Costs Orders and Discretion: A Complete Guide

When a case ends, the costs question often matters as much as the outcome on the merits. The court has broad discretion to decide who pays, how much, and on what basis. That discretion is not unlimited: it is structured by CPR Part 44, guided by clear principles, and exercised by reference to the conduct of the parties and the overall justice of the case. This guide sets out the framework governing costs orders in civil proceedings: when the general rule applies, when and why the court departs from it, what indemnity costs mean in practice, and the specialist regimes for QOCS, non-party costs orders, and costs on discontinuance.

The court’s discretion as to costs (CPR 44.2)

Costs in civil proceedings are in the discretion of the court. Under CPR 44.2(1), the court can decide whether costs are payable by one party to another, the amount of those costs, and when they are to be paid. That discretion is wide: it encompasses no order as to costs, a full order in favour of the successful party, an issue-based or percentage order, or any other order the justice of the case requires.

In exercising that discretion, the court must have regard to all the circumstances. CPR 44.2(4) specifies that those circumstances include the conduct of all the parties (before and during the proceedings), whether a party succeeded on part of its case even if not wholly successful, and any admissible offer to settle that falls outside Part 36. Conduct is broadly defined: it covers pre-action behaviour, compliance with protocols, and the manner in which the litigation was conducted throughout.

The general rule and departing from it

The starting point is that the unsuccessful party pays the successful party’s costs (CPR 44.2(2)(a)). But “unsuccessful” and “successful” are not always binary. Where a party wins overall but loses on significant issues, the court may make an issues-based or proportionate costs order that reflects the mixed outcome. The “successful party” for costs purposes is assessed in the round: what was the party trying to achieve, and did they achieve it?

Where a party fails on discrete issues but succeeds overall, the general rule still governs the overall costs. However, the court may reduce the successful party’s recovery on issues where they lost, or order a percentage of overall costs, particularly where the losing issues took up substantial time and cost and could have been avoided or conceded earlier.

Indemnity costs: the “out of the norm” test

The standard basis is the default for any costs assessment. To justify indemnity costs, there must be something in the conduct of the action or the circumstances of the case that takes it outside the norm of ordinary and reasonable litigation conduct. The leading formulation comes from Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson [2002] EWCA Civ 879.

The threshold does not require moral condemnation or bad faith. Unreasonable conduct to a high degree is sufficient. Common triggers include:

• Advancing dishonest or fraudulent allegations without an adequate evidential foundation
• Pursuing speculative or weak claims aggressively over a prolonged period
• Deliberately obstructive or unreasonable litigation conduct
• Using litigation as a vehicle for commercial pressure rather than genuine dispute resolution
• Contempt proceedings deployed for a non-judicial purpose

Indemnity costs may also arise from contractual provisions (such as a contractual costs clause), or as a consequence of a Part 36 offer that the claimant fails to beat at trial.

What indemnity costs means in practice (CPR 44.3 and 44.4)

An order for indemnity costs does not hand the receiving party a blank cheque. Under CPR 44.3 and 44.4, on the indemnity basis the court will not allow costs that were unreasonably incurred or unreasonable in amount. Two things change compared with the standard basis:

• Proportionality is not a freestanding requirement. The standard-basis proportionality cross-check (CPR 44.3(2)(a)) does not apply on the indemnity basis. The question is reasonableness only.
• The burden of doubt shifts. On the standard basis, doubt is resolved in favour of the paying party. On the indemnity basis, it is resolved in favour of the receiving party.

In practice, this means that rates above the Guideline Hourly Rates may be allowed if they are reasonable, but they still need to be justified. Items that are genuinely unreasonable in amount will still be reduced. An award of indemnity costs can make a significant difference to recovery, particularly in cases with a high ratio of incurred costs to budget, because the costs budget ceases to set the assessment ceiling.

Payment on account (CPR 44.2(8))

Where the court orders costs subject to detailed assessment, it must also order a reasonable payment on account of those costs unless there is good reason not to do so (CPR 44.2(8)). A payment on account should therefore be the default, not the exception.

The amount is for the court’s discretion. The conventional approach is to order a sum that the receiving party will clearly recover on assessment: typically an estimate of likely recovery, with an appropriate margin of error. In budgeted cases, a payment on account of around 90% of budgeted phase costs (and 75% of incurred costs) has been approved as a starting point in some decisions, reflecting the discipline of the approved budget. Where costs are on the indemnity basis, the budget is not the benchmark and the payment on account is assessed on a broader basis.

A receiving party’s inability to pay is not a good reason to refuse a payment on account.

Qualified One-Way Costs Shifting (QOCS)

QOCS applies to proceedings that include a claim for damages for personal injury or death (CPR 44.13(1)). The general effect is that a defendant who obtains a costs order against the claimant in such proceedings cannot enforce that order beyond the aggregate of any damages and interest ordered in the claimant’s favour. In most cases where the claimant recovers nothing, the defendant cannot enforce its costs order at all.

The QOCS exceptions matter in practice:

• Fundamental dishonesty (CPR 44.16(1)): if the court finds that the claim is fundamentally dishonest, QOCS protection is disapplied and the defendant can enforce costs to the full amount.
• Mixed claims (CPR 44.16(2)(b)): where proceedings include claims for the claimant’s benefit that fall outside QOCS, the court has discretion to permit enforcement to the extent just. Whether proceedings are “in the round” a personal injury case depends on the nature of the loss, not just the cause of action.
• Third-party benefit (CPR 44.16(2)(a)): this exception has been applied to credit hire companies who fund and control litigation for their own commercial benefit, and can also apply where a claim is substantially made for someone else’s financial advantage.
• Failure to beat a Part 36 offer: QOCS applies to the period before the relevant offer was made, but from the date it expired, costs may be enforced up to the amount of damages recovered.

QOCS protection follows the proceedings to appeals: where fixed costs apply at first instance, they do not apply on appeal, but QOCS does.

Non-party costs orders (s.51 SCA 1981)

The court has jurisdiction under s.51 of the Senior Courts Act 1981 to order a person who is not a party to proceedings to pay the costs of a party. Such orders are exceptional in the sense that they arise outside the ordinary run of cases where parties pursue or defend claims at their own risk and expense. The ultimate question is whether, in all the circumstances, it is just to make the order.

Non-party costs orders are most commonly sought against litigation funders or insurers who controlled the proceedings and stood to benefit from a successful outcome, directors or shareholders who maintained litigation in a company’s name for their own benefit, and credit hire companies who fund and control personal injury proceedings for commercial gain. The key factors are control over the litigation and benefit from a successful outcome. A non-party who merely finances proceedings to facilitate access to justice for another is in a different position from one who gains access to justice for their own purposes.

Costs on discontinuance (CPR 38.6)

When a claimant discontinues all or part of a claim, the default rule is that the claimant is liable for the defendant’s costs incurred up to the date of service of the notice of discontinuance (CPR 38.6(1)). The court can order otherwise, but the burden is on the discontinuing claimant to show good reason to depart from this presumption.

The principles for displacing the default rule are well established:

• The merits alone are not enough. The fact that the claimant would or might have succeeded at trial is not sufficient to displace the presumption.
• Practical or financial reasons are not enough. Discontinuing for pragmatic, commercial, or resource reasons does not displace the default.
• A change of circumstances is usually required. To succeed in displacing the presumption, the claimant generally needs to show a change of circumstances brought about by the defendant’s unreasonable conduct, to which the claimant has not contributed.

Beyond the question of who pays on discontinuance, the basis of that assessment can also be contested. Where the circumstances are sufficiently outside the norm, indemnity costs on discontinuance may be ordered even though the default under CPR 38.6 is the standard basis.

Costs against a successful party

The general rule points to an order against the unsuccessful party. But the court’s discretion is not confined to following the event. A party may win overall and still be ordered to pay some or all of the other side’s costs where their conduct warrants it.

Circumstances in which a successful party may face adverse or reduced costs orders include: failure on significant discrete issues that took up substantial time; unreasonable conduct before or during the proceedings; late admissions or concessions that could have been made much earlier; and failure to follow pre-action protocols in a way that unnecessarily inflated costs. The discretion is real, but departure from the general rule requires good reason. Where the successful party acted reasonably throughout, costs follow the event.

This guide is for general information and does not constitute legal advice. For advice on a specific matter, please contact TMC Legal.