Indemnity Costs: Costs Awarded on the Indemnity Basis Meaning

When a court orders one party to pay costs, those costs will usually be assessed on either the standard basis or the indemnity basis.

The indemnity basis is more favourable to the receiving party and can result in a higher level of costs recovery. However, it does not mean that the successful party will automatically recover everything it has spent. So, what are indemnity costs, when can they be awarded and what happens if the parties cannot agree how much should be paid?

What are indemnity costs?

The rules governing the assessment of legal costs are contained within CPR Part 44. On the standard basis, the court will only allow costs that are reasonable and proportionate to the matters in issue. If there is any doubt about whether costs were reasonably incurred or proportionate, the court will resolve that doubt in favour of the paying party.

The indemnity basis is different, however. There is no separate proportionality test. Any doubt about whether costs were reasonably incurred or are reasonable in amount is resolved in favour of the receiving party. This gives the receiving party an advantage when the final amount of costs is determined.

Does indemnity basis mean all costs are recovered?

No it does not meal all costs will be recovered. An award of indemnity costs does not mean the losing party simply has to pay the successful party’s entire legal bill. Costs that were unreasonably incurred or are unreasonable in amount can still be reduced or disallowed.

For example, a paying party may still challenge excessive time, unreasonable hourly rates, unnecessary work or duplication.

The important difference is that proportionality does not apply in the same way and doubts over reasonableness favour the receiving party.

When will indemnity costs be awarded?

Indemnity costs are not automatically awarded simply because one party loses.

One of the leading Court of Appeal decisions is Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson. The court explained that there generally needs to be something about the case or the way it has been conducted that takes the case out of the norm.

There is no fixed list of circumstances. An indemnity costs order might be considered where a party has pursued a particularly weak case, made serious allegations without sufficient evidence, continued with allegations after their position became difficult to justify or behaved unreasonably during the litigation.

The court will only make its decision after considering the particular circumstances of the case.

Recent examples of indemnity costs

A number of recent decisions demonstrate how indemnity costs can arise.

In the litigation brought by Prince Harry and other claimants against Associated Newspapers, the High Court ordered indemnity costs after criticising the way serious allegations had been brought and pursued. The claimants were also ordered to make an interim payment of around £9.54 million towards the publisher’s costs.

ARC Costs has also covered HD & Ors v North Devon Healthcare Trust & Ors, where solicitor misconduct resulted in an indemnity costs order.

More recently, Samra & Anor v Sandwell Metropolitan Borough Council showed that unreasonable conduct is not always necessary. The Upper Tribunal awarded indemnity costs following a compulsory purchase compensation dispute without needing to determine whether the council had behaved unreasonably.

These cases show that an award of indemnity costs can arise in very different circumstances.

Can indemnity costs apply to only part of a claim?

Yes, the court may order indemnity costs for only part of the claim or from a particular date. For example, the court might decide that a party’s conduct only became unreasonable at a certain stage of the proceedings. Costs before that point could remain on the standard basis, with later costs assessed on the indemnity basis.

The wording of the costs order is therefore important.

What about Part 36 offers?

Part 36 offers can also result in indemnity costs. Where a claimant makes a valid Part 36 offer and then achieves a judgment at least as advantageous as that offer, enhanced costs consequences can apply. Subject to the Part 36 rules, these can include costs being awarded on the indemnity basis for the relevant period.

Settlement offers can therefore have important consequences beyond the amount being offered. However, simply rejecting an offer does not mean indemnity costs will automatically follow. The circumstances and the type of offer made will matter.

What happens after indemnity costs are awarded?

Being awarded costs does not necessarily determine how much the losing party will actually have to pay. The parties may negotiate and agree a figure. If agreement cannot be reached, the costs will be assessed. In higher-value cases, this may involve a detailed assessment.

The receiving party will usually prepare a Bill of Costs and the paying party can challenge the amounts claimed. The costs include items such as solicitors’ time, counsel’s fees, expert fees and other disbursements, depending on the case.

Even where the indemnity basis applies, these costs can still be examined to determine whether they were reasonably incurred and reasonable in amount.

Standard basis vs indemnity basis

The main difference between standard basis and indemnity basis costs is relatively simple. On the standard basis, costs must be reasonable and proportionate, with doubts generally resolved for the paying party.

On the indemnity basis, proportionality does not apply in the same way and doubts about reasonableness are resolved for the receiving party. Neither basis automatically guarantees that the receiving party will recover its entire legal bill.

How ARC Costs can help

ARC Costs acts for both paying and receiving parties in costs disputes.

Our work includes preparing and challenging Bills of Costs, Points of Dispute and Replies, advising on Part 36 offers, negotiating settlements and assisting with detailed assessment proceedings.

For a receiving party, an indemnity costs order can improve the level of recovery. For a paying party, however, it does not mean that every item claimed must be accepted.

Specialist advice can help both sides understand the effect of the order and determine what should reasonably be paid.

Follow Us