Contributed by: Khaitan & Co
A bench of the Supreme Court, comprising of Hon’ble Sanjay Kishan Kaul and Hon’ble Mr. Justice Hrishikesh Roy, vide judgement delivered on 17 September 2021 in Uflex Ltd. v Govt. of Tamil Nadu & Others 2021 SCC OnLine SC 738 discussed the concept of awarding costs in civil and commercial litigations and discouraged the uncalled-for and needless litigations.
In October 2020 the Government of Tamil Nadu issued a Notice Inviting Tender (herein referred to as “NIT”) for the supply of polyester-based hologram excise labels to be pasted across the caps of liquor bottles sold by the State Government in an attempt to curb the sale of spurious liquor.
The NIT was issued with various technical specifications and eligibility criteria. Thereafter, two prospective tendering parties namely M/s Alpha Lasertek India LLP and M/s Kumbhat Holographics challenged the process vide Writ Petitions. The Writ Petitions were dismissed by the Single Judge. Subsequently, Writ appeals were filed by Kumbhat and Alpha, wherein the Division Bench of the High Court allowed the appeal and gave the Tamil Nadu government four months to float a fresh tender while permitting the existing successful tenderers to continue to provide the supplies under the same terms and conditions. The fresh tender was directed to be floated with technical specifications that are generic or in consonance with the Tender Act. Uflex and Montage were the successful bidders and they challenged Madras High Court in Supreme Court.
The Supreme Court set aside the High Court judgment and directed the respondent companies to pay a sum of Rs 23 lakh to the appellant and Rs 7.5 lakhs to the state government for the litigation expenses they had to incur. The Supreme Court opined that in commercial matters there is an obvious aspect of commercial competitiveness, hence for every succeeding party who gets a tender there may be a couple or more parties who are not awarded the tender as there can be only one. The Court further stated that the objective is not to make the Court an appellate authority for scrutinizing as to whom the tender should be awarded and moreover the economics must play its role for which the tendering authority knows best as to what is suited in terms of technology and price for them.
The Apex Court examined that merely because a company is more efficient, obtains better technology, makes more competitive bids and, thus, succeeds more cannot be a factor to deprive that company of commercial success on that pretext. The Court referred to the observations of the Supreme Court in Ashok Kumar Mittal v. Ram Kumar Gupta (2009) 2 SCC 656 and Vinod Seth v Devinder Bajaj (2010) 8 SCC 1. The said judicial pronouncements took note of the levying costs in civil matters which did not act as a deterrent to vexatious or luxury litigation borne out of ego or greed or resorted to as a ‘buying time’ tactic. These two judicial pronouncements were even followed in Sanjeev Kumar Jain v Raghubir Saran Charitable Trust (2012) 1 SCC 455. It is in that context that the Court observed that appropriate changes in the provisions relating to costs contained in the report of the Law Commission of India should be followed up by the Parliament and the respective High Courts. The Court distinguished the common thread running through all these three cases is the reiteration of salutary principles that are:
costs should ordinarily follow the event;
realistic costs ought to be awarded keeping in view the ever-increasing litigation expenses; and
the cost should serve the purpose of curbing frivolous and vexatious litigation.
The Court highlighted that in carrying on commercial litigation, parties must weigh the commercial interests, which would include the consequences of the matter not receiving favourable consideration by the courts. Mindless appeals should not be the rule. It was noted that in the given facts of the case the respondents succeeded before the Division Bench though they failed before the learned single Judge hence it could be said that all the parties are financially strong and took the commercial decision to carry this legal battle right up to the Supreme Court and they must, thus, face the consequences and costs of success or failure in the present proceedings.
Lastly the Court held that whereas the present proceedings arise from a writ proceeding under Article 226 of the Constitution, it is really a commercial dispute and thus the failing party cannot hide behind the veneer of the present dispute being in the nature of a writ proceeding.
Application by Indian and Foreign Courts
The Indian judiciary at various instances have undoubtedly recognised and frowned upon frivolous litigation in numerous judgments. A case where Supreme Court, in an extremely well-articulated judgment dwelled on the need for curbing unscrupulous litigation is Ramrameshwari Devi & Ors v Nirmala Devi & Ors. CA Nos. 4912-4913/2011 (Arising out of SLP(C) Nos. 3157-3158/2011) where it was observed that the present Indian legal system encourages uncalled for litigation because the parties raise unwarranted claims and defences and even adopt obstructionist and delaying tactics because the courts do not impose actual or realistic costs. Further, in Gayatri De v Mousumi Cooperative Housing Society Ltd. & Ors. (2004) 5 SCC 90, the Supreme Court allowed the appeal and even recognised that the case was eminently a fit case to award exemplary cost, but they took a lenient view of the matter and granted no cost.
In the recent case of Juhi Chawla & Ors v Science and Engineering Research Board & Ors., CS (OS) 261/2021 wherein the famed actor Ms. Juhi Chawla filed a suit against the setting up of 5G wireless networks in the country. The suit was dismissed on similar grounds, and the Delhi High noted that the suit included unnecessary, scandalous, frivolous and vexatious averments which are liable to be struck down and even held that the plaintiffs abused and misused the process of law which resulted in waste of judicial time. Further, a fine of Rs. 20 lakhs was imposed on the plaintiffs to be paid to the Delhi State Legal Services Authority (DSLSA) to utilize this cost for the cause of the victims of road accidents.
The said issue was further well recognised by the Supreme Court in Subrata Roy Sahara v Union of India (2014) 8 SCC 470. The Apex court opined that our judicial system is grossly afflicted with frivolous litigation and hence, ways and means should be evolved to deter litigants from their compulsive obsession towards senseless and ill claims. The court recognised that behind every irresponsible and senseless claim there is an innocent sufferer on the other side who could be suffering long drawn anxiety and nervousness whilst the litigation is pending, without any fault on their part. The Court further recognised that the status is such that administrative and executive decision making are being left to courts. The Court has also gone to suggest a separate ‘Code for Compulsory Code’, that deters litigants from adopting any delaying tactics in proceedings without litigation. However, such suggestions by the apex court are pending statutory recognition. The concept of imposing costs to discourage frivolous litigation cannot be regularised over-night. For example, in Sanjeev Kumar Jain v Raghubir Saran Charitable Trust 2011 (12) SC 435 the Supreme Court discussed the aspect of ‘actual realistic costs’, wherein it was opined that the object is to streamline the award of costs and simplify the process of assessment, while making the cost `actual and realistic'. Further, it was noted that while ascertaining of actuals in regard to expenditure incurred 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.
The Apex Court has even paid attention to the notion of ‘buying time’ tactic based litigation and noted in Ashok Kumar Mittal v Ram Kumar Gupta (2009) 2 SCC 656 that the present system of levying meagre costs in civil matters or no costs in some matters, is absolutely 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.
The courts have now and again even discussed the idea of whether the Indian judiciary and legislature system should adopt suitably, the western models of awarding cost. It is a matter that requires to be debated and should engage the urgent attention of the Law Commission of India.
Besides, the Court in the aforesaid case of Uflex Ltd. v Govt. of Tamil Nadu & Others, even referred to the Manitoba Law Commission Report of Canada that analysed the ‘Costs Awards in Civil Litigation’ and referred to six broad goals as under:
indemnification – successful litigants ought to at least be partially indemnified against their legal costs;
deterrence – potential litigants should carefully assess the merits of the claim and should refrain from taking any unnecessary legal actions;
rules should be made decipherable and simple to understand;
early settlement of disputes should be encouraged
the costs regime should facilitate access to justice; and
there should be flexibility in rules to ensure that justice can be done.
It is pertinent to note that in the United States the Federal Court of Appeal in Nova Chemicals Corporation v Dow Chemical Company 2017 FCA 25, indicated that a successful party may be able to recover a lump sum of 25-50% of its legal fees. The Federal Court held that determining the amount is fact specific, and there could not be a "default" rate specified. The Federal Court has over time used a variety of approaches in determining the cost. It is perceived that the parties who raise excessive issues have a better chance at success, but ought to face costs consequences for the time and expenses associated with needless positions. The early resolution of issues and focusing of the case on the key issues in dispute, not only trends towards lower fees overall, but has been encouraged by the Federal Court in assessing the overall reasonableness.
The English and Wales Court of Appeals shares a similar opinion. Although an additional point is taken into consideration wherein it is also examined if the orders for costs would be within or beyond the means of the defendant. The general rule is that a defendant should not be ordered to pay costs in such a sum, which through lack of means, could not be paid within a reasonable period of one year. However, the case of R v Olliver and Olliver, 11 Cr.App.R.(S)10, CA where fines, costs and compensation would take two and half years to pay by instalments it was held that there was nothing wrong in principle with the period being much longer than a year, provided that it was not an undue burden and so too severe a punishment.
Strikingly, Hong Kong on the other hand holds a firm position with regard to imposing costs on appeals of arbitral awards in order to support the finality of the arbitration, wherein indemnity costs are to be paid by the unsuccessful applicant who attempted to set aside the arbitral award, unless special circumstances can be shown.
In view of the above, the Singapore High Court favoured the reasoning in BTN and another v BTP and another  SGHC 38 where it was held that it was well established in Singapore that the imposition of costs on an indemnity basis was dependent on there being exceptional circumstances to warrant a departure from the usual course of awarding costs on a standard basis. The Court found that while the category of exceptional circumstances attracting indemnity costs is not closed, it would do violence to the notion of such circumstances having to be "exceptional" if every instance of an award being challenged unsuccessfully is said to be presumptively an "exceptional" circumstance warranting indemnity costs.
The Supreme Court has at various instances by way of judgments observed the hesitancy in the judicial system to impose costs and highlighted that in the tussle for enforcement of rights against a State, different principles apply but in commercial matters costs must follow the cause. The courts have discussed the imposition of costs in details with respect to the facts of each case. In some cases, they have elaborated the factors necessary to be considered such as the litigation fees, court fees and duration, and in some levied the costs and made the said costs payable to the aggrieved parties and in some made the costs payable to some non-charitable organisation. The Courts have even set precedents by taking into consideration the ever-increasing litigation expenses and redeeming the blameless parties but the same being a wide-ranging and far-reaching issue cannot be resolved only by way of such precedents. The need of the hour is a legislative reform that will discourage unnecessary litigation, saving the time and efforts of the courts and ensuring honest litigants receive their due.
Contributed by Khaitan & Co
The above article is authored by Mr. Ajay Bhargava (Partner), Mr. Shivank Diddi (Senior Associate) and Ms. Natasha Syal (Associate).