Who pays litigation costs?

Costs in Litigation – Who Pays?

One of the first questions people ask when considering court proceedings is simple: who pays the legal costs?

In New South Wales, the starting point is the general rule that “costs follow the event”, in other words, the losing party usually pays the successful party’s legal costs. This principle is reflected in section 98 of the Civil Procedure Act 2005 (NSW), which gives courts broad discretion to decide by whom, to whom and to what extent costs are to be paid.

That discretion is important. While the general rule provides a guide, costs outcomes are not automatic. Courts look closely at the conduct of the parties and the circumstances of the case when deciding what is fair.

There are three common types of costs orders you are likely to encounter.

Ordinary costs orders

An ordinary (or “party/party”) costs order is the most common outcome. It requires the losing party to pay a portion of the successful party’s legal costs as assessed on the ordinary basis. In practical terms, this usually means the winner recovers a significant part, but not all, of their legal expenses. This can be around 60-70% of the legal costs.

Courts typically make this order where the case has been conducted in a reasonable and straightforward way. The idea is to compensate the successful party without imposing an undue penalty on the loser. However, because only “reasonable” costs are recoverable, there is often a gap between what was actually spent and what is ultimately paid.

For someone involved in litigation, this means even a successful outcome may still involve out-of-pocket costs.

Indemnity costs orders

Indemnity costs orders are more serious. They require the losing party to pay costs on a more generous basis, covering most of the successful party’s legal expenses.

Courts do not award indemnity costs lightly. They are usually reserved for situations where the losing party has acted unreasonably, for example, by pursuing a hopeless case, ignoring a reasonable settlement offer or engaging in misconduct during the proceedings.

The practical implication is significant: the financial consequences can be much higher than under an ordinary costs order, making litigation riskier if a party takes an unreasonable position.

Gross sum costs orders

A gross sum costs order fixes the amount of costs payable as a single lump sum, rather than requiring a detailed assessment process. This power allows the court to bring finality to the issue of costs quickly and efficiently.

Courts may choose this approach where the matter has already been litigated extensively or where a further assessment would be time-consuming and disproportionate. It provides certainty and avoids additional legal expense.

For the paying party, this means there is no opportunity to argue over individual items in a bill of costs and the amount is set and payable.

Why it matters

Understanding how costs work is critical when deciding whether to start or defend proceedings. While the general rule offers some predictability, the court’s discretion means outcomes can vary widely. Conduct, strategy and timing all play a role.

Approaching litigation with a clear understanding of costs risk can help you make informed decisions, manage expectations and, where possible, resolve disputes efficiently before those risks escalate.

The contents of this publication are for reference purposes only. This publication does not constitute legal and / or medical advice and should not be relied upon as legal and / or medical advice. Specific legal and / or medical advice should always be sought separately before taking any action based on this publication.