Australia: Costs orders and litigation – beware unpredictable outcomes and always take settlement offers seriously

Last Updated: 14 March 2018
Article by Zohra Ali

I was recently involved in a case where someone was offered half a million dollars as settlement, declined that offer, lost his case in the Supreme Court and had a costs order made against him. He subsequently decided to make an application to the Court of Appeal, but he also lost the appeal and had another costs order made against him.

The costs of the two proceedings together are likely to equate to at least $250,000. This person has gone from potentially gaining half a million dollars to losing a quarter of a million.

"No win no fee" arrangements can lead to overlooking risk of adverse costs orders

The solicitors who ran this case ran it on a no win no fee basis. This means that if the client does not win the case, the solicitors do not charge any professional fees.

The no win no fee method can be quite enticing and useful for those who do not have the funds to engage in litigation but may have a strong case. The downside in these situations however, is that the risk of having to pay the other party's costs often gets overlooked.

Outcome of litigation inherently unpredictable

Anytime someone engages in litigation, they need to consider any settlement offers received carefully and accept the fact that no matter how prepared you are or how strong a case you may feel you have, there is always the risk that you might not win.

And if you do not win, you can be subject to a hefty costs order that could completely change your life, and not for the better.

How can I still lose when my legal advisers are telling me I have a strong case?

This is a good question, and there are a number of reasons.

You may have a strong case, but you might be called to the stand to give evidence. If this happens, you might not be a good witness. Your solicitor is limited in how much guidance he or she can give you with respect to what to say in the witness box, as there is a fine ethical line between witness preparation and "witness coaching".

Also, being in the witness box can be scary, nerve wracking and emotionally draining. These feelings can all impact negatively on how you answer questions and how you present yourself in the witness box. If you exude negative emotions or rub the judge up the wrong way, you could be inadvertently harming your own case.

All parties to litigation typically believe they have a strong case

Going to a final hearing is a gamble. You are placing the decision-making power into the hands of a third party, and hoping that on the basis of the evidence, they will make a decision in your favour.

While your evidence and claim may be strong, do not forget that the other party would not have taken the matter this far if they did not also believe they have a strong case.

Subconscious bias can cloud objectivity

Humans can declare objectivity in their decision making and can even appear to be objective. However, we cannot control the subjective influence our subconscious mind can have on a decision.

Sometimes we cannot consciously recognise our own biases regarding particular characteristics and/or behaviours. How can we ensure objectivity with respect to such biases if we do not even know that they exist?

The same applies to judges. You do not know the judge's history, their story or their experiences. If the judge had a negative experience in the past and you bear any kind of resemblance or share a mannerism with someone who may have been the cause of that negative experience, this could be the cause of the downfall of your entire case.

At what point do judges decide who wins the case?

There is a theory among lawyers that judges have already made their decision fairly early on in the final hearing, and then work backwards to justify their decision in preparing judgment. While I do not know if it is true, I have noticed that whenever I read our firm's fortnightly "Which case won?" newsletters, I instinctively lean towards a specific response without necessarily being familiar with the legalities of the case.

The majority of the time, the response I select is correct. Remember, judges review and become familiar with your claim before the final trial. The final trial is simply an opportunity for each party to present evidence and to present submissions, but if the judge already has some preconceived views about your claim, it may be difficult to persuade him or her to adopt a different viewpoint, especially if you are not aware of those preconceived views.

Different types of costs orders

If you have a case which is going to trial, you should become familiar with the different types of costs orders so that you know what kind of costs orders you may be facing.

Scaled costs are costs which are regulated by law and capped at a certain amount. Scaled costs are common in certain debt recovery matters where default judgment is given in favour of the plaintiff because the defendant never responded or filed a defence to the claim.

Solicitor/client costs are the costs that you pay to your lawyer. Unless you are in a no win no fee arrangement, these costs are payable to your lawyer regardless of the outcome of your case. Normally you would pay these costs on a weekly or monthly basis, depending on your solicitor's billing schedule.

Party/party costs are the costs which the winning party in the case can recover from the unsuccessful party, in the event that an ordinary costs order has been made. The purpose of these orders is to compensate the winning party for their solicitor/client costs.

Indemnity costs are the costs payable to a successful party where the successful party has been subjected to unnecessary costs as a direct result of the conduct of the other party. The awarding of an indemnity costs order is made by the court upon an application from the aggrieved party.

An example of a circumstance where an indemnity costs order may be made is when a party has appealed the decision of a judge after being unsuccessful in their case, and subsequently loses that case too (as in the example given earlier).

Possible dire financial consequences of a costs order

If you receive a costs order against you, the costs order is automatically considered to be a court judgment. Bankruptcy notices can be served on the basis of the judgment.

If you are unable to negotiate a deal with the winning party, you could end up bankrupt. I say this because matters which go to a final hearing usually incur costs of $100,000 to $150,000 per party, depending on the complexity of the case.

If you appeal the decision and lose that too, as in the example at the beginning of this article, then you can add another hundred thousand and you are looking at $250,000 in costs being payable. Most people do not have $250,000 lying around.

Unless you are able to come up with that money (which could even mean needing to sell your house), you could be made bankrupt and most of your assets may vest into an appointed bankruptcy trustee who will then liquify your assets to satisfy creditor debts.

Emotional consequences of a costs order

Aside from the financial consequences of a costs order, there are significant emotional consequences as well. A costs order can put a strain on you and your family, and potentially cause marital problems.

It can cause you to feel resentment, regret and hatred. It can also cause you physical distress and real depression.

Bad reasons for going to court

Going to court and going to a final hearing is a serious matter with serious financial consequences. Do not let matters of principle, a misdirected search for justice or greed be the motivation for going to court.

Listen to your solicitors carefully, take settlement offers seriously and always be commercial and practical in your decision making. Do not let your heart rule your head, or you could end up in a far worse position than you were in when you embarked on the litigation.

Zohra Ali
Business disputes and litigation
Stacks Champion

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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