UK: High Court Orders Indemnity Costs Following Discontinuance Of Proceedings Alleging Serious Fraud

Last Updated: 12 September 2018
Article by Herbert Smith Freehills

The High Court has ordered indemnity costs against a claimant who made repeated and serious allegations of fraud against the defendants and then discontinued the proceedings without explanation: PJSC Aeroflot – Russian Airlines v Leeds & Anor (Trustees of the estate of Boris Berezovsky) & Ors [2018] EWHC 1735 (Ch). The court endorsed earlier authority to the effect that, in the ordinary course, discontinuance of proceedings in which fraud or serious misconduct has been alleged should result in an indemnity costs order.

The court also held that indemnity costs were justified in the present case applying the more general test that the claimant's conduct of the proceedings fell "out of the norm". That conduct included the relentless manner in which the fraud allegations had been pursued "up to the bitter end", engaging in aggressive correspondence, and making several inaccurate statements to the court.

The decision highlights the special treatment that allegations of fraud and serious misconduct are given in civil proceedings, including the strict ethical obligations on legal representatives not to pursue such allegations without having satisfied themselves that there is reasonably credible material establishing an arguable case. The court recognises the serious implications to defendants of having fraud alleged against them and, where such allegations are then abandoned, being deprived of the opportunity to defend the allegations and vindicate their position.

While an award of indemnity costs in such circumstances is not automatic and a court retains a discretion based on all the circumstances of the case, claimants who pursue allegations of fraud or serious misconduct should be aware of the seriousness of doing so and the likelihood of incurring the court's disapproval if they abandon such allegations, particularly without putting forward any good explanation.


The claimant was a Russian airline and had accused the defendants of serious fraud, conspiracy, and dishonesty. The defendants were (i) two Russian businessmen who previously worked for the claimant (G and B) and (ii) a group of companies known as the Forus companies. At the time of the alleged fraud the Forus companies were controlled by B. The claimant alleged that G and B conspired together to cause the claimant to enter into substantial loan agreements with the Forus companies, which were unnecessary and were used to misappropriate vast sums of money. The defendants contested every aspect of the claim and alleged that the proceedings were politically motivated.

Shortly before the trial G was found murdered and, shortly after that, the claimant served notice discontinuing the proceedings without explanation. The defendants sought an order for their costs to be awarded on the indemnity basis.


The court allowed costs on the indemnity basis. In reaching that decision, Mrs Justice Rose considered the following three issues.

i) Will indemnity costs be the appropriate remedy in fraud proceedings when there is a notice of discontinuance?

The court referred to Clutterbuck v HSBC Plc [2015] EWHC 3233 (Ch), which identified the general proposition that when a claimant discontinues a case involving serious allegations of fraud, an order for indemnity costs will generally be appropriate. This was regarded as a natural extension of the general position that indemnity costs will usually be appropriate where a claimant fails to make good its fraud allegations following a full trial. The court observed that there will usually be even stronger grounds for a court to express its disapproval in a case where such allegations are abandoned, thereby depriving the defendant of the opportunity to vindicate its reputation.

While Mrs Justice Rose accepted that the proposition articulated in Clutterbuck should not be regarded as a "rule", she accepted the approach as sound. Where a claimant makes serious allegations of fraud, conspiracy and dishonesty and then abandons those allegations, an order for indemnity costs "is likely to be the just result, unless some explanation can be given as to why the claimant has decided that the allegations are bound to fail."

The court observed that there were no grounds to distinguish the present case from Clutterbuck, noting that in both cases the fraud allegations had been abandoned only at the last moment before trial and with no explanation given.

ii) Was the claimant's conduct "out of the norm"?

The court also accepted that there was sufficient basis to order indemnity costs on the more familiar basis that the claimant's conduct of the proceedings was "out of the norm" for such litigation.

This included the vigorous and relentless manner in which the claimant had pursued the fraud allegations over eight years (including repeating and relying on the claims in the context of several interim disputes) right up to hours before serving the notice of discontinuance. Further, the claimant was found to have acted more generally in an "unusually aggressive" manner. This included sending what Mrs Justice Rose regarded as a "shameful" letter to G's estate on the day he died which "berated" G's daughter and civil partner, and referring to the foreign lawyer who had set up the Forus companies as "the convicted fraudster" when the factual circumstances did not justify that description. In addition, the court took into account its finding that the claimants had made a number of inaccurate and misleading statements to the court during interim hearings.

iii) Was the defendants' refusal to mediate relevant to the costs order?

In response to the application for indemnity costs, the claimant argued that such an order was not appropriate on the grounds that the defendants had refused to mediate the dispute (relying on the established position that a party's unreasonable refusal to mediate may justify it being deprived of some or all of the costs to which it would otherwise have been entitled).

The court rejected that argument, finding that the defendant's refusal to mediate in this case was not unreasonable. Mrs Justice Rose emphasised the fact that, given the nature of the fraud allegations, proceeding to a full trial would have been the only way the defendants could have defended their reputations and vindicated their position.

It should be noted, however, that the assessment of whether a refusal to mediate was unreasonable in any particular case is a matter of discretion, based on the judge's view of the overall circumstances. Cases involving fraud allegations are in fact frequently mediated, and a judge in another case may not be as willing to accept the existence of fraud allegations as in itself sufficient justification for a refusal to mediate – particularly in a case where the claimant's conduct had not attracted the same level of disapproval as in this case.

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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