Costs of litigation
1. Costs Orders
At the end of litigation, the winner is generally awarded costs to be paid by the loser. However, there is usually a substantial difference between a litigant's solicitor's bill, and the amount of costs the loser is ordered to pay the winner. The court-ordered cost payment may be only two-thirds of the winner's actual costs. Court-ordered costs between parties are known as party/party costs. When the court makes a costs order, the costs are either agreed between the parties or assessed by the court. A court order will never cover any of the litigant's personal costs (loss of time and so on).
2. Payment into court, and Offers of Compromise
The courts have used costs orders to encourage early settlement of disputes. The courts are able to make penalty costs orders against parties who fail to accept certain settlement offers.
All of the major courts used to have rules which permitted Defendants to pay money into court. The Defendant could make an offer of settlement by paying a certain sum of money into a court account. The payment into court was confidential and not communicated to the judge, until the case had been determined. The effect of the payment into court was as follows:
(a) If the Plaintiff won on liability, but failed to obtain a verdict for an amount greater than the amount paid into court, there would be two costs orders. The Defendant would be ordered to pay the Plaintiff's costs to the date of the payment in, and the Plaintiff would have to pay the Defendant's costs from that date onwards. This is to be compared with the case where the Plaintiff loses on liability;
(b) Where, the Plaintiff loses all aspects, it would be ordered to pay the Defendant's costs regardless of the payment into court.
The payment into court system has largely been replaced or by a system which has the same costs incentives The new system is known as the Offer of Compromise. It is available to all parties in litigation, not just the Defendant. The general principle remains the same: there will be a costs penalty against the party who rejects an Offer, proceeds to trial, and then fails to obtain an amount which is greater than the original Offer.
It is significant that both Plaintiffs and Defendants can use the Offer of Compromise system. An example of a Plaintiff using the system is where a Plaintiff would settle for less than the judgment which it finally obtained. In such a case, the court will award costs on a significantly more generous basis than if the Plaintiff's Offer of Compromise had not been made.
It can be seen that the purpose of the Offer of Compromise rules is to encourage parties to realistically assess their chances of success and then take steps to resolve the proceedings, without unnecessarily dragging the litigation on. Careful consideration of the prospects of success and the likely outcome of the litigation is encouraged by the Offer of Compromise mechanism.
It should be noted that the imposition of a costs penalty is presumed, but not automatic. A litigant or its advisers may try to predict the prospects of success, but may be unable to, on consideration of the material which they had available to them at the time. The court may, at its discretion, take these matters into account in making a costs order.
3. Other types of settlement offers with costs penalties: the Calderbank Letter
A Calderbank letter is a written communication where a party to litigation makes an offer which is "without prejudice, save as to costs". The effect of this is that the offer must be kept secret until the court comes to consider any issue of costs, that is at the end of the proceedings. The letter can be used as a ground for arguing that the party to whom the offer was made should pay the offerer's costs from the date of rejecting the offer if the party to whom the offer was made failed to do better than the offer at trial.
The courts will use their costs discretion with respect to Calderbank letters in much the same way as Offers of Compromise.
In any event, the Evidence Act (NSW) 1995 removes the secrecy or privilege attaching to all 'without prejudice' offers, where the offer is relevant to determining liability for costs.
Again, the courts retain a general discretion as to the making of costs orders. Courts would consider such factors as the timing of any offer, whether the offence already had sufficient information available to consider it properly, and whether the offer was in fact a genuine discount.
This is a very brief introduction to the costs of litigation and is not intended to be legal advice. This publication cannot be relied on as a substitute for appropriate legal advice suited to your circumstances. Given that this is the case, you should seek and retain the advice of a solicitor if you require a comprehensive and up to date analysis of the law pertaining to your circumstances.