The Likelihood Of Higher Costs Awards

Times Newspapers have been ordered to pay indemnity costs to a successful libel claimant who had earlier offered to settle for a third of the sum he was awarded at trial.

TV producer Sean McPhilemy sued in respect of a Sunday Times article which he said accused him of deceit. A jury awarded him damages of £145,000 and the judge ordered Times Newspapers to pay his costs. An appeal by Times Newspapers against the jury’s verdict failed. But McPhilemy’s cross-appeal on costs succeeded. McPhilemy argued that his costs should be paid on the indemnity basis (a more generous basis than the standard basis ordered by the judge). The Court of Appeal agreed. As well as ordering the Sunday Times to pay McPhilemy’s indemnity costs, it also awarded interest on those costs at a rate 4% above base rate. (Under CPR36.21, it could have awarded interest at up to 10% above base rate.)

McPhilemy had made a Part 36 Offer not long before the trial commenced. He offered to accept, among other things, damages of £50,000. That offer was rejected but at trial McPhilemy did better than £50,000 and he therefore applied for his costs to be paid on the indemnity basis pursuant to CPR 36.21. He also applied for interest on those costs.

Mr Justice Eady refused to order indemnity costs. In his judgment he said that an award of indemnity costs would be interpreted as an indication of the court’s disapproval of the defendant’s conduct. In the exercise of his discretion, he decided that it would be unjust to make such an order against Times Newspapers.

The Court of Appeal decided that Eady J was wrong to consider that an order for payment of indemnity costs implied disapproval by the court of the defendant’s conduct or otherwise carried some stigma or could be regarded as punitive. In Petrotrade v Texaco, a Court of Appeal decision made shortly after Eady J’s judgment, Lord Woolf had said : "It would be wrong to regard the rule [CPR 36.21] as producing penal consequences. An order for indemnity costs does not enable a claimant to receive more costs than he has incurred. Its practical effect is to avoid his costs being assessed at a lower figure."

The Court of Appeal’s decision in McPhilemy provides clear encouragement to claimants to seek indemnity costs from defendants whenever they beat a Part 36 Offer. But it surely has a wider application. Since the court has made it clear that indemnity costs should not be regarded as penal and are not restricted to cases where the court disapproves of the defendant’s conduct, there is nothing to stop claimants from routinely making applications for indemnity costs either at the conclusion of trial or at various interlocutory stages. It would appear that the court has a wide discretion to order indemnity costs whenever it is just to do so. The Court of Appeal has declared that the purpose of an order of indemnity costs is to address the element of perceived unfairness which arose from the fact that an award of costs on the standard basis would, almost invariably, lead to the successful claimant recovering less than the costs which he had to pay to his solicitor.

Of course, the situation could work in a defendant’s favour too. Although CPR 36.20 does not give the court express power to award indemnity costs against a claimant who fails to do better than a defendant’s Part 36 payment, it is presumably open to a court to exercise its discretion and to make such an order in an appropriate case.

The difference between costs assessed on an indemnity basis and on the standard basis may be very significant. The criteria for assessment are set out at CPR 44.4. Whichever basis of assessment applies, costs unreasonably incurred or unreasonable in amount will be disallowed. And costs will only be allowed to the extent that they are proportionate to the matters in issue. But in making its assessment on an indemnity basis, the court will resolve any doubts in favour of the receiving party. On a standard basis assessment, doubts are resolved in the paying party’s favour.