Lawyers Briefing Notes

Fri, 16 Sep 2011

Indemnity Costs: pursuing a weak claim

Costs under CPR Part 44.4 are awarded on a standard or indemnity basis. If a party is awarded costs on an indemnity basis the court will resolve any doubt about the reasonableness of the costs claimed in favour of the receiving party.

It is extremely rare for a party to recover all of its costs from the opponent and so any opportunity to claim costs on an indemnity basis would be an attractive proposition.

The factors that fall to be considered when deciding whether to order indemnity costs have been developed incrementally through case law and the following are not exceptional propositions:-

  1. Indemnity costs are not intended to be penal and regard must be had to what in the circumstances is fair and reasonable.

  2. An order for indemnity costs can be made even where the paying parties conduct can not properly be regarded as deserving of moral condemnation.

  3. The court has a very wide discretion but there must be some conduct or some circumstances which takes the case out of the norm.

  4. The conduct must be unreasonable to a high degree.

  5. Pursuing a weak claim will not usually, on its own justify an order for indemnity costs but to maintain a claim that a party knows or ought to know is doomed to fail on the facts and law is conduct that is so unreasonable as to justify such an order.

  6. There is no injustice to a claimant in denying it the benefit of an assessment on a proportionate basis when the claimant has shown no interest in proportionality in casting its claim disproportionately widely requiring the defendant to meet such a claim.

  7. If one party has made a real effort to find a reasonable solution and the other has resisted that sensible approach then the latter puts himself at risk.

  8. Rejection of a reasonable offer will not automatically result in an order for indemnity costs but where the successful party has behaved reasonably and the losing party has behaved unreasonably the rejection of that offer may result in such an order.

  9. Rejection of two reasonable offers can of itself justify an order for indemnity costs.

Whilst every cases turns on its facts, clearly the application of any of the above propositions could be persuasive in a claim for indemnity costs following success at trial or on application at detailed assessment.

The recent decision of Southwark LBC v IBM UK Limited [2011] EWHC 653(TCC) the court decided that it was appropriate to order indemnity costs from the time when an offer to settle made by the defendant should have been accepted by the claimant in circumstances where it would have been apparent to the claimant by that time that it was pursuing a weak claim.

Southwark LBC had advanced claims based on an overarching contract, misrepresentation, negligence and collateral warranty, its main complaint being that the software provided by IBM UK Limited was not fit for purpose.

At trial, the claim by Southwark was dismissed and judgment was entered for IBM. IBM sought indemnity costs on the basis that Southwark pursued the action without any evidence about its allegations. In the case, Southwark did not serve any witness statements choosing instead to rely on pre contract documentation and proof of a collateral contract. The judge considered this to be evidence in support of its allegations. However, by the end of 2010 when the witness statements had been served, Southwark should have become aware that its case was seriously weakened.

Pursuing a case consisting of wide ranging and shifting allegations, the judge accepted that Southwark had put its case in a variety of ways however the essential case was always that the software was not fit for purpose. By mid January 2011, after the exchange of witness statements, Southwark should have been aware that over half its complaints on suitability were not supported by its own expert and again, at that stage, should have been aware that its case was at best very weak.

It was around this time that IBM put forward a ‘drop hands’ offer which the court said was a good offer given the difficulties which Southwark ought to have appreciated and there was no good reason why it was not accepted.

The court decided that the facts of this case pursuing a weak claim was sufficient to justify an award of costs on an indemnity basis.

There is a caveat to this decision in that the court was able to identify a point in time where Southwalk should have been aware that they were pursuing a weak case but continued regardless.

Undoubtedly, this case should serve as a short across the bows to would be claimants who are pursuing a frivolous claim. This does not mean to say that they don’t have a legitimate claim but the deciding factor will be whether the claim is weak on the evidence.