Generally, a civil court has a discretion to order that a party pay the other party’s legal costs for a proceeding. Courts in NSW have the power to award costs pursuant to section 98 of the Civil Procedure Act 2005 (NSW).
A fundamental principle of civil litigation is that “costs follow the event” (i.e. final judgment): see rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW). This means that a successful party to litigation has a “reasonable expectation” of being awarded costs against an unsuccessful party (see Oshlack v Richmond River Council (1998) 193 CLR 72). The purpose of this principle is to compensate the party that has been successful in the litigation.
However, there are certain situations when the presumption of a “reasonable expectation” is capable of being rebutted. In Tomanovic v Global Mortgage Equity Corporation Pty Ltd (No 2)  NSWCA 256 Campbell JA stated some of these instances, which included (non-exhaustive):
- Where the successful party invited the proceedings;
- Where the successful party unnecessarily protracted the proceedings;
- Where the successful party prosecuted the matter solely for the purpose of increasing costs recoverable.
Costs are awarded either on an “an ordinary basis” or an “indemnity basis”. Costs on the ordinary basis is the general rule (see rule 42.2 of the UCPR) whereby a court orders an unsuccessful party to pay a proportion of the legal costs of the successful party (usually 60-70%). Costs on an indemnity basis (see rule 42.5 of the UCPR) refers to the payment of the entire legal costs of a successful party to litigation. A particular situation where indemnity costs may be awarded is when a party has issued what is known as a “Calderbank offer”.
A Calderbank offer is an offer sent from one party to the other and attempts to settle a matter. A Calderbank offer can be either in writing or oral and the terms of the settlement must be expressed to be “without prejudice save as to costs”. The purpose of issuing a Calderbank offer (other than attempting to settle the matter) is that if judgment is made in favour of the party who issues the offer and the terms of the judgment are more favourable than the terms of the offer, then the unsuccessful party may, upon the exercise of the courts discretion, be ordered to pay costs on an indemnity basis from the date the offer was made. Conversely, if a party makes an offer and judgment is entered in the other party’s favour and the judgment is less favourable than the offer, the court may order that the party pay costs on an indemnity basis, from the date that the offer was made.
Alternatively, an “offer of compromise” may be made pursuant to Part 2, Division 3 of the UCPR. These types of offers, are similar to Calderbank offers, however if the situations above occur, the offer of compromise will give rise to an entitlement of a party to receive costs on an indemnity basis, rather than a factor considered by the court when exercising its discretion.