Contractual costs clauses: What does recovery of “all reasonable costs” really mean?

13th January 2020

Karl Anders and Nick Lees, partners in Walker Morris’ Litigation & Dispute Resolution Departments, explain what a contractual entitlement to “all reasonable costs” has been interpreted to mean by the High Court in the recently reported case of Alafco v Hong Kong Airlines Ltd [1].

Contractual costs clauses: What parties need to know

The High Court considered the meaning of a recovery of costs clause. The clause was contained in a lease, but a similar provision is likely to be found in a wide variety of commercial contracts.

The clause stated that the tenant had to pay the landlord’s reasonable costs and expenses incurred in preserving the landlord’s rights under the lease, including legal costs.

Following litigation concluded in it’s favour, the landlord argued that the recovery of costs clause meant it was entitled to recover its legal costs on the indemnity basis (rather than the standard basis), despite the reference in the clause to “reasonable” costs.

• The difference between costs recovery on the “standard” and the “indemnity basis”
  • For legal costs to be recovered on the standard basis, they have to have been reasonably incurred; they have to be reasonable in amount; and they have to be proportionate [2]. The requirement for proportionality can mean that the amount of recoverable costs is significantly less than that claimed, as even reasonably incurred sums, and sums that are reasonable in amount, can be disallowed if they are assessed to be disproportionate to the sums in dispute in the case, or in respect of the complexity of the litigation.
  • Legal costs recovered on the indemnity basis still have to have been reasonably incurred and be reasonable in amount, but they are not subject to the proportionality requirement. In addition, there is a presumption in favour of the receiving party i.e. the onus is on the paying party to establish that any claimed costs are unreasonable.  Recovery on the indemnity basis is therefore substantially more advantageous for a costs claimant.

Contracting parties should note that the High Court in Alafco concluded that a recovery of costs clause in a lease is a contractual entitlement to recover costs on the indemnity basis.

Whether or not a clause states that a party is entitled to recover “all costs” or “all reasonable costs” is irrelevant.  The presence of the word “reasonable” does not preclude recovery on the indemnity basis (because the indemnity basis is, itself, already subject to reasonableness).

[1] Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd [2019] 11 WLUK 355

[2] Civil Procedure Rule 44.3