In a recent case, a defendant was ordered to pay a claimant's costs of enforcement proceedings on an indemnity basis following an adjudicator's decision in the claimant's favour (Faithdean Plc v Bedford House Ltd (No.1)  3 WLUK 62). This is a salient reminder of the Technology and Construction Court's (TCC) robust approach to the enforcement of adjudicators’ decisions and the consequences of failing to pay.
But what does "indemnity basis" mean? And what practical lessons can we learn from this case?
Standard vs indemnity basis
By default the court will assess costs on the standard basis. This means that a party will only recover costs which are:
- reasonably incurred,
- reasonable in amount, and
Any doubt as to whether costs meet this criteria is made in favour of the party paying. Usually a party can look to recover in the region of 60-70% of their costs if successful.
The court will only assess costs on an indemnity basis (that is a recovery of around 90% or so) if requested to do so by the party seeking to recover. This is because costs awarded on an indemnity basis are penal in nature and only appropriate where one party deserves to be compensated for the wrongful conduct of the other party during the proceedings. Moreover, there is no requirement for indemnity costs to be proportionate, which means that the receiving party is likely to get a higher recovery than on a standard basis. This highlights the punitive nature of indemnity costs which places the onus on the paying party to show that the awarded costs are unreasonable.
So what amounts to wrongful conduct in enforcement proceedings?
The relevant test to determine the applicability of an indemnity costs order is whether there is some conduct or some circumstance which takes the case "out of the norm". The "norm" in this instance does not reflect whether the conduct is normal but whether something is outside the ordinary and reasonable conduct of proceedings. In Faithdean No. 1, there were multiple factors that took the case "out of the norm" which we look at in more detail below.
Indemnity costs in relation to adjudication enforcement proceedings
It is well trodden ground that only in very limited circumstances and with a specific defence will the court decline to enforce an adjudicator's decision. So how does this relate to the test for indemnity costs and why they were awarded in Faithdean No.1?
The claimant was awarded at least £1.5 million in liquidated damages. Although the exact amount owed by the defendant was still to be determined, the adjudicator's decision had established an approximate minimum sum which, in line with usual practice, would not be overturned or re-considered.
However, in response to the claimant issuing enforcement proceedings, the defendant indicated that the claim would be defended in full despite the fact that neither of the requisite jurisdictional or natural justice issues had arisen during the adjudication to provide the defendant with a viable defence to enforcement of the decision.
Linking this back to the test for indemnity costs, by (i) not immediately making payment to the claimant of £1.5 million in accordance with the adjudicator's decision, and (ii) stating that the claim was going to be defended in full when it knew that there was no defence to enforcement proceedings, the defendant did not act in an ordinary or reasonable way. This, according to Mr Justice Fraser, took the case "out of the norm" (per ICI v Merit Merrell  EWHC 2299 (TCC), at para 12), allowing costs to be awarded in the claimant's favour on an indemnity basis.
Practical tip: In order to avoid this penalty, the losing party should not seek to avoid payment of the awarded sum unless it has an arguable defence to the validity of the adjudicator's decision itself.