Costs in defamation proceedings: who pays and why offers matter

In defamation litigation the costs frequently matter more than the damages. A contested trial in a superior court can generate legal costs on each side that approach or exceed any realistic award, and the rules that determine who bears those costs therefore influence strategy from the concerns notice stage onward. The uniform legislation contains a costs provision specific to defamation, s 40, which sits alongside the general rules of each court on costs, offers to settle and security. This article explains how those rules work together and why offers, made early and framed carefully, are the most effective tool either side has to manage the risk.

Costs follow the event

The general rule in Australian courts is that costs are in the discretion of the court but follow the event unless the court orders otherwise.¹ A plaintiff who wins ordinarily recovers costs from the defendant; a plaintiff who loses ordinarily pays the defendant’s costs. Where success is divided, for example where a plaintiff succeeds on some imputations and fails on others, or where a defendant succeeds on liability but a plaintiff defeats a particular defence, the court may apportion costs or make issue based orders.

Two bases of assessment apply. Costs on the standard basis (called the ordinary basis in New South Wales and party and party costs in older usage) allow all costs necessary or proper for the attainment of justice or for enforcing or defending the party’s rights.² In practice standard costs recover a substantial proportion, but not all, of what a party actually spent, so even a successful party ends up out of pocket. Costs on the indemnity basis allow all costs reasonably incurred and of a reasonable amount, having regard to the court’s scale, any costs agreement and ordinary professional charges.³ Indemnity costs come much closer to full reimbursement. An award of indemnity costs is not punitive; it compensates a party for costs it should not have been put to.⁴

Section 40: the defamation specific rule

Section 40(1) provides that in awarding costs the court may have regard to the way in which the parties conducted their cases, including any misuse of a superior financial position to hinder the early resolution of the proceedings, and to any other matters it considers relevant.⁵ The reference to financial position addresses a recurring feature of defamation litigation, in which a well resourced media defendant faces an individual plaintiff, or a wealthy plaintiff faces an individual publisher.

Section 40(2) is more prescriptive. Unless the interests of justice require otherwise, the court must order costs on an indemnity basis in two situations. Where the plaintiff succeeds, it must do so if satisfied that the defendant unreasonably failed to make a settlement offer or to agree to a settlement offer proposed by the plaintiff. Where the defendant succeeds, it must do so if satisfied that the plaintiff unreasonably failed to accept a settlement offer made by the defendant.⁵ “Settlement offer” is defined to mean any offer to settle made before the proceedings are determined, and expressly includes an offer to make amends that was a reasonable offer at the time it was made.⁵

The provision obliges both sides to negotiate reasonably. In Davis v Nationwide News Pty Ltd, the defendant newspaper made only a “walk away” offer, on the footing that it expected to defend the claim. The plaintiff succeeded on three of her pleaded imputations and obtained judgment for $150,736 including interest. McClellan CJ at CL held that the defendant had unreasonably failed to make a settlement offer, and ordered indemnity costs for the whole proceeding. His Honour reasoned that it should have been apparent to the defendant at the time of publication that the plaintiff had been defamed and would recover a sum for her damage, so that a reasonable offer would have included at least an apology and some compensation.⁶ The judgment also makes the point that s 40 contemplates indemnity costs even where the party who made the offer does not do better at trial than its own offer, because the question is the reasonableness of conduct rather than a mechanical comparison.⁷

For defendants the lesson is that confidence in a defence does not excuse a refusal to engage. For plaintiffs the lesson is that a defendant’s reasonable offer, if refused, carries a double risk: the s 18 defence if the offer was an offer to make amends, and indemnity costs under s 40(2)(b) if the defendant then succeeds.

Formal offers and Calderbank letters

Section 40 operates alongside the general machinery each court provides for settlement offers.

Formal offers under court rules carry prescribed consequences. In Queensland, a party may serve an offer to settle under Chapter 9 Part 5 of the Uniform Civil Procedure Rules 1999; the offer must be in writing and state that it is made under that Part.⁸ If a plaintiff’s offer is not accepted and the plaintiff obtains a judgment no less favourable than the offer, the court must, unless the defendant shows another order is appropriate, order the defendant to pay the plaintiff’s costs on the standard basis up to the day of service of the offer and on the indemnity basis after it.⁹ If the plaintiff does not accept the defendant’s offer and later obtains a judgment less favourable to the plaintiff than that offer, the plaintiff recovers standard costs up to the day of service but must pay the defendant’s costs on the indemnity basis from then on.¹⁰ The New South Wales rules and the Federal Court Rules contain comparable regimes with their own conditions and timing.²³

A Calderbank letter, named for the English Court of Appeal decision in which Cairns LJ suggested the device, is an offer made in correspondence expressed to be “without prejudice save as to costs”.²⁴ It carries no automatic consequence, but if it is refused and the offeree does no better at trial, the court may award indemnity costs from the date of the offer if the refusal was unreasonable. The factors are well settled: the stage of the proceeding when the offer was received, the time allowed to consider it, the extent of the compromise offered, the offeree’s prospects assessed at the date of the offer, the clarity of its terms, and whether it foreshadowed an application for indemnity costs if rejected.¹¹ Lehrmann v Network Ten Pty Ltd (Costs) illustrates the relationship between the two bases. The indemnity costs order in that case did not rest on the Calderbank letter. It rested on the applicant’s conduct in running a case he knew to be false, which Lee J treated as a serious breach of his obligations under the case management provisions of the Federal Court of Australia Act 1976 (Cth).¹² His Honour added that, had that basis not been available, the applicant’s rejection of the respondents’ early Calderbank offer, made when he knew he was prosecuting the proceeding on a falsehood, would have been unreasonable and would have justified indemnity costs from the date of the offer.²⁵

Whether s 40 applies in the Federal Court has been doubted. This is because s 40 is a state provision, whereas the Federal Court’s costs power derives from s 43 of the Federal Court of Australia Act 1976 (Cth). In Lehrmann (Costs) Lee J repeated his doubt that s 40(1)(a) is picked up in federal jurisdiction but found it unnecessary to decide, because the same principles inform the exercise of the federal discretion.¹³ Parties litigating defamation in the Federal Court should therefore expect the substance of s 40 to be applied even if its source is different.

Offers to make amends and costs

The offer to make amends has costs consequences at three points. First, an offer must include an offer to pay the expenses reasonably incurred by the aggrieved person before the offer was made and in considering it, which in practice means a contribution to the complainant’s legal costs to that date.¹⁴ Second, if the offer is accepted, the court may order the publisher to pay the expenses reasonably incurred by the aggrieved person as a result of accepting it, and may order that any legal costs forming part of those expenses be assessed on an indemnity basis.¹⁵ Third, if the offer is refused, it is a settlement offer for the purposes of s 40(2), provided it was reasonable when made, and it may also found the s 18 defence.⁵

The combination explains why a well judged offer to make amends is the single most powerful step a publisher can take: it limits exposure to costs, creates a potential complete defence, and shifts the costs risk onto a complainant who refuses it. It also explains why complainants should take advice before refusing one.

Costs of the pre action stage

Costs incurred before proceedings are commenced, such as drafting a concerns notice or responding to one, are not recoverable as of right. If the dispute settles, they are recovered only if the settlement provides for them, which is why a costs contribution is a standard term. If proceedings follow, costs orders are made in respect of the costs “of and incidental to” the proceeding, and the extent to which pre action work falls within that description depends on the court’s assessment of whether it was reasonably undertaken in contemplation of the litigation. The statutory expenses component of an offer to make amends is the one place where the Act itself provides for pre action costs to be met.¹⁴

Security for costs

A defendant who doubts that a plaintiff could meet an adverse costs order may apply for security for costs. In Queensland the court may order a plaintiff to give security only if a threshold condition is met, including that the plaintiff is a corporation unlikely to be able to pay, is suing for another’s benefit, has misstated or changed address, or is ordinarily resident outside Australia.¹⁶ Impecuniosity alone does not ordinarily expose an individual plaintiff to an order, although the rule also allows an order where the justice of the case requires it. In deciding whether to order security the court considers matters including the means of those standing behind the proceeding, the merits, whether the plaintiff’s impecuniosity is attributable to the defendant’s conduct, whether an order would stifle the proceeding, and whether the matter is of public importance.¹⁷ Corporate plaintiffs are the usual targets of such applications; in any event, corporations may sue for defamation only if they qualify as excluded corporations under s 9.

Self represented parties

A party who runs a defamation case without a lawyer faces the same costs risk as any other party if unsuccessful, but cannot recover costs for their own time if successful. The High Court held in Cachia v Hanes that costs are a partial indemnity for professional legal costs actually incurred and do not extend to the time or lost earnings of a litigant in person.¹⁸ A self represented plaintiff who wins therefore recovers disbursements and little else, while a self represented plaintiff who loses may be ordered to pay the represented defendant’s full standard or indemnity costs.

Federal Court and state courts

Defamation proceedings may be brought in the Federal Court where federal jurisdiction is attracted, and many high profile cases are. The Federal Court applies its own rules on offers and assessment, and its costs discretion is governed by the Federal Court of Australia Act 1976 (Cth), including the requirement to take account of any failure to comply with the overarching purpose of resolving disputes as quickly, inexpensively and efficiently as possible.¹⁹ Costs in state courts are assessed under the relevant court scale, and the scale applicable in a District Court is lower than in a Supreme Court. The choice of court therefore affects both recoverable costs and procedure, and parties should seek advice on it in each case.

Proportionality

Every Australian court now operates under a statutory instruction to resolve disputes efficiently and at proportionate cost. In Queensland the rules exist to facilitate the just and expeditious resolution of the real issues at a minimum of expense.²⁰ In New South Wales the overriding purpose is the just, quick and cheap resolution of the real issues, and practice and procedure are to be implemented so that cost is proportionate to the importance and complexity of the subject matter.²¹ Defamation cases test those principles because the sums in issue are often modest and the costs are not. Courts have used issue based orders, partial indemnity orders and disallowance of wasted costs to reflect the way cases were run.²² Parties who pursue every imputation, every defence and every interlocutory point should expect that approach to be reflected in the costs order, whichever side they are on.

Getting advice

Costs strategy in defamation begins before any proceeding is filed. The timing and terms of a concerns notice, the decision whether to make or accept an offer to make amends, and the use of formal or Calderbank offers all determine how the costs risk is distributed if the matter reaches judgment. Both complainants and publishers benefit from advice on those decisions at the time they are made rather than after the costs have been incurred.