Pacific Indemnity Underwriting Agency Pty Ltd v Maclaw No 651 Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No. 4758 of 2002

PACIFIC INDEMNITY UNDERWRITING AGENCY PTY. LTD.	Appellant
PACIFIC INDEMNITY UNDERWRITING AGENCY PTY. LTD.	v.
MACLAW NO. 651 PTY. LTD. & ANOR	Respondents

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JUDGES:	ORMISTON and NETTLE, JJ.A. and HANSEN, A.J.A.
WHERE HELD:	MELBOURNE
DATES OF HEARING:	19 and 20 July 2004
DATE OF JUDGMENT:	29 June 2005
MEDIUM NEUTRAL CITATION:	[2005] VSCA 165

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INSURANCE – Judicial Review – VCAT – Costs – Interpretation of compromises – Insurer agreed to pay “reasonable legal costs and expenses” of applicant owner suing pursuant to s.61 of Domestic Building Contracts Act 1995 – Whether obligation to pay full indemnity costs or party/party costs – Claims made as owner by virtue of policy issued to insured builder in accordance with Ministerial Order of 1996 (under Building Act 1993) – Claims enforcing policy condition giving “right to recover from [insurer] an amount equal to [insurer’s] liability under insuring clause” – Both claims settled before final hearings, including agreement to pay “reasonable legal costs etc.” – How costs terms to be interpreted in light of s.109 of Victorian Civil and Arbitration Tribunal Act 1998 – Whether parties intended to adopt language (in like terms) in policy clause relating to indemnity for costs of a party “making a Claim against the Insured” – Meaning of clause in policy – Relevance of fact that owner stood in shoes of insured builder to enforce insured’s rights against insurer – Nature and extent of right of indemnity – Whether right extends to liability for costs incurred by insured builder in responding to owner’s claims for breach of contract etc., being costs etc. awarded in favour of owner or costs etc. claimed by owner against insured – Whether owner has right over against insurer – Decision of VCAT in Reid v. FAI General Insurance [1999] VCAT 1773, relied upon by Tribunal and judge, held to have been decided erroneously – Whether taxable bill of costs may have to be provided in VCAT proceedings.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr D.F.R. Beach, Q.C. with Ms B. Lim	Deacons
For the First Respondent	Mr G.H. Garde, Q.C. with Mr M.T. Settle	Macpherson & Kelley
No appearance for Second Respondent

ORMISTON, J.A.:

The sole question in this appeal concerns the proper interpretation of provisions embodying agreements to pay “the reasonable legal costs and expenses” of the respondent Maclaw No. 651 Pty. Ltd. (“Maclaw”) in terms of settlement and in an accepted offer of settlement, each apparently terminating two claims brought by Maclaw in the Victorian Civil & Administrative Tribunal and each containing also a term agreeing to pay in substance the whole of Maclaw’s claim. Lest it be thought that appeals over costs in VCAT put in issue only minor amounts, the awards of costs ultimately made or assessed by the Tribunal amounted to $325,414.46 in the one case and $39,292.12 in the other. The specific issue raised at the Tribunal, on appeal before a judge of the Trial Division and on the further appeal to this Court, is whether the Tribunal was correct to interpret the agreed terms as to costs as requiring an order for payment on the basis of a complete or “full” indemnity of Maclaw’s costs and expenses or whether, as the appellant insurer contends, they should have been construed as requiring payment of costs only on a party/party basis, or whether, possibly, they required assessment on some other basis such as that ordinarily described as a solicitor/client basis.

The dispute arose out of two claims brought by Maclaw, a building developer and owner, against the director of a building company and three insurance companies including the appellant (then the third respondent) seeking a direct indemnity (as permitted by the relevant insurance policy) for failure of the builder, because of its insolvency, to complete works agreed to be performed pursuant to a building contract to build a number of domestic buildings at Flemington. The three insurers made respondents to the claim in VCAT were the named insurers (for their respective proportions) under a policy of insurance taken out by the builder ( Dwyer

and Johnston Constructions Pty. Ltd.[1]) by reason of the requirements of the Building Act 1993 and which took a form in accordance with (or treated under Condition 13 of the policy as complying with) the requirements of a Ministerial Order made 25 September 1996 under s.135 of that Act. Of course the policy, as required under the Act, was designed to provide cover to the named builder in relation to its “business of an industrial or commercial builder” but the policy, as also required by the legislative scheme, contained a specific condition (Condition 9) by which it was agreed under certain conditions that “the building owner” should have the right to recover from the insurer an amount equal to the insurer’s liability under the “insuring clause” relating to non-completion of residential buildings, as described in Section 2(ii) of the policy, and it was on this basis that Maclaw made its claim and brought the proceedings in VCAT which were ultimately compromised.

[1]The builder seems to be named incorrectly on the policy schedule as “Dwyer Johnson Constructions Pty. Ltd.”.

The two compromises each took a slightly different form. In the case of claim 508/98 a settlement offer was made to Maclaw by the appellant pursuant to Part 4 Division 8 of the Victorian Civil & Administrative Tribunal Act 1998 (“the Act”) which offered “to settle the Applicant’s … claims in this proceeding”. There was then offered “in full and final settlement of all claims in this proceeding” the sum of $112,627 inclusive of interest and, secondly –

“the applicant’s reasonable legal costs and expenses to be assessed by the Tribunal in default of agreement between the parties, such payment to be made within 30 days of agreement by the parties or assessment and determination by the Tribunal.”

That offer made 8 May 2000 was accepted pursuant to the relevant section of the Act by a simple notice dated 19 May 2000 on behalf of Maclaw that the offer of settlement “is accepted by it”.

The terms of settlement dated 3 October 2000 in claim 509/98 were somewhat more elaborate and took the form of terms signed by counsel for Maclaw and for the relevant insurers. It recited the fact that Maclaw had brought the proceedings to recover sums alleged to be due under the policy of insurance and that the insurers had denied liability but that they had agreed to resolve their differences. There followed a number of terms, the first of which was that the insurers agreed to pay Maclaw $1.2 million “in full settlement of the Applicant’s claim and interest”. Then in paragraph 2 it was agreed:

“In addition to paragraph 1 hereof, the Insurers agree to pay the Applicant’s reasonable legal costs and expenses in relation to the claim and the proceeding, the amount of such reasonable costs and expenses to be determined by VCAT in default of agreement, and it is acknowledged that the Applicant’s rights under paragraph 4 of the Order made 29 May 2000 are reserved and that these terms of settlement do not affect or alter the Applicant’s rights pursuant to the order of the Court of Appeal.” [2]

[2]The latter order of this Court had been made relatively early in the proceeding and contained a conventional order for costs in favour of Maclaw. The order of 29 May 2000 is described more fully in the next paragraph.

The rest of the terms contained relatively conventional provisions for enforcement, a conditional indemnity in respect of GST liability beyond any input credit, a general release and discharge and an agreement to request an individual to account for a security deposit to Maclaw in respect of the agreed settlement sum though not in respect of costs under paragraph 2. The reference in the second-last clause of paragraph 2 to Maclaw’s rights under paragraph 4 of the order made 29 May 2000 was said to refer to a paragraph of an order made by VCAT some time earlier in proceeding No. 328/2000 (though stated therein to relate to Maclaw’s claim in application 509/98), which took the form of a consent declaration made by the Tribunal in these terms:

“Under the indemnity provided by the insurers under the Ministerial Order3 [sic] the Certificate of Insurance, Clauses 1 and 9 of that part of the policy headed Conditions and clause 1 of that part of the policy headed Policy Clauses, the owner is entitled to claim only a maximum of $100,000 for each home at the property (inclusive of associated works) and reasonable legal costs and expenses.”

It seems from a reading of the whole of the consent orders and declarations then made that the insurers (which included the present appellant under a different name) had sought declarations against Maclaw relating to the proper interpretation of the policy. A series of declarations were agreed to under the consent order which may be said largely to have favoured the insurers. For example, the first declaration stated that the building owner had a duty to mitigate its loss and damage; the second that in calculating the relevant indemnity the owner was obliged to deduct certain amounts which were payable but not paid; the third that under the indemnity the owner could “only claim the reasonable cost of completing” the works; the fourth that (under para.4 already set out) a maximum of $100,000 and reasonable legal costs applied for each house; the fifth that certain costs including those for associated works, supervision, overheads and “professional fees” should be apportioned by the owner in respect of each house; the sixth that the insurers were not liable to indemnify the owner for any variations in works agreed to after insolvency; the seventh that under a specific clause the insurers were not liable to indemnify the owner for financing and holding costs; the eighth that in respect to a specified claim the insurers were obliged to give indemnity only for loss relating to a manager’s flat; but the ninth declared that a particular letter from one insurer’s solicitors constituted a rejection by them all. Costs were reserved. It may therefore be seen that apart from the ninth declaration each of the other matters constituted a degree of success for the insurers. Consequently it is not clear, either from a consideration of paragraph 4 or from the surrounding circumstances, what precisely was intended to be preserved by paragraph 2 of the terms of settlement, bearing in mind that those later terms were said to amount to a complete release and discharge against all claims, demands and the like. It will be seen below that Maclaw contends that nevertheless the right under the policy to be indemnified in respect of certain legal costs and expenses was thereby preserved because of the reference in paragraph 4 of the order to those reasonable costs and expenses, notwithstanding that it merely recited the policy maximum (pursuant to the Ministerial Order under the Building Act) by setting out the insurer’s limit of liability thereunder.

It is therefore necessary to look at the terms of the policy or “insuring agreement”, as it is described, not only because it was the basis for Maclaw’s claim against the appellant (as flowing from the cover granted by the appellant insurer to the builder), but also because certain terms are said to be the basis of each of the agreed terms to pay costs. I should add, however, that the Tribunal made no finding of fact that either of the provisions as to costs appearing in the compromises was taken from the policy, although the learned trial judge assumed that the parties did use the policy “so that their rights under the policies were preserved by the settlement terms”, thus requiring consideration of the meaning of the expression in the policy.[3]
[3]His Honour, on the other hand, found at para.[37] that there was “insufficient evidence as to acceptance or non-acceptance of the decision in Reid within the jurisdiction”, referring to a decision by the Tribunal given on 28 May 1999 which had placed an interpretation on the same words seemingly dependent on an interpretation of the policy: see below at para.[17].

The relevant policy terms are to be found both in the agreement (headed “RCI Builders Insurance”[4]) and the “policy schedule/certificate of insurance”. One might assume that, at least in the first year of insurance, the two documents formed either one document or were attached to each other in one way or another, but in any event, even if the schedule had been provided separately because the original policy had been issued earlier, the schedule appears by the operative clause to have been treated as “forming part of this policy”.
[4]RCI appears to mean “Residential, Commercial and Industrial”.

The relevant terms of that part of the agreement which appears to take the form of a policy began by reciting that the insured had applied for “indemnity during the period stated in the schedule” and had paid the premium therein stated, in consequence of which the insurer agreed to hold the insured covered subject to the conditions which followed. Cover was granted, under Section 1, in respect of certain claims arising out of the insured’s business as a commercial and industrial builder (which is not relevant to the present dispute) and, under Section 2, so as to:

“Indemnify the Insured against any Claim or Claims made against the Insured during the period of insurance … and which are notified to the Company during the period of insurance … for legal liability, by reason of, following and consequent upon:
(i)any breach of a Domestic Building Contract (as defined) in relation to:
(a)an Implied Statutory Warranty; or
(b)a failure to maintain a standard or quality of building work specified in the contract …

arising after the completion or lawful termination of the Domestic Building Contract; or
(ii)non-completion of the Domestic Building Contract wholly due to the
(a)death or legal incapacity of an Insured person;
(b)disappearance of an Insured person;
(c)the Insured becoming insolvent or becoming insolvent under administration or becoming an externally administered corporation;
(d)cancellation or suspension of an Insured person’s registration as a building practitioner …;
(e)early termination of a Domestic Building Contract by the Building Owner due to the wrongful failure or wrongful refusal … to complete the building work; or

(iii)any other act error or omission … whenever committed … or wherever … committed on the part of the Insured as a result of the involvement … of the insured in the business of a Residential Builder …”.

The following definitions may be seen to be applicable. “Building owner” is defined to have the same meaning “as defined in the Domestic Building Contract and Tribunal Act 1995 …”. “Claim” is defined to mean in the first place any writ, application or the like, but secondly “the receipt by the insured of any written or verbal notice of demand for compensation made by a third party against the insured”. “Insured” is defined to mean an individual, a corporation or other entity “specified in the application being the basis of this insurance”, but in addition persons who during the period of insurance were partners, directors, controlling officers or even employees of a corporation or other entity referred to in the first part of the definition. The expression “residential … builder” is defined to mean a “builder for the purpose of the Domestic Building Contracts and Tribunal Act 1995 …”.

Certain conditions and other terms of the policy may also be seen to be relevant. Condition 1 states:

“The liability of the Company hereunder shall not exceed in the aggregate for all Claims under each Section of this policy the limit of liability stated in the Schedule against each Section of the policy except that (subject to the provisions hereof) the Company will in addition pay the costs and expenses incurred in the defence or settlement of any Claim.” (Emphasis added.)

The qualification refers to the power of the insurers to take over the defence of a claim and provisions as to what they might do when settling such a claim. In particular, Condition 2 reads relevantly:
“The Insured shall not admit liability for or settle any claim or incur any costs and expenses in connection therewith without the written consent of the Company which shall be entitled to take over conduct, in the name of the Insured, of the defence or settlement of any Claim …
The Company may, if it believes that the Claim will not exceed the policy excess, instruct the Insured to conduct the defence of the Claim. In such circumstances the Company will reimburse the Insured for all reasonable defence costs in the event that any payment made to dispose of the Claim by way of damages, exceeds the policy excess.”

The limit of liability is dealt with in general terms in what are described as the “Policy Clauses” and the actual limit in respect of the particular insured appears as part of the insurance details in the policy schedule/certificate of insurance (see below, para.[11]).

Next, and relevantly to the present proceedings, Condition 9 states that it is agreed that “the Building Owner shall have the right to recover from the Company an amount equal to the Company’s liability under Insuring Clause – Section Two – Residential, sub-section (ii) of this policy”, although pursuant to the second part of (or proviso to) Condition 9 that right is only to be exercised where the owner has made every reasonable attempt to find the insured or resolve the dispute and where “the Insured has refused to make a Claim against this policy”. To strengthen the owner’s rights Condition 14 states that the insurers are “not entitled to avoid liability under this policy” for the owner’s claims on the ground of the builder’s misrepresentation or non-disclosure or non-payment of premium. (See also General Exclusion 3 as to non-responsibility of owners for a builder’s fraudulent claim, if not connived in.) Condition 13 states that the indemnity under Section 2 of the policy is issued in compliance with the Ministerial Order but that “if any term of the policy conflicts or is inconsistent with such Ministerial Order then this policy shall, subject to any applicable law, be read and be enforceable as if it complies with such Ministerial Order”. There are two other General Exclusions which may be thought to be applicable or relevant, which relate to Section 2 only, one being the first “Additional Exclusion”, which provides that the policy “shall not indemnify the Insured in respect of any Claim made against them for … 1. Liability to pay legal costs of a Building Owner if such legal costs do not directly relate to the enforcement of a Claim against the Insured which is indemnified under this policy”. The second, being Additional Exclusion 9, denies a right to indemnity for “any act, error or omission” by the building owner.

As I have said, it is in what are called the “Policy Clauses” that the limit of liability and costs and expenses are generally described. The clause numbered 1 relating to limit of liability reads:

“The liability of the Company shall not exceed in the aggregate for all Claims under this policy the sum stated as the Limit of Liability in the Schedule set out against each section of the policy except that (subject to the provisions of this policy) the Company will in addition pay the costs and expenses incurred in the defence or settlement of any Claim.” (Emphasis added.)

In respect of claims under Section 2 it is made clear that the limit of indemnity so set out “will operate in respect of any one claim and in the aggregate during any one period of insurance” and there are further provisions relating to aggregated claims, which are presently irrelevant but which repeat the obligation to pay the relevant costs and expenses. No limit of liability is stated in the policy schedule/certificate of insurance as being applicable to Section 1, but in respect of Section 2 “Residential (basic)” the limit is stated as “$100,000 CYOR”. The latter acronym was accepted as meaning “carry your own risk”, but it was not otherwise explained how that applied to the policy document. Policy Clause number 2 relates to excesses for each claim which are likewise specified in the policy schedule/certificate of insurance.

The most relevant policy clause, so it was said, is that under the heading “Costs and Expenses”. It is unnecessary to examine the clause relating to Section 1, although it also contains an indemnity against costs and expenses incurred with the written consent of the company in defending or settling any claim; but rather it is the clause relating to Section 2 “only” which is here relevant and which reads:

“It is understood and agreed that, once indemnity has been granted under Section 2 the Company will pay, in addition to the Limit of Liability stated in the Schedule, the costs and expenses incurred with the written consent of the company in the defence and/or settlement of any Claim which exceeds the policy excess including the reasonable legal costs and expenses of the party making a Claim against the Insured.” (Emphases added.)

As to this clause it was also said that this was both consistent with and required by the Ministerial Order of 1996. Reference was made to that order in some detail but it is sufficient to refer to only a few provisions. Generally the Order is applicable to builders who enter into major domestic building contracts, as defined, and it contains in clause 11.3 a requirement that every policy contain a provision, to which I have already referred, that, if any term of the policy is inconsistent with the Ministerial Order, then the policy shall be read as if it did so comply. It is significant to notice that the Ministerial Order does not contain directly an obligation to include a provision to pay costs or expenses. The only requirement is in effect one which says that, if a builder obtains cover which is limited to a stated minimum of $100,000, then the policy must also contain a term excluding costs and expenses from the $100,000 and effectively requiring the policy to contain an obligation to pay them. So in clause 10.1 under the headings “Minimum Requirements …” and “Permissible Requirements”, it is provided:

“In relation to Parts (A) and (B) the policy may:
10.1.1 [include provisions stating maximum excesses an insured may be required to bear (which have not been exceeded in the present policy)]
10.1.2(a) limit the aggregate liability of the insurer under the policy to not less than One Hundred Thousand Dollars ($100,000) (or, where the policy relates to more than one home, One Hundred Thousand Dollars ($100,000) per home) plus reasonable legal costs and expenses of any claimant against the insured associated with the successful enforcement of a claim against the insured or the insurer; or
(b)limit or exclude liability of the insurer for the legal costs of any claimant against the insured which are not directly or indirectly related to the enforcement of the policy or a claim against the insured in respect of which the insured is indemnified under the policy.” (Emphasis added.)

It is not necessary to describe in great detail what occurred in the applications to VCAT which led to these compromises. They were each brought by Maclaw as the building owner in July 1998 naming (at that time) HIH Casualty & General Insurance Ltd. as the only respondent. The orders originally sought were that a decision made by the insurer to deny liability should be reversed and that there should be an indemnity “for the loss and damage resulting from the non-completion” of the stated works “and from the loss of progress payments or parts thereof”, in each case stating that the builder had become insolvent. Not long afterwards Mr Johnston, as a director of the builder, the appellant and a third insurer, GIO Insurance Ltd. were added as parties, the appellant being named as the third respondent. At that stage (December 1998), Maclaw in each application filed amended points of claim in extensive terms. Both alleged that there were terms in the policy that the insurers “would indemnify the builder against legal liability for any claim or claims made against the builder”, but did not refer to any claim by Maclaw whether for costs against the builder or for any further costs or expenses related to the bringing of the claim directly against the insurer. After alleging the refusal of the insurers to pay, Maclaw proceeded to allege in paragraph 17 that they became liable to indemnify it “for any loss or damage” etc., again not referring to any further claim for costs or expenses. Finally there was an allegation that Maclaw had suffered and continued to suffer loss and damage, particulars of which have not been set out in the Appeal Book, from which I would assume that there was no relevant claim for costs and expenses. Relief sought included an order setting aside the decision refusing to indemnify Maclaw, an order that the insurers indemnify Maclaw in respect of its loss and damage for “not completing the works”, a declaration that the insurers were obliged to indemnify the applicant “in respect of its loss and damage”, a general claim for damages and finally there was a general claim for “costs”. The latter claim would appear to be a conventional claim for costs in legal proceedings, as there is otherwise no reference either to expenses or to any provision in the policy giving rise to a claim for costs and expenses.

In January 1999 the Tribunal directed that a preliminary question raised by the insurers be determined as to whether the building work described in the applications came within the definition of “domestic building work” in the Domestic Building Contracts Act 1995. It was this question which was heard by the Tribunal in June 1999 that led to the decision of the Court of Appeal referred to earlier.[5] The question was resolved contrary to the interests of the insurers and led to the dismissal of the appeal and a conventional order for costs in favour of Maclaw, which was stated in the terms of settlement not to have been affected by that settlement.
[5]See the last quotation in para.[4].

In early 2000 steps were taken to bring the matters on for hearing and it was ultimately fixed for 29 May 2000. Application 508/98 was settled, as appears above, on 19 May 2000 and the consent declarations, likewise referred to above[6], were made on 29 May of that year. Issues then arose as to the quantum of Maclaw’s claim but, before that issue could be resolved, the other application No. 509/98 was settled on 3 October 2000, again as appearing above.[7]
[6]See para.[3].
[7]See para.[4].

On 6 December 2000 the insurer’s solicitors wrote to Maclaw’s solicitors asking that they be provided with bills of costs in taxable form in relation to each proceeding. Some months later on 1 March 2001 Maclaw’s solicitors claimed that they were not obliged to provide a taxable bill because, by reason of the agreement to pay “reasonable legal costs and expenses”, the insurers were obliged to pay all Maclaw’s costs and expenses “on a full indemnity basis”, relying on a decision in VCAT of Reid v. FAI General Insurance Co. Ltd.[8]. The letter continued by stating that their client’s legal costs were calculated on an hourly basis over three successive periods and whereby they sought a total sum of $639,760.98. They did, however, set out a schedule of those costs and expenses. Some $552,000 was referable to solicitors “fees and disbursements including counsel’s fees”, but were set out solely on the basis of various invoice numbers, of which there were thirty numbered invoices covering the period from 30 September 1998 to 31 January 2001. In addition, there were certain other expenses claimed to be paid to various experts and bodies such as Transcripts Australia and the Institute of Arbitrators and Mediators Australia, together with a relatively small sum of $4,932 for photocopying. This claim led to a continuing dispute between the parties’ solicitors as to what Maclaw’s solicitors were obliged to do in order to support its claim for legal costs and expenses, which in due course led to a slight increase in the total to $648,196.83, although the photocopying account was reduced to a mere $960, related to a special reference hearing.
[8][1999] VCAT 1773.

On 22 May 2001 Maclaw took out a summons in each proceeding for directions and other orders claiming payment of its reasonable legal costs and expenses “of the claim and the proceeding”, and for various alternative orders, including orders pursuant to s.109(3) of the Act. In support of the application was an affidavit of a partner of Maclaw’s solicitors setting out in some detail the background and the basis for their claim for indemnity costs. Considerably greater detail as to the costs incurred by that firm appeared therein, together with a schedule which consisted in a large number of items forming the basis of the earlier claim and which condescended to such details as telephone calls and the preparation and perusal of specifically named documents, together with some invoices, extending in all to some thirty pages. The solicitor said that the claimed costs had been calculated in accordance with a fee agreement between Maclaw and his firm (for which the rates were set out). There followed a paragraph in which the solicitor, having said that he was a specialist in commercial litigation, stated that the rates charged in the matter were “fair and reasonable, and represent market rates during the relevant period”. He added that the rates in fact charged under the fee agreement were “less than the rates generally charged by the firm for this type of work” because of a long standing relationship of the family which controlled Maclaw with the firm of solicitors. There followed then considerable detail as to the proceedings generally and an assertion as to why it was reasonable to claim costs on an indemnity basis, which made a number of assertions which apparently went beyond reliance on the two settlements.

In addition there was a supporting affidavit from one Ariel Weingart who has been both a solicitor and costs consultant for many years and who stated that he had read the affidavits and exhibits of the solicitor and the “Producer’s Billing Guides” of the firm. He had made a comparison at random between some original time sheets, saying that he found those to accord with the billing guides and that he believed that they were compiled from the daily time sheets. He concluded by saying that the “rates contained in the costs agreement [were], I believe, fair and reasonable, and comparable with rates at which those services [were] purchased in the ordinary legal market in Victoria for this type of work, having regard to the skill and knowledge of the professional staff performing the work and the responsibility placed upon them”.

Eventually, after what seems to have been a spate of delaying tactics by the insurers or their legal representatives, the costs applications came on for hearing before a deputy president of the Tribunal, Professor Cremean, on 29 October 2001. In the course of that hearing the solicitor was not cross-examined but Mr Weingart was questioned by counsel for the insurers about what he had intended to say in his affidavit. He said the question asked of him by Maclaw’s solicitors was “whether the charges pursuant to the costs agreement were reasonable” and they asked him also “to check that the amounts claimed in the billing guide in the accounts were substantiated by the time sheets”. He conceded that he was not asked to express any opinion, nor had he expressed any opinion, as to “whether the work that was done to generate the time sheets was itself reasonable”. In further explanation he said that some of the items could be said to be reasonable, such as certain attendances. On the other hand he could not express a view as to whether a certain item charged on the time sheets in fact occurred and more particularly whether the time taken was appropriate. On two occasions he expressed the view that, if he were presented with the bills, it would be impossible for him to say “whether these fees are reasonable or not”, at least on the basis of the enquiries he had made. It appears from his answers that it might not necessarily have been impossible to reach a conclusion overall about the reasonableness of the charges but, as stated by Mr Weingart, “I can’t say it”, because his brief was restricted to making sure that the agreed rates were appropriate and reasonable.

Professor Cremean gave his decision on 14 December 2001 by which he determined that Maclaw was “to be paid their ‘reasonable costs’ in accordance with the settlements reached” and, more particularly, that the expression “reasonable costs” was to be interpreted, in accordance with Reid, as entitling it to an indemnity for its legal costs. He further determined that Maclaw was entitled to interest on those costs at the prevailing rate and that the costs of the application itself should be paid on an indemnity basis “under s.109” of the Act. Maclaw was to prepare draft orders giving effect to the determinations, which in turn led to a further determination as to the precise amount payable, made by Professor Cremean on 13 February 2002. What is significant is that upon a reading of the Deputy President’s reasons it is clear that he held that the interpretation based on Reid meant that the applicant Maclaw was entitled to its general costs of the two applications originally brought in 1998 on a full indemnity basis. It is necessary briefly to look to those reasons, in order to understand the nature of the arguments before this Court.

The Deputy President first referred to a finding in Reid to the effect that “reasonable legal costs” is to be equated with costs at “the rates at which those services must be purchased in the ordinary market”, a view seemingly derived from the decision of the New South Wales Court of Appeal in N.S.W. Crime Commission v. Fleming[9]. So, it seemed to follow, costs are not to be considered as other than “reasonable” merely because they represent calculations made at what are shown to be “market rates”, i.e., rates fixed by reference to the “actual cost of obtaining” the relevant legal services, being in the present case calculated (for the most part) at the ordinary charge-out rate for commercial work by the solicitor. The reasoning in Reid was said to be “wholly convincing”, for though the issue there involved the interpretation of a policy of insurance giving a “full indemnity” for costs, that view was equally applicable to the present case. If there was an ambiguity in the language of the two terms, then, applying Codelfa Constructions Pty. Ltd. v. State Railway Authority of N.S.W.[10], the Deputy President was entitled to look at the factual matrix, in particular the fact that the respondents to Maclaw’s application (including the present appellant) were insurers of domestic building work under the Building Act 1993, “the obvious aim of which is consumer protection”. He did not think it appropriate to consider the practice of courts as to costs, nor the decision of the Court of Appeal in Spencer v. Dowling[11]. The onus rested on the insurer to show that the fees charged were other than reasonable, especially having regard to the expert opinion before the Tribunal as to the reasonableness of the rates charged. He therefore found the costs charged (and claimed) to be “appropriate and reasonable”, without further examination as to whether the particular services provided or the times taken for that purpose were themselves necessary or reasonable. The Deputy President then also held, pursuant to the explicit provisions of s.109, that he had power to award costs on an indemnity basis in respect of the costs of the specific applications to resolve the issue as to “costs and expenses”, because of the extraordinary circumstances, in particular the delays caused by the insurers and their “time-wasting” tactics. The latter decision, being based on the exercise of discretion, albeit one framed in terms of s.109, is not the subject of the present appeal.
[9](1991) 24 N.S.W.L.R. 16.
[10](1982) 149 C.L.R. 337 at 353 per Mason, J.
[11][1997] 2 V.R. 127.

It may be seen that incidentally the Deputy President had refused to order the delivery of a bill of costs in taxable form or some document to like effect for the purpose of fixing the costs in the Tribunal. That decision was consistent with his general reasoning as to the nature and meaning of the agreed term in the two compromises and of the words used in the policy, but there was not otherwise any examination of the question.

Leave to appeal from the Tribunal was granted to the present appellant insurer[12] by a master and the matter came on before a judge of the Trial Division. His Honour identified three questions, the second of which, relating to interest on costs, is no longer of consequence, as it was found in favour of the present appellant. Of the other two questions, the first, the question of more general consequence, was whether the words used in the two compromises, more particularly the words “reasonable costs”, meant costs to be fixed on a party/party basis, on a solicitor/client basis or on an indemnity basis, or indeed on any other and what basis. The third was whether and in what circumstances an unsuccessful party is entitled to have a bill of costs in taxable form delivered to it and have those bills taxed as a necessary precondition to the making of a final order for costs in the Tribunal.
[12]The remaining insurer was made a respondent and in form it remains the second respondent to the present appeal.

His Honour, after describing the way in which the Tribunal had reached its conclusions, then turned to the competing submissions put before him which were not entirely different from those made in this Court. The insurance companies had submitted that the term “reasonable costs” in the two settlement documents should be construed as requiring the payment of costs on a party/party basis, whereas the respondent maintained the Tribunal was correct in concluding that it required payment on an indemnity basis. The appellant also argued below that, if there were an ambiguity, there were a number of relevant matters which made up the factual matrix, including the fact that the phrase appeared in settlement agreements, that in each case the compromise was made in a proceeding in a jurisdiction in which prima facie no costs are awarded, that parties to a compromise do not ordinarily agree to provide 100 per cent of any matter claimed, that, if they had wished a higher measure, it could have been specifically stated and that, so far as the accepted offer was concerned, the ordinary costs consequences of non-acceptance was an order for costs on a party/party basis: see ss.112 to 115 of the Act. The appellant’s principal contention, however, was that Reid was wrongly decided, but, alternatively, if it were correct, it was not applicable to the present case as the earlier case related only to the construction of an insurance policy.

His Honour rejected the contention that the terms in the two compromises referred to costs on a party/party basis in that the phrase in question was flexible in meaning and had to be determined by the context in which it was found. On the other hand, he rejected the respondent’s primary contention that the phrase encompassed “a well understood expression” which had a particular meaning in the VCAT jurisdiction recognised at least since the decision in Reid. As to that his Honour said the analysis “may well be correct”, but he added: “But it is not something of which I am able to take judicial notice and there is insufficient evidence as to acceptance or non-acceptance of the decision in Reid’s case within the jurisdiction.”

His Honour then expressed the view that the issue was to be resolved “on the basis … that what the parties clearly did was settle the claims related to the direct losses caused by the builder and to take to VCAT the other aspect of the claim for ‘reasonable legal costs and expenses’”. So he concluded that the parties had taken and used the phrase from the policies in question “so that their rights under the policies were preserved by the settlement terms”. Consequently the respondent’s entitlement under those terms “would turn principally on the meaning of the phrase ‘reasonable legal costs and expenses’ in the policies”. I should here note that the basis for those inferences, that is, the inferences drawn in the last three sentences, was not clearly stated, for they had not been the subject of findings by the Deputy President in the Tribunal hearing and they seem not to have been the subject of direct submission on the part of the respondent, at least so far as can be gleaned from the Deputy President’s reasoning.

Nevertheless, upon that basis, his Honour took into account a number of factors similar to those relied upon before the Tribunal in order to reach the interpretation adopted both in Reid and by the Tribunal in the present case. The factors the judge referred to included: (1) that the policies were provided pursuant to consumer protection legislation; (2) that “the approach taken to providing” that protection was “to use insurance”; (3) that the policies, though subject to limits, were intended “to offer indemnity insurance” with an obligation to protect up to those limits; (4) that, if the entitlement to costs were less than an indemnity, it would “inevitably have the result that successful claimants would have to meet“ a significant portion of the costs and expenses of pursuing their claim out of the moneys intended to compensate them for the direct losses caused by a builder’s defaults, contrary to the intention of the legislation; and (5) that in most cases there would be a significant difference between the financial strength of the claimants and the insurers, so that to adopt the insurer’s interpretation would place claimants “at a serious disadvantage in negotiation”, but that in any event “the insurer is protected by the requirement of reasonableness”. For those reasons his Honour concluded that the terms in each of the compromises relating to reasonable legal costs and expenses were to be construed “as entitling Maclaw to reasonable legal costs and expenses assessed on an indemnity basis – the construction adopted below”.

His Honour also dealt with the Tribunal’s failure to require the provision of a taxable bill. The judge accepted that to allow an appeal on that issue was to permit the appellant to challenge the exercise of the Tribunal’s discretion in the conduct of the hearing, which he called a discretion which by ss.97 and 98 of the Act is required to be exercised “with as little formality and technicality” as the requirements of the legislation fairly permit. In any event his Honour concluded that there was no breach of the Tribunal’s obligation because he held that there was no obligation on the respondent to put forward a bill in taxable form. The judge said that the insurers already had “detailed information of how the claim was made” and had it within their own power to investigate that to the extent that they wished. He therefore rejected the appellant’s contentions.

Liability of insurer to building owner – General

For the purpose of resolving this appeal a large number of principles have been called in aid, as well as a considerable body of authority dealing singly or in various combinations with the words “reasonable”, “costs” and “expenses”. From time to time in the course of argument resort was had to the ordinary principles relating to the payment of costs in the Supreme Court and other courts, to the construction of leases and mortgage and other security documents and, with perhaps less enthusiasm (but for reasons presently not apparent to me),to the interpretation of insurance policies, especially liability insurance policies. Again reference has been sought to be made by counsel to the practices employed by VCAT in relation to the ordering of costs, to the nature of the jurisdiction exercised by that Tribunal in relation to building disputes and the policy of the Parliament and of the Minister under various provisions of the Building Act, the Domestic Building Contracts Act and in particular the Ministerial Order prescribing the form of policy or, at least, the minimum requirements of a policy, to be issued by insurers to building contractors, including the incidental cover required to be given in favour of building owners in certain prescribed circumstances. If one had full regard to this diverse collection of considerations and concepts, then the solution to the present problem would be by no means easy, indeed the difficulty in reaching a solution has been all too obvious to me, except that, if one has regard to the rationale behind many of the rules cited in support of various propositions, then their irrelevance to the present appeal ultimately becomes clear. One particular difficulty which must be addressed is the significance of the decision of VCAT in Reid, not because it is a decision of authority which must be given relevant weight as a precedent in this Court, but because its reasoning seems to lie behind the decisions made both by VCAT and the judge of the Trial Division in the present case.

One must therefore look in the first place at a few obvious considerations. The first is that the Tribunal and the Court have been at all times considering the language of two compromises, not two court orders, not two insurance policies and not two statutory provisions. The essence of a compromise is that it amounts to an agreement and is enforceable by one side or the other because it is a contract. The second compromise, that embodied in the terms of settlement, is undoubtedly a contractual document. The first compromise, though in form a statutorily prescribed acceptance of a statutorily mandated offer of settlement, amounts in effect to the same thing. The offer to settle having been made, the served notice of acceptance results in there being an agreement enforceable by each side according to its terms. One is therefore looking at what the parties agreed to, at least in the first place, not what some statute, subordinate authority, court or tribunal has laid down.

Secondly, the two compromises relate to legal proceedings and to what one party has agreed to pay to the other to resolve those legal proceedings and they do not relate, except incidentally, to the parties’ obligations under a policy of insurance, a court order, a statute or any other kind of document. To construe both documents properly one should bear firmly in mind that the parties thereby intended to compromise their disputes by agreeing that particular sums should be paid in terms expressed in a particular way. The object in each case was to bring the proceedings to an end, not to keep them on foot for any purpose and not to save any aspect of the dispute, even that relating to costs themselves, to another day. If the dispute were to come back to the Tribunal it would only be for the purpose of estimating in a proper way what the agreed amount of costs was in accordance with accepted principle and so as to give effect to the agreed terms between the parties. It was not, in my opinion, intended that the issue of costs was to be reserved to another day, or decided in a different way; the object of agreed terms of settlement or of an accepted offer of settlement is to reach final conclusion. Indeed, if there were no conclusive resolution of the matter so far as the settlement offer was concerned, then there was no acceptance either in contract or pursuant to the relevant statutory provision. Very exceptionally, of course, parties can agree to put over some matter to another day but that is the exception rather than the rule and offers of settlement and compromises should be read upon the assumption that the parties intend to deal with all the issues and the whole of the dispute between them.

Thirdly, the subject of each compromise was costs which might otherwise have been ordered to be paid in respect of legal proceedings, albeit that they were brought in the original jurisdiction of VCAT. If the parties had not reached agreement then the disputes would most likely have proceeded to their conclusion, at which point the successful party may have sought an order for costs from the Tribunal. [Parenthetically I should add that, bearing in mind its context, “expenses” should not be construed as extending to expenses of a kind not concerned directly with the legal enforcement of the parties’ obligations and should be confined to those expenses such as disbursements which are ordinarily encompassed by conventional orders for costs.] So it should be remembered that, if the parties had been unable to agree and the matters had returned to the Tribunal, then the prima facie rule under sub-s.(1) of s.109 of the Act would have applied that “each party is to bear their own costs in the proceeding”. That provision is “subject to this Division”, so that by sub-s.(2) there is power expressed in terms that: “At any time, the Tribunal may order that a party pay all or a specified part of the costs of another party in a proceeding.” Sub-section (3) lays down a requirement that an order under sub-s.(2) can only be made if the Tribunal is satisfied that it is fair to do so having regard to a considerable number of stated criteria, including whether a party has unnecessarily disadvantaged another party to the proceeding by certain conduct; whether a party has been responsible for unreasonably prolonging the proceeding; the relative strength of the parties’ claims, in particular where a party has made a claim “that has no tenable basis”; the nature and complexity of a proceeding; and finally, any other matter that the Tribunal considers relevant. It should further be noted that under s.111 of the Act, if the Tribunal makes a costs order, then the Tribunal “may fix the amount of costs itself or order that costs be assessed or settled by the principal registrar”. Unlike the rules applicable in the Supreme Court and other courts the Act contains no provision whereby scales of costs are or can be laid down, so that the quantum is clearly left to the Tribunal’s discretion. For present purposes what is significant is that there is no suggestion that such an order for costs would ordinarily be by way of full indemnity in proceedings such as the present, or indeed, would be other than in accordance with the usual practice that costs are awarded on a party-party basis, unless a specific reason exists for giving a greater right to costs.

Furthermore, there should be no presumption, as seems to have been assumed in both the Tribunal and the Trial Division, that costs ought to be paid in favour of claimants in domestic building disputes brought in VCAT. In other words, s.109 and the subsequent sections should be allowed to operate according to the natural construction of their language. The extent to which Parliament thought that in VCAT proceedings specific provisions relating to costs and other procedural matters should be altered to prescribe different modes of process and the making of different kinds of orders, according to the nature of the proceeding brought in the Tribunal or according to the jurisdiction exercised under particular Acts, can be gauged from ss.39 and 58 of the Act and in particular from Schedule 1 thereof. For present purposes, i.e. the power of the Tribunal to award costs, s.58 and particular provisions of Schedule 1 of the Act represent that legislative intention, so far as Part 4 of the Act, including the provisions as to costs, is concerned. Something in excess of 21 “jurisdictions” give VCAT varied or different powers in this way, each being identified by the statute (or group of statutes) which grants VCAT particular jurisdiction. So far as the relevant jurisdiction, granted under the Domestic Building Contracts Act 1995 (see especially ss.53-59 and 59A-62) is concerned, Part 6 of the First Schedule to the Act makes only minor alterations to the procedure otherwise laid down by Part 4 of the Act, as appears from clauses 12 and 12A of the Schedule. By way of contrast, the rules laid down for costs under s.109ff. are specifically varied by clauses of the First Schedule for proceedings in which jurisdiction is granted under, for example, the Equal Opportunity Act 1995 (see clause 27), the Small Claims Act 1973 (see clause 88), under “Taxing Acts” (see clause 91) and under each of the Transport Accident Act 1986 (see clause 92) and the Valuation of Land Act 1960 (see clause 99), by each of which clauses it is stated that s.109 does not apply at all. Nor is anything otherwise to be found in the Domestic Building Contracts Act which prescribes how costs should be awarded in proceedings in the Tribunal.

Now it does not follow that particular factors in building disputes, especially building insurance disputes of this kind, cannot activate the Tribunal’s power to award costs as laid down by s.109, such as the “nature and complexity” of some building disputes or the unreasonableness of a builder’s or insurer’s conduct, but it should be borne in mind at all times that the scheme of the VCAT legislation is that prima facie each party is to “bear their own costs in the proceeding”. Why Parliament saw this to be appropriate in cases such as the present and why it chose not to vary s.109 so far as domestic building disputes, or at least claims against insurers, are concerned, may, to some eyes, be hard to fathom. If the same disputes were still able to be litigated in one of the ordinary courts of this State, there would be the conventional “bias” in favour of the conclusion that costs should follow the event, even if only on a party/party basis. But that is not the presumption of the present legislative scheme, as represented in particular by s.109.

There is a further important general consideration arising from the nature of the claims resolved by these proceedings. It is said, correctly, that Maclaw as claimant sought enforcement of the terms of an insurance policy. It did not, however, do so by virtue of its being the insured party under the policy: the insured, by the policy mandated under the Building Act, remained all times the builder. Maclaw made its claim as building owner, not in reliance on any clearly accepted common law right, but by virtue of a specific provision (Condition 9) in the policy which gave it an explicit right (in certain circumstances) to sue the insurer directly and to recover “an amount equal to the company’s liability under [the] insuring clause” to the builder. The right of a third party such as the “owner” named in the policy to enforce an insurance contract may now be said, without examination of the difficult issues raised by the common law rules as exemplified in Trident General Insurance Co. Ltd. v. McNiece Bros Pty. Ltd.[13], to derive from s.48 of the Insurance Contracts Act 1984 (Cth): and see also s.61 of the Domestic Building Contracts Act. Nevertheless, so far as the insurer is concerned, the rights that a claimant owner such as Maclaw was entitled to enforce were the builder’s rights as the insured under the policy and no more.
[13](1988) 165 C.L.R. 107.

This requires some examination of the policy here in question, for essentially (with some qualifications) this was a policy which granted cover to the builder, who took out the policy and was named as “the insured”. The amount of indemnity therein granted must be read, at least in the first place, in light of the fact that it was the builder who had a direct right of action against the insurer. Prima facie, therefore, any limits and any extensions related to claims by the builder and any consequential rights, unless something further can be discerned from the policy. Condition 9 certainly entitled the “building owner” to sue, but that was a right only to stand, in effect, in the shoes of the builder in specified circumstances and all it could recover was “an amount equal to [the] company’s liability” under the relevant clause. In the circumstances and in its context the “liability” referred to must be the insurer’s liability to the insured, in other words, the liability must be measured by the appellant’s obligation to the insured builder, subject, as that was, to the terms and conditions of the policy.

There are otherwise no relevant or direct references to the rights of the building owner to sue, except to the extent that in two provisions the insured’s own rights are expanded or qualified. For example, the qualification as to the legal costs of the building owner in Additional Exclusion 1 (see para.[10]) is, nevertheless, tied clearly to costs which relate (or at least impliedly relate) to the enforcement of an indemnified claim “against the insured”.

Likewise, and more importantly, in what is seen to be the critical policy clause relating to “costs and expenses” (as set out in para.[12]), Maclaw’s rights are only referred to indirectly and in terms which describe the building owner as “the party making a claim against the insured”. In other words, the relevant right to costs and expenses is expressed in terms which, on their surface, look at that right only from the viewpoint of the insured facing a claim from the building owner or from somebody otherwise entitled to stand in its shoes.[14]
[14]If the Ministerial Order is to be given any additional force by reason of its inconsistency, it would only be because clause 12.1.2(a) adds the words “or owner” at the end, but I believe in practical terms that adds little to the relevant right and at most makes clear that which is implicit.

In short, therefore, the policy is concerned primarily with an insured builder’s rights to seek indemnity from the insurer for certain defined claims, being in fact those claims which may be made against it by a building owner and its successors. The description of those rights, including any right also to include and claim legal costs and expenses, must be construed upon the basis that it is the insured who is primarily entitled to make such a claim, so that the policy must be looked at from the viewpoint of the insured, both as a party facing claims from third parties and as making claims itself against the insurer, not from the viewpoint of the owner making the claim for which indemnity is granted under the policy. For example, most of the references to “costs and expenses” are in fact to those directly incurred by the insured or capable of being incurred by it, in considering and, if necessary, contesting a building owner’s claim.

The second general observation to be made about the terms of the policy or contract is that there is in fact no general right expressly given to the insured to obtain indemnity from the insurer for any costs (or expenses) incurred by it as the builder or by any person, such as Maclaw as the building owner, who makes a claim against the insured. Those provisions to which I have already referred as having greatest relevance to the present dispute are in fact each limit of liability or excess clauses. The “costs and expenses” clause, in particular, is predicated on payment of the “limit of liability” stated in the schedule, so as to ensure that the insured (in accordance with the Ministerial Order) is able to recover by way of indemnity for liability for defective works and the like the whole of the stipulated sum contained in the limitation clauses in both the policy and the schedule, without the need to include for that purpose any amount by way of costs and expenses. There is remarkably no specific provision in the principal operative clauses, or anywhere else in the policy, which directly gives a right to seek indemnity for costs and expenses of any kind which are awarded against the builder in favour of a building owner or are sought by and paid to a building owner as part of a settled claim against the builder. There are, of course, specific provisions, especially in the conditions, which entitle the insured builder to claim its costs and expenses in particular circumstances from the insurer, but that is not the present issue.

Nevertheless it seems to me that the principal indemnity against defined claims will implicitly include a right in the insured builder to claim over any costs recovered from it by the building owner. It would seem also to be implicit that, if there had been no litigation, but the insured builder had chosen reasonably (and subject to the policy, especially Condition 2) to pay upon the basis of a claim made against it, then any sum fairly agreed by way of compromise between builder and owner (and paid by the builder) which could be said to comprise the building owner’s legal costs and expenses would likewise implicitly be the subject of an indemnity; cf., e.g., Xenos v. Fox[15] and Forney v. Dominion Insurance Co. Ltd.[16]; Government Insurance Office (N.S.W.) v. Crowley[17]; and see generally Derrington and Ashton: The Law of Liability Insurance[18]. Such an implication might also be made from the terms of the “Costs and Expenses” clause, for it would be strange that costs and expenses, which might reasonably be claimed in addition to the $100,000 limit, could not equally be claimed if the relevant claim against the builder were less than $100,000 and which did not “exceed the policy excess”.
[15](1869) L.R. 4 C.P. 665.
[16](1969) 1 W.L.R. 928.
[17][1975] 2 N.S.W.L.R. 78 at 81.
[18](2^nd ed.) paras.8-461 to 8-465 and esp. 8-502 to 8-504.

The final general observation I would make is that the case of Reid, which has already been referred to and which will require some further examination below, was a case in which two questions of costs arose: the first related to the proper construction of a policy of insurance similar (but not identical) to the present and the insurer’s obligations under that policy and the second was the issue of costs in the proceedings brought in the Tribunal to establish that right. Although it may be broadly said that the Deputy President favoured a view that the obligation, so far as the building owner was concerned, was to “indemnify” it pursuant to the policy, it must also be noted that, as to the costs of the actual litigation in which that dispute was resolved and which therefore required consideration of the operation of s.109 of the Act, there was no indemnity order made for costs, howsoever that should be defined, and the Deputy President, after considering various factors, made an order to the effect that costs should be paid and taxed on a party/party basis assessed by reference to a particular scale payable in the County Court.

Proper construction of the expression “reasonable legal costs and expenses”

One may first start with the fact, noted in the preceding paragraph, that the expression “reasonable legal costs and expenses, is here found in two documents intended to bring an end to legal proceedings, being proceedings brought in the Tribunal. Prima facie, if one sees in such documents references to “costs”, then ordinarily one should assume that the term refers to the kind of costs which courts and tribunals are accustomed to order. In the present case that is emphasised by the fact that in each of the compromises those costs, if not agreed, were to be in the one case “assessed” and in the other “determined” by VCAT. In each case the proceeding had been on foot for some time, a considerable number of interlocutory steps had been taken, a number of hearings had been conducted (from one of which there had in due course been an appeal to this Court) and the parties were obviously resolving the proceedings brought in the Tribunal. There does not seem to be any evidence on the face of the two compromises of the parties’ explicitly treating the issue of costs as something compromised in terms of the policy, except to the extent that the words used in the policy in the costs clause relating to Section 2 are used in the compromises.

It was, however, strongly contended that by using the particular expression the parties were intending to preserve the rights of the building owner under the policy. The learned judge clearly took that view of the parties’ intentions, apparently deriving his conclusion from the findings of the Tribunal. As to this, the most that the Deputy President stated was that he was permitted to take into account the factual matrix leading to the making of the contracts of compromise and for that purpose he could take into account that the respondents were insurers of domestic building work “under legislation … the obvious aim of which is consumer protection”. The other factors included the terms of the Ministerial Order and “the form of expression used in the settlement terms”. Perhaps by that he intended to imply that the expression in the compromises was taken from the terms of the Ministerial Order, but he certainly did not say directly that that was the parties’ intention as inferred from those materials. The judge’s conclusion on this question, with respect, was therefore rather too highly stated.

On the other hand, if one is concerned merely with inferences, then the expression used clearly is identical to that found in the policies and, for that matter, in the Ministerial Order. Although this particular expression cannot be described as unusual, it was not expressed in these compromises in terms which are regularly found in compromises of matters before the courts, largely, one would imagine, because compromises of legal proceedings tend to use expressions as to costs which may be found in the rules or which otherwise are used customarily in particular jurisdictions in making orders for costs of a kind which enable their ready taxation according to accepted principles by the Taxing Master and his equivalent in other jurisdictions. It should be added that it appears that, when costs orders are made in the Tribunal, commonly they are expressed in terms of costs orders of the kind made in either the Magistrates’, County or Supreme Courts, so that the Tribunal is familiar with the task of having to tax costs on those bases.

The contrary view is that the parties used a general expression, qualified by the broad adjective “reasonable”, so as to leave the Tribunal with the widest discretion in ultimately fixing those costs. Such a conclusion, however, is not entirely satisfactory as it would conduce to disputes such as the present if frequently adopted, so that the more reasonable inference is that the parties intended to describe some standard by which those costs should be assessed, if there were a dispute. As to that, one may accept that the word “reasonable” in conjunction with expressions as to costs has the broadest connotation and is equally applicable to taxations either on a party/party basis or on a solicitor/client basis[19], though conventionally it is an inappropriate expression in orders for costs on an indemnity basis, whereby a test is ordinarily applied by the Taxing Master so as to exclude only that which is shown to be “unreasonable”.[20]
[19]Cf. per Callaway, J.A. in Spencer v. Dowling [1997] 2 V.R. 127 at 163: see also per Winneke, P. at 147.
[20]See Williams, Supreme Court Practice, para.63.02.195 and the cases cited therein.

Nevertheless the expression used is not one which immediately excites recognition as a standard order for costs of a kind with which a Taxing Master would be familiar, except to the extent that each of the words used have well known but imprecise meanings in this context. It is thus easier to conclude that the parties intended, at least to a degree, to refer back to what was included in the policy as the basis for settling the claims under that policy. Consequently, for present purposes, and without examining the question further, I would be prepared to act upon the basis that the parties used the expression knowing that it had been used in the policy and intending that it should be given the same meaning as would be given to the expression in the policy, whatever that proper meaning might be.

Meaning of expression in the policy

Consequently the meaning of the expression “reasonable legal costs and expenses” must be considered in the context of both the policy and the compromises, to see what the parties meant when they sought to settle these two proceedings. The appellant’s case, as already noted, is that all that was meant by the expression was party and party costs, which itself would connote a test of reasonableness, just as much as such a test is relevant to any other form of taxation, albeit that in the case of indemnity costs the reverse onus applies. But for what has been said by the Tribunal both earlier in Reid and other cases and in the present decision, as well as by the learned trial judge, I would have thought that the word “reasonable” is of general application in the taxation of costs. As Winneke, P. said in Spencer v. Dowling[21] the expression “reasonably incurred” is “apt to describe costs on a party and party basis, as much as they are to describe costs on a solicitor/client basis, because such costs have always been regarded as the costs which are reasonably incurred in the attainment of justice between the parties”.
[21]At 147, with whose conclusions Callaway, J.A. essentially agreed on this issue. Hayne, J.A., dissenting on the principal issue, found it inappropriate to discuss costs.

The arguments of Maclaw supporting the opinion that “reasonable legal costs” are apt to describe, in the present context at least, costs on a full and unqualified indemnity basis have already been set out in some detail in that they adopted what had been said in the Tribunal and by the Trial Division judge. With respect, I find the opinion so expressed difficult to accept for on its face the very expression would seem to connote, if not require, a test of reasonableness rather than an absolute entitlement by way of indemnity. One could understand there being provisions in policies of insurance which entitle an insured to a complete indemnity with respect to the subject matter of the policy as well as costs incurred with respect to any claim under the policy or to its enforcement. I shall not go through the many cases which I have examined where an absolute obligation by way of indemnity has been explicitly agreed. The same can likewise be said of the many cases in which mortgagees or lessors have been held to be entitled, by the terms of the relevant document, to a full indemnity in respect of costs incurred in the enforcement of security or lease.

There is in the present policy, nevertheless, a general obligation to “indemnify the insured” against claims made against the builder in certain defined circumstances but, so far as costs of enforcement are concerned, it would be difficult on the authorities to imply a complete indemnity with respect to those costs unless that was also explicitly stated. More importantly, costs are in part explicitly dealt under the policy but in two different ways. Condition 1 clearly entitles the insured to seek from the insurer payment of “the costs and expenses incurred in the defence or settlement of any claim”, which might connote total indemnity but for the fact that in Condition 2 there is a reference to the insurer reimbursing the insured “for all reasonable defence costs in the event that any payment … exceeds the policy excess”. On the other hand, the provisions which directly refer to the costs of a party making a claim against the insured are expressed in terms of the “reasonable legal costs and expenses” of that party. It is not difficult to see why. What one is there concerned with, and indeed what one is here concerned with for the purpose of this appeal, are the costs incurred not by the insured but by a claimant building owner such as Maclaw.

One can immediately imagine two sets of circumstances in which the insured builder might seek to claim over those costs against the insurer. The first is where the building owner brings proceedings against the builder in relation to something which is the subject matter of the policy and the builder resists the claim but ultimately loses the proceedings. In that case, assuming that the builder has not breached the terms of the policy by defending the claim, it is natural that the builder as defendant will suffer an order for the costs of the owner as plaintiff and will not unnaturally seek indemnity from the insurer for those costs. Those costs will largely be out of the control of the builder in the sense that they will have been incurred by the plaintiff owner who will be entitled to recover its taxed costs in terms of any order made by a court or tribunal. Ordinarily they will be party/party costs calculated and taxed according to conventional rules, but from time to time there may be orders made on a solicitor/client or even an indemnity basis. In those circumstances, save possibly for an order for indemnity costs which might be made upon the basis that the builder has been unreasonable in its conduct of the proceedings (which issue need not be presently considered further), there should be little doubt that the builder will be entitled to claim those costs by way of indemnity from the insurer. It would be inappropriate to describe them in the policy other than as “legal costs” or “legal costs and expenses” (or the like) because it would not be desirable to characterise them as party/party or solicitor/client costs or as costs to be taxed on any other specific basis, for the object in that respect is to grant an indemnity in relation to the costs ordered against the builder with respect to the proceedings brought in court or tribunal.

There is a second set of circumstances where it would be equally inappropriate to be any more specific with the description of “reasonable legal costs and expenses”. Claims made by building owners against builders frequently will not go to court or tribunal but may be resolved by compromise, as already noted, so that in those circumstances there will be no costs directly awarded against the builder which it may claim over. The builder, however, may fairly be asked by the successful building owner as part of the compromise to pay the building owner’s costs and expenses or at least some part thereof as a means of compromising the claim and so avoiding litigation. That is eminently desirable and insurers such as the present appellant doubtless have seen it desirable to allow insured builders to reach such compromises (pursuant to Condition 2), upon the basis that some costs are paid as a means of avoiding litigation. In those circumstances there will be no taxable order for costs but a claim for costs will nevertheless be made, at least in some cases. Thus it is likewise appropriate that the policy should permit the builder to claim over the “reasonable legal costs and expenses of the party making a claim against the insured” so as to permit the claim to be resolved. The insurer will fairly be obliged to indemnify the builder for some such costs, but sensibly the relevant clause has been expressed in those terms because compromises should not be seen as an excuse for the insured and the claimant owner unreasonably to load the costs which are claimed over against the insurer. Again, if described as “the reasonable legal costs and expenses”, then there is a touchstone by which those costs and expenses may be assessed which will not give carte blanche to insured (or building owner) to seek an indemnity for costs which, if the proceedings went to court or tribunal, would be taxed off and not be the subject of any order by which full indemnity of the owner’s costs could be sought, albeit that full indemnity will ordinarily be granted of the costs ordered to be paid by the insured builder.

This elaborate description of what might seem to be mere common sense propositions is necessary in order to show that the policy might fairly be taken to have contemplated those two sets of circumstances, the one where an order for court or tribunal costs should be the subject of indemnity and the other where claims are compromised before proceedings which should likewise attract an indemnity if the relevant costs are seen to be “reasonable”. Needless to say, the present case is obviously one which required proceedings to be brought by the claimant building owner, albeit that in the end they could not be sought directly against the builder but only in reliance on Condition 9 whereby Maclaw sought to enforce its rights against the builder directly against the insurer. In a sense it could be said that there were no relevant costs because no costs had been awarded against the builder, but that is artificial in that the proceeding in the Tribunal was originally brought against both the insured builder and the insurer pursuant to Condition 9.

So far as the present compromises are concerned, they were both compromises of litigation in which costs were sought against the insurers and would have been obtained by the owner if it had ultimately been successful, so that the relevant costs might be seen as those which could have been awarded in Maclaw’s favour against the builder. However, the builder unsurprisingly dropped out, so that the analogy is not apposite. For the purpose of understanding the policy, however, it must be recognised that a compromise might in other circumstances have been reached with the builder, or indeed the builder might have agreed without question to pay out Maclaw’s claim as building owner against it. In those circumstances I consider the words of the policy, entitling the builder to an indemnity, would comprehend the reasonable legal costs and expenses of the claimant building owner, if compromise or payment were proper. Since the costs would not and could not in those circumstances be awarded and taxed as the costs of a proceeding, nevertheless, if the insured builder were to find it necessary to pay out, in addition to the indemnity against defective works and the like, a sum representing the legal costs and expenses of the building owner, then that would come within the terms of the policy, as part of the builder’s “liability … consequent upon” its breach etc.. It is unnecessary to examine the large number of authorities in which it has been held that a person entitled to an indemnity from an insurer is permitted to claim not merely in respect of a sum found by a court or tribunal to be owing by it but also, if, subject to the terms of the policy, the insured acts reasonably, in respect of a sum agreed to be paid to compromise the claim asserted by the building owner, without defeating its right of indemnity: see cases such as Edwards v. Insurance Office of Australia Ltd.[22] and Unity Insurance Brokers Pty. Ltd. v. Rocco Pezzano Pty. Ltd.[23], and more generally the cases discussed in Derrington and Ashton at paras.8-288 to 8-305. In that kind of claim, i.e. one founded on a compromise by the insured with a claimant building owner, not only is there ordinarily a test of reasonableness as to the kind of settlement which would give a right to seek indemnity but, where founded on policies expressed in similar terms to the present, that would include an indemnity against any “reasonable legal costs and expenses” sought by the building owner and agreed to be paid by the insured builder if those costs etc. satisfy the description in the relevant clause.[24]
[22](1933) 34 S.R.(N.S.W.) 88 (F.C.).
[23](1998) 193 C.L.R. 603.
[24]This was in fact what occurred in Reid, as may be seen by the earlier decision of the Tribunal reported as Reid v. FAI General Insurance Co. Ltd. [1999] VCAT 1, where Deputy President Cremean described the nature of a proposed compromise and answered a preliminary question whether indemnity might be obtained under the terms of that policy (slightly different from the present) for costs and expenses directly or indirectly related to the enforcement of the policy. It was held that the policy did grant such an indemnity but the quantum and the method of calculation of the quantum was left over to another day, being in fact the hearing which led to the determination in Reid already referred to.

Whether and to what extent the policy grants an indemnity with respect to costs

The issue is what in the context of this dispute is the proper analysis of the expression “reasonable legal costs and expenses”. The appellant says, as it did below, that, as this relates to agreed compromises of litigation conducted for some time in the Tribunal, the costs provisions should be interpreted as giving rise to a right to be indemnified for costs of the kind which might have been awarded if the two proceedings had reached the point of final determination in each case and conventional orders for costs made in favour of the building owner. [Parenthetically it is to be assumed for this purpose that the discretion under s.109 of the Act would have been exercised so as to lead to an award of costs by the Tribunal in its discretion.] Maclaw, for its part, says that the judgment of the Trial Division judge, affirming the determination of the Tribunal, should likewise be affirmed because it was properly held by both judge and Tribunal that Maclaw as building owner was entitled to a full indemnity for the legal costs incurred by it in enforcing its rights. His Honour[25] held that the “correct interpretation” of the relevant phrase was that adopted by the Tribunal taken from the decision of Deputy President Macnamara in Reid. In order to understand what both judge and Tribunal have said in the present case it is necessary to set out what appears to be the relevant passage from Reid as quoted and relied upon below, for, although it cannot be described as authoritative in the conventional sense, it is the basis upon which the matter has been resolved to the present stage. The relevant passage from paragraph [27] of Reid reads:

Need for a bill of costs

The supplementary issue before the judge in the Trial Division and before this Court was whether it was proper for the Tribunal to refuse to direct the delivery of a bill of costs for the purpose of consideration by the appellant and its advisers and for the purpose of assessment of the relevant costs in the Tribunal. It may be seen from what I have written, perhaps in excessive detail, in relation to the principal issue that the premise upon which Maclaw’s advisers refused to deliver a bill and the Tribunal who refused to direct one were misconceived, although that ordinarily ought to be merely a matter of procedure. Generally speaking, moreover, even where costs are to be assessed or taxed on a solicitor/client or indemnity basis, that is no excuse for refusing to deliver a bill, unless the parties agree to the contrary or unless court or tribunal directs to the contrary. Every form of taxation may require consideration of items of detail, although the basis of taxation may qualify the kind of bills that should be delivered, as may specific rules or regulations on that subject.

In ordinary litigation, whether or not conducted in a tribunal, prima facie a bill should be delivered for consideration by opposing party and by court or tribunal. Even in the case of costs taxed on an indemnity basis, it is open to the unsuccessful party to object that particular items are unreasonable, just as on a solicitor/client basis it is for the judgment creditor to establish that items are reasonable, howsoever that may be achieved in particular circumstances. In the present case there seems to have been a misunderstanding, largely derived from Reid, to the effect that market rates should be the basis of the assessment of costs in cases such as the present. It is unnecessary to embark upon a discussion of the circumstances in which the payment of market rates is appropriately to be allowed as the basis upon which costs may be taxed, but it was clearly wrong in the present case to assume that, merely because the building owner had agreed to pay a particular rate which was not thought to be unreasonable, that that was sufficient proof for the purpose of calculating costs on a daily or hourly basis. It may have been appropriate for taxation on a solicitor/client basis, at least, but that is no longer relevant. What is more important is that in considering costs below there was a failure to distinguish between the reasonableness of the rate charged per hour or the like, and the reasonableness of the items of work performed and the extent of time taken to perform them, to touch only on matters affected by hourly rates of payment. A bill is ordinarily required so that the parties and the court or tribunal can properly ascertain what properly has been done in the necessary enforcement of a party’s rights, so that particular items may be taxed off if they do not satisfy the relevant criterion. It is sufficient to say that a bill should have been directed in the present case. Whether it ought to be directed when the matter is returned to the tribunal is another matter, having regard to the materials ultimately exhibited to the filed affidavits. It should be a matter for the tribunal what is in fact required, when the matter is remitted.

Orders

As already stated I am of the opinion that the appeal should be allowed and that orders numbered 2 and 3 of the judgment given in the Trial Division on 28 February 2003 be set aside and the following orders be made in lieu thereof:

(i)That the appeals against the orders and determinations made by VCAT in proceedings A508/1998 and A509/1998 on 14 December 2001 and 13 February 2002 be allowed and that the first respondent pay the appellant’s costs of that appeal, including the costs of the application for leave to appeal made to Master Wheeler;

(ii)That the said orders and determinations of VCAT made on 14 December 2001 and the orders contained in paragraphs 2 to 6 of each order made on 13 February 2002 be set aside and in lieu thereof there be substituted a declaration in each proceeding that the expression “reasonable legal costs and expenses” in the settlement offer dated 8 May 2000 and in the terms of settlement dated 3 October 2000 (whereby the proceedings were settled) means costs to be assessed and determined on a party/party basis in accordance with the ordinary practices of the Tribunal, but that otherwise the subject matter of each of the applications before the Tribunal be remitted for further determination by the Tribunal according to law, including the costs of the summonses dated 22 May 2001 and 15 October 2001.

I would further order that the first respondent pay the appellant’s costs of and incidental to this appeal including any reserved costs.

NETTLE, J.A.:

I have had the advantage of reading in draft the reasons for judgment of Ormiston, J.A. and the reasons for judgment of Hansen, A.J.A. As their Honours explain, the sole question in this appeal is what is meant by the expression “the reasonable costs and expenses [of Maclaw No. 651 Pty Ltd]” as it appears in two agreements to compromise proceedings in the Domestic Building List of the Victorian Civil and Administrative Tribunal.

I agree with their Honours that the expression means the costs and expenses of Maclaw No. 651 Pty Ltd assessed on the basis which would properly have applied if orders for costs had been made in favour of Maclaw No. 651 Pty Ltd as the successful party in the Domestic Building List proceedings.

I also agree with their Honours that where an order for costs is made in favour of a successful party in Domestic Building List proceedings, the costs should

ordinarily be assessed on a party/party basis. If and to the extent that Reid v. FAI[51] suggests otherwise, I agree with Ormiston, J.A. that it is wrong and should not be followed.

[51][1999] VCAT 1773.

Of course there may be occasions when it is appropriate to award costs in favour of a successful claimant in Domestic Building List proceedings on an indemnity basis. But those occasions will be exceptional and, broadly speaking, circumscribed by the same criteria as govern the award of indemnity costs pursuant to Rule 63.28(c) of the Supreme Court (General Civil Procedure) Rules 1996.[52] It is not suggested that the circumstances of this case satisfy those criteria.
[52]See Williams, Civil Procedure Victoria at [63.02.205] and [63.02.210].

I concur in the orders proposed by Ormiston, J.A.

HANSEN, A.J.A.:

This appeal is brought by leave from a judgment given in the Common Law Division on an appeal on a question of law from a decision of the Victorian Civil and Administrative Tribunal (VCAT). The decision was made in two proceedings, A508/1998 and A509/1998, in which the parties were identical. (A third proceeding, A507/1998, is not relevant to this appeal.)

The learned judge affirmed the decision of VCAT that a provision in settlement agreements that the appellant pay “the reasonable legal costs and expenses” of the first respondent meant costs assessed on an indemnity basis. The appellant contends that the expression means costs on a party and party basis. That difference of construction is the primary point raised for decision by the appeal. A second question is whether before proceeding to determine the amount of the costs and expenses on an indemnity basis VCAT should, as the appellant requested, have required the first respondent to provide a bill of costs in taxable form. The Deputy President of VCAT who heard the matter rejected that application and ordered that the appellant and second respondent (who has not participated in the appeal) pay the first respondent’s “reasonable costs” fixed at $39,292.12 with interest in proceeding A508/1998, and $325,414.46 with interest in proceeding A509/1998. He also ordered that the appellant and second respondent pay the first respondent’s costs of its application for an order for costs, dated 22 May 2001, such costs to be on the Supreme Court Scale, on an indemnity basis, and assessed by the Principal Registrar.

While he affirmed the decision of VCAT that “reasonable costs and expenses” meant costs on an indemnity basis, the judge otherwise allowed an appeal against the orders for interest. There is no appeal from the decision on interest.

The appellant and the second respondent were insurers, together with HIH Casualty and General Insurance Ltd (HIH), for their respective interests under a policy of domestic building insurance relating to stage one and stage two of domestic building work at a property of the first respondent in Flemington. Proceeding A508/1998 related to stage two, and proceeding A509/1998, to stage one. The builder became insolvent and did not complete the works. On a claim being made by the first respondent, the insurer denied liability under the policy. On 22 July 1998 the first respondent commenced the proceedings in the Domestic Building List at VCAT. Initially HIH was the only respondent. The appellant and the second respondent were added as respondents subsequently. The builder was also a respondent, but is not a party to the appeal.

By amended points of claim dated 22 December 1998 the first respondent claimed against the insurers and the builder (also a respondent to the proceedings) orders and declarations to the effect that it be indemnified under the policy, damages, interest and costs.

The proceedings were settled on terms which included the following. In A508/1998 the first respondent, on 19 May 2000, accepted the offer of the insurers that:

“… In Full And Final Settlement of all claims in this proceedings … to pay …:
1.the sum of $112,627 (inclusive of interest, if any), such payment to be made within 30 days …

AND
2.the applicant’s reasonable legal costs and expenses to be assessed by the Tribunal in default of agreement between the parties...”

In proceeding A509/1998 the parties entered into terms of settlement dated 3 October 2000 which provided for payment of a sum in full settlement of the claim and interest and, in addition, that “the Insurers agree to pay the Applicant’s reasonable legal costs and expenses in relation to the claim and the proceeding, the amount of such reasonable costs and expenses to be determined by VCAT in default of agreement …”.

On 6 December 2000 the appellant’s solicitors asked the first respondent’s solicitors for bills of costs in taxable form for each case. On 1 March 2001 the first respondent’s solicitors replied stating that given the decision of VCAT in Reid v. FAI General Insurance Co. Ltd.[53] “your clients’ are obliged to pay all our client’s costs and expenses on a full indemnity basis”. The solicitors refused to provide bills in taxable form. The appellant’s solicitors disputed this position. On 22 May 2001 the first respondent filed an application in each proceeding for an order that the insurers pay its reasonable legal costs and expenses of the claim and the proceeding. The application was supported by affidavits of the first respondent’s solicitor and a cost consultant.
[53][1999] V.C.A.T. 1773.

On 16 October 2001 the appellant filed an application in each proceeding for an order that the first respondent provide a bill of costs in taxable form on or before 22 October 2001. That was with a view to the bills being available before the hearing of the first respondent’s application. Bills in taxable form were never provided.

The first respondent’s application for costs was heard on 31 October 2001 and judgment was given on 14 December 2001. It was determined that the expression “reasonable costs” was to be interpreted in accordance with the decision in Reid v. FAI General Insurance Co. Ltd, and that the first respondent was entitled to interest and to costs (including reserved costs) according to the Supreme Court Scale on an indemnity basis under s.109 of the Victorian Civil and Administrative Tribunal Act 1998 (the Act). By a subsequent order, made on 13 February 2002, the costs were fixed, and ordered to be paid, in the amounts mentioned earlier, the appellant’s application dated 16 October 2001 was dismissed and the first respondent received an order for the costs of its application for costs.

On 15 April 2002 Master Wheeler granted the appellant leave to appeal from the orders of VCAT. The notice of appeal identified three questions of law as arising on the appeal, namely:

1.Whether the expression “reasonable costs” meant costs on a party/party, solicitor/client, indemnity, or some other basis?

2. Whether VCAT had power to award interest?
3.In what circumstances is a party entitled to have bills of costs in taxable form delivered to it, and to have the bills taxed before any final order for costs is made by VCAT?

In his reasons the judge noted the submission of the appellant that “reasonable legal costs and expenses” referred to party/party costs. Then, after noting that in context the phrase could refer to different cost bases, he referred to the first respondent’s submission that the phrase authorised the use of market rates and the reasonable indemnification of a claimant. The first respondent submitted that the interpretation of the phrase “reasonable legal costs and expenses” in Reid was well understood and commonly applied at VCAT when the settlements were agreed. That indicated that the parties intended that meaning in their settlement terms. His Honour observed, however, that there was insufficient evidence of the acceptance or non-acceptance of Reid’s case in VCAT. His Honour then said:

“38.The issue is to be resolved, in my view, on the basis rather that what the parties clearly did was settle the claims related to the direct losses caused by the builder and to take to VCAT the other aspect of the claim brought under the policies, namely the claim for ‘reasonable legal costs and expenses’. That is, the parties used the phrase from the policies so that their rights under the policies were preserved by the settlement terms. As a result the determination of the entitlement of Maclaw under the settlement terms would turn principally on the meaning of the phrase ‘reasonable legal costs and expenses’ in the policies.
39.Turning then to the construction of the phrase, in my view, the interpretation adopted by Deputy President Macnamara and Deputy President Cremean is the correct interpretation. I draw particular attention to the fact that:
·    the policies are provided pursuant to consumer protection legislation;
·    the approach taken to providing consumer protection is to use insurance;
·    the policies, while subject to limits, are intended to offer indemnity insurance with an obligation to protect up to the limits provided in the policy;
·    if the entitlement to costs were to be less than an indemnity, it would inevitably result in successful claimants having to meet a significant portion of the costs and expenses of pursuing their claim out of the monies intended to compensate them for the direct losses flowing from the builder’s default. This would severely impede and could defeat the purpose of the legislation.
·    in most cases, there will be a significant difference in the financial strength of the claimants and the insurers. I refer not merely to the fact that the insurers are likely to have access to significantly greater financial resources but also to the fact that, typically, claims will be made by claimants under financial pressure because of default by builders. To adopt the interpretation sought by PIU and GIO would place claimants at a serious disadvantage in any negotiation because they could not afford to embark upon any contest with the insurer and the insurer would be well aware of that fact. To create such a situation would, in my view, severely impede if not defeat the purpose of the legislation. To adopt the interpretation advanced by Maclaw, however, reduces any imbalance. The insurer is protected by the requirement of reasonableness.
For these reasons I have come to the conclusion that the phrase “reasonable legal costs and expenses” in the offer and acceptance and the terms of settlement is to be construed as entitling Maclaw to reasonable legal costs and expenses assessed on an indemnity basis – the construction adopted below.”

It can be observed at once that the decision in Reid was not of assistance to the first respondent. Indeed, if anything it supported the appellant. That is because the discussion in Reid on which the Deputy President relied, as did counsel for the first respondent on this appeal, concerned the issue of whether certain legal costs could be recovered as part of the claim and, if so, the basis on which they should be assessed. That issue was resolved and an allowance was made for the recovery of legal costs as part of the claim. Having determined that issue the Deputy President in Reid then dealt with some other issues and concluded with the matter of the costs of the proceeding. It is instructive to note how he dealt with costs. The Deputy President said:

“[31]The general provision of Section 109(1) of [the Act] is that the costs lie where they fall. Sub-sections (2) and (3) of that provision however, permit a departure from that rule in light of a wide number of circumstances including inter alia ‘the nature and complexity of the proceeding’ Section 109(3)(d) and ‘any other matter the Tribunal considers relevant’ Section 109(3)(e). In the present case Mr Reid makes a claim under a policy of insurance issued as a measure of consumer protection. If he does not receive an indemnity for the costs which he incurs in mounting this claim he will receive less than the Statute and the Ministerial Order supposed that he should. Moreover, in the present instance the insurer has failed to pay the rectification costs for Mr Reid’s house for the purpose of exacting from him a release for the claim for legal costs and other expenses which I have substantially upheld. For reasons which I gave in Salerno v. Crimes Compensation Tribunal (1995) 8 V.A.R. 272, 283 with respect to the General Division of the old Administrative Appeals Tribunal and Malthall Proprietary Limited v. Bevendale Pty. Ltd. (No. 2) (1998) V. ConvR. ¶ 58-528 the correct scale to apply in these circumstances is the County Court Scale and having regard to the sum of money claimed, the costs should be fixed by reference to Scale ‘C’.”

This order entitled the successful party to costs fixed on a County Court Scale as between party and party. Such an order is consistent with “an indemnity”, as that is the long understood purpose of an order for party/party costs, even though costs on that basis do not cover all of a party’s costs.

In the present proceedings the first respondent’s claim for costs and expenses was not for costs as part of the claims, as in Reid. Indeed, the claims had been settled. The claim before the Deputy President was for the costs of the proceeding in the true sense.

In my view the judge erred in his conclusion that “reasonable legal costs and expenses” meant costs on an indemnity basis as VCAT had decided. In so deciding the judge was agreeing with the view expressed in VCAT, based on Reid, that the indemnity should be “a full indemnity for legal costs”. But the part of the reasons in Reid that was relied on was irrelevant to the point as it dealt with costs as part of the claim. Hence the reliance on that part of the reasoning was misplaced. Further, when the reasoning in Reid is examined it is seen that the costs claimed as part of the claim were not a full indemnity on the basis of the scale used, as an allowance off was made. The allowance was made because it was appropriate to do so when allowing for legal costs as part of a claim.

It follows that when the judge said that he agreed with the construction of the phrase in the policy adopted in Reid and by the Deputy President in this case, there was a misapprehension as to the point to which the discussion in Reid that was relied on was directed, and it was also overlooked that in Reid the costs of the proceeding were ordered on a party/party basis. It is not to the point on this appeal whether Reid was correctly decided on the issue of recovery of legal costs as part of a claim, or as to the basis on which such costs are properly to be assessed, and nothing said here reflects on that part of the decision.

It is convenient at this point to note that counsel referred to some cases concerned with the interpretation and application of provisions entitling a party to costs. Cases abound in which courts have considered whether a phrase describing a right to costs meant party/party or some other basis of costs. The phrase might be found in legislation, or in an agreement between parties or order of a court. In each case the answer will depend upon the particular language expressing the entitlement and the context in which it is used. In Spencer v. Dowling[54] the Court of Appeal considered s.47(2) of the Equal Opportunity Act 1984 which required the Equal Opportunity Board to award “costs reasonably incurred” in the absence of special circumstances. It was held that in the statutory context “costs reasonably incurred” referred to costs assessed on a party/party basis, and not on a solicitor/client basis. It is to be noted that in his judgment Winneke P said that the words “costs reasonably incurred”:
[54][1997] 2 V.R. 127.

“ … are apt to describe costs on a party and party basis, as much as they are to describe costs on a solicitor/client basis, because such costs have always been regarded as the costs which are reasonably incurred in the attainment of justice between the parties … There seems to me to be no justification for assigning to the words ‘special circumstances’ a meaning which limits them to ‘depreciating’ rather than ‘appreciating’ circumstances. … It would be surprising, to say the least, if Parliament was obliging the board to award (absent special circumstances) a higher measure of costs than are traditionally awarded in the superior courts of this State.”

Agreements which commonly confer an entitlement to costs are mortgages and leases, and the question has often arisen as to the nature and extent of the entitlement conferred. An example of a mortgage is In Re Adelphi Hotel (Brighton) Ltd.[55] where Vaisey J held that the mortgagee’s right to “all costs charges and expenses” of negotiating, preparing, realising and enforcing the mortgage was to costs taxed as between party and party, observing that (at 961):
“ … any other basis of taxation is only justified when the party asking for it can show that he is entitled to it either upon some well-recognised principle, or under some contract plainly and unambiguously expressed.”

On the other hand, the conclusion was to the contrary in Gomba Holdings Limited v. Minories Finance Limited[56] where the mortgage provided that the mortgagor would pay on demand and on a full indemnity basis all costs, charges and expenses however incurred by the mortgagee or a receiver under the mortgage or in enforcing the security. The Court of Appeal held that this provision entitled the bank to the actual costs, charges and expenses except for any costs that had not been reasonably incurred or were unreasonable in amount. That qualification is well understood in the taxation of costs on a solicitor/client or indemnity basis (the difference between those bases being upon whom the onus to establish the lack of reasonableness lies), and is important to remember in light of the reference in the reasons of the Deputy President to a “full” indemnity and to his approach to the assessment of the first respondent’s costs. As to leases, it is sufficient to refer to the recent decision in Carbure v. Brile (No. 2)[57] where Balmford J held that the phrase “the landlord’s reasonable expenses” of any default by the tenant and the exercise of any right or remedy against the tenant required the tenant to pay costs on a party/party basis. Her Honour referred to Ensabella v. Players On Down Under Pty. Ltd[58] where the Court of Appeal held that the requirement of the tenant to pay “costs charges and expenses” incurred in consequence of default imported an obligation to pay party/party costs only. In Carbure Balmford J considered that the addition of the adjective “reasonable” did not require the tenant to pay more costs, in particular on a solicitor/client basis, than it would have without that addition.

[55][1953] 1 W.L.R. 955.

[56][1993] Ch. 171.

[57][2002] V.S.C. 313.

[58][2000] V.S.C.A. 73.

With those observations, and bearing in mind that both counsel focussed on the settlement terms and relevant context, I return to the matters referred to by the judge in addition to Reid’s case. In my view none of the other matters constitute reason to conclude that the phrase was intended to mean costs on an indemnity basis.

In my view, the various factors to which the judge drew attention, apart from the aspect of consumer protection legislation, may be as applicable in indemnity insurance situations generally as they are in the area of domestic building insurance. There is no rule or practice that in a successful claim under a policy of indemnity insurance costs will be ordered on a basis other than party/party. Of course, in any case circumstances may exist, often called special circumstances, which may warrant a more beneficial order on costs. Further, under an indemnity cover, an insured will recover by way of loss only that which can be recovered under the terms of the policy, and that may not be what the insured regards as the full loss. Even if an insured were to recover to the full extent of the indemnity it would not follow that without something special in the circumstances, costs would be ordered on more than the usual party/party basis.

The first respondent submitted that the consumer protection aspect was to be seen in the requirement for compulsory insurance in the Domestic Building Contracts Act 1995, the Ministerial Order and the policy, the purpose of which was, subject to the terms of the cover, to save a home owner harmless from loss in the event of, for example, defective work or the builder not completing the job. For its part, the appellant insisted that the phrase was to be construed as it stood in the settlement agreements. They contained the parties’ agreement on costs and, as with any written agreement, the intention of the parties was to be ascertained from their terms.

Although the policy exists in the context of legislation concerned to protect home owners from loss, that factor does not establish that the phrase “reasonable legal costs and expenses” means costs on an indemnity basis. Why should that factor, even with the other factors referred to by the judge, mean that in their settlement terms the parties intended an indemnity basis rather than a party/party or solicitor/client basis? I find nothing in the phrase, whether considered in the terms alone or in the context of the policy, the Ministerial Order, and the purpose of consumer protection, that indicates that the intention of the parties in using the word “reasonable” was that the costs should be paid on an indemnity basis.

It was further submitted by the appellant that it was impermissible for the judge to decide that “the parties used the phrase from the policy so that their rights under the policies were preserved by the settlement terms”. This decision was attacked on the basis that there was no evidence to support it. His Honour regarded the position as clear, but he referred to no evidence that established that this was the parties’ intention and none was referred to on the appeal. The fact that the phrase in the policy was used in the settlement terms does not mean that the parties intended to preserve “their rights under the policies”. There was no evidence as to the intention of the parties, other than as might have been conveyed by the settlement terms, and it was not open to the judge to speculate as to those intentions.

Moreover, the decision was I think based on a false premise as to what those rights were. Underlying the decision is the misapprehension as to the decision in Reid. Reid did not decide that in VCAT costs of a proceeding should be awarded on an indemnity basis as distinct from party/party or solicitor/client or any other basis. Yet it must have been that false understanding that the judge had in mind in referring to the parties preserving their rights under the policies. If Reid is put to one side, the only “right” is to reasonable legal costs and expenses, but to refer to that does not establish a “right” to costs on an indemnity basis.

Regarding the matter for myself, the phrase “reasonable legal costs and expenses” refers to costs on a party/party basis. If anything, the introduction of the word “reasonable” reinforces this understanding of the phrase, rather than indicating some greater right to costs. As the judge said, the parties used the phrase in the policy but there is nothing in the policy or the Ministerial Order which carries the meaning in the settlement terms that the costs are to be on a basis other than party/party. If the matter is put as the first respondent does, and it is contended that the phrase means a “full” indemnity, or an indemnity in the sense of something more than solicitor/client but less than a complete indemnity, I am unable to find anything in the terms to establish that construction.

It follows from these reasons that the first respondent was entitled under the settlement agreements to costs on a party/party basis, and that the first question of law raised on the appeal should have been answered accordingly.

This leaves for consideration the third question of law concerning the provision of bills of costs in taxable form. The judge considered the appellant’s criticisms of the procedure that was followed in establishing and testing the costs and expenses claimed by the first respondent, in particular in the failure to require the provision of bills in taxable form. The judge, noting that the insurers had “detailed information of the claims” said that the insurers “had it in their own power to investigate those claims further if they had so wished”. Considering that the insurer’s highest case was that views could differ as to the best procedure to have been followed in the circumstances, the judge found that no error of law had occurred in refusing to require the provision of bills of costs.

Counsel for the appellant submitted that the judge erred in so concluding, and contended that he should have required the first respondent to supply bills in taxable form. That order should now be made as, unless it is, the appellant can not assess the reasonableness or otherwise of costs. The information provided by the first respondent was merely invoices showing details of time based charges. Moreover the evidence of the deponents before VCAT was that the rates charged were reasonable but there was no express evidence that the various items of work were reasonably required to be performed or were reasonable in themselves. Notwithstanding that lack of evidence, and the possibility “that it is possible for a bill detailing reasonable costs to include unreasonable items”, the Deputy President concluded that, relying on the evidence, the fees charged, at the charge-out rates applied, were “appropriate and reasonable”. He said that “there was nothing in these bills which looked to me to be untoward or obviously unreasonable”. Those remarks indicate that the Deputy President acted, in part, on the appearance of the charges.

The shortcomings, and risk of injustice, in such an approach are evident. Yet it is not necessary to determine whether there was error in refusing to require bills of costs. That is because the question of costs will have to be considered afresh. The hitherto erroneous approach of indemnity costs must be discarded. The logical first step is for the first respondent to provide the appellant with details of its costs in such a form that enables a proper appraisal to be made. The parties may agree on the costs but, if they do not, it will be for them to consider the way in which the costs should be ascertained. In this respect Reid provides the obvious guide of ordering that the first respondent’s costs be paid on the appropriate court scale, that such costs be assessed by the Principal Registrar, and with such further or other directions as may be appropriate to facilitate the assessment. In these circumstances the need for an order for bills of costs in taxable form may not arise. Nor may it even become necessary for there to be an order for an assessment. If it were not for these circumstances the expedient course might be for this Court now to order such an assessment. However, in the entirely changed circumstances the better course is not to make such an order, leaving the further conduct of the matter to the parties and VCAT. For these reasons it is neither necessary to determine the third question of law nor appropriate to order that bills of costs in taxable form be provided.

For these reasons I would allow the appeal. Orders should be made as proposed by Ormiston, J.A.

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[2005] VSCA 165

29 June 2005