Litigation can be both a time-consuming and costly exercise. In some legal disputes, you might end up being liable for not only your own legal costs, but also the costs of the opposing party.
As such, it is important to have an understanding of the possible cost consequences of commencing or defending a legal claim.
In litigation costs generally follow the event
The general rule is that costs “follow the event”. What this means is that, at the end of the litigation, the successful party is generally entitled to receive its litigation costs from the unsuccessful party on a party and party basis.
The purpose of an order for costs is to compensate the party in whose favour it is made, and not to punish the party against whom the order is made.
Different types of costs orders
The Court has the power to make different types of costs orders. There are two main types of costs orders:
- Costs on a party and party basis: This is the usual costs order made in favour of a successful party. If a party and party costs order is made, the party is only entitled to claim the costs that are allowed pursuant to a scale of costs that is set by the Legal Costs Committee, which will usually fall within the range of 60% to 70% of the costs actually paid.
- Costs on a solicitor and client basis or indemnity costs: If the Court considers there has been some conduct by the unsuccessful party which justifies a departure from the usual rule of costs on a party and party basis, the Court can impose a costs order on a solicitor and client basis, or an indemnity basis. Such an order allows the successful party to recover all of its reasonable costs incurred in respect of the dispute, and can amount to up to 95% of the actual costs incurred. Costs on this basis will usually be ordered if a party unreasonably rejects an offer of settlement.
Circumstances when costs might not follow the event
The usual rule may be departed from if the successful party failed to win on certain issues which took up a significant part of the hearing. In such circumstances, a Court may not only order that the successful party be deprived of its costs associated with those issues, but that it pay the other party’s costs of arguing those issues.
The Court may also depart from the usual costs order where there has been a settlement offer during the course of the proceedings, which was unreasonably rejected by the recipient of the offer.
For example, a party may reject an offer, proceed to hearing and then fail to obtain an amount which is greater than the original offer. In those circumstances, a Court may order the recipient of the offer to pay the other party’s costs on an indemnity basis or a solicitor and client basis from the time when the offer was made. In this way, the Court can use costs orders to encourage early settlement of disputes.
In addition, there are some types of cases in which the Court will ordinarily not make an order as to costs, so that each party is required to pay their own costs regardless of the outcome.
It is crucial to note that not all costs associated with the litigation process are recoverable. There will almost always be a shortfall between what you pay to your lawyers and what the loser is eventually ordered to pay to you.
There are also hidden costs of having employees of the business deal with the claim (either by liaising with lawyers or providing evidence at the hearing) and the costs of potential reputational damage are not recoverable, no matter what the outcome of the dispute is.
Before commencing proceedings or making a decision to actively defend a claim, it is important that you have an understanding of the possible costs implications of the litigation process. The potential costs of litigation can impact how the claim is conducted and any settlement strategy which might be adopted.
If you or someone you know wants more information or needs help or advice, please contact us.