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People who get involved in litigation for the first time are often amazed that a successful party does not recover all the costs it expends in fighting the action. If you are forced to take legal action to recover what is lawfully yours, it seems odd that the court does not order your unsuccessful opponent to reimburse what you have had to spend. After all, you were right and they were wrong – and their misconceived refusal to pay has caused you to incur those inevitably large legal costs.

The court has a discretion as to how much in costs a successful party can recover. For example, it can order that only a proportion is recovered or only costs incurred from a certain date. It can also assess the amount of costs to be paid – on either the standard basis or on the indemnity basis.

Even on the indemnity basis, the successful party will probably not get back everything it has spent. It will not recover costs which are unreasonable and there will, of course, be differing views as to what is reasonable. However the indemnity basis is certainly more favourable to the successful party that the standard basis. For example, any doubts as to reasonableness are resolved in the successful party’s favour. On the standard basis, any such doubts are resolved in favour of the paying loser.

Two particular routes by which a party can try to obtain an order from the court for indemnity costs recently came up for consideration by Mr Justice Coulson in Fitzpatrick Contractors vs Tyco Fire and Integrated Solutions (UK). According to Part 36.14 of the Civil Procedure Rules, if an action goes all the way to judgment and the claimant does as well or better than a Part 36 settlement offer that it made, then the court will order the unsuccessful defendant to pay indemnity costs to the claimant unless it considers that it would be unjust to do so. So, while the court has a discretion in these circumstances over whether or not to award indemnity costs, there is at least a presumption that it will normally do so.

If a settlement before trial was going to result in an indemnity costs order, a defendant might be discouraged from settling. the rules should not be construed in a way that discouraged settlements

Another route to an indemnity costs order is via Part 44.3 of the Civil Procedure Rules. This sets out matters that the court has to take into account when exercising its discretion on costs generally, including the conduct of the parties. It has long been the practice of the court to inflict an indemnity costs order on a party that has behaved reprehensively, although there is some judicial debate as to how bad the behaviour has to be before such an order is made.

Fitzpatrick had brought a claim for damages against Tyco, and on 24 January 2008 Fitzpatrick made a Part 36 offer to settle the litigation for payment of £10.25m. Under the rules, the relevant period for acceptance of the offer was 21 days. Tyco did not accept it within this period and a trial of preliminary issues took place in March 2008 in which Fitzpatrick was substantially successful. The main trail was then adjourned to April 2009. On 14 January 2009, Tyco’s solicitors wrote to Fitzpatrick’s solicitors accepting the offer that had been made almost a year earlier.

Fitzpatrick asked for an indemnity costs order against Tyco. The rules under Part 36 were silent as to whether such an order should be made in these circumstances. However, Fitzpatrick argued that by analogy with Part 36.14, there should be a presumption of indemnity costs. The judge did not accept this. He said it was wrong to import a presumption of indemnity costs where the rules did not expressly do so. Parties should be continuously encouraged to review litigation on which they were engaged. If a settlement before trial was going to result in an indemnity costs order, a defendant might be discouraged from settling. And the rules should not be construed in a way that discouraged settlements.

Fitzpatrick also asked for indemnity costs on the grounds of Tyco’s conduct. After a careful review of the history, the judge concluded that the parties’ approach on both sides had been reasonable and that an order for indemnity costs was not warranted on this basis either.