Compensatory Costs under Section 35A of the Code of Civil Procedure, 1908

Compensatory Costs under Section 35A of the Code of Civil Procedure, 1908: A Critical Analysis of its Scope, Limitations, and Judicial Discourse in India

Introduction

The Code of Civil Procedure, 1908 (CPC) provides various mechanisms to ensure the orderly conduct of civil litigation and to prevent the abuse of the judicial process. Among these, Section 35A specifically addresses the issue of false or vexatious claims or defences by providing for the award of "compensatory costs." The primary objective of this provision is to deter litigants from initiating or pursuing claims and defences that are known to be baseless, thereby saving judicial time and resources, and compensating the aggrieved party for the harassment and expense endured. This article undertakes a critical analysis of Section 35A, examining its legislative intent, key legal principles, the contentious monetary ceiling, its distinction from other cost-related provisions in the CPC, and its application and interpretation by the Indian judiciary. The analysis draws heavily upon landmark judgments and statutory provisions to evaluate the efficacy of Section 35A as a tool to curb frivolous litigation in India.

Background and Evolution of Section 35A of the CPC

Section 35A was incorporated into the CPC to provide a specific remedy against parties who institute or defend legal proceedings on grounds that are demonstrably false or vexatious. The legislature recognized that general costs under Section 35 might not always be sufficient to compensate a party who has been dragged into litigation based on frivolous grounds. The provision aims to provide a measure of solace and recompense to the innocent litigant.

Initially, the maximum amount that could be awarded as compensatory costs under Section 35A was Rs. 1,000. This was subsequently increased to Rs. 3,000 by an amendment in 1977.[1] Despite this increase, the adequacy of this amount has been a subject of considerable judicial debate, particularly in light of escalating litigation expenses and the depreciating value of money over time. The underlying problem that Section 35A seeks to address – the proliferation of frivolous and vexatious litigation – remains a significant challenge for the Indian judicial system, leading to docket explosion and undue delays in the administration of justice.

Analysis of Key Legal Principles Governing Section 35A

Nature and Object of Compensatory Costs

The Supreme Court of India has clarified that the primary object of levying costs under Sections 35 and 35A of the CPC is to recompense a litigant for the expenses incurred in the litigation to vindicate or defend their rights.[2] Consequently, such costs are typically payable by the losing litigant to their successful opponent.[2] The Supreme Court in Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust & Ors. noted that the description "compensatory costs" under Section 35A suggests a restitutive rather than punitive nature.[1] However, the Court also opined that costs awarded for false or vexatious claims should ideally be punitive.[1] This contrasts with some High Court views, such as in Velluri Krishna Rao v. M/S. The Vysya Bank Ltd., where it was held that compensatory costs under Section 35A are intended as compensation for the successful party and not as a punishment for the unsuccessful party or a deterrent against future litigation.[3] Nevertheless, the deterrent effect is often seen as an implicit goal, as articulated in cases like Rachhpal Singh Through His Lrs. v. Mohinder Singh, which emphasized that costs should act as a deterrent to vexatious, frivolous, and speculative litigations or defences.[4]

Conditions for Awarding Compensatory Costs

The award of compensatory costs under Section 35A is not automatic. Certain conditions must be met:

  • The claim or defence, or any part thereof, must be found to be false or vexatious.[5]
  • Such falsity or vexatiousness must be to the knowledge of the party who raised the claim or defence.[3]
  • An objection must have been taken by the other party that such claim or defence was false or vexatious to the knowledge of the party raising it.
  • The court must be satisfied, for reasons to be recorded, that the objection was well-founded.
  • If, after hearing the party who raised the objection and the party against whom it is made, the court is so satisfied, it may make an order for the payment to the objector, by the party who made such claim or defence, of costs by way of compensation.
  • The interests of justice must require the award of such compensatory costs.[3]

It is crucial that the court records its reasons for awarding compensatory costs, ensuring that the decision is based on a proper application of mind to the facts and circumstances of the case. Merely because a suit is dismissed or a defence is rejected does not automatically qualify the claim or defence as false or vexatious for the purpose of Section 35A.[3]

The Monetary Cap: A Point of Contention and Reform

Section 35A(2) imposes a statutory limit on the amount of compensatory costs that can be awarded. This limit is currently Rs. 3,000 or the amount of the court's pecuniary jurisdiction, whichever is less.[1], [6], [7] This monetary ceiling has been widely criticized by the judiciary as being "absurdly small" by present-day standards and grossly inadequate to serve as a deterrent or as realistic compensation.[1] The Supreme Court in Sanjeev Kumar Jain observed that such a small sum might, instead of discouraging, actually encourage false and vexatious claims, and that courts have virtually given up awarding compensatory costs because the amount is insignificant.[1] The Court suggested that the ceiling should be at least Rs. 1,00,000.[1] Similar sentiments about the need for realistic costs have been echoed in other judgments.[4], [8]

A significant development in this regard is the amendment brought about by the Commercial Courts Act, 2015. For disputes falling under the purview of Commercial Courts, Section 16 of the Act amends the CPC, and one such amendment is the omission of sub-section (2) of Section 35A for such commercial disputes.[9] This effectively removes the monetary cap on compensatory costs in commercial litigation, allowing courts to award actual and realistic costs.

Distinction from General Costs (Section 35) and Costs for Delay (Section 35B)

Section 35A must be distinguished from other provisions in the CPC dealing with costs:

  • Section 35 (General Costs): This section grants the court discretion to award costs incidental to all suits. The general rule is that costs follow the event, meaning the successful party is entitled to costs from the losing party.[1], [10] Unlike Section 35A, Section 35 is not capped and applies to appeals as well.[6] The primary object is also recompense.[2]
  • Section 35B (Costs for Causing Delay): This provision empowers the court to impose costs on a party that fails to take a required step or obtains an adjournment, thereby causing delay. Such costs are intended to reimburse the other party for expenses incurred in attending court on that date, and payment can be made a condition precedent for further prosecution of the suit or defence.[11], [12]
  • Section 95 (Compensation for obtaining arrest, attachment or injunction on insufficient grounds): This section allows the court to award compensation, up to Rs. 50,000, against a plaintiff if it appears that an arrest, attachment, or temporary injunction was applied for on insufficient grounds, or if the plaintiff's suit fails and there was no reasonable or probable ground for instituting it.[13], [14]
  • Order XXA (Miscellaneous Costs): This order enumerates certain items that can be considered by the court while imposing costs, such as expenses for notices, typing, inspection of records, and witness expenses. Rule 2 of Order XXA mandates that such costs shall be in accordance with rules made by the High Court.[6], [7]

Application in Appeals and Revisions

The general consensus among High Courts is that Section 35A, by its terms, does not apply to appeal or revision proceedings.[6], [15] The power to award costs in appeals and revisions is typically governed by Section 35 of the CPC, which is not fettered by the monetary limitation contained in Section 35A.[6]

Judicial Interpretation and Application of Section 35A

Early Interpretations and the Restrictive Cap

Historically, courts applied Section 35A strictly within its textual confines, focusing on its compensatory nature and adhering to the monetary cap. The low ceiling often rendered the provision ineffective as a true deterrent or adequate compensation, leading to its infrequent use or use only for nominal sums.

Judicial Calls for Reform and Realistic Costs

The judiciary has been vocal about the inadequacy of Section 35A. The Supreme Court in Sanjeev Kumar Jain made a compelling case for legislative reform, suggesting a significant increase in the monetary cap and a re-evaluation of the nature of these costs to include a punitive element.[1] The spirit of awarding realistic costs to curb frivolous litigation, as emphasized in Ramrameshwari Devi And Others v. Nirmala Devi And Others,[16] aligns with the intended purpose of Section 35A, even if the section itself was found wanting. The Delhi High Court in Padmawati & Ors. v. Harijan Sewak Sangh observed that costs should reflect the actual deprivation suffered and deter wrongdoers.[8] Similarly, the Punjab & Haryana High Court in Rachhpal Singh noted that nominal costs encourage frivolous litigation.[4] Even while acknowledging these calls for reform, courts like the Andhra Pradesh High Court in Pothuri Tulasi Das v. Pothuri Hari Prasad have noted that, outside the Commercial Courts Act, the Rs. 3,000 cap remains binding.[17]

The Impact of the Commercial Courts Act, 2015

The omission of Section 35A(2) for commercial disputes by the Commercial Courts Act, 2015, marks a significant shift. As observed by the Bombay High Court in Dashrath B. Rathod v. Fox Star Studios India Pvt. Ltd., in commercial actions, costs are intended to follow the event, and the losing party is expected to pay actual and compensatory costs without the earlier cap.[9] This legislative step reflects a recognition of the need for more stringent cost regimes, at least in commercial matters, to deter unmeritorious litigation.

Distinguishing Compensatory Costs from Exemplary/Punitive Costs

The limited scope of Section 35A has sometimes led to judicial attempts to impose higher "exemplary" or "punitive" costs under other powers, creating a complex interplay. In Ashok Kumar Mittal v. Ram Kumar Gupta And Another, the High Court had imposed exemplary costs of Rs. 1 lakh each on both parties for lying on oath, directing payment to the Delhi High Court Legal Services Committee. The Supreme Court, while noting the Rs. 3,000 cap under Section 35A and its primary object of recompensing a litigant, questioned whether costs could be awarded to the State or a third party as a penalty in litigation between private parties, cautioning courts to "act with care while opening new frontiers."[2] Eventually, the costs were directed to be paid to the State. A similar issue arose in Rakesh Kumar Gupta v. MCD And Anr., where substantial exemplary costs imposed by a lower court were challenged on the ground that if they were under Section 35A, they were capped at Rs. 3,000.[18] These cases highlight the tension between the restrictive nature of Section 35A and the judicial desire to penalize egregious conduct more severely. The debate on whether Section 35A costs should be purely restitutive or also punitive continues, with Sanjeev Kumar Jain advocating for a punitive element[1] and cases like Velluri Krishna Rao emphasizing their compensatory nature.[3]

Prerequisites for Invoking Section 35A

Courts have emphasized that a clear finding of a false or vexatious claim or defence, made to the knowledge of the party, is essential for invoking Section 35A.[3] The mere dismissal of a suit or rejection of a defence is insufficient. There must be a specific objection raised by the aggrieved party and a reasoned satisfaction by the court that the claim or defence was indeed false or vexatious and that the award of compensatory costs is warranted in the interests of justice.

Challenges and Future Directions

Despite its laudable objective, Section 35A of the CPC, in its current form (outside the ambit of the Commercial Courts Act), faces significant challenges. The primary impediment is the grossly inadequate monetary ceiling of Rs. 3,000, which fails to act as a realistic deterrent or provide meaningful compensation. This has led to a situation where, as noted by the Supreme Court, courts have virtually stopped awarding these costs.[1]

There is a compelling need for legislative amendment to substantially enhance this ceiling for all civil matters, not just commercial disputes. Furthermore, consideration should be given to clarifying whether such costs can also have a punitive dimension, as suggested by the Supreme Court, to more effectively discourage vexatious litigation. However, any reform must carefully balance the need for deterrence against the fundamental right of access to justice, ensuring that legitimate litigants, especially those from weaker sections, are not discouraged from approaching the courts.[1]

Conclusion

Section 35A of the Code of Civil Procedure, 1908, represents an important, albeit underutilized and often criticized, tool in the Indian legal system's arsenal against false and vexatious litigation. While its intent to compensate aggrieved parties and deter frivolous claims is commendable, its efficacy has been severely hampered by the anachronistically low monetary cap. Judicial pronouncements have consistently highlighted this inadequacy and called for reforms. The amendment introduced by the Commercial Courts Act, 2015, by removing this cap for commercial disputes, is a positive step and indicates legislative acknowledgment of the problem. However, for Section 35A to become a truly effective instrument across the spectrum of civil litigation in India, broader legislative reforms are imperative. Enhancing the monetary ceiling to realistic levels and potentially clarifying its punitive scope, while safeguarding access to justice, would empower the courts to more effectively curb the menace of frivolous litigation, thereby preserving judicial resources and upholding the sanctity of the legal process.

References

  1. Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust & Ors. S (Supreme Court Of India, 2011).
  2. Ashok Kumar Mittal v. Ram Kumar Gupta And Another (2009 SCC 2 656, Supreme Court Of India, 2009).
  3. Velluri Krishna Rao v. M/S. The Vysya Bank Ltd. . (Andhra Pradesh High Court, 2002).
  4. Rachhpal Singh Through His Lrs. v. Mohinder Singh (Punjab & Haryana High Court, 2010).
  5. Secretary, West Bengal Council Of Higher Secondary Education v. Soumyadeep Banerjee & Ors. (Calcutta High Court, 2010).
  6. Harish Relan v. Kaushal Kumari Relan & Ors. S (Delhi High Court, 2015).
  7. Maharashtra State Electricity Board, Khamgaon And Another v. M/S Sureka Industries, Khamgaon . (Bombay High Court, 2006).
  8. Padmawati & Ors. v. Harijan Sewak Sangh . (2008 SCC ONLINE DEL 1202, Delhi High Court, 2008).
  9. Dashrath B. Rathod v. Fox Star Studios India Pvt. Ltd. (Bombay High Court, 2017).
  10. Salem Advocate Bar Association, T.N v. Union Of India . (2005 SCC 6 344, Supreme Court Of India, 2005).
  11. Anand Parkash v. Bharat Bhushan Rai And Another (Punjab & Haryana High Court, 1981).
  12. Gulab Singh v. Dhanraj (Rajasthan High Court, 1982).
  13. Salem Advocate Bar Association, T.N v. Union Of India . (2005 SCC 6 344, Supreme Court Of India, 2005) [Primary Reference].
  14. Vinod Seth v. Devinder Bajaj And Another (2010 SCC 8 1, Supreme Court Of India, 2010).
  15. Manak Lal v. Mahendra Singh (1985 SCC ONLINE RAJ 26, Rajasthan High Court, 1985).
  16. Ramrameshwari Devi And Others v. Nirmala Devi And Others (2011 SCC 8 249, Supreme Court Of India, 2011).
  17. Pothuri Tulasi Das v. Pothuri Hari Prasad (Andhra Pradesh High Court, 2017).
  18. Rakesh Kumar Gupta… v. Mcd And Anr.… (Delhi High Court, 2009).