Being Right is Not Always Enough - Why taking a commercial approach to litigation from the outset is crucial
If you feel you have been "ripped off" or ill-done by in a commercial matter, beware! This emotive response can sometimes lead to poor judgement when deciding whether or not to litigate in certain situations. Simply being "right" is not always synonymous with being commercial. Time and time again a litigator is required to ensure that his or her client understands the commercial realities of pursuing their principles.
The Harsh Reality
Unfortunately, when litigating commercial matters, even if you are guaranteed a 'win' in the Court, you may end up losing considerable money and time in the process.
The Local Court of New South Wales has a monetary jurisdictional limit of $100,000 or $120,000 by consent. However, there is a further separation between the small claims division (up to $10,000) and the general division ($10,001 to $100,000, or $120,000 by consent). This division has a major effect on the amount of costs that can be awarded to a successful litigant.
For example, as at April 2014, the maximum amount of costs that can be awarded to a successful plaintiff for a liquidated claim in the sum of $9,000 is $697.60.
The reason for the relatively low limit of costs that can be awarded is that the Court wants to encourage litigants in the small claims division to represent themselves, as opposed to appointing lawyers. The small claims division is a less formal division with hearings being conducted by Assessors as opposed to Magistrates.
This is not to say that all matters in the small claims division should not be litigated by a lawyer. However, parties should be aware of all of the circumstances before rushing off in the heat of the moment, retaining a lawyer, litigating, and then being unable to recover the cost of the legal proceeding - which may end up being more than the claim amount.
What About Larger Scale Debts?
This principle is also applicable to larger scale debts which may fall in other court jurisdictions. Generally speaking legal costs are awarded to a successful litigant on the basis of any of the following:
- Party/Party Costs – The most common basis on which costs are awarded. As a rule of thumb the costs recoverable from an unsuccessful litigant will be between 60% and 70% of a successful litigant’s legal costs. This still means that about 30% to 40% of a successful litigant’s legal bill will be paid out of their own pocket.
- Indemnity Costs – These costs are generally awarded in circumstances surrounding rejected offers of settlement or where carriage of a matter has been so lacking that a Court is satisfied a pecuniary costs order is warranted. Generally, recoverable indemnity costs are between 70% and 80% of a successful litigant’s legal costs.
- Solicitor/Client Costs – These costs are often interchangeable with indemnity costs however are generally believed to be higher than indemnity costs.
Adopt a Rational Approach
Commencing litigation should be seen as a potential investment as opposed to a witch hunt. Parties should ask themselves one simple question; is it worth spending $X and Y months in the pursuit of $Z?
In answering this question a general action plan should be drawn up to determine the various steps involved in litigation. Once a larger picture is painted it is easier to calm the frustration of feeling 'ripped off' and make a pragmatic decision as to how to pursue a legal entitlement.
Parties should ensure they have a full and frank discussion with their legal practitioner as to what the potential cost of litigating a matter could be. This may end up being the deciding factor in whether the better commercial approach would be to negotiate or litigate.
If you have an issue with a commercial legal matter and are unsure as to the best way forward, contact our experienced team for commercially practical, and realistic, advice.
Caroline Hutchinson, Principal
Phone: +61 2 9895 9200
Hadi Boustani, Associate
Phone: +61 2 9895 9202