Fundamentals of Costs in Litigation

If your business dispute has hit the point of litigation, then you probably know you’re in for what could be a long and arduous journey.

Of the many things to think about along the way, the topic of legal costs is a prominent issue.

Of course, the initial concern is usually about the costs that you might need to pay to your litigation lawyers.

However, after that typically comes questions about the nature of cost recovery or cost risk – that is, if you “win”, what does that means in terms of clawing back some of your legal costs from the other party?

So, in this article we’re going to set out some of the fundamentals associated with legal costs in litigation, with a particular focus on the costs that might be ordered to be paid from one party to the other.

Basic Policy behind Legal Costs

There is a long-standing policy that is best explained something like this:

1. We do not want to encourage people to sue each other;
2. We do want to encourage people to settle their disputes out of Court;
3. Our costs regime should be designed in congruence with those desired outcomes;
4. Accordingly, nobody should go into litigation thinking they will recover 100% of their costs if they win.

As you will see, this basic ideology of discouraging parties from litigating flows through to the costs regime in most places around Australia, including both State and Federal Courts. Principally the impact of the policy is to ensure that the amount of costs you can usually recover are significantly less than the costs you will actually incur.

The General Rule: “Costs Follow the Event”

The standing principle of how costs work is that if you “win”, you can generally expect the Court to make a costs order in your favour.

That “winning” might relate to:

1. Some kind of interim stoush such as an application to strike out a pleading; or
2. The trial of the entire matter.

Of course, sometimes it’s not as easy as you might think to figure out if somebody “won”.

What if you sue me for $1,000,000 and the Court ultimately gives you judgment for $10?  Did you “win” in that instance? Technically yes, because the Court made an order in your favour. But compared to what you were asking for, you had a pretty tragic outcome.

Similarly, what happens if we sue each other, and neither of us succeed in our claims?  We’ve both lost, but we’ve both won at the same time. What should the costs outcome be in that case?

For this reason, while some general principles can be applied to costs in litigation, the Court almost always has a discretion to make the costs order that it believes is most appropriate in all the circumstances. Generally the parties will be allowed to make submissions about costs, and why (or why not) the standard outcome should apply.

What a Costs Order Looks Like

Different places use slightly different language.

In Queensland, however, a typical costs order in favour of a Plaintiff (the person suing) might look something like this:

The Defendant is to pay the Plaintiff’s costs on a standard basis.

There are, however, several other costs orders the Court can make, including:

1. “Costs Reserved” – this means “we’ll worry about deciding that later” and is fairly common in interim applications or procedural components of a larger proceeding;
2. “Costs in the Cause” – this is less common now, but means “if a party wins the larger proceeding and gets a costs order in their favour, they can have these costs included in the calculation”
3. “No order as to costs” – this means that nobody can claim the relevant costs from the other party. This is often the order made if the parties have agreed or consented to some kind of procedural directions and no hearing has been required.

For now, however, let’s stick with our first example – where the Plaintiff has been awarded costs “on a standard basis”.

What are Costs on a “Standard” Basis?

There are two normal phrases used to describe how your costs are to be calculated before the other party is required to pay them.

1. Standard Basis, also called “Party and Party” basis – this is a method in which the calculation is done by reference to a scale of costs set forth by the relevant Court;
2. Indemnity Basis, also called “Solicitor and Client” basis – this arises rarely in practice, but is a higher award of costs where you actually payments to your lawyers become much more relevant.

We’re going to focus on the first one for this article.

Once the order is made, a party can have their costs “assessed”. This involves going through your lawyers’ entire file and measuring what they have done against the relevant Court scale. A table of the claims is then prepared and delivered to the other party for review.

The best way to describe it is with an example.

Let’s say your lawyers have written a long letter during the litigation. It took them 5 hours to write, cost you $6,000, and end up being 1,500 words long. What can you claim for that part of the litigation?

Here are two examples from the Queensland scale of costs:

1. The Magistrates Court for a matter $50k and under will allow $NIL (yep – zero) for that letter – writing a letter is not a scale item for such matters in that Court, and you will not recover that cost under a standard costs order;
2. The District and Supreme Courts will allow $25.65 per 100 words for drafting the letter, and $6.20 per 100 words for “producing” (settling and finalising) the letter. This means you would get an allowance of $477.75 for that letter which cost you $6,000. You might get some sundry extras for the covering email, getting your instructions, printing it and the like (naturally with this kind of maths you will claim as much as you legitimately can).

So What Percentage Will you Recover Then?

The costs you can claim against the other party are usually significantly less than the costs you will actually incur (at least in the realm of business litigation that we are discussing).

There are two main reasons for this:

1. The calculation method is different, as discussed above;
2. The rates are lower – even in the cases where the time taken to do a thing is relevant, the rates applied are usually much lower than those which your lawyers actually charge, in line with the policy we mentioned at the start of this article.

The actual outcome for you is going to heavily depend on what Court you’re in, the nature of the matter, the type of work that has been done, the involvement of third parties like barristers, and a range of other factors that makes any kind of “rule of thumb” we might offer here incredibly general.

That said, as a very vague guideline you might anticipate that your costs recovered on a “standard basis” could be something in the range of 40 to 60% of your actual legal spend.

Realistically the normal calculation of the costs that you can claim from the other party bears no relationship to the costs you actually incur and have to pay your lawyers. So trying to put it in these kinds of terms inevitably comes with a big disclaimer like the one we just gave.

Can you Increase the Costs you can Claim?

Yes, there are various times you might ask the Court to give you a higher award of costs on an “indemnity” basis.

That said, while claiming costs on an indemnity basis is frequently threatened in legal correspondence, it happens fairly irregularly in practice.

We’ll deal with that topic in another article though.

The Lesson? Be Careful

Litigation is long and costly at the best of times.

Most matters settle through negotiation without the Court needing to make a final order about costs. But some matters do run through to a conclusion, or perhaps have costs orders made about smaller parts of the proceedings.

Therefore as part of your overall thinking and strategy, it’s important to consider and discuss with your lawyers the general nature of what you can or cannot recover as part of a costs order, especially in lower Courts or Tribunals. At the very least this can help you make informed decisions about your desired way forward and the kinds of steps that you want to pursue along the way.