Masood Ahmed, University of Leicester and Lal Akhter, Docket Live & Med Chambers, Leicester
In civil litigation, costs will either be assessed on the standard basis or the indemnity basis; the default position is the standard basis. A court may, however, order costs on the indemnity basis if the circumstances of the case justify such an order being made. The effect of an indemnity costs order 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. In the recent decision of Andrew Evans v R & V Allgemeine Verischerung AG  EWHC 2688 (KB)His Honour Judge Howells considered the successful claimant’s application for costs to be awarded in its favour on an indemnity basis.
Judicial approach to indemnity costs
The Court of Appeal has declined to define the circumstances in which a court could or should make an order for costs on the indemnity basis. In Excelsior Commercial and Industrial Holdings v Salisbury Hamer Aspden & Johnson  EWCA Civ 879 the Court of Appeal declined to give detailed guidance at the principles to be applied by judges intending to make indemnity costs orders, recognising that every case must be fact specific, and taking the view that they should not strive to replace the language of the rules with other phrases. Nevertheless, it was stated that the making of an indemnity costs order was where conduct or circumstances was “out of the norm”. In Three Rivers v Bank of England  EWHC 816 Tomlinson J gave a detailed summary of factors to be taken into consideration when considering whether to make an indemnity costs order, including (i) the conduct of the unsuccessful party before and during the trial; (ii) whether it was reasonable for the party to pursue particular allegations; and (iii) whether the case was speculative, weak, or opportunist. By way of an example, Tomlinson J explained that a case would be out of the norm to justify an order for indemnity costs where a party pursues a claim which was irreconcilable with contemporaneous documents. (see also Fitzpatrick Contractors Ltd v Tyco Fire and Integrated Solutions (UK) Ltd  EWHC 1391 (TCC)).
Evans v R & V
The claimant was successful in the action and there was no dispute that the defendants should pay the claimant’s costs. It is also accepted that from 7th July 2022 (which was 21 days after the expiry of a relevant Part 36 offer) those costs should be on an indemnity basis. However, the claimant made an application to the court to order that the defendants pay the costs of the action as a whole on the indemnity basis.
Having considered the authorities, HHJ Howells noted that indemnity costs are not to be awarded simply because a party has lost or has pursued the case to trial which was, on the face of it, weak. It was wrong to consider this discretion with the benefit of hindsight (i.e. with knowledge of how a particular issue has ultimately resolved). He then explained that he would consider the conduct of the defendant during the proceedings both before litigation and after and before and during trial, and to assess whether that conduct or other circumstances took the case “outside the norm” (i.e. something outside the ordinary and reasonable conduct of proceedings). In doing so, HHJ Howells took each of the claimant’s allegations of the defendant’s “conduct” in turn.
Failure to engage with the Rehabilitation Code
The defendant’s failure to engage with the Rehabilitation Code, to voluntarily accept the provisions of the Code and to work with the claimant for example by funding treatment could not be criticised as conduct taking outside the norm. All insurers, HHJ Howells noted, might be well advised to try and work in a collaborative fashion as per the terms of the code. However, refusing to do so was not in itself sufficient to say that indemnity costs followed. That was particularly the case where the insurer is an overseas one and therefore not bound in any way by the Code.
Failure to engage with ADR
The claimant contended that the defendant did not respond to their offer of ADR. In response, the defendant argued that they did not show an unwillingness to engage with ADR: it was simply a question of timing and availability of evidence so that risks could be assessed. HHJ Howells accepted that it should not always be necessary to wait for finalised joint reports from experts before litigation risk can be evaluated but went on to say that he was not satisfied that this was conduct “out of the norm”.
Failure to cooperate in narrowing issues in dispute
The claimant asserted that the defendant failed to narrow issues in dispute in respect of agreeing issues of German law, either early in proceedings or shortly before trial. However, HHJ Howells noted that the experts remained far apart in their evidence; each party was entitled to challenge and test the other side’s evidence and therefore this was not unreasonable conduct.
Failure to prepare for trial / comply with rules and practice directions
The claimant pointed to “a litany of failures on the part of the defendant” including (i) not instructing an expert witness properly by providing him with all the evidence: this was corrected during trial; (ii) late expert evidence for the joint statement; (iii) failing to comply with the requirement for video link evidence for oversees witnesses; (iv) not arranging for an interpreter for their expert; (v) making 3 different applications during the course of the trial which caused delay and wasted valuable trial time; and (vi) failing to provide defence counsel with the video evidence attached to an expert’s report. Despite these failures, HHJ Howells concluded that “they were not such that they disrupted any significant degree the smooth running of this action and, whilst failures of preparation are never to be condoned, I do not find that any of the failures identified here, either individually or cumulatively, constituted conduct outside the usual and reasonable conduct of proceedings.”
Pursuing a hopeless case
The claimant argued that the defendant’s case was hopeless because its own reconstruction evidence contradicted factual witnesses; the witnesses were unable to be called to give oral evidence because of failure to comply with the practice direction; and it changed its case late on. However, the question of whether this was conduct so out of the norm to justify indemnity costs should not, HHJ Howells explained, be judged retrospectively from the position of knowledge that such evidence was ultimately rejected at trial. It could not be said, on a reading of the evidence overall, that the defendant’s case was so hopeless that it should not have been pursued. Trials test the strength of evidence: the defendant’s evidence was not preferred but it was not, on its face, so hopeless that a party could say it was bound to fail. It was not unreasonable to fight this trial.
Failure to respond to Part 36 offer
Although the defendant did not respond to the claimant’s Part 36 offer, there was no obligation to do so. HHJ Howells stated that he could not award a double indemnity costs order for failing to respond, nor treat that failure to reflect back on the litigation generally and say that indemnity costs should be awarded from an earlier date. The risk that the defendant faced by not accepting the claimant’s offer had already come into effect by the standard Part 36 consequences which HHJ Howells had ordered.
Having taken a step back, HHJ Howells concluded that, although the conduct of the litigation by the defendant has been imperfect, the parties in litigation “are entitled to run cases which are not the strongest. They take their chance at trial. The defendant took that chance and lost.” Furthermore, the conduct of the defendant was not so far below the bar as to be “something outside the ordinary and reasonable conduct of proceedings.” Therefore, the claimant’s application for indemnity costs was rejected.
The decision is yet another reminder of the wide discretion that the courts enjoy on the issue of costs. More specifically, the decision provides an important reminder of the test that must be satisfied before a court will grant indemnity costs. Thus, any application for indemnity costs must be supported with strong and convincing evidence which clearly demonstrates that the conduct complained of is “something outside the ordinary and reasonable conduct of proceedings”. As the Court of Appeal held in Esure Services Ltd v Quarcoo (2009) EWCA Civ 595, indemnity costs are not to be ordered solely in cases where there is some lack of probity or conduct deserving of moral condemnation on the part of the paying party. Two additional observations can be made of the decision. The first is that the catalogue of failures by the defendant are surprising, especially given the fact that its was represented by a large, well respected law firm. The second observation relates to the judge’s conclusion that the defendant’s failure to engage with ADR did not attract indemnity costs. The judge noted that the defendant had not responded to the claimant’s offers of ADR. Although a court order provided a standard term which encourages the parties to consider ADR, the defendant argued that ADR was premature. The claimant suggested that a date to be put in the diary so that when all the evidence was available, parties were ready to meet. Unfortunately, that was not done. By the time that the defendant agreed to ADR there were no convenient dates. As such, the claimant argued that the defendant had not negotiated in any way. These facts were enough, we argue, for the judge to penalise the defendant by way of indemnity costs. This conclusion is supported by recent authorities. In Thakkar v Patel  EWCA Civ 117, for example, Jackson LJ made clear the importance of the parties’ duty to engage with mediation. He warned
The message which the court sends out in this case is that in a case where bilateral negotiations fail but mediation is obviously appropriate, it behoves both parties to get on with it. If one party frustrates the process by delaying and dragging its feet for no good reason, that will merit a costs sanction. In the present case, the costs sanction was severe, but not so severe that this court should intervene.
Furthermore, the courts have, more recently, developed a consistent line of jurisprudence in penalising parties in costs, including indemnity costs, for a failure to consider and engage with ADR (see e.g. DSN v Blackpool Football Club Ltd  EWHC 670 (QB); Wales (t/a Selective Investment Services) v CBRE Managed Services Ltd & Anor  EWHC 1050 (Comm); and BXB v Watch Tower and Bible Tract Society of Pennsylvannia & Ors  EWHC 656 (Admin)). Therefore, courts should be more willing to exercise their powers in indemnity costs where there has been a clear and deliberate breach of the parties’ ADR obligations.