Learning Outcomes
After reading this article, you will be able to explain the indemnity principle in civil litigation costs, distinguish between the standard and indemnity bases of assessment, and apply these concepts to SQE1-style scenarios. You will also understand how the indemnity principle affects cost recovery, including its interaction with funding arrangements and court orders.
SQE1 Syllabus
For SQE1, you are required to understand the indemnity principle as it applies to costs in civil litigation. Focus your revision on:
- The definition and rationale of the indemnity principle in cost recovery.
- The difference between the standard and indemnity bases of assessment.
- How the indemnity principle limits recoverable costs to those actually payable by the client.
- The impact of funding arrangements (e.g., CFAs, pro bono) on the indemnity principle.
- Typical scenarios where indemnity costs may be ordered and the consequences for parties.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the indemnity principle and how does it affect the amount of costs a successful party can recover from an opponent?
- How does the standard basis of assessment differ from the indemnity basis in cost recovery?
- Can a party recover costs from an opponent if their solicitor acted pro bono? Explain your answer.
- In what circumstances might a court order costs on the indemnity basis rather than the standard basis?
Introduction
The indemnity principle is a core rule in civil litigation costs. It ensures that a party cannot recover more in legal costs from an opponent than they are liable to pay their own solicitor. This principle underpins fairness in cost recovery and prevents parties from profiting from litigation. Understanding how the indemnity principle operates, and how it interacts with the standard and indemnity bases of assessment, is essential for SQE1.
The Indemnity Principle: Definition and Rationale
The indemnity principle means that a party awarded costs cannot recover more from the losing party than they are themselves liable to pay their own legal representative. The principle prevents a party from making a profit from a costs order and ensures cost recovery reflects actual liability.
Key Term: indemnity principle
The rule that a party cannot recover more in legal costs from an opponent than they are liable to pay their own solicitor.
This principle applies to all inter-partes costs orders, whether costs are assessed on the standard or indemnity basis.
Standard vs Indemnity Basis of Assessment
When the court assesses costs, it does so on either the standard basis or the indemnity basis. The choice of basis affects what costs are recoverable and how any doubts are resolved.
Key Term: standard basis
Costs are allowed if they are reasonable and proportionate to the matters in issue. Any doubt is resolved in favour of the paying party.Key Term: indemnity basis (assessment)
Costs are allowed if they are reasonable, regardless of proportionality. Any doubt is resolved in favour of the receiving party.
Standard Basis
This is the default basis for assessment. The court will only allow costs that are both reasonable and proportionate. If there is uncertainty about whether a cost was reasonably incurred or is reasonable in amount, the court will decide in favour of the party paying the costs.
Indemnity Basis
The indemnity basis is less restrictive. The court allows all costs that are reasonable, even if they are disproportionate. Any doubt is resolved in favour of the party receiving the costs. Indemnity costs are usually awarded where a party's conduct has been unreasonable or improper.
Worked Example 1.1
A claimant wins a contract claim. The court orders the defendant to pay the claimant's costs on the standard basis. The claimant's solicitor charges £200 per hour, but the client has a special agreement to pay only £150 per hour. The claimant submits a bill to the defendant at £200 per hour. How much can the claimant recover?
Answer: The claimant can recover a maximum of £150 per hour from the defendant, as this is the amount the claimant is actually liable to pay their solicitor. The indemnity principle prevents recovery of more than this.
How the Indemnity Principle Limits Cost Recovery
The indemnity principle operates as a cap on recoverable costs. The successful party cannot claim more from the losing party than they are contractually obliged to pay their own solicitor. If the client is not liable to pay a particular fee, it cannot be recovered from the opponent.
Key Term: inter-partes costs
Costs payable by one party to another, usually ordered by the court at the end of litigation.Key Term: solicitor and own client costs
The costs a client is liable to pay their own solicitor under their retainer agreement.
Worked Example 1.2
A defendant is represented pro bono (for free) by a solicitor. The defendant wins and applies for costs. Can the defendant recover costs from the claimant?
Answer: No. Under the indemnity principle, if there is no liability to pay the solicitor, no costs can be recovered. However, the court may order a payment to a designated charity under specific statutory provisions, but not as inter-partes costs.
Funding Arrangements and the Indemnity Principle
The indemnity principle interacts with various funding arrangements:
- Conditional Fee Agreements (CFAs): If the client is only liable to pay their solicitor if they win, the indemnity principle still applies, but only to the extent of the liability actually incurred.
- Damages-Based Agreements (DBAs): The amount recoverable from the opponent cannot exceed the client's liability under the DBA.
- Pro bono representation: No costs are recoverable unless allowed by statute (e.g., Legal Services Act 2007, s.194, payment to charity).
Exam Warning
If a party claims costs for work not covered by their retainer, or for which they are not liable, the court will disallow those costs. Always check the terms of the client-solicitor agreement.
Indemnity Costs Orders: When Are They Made?
The court may order costs on the indemnity basis where a party has acted unreasonably, negligently, or in bad faith. Examples include:
- Refusing reasonable settlement offers.
- Pursuing hopeless claims or defences.
- Misconduct during litigation.
Indemnity costs are not automatic and are at the court's discretion.
Worked Example 1.3
A claimant rejects a defendant's reasonable Part 36 offer and proceeds to trial, but recovers less than the offer. The court orders the claimant to pay the defendant's costs on the indemnity basis from the date the offer expired. What does this mean for cost recovery?
Answer: The defendant can recover all reasonable costs incurred after the expiry of the offer, even if they are disproportionate, subject to the indemnity principle cap.
Practical Implications for SQE1
- The indemnity principle always applies: recoverable costs cannot exceed the client's liability to their solicitor.
- The standard basis is the default for cost assessment; indemnity basis is exceptional.
- Funding arrangements (CFAs, DBAs, pro bono) affect what costs are recoverable.
- Courts scrutinise costs claimed to ensure compliance with the indemnity principle.
Revision Tip
When preparing for SQE1, focus on identifying whether a costs claim is limited by the indemnity principle and which basis of assessment applies in a scenario.
Key Point Checklist
This article has covered the following key knowledge points:
- The indemnity principle limits recoverable costs to the amount the client is liable to pay their own solicitor.
- Costs are assessed on either the standard basis (reasonable and proportionate) or the indemnity basis (reasonable only).
- The indemnity principle applies to all inter-partes costs orders, regardless of the basis of assessment.
- Funding arrangements (CFAs, DBAs, pro bono) affect the operation of the indemnity principle.
- Indemnity costs are awarded where a party's conduct justifies it, but the indemnity principle still caps recovery.
Key Terms and Concepts
- indemnity principle
- standard basis
- indemnity basis (assessment)
- inter-partes costs
- solicitor and own client costs
