The above case was a claim brought forward to set aside a de-merger transaction relating to a family company. There were four Defendants in the claim, and all four of the Defendants sought indemnity costs from the unsuccessful Claimants.

Indemnity costs

In England and Wales, indemnity costs refer to a higher scale of legal costs awarded by the court in favour of the receiving party in litigation. These costs are meant to compensate the successful party more fully for their legal expenses than the standard costs regime.

Standard vs. Indemnity Costs

Standard Costs:

When assessing costs on the standard basis, the court will only order the losing party to pay costs that are reasonable and proportionate to the case. The burden is on the winning party to prove that the costs payable meet this standard, meaning they typically recover less than they actually spent.

Indemnity Costs:

When costs are assessed on the indemnity basis, the court is more generous in favor of the winning party. The losing party must cover all costs that are reasonable, but proportionality is not a factor. This generally means the winning party can recover a much larger proportion of their costs.

When Indemnity Costs Apply

Indemnity costs are not awarded in every case. An order for costs on this basis will be granted by the court when it finds that the conduct of the losing party has been unreasonable, improper, or out of the ordinary. For example:

• When a party refuses a reasonable offer to settle (such as a Part 36 offer) and subsequently loses the case.
• In cases involving misconduct during litigation, such as dishonest behavior, excessive delay, or abuse of the court process.
• For claims or defences that are clearly without merit or vexatious.

The Court of Appeal, in Munkenbeck & Marshall v. McAlpine [1995] E.G. 24 (C.S.), refrained from specifying the exact circumstances under which indemnity costs should be awarded, noting that it is for the judge to exercise discretion based on the specific facts of each case.

Under 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.”

De Sena and Anor v Notaro and Ors [2020] Costs LR 737 – Judgment for Indemnity Costs

His Honour Judge Matthews, sitting as a High Court Judge in Bristol was hearing the case.

The unsuccessful Claimants were ordered to pay costs on the indemnity basis. A factor in providing this Order was the Claimant’s unreasonable refusal to accept offers to settle during the main course of action.

Whilst HHJ Matthews accepted that there was no rule which stated a failure to accept an offer of settlement would automatically result in an award for indemnity costs, he stated that failure to accept reasonable offers could play a factor in justifying an award of indemnity costs to be awarded to the Defendants.

• First and Second Defendant.

The First and Second Defendants argued that the Claimants failed to accept various offers for settlement, a total of three offers proposed to them during the course of the claim. The first offer was made a fortnight before the Claimant’s Replies to the Defences were served, and was for the sum of £20,000 plus costs.

The second offer was made two years after the first, two weeks after the Pre-Trial Review and a month before Trial. This was in the sum of £400,000. The final offer made by the Defendants was made after the First Claimant’s evidence was concluded. The final offer made required the Claimants to pay the First and Second Defendants’ costs on the standard basis, but it did protect the Claimants from an application to be made for indemnity costs.

In making the order, HHJ Matthews referred to the recent case of Lejonvarn and specifically the comments of Lord Justice Coulson in that matter, that an award for indemnity costs can be sought where the Defendant can show that the Claimant’s refusal to accept a reasonable offer was ‘out of the norm’. This was found to be the case, especially where a claim was weak or opportunistic.

HHJ Matthews went on to state that it was out of the norm for the Claimants not to accept the Part 36 Offers proposed, especially the first two offers, which were made after statements of the case and merits of the case were apparent.

In relation to the third offer, HHJ Matthews went on to say that the Defendants were giving the Claimants a way out of a terrible position they had put themselves in, and even then the Claimants failed to accept this offer.

The decision in this matter reiterates the importance of engaging in Alternative Dispute Resolution (ADR), and the consequences of refusing to engage in the same and/or to negotiate.

• Third and Fourth Defendant

An Order for indemnity costs was made in favour of the Third and Fourth Defendants also. The Third Defendant submitted that an interim payment made on account of costs should be calculated by reference to the actual costs figure, rather than the budgeted figure. In this case, the actual costs were twice the amount of the budgeted costs.

HHJ Matthews rejected this approach submitting that it was still necessary to show the costs were reasonably incurred and reasonable in amount. Costs budgeting was deemed to be the only investigation so far made into costs with the parties making an effort to ensure reasonableness of costs within their budgets. HHJ Matthews held that the safest starting point is the costs budgets as approved, together with information available as to changes in the case and the outcome of Trial.

How Can ARC Costs Assist?

As independent Costs Lawyers and Costs Draftsman providing legal advice, we act for both receiving parties in maximising their legal costs recovery, and also for paying parties in reducing the amount of any costs claim brought against them. We are adept in preparing Bills of Costs and conducting negotiations on your behalf, as well as preparing Points of Dispute or Points of Reply. Should you require assistance in respect of any costs dispute, or require advice on Alternative Disputer Resolution, please contact us via the live chat facility below, via email at info@arccosts.co.uk, or call one of our costs experts on on 01204 397302.

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