Indemnity Costs in Litigation

An award of indemnity costs might give a party in a lawsuit a major advantage, due to the fact that the paying party will be responsible for the legal expenses and the proportionality criterion will not be applied. Since costs on the standard basis are the norm, the indemnity costs principle (included in Civil Procedure Rules 44.3(3)) can be considered punitive in nature.

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What are Indemnity Costs?

All fees, charges, disbursements, expenditures, and compensation expended by a party to litigation in carrying out proceedings are considered indemnity costs, provided they have not been incurred in an inappropriate manner or for an unreasonable amount.

An indemnity costs order is intended to compensate a party as fully as feasible for the expense and inconvenience of litigation. One of the two bases on which expenses between parties in a lawsuit can be calculated is indemnity costs. Two bases are: standard basis and indemnity basis.

When issuing an order for costs to be paid, the court shall specify the indemnity basis of assessment or the standard basis of assessment. The language of Civil Procedure Rule 44.3(4) makes it appear that the costs will be assessed on the standard basis if no indication of the basis is supplied. Most cost orders are on the standard basis.

Civil Procedure Rules on Indemnity Costs

The following Civil Procedure Rules (“CPR”) are relevant to indemnity costs:

• CPR 44.2(1) The court has discretion as to –

• whether costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

(2) If the court decides to make an order about costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

• the court may make a different order.

This rule entails the discretion of the court when calculating costs

• CPR 44.3(3) Where the amount of costs is to be assessed on the indemnity basis, the court will resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party.

If costs are calculated on an indemnity basis, proportionality is not a factor to be taken into consideration because there is a presumption of proportionality in favour of the receiving party

• CPR 44.4(1) The court will have regard to all the circumstances in deciding whether costs were–

(b) If it is assessing costs on indemnity basis –

(i) Unreasonably incurred; or

(ii) Unreasonable in amount.

When are Indemnity Costs Awarded?

CPR 44.2 makes it clear that the courts have a lot of discretion when it comes to ordering indemnity costs, and when deciding whether to use that discretion, the court will consider all the circumstances of the case and consider the objections made in support of such an order for costs in the context of the overall litigation. The Court of Appeal declined to define the precise situations in which indemnity costs may be ordered in Munkenbeck & Marshall v. McAlpine [1995] E.G. 24 (C.S.), stating that it was a matter in each case of the judge using his judgement on the facts at hand.

According to case law, indemnity costs are frequently issued when there is some fault or abuse of the legal system on the part of the party that must pay the expenses. It is also true that the court is primarily concerned with the losing party when deciding whether to grant costs on an indemnity basis rather than the actual merits of that party’s argument, while both of these can occasionally be found deficient, the party’s handling of the matter should be considered.

“Outside of the norm” Cases

Indemnity costs are awarded in a circumstance which takes the case “out of the norm”. Lord Woolf CJ in Excelsior Commercial and Industrial Holdings Ltd v. Salisbury Hammer Aspden and Johnson (A Firm) [2002] EWCA Civ 879, said “an indemnity order may be justified not only because of the conduct of the parties but also because of other particular circumstances of the case.”

Lord Woolf CJ provided two instances when factors other than conduct supported a request for indemnity costs:

• A situation where a party is drawn into expensive litigation despite having no other interest than the issue that arises in that case and is involved in the proceedings as a test case; 
• a situation where the nature of the litigation prevents the parties from conducting the litigation in a proportionate manner.

In Three Rivers v Bank of England [2006] EWHC 816, according to Tomlinson J., the following facts took the case out of the norm and prompted the award of indemnity costs:

• Despite the absence of any support in the documented evidence for the charges, the claimant persistently and aggressively pursued significant and extensive accusations of dishonesty or impropriety over an extended period of time, continuing the accusations without remorse.
• Both before and throughout the trial, the claimant vigorously pursued publicity for its serious charges.
• By pursuing an unfounded claim, the claimant’s actions transformed the case into an unusual factual investigation.
• The claimant pursued a claim that was incongruous with the contemporaneous documents and, to put it mildly, weak and unrealistic in certain ways.
• The claimant filed and pursued a costly and extensive lawsuit in a way intended to put the defendant under commercial pressure, and during the trial, in an effort to support the claims, resorted to presenting a constantly-evolving case, only to be soundly defeated.

Gloster J ordered indemnity costs in P Morgan Chase Bank (formerly known as The Chase Manhattan Bank) (a body corporate) and Others v Springwell Navigation Corporation (a body corporate) [2008] EWHC 2848 (Comm), because she was of the view that the scope of litigation was “massive” and unnecessary, and must have been narrower. Serious allegations of dishonesty, improper behaviour, and deceit were brought up and pursued by Springwell. Some of these claims were abandoned right before trial, while others were pursued but abandoned following the cross-examination of Chase witnesses.

Cases like Three Rivers and Springwell show us that Bringing claims of fraud or dishonesty without any supporting evidence puts one at danger of losing the case, being ordered to pay indemnity costs, and receiving negative judicial and professional feedback. Cases alleging fraud that are lost (or withdrawn) may also result in an indemnity-based order for costs, in addition to an unfavourable order for costs.

Unreasonable conduct is sufficient for indemnity costs, no need for conduct deserving of moral condemnation

In Kiam v MGN (No2) [2002] EWCA Civ 66, Simon Brown LJ said “… conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs …” and, he added, “To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context does not mean merely wrong or misguided in hindsight …”

In Re Continental Assurance Co of London, liquidators who had pursued a protracted action with large costs were required to pay costs on an indemnity basis.

Failure to comply with pre-action protocol

Norris J stated that he would not grant indemnity costs in the case of Forstater and others v. Python (Monty) Pictures Ltd and others [2013] EWHC 3759 (Ch) solely because a pre-action process had been disregarded. However, there was a strong argument for indemnity costs when a minor claim was initiated without prior notice and taken to trial for the purpose of recovering costs despite a proposal to settle the claim and have the costs decided by a costs judge.

Delaying Procedural timetable

Courts can show strong case management and are no longer tolerant of delays. One method to convey this is by ordering indemnity costs.

Retracting a summary judgement application that shouldn’t have been made

In The Libyan Investment Authority v. Goldman Sachs International [2014] EWHC 3364 (Ch), the High Court made an interim judgement of £200,000 on account of the defendant’s costs of its withdrawn summary judgement application and ordered the defendant to pay those costs on an indemnity basis. The application was deemed to be sufficiently “out of the norm” by the court.

Indemnity costs were granted to the claimant in Simmons & Simmons v. Hickox [2013] EWHC 2141 (QB) after the defendant’s move for summary judgement was rejected. The judge believed that it was improper to submit the application, which claimed that a contingency fee arrangement was unenforceable under Anguillan law.

On Discontinuance

Instead of only allowing costs to be paid on the usual basis, the court might find it appropriate to order that discontinued proceedings’ expenses, pursuant to CPR 38.6, be paid on the indemnity basis.

The High Court ordered the claimant to pay the defendants’ costs on an indemnity basis in PJSC Aeroflot – Russian Airlines v. Leeds and another (Trustees of the estate of Berezovsky) and others [2018] EWHC 1735 (Ch), after the claimant’s fraud claim was abandoned without justification just before trial.

Part 36 Offers

Indemnity costs flow automatically (as of the date the relevant period expired) as one of the repercussions of a claimant’s Part 36 offer not being accepted by a defendant and the claimant subsequently receiving a judgement at trial that is equal to or more advantageous than the offer (CPR 36.17), unless the court finds it to be unjust. No indication of wrongdoing is required. Therefore, there are different factors to examine here than there are when indemnity costs orders are involved. Although automatic, the indemnification order imposed by that regulation is still up to the court’s discretion and is not required to cover the full course of the litigation.

Only the current procedures are covered by Part 36 protection. A new Part 36 offer must be made in the event of a later appeal in order to obtain an order for indemnity costs (CPR 36.4). The defendants in KR v. Bryn Alyn [2003] EWCA Civ 85 and [2003] 1 FCR 385 refused Part 36 offers before the issuance of proceedings but lost at trial. According to CPR 36, the trial court granted the claimant indemnity expenses. The defendants appealed, and their appeal was likewise rejected; but, because there had been no additional Part 36 offers to settle the appeal, the claimant did not win an order for indemnity costs of the appeal, merely costs on a regular basis.

CPR automatically resulting in indemnity costs

• Assessment of costs payable to a trustee or personal representative out of a fund (CPR 46.3).
• Assessment of costs payable to a solicitor by their client (CPR 46.9).

When are Indemnity Costs rejected?

In Crypto Open Patent Alliance v Wright [2022] EWHC 242 (Ch) Judge Paul Matthews did not order costs on an indemnity basis because he thought both parties counsel were acting like schoolchildren in the playground. He found “all this mud-slinging (on both sides) not only unedifying, but also somewhat underwhelming”. Both sides were behaving in “an ultra-aggressive and uncooperative way towards each other”. To order indemnity costs, “would be to encourage similar behaviour in future”.

No indemnity costs order where no conduct deserving of moral condemnation or any unreasonable conduct

It is typically insufficient on its own to support indemnity costs when a party raised and prosecuted a tenuous claim or turned down a reasonable settlement proposal outside of Part 36. According to McPhilemy v. Times Newspapers No. 2 [2001] EWCA Civ 933, the litigant’s actions must amount to misconduct that is morally reprehensible or be extremely illogical in order to support an indemnity order. They cannot just be wrong or mistaken in retrospect.

Weak Case

In Fitzpatrick Contractors Limited v Tyco Fire and Integrated Solutions (UK) Limited [2008] EWHC 1391, Coulson J rejected an order for indemnity costs against Tyco. Tyco’s case was weak and had been significantly damaged by the unsatisfactory character of a witness’s testimony. He decided that this was a form of risk common to all civil litigation and could not, by itself, justify an award for indemnity costs.

It was decided in Noble v. Owens [2011] EWHC 1409 (Ch) that the fact that a fraud claim had caused stress and anxiety was insufficient justification for an indemnity costs order. The claim had been carefully thought out and wasn’t speculative or reckless.

Refusal to mediate

It was decided that the defendants’ inability to participate meaningfully in mediation proposals did not warrant an order for costs against them on the indemnity basis in Richards and another v. Speechly Bircham LLP and another [2022] EWHC 1512 (Comm).

Making such an order would entail prioritising that element over other favourable ones, such as the fact that they had successfully disputed a major portion of the claim and outperformed both of the claimants’ Part 36 offers. An order requiring the defendants to cover the claimants’ costs up to and including trial on the standard basis was issued due to their unreasonable behaviour.

Conclusion

The discussion above shows that there is a reluctance to award indemnity costs where an innocent party won at trial, unless the situation clearly called for such an award. Why should a party who has won in court—and frequently has been pursued without their consent—have to pay a significant financial penalty because 15% to 30% of their expense bill may not be recovered?

This can result in a fine of tens of thousands of pounds or more for the innocent party in cases when the action has been protracted, expensive, or both.

Indemnity costs is not a penal order or one that carries a negative connotation. Instead, it only makes sure that a party who was unduly subjected to the expenditure of legal proceedings recovers a bigger portion of their entire costs.

The paying party is not subject to a fine or other arbitrary financial punishment for having the audacity to initiate or oppose proceedings. Such an award is nonetheless effectively capped by the indemnity concept as well as by an evaluation that incorporates a reasonableness factor.

However, the above case law makes it quite obvious that an award of indemnity costs would remain elusive, except in the most severe circumstances.

Instructing our Litigation Lawyers

LEXLAW provides the best possible outcome for our clients by conducting in depth investigation and research into the realistic prospects of a case before selecting the appropriate course of action in order to reduce time and expense.

Liability for costs is always an issue in litigation and based on our extensive litigation experience we provide our clients with as much strategic, practical as well as carefully considered legal advice in order to ensure minimum risk in respect of costs.

Where appropriate we encourage the use of alternative dispute resolution (such as mediation and without prejudice negotiation) and our lawyer’s negotiation skills are first class. If early settlement at advantageous terms is not possible, we are extremely experienced and capable at navigating our clients through the litigation process.