British Racing no longer in the fast lane: indemnity costs prevail where costs claimed as damages

In a notable departure from earlier case law, the High Court determined last month in Hawksford Trustees Jersey Ltd v Halliwells LLP (In liquidation) [2015] EWHC 2996 (Ch) that the proper method of assessing costs claimed as damages in the context of proceedings was on the indemnity basis.

As many readers are aware, a party's costs are assessed on the standard or indemnity basis; with the latter being much more favourable. Whilst in both instances the Court will not allow costs to be recovered that are unreasonable or unreasonably incurred, any doubt as to reasonableness in relation to indemnity costs is resolved in the favour of the claiming party. Additionally, the Court is not required to consider the global proportionality of costs assessed on the indemnity basis as there is an automatic presumption these are proportional.  

The Judgment

The case in question was brought by a corporate trustee pursuing a claim against its previous solicitors, Halliwells, for legal costs incurred in other proceedings. Briefly, Halliwells adopted the position that the costs claimed by way of damages were excessive and only those incurred on the standard basis should be recoverable pursuant to the British Racing case.

In contrast, the Claimant invited the Court to depart from the1996 British Racing authority as it was supervened by the effects of the CPR – which now required costs recoverable on the standard basis to be both proportional and reasonable. Instead, the Claimant invited the Court to follow the departing decision of Newey J in Herrmann v Withers LLP.

In his judgment, his honour Judge Pelling QC agreed with the Herrmann approach, the reasoning being that, as per Herrmann, following the implementation of the CPR the difference between standard and indemnity costs was no longer simply the burden of proof and "costs will not necessarily be recoverable on the standard basis even if reasonably incurred". Moreover, pursuant to CPR r.46.9(3) costs as between a solicitor and client are to be assessed on the indemnity basis so the Claimant should be entitled to "recover by way of damages in respect of their own costs…that portion that would have been allowed had they been subjected to a detailed assessment on the indemnity basis".

Commentary

In a world post-CPR and Jackson reforms, this decision is not unsurprising. Certainly, recent case law demonstrates that judges have had an ongoing reluctance to follow the authority in British Racing.

While many will view the High Court's decision as fair, it is likely to have significant consequences for indemnity insurers, since it effectively increases the damages to which a claimant is entitled irrespective of whether the costs to the original proceedings are proportional. It also gives rise to the very real possibility that a claimant might recover more costs by way of damages, than they could by means of a costs award in any underlying litigation.