Legal Cost Specialists

Costs budgets and the indemnity princple

There appears to be considerable confusion as to the interrelationship between costs budgets and the indemnity principle.

The normally infallible Dominic Regan, writing in Litigation Funding magazine, said:

“Incidentally, there is no consolation for a party who, say, exceeds the budget on a given item by, for example, £10,000 – but miraculously comes in under £10,000 on another part of it. This is because of the confounded indemnity principle, which survives all assassination attempts. One cannot charge the other side more than one can charge the client, and so the underspend will not save the day.”

In similar vein, the recent Costs Law Reports newsletter said:

“It is crucial to monitor each element of the budget since swings and roundabouts do not operate here. Imagine £20,000 was approved for both evidence and disclosure respectively. The party concerned actually spends £30,000 on the former but only £10,000 on the latter. The total, £40,000, is the same as the budgeted amount but in fact only £30,000 is recoverable. Yet again the indemnity principle kicks in. Here, the client could only be charged £10,000 for disclosure so not a penny more can be sought from the paying party since he cannot be required to pay more than the sum which the client is liable to pay his solicitor for the item of work in question.”

However, the indemnity principle has nothing to do with it, as such. A costs budget does not limit the amounts a party can incur in costs but simply limits the amount they can normally expect to recover from the other side if successful (and not even that for defendants with qualified one way costs shifting in personal injury claims). A party who has a budget set at £20,000 for a given phase is perfectly free to incur costs much higher than that and can be charged the full amount by their solicitor for the work in excess of the budget (assuming they have received proper advice from their solicitors as to the likely consequences for recovery).

The reason one cannot “move” the overspend in one area to another is not because of the indemnity principle but because of the wording of the rules. CPR 3.18 states:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(a) have regard to the receiving party’s last approved or agreed budget for each phase (emphasis added) of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

The approved budget creates not just a global cap on what can normally be recovered from the other side but also a cap on each phase of the proceedings.

7 thoughts on “Costs budgets and the indemnity princple”

  1. But the popint about the Indemnity Principle, is that if ACTUAL costs incurred in a phase are less than budget, and that is the amount the client will be charged, then THAT is where the cap lies, not in 3.18 – you ignore subsection (b), and CPR 3 II generally, in terms that the budget is NOT a cap (as you suggest – that is a different part of CPR), and if good reason can be shown, then that budget restriction will not apply.

    Interestingly, the original draft of the revised CPR contained a rule in budgeting specifically mirroriing the old CPR 44.2, requiring the solicitor to notify the client within 7 days of a budget Order being made, but that was removed from the final rules – why, nobody (very esteemed costs counsel included) has ever been able to explain

  2. I still don’t see how the indemnity principle comes into it. For example, the Court fixes the budget for a certain phase at £20,000. The solicitor advises the client that this is too low to do the job properly and asks for approval to spend twice that, which the client gives. At the end of the case, what is normally going to be the maximum recoverable for that phase? £20,000. The fact that the indemnity principle would allow £40,000 to be recovered is irrelevant.

    The budget obviously not an absolute cap, which is why I used the word “normally”. For practical purposes, in most cases it will act as a cap on what can be recovered.

  3. because the examples you used i.e. Dominic Reagan, to attempt to demonstrate your point, specify the Indemnity Principle IS a cap on recoverable costs, so if your spend is say an actual £8k where you budgetted for £10k, you only get £8k

    thats totally different from agreeing with your client £40k on a budget of £20k (of course there MUST be 1 client out there who would agree to that!!), however, even there if the actual spend in that phase is still under the budget (say the case settled early), the Indemnity Priciple would still apply.

    so, for all you Defendants who dont ask for DA on budgeted cases………….

  4. Truly Eminent Costs Professional

    Lets hope this calls for some highly progressive and prolonged satellite litigation!

  5. It would certainly prolong our relevance to the legal profession.

    Many of us hold rights of audience within our own right as well as rights to conduct litigation, which we are willing to exercise, subject to prior agreement.

  6. In my mind this creates an inefficient review process in that an incentive has been created for the paying party to argue that otherwise agreed recoverable costs have been incorectly allocated to a specific budget phase. By reallocation, phased budget amounts could be exceeded forcing a cap to apply.

  7. its NOT A CAP! read the rules, Capping is totally different.

    and how many of you have realised yet, because of budgets and this issue of phases and actual amount spent vs budgeted for, means DA bills drawn where a budget has occurred, will have to be split to each phase…..

    and how many clever draftsmen out there will know how to “re-allocate” overspend from 1 phase to another…..

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