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Recovery of costs under a contractual clause

Prospects of recovering costs is an important factor to be considered at the outset of litigation. There is a common preconception that if a party is successful in bringing or defending a claim, they are guaranteed to be awarded 100% of their legal costs. However, this is not guaranteed.

Most commonly, a successful party to a claim will be awarded costs on the ‘standard basis’. This means that generally, a losing party will be ordered by the Court to pay a winning party’s ‘proportionate costs’. This normally equates to approximately 60 – 70% of the total legal costs incurred.

Having said that, in certain cases, such as those where the losing party has acted unreasonably in their conduct of the litigation or did not accept a Part 36 offer and the winning party has been awarded higher damages than that offer, a party may be awarded costs on an ‘indemnity basis’. This means that the winning party is entitled to recover  100% of its legal costs, subject to them being reasonable.

More recently, a party’s ability to recover costs on an indemnity basis from a claim arising out of a contractual dispute is no longer constrained to cases where the other party’s conduct is in question.

In the recent case of Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd the Commercial Court held that a contract specifying that a party was entitled to “all reasonable costs and expenses” of litigation, in connection with preserving its contractual rights, meant that it was entitled to assessment of those costs on the indemnity basis.

The case concerned a dispute over a lease. The Claimant issued proceedings and was subsequently successful at the Summary Judgment stage. In relation to the recovery of its costs, the Claimant sought costs on the ‘indemnity basis’ as a result of the Defendant’s unreasonable conduct or alternatively by seeking to rely on clause 25.4.2 of the lease which stated:

“The Lessee shall pay to the Lessor on demand all reasonable costs and expenses (including reasonable legal expenses) incurred by the Lessor or any Financier in connection with any amendment to, or the granting of, any waiver or consent or the preservation of any rights of the Lessor under, any Relevant Document required in writing by the Lessee.”

The Court found that although there was not enough evidence to show that the Defendant’s conduct in the litigation was unreasonable, the Claimant was entitled to be awarded indemnity costs on the basis of clause 25.4.2. The key element of that clause being that the Claimant was entitled to recover “all reasonable costs and expenses”.

The case however raised an important question, namely whether the word ‘reasonable’ precluded the Court from awarding costs over and above the ‘standard basis’. The Court considered the case of Euro Asian Oil Sa v Credit Suisse AG and held that a reference to reasonableness does not in itself prevent the Court from awarding indemnity costs as under CPR44.3 a party is only ever entitled to recover reasonably incurred costs in any event. These can be reasonable on either a standard or indemnity basis. The Court saw no reason to depart from the principles set out in Littlestone v MacLeish.

This is welcome news for parties pursuing contractual remedies in all areas including property litigation. An award of costs on an indemnity basis is much more favourable for the receiving party as there is no need to show that the costs are ‘proportionate’. The onus is placed on the losing party to show that the costs are unreasonable.

At DTM Legal, our specialist property ligation department is on hand to assist in resolving a variety of property disputes, whether a party has breached a lease or otherwise against you, or you are being accused of committing the breach.

Should you require any assistance or further information about anything contained with this article, please do not hesitate to contact our Head of Property, Anna Duffy, on 0151 230 1219.


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