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Indemnity costs intended to have chilling effect

07 February 2017

Court orders indemnity costs in recognition of the fact that litigation became “out of control” due to factors that were attributable to the conduct of the Claimants and their legal representatives and experts in the lead up to trial.

Indemnity costs are rarely granted as they are penal in nature and the court has to be satisfied that there has been wrongful conduct which takes the case outside the norm. The court considered this further in the case of Arroyo & Others v Equion Energia Ltd (formerly known as BP Exploration (Columbia), Ltd).


Costs between parties in litigation are usually ordered to be paid on a standard basis so that costs recovered are proportionate and reasonable. In the rare cases where costs are awarded on an indemnity basis the proportionality test does not arise and it will be for the paying party to show the costs are reasonable. Therefore, the receiving party is more likely to obtain a much higher recovery than on the standard basis. In this case the Claimants were a group of 109 Columbian farmers claiming for damage caused by the construction of a pipeline that ran through their farms. The claim was subject to Columbian law but brought in England as this was where the Defendant, then an English subsidiary of BP, was based. Four test cases were heard by the court but all were unsuccessful, the Judge finding that either no damage had been caused and/or no loss suffered. The remaining cases were dismissed.

At the cost hearing the Defendant estimated its costs to be around £34 million and, referring to the Claimants’ conduct at various stages of the proceedings, sought its costs on an indemnity basis. The Claimants argued that the Defendant’s costs should be paid on a standard basis and reduced by 40% to reflect the fact that the Defendant had been unsuccessful in relation to four issues.


While maintaining that it was not necessary to succeed on all points in order to recover full costs, the court ordered a small reduction to the costs claimed by the Defendant in recognition of its failure to succeed on one issue.

However, the court ordered that the Claimants pay standard costs up to five weeks before trial and indemnity costs from that point onwards. This was due to the individual and cumulative effect of four key factors which took the case “beyond the norm”, specifically:

  •  the inadequate schedules of loss which had not been read and/or understood by the Claimants and which were amended on numerous occasions;
  • expert reports containing misleading cross-references and misleading implications of inter-dependence;
  • new expert calculations presented in breach of a court order intended to limit the scope of additional reports; and
  • the Claimants’ rejection of a ‘drop hands’ offer.

In response to a submission that an order for indemnity costs in cases such as these may have a chilling effect on access to justice, the Judge pithily retorted that if the award had a chilling effect on the sorts of failures he had criticised in the substantive and cost judgments, then the order would have a “useful purpose beyond the scope of the litigation”.


While an exceptional case on the facts, this judgment is a salutary reminder of the need to keep litigation under control and provides further examples of the types of conduct which may warrant an order for indemnity costs.

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