Those who may not be too familiar with civil litigation funding may reasonably ask: What is the difference between standard and indemnity costs? The distinction is an important one within the Civil Procedure Rules, as it can materially affect the level of costs a successful party ultimately recovers.

In broad terms, the difference between standard and indemnity costs lies in the approach the court adopts when costs are assessed. While both bases aim to compensate the receiving party, indemnity costs typically allow a higher level of recovery and involve a more favourable approach to any doubt that arises on assessment.

For practitioners, understanding when the court is likely to depart from the standard basis and the consequence of doing so is essential when advising on costs risk and litigation strategy.

 

The Standard Basis of Costs

In most civil proceedings, costs are assessed on the standard basis pursuant to the Civil Procedure Rules. This remains the default position when the court orders one party to pay another’s costs.

When costs are assessed on the standard basis:

• Only costs which are proportionate to the matters in issue are recoverable
• Any doubt as to whether costs were reasonably or proportionately incurred is resolved in favour of the paying party
• The court applies a structured proportionality test when reviewing the bill

This reflects the general principle that costs and standard costs should remain controlled and proportionate to the value, complexity, and importance of the claim.

For the receiving party, this means that even reasonably incurred costs may be reduced if the court considers them disproportionate overall.

 

The Indemnity Basis of Costs

By contrast, where costs are assessed on an indemnity basis, the court adopts a more generous approach to recovery.

Key features of indemnity costs include:

• The proportionality test does not apply in the same way
• Any doubt is resolved in favour of the receiving party
• The receiving party is likely to recover a higher proportion of its costs

An award of indemnity costs is therefore significant. The court retains discretion when making an award of indemnity costs and will usually reserve such orders for cases involving some form of unreasonable conduct or litigation misconduct.

In practice, parties seeking indemnity costs should clearly identify the conduct relied upon and ensure the evidential basis for the application is properly set out.

 

When Will the Court Award Indemnity Costs?

The court’s power to award costs is governed by CPR Part 44. While the standard basis remains the default, the court may order indemnity costs where the circumstances justify a departure from the norm.

Common situations include:

• Failure to comply with the Pre-Action Protocol
• Unreasonable refusal to engage in alternative dispute resolution
• Pursuing or defending a claim in an obviously unreasonable manner
• Serious procedural breaches or litigation misconduct
• Beating a well-pitched Part 36 offer in certain circumstances

For example, where a party unreasonably refuses a well-pitched Part 36 offer, the court may consider ordering indemnity costs from the relevant date.

Each case turns on its own facts, and the court will consider the overall justice of the case before ordering indemnity costs.

 

Key Authority on Indemnity Costs

The modern approach to indemnity costs is commonly traced to the Court of Appeal’s decision in Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson [2002] EWCA Civ 879. Despite two decades passing, the case remains a leading authority on when the court may properly depart from the standard basis.

In Excelsior, the Court of Appeal confirmed that the critical question is whether the conduct of the paying party takes the case “out of the norm”. Importantly, the court made clear that there is no requirement to establish dishonesty or moral blame. Rather, the jurisdiction focuses on whether, viewed objectively, the conduct justifies a more favourable basis of assessment for the receiving party.

The decision emphasises that indemnity costs are not reserved only for extreme or exceptional misconduct. However, they do require something beyond the ordinary run of contested litigation. The court will consider the overall course of the proceedings, including compliance with the rules, the reasonableness of the parties’ positions, and their conduct in settlement discussions.

For practitioners, the key takeaway is that applications for indemnity costs should be firmly grounded in identifiable litigation behaviour that can properly be said to move the case outside the norm. Unsupported assertions of unreasonableness are unlikely to persuade the court to depart from the standard basis.

 

Making an Application for Indemnity Costs

A party seeking indemnity costs will usually make a formal application for indemnity costs at the appropriate stage of the proceedings, often at trial or at the conclusion of a successful interim application.

When considering whether to depart from the standard basis, the court will look closely at:

• The conduct of the parties throughout the proceedings
• Compliance with relevant rules and court orders
• Whether the case was pursued reasonably
• Any failures to engage constructively in settlement efforts

The threshold is deliberately high. The court will not order indemnity costs simply because one party has been unsuccessful.

 

Practical Impact on the Paying and Receiving Party

The difference between the two bases can be commercially significant.

For the receiving party:

• Indemnity costs usually result in greater recovery
• Assessment is more favourable
• Challenges by the paying party become harder to sustain

For the paying party:

• Exposure increases materially
• Proportionality arguments carry less weight
• The overall costs risk becomes more difficult to control

This is why disputes about the appropriate basis of assessment frequently arise in contested cost hearings and why the wording of court orders can be critically important.

 

Strategic Considerations in Litigation

From a practitioner’s perspective, the possibility of indemnity costs should be considered throughout the lifecycle of a claim.

Particular care should be taken where:

• A Part 36 offer is under consideration
• There are concerns about the opponent’s conduct
• Procedural compliance issues arise
• Settlement opportunities are being evaluated

Equally, parties should be mindful that unreasonable conduct may expose them to an adverse indemnity costs order even if they ultimately succeed on part of the case application.

Careful costs management and early strategic advice can materially reduce the risk of adverse costs consequences.

 

Indemnity Costs and Part 36 Strategy

Part 36 continues to be one of the most significant procedural mechanisms capable of triggering an indemnity costs order. Where a claimant matches or beats its own Part 36 offer, CPR 36.17 provides that the court will ordinarily order indemnity costs from the relevant date, unless it considers such an outcome unjust.

From a strategic perspective, several points merit careful attention:

• The offer must represent a genuine and realistic attempt to settle the proceedings;
• Timing is critical, particularly in cases where litigation risk is evolving;
• Parties should ensure strict procedural compliance with Part 36 formalities; and
• The court retains an overriding discretion where the automatic consequences would be unjust.

Practitioners should also be mindful that an ineffective or purely tactical offer may carry limited weight when the court considers whether indemnity consequences should follow. Conversely, a well-pitched and properly timed Part 36 offer can materially alter the costs landscape and significantly increase pressure on the paying party.

Early, informed advice on Part 36 strategy, therefore, remains an essential component of effective costs management.

 

Frequently Asked Questions

Are indemnity costs the same as full recovery of legal costs?

Not necessarily. Although indemnity costs are more generous, they do not guarantee complete recovery. Costs must still be reasonably incurred and reasonable in amount. However, because proportionality is applied differently and doubts are resolved in favour of the receiving party, the recovery rate is typically higher than on the standard basis.

Does beating a Part 36 offer automatically result in indemnity costs?

In many cases, yes, but it is not entirely automatic. Under CPR Part 36, where the relevant conditions are met, the court will usually order indemnity costs from the relevant date unless it considers it unjust to do so. The court will still review the circumstances carefully.

Can indemnity costs be awarded on interim applications?

Yes. The court has a wide discretion when dealing with the costs of interim applications. Where a party’s conduct on a specific application is found to be unreasonable, the court may make an indemnity costs order relating to that discrete part of the proceedings.

How high is the threshold for ordering indemnity costs?

The threshold is deliberately set above the norm. The court will usually require conduct that takes the case “out of the ordinary” before departing from the standard basis. Mere weakness of a party’s case will not usually be sufficient without some additional unreasonable behaviour.

What should practitioners do when seeking indemnity costs?

Practitioners should clearly identify the conduct relied upon, gather supporting evidence early, and ensure the point is raised expressly at the appropriate hearing. A properly framed submission significantly improves the prospects of the court awarding costs on the indemnity basis.

 

How Greener Costs Can Assist

Understanding the difference between standard and indemnity costs is critical to managing litigation risk effectively. Strategic advice at the right stage can materially affect the level of costs recovered or paid.

Greener Costs supports solicitors and litigators with detailed costs advice, strategic input on costs recovery, and expert assistance throughout the assessment process. Our team regularly advises both paying and receiving parties on the risks associated with indemnity costs and on the tactical steps that can strengthen a party’s position.

To discuss how Greener Costs can assist you in navigating the difference between standard and indemnity costs, please contact our team via info@greenercosts.co.uk or fill in our enquiry form below for a confidential, no-obligation discussion.