Can the costs of settlement negotiations be allowed on taxation?
Long gone are the days when the costs of settlement negotiations were only allowed if they bore fruit. The current position in Victoria is that the costs of settlement negotiations are allowed on taxation if they were reasonably and properly incurred, regardless of whether negotiations were successful (Supreme Court (General Civil Procedure) Rules 2015, r63.78).
Other Australian jurisdictions approach the issue of settlement negotiation costs in a similar manner, even in the absence of express provision in the court rules (see: Higgins v Nicol (No 2) (1972) 21 FLR 34, at 57-58).
But when will settlement negotiation costs have been properly and reasonably incurred?
As a general rule, the costs of settlement negotiations will be allowed, subject to the particular circumstances of the case. The reasons for allowing the costs of settlement negotiations are manifold, including (Charlick Trading Pty Ltd v Australian National Railways Commission [2001] FCA 629 per Mansfield J at [92]):
🤝 There is substantial public and private interest in encouraging litigants to resolve disputes by negotiation or mediation because it saves costs, judicial resources and time.
🤝 Limiting or disallowing the costs of unsuccessful settlement negotiations may discourage litigants from engaging in negotiations.
🤝 Pre-trial mediation (and other ADR) is a common feature of modern litigation and is increasingly being mandated by the courts.
🤝 Unsuccessful negotiations will often refine the issues in dispute, reducing the scope of the proceedings before the court in any event.
Interestingly, the costs allowable as incidental to settlement negotiations may extend to:
🤝 Costs relevant to an issue that is not connected with the litigation itself but raised in negotiations or at mediation. For example, negotiations to discharge one or more of the parties’ past liabilities, or release one of the parties from other claims; Brennand and Naughton v Hartung and Best Practice Education Group Ltd t/as Blue Gum Community School [2014] ACTSC 326, per Refshauge J at [165] (citing Bennett v Seaman [1993] ACTSC 71 with approval).
🤝 The costs of multiple solicitors attendances or preparation for mediation or other ADR; Henley v State of Queensland [2005] QDC 94, per McGill DCJ at [37].
Allowing these costs may seem counterintuitive at first blush, because ordinarily costs incurred prior to proceedings may only be allowed if they are relevant to and useful in the litigation, or attributable to the conduct of the defendant (see Can pre-proceedings costs be allowed on taxation?). However, in determining whether to allow settlement negotiation costs, the court’s concern is not the nexus between issues raised in negotiations and the litigation. This recognises that a party to negotiations might genuinely raise an issue or solution that does not fit neatly within their pleaded cause of action, while preserving the court's discretion to disallow costs arising from making and considering settlement proposals that are disingenuous or frivolous (see again: Brennand and Naughton v Hartung and Best Practice Education Group Ltd t/as Blue Gum Community School [2014] ACTSC 326).
Takeaways
The costs of settlement negotiations will usually be allowed on taxation, unless those costs were not incurred as a part of a genuine attempt to resolve or narrow the issues in dispute.