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JimLawyer
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Under UK law, in a commercial contract's indemnification

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Under UK law, in a commercial contract's indemnification clause, what is the meaning of "all costs, on an indemnity basis"?
JA: Have they talked to a lawyer about this? What country do they live in? If different, what country does this legal question relate to?
Customer: One party is a UK company (they drafted the bilateral agreement); the other party is incorporated in Delaware, USA.
JA: What steps have they taken so far?
Customer: They are reviewing a first draft and have not seen an indemnification clause requiring indemnification of costs "ON AN INDEMNITY BASIS."
JA: Is there anything else the Lawyer should know before I connect you? Rest assured that they'll be able to help you.
Customer: Not that I can think of

Hello, this is Jim and welcome to JustAnswer. I will be the lawyer working with you today.
Sorry to hear of the issue. I will set out my written answer shortly.

The phrase (costs on the indemnity basis) means that if there was a dispute and you become involved in court action, the court can assess the winner's costs either on the standard basis, or the indemnity basis.
If the court assesses them on the indemnity basis, the court simply gives the benefit of any doubt to the winner, on whether the costs were reasonably incurred and payable or not (in favour of the receiving party - which would be the winner). If costs are awarded on the standard basis it gives the benefit of doubt to the paying party.
Costs are usually awarded on the indemnity basis if the conduct of the losing party is very questionable - meaning the winning party is likely to receive more in the way of legal costs by order of the court.
The UK company will have referred to the UK's Civil Procedure Rules, specifically Rule 44 :

CPR rule 44.3

(1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess those costs –

(a) on the standard basis; or

(b) on the indemnity basis,

but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount.

(Rule 44.5 sets out how the court decides the amount of costs payable under a contract.)

(2) Where the amount of costs is to be assessed on the standard basis, the court will –

(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and

(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.

(Factors which the court may take into account are set out in rule 44.4.)

(3) Where the amount of costs is to be assessed on the indemnity basis, the court will resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party.

So in layman's terms, it means that if there is a commercial dispute and the courts are used, indemnity costs are generally higher. As the court will give preference to the aggrieved party and award them costs as it sees fit with no real argument taken in to account by the paying party.

I hope this helps and answers the question - my goal is to ensure you are happy with the answer and have the information you need. If you have any follow up questions then please let me know. I will reply as soon as I can to help with any further queries.

Many thanks,
Jim

Please let me know if the answer helped or if you need me to cover anything else?. I am happy to clarify the answer or if you have any follow up questions. If so, I’d be grateful if you would let me know. I am free most days, including weekends, so feel free to ask me anything you are unsure of.

Best wishes,

Jim

Customer: replied 14 days ago.
This is very helpful - thank you. ***** may ask a question specific to the current transaction's clause relative to indemnification in a mutual "Confidentiality and Circumvention" agreement: Would you recommend seeking to eliminate certain words, specifically "on an indemnity basis," "consequential" losses (I don't generally see this in contract here in US) and "loss of reputation" (we don't generally see this either and I can't imagine how that might be measured)? Or, since it is mutual, if my client is confident that they will not be the party that breaches the agreement, should they feel fine about retaining the clause "as is?" The term in question reads as follows: 1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess those costs –(a) on the standard basis; or(b) on the indemnity basis,but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount.(Rule 44.5 sets out how the court decides the amount of costs payable under a contract.)(2) Where the amount of costs is to be assessed on the standard basis, the court will –(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.

I would try to get them to change "from an indemnity basis" to "the standard basis", so you are on an equal footing, yes. As potentially they could use a very expensive lawyer in the UK to sue, if there was a breach of the agreement in some form, and the clause would give the court the ability to grant them their high legal costs. So there could be a situation whereby a minor breach leads to disproportionate legal costs being incurred. I have seen the clause in other contracts and is a safeguard for them, a way to scare the other party with the threat of high legal costs and to therefore ensure the other party does not breach the contract.
Loss of reputation is more of a defamation situation so in my view that should be left out too. If your client is confident they will not be the party which breaches the contract then OK though in life nothing is guaranteed - bear in mind people have breached contracts due to the pandemic by way of an example, when they had no other choice. That clause regarding the costs, it just leaves the door open for the court to assess costs either on the standard basis or indemnity basis - which is a typical and well-used term and I would not dispute it as a result.

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Customer: replied 14 days ago.
Thank you for the further very clarifying response! I'm very pleased (and perhaps surprised) that this is the initial advice I gave the client although I did not have the thorough explanation and all the considerations, so again, thank you. You've provided excellent service and I will make sure that is reflected in the rating!