Anyone who has been involved in litigation is aware of exactly how costly it is. In fact, the further that parties pursue litigation, the greater an issue that costs becomes and even becomes a barrier to resolving matters on a commercial basis.

As such, it is important for parties to appreciate how Courts deal with legal costs, and what practical strategies can be put in place to protect against cost risks. That is why it is surprising that this is an area that is so often not considered or misunderstood, by both parties, institutional clients and lawyers alike.

It is particularly important to a number of litigants, including small and medium enterprises, and professionals such as insolvency practitioners, to understand that costs landscape and how that might impact their decision to commence proceedings or resolve them at an early stage.

Here is a summary of a few key issues that any party to litigation must be aware of. It is by no means exclusive (any of these could be a separate Alert), and each party must rely on its own legal advice, but these are issues that regularly appear in matters we see.

1. If you commence proceedings, or defend them, you expose yourself to the risk of a costs order

This might seem so obvious as to go without saying, but a lot of claimants do not appreciate this, or the ability of the Court to order costs against non-parties, including liquidators commencing proceedings in the name of a company, or funders that support such claims.

2. Applications for security for costs should be brought promptly, but are by no means guaranteed. Discretion is advised as applications for security for costs can be just as costly

Parties that commence proceedings in the name of a company (particularly in a liquidation scenario) should expect to be met with an application for security for costs. However, as with most costs issues, orders for security are at the discretion of the Court and an application for security may actually cost more than arguing about the matter as a whole.

Expert evidence may be required and even if it can be shown that the plaintiff cannot meet an order for costs, the Court may still not make orders for security for a number of reasons.

3. An order for costs does not mean all of your costs

Even after the entire case is run, and judgment is received, and you win, you will not receive all of your costs back. Although a successful party is generally entitled to an order for its costs, these costs are often ordered on the basis of “as agreed or assessed”.

Also, this type of order generally entitles a party to costs on a “party/party basis” or “costs on the ordinary basis” only. This might normally equate to about 65% to 70% of that actual costs incurred.

4. What about offers of compromise or Calderbank offers?

There are ways to increase the amount potentially recoverable, but even those ways will be very unlikely to result in 100% recovery of costs. Even if an order is made for costs on an indemnity basis, this will still only result in an order in the range of 80% to 90% of actual costs incurred (if lucky).

There is so much confusion regarding the difference between an offer of compromise based on the Rules and an offer made on a Calderbank basis. Even lawyers fail to appreciate this difference, or how to respond to such an offer.

For example, an offer of compromise under the Uniform Civil Procedure Rules 2005 (NSW) may give rise to an automatic right to indemnity costs, but it has some important restrictions on its form and content. If an offer doesn’t comply with those requirements then it does not provide any protection at all.

Similarly, an offer on a Calderbank basis does not automatically give rise to a right to seek costs on an indemnity basis if it is rejected. It is also necessary to show that the offer was unreasonably refused and this can be difficult depending on the terms of the offer and its timing. For example, it might be reasonable to reject an offer at the start of a proceeding, but unreasonable to reject the same offer just before a hearing.

5. Costs of costs applications are also expensive

Even if you have won, and you receive a costs order, or you want to make an application for costs on an indemnity basis, this will also incur additional legal costs. These costs may not be recoverable. For example, if you make an application for indemnity costs based on a Calderbank offer and lose that application, you may actually be required to pay the costs of that application.

Key Takeaways

Almost every day there are judgments on costs issues that appear on the Court websites, and any number of them could have been avoided, for the benefit of both parties and the Court.

Costs in legal proceedings are always expensive. Issues arising in relation to costs are often complicated and not understood well. It is important to get competent legal advice at the earliest possible opportunity to ensure that your position as to costs is protected as best as it can be.

Sometimes that means that the costs of arguing about costs might not be worth it, but it takes a good lawyer to give proper advice on this complicated issue.