Within reason

Those applying for indemnity costs awards need to back up their claims fully. Tony Hill reports on the latest significant judgment

Justice Coulson
Justice Coulson

The question of entitlement to an indemnity costs award is something of which most ­litigation practitioners will be broadly aware, but there remains a certain tentativeness and blurred understanding when it comes to applying to the court for an order.

In his judgment in the case of D Morgan plc v Mace & Jones (a firm) last month, Mr Justice Coulson provided a helpful discussion of the criteria and thresholds that might be relevant when a party seeks indemnity costs.

The scope for an award of indemnity costs in litigation is set out in Civil Procedure Rules (CPR) 44.3(4) and 44.4(3). The ­former ­indicates the general factors to which the court will have regard in making a costs order and the latter confirms that the effect of an order for indemnity costs is that any doubt as to whether they were (i) reasonably incurred and (ii) reasonable in amount will be resolved in favour of the receiving party. A standard costs order, in contrast, determines any doubt in accordance with ­reasonableness and ­proportionality in favour of the paying party.

Beyond the norm

The test for determining whether or not indemnity costs should apply was laid down in Excelsior Commercial & Industrial ­Holdings Limited v Salisbury Hammer ­Aspden & Johnson (2002). In that case, the Court of Appeal (CoA) stressed that indemnity costs could only be ordered where there was “some ­conduct or some circumstance which takes the case out of the norm”.

In Excelsior the CoA made it clear that a claimant should not be subject to an ­indemnity costs award merely because there had been a failure to beat a Part 36 offer.

This theme was taken up and worked through by Coulson J in Morgan. In that case the claimant was found to have advanced an “exaggerated and fundamentally flawed” action, which the judge said had taken it to the boundary of what might be considered “the norm”. The judge felt that a failure to give proper disclosure and dilatory conduct of the proceedings by the claimant were also factors that fell just short of warranting an indemnity order.

What tipped the balance in favour of the defendant, however, was the claimant’s ­failure to accept a Part 36 offer made a ­couple of months before the trial, which when assessed against a background of speculative litigation (and the additional component is crucial) was deemed ­sufficient to justify indemnity costs.

It is important to note that CPR 36.14(3)(b) provides that a claimant whose Part 36 offer is not beaten at trial by a ­defendant will ordinarily be entitled to their costs on the indemnity basis from the date on which the standard 21-day period for acceptance expired (as well as interest penalties). Anomalously, no such right is allowed to defendants.

The judge’s decision in Morgan was ­reinforced by the fact that the claimant was found to have given “highly unreliable” ­evidence in the witness box and that he had, on occasion, told “deliberate untruths”.

“When the principal witness and owner of the unsuccessful claimant seeks to bolster his speculative claim in such an illegitimate way his conduct is unreasonable to a high degree, and he inevitably lays the claimant open to the finding that the case was ­pursued outside any acceptable norm,” the judge said at the time, encapsulating the present state of the law on indemnity costs.
The award was accordingly made for indemnity costs from the last day the Part 36 offer could have been accepted.

Spurious and injurious

This is an interesting analysis for both claimants and defendants. In fact, Coulson J appears to suggest that the bar for an indemnity costs order is to be set at quite a high level.

Note that more was required in Morgan than exaggeration, a fundamentally flawed claim and defaults on disclosure coupled with delay in progressing the claim. It was only with the addition of an imprudently rejected Part 36 offer and an element of significant unreliability in the evidence that the claimant was found to have crossed the threshold.

Nevertheless, defendants should be emboldened to seek indemnity costs in all types of litigation where the cumulative ­factors identified by Coulson J apply or a similar sort of analysis can be made out. Although Morgan was a solicitors’ ­negligence case of considerable substance (£50m) and technical complexity, there is no reason why the judge’s reasoning should not apply with equal force to any sort of case.

As so often with costs judgments, there is still abundant room for debate and ­discretion, but this should be recognised by parties as a strong reminder that indemnity costs to a high level (in Morgan the figure represented the bulk of the costs of trial preparation and the trial itself) are a ­serious risk for overambitious claimants.

Tony Hill is a consultant at Beachcroft