Indemnity costs can add woe to a losing party’s bill

The recent High Court case of Noorani v Calver [2009] EWHC 592 (QB) has provided valuable guidance as to the factors a court will take into account when deciding whether to award costs to a party on an indemnity basis.

The court may assess costs on one of two bases: on the indemnity basis or on the standard basis. If costs are assessed on the indemnity basis, the court will give the benefit of any doubt as to whether the costs were reasonably incurred or whether the costs were reasonable in amount in favour of the receiving party. If costs are assessed on the standard basis, the court will give the benefit of any doubt as to whether the costs were reasonably incurred or were reasonable in amount in favour of the paying party. In practice, it is rare for costs to be assessed on the indemnity basis and they will only be awarded by the court if, as we shall see from Noorani v Calver, there are specific factors which justify them – in this case hinging around Civil Procedure Rule 44.3 (see box).

The claimant commenced High Court libel and slander proceedings against the defendant. Both the claimant and the defendant were senior members of the West Wirral Conservation Association. The association was split into two opposing camps, with both the claimant and the defendant in each camp. The heart of the action revolved around a letter written by the defendant stating that, following a telephone conversation between the clamant and the defendant, the defendant was subjected to a series of nuisance silent telephone calls and calls which included, among other issues, direct threats of violence. Although the letter did not mention the claimant by name, the claimant argued that the letter implied that he was responsible for the calls.

From an early stage in the proceedings, the defendant was able to demonstrate that the calls had actually been made by an acquaintance of the claimant, who had made a confession to the police that the claimant had told him to make the calls to the defendant. As a result, the defendant’s solicitors demanded that the claimant withdraw his claim and pay the defendant’s costs, to be assessed if not agreed. The claimant refused and persisted with his claim. Further offers were made to the claimant at various stages of the proceedings but these were not taken up and the matter continued to trial.

During the trial, the claimant was cross-examined in detail in respect of the calls. Following this cross-examination the trial judge, Mr Justice Coulson, noted that the evidence the claimant gave was ‘disastrous for his case’. Unsurprisingly, by the third day of the trial, the claimant requested that the proceedings be discontinued.

Although it was clear that the claimant would be responsible for ­the defendant’s costs as a result of discontinuing his claim, the issue arose as to whether the costs should be assessed on the indemnity basis.

The court found in favour of the defendant and awarded costs on the indemnity basis. In reaching his decision, Coulson J made a number of important comments in respect of when indemnity costs should be allowed. Citing CPR 44.3, the judge held: ‘If indemnity costs are sought, the court must decide whether there is something in the conduct of the action, or the circumstances of the case in question, which takes it out of the norm in a way which justifies an order for indemnity costs.’

Coulson J then considered two important elements of the dispute that he found to be relevant when awarding the defendant's costs on an indemnity basis.

The parties’ pre-trial conduct: after considering the history of the proceedings and the defendant’s various offers, Coulson J held that, despite being made aware of the strong evidence against his claim, the claimant’s unreasonable behaviour in refusing to withdraw his claim and to pay the defendant’s costs meant that the defendant had achieved the same result he would have achieved if the claimant had accepted his offer earlier on in the proceedings. The judge further observed that the only difference now was that the defendant had incurred considerable costs in having to defend the matter to trial and concluded: ‘That is an important part of the story and the party’s conduct which, so it seems, to me, on its own, justify an order in the defendant’s favour for indemnity costs.’

The nature of the claim: the nature of the claim was another factor which Coulson J took into account when awarding indemnity costs. He found that the claimant’s claim was fundamentally flawed, especially in the light of the evidence which linked the claimant to the phone calls. Coulson J found that the libel action was being used by the claimant for ulterior purposes and that it was clear, following the evidence provided by the claimant during detailed cross-examination, that a jury would find that the claimant had indeed made the silent calls. It was this second reason that also justified costs being awarded on an indemnity basis.

Noorani demonstrates the strict approach the courts will take when deciding whether to award costs on an indemnity basis. The courts will, in particular, look closely at how the parties conducted themselves throughout the proceedings as well as the underlying arguments of each party’s case and, if the parties have behaved unreasonably and/or their claims or defences are fundamentally flawed, then the courts are likely to award costs on the indemnity basis. Clients who may simply want their day in court should be strongly advised as to the risks of not only ­losing the case and having to pay the other side’s costs, but also of the risk that a court may award indemnity costs against them.

Masood Ahmed is senior law lecturer at Birmingham City University