A usual principle of civil litigation is that costs “follow the event” – i.e., that the winner is entitled to have part of his or her legal costs paid by the loser. This is the situation in most Australian courts that hear civil proceedings, and also in comparable courts in other ‘common law’ countries.

However, there are exceptions to this situation. In a recent decision of the NSW Court of Appeal, involving a claim for less than $40,000 (before taking interest into account) – brought on appeal from a decision of the NSW District Court – the NSW Court of Appeal made a number of findings that may have significant implications for some claimants who choose to file their proceedings in the NSW District Court at first instance. The NSW Court of Appeal noted that while the claimant in this particular case was successful in getting a costs order against the defendant, the more usual outcome of bringing a civil claim for less than $40,000 in the NSW District Court is that costs will not be awarded due to the operation of UCPR r.42.35.

‘UCPR’ stands for the ‘Uniform Civil Procedure Rules’ which apply to civil proceedings in the NSW District Court and (with minor variations) in other courts conducting civil litigation in Australia. Rule 42.35 exists so that prospective litigants are encouraged to file ‘small’ claims in the Local Court, not the District Court, because it is generally more cost-effective to run a non-complex case in the Local Court. If the claim does not quite reach the $40,000 threshold, it may still be eligible for a costs award in the NSW District Court in some circumstances. For example, UCPR r.42.35 will not apply if interest on the claim takes the total above $40,000, or if the plaintiff can show that commencing or continuing in the NSW District Court “was warranted.” In practice, “was warranted” is a high threshold to meet, and complexity alone is not usually sufficient. Another aspect addressed by the NSW Court of Appeal was the making of an offer of compromise under UCPR r.20.26, and also separately relying on the principles in Calderbank.

‘Calderbank’ refers to a famous 1975 English case, where it was decided that if a party in litigation makes an offer to another party, which is not accepted, and if the first party then gets a better outcome at hearing than the offer made, the offeree who rejected the offer may have to bear a greater share of the costs of the proceeding. The underlying principle is that rejecting a reasonable offer will almost inevitably lead to more costs being incurred by both parties than if the offer was accepted. UCPR r.20.26 operates in similar terms. Therefore, the exchange of offers by parties is an important mechanism to achieve settlement and reduce the parties’ overall costs. Where the offeror – whose offer satisfies the relevant requirements – subsequently gets a better outcome at hearing than the offer amount, costs may be awarded on an indemnity basis against the other party so long as the limitation in UCPR r.42.35 does not apply to the offeror.

‘Indemnity basis’ reflects the true costs that the party incurred, whereas normally costs awards are only for a part of the actual costs.

The lessons from this NSW Court of Appeal case are firstly that choice of forum (NSW Local Court or NSW District Court) is an important decision that may have costs implications, secondly that a judgment amount includes any interest awarded, and thirdly that consideration should always be given to making an offer of compromise as that too has potential costs implications. Offers of compromise are often dual offers, proposing settlement on similar terms but relying on both UCPR r.20.26 and Calderbank. Care is required to ensure that the proposed settlement meets the requirements for each basis.