Indemnity Costs in UK Law

I for my part, understand the Court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight.

If costs are awarded on an indemnity basis, in many cases there will be some implicit expression of disapproval of the way in which the litigation has been conducted, But I do not think that this will necessarily be so in every case.

The discretion is a wide one to be determined in the light of all the circumstances of the case. To award costs against an unsuccessful party on an indemnity scale is a departure from the norm. There must, therefore, be something – whether it be the conduct of the claimant or the circumstances of the case – which takes the case outside the norm. It is not necessary that the claimant should be guilty of dishonesty or moral blame.

It is plain, as Lord Woolf, Master of the Rolls, pointed out in the Petrotrade case, that paragraphs (2) and (3) of CPR 36.21 – in conjunction with paragraph (4) – are intended to provide an incentive to a claimant to make a Part 36 offer. The incentive is that a claimant who has made a Part 36 offer (which is not accepted) and who succeeds at trial in beating his own offer stands to receive more than he would have received if he had not made the offer.

As the passages set out in paragraph 14 above make clear, costs management orders are designed to set out the probable limits of the costs that will be proportionately incurred. I accept, of course, that a party seeking to recover disproportionate costs on an assessment on the indemnity basis is required to show that those costs were reasonably incurred; though that requirement is subject to the provisions of r. 44.3(3).

Secondly, this would provide the benefits of both consistency and certainty. There is a concern that, if an order for indemnity costs allows a receiving party to ignore the costs management order, then that will encourage successful parties to argue for indemnity costs every time. That would be unfortunate, and would leave an unacceptable doubt hanging over even approved costs budgets, all the way through to judgment and beyond.

I take those two examples only for the purpose of illustrating the fact that there is an infinite variety of situations which can come before the courts and which justify the making of an indemnity order. This court can do no more than draw attention to the width of the discretion of the trial judge and re-emphasise the point that has already been made that, before an indemnity order can be made, there must be some conduct or some circumstance which takes the case out of the norm.