When a business suffers loss because of another party’s wrongdoing, it is natural to assume that all additional expenses caused by that wrongdoing should be recoverable.
But what happens when those expenses include the cost of bringing litigation itself?
The recent High Court decision in Musst Holdings Ltd v Astra Asset Management UK Ltd & Anor [2026] EWHC 1599 (Ch) provides an important reminder: legal costs and other expenses incurred in litigation will generally be dealt with under the court’s costs regime, rather than recovered as damages.
The distinction can be particularly important for businesses involved in complex commercial disputes, especially where litigation funding and After-the-Event (ATE) insurance are involved.
Damages and legal costs are not the same thing
Damages and costs serve different purposes.
Damages are intended to compensate a claimant for loss caused by the defendant’s breach of contract, negligence or other actionable wrongdoing.
Legal costs, on the other hand, relate to the expense of conducting the litigation. They are generally dealt with separately under the court’s costs jurisdiction.
This distinction may appear technical, but it can have significant financial consequences.
A successful claimant does not automatically recover every pound spent on its legal dispute. The amount recoverable by way of costs depends on the relevant rules, the court’s costs orders and, where appropriate, detailed assessment.
The court in Musst Holdings emphasised that allowing parties to re-characterise litigation expenditure as damages could undermine this established costs regime.
What happened in Musst Holdings?
Musst Holdings arose from a commercial dispute involving negligent misrepresentation.
Following an earlier judgment, the claimant sought to recover additional expenditure it had incurred because it had been required to pursue two sets of proceedings rather than one.
The claimant argued that, had it not been for the defendants’ wrongdoing, it would have been able to deal with its claims in a single action. The additional expenditure was therefore said to be a loss caused by the defendants.
The amounts claimed included additional legal costs, a further court issue fee, ATE insurance premiums and litigation funding charges.
The argument had an obvious commercial attraction: if the defendant’s wrongdoing caused the claimant to incur additional expenditure, why should that expenditure not form part of the claimant’s damages?
The High Court nevertheless rejected the claim.
The court’s reasoning
Mr Justice Leech drew a fundamental distinction between the compensatory principle and the costs principle.
The compensatory principle provides that a claimant should, in appropriate circumstances, be compensated for loss caused by the defendant.
However, that principle does not override the separate rules governing litigation costs.
The court concluded that the additional legal expenditure incurred by Musst was still expenditure associated with conducting litigation against the defendants. It therefore fell within the ordinary costs regime rather than becoming recoverable as substantive damages.
Importantly, the court did not consider the fact that the additional costs would not have been incurred “but for” the defendants’ wrongdoing to be sufficient.
Causation alone was not enough. The court also had to consider the legal character of the expenditure.
The same reasoning applied to the additional ATE insurance premiums and litigation funding fees. The court considered these to be sufficiently connected with the financing and conduct of the litigation that they could not simply be converted into damages.
Are litigation costs ever recoverable as damages?
There are important exceptions.
The general rule does not mean that litigation-related expenditure can never form part of a damages claim.
For example, where a defendant’s wrongdoing causes a claimant to incur costs in separate proceedings against a third party, those costs may, depending on the circumstances, be recoverable as damages.
There can also be circumstances involving professional negligence where a solicitor or other professional’s breach causes a client to incur unnecessary litigation costs.
The key question is therefore not simply:
“Did the defendant’s conduct cause me to incur this expense?”
It is also:
“What is the legal nature of the expense, and does the established costs regime apply to it?”
That distinction can be critical when assessing the value and prospects of a commercial claim.
What does this mean for businesses?
For businesses considering or already involved in litigation, Musst Holdings highlights the importance of understanding the difference between the value of the underlying claim and the costs of pursuing that claim.
This is particularly relevant where a dispute involves substantial legal fees, litigation funding or ATE insurance.
A business should not assume that because a particular expense was reasonably incurred, foreseeable or caused by the defendant, it will necessarily be recoverable from the defendant as damages.
The court will look at the substance of the expenditure rather than simply the way in which it is pleaded.
This makes early legal and costs advice particularly important. The potential recovery of damages, exposure to adverse costs and the availability and structure of litigation funding can all influence the commercial strategy for a dispute.
A commercial approach to litigation
Commercial litigation is not simply about establishing who is right or wrong.
For businesses, the cost of pursuing a claim, the potential recovery, funding arrangements, costs exposure and overall commercial objective must all be considered when deciding how a dispute should be managed.
Musst Holdings is a useful reminder that the courts will protect the distinction between substantive compensation and litigation costs. Parties cannot ordinarily bypass the established costs regime simply by describing litigation expenditure as loss.
At Bhakar Greenfield LLP, we approach commercial disputes with both the legal and commercial position in mind. We help businesses assess their claims, understand their potential recovery and costs exposure, and develop litigation strategies that are aligned with their wider commercial objectives.
The strongest litigation strategy is not simply about winning the case. It is about understanding the financial and commercial consequences of getting there.
