Court Clarifies Test for Indemnity Costs

Court Clarifies Test for Indemnity Costs

By Allan Doughty and Jennifer Haworth

On 25 July 2022, in the matter of Ivanashvili v. Credit Suisse Life (Bermuda) Limited, Chief Justice of  the Supreme Court of Bermuda, Mr. Narinder Hargun handed down a ruling which clarified what a successful party must demonstrate in order to claim “indemnity costs” against a losing party once litigation has concluded. In a separate ruling from the Court of Appeal, as rendered in St. John’s Trust Company (PVT) Limited v. Medlands PTC et al. on 2 November 2022, reached the same conclusion to that of the Chief Justice, although without referencing the Ivanashvili case.

These rulings are important given that the difference between the payment of the successful party’s legal fees, or “costs” on the “standard basis” can be significant. Costs awarded on a standard basis are typically paid out at a rate of 60-70%. When costs are awarded on an “indemnity basis”, however, the successful party stands to recover approximately 95% of his or her legal fees from the losing party. As Bermuda’s judiciary does not wish to encourage parties to litigate, the Supreme Court of Bermuda has traditionally held that indemnity costs should only be awarded on rare occasions where the paying party: engaged in misconduct during the course of the litigation that created an extraordinary circumstance, that went to the heart of the action, and affected its whole conduct.

Since the year 2002, however, the Courts of England and Wales have taken a different approach and have held that indemnity costs may be awarded in favour a successful party if there has been some conduct or circumstance that took the case outside of the “norms” which apply to civil litigation. In adopting this approach, the judiciary of England and Wales not only have the discretion to consider the conduct of the losing party during the course of litigation but also to consider the strengths and weakness of the cause of action or the defence. In taking this expanded view, the Courts of England and Wales may take into account whether the position of the losing party was in fact hopeless and weigh that circumstance in determining whether to award costs on an indemnity basis.

There have been several attempts since 2002 to persuade Bermuda’s Courts to follow the lead of the judiciary of England and Wales in adopting a less stringent standard when it comes to the award of indemnity costs. Until this year, those applications have been rejected and the “extraordinary circumstance” requirement has held. 

In the Ivanashvili ruling, the Chief Justice, in considering previous rulings of the Court of Appeal found that the higher court had in fact applied the UK standard in awarding costs on an indemnity basis, without saying so, and held that there was no reason why the Supreme Court of Bermuda should do otherwise.  In St. John’s Trust Company, the Court of Appeal reached the same conclusion and unequivocally stated that the UK standard in assessing indemnity costs applies in Bermuda. The St. John’s Trust Company decision although rendered after Ivanashvili was actually heard prior to Ivanashvili which may explain why the Court of Appeal did not reference it.

The significance of these two rulings cannot be understated in that until the latter part of 2022 it has been quite difficult for a successful party to recover costs on an indemnity basis.   On a practical level, the “extraordinary circumstance” requirement has often informed whether litigation should be pursued at first instance. The reason for that concern lay with a policy that holds that when costs awarded on a standard basis a significant portion of those fees should be disallowed if the costs of the litigation exceeded the value of the dispute. If, however, costs are awarded on an indemnity basis, the proportionality of the costs incurred to the amount in dispute is of less concern to the Court as indemnity costs amounts to a finding that the losing party is responsible for the size of the successful party’s legal bill.  

 We recently received an ex tempore ruling from the Chief Justice in the matter of an interpleader between John Rowe v  Cameron Hill and HSBC Bank Bermuda Limited in the Supreme Court Commercial Court Jurisdiction 2022: No. 36 (as yet unreported). In that ruling, the Chief Justice made an order for indemnity costs in favour of the Bank against an unsuccessful defendant with a hopeless claim unsupported by the evidence who had conducted his claim improperly demonstrates the Court’s willingness to apply the outside the norms test.