Understanding Cost Orders and Their Impact on Commercial Agreements

Running a business in the UK means making decisions that carry both opportunity and risk. Whether you’re signing a new supplier contract, negotiating a major deal, or dealing with a business dispute, one topic that often gets overlooked is the impact of costs orders.

Many business owners only discover what a “costs order” really means when they’re in the thick of a legal dispute-often after the stakes are already high. But understanding how courts handle legal costs, and what a cost order could mean for your business, is critical for managing risk and negotiating fair agreements from the outset.

In this guide, we’ll break down what costs orders are, how they affect commercial agreements, and what smart business owners can do to protect themselves. We’ll cover the essentials in plain English-so you can stay focused on growth, without getting tripped up by unexpected legal bills.

What Is a Costs Order?

In simple terms, a costs order is a decision by a court (or sometimes an arbitrator) about who will pay for the legal costs of a dispute. These costs can include lawyers’ fees, court fees, expert witness expenses, and associated out-of-pocket costs of running or defending a claim.

After a dispute is resolved-whether at trial, by settlement, or even earlier-courts in England and Wales often decide which party should bear these costs. The general rule is “costs follow the event,” meaning the losing party usually pays the winning side’s reasonable legal costs, either in full or in part.

However, it’s not always this straightforward. Costs orders can vary in amount, timing, and scope, depending on the conduct of the parties, the complexity of the case, and-critically-what your contract says about costs and litigation risk.

Why Are Costs Orders Important for Business Owners?

If you’re running a business, a costs order can be a major financial exposure. Here’s why:

• Even if you win your case, you may not recover all your legal expenses. Courts usually award “reasonable” or “proportionate” costs, not a blank cheque for everything you spent.
• If you lose, you could end up paying your own costs and a chunk of the other side’s-potentially a shock to your cash flow.
• Costs orders influence how parties negotiate settlements and structure commercial contracts. The threat of paying the other side’s costs can encourage early compromise or affect how boldly you enforce contracts.

It’s easy to focus on the core of a deal and overlook what happens if things go wrong. But thinking through costs risk, and addressing it clearly in your core commercial contracts, can help your business avoid nasty surprises.

How Do UK Courts Decide on Costs Orders?

The Civil Procedure Rules (CPR) set out how English courts deal with costs in litigation. The main principles are:

• The loser usually pays: The “loser pays costs” rule is a general starting point, but the judge has discretion to order otherwise based on fairness.
• Interim and final cost orders: Costs can be awarded at different stages-not just at trial, but sometimes after key procedural hearings along the way.
• Conduct matters: If a party has behaved unreasonably (for example, refusing to mediate, dragging out proceedings, or conducting a frivolous case), the court may reduce or increase their costs liability.
• “Standard” vs “indemnity” basis: Orders can be made so that only reasonable costs are paid (“standard basis”) or so that all costs except those that are unreasonable are paid (“indemnity basis”), which is less common but more severe.

The precise outcome in any case depends on the facts and on the judge’s discretion. That’s why it’s so important to think about cost exposure and draft clear contract terms to mitigate these risks.

Where Do Cost Orders Show Up in Commercial Contracts?

It’s common (and wise) to address the risk of cost orders in your business contracts. Some typical examples include:

• Dispute resolution clauses: Many agreements spell out how disputes will be resolved-by court, arbitration, mediation, or a combination-and may specify who bears legal costs in the event of a dispute.
• Indemnity provisions: One side may agree to “indemnify” the other, meaning to cover their legal costs in specified circumstances (say, if a party breaches or causes a claim by a third party).
• Exclusion and limitation of liability clauses: Contract terms may try to limit a party’s exposure-including for adverse costs orders. But “fairness” rules under UK law can sometimes override these.
• Offers to settle (“Part 36 Offers”): Integrating procedures for early settlement can impact who pays costs if one party unreasonably refuses a fair settlement.

When you’re negotiating a commercial contract or partnership agreement, it’s smart to get advice on how these costs order risks can be addressed upfront-not just left to chance.

Common Types of Costs Orders

Let’s break down some costs orders you might encounter in commercial disputes:

• Standard Orders: The losing party pays the winning party’s legal costs on the standard basis (reasonable costs only, with any ambiguity typically resolved in favour of the paying party).
• Indemnity Orders: The losing party pays all costs except those that are unreasonable (broader coverage, higher risk).
• “No Order as to Costs”: Both parties bear their own costs, usually in cases where both parties are seen as equally blameworthy, or if it’s in the interests of justice.
• Costs in the Case: The decision on who pays is deferred until the final outcome, but will generally follow the event.
• Interim Costs or Costs Thrown Away: Costs of a specific application/hearing, or costs wasted due to another party’s conduct during the proceedings.

Understanding the differences matters, especially if you’re structuring a business deal or heading into litigation. Knowing the likely outcomes can shape the way you strategise in a dispute or during commercial negotiations.

Cost Orders and Settlement Negotiations

The risk of an order for costs is a powerful lever in settlement talks. If the other party believes you have a strong case and could recover your costs at court, they may be more likely to settle early, reducing legal spend and uncertainty for everyone involved.

Conversely, if your business is exposed by a weak case, or poor conduct during proceedings, the risk of an adverse costs order can make holding out for trial much more dangerous. Factoring in potential costs orders (including “hidden” expenses like expert reports) should always be part of your risk assessment when settling a dispute.

In some cases-like with Part 36 Offers-you can put pressure on the other side by offering to settle on fair terms, then strengthening your hand in seeking costs if they refuse and ultimately lose or win less at trial.

Do Costs Orders Apply in Arbitration and Alternative Dispute Resolution?

Costs orders aren’t just a court issue. In fact, more and more commercial contracts mandate arbitration or mediation, either instead of or before court proceedings.

Arbitrators also routinely make costs orders similar to UK courts-"costs follow the event" is a typical outcome unless the parties’ contract says otherwise. Always check dispute resolution clauses carefully. Agreeing to pay costs in arbitration can still mean a hefty bill if you’re not prepared.

Mediation is more informal, and generally, each side bears its own costs regardless of outcome, unless the parties agree differently as part of a settlement.

For more insights, our guide to arbitration clauses breaks down how to use them effectively in your business contracts.

How Should Businesses Factor in Costs Orders When Drafting Commercial Agreements?

Addressing order for costs risk in your contracts is not just about protecting your business in litigation. It’s about:

• Setting clear expectations for both parties about risk allocation.
• Reducing the incentive for “frivolous” or vexatious claims by making clear who pays for what.
• Preventing disputes in the first place-well-drafted contracts are less likely to be litigated.

Some things to consider when negotiating contracts include:

• Adding a clear governing law and dispute resolution clause (explaining where, how, and under what rules disputes will be decided).
• Clarifying whether costs are to follow the event, be split, or follow some other agreed formula in the event of a dispute or breach.
• Deciding whether indemnities should include legal costs on a “solicitor and own client” (broad) or standard basis.
• Requiring parties to try alternative dispute resolution (ADR) before going to court-minimising the risk, cost, and hassle of lengthy litigation.

For tips on how to get your commercial contracts right from the outset, our guide to drawing up business contracts can help you avoid the most common pitfalls.

What Happens If You Ignore Costs Risks?

Ignoring the risks of costs orders is a bit like driving without insurance. If a dispute arises, you could face:

• Unexpected bills eating into your profits if you’re on the wrong end of a costs order.
• Difficulty enforcing your rights if the potential exposure to costs scares your business away from taking action.
• Weakened negotiating position in settlement talks-if the other side knows you haven’t planned for litigation costs, they may push harder.
• Reputational damage if you gain a “bad payer” reputation for refusing to pay costs orders promptly.

Having professionally drafted terms, and understanding your costs exposure, keeps you in control and protects your business whatever comes your way. If you’re unsure what’s best for your situation, it’s always wise to have your contracts reviewed by a legal expert before they’re signed.

Tips to Reduce the Risk of Adverse Costs Orders

• Include clear dispute resolution and costs allocation clauses in all major commercial contracts.
• Consider insurance (like legal expenses cover) if you regularly enter high-value contracts where disputes are possible.
• Be reasonable in conduct: Courts may penalise parties who behave unreasonably during a dispute, even if they ultimately “win.”
• Keep records of all contract performance and dispute negotiations-these can be invaluable if there’s disagreement about legal costs later on.
• Seek legal advice before escalating any dispute-strategic negotiations can often spare you the hassle of litigation and punitive costs awards.

If you need concrete guidance or want a review of your contracts for costs risk, Sprintlaw’s contract review service can provide tailored support for your circumstances.

Key Takeaways

• Costs orders can have a serious impact on your business’s bottom line if a dispute ends up in court or arbitration.
• English courts usually order the losing party to pay the other side’s costs, but outcomes vary and “winner takes all” is rare.
• The way costs are handled can (and should) be specified in carefully drafted commercial contracts-don’t leave it to chance.
• Risk of costs orders shapes how disputes are handled, negotiated, and settled in UK commercial law.
• Addressing costs allocation early can save expense, hassle, and uncertainty-talk to a legal expert about the right approach for your deals.

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If you’d like help understanding costs orders or ensuring your commercial agreements protect your business from unnecessary risk, get in touch at team@sprintlaw.co.uk or call 08081347754 for a free, no-obligations chat with our team.