Costs Orders Explained: What Australian Small Businesses Need To Know

Running a small business in Australia is exciting, but disputes can quickly affect your cash flow. If you’re dealing with a contract disagreement, a staff issue or a complaint under the Australian Consumer Law, one of the first questions is often: who pays the legal costs?

Understanding how costs orders work can help you make better decisions about when to push ahead, when to settle, and how to manage risk along the way. In this guide, we’ll unpack what a costs order is, when you may have to pay (or recover) legal costs, and practical steps you can take to protect your business.

If you’ve heard terms like “party/party costs” or “indemnity costs” and want plain-English answers, you’re in the right place.

What Is A Costs Order?

A costs order is a decision by a court or tribunal about who must pay the legal costs of a case. It’s usually made at the end of a matter, after a judgment or determination, but sometimes interim costs orders are made along the way.

“Costs” typically include legal fees paid to your lawyers and barristers, court filing and hearing fees, and case-related disbursements (for example, expert reports or process servers). They do not include compensation or damages awarded on the underlying claim.

Importantly, a costs order doesn’t always mean one side pays 100% of the other’s legal bill. The type of order and the way costs are assessed will influence how much is actually recoverable.

How Do Costs Orders Work In Australian Courts?

The general rule in Australian civil litigation is “costs follow the event” - the unsuccessful party pays the successful party’s costs. That said, costs are always discretionary. Courts can (and do) depart from the usual position where it’s fair to do so based on the circumstances.

Common Types Of Costs Orders

• Party/party costs: The most common outcome. The unsuccessful party pays the successful party’s reasonable and necessary costs of running the case. This often equates to a portion of what was actually spent, assessed against a scale or on a “reasonable necessity” basis.
• Indemnity costs: A higher standard, ordered in defined or special circumstances (for example, serious misconduct, hopeless claims or refusal of a clearly reasonable offer). Indemnity costs can approach most or all of the successful party’s reasonable legal spend, but they’re not automatic and still subject to assessment.

How Courts Decide Who Pays

Because costs are discretionary, courts look at the overall justice of the situation. Factors often include:

• Conduct during the case (e.g. unreasonable positions, non-compliance with timetables, or needlessly prolonging the dispute).
• Offers to settle (for example, a genuine “without prejudice” offer or a formal Offer of Compromise that was better than the judgment result).
• Success on particular issues (sometimes costs are apportioned if each side wins some issues).
• Public interest factors and the nature and complexity of the proceedings.

It’s common for settlement dynamics to influence costs. A carefully framed without prejudice offer can improve your costs position even if the case doesn’t resolve then and there.

How Much Do You Actually Recover?

If you obtain party/party costs, you’ll often recover less than your full legal spend - a ballpark range many practitioners see in standard matters is around 60–75%, but the percentage varies widely and depends on the court, scale, complexity and what was necessary for the case. On indemnity, recovery is usually higher, but it’s still subject to an assessment of reasonableness.

If the parties can’t agree, costs go to assessment (sometimes called “taxation”), where a costs assessor or registrar determines what’s payable by line item.

What About “Lower Value” Or Simplified Court Matters?

In some state Magistrates’ or Local Court jurisdictions, smaller claims can be dealt with on simplified procedures and capped or limited costs. The details differ by state and by track, so it’s important to check the specific court rules that apply to your matter. Even where the starting point is a cap or limitation, there can be exceptions (for example, unreasonable conduct by a party).

Courts Vs Tribunals: When Do Different Rules Apply?

Tribunals are designed to be more accessible and less formal than courts, so costs work differently.

As a broad guide, several civil and administrative tribunals across Australia adopt a “no costs” starting position - each party bears their own legal costs - unless the tribunal is satisfied special grounds exist to award costs. For example, in the NSW Civil and Administrative Tribunal (NCAT), the legislation refers to “special circumstances” (not “exceptional circumstances”). Other tribunals have similar tests or tailored powers.

Special grounds can include where a party has acted unreasonably, without merit, or in a way that caused unnecessary disadvantage or delay, or where the matter is unusually complex. Tribunals also consider the interests of justice and any specific statutory criteria.

Employment-related forums follow their own rules, too. For instance, certain Fair Work matters adopt a “no costs unless” framework, with costs orders available where a party acted vexatiously or without reasonable cause. Always check the rules for the forum you’re in before assuming costs will (or won’t) be awarded.

Contract Clauses And Documents That Influence Costs

Your contracts can strongly influence how costs are managed in a dispute, even though a contract can’t remove a court or tribunal’s statutory discretion about costs orders.

Clauses That Matter

• Costs and indemnity clauses: A contract might say a party must pay the other’s enforcement costs or indemnify them for losses, including legal costs on a solicitor–client or indemnity basis. This creates a separate contractual right to recover costs, but it doesn’t bind a court’s discretion on who gets a formal costs order. Courts still decide costs orders; the clause governs what one party can claim from the other under the contract.
• Jurisdiction and venue clauses: These clauses decide where disputes will be heard (which court and which state). That can affect procedure, scales of costs, and how costs are assessed, but it doesn’t guarantee a particular costs outcome.
• Dispute resolution clauses: Well-drafted clauses requiring negotiation or mediation before litigation can reduce spend and create opportunities to resolve issues before costs spiral.
• Debt recovery provisions: Clear payment terms and recovery rights in your Terms of Trade can improve your position if an invoice goes unpaid and you need to enforce it.

If you’re signing a new supplier, customer or services agreement, consider a tailored contract review so you know exactly where you stand on costs, jurisdiction and dispute resolution. For many businesses, a clear Customer Contract and payment terms can prevent a breach of contract from turning into expensive litigation.

Settlement Documents And Execution

When you resolve a dispute, it’s common to document the outcome in a Deed of Release and Settlement. This is where the parties agree on who pays what, including any contribution to legal costs, and release each other from further claims.

Make sure you get the formalities right when signing documents. Depending on your structure, you may sign as a company under section 127, sign as an individual, or execute as a deed if required.

What Costs Are Usually Recoverable - And What’s Not?

If a costs order is made in your favour, you can generally recover reasonable costs that were necessary for the conduct of the case. Typical recoverable items include:

• Professional fees for your solicitor and (if used) barrister for necessary work.
• Court fees (filing, service, hearing or daily fees).
• Disbursements such as expert reports, transcripts, process servers, and reasonable travel where appropriate.

Items that are typically not recoverable include your time as a business owner, general overhead, disruption to your business, and lost income from attending court. GST treatment varies depending on your ability to claim input tax credits.

Remember: a party/party assessment trims costs to what was necessary and reasonable. Even with a win, don’t assume you’ll be reimbursed dollar-for-dollar.

Practical Strategies To Manage Costs Risk

Legal costs don’t need to be a mystery. A few practical steps can significantly reduce your exposure and give you more control.

Before A Dispute Arises

• Use clear contracts: Put well-drafted terms in place with customers and suppliers (scope, deliverables, payment, dispute resolution and costs). This is basic risk management and often prevents disputes from escalating.
• Set firm payment processes: Tight invoicing, reminders and recovery procedures in your contracts and operations can keep debt issues out of court.
• Build an evidence habit: Keep records of emails, variations, delivery notes, and meeting outcomes. Good evidence shortens disputes and lowers costs.

When A Dispute Starts

• Get early advice: Short, early advice can reframe your options and sometimes unlock a quick commercial resolution. It also helps you avoid steps that attract adverse costs risks.
• Consider ADR: Mediation or without prejudice discussions can resolve the problem faster, even if you’re confident about your legal position.
• Make smart offers: Reasonable settlement proposals - whether informal or formal - can protect your costs position if the other side refuses and does worse at the hearing.
• Budget and stage your spend: Ask for a costs estimate, break the matter into phases and reassess after key milestones (for example, after receiving evidence).

Responding To A Costs Order Against You

• Act quickly: Seek advice on the order and deadlines. You may be able to negotiate, agree a figure, or propose instalments.
• Scrutinise the bill: In assessment, challenge items that aren’t necessary or reasonable. You can often reduce the total payable by engaging with the process properly.
• Document any constraints: If cash flow is tight, open a dialogue early about staged payments to avoid enforcement action.
• Close it out properly: If you settle, document the outcome in a clear deed and include costs, releases and confidentiality to prevent further issues.

If negotiations are progressing and you want to document terms, it can be helpful to prepare a short form heads of agreement and then finalise with a formal settlement deed - keeping all communications appropriately marked without prejudice until the deed is signed.

Realistic Scenarios For Small Businesses

Here are a few common situations where costs orders become front and centre for small businesses:

• Unpaid invoices: You sue to recover a debt under your terms. If successful in court, you’ll usually get a costs order, but it may not cover every dollar spent. Strong payment and recovery clauses in your contracts make this far smoother.
• Scope creep dispute: A customer alleges you didn’t deliver the agreed scope; you say they changed it. If you resolve by settlement, the deed can agree that each party bears their own costs, or that one pays a contribution toward the other’s legal fees. Clarity in your scope and variation processes saves significant cost here.
• Supplier breach: You claim damages for late delivery that affected your own client work. If you win, expect party/party costs unless there are reasons to order indemnity (for example, clearly unreasonable defence conduct). If your contract contains a well-drafted indemnity, you may also have a contractual claim for legal costs, separate from any court order.

The key theme: plan for costs before a dispute ever starts. That’s where your contracts and processes do the heavy lifting.

Key Takeaways

• A costs order decides who pays legal costs after a case; in courts, the usual rule is that the unsuccessful party pays, but courts always retain discretion.
• Party/party costs rarely cover 100% of actual spend; indemnity costs are higher but are reserved for defined circumstances and are still assessed for reasonableness.
• Tribunals often start from a “no costs” position, with costs only ordered where statutory tests are met (for example, NCAT’s “special circumstances”).
• Contract clauses can’t remove a court’s discretion on costs orders, but they can create separate rights to recover enforcement costs and shape where and how disputes are run.
• Clear terms, smart settlement strategies and early advice can significantly reduce your exposure and improve your outcomes.
• Document settlements properly - a well-executed Deed of Release and Settlement should address costs, releases and confidentiality so the dispute is finished for good.

If you’d like a consultation about managing legal costs and protecting your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.