General rules (on costs) can cause major problems

When parties are considering whether or not to commence legal proceedings, one of the factors at the forefront of most claimants’ minds is the legal costs likely to be incurred.  Parties often make their decision based on an assumption that they will be able to recover most of their legal  costs from the other party if they are successful.

In this Bulletin, we look at the General Rule on Costs and a recent – and cautionary – example, where the successful party to legal proceedings ultimately became liable for the defendants legal costs.

General rule on costs

The general rule in relation to costs is set out at rule 42.1 of the Uniform Civil Procedure Rules 2005 which reads:

“42.1         General rule that costs follow the event

Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.”

Although costs are at the discretion of the court, rule 42.1 creates a presumption that costs will be awarded to the successful litigant.  The presumption will only be displaced where there has been some sort of disentitling conduct by the successful party.

Effect of offers of settlement

Prior to or during legal proceedings, parties often make offers of settlement.  They may be made informally by a letter (sometimes referred to as “Calderbank offers”), or more formally as an offer of compromise made in accordance with the Uniform Civil Procedure Rules 2005. 

Should a party unreasonably fail to accept an offer of settlement, then they may be liable for a sanction as to costs against them.

In these circumstances, the successful party to the legal proceedings can seek an order for costs on an indemnity basis (a higher level of recovery than the ordinary basis), or a losing party can seek an order for costs from the date of making the offer, contrary to the general rule that costs follow the event.

The case

Local Court proceedings were commenced by a liquidator (and the insolvent company to which he had been appointed) against a sole director seeking the recovery of $20,460 as an unfair preference under the Corporations Act.  The plaintiffs made a “Calderbank offer” at an early stage of the proceedings, to accept the principal amount of the claim only and forgo costs and interest.  The proceedings were defended by the director and progressed to a contested hearing.  The plaintiffs succeeded at the hearing and judgment was awarded in their favour in the sum of $23,272.11 including interest.

Pursuant to the general rule the plaintiffs were entitled to the benefit of the presumption that costs follow the event.  The plaintiffs relied on the Calderbank offer and sought an order that the defendant pay the plaintiffs’ costs on the ordinary basis up to the date of the offer and thereafter on an indemnity basis.

Despite previous cases in which it has been held that it is irrelevant whether creditors are likely to receive a dividend when considering an unfair preference claim, the Magistrate in this case noted that it was unlikely that creditors of the second plaintiff (the insolvent company) would receive a dividend as a result of the judgment, and that the funds recovered would be absorbed in meeting the liquidator’s fees and legal costs only.  His Honour said “Creditors, to use an Australian expression, were not going to get a look in”. 

The Magistrate accordingly used his discretionary power to decline making an order that the defendant pay the plaintiffs’ costs on an indemnity basis from the date of the Calderbank letter.  The Magistrate then went one step further and departed from the general rule that costs should follow the event, by making an order that each party pay its own costs. 

The appeal

The plaintiffs filed a summons in the Supreme Court seeking leave to appeal the costs order made by the Local Court Magistrate.  The plaintiffs made the same submissions regarding costs in the Supreme Court as had been made to the Magistrate and sought to have the Magistrate’s costs order set aside.  The Supreme Court  found that the plaintiffs had not discharged their onus of showing that the Magistrate’s costs order was based on an error of principle or attended with sufficient doubt to warrant reconsideration on appeal. 

The Associate Justice in the Supreme Court said:

“Costs are discretionary.  Costs usually follow the event.  This is an appropriate order in the circumstances.  The plaintiffs are to pay the defendant’s costs of this appeal as agreed or assessed”.

Therefore not only did the plaintiffs fail to obtain a costs order in the Local Court, the Supreme Court applied the general rule that costs follow the event and made an order that the plaintiffs pay the defendant’s costs of the appeal proceedings.  The end result was that after making an offer of settlement, the plaintiffs won the case and were awarded a judgment for the full amount of their claim plus interest but ended up with a costs order against them. 

No doubt the judgment amount of $23,272.11 including interest was largely eroded by the adverse costs order.

Comment

This is a reminder that costs are always discretionary and may not follow the general rule even where an offer has been made by a plaintiff to accept an amount less than the judgment sum ultimately awarded. 

In particular, liquidators should be aware that they may not be awarded costs when successful in unfair preference actions in circumstances where creditors are unlikely to receive a dividend from the insolvent company after the judgment sum is received.