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Indemnity costs and budgeting

The issue of indemnity costs orders and budgets has come before the High Court on several occasions over the last few years. However, the Court of Appeal has now weighed in on the issue. So, what is the position regarding the application of costs budgets when a receiving party has been awarded indemnity costs?

CPR 3.18

The starting point is CPR 3.18:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(a) have regard to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings;

(b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and

(c) take into account any comments made pursuant to rule 3.15(4) or paragraph 7.4 of Practice Direction 3E and recorded on the face of the order.”

CPR 3.18 explicitly refers to assessment on a standard basis. This seems clear; the rule does not apply when assessing the costs on an indemnity costs basis.

The case law

However, despite this, in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd, Coulson J (as he then was) commented that:

“…as a matter of logical analysis, it seems to me that the costs management order should also be the starting point of an assessment of costs on an indemnity basis, even if the ‘good reasons’ to depart from it are likely to be more numerous and extensive if the indemnity basis is applied.”

Conversely, in Slick Seating Systems GL Events SA v Lea Mark Adams (1) Leamark Ltd (2) LA Structures (3) John Jones (4), HHJ Brown QC explicitly stated that as an indemnity costs order had been made:

“…costs budgeting, even if the claimants had exceeded their budget would not have come into play.”

The following year, Judge Keyser QC commented, obiter, in Kellie and another v Wheatley and Lloyd Architects Ltd, that:

“budgets are prepared and assessed in line with what would be considered to be the reasonable and proportionate costs that could be incurred which was a clear application of the standard basis test, it would be incorrect to take an approved budget which has been assessed in line with these principles and use it as a marker for assessing the same costs on an indemnity basis.”

Further, in Denton and others v TH White, it was concluded that:

“If the offending party ultimately loses, then its conduct may be a good reason to order it to pay indemnity costs. Such an order would free the winning party from the operation of CPR r.18 in relation to its costs budget.”

Case closed it would seem, but tactically for a receiving party, is this the best way forward? If the costs budget simply has no relevance when an indemnity costs order is made, then the whole of the receiving party’s costs are opened up to the scrutiny of the defendant and the court and as such, they could end up in a worse position than if they had not been awarded indemnity costs. If a receiving party has remained within budget, should they not be awarded the benefits of Harrison v University Hospitals and Coventry and Warwickshire NHS Trust and receive the budgeted costs in full without further scrutiny?

It would seem that the High Court may be coming round to this view. In Excelerate Technology Limited v Cumberbatch and another, HHJ Brown QC appeared to reassess his position, and whilst he reaffirmed his view that the claimant was not limited to the agreed costs budget, he appeared to acknowledge that Coulson J’s approach may have merit:

“Where, as here, the Claimant’s costs will be assessed on an indemnity basis, the Claimant will not be so limited by the rules to the agreed costs budget but it may, in practical terms be a starting point or guide for the costs judge on any detailed assessment.”

However, the tables turned again in 2020 when the Court of Appeal considered the matter in Lejonvarn v Burgess and anotherIn that case, Coulson LJ revisited the question of the relevance of the costs budget to indemnity costs and concluded that there was an “absence of overlap between costs budgeting regime on one hand, and an order for indemnity costs on the other.” He referred to the analysis of the position in Kellie and concluded that he agreed with the same and “to the extent that [his] obiter comments in Elvanite suggested the contrary, they should be disregarded.”


The question therefore becomes how does this decision of the Court of Appeal fit with the decision in Harrison?

For receiving parties, there are clear benefits if you are within budget to argue that the costs budget retains a degree of relevance so that the benefit of Harrison can be retained.

However, if a receiving party has exceeded the budget, then the opposite is true and clearly that party would wish the budget to be dispensed with or at the very least, more good reasons to depart considered.

If a receiving party has only partly exceeded the budget, should a composite approach be taken? Should the courts be invited to apply the budget to those costs within phase and apply the benefits of Harrison and only assess (on the indemnity basis) those costs that exceed the budget?

For paying parties, it will be also be tactical consideration; should all the costs be opened up to an assessment, putting the burden of proof on them to show the costs are unreasonable (CPR 44.3) or would they prefer the certainty of the costs budget, albeit with “good reason” arguments coming more in to play?

Time will tell what approach the courts will continue to take. In Lejonvarn, the budget in question had been exceeded by a significant amount, with costs of £724,000 and a budget of £415,000, so the issue did not arise but the direction of travel prior to this would appear to favour at least some consideration being given to the budget as set, and the certainty this would provide both receiving and paying parties clearly has its benefits.

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