Costs Regime (Section 35 CPC as Modified)

For over a century Indian civil litigation treated costs as an afterthought — a few hundred rupees tacked onto a decree, often nothing at all, with each side bearing its own lawyers. The Commercial Courts Act, 2015 set out to break that habit. By substituting a wholly new Section 35 of the Code of Civil Procedure for suits over a commercial dispute of Specified Value, Parliament installed a genuine “costs follow the event” regime: the unsuccessful party ordinarily pays the actual, reasonable costs of the successful party, the court must give written reasons to depart, and the old statutory ceilings simply vanish. This chapter explains the substituted provision word by word, traces how the Supreme Court in Uflex Ltd. v. Government of Tamil Nadu turned the text into a working deterrent against frivolous litigation, and maps the practical mechanics aspirants must reproduce in an exam answer.

Why commercial disputes needed a different costs rule

The ordinary costs jurisprudence under the unamended Code was, in the candid words of the Supreme Court, a near-dead letter. Section 35 of the Code of Civil Procedure, 1908 left costs entirely to the court's discretion; Section 35-A capped “compensatory costs” for false or vexatious claims at a derisory ceiling; and the practical convention in most trial courts was to award nominal costs or to direct the parties to bear their own. The result was that a litigant who fought, and won, a years-long contractual battle recovered a fraction of the lawyers' fees, court fees and witness expenses actually sunk into the case. Litigation became, in effect, costless to the loser — an open invitation to file weak suits and to drag out proceedings.

The drafters of the Commercial Courts Act treated this as a structural defect. If high-value commercial disputes were to be resolved quickly and predictably — the entire premise of the new Commercial Courts and Commercial Divisions — then the economics of litigating had to change. A meaningful costs sanction does two things at once: it deters parties from raising frivolous claims and defences, and it indemnifies the winner against the expense of having been dragged to court. Section 16 of the Act, read with its Schedule, therefore amends the Code of Civil Procedure in its application to commercial disputes of Specified Value, and one of the headline amendments is the wholesale substitution of Section 35.

The reform did not write on a blank slate. The Supreme Court had already, in Vinod Seth v. Devinder Bajaj, (2010) 8 SCC 1, and in Salem Advocate Bar Association (II) v. Union of India, (2005) 6 SCC 344, lamented the unrealistic level of costs awarded in Indian courts and urged a shift toward actual costs. The Commercial Courts Act converted those judicial exhortations into statutory command. For the broader architecture of the Act, see the introduction and the subject hub.

Scope: only commercial disputes of Specified Value

The substituted Section 35 does not apply to every suit. Its opening words confine it to “any suit relating to a commercial dispute of a Specified Value”. Two threshold concepts therefore gate the entire costs regime, and both have their own dedicated treatment elsewhere in these notes.

First, the lis must answer the statutory definition of a commercial dispute — a dispute arising out of one of the enumerated categories in Section 2(1)(c) of the Act, ranging from ordinary mercantile transactions and partnership disputes to franchising, distribution, joint ventures, intellectual property and the like. A dispute that does not fall within that list is not a commercial dispute, the suit cannot be a commercial suit, and the substituted Section 35 has no application; the old, weaker Section 35 governs instead.

Second, the dispute must cross the Specified Value pecuniary threshold (presently three lakh rupees, after the 2018 amendment), computed under Section 12 of the Act. A commercial dispute below that floor is litigated as an ordinary civil suit, again outside the new costs regime. The practical upshot for an examinee is that the very first step in any Section 35 problem is to confirm jurisdiction: is this a commercial dispute, and does it meet the Specified Value? Only then does the rewritten costs rule engage.

The substituted Section 35: text and structure

The Schedule to the Commercial Courts Act substitutes Section 35 in its application to commercial disputes of Specified Value. The new provision is built in three operative limbs. Sub-section (1) confers a structured discretion: “notwithstanding anything contained in any other law for the time being in force or the Fees payable to the witnesses, the Court, in relation to any commercial dispute, shall have the discretion to determine — (a) whether costs are payable by one party to another; (b) the quantum of those costs; and (c) when they are to be paid.”

An Explanation to sub-section (1) supplies a definition that the old Code never had. For these purposes “costs” means reasonable costs relating to (i) the fees and expenses of the witnesses incurred; (ii) the legal fees and expenses incurred; (iii) any other expenses incurred in connection with the proceedings. This is the textual hook for awarding real money — it expressly brings counsel's fees and out-of-pocket expenses within the ambit of recoverable costs.

Sub-section (2) installs the general rule: “If the Court decides to make an order for payment of costs, the general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party.” Crucially, a proviso then permits departure — “Provided that the Court may make an order deviating from the general rule for reasons to be recorded in writing.” The discretion to deviate is thus real, but it is a reasoned discretion: silence will not do.

Sub-section (3) channels that discretion by listing the factors the court must weigh: the conduct of all the parties; whether a party has succeeded on part of its case even if not the whole; whether a party made a frivolous claim or counterclaim and caused thereby a delay in the disposal of the case; and whether any reasonable offer to settle was made by a party and unreasonably refused by the other. An illustration appended to the section gives the worked example of a party who refuses a reasonable settlement offer and ultimately fares no better at trial — a paradigm case for loading costs onto the refusing party.

“Costs follow the event” — the default flips

The single most important change worked by sub-section (2) is the reversal of the default. Under the old discretionary regime the practical norm was “each party bears its own costs”; under the substituted Section 35 the norm becomes “the loser pays the winner.” This is the English “costs follow the event” principle, transplanted into commercial litigation in India. The successful party is now presumptively entitled to recover its reasonable costs from the unsuccessful party, and a court that wishes to depart must justify the departure in writing.

The Supreme Court underscored exactly this in Uflex Ltd. v. Government of Tamil Nadu, (2022) 1 SCC 165 (decided 17 September 2021), observing that the time had come to shed the judicial reluctance to impose costs and that costs should ordinarily follow the event. The Court treated the routine direction that “parties shall bear their own costs” as an abdication that defeats the legislative purpose. Importantly, the reversal does not strip the court of discretion altogether: sub-section (1) still asks whether costs are payable “by one party to another” at all, and the proviso to sub-section (2) preserves a reasoned power to deviate. What has changed is the starting point and the burden of explanation — the winner no longer has to argue for costs; the loser, or the court departing from the rule, must explain why costs should not follow.

For exam purposes the formulation to remember is precise: the rule is not “costs must follow the event come what may,” but “costs ordinarily follow the event, and any departure must be supported by reasons recorded in writing.” Reproducing that proviso is what separates a full-marks answer from an approximate one.

What “costs” include — reasonable actual costs

The Explanation to sub-section (1) is the engine room of the new regime because it defines costs broadly enough to make them bite. Three heads are recognised. The first is the fees and expenses of witnesses — the cost of producing evidence, including the expenses of bringing witnesses to court. The second, and most consequential, is legal fees and expenses incurred — this is the express statutory basis for recovering counsel's professional fees, a head that the old Code never squarely allowed. The third is a residual category: any other expenses incurred in connection with the proceedings, which sweeps in court fees, e-filing charges, the cost of certified copies, expert fees, and similar disbursements.

The qualifier throughout is “reasonable.” The Act does not promise indemnity for whatever a litigant chose to spend; it promises reasonable costs. In Uflex the Supreme Court married these two ideas — actuality and reasonableness — holding that the best reflection of the costs actually incurred is what the parties have in fact paid towards counsel's fee and out-of-pocket expenses, while insisting that there must be proportionality, so that if the costs claimed are unreasonable the doubt is resolved in favour of the paying party. The practical method that has emerged in the Commercial Divisions, particularly of the Delhi and Bombay High Courts, is for the successful party to file a bill or statement of costs supported by fee invoices and disbursement vouchers, which the court then scrutinises for reasonableness before fixing the figure.

The decisive contrast with ordinary suits is that the statutory ceilings are gone. The Rs 3,000 cap formerly imposed on compensatory costs under Section 35-A(2) of the Code is, for commercial disputes, removed by the Schedule, clearing the path for awards measured in lakhs where the litigation warranted them. In Uflex itself the Court awarded roughly Rs 23 lakh to the successful appellant and about Rs 7.5 lakh to the State — figures that would have been unthinkable under the unamended Code and that demonstrate the regime working as intended.

Factors: conduct, partial success and proportionality

Sub-section (3) does not leave the court adrift; it lists the considerations that structure the costs order. The first is the conduct of all the parties, both before and during the proceedings. A party that suppressed documents, took evasive pleas, sought repeated adjournments or otherwise prolonged the litigation can expect that conduct to be reflected in the costs against it; conversely, a successful party whose own conduct was less than candid may find its costs trimmed. The Uflex Court expressly directed that the court look to the conduct of the parties, the reasonableness of the allegations raised, the manner in which the case was prosecuted or defended, and any exaggeration of the claim.

The second factor is partial success: “whether a party has succeeded on part of its case, even if that party has not been wholly successful.” This permits the apportionment of costs. Where a plaintiff wins on the main relief but loses on a subsidiary head, or where a defendant defeats most of the claim but concedes a small part, the court can fashion a proportionate order rather than treating the matter as all-or-nothing. This flexibility is what makes the regime fair as well as deterrent — the “event” that costs follow is read issue by issue, not merely as the ultimate decree.

Proportionality, although introduced judicially in Uflex rather than spelt out in the section, has effectively become a fourth structuring principle: the costs awarded must bear a sensible relationship to the value and complexity of the dispute, so that the costs order indemnifies the winner without becoming a windfall or a punishment disguised as compensation.

Frivolous claims and unreasonably refused settlement offers

Two of the listed factors are explicitly punitive in design. The third factor in sub-section (3) asks whether a party made a frivolous claim or counterclaim and caused thereby a delay in the disposal of the case. This is the statutory weapon against vexatious litigation: a party that clogs a commercial docket with a hopeless claim, advanced only to harass or to gain leverage, can be made to pay for the delay it caused. Uflex arose on exactly such facts — the Supreme Court found the challenges to the tender to be without merit and imposed substantial costs precisely to deter the frivolous and vexatious litigation it identified.

The fourth factor introduces a settlement-incentive that will be familiar to students of English costs practice: “whether any reasonable offer to settle is made by a party and unreasonably refused by the other party.” The appended illustration makes the mechanism concrete — if a party rejects a reasonable settlement offer and then does no better, or worse, at trial, the court may visit the costs of the subsequent litigation on the party who unreasonably refused to settle. This pressures litigants to evaluate settlement offers honestly rather than gambling on a better result at the cost of the system's time. It dovetails with the Act's broader settlement philosophy embodied in pre-institution mediation, where the parties are pushed toward early resolution before the suit is even instituted.

Read together, these two factors transform costs from a mechanical follow-the-decree exercise into a behavioural tool: they reward parties who litigate honestly and settle reasonably, and they penalise those who file weak claims or stonewall sensible compromise.

The power to deviate — reasons in writing

The proviso to sub-section (2) is what keeps the regime just. The general rule is that the loser pays, but the court “may make an order deviating from the general rule for reasons to be recorded in writing.” The deviation power is therefore wide in substance but tightly controlled in form. A court may decline to award full costs, may split costs, may direct the parties to bear their own costs, or may even — in a rare case of misconduct by the nominal winner — award costs against the successful party. What it may not do is exercise that power silently.

The requirement of written reasons does real work. It prevents the regime from collapsing back into the old habit of routinely directing parties to bear their own costs, because a court must now articulate a principled justification for any such departure. It also makes the costs order reviewable: an appellate court can test whether the reasons given actually justify the deviation. In Uflex the Supreme Court criticised precisely the unreasoned, reflexive refusal to impose costs and emphasised that the discretion must be exercised judicially, in accordance with reason and justice, and not arbitrarily. The deviation proviso, in short, is a discretion bounded by transparency — the hallmark of the entire commercial-courts reform.

Uflex v. Tamil Nadu: the regime's charter

No discussion of commercial costs is complete without Uflex Ltd. v. Government of Tamil Nadu, (2022) 1 SCC 165, the Supreme Court's most systematic statement on the subject. Although the case arose from a tender dispute rather than a contractual suit, the Court used it as a vehicle to lay down general principles on the imposition of realistic costs, expressly invoking the philosophy of the substituted Section 35.

The Court's principal holdings repay close reading. First, costs should ordinarily follow the event, and the prevailing judicial hesitancy to impose costs serves the litigant poorly and burdens the system. Second, the touchstone for quantifying costs is what the parties actually paid — the best reflection of costs incurred is the counsel's fee and out-of-pocket expenses actually disbursed — subject always to proportionality, so that unreasonable claims are resolved in favour of the paying party. Third, the discretion must be exercised judicially: the court must weigh the conduct of the parties, the reasonableness of the allegations, the manner of prosecution or defence, and any exaggeration of the claim. Fourth, realistic costs serve a dual purpose — to deter frivolous and vexatious litigation and to indemnify the successful litigant against the expense of the proceedings.

The Court then put principle into practice, awarding approximately Rs 23 lakh to Uflex and around Rs 7.5 lakh to the State Government. The figures matter as much as the reasoning: they signalled to the bar and the bench that the new Section 35 means what it says, and that token costs are no longer an acceptable response to hard-fought commercial litigation. For aspirants, Uflex is the single authority to cite for the proposition that the Commercial Courts Act intends actual, realistic, proportionate costs.

The jurisprudential backdrop: Salem Advocate and Vinod Seth

The substituted Section 35 did not arrive unannounced. Two earlier Supreme Court decisions had already identified the disease that the Act would cure. In Salem Advocate Bar Association (II) v. Union of India, (2005) 6 SCC 344, while upholding the 1999 and 2002 amendments to the Code, the Court drew attention to the unrealistic and inadequate level of costs being awarded by Indian courts and stressed that costs ought to be actual and reasonable, sufficient to compensate the successful party for the expense to which it had been put. The Court linked low costs to the proliferation of frivolous litigation and to the abuse of process.

That theme was developed in Vinod Seth v. Devinder Bajaj, (2010) 8 SCC 1, where the Supreme Court again emphasised the need for realistic costs and the courts' power to require security for costs and to award costs that actually deter speculative litigation. Although Vinod Seth predates the Act and was decided under the unamended Code, it is routinely cited as the doctrinal precursor to the commercial-costs regime, and the Court there foreshadowed almost every feature later codified in the substituted Section 35.

The lesson of this lineage is that the Commercial Courts Act's costs provision is best understood not as a novelty but as the legislative crystallisation of a reform the Supreme Court had been urging for a decade. Citing Salem Advocate and Vinod Seth alongside Uflex demonstrates command of the full arc — judicial diagnosis, legislative prescription, and judicial enforcement.

Interaction with Sections 35-A and 35-B

The substituted Section 35 does not operate in isolation from the rest of the Code's costs machinery, and aspirants must be precise about the interaction. Section 35-A of the Code provides for compensatory costs in respect of false or vexatious claims or defences, but historically capped them at Rs 3,000. For commercial disputes of Specified Value, the Schedule to the Commercial Courts Act omits that monetary ceiling, so that the compensatory-costs power, where invoked, is no longer hobbled by an arbitrary limit. The frivolous-claim factor now built into Section 35(3) substantially overlaps with the policy of Section 35-A, but the substituted Section 35 supplies the broader and more flexible instrument.

Section 35-B, which deals with costs for causing delay — typically where a party seeks an adjournment — continues to operate, reinforcing the conduct-based discipline that runs through the entire scheme. A party that repeatedly delays the proceedings may face both an adjournment-related order under Section 35-B during the trial and an adverse final costs order under Section 35 reflecting that same conduct. The provisions are cumulative rather than mutually exclusive.

The clean way to express the relationship in an answer is this: for commercial disputes of Specified Value, Section 35 is rewritten to make costs follow the event on an actual-costs basis; the Section 35-A ceiling is lifted; and Section 35-B's delay-costs power survives intact, so that the overall effect is a markedly more potent and integrated costs regime than that available in ordinary civil suits.

Practical mechanics: quantification, timing and appeal

In practice the Commercial Divisions have developed a workable procedure. The successful party files a statement or bill of costs, itemising counsel's fees, witness expenses, court fees and disbursements, and supports it with invoices and vouchers. The court then assesses reasonableness — testing the claimed figures against the value and complexity of the dispute and against the conduct factors in Section 35(3) — before fixing the sum and directing when it is to be paid, as sub-section (1)(c) requires. Where the matter is fact-intensive the court may direct the parties to file written submissions on costs after judgment on the merits.

On appeal, a costs order is reviewable like any other part of the decree, but the appellate court — sitting as the Commercial Appellate Court or Commercial Appellate Division — will accord considerable deference to the trial court's exercise of a discretion the statute confides to it, intervening principally where the trial court ignored the statutory factors, awarded costs without the written reasons the proviso demands, or fixed a figure so disproportionate as to be perverse. Uflex supplies the appellate yardstick: the discretion must have been exercised judicially and proportionately.

For the examinee, the practical takeaway is to treat costs as a substantive part of the relief, not a postscript. A model answer on a commercial-suit problem should identify whether the matter qualifies as a commercial dispute of Specified Value, state the costs-follow-the-event default, list the Section 35(3) factors that bear on the facts given, note the broad definition of recoverable costs including counsel's fees, and flag the proviso's requirement of written reasons for any deviation — the whole anchored to Uflex.