THE RISK OF INDEMNITY COSTS: WHAT ARE YOU GOING TO TELL YOUR CLIENT?

The idea of costs budgeting was, in part at least, to give the parties some certainty as to the costs they would have to face it they lost an action.   However the decision in  Kellie & Kellie -v- Wheatley & Lloyd Architects Ltd[2014] EWHC 2866(TCC) raises some interesting issues as to the advice that must be given to clients in relation to costs budgeting and the risks of an award of indemnity costs.

DOES THE COSTS BUDGET FORM THE BASIS FOR ASSESSMENT WHEN THE COURT MAKES AN ORDER FOR INDEMNITY COSTS?

One of the issues the judge considered was whether the figures in the costs budget could form the basis of an award of costs when an order for indemnity costs had been made.  The judge doubted whether earlier obiter comments on the subject were correct and, wary of the risks, made obiter remarks in his judgment:

“17. Although the proliferation of obiter dicta at first instance is no doubt to be avoided, I would wish to express my respectful disagreement with that approach [that the costs budget could form the basis of assessment when indemnity costs are awarded). As the passages set out in paragraph 14 above make clear, costs management orders are designed to set out the probable limits of the costs that will be proportionately incurred. It is for that reason, and not because of any quirk of drafting, that r. 3.18 refers specifically to standard assessment and not to indemnity assessment. Proportionality is central to assessment on the standard basis and it trumps reasonableness; cf. Motto v Trafigura Ltd [2011] EWCA Civ 1150, per Lord Neuberger of Abbotsbury at [49]. However, proportionality is not in issue if costs are to be assessed on the indemnity basis; see r. 44.3(3). I therefore find it difficult to see why logical analysis requires importing the approach in r. 3.18 into assessment on the indemnity basis.”

WHAT ARE THE RISKS OF INDEMNITY COSTS BEING ORDERED?

The same judgment contains a useful analysis of the circumstances where indemnity costs can be awarded. However one major, and developing, area of indemnity costs arises as a result of claimant’s offers in Part 36.

THE CONSEQUENCES OF NOT BEATING A CLAIMANT’S PART 36 OFFER

CPR 36.14(3) deals with the costs consequences where a defendant fails to do better than a claimant’s part 36 offer.

(3) Subject to paragraph (6), where rule 36.14(1)(b) applies, the court will, unless it considers it unjust to do so, order that the claimant is entitled to –

(a) interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate(GL) for some or all of the period starting with the date on which the relevant period expired;

(b) his costs on the indemnity basis from the date on which the relevant period expired; and

(c) interest on those costs at a rate not exceeding 10% above base rate(GL); and

(d) an additional amount, which shall not exceed £75,000, calculated by applying the prescribed percentage set out below

(NB there is no corresponding order for indemnity costs when a claimant fails to beat a defendant’s Part 36 offer. See CPR 36.14(2)).

In Elsevier -v- Munro [2014] EWHC 2728 (QB) the defendant conceded that it was liable to pay costs on the indemnity basis.

THE NEED TO WARN THE CLIENT OF THE RISKS AND CONSEQUENCES OF INDEMNITY COSTS

One can imagine that careful advice is given to defendants when a Part 36 offer is made in any event. The risk of 10% additional damages, in itself, gives rise to a major risk.  Nevertheless it is important to bring home to the client the fact that an indemnity costs award could lead to figures much higher than the costs budget, in particular the question of proportionality of the costs will not be relevant).

THE MORE DELICATE TASK: WARNING THE CLIENT OF THE CONSEQUENCES OF THEIR OWN BEHAVIOUR

A much more difficult task is warning the client of the risks of indemnity costs which relate to the action of a whole. These are set out in detail in the previous post about this case. In summary:-

  • The test is not conduct attracting moral condemnation but rather unreasonableness.
  • The court has regard to conduct before and after the trial and the manner in which the case was conducted.
  • A cause that is speculative, weak or opportunistic.  However the pursuit of a weak claim will not, usually, lead to an order. But the pursuit of a hopeless claim (where the claimant should have realised it was hopeless) may do.
  • A claim including allegations of dishonesty, pursued by hostile cross-examination,  and which is not justified.
  • Where the allegations are the subject of extensive publicity courted by the applicant.
  • The unreasonableness has to be a high degree – this does not mean merely wrong or misguided in hindsight.
  • If  there  is something in the conduct of the case which takes it outside the norm in a way that justifies indemnity costs.
  • If a claimant casts its claim disproportionately wide and requires the defendant to meet the claim.
  • Dishonesty or moral blame does not have to be established to justify indemnity costs.
  • The conduct of experts can justify indemnity costs in respect of costs generated by them.
  • A failure to comply with the Pre-Action Protocol could result in indemnity costs being awarded.
  • A refusal to mediate or engage in some other alternative dispute resolution process could justify an award of indemnity csots.

SO THERE ARE CIRCUMSTANCES IN WHICH THE COSTS BUDGET COULD BE (ALMOST) MEANINGLESS

The crucial elements here are that:

  • All litigators must be aware of this risk and the circumstances when it could apply.
  • The clients and insurers have to be made aware of the risk.

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