Introduction
Costs on an indemnity basis is a feature observed in common law jurisprudence, and enables a party to secure compensation to as full an extent as possible for the outlay and trouble of litigation.
Jurisdictions which are based on a common law system i.e., England and Wales, the Dubai International Financial Centre ("DIFC"), Singapore, Hong Kong, etc., have mechanisms which inter alia govern costs on an indemnity basis and how these are applied.
This article shall consider how indemnity costs are dealt with by court systems in England and Wales, the DIFC, but also the trend in international arbitrations.
Rule of Indemnity Costs
Usually when making an order of costs, the basic rule is that the successful party is entitled to costs on the standard basis; however, the successful party can secure a different order which is that costs will be assessed on an indemnity basis.
An indemnity costs order cannot be construed as a penal costs order, it allows costs to be assessed on the basis of what has been reasonably incurred rather than the default standard basis of what is reasonable and proportionate both in amount and work done.
Therefore, one of the major differentiating factors between indemnity costs and standard costs is that where in a case of standard costs, the party will receive only costs which are proportionate, this requirement of proportionality does not exist in relation to an order of costs made on an indemnity basis.1
However, while proportionality is not the cornerstone for an order of costs on an indemnity basis, it is often perceived that indemnity costs are punitive in nature. On the contrary, the basis for indemnity costs is not to punish the paying party but to arrive at a fair result for the party in whose favour costs are issued.2
Statutory Framework Adopted by the Courts for Awarding Costs on Indemnity Basis
The basis for awarding indemnity costs is prevalent across several common law judicial systems.
Some of the key jurisdictions i.e., England & Wales and the DIFC Courts are highlighted for the purpose of this article, below.
In England & Wales, Part 36 of the Civil Procedure Rules ("CPR") provides a structured settlement mechanism which is designed to encourage parties to resolve their disputes before trial.3
Under Part 36 of the CPR, either party can make an offer to settle a claim or a portion of the claim/counter-claim, in writing, specifying a 'relevant period' of at least twenty-one (21) days during which the other party can accept or refuse the offer.4
For the purpose of this article, the costs consequences of a Part 36 offer is relevant inasmuch as it allows the offering party to seek costs from the Court on an indemnity basis from the date on which the relevant period expired.5
While awarding costs on an indemnity basis, the Court needs to adopt the following basis of assessing costs:6
disallow any costs which it finds to have been unreasonably incurred; or
disallow any costs which it considers to be unreasonable in amount.
Further, the Court needs to ensure to resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party.7
It is noteworthy that the Court's discretion in awarding indemnity costs is wide, and it will exercise this by considering all circumstances and considering matters complained of in the context of the overall litigation.8 In one instance, the Court awarded indemnity costs in cases subject to fixed costs, where a claimant beat his own Part 36 offer.9
In recent times, the Court has been strict in its application of indemnity costs, considering even £1 settlement offers genuine and awarding indemnity costs after the claimant was able to achieve a better outcome at trial.10
Even in arbitration claims, the Court has considered the application of indemnity costs arising due to discontinued proceedings seeking to challenge two arbitral awards.11
The DIFC Courts modelled on common law system, has adopted a similar pattern, bringing the concept of indemnity costs to the United Arab Emirates and the Middle East.
Part 32 of the Rules of the DIFC Courts ("RDC") also incentivizes early settlement of disputes by imposing cost consequences when a
Similar to the CPR, the RDC also requires the offer to be in writing, specify a period of not less than twenty-one (21) days and state whether it relates to the whole or part of the claim/counter-claim.12
Further, the DIFC Court also has power to and will order costs on the indemnity basis from the date on which the relevant period expired, unless it considers it unjust to do so.13
Meanwhile, Part 38 of the RDC also adopts a mechanism similar to Part 44 of the CPR, inasmuch as where costs are to be assessed on an indemnity basis, the Court will resolve the doubt as to whether costs were reasonably incurred or were reasonable in amount, in favour of the receiving party.14
Therefore, the Court will also consider the following factors while assessing costs on the indemnity basis i.e., costs unreasonably incurred or unreasonable in amount.15
The DIFC Courts' Cost Regime, also stipulates factors to be considered by the Courts, in determining whether costs are to be issued on a standard basis or indemnity basis:16
circumstance where the facts of the case and/or the conduct of the paying party are/is such as to take the situation away from the nor; for example, where the Court has found deliberate misconduct in breach of a direction of the Court or unreasonable conduct to a high degree in connection with the litigation; or
otherwise inappropriate conduct in its wider sense in relation to a paying party's pre-litigation dealings with the receiving party, or in relation to the commencement or conduct of the litigation itself; or
where the Court considers the paying party's conduct to be an abuse of process.
It is also open to the DIFC Court to award costs on the indemnity basis in relation to specific portions of the trial or hearings which have led to unnecessary costs being incurred by a party.17 However, an order for indemnity costs will not enable a party to receive more costs than what they have incurred.18
The DIFC Courts have also ordered costs on an indemnity basis based on the principle under RDC 32.49(b) that the party's offer was at least as advantageous to them as the proposals contained in the party's Part 32 offer.19
In 2017, the DIFC Courts introduced an administrative direction empowering the Court to order costs on an indemnity basis for failed challenges to set aside arbitral awards or applications for removal of arbitrators, before the DIFC Courts.20 The DIFC Courts have applied this administrative direction inter alia noting that a category of circumstances justifying an order for indemnity costs is where an unsuccessful Article 41(2) challenge is made which has been found not to have real prospects of success.21
Meanwhile, several other jurisdictions i.e., Singapore and Hongkong also have similar provisions.
In Singapore, the rules follow similar procedure for issuing costs on the indemnity basis.22 It is however pertinent to point out that in offers to settle, the 'relevant period' is lesser i.e., fourteen (14) days,23 with similar cost consequences of indemnity costs if a party fails to settle from the date of the offer unless the Court orders otherwise.24
Singapore Courts have been careful in imposing indemnity costs and have held that if there is no genuine or serious effort to compromise, an insincere offer will not trigger issuance of costs on an indemnity basis.25
In a recent decision, the Singapore High Court has also set down categories of conduct that may provide good reason to order indemnity costs:26
where the action is brought in bad faith, as a means of oppression or for other improper purposes;
where the action is speculative, hypothetical or clearly without basis;
where a party's conduct in the course of proceedings is dishonest, abusive or improper; and
where the action amounts to wasteful or duplicative litigation or is otherwise an abuse of process.
The rules of the Court in Hongkong also allow for Court's to impose cost consequences on an indemnity basis where a party fails to do better than the sanctioned offer or sanctioned payment.27
Moreover, the Courts in Hongkong have adopted a default rule that when an award is unsuccessfully challenged, indemnity costs will be granted in the absence of special circumstances.28
Indemnity Costs and its Application in International Arbitrations
Unlike court systems, the issue of costs in international arbitrations is usually reserved for the tribunal's assessment and determination. Several arbitral institutions like UNCITRAL29, DIAC30, ICC31, SIAC32 simply reserve the issue of costs to the tribunal, without in any manner expanding on the issue of costs.
On the other hand, the rules of the LCIA provide some much-needed clarity as to the general principle of costs being followed by tribunals i.e., costs should reflect the parties' relative success and failure in the award or arbitration or under different issues, except where it appears to the tribunal that in the circumstances the application of such a general principle would be inappropriate under the arbitration agreement or otherwise.33
Interestingly, the LCIA also adopts a different methodology as compared to other arbitral institutions, with a rebuttable presumption that tribunals shall not be required to apply the rates or procedure for assessing such costs practised by any state court or other legal authority.34
The English Arbitration Act, 1996 ("English Arbitration Act") also provides that the Tribunal shall award costs on the general principle that costs follow the event except where it appears to the Tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.35 Thus, sufficient autonomy is placed in the hands of the Tribunal insofar as it relates to the issue of costs.
However, the DIFC Arbitration Law (DIFC Law No.1 of 2008) ("DIFC Arbitration Law"), does not provide the same clarity as the English Arbitration Act, but on the contrary only provides the heads of costs a Tribunal can fix in its award.36
Therefore, the DIFC Arbitration Law fails to provide as much autonomy as provided under the English Arbitration Act. While there have been no challenges before the DIFC Courts thus far relating to the issue of awarding indemnity costs, it will be interesting to see whether Tribunals seated in DIFC award indemnity costs which are challenged before the DIFC Courts.
Conclusion
While costs on an indemnity basis is a general rule in a common law court system and has been enforced time and again by the courts, it may not as straightforward in international arbitrations, with varying permutations and combinations being applied by both arbitral institutions and Tribunals alike, insofar as it relates to fixing costs.
Although arbitral institutions have generally kept the door open insofar as it concerns costs, it does not specifically address indemnity costs. Nevertheless, while Tribunals may be empowered to order costs on an indemnity basis, it is by and large an issue which is reserved for the Tribunals determination and assessment.
Therefore, even though common law courts are now increasingly open to issuing costs on an indemnity basis inter alia for unsuccessful challenges to arbitral awards, it will be interesting to see how this area of law evolves further and whether we see more challenges being filed before the Courts as a result of Tribunals fixing costs on an indemnity basis.
Footnotes
1 Excelsior Commercial & Industrial Holdings Ltd. V. Salisbury Hamer Aspden & Johnson [2002] EWCA Civ 879
2 Three Rivers District Council & Ors. v. The Governor & Company of the Bank of England [2006] EWHC 816 (Comm); Petrotrade Inc v. Texaco Ltd [2002] 1 WLR 947; Victor Kermit Kiam II v. MGN Ltd [2002] EWCA Civ 66
3 Part 36 (Offers to Settle), Civil Procedure Rules, 1998
4 CPR 36.5 – Part 36 (Offers to Settle)
5 CPR 36.17(4)(b) – Part 36 (Offers to Settle)
6 Para 6.1, Practice Direction 44 – General rule about costs
7 CPR 44.3(3) – Part 44 (General rule about costs)
8 JPMorgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm)
9 Broadhurst v. Tan [2016] EWCA Civ 94
10 Shah v. Shah [2021] EWHC 1668 (QB)
11 Koshigi Ltd. & Anr. v. Donna Union Foundation & Anr., [2019] EWHC 122 (Comm)
12 RDC 32.4 – Part 32 (Offers to Settle)
13 RDC 32.51(2) – Part 32 (Offers to Settle)
14 RDC 38.19 – Part 38 (General Rules About Costs)
15 RDC 38.21 – Part 38 (General Rules About Costs)
16 Para 1, Practice Direction No.5 of 2014 (DIFC Courts' Cost Regime)
17 Para 2, Practice Direction No.5 of 2014 (DIFC Courts' Cost Regime)
18 Para 3, Practice Direction No.5 of 2014 (DIFC Courts' Cost Regime)
19 (1) Alexander Reuter (2) Andre Bledjian v. (1) Wellness United INC. (2) Jacob Logothetis (AKA Iakovos Logothetis) (3) Angela Turovskaya [2021] DIFC CFI 108 (27 October 2023)
20 Practice Direction No.1 of 2017 dated 27 February 2017
21 Nazeer v. Noah, ARB 011/2024 (15 August 2024)
22 Rule 22, Order 21 (Costs)
23 Rule 3, Order 22A (Offer to Settle)
24 Rule 9, Order 22A (Offer to Settle)
25 Singapore Airlines Ltd v Fujitsu Microelectronics [2001] SGCA 1
26 BTN v BTP [2021] SGHC 38
27 Rules 23 & 24, Order 22 (Offer to Settle and Payments into Court)
28 A v. R, [2009] 3 HKRLD 389
29 Article 40, UNCITRAL Arbitration Rules 2021
30 Article 36, DIAC Arbitration Rules 2022
31 Article 38, ICC Arbitration Rules 2021
32 Article 58, SIAC Arbitration Rules 2025
33 Rule 28.4, LCIA Arbitration Rules 2020
34 Rule 28.3, LCIA Arbitration Rules 2020
35 Section 61(2), Part I, Costs of the Arbitration, Arbitration Act, 1996
36 Section 38(5) of the DIFC Arbitration Law (DIFC Law No.1 of 2008)
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.
