Indemnity Costs Orders - When are they appropriate?


It is the all too common state of affairs where parties begin throwing about threats of applications for indemnity costs but when are they really appropriate?  The bases of assessment, which are applicable to both Detailed and Summary Assessments, are detailed within the Civil Procedure Rules in Part 44.4. Under the 'old rules' the bases were contained within Order 62 rule 12. In deciding whether to and what order for costs to make the court will consider the nine primary parameters contained within CPR 44.3(4).


Under Part 44.4, on the standard basis, the Court will not allow costs that have been unreasonably incurred or which are unreasonable in amount. Any doubt will always be resolved in favour of the paying party. The principle addition to the old Order 62 is the introduction of the principle of 'proportionality' to the equation. The Overriding Objective set out within CPR Part 1.1 also makes clear the need for the Courts to deal with matters in ways which are proportionate. The Courts are always to have regard to the Overriding Objective when applying the test of proportionality. Unfortunately the principle of proportionality is not defined within the Costs Practice Directions and, at least until perhaps the recent case of Home Office -v- Lownds (Lord Woolf, Laws and Dyson LJJ) 21 March 2002, very little guidance was provided in connection with the application of the principle at costs assessments. It should be remembered that proportionality plays no part on the Indemnity Basis. When an assessment of costs is carried out on this basis, the court will simply not allow costs that are unreasonably incurred or unreasonable in amount (see CPR 44.5 (1) (b)).


Costs between the parties are usually awarded on the standard basis but when exactly should one request an order for costs on the indemnity basis? Unfortunately the Civil Procedure Rules do not make it clear exactly when indemnity costs orders are appropriate. We have to rely primarily on the guidance enshrined within case law. In the case of Bowen Jones -v- Bowen Jones [1986] 3 All ER 163 it was suggested that indemnity costs should only be awarded in "exceptional circumstances" but offered little more direction than that. What are "exceptional circumstances"? It was submitted, in the case of Connaught Restaurants Ltd -v- Indoor Leisure Ltd [1992] CILL 798 that costs on the indemnity basis should only be considered appropriate if the circumstances concerned with the case were "outside the run of normal litigation". In that specific case it was furthermore considered appropriate that costs should be payable on the indemnity basis if the proceedings had been conducted "bitterly or unreasonably".


Conduct will commonly be a deciding factor in deciding whether the indemnity basis is the appropriate alternative to the standard basis and then only if the court considers a party's conduct has been wholly unreasonable. An example of such unreasonableness may be where a claiming party has been purposely dishonest and, more to the point, has intentionally misled the parties to the proceedings. A costs order on the indemnity basis was awarded as a result of such behaviour in the case of Wanderer Ltd -v- Nigel Burgess Ltd [1990] (unreported, May CA). Unreasonable conduct may also involve a party's failure or unreasonable unwillingness to disclose request information or documentation or perhaps a party's failure to comply with court directions. Naf Naf -v- Dickens [1993] FSR 424 exemplifies such an instance. Where wasted costs are made on the indemnity basis, consideration will often be given to the case of Ridehalgh -v- Horsefield [1994] Ch 205 in which examples of improper, negligent and unreasonable conduct were respectively defined.


Other circumstances in which an order for costs would not be made on the standard basis is where a party makes an offer to settle a case and beats that offer at a subsequent trial or assessment. Most practitioners will be familiar with this scenario but perhaps not completely au fait with the specifics. Prior to the introduction of the Civil Procedure Rules in 1999 costs consequences where offers to settle were made were illustrated by the case of Calderbank -v- Calderbank [1975] 3 WLR 586 and subsequently by CPR Part 36. Where a Claimant does better at trial than the offer he has already put forward costs will usually be awarded on the indemnity basis. CPR Part 36.21 (3) (a) stated that "The court may also order that the claimant is entitled to - his costs on the indemnity basis from the latest date when the defendant could have accepted the offer without needing the permission of the court;". In costs proceedings the court may be reluctant to make orders on the indemnity basis where the claiming party simply recovers more than the paying party had offered prior to the assessment without circumstances involving conduct issues, highlighted above, being a significant factor. See Part 47.18 and associated practice direction for further guidance on factor to be taken into account when the court decides who should pay the costs of Detailed Assessment.







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Content last updated: 30/10/09