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Indemnity costs are all costs, including fees, charges, disbursements, expenses and remuneration, incurred by a party to litigation in undertaking proceedings provided they have not been unreasonably incurred or are not of an unreasonable amount.
Indemnity costs are ordinarily awarded only in circumstances involving misconduct, for example, to penalize a party where they have maintained a cause of action with no real prospect of success  or for some ulterior motive or with wilful disregard for known facts or clearly established law , made deliberately false allegations of fact  or have unreasonably rejected an offer or compromise not bettered in litigation .
The conduct held to justify the imposition of indemnity costs in Re Bond Corp Holdings Ltd (1990) 1 ACSR 350 was the presentation of a winding-up petition on a genuinely and substantially disputed debt. In line with authorities in other jurisdictions, orders for indemnity costs have been made both in cases of reprehensible conduct or bad faith (such as a party attempting to “burn off” another party by exploitation of power, position or greater financial resources or the taking of unnecessary points delaying or enlarging the time occupied by the proceedings (instances suggested in Re Smith; Ex parte Rundle (No 2) (1991) 6 WAR 299 at 301)) as well as in proceedings by private litigants undertaken in the public interest, for example, to secure observance of the rule of law. That in itself is an important matter of public interest: Re Smith; Ex parte Rundle (No 2) (1991) 6 WAR 299.
More recently, Wheeler J in Co-operative Bulk Handling Ltd v Australian Manufacturing Workers Union (WA Branch) (unreported, SC of WA, Wheeler J, 30 April 1997, Lib No 970190) rejected an application for indemnity costs. The defendant filed a chamber summons seeking to have the plaintiff's claims for a permanent injunction to restrain the defendant's industrial action, struck out as an abuse of process. The court refused to award indemnity costs against the plaintiff following discontinuance as the court was not prepared to infer that the plaintiff had acted unreasonably in instituting proceedings.
The circumstances in which indemnity costs will be ordered in Western Australia have again been considered by the Supreme Court in Unioil International Pty Ltd v Deloitte Touche Tohmatsu [No 2] (1997) 18 WAR 190. In this case, the creation of false issues by tactical denials or failures to admit contained in a pleading was considered a sufficient ground for making a special costs order. Ipp J held that a failure to make a bona fide attempt to agree to facts might justify the ordering of payment of costs of an indemnity basis and concluded:
“In my view, inherent in the case management system now in operation in this jurisdiction is a general duty upon lawyers, in appropriate circumstances, to co-operate so as to avoid needless disputes. Appropriate costs orders may be made when the use of aggressive, discourteous and non-co-operative behaviour leads to the incurring of delay, inconvenience and needless costs… had there been proper co-operation on the part of the first defendant, the plaintiffs' solicitors would have been advised that the evidence of the witnesses concerned would be accepted and there was no need for them to testify. The failure to do so caused unnecessary costs. In my view, an order for indemnity costs in regard to the fees and disbursements incurred in regard to these witnesses, after their witness statements had been exchanged, should be made.”
The court can voice its strong disapproval of conduct which subverts the spirit of O 1 rr 4A and 4B(WA) and, as a result, order payment forthwith of costs on an indemnity basis: Inform Formwork Pty Ltd v McInnes Concrete Service Pty Ltd (unreported, Full WA Court 1995, Lib No 950611).
Roberts-Smith J in Lee v Mavaddat  WASC 68 at  made some useful general comments concerning indemnity costs.
First his Honour at  commented that usually costs are ordered to be paid on a party and party basis. Indemnity costs “can be ordered as and when the justice of the case so requires”. The last comment is important emphasizing that costs are not restricted to any specified categories.
During the course of argument, the proposition was put that while this principle can be applied to defendants as well as plaintiffs “a court ought to be slower in being prepared to presume an ulterior motive in the absence of any evidence from which such a motive may fairly be heard, eg Biltoft Holdings Pty Ltd v Casselan Pty Ltd (1991) 4 WAR 14 at 20”: at .
At  his Honour referred to Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, where Sheppard J gave a useful summary of the principles at 232-234. His Honour commented that the “settled practice” was for costs orders to be made on a party and party basis usually a different order ought not to be made. It can only be made if justified by the circumstances namely “the existence of some special or unusual feature of particular case justifying such an order”.
Roberts-Smith J gave several examples from the Colgate-Palmolive decision including making false and irrelevant allegations of fraud. Sheppard J at  then continued to explain that the question is always whether the facts and circumstances of the case in question warrant making an order for payment of costs other than by reference to party and party.
 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397.
 J-Corp Pty Ltd v Australia Builders Labourers Federation Union of Workers (WA) (No 2) 1993 46 IR 301 at 303.
 Degmam Pty Ltd (in liq) v Wright (No 2)  2 NSWLR 1 at 34
 Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425.
Liability limited by a scheme approved under Professional Standards Legislation.