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Running a business can be problematic at times. For example, you could encounter a business disagreement with another person or company when you carry out your business activity. If not quickly resolved, this could develop into a full-blown commercial dispute. Whilst parties to commercial disputes are encouraged to resolve these without court proceedings, there are instances where commercial litigation appears to be the ideal option. If so, knowing the rules for court proceedings is essential, including the importance of an indemnity costs award or an indemnity costs order. This article will explain the legal rights and obligations for indemnity costs.
What Are Indemnity Costs?
Indemnity costs are the costs a party incurs when carrying out litigation. However, these costs do not include anything which is either:
- unreasonable; or
- inappropriately incurred.
There are various costs associated with commercial proceedings which will be included in indemnity costs, such as:
- legal fees;
- expenditure;
- disbursements; and
- compensation.
If you are the unsuccessful party and receive an indemnity costs order, you must compensate the other party for their litigation costs. Legally, the Civil Procedure Rules (CPR) detail the indemnity costs principle. A court has two bases on which to calculate indemnity costs, which is either a:
- standard basis, or
- indemnity basis.
If neither is specified, a standard basis will be applied. This is the most common basis for calculating indemnity costs. The court considers receiving an indemnity order a form of punishment. As a result, it is usually ordered against the party who lost the commercial proceedings.
Will a Court Always Award Indemnity Costs?
The court has the discretion to award indemnity costs to a party in commercial litigation. A judge has to consider them on a case-by-case basis, taking into account:
- all circumstances surrounding the litigation; and
- any objections made towards a potential indemnity costs award.
However, generally speaking, indemnity costs will be awarded where, during the court proceedings, there has been a failure in a party’s conduct within the legal system. Therefore, the party considered at fault will receive the order to pay the costs. However, it is possible to award indemnity costs based on other factors, such as where the court litigation cannot be carried out in a proportionate manner. Because these circumstances add complexity to indemnity costs orders, seeking advice from a dispute solicitor can help you determine whether any relevant reasons apply to your case.
Examples of where a party’s conduct may give rise to an indemnity costs order include:
- unreasonable conduct even if it is not morally condemnable;
- not complying with the pre-action procedure;
- a party delaying the timetable for proceedings;
- where a party inappropriately makes an application for a summary judgment and this is retracted; and
- where a party decides to discontinue the case.
However, there are two instances where the CPR say that indemnity costs must be awarded. This is where an assessment of costs needs to be made either:
- from a fund to a trustee or personal representative; or
- by a client to their solicitor.
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What Does the Court Consider When Making Indemnity Orders?
The CPR detail the discretion of the court when it comes to indemnity costs in litigation. It can decide:
- whether a party has to pay other party’s costs;
- the amount a party has to pay the other;
- when the payment needs to be made;
- who pays who, although it is usually the losing party who will pay; and
- whether the costs a party incurred are a reasonable amount or incurred in a reasonable fashion if the indemnity order is on an indemnity basis.
If the court does calculate on an indemnity basis, in assessing reasonably, it has to look at all the circumstances except proportionality. This is because the court presumes favour towards the receiving party.
When Are Indemnity Costs Unlikely to be Awarded?
There are typical instances when a judge is unlikely to award indemnity costs in litigation. One such example may be where you and the other party are acting in an uncooperative and aggressive way toward each other. Other instances include where:
- there is no unreasonable conduct, even if the party was simply wrong, such as by starting a weak claim or refusing a reasonable settlement;
- the court case is weak; or
- there has been a refusal to mediate.
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Key Takeaways
If you are a party to commercial litigation, it is possible that you could either find you have an indemnity costs order at the end of it or receive an indemnity costs award. Indemnity costs refer to all the costs associated with participating in court proceedings, such as legal fees. Usually, they arise when a party has been at fault regarding their conduct within the legal system. However, the judge must still look at the circumstances of the case and any opposition to a potential order. If you are successful, an indemnity order will tell the other party to pay when proceedings conclude. Nonetheless, you should be aware of conduct that may risk your ability to secure an indemnity order.
If you need help understanding indemnity costs in the UK, LegalVisions’ experienced disputes and litigation solicitors can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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