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[Costs Following Cause Principle] Supreme Court Asks Loosing Firms In Dispute To Pay Succeeding Company

The top court said that in a tussle for enforcement of rights against a State different principle apply but in commercial matters costs must follow the cause. Under the ‘costs following cause’ principle, a losing party in a civil dispute has to pay the succeeding party the legal cost incurred on the litigation.

The Supreme Court on Friday adopted a principle of ‘costs following cause’ which is being followed in many countries but with hesitancy in India and imposed costs on two companies for challenging the conditions of a tender process and asked them to pay the legal fees to succeeding firm and compensation to the state government.

The top court said that in a tussle for enforcement of rights against a State different principle apply but in commercial matters costs must follow the cause. Under the ‘costs following cause’ principle, a losing party in a civil dispute has to pay the succeeding party the legal cost incurred on the litigation. A bench of Justices Sanjay Kishan Kaul and Hrishikesh Roy awarded over Rs 23.25 lakh to Uflex Limited, a company whose appeal was allowed and even awarded Rs 7.58 lakh to the state government as compensation for defending the litigation payable by the two rival firms, which lost the case.

“The costs following cause is a principle which is followed in most countries. There seems to be often hesitancy in our judicial system to impose costs, presuming as if it is a reflection on the counsel. This is not the correct approach. In a tussle for enforcement of rights against a State different principle applies but in commercial matters costs must follow the cause,” the top court said.

The top court passed the order on an appeal filed by Uflex Ltd against the Madras High Court order of April 29, giving Tamil Nadu government four months’ time to float a fresh tender for production and supply of polyester based hologram stickers to be pasted across the caps of bottles of liquor sold the Tamil Nadu State Marketing Corporation (TASMAC).

To determine the costs, the top court adopted an innovative approach and asked the parties what they have paid to their advocates as fee and pocket expenses. “It is with the aforesaid objective that we had asked the parties to file their bill of costs vide order dated August 17, 2021. The objective was to bring forth this principle into force by quantifying actual costs for the succeeding party,” it said.

The top court said that the failing party cannot hide behind the veneer of the present dispute being in the nature of a writ proceeding. “The tender jurisdiction was created for scrutiny of commercial matters and, thus, where continuously parties seek to challenge award of tenders, we are of the view that the succeeding party must get costs and the party which loses must pay costs,” it added.

The bench said, this was really a battle between two commercial entities on one side seeking to get set aside an award of a tender to two other entities. The top court which scrutinised the bill of fee and costs said that it is inclined to allow actual costs. “The total costs, thus, payable to the petitioner/appellant (Uflex Ltd) would be Rs.23, 25,750. The State Government cannot be left behind so far as their compensation of costs in defending such litigation is concerned and we, thus, allow the costs of Rs.7,58, 000”, the bench said.

It noted that the aspect of awarding the costs has received consideration of the Law Commission of India in its Report Number 240, specifically in relation to civil litigation. The top court said that two verdicts of this court given in 2009 and 2010 have taken note of the levying of meager costs in civil matters which 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”.

“It is in that context that this had 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 top court said.

The bench said that the common thread in these judicial pronouncements are the reiteration of salutary principles--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.

“We may note that this endeavour in India is not unique to our country and in a way adopts the principle prevalent in England of costs following the event. The position may be somewhat different in the United States but then there are different principles applicable where champerty is prevalent”, the bench said.

It added that in most of the countries like India the discretion is with the Court and there has to be proportionality to the costs and if they are unreasonable, the doubt would be resolved in favour of the paying party.

The bench then examined the principles followed in Australia, Hong Kong and Canada on awarding costs in civil matters and said, “we have set forth the aforesaid so that there is appreciation of the principles 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 said that all the parties before the top court are financially strong and took a commercial decision to carry this legal battle right up to this Court and therefore “they must, thus, face the consequences and costs of success or failure in the present proceedings”.


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