17. Costs in the Domestic Building List and the effect of Offers of Compromise

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1 17. Costs in the Domestic Building List and the effect of Offers of Compromise The General Rule Pursuant to Section 109 of the VCAT Act 1998, the general rule is that parties will bear their own costs. However, the Tribunal has a discretion to award costs under section 109(3) having regard to (a) whether a party has conducted the proceeding in a way that unnecessarily disadvantaged another party to the proceeding by conduct such as (i) failing to comply with an order or direction of the Tribunal without reasonable excuse; (ii) failing to comply with this Act, the regulations, the rules or an enabling enactment; (iii) asking for an adjournment as a result of (i) or (ii); (iv) causing an adjournment; (v) attempting to deceive another party or the Tribunal; (vi) vexatiously conducting the proceeding; (b) whether a party has been responsible for prolonging unreasonably the time taken to complete the proceeding; (c) the relative strengths of the claims made by each of the parties, including whether a party has made a claim that has no tenable basis in fact or law; (d) the nature and complexity of the proceeding; (e) any other matter the Tribunal considers relevant.

2 Recent Trends The recent trend in the Domestic Building List is that costs will follow the event. In Australian Country Homes Pty Ltd v. Vasiliou, Senior Member Young indicated that where a matter in the Domestic Building List involved what could be described as a complex legal matter, costs would follow the event. This must be contrasted with Sabroni Pty Ltd v Catalano where Deputy President Aird said that there was nothing in the nature of a proceeding in the Domestic Building List that would justify departure from the presumption contained section 109. Under s.109(3)(c), the Tribunal may take into account the relative strengths of the claims made by each of the parties, and therefore a substantially successful party may be entitled to have a reasonable expectation that costs will be made in its favour: Lefkas Builders Pty td v Dondas Constructions Pty Ltd. In Lefkas Builders, although the applicant was successful in their claim, Deputy President Aird did not award costs as the applicant had conducted the proceedings in a manner that was disadvantageous to the Respondent, which is a specific factor for consideration under s.109(3)(a). This was evidenced by the fact that the Applicant made significant changes and variations in the claim during the course of the proceeding. As a consequence of the Applicant s conduct, the Respondent did not have notice of the final claim to be made against it until the last business day before the hearing commenced. Under s.109 (3) (d), the Tribunal may have regard to the nature and complexity of the proceeding when determining whether to make a costs order under s.109. In Ryan v Urbane Builders Senior Member Lothian found that the Respondent s conduct unnecessarily and unreasonably prolonged the time spent in hearing and this was a relevant factor for consideration when awarding costs under section 109(3).

3 Case Study Brien v Brighton Pool Shop [2006] VCAT 2457 Senior Member Cremean was critical of the manner in which the unsuccessful Respondents conducted themselves, both during the litigation and during the project itself. He departed from the Section 109 presumption that parties bear their own costs for the following reasons: the Applicants not only succeeded but did so to an amount nearly 10 times that which was ordered on the Counterclaim; the attitude of the Respondents caused the proceedings to become long, complex, detailed and very expensive. Senior Member Cremean described these delays as unfortunate and inconvenient and irritating ; certain practices of the First Respondent were deemed extremely hazardous, illegal, wrong headed and unjustified; and the Applicants made many very reasonable compromises but the First Respondent was obstinate and unreasonable. Commentary Cases like Brien are evidence that the entitlement to costs will largely depend on the conduct of the parties in the litigation and the idiosyncrasies of the particular member rather than the merits of the claim, especially given the general rule. Litigants should be wary of any delaying conduct and should seek to explain any irregularities or illegality of their clients at the earliest possible time.

4 Offers of Compromise Section 112 states: Presumption of order for costs if settlement offer is rejected (1) This section applies if (a) (b) (c) (d) a party to a proceeding (other than a proceeding for review of a decision) gives another party an offer in writing to settle the proceeding; and the other party does not accept the offer within the time the offer is open; and the offer complies with sections 113 and 114; and in the opinion of the Tribunal, the orders made by the Tribunal in the proceeding are not more favourable to the other party than the offer. (2) If this section applies and unless the Tribunal orders otherwise, a party who made an offer referred to in sub-section (1)(a) is entitled to an order that the party who did not accept the offer pay all costs incurred by the offering party after the offer was made. (3) In determining whether its orders are or are not more favourable to a party than an offer, the Tribunal (a) (b) must take into account any costs it would have ordered on the date the offer was made; and must disregard any interest or costs it ordered in respect of any period after the date the offer was received. Requirements for valid offers It is important that the offer is capable of acceptance. In Ahn Construction v Shoji Investments Pty Ltd [2004] VCAT 2425 Senior

5 Member Walker held that an offer made by one party that was conditional upon settlement of another proceeding did not fulfil the requirements of the VCAT Act, and therefore it had no impact on the order for costs. The importance of careful compliance with the provisions of the VCAT Act is evidenced in Fasham Johnson Pty Ltd v Ware (2004) VCAT 1708 in which Senior Member Cremean made the following comments: In light of the regime fixed by s.112, 113, 114 and 115 of the Act, I would be in doubt that there is any room for a Calderbank v Calderbank offer to be made in proceedings in the Tribunal. I would think an offer of compromise that does not comply with that regime cannot operate as an offer of compromise at all. The meaning of all costs There has been a variety of approaches taken to the meaning of all costs in Section 112 (2). In Paleka v. Suvak (unreported, VCAT, Walker SM, 31 August 2000) Senior Member Walker held that VCAT had a discretion to award either party/party, solicitor/client or indemnity costs depending on the circumstances. The general approach has been to award solicitor/client costs (see Ryan v Urbane Builders). However, in Pratley Constructions v Racine [2005] VCAT 457, Senior Member Young made an order for indemnity costs where an offer to settle was in the hands of an Applicant who had a significantly weaker case than the Respondent. In Gower v. Vero Insurance Limited [2005] VCAT 1447 Senior Member Cremean made an order for costs on an indemnity basis against the respondent due to untruthful evidence put forward by the insurer. Dover Beach v Geftine [2008] VSCA 248 VCAT Decision As discussed above, in VCAT, Dove J found for the owner and awarded $29,950 as damages. Dove J examined the effect of an offer of compromise by the owner on the following terms (relevant portions):

6 3. The Applicant pay to the First & Third Respondents the sum of $25, The Applicant shall pay to the First & Third Respondents such costs, if any, as may be agreed between these parties or, in default of agreement, as may be fixed by the Tribunal 10. This offer is made without prejudice to the right of the Applicant to submit to the Tribunal that the Respondents are not entitled to any costs in this matter. The Builder submitted that VCAT should not exercise its discretion under Section 109 to award costs on the grounds that the offer: a) was flawed and uncertain in its terms due to paragraphs 4 and 10, and b) was unfair as it only gave the Respondents 21 days to accept, when a significant part of that period was absorbed by the Christmas-New Year holiday period. VCAT held that the offer was as clear and precise as the Section 112 of the VCAT Act allowed. Dove J noted: In the event that its offer was accepted by the respondents, that the general provisions of s.109 should apply and that no order for costs should be made; If s.109 applied, a presumption arose that no costs should be ordered to be paid. As s.112 does not contain any provision concerning costs in relation to acceptance of an offer of compromise, the Tribunal would be left to determine the entitlement to costs pursuant to the provisions of s.109. This regime stands in contrast to the relevant provisions of O.26 Supreme Court Rules. O which states that unless the Court otherwise orders, the defendant shall pay the costs of the plaintiff in respect of the claim up to and including the day the offer was served and costs shall only be refused in exceptional circumstances. It offered $25, and further offered to pay the respondents costs, if the Tribunal so ordered. In doing so it was echoing the spirit of O.26, by agreeing to pay costs if the Tribunal so ordered. Any complaint of lack of clarity or precision might properly be directed at the drafting of s.112.

7 The Tribunal rejected any suggestion that the offer was invalid due to lack of time to accept on the basis that: 1. neither the VCAT Act nor the Rules make any provision for a period during which time shall not run; and 2. the concept of a summer vacation does not exist at VCAT, where the Tribunal resumes sitting in early January. Dove J awarded party/party costs up to the day of the offer and indemnity costs thereafter. Court of Appeal As discussed above, the matter has been remitted back to VCAT to determine the Builder s Counterclaim however the Court of Appeal made comments in obiter about the costs orders in VCAT. Each of the members of the Court agreed with that offer was not uncertain and complied with section 112. Ashley JA held:..the offer created no greater or lesser degree of uncertainty than arises under the Rules, and which is unexceptional. All Geftine did, with respect to costs, was to tell Dover that by its offer the costs regime set up by the VCAT Act was to apply (in the absence of agreement between the parties as to costs) according to its tenor [para 123] Commentary As the Geftine decision indicates offers must be properly considered when received. Appeal against insurers Case Study Housing Guarantee Fund Ltd v Ryan [2005] VSC 214 Facts

8 The Applicants were home owners who applied a review of a decision of the Housing Guarantee Fund. In 29 July 2004 the substantive application settled on the basis that the respondent would pay the applicants the sum of $100,000 plus their reasonable legal costs and expenses. Prior to that settlement the applicants had made an offer of compromise whereby they signified their willingness to accept payment from the respondent of $90,000 in full and final settlement of their claim. VCAT Decision Young SM ordered that the phrase reasonable costs and expenses as used in the policy entitled the home owners to costs assessed on an indemnity basis. Supreme Court The Insurer appealed to the Supreme Court. Although the costs element was not appealed by the insurer, Mandie J commented that the phrase reasonable legal costs and expenses used in the context of an insurance policy should be interpreted as referring to party-party costs only. His Honour referred to Pacific Indemnity Underwriting Agency Pty Ltd v Maclaw No 651 Pty Ltd & Anor [2005] VSCA 165 (29 June 2005) in which Hansen JA at para 118 stated: the phrase 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 costs are to be on a basis other than party/party. On remitter to VCAT, Senior Member Young followed the obiter of Mandie J and Maclaw and awarded costs on a party/party

9 basis. Commentary Both Maclaw and HGF v Ryan are authority for the proposition that owners will be entitled to party/party costs on a successful claim. The door is still open for owners to make offers of compromise which would entitle them to greater costs if such an offer was not bettered at hearing, as in the Geftine decision.