UK: It Always Pays to Win – But Sometimes It Pays More

Last Updated: 3 August 2006
Article by Julia Ford

Under the English Civil Procedure Rules the Court has discretion as to whether costs are payable by one party to any other, the amount of those costs and when they are to be paid. (CPR 44.3) The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party (i.e., their legal expenses—covering solicitors’ and counsel’s fees, together with disbursements that usually include expert fees, Court fees, costs of transcribers, photocopying and other associated expenses), although the Court has the power to make a different order.

According to Parts 44.3(4) and (5) of the Civil Procedure Rules, in deciding what order (if any) to make about costs, the Court must have regard to all the circumstances, including —

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of his case, even if he has not been wholly successful . . . ;

(5) The conduct of the parties includes;

(a) conduct before, as well as during, the proceedings . . . ;

(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; and

(c) the manner in which a party has pursued or defended his case or a particular allegation or issue . . . ."

The Court has the option of assessing costs on the standard or the indemnity basis. In assessing costs on the standard basis the Court will only allows costs which are proportionate to the matters in issue, and resolve any doubt it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favor of the paying party. On the other hand, if costs are assessed on the indemnity basis, the Court will resolve any doubt as to whether costs were reasonably incurred or were reasonable in amount in favor of the receiving party. In either case, the Court will not allow costs which have been unreasonably incurred or are unreasonable in amount.

The circumstances in which indemnity costs can be awarded have been the subject of much judicial discussion recently. In Tradigrain S.A. & Ors. v Intertek Testing Services Canada Ltd. & Anor [2006] EWHC 926 (Comm), Mr. Justice Langley emphasized the general point, made in his earlier decision in Amoco v. BAO [2002] BLR 135, that "a victory, however resounding, is not enough of itself to justify indemnity costs. There has to be some added factor to justify departure from what is and remains the general rule that costs are to be assessed on the standard basis." The basic principle is, therefore, that there must be some conduct or some circumstance which takes the case out of the norm. Indemnity costs are not intended as a punishment, rather as a device to ensure a more equitable result for the beneficiary of a costs award; the costs paid still have to have been "reasonably" incurred although the burden will be shifted to the paying party to prove that the relevant costs were not reasonably incurred.

The second recent case to discuss indemnity costs was handed down by Mr. Justice Tomlinson in respect of (1) Three Rivers District Council And Others and (2) Bank Of Credit And Commerce International Sa (In Liquidation) v The Governor And Company Of The Bank Of England [2006] EWHC 816 (Comm). BCCI was a bank based in Pakistan that collapsed in the early nineties causing considerable hardship for its creditors,many of whom were small investors. BCCI was founded in 1972 by Pakistani businessman Aga Hasan Abedi. It operated in 60 countries and its regulation was split between the Bank of England, the Cayman Islands and Luxembourg, which led to difficulties when it was being wound up. During the 1980s, evidence emerged of BCCI’s links with terrorist organizations, arms shipments to Arab states and South American drug cartels. (The background to this murky affair is contained in A Report to the Committee on Foreign Relations United States Senate by Senator John Kerry and Senator Hank Brown December (1992 102d Congress 2d Session Senate Print 102- 140).) The English liquidators of the collapsed bank, acting on behalf of 6,500 UK-based depositors, who lost money when it was shut down in 1991, sued the Bank of England (UK’s central bank) for about £1bn for "knowingly or recklessly" failing in its supervisory role. The Bank was legally protected from negligence claims. The liquidators therefore pursued a claim of "misfeasance," which implied that Bank officials were not just reckless but acted dishonestly.Misfeasance is the "wrongful exercise of lawful authority."Various employees were accused of dishonesty in the pleadings, and in the extensive press reporting of the case that ensued. The case took 10 years to reach the Courts but the liquidators withdrew their claim after the (lengthy) cross examination of the Bank’s first two witnesses. When a claim is discontinued in English proceedings, costs are usually payable by the claimant. In this instance the liquidators had already offered to pay the Bank’s costs on an indemnity basis.

The Bank of England sought the above mentioned judgment, however, to confirm their legal, as opposed to commercial, entitlement to indemnity costs. Both sides no doubt understood that any ensuing judgment on the Bank’s entitlement to indemnity costs would contain criticism of the liquidators’ handling of the case, and this is why, despite the liquidators’ agreement to pay on the indemnity basis, the Bank of England still sought confirmation from the judge that they were entitled to indemnity costs.

This judgment has excited considerable comment in both the legal and national press in the United Kingdom in particular because of the strident criticisms made by the judge in relation to the conduct of the legal team representing the liquidators of BCCI. Given both its profile and the detailed analysis by Mr. Justice Tomlinson of the factors he considered in awarding indemnity costs to the Bank of England, the BCCI judgment provides a helpful restatement of the criteria adopted in awarding indemnity costs against a losing party. Above all:

The Court should have regard to all the circumstances of the case and the discretion to award indemnity costs is extremely wide.

There must be some conduct or some circumstance which takes the case out of the norm.

The Court can and should consider the conduct of an unsuccessful claimant both before and during the trial, in particular whether it was reasonable for the claimant to raise and pursue particular allegations and the manner in which the claimant pursued its case and its allegations. If the conduct of the unsuccessful claimant is relied on as a ground for ordering indemnity costs then the test is the "unreasonableness" of the conduct.

Although each decision will be based on its own facts, a claimant can expect to pay indemnity costs if it fails on a claim which contains one or more of the following elements:

The claim is speculative, weak, opportunistic or thin (e.g. a claimant who chooses to pursue it is taking a high risk); The claim includes allegations of dishonesty or conduct meriting an award to the claimant of "exemplary" damages, and those allegations are pursued aggressively, inter alia by hostile cross-examination of witnesses:

The unsuccessful allegations are the subject of extensive publicity, especially where such publicity has been courted by the unsuccessful claimant: and

Conduct attracting moral condemnation is, in itself, a ground for an award of indemnity costs.

In the BCCI case, Mr. Justice Tomlinson took particular note of the fact that (as he saw it) the liquidators commenced and pursued large-scale and expensive litigation in circumstances calculated to exert commercial pressure on the Bank. During the course of the trial , they resorted to advancing a constantly changing case in order to justify the allegations made, only then to withdraw the claim. The allegations were "thin (and, in some respects, far-fetched) and irreconcilable with the contemporaneous documents."They effectively turned the case into an unprecedented factual enquiry by the pursuit of an unjustified case. They advanced and aggressively pursued serious and wide-ranging allegations of dishonesty or impropriety over an extended period of time against a large number of Bank officials (despite the lack of any foundation in the documentary evidence for those allegations. They maintained those allegations, without apology, to the bitter end. And the Court found that they actively sought to Court publicity for those allegations of dishonesty both before and during the trial in the international, national and local media.

Mr. Justice Tomlinson therefore held that an award of indemnity costs against the liquidators was justified. The fact that the judgment was handed down at all was in itself significant, since the liquidators had already agreed to pay indemnity costs to the Bank and had sought to preventMr. Justice Tomlinson ruling on the question of indemnity costs (or awarding the costs of the Bank’s application). Instead,Mr. Justice Tomlinson held that, although the claim had been withdrawn before he could make a judicial determination on the facts, "In my judgment the Bank was fully entitled to pursue this application. It would have been an affront to justice and contrary to the public interest had the liquidators successfully stifled publication of the Court’s conclusions. It was of itself unreasonable of the liquidators to deny the Bank’s entitlement to the costs order which it sought."

There is no doubt that the device of awarding indemnity costs provides some protection against the practice of bringing claims in the belief there is a "deep pocket" (often an insurer) who could be persuaded into an early settlement to curtail expenses. In the insurance context, under English law, ex gratia payments do not automatically attract the benefit of reinsurance protection; therefore, the settlement of such speculative litigation is unattractive to an insurer both from a commercial, as well as a moral, perspective. However, even an award of indemnity costs will leave some costs unrecovered. In most cases, whether costs are assessed on a standard or indemnity basis, a vindicated party will still end up bearing some of the costs of successfully defending a claim. If the party has insurance coverage it will still be responsible for the deductible. If it has no insurance coverage then it must bear all of the unrecovered costs.

The case law emphasizes that the award of indemnity costs is not intended to be punitive. The question, therefore the question remains: Does the threat of being charged with costs on an indemnity basis—coupled with the prospect of critical comments in the judgment awarding such costs—a deterrent, on its own, to the active pursuit of high value, but in some cases highly egregious,"nuisance" claims?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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