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The current cost regime needs reforming to levy realistic costs that deter parties from filing frivolous matters for dispute resolution, write Nitu Agarwal and Chandrei Mitra of YNSS Law Offices

The provision for awarding costs to a winning party in arbitration or litigation is based on the principles of “loser pays” and “costs follow the event”. But historically, the Indian legislature has been reluctant to incorporate provisions in statutes that follow these principles.

In various statutes, costs are either capped or left to the discretion of the court or tribunal. In some cases, the statutes merely state that reasonable costs ought to be awarded. These qualifications mean that actual costs are rarely, if ever, provided to a winning party under the legal system.

Awarding costs serve a critical purpose in any judicial system – it discourages the filing of frivolous litigation; encourages parties to settle when their defence is frivolous or without merit; promotes the efficiency of legal proceedings; and discourages the malicious prolonging of cases.

If a party is aware that it will have to bear the costs of the proceedings, it will naturally act more responsibly.

Given 含羞草社区 socialist economic background since independence, the legislature likely felt it was important for people from all strata of society to have access to courts. This was one reason why costs were kept nominal or were not awarded at all.

Unfortunately, this practice extended to arbitrations as well, which are typically adversarial proceedings between corporations, where such concerns do not apply. One reason for this was the inefficiency of arbitration in India, which often took years to conclude.

Conscious of this inefficiency, arbitrators likely feared being blamed for delays and escalating costs. Many arbitrators were retired judges unaccustomed to awarding significant costs.

Prior to 2015 – when provisions related to the awarding of costs were amended following recommendations of the 246th Law Commission Report – the situation regarding arbitration costs was dismal. In more than 90% of arbitrations, parties were left to bear their own costs. This was despite the fact that arbitrations, much like court matters, could last for decades due to the absence of any statutory timeline for their completion.

The 246th Law Commission recommended sweeping changes to the Arbitration & Conciliation Act, 1996, many of which were accepted by the legislature. This included the introduction of section 31A, which deals with costs to be awarded to a winning party in arbitration. While this provision was a welcome change, it left the awarding of costs to the discretion of the tribunal.

The changes in the law, despite their limitations, have brought about some improvement. Arbitrators are now awarding costs, albeit not always the actual costs, to winning parties. There is growing recognition of the principles of “loser pays” and “costs follow the event”.

However, the application of these principles remains inconsistent and sporadic across arbitrations. Since the legislature left the costs of the awards to the discretion of the arbitral tribunal, many tribunals still direct parties to bear their own costs.

This practice must be viewed against the backdrop of rising arbitration costs, which can make arbitration cost-prohibitive for some parties.

The reluctance to impose actual costs on losing parties encourages frivolous arbitrations and claims, further increasing the financial burden on innocent parties.

Reform needed

Reform in the current cost regime is therefore necessary. It should be made mandatory for arbitral tribunals to award realistic costs to parties. The principles for determining costs should also be clearly outlined, taking into account fees paid to arbitrators, administrative expenses, and lawyers’ fees.

If the legislature uses terms such as “reasonable costs”, it is likely that many arbitration tribunals will continue to award only nominal costs.

The costs regime across statutes needs to be revisited by the legislature in light of the significant backlog of cases before the courts. Sitting judges should be encouraged to award costs consistently, creating a domino effect that will also influence arbitration practices.

While Indian arbitration continues to evolve, balancing tribunal discretion with legislative guidelines for cost awards is crucial. Reinforcing the mandate for actual cost allocation will enhance the effectiveness and credibility of arbitration, positioning it as a preferred method of dispute resolution, as envisaged by the amendment of the act.

The prospect of being required to pay actual costs will deter non-serious litigants, reducing the burden on arbitrators and allowing them to focus on genuine claims.