Costing: Costs cap goes local
published in adapted format in Law Society Journal, October 2007, Volume 45, page 30)
This article analyses when and in what circumstances the recovery of costs is restricted in claims brought in the Local Court of NSW.
Costs cap goes local
By Suzanne Ward[note]Suzanne Ward is a Director of Pattison Hardman – The Legal Costing Company.[/note]
The Local Court of NSW issued Practice Note 2 of 2007 with effect from 1 March 2007 introducing a costs cap in the General Division of the Local Court. The purpose of the practice note is to limit costs recoverable in Local Court proceedings in accordance with Part 6 of the Civil Procedure Act 2005. The overriding stated purposes of Part 6 includes facilitating ‘the just, quick and cheap resolution of real issues’ in civil proceedings,[note]Civil Procedure Act 2005, Section 56.[/note] ensuring ‘proportionality of costs’,[note]Civil Procedure Act 2005, Section 60.[/note] and ensuring ‘just, efficient and timely determination of proceedings’.[note]Civil Procedure Act 2005, Section 57.[/note] Practice Note 2 of 2007 is entirely consistent with these purposes.
From a transitional viewpoint, ‘unless the court in a particular case determines otherwise’ the Practice Note applies to proceedings ‘no matter when commenced where the first defence is filed or (in the case of a matter commenced in the Small Claims Division) where the matter is transferred from the Small Claims to the General Division’, after the commencement of the Practice Note.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 4.2.[/note] The Practice Note limits the amount of costs to be awarded in proceedings in the General Division where the amount claimed does not exceed $20,000 and in all matters transferred from the Small Claims Division to the General Division.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 4.1.[/note] Significantly, the Practice Note also provides that unless the Local Court determines otherwise in a particular case its discretion regarding costs incurred after the first defence is filed ‘will be exercised as if a maximum costs order under Rule 42.4 of the Uniform Civil Procedure Rule 2005 had been made in the proceedings at the time of filing the first defence’ in the terms set out at Clause 4.4 of the Practice Note.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 4.3.[/note]
Uniform Civil Procedure Rule 42.4 (4) allows the court ‘in the interest of justice; or where there are ‘special reasons’ to specify or vary maximum recoverable costs that may be recovered by one party from another. Significantly, this order may be of the court’s own motion or by an application of a party to the proceedings. Rule 42.4 (2) also sets out examples of a range of attendance types that may not be included in a maximum costs order. For example, at rule 42.4(2)(a), where a party has failed to comply with an order. Practice note 2 of 2007 must be read in close consideration of this Rule.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 1.[/note]
Practice Note 2 of 2007 draws on these Rules to expressly and unequivocally ‘indicate a limitation on the maximum amount of costs’ that will now generally be awarded in the proceedings to which the Practice Note applies.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 3.1[/note] The Practice Note also expressly states that Practice Note 1 of 2000 – which had long been utilised as a guide as to fair and reasonable hourly rates recoverable in the Local Court – is now superseded to the extent of any inconsistency.
The significance of the Costs Cap set out in the Practice Note (which applies after the first defence is filed)[note]Local Court of NSW, Practice Note 2 of 2007, Clause 3.2. Clause 4.3 states that costs prior to filing of the first defence may be ordered in addition to a maximum costs order.[/note] for Local Court solicitors and solicitor advocates is two-fold. First, the Practice Note states that the maximum amount of costs which may be recovered by a successful party for matters transferred from the Small Claims Division shall be fixed at $2,500.00.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 5.1[/note] This means practitioners must carefully investigate and assess the quantum of their client’s claim prior to issuing proceedings in the Small Claims Division (and then transferring later) as a transfer will not remove the claim from this restrictive costs cap. Filing a claim incorrectly in the Small Claims Division will therefore effectively penalise your client by increasing the gap in the costs recoverable from the unsuccessful party and its solicitor/own client costs.
Second, briefing counsel will not solve the problem as counsel’s fees are expressly included in the costs cap.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 3.3. It should be noted, however, that general disbursements are ‘not included’ in the costs cap.[/note]
For matters commenced in the General Division where the amount claimed does not exceed $20,000.00 the cap is less severe. The maximum amount of costs a Magistrate is able to order for these claims is:
‘a) where the plaintiff succeeds – 25% of the amount awarded by the court;
b) where the defendant succeeds – 25% of the amount claimed by the plaintiff.'[note]Local Court of NSW, Practice Note 2 of 2007, Clause 4.4.[/note]
In accordance with this Clause of the Practice Note, where the amount claimed by and amount awarded to the plaintiff is in both cases $20,000.00, the cap in both cases is $5,000.00. However, if the plaintiff claims $20,000.00 but is awarded only half of its claim (i.e. $10,000.00), the cap on the plaintiff’s costs is also reduced by half (i.e. to $2,500.00) as the plaintiff’s cap is linked to the amount of the damages awarded. In accordance with these provisions an unsuccessful plaintiff will effectively be “penalised” for incorrectly assessing or bringing an inflated claim for damages (as the defendant’s costs cap, by contrast, is linked to the quantum of the plaintiff’s claim). If the plaintiff is unsuccessful, for example, but originally claimed $20,000.00, the cap on the defendant’s costs remains at $5,000.00.
This Practice Note is likely to have significant consequences for the conduct of Local Court proceedings as any variation to the maximum costs order is not possible unless, subject to time limitations, an application is made by notice of motion and affidavit setting out the importance of the subject matter, complexity of proceedings, an estimate of recoverable party/party legal costs and specification of an amount sought as an alternative maximum costs order.[note]Local Court of NSW, Practice Note 2 of 2007, Clause 6. It is expressly stated in the Practice Note that a Bill of Costs must not be annexed to the Affidavit. Further, time limits for applying for variations of maximum costs orders must also be noted and complied with.[/note] The inclusion of counsel’s fees (akin to the cap in Civil Liability Claims) will also likely result in a reduction in the extent of use of counsel in Local Court proceedings and a corresponding increase, by necessity, in the number of solicitor advocates in the Local Court. However, the effect of maximum costs orders and how they will be utilised and applied remains to be seen.
Further, and perhaps most significantly, the effect of a maximum costs order in Local Court proceedings must also be considered in the context of the Legal Profession Act 2004 when providing estimates of solicitor/own costs and recoverable party/party costs in accordance with s.309(f) and, when considering settlement offers, s.313. The threat of a possible maximum costs order is also, clearly, an additional tool and consideration to both plaintiff and defendant litigants when negotiating settlements.
POSSIBLE BREAK-OUT QUOTES
Filing a claim incorrectly in the Small Claims Division will therefore effectively penalise your client by increasing the gap in the costs recoverable from the unsuccessful party and its solicitor/own client costs.
The threat of a possible maximum costs order is also, clearly, an additional tool and consideration to both plaintiff and defendant litigants when negotiating settlements.