Costs-jurisdiction no more: What changes to the award of costs means for parties in federal discrimination claims

On 19 September 2024, Parliament passed the Australian Human Rights Commission Amendment (Costs Protection) Act 2023.

The Act inserts a modified “equal access” costs protection provision for unlawful discrimination claims into the Australian Human Rights Commission Act 1986 (the AHRC Act).

Essentially, the Act modifies the existing approach where costs typically follow the event, to one where, subject to some limited exceptions:

1. if an applicant is successful on one or more grounds of their claim, the respondent will be required to pay the applicant’s costs;
2. if the applicant is unsuccessful in their claim, the applicant will not be required to pay the respondent’s costs and the parties’ will bear their own costs.

What are the changes?

The new costs regime will apply to all federal unlawful discrimination proceedings before the Federal Court of Australia and Federal Circuit and Family Court of Australia.

The Act is designed to implement recommendation 25 of the Respect@Work Report and to increase access to justice for potential applicants in unlawful discrimination claims.

While recommendation 25 recommended a provision based on section 570 of the Fair Work Act 2009 (the FW Act) (which essentially provides for a no-costs jurisdiction save for limited exceptions) the Act goes further, and adopts what Parliament has called a “modified ‘equal access’” regime.

The Explanatory Memorandum sets out that the intention of this reform is to “alleviate the barrier to justice that the risk of an adverse costs order currently poses for applicants.”

This is informed by the findings of the Respect@Work Report, which considered that the previous costs regime, where costs generally followed the event with the unsuccessful party ordered to pay the other party’s costs, was a disincentive for people pursuing sexual harassment and other unlawful discrimination claims.

When will this apply?

The changes in the Act came into effect on 2 October 2024, the day after it received Royal Assent, which occurred on 1 October 2024.

However, importantly, the amendments will not apply to existing applications made under the AHRC Act that are already before the Courts before this Act commenced.

This means that any matters that are currently on foot will continue under the previous costs provisions and the new regime will only apply to applications made after the changes commenced on 2 October 2024.

The Explanatory Memorandum notes that this is to ensure that there are no unintended consequences for parties who are “part way through a complaints process.”

When will a respondent have to pay an applicant’s costs?

When an applicant succeeds on one or more grounds of their claim, the Courts must order the respondent to pay the applicant’s costs.

There is an exception to this for where an applicant’s “unreasonable act or omission” caused the parties to incur costs in respect of that act or omission. In these cases, even if the applicant’s claim succeeds, the court is not required to order the respondent to pay the costs incurred by the applicant as a result of the applicant’s unreasonable act or omission.

This can also be a ground for ordering the applicant to pay the respondent’s costs in respect of that act or omission, as set out below.

When will an applicant have to pay a Respondent’s costs?

The default rule is that the applicant must not be ordered to pay the costs incurred by another party, unless the court is satisfied that one of the exceptions applies.

Specifically, the Courts may order that the applicant pay (some or all of) a respondent’s costs where:

1. the court is satisfied that the applicant “instituted the proceedings vexatiously or without reasonable cause”; or
2. the court is satisfied an applicant’s “unreasonable act or omission” caused the other party to incur costs in respect of that act or omission; or
3. all of the following apply:
   1. 1. the respondent was successful in the proceedings (all claims against them were dismissed); and
      2. the court is satisfied the respondent does not have a “significant power advantage over the applicant”; and
      3. the court is satisfied the respondent does not have “significant financial or other resources, relative to the applicant.”

The first exception

In relation to the first exception, where an applicant “instituted the proceedings vexatiously or without reasonable cause”, the Explanatory Memorandum does not provide guidance on when proceedings are instituted “vexatiously or without reasonable cause” in the context of discrimination claims.

However this wording appears in section 570 of the FW Act. In this context, the courts have held that:

1. whether or not proceedings are “vexatious” will include a consideration of:

• • the motive of the applicant in making the application; and
  • whether the “predominant purpose ….is to harass or embarrass the other party, or to gain a collateral advantage”; and

2. whether or not proceedings are “without reasonable cause” will include a consideration of:

• • whether the proceeding had any reasonable prospect of success at the time the matter was instituted, regardless of whether or not the applicant was ultimately unsuccessful; and
  • whether the application should not have been made if there were no substantial prospects of success.

Although the legislative context differs, it is likely that the Courts will draw on the existing case law in the fair work context when considering the first exception under the new regime in federal discrimination law matters.

The second exception

In relation to the second exception, where an applicant’s “unreasonable act or omission” caused the other party to incur costs in respect of that act or omission, the Explanatory Memorandum gives the examples of this applying where the applicant:

1. has unreasonably caused unnecessary delays in the proceedings;
2. has failed to comply with court orders and rules; or
3. has otherwise abused the processes of the court.

However, the Explanatory Memorandum notes that this second exception intended to be a “high threshold and reserved for rare cases”, and that this is not intended to capture acts such as:

1. a mere refusal of a settlement offer;
2. a refusal to particulate in a conciliation;
3. the running of novel arguments; or
4. where these acts or omissions are attributable to a self-represented litigant’s lack of legal expertise.

The third exception

Finally, in relation to the third exception, the Explanatory Memorandum sets out that the intention of the third exception is to take into account respondents who are not well-resourced or “at a significant power advantage” to an applicant.

In considering whether the third exception is enlivened, the Explanatory Memorandum gives examples of where a respondent maybe have a significant power advantage over an applicant, including where a respondent is an “individual applicant’s employer.” It goes on to provide that:

1. “power advantage” is intended to be broad term which encompass cultural and organisational power imbalances such as hierarchical workplaces and employee’s employment conditions;
2. if a respondent wishes to rely on this third exception, they will need to provide evidence of their financial position; and
3. this exception may be enlivened for a small business or an individual respondent with limited assets, revenue streams or other resources.

Settlement and litigation implications

The new costs regime is intended to address barriers to access for applicants and support victim-survivors of harassment and discrimination. The regime may also have an impact on the frequency with which matters settle in unlawful discrimination matters.

Where the Courts now must order that a respondent pays an applicant’s costs in the event the applicant is successful on one ground in a claim, respondents may be less willing to pursue a matter to hearing where the costs implications and risks of a protracted litigation may be significant.

The new regime may therefore have a significant impact on the considerations of parties when assessing the risks and benefits of proceeding and the sum of any settlement amounts. Respondents faced with the potential liability for all costs in a matter may be more likely to want to engage in settlement discussions at an earlier stage or for a higher sum.

Conversely, applicants may be more willing to pursue a matter, where the disincentive of an adverse costs order has been all but removed as an applicant can only be ordered to pay a respondent’s costs in specific and limited circumstances.

This may have an impact of encouraging early settlement of claims or engagement by parties in alternate dispute resolution, where disincentives to litigate claims have been reduced for applicants and increased for respondents.

However, settlement implications may not be as impactful in matters involving Commonwealth entities, many of whom who are bound by the Legal Services Directions 2017 which sets out that a “meaningful prospect of liability” is a requirement for any monetary settlement. This limits the Commonwealth’s ability to make “commercial offers” to settle otherwise unmeritorious claims early, and where the costs of litigation itself has limited influence over the quantum of any potential settlement sum.

Further, where only one ground of an applicant’s claim needs to be successful for the respondent to be ordered to pay their costs, it may be that applicants lodge broad claims which canvas numerous grounds, rather than limited claims which only include a few specific grounds.

Key takeaways

The new costs regime under the Act aims to address financial disincentives to applicants bringing claims of harassment and unlawful discrimination.

It is important for employers, who are often respondents to unlawful discrimination claims, to be aware of the “default” position that an applicant will not be ordered to pay the respondent’s costs, even where the respondent is successful, save for the limited and prescribed exceptions.