Legal Costs Recoverable as Damages

Imagine losing a case in court, only to be burdened not only with the loss but also with the legal costs of the opposing side. It's a double blow that many fail to anticipate, but it raises an essential question: Can legal costs be recovered as damages? This issue is far from straightforward, blending elements of contract law, tort law, and the discretion of the court. What makes it even more intriguing is that in some cases, legal costs can be claimed as damages, while in others, they cannot. This inconsistency creates a fascinating landscape for both claimants and defendants.

To understand this, let’s dive into key types of damages and when legal costs are recoverable.

Breaking the Norm: Legal Costs as Recoverable Damages

Most legal systems operate under the notion that each party bears its own legal costs. However, there are exceptions where legal costs are treated as "recoverable damages." These exceptions can vary depending on jurisdiction and the specific nature of the dispute.

Contractual Breaches often allow for such recovery. In cases where a contract explicitly states that the prevailing party is entitled to costs, courts generally enforce these provisions. Here, legal costs can be recovered as part of a broader claim for damages. But what happens when there is no such clause? This is where things become less predictable.

In tort claims, legal costs are typically not recoverable as damages unless expressly provided by statute. However, an important exception arises in cases involving malicious prosecution or abuse of process, where the wrongful use of the legal system itself becomes a central element of the claim. In such scenarios, the defendant can claim the legal costs incurred as part of the overall damages caused by the plaintiff's malicious actions.

How Courts Approach Legal Cost Recovery

The approach taken by courts can vary widely. In common law jurisdictions, the principle of "costs follow the event" often governs cost awards. This means the losing party may be ordered to pay the winning party’s costs, although this is typically separate from the recovery of damages. The wrinkle comes in when courts assess whether legal costs themselves should be treated as part of the damages awarded.

In England and Wales, the principle was significantly altered by the case of Hunt v R.M. Douglas (Roofing) Ltd (1990), where the House of Lords ruled that a party may claim legal costs as damages, but only under specific circumstances. They reasoned that if the claimant’s cause of action arose due to the necessity of defending a prior action, then the costs of that defense could be recovered as part of the damages in a subsequent claim.

Similarly, in Australia, the High Court in Commonwealth v Amann Aviation Pty Ltd (1991) recognized the recoverability of legal costs as damages in certain contractual disputes, particularly where the breach led directly to the incurrence of legal costs. This decision opened the door to more claims for costs as damages in cases involving contract disputes, though it remains contentious and subject to judicial discretion.

Table: Legal Costs Recoverability by Jurisdiction

Jurisdiction	Recoverable as Damages?	Key Case Law Examples
United States	Limited, contractual or statutory basis	Alyeska Pipeline v Wilderness Society (1975)
England & Wales	Under specific circumstances	Hunt v R.M. Douglas (Roofing) Ltd (1990)
Australia	Contractual disputes, selective	Commonwealth v Amann Aviation Pty Ltd (1991)
Canada	Rare, typically not recoverable	Bank of America Canada v Mutual Trust Co. (2002)
European Union	Generally not recoverable	Regulated by individual Member States

Practical Implications for Litigants

When stepping into litigation, understanding whether your legal costs may be recoverable as damages can significantly affect how you structure your claim. For claimants, this potential recovery may provide a strategic advantage—especially in high-stakes cases. For defendants, knowing that they may face not just the underlying claim but also the opposing party’s legal costs can add another layer of risk.

Businesses, in particular, should be aware of the importance of drafting contracts with clear provisions on legal costs. For example, including an attorney’s fee clause can preempt disputes over costs and clarify whether such costs will be treated as damages in the event of a breach. Moreover, in tort cases, defendants must be mindful of the potential for malicious prosecution claims, which can expose them to an entirely new category of financial liability.

The Bottom Line: Are Legal Costs a Gamble?

While the recoverability of legal costs as damages offers an enticing avenue for those seeking full compensation, it remains a legal minefield. Courts exercise broad discretion, and the rules differ across jurisdictions. In some cases, the pursuit of legal cost recovery may lead to additional litigation, further complicating an already complex process. However, with careful legal strategy and a deep understanding of the applicable laws, claimants can turn this element of litigation into a powerful tool for maximizing their recovery.

In conclusion, the potential for legal costs to be recovered as damages hinges on the specific facts of the case, the jurisdiction, and the applicable law. For litigants and legal professionals alike, understanding this area can make the difference between a total victory and a partial one.