Scope of costs covered by an indemnity
EURO ASIAN OIL v CREDIT SUISSE [2017]
An indemnity is an express obligation on one party to compensate the other contracting party for some defined loss or damage arising from a particular trigger event, by making a monetary payment to that other party. The scope of an indemnity is entirely dependent upon its precise wording as this case amply demonstrates.
Background:
In the absence of a contractual agreement as to how fees should be paid, where costs proceedings are initiated there are two bases on which a Court will decide how they should be paid - on either what is called a 'standard' basis or on an 'indemnity' basis:
- Standard basis - a judge will only allow the recovery of costs where they are proportionate, and either reasonably incurred or reasonable in amount. If there is any doubt about either the reasonableness or proportionality, the judge will give the paying party the benefit of that doubt. There is a presumption that costs will be assessed on the standard basis and this is the most common approach used by the Courts.
- Indemnity basis - however, where, for example, a party’s conduct during the proceedings is found to have been outrageous in some way, the other party may request that the Court makes its order for costs using the ‘indemnity’ basis. If this happens, there is no requirement that the costs incurred are proportionate and costs will only not be recoverable if the paying party is able to show that they have been unreasonably incurred or are unreasonable in amount.
Facts:
- Euro Asian Oil (“E”) and Credit Suisse (“C”) had entered into a Letter of Indemnity which provided that C agreed: “to protect, indemnify and to hold [E] harmless from and against any and all damages, costs and expenses (including reasonable attorney fees) which [E] may suffer”.
- The parties could not agree on the scope of the indemnity so far as the recovery of legal fees was concerned. E argued that the ‘any and all damages, costs and expenses’ element meant it should be able to claim costs on an indemnity basis. C disagreed.
Decision:
- The Court decided that where costs are being awarded in accordance with contractual provisions and those provisions expressly provided that the costs should be limited to ‘reasonable attorney fees’, the costs were to be awarded on the standard basis.
- In these circumstances, use of those words meant that the contract did not provide for costs on an indemnity basis because they would not be reasonable.
Points to note:
- This is a somewhat unusual case dealing specifically with an entitlement to legal fees under what appears to be an indemnity. If the word ‘reasonable’ is included in this kind of context in relation to costs, it may rule out the possibility that the Court will award costs on an indemnity basis.
- However, it does have much broader lessons. The decision underlines that, at least so far as the ‘reasonable attorney fees’ were concerned, the indemnity was nothing of the sort. Indemnities are often justified by those seeking the indemnity on the basis that they make enforcement of recovery much easier than it might otherwise be. However, because of the particular wording here (specifically the inclusion of the word ‘reasonable’), the onus would still have been on the injured party to prove that the costs sought were both proportionate and either reasonably incurred or reasonable in amount. The indemnity was therefore of little value.
- This case emphasises that indemnities are 100% creatures of drafting in terms of what force and effect they will have. Great attention should be paid to the precise wording of indemnities to ensure that they have their intended value.