The rise of indemnity costs

The Solicitors Regulation Authority’s (SRA) recent report Walking the line: the balancing of duties in litigation raises concerns about solicitors and their engagement in improper or abusive litigation on their clients’ behalf. The new proportionality costs test means that a defendant who successfully survives such an action may not be able to recover more than a fraction of their costs unless they persuade the court to award them costs on the indemnity basis. It will come as no surprise therefore that applications for indemnity costs are becoming more frequent. What is perhaps more surprising is the readiness with which judges are granting these applications. We look at some of the circumstances in which a litigant can realistically hope to get an order for indemnity costs.

Indemnity costs – the test

The case most often referred to is Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson (2002). The Court of Appeal said that indemnity costs should only be awarded where the case is “outside the norm”. Before the introduction of the Civil Procedure Rules, the courts had required conduct meriting moral condemnation before they would make such an order but this is no longer the case. The purpose of the order is not to punish the paying party for its conduct but to provide the receiving party with a more generous measure of recoverable costs.

Any dishonesty or lack of integrity in the formulation of the claim or the conduct of the litigation will make an order for indemnity costs highly likely but orders have been made in a wide range of circumstances not involving morally reprehensible conduct.

Excessive litigation

Many of the examples of unacceptable conduct referred to in the SRA report involve the solicitor unduly prioritising the client’s interest over their other duties. One example given is “excessive litigation, where the solicitor fails to consider their other duties when following a client’s wish to pursue aggressive and, in particular, speculative litigation”.

This is not a new problem. Back in 2006 in the Three Rivers litigation, Tomlinson J gave examples of circumstances which would take a case out of the norm. These included pursuing serious and wide-ranging allegations of dishonesty or impropriety and/or a weak claim irreconcilable with the contemporaneous documents. Litigation calculated to exert commercial pressure on a defendant will usually justify an order for indemnity costs. The characteristics of excessive litigation often include a constantly changing case, grossly exaggerated quantum, the pursuit of all issues to the bitter end and no regard for proportionality.

Perhaps the most outrageous example in recent months has been that of Excalibur Ventures LLC v Texas Keystone Inc. As the judge put it, the claim was pursued as if it were an act of war. The claimant’s solicitors participated in this enterprise with correspondence that was highly aggressive and on occasion included unacceptable content such as ill-founded allegations of criminal conduct. The judge warned that parties whose solicitors engage in this type of behaviour should not be surprised if they end up paying the costs on the indemnity basis.

Pursuing a hopeless case

In Noorani v Calver the judge said that the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) could justify an indemnity costs order. This need not be accompanied by any of the other factors listed above, although it often will be. This could be of particular relevance where claims without any merit are persisted in unreasonably by litigants in person.

Misleading the court

The SRA report also records an increase in reports of solicitors misleading the court, where the solicitor knowingly or recklessly gives false information to the court or permits it to be given. This will usually be in witness statements or statements of case. The same effect can be sought by withholding relevant documents. Boreh v Republic of Djibouti is a recent illustration of a solicitor deliberately misleading the court in the context of an application for a freezing injunction.

In ZYX Music GmbH v King, the judge found serious abuses of the witness statement procedure. He said that the primary responsibility to prevent abuse must lie with each party's solicitors but that it was impossible to determine whether the solicitors were in default or the extent of default, because that was not in issue at the trial and the solicitors had not given evidence, and because of client privilege. For these reasons, the court will rarely be able to distinguish between the conduct of the party and their legal representatives and will apply the relevant sanction, usually indemnity costs, to the party.

Failure to accept a settlement offer

In 2002 the Court of Appeal in Kiam II v MGN Ltd (No 2) said that it would be “a rare case indeed” where the refusal of a settlement offer would attract an order for indemnity costs. Conduct would have to be “unreasonable to a high degree” to justify such an order.

The introduction of the Jackson reforms in April 2013 and the increased focus on proportionate costs in the overriding objective is changing the court’s attitude to parties who fail to settle. The court will have regard to the parties’ conduct when exercising the general costs discretion under CPR 44.2 irrespective of whether or not CPR 36 is engaged.

Indemnity costs were ordered in Walter Lilly & Company Limited v Mackay against an unsuccessful defendant who had unreasonably failed to accept a Part 36 offer withdrawn a week before trial. An unreasonable refusal to mediate may also result in an order for indemnity costs (see Garritt-Critchley v Ronnan).

In Igloo Regeneration (GP) Ltd v Powell Williams Partnership the judge considered the claimants’ decision to reject an offer at a level they themselves had put forward just a matter of days before to be unjustifiable conduct. Parties, and not only the court, now have to consider the impact of costs under the overriding objective. An enormous amount of time, cost and court resource was wasted as a result of the claimants' behaviour. They were ordered to pay the successful defendant’s costs on the indemnity basis from shortly after the relevant offer.

Comment

An order for indemnity costs can now, almost literally, be described as worth its weight in gold. Where a claim is pursued successfully to trial, the claimant’s unrecoverable costs following assessment under the new proportionality test may exceed the claim. Where a claim is defeated, the defendant’s unrecoverable costs are likely to be significant. An order for indemnity costs is the only satisfactory outcome for the successful party in those circumstances.

The courts’ reluctance to make orders for indemnity costs in the absence of extreme or morally reprehensible behaviour is much less evident. The only fair way of sharing the courts’ resources and of achieving a fair outcome for the successful party may prove to be an order for indemnity costs. There is no longer an unfettered right to pursue a good case to trial. If a claimant could and should have settled at an earlier stage in the proceedings and ultimately fails to win, they may now find themselves on the receiving end of what used to be a sanction reserved for conduct falling outside the norm.