Costs in Local Court civil claims: who pays and how much.

Why costs decide whether a case is worth running.

In civil litigation there are two sets of costs: your own legal costs, and the risk of paying the other side's if you lose. The rules on the second are what make costs so important. A claim worth ten thousand dollars is not worth running if losing could cost you thirty thousand in the other side's legal fees. Understanding the costs rules before you start is what stops a sensible dispute becoming an expensive one.

This is general information, not advice on your matter. Costs outcomes turn on the division, the result, and the offers made along the way, and they can be assessed in detail after the case. For any claim where costs are a real risk, getting advice on your exposure before you file or defend is money well spent.

How do costs work in the Small Claims Division?

In the Small Claims Division, up to twenty thousand dollars, professional legal costs are restricted. If you win, the court can order the other side to repay your filing fee, your service costs, and interest, but it will not usually order them to pay your solicitor's fees. If you lose, you are generally not exposed to the other side's legal costs either.

That restriction is deliberate. It keeps small claims cheap and lets people run them without fear of a large costs order. It also means that, for a small claim, paying a lawyer to run the hearing often does not make economic sense, because you cannot recover the lawyer's fees even if you win. Our guide on the Small Claims Division explains the stream.

How do costs work in the General Division?

In the General Division, from twenty thousand to one hundred thousand dollars, costs generally follow the event. That means the losing party usually pays a large part of the winning party's legal costs, in addition to bearing their own. For a claim of this size, that exposure can run to tens of thousands of dollars, and it is often the biggest financial risk in the case.

Costs that follow the event are assessed, not paid in full. The winner recovers costs on what is called the ordinary basis, which is a reasonable proportion of their actual legal costs, not every dollar. So even a winning party who recovers costs is usually out of pocket to some degree. The practical effect is that both sides carry real costs risk in the General Division, which is a strong push towards settlement.

How do offers of compromise change the costs risk?

Offers are the main tool for shifting costs risk. A formal offer of compromise, made under the court rules, or a Calderbank offer, made in a without prejudice letter, puts the other side on notice. If they reject the offer and then do worse at the hearing, they can be ordered to pay costs on a higher, indemnity basis from the date of the offer. That can add a large penalty to a party who unreasonably refused a fair offer.

This is why offers should be made early and in writing, and why rejecting one carries risk. A defendant who turns down a reasonable offer to settle for eighteen thousand dollars and then loses a judgment for twenty thousand may end up paying indemnity costs on top. Offers are the lever that a well-advised party uses to control the costs exposure of a case, and ignoring them is dangerous.

What is the difference between ordinary and indemnity costs?

Ordinary costs, the default when costs follow the event, are a reasonable proportion of a party's actual legal costs, assessed for reasonableness. Indemnity costs are a fuller recovery, closer to the actual bill, and they are awarded as a penalty, usually where a party has behaved unreasonably or has beaten a rejected offer. The gap between the two can be large.

The distinction matters because it is the mechanism that offers use. A party who rejects a reasonable offer and does worse moves from paying ordinary costs to paying indemnity costs from the date of the offer. That shift is what makes offers powerful and what makes ignoring a fair offer a costly mistake.

How can you keep your costs down?

The main way to control costs is to settle early where you can, and to make and respond to offers sensibly. Litigation costs rise steeply as a case approaches a hearing, so a matter resolved at mediation or by an early offer is far cheaper than one fought to judgment. Our guide on mediation explains how it can settle a dispute at a fraction of the cost of a hearing.

Choosing the right division also controls costs. A claim run in the Small Claims Division carries little costs risk. The same claim, if it can be kept under the small claims limit, avoids the costs exposure of the General Division. Where the claim is genuinely larger, the costs risk is part of the price of pursuing it, and it should be weighed before you commit to a fought case.

Primary sources: costs in civil proceedings are governed by the Civil Procedure Act 2005 (NSW) and the costs and offer-of-compromise provisions of the Uniform Civil Procedure Rules 2005 (NSW), with the small claims costs restriction applying in the Small Claims Division. Costs assessment is governed by the Legal Profession Uniform Law Application Act 2014 (NSW). NSW costs decisions are searchable on JADE.

Common questions

Who pays legal costs in a NSW Local Court civil claim?

It depends on the division. In the Small Claims Division, up to twenty thousand dollars, professional legal costs are restricted, so a winner recovers filing and service costs and interest but not solicitor's fees, and a loser is generally not exposed to the other side's legal costs. In the General Division, costs generally follow the event, so the loser usually pays a large part of the winner's legal costs.

Can you recover legal costs in small claims?

Usually not. Professional legal costs are restricted in the Small Claims Division. A winning party can recover the filing fee, service costs and interest, but not their solicitor's fees in the ordinary case. This keeps small claims cheap and means paying a lawyer to run the hearing often does not make economic sense.

What is an offer of compromise?

It is a formal settlement offer made under the court rules. If the other side rejects it and then does worse at the hearing, they can be ordered to pay costs on a higher, indemnity basis from the date of the offer. A Calderbank offer, made in a without prejudice letter, works in a similar way. Offers are the main tool for shifting costs risk onto the other side.

What is the difference between ordinary and indemnity costs?

Ordinary costs are a reasonable proportion of a party's actual legal costs and are the default when costs follow the event. Indemnity costs are a fuller recovery, closer to the actual bill, awarded as a penalty, usually where a party behaved unreasonably or beat a rejected offer. The gap between the two can be large.

How can you keep litigation costs down?

Settle early where you can, make and respond to offers sensibly, and consider mediation, which can resolve a dispute at a fraction of the cost of a hearing. Choosing the right division also matters, because a claim run in the Small Claims Division carries little costs risk compared with the General Division.

To speak to a litigation lawyer, call Aaron Kernaghan on 0421 717 019.

This article is written by Aaron Kernaghan, Special Counsel at Good Legal Lawyers, as at 30 August 2026. It is general information and reflects the personal opinion of the author only. It is not legal advice, it is not a substitute for advice on your own matter, and it does not purport to be accurate or complete. The law changes and procedure varies from case to case. For advice on a specific matter, contact Aaron Kernaghan on 0421 717 019 or contact the firm.

More commentary by Aaron Kernaghan.

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