Circumstances in which Indemnity Costs are Appropriate
There has been significant interest in the recent clinical negligence case EAXB v University Hospitals of Leicester NHS Trust in which the claimant was awarded indemnity costs where the defendant instigated a joint settlement meeting but made no offer. Therefore, we discuss the many circumstances in which a costs award on the indemnity basis may be justified.
The court has absolute discretion as to costs under CPR 44.2 and will have regard to the factors set out at CPR 44.2(4) and (5) when considering what costs order to make. The starting point is that costs will be awarded on the standard basis and so to justify a costs award on the indemnity basis requires “some conduct or some circumstance which takes the case out of the norm” in line with the guidance given by Lord Woolf in Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hamer Aspden & Johnson (Costs)  EWCA Civ 879. The intention behind an award of costs on the indemnity basis is to ensure that the receiving party does not have to overcome the proportionality test and any doubt as to reasonableness is resolved in its favour.
Traditionally, costs have been awarded on the indemnity basis where there has been some accountability or abuse of process such as the following:
Indemnity costs may be justified when there has been a significant level of unreasonableness or inappropriate conduct, which should be viewed in the context of the entire litigation.
In National Westminster Bank plc v Rabobank Nederland  EWHC 1742, indemnity costs were considered appropriate when a party’s core allegations were deeply flawed and it pursued claims of dishonesty throughout a trial.
Opportunistic technical challenges in respect of time limits and relief from sanction were identified as unreasonable conduct that may justify an order for indemnity costs in the well-known case of Denton v T H White  EWCA Civ 906.
Conduct and Hopeless Defences
In Lifeline Gloves Ltd v Richardson  EWHC 1524 (Ch), the claimant made an application for summary judgment which was dismissed on the basis that the defence case indicated that a trial would be justified. However, the defendant then proceeded to withdraw its defence. The defendant’s conduct was considered unreasonable and it was ordered to pay costs on the indemnity basis.
However, a party may also be ordered to pay indemnity costs if they pursue summary judgment when they ought to have known that it was not justified. Simmons & Simmons v Charles Hickox  EWHC 2141 (QB) refers.
Continued Pursuit of a Hopeless Claim
In Wales Construction Ltd v HGP Greentree Allchurch Evans Ltd  EWHC 2174 (TCC), the witness statements and an agreement reached between the parties’ experts made it clear that the claimant had no case against the defendant and should have discontinued its claim at that stage. However, the claimant continued pursuit of its claim and only discontinued on the day of the trial. The claimant’s conduct was considered unreasonable and it was ordered to pay costs on the indemnity basis.
A more recent example was demonstrated in Lejonvarn v Burgess & Anr  EWCA Civ 114, in which Lord Justice Coulson noted that the respondents had time to consider the implications of their previous failed claim against the appellants, and should have realised the remaining claims were so weak that they were very likely to fail. Coulson LJ noted that the decision to continue the case was less about seeking fair and reasonable compensation and more about punishing Ms Lejonvarn for alleged mistakes.
Indemnity costs may be justified when a lawyer conducts ‘excessive litigation’ whereby they fail to consider their other duties when following a client’s instruction to pursue aggressive and speculative litigation.
An example of this is the conduct of litigation for the purposes of exerting commercial pressure on a defendant. In Amoco (UK) Exploration Co v British American Offshore Ltd  EWHC 484 (Comm), the claimant lost the case heavily and was ordered to pay costs on the indemnity basis because it had “conducted itself on the basis that its commercial interests took precedence over the rights and wrongs of the matter”.
The characteristics of excessive litigation often include a constantly changing case (as was also the case in Amoco), grossly exaggerated quantum, and the pursuit of all issues to conclusion with no regard to proportionality.
Failed Allegations of Fraud
The general provision in relation to cases in which allegations of fraud are made is that, if they proceed to trial and the case fails, then in the ordinary course of events the party that makes such allegations will be ordered to pay costs on the indemnity basis. This was recently demonstrated in Natixis S.A v Marex Financial & Ors  EWHC 3163 (Comm).
The same position applies even on discontinuance. Clutterbuck v HSBC Plc  EWHC 3233 (Ch) refers.
Of course, the court retains complete discretion and there may well be factors that indicate that, notwithstanding the failure of the claim in fraud, indemnity costs are not appropriate.
Failure to come to Court with Open Hands
Indemnity costs may be justified when a party fails to comply with its duty to the court. In U & M Mining Zambia Ltd v Konkola Copper Mines plc  EWHC 3250 (Comm), U & M applied for a freezing injunction but failed to provide full disclosure when making the application. The injunction was continued, but the applicant was ordered to pay costs on the indemnity basis.
Refusal to Engage in Alternative Dispute Resolution
In the recent case of DSN v Blackpool Football Club Ltd (Rev 1)  EWHC 670 (QB), the defendant flatly refused to engage in ADR because it believed it had a strong defence and because “no purpose would be served by any form of ADR”. The claimant beat its own Part 36 offer made in December 2019 and would have, therefore, been entitled to costs on the indemnity basis from the date of expiry of that offer. However, instead the claimant was only awarded costs on the indemnity basis from 25 February 2019, being the date on which the defendant refused to attend a joint settlement meeting.
Failure to Accept a Settlement Offer
The Court of Appeal was clear in KIAM II v MGN Ltd (No 2)  EWCA Civ 66 that it would be rare that a failure to beat an admissible offer made under CPR 44 would attract an order for indemnity costs. However, in Southwark London Borough Council v IBM UK Ltd  EWHC 653 (TCC), an order was made on the indemnity basis when the claimant ought to have appreciated that there was no good reason why an offer made by the defendant should not have been accepted but failed to do so.
In the recent case of De Sena and Anor v Notaro and Ors  EWHC 1366 (Ch), HHJ Matthews considered the claimants’ failure to accept the defendant’s offers of settlement when awarding the defendant indemnity costs. He stated that “a refusal to accept a reasonable offer of settlement is nevertheless a factor which, added to other factors, may take the case out of the norm, and thus justify an award of indemnity costs”. The defendant had made three settlement offers; one by way of Part 36 and two without prejudice save as to costs offers.
He noted the comments of Coulson LJ in Lejonvarn (see above), that “moreover, if the claimant’s refusal to accept the offer comes against the background of a speculative, weak, opportunistic or thin claim, then an order for indemnity costs may very well be made.”
It should be noted that offers of settlement made under Part 44 should not be given the same status as Part 36 offers and the consequences under CPR 36.17 should not be applied to Part 44 offers.
Other Circumstances in which Indemnity Costs may be Awarded
Other examples of unreasonable conduct that may give rise to a costs award on the indemnity basis include abusing the court procedure, reliance on unjustified defences, misleading the court, and the admission and reliance upon voluminous and unnecessary evidence.
Indemnity Costs under Part 36
Not all orders on the indemnity basis are based on there having been some accountability or abuse of process. Costs on the indemnity basis may be awarded as the result of a Part 36 offer.
Under CPR 36.17(4)(b) the court must, unless it considers it unjust to do so, order that the claimant is entitled to costs (including any recoverable pre-action costs) on the indemnity basis from the date on which the relevant period expired.
The cases referred to in this article are merely a handful of authorities that demonstrate examples of conduct giving rise to indemnity costs. A table containing more of the key cases on indemnity costs can be found on Practical Law here.
An application for indemnity costs is based on the behaviour of the paying party justifying a departure from the normal basis for assessment. The mere fact that a case is complex and involves a lengthy trial does not take it outside of the norm. Similarly, the mere fact that a party discontinues a claim, withdraws defences or is unsuccessful at trial does not warrant a costs award on the indemnity basis. There must be something more, something which takes the case out of the norm. The question is whether the conduct of the paying party was at a sufficiently high level of unreasonableness or inappropriateness to justify an indemnity award.
As well as having the power to award the receiving party the totality of its costs on the indemnity basis, given the court’s discretion in making an order for costs and the menu of costs orders available, the court also has the power to award indemnity costs from a certain date or in respect of a specific issue.
Ultimately, the discretion to make a costs order on the indemnity basis is wide and the court must consider each case on its own facts.