The indemnity principle is a fundamental part of the law of legal costs in England and Wales. It forms the basis for how successful litigants (often referred to as the Receiving Party) can recover costs in civil proceedings (or where an inter-partes costs order has been made) and reflects the broader aim of ensuring fairness in litigation. The indemnity principle states that a party cannot recover more in legal costs from their opponent than they are liable to pay their own Solicitor. In effect, it prevents a litigant from profiting from a costs order and that they are only compensated for their actual loss with regards to expenditure on legal services. It also ensures that a losing party does not have liability to pay an excessive amount of costs which is not reasonable, or beyond what has actually been incurred.

Costs law has become exceptionally intricate over the past decade, and it is easy for a legal representative, without the assistance of a costs expert, to potentially offend the indemnity principle when they are seeking recovery of their costs.

ARC Costs have a team of experienced Costs Draftsmen and Costs Lawyers who can assist in the drafting of costs budgets, bills and negotiation of legal costs in line with the indemnity principle.

Indemnity Principle in Legal Costs – Origins and Rationale

The indemnity principle has its roots in common law. It is based upon the idea that the purpose of a costs order is to essentially indemnify or reimburse the successful party for costs reasonably incurred in the litigation. It is not intended to punish the losing party or provide a windfall to the winner.

This principle ensures that a successful litigant is restored to the financial position they would have been in had the litigation not occurred, without gaining a profit. It also protects the losing party from paying costs that the winning party was never liable to pay in the first place.

In reality, even when costs are awarded inter-partes, it is generally the position that the Receiving Party often recovers less than their actual outlay on costs, due to certain elements being deemed to be unreasonable in amount.  It is therefore not uncommon for costs on assessment to be recovered at 70 – 80% of what has been incurred/claimed.

Standard Basis Costs v Indemnity Basis Costs

The indemnity principle applies in both standard basis and indemnity bases costs assessments. However, each will have differing levels of scrutiny by a costs judge:

• Standard basis: The court allows only costs that are proportionate to the matters in issue. If there is any doubt as to whether costs were reasonably incurred or proportionate in amount, the benefit of that doubt is given to the paying party.  This is the default approach to detailed assessments, and generally 20 – 30% of Bills are reduced on this basis.
• Indemnity basis: The court still only allows costs that were reasonably incurred and reasonable in amount, but if there is any doubt, the benefit of that doubt is given to the receiving party. In addition, the stricter test of proportionality falls away.  However, even on the indemnity basis, the indemnity principle still applies. A party cannot recover more than they have agreed to pay their own legal representative.  Typically on an indemnity basis assessment, around 10% of the Bill could be knocked off on assessment unless highly unreasonable costs are sought.

For example, if a Solicitor has agreed to act for a client at a reduced hourly rate or under a capped fee arrangement, the client cannot claim more than this from the opposing party.

Where interim invoices have been raised to the client, if these are statute bills, then a Bill will need to be partitioned to split for these interim invoices, and capped accordingly so as to avoid any overspend being recouped from the other side.

Similarly, if a Solicitor acts on a “no win, no fee” basis (conditional fee agreement), the recoverable costs are limited to the costs the client would actually pay under the agreement in the event of success.

Conditional Fee Agreements and the Indemnity Principle

Conditional Fee Agreements (CFAs) are common in personal injury and other civil claims. Under a CFA, a Solicitor agrees not to charge their client unless the case is successful. If successful, the Solicitor may charge their normal fees plus a success fee.

The indemnity principle still applies in CFA cases. The amount recoverable in inter partes costs is limited to what the client is liable to pay in accordance with the rates as set out in the Agreement. Following the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), success fees and after-the-event (ATE) insurance premiums are no longer recoverable from the losing party in most civil claims (with some exceptions such as mesothelioma cases and publication and privacy proceedings).

In Bailey v IBC Vehicles Ltd [1998] EWCA Civ 566, the Court of Appeal confirmed that the indemnity principle limits the receiving party’s recoverable costs to what they are contractually liable to pay their Solicitor.

Exceptions to the Indemnity Principle in Legal Costs

Although the indemnity principle is a strong rule, it is not absolute. There are certain exceptions and modifications, including:

Legal Aid Costs

Legal aid certificates act as a retainer for a legally aided individual to recover legal aid costs from the Legal Aid Agency.  In circumstances whereby a legally aided individual has an inter partes costs order made in their favour, then the indemnity principle does not apply, and the conducting Solicitor for the Receiving Party is not limited to recovering legal aid rates.  Civil rates, usually pegged as alongside the applicable guideline rates at the time, can be claimed in any Bill of Costs thereby allowing the conducting Solicitor to recover fees akin to if the matter was funded by an alternative retainer.

Solicitors Acting Pro Bono

In cases where legal services are provided free of charge (pro bono), the indemnity principle would ordinarily bar recovery of any costs, as the client is not liable to pay. However, under the Legal Services Act 2007, a successful pro bono party may recover a “pro bono costs order” equivalent to inter partes costs, which are then paid to a designated charity rather than the party themselves. This is an express statutory exception.

Fixed Costs Regimes

In certain types of cases, such as personal injury fast track claims, fixed recoverable costs apply regardless of the actual fee agreement between solicitor and client. The courts have held that this is not inconsistent with the indemnity principle, as Parliament has created a statutory regime that overrides it.  As an example, on an hourly rate basis a Solicitor may incur less than the actual fixed fees permitted to be recovered under CPR 45.  Irrespective, the fixed costs can still be awarded as these are enshrined within the Rules.

Challenges and Controversies

The indemnity principle, while generally accepted, has been the subject of litigation and criticism, particularly in relation to technical challenges brought by paying parties seeking to escape liability for costs.

For instance, paying parties often attempt to argue that a solicitor-client retainer does not comply with the indemnity principle, thereby voiding a costs claim. This is common in CFA type disputes whereby, no fees have actually been paid by the client, and therefore the question as to whether a liability for costs has actually arisen is more arguable.  These arguments often focus on issues such as:

• A lack of a written retainer;
• Conflicts between the solicitor’s retainer and the claimed costs;
• Use of CFAs or damages-based agreements (DBAs) that do not comply with regulations.

However, Courts have generally taken a pragmatic approach, resisting overly technical arguments that would deny a successful party their costs. In Beasley v Alexander [2012] EWCA Civ 1269, the Court of Appeal confirmed that the indemnity principle is not to be used as a weapon to avoid paying costs where there is no real prejudice.

Costs Budgets and the Indemnity Principle

Under the Civil Procedure Rules (CPR), particularly CPR 3.13 to CPR 3.18, costs management and budgeting are now central features of multi-track litigation. Approved costs budgets guide what can be recovered in costs assessments.

However, even where a budget is approved or costs are allowed under a budget, the indemnity principle still operates. A receiving party cannot recover more than they are liable to pay under their solicitor’s retainer, even if the budgeted amount is higher.

This also works in converse, whereby if a Receiving Party’s actual costs exceed a budgeted amount, they are able to claim for the same.  These costs may however, not be recouped on a standard basis assessment due to the costs unreasonably exceeding an approved Budget, and no “good reason” existing to deviate from the Budget.

Practical Implications

For solicitors and clients, the indemnity principle highlights the importance of:

• Having a clear and compliant retainer agreement;
• Ensuring that the costs claimed reflect the retainer terms;
• Avoiding exaggerated or inflated costs claims;
• Understanding the limits of recoverable costs under CFAs or DBAs.
• Reviewing their hourly rates regularly to ensure these do not lag behind industry guidelines.

For paying parties, the indemnity principle can provide a ground to challenge costs, but such challenges must be based on substance rather than technicalities.

How Can ARC Costs Assist?

ARC Costs is a specialist legal costs consultancy who can assist with the recovery and negotiation of legal costs in compliance with the indemnity principle, ensuring that Receiving Parties comply with it and maximise or protect recoverable costs. 

As independent experts, we can act for Paying or Receiving Parties, and therefore we can defend or structure reasonable costs arguments around the indemnity principle where appropriate to do so.

ARC Costs ensures that costs budgets, bills of costs, and N260 statements accurately reflect the retainer terms between solicitor and client. This helps to avoid breaches of the indemnity principle, such as claiming more than the client is liable to pay.

We can negotiate costs using points of dispute and replies. If a challenge based on the indemnity principle arises, ARC Costs can provide advocacy and representation in costs hearings. We can attend costs assessments to argue the receiving party’s position or defend against an indemnity principle challenge.

For assistance with any legal costs queries, contact one of the team today. You can email info@arccosts.co.uk, or speak to one of our experts by calling 01204 397302.