What is the difference between standard and indemnity basis for legal costs?

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Legal Costs: Standard vs. Indemnity Basis Explained

Following their unsuccessful lawsuit against Associated Newspapers Limited (ANL), Prince Harry, Elton John, and five other claimants are facing substantial legal bills. The amount they will ultimately be required to pay hinges on whether the court orders costs to be assessed on a "standard basis" or a more stringent "indemnity basis." ANL, the publisher of the Daily Mail, is seeking a significant portion of its £34 million (US$45 million) in legal expenses, and the distinction between these two cost assessment methods could result in the claimants being liable for "many millions" out of their own pockets, particularly given their combined insurance cover of £16.2 million.
Standard Basis for Legal Costs

Under the standard basis for assessing legal costs, a court typically allows costs that are reasonable and proportionate to the sums in issue in the case. This means that the winning party can recover only those costs that are considered necessary for the proper conduct of the litigation and are of a reasonable amount. For instance, if a case involves a relatively modest financial dispute, the recoverable costs would generally be capped at a level that reflects the scale of that dispute. This approach aims to prevent excessive expenditure on litigation, ensuring that parties do not incur disproportionately high legal fees.
Indemnity Basis for Legal Costs

In contrast, the indemnity basis for legal costs is a much more generous method of assessment for the winning party. When costs are awarded on an indemnity basis, the court allows all costs except those that are found to be unreasonable or disproportionate. This is a stricter standard than the "reasonable and proportionate" test applied under the standard basis. For example, if ANL's legal team argues, as they did in this case, that the litigation was an "all-out attack" or a "campaign," they might contend that a higher proportion of their substantial legal spend is attributable to the claimants' actions, thus warranting an indemnity basis award.
Impact on Claimants' Liability

The practical difference between these two bases can be significant, particularly in high-stakes litigation. If the judge orders costs on the standard basis, the claimants would recover a portion of ANL's expenses that are deemed reasonable and necessary for the litigation. However, if the court determines that the case warrants an indemnity basis award, ANL could recover a far greater percentage of its £34 million in costs. This is because the indemnity basis presumes that costs are recoverable unless proven to be unreasonable, a much higher bar for the losing party to overcome than demonstrating proportionality under the standard basis.
Insurance Shortfall and Financial Exposure

The claimants' potential financial exposure is further complicated by their insurance coverage. They have a combined insurance policy totalling £16.2 million, which is intended to cover their legal costs. However, as their lawyer Nicholas Bacon indicated, if the costs are awarded on the indemnity basis, this insurance cover would likely be insufficient. This shortfall means that the claimants could be personally liable for paying the remaining costs out of their own funds, potentially amounting to "many millions" of pounds, underscoring the substantial financial risk associated with losing a high-profile legal battle.

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What is the difference between standard and indemnity basis for legal costs?

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