We looked at the decision in Kellie & Kellie -v- Wheatley & Lloyd Architects Ltd[2014] EWHC 2866(TCC) yesterday in the context of drafting witness statements.  The judgment is equally interesting on the issue of costs and costs budgeting. There is an important review of the law relating to conduct and costs; the power to award indemnity costs; the effect of an order for indemnity costs on a costs budget. Finally there is a discussion of what sums should be paid on account when the case has been subject to a costs budget.


The claimants brought a claim in professional negligence against the defendants which, at trial, was rejected.  The court held a further hearing to consider issues relating to costs.


The claimants argued that the Defendant’s costs should be reduced by a sum to reflect the failure of a several lines of argument put forward by the defendant. This was rejected by the judge.

It is probably futile to engage in a semantic discussion of whether the no-loss defence and the limitation defence were distinct issues or merely arguments on wider issues. Each of them gave rise to specific legal submissions. It is possible that they necessitated some further evidential enquiry, but I should think that, if they did, it was probably minimal. The circumstances in which the claimants came to the Property and invested money in it were part of the background to the case, and the detail with which the parties investigated the course of events makes it unlikely that they would have pruned the evidence if the two defences had not been raised. No additional time of any significance for costs was taken with the points at trial. Counsel’s fees for conducting the trial are unlikely to have been affected by these points, and I have no information to justify a conclusion that pre-trial costs will have been increased by the need to consider them; any such increase is, again, likely to have been negligible. I do not think that Mr Lixenberg’s decision not to make oral submissions on the defences is a matter that should be reflected in costs. There is a proper interest in counsel exercising judgment on what does and does not need to be pursued at trial and in sensible decisions being taken to abandon or at least, as in the present case, not to press lines of argument. Such decisions should not too readily be discouraged by the fear of adverse costs consequences. In summary, these two defences did not affect the outcome of the case and made no identifiable difference to the costs incurred by either party. They should not in my judgment affect the basic outcome, which is that the unsuccessful party must pay the costs of the successful party.


The defendant identified several matters of conduct on the part of the claimants which, it stated, should give rise to an order for indemnity costs.


The judgment contains an interesting discussion in relation to both indemnity costs and costs budgeting.

“Indemnity costs: general principles

  1. The two bases of assessment are provided for in r. 44.3 as follows:

“(1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess those costs –

(a) on the standard basis; or

(b) on the indemnity basis,

but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount.

(2) Where the amount of costs is to be assessed on the standard basis, the court will –

(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and

(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.

(3) Where the amount of costs is to be assessed on the indemnity basis, the court will 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.”

  1. It used sometimes to be suggested that there was little practical difference between the two bases of assessment; cf. Fourie v Le Roux [2007] UKHL 1, [2007] Bus LR 925, per Lord Scott of Foscote at [39]. If that was ever true, it probably long since ceased to be so. In Lownds v Home Office [2002] EWCA Civ 365, [2002] 1 WLR 2450, Lord Woolf C.J., speaking for the Court of Appeal, said at [6] – [7]:

“6. The fact that when costs are to be assessed on an indemnity basis there is no requirement of proportionality and, in addition, that where there is any doubt, the court will resolve that doubt (as to whether costs were unreasonably incurred or were reasonable in amount) in favour of the receiving party, means that the indemnity basis of costs is considerably more favourable to the receiving party than the standard basis of costs.

7. Prior to the CPR coming into force it was already possible for a court to make an indemnity order for costs. This did no more, however, than to reverse the burden of proof in respect of disputed items of costs. The advantages of an indemnity order over a standard order are now far more significant.”

See too the more extended dictum of Lord Woolf CJ, with whose judgment Waller and Laws LJJ agreed, in Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hamer Aspden & Johnson (a firm)[2002] EWCA Civ 879 at [15], cited with approval by Rix LJ, with whose judgment Tomlinson LJ and Sir Mark Waller agreed, in Epsom College v Pierse Contracting Southern Ltd (in liquidation) [2011] EWCA Civ 1449 at [73].

  1. This distinction, if not made more important, is at least highlighted by the provisions for costs management in Section II of Part 3 of the CPR. Practice Direction 3E—Costs Management, which supplements that Section, states at paragraph 7.3:

“When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.”

Rule 3.18 provides:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and

(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

In Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, Moore-Bick LJ referred to the costs management provisions and said of them at [28]:

“Read as a whole they lay greater emphasis on the importance of the approved or agreed budget as providing a prima facie limit on the amount of recoverable costs. In those circumstances, although the court will still have the power to depart from the approved or agreed budget if it is satisfied that there is good reason to do so, and may for that purpose take into consideration all the circumstances of the case, I should expect it to place particular emphasis on the function of the budget as imposing a limit on recoverable costs. The primary function of the budget is to ensure that the costs incurred are not only reasonable but proportionate to what is at stake in the proceedings. If, as is the intention of the rule, budgets are approved by the court and revised at regular intervals, the receiving party is unlikely to persuade the court that costs incurred in excess of the budget are reasonable and proportionate to what is at stake.”


The case had been subject to costs budgeting under a pilot scheme. The award of costs on the indemnity basis would allow the defendants to receive costs above the budgeted sum.

  1. “The present proceedings were commenced before the CPR were amended to provide for costs management. But the case was nevertheless subject to costs management under the broadly similar Pilot Scheme that was then operating in the TCC. H.H. Judge Havelock-Allan QC approved the defendant’s costs budget in a sum of £91,700. In oral submissions Mr Lixenberg and Mr Troup proceeded on the basis that this is the figure that would be allowed on a standard assessment unless the court departed from the costs budget; this suggests that the approved figure was a total to include both incurred and estimated costs. What is clear is that the judge refused to approve a budget in a much larger amount—as I understand it, in excess of £140,000 for incurred and estimated costs—on the ground of proportionality. Before me, the defendant submitted a schedule showing its total costs incurred in this litigation at £166,469 and sought a payment on account of costs in the sum of £120,000. In short, what is at stake in the defendant’s application for an award of costs on the indemnity basis is the opportunity to recover costs significantly greater than those likely to be considered proportionate on a standard assessment.”


There is then a consideration of the relevance of costs budgets when costs are awarded on an indemnity basis. The judge disagreed with an earlier decision.

  1. In this connection, counsel referred me to obiter dicta of Coulson J in Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd [2012] EWHC 1643 (TCC), [2013] BLR 473. In that case, as in this, costs management had taken place under the TCC Pilot Scheme. The applicable Practice Direction contained a provision to the same effect as the present r. 3.18. Coulson J refused an application for indemnity costs. However, he went on to consider the relevance of costs management orders to the assessment of costs on an indemnity basis.

“28. Prima facie, whether under PD 51G paragraph 8, or CPR 3.18, the costs management order (with its approval of the costs budget) is expressed to be relevant only to an assessment of costs on a standard basis. However, as a matter of logical analysis, it seems to me that the costs management order should also be the starting point of an assessment of costs on an indemnity basis, even if the ‘good reasons’ to depart from it are likely to be more numerous and extensive if the indemnity basis is applied.

29. The first reason for this is that, as set out in paragraphs 2 and 3.2 of PD 51G (paragraph 10 above), the costs budgets represent the parties’ estimate of all the costs that they think that they will incur. It is not an estimate based on any particular form of costs assessment; it is just an estimate of likely costs. If it is an accurate estimate of all the costs that will be incurred, then it seems to me that it should be the relevant starting point for an assessment of costs on an indemnity basis as well as for an assessment on the standard basis.

30. Secondly, this would provide the benefits of both consistency and certainty. There is a concern that, if an order for indemnity costs allows a receiving party to ignore the costs management order, then that will encourage successful parties to argue for indemnity costs every time. That would be unfortunate, and would leave an unacceptable doubt hanging over even approved costs budgets, all the way through to judgment and beyond. A paying party will have fought the trial assuming that, even if it loses, its opponent will be unlikely to recover more than the amount recorded in the costs management order, unless there is good reason for any departure. That is the certainty that the new regime provides. Even if the paying party has to pay costs on an indemnity basis, that does not seem to me automatically to justify an abandonment of that certainty, and the encouragement of a costs free-for-all.

31. Of course, in any given case, it might be said that an award of indemnity costs – which does not require any assessment of proportionality – might be a ‘good reason’ to depart from the costs budget approved by the court pursuant to paragraph 8 of PD 51G. I can well see that, in particular factual circumstances, an award of indemnity costs might be a good reason to permit such a departure. But that would be fact-specific, and it would not detract from the principle of at least starting the costs assessment by reference to the approved budget.”

  1. 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. 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. The first reason given by Coulson J, at [29], has force if at all only if an approved or agreed budget does indeed reflect the costs that the receiving party says it expects to incur. However, the present case is an example precisely of the proper use of costs management in approving a budget at a lower figure than that proposed by the receiving party, on the very ground of proportionality. To suppose that the imposition of a budget under Part 3 would create some sort of presumption as to the limits of reasonable costs would be to ignore the fact that the approval of costs budgets is done on the basis of proportionality, not mere reasonableness. The matters referred to in connection with the first reason may, accordingly, justify having regard to the amount of costs the receiving party expected to incur, but they do not justify applying the r. 3.18 analogously to assessment of costs on the indemnity basis. Similarly, the second reason, stated at [30], seems to me, with respect, to go further than is justified by the costs management regime. When a costs management order is made, the parties know that costs within the approved budget are likely to be considered proportionate, and costs in excess of the approved budget are likely to be considered disproportionate; in either case, the burden of justification lies on the party seeking a departure from the approved budget. But the costs management regime is not intended to give litigants an expectation that they will not incur a liability for disproportionate costs pursuant to an order for costs on the indemnity basis; any such expectation must rest on a party’s own reasonable and proper conduct of litigation. It is no objection to an order for costs on the indemnity basis that it is likely to permit the recovery of significantly larger costs than would be recoverable on an assessment on the standard basis having regard to the approved costs budget; that possibility is inherent in the different bases of assessment, and costs on the indemnity basis are intended to provide more nearly complete compensation for the costs of litigation. I accept, of course, that a party seeking to recover disproportionate costs on an assessment on the indemnity basis is required to show that those costs were reasonably incurred; though that requirement is subject to the provisions of r. 44.3(3). That does not, however, justify the analogous use of r. 3.18, which has three disadvantages. First, it is both unnecessary and contrary to the rationale of that rule. Second, it tends to obscure the fact that the nature of the justification required of a receiving party is quite different under the two bases of assessment. Third, and consequently, it risks the assimilation of the indemnity basis of assessment to the standard basis, which is not justified by the costs management regime in the CPR. In my judgment, the proper way of addressing the concern identified by Coulson J in Elvanite at [30] is, first, by ensuring that applications for indemnity costs are carefully scrutinised and, second, by the proper application of the well understood criteria of assessment in r. 44.3(3) to the facts of the particular case. It might also be remembered that, even if there exist grounds on which an award of indemnity costs could properly be made, such an award always remains in the discretion of the court.


The judge then considered the principles governing indemnity costs.

  1. In general terms, an award of costs on the indemnity basis is justified only if the paying party’s conduct is morally reprehensible or unreasonable to a high degree, so that the case falls outside the norm. The applicable principles were set out at length by Tomlinson J in Three Rivers District Council v The Governor and Company of the Bank of England [2006] EWHC 816 (Comm), at [25], in a passage on which Mr Lixenberg relied (omitting the eighth point, which was formulated with particular regard to the Three Rivers litigation):

“(1) The court should have regard to all the circumstances of the case and the discretion to award indemnity costs is extremely wide.

(2) The critical requirement before an indemnity order can be made in the successful defendant’s favour is that there must be some conduct or some circumstance which takes the case out of the norm.

(3) Insofar as the conduct of the unsuccessful claimant is relied on as a ground for ordering indemnity costs, the test is not conduct attracting moral condemnation, which is an a fortiori ground, but rather unreasonableness.

(4) The court can and should have regard to the conduct of an unsuccessful claimant during the proceedings, both before and during the trial, as well as 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.

(5) Where a claim is speculative, weak, opportunistic or thin, a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails.

(6) A fortiori, where the claim includes allegations of dishonesty, let alone allegations of conduct meriting an award to the claimant of exemplary damages, and those allegations are pursued aggressively inter alia by hostile cross examination.

(7) Where the unsuccessful allegations are the subject of extensive publicity, especially where it has been courted by the unsuccessful claimant, that is a further ground.”

  1. More recently, in Courtwell Properties Ltd v Greencore PF (UK) Ltd [2014] EWHC 184 (TCC), Akenhead J said this:

“22. So far as indemnity costs are concerned, there are numerous authorities which address the circumstances in which these may be ordered. A helpful if not absolutely exhaustive summary was given by Mr Justice Coulson in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] EWHC (TCC):

’16. The principles relating to indemnity costs are rather better known. They can be summarised as follows:

(a) Indemnity costs are appropriate only where the conduct of a paying party is unreasonable “to a high degree. ‘Unreasonable’ in this context does not mean merely wrong or misguided in hindsight“: see Simon Brown LJ (as he then was) in Kiam v MGN Ltd [2002] 1 WLR 2810.

(b) The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it out of the norm in a way which justifies an order for indemnity costs: see Waller LJ in Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson [2002] EWCA (Civ) 879.

(c) The pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, provided that the claim was at least arguable. But the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may well lead to such an order: see, for example, Wates Construction Ltd v HGP Greentree Alchurch Evans Ltd [2006] BLR 45.

(d) If a claimant casts its claim disproportionately wide, and requires the defendant to meet such a claim, there was no injustice in denying the claimant the benefit of an assessment on a proportionate basis given that, in such circumstances, the claimant had forfeited its rights to the benefit of the doubt on reasonableness: see Digicel (St Lucia) Ltd v Cable and Wireless PLC [2010] EWHC 888 (Ch).’

To this can be added a number of other specific and general points:

(i) The discretion to award indemnity costs is a wide one and must be exercised taking into account all the circumstances and considering the matters complained of in the context of the overall litigation (see Three Rivers DC v the Governor of the Bank of England [2006] EWHC 816 (Comm) and Digicel (as above)).

(ii) Dishonesty or moral blame does not have to be established to justify indemnity costs (Reid Minty v Taylor [2002] 1 WLR 2800).

(iii) The conduct of experts can justify an order for indemnity costs in respect of costs generated by them (see Williams v Jervis [2009] EWHC 1837 (QB)).

(iv) A failure to comply with Pre-Action Protocol requirements could result in indemnity costs being awarded.

(v) A refusal to mediate or engage in mediation or some other alternative dispute resolution process could justify an award of indemnity costs.”


The judge carried out a detailed consideration of the claimants’ conduct and decided it did not justify an order for indemnity costs.


There is an interesting part of the judgment relating to payment on account.  The defendant’s budget had been approved by the court in the sum of £91,700.  The judge made an order on account of costs of £90,000.

  1. Should there be a further payment on account of costs? Mr Lixenberg submits that there should, and that it should be in the full amount of the approved costs budget (£91,700) together with an additional amount to reflect the fact that the trial was not concluded within the anticipated four days but went into a fifth day. There is not (he submits) any reason to suppose that the costs will be assessed at less than the amount of the approved budget, and the unforeseen extension of the trial is a good reason for permitting recovery of costs in a greater amount. Mr Troup, in response, submits that the interim payment of £70,000, already ordered, is perfectly sufficient, representing more than 75% of the approved budget.
  2. In Gollop v Pryke (November 29, 2011; unreported), Warren J suggested that, in deciding on the appropriate amount of a payment on account of costs, the court should make a reasonable assessment of what is likely to be awarded on assessment. Having regard to the defendant’s approved budget and to the length of the trial, I do not think it at all likely that less than £90,000 will be awarded on a standard assessment of the defendant’s costs. Indeed, the greater likelihood is that the increased length of the trial will result in a modest uplift above the amount of the approved budget. The only matter raised by Mr Troup as indicating a likely reduction of the costs to be allowed was what he said were excessive charges by the defendant’s solicitors. However, that observation was made with reference to the summary of total costs in the sum of £166,469; objections to a bill in that amount are not in point.
  3. In circumstances where there is an approved costs budget in the sum of £91,700 and where the only material considerations raised before me tend to indicate the probability of a modest increase to the approved amount, but no reduction from it, I see no good reason why the claimants ought not to pay £90,000 on account of the costs awarded to the defendant. That is the amount originally sought by the defendant’s solicitors in correspondence. I resist, however, Mr Lixenberg’s invitation to pre-empt entirely the assessment process by ordering a payment in excess of £91,700 on account of the lengthened trial.