also necessary to refer to the larger question of costs in civil suits. For this  

purpose, during the hearing, this Court requested Dr. Arun Mohan, learned  

senior counsel to assist as an Amicus Curiae in the matter. In pursuance of  

it, Dr. Arun Mohan collected and made available considerable material with  

reference to practices relating to levy of costs in several other jurisdictions.  

We find that the schemes/processes for assessment of costs in some of the  

western  countries  may  not  be  appropriate  with  reference  to  Indian  

conditions. The process of taxation of costs has developed into a detailed  

and  complex  procedure  in  developed  countries  and  instances  are  not  

wanting where the costs awarded has been more than the amount involved  

in the litigation itself. Having regard to Indian conditions, it is not possible  

or practical to spend the amount of time that is required for determination of  

‘actual costs’ as done in those countries, when we do not have time even to  

16

dispose of cases on merits. If the Courts have to set apart the time required  

for the elaborate procedure of assessment of costs, it may even lead to an  

increase in the pendency of cases. Therefore, we requested Dr. Arun Mohan  

to suggest  ways and means of simplifying costs procedures to suit Indian  

conditions  so  that  appropriate  suggestions  could  be  made  to  the  

Government.  He  has  put  forth  several  suggestions.  Law Commission  of  

India has also intervened and made several valuable suggestions.  Notices  

were issued to  the High Courts  to  ascertain the Rules and procedures  in  

force in regard to costs. For convenience, we will refer to Delhi High Court   

Rules as the present matter arises from Delhi.  

Strict enforcement of Section 35(2) of the Code

13.  The discretion vested in the courts in the matter of award of costs is  

subject to two conditions, as is evident from section 35 of the Code:  

(i) The discretion of the court is subject to such conditions and limitations as may be  prescribed and to the provisions of law for he time being in force (vide sub-section  (1)]

(ii) Where the court does not direct that costs shall follow the event, it shall state the  reasons in writing [vide sub-section (2)].

The mandate of sub-section (2) of Section 35 of the Code that “where the  

Court directs that any costs shall not follow the event, the Court shall state  

its reasons in writing” is seldom followed in practice by courts. Many courts  

either do not make any order as to costs or direct the parties to bear their  

17

respective costs without assigning or recording the reasons for giving such  

exemption from costs.  Unless the Courts develop the practice of awarding  

costs in accordance with Section 35 (that is, costs following the event) and  

also give reasons where costs are not awarded, the object of the provision  

for  costs  would  be  defeated.  Prosecution  and defence  of  cases  is  a  time  

consuming and costly process. A plaintiff/petition/ 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,  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   

recognised that levy of costs and compensatory costs is one of the effective  

ways of curbing false or vexatious litigations.

Section 35A of the Code – Exemplary costs.

14.   Section  35A  refers  to  compensatory  costs  in  respect  of  false  or  

vexatious claims or defenses. The maximum amount that could be levied as  

compensatory costs for false and vexatious claims used to be ` 1,000/-.  In  

the year 1977, this was amended and increased to ` 3,000/-.  At present, the  

maximum that can be awarded as compensatory costs in regard to false and  

vexatious claims is ` 3,000/-. Unless the compensatory costs is brought to a  

realistic level, the present provision authorizing levy of an absurdly small  

18

sum by present day standards may, instead of discouraging such litigation,  

encourage  false  and  vexatious  claims.  At  present  Courts  have  virtually  

given up awarding any compensatory costs as award of such a small sum of  

` 3,000/-  would  not  make much difference.  We are  of  the view that  the  

ceiling in regard to compensatory costs should be at least `1,00,000/-.

15.  We may also note that the description of the costs awardable under  

Section 35A “as compensatory costs” gives an indication that 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.

Court fees

16. Though  there  is  a  general  impression  that  the  court  fee  regarding  

litigation is high, in fact, it is not so.  Except in the case of few categories of  

suits  (that  is  money  suits,  specific  performance  suits  etc.,  and  appeals  

therefrom), where court fee is ad volerem, in majority of the suits/petitions  

and appeals arising therefrom, the court fee is a fixed nominal fee. The fixed  

fees that are payable, prescribed decades ago have not undergone a change  

and in many cases, the fixed fee is not worth the cost of collection thereof.  

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There is therefore a need for a periodical revision of fixed court fees, that is  

payable in regard to suits/petitions/appeals filed in civil courts, High Court,   

Tribunals  and  Supreme  Court.  For  example,  in  Supreme  Court,  the  

maximum court fee payable is only  `  250/-, whether it is a suit or special  

leave petition or appeal.  

17. A time  has  come when  at  least  in  certain  type  of  litigations,  like  

commercial  litigations,  the  costs  should  be  commensurate  with  the  time  

spent by the courts. Arbitration matters, company matters, tax matters, for  

example,  may involve  huge amounts.  There is  no reason why a nominal  

fixed fee  should  be collected  in  regard  to  such cases.  While  we are  not  

advocating an ad valorem fee with reference to value in such matters,  at  

least the fixed fee should be sufficiently high to have some kind of quid-

pro-quo to the cost involved. Be that as it may.

Award of Realistic Costs

18.  In Salem Advocates Bar Association, this Court suggested to the High  

Courts that they should examine the  Model Case Flow Management Rules  

and consider making rules in terms of it, with or without modification  so  

that a step forward is taken to provide to the litigating public a fair, speedy  

and  inexpensive  justice.  The  relevant  rules  therein  relating  to  costs  are  

extracted below:

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“Re: Trial Courts  

So far as awarding of costs at the time of judgment is concerned, awarding  of costs must be treated generally as mandatory in as much as the liberal  attitude of the Courts in directing the parties to bear their own costs had  led parties to file a number of frivolous cases in the Courts or to raise  frivolous and unnecessary issues. Costs should invariably follow the event.  Where a party succeeds ultimately on one issue or point but loses on num- ber of other issues or points which were unnecessarily raised, costs must  be appropriately apportioned. Special reasons must be assigned if costs are  not being awarded. Costs should be assessed according to rules in force. If  any of the parties has unreasonably protracted the proceedings, the Judge  should consider exercising discretion to impose exemplary costs after tak- ing into account the expense incurred for the purpose of attendance on the  adjourned dates.

Re: Appellate Courts

Awarding of costs must be treated generally as mandatory in as much as it  is the liberal attitude if the Courts in not awarding costs that has led to  frivolous points being raised in appeals or frivolous appeals being filed in  the courts. Costs should invariably follow the event and reasons must be  assigned by the appellate Court for not awarding costs. If any of the parties  have unreasonably protracted the proceedings,  the Judge shall  have the  discretion to impose exemplary costs after taking into account the costs  that may have been imposed at the time of adjournments.”

19. The costs in regard to a litigation include (a) the court fee and process  

fee; (b) the advocate’s fee; (c) expenses of witnesses; and (d) other expenses  

allowable under the Rules. We have already referred to the need to revise  

and  streamline  the  court  fee.  Equally  urgent  is  the  need  to  revise  the  

advocate’s fee provided in the Schedule to the Rules,  most  of which are  

outdated and have no correlation with the prevailing rates of fees. In regard  

to money suits, specific performance suits and other suits where ad valorem  

court fee is payable, the Advocate’s fee is also usually ad valorem. We are  

more concerned with the other matters, which constitute the majority of the  

21

litigation, where fixed Advocates’ fees are prescribed. In Delhi in regard to  

any  proceedings  (other  than  suits  where  the  ad  valorem  court  fee  is  

payable), the maximum fee that could be awarded is stated to be ` 2000 and  

for appeals of the scale if that is payable to original suits.  

20. The  Supreme  Court  Rules  (Second  Schedule)  prescribes  a  fee  of  

`2400/- for leading counsel and `1200/- for Associate Advocate in regard to  

defended appeals and suits or writ petitions. For special leave petitions, it is  

`800/- for leading counsel and `400/- for Advocate-on-Record. It is of some  

interest  to  note  that  the fee paid to  amicus  curiae in  criminal  appeals  in  

Supreme Court and to the Legal Aid counsel appointed by Supreme Court  

Legal  Services  Committee  is  much  higher  than  the  above  scale  of  fees.  

There is need to provide for awarding realistic advocates’ fee by amending  

the relevant rules periodically. This Court, of course, in several cases has  

directed  payment  of  realistic  costs.  But  this  Court  could  do  so,  either  

because of the discretion vested under the Supreme Court Rules, 1966 or  

having regard to Article 142 of the Constitution under which this Court has  

the  power  to  make  such  orders  as  are  necessary  to  do  complete  justice  

between the parties.  

21. A serious fallout of not levying actual realistic costs should be noted.  

A litigant, who starts the litigation, after sometime, being unable to bear the  

22

delay  and  mounting  costs,  gives  up  and  surrenders  to  the  other  side  or  

agrees to settlement which is something akin to creditor who is not able to  

recover the debt, writing off the debt.  This happens when the costs keep  

mounting and he realizes that even if he succeeds he will not get the actual  

costs. If this happens frequently, the citizens will lose confidence in the civil  

justice system. When a civil litigant is denied effective relief in Courts, he  

tries  to  take  his  grievances  to  ‘extra  judicial’  enforcers  (that  is  goons,  

musclemen,  underworld)  for  enforcing  his  claims/right  thereby  

criminalising  the  civil  society.   This  has  serious  repercussions  on  the  

institution of democracy.   

22. We  therefore,  suggest  that  the  Rules  be  amended  to  provide  for  

‘actual realistic costs’. The object is to streamline the award of costs and  

simplify  the  process  of  assessment,  while  making  the  cost  ‘actual  and  

realistic’.  While  ascertainment  of  actuals  in  necessary  in  regard  to  

expenditure incurred (as for example travel expenses of witnesses, cost of  

obtaining certified copies etc.) in so far as advocates’ fee is concerned, the  

emphasis  should  be on ‘realistic’  rather  than ‘actual’.  The courts  are not  

concerned with the number of lawyers engaged or the high rate of day fee  

paid to them. For the present, the Advocate fee should be a realistic normal  

single fee.  

23

Costs in Arbitration matters  

23.  We have referred to the effect of absence of provisions for award of  

actual costs, on civil litigation. At the other end of the spectrum is an area  

where award of actual but unrealistic costs and delay in disposal is affecting  

the credibility of an alternative dispute resolution process. We are referring  

to  arbitration  proceedings  where  usually  huge  costs  are  awarded  (with  

reference to actual unregulated fees of Arbitrators and Advocates).  

24. Clause (a) of section 31(8) of Arbitration and Conciliation At, 1996  

(‘Act’ for short) deals with costs. It provides that unless otherwise agreed by  

the parties, the costs of an arbitration shall be fixed by the arbitral tribunal.  

The explanation to sub-section (8) of section 31 makes it  clear that ‘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. Clause (b) of section 31(8) of the Act provides that unless  

otherwise agreed by parties, the arbitral tribunal shall specify (i) the party  

entitled to costs, (ii) the party who shall pay the costs, (iii) the amount of  

costs or method of determining the amount, and (iv) the manner in which  

the costs shall be paid. This shows that what is awardable is not ‘actual’   

24

expenditure but ‘reasonable’ costs.  

25. Arbitrators  can  be  appointed  by  the  parties  directly  without  the  

intervention  of  the court,  or  by an Institution  specified  in  the arbitration  

agreement.  Where  there  is  no  consensus  in  regard  to  appointment  of  

arbitrator/s, or if the specified institution fails to perform its functions, the  

party who seeks arbitration can file an application under section 11 of the  

Act for appointment of arbitrators. Section 11 speaks of Chief Justice or his  

Designate  ‘appointing’  an arbitrator.  The word ‘appoint’  means  not  only  

nominating or designating the person who will act as an arbitrator, but is  

wide enough to include the stipulating the terms on which he is appointed.  

For example when we refer to an employer issuing a letter of appointment, it  

not only refers to the actual act of appointment, but includes the stipulation  

of the terms subject to which such appointment is made. The word ‘appoint’  

in section 11 of the Act, therefore refers not only to the actual designation or  

nomination  as  an  arbitrator,  but  includes  specifying  the  terms  and  

conditions, which the Chief Justice or Designate may lay down on the facts  

and circumstances of the case. Whenever the Chief Justice or his Designate  

appoint arbitrator/s, it will be open to him to stipulate the fees payable to the  

arbitrator/s, after hearing the parties and if necessary after ascertaining the  

fee  structure  from  the  prospective  Arbitrator/s.  This  will  avoid  the  

embarrassment of parties having to negotiate with the Arbitrators, the fee  

25

payable to them, after their appointment.

26. This Court in Union of India v. Singh Builders Syndicate – 2009 (4)  

SCC 523, dealt with the complaints about the arbitration cost in India:    

     “20. Another aspect referred to by the appellant, however requires serious  consideration. When the arbitration is by a Tribunal consisting of serving  officers, the cost of arbitration is very low. On the other hand, the cost of  arbitration can be high if the Arbitral Tribunal consists of retired Judge/s.

21. When a retired Judge is appointed as Arbitrator in place of serving  officers, the government is forced to bear the high cost of Arbitration by  way of private arbitrator's fee even though it  had not consented for the  appointment  of  such  non-technical  non-serving  persons  as  Arbitrator/s.  There is no doubt a prevalent opinion that the cost of arbitration becomes  very high in many cases where retired Judge/s are Arbitrators. The large  number of sittings and charging of very high fees per sitting, with several  add-ons,  without  any ceiling,  have many a time resulted in the cost  of  arbitration  approaching  or  even  exceeding  the  amount  involved  in  the  dispute or the amount of the award.  

22. When an arbitrator is appointed by a court without indicating fees,   either both parties or at least one party is at a disadvantage. Firstly, the   parties  feel  constrained  to  agree  to  whatever  fees  is  suggested  by  the   Arbitrator, even if it is high or beyond their capacity. Secondly, if a high   fee is claimed by the Arbitrator and one party agrees to pay such fee, the   other party, who is unable to afford such fee or reluctant to pay such high   fee, is put to an embarrassing position.  He will  not be in a position to   express  his  reservation  or  objection  to  the  high  fee,  owing  to  an   apprehension that refusal by him to agree for the fee suggested by the   arbitrator, may prejudice his case or create a bias in favour of the other   party who readily agreed to pay the high fee.  

23.  It is  necessary to  find an urgent  solution for this  problem to save  arbitration from the arbitration cost. Institutional arbitration has provided a  solution as the Arbitrators' fees is not fixed by the Arbitrators themselves  on case to case basis, but is governed by a uniform rate prescribed by the  institution under whose aegis the Arbitration is held.  Another solution is   for the court to fix the fees at the time of appointing the arbitrator, with   the  consent  of  parties,  if  necessary  in  consultation  with  the  arbitrator   concerned. Third is for the retired Judges offering to serve as Arbitrators,  to indicate their fee structure to the Registry of the respective High Court  so that the parties will have the choice of selecting an Arbitrator whose  fees are in their `range' having regard to the stakes involved.  

26

24. What is found to be objectionable is parties being forced to go to an  arbitrator appointed by the court and then being forced to agree for a fee  fixed by such Arbitrator. It is unfortunate that delays, high cost, frequent  and sometimes unwarranted judicial  interruptions  at  different stages are  seriously  hampering  the  growth  of  arbitration  as  an  effective  dispute  resolution process. Delay and high cost are two areas where the Arbitrators  by self regulation can bring about marked improvement.”

(emphasis supplied)

27. There is  a  general  feeling  among consumers  of  arbitration  (parties  

settling  disputes  by  arbitration)  that  ad-hoc  arbitrations  in  India  -  either  

international  or  domestic,  are  time  consuming  and  disproportionately  

expensive. Frequent complaints are made about two sessions in a day being  

treated as two hearings for purpose of charging fee; or about a sessions for  

two hours being treated as full sessions for purposes of fee; or about non-

productive sittings being treated as fully chargeable hearings. It is pointed  

out  that  if  there  is  an  arbitral  tribunal  with  three  arbitrators  and  if  the  

arbitrators are from different cities and the arbitrations are to be held and the  

Arbitrators  are  accommodated  in  five  star  hotels,  the  cost  per  hearing,  

(Arbitrator’s fee, lawyer’s fee, cost of travel, cost of accommodation etc.)  

may easily run into Rupees One Million to One and half Million per sitting.   

Where the stakes are very high, that kind of expenditure is not commented  

upon. But if the number of hearings become too many, the cost factor and  

efficiency/effectiveness  factor  is  commented.  That  is  why  this  Court  in  

Singh Builders Syndicate observed that the arbitration will have to be saved  

from the arbitration cost.  

27

28. Though what is stated above about arbitrations in India, may appear  

rather harsh, or as an universalisation of stray aberrations, we have ventured  

to refer to these aspects in the interest of ensuring that arbitration survives  

in India as an effective alternative forum for disputes resolution in India.  

Examples  are  not  wanting  where  arbitrations  are  being  shifted  to  

neighbouring  Singapore,  Kuala  Lumpur  etc.,  on  the  ground  that  more  

professionalized  or  institutionalized  arbitrations,  which  get  concluded  

expeditiously at a lesser cost, are available there. The remedy for healthy  

development of arbitration in India is to disclose the fees structure  before  

the appointment of Arbitrators so that any party who is unwilling to bear  

such  expenses  can  express  his  unwillingness.  Another  remedy  is  

Institutional Arbitration where the Arbitrator’s fee is pre-fixed. The third is  

for each High Court to have a scale of Arbitrator’s fee suitably calibrated  

with reference to the amount involved in the dispute. This will also avoid  

different designates prescribing different fee structures. By these methods,  

there  may be a reasonable  check on the fees  and the cost  of  arbitration,  

thereby making arbitration, both national and international, attractive to the  

litigant public. Reasonableness and certainty about total costs are the key to  

the development of arbitration. Be that as it may.  

Conclusion

28

29. In view of the above, the order dated 20.1.2010 of the High Court, to  

the extent it levies costs of ` 45,28,000/- on the appellant is set aside and in  

its place it is directed that the appellant shall  pay the costs of the appeal   

before the High Court as per Rules plus ` 3000/- as exemplary costs to the  

respondents.  

30. We suggest  appropriate  changes  in  the provisions  relating to  costs  

contained as per paras 14 to 29 above to the Law Commission of India, the  

Parliament and the respective High Courts for making appropriate changes.

31. As the respondents have succeeded before the High Court and award  

of such costs was not at the instance of the respondents, we do not award  

any costs in this appeal.  

32. We place on record our appreciation for the assistance rendered by  

Dr. Arun Mohan, Amicus Curiae and Mr. A. Mariarputham, learned senior  

counsel appearing for Law Commission of India.

____________________J.         ( R.V. Raveendran)

____________________J. (A. K. Patnaik)

New Delhi;             

29

October 12, 2011.

30