London Borough of Southwark v IBM UK Ltd

An indemnity costs order is compensatory rather than penal. It requires conduct or circumstances taking the case outside the norm, involving unreasonable conduct to a high degree. A merely weak or misguided claim will not ordinarily suffice, although pursuing a hopeless claim may do so. The court may also take account of a party’s failure to review its case and its rejection of a reasonable settlement offer. The appropriate order may divide the costs period, awarding standard costs up to the point when the claim or offer should reasonably have been reassessed, and indemnity costs thereafter.

The claimant had previously failed in its substantive claim concerning software and services supplied by the defendant. Judgment had been entered for the defendant, and the claimant accepted liability for the defendant’s costs. The issue was whether those costs should be assessed on the standard or indemnity basis.

The defendant relied on the claimant’s shifting and partly abandoned allegations, its failure to reassess the merits after evidence was exchanged, the disposal of the software, and its rejection of a settlement offer. The court assessed the significance of each factor and determined the appropriate costs period.

1. Applicable principles. Under Civil Procedure Rules 1998, Part 44.3 and Part 44.4, the court considers conduct before and during proceedings, success, admissible offers, the reasonableness of pursuing particular claims, and the manner in which the case was advanced. Indemnity costs are not penal and are not confined to conduct involving moral impropriety. The discretion is wide, but the case must be taken outside the norm by conduct unreasonable to a high degree.
2. A weak or misguided claim does not ordinarily justify indemnity costs. A hopeless claim, or one which the claimant knew or ought to have known was doomed to fail, may justify such an order. Rejection of a reasonable offer does not automatically have that consequence, but may do so when the successful party acted reasonably and the losing party did not.
3. The claimant’s failure to comply more fully with pre-action protocol requirements carried little weight because its case had been broadly stated in correspondence. Disposal of the software also carried little weight: the dispute concerned its inherent suitability, and there was no malicious or untoward conduct, although some costs had been wasted by misleading impressions about its availability for inspection.
4. Greater weight attached to the claimant’s failure to review its case after the exchange of witness evidence. By mid-January 2011 it should have recognised that substantial parts of the claim were unsupported or very weak. The claimant’s rejection of the defendant’s 10 January 2011 walk-away offer was unreasonable in the circumstances.
5. The fair order was that the defendant recover costs on the standard basis up to 4 pm on 14 January 2011, and on the indemnity basis thereafter.

Not stated in the judgment.