This piece deals with the principles of when indemnity costs should be made as a result of a fault by the paying party. This is very different from indemnity costs under Part 36 which is considered in my piece Part 36: The Dry Salvages.
Courts have a very wide discretion in relation to costs. In Bolton Metropolitan District Council v Secretary of State for the Environment (Practice Note)  1 WLR 1176, referred to by Lord Phillips MR in R (Corner House Research) v Secretary of State for Trade and Industry  EWCA Civ 192, the court said: –
“As in all questions to do with costs, the fundamental rule is that there are no rules. Costs are always in the discretion of the court, and a practice, however widespread and longstanding, must never be allowed to harden into a rule.”
That is as true of indemnity costs as anything else; with the increased emphasis on proportionality, whatever that means – see Proportionality: The Emperor’s New Clothes – indemnity costs have suddenly become very much more important.
“(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances including –
- the conduct for the parties…
(5) The conduct of the parties includes –
- whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;
- the manner in which a party has pursued or defended its case or a particular allegation or issue; and
- whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.”
CPR 44.3 reads:-
(1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess those costs –
- on the standard basis; or
- 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 –
- 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
- 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.”
EFFECT OF INDEMNITY COSTS ORDER
the Queen’s Bench Division of the High Court said:-
“8. The effect of an order requiring payment of costs on the indemnity basis is to disapply the requirement that, in addition to costs being reasonably incurred, they should also be proportionate to the sums and issues at stake in the litigation and that, in the event of the assessment Judge having a doubt as to whether or not an item of cost has been incurred reasonably, the benefit of such doubt should go to the receiving rather than the paying party.”
the Technology and Construction Court of the High Court pointed out that whatever was previously thought it is now clear that an indemnity costs order is significantly more valuable than a standard order. The Court quoted Lord Woolf in Lownds v Home Office  EWCA Civ 365,  4 All ER 775,  1WLR 2450:-
“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 unreasonable 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.”
The indemnity hourly rate or solicitor and own client hourly rate, which is the same thing, will almost always be higher than the amount stated in the budget and the amount sought from the other side on the standard basis. Many of us were brought up to advise clients that in the event of success they would recover about two-thirds of their costs. This was long before proportionality revealed its recent head and it reflected the difference in the hourly rates charged to one’s own clients and the rates generally recoverable on taxation (now assessment).
The courts themselves have said that they can and, where appropriate should, reduce hourly rates on proportionality grounds. It follows that if an order on an indemnity basis is made then that reduction goes out of the window.
You do not need to put the solicitor and own client rate in the budget. By not doing so you do not prejudice your chances of getting that full rate if an indemnity order is made.
WHEN SHOULD AN INDEMNITY COSTS ORDER BE MADE?
the court said that public bodies do not have a stronger claim to indemnity costs than other litigants.
the Court of Appeal declined to give circumstances where indemnity costs orders should or should not be made and emphasised the breadth of discretion of the trial judge and simply said “there must be some conduct or some circumstances which takes the case out of the norm. That is the critical requirement.”
The Court of Appeal cited with approval a passage from the Court of Appeal’s own judgment Kiam II v MGN Ltd (2)  EWCA Civ 66:-
“…conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order made under Part 44 (unlike one made under Part 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory…”
the Technology and Construction Court of the High Court, in rejecting the application for indemnity costs in that case, gave extensive guidance as to the grounds on which such an order should be made.
‘18. 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  EWHC 816 (Comm), at , 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.””
- More recently, in Courtwell Properties Ltd v Greencore PF (UK) Ltd  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  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 II v MGN Ltd (2)  EWCA Civ 66.
(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 & Johnson (a firm)  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 Allchurch Evans Ltd  EWHC 2174 (TCC).
(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 & Ors v Cable and Wireless PLC & Ors  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  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  EWCA Civ 1723).
(iii) The conduct of experts can justify an order for indemnity costs in respect of costs generated by them (see Williams v Jervis  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.””’
“Examples of conduct that have led to such an order for indemnity costs include the use of litigation for ulterior commercial purposes… and the making of an unjustified personal attack on one party by the other.”
INTERPLAY WITH COSTS BUDGETING
In Kellie v Wheatley & Lloyd Architects Ltd  EWHC 2886 (TCC),  All ER (D) 152 (Aug), the High Court looked at the interplay between costs budgets and indemnity costs, and the grounds for making an indemnity costs order and fundamentally disagreed with another High Court decision on the costs budget issue.
Although this case dealt with alleged misconduct, the findings concerning the interplay between costs budgeting and indemnity costs apply to indemnity costs orders arising out of a claimant matching its own Part 36 offer.
This was a professional negligence claim which was lost and the defendant sought indemnity costs on the ground of the claimant’s conduct.
The relevant rule is CPR 44.3 as set out above.
The court pointed out that whatever was previously thought it is now clear that an indemnity costs order is significantly more valuable than a standard order.
Here the court said that this distinction is highlighted by the CPR and Practice Direction concerning costs management. Practice Direction 3E, para 7.3 provides:
‘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.’
‘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 of the proceedings; and
(b) not depart from such approval or agreed budget unless satisfied that there is good reason to do so.’
In Henry v News Group Newspapers Ltd  EWCA Civ 19,  2 All ER 840, the Court of Appeal said:
‘The primary function of the budget is to ensure that costs incurred are not only reasonable, but proportionate to what is at stake in the proceedings.’
Here the defendant’s budget had been approved at £91,700 with the judge having refused, on proportionality grounds, to approve a budget of over £140,000. The amount now sought on the indemnity basis was £166,469. The court thus had to consider the relevance of a costs budget when an indemnity costs order has been made, and specifically disagreed with a previous decision of the High Court in Elvanite Full Circle Ltd v AMEC Earth and Environment (UK) Ltd  EWHC 1643 (TCC),  4 All ER 765,  BLR 473.
In Elvanite the High Court held that even on an indemnity basis the starting point is the approved budget. The court here in Kellie v Wheatley and Lloyd Architects Ltd  EWHC 2886 (TCC),  All ER (D) 152 AUG disagreed, holding that:
‘17. … 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 CPR 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. However, proportionality is not in issue if costs are to be assessed on the indemnity basis. … I therefore find it difficult to see why logical analysis requires importing the approach in CPR 3.18 into assessment on the indemnity basis. The first reason given by Coulson J, at , 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 CPR 3.18 analogously to assessment of costs on the indemnity basis. Similarly, the second reason, stated at, 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 CPR 44.3(3). That does not, however, justify the analogous use of CPR3.18, 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  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 CPR 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.’
In neither Elvanite Full Circle Ltd v AMEC Earth and Environment (UK) Ltd  EWHC 1643 (TCC),  4 All ER 765,  BLR 473 nor Kellie v Wheatley and Lloyd Architects Ltd  EWHC 2886 (TCC),  All ER (D) 152 AUG was an indemnity cost order in fact made, so both judgments are obiter, that is not relevant to the decision, and therefore not binding on other courts. As to payment on account the judge ordered £90,000 against the approved budget of £91,700.
the Court of Appeal awarded indemnity costs to a legally-aided party in order to penalise the losing party for its unreasonable conduct in the case. It is no bar to an indemnity costs order that the only beneficiary is the claimant’s lawyer, as the claimant would not have to pay anything in any event, whatever the result, that is a loss or a win with costs on the standard basis or a win with costs on an indemnity basis.
In Phoenix Finance Ltd v Federation Internationale de l’Automobile & Ors  EWHC 1028 (Ch),  CP Rep 1, (2002) The Times, 27 June, the Chancery Division of the High Court held that it is not the law that an indemnity costs order will only be made if the conduct complained of has increased the costs that are recoverable.
The question is the reasonableness or otherwise of the conduct and is not dependent upon whether the conduct, whether reasonable or unreasonable, has increased the costs payable.
WILL PROPORTIONALITY ENCOURAGE COURTS TO MAKE INDEMNITY COST ORDERS?
It will be interesting to see if a new line of awards on the indemnity basis emerges on the grounds that although the costs were disproportionate to the matters in issue there were, nevertheless, good reasons for incurring them and therefore the award should be on the indemnity basis so as to avoid the risk of reduction on the ground of disproportionality on the standard basis.
COSTS OF COSTS
the District Judge had awarded costs on the indemnity basis on the ground that if parties litigate only as to costs, then it seemed to him that they must bear a greater risk that if they are unsuccessful they will be ordered to pay costs on the indemnity basis. In allowing an appeal against that order the Court of Appeal held that there is no reason why parties litigating over costs alone should be at any greater risk of an award of indemnity costs than those litigating over other matters.
the High Court ordered that the costs of the recall of an expert witness to deal with a written statement produced by the other side’s expert during the trial and at the order of the court should be paid on an indemnity basis.
The court said:-
“37. In my judgment, however, the fact that the court was obliged to ask Professor Trimble, in the middle of his evidence, to provide a written statement as to what exactly his evidence was and the basis upon which he was saying that the Claimant’s continuing symptoms were psychogenic did arise from serious shortcomings in the way in which Professor Trimble approached the giving of his evidence. It was helpful to the court to have that material but it was necessary for the Claimant to recall Dr Allder to deal with this new basis upon which Professor Trimble was finally presenting his evidence.
- In my judgment, that conduct on the part of Professor Trimble was so out of the norm that it justifies an order for indemnity costs.
- Accordingly, I order that the costs of the recall of Dr Allder, occasioned by the production by Professor Trimble of the final written statement of his position shall be awarded on an indemnity basis. I make an order for indemnity costs but limited in that way.”
the deficient expert evidence produced by the unsuccessful claimant had led to unnecessary costs being incurred by the defendant and accordingly the costs incurred by the defendant in that respect were awarded on the indemnity basis.
the High Court said that CPR 61 does not provide for costs on the indemnity basis where a CPR Part 61 offer is successful, whereas CPR Part 36 does provide for indemnity costs when a CPR Part 36 offer is successful.
In those circumstances, it was not appropriate in a collision action in the Admiralty Division of the High Court, governed by Part 61, to order costs on the indemnity basis merely because an offer had been successful.
INDEMNITY COSTS AGAINST NON-PARTIES
the court joined a party who had direct control over the second defendant company to the action for the purpose of costs and then made an indemnity costs order against that person.
Third Party Funders
the court awarded costs on an indemnity basis against third party funders.
The claimants brought what turned out to be a very speculative claim against the defendants and consequently costs were awarded against them on an indemnity basis.
However they did not pay and an application was made that the third party funders pay; some admitted liability to pay but not on an indemnity basis and others denied liability and one third party funder did not acknowledge service.
The claimants had been ordered to provide security for costs but there was a shortfall of £4.8 million between the security provided and the amount of costs.
The security that was paid, as ordered, was £17.5 million and that was supplied from funds from three sets of third party funders.
The basis of the security ordered was, as normal, the standard basis and the shortfall between the security provided and the amount of costs was almost entirely represented by the difference between standard costs and indemnity costs.
The court held that the fact that the security was inadequate was not a ground for declining to make a non-party costs order; indeed it may be the reverse – see Petromec Inc v Petroleo Brasileiro SA Petrobras  EWCA Civ 1038 and Dolphin Quays Developments v Mills  EWHC Civ 385.
At paragraph 58 of the judgment Christopher Clarke LJ sets out a lengthy list of reasons as to why he awarded indemnity costs against the claimant.
The judge then said:-
“60. The purpose of an order for indemnity costs is not to impose a penalty on the unsuccessful litigant (or his funders). It is to afford the successful party a more generous criterion for assessing which of his actual costs should be paid by his opponent because of the way in which the latter, or those in his camp, have acted. I set out some of the principles relating to the grant of indemnity costs in the costs judgment.”
The judge then dealt with the law concerning making a costs order against a non-party, commenting that the discretion under section 51(3) of the Senior Courts Act 1981 is very wide and the test is whether in all the circumstances it is just to exercise the power – see Globe Equities Ltd v Globe Legal Services Ltd  EWCA Civ 3023 (see my piece Wasted Costs and Non-Party Costs Orders).
That discretion extends to the form of the order and the proportion of any costs to be paid and the amount of any award – see Nelson v Greening  EWCA Civ 1358.
A third party order does not have to be on the basis of joint and several liability with the litigant.
Although there can be no comprehensive checklist of necessary or sufficient factors – see Systemcare (UK) Ltd v Services Design Technology Ltd  EWCA Civ 546  , the principles upon which the discretion should be issued were set out in Dymocks Franchise Systems (NSW) Pty Ltd v Todd  UKPC 39 as follows:-
“(1) A costs order against a non-party is “exceptional”, but “exceptional” means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order.”
(2) The discretion will not generally be exercised against “pure funders” but where;
“the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation…”
(3) The most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed financially insecure companies generally, in litigation designed to advance the funder’s own financial interests. Lord Brown said this at :-
“In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”
(4) Where a funder says that there is no impropriety in promoting a claim because it received “encouraging advice” from its lawyers;
“This cannot, however, avail them. The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against the non-party, its absence does not preclude the making of such an order.”
On this point the judge concluded:-
“66. In the light of those principles I have no doubt that Psari and Mr Lemos… should be liable to the defendants for their costs. The claim could not have been brought without their assistance; they stood to benefit from its success to the tune of a healthy multiple of their investment. That the pursuit of speculative litigation is in the same category and to be viewed in the same way as impropriety for these purposes was affirmed by Rix LJ in Goodwood Recoveries Ltd v Breen  EWCA Civ 414 at . Similar considerations apply to the other funders.
- In the same case Rix LJ, with whom May LJ agreed, accepted that where a non-party director could be described as “the real party”, seeking his own benefit, controlling and/or funding the litigation, then:
“even where he has acted in good faith or without any impropriety, justice may well demand that he is liable in costs on a fact sensitive and objective assessment of the circumstances”.
This is a change from the earlier requirement that there must be impropriety or a lack of good faith as set out in Metalloy Supplies Ltd v M/A. (UK) Ltd  EWCA Civ 671, 1620; this approach was applied in Landare Investments Ltd v Welsh Development Agency  EWHC 946 (QB).
In Systemcare (UK) Ltd v Services Design Technology Ltd  EWCA Civ 546 the court pointed out the “and/or” formulation and said that it was not necessary for both elements to be present. So a third party can be liable in costs if they have controlled or funded the litigation. In Sims v Hawkins  EWCA Civ 1175 the court referred to the principal question as “whether the non-party (who renders himself liable to the regime, whether by funding or controlling the litigation or even in some other way)” was the “real party” to the litigation.”
Indemnity Costs against the Funders
The judge then went on to consider the issue of whether the costs to be paid by the funders should be on the indemnity basis.
The judge had no doubt that costs should be ordered on that basis if indemnity costs were appropriate generally in the case, and he had found that they were. “To do otherwise would, in my judgment, be unfair to the Defendants and their personnel, who were on the receiving end of claims and actions of the character that I described in the costs judgment.”
The Divisional Court had taken a similar view in R v SSHD Ex Parte Osman  COD 204 and a similar approach was taken by the court in Murphy v Rayner  EWHC 1 (Ch).
The judge said:-
“112. To make an order for indemnity costs would not be to penalize but to recompense. The sum presently in issue – about £ 4.8 million – is not disproportionate to the total monies contributed by Psari (and other funders), or to the individual contributions of most of them, and certainly not disproportionate to the anticipated return.”
The judge then reviewed, at length, the authorities in relation to indemnity costs against third party funders, which are essentially fact sensitive. The judge had this to say:-
“128. I recognize that there are, in this context, potentially competing public policies. If professional funders are exposed to the risk not only of standard but also of indemnity costs they may decline to fund, or only be prepared to do so at a higher cost or, perhaps more likely, against some form of indemnity or an increased reward for success, even in relatively standard cases. In either case access to justice may be curtailed…
- I do not regard these considerations as compelling. Indemnity costs are awarded in circumstances (including but not limited to the conduct of a party and not necessarily involving dishonest, morally culpable or improper behaviour) which are outside the norm.”
The judge also said that he did not regard the possibility of a wasted costs order against the claimant’s solicitors, Clifford Chance, as a reason not to make an indemnity costs order against the third party funders.
The “Arkin Cap” and Indemnity Costs
The principle of the “Arkin Cap” is that a professional funder should normally be potentially liable to the opposing party only to the extent of the funding provided. Thus if a funder provides £1 million they should not be liable to the other side for more than £1 million.
Here the court explained it in this way:-
“70. The position of a professional funder i.e. a funder who has a commercial interest in the outcome of the litigation, as opposed to a “pure funder” was considered by the Court of Appeal in Arkin v Borchard Lines Ltd (numbers 2 and 3)  EWCA Civ 655. The Court recognised that there were two competing principles. The first was that costs should follow the event so that a funder who wholly or partly causes the defendant to incur costs should be liable for those costs. The second was the policy of ensuring access to justice. Exposure of funders to the risk of having to pay costs of the opposing party assessed on an indemnity basis might increase the risk and hence the price of funding litigation.
- The solution derived by the Court was to hold that a professional funder who financed part of a claimant’s costs of litigation (£1.3 million in respect of the cost of expert evidence), should be potentially liable for the costs of the opposing party to the extent of the funding provided. The Court said that it could see no reason in principle why the solution suggested should not also apply where the funder had contracted the greater part, or even all, of the expenses of the action. But it reached no decision on the point.
- It seems to me that it is appropriate to apply the Arkin Cap in the present case. The position might be different if a funder had behaved dishonestly or improperly or if, as the Court put it in Arkin, “the funding agreement falls foul of the policy considerations which render an agreement champertous” e.g. if the funder has taken complete control over the litigation. In such a case it may be that there should be no cap at all.”
What was the Funder’s Exposure?
Here the court considered, apparently for the first time in any case, whether the cap should be the sum contributed by the funders for the claimant’s costs and thus not take into account the additional money provided for security of costs or whether it should be the total sum provided, including the sum provided for security of costs.
The court found that it was the total sum provided, including the sum provided for security of costs.
Thus if a funder provided £5 million towards the Claimant costs and then say £7 million for security of costs its total exposure in relation to an adverse costs order is £12 million.
Of course the amount provided by way of security of costs would go straight to the other party and would thus reduce the balance payable and thus it would not always be the case that the total further sum payable would equal the total sum invested by the funder.
The judge said:-
“135. The provision of money to Excalibur in order that it may provide security for costs is not the equivalent of a payment of costs ordered at the end of the case. It was a form of funding of the claim in exchange for a return attributable to the monies provided for that purpose – in effect an investment.”
The judge went on to say:-
“137. If the position were otherwise a funder whose sole contribution was to provide money for security for costs, without which the action would not have continued, would be in the happy position of facing no possible exposure under section 51; whereas those who funded the costs would bear that burden (alone). This would be the position even though, had the claim succeeded, the security for costs provider would have a right to share in the proceeds increased by a percentage reflecting what he had contributed in respect of security. In effect such a provider would have, so far as exposure to an order under section 51 was concerned, a “free ride”, on the back of those financing the costs. This could not be just and cannot be right.”
In this piece I have looked at indemnity costs orders under CPR Part 44, and as set out above these should only be ordered when there has been conduct outside the norm.
Under Part 36 a claimant who matches his or her own Part 36 offer should get indemnity costs as a matter of right, without there being any suggestion of misconduct on the part of the defendant.
Thus very different considerations apply and I deal with these in my piece – Part 36: The Dry Salvages.
However the consequences of indemnity costs orders under Part 36 are as above, that is that proportionality does not apply and any doubts are resolved in favour of the receiving party rather than the paying party.
- CPR 3.18
- CPR 36
- CPR 44
- CPR 44.2(1)
- CPR 44.2(4)
- CPR 44.2(5)
- CPR 44.3
- CPR 44.3(3)
- CPR 44.3(4)
- CPR 61
- Practice Direction 3E, para 7.3
Bolton Metropolitan District Council v Secretary of State for the Environment (Practice Note)  1 WLR 1176 (Link not available)
Landare Investments Ltd v Welsh Development Agency  EWHC 946 (QB) (Link not available)
R (Corner House Research) v Secretary of State for Trade and Industry  EWCA Civ 192 R v SSHD Ex Parte Osman  COD 204 (Link not available)