Costs - The indemnity principle

Learning Outcomes

This article explains the indemnity principle in civil litigation costs, including:

• Its function as a hard cap on recoverable inter-partes costs, how it differs conceptually from indemnity-basis assessment, and why it remains central to modern CPR costs practice.
• The operation of CPR 44 proportionality on the standard basis, the “doubt to the paying/receiving party” tests on each basis, and how those interact with the indemnity cap during detailed assessment.
• Typical retainer structures (fixed, capped, hourly, discounted, CFA, DBA), treatment of written-off time, pro bono work, disbursements and VAT, and how client liability is determined from the retainer wording.
• The impact of CFAs, DBAs, ATE insurance, legal aid funding, QOCS and pro bono costs orders on inter-partes recovery, including what additional liabilities are and are not recoverable post-2013.
• Fact patterns and litigation conduct that justify indemnity costs orders, the role of Part 36 offers, and the effect of contractual indemnity clauses on the ordered assessment basis.
• How the indemnity principle interfaces with costs budgets, costs management, fixed recoverable costs, and the fast, intermediate and multi-track regimes, and the main pitfalls and exam traps to watch for in SQE1 problem questions.

SQE1 Syllabus

For SQE1, you are required to understand the indemnity principle in civil litigation costs and its application across assessment bases, funding arrangements, and VAT, with a focus on the following syllabus points:

• The precise definition, policy foundations, and continuing importance of the indemnity principle in controlling recoverable litigation costs.
• Full differentiation between standard and indemnity bases of cost assessment under the Civil Procedure Rules.
• The operation of the indemnity principle in limiting costs recovery to what is genuinely owed by a party to their own legal representatives, with practical examples.
• The implications and legal limits of various funding arrangements—CFAs, DBAs, ATE insurance, legal aid, and pro bono work—on inter-partes costs recovery under the indemnity principle.
• Typical fact patterns and conduct justifying indemnity costs orders, including abuse of process, refusal of ADR, adverse Part 36 outcomes, and the enforcement of contractual cost indemnities.
• The relationship among approved and agreed costs budgets, the proportionality test, and variations in costs recovery depending on which assessment basis is ordered.
• The rules governing VAT recovery on costs, including treatment for VAT-registered parties and notable exceptions.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the indemnity principle and how does it affect the amount of costs a successful party can recover from an opponent?
2. How does the standard basis of assessment differ from the indemnity basis in cost recovery?
3. Can a party recover costs from an opponent if their solicitor acted pro bono? Explain your answer.
4. In what circumstances might a court order costs on the indemnity basis rather than the standard basis?

Introduction

The indemnity principle is fundamental to the English civil justice costs system. It sets a hard cap: a party cannot recover from their opponent more in legal costs than they are actually liable to pay their own legal representatives under the agreement (retainer) between them. This ensures that a winning party is indemnified—reimbursed for true loss—but cannot make a profit or recover a windfall from the losing party.

This principle operates as a strict limit in every situation where inter-partes costs are claimed, regardless of whether the claimed amount appears otherwise reasonable, proportionate, or necessary. The courts will enforce the indemnity principle with rigour; any attempt to recover from an opponent more than is owed under the retainer is liable to be struck out or reduced on assessment. This is true whether the assessment is undertaken on the standard basis or the indemnity basis.

A frequent area of confusion is the use of the word “indemnity”: on the one hand, the “indemnity principle” is a substantive cap on recovery, but on the other, “costs assessed on the indemnity basis” refers to a particular procedural approach to quantifying costs that is, in certain respects, more favourable to the receiving party than the standard basis. The difference, while primarily procedural, has significant real-world consequences for what costs are allowed.

Key Term: indemnity principle
The fundamental rule that a successful party cannot recover more in legal costs from an opponent than they are contractually liable to pay their own legal representatives.

Key Term: liability cap (indemnity principle)
The maximum inter-partes recovery for any item is the client’s actual enforceable liability for that item under the retainer (plus VAT if irrecoverable), not any higher figure claimed.

The indemnity principle affects not only legal fees (hourly rates, fixed or capped fees), but also disbursements such as court fees, counsel’s fees, VAT on legal fees, and additional charges like ATE insurance premiums or conditional fee success fees. Unless the client has a real liability for an item, it cannot be claimed from an opponent.

Key Term: solicitor and own client costs
Charges and disbursements the client owes to their own solicitor under the retainer (contract of engagement).

Key Term: inter-partes costs
Costs which one party is ordered (or agrees) to pay to another under a court order or settlement.

Statutory exceptions to the indemnity principle exist, but they are tightly circumscribed. For instance, when a party is represented pro bono and there is no actual liability for fees, a costs order may be made not in favour of the successful party but as a payment to an approved charity (see pro bono costs orders). In addition, fixed recoverable costs and certain costs in special regimes may follow their own rules of quantification, but the indemnity principle remains a baseline cap: recovery cannot exceed the client’s liability.

Crucially, the indemnity principle must be understood alongside the overriding objective of the Civil Procedure Rules, which requires the court to deal with cases justly and at proportionate cost, discourages unnecessary expense, and polices fair play between adversaries.

The Indemnity Principle: Definition and Rationale

At its core, the indemnity principle is a control on cost recovery: no party may recover more from an opponent than they are actually liable to pay to their own solicitor or legal representative under their retainer. This rule is both a matter of public policy and a recognition that costs awards are intended to make the successful party whole—but not to leave them better off.

The principle serves three functions in practice:

• Preventing windfall recoveries by locking recovery to the client’s real debt to their solicitor.
• Encouraging transparent retainers and accurate bills.
• Discouraging opportunistic or inflated claims that would otherwise undermine the proportionality and fairness of the costs jurisdiction.

In practical terms, if a solicitor files a bill for a higher rate or broader range of charges than the retainer provides, those costs will be assessed down (or disallowed) on the grounds that the client was never truly liable for those claimed sums. Any liability “written off” or remitted by the solicitor cannot be passed on to the opposite party.

This principle extends further: where a fee is never charged (e.g., pro bono representation) or is expressly capped or discounted under the retainer, the maximum claim—regardless of what is “reasonable”—is the client’s own actual liability. This is particularly relevant to cases involving conditional fee agreements, discounted hourly rates, VAT-recovery issues, or partial written-off charges by solicitors. The court is generally alert to the language of retainers and will construe them objectively to determine whether a real client liability arises for each item.

Key Term: assessment basis
The test applied by the costs judge when quantifying recoverable costs: either the standard basis or the indemnity basis under CPR 44.3.

Key Term: standard basis
The default basis of assessment: only costs that are reasonable and proportionate are allowed; doubts are resolved in favour of the paying party.

Key Term: indemnity basis (assessment)
A more generous basis: proportionality is not a separate hurdle; all costs reasonably incurred and reasonable in amount are allowed; doubts are resolved in favour of the receiving party.

What the indemnity principle does and does not do

• It does cap every cost item by the client’s true liability (including VAT treatment).
• It does not guarantee any recovery: on the standard basis, items may still be excluded for unreasonableness or disproportionality.
• It does not convert a non-liability into a payable item: written-off time, free trainee time, or success fees (post-2013) cannot be recovered inter-partes if not payable by the client.

Key Term: VAT on costs
Only irrecoverable VAT is recoverable inter-partes. If the client can reclaim VAT as input tax, no VAT may be recovered from the opponent.

Key Term: costs budget
A Precedent H schedule of incurred and estimated costs used for costs management in multi-track cases; a significant factor on the standard basis but not a cap on the indemnity basis.

Key Term: fixed recoverable costs (FRC)
Prescribed costs sums or tables that fix the amount recoverable between the parties (primarily for the fast track and intermediate track). They do not override the indemnity cap: a party cannot recover more than they are liable to pay.

Standard vs Indemnity Basis of Assessment

When quantifying costs, CPR 44.3 requires the court to assess them either on the standard basis or on the indemnity basis. This choice affects how strictly the bill is scrutinised, but recovery is always capped by the indemnity principle—the client’s true contractual liability.

Key Term: Part 36
A self-contained CPR regime for formal offers with specified costs and interest consequences when not accepted and later “beaten” or “not beaten” at trial.

Key Term: QOCS
Qualified one-way costs shifting in personal injury claims: defendants’ costs are generally not enforceable against claimants except in specified situations, but post-2023 reforms allow set-off against damages, interest and costs orders in the claimant’s favour.

Standard Basis

The standard basis is the default. Costs are allowed only if they are both reasonable and proportionate, judged against the complexity, conduct, and value at stake. Even necessary expenditure may be curtailed if the overall total is disproportionate.

Assessment proceeds in two stages:

• Reasonableness: line-by-line scrutiny of necessity, utility, and levels (rates/time).
• Proportionality: an overall sense-check against the matters in issue. Disproportionate totals can be reduced even if individual items appear reasonable.

Approved or agreed budgets weigh heavily on the standard basis; the court will not depart from a last approved/agreed budgeted phase without “good reason” (CPR 3.18).

Crucially, doubts on the standard basis are resolved in favour of the paying party.

Indemnity Basis

Assessment on the indemnity basis is exceptional and usually reflects serious litigation misconduct, refusal of reasonable settlement, or a contractual right to indemnity costs. On this basis, any cost that is reasonably incurred and reasonable in amount is allowed, without the separate proportionality hurdle. Doubts go in favour of the receiving party.

Budgets do not constrain indemnity basis recovery (though they may remain evidentially relevant to reasonableness). However, the indemnity principle continues to cap recovery: a party cannot exceed the client’s contractual liability.

The remedial tilt of the indemnity basis—no proportionality check and benefit of doubt to the receiving party—often results in higher recoveries, but it is not a licence to print money: manifestly unreasonable items will still be disallowed.

Worked Example 1.1

A claimant wins a contract claim. The court orders the defendant to pay the claimant’s costs on the standard basis. The claimant’s solicitor charges £200 per hour, but the retainer caps the client’s liability at £150 per hour. The claimant claims £200 per hour inter-partes. How much can be recovered?

Answer:
At most £150 per hour. The indemnity principle caps recovery by the client’s true liability under the retainer, regardless of reasonableness or proportionality.

Worked Example 1.2

A VAT-registered claimant can fully reclaim input VAT. Their solicitor’s bill is £12,000 plus VAT. Can the claimant recover VAT inter-partes?

Answer:
No. VAT is not a loss if the client can reclaim it from HMRC. Only irrecoverable VAT is recoverable under the indemnity principle.

How the Indemnity Principle Limits Cost Recovery

The indemnity principle sets an absolute ceiling on every cost item. After quantification under the applicable basis, the final figure for any item cannot exceed what the client is actually (or contingently) liable to pay under a properly construed retainer.

Key practical consequences:

• No liability, no recovery: if a client is not legally liable to pay an item, it cannot be claimed inter-partes (e.g., purely pro bono work, or time expressly not charged under the retainer, such as free trainee time).
• Caps and discounts bite: where a retainer fixes or caps fees, the cap governs recovery even on the indemnity basis.
• Written-off time is not recoverable: retrospective write-offs reduce the client’s liability and therefore reduce the recovery cap.
• Disbursements depend on liability: counsel’s and experts’ fees are recoverable only to the extent the client (directly or via the solicitor as agent) is liable. A genuine “no win, no fee” agreement with counsel generates no payable disbursement on a loss.
• VAT must reflect the client’s status: VAT is recoverable only where the client cannot reclaim input VAT.
• “Costs inclusive” settlements and retainer clauses must be read carefully: provisions that limit the client’s liability to “such costs as are recovered inter-partes” may interact with the indemnity principle by reducing, rather than increasing, client liability.

Key Term: damages-based agreement (DBA)
A percentage-of-damages fee model regulated by the 2013 DBA Regulations; the solicitor is paid a share of the recovery on success and nothing if the claim fails.

Key Term: success fee
The percentage uplift payable to a solicitor under a CFA if the case is won; generally not recoverable inter-partes for most post-2013 claims in England and Wales.

Key Term: ATE insurance premium
A premium for after-the-event legal expenses insurance; largely irrecoverable inter-partes, with limited exceptions (e.g., specified elements in clinical negligence).

Common retainer structures and the indemnity cap

• Hourly-rate retainer: rates and time must be reasonable and proportionate (standard basis) and subject to the indemnity cap (client’s liability).
• Fixed fee retainer: the fixed fee is the maximum inter-partes recovery for profit costs; disbursements remain separately recoverable if the client is liable for them.
• Capped fee retainer: the cap is the maximum, regardless of recorded time.
• Discounted CFA (e.g., 60% of hourly rates if lost, 100% plus success fee if won): inter-partes recovery is limited to the recoverable base costs element (no success fee inter-partes post-2013), and only to the extent of the client’s base liability under the discount terms.
• DBA: inter-partes recovery is determined by the ordinary rules (reasonable costs, etc.), but the solicitor must give credit for inter-partes recovery against the DBA percentage; the client should never pay more than the DBA allows.

Worked Example 1.3

A defendant is represented pro bono by solicitors. The defendant wins and applies for costs. Can they recover inter-partes costs?

Answer:
No. The indemnity principle precludes recovery where there is no client liability. However, the court may order a payment to a prescribed charity under the pro bono costs order regime.

Worked Example 1.4

A retainer states that trainee time is not chargeable. The receiving party’s bill includes trainee hours for document review. Can these hours be recovered inter-partes?

Answer:
No. The client is not liable for those hours; the indemnity principle prevents recovery.

Retrospective write-offs and timing

The indemnity cap is assessed by reference to the client’s enforceable liability. If, prior to assessment, the solicitor agrees to reduce or waive the client’s liability (e.g., a write-off), the cap falls accordingly. Conversely, a clause making the client liable for the solicitor’s billed time (subject to later inter-partes recovery) maintains a liability unless and until it is waived. The court looks at the true legal position, not merely invoices rendered.

Indemnity principle and counsel’s fees

Counsel’s fees are usually recoverable as disbursements if:

• Counsel has been instructed as the solicitor’s agent, and
• The client is liable to the solicitor for counsel’s fees (or directly to counsel).

Where counsel is acting under a “no win, no fee” agreement, there is no liability—and no recovery—if the case is lost. If the case is won, the recoverable element will reflect the fee actually charged and payable, subject to reasonableness.

VAT: in-house and external providers

• External counsel and experts: VAT treatment follows general VAT rules.
• In-house costs (e.g., in-house advocates): VAT may not be charged as a disbursement; only proper internal costs are recoverable, often as part of profit costs, and subject to the client’s VAT status for inter-partes VAT recovery.

Funding Arrangements and the Indemnity Principle

Modern funding arrangements interact significantly with the indemnity principle.

Conditional Fee Agreements (CFAs)

CFAs typically stipulate no base costs if the case is lost, and base costs plus a success fee if won. Since LASPO 2012, success fees are generally not recoverable inter-partes. Only base costs for which the client is actually liable are potentially recoverable from the opponent.

• Discounted CFAs: if the claim fails, the discounted liability exists; inter-partes recovery is nil but the client may owe the discount. If the claim succeeds, inter-partes recovery is limited to base costs (no success fee), subject to assessment.
• Hybrid CFAs: the indemnity cap always tracks the base liability created by the retainer’s substantive terms; the court will not infer liabilities.

Damages-Based Agreements (DBAs)

Under a DBA, the solicitor’s fee is a percentage of damages. Inter-partes recovery is not calculated by that percentage. Instead, recoverable costs follow the usual rules (standard/indemnity basis), subject to the indemnity cap. The solicitor must credit inter-partes recovery against the DBA percentage so that the client does not overpay.

Key Term: pro bono costs order
A statutory order (e.g., under s.194 Legal Services Act 2007) directing payment by the losing party to a designated charity where the winner was represented pro bono.

After-the-Event (ATE) Insurance

ATE premiums are generally not recoverable inter-partes except for limited exceptions (e.g., specified elements in clinical negligence claims). Even within exceptions, recovery cannot exceed the client’s liability for the premium. If the insurer waives the premium, nothing is recoverable.

Legal Aid

In legally aided cases, statutes and regulations govern costs and the statutory charge. Inter-partes recovery is still capped by the client’s actual liability under the legal aid scheme; special statutory rules may alter caps in defined ways, but the general indemnity rule still informs recoverability.

QOCS (and 2023 reforms)

QOCS protects personal injury claimants from enforced adverse costs, but does not override the indemnity principle. From April 2023, defendants can set off their costs against not only damages and interest but also costs orders in the claimant’s favour. While QOCS affects enforceability of a defendant’s costs recovery, it does not authorise recoveries that exceed the client’s liabilities under the retainer.

Key Term: assessment basis
The standard or indemnity basis tests under CPR 44.3 for quantifying costs, distinct from the indemnity principle cap.

Worked Example 1.5

A claimant has a CFA with a 50% success fee. Base costs are £60,000 and the success fee is £30,000. The claimant wins. What can be recovered from the defendant?

Answer:
Only reasonable base costs (subject to assessment). The £30,000 success fee is a client/solicitor liability and is not recoverable inter-partes in most post-2013 claims.

Worked Example 1.6

A claimant uses a DBA at 25% of damages. They recover £200,000 in damages and seek £50,000 by reference to the DBA percentage. Is that recoverable inter-partes?

Answer:
No. Inter-partes costs are assessed per CPR 44, not by the DBA percentage. The solicitor must give credit for any inter-partes recovery against the DBA percentage.

Indemnity Costs Orders: When Are They Made

A court may order costs on the indemnity basis in exceptional situations to mark disapproval of conduct and to shift the burden of doubt in favour of the receiving party. Typical triggers include:

• Egregious or abusive conduct (dishonesty, deliberate rule breaches, persistent non-compliance with orders).
• Unreasonable refusal of ADR or negotiation, contrary to the ethos of the CPR.
• Part 36 consequences: failure to accept a claimant’s Part 36 offer that is later equalled or beaten at trial engages specified penalties including indemnity costs from the end of the relevant period.
• Contractual indemnity clauses that provide for indemnity costs; the court usually gives effect to these.

Indemnity costs are not punitive damages, but they relax the hurdles for recovery: proportionality does not apply, and doubts are resolved for the receiving party. Reasonableness remains required.

Key Term: assessment basis
The criteria the court uses to decide what costs are recoverable (standard or indemnity), not to be confused with the indemnity principle.

Worked Example 1.7

A claimant rejects a defendant’s reasonable Part 36 offer and recovers less at trial. The court orders the claimant to pay the defendant’s costs on the indemnity basis from the offer’s expiry. What follows?

Answer:
The defendant can recover reasonable costs (no proportionality test) incurred after expiry, capped by their client’s liability under the indemnity principle.

Worked Example 1.8

A commercial contract contains an indemnity costs clause. The successful claimant seeks indemnity costs per the clause. Is the court likely to grant them?

Answer:
Yes. Courts commonly enforce contractual costs indemnities and order assessment on the indemnity basis, subject to reasonableness and the indemnity cap.

Further Scenarios for Indemnity Costs

• Late abandonment of hopeless claims causing wasted expense.
• Flagrant directions breaches impairing court timetables.
• Persistent refusal to engage with ADR without good reason.
• Tactical conduct designed to drive unnecessary costs.

The modern judicial approach treats costs sanctions as essential tools to enforce the overriding objective and encourage realistic engagement with settlement.

Indemnity Principle and Costs Management, Budgets, and Fixed Costs

The relationship between costs management (budgets), assessment bases, and the indemnity principle is complex.

• On the standard basis: the last approved or agreed costs budget is a strong anchor. The court may not depart from it without “good reason.” Even then, the indemnity principle cap still applies.
• On the indemnity basis: budgets are not binding, and the court will assess reasonableness of actual costs. The indemnity principle cap still applies.

Key Term: fixed recoverable costs (FRC)
A regime fixing recoverable costs across the fast track and intermediate track (with tables by complexity bands). FRC govern quantum, but the indemnity principle still prevents recovery above the client’s actual liability.

The intermediate track and FRC

Since the extension of FRC, most non-PI and PI claims of modest to mid-value allocated to the fast or intermediate track are subject to FRC. Key points:

• FRC govern the amount recoverable inter-partes. If FRC prescribe a figure higher than the client’s liability, the indemnity principle prevents over-recovery; careful drafting of retainers can avoid a conflict by making the client liable for at least the FRC if reasonable and payable.
• Where costs are ordered on the indemnity basis in FRC cases, the court may still apply FRC unless a rule-based gateway allows departure (e.g., serious misconduct), in which case costs are assessed conventionally, always subject to the indemnity cap.
• In multi-track cases, costs budgeting remains central.

Key Term: costs budget
A court-managed plan of incurred and estimated costs by phase (Precedent H) for multi-track cases; it is highly influential on the standard basis but not a ceiling on indemnity basis assessments.

Worked Example 1.9

A fast-track claim subject to FRC settles after trial with a costs order in the claimant’s favour. The claimant’s retainer caps their liability for profit costs below the FRC figure. Can the claimant recover the FRC in full?

Answer:
No. FRC fix the maximum recoverable inter-partes, but the indemnity principle caps recovery at the client’s liability. Drafting retainers to align with FRC avoids under-recovery.

Worked Example 1.10

In a multi-track case with an approved budget, the court orders indemnity costs from a given date due to the defendant’s conduct. Does the budget limit recoverable costs after that date?

Answer:
No. On the indemnity basis, budgets do not limit recovery. Costs must still be reasonable and are capped by the indemnity principle.

VAT and the Indemnity Principle

VAT is often overlooked. Inter-partes VAT recovery follows these rules:

• VAT is recoverable only if it represents an irrecoverable cost to the client. If the client is VAT-registered and can reclaim VAT as input tax, VAT is not recoverable from the opponent.
• Some clients (e.g., many private individuals) cannot recover VAT; in those cases, VAT forms part of the recoverable loss, subject to reasonableness and the indemnity cap.
• Where mixed recoverability applies (partly recoverable input tax), only the irrecoverable proportion is recoverable inter-partes.
• Disbursements: VAT treatment turns on whether VAT was charged on the disbursement and whether it is a true disbursement or part of the solicitor’s services. The label in an invoice is not conclusive.

Worked Example 1.11

A non-VAT-registered claimant pays counsel’s fee of £5,000 plus VAT. Is the VAT recoverable inter-partes?

Answer:
Yes, subject to reasonableness. The VAT is irrecoverable by the client, so it is a real cost. The indemnity cap is the client’s liability for the fee plus VAT.

Worked Example 1.12

A VAT-registered claimant pays expert fees of £10,000 plus VAT and reclaims the VAT from HMRC. The bill of costs includes VAT. Is that correct?

Answer:
No. VAT reclaimed from HMRC is not a loss; only the net fee is recoverable inter-partes.

Advanced Applications and Frequent Pitfalls

“Costs inclusive” settlements and indemnity cap

Where a settlement is “inclusive of costs,” the receiving party’s inter-partes costs entitlement ends with the inclusive figure. Solicitor–client liabilities may remain higher, but the indemnity principle still caps inter-partes recovery. Draft inclusivity carefully to avoid unintended consequences (e.g., VAT inclusivity where the client cannot reclaim VAT).

Write-offs and retrospective discounts

Agreed write-offs shrink the indemnity cap. If write-offs are offered without prejudice save as to costs, the court will still consider the client’s true liability at assessment. Do not expect to claim written-off time inter-partes.

“Free” time and trainee hours

If the retainer says trainee time is non-chargeable, trainee time cannot be recovered. If the retainer allows trainee time to be charged, the court will still assess reasonableness on rates and time spent.

Counsel’s CFA and split liabilities

Where the solicitor is liable as principal to counsel, the disbursement may be recoverable even if the client is insulated vis-à-vis counsel, but only to the extent the client is liable to the solicitor for the disbursement (often by contract). Careful agency and retainer drafting matters.

Worked Example 1.13

A solicitor instructs counsel under written terms making the solicitor liable for counsel’s fees. The client’s retainer provides that disbursements are payable by the client. Counsel is paid £8,000 + VAT. The client wins. Is the fee recoverable?

Answer:
Yes, subject to reasonableness and VAT treatment. The client is liable for disbursements under the retainer, and the solicitor is counsel’s principal. The indemnity cap equals the client’s disbursement liability.

Worked Example 1.14

A retainer provides the client will pay “such costs as are recovered from the opponent.” The case settles with a standard-basis order. Is there a client liability, and what is the impact?

Answer:
The client’s liability is pegged to inter-partes recovery. The indemnity cap cannot exceed the recovery itself. This can avoid shortfalls but also limits recovery to assessed costs.

Indemnity principle and interest on costs

Interest on costs (under s.17 Judgments Act or at a discretionary rate) is ancillary to the costs order. The indemnity principle does not prevent interest orders, but the principal sum to which interest applies remains capped by the client’s liability.

Worked Example 1.15

The court awards indemnity costs from a Part 36 date and interest on those costs at 4% over base rate. The receiving party’s retainer caps hourly rates below those claimed. How is interest calculated?

Answer:
Interest applies to the assessed sum (subject to the indemnity cap), not to the unassessed figures or above-cap rates.

Part 36, Indemnity Principle, and Tactical Costs Outcomes

Part 36 is a powerful lever with defined consequences:

• Claimant beats its own offer: indemnity costs (from expiry of the relevant period), enhanced interest, and an additional amount are usually ordered, unless unjust.
• Claimant wins but does not beat its offer: normal costs consequences apply; no Part 36 penalties.
• Defendant’s offer is not beaten: split costs orders from expiry of the relevant period are usual.

In all cases, the indemnity principle limits the absolute recovery to the client’s liability.

Worked Example 1.16

A claimant beats a Part 36 offer and seeks indemnity costs from Day 22. Their retainer discounts hourly rates by 20%. Can the claimant recover at market rates?

Answer:
No. Even on the indemnity basis, recovery cannot exceed the client’s discounted liability per the retainer.

Worked Example 1.17

A defendant makes a strong Part 36 offer that the claimant fails to beat. The court orders the claimant to pay the defendant’s post–relevant period costs, but the claimant is protected by QOCS. Can the defendant enforce?

Answer:
Enforcement will be limited per QOCS (with the 2023 set-off rules permitting set-off against damages, interest, and costs orders in the claimant’s favour). The indemnity principle remains a cap on the defendant’s recoverable figures.

Costs Appeals, Solicitors Act Assessment, and the Indemnity Principle

While this article focuses on inter-partes assessment, two adjacent processes are relevant:

• Appeals on costs: the court will not revisit reasonableness unless the decision was wrong or unjust due to serious procedural irregularity. The indemnity principle is a matter of law applied on the material before the costs judge.
• Solicitors Act 1974 assessments (solicitor–client): determine what the client must pay. A significant reduction in solicitor–client assessment may inform inter-partes assessment (and vice versa), but the indemnity principle applies independently in the inter-partes sphere.

Compliance Tips and Common “Exam Traps”

Exam Warning

• Do not conflate the indemnity principle with indemnity-basis assessment. One is a cap, the other is an assessment test.
• Do not claim VAT where the client is VAT-registered and reclaims input VAT.
• Remember that a costs budget anchors standard basis assessments but does not apply as a ceiling on indemnity basis; in both cases, the indemnity principle still caps by client liability.
• Fixed recoverable costs are not a “licence to exceed” the client’s retainer liability: the indemnity cap still applies.
• Success fees and most ATE premiums are not inter-partes recoverable post-2013 (subject to narrow exceptions).

Revision Tip

• Always read the retainer: identify the precise liability (rates, caps, discounts, disbursements, VAT).
• Check track allocation and FRC applicability. In fast/intermediate tracks, FRC may govern quantum; the indemnity principle still caps by client liability.
• Confirm the assessment basis ordered (standard or indemnity) and whether any Part 36 consequences apply.

Extended Worked Examples

Worked Example 1.1​

A claimant on the intermediate track wins at trial. FRC table applies and prescribes £18,000 for trial advocacy plus stage costs. The claimant’s retainer is a fixed fee of £15,000 for all work excluding disbursements. The claimant claims the prescribed FRC figure. How much is recoverable?

Answer:
At most £15,000 for profit costs, because the indemnity cap is the client’s fixed liability. Disbursements incurred and payable (e.g., counsel’s brief fee if treated as a disbursement) may be recovered separately, subject to FRC rules and reasonableness.

Worked Example 1.2​

A defendant obtains an order for indemnity costs from a sanction date due to the claimant’s serious disclosure breaches. The defendant’s budgeted sum for trial preparation was £40,000; actual costs were £65,000. The retainer imposes no cap. What can the defendant recover?

Answer:
On the indemnity basis, budgets do not limit recovery. The defendant may recover all reasonable trial preparation costs (£65,000 if reasonable), subject to the indemnity cap (the client’s liability under the retainer, which is uncapped here).

Worked Example 1.3​

A legally aided claimant succeeds. The court orders the defendant to pay costs. The claimant’s liability to their solicitors under legal aid is limited to statutory rates. The bill claims higher private rates. What is allowed?

Answer:
Inter-partes recovery may follow prescribed legal aid principles and may allow rates above legal aid rates in some circumstances, but never beyond the client’s true liability under the scheme and the applicable statutory framework interpreting the indemnity principle in this context.

Practical Implications for SQE1

The practical impact of the indemnity principle for solicitors and parties is significant. All retainers should be drafted and reviewed carefully to ascertain the true extent of the client’s liability (including any caps, discounted rates, staged fees, success fees payable by the client only, or disbursement obligations), and to ensure alignment with likely inter-partes recovery regimes (standard vs indemnity basis, FRC in fast/intermediate tracks, costs management in multi-track).

Standard and indemnity basis assessments differ in their approach to proportionality and burden of doubt. In both cases, the indemnity principle caps every recoverable item by the client’s liability. Funding mechanisms (CFAs, DBAs, ATE, legal aid, pro bono) modify client liability and, by doing so, shape the cap. VAT must be correctly treated with reference to the client’s status. Part 36 offers remain a powerful lever for indemnity basis awards and interest consequences, but never displace the indemnity cap.

Revision Tip​

• Establish early:
  • The assessment basis ordered.
  • Whether FRC apply (fast/intermediate track) or budgets apply (multi-track).
  • The client’s VAT status.
  • The precise retainer liability for each category (profit costs, disbursements, additional liabilities).
  • Any Part 36 offers and their consequences.

Key Point Checklist

This article has covered the following key knowledge points:

• The indemnity principle limits recoverable costs to the amount the client is contractually liable to pay their own solicitor, including the effect of caps, discounts, and written-off time.
• Standard vs indemnity basis: proportionality and burden of doubt differ; the indemnity cap applies on both bases.
• Budgets anchor standard assessments; budgets do not limit indemnity assessments, but the indemnity cap always applies.
• Funding arrangements—CFAs, DBAs, ATE, pro bono, legal aid—shape or limit client liabilities and therefore inter-partes recovery; additional liabilities are mostly non-recoverable post-2013.
• VAT is recoverable only where irrecoverable by the client (e.g., individuals); VAT-registered clients cannot recover VAT inter-partes.
• Indemnity costs orders arise from egregious conduct, Part 36 outcomes, and contractual indemnities; they relax proportionality but not the indemnity cap.
• QOCS affects enforcement (especially post-2023 set-off), not the indemnity principle’s cap.
• Fixed recoverable costs apply in fast/intermediate tracks; they do not override the indemnity cap.
• Disbursements (counsel, experts) are recoverable only to the extent the client is liable, and subject to reasonableness and VAT treatment.
• Retainer drafting is critical to align client liability with potential inter-partes recovery, particularly under FRC.

Key Terms and Concepts

• indemnity principle
• liability cap (indemnity principle)
• solicitor and own client costs
• inter-partes costs
• assessment basis
• standard basis
• indemnity basis (assessment)
• costs budget
• fixed recoverable costs (FRC)
• VAT on costs
• success fee
• ATE insurance premium
• pro bono costs order
• damages-based agreement (DBA)
• Part 36
• QOCS

Appendix: Consolidated Key Term Definitions (for quick reference)

Key Term: indemnity principle
The fundamental rule that a successful party cannot recover more in legal costs from an opponent than they are contractually liable to pay their own legal representatives.

Key Term: liability cap (indemnity principle)
The maximum inter-partes recovery for any item is the client’s true enforceable liability for that item under the retainer (plus irrecoverable VAT), not any higher figure claimed.

Key Term: solicitor and own client costs
Charges and disbursements owed by the client to their solicitor under the retainer.

Key Term: inter-partes costs
Costs which one party is ordered or agrees to pay to another under a court order or settlement.

Key Term: assessment basis
The CPR 44.3 framework for quantifying costs on the standard or indemnity basis.

Key Term: standard basis
Only reasonable and proportionate costs are allowed; doubts are resolved in favour of the paying party.

Key Term: indemnity basis (assessment)
Proportionality does not apply; all costs reasonably incurred and reasonable in amount are allowed; doubts favour the receiving party.

Key Term: costs budget
A Precedent H schedule of incurred and estimated costs used for costs management in multi-track cases; a strong anchor on the standard basis.

Key Term: fixed recoverable costs (FRC)
Prescribed sums or tables fixing recoverable costs (primarily in fast/intermediate tracks); they set a ceiling inter-partes but do not displace the indemnity cap.

Key Term: VAT on costs
Only irrecoverable VAT is recoverable inter-partes; VAT-registered clients cannot recover VAT they can reclaim from HMRC.

Key Term: success fee
The CFA percentage uplift payable by the client on success; generally not recoverable inter-partes post-2013.

Key Term: ATE insurance premium
A premium for after-the-event legal expenses insurance; largely irrecoverable inter-partes save for limited statutory exceptions.

Key Term: pro bono costs order
A court order directing payment to a designated charity where the winner had pro bono representation and no client liability.

Key Term: damages-based agreement (DBA)
A percentage-of-damages fee model under the 2013 DBA Regulations; inter-partes costs are still assessed conventionally and credited against the DBA.

Key Term: Part 36
A CPR regime for formal settlement offers with defined costs/interest consequences depending on the result at trial.

Key Term: QOCS
Personal injury regime controlling enforcement of defendants’ costs against claimants; post-2023, set-off against damages, interest and claimant’s costs orders is permitted.