Who bears costs when a case is settled?

Posted on November 21st, 2016

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Tony Cavanagh is a Director at Mullane & Lindsay in Newcastle and specialises in commercial dispute resolution & litigation, and employment law.

The NSW Court of Appeal recently had to consider whether costs should be awarded, in circumstances where a plaintiff accepted a settlement offer from a defendant which had been made prior to a hearing; but which was not accepted until after the hearing and when the Court’s judgment was reserved. The defendant’s offer was explicitly said to be “exclusive of costs”.  who bears costs settlement

The defendants later made an application that they be awarded the costs of proceeding, and the plaintiff contended that was a breach of the agreement, that entitled the plaintiff to damages. In this context it must be remembered that an agreement to settle litigation is a form of contract, and that usual contractual remedies are available for any breach of it. The Court rejected the plaintiff’s claim that the words “exclusive of costs” meant that it was an implied term of the contract that each party would bear their own costs.  Rather, consistent with decisions made in relation to formal Offers of Compromise, the phrase meant the settlement agreement did not deal with costs at all. The issue had to be dealt with under the general law rather than under the terms of a settlement contract.  

The Court said that the starting point was that where it was no longer necessary for a Court to adjudicate a dispute, each party ordinarily would bear its own costs but if there was a clear reason to depart from that general rule, Courts could do so.  The two reasons considered in the judgment were whether one party had ‘capitulated’ and whether there was unreasonable conduct that merited an award of costs.

Ultimately whilst there was no ‘capitulation’, the Court decided the plaintiff had acted unreasonably because he could have accepted the defendant’s offer before the hearing and, therefore, saved the defendant the cost of it.  The plaintiff was ordered to pay costs, but only from a specified date.

Although the case is in one sense fairly technical, a couple of useful points can be derived from it.  Firstly, many people do not appreciate that a settlement agreement is a contract, and can be enforced as such.  Consequently, care needs to be taken in drafting the terms of the agreement to ensure that all relevant matters are included in it.  In this case it would seem the plaintiff did not appreciate that acceptance of the offer still left cost arguments “at large”.

Secondly, although it is usually the case that where there is a settlement, each party bears their own costs (in the absence of some specific agreement otherwise) there are at least some circumstances in which the Courts can and will award costs – and a party who is compromising its position substantially, or whose prior conduct in the litigation may have been questionable, has a particular interest in ensuring that any settlement agreement specifically addresses costs to avoid the possibility, as occurred here, of a separate costs argument even after the settlement:  Khoury v JCS Technologies Pty Ltd [2016] NSWSC 1575.

Tony Cavanagh Director at Mullane & Lindsay Solicitors NewcastleTony Cavanagh is a Director at Mullane & Lindsay Solicitors and practises extensively in Commercial dispute resolution and litigation, and employment law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle or Sydney office. 

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