Indemnity Costs: Lessons from The New Lottery Company Case

The decision in The New Lottery Company Ltd and Another v The Gambling Commission and Others [2026] Costs LR 481 provides important guidance on one of the most heavily contested areas of costs litigation. This area is when the court should award indemnity costs rather than costs on the standard basis.

For solicitors, litigants and costs professionals alike, the distinction between costs on the standard basis and costs on the indemnity basis can have significant financial consequences. Whilst the successful party will usually recover its costs, the basis upon which those costs are assessed can dramatically affect the final amount recovered.

The New Lottery Company decision is a useful reminder that obtaining an indemnity costs order remains exceptional. However, it also demonstrates how the court’s discretion may be exercised where the conduct of a party takes a case beyond ordinary litigation behaviour.

At ARC Costs, we regularly advise receiving and paying parties on indemnity costs disputes, including whether there are grounds to pursue or resist an application for indemnity costs. Cases such as this illustrate the factors the court will consider when deciding whether a matter falls outside the norm.

What are indemnity costs?

Under the Civil Procedure Rules, costs are generally assessed on either the standard basis or the indemnity basis. The default position under CPR 44.2 is that the unsuccessful party will usually be ordered to pay the costs of the successful party, subject to the court’s discretion.

Where costs are assessed on the standard basis, the court will only allow costs which are both reasonably incurred and proportionate. Any doubt is resolved in favour of the paying party.

By contrast, where costs on the indemnity basis are awarded, proportionality no longer applies in the same way. Whilst costs must still be reasonably incurred and reasonable in amount, any doubt is resolved in favour of the receiving party.

This distinction can result in a significantly higher level of recovery. For that reason, applications for indemnity costs are frequently pursued in substantial litigation.

The court’s discretion under CPR 44.2

The starting point for any costs decision is CPR 44.2, which provides the court with a broad discretion when determining:

• Whether costs should be paid
• Who should pay them
• When they should be paid
• The basis upon which they should be assessed

The rule requires the court to consider all the circumstances of the case.

Factors commonly considered include:

• The conduct of the parties
• Whether a party succeeded on all or part of its case
• The reasonableness of pursuing particular allegations
• Compliance with court orders
• The parties’ conduct during settlement discussions
• Any offer to settle, including a Part 36 offer

The question is whether there is something about the case that justifies departing from the usual position of a standard basis assessment.

What happened in The New Lottery Company case?

The litigation arose from a challenge relating to the Gambling Commission and the award of the Fourth National Lottery Licence. The underlying proceedings were substantial, complex and of considerable public importance.

Following the substantive outcome, the court was required to determine the appropriate costs order.

Among the issues considered was whether there was sufficient justification for an order that costs be assessed on the indemnity basis.

As is often the case in high-value litigation, the successful party argued that the conduct of the opposing parties justified a departure from the normal costs rules. The court therefore had to consider whether the circumstances of the case were sufficiently unusual to warrant indemnity costs.

When will the court award indemnity costs?

The authorities consistently emphasise that indemnity costs are not awarded simply because one party has lost. The fact that a party’s case was unsuccessful does not automatically make it unreasonable.

Instead, the court generally looks for conduct which takes the matter beyond ordinary litigation. The phrase often used is whether the case is “out of the norm”.

This principle can be traced through numerous authorities and continues to guide modern costs decisions.

The challenge for parties seeking indemnity costs is demonstrating that the conduct complained of genuinely justifies departure from the standard basis.

Examples may include:

• Pursuing hopeless allegations
• Serious procedural misconduct
• Failure to engage with alternative dispute resolution
• Unreasonable refusals to negotiate
• Dishonest conduct
• Conduct that significantly increases costs unnecessarily

However, the court will assess each case on its own facts.

The significance of settlement conduct

One of the recurring themes in modern indemnity costs decisions is the importance of settlement behaviour. Courts increasingly expect parties to engage constructively with settlement opportunities and alternative dispute resolution. Failure to do so can sometimes influence costs outcomes.

The presence of a realistic Part 36 offer may also play an important role. Where a party rejects a reasonable settlement proposal and proceeds unsuccessfully to trial, that conduct may become relevant when considering costs consequences.

However, the court will always consider the broader context before deciding whether indemnity costs are appropriate.

Not every failed settlement discussion will justify a departure from the standard basis.

The “out of the norm” test

The New Lottery Company case reinforces the continuing importance of the “out of the norm” test.

This phrase originates from earlier authorities and remains central to modern costs jurisprudence.

The court is not concerned with punishing unsuccessful parties.

Instead, it seeks to determine whether the conduct of the litigation was sufficiently unusual or unreasonable to justify enhanced costs recovery. This is often where disputes become finely balanced.

Many parties believe their opponent’s conduct was unreasonable. The court, however, applies a more objective assessment.

At ARC Costs, we frequently advise clients that dissatisfaction with an opponent’s conduct is not enough. The conduct must genuinely move the case beyond the ordinary run of contested litigation.

Guidance from Industrial Holdings Ltd v Salisbury

The courts continue to draw upon earlier authorities such as Industrial Holdings Ltd v Salisbury Developments Ltd when considering indemnity costs applications. That decision emphasised that indemnity costs should not become routine and that the court must identify features of the litigation that justify a departure from the normal approach.

This principle still remains relevant today. Whilst courts are willing to award indemnity costs in appropriate cases, they continue to regard such orders as exceptional rather than automatic.

The New Lottery Company decision reflects that cautious approach.

What does this mean for receiving parties?

For any receiving party, an indemnity costs order can be highly valuable. Not only does it improve prospects of recovery at the subsequent assessment of costs, but it also removes the proportionality hurdle that often leads to substantial reductions.

Additionally, where doubts arise during assessment, those doubts are resolved in favour of the receiving party. This can significantly strengthen the receiving party’s negotiating position.

However, parties seeking indemnity costs must ensure that they can clearly identify conduct that justifies the enhanced order. Simply winning the case will rarely be sufficient.

What does this mean for paying parties?

For the paying party, resisting indemnity costs can have significant financial importance.

Arguments often focus on demonstrating that:

• The litigation involved genuine disputes
• The case was reasonably arguable
• Conduct remained within the normal bounds of litigation
• Settlement positions were reasonable
• There was no serious misconduct

In many cases, successfully resisting an indemnity costs application can substantially reduce overall exposure.

How ARC Costs can assist

Many parties assume that because they have achieved a strong result at trial, indemnity costs should follow automatically. The courts continue to make clear that this is not the case. The key question is whether there is something about the conduct of the litigation that takes the matter outside the norm. The New Lottery Company decision is another reminder that indemnity costs remain exceptional, even in high-profile and heavily contested disputes.”

In our experience, the strongest indemnity costs applications are those supported by clear evidence of unreasonable conduct, procedural failures, or settlement behaviour that has unnecessarily increased costs.

Applications concerning indemnity costs frequently involve complex arguments about litigation conduct, settlement offers, proportionality and the court’s discretion under CPR 44.2.

At ARC Costs, we regularly advise both receiving and paying parties on:

• Applications for indemnity costs
• Costs recovery strategy
• Part 36 consequences
• Assessment of costs
• Detailed assessment proceedings
• Settlement negotiations
• Costs budgeting and proportionality

Whether seeking to justify an order for indemnity costs or resisting one, specialist costs advice can often have a significant impact on the outcome.

The decision in The New Lottery Company Ltd v The Gambling Commission [2026] Costs LR 481 serves as a useful reminder that indemnity costs remain a powerful tool, but one that will only be awarded where the facts genuinely justify departure from the standard basis.

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