It's the issue that is top of mind for almost all litigants. However, it's probably one of the most misunderstood.
When considering costs of litigation, you should remember the following:
- Usually, a successful party will be entitled to a costs order.
- Costs orders are discretionary.
- Making written settlement offers early will increase the likelihood of favourable costs orders being made.
- Even if a favourable costs order is made, you will likely still be out of pocket.
- There is no guarantee of recovery of a costs order.
The usual costs order
As the saying goes, the winner (usually) takes all. That also (usually) applies to litigation. If you are successful in a claim or in defending a claim, the court will reward you by ordering the unsuccessful party to pay your costs.
The usual cost order requires the unsuccessful party to pay the successful party's costs on the 'ordinary basis' (also known as party/party costs). Costs on an ordinary basis are often only about 60% to 75% of actual costs incurred.
If the court thinks that special circumstances exist, then the court may order that the unsuccessful party pay costs on an 'indemnity basis' (also known as solicitor/client costs). These costs orders often amount to 85% or greater than actual costs incurred.
Generally, the parties must proceed to costs assessment before any amounts are payable, although sometimes, the court may order that costs be paid in a lump sum without the need for assessment.
Costs are discretionary
In deciding the appropriate costs order that should be made in a matter, the court has a wide discretion. This will require that the court consider broadly the question of what is fair in the circumstances.
In a recent matter1, the applicant was successful in obtaining two of the four orders sought. The court ordered that the fair outcome, given the mixed success, was that there should be no order as to costs with the intent that each party pay their own costs.
As part of exercising its discretion, the court will also consider any settlement offers made by the parties. The importance of this is covered below.
In our experience, making settlement offers early will assist to increase the costs you may be able to recover from an unsuccessful party if your offer is not accepted and you obtain a more favourable result than your offer.
Offers can be in the form of 'calderbank' offers or offers of compromise made under the court rules.
A calderbank offer is an offer of settlement expressed to be without prejudice save as to costs.
For a calderbank offer, the party who makes the offer must prove to the court that the other party's failure to accept the offer was unreasonable. This is not the case for offers of compromise made under the court's rules.
Where appropriate, it is possible to serve both types of offers simultaneously in an attempt to maximise the amount of costs that may be recoverable in proceedings, and, at the same time, apply pressure on the other party to consider whether to settle or continue to litigate the dispute.
Costs orders don't indemnify you fully
Costs are usually assessed (or taxed if in the Federal Court) if they cannot be agreed with the paying party.
As indicated above, it is most likely that any costs order made in your favour will only give rise to a recovery of approximately 60% to 75% of the actual costs for an ordinary costs order, and approximately 85% to 90% for an indemnity costs order.
In either situation, you will be left out of pocket. The strategic use of settlement offers will help to bridge the gap between your actual costs and what you can recover, but all litigants must be mindful that the litigation will cost them something even if favourable costs orders are obtained.
Recovery of costs is uncertain
Even when you do all the right things, and the court rewards you with a costs order in your favour, you may not actually be reimbursed.
In our experience, individuals become difficult to find or may become bankrupt. For companies, they may be placed into administration or liquidation with no funds to pay your costs.
To increase the chances of recovering costs, we recommend that you reach an agreement on the amount to be paid or have the costs assessed as promptly as possible after the costs order is made. It is also important to be commercial in making decisions around settlement generally in court proceedings.
Once you have the costs assessed, you can register the costs certificate that you obtain as a judgment. You can then take enforcement steps such as issuing a garnishee order to a bank or employer, or requiring an individual to be examined as to their financial affairs. You can also have the sheriff execute a writ to seize personal property which will be sold and the proceeds of sale paid to satisfy the costs order.
It is important to regularly consider the costs implications of litigation as the process unfolds. As costs are discretionary, steps should be taken to ensure that litigation is conducted in a manner that will increase the chances of costs being awarded in your favour whether you are bringing or defending a claim. A clear strategy should be implemented from the outset and consideration should be given to making written offers of settlement as early as possible.
You can increase the chance of costs being paid if you either reach an agreement on the amount to be paid or have the costs assessed as soon as possible after the costs order is made. If you act promptly, the risk of a debtor absconding or moving assets will be minimised.
1 Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue (No. 2)  NSWSC 68