The article below was first published in March 2011.
Does an award of indemnity costs matter? A Regional Costs Judge remarked to the writer many years ago, that he could not see that the basis of an award of costs did, as he would consider the quantum of costs, irrespective of the burden of proof, and would not allow unreasonable costs on either basis.
In practical terms, an award of costs on the indemnity basis, can be said to matter, for three reasons. The first is that the principle of proportionality does not apply when costs are being assessed on an indemnity basis. Secondly, the burden of proof, or the onus of persuasion lies on the paying party to rebut a presumption of reasonableness. Thirdly, and most significantly, because indemnity costs are so rarely awarded, the very fact of an award, tends to enhance the receiving party’s standing in negotiations over costs. If on a standard basis assessment 70% to 85% of a bill might be recovered, then on the indemnity basis 85% plus represents the basis for negotiations.
This is what psychologists term the normalisation process.
Indemnity costs can be awarded under the provisions of part 36 of the Civil Procedure Rules, or otherwise by the exercise of the Court’s discretion. The leading case as to the principles upon which an award on the indemnity basis may be appropriate is that of Excelsior Commercial and Industrial Holdings.v.Salisbury Hamer Aspden and Johnson  EWCA Civ 879, where the Court of Appeal noted:
31. In the context of that case I see that those paragraphs set out the need for there to be something more than merely a non−acceptance of a payment into court, or an offer of payment, by a defendant before it is appropriate to make an indemnity order for costs. Insofar as that is the intent of those paragraphs, I have no difficulty with them. However, I would point out the obvious fact that the circumstances with which the courts may be concerned where there is a payment into court may vary considerably. An indemnity order may be justified not only because of the conduct of the parties, but also because of other particular circumstances of the litigation. I give as an example a situation where a party is involved in proceedings as a test case although, so far as that party is concerned, he has no other interest than the issue that arises in that case, but is drawn into expensive litigation. If he is successful, a court may well say that an indemnity order was appropriate, although it could not be suggested that anyone’s conduct in the case had been unreasonable. Equally there may be situations where the nature of the litigation means that the parties could not be expected to conduct the litigation in a proportionate manner. Again the conduct would not be unreasonable and it seems to me that the court would be entitled to take into account that sort of situation in deciding that an indemnity order was appropriate.
32. I take those two examples only for the purpose of illustrating the fact that there is an infinite variety of situations which can come before the courts and which justify the making of an indemnity order. It is because of that that I do not respond to Mr Davidson’s submission that this court should give assistance to lower courts as to the circumstances where indemnity orders should be made and circumstances when they should not. In my judgment it is dangerous for the court to try and add to the requirements of the CPR which are not spelt out in the relevant parts of the CPR. This court can do no more than draw attention to the width of the discretion of the trial judge andre−emphasise the point that has already been made that, before an indemnity order can be made, there must be some conduct or some circumstance which takes the case out of the norm. That is the critical requirement.
In later cases, these comments on the requirement for conduct or abnormal circumstances have been the subject of much argument. A spate of recent decisions has illustrated the applications of the principles.
In the case of D Morgan PLC.v.Mace and Jones (A Firm)  EWHC 26, a decision of Coulson J., a professional negligence action against a firm of solicitors failed on grounds of causation, and in circumstances where the firm had offered £1.2 million by way of settlement. Indemnity costs were ordered from the last point that the Defendant’s part 36 offer could have been accepted, both on the grounds that the refusal to accept that offer was unreasonable to a high degree, and where the Claimant’s owner had sought to bolster his case by telling deliberate untruths.
In the case of London Tara Hotel Ltd.v.Kensington Close Hotel Ltd  EWHC 29, a decision of Roth J, an award of indemnity costs was sought on the basis that the claim for damages against the successful defendant had been enormously exaggerated and because an offer to settle by the defendant had been rejected. The court had no difficulty with the concept that the presentation of a grossly inflated claim might constitute conduct which could justify an award of indemnity costs, but went onto hold that a claim which was merely misconceived, did not warrant such a penalty. The same was true of a failure to accept a defendant’s offer. The application for costs on the indemnity basis was accordingly rejected.
Finally, a decision of a tax tribunal is yet another illustration of the application of the Excelsior guidance. In the case of Bowcombe Shoot and Upcerne Shoot.v.Revenue and Customs Commissioners  UKFTT 64, the tribunal refused to award indemnity costs, noting that although there was no requirement for there to be moral condemnation, there had to be such conduct as would justify an order carrying some stigma. Merely being wrong or misguided (with the benefit of hindsight) would not cross the threshold of unreasonableness, to justify such an award.
The Excelsior decision continues to cast a long shadow. The three decisions noted above, show reluctance to award indemnity costs in circumstances where an innocent party triumphed at trial, save in circumstances which overwhelmingly justified such an award.
In a sense, the continuing reluctance of the courts to award indemnity costs remains something of a mystery. Why should a party who has been vindicated in the court system, and often who has been pursued through no fault of their own, have to bear a substantial financial penalty through perhaps 15% to 30% of their bill of costs being irrecoverable? In circumstances where litigation has been heavy, prolonged or simply costly, that can represent a penalty to the innocent party of thousands, or tens of thousands of pounds. Moreover an award of indemnity costs is not in any real sense of the word, a penal order or one that connotes stigma. Rather it simply ensures that a party who has been put to the expense of legal proceedings unnecessarily, recovers a larger element of their overall costs.
The paying party is not forced to pay a penalty, or inflicted with an arbitrary financial fine, simply for having the temerity to bring or resist proceedings. Such an award remains effectively capped, both by the indemnity principle and by an assessment importing a criterion of reasonableness.
But the clear message from the case law noted above is that an award of indemnity costs will remain elusive, save in the grossest of circumstances.