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Published On: 9 October 2014
Kellie v Wheatley & Lloyd Architects Ltd  EWHC 2886 – Technology and Construction Court, 27 August 2014
In a recent judgment, Keyser J has provided some much needed guidance on the application of costs budgets to orders for indemnity costs.
Mr and Mrs Kellie had brought a claim against their architects, Wheatley & Lloyd Architects Limited, alleging professional negligence and losses to the value of their home. This claim was unsuccessful and the court was required to determine the level of costs to be paid by Mr and Mrs Kellie to the architects. In determining the issue of costs, the court examined a number of issues of interest to litigation practitioners:
when indemnity costs are appropriate
the relevance of costs budgets to indemnity costs awards and
when a party should have costs disallowed for raising and losing on discrete issues.
Keyser J declined to make an award of indemnity costs in favour of the successful architects, despite the claim against them being weak; the case may provide a "high water mark" for cases which remain within the standard costs basis of award. Cases where indemnity costs awards are appropriate are restricted to those where there is some "exceptional" feature, for example relating to how the litigation was conducted, there mere fact a case is weak is not enough on its own.
Costs budgets and indemnity costs
Keyser J's obiter comments on the applicability of costs budgets to assessment of costs on the indemnity basis are of particular interest. Disagreeing with previous obiter comments of Coulson J in Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd (2012), Keyser J explained why an approved costs budget was not the appropriate starting point for an assessment on the indemnity basis. He referred to Rule 3.18 of the Civil Procedure Rules (CPR), which states:
"where a costs management order has been made, when assessing costs on the standard basis, the court will have regard to the receiving party’s last approved or agreed budget …" [emphasis added]
He further pointed out that the explicit reference to “standard” costs in Rule 3.18 meant it was not intended to apply to “indemnity” costs.
Keyser J went on to explain, persuasively, that where costs are awarded on the standard basis the court will only allow the successful party to recover “reasonable and proportionate” costs, with any doubt resolved in favour of the paying party. In contrast, where indemnity costs are awarded, the court will consider only whether costs were incurred “reasonably”, with doubts resolved in favour of the receiving party. As costs budgets and consequent cost management orders were prepared on the standard basis taking into account the twin test of “reasonableness and proportionately”, and indemnity costs only concerned determining what costs were “reasonable”, clearly costs budgets had no relevance to determining what costs were recoverable on an indemnity basis.
The costs related to unsuccessful defences
In determining whether there should be a reduction in costs to take account of the defendant having lost on two discrete issues, Keyser J held that the running of two unsuccessful defences which did not add materially to the overall costs of the action should not in the circumstances limit recovery. The two defences did not affect the outcome of the case and no additional time of any significance had been taken by the failed defences at trial. Had significant costs or time been wasted, a proportionate costs order might of course have been made.
Keyser J's comments on the non-applicability of costs budgets to awards of indemnity costs are in clear contradiction to views expounded by Coulson J in an earlier first instance decision. They show that the courts are still uncertain on question of how indemnity awards will work under the new costs budgeting regime, and this may remain the position until this point is clarified by the Court of Appeal. Having said that, there is considerable force to Keyser J's obiter comments: the relevant CPR provisions do not refer to indemnity awards in the context of costs budgets, they only refer to "standard" costs awards. Litigants should take note: low costs budgets are no protection to losing parties where indemnity costs awards are made.