The Hidden Barrier to Litigation Innovation - Taxation of Costs
Artificial Intelligence is reshaping the legal sector in, what I consider, is an exciting way. But in Australia, it’s essential to confront a hidden barrier which threatens to stall meaningful progress. One which I am not seeing being spoken about much: the taxation of costs.
Why Costs Matter
I get it, litigation is expensive. My 8 years practicing within civil litigation has shown me just how much small scale and large class actions and royal commissions cost.
At the end of a matter (lets leave aside royal commissions though as they are a different beast), the successful party can usually recover part of their legal costs from the other side. This process is called the “taxation of costs” - it determines how much of those fees are considered reasonable and recoverable.
On paper, it’s a neutral mechanism. In practice? It' shapes how lawyers work. If a system is rewarded by the use of detailed time entries and manual labour, lawyers will continue to be incentivised to work that way. If efficiency leads to less time recorded - even when it achieves the same result of better - the system punishes innovation.
The AI Clash
Throughout my career as a litigation lawyer, I have often encountered the dissonance between innovation and outdated practices. AI solutions can now conduct legal research in minutes, draft documents at speed, and streamline discovery processes. I am so excited to see how AI is going to improve the litigation space, as before hand the most this area of the law got was eDiscovery, but nothing that could rehaul the how of the entire process. These tools do not replace legal judgement, but they free up the lawyers to focus on higher-order strategy and advocacy.
Yet when those efficiencies will often translate into less billable time. The main costs recovery framework used by lawyers will fail to capture the value being delivered. A painstaking manual review of thousands of documents may be fully recoverable; but an AI-assisted review that takes a fraction of the time may not.
This isn’t just inefficient, it creates a structural disincentive for firms to innovate. And that’s before discussing any potential ethical issues of not using AI for the process to lower the costs for clients.
International Comparisons
Other jurisdictions are beginning to grapple with this tension. In the United Kingdom, reforms to civil procedure rules have encouraged proportionality in costs and alternative free arrangements, though taxation still largely rests on time-based records. In the United States, the shift towards eDiscovery an the use of AI tools has forced courts to consider reasonableness in outcomes, not just inputs. Canada has piloted projects exploring efficiency-based assessments of costs, recognising that technology is integral to modern litigation.
Australia risks being left behind. Without reform, our courts and practitioners may find themselves tied to outdated processes while the rest of the professional globally moves ahead.
The Real - World Impact
Why does this matter beyond the legal profession? Because clients ultimately pay the price. And they’re already demanding for more value based pricing, which litigation is already behind in being able to deliver. A system that penalises efficiency forces law firms to choose between innovation and financial viability. Clients either absorb higher costs or miss out on the benefits of faster, more accurate legal aservices. Courts too bear the burden, with clogged lists and drawn out disputes that technology could have helped streamline.
For a legal/justice system already grappling with accessibility and affordability challenged, this barrier should not be ignored.
A Path Forward
Reforming what the taxation of costs looks like is not merely an administrative housekeeping task. It’s about aligning the modern legal practice with integrity and modern real world expectations. So, what could this look like?
Recognising the value of outcomes, not just the hours of input.
Encouraging proportionality, where recoverable costs reflect the complexity and stakes of the matter rather than the time spent.
Allowing explicit recovery for AI and technology-enabled processes.
Piloting reforms in specialists lists (commercial, personal injury, family) to test models before broader adoption.
None of this undermines fairness. In fact, it could be argued that it creates space for lawyers to embrace tools that benefit clients, courts, themselves, and the broader legal/justice system.
If we are serious about modernising the legal profession, reforming the taxation of costs is non-negotiable. Imagine a costs framework that rewards efficiency, supports AI-driven solutions, and ensures that lawyers are not punished for innovating.
Until we align our recovery systems with the realities of contemporary practice, innovation will remain stalled at the courthouse doors.
