Legal costs are coming under close scrutiny by the Court. A party to a dispute must put itself in the best possible position to maximise costs recovery. An indemnity may be included in a contract but this doesn't always result in full costs recovery.
Active costs management is key
Managing costs is an increasingly important aspect of any dispute. For multi-track cases, with a value of less than £10m, parties are now required to submit a costs budget detailing estimated costs for each step in the litigation process and, where possible, to agree that budget with the other side prior to attending the first Case Management Conference. It is therefore imperative that parties work with the other side, and the court, to actively manage cases in a way that deals with costs effectively.
Whilst the court will usually order the loser to pay the winners costs, the amount of costs awarded cannot be guaranteed. The Court has the power to assess the proportionality and reasonableness of costs incurred. The Jackson Reforms implemented in April 2013 changed the overriding objective of the Civil Procedure Rules to require parties to conduct litigation "at proportionate cost". As a result, we have seen an increasing trend where judges do not allow disproportionate and unreasonable costs to be recovered.
Does a contractual indemnity to pay costs guarantee recovery?
An indemnity is an obligation to compensate a party for loss or damage by making a money payment on a 'pound for pound' basis. Often a contractual indemnity provides for the winners costs to be paid in full.
Notwithstanding the existence of a contractual indemnity, the Court in AstraZeneca UK Ltd v International Business Machines Corporation  EWHC 3373 (TCC) actively considered how "unreasonable or unreasonably incurred" the costs had been. Although it upheld the clause, the Court stated it should exercise its discretion so as to reflect the commercial rights of the parties.
The Court applied Civil Procedure Rule Part 48.3 (now 44.5) which states that where the Court assesses costs payable under the terms of a contract, the costs payable under those terms are, unless the contract expressly provides otherwise, presumed to be costs which have been reasonably incurred and reasonable in amount. In assessing costs by such criteria the court looked not only at the number of issues but also the importance of those issues to the parties in all the circumstances of the case.
Can an indemnity clause cover all costs - reasonably incurred or not?!
Even if a party agreed a contractual indemnity which attempted to agree recovery of unreasonable costs, the fairness of such a clause may become subject to the test of reasonableness under the Unfair Contract Terms Act 1977 ("UCTA"). When dealing with consumers or where commercial parties contract on standard terms the reasonableness of a wide reaching indemnity clause is likely to be called into question. In some circumstances, particularly where the size and bargaining power of the contracting parties is uneven, there is a higher risk of the court applying UCTA and, subject to the severance clauses of the contract, rendering the indemnity unenforceable.
The Jackson reforms have encouraged the Court to exercise its wide discretion in disallowing the recovery of costs incurred unreasonably, to actively manage cases and to generally disallow the recovery of costs incurred unreasonably during a case. To be in the best position to achieve maximum costs recovery:
- Work with your legal advisers to keep costs as reasonable as possible, both in the scope of work required and in the time taken to complete such work. The more reasonable the costs, the less likely the Court will be to intervene in a contractual agreement on costs.
- Assist and engage in early discussions with the other side on costs - the court will always retain ultimate discretion but is less likely to interfere in circumstances where cost estimates have been agreed with the other side at an early stage.
- If you want to include a contractual indemnity to recover all costs, ensure the clause is unambiguous and clear as to the basis on which you expect recovery. To assist in it being deemed reasonable and enforceable you should negotiate the clause with the other side allowing them an opportunity to comment on it.
If you are in any doubt about maximising your costs recovery and the drafting of indemnity clauses for the recovery of costs, seek legal advice.