Judges at odds over relationship between budgeting and indemnity costs

Cardiff: HHJ Keyser adds to the costs management obiter dicta

The High Court is at odds over the relationship between budgeting and indemnity costs, after one judge expressly disagreed with the view of another that the costs management order (CMO) should also be the starting point for an assessment of indemnity costs.

His Honour Judge Keyser QC, sitting as a High Court judge in Cardiff, said that CMOs are designed to set out the probable limits of the costs that will be proportionately incurred – but proportionality does not apply to indemnity costs.

He was considering the costs in Kellie & Anor v Wheatley & Lloyd Architects Ltd [2014] EWHC 2886 (TCC), ran under the pre-Jackson costs management pilot in the Technology and Construction Court.

The defendant had put in a budget of around £140,000, but the CMO was for £91,700. After winning at trial, the defendant submitted that its total costs were £166,469, and sought indemnity costs over the claimant’s conduct.

“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,” the judge observed.

He then considered in depth obiter dicta of Mr Justice Coulson in Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd [2012] EWHC 1643 (TCC), which was also run under the pilot.

Coulson J said a logical analysis of rule 3.18 – on assessing costs under a CMO on the standard basis – led to the conclusion that the CMO should also be the starting point of an assessment of indemnity costs, even if the ‘good reasons’ to depart from it are likely to be more numerous and extensive.

His first reason was that the budgets are simply an estimate of likely costs and so should be the starting point for any assessment.

Secondly, he argued that if an order for indemnity costs allowed a receiving party to ignore the CMO, that would encourage successful parties to argue for indemnity costs every time, which “would leave an unacceptable doubt hanging over even approved costs budgets”.

HHJ Keyser expressed his “respectful disagreement with that approach”. He argued that CMOs 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 rule 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; see rule 44.3(3). I therefore find it difficult to see why logical analysis requires importing the approach in rule 3.18 into assessment on the indemnity basis.”

He continued that Coulson J’s first reason would only have force if an approved budget reflected 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… 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.”

In relation to Coluson J’s second reason, HHJ Keyser said 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 indemnity costs.

“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.”

He said the proper way of addressing the concern identified by Coulson J 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 rule 44.3(3) to the facts of the particular case”.

On the facts of the case, however, HHJ Keyser decided not to make an award of indemnity costs.


    Readers Comments

  • Greg Cox says:

    This point was addressed, obiter, in Denton (http://www.bailii.org/ew/cases/EWCA/Civ/2014/906.html) – the sanctions/Mitchell cas – by the Master of the Rolls and Vos LJ at paragraph 43 – “If the offending party ultimately loses, then its conduct may be a good reason to order it to pay indemnity costs. Such an order would free the winning party from the operation of CPR rule 3.18 in relation to its costs budget”.

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