In civil litigation, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, with those costs typically assessed on the standard basis in accordance with CPR 44.2. However, in certain circumstances, the court may instead order costs on the indemnity basis.

Understanding when indemnity costs are awarded in civil litigation is essential, as such orders can significantly increase the amount a losing party is required to pay.

 

What Are Costs on the Indemnity Basis?

Costs on the indemnity basis are more favourable to the receiving party than costs assessed on the standard basis.

On the standard basis, the court will only allow costs which are both reasonably incurred and proportionate, with any doubt resolved in favour of the paying party. By contrast, where costs are assessed on the indemnity basis, any doubt is resolved in favour of the receiving party and the requirement for proportionality is effectively removed.

As a result, a party ordered to pay the costs on the indemnity basis will usually face a higher overall liability following the assessment of costs.

 

When Are Indemnity Costs Awarded?

There is no fixed rule defining when indemnity costs should be awarded. Instead, the court exercises its discretion under CPR 44.2, with the key test being whether the conduct of the losing party takes the case “out of the norm.”

So, when are indemnity costs awarded in practice? Typically, it will involve some form of unreasonable conduct or litigation behaviour that the court considers sufficiently serious to justify a departure from the standard basis.

This may arise from the way a claim is pursued, defended, or conducted at any stage, including during the pre-action phase.

 

What Conduct Can Justify an Order for Indemnity Costs?

The court will look closely at the conduct of the parties when deciding whether to make an order for indemnity costs. While each case turns on its facts, there are several well-established examples of behaviour that may justify an order for indemnity costs.

Unreasonable conduct is one of the most common factors. This can include pursuing a weak or exaggerated claim, advancing arguments with no real prospect of success, or maintaining a defence that lacks merit.

A failure to engage in alternative dispute resolution may also be relevant. Where a party refuses to consider settlement or ignores reasonable attempts to resolve the dispute, the court may take this into account when deciding whether indemnity costs are appropriate.

The court may also consider whether there has been any abuse of process, such as tactical manoeuvring designed to delay proceedings or increase costs unnecessarily. Similarly, significant departures from expected litigation conduct, including late changes to a party’s case, may weigh in favour of indemnity costs.

In many cases, an application for indemnity costs will be made by the successful party at the conclusion of the case, particularly where the behaviour of the losing party has had a clear impact on the progression or cost of the litigation.

 

Indemnity Costs and Part 36 Offers

Part 36 offers are one of the most important mechanisms in civil litigation for encouraging settlement and controlling costs risk.

Where a claimant makes a valid Part 36 offer and then goes on to obtain a judgment more advantageous than that offer, the court will usually order that the defendant pays costs on the indemnity basis from the expiry of the relevant period.

This is one of the clearest examples of when are indemnity costs awarded, as the rules create a strong presumption in favour of such an outcome.

In these circumstances, the paying party may also be required to pay enhanced interest and additional sums, further increasing the financial consequences of failing to accept a well-judged offer.

The courts, including the Court of Appeal, have repeatedly emphasised the importance of Part 36 offers in promoting settlement and ensuring that parties properly assess the risks of continuing litigation.

 

Key Case Law on Indemnity Costs

The principles governing indemnity costs have been shaped by a number of important decisions.

In Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson, the court confirmed that indemnity costs are appropriate where there is something in the conduct of the case that takes it out of the norm. This remains a leading authority on the issue.

This approach was reinforced in Three Rivers District Council v Bank of England (No 6), where the court emphasised that indemnity costs may be justified where a party’s conduct is unreasonable to a high degree, even if it does not amount to impropriety.

These cases demonstrate that the threshold is not necessarily one of misconduct in the strict sense, but rather whether the behaviour or circumstances are sufficiently unusual to warrant a different approach to costs.

 

Practical Guidance for Litigants

Understanding when indemnity costs are awarded is not just a matter of legal theory—it has real practical implications for anyone involved in litigation.

Parties should ensure that their conduct throughout the case is reasonable, proportionate, and aligned with the expectations of the court. This includes engaging constructively in pre-action discussions, considering alternative dispute resolution, and carefully evaluating any Part 36 offers.

Failing to do so may result in a party being ordered to pay the costs on the indemnity basis, significantly increasing their financial exposure.

For the successful party, identifying circumstances that may justify an order for indemnity costs can be an important step in maximising costs recovery at the conclusion of proceedings.

 

How Greener Costs Can Help

Understanding when indemnity costs may be awarded in civil litigation is only part of the picture. In practice, identifying whether a case falls outside the norm and successfully arguing for or against indemnity costs requires careful analysis of both conduct and strategy.

At Greener Costs, we provide specialist support to both receiving and paying parties on all aspects of costs disputes, including:

• Advising on whether there are grounds to seek indemnity costs
• Responding to applications for indemnity costs
• Strategic guidance on Part 36 offers and litigation conduct
• Preparing for detailed assessment and maximising costs recovery

Whether you are seeking to justify an order for indemnity costs or minimise your exposure as the paying party, early expert input can make a significant difference to the outcome.

Get in touch with Greener Costs via our enquiry form below, email info@greenercosts.co.uk or call 01204 263047 to discuss how we can support you throughout the costs process.

 

Frequently Asked Questions

Are indemnity costs awarded automatically?

No, indemnity costs are not awarded automatically in most cases. The court retains discretion under CPR 44.2 and will consider all the circumstances, including the conduct of the parties, before making an order.

Do indemnity costs mean all legal costs are recovered?

Not necessarily. While costs on the indemnity basis are more favourable to the receiving party, they must still be reasonably incurred. However, the absence of a proportionality requirement generally results in a higher level of recovery.

Can a defendant obtain indemnity costs?

Yes, a defendant can obtain indemnity costs where the claimant’s conduct justifies such an order. This may include pursuing a claim with no real prospect of success or failing to engage in reasonable settlement discussions.

Is unreasonable conduct required for indemnity costs?

Unreasonable conduct is a common factor, but not strictly required. The key question is whether the case is out of the norm, which can arise from a range of circumstances.