Indemnity Costs and the October Reforms
Posted on 1st August 2023 at 09:40
By Sean Linley, Senior Costs Draftsman
Note: This article was updated on 1 November 2023.
Under the existing fixed costs framework where a party obtains an indemnity costs order, that party is entitled to time basis costs for the period of that order. This was the decision reached in Broadhurst v Tan  EWCA Civ 94. But it's all changes post 1 October, this blog seeks to go through the the application of indemnity costs under October's reforms and the alternative costs sanctions now available.
For those wanting a speed read the key points are:
- Pre-October Indemnity Costs would disapply fixed costs (Broadhurst v Tan).
- Post-October Part 45 only permits the Court to award the applicable fixed costs (seemingly disapplying Broadhurst v Tan)
- The rules permitting the Court to only award the applicable fixed costs are subject to Judicial Review so may change.
- Indemnity basis costs may still be beneficial to the recovery of disbursements even if it does not alter the solicitor's fixed costs.
- Part 36 in fixed costs cases replaces automatic indemnity costs with a 35% uplift of difference between fixed costs payable when the relevant period expires and the fixed costs awarded.
- There is no 35% uplift or indemnity basis costs for Portal cases under Part 36, only additional interest.
- Non-Portal cases you can apply under 'Unreasonable Behaviour' test for a 50% uplift or decrease to the applicable fixed costs. This does not apply to Portal cases.
- Non-Portal cases can also apply to disapply fixed costs where there are exceptional circumstances. This test does not apply to Portal cases.
Part 36 & Indemnity Costs
Under the revised Part 36 rules, indemnity costs are out and non-Portal fixed costs cases will instead be entitled to an uplift on the applicable fixed costs which is 35% of the difference between the fixed costs payable when the relevant period of the offer expired and the fixed costs awarded. Note though that this only applies where a claim concludes at Trial.
For Portal fixed costs cases Part 36 is a pretty blunt tool. There are no indemnity costs. There are no uplifts on fixed costs either. The bottom line is that you would only recover the fixed costs you are entitled to in any event. It therefore begs the question, what generosity do you get for beating your Part 36 offer in a Portal case? The only additional benefit from a costs perspective, is additional interest on the applicable fixed costs which run from "the first business day after the deemed date of the Protocol offer". The obvious question is to ask why such a disparity exists between the fixed costs schemes under Part 36? Is it deliberate and if so why? This is a question I sought to put to the CPRC earlier in the year but unfortunately it went unanswered.
The other two notable Part 36 points are that late acceptance does not grant any uplift in non-Portal cases and that on an ex-Portal case (i.e. a claim which drops out of the Portal and into Fixed Recoverable Costs), if a Claimant fails to beat a Defendant's protocol offer then only Stage 1 and 2 Portal costs are recoverable for the Claimant. So theoretically a claim drops out of the Portal, moves onto Fixed Recoverable Costs. If the Defendant beats its protocol offer at Trial then the Defendant gets the applicable Fixed Recoverable costs but the Claimant is restricted to Portal costs. It appears, however, if the Defendant's protocol offer was accepted late then no such restriction to Portal costs would apply. Similarly an ex-Portal case that settles without Trial would see the relevant Fixed Recoverable Costs apply as opposed to Portal costs. To be blunt the rules aren't overly clear but this appears to be a valid interpretation of them.
Indemnity Costs outside of Part 36 - Unreasonable Behaviour?
So could a party obtain an indemnity costs order outside of Part 36? In principle there is nothing preventing a party applying for an indemnity basis costs providing that 'out of the norm' conduct is established as per the lead authority in Excelsior.
However, Part 45 now introduces an 'unreasonable behaviour' test which any party can apply for and if 'unreasonable behaviour' is found then depending on which party applies the court can either award an uplift of 50% of the applicable fixed recoverable costs or reduce the applicable fixed recoverable costs by 50%.
CPR 45.13(3)(a) defines 'unreasonable behaviour' as "conduct for which there is no reasonable explanation." How might the court interpret this?
The case of Ridehalgh v Horsefield  Ch 205 may provide some insight. Sir Thomas Bingham MR said:
"... conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result or because other more cautious legal representatives would have acted differently. The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting in a practitioner's judgment, but it is not unreasonable"
This suggests it will be a high threshold but does give some practical guidance on how Practitioners should consider their own or their opponents conduct as either could well be costly.
Unreasonable Behaviour doesn't apply to Portal cases
The test for 'unreasonable behaviour' does not apply to Portal cases. It's not clear whether this exclusion is deliberate and if so why?
So what can you do in Portal cases? The Part 36 uplift is non-exsistent save for some additional interest. You could, however, apply for indemnity costs.
As above under the pre-October rules an indemnity basis costs order would mean time basis costs and the disapplication of fixed costs (from when the indemnity costs order applies). However, the new Part 45 proves problematic.
Contracting out of fixed costs and Broadhurst v Tan
CPR 45.1(3) provides that the court can only award fixed costs. If this is the case then an indemnity costs order on any fixed costs case will no longer disapply fixed costs as per Broadhurst v Tan. This presents a possible scenario where more time is expended, the fixed costs remain the same and potentially it is the client or solicitor who has to fill the shortfall. For Portal cases an uplift on the solicitor costs appears to not be possible under the post October rules. They are not included under 'unreasonable behaviour' or 'exceptional circumstances'.
The issue of contracting out of fixed costs and the possible prohibition of the same by CPR 45.1(3) is subject to judicial review proceedings so it is something which may change. Could Broadhurst v Tan come back?
Is there any point seeking an Indemnity Costs Order?
There may be some merit in certain cases to seek an indemnity costs order even if it has no apparent impact on the recoverable solicitor costs. Barring certain exceptions most disbursements are unfixed so an indemnity basis costs order may assist in recovery of disbursements. This could actually benefit the recoverable solicitor costs and reduce any prospective shortfall.
Clearly there are questions about whether it would be worth making an independent application for indemnity costs but if at a final hearing anyway it could be worth asking the court to make such an order, particularly in Portal cases.
There's also a distinction in the tests for 'unreasonable behaviour' and indemnity costs.
Unreasonable Behaviour requires conduct for which there is no reasonable explanation.
Indemnity costs requires conduct which is out of the norm.
The language differential is subtle but in theory conduct out of the norm may be reasonable so the Court could decline to apply unreasonable behaviour but could apply indemnity costs. For non-Portal cases on the Fast & Intermediate Tracks then this could be a real boost for the recovery of unfixed disbursements. Even where elements of disbursements are fixed (such as Counsel/Specialist Legal Representative) these fixed bolts-on have to be justified. An indemnity costs order is going to assist with this justification.
It may also be said that an indemnity costs order would be useful in supporting evidence if applying for exceptional circumstances to disapply fixed costs in non-Portal claims.
The Way Forward?
A good start would be for Portal cases to be included within the remit of the Part 36 uplift and the Unreasonable Behaviour & Exceptional Circumstances tests. This would at least bring consistency.
For any Practitioners it's worth having in mind:
A. Can you apply for Unreasonable Behaviour?
B. If not can you apply for an Indemnity Costs Order?
C. And are there Exceptional Circumstances?
Indemnity costs are going to be less impactful in fixed costs going forwards but they are not necessarily completely redundant. Plus with the on-going judicial review proceedings it remains to be seen whether Part 45 will be amended in relation to contracting out of fixed costs and whether this could bring Broadhurst v Tan back into play, disapplying time basis costs. If it does then indemnity costs becomes increasingly attractive to pursue for receiving parties.
Should you have any queries arising from this article or upon costs generally then please do not hesitate to get in touch with our friendly team either via phone 01482 534567 or e-mail email@example.com.
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