What commercial litigation involves: stages, costs, time and the judgment you still have to collect

Many business owners decide whether to sue on the strength of one question: are we right? It is the wrong question to ask first. Being right is necessary, but it is far from sufficient. Litigation is a long, expensive and demanding process whose outcome is uncertain even for strong claims, whose costs are only partly recoverable even if you win, and whose final product, a judgment, is only worth what you can actually collect.

None of this means litigation should be avoided at all costs. Sometimes it is the only way to recover a significant sum, protect an important right or stop damaging conduct. And the credible willingness to litigate is often what brings the other side to a sensible settlement. But a business that understands what litigation involves before it begins makes better decisions about whether to start, how to run it and when to stop.

This article explains, in general terms, the steps before proceedings start, the main stages of commercial litigation in Australian courts, the costs and time involved, the burden on the business itself, the question of enforcement, and a practical way to evaluate a claim. It is general information, not legal advice. Procedures differ between courts and jurisdictions, and change from time to time, so get advice about the court where your dispute would be heard.

Before proceedings start

Most disputes go through several steps before anyone files a claim.

Letters of demand. A formal letter setting out the claim, the amount sought and a deadline for payment or response is usually the first step. It often prompts payment or negotiation, and it shows the court later that the claimant gave the other side a fair opportunity to resolve the matter.

Pre-action steps. Some courts and statutes require parties to take genuine steps to resolve a dispute before starting proceedings. In the Federal Court, for example, the Civil Dispute Resolution Act 2011 (Cth) generally requires a party starting proceedings to file a statement of the genuine steps it has taken to resolve the dispute, or why it has not taken any. Contracts may also require negotiation, expert determination or mediation before litigation. Skipping a mandatory contractual step can delay or derail proceedings.

Choosing the forum. Where a claim can be brought depends on the amount, the type of claim, the parties’ locations, any jurisdiction clause in the contract and whether federal laws such as the Australian Consumer Law are involved. Smaller claims are usually heard in local or magistrates courts, or in civil and administrative tribunals, often under simplified procedures. Larger claims go to district, county or supreme courts, or to the Federal Court for claims arising under Commonwealth laws. If the contract contains an arbitration clause, the dispute may have to be arbitrated instead of litigated.

Checking the other side. Before investing in a claim, check whether the defendant can pay. Company searches, property searches and the Personal Property Securities Register can reveal whether the business has assets, whether they are already secured to a lender and whether it is in financial difficulty.

The main stages of a commercial case

Procedures vary between courts, but a commercial case typically moves through the following stages.

Many cases settle at some point along this path, often after disclosure, after experts have reported or at mediation, when each side has a clearer view of the evidence. The resolving disagreements without stopping work article explains how mediation and other processes can resolve disputes earlier.

Figure 1The path of a commercial case

1. 1Pleadings
2. 2Case management
3. 3Disclosureoften the heaviest burden
4. 4Evidencewitnesses and experts
5. 5Interlocutory applications
6. 6Mediation
7. 7Trial
8. 8Judgment
9. 9Appeal

Disclosure is where the burden often falls

The obligation to disclose documents is frequently the most demanding part of litigation for a business. Relevant documents can include emails, text messages, drawings, job records, accounting entries and meeting notes, and they must be preserved once litigation is reasonably anticipated. Destroying or failing to preserve relevant documents can have serious consequences. Businesses with organised records find disclosure much less painful and much cheaper.

Experts are often decisive

Commercial disputes about construction, engineering, quantities, valuation or loss usually turn on expert evidence. Experts in Australian courts owe their primary duty to the court, not to the party that engages them, and must comply with court codes of conduct. Courts may order experts to meet and produce joint reports identifying where they agree and disagree. Choosing a credible, independent expert, and briefing them with accurate facts, matters far more than finding one who will say what you want.

What litigation costs

Legal costs in commercial litigation can be substantial, and they accumulate across every stage: lawyers’ fees, barristers’ fees, expert fees, court fees and the cost of preparing documents and evidence.

The general rule in Australian courts is that the unsuccessful party pays a portion of the successful party’s costs. Two points are often misunderstood:

• Recovery is partial. Costs orders are usually assessed on a standard basis that allows reasonable costs of conducting the case, which is commonly less than what the winning party actually paid its lawyers. The winner therefore usually bears some of its own costs even after a costs order.
• Losing is doubly expensive. The losing party pays its own costs and, usually, a portion of the winner’s.

Courts can also make security for costs orders, requiring a claimant, particularly a company that may not be able to pay an adverse costs order, to provide security before the case proceeds. Reasonable settlement offers, made in the form a court recognises, can also shift costs onto a party that unreasonably rejects them.

Litigation funding and after-the-event insurance exist for some claims, typically larger ones, but they come at a price and with conditions.

What litigation costs in time and attention

Commercial cases in superior courts commonly take a year or more to reach trial, sometimes much longer, depending on the court, complexity and the parties’ conduct. Lower courts and tribunals can be faster.

The internal cost is often underestimated. Owners and key staff spend time finding documents, explaining events to lawyers, preparing statements, reviewing the other side’s evidence, attending mediation and giving evidence. The emotional toll can be significant, particularly for owner-managers who feel personally wronged. That time and attention are taken from running the business.

A judgment is not payment

Winning a judgment gives a legal right to be paid. It does not put money in the bank. If the losing party does not pay voluntarily, the successful party must enforce the judgment, which can involve:

• examining the debtor about its assets and finances;
• seizing and selling property under a court process;
• garnishee orders directing money owed to the debtor, such as bank balances or debts from its customers, to be paid to the judgment creditor;
• charging orders over property; or
• insolvency processes, such as a statutory demand leading to winding up of a company, or bankruptcy proceedings against an individual.

Each step costs money and time, and none helps if the debtor has no unencumbered assets. If the defendant becomes insolvent, an unsecured judgment creditor usually ranks alongside other unsecured creditors and may recover little or nothing. This is why checking the defendant’s financial position before starting proceedings is so important.

Figure 2Turning a judgment into payment

• A judgment debt
  • Examinationof the debtor's assets and finances
  • Seizure and saleof property
  • Garnishee ordersbank balances, debts owed to the debtor
  • Charging ordersover property
  • Insolvencywinding up or bankruptcy

Evaluating whether a claim is worth pursuing

A disciplined evaluation turns the decision from a question of principle into a question of value. A simple framework considers:

1. Merits. What must be proved, what evidence exists, and what is the realistic probability of success on each issue?
2. Quantum. If the claim succeeds, what amount is likely to be awarded? Claims are often reduced on assessment.
3. Costs. What will it cost to reach trial, and how much is likely to be recovered if successful, or payable if not?
4. Time. How long will it take, and what is the cost of waiting?
5. Collectability. Can the defendant pay?
6. Internal burden. What management time and disruption will the case cause?
7. Strategic factors. Precedent for future dealings, reputation, relationships and confidentiality.

This framework does not produce a precise answer, but it reveals whether the claim is worth pursuing, worth pursuing only to a certain point, or best settled.

A worked example

This is an illustrative example. The businesses, figures and assumptions are hypothetical and simplified.

A small engineering business claims $120,000 from a former customer for unpaid invoices and work done. Its lawyers estimate it would spend about $90,000 in legal and expert costs to reach the end of a trial, and assume, for planning purposes, that a successful party might recover around 60% of those costs, with the other side’s costs being similar. They assess the probability of success at about 65%.

The business sets out two outcomes, ignoring interest and time for simplicity:

• If it wins: it recovers $120,000 plus costs of about $54,000 (60% of $90,000), less its own $90,000 spent, for a net gain of $84,000.
• If it loses: it bears its own $90,000 and pays about $54,000 of the other side’s costs, for a net loss of $144,000.

Figure 3Two outcomes for a $120,000 claim run to trial

If it wins: net gain$84,000$120,000 + $54,000 recovered − $90,000 spent

If it loses: net loss−$144,000$90,000 own costs + $54,000 of theirs

The probability-weighted value is 0.65 × $84,000 plus 0.35 × (minus $144,000), which is $54,600 minus $50,400, or about $4,200. Before accounting for a year or more of management time, the risk the customer cannot pay and the stress involved, the expected value of running the case to trial is close to zero.

Figure 4The expected value of running the case to trial

Expected value = P(win) × Net gain + P(lose) × Net loss

1. 0.65 × $84,000 + 0.35 × (−$144,000)
2. $54,600 − $50,400
3. About $4,200

This does not mean the claim lacks merit. It means the business should look for a resolution well before trial. A credible letter of demand, a well-reasoned settlement offer and early mediation might achieve a settlement of, say, $70,000 to $80,000 within a few months, with modest costs. If the customer refuses to engage, the business can still commence proceedings and use the early stages to test the evidence, while reviewing the economics at each milestone.

How this applies to a small Australian business

• Start with collectability. Check the other side’s financial position before spending on legal costs.
• Follow the contract’s dispute steps. Mandatory negotiation, expert determination or mediation clauses usually have to be followed first.
• Organise your records now. Good records make claims stronger and disclosure cheaper.
• Preserve documents once a dispute looms. Do not delete emails or files that may be relevant.
• Budget in stages. Ask your lawyer for costs estimates for each stage, and review the economics at each milestone.
• Use the lower-cost forums. For smaller claims, local courts and tribunals often offer simpler and cheaper processes.
• Keep settlement in view. The best time to settle is usually after you understand the evidence and before the most expensive stages begin.

Common mistakes

• Deciding on principle alone. Being right does not guarantee recovery, and principle has a price.
• Underestimating costs and time. Commercial litigation commonly takes a year or more and costs more than expected.
• Assuming costs will be fully recovered. Recovery is usually partial.
• Ignoring enforcement. A judgment against a party with no assets is of little value.
• Choosing a partisan expert. Experts owe their duty to the court, and partisan evidence is often given little weight.
• Poor document preservation. Lost or deleted documents can damage a case and attract criticism.
• Never revisiting the decision. The economics of a case change as evidence emerges. Review them at each stage.

Questions to ask

• Can the other party pay a judgment, and what assets does it have?
• Does our contract require negotiation, expert determination, mediation or arbitration first?
• Which court or tribunal would hear this claim, and why?
• What is the realistic probability of success on each issue, and what amount is likely to be awarded?
• What will each stage cost, how much might be recovered, and what would we pay if we lost?
• How much management time will this take, and who will do it?
• At what points will we review whether to continue, settle or stop?

Bringing it together

Commercial litigation in Australia follows a broadly familiar path: pre-action steps, pleadings, case management, disclosure, evidence, mediation, trial, judgment and possibly appeal. Each stage costs money and management time, recovered costs are usually partial, the outcome is uncertain and a judgment must still be enforced against a party able to pay.

That does not make litigation wrong. It makes it a significant investment decision that deserves the same discipline as any other. Check collectability first, follow the contract’s dispute steps, organise records, budget in stages, keep settlement in view and revisit the decision as the evidence develops. For working through what the contract actually requires before deciding anything, the thinking clearly about a contract problem article provides a structured method.

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Source: KEVOS editorial notes. Examples and figures in this article are illustrations. This article provides general information and does not constitute legal advice.