Understanding Litigation Costs
Legal costs can be a point of contention in a legal dispute. But what exactly are litigation costs, and how are they allocated in legal proceedings? Earlier, Luuk Rietveld wrote an article on Security for legal costs by foreign parties, in which the issue of cost allocation was introduced. This article delves deeper into the subject.
Two companies, A and B, see themselves in a legal dispute over a breach of contract. A claims that B failed to uphold their agreement by leaking confidential information, despite both parties agreeing to keep it confidential. Ultimately, the matter ends up in court, and both companies incur substantial legal expenses for the proceedings.
Outcome of the Dispute?
After careful consideration and an extensive legal process, the court rules in favour of A. The court finds that B did indeed breach its contractual obligations. Consequently, B is considered the losing party.
Article 237, paragraph 1 of the Dutch Code of Civil Procedure (DCCP) governs the cost award:
"The party that is ruled against in the judgment shall be ordered to pay the costs. However, the costs may be fully or partially offset between spouses or registered partners or other life partners, blood relatives in the direct line, brothers and sisters, or relatives in the same degree, as well as if both parties have been ruled against on certain points. The court may also order the party who needlessly incurred or caused the costs to bear them."
In this specific dispute, B, as the losing party, is ordered to pay the litigation costs, including the legal fees of A. These costs include court fees (fees incurred to initiate a case in court), other expenses (such as costs for witnesses or experts), legal fees, and extrajudicial costs (costs a party incurs before going to court).
- Court fees, known as griffierechten, are mandatory fees that parties must pay to initiate court proceedings. These fees vary depending on the type of proceeding and the amount in dispute. They are outlined in the Court Fees (Civil Cases) Act, and they must be paid before the case commences.
- Legal fees are calculated based on the liquidation tariff, a predefined fee schedule. This tariff takes into account the complexity and financial significance of the case, providing guidelines to ensure legal costs remain predictable, transparent, uniform, and reasonable. The liquidation tariff is in line with the 2008 Local Counsel Requirement (Abolition) and Introduction of Electronic Data Interchange Act. The awarded amount based on the liquidation tariff is generally less than the actual fees paid to an attorney or representative during a proceeding.
- The tariff for extrajudicial collection costs is legally determined and depends on the amount of the debt. This tariff can be found in the Decree on Extrajudicial Collection Costs.
In some cases, the court may decide to offset the litigation costs if both parties were partially unsuccessful (article 237 DCCP) or if, in short, certain family relationships exist between the parties. This compensation may also occur when specific circumstances justify not fully burdening the losing party with costs.
Exception for Intellectual Property Cases: in cases where an intellectual property right is enforced, such as trademark or copyright disputes, a different rule for litigation costs applies. Article 1019h DCCP dictates that the party ruled against must pay reasonable and proportionate court costs and other expenses incurred by the prevailing party, meaning that the winning party is entitled to reimbursement of all litigation costs.
Why Is This Important?
Understanding litigation costs is crucial for making strategic and financial decisions in legal disputes. It enables the party in litigation to assess the financial costs and risks of a legal proceeding and prepare accordingly. Moreover, it facilitates the consideration of whether alternatives, such as mediation, arbitration, or binding advice, may be a more suitable method of dispute resolution for a specific case.
- Timely assess, possibly in consultation with your attorney, the feasibility and prospects of your case.
- Before taking a case to court, evaluate, possibly with your attorney, whether an alternative form of dispute resolution is more appropriate, potentially saving costs (and time).
- Incorporate potential litigation costs into your financial planning and budgeting. Make sure you understand the financial implications.