A common principle of civil litigation is that costs “follow the event,” meaning that the winner is entitled to have the loser pay part of his legal costs. This is the situation in most Australian courts dealing with civil proceedings, and also in comparable courts in other ‘common law’ countries.

However, there are exceptions to this situation. In a recent decision by the NSW Court of Appeal, involving a claim for less than $40,000 (before interest is taken 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 bring 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 obtaining an order for costs against the defendant, the more usual result of bringing a civil claim for less than $40,000 in the NSW District Court is costs will not be awarded. for the operation of the UCPR r.42.35.

‘UCPR’ means the ‘Uniform Rules of Civil Procedure’ 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 to encourage potential litigants to file “small” claims in local court, not district court, because it is generally more cost-effective to take a non-complex case in local court. If the claim does not reach the $40,000 threshold, you may still be eligible for an award of costs in the NSW District Court in some circumstances. For example, UCPR r.42.35 will not apply if the claim interest exceeds $40,000 in total, or if the claimant can show that it was “justifiable” to start or continue in the NSW District Court. In practice, “was justified” is a high threshold to meet, and complexity alone is often not enough. Another issue addressed by the New South Wales Court of Appeal was the making of an offer in compromise under UCPR r.20.26, and also separately relying on the Calderbank principles.

‘Calderbank’ refers to a famous English case from 1975, where it was decided that if one party in litigation makes an offer to another party, it is not accepted, and if the first party obtains a better result at the hearing than the offer made, the recipient who refused the offer may have to bear a greater part of the costs of the proceedings. 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 were accepted. UCPR r.20.26 operates on similar terms. Therefore, the exchange of offers between the parties is an important mechanism for reaching agreements and reducing the overall costs of the parties. When the offeror, whose offer meets the pertinent requirements, subsequently obtains a result at the hearing that is better than the amount of the offer, the costs may be awarded as compensation against the other party, provided that the limitation in UCPR r.42.35 does not apply to the bidder

The ‘indemnity basis’ reflects the actual costs incurred by the party, whereas cost awards are typically only a portion of the actual costs.

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