Winning your case feels great until you get the costs bill. Costs can easily exceed the amount in dispute. Understanding costs rules is essential for any solicitor - you need to advise clients on their exposure from day one.
Costs in civil litigation follow the general rule: the loser pays. This means the unsuccessful party usually pays the successful party's costs. But it is not automatic - the court has discretion. Costs can make or break a case financially, and managing client expectations about costs is crucial.
The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but the court may make a different order.
Costs budgeting is like financial planning for litigation. Instead of costs spiralling out of control, parties must file a budget setting out estimated costs for each phase of the case. The court reviews and approves these budgets, creating a cap on recoverable costs (with some exceptions).
Costs budgeting applies to most multi-track cases in the High Court and County Court. There are exceptions - for example, personal injury cases valued under £25,000, and some other specific types of claim. The rules are in CPR Part 3 and Practice Direction 3E.
The court will manage the costs to be incurred by the parties in proceedings which are on the multi-track.
Each party files and exchanges a costs budget (Precedent H) before the first Case Management Conference (CMC). At the CMC, the court reviews the budgets, encourages agreement, and makes a costs management order setting limits on recoverable future costs.
Start preparing your Precedent H budget early. It takes time to get accurate figures from fee-earners and experts. A well-prepared budget shows the court you are organised and proportionate. A sloppy budget suggests you may not manage the case well.
Precedent H distinguishes between incurred costs (spent before the budget is filed) and future costs (estimated to be spent). Incurred costs are not usually approved at the CMC - they are assessed at the end of the case. The court's approval mainly relates to future costs.
Precedent H breaks down costs into phases: pre-action, issue and statements of case, disclosure, witness statements, expert evidence, interim applications, CMCs, and trial. Each phase has its own budget. This helps the court see where the money is going and identify any disproportionate spending.
Before the CMC, parties should try to agree budgets. If they cannot agree, they file a budget discussion report (Precedent R) explaining the differences. At the CMC, the judge will review both budgets, ask questions, and make a costs management order approving or modifying the figures.
The court can mark phases as "agreed" (both parties agree), "budgeted" (court has set a figure), or "unbudgeted" (no budget set, often for phases already incurred). Budgeted figures are not rigid caps but are presumptive limits - courts can depart from them later if there is good reason.
If you need to spend more than your budgeted figure, you can apply to vary the budget. Do not just exceed it without permission - you risk not recovering the excess. The earlier you apply, the more likely the court is to agree.
The first CMC is where costs budgeting happens. Come prepared with Precedent H, Precedent R (if budgets differ), and knowledge of your figures. Judges do not appreciate parties who cannot explain their own budgets. You should be ready to justify each phase.
The court looks at proportionality, complexity, and the needs of the case. A budget that seems excessive will be cut down. The court may refer to previous cases as guidance. Be ready to compare your figures to what is typical for similar cases.
When negotiating budgets, focus on the big-ticket items. Minor differences in disclosure or witness statements may not be worth arguing about. Preserve your credibility for the phases that really matter. And be realistic - aggressive budgets get trimmed.
Budgets can be reviewed at subsequent CMCs or by application. If the case changes significantly, you may need to vary the budget. The court will consider whether the change was foreseeable and whether the original budget was realistic.
Inter-partes costs are costs ordered to be paid from one party to another. Unlike solicitor-client costs (what your own client owes you), inter-partes costs are what the court orders the loser to pay the winner. These are usually assessed on the standard basis.
Although the general rule is loser pays, the court has wide discretion. The court considers factors like: the conduct of the parties, whether a party won on some issues but lost on others, whether a Part 36 offer was beaten, and the financial situation of the parties.
The court will have regard to all the circumstances, including the conduct of the parties, whether a party has succeeded on part of its case, any admissible offer to settle, and whether costs were proportionately incurred.
Poor conduct can reduce your costs recovery. This includes unreasonable behaviour, failing to follow court directions, prolonging litigation unnecessarily, or refusing mediation. The court can penalise parties who do not play by the rules.
If you win on some issues but lose on others, the court may reduce your costs award. The court considers the significance of the issues won and lost. Winning on liability but losing on quantum might mean a reduced costs award.
You do not have to wait until the end of the case to get costs. If you win an interim application, or if judgment is given in your favour on a preliminary issue, you can ask for a payment on account of costs. This provides cash flow during lengthy litigation.
Where a court makes an order for costs, it may order a payment on account of those costs at any time, and may determine the amount by summary assessment.
Common situations include after a successful summary judgment application, after striking out a defence, or after judgment on a preliminary issue. The court considers the likely overall costs award and orders an appropriate percentage upfront.
For shorter hearings, the court may assess costs immediately by summary assessment. The judge will look at both parties' bills of costs and make a quick determination. This avoids the need for a separate detailed assessment hearing.
At the end of the case, if you win, the court will usually order the other side to pay your costs. But how much? The court needs to assess the reasonable amount. There are three routes: detailed assessment, summary assessment, or agreement between the parties.
Detailed assessment (formerly "taxation") is the full procedure for assessing costs. The receiving party serves a bill of costs, the paying party serves points of dispute, and there may be a hearing before a costs officer. This can be time-consuming and expensive.
For shorter trials or straightforward cases, the court may use summary assessment. The judge looks at the bills and makes a decision there and then. No separate hearing is needed. This is quicker and cheaper but may be less precise.
If parties cannot agree on costs, they can seek a certified agreement. A costs officer reviews the bill and issues a certificate. If either party is unhappy, they can commence detailed assessment within a certain time.
Sometimes someone who is not a party to the litigation should pay costs. This might be a funder, an insurer, or a parent company. CPR 46.2 allows the court to make non-party costs orders in certain circumstances.
The court may make an order for costs against a non-party in certain circumstances, including where the non-party is funding the proceedings and has a stake in the outcome.
Conditional Fee Agreements (CFAs), After The Event (ATE) insurance, and Litigation Funding Agreements (TEFA) can all expose funders to costs liability. The court looks at whether the funder stood to benefit from the proceedings and the degree of control they had.
Professional litigation funders, who provide money to run cases in return for a share of the recovery, can be subject to non-party costs orders. This protects against speculative litigation funded by deep-pocketed third parties.
Part 36 offers are the court's preferred method of encouraging settlement. A properly drafted Part 36 offer creates powerful incentives to accept - and penalties for rejecting. If you beat your own Part 36 offer at trial, you get enhanced damages, interest, and indemnity costs.
A Part 36 offer must be in writing, specify a period of not less than 21 days for acceptance, state whether it relates to the whole claim or part, and state whether it includes costs. It must also state that it is made "without prejudice except as to costs."
An offer to settle must be in writing and state whether it relates to the whole of the claim or to part of it, and whether it takes into account any counterclaim.
If a Part 36 offer is accepted within the relevant period, the claim ends on those terms. The offeree pays their own costs from the date the relevant period expires. This creates certainty and ends the litigation.
If a claimant beats their own Part 36 offer at trial, they get: (1) interest on up to £500,000 at 10% above base rate, (2) indemnity costs from the expiry of the relevant period, (3) an additional amount of up to £75,000 depending on the sum recovered. These are powerful incentives to settle.
Where a claimant beats their own Part 36 offer, the court will order additional interest, costs on the indemnity basis, and an additional amount.
Rejecting a reasonable Part 36 offer is risky. If you lose at trial, you may pay indemnity costs and interest from the date the offer expired. This can add tens of thousands to your bill. Think very carefully before saying no.
QOCS applies to most personal injury claims. It protects claimants from having to pay defendants' costs if they lose, while allowing successful claimants to recover their costs. There are exceptions, including for fundamental dishonesty or abuse of process.
Subject to exceptions, this Section prevents a court from ordering a claimant to pay costs incurred by a defendant in a personal injury claim.
Security for costs is money or a guarantee that a claimant must provide to ensure that if they lose, they can pay the defendant's costs. It is particularly important when the claimant is based overseas or has no assets in the jurisdiction.
CPR 25.13 sets out grounds for ordering security. The most common is where the claimant is resident outside the UK (or another state bound by the Brussels I Regulation or Lugano Convention). Other grounds include impecuniosity, changes of address, and failure to provide an address for service.
The court may order security for costs where the claimant is resident out of the jurisdiction, is a company and there is reason to believe it will be unable to pay the defendant's costs, or has changed address to evade jurisdiction.
The court considers: whether the claimant can pay costs if they lose, the merits of the claim, the conduct of the parties, whether the claim is being funded by a third party, and whether ordering security would stifle a genuine claim.
Security is usually a payment into court or a bank guarantee. The amount is what the defendant reasonably expects to spend defending the claim, not the full extent of potential liability. The court may order a lower amount if security would otherwise be oppressive.
When applying for security, focus on the risk of non-recovery if you win. If the claimant cannot pay your costs even if successful, your victory may be pyrrhic. Act early - the closer to trial, the less likely the court is to order security.
Fixed costs are set amounts that recover regardless of what was actually spent. They apply to certain types of proceedings and tracks. Fixed costs provide certainty and avoid the need for detailed assessment. CPR Part 45 sets out the fixed costs regimes.
Most fast track cases have fixed recoverable costs. The amount depends on the value of the claim and the trial stage reached. There are different figures for cases that settle pre-issue, pre-allocation, or proceed to trial.
In small claims, parties generally bear their own costs. Only limited fixed costs are recoverable: court fees, travel expenses, and a small amount for legal representation. This reflects the philosophy of small claims as a forum for litigants in person.
Subject to exceptions, the fixed costs in Part 45 apply to all fast track claims and specified proceedings.
Fixed costs apply to various specific proceedings including: possession claims, defamation claims, personal injury claims under £25,000, and some applications. Each has its own regime in CPR Part 45.
Detailed assessment under CPR Part 47 is the full costs assessment process. The receiving party serves a bill of costs, the paying party serves points of dispute, and there may be a detailed assessment hearing before a costs judge or costs officer.
The receiving party serves points of claim explaining why their costs are reasonable. The paying party serves points of dispute challenging items in the bill. These documents focus the assessment on the contentious issues.
Provisional assessment is a paper-based assessment by a costs officer. It is used for bills below a certain value (currently £75,000, or £100,000 in London). The officer reviews the papers and issues a certificate. Either party can request an oral hearing within 21 days.
At a detailed assessment hearing, the costs officer hears arguments on disputed items. Evidence may be given about the reasonableness of time spent, the complexity of work, and the appropriate hourly rates. The officer then issues a determination.
Costs are assessed on either the standard basis or the indemnity basis. The standard basis is the default. The indemnity basis is more generous to the receiving party and is usually ordered as a punishment for unreasonable conduct.
Where the court assesses costs on the standard basis, it will only allow costs which are proportionate and reasonable. On the indemnity basis, the court will resolve any doubt in favour of the receiving party.
On the standard basis, costs must be both proportionate and reasonable. The court considers whether the costs were reasonably incurred, whether the amount is reasonable, and whether the costs are proportionate to the matters in issue. Any doubt is resolved against the receiving party.
On the indemnity basis, costs do not need to be proportionate - they only need to have been reasonably incurred. Any doubt is resolved in favour of the receiving party. This is a more generous test, and costs assessed on indemnity basis are usually higher.
The court may order indemnity costs where there has been unreasonable conduct, including dishonesty, abuse of process, or significant procedural breaches. Beating a Part 36 offer is another common ground. The message is clear: misbehave and you pay more.
| Feature | Standard Basis | Indemnity Basis |
|---|---|---|
| Proportionality test | Yes - costs must be proportionate | No - proportionality not considered |
| Reasonableness test | Yes - costs must be reasonable | Yes - costs must be reasonable |
| Resolution of doubt | Against receiving party | In favour of receiving party |
| When ordered | Default position | Unreasonable conduct, beating Part 36 |
| Recovery level | Lower (often 60-80% of bill) | Higher (often 80-100% of bill) |
If you are the receiving party, argue for indemnity basis if you can point to the other side's unreasonable conduct. If you are the paying party, emphasise proportionality and challenge items that seem excessive. Detailed assessment is a negotiation - be prepared to compromise.
Costs should inform your litigation strategy from day one. Advise clients on their exposure, consider Part 36 offers carefully, and manage budgets proactively. A good litigator wins the case - a great litigator wins the case and recovers their costs.