Costs Consequences in Victorian Litigation: Who Pays Legal Costs?

The General Rule: Costs Follow the Event

The starting point in nearly every Victorian civil proceeding is that costs follow the event. In practice, that means the unsuccessful party is ordered to pay a portion of the successful party's legal costs. The rule applies in the Magistrates' Court of Victoria, the County Court of Victoria and the Supreme Court of Victoria, as well as in most tribunals to a limited degree.

The rule is sometimes misunderstood as automatic. It is not. It is a strong default, but each Court retains a discretion to depart from it. The discretion is most often exercised where:

• the successful party only partly succeeded — for example, winning on some claims and losing on others;
• the successful party behaved unreasonably during the proceedings, prolonged the case, or ran unnecessary arguments;
• the unsuccessful party made an early reasonable settlement offer that the successful party rejected; or
• the proceedings concerned the construction of a document, the interpretation of a Will, or another matter that the Court considers should be borne by a fund (such as an estate) rather than personally.

A practical example: a plaintiff sues for $150,000 and recovers $40,000. The plaintiff is technically successful but well below the amount claimed. If the defendant had offered $50,000 early in the case, the Court is likely to deprive the plaintiff of part of their costs, or even order the plaintiff to pay the defendant's costs from the date of the offer.

Party/Party Costs vs Solicitor/Client Costs

One of the most common misconceptions is that a winning party recovers all their legal costs. They do not. There are two distinct concepts at play.

Solicitor/client costs are the costs owing under the costs agreement between a client and their lawyer. They reflect the actual work performed at the agreed hourly rates and fixed fees. Subject to the Legal Profession Uniform Law (Victoria) and any applicable costs disclosures, these costs are payable regardless of who wins or loses.

Party/party costs — in the Supreme Court of Victoria now usually called "standard" costs — are the costs the Court orders one party to pay the other. They are assessed by reference to the court scale and the principles of reasonableness. Even on a generous assessment, party/party costs typically recover only about 60–70% of a party's actual legal spend.

The difference between the two is the costs shortfall: the amount a successful party still has to pay their own lawyer out of their recovery. A litigant who recovers a $100,000 judgment plus an order for standard costs may, after accounting for their own solicitor/client costs, end up with significantly less than $100,000 in hand. This is why early thinking about costs — not just damages — is essential.

Indemnity Costs

Indemnity costs sit above the standard (party/party) basis. They recover the costs actually and reasonably incurred — usually a much higher proportion of the successful party's legal spend, often close to 100%.

Indemnity costs are not the default. They are reserved for cases where the Court considers the conduct of the losing party warrants a more punitive costs outcome. Typical grounds include:

• maintaining a claim or defence that had no reasonable prospects of success;
• making serious allegations (such as fraud or dishonesty) that were not made out;
• wilful disregard of known facts or established law;
• unreasonable rejection of a Calderbank offer or formal offer of compromise; and
• conduct that has unnecessarily prolonged the litigation or increased costs.

For a litigant who is on the receiving end, an indemnity costs order can convert a manageable loss into a financially serious one. For a litigant pursuing unmeritorious claims, the prospect of an indemnity costs order is one of the most effective brakes the Court has.

Calderbank Offers

A Calderbank offer is a written settlement offer made "without prejudice save as to costs". It takes its name from the English case Calderbank v Calderbank [1976] Fam 93, and it is used routinely in Victorian commercial and estate litigation today.

The mechanism works in two stages. First, while the case is on foot, the offer cannot be referred to as evidence of any admission or as part of the substantive dispute. Second, after judgment, the offer can be put before the Court when costs are being argued. If the party who rejected the offer has failed to achieve a better outcome at trial than the offer, the Court may order them to pay indemnity costs from the date of rejection.

For a Calderbank offer to attract the indemnity costs consequence, it generally must:

• be made in writing and clearly identified as a Calderbank offer;
• be a genuine offer of compromise — not a thinly disguised demand for total capitulation;
• provide a reasonable time for consideration; and
• be one that, viewed objectively, the rejecting party should have accepted.

A practical example: a defendant offers $80,000 by way of Calderbank in a $200,000 commercial claim three months before trial. The plaintiff rejects, goes to trial, and recovers $60,000. The plaintiff is "successful" in the technical sense, but the Court may well order them to pay the defendant's costs on an indemnity basis from the date the offer expired.

Offers of Compromise

An offer of compromise is the formal settlement offer recognised by the Court rules. In the Supreme Court of Victoria, it is governed by Order 26 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic). The County Court has equivalent provisions.

Where a formal offer of compromise is made and the rejecting party fails to do better at trial, the costs consequences are largely fixed by the rules. Broadly speaking, if the defendant beats their own offer at trial, the plaintiff usually pays the defendant's costs on an indemnity basis from the day after service of the offer. If the plaintiff beats their own offer, the defendant usually pays the plaintiff's costs on an indemnity basis from the same point.

Formal offers of compromise leave less room for argument than Calderbank offers because the costs consequences are pre-programmed by the rules. They are often used in tandem: a Calderbank offer earlier in the case, and a formal offer of compromise closer to trial.

Consequences of Rejecting Reasonable Offers

The combined effect of Calderbank offers and offers of compromise is that a party who refuses a reasonable settlement offer can face dramatically worse costs outcomes than the substantive judgment might suggest. We routinely see costs orders that exceed the value of the underlying claim.

Three factors govern whether a rejection attracts indemnity costs:

1. Reasonableness of the offer — was the offer a genuine compromise, made in clear terms, with enough information for the recipient to evaluate it?
2. Reasonableness of the rejection — viewed at the time of rejection (not with the benefit of hindsight), was it reasonable to reject the offer?
3. The trial outcome — did the rejecting party do better than the offer? If not, the indemnity costs argument is open.

For this reason, parties should treat every settlement offer as a costs-shaping event, document the basis on which any offer is rejected, and obtain advice promptly when an offer arrives.

Costs in the Magistrates', County and Supreme Courts

Costs risks scale dramatically with the court hearing the dispute. Choosing the right forum at the outset is one of the most important costs decisions a litigant makes.

The Magistrates' Court of Victoria handles civil claims up to $100,000. Costs are tightly controlled by scale, and many disputes are diverted to pre-hearing conferences or arbitration. Solicitor/client costs and party/party costs are both lower than in the higher courts. For most consumer, residential and small-business disputes, the Magistrates' Court is the appropriate forum.

The County Court of Victoria handles larger civil disputes, generally for claims above $100,000 with no upper limit. The procedural rules and costs scales are more generous than the Magistrates' Court, and litigants can expect costs to rise into the tens or low hundreds of thousands of dollars even in relatively contained matters.

The Supreme Court of Victoria deals with the most complex and high-value civil disputes, including most contested probate, family provision (TFM) claims under Part IV of the Administration and Probate Act 1958 (Vic), and significant commercial disputes. Costs orders in the Supreme Court routinely reach six figures, and complex trials can produce party/party costs of $500,000 or more.

Picking the wrong court can produce its own costs consequences. A plaintiff who issues in the Supreme Court when the matter could properly have been brought in the County Court may be deprived of the additional costs they have incurred by using a more expensive forum.

Costs Risks in Estate Litigation and TFM Claims

Estate litigation has its own costs tradition. For many years, costs in contested probate and family provision (testator's family maintenance, or "TFM") cases were commonly ordered out of the estate. That approach has been progressively narrowed by the Supreme Court of Victoria.

Today, the position is more nuanced:

• An unsuccessful TFM claimant whose claim was weak or pursued unreasonably can be ordered to pay the executor's costs personally — not out of the estate.
• An executor who defends a claim unreasonably, or who fails to engage with mediation in good faith, can be denied indemnity from the estate and may be ordered to bear costs personally.
• Costs of construction summonses (where the Court is asked to interpret the Will) are usually paid out of the estate, because the proceedings benefit the administration of the estate.
• In most contested cases, the Court actively encourages mediation, and an unreasonable refusal to mediate can itself attract adverse costs consequences.

We discuss the specific costs framework that applies to contested Will proceedings in our companion guide on costs of contested will proceedings in Victoria, and the role of negotiated alternatives in our guide to mediation in estate litigation. Background on the underlying claims is in our guide to family provision claims in Victoria.

Costs Risks in Commercial Disputes

For business owners, commercial litigation is rarely a question of principle alone. It is a commercial calculation in which costs are central.

The key risks to consider before issuing or defending commercial proceedings include:

• The costs-to-claim ratio — a $250,000 claim that may cost $200,000 to take to trial in the County Court is often commercially uneconomic, even if the merits are strong.
• The recoverability of any judgment — a judgment is worth nothing if the defendant has no assets or has structured their affairs to defeat enforcement.
• Management time and distraction — senior staff time spent on litigation is itself a significant cost that does not appear on any invoice.
• Reputational and relationship impact — particularly for ongoing business relationships, supplier disputes and shareholder disputes.
• The other side's settlement appetite — well-pitched early offers can resolve disputes before significant costs are incurred.

Many commercial disputes can be resolved at the pre-litigation stage with a properly drafted letter of demand or through structured negotiation. Where formal proceedings cannot be avoided, the strategic options available include the Victorian Civil and Administrative Tribunal (in appropriate cases — see our guide to going to VCAT), and the various alternatives to court proceedings that often produce better commercial outcomes.

Examples in Practice

Example 1 — the missed Calderbank. A supplier sues a customer for $180,000 in the County Court for unpaid invoices. The customer disputes the quality of the goods. Six months before trial, the customer offers $120,000 by Calderbank. The supplier rejects and proceeds to trial, recovering a judgment of $100,000. The Court orders the supplier to pay the customer's costs on an indemnity basis from the date the offer expired. The net financial outcome is worse for the supplier than if they had accepted.

Example 2 — the weak TFM claim. An adult child brings a family provision claim against their late parent's estate, where they received a modest gift and have no demonstrated financial need. The claim is unsuccessful at trial. The Court orders the claimant to pay the executor's costs personally, rather than allowing the costs to come out of the estate, because the claim had limited merit and was pursued after a reasonable settlement offer.

Example 3 — the over-pleaded fraud allegation. A plaintiff in a commercial dispute pleads fraud against a former director. The fraud allegation is not made out at trial. The plaintiff succeeds on a narrower contractual claim. The Court orders the plaintiff to pay the costs attributable to the fraud allegation on an indemnity basis, even though the plaintiff was otherwise successful.

Why Early Legal Advice Matters

The single most effective costs-control measure is early legal advice. The earlier a litigant understands their merits, their forum options and their settlement position, the more levers they have to limit costs exposure.

Early advice typically helps a client to:

• assess the realistic prospects of success rather than the emotionally satisfying view;
• choose the appropriate court or tribunal, taking account of costs scale and procedural rules;
• draft and time Calderbank offers and formal offers of compromise to maximise the costs pressure on the other side;
• evaluate incoming offers carefully so that any rejection is defensible if costs are later argued; and
• avoid steps — over-pleading, unnecessary applications, speculative allegations — that create indemnity costs exposure.

Parke Lawyers acts for individuals, business owners, executors and beneficiaries across the full range of Victorian civil disputes. Our litigation and dispute resolution practice works closely with our commercial and business law and estate litigation and TFM claims teams so that costs strategy is built into every matter from the outset.

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