Litigation costs - a rule of thumb

One of the most difficult client questions to answer with confidence is “how much will this dispute cost me?”

This is a shame. An accurate answer to this question is necessary in order for the client to make the, sometimes finely balanced, decision as to whether to proceed with litigation or not.

However, although we are not selling widgets and precise answers to this question is often elusive, there is, I submit a formula which provides a sufficiently helpful proximate rule of thumb:

Cost = Bespoke / Records

Where:

• Cost means the estimated cost of resolving the dispute;

• Bespoke means how bespoke the contract (1 means unaltered standard form, 5 means entirely bespoke)

• Records means how complete the documentary record is (1 means non-existent, 5 means complete, clear and organised).

By the use of this simple formula, we can see that the litigation costs are likely to be lower when the contract is standard, and the documentary record complete. On the other hand, a dispute is likely to be expensive when the contract is entirely unique, and the documentary record is disordered, incomplete and fragmented.

Why is the case? It’s relatively simple. A standard form contract has been used and “stress tested” on a large number of construction projects. Its terms are well known and understood, and if areas of ambiguity exist, the courts have often provided guidance about how certain terms should be read, and how they intersect.

On the other hand, a bespoke contract has been drafted from scratch for this particular project. Its terms therefore are unfamiliar to the project participants, and there is no bank of historical knowledge (and court guidance) about how various terms operate and interrelate. This means uncertainty (and hence disputes) are likely to arise. And these disputes will be expensive to resolve. While two sensible lawyers may be able to resolve a legal dispute about the meaning of a standard form contract by reference to previous examples of how such clauses were interpreted, in bespoke contracts there is no precedent, and often valid competing interpretations. Settlement is therefore harder to achieve, and disputes will be more expensive to resolve, perhaps requiring court intervention.

In relation to records, a project with a complete and accurate documentary trail is inevitably cheaper to resolve. This is because once a dispute arises, you can readily assume that anything which is not recorded in writing will be disputed. Hence, the more is captured in writing, the narrower the scope for factual disputes to arise. An entirely complete and watertight documentary record is very difficult to cavil with. On the other hand, when a set of events is entirely unrecorded, it is much easier to fall into a “they said, they said” debate. Such heated arguments (where both sides are implicitly calling each other a liar) are emotional, and difficult to resolve without a court determination about who’s version of events is more likely to be correct.

The formula can also be used as guidance for clients seeking to reduce legal fees in the event a dispute arises.

In relation to contracts, the advice is simple – while sometimes bespoke clauses are required in contracts, the contract as a whole should be no more bespoke than is necessary. Drafting from scratch is doubly more expensive – more expensive for the lawyer to draft, and more expensive to resolve a dispute about afterwards.

In relation to documentary records, the message should be equally clear – a good documentary records is not an optional extra, it is like insurance. It is mandatory. If you cannot afford to keep good records up front, you had better be able to afford an expensive dispute arising later. It’s your choice, but the advice is clear.

About the author

Samuel J Woff is a commercial construction lawyer and construction litigation specialist, speaker and published author. He has broad experience across a range of construction litigation matters including domestic and international arbitrations, litigation in the Victorian Supreme Court and security of payment adjudications.

Copyright 2023 Samuel J Woff