Recovery of costs: Interpreting the meaning of ‘all reasonable costs’ in contractual costs clauses (Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd – 2019)

Relevant to commercial contracts of any nature, the High Court considered the meaning and interpretation of a lease provision entitling a party to ‘all reasonable costs’.

The background

In Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd [2019], the parties entered into a lease, in respect of which the claimant landlord later brought proceedings against the tenant and succeeded in obtaining Summary Judgment.

A costs clause was contained in the lease, stating that the tenant was to pay the landlord’s ‘reasonable costs and expenses’ incurred in preserving the landlord’s rights under the lease, which included the landlord’s legal costs. Having received judgment in its favour, the landlord sought costs on an indemnity basis, rather than a standard basis.

Costs claimed on a standard basis must have been ‘reasonably incurred’, being a reasonable sum and proportionate to the disputed sums in the case and the complexity of the case.

Costs claimed on an indemnity basis must still be reasonably incurred and of a reasonable sum, but these costs are not subject to proportionality. Costs claimed on an indemnity basis are in the favour of the claimant party, as it is for the paying party, in this case the tenant, to prove that costs claimed are unreasonable.

The decision

The High Court found in favour of the landlord, concluding that it was entitled to recover costs on an indemnity basis. Indeed, a recovery of costs clause in not just this lease but any commercial contract results in contractual entitlement to recover costs on an indemnity basis.

Even where the clause states that costs must be ‘reasonable’, an indemnity basis is still appropriate as these costs are already subject to reasonableness in any event.

Advice and action

Alafco provides helpful guidance for those claiming costs under a lease or other commercial contract. It is clear from the decision that claimant parties are entitled to recover costs on an indemnity basis, including where costs are subject to ‘reasonableness’.