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

However, there are exceptions to this situation. In a recent NSW Court of Appeal decision, involving a claim for less than $40,000 (before taking into account interest), made on appeal from a NSW District Court decision, 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 plaintiff in this particular case was successful in obtaining an order for costs against the defendant, the more common result of bringing a civil suit 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 District Court of NSW and (with minor variations) in other courts conducting civil litigation in Australia. Rule 42.35 exists to encourage potential litigants to bring “small” claims in local court, not district court, because it is generally more cost effective to pursue a non-complex case in local court. If the claim does not meet the $40,000 threshold, it 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 interest on the claim 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 NSW Court of Appeal was the making of an offer in compromise under UCPR r.20.26, and also relying separately on the Calderbank principles.

‘Calderbank’ refers to a famous English case from 1975, where it was decided that if one party to a dispute makes an offer to another party, which is not accepted, and if the first party obtains a better result at the hearing than the offer done, the addressee who rejected the offer may have to bear a larger part of the costs of the procedure. 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 in similar terms. Therefore, the exchange of offers between the parties is an important mechanism to reach agreements and reduce the overall costs of the parties. When the offeror, whose offer complies with the relevant requirements, subsequently obtains a result in the hearing that is better than the amount of the offer, the costs may be awarded by way of compensation against the other party, provided that the limitation in UCPR r.42.35 does not applies to the offeror

The ‘compensation basis’ reflects the actual costs incurred by the party, whereas cost awards are normally 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 to making an offer in compromise, as that also has potential cost implications. Compromise offers are often dual offers, proposing deals on similar terms but based on both UCPR r.20.26 and Calderbank. Care is required to ensure that the proposed agreement meets the requirements for each base.