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"In deciding what order (if any) to make about costs, the court

must have regard to all the circumstances, including:

(i) The conduct of all the parties;

(ii) Whether a party has succeeded on part of his case, even if

he has not been wholly successful; and

(iii) Any payment into court or admissible offer to settle made

by a party which is drawn to the court's attention.

The conduct of the parties includes:

(a) Conduct before, as well as during, the proceedings and in

particular the extent to which the parties followed any relevant

pre-action protocol;

(b) Whether it was reasonable for a party to raise, pursue or

contest a particular allegation or issue;

(c) The manner in which a party has pursued or defended his

case or a particular allegation or issue; and

(d) Whether a claimant who has succeeded in his claim, in

whole or in part, exaggerated his claim".

Supreme Court of India

Vinod Seth vs Devinder Bajaj & Anr on 5 July, 2010

The need for reform :

22. Before concluding, it is necessary to notice the reason why the High Court was trying to find some way to protect the interests of defendants, when it felt that they were being harassed by plaintiff. It made the impugned order because it felt that in the absence of stringent and effective provision for costs, on the dismissal of the suit, it would not be able to compensate the defendants for the losses/hardship suffered by them, by imposing costs. If there was an effective provision for levy of realistic costs against the losing party, with reference to the conduct of such party, the High Court, in all probability would not have ventured upon the procedure it adopted. This draws attention to the absence of an effective provision for costs which has led to mushrooming of vexatious, frivolous and speculative civil litigation.

23. The principle underlying levy of costs was explained in Manindra Chandra Nandi v. Aswini Kumar Acharaya - ILR (1921) 48 Cal. 427 thus:

"We must remember that whatever the origin of costs might have been, they are now awarded, not as a punishment of the defeated party but as a recompense to the successful party for the expenses to which he had been subjected, or, as Lord Coke puts it, for whatever appears to the Court to be the legal expenses incurred by the party in prosecuting his suit or his defence. * * * * The theory on which costs are now awarded to a plaintiff is that default of the defendant made it necessary to sue him, and to a defendant is that the plaintiff sued him without cause; costs are thus in the nature of incidental damages allowed to indemnify a party against the expense of successfully vindicating his rights in court and consequently the party to blame pays costs to the party without fault. These principles apply, not merely in the award of costs, but also in the award of extra allowance or special costs. Courts are authorized to allow such special allowances, not to inflict a penalty on the un-successful party, but to indemnify the successful litigant for actual expenses necessarily or reasonably incurred in what are designated as important cases or difficult and extraordinary cases."

In Salem Advocate Bar Association v. Union of India [2005 (6) SCC 344] this after noticing that the award of costs is in the discretion of the court and that there is no upper limit in respect of the costs awardable under Section 35 of the Code, observed thus: