The Costs of the Costs Rules

The standard defence of the Australian approach to litigation costs — that the unsuccessful party pays the successful party's legal costs, subject to judicial discretion — rests on a set of propositions that are, individually, plausible. It deters unmeritorious litigation. It compensates successful parties for the burden of having to litigate at all. It creates incentives for early resolution. It produces outcomes that are, broadly, consistent with justice.

These propositions deserve more sceptical examination than they typically receive.

What the rules actually do in practice

The costs-follow-the-event rule, as a general principle, creates the following problem: the prospect of an adverse costs order imposes a risk on the party with a legitimate claim that is entirely disproportionate to the merits of their position. A plaintiff with a strong case on the merits but limited financial resources is exposed to a costs liability they cannot absorb if, for any number of reasons unconnected to the merit of their position — an unexpected evidentiary ruling, a witness who does not perform as anticipated, a point of law that the court resolves against them — they are unsuccessful.

That risk is not distributed equally across the litigation population. Well-resourced defendants can absorb an adverse costs order. They can also afford to incur substantial costs in defending matters, knowing that those costs create reciprocal pressure on a resource-constrained plaintiff. The asymmetry between the cost-absorptive capacity of institutional defendants and individual plaintiffs is one of the defining structural features of Australian civil litigation, and it is one that the costs rules systematically exacerbate rather than mitigate.

The costs-as-deterrent narrative

The argument that costs-follow-the-event deters unmeritorious litigation is, at best, a half-truth. It deters meritorious litigation by resource-constrained plaintiffs as effectively as it deters unmeritorious litigation by the same cohort. A plaintiff who cannot afford to lose does not litigate, regardless of the merits of their position.

The deterrence effect operates differently for institutional litigants, who can assess costs exposure as a line item in their risk management rather than as an existential threat. An insurance company, a large employer, a government agency — all of these entities absorb adverse costs orders differently from an individual plaintiff. The costs rules' deterrence effect is highly sensitive to the identity of the party bearing the risk, a sensitivity that their theoretical justification largely ignores.

Settlement incentives

The proposition that costs rules incentivise early settlement is partially correct but hides important complexity. They incentivise settlement by the weaker party — meaning the party with less financial resilience — at a price that reflects the cost risk rather than the underlying merits. Settlements that occur because one party cannot bear the cost of continuing, rather than because both parties have reached a fair assessment of the likely outcome, are not the justice-serving settlements that the costs rules' defenders have in mind.

The Calderbank offer mechanism — under which a party may make a settlement offer and gain costs advantages if the offer exceeds the outcome at trial — is in principle a useful tool for promoting rational settlement behaviour. In practice, it is used strategically by better-resourced parties to create costs pressure, and the calculation of whether an offer was reasonable is not always as clean as the doctrine suggests.

What reform would require

A frank reform conversation would acknowledge that the costs rules, as currently constituted, serve the interests of institutional repeat-player defendants more consistently than they serve the interests of access to justice. This is not, I want to be clear, an argument for a one-way costs rule of the American style — there are real problems with that model too, and the deterrence argument has some genuine purchase. It is an argument for a more differentiated approach.

Courts already have discretion in costs, and that discretion is exercised thoughtfully in individual cases. But judicial discretion exercised case-by-case is not a substitute for a systemic analysis of how the costs rules operate across the litigation population as a whole. That systemic analysis — including empirical work on who litigates, who settles, at what price, and with what correlation to merits outcomes — is what the reform conversation currently lacks.

The Law Council has done useful work on access to justice. State law reform commissions have examined costs rules in specific contexts. What has not happened is a comprehensive, evidence-based review of whether the Australian civil costs regime is achieving its stated objectives. In the meantime, practitioners on the ground — particularly those doing litigation in the personal injury, employment, and tenancy spaces — already know the answer.