Legal costs are one of the most important considerations in civil litigation. Whether bringing or defending a claim, parties must think about not only the strength of their case but also the potential financial consequences of the proceedings. Litigation can be costly, and an adverse costs order can substantially increase the overall expense of a dispute.
The costs framework serves several key functions within the civil justice system. In addition to compensating successful parties, it encourages compliance with procedure, promotes efficient case management, and incentivises parties to settle. Costs considerations can therefore influence strategic decisions at every stage of a dispute, from pre-action through to trial.
In this guide, we examine the key principles governing costs orders, common types of costs awards, when and how costs are assessed, and the factors that courts take into account when exercising their discretion. We also consider recent developments and practical steps that parties can take to manage costs risk effectively.
Summary
- What is a Costs Order?
- General Principles Governing Costs
- Types of Costs Orders
- When Are Costs Determined and Paid?
- Costs Management and Budgets
- Effect of Settlement Offers (Part 36 and Without Prejudice Offers)
- Recent Case Law and Developments
- Practical Tips for Litigants
What is a Costs Order?
A costs order is a ruling made by the court deciding who pays legal costs in civil litigation. It may require one party to pay all or part of another party’s costs and can be made at interim stages or at the end of proceedings.
The general rule is that "costs follow the event", which means that the losing party usually pays the successful party’s costs. However, this is not automatic; the court retains a broad discretion when determining costs and will look at the circumstances of the case, making the outcome not always clear-cut.
Costs are normally assessed on the standard basis, meaning only costs that are reasonably incurred and proportionate to the issues in dispute are recoverable. As a result, full recovery is rare.
The costs covered by a costs order may include:
- solicitors’ fees,
- barristers’ fees,
- court fees,
- expert witness fees, and
- other reasonable litigation-related expenses.
Different costs rules may apply in lower-value claims, especially those assigned to the small claims track, where recovery of legal costs is typically very limited irrespective of the outcome.
General Principles Governing Costs
The rules governing costs in civil litigation are mainly found in Part 44 of the Civil Procedure Rules (CPR),which outlines the court’s powers and the principles applied when making costs orders.
The General Rule: Loser Pays
The general rule under CPR 44.2(2)(a) is that the losing party usually pay the winning party’s costs. This is intended to ensure that a party who has successfully pursued or defended a claim is not unfairly burdened by the costs of litigation. However, the rule is not absolute, and the court has the discretion to depart from this, where it considers it fair.
Court’s Discretion and Relevant Factors
When deciding whether costs should be payable, by whom, and in what amount, the court will consider all the circumstances of the case, including the conduct of the parties both before and during the proceedings. This includes compliance with court rules and directions, cooperation with the litigation process, and the reasonableness of the parties’ conduct. The court will also consider whether a party has unnecessarily increased costs by pursuing weak arguments, causing delays, failing to engage constructively in settlement discussions, or otherwise behaving unreasonably.
The court will also consider any offers to settle made by the parties. A party that unreasonably rejects a sensible settlement offer may face negative costs consequences, even if it ultimately succeeds on some aspects of its claim.
Costs Must Be Reasonably Incurred and Proportionate
Recovering costs does not mean that every expense will be reimbursed. The court will usually permit recovery only of costs that were reasonable and proportionate to the matters in issue.
When assessing costs, the court will consider factors such as the value, complexity, and importance of the claim, together with the work undertaken by the legal representatives. Costs that are excessive, unnecessary, or disproportionate may be reduced.
Types of Costs Orders
The court has a range of costs orders available, each with different financial consequences. The type of order made can affect both a party’s liability for costs and the amount that can ultimately be recovered.
Standard Basis vs. Indemnity Basis
One of the most important distinctions is between costs assessed on the standard basis and those assessed on the indemnity basis.
The standard basis is the court’s default approach. The only costs recoverable under this basis are those that have been reasonably incurred and are proportionate to the issues in dispute. Any doubt about whether a particular cost should be allowed will generally be resolved in favour of the paying party.
By contrast, an indemnity costs order is more favourable to the receiving party. Costs must still be reasonably incurred, but they do not need to be proportionate. Any doubt about recoverability will usually be resolved in favour of the receiving party, often leading to a higher level of recovery. Indemnity costs are typically awarded in cases where there has been unreasonable conduct, litigation misconduct, or a failure to beat a formal Part 36 settlement offer.
Costs in the Case/Costs in Any Event
These orders commonly arise following interim applications made during the course of litigation.
A ‘costs in the case’ order means that the costs of a particular application will follow the outcome of the proceedings as a whole. The party who ultimately succeeds in the claim will recover those costs, regardless of who was successful on the application itself.
A ‘costsin any event’ order allows the successful party on the application to recover its costs of that application, irrespective of the final result of the case. This means that even if that party ultimately loses the claim, it will still be entitled to recover the costs of the application.
No Order as to Costs
Where the court makes no order as to costs, each party must bear its own legal costs. This often occurs where there is no clear winner or where both parties have achieved some level of success.
Issue-Based or Proportionate Costs Orders
Rather than making a single costs order for the entire case, the court may allocate costs according to the parties’ success on particular issues. For example, a claimant who succeeds overall but loses on a significant issue may recover only part of its costs or may be ordered to pay the defendant’s costs relating to that issue.
Interim and Wasted Costs Orders
Interim costs orders are made before the final resolution of a claim, often following hearings or applications. They are typically assessed summarily and are commonly payable within 14 days.
Wasted costs orders are made against legal representatives personally where their improper, unreasonable, or negligent conduct has caused unnecessary costs to be incurred. In such cases, the lawyer rather than the client may be ordered to pay those costs.
When Are Costs Determined and Paid?
The court will usually decide costs at the conclusion of a trial, hearing, or application. In some cases, particularly shorter hearings and interim applications, the court will also determine the amount of costs immediately.
Summary Assessment
Summary assessment is a streamlined procedure in which the judge assesses costs at the end of the hearing. Prior to the hearing, the party seeking costs will usually file and serve a Statement of Costs that specifies details of the work undertaken, time spent, hourly rates, and any disbursements incurred. The judge will then decide the amount payable and include that figure in the costs order.
Detailed Assessment
Where costs are not assessed summarily, the court will usually order that one party pay the other’s costs, with the amount to be assessed if not agreed between the parties.
The receiving party must prepare a detailed Bill of Costs setting out the costs claimed. The paying party may then serve Points of Dispute to challenge those costs, after which the court will determine the amount that is reasonable and recoverable. Detailed assessment is commonly used in higher-value or more complex litigation where a full examination of the costs claimed is required.
When Must Costs Be Paid?
The timing of payment depends on the method of assessment.
Where costs are assessed summarily, payment is usually required within 14 days of the order.
Where costs are subject to detailed assessment, the process can take several months because the final amount is not decided immediately. Once the assessment is completed and the amount payable has been fixed, payment will usually be due within 14 days, unless the court directs otherwise.
Since detailed assessment can be a lengthy process, the court will often order a payment on account of costs before the assessment is completed. This arrangement provides the receiving party with an interim payment, ensuring that they are not left out-of-pocket while the final amount of recoverable costs is being determined.
Costs Management and Budgets
In most multi-track cases, the court takes an active role in managing the parties’ legal costs through a process known as costs management. Early in the proceedings, each party is usually required to create and share a costs budget setting out its estimated legal costs for each phase of the case, including disclosure, witness evidence, expert evidence, and trial preparation.
The court will then review these budgets at a Costs and Case Management Conference (CCMC). During this hearing, the judge assesses the parties’ proposed costs and may approve them, reduce them, or ask for changes where they appear unreasonable or excessive. The goal is to ensure that the costs of the litigation remain proportionate to the value, complexity, and importance of the dispute.
Costs budgets can have a significant impact on the amount of costs ultimately recovered. When costs are assessed at the conclusion of the case, the court will generally not permit a party to recover costs that exceed its approved budget unless there is a good reason for doing so. Therefore, it is crucial that parties prepare their budgets carefully and seek revisions if circumstances change during the litigation.
Effect of Settlement Offers (Part 36 and Without Prejudice Offers)
Settlement offers can have a major influence on who pays legal costs, so it is essential that parties think carefully before rejecting one.
A Part 36 Offer is a formal settlement offer made under the CPR. Its purpose is to encourage parties to settle disputes without going to trial by attaching important costs implications to the offer. If a claimant submits a Part 36 offer and subsequently wins at trial with a result that is at least as good as the offer, the court may award the claimant additional benefits, such as costs on the more favourable indemnity basis, enhanced interest on damages and costs, and an additional monetary award.
On the other hand, if a defendant makes a Part 36 offer which the claimant rejects, and the claimant then fails to secure a better result at trial, the claimant will usually be responsible for paying the defendant’s costs from the date the offer expired. This can happen even if the claimant technically wins the case. The costs consequences can sometimes be greater than the value of the claim itself.
Parties can also make “without prejudice save as to costs” offers. These are less formal than Part 36 offers and do not automatically trigger specific costs consequences. However, once the case is resolved, the court can take these offers into account when deciding who should pay costs. If a party unreasonably rejects a sensible settlement offer and then does no better at trial, the court may require that party to pay a larger share of the costs.
Recent Developments and Trends
Recent case law shows that courts are taking a stricter approach to legal costs and placing greater importance on whether the costs claimed are proportionate to the dispute. Even where costs have been reasonably incurred, judges may reduce the amount recoverable if the overall figure is considered excessive. This approach was reinforced by the Court of Appeal in West v Stockport NHS Foundation Trust, which confirmed that costs must satisfy the test of proportionality even if reasonably incurred.
Courts are also focusing on costs budgeting and are increasingly willing to reduce unrealistic budgets before or during litigationwhere projected costs are disproportionate to the value, complexity or importance of the claim.
Another important development is the increased emphasis on the conduct of the parties. Courts have demonstrated a readiness to impose adverse costs consequences on parties who act unreasonably, fail to cooperate or unnecessarily prolong and escalate the costs of proceedings. In Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson, the Court of Appeal established that unreasonable litigation conduct can justify an indemnity costs order, enabling the successful party to recover a greater proportion of its legal costs.
Overall, recent decisions illustrate that parties must manage litigation efficiently, keep costs proportionate, comply with court directions and conduct themselves reasonably throughout proceedings. Failure to do so can have significant financial consequences when the court assesses liability for costs.
Practical Tips for Litigants
Managing costs in litigation is as much about strategy as outcome. The following steps set out key ways to control and manage costs risk throughout proceedings:
- Set a realistic costs budget early: Prepare a detailed budget at the beginning that reflects the real complexity and value of the dispute. Courts expect budgets under the costs management regime to be properly considered rather than optimistic estimates.
- Monitor costs continuously: Regularly compare actual spending against the approved budget. Early identification of overspends allows you to make corrections before costs become unrecoverable or hard to justify.
- Make sensible settlement offers: Use structured offers, especially Part 36 where appropriate, to manage risk. A reasonable offer can protect against adverse costs consequences and may shift pressure onto the opposing party.
- Keep clear and detailed records: Maintain accurate time recording, task descriptions, and correspondence logs. Poor documentation often results in reductions on assessment, even where work was necessary.
- Review proportionality throughout the case: Continuously assess whether steps being taken are justified by the value and importance of the dispute. Avoid unnecessary applications or excessive preparation.
- Avoid over-litigation: Concentrate on key issues and avoid excessive work, as courts will not reward disproportionate or inefficient conduct.
Seeking Legal Advice
Costs orders are a central feature of civil litigation and are most commonly made at the conclusion of proceedings, although they may also arise earlier in relation to interim applications or where conduct or procedural issues make it appropriate. In deciding costs, the court will assess which party has succeeded, how the parties have conducted themselves throughout the litigation, and whether the costs claimed are reasonable and proportionate to the matters in dispute.
Recent developments in case law indicate a stricter judicial approach, with increasing emphasis on controlling disproportionate expenditure and promoting efficient, responsible litigation conduct. This makes it clear that costs risk exists at every stage of a case, from pre-action steps through to final judgment.
Whether you are bringing or defending a claim, obtaining early advice on costs strategy can help reduce risk, maximise recovery, and avoid costly mistakes. Our Commercial Litigation team at Witan Solicitors provides clear, practical guidance on costs exposure, litigation budgets, settlement strategies, and costs recovery. To discuss your matter, contact us on 0300 303 2071 or via email.
