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[2003] VSC 40
mixed. The appeal against the order for interest on costs succeeded. The appeal otherwise failed. The judge invited counsel’s submissions before making final orders ([234], [237]).
The Court held that the insurers had to pay Maclaw’s reasonable legal costs on an indemnity basis because the settlements preserved a costs claim using language from consumer-protection insurance policies intended to provide indemnity cover. But the settlements did not preserve a separate claim for interest on those costs, so VCAT should not have awarded interest. The insurers also failed to show that VCAT made an error of law by refusing to require bills in taxable form.
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In Pacific Indemnity Underwriting Agency Pty Ltd v Maclaw No 651 Pty Ltd [2003] VSC 40, Smith J considered an appeal from costs decisions made by the Victorian Civil and Administrative Tribunal. The judgment concerned three related questions: what costs basis was meant by “reasonable legal costs and expenses”; whether Maclaw could recover interest on those costs after settling other parts of its claims; and whether VCAT had to require Maclaw to provide bills in taxable form.
No linked legislation citations have been extracted yet.
Maclaw owned land in Flemington and proposed to construct a multi-storey residential development. Its builder, Dwyer and Johnson Constructions Pty Ltd, became insolvent in May 1998 and could not complete the project. Maclaw made claims under the relevant domestic building insurance, but liability was denied. It then brought proceedings against PIU and the insurer then referred to as GIO, later known as Gordian Run Off Limited ([9], [16]).
The parties resolved the main compensation claims in separate arrangements in 2000. The May offer provided for payment of $112,627 in full and final settlement of all claims, and separately for Maclaw’s “reasonable legal costs and expenses” to be assessed by VCAT if the parties could not agree. The October terms provided for payment of $1.2 million in full settlement of Maclaw’s claim and interest, as well as reasonable legal costs and expenses to be determined by VCAT if necessary ([22]).
VCAT decided that “reasonable costs” should be interpreted consistently with Reid v FAI General Insurance Co Ltd [1999] VCAT 1773. It treated the phrase as permitting indemnity costs, awarded interest on costs, and declined the insurers’ request for bills in taxable form ([48], [56]). PIU obtained leave to appeal, identifying questions about the meaning of the costs phrase, VCAT’s power to award interest on costs and the circumstances in which taxable bills should be required ([64]).
Smith J allowed the appeal only on the interest issue. The appeal otherwise failed. The judgment concluded by inviting submissions before final orders were made ([234], [237]).
The Court did not accept that “reasonable legal costs and expenses” necessarily meant party/party costs. Smith J said the phrase was “flexible in meaning” and that its meaning depended on context ([144]). It could, depending on that context, refer to party/party costs, solicitor/client costs, indemnity costs, or none of them ([147]). The decision therefore turned on the particular agreements and the insurance setting, rather than on a universal definition of the phrase.
The settlements did not simply introduce a new, independent costs entitlement in isolation. Smith J reasoned that the parties settled claims for direct losses caused by the builder while leaving the insurance-related costs claim for determination. They used the costs language from the policies to preserve that claim. The Court therefore treated the meaning of the settlement language as turning principally on the meaning of the equivalent phrase in the insurance policies ([167]).
The statutory and commercial setting mattered. The relevant policies were provided under domestic building legislation intended to protect consumers. They offered indemnity insurance, subject to policy limits. Smith J considered that a party/party costs interpretation could make successful claimants fund a significant portion of pursuing their claims from the money intended to compensate them for losses caused by the builder. That could impede or defeat the legislative purpose. He also considered the imbalance between insurers and claimants, who might be under financial pressure following a builder’s default. On the Court’s reasoning, indemnity-based costs reduced that imbalance, while the requirement that the costs be reasonable continued to protect the insurers ([170]).
The interest issue was decided by close attention to what each settlement did and did not preserve. For the May offer, the Court read the provision for payment of reasonable costs alongside the settlement of “all claims”. Because the offer did not reserve a claim for interest on those costs, Smith J concluded that the interest claim had been settled when Maclaw accepted the offer ([196]). The October terms expressly dealt with the claim and interest, and separately left reasonable legal costs and expenses to be determined. But the Court did not read that reservation of costs as also reserving interest on costs. It also considered the broad release in paragraph 7 of those terms ([199], [203]). The result was that the insurers had been released from liability for interest on costs under both arrangements ([206]).
On the taxable-bill issue, Smith J treated the insurers’ complaint as a challenge to the way VCAT managed the hearing. VCAT had broad powers to regulate its own procedure, subject to requirements including fairness and natural justice ([222]). The insurers had detailed information about the cost claims and could investigate further. VCAT considered the evidence and the specific criticisms made. The Court held that the insurers showed, at most, that another procedure might have been preferred; they did not show that VCAT was legally required to order taxable bills or that its procedural discretion involved an error of law ([227], [230]).
The judgment addresses how a particular phrase should be read in a particular contractual and statutory setting. Before this decision, the parties disagreed about whether “reasonable costs” had a settled ordinary meaning in the costs jurisdiction. PIU argued for party/party costs, while Maclaw relied on Reid and argued for an indemnity measure. Smith J did not accept that the expression had a fixed meaning detached from its setting. His analysis was that the phrase could bear different costs meanings and required careful attention to context ([141], [144], [147]).
For this dispute, the Court affirmed the VCAT outcome on costs: the reasonable legal costs and expenses were assessable on an indemnity basis. The key contextual features identified were the policy wording carried into the settlements, the indemnity nature of the insurance, and the consumer-protection purpose of the scheme ([167], [170]). This should not be read as holding that every contractual promise to pay “reasonable costs” means indemnity costs. The judgment expressly states that the phrase is capable of varying meanings depending on context ([147]).
The decision also illustrates a separate point about settlement drafting. A provision that keeps a claim for costs open does not necessarily keep open a distinct claim for interest on those costs. The Court examined the actual language of each settlement and held that interest had not been reserved ([196], [203], [206]). The judgment does not establish that interest can never accompany an unresolved costs claim. Its conclusion arose from the wording and releases in these two settlements.
Finally, the decision distinguishes an error of law from disagreement about procedural choices. VCAT’s broad procedural powers operated alongside duties of fairness and natural justice. On the facts described, the insurers’ access to detailed costs information and opportunity to challenge the claim meant that the refusal to order taxable bills did not establish legal error ([222], [227], [230]).
At [147], Smith J explained that “reasonable legal costs and expenses” may refer to different costs measures depending on context. In plain English, the phrase does not automatically tell the reader which legal costs scale applies. The surrounding contract, statutory purpose and circumstances matter.
At [167], Smith J identified the link between the settlements and the insurance policies. The parties had settled the direct-loss claims but left the costs issue unresolved using language drawn from the policies. In plain English, the settlements carried forward the policy-based costs question rather than replacing it with a wholly separate measure.
At [170], Smith J concluded that the phrase entitled Maclaw to reasonable legal costs assessed on an indemnity basis. The reasons included the consumer-protection context and the risk that claimants would otherwise have to use compensation for direct losses to pay a substantial part of the costs of pursuing their claims. The indemnity interpretation did not remove the reasonableness limit.
At [196], the Court held that the May settlement did not preserve interest on costs. The offer settled all claims, and the costs provision did not mention or reserve interest on those costs. In plain English, keeping the costs amount to be assessed was not enough to keep a separate interest claim alive.
At [206], the Court expressed its conclusion for both settlements: the insurers had been released from liability for interest on costs. This followed its separate reading of each agreement, not an assumption that every settlement of costs automatically excludes interest.
At [227], Smith J said that differing views about the best procedure did not demonstrate an error of law. In plain English, an appellate court does not intervene merely because it might have preferred a different way to test a costs claim. The question was whether the Tribunal breached its legal obligations, and the Court found that had not been shown.
The costs reasoning is most relevant where a contract or settlement uses the phrase “reasonable legal costs” or “reasonable legal costs and expenses”, and the parties dispute which costs basis applies. The judgment indicates that the phrase should be examined in its contractual setting, rather than treated as automatically synonymous with party/party costs or another particular scale ([144], [147]).
The decision is especially pertinent where the settlement preserves a costs entitlement arising from an insurance policy, and that policy forms part of a statutory consumer-protection scheme. In PIU v Maclaw, the Court relied on the relationship between the policy wording, the settlements and the indemnity purpose of the insurance ([167], [170]). Different contractual language or a different statutory purpose could affect the contextual analysis; the judgment does not decide those other situations.
The settlement reasoning may be relevant where a settlement resolves some claims but leaves legal costs for later agreement or assessment. The case highlights the need to distinguish the reserved costs claim from a separate claim for interest on those costs. The result depended on the wording of the offer, the terms of settlement and their release provisions ([196], [199], [203], [206]).
The procedural discussion may matter where a party challenges a tribunal’s choice about the form in which costs evidence must be presented. The decision is relevant where the tribunal has considered the material, the opposing party has detailed information and an opportunity to respond, and the complaint is that a different process would have been preferable ([222], [227], [230]). It does not establish that a tribunal can dispense with fairness or natural justice.
The judgment text provided for this analysis contains no decisions from later courts applying, distinguishing or limiting PIU v Maclaw. It therefore does not support a conclusion about how later courts have treated the decision.
The authorities discussed in Smith J’s reasons include the earlier VCAT decision in Reid v FAI General Insurance Co Ltd and the Victorian Court of Appeal decision in Spencer v Dowling. Smith J accepted the Reid approach as applicable to the particular insurance-related settlement, while treating the phrase as context-dependent rather than adopting a universal rule. He cited Spencer in support of the proposition that the meaning of costs language depends on context ([144], [170]). These are prior authorities discussed in the judgment, not later treatment of PIU v Maclaw.
The judgment does not determine how “reasonable costs” should be construed in every other contract, insurance policy or statutory scheme. Its conclusion is tied to the particular policy language, settlement terms and consumer-protection context ([167], [170]). The judgment also does not resolve the meaning of that phrase where the underlying policy is not an indemnity policy or where the relevant scheme has a different purpose.
The Court did not decide when interest might be recoverable on costs if the settlement expressly preserved that question. Smith J found that these settlements had released liability for interest on costs and said it was unnecessary to consider the insurers’ other arguments about timing ([206], [212]). The judgment therefore does not settle the start date for interest under a differently worded agreement.
Nor does the judgment define when a tribunal must require a bill in taxable form. It holds that the insurers had not demonstrated legal error in this case, given the information available, the opportunity to investigate and the hearing process adopted ([227], [230]). Circumstances involving inadequate disclosure, an inability to test the claim or procedural unfairness were not decided in the supplied judgment.
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[2003] VSC 40
JUDICIAL REVIEW - VCAT - Error of law - Interpretation of "reasonable costs" - interest on costs - Exercise of procedural discretion. INSURANCE - Domestic building contract insurance - Meaning of "reasonable costs".
(a) A 508/98. A settlement offer was made by the insurer pursuant to Part 4 of the Victorian Civil and Administrative Act 1998, and accepted, on 19 May 2000, by Maclaw. The offer provided , inter alia, that the insurers:
"IN FULL AND FINAL SETTLEMENT of all claims in this proceeding ... pay to the Applicant: -- 1. The sum of $112,627.00 (inclusive of interest, if any), such payment to be made within 30 days of acceptance of this offer; AND 2. 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 ..."
(b) A 509/98. The parties entered into terms of settlement on 3 October 2000, under which, inter alia, the insurers agreed to the following:
"1. The insurers agree to pay the Applicant $1.2 million in full settlement of the Applicant's claim and interest, such sum to be paid within 21 days. 2. 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. ... 6. The Insurers agree to indemnify the Applicant in relation to any GST liability that may be imposed on the Applicant with respect to the payment to it by the Insurers of the said sum of $1.2 million but only to the extent to which such GST liability is not the subject of or matched by a GST imput credit claimed by the applicant. 7. The Applicant, subject to compliance by the Insurers with these Terms of Settlement, and the Insurers release and forever discharge each other from and against all claims, actions, demands, causes of action, liabilities or costs of any description which they have or but for these terms would have had arising out of or in any way related in relation to the subject matter of the proceeding and Flemington Stage 1."
In paragraph 2 of the above terms of settlement, reference was made to paragraph 4 of an order made on 29 May 2000. That order recorded a series of consent declarations as to the relative rights of the applicant and the insurers. Paragraph 4 read as follows:
"Under the indemnity provided by the insurers under the Ministerial Order, 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."
1. Maclaw was to be paid its "'reasonable costs" in accordance with the settlements reached";
2. the expression 'reasonable costs' was to be interpreted in accordance with the decision in Reid v FAI General Insurance Co Ltd [1999] VCAT 1773;
3. Maclaw was "entitled to interest on its costs in accordance with law at the rate prevailing from time to time";
4. Maclaw was entitled to costs in the costs proceedings "(including reserved costs) according to the Supreme Court Scale on indemnity basis under section 109 of the Victorian Civil and Administrative Tribunals Act 1998".
The precise form and details of the orders remained to be clarified. In particular, it was necessary that costs be apportioned between the proceedings. The Tribunal gave directions for the preparation and service of draft orders and directed a further directions hearing to be held on 14 January 2002. The hearing of the claims was adjourned to 13 February 2002. The parties filed further material.
1. Maclaw's costs were to be paid by PIU and GIO fixed at $39,292.12 in A508/98 and $325,414.46 in A509/98.
2. Interest on the aforesaid sum of $39,292.12 was to be paid from 19 May 2000 and interest upon the sum of $325,414.46 was to be paid from 3 October 2000 (being the respective dates of settlement between the parties) at the rate of 12.3 per cent to 16 April 2001 and 11.5 per cent from 17 April 2001.
3. The insurers' applications for orders for bills in taxable form were dismissed.
4. PIU and GIO were to pay Maclaw's costs (including reserved costs)[9] of the costs application and the costs of the directions hearing on 13th Feb 2002 including the cost of Senior Counsel and the costs in relation to the application filed 22 May 2001 according to the Supreme Court Scale on an indemnity basis.
1. What is the meaning of the expression "reasonable costs" as the expression appears in the Settlement Offer dated 8 May 2000 and the Terms of Settlement dated 3 October 2000, and, in particular, does it mean costs:
2. Did the Tribunal have power to order interest on costs, and if so, from what date? 3. In what circumstances is a party entitled to have the bills of costs in taxable form delivered to it, and have the bills taxed before any final order for costs is made by the Tribunal?
"In my view there is a line of authority which shows that in appropriate circumstances 'reasonable legal costs' equates with the rates at which those services must be purchased in the ordinary market."
"In my view this policy should be regarded as giving an indemnity and a full indemnity for the legal costs. Costs are not to be regarded as other than "reasonable" merely because they represent what the market rates are. Indeed it is that very congruence with the market which makes those fees reasonable. I reach this conclusion with the greater confidence in the knowledge that the form of policy relied upon here is issued pursuant to statute as a consumer protection measure."
"It is true that one factor influencing the learned Deputy President was the circumstance that what was there involved in the issue before him was a policy of insurance. That policy, he said, should be regarded as giving an indemnity and a full indemnity for legal costs. I consider that attitude is equally applicable here. I consider also that on the meaning of the term 'reasonable costs and expenses', I am, in the event of ambiguity, entitled to refer to the 'objective framework of facts within which the contract [of settlement] came into existence and to the parties presumed intention in this setting' see per Mason J: Codelfa Constructions and Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 C. L. R. 337 at 353. That objective framework of facts (or 'factual matrix' as Lord Wilberforce called it in Reardon and Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570 at 575) includes in my view the fact that the Third and Fourth Respondents are both insurers and that they are insurers of domestic building work under legislation (including the Building Act 1993 (Vic) the obvious aim of which is consumer protection. Other factors include the terms of the relevant Ministerial Order, the provision it makes and the form of expression used in the settlement terms."
The Tribunal dismissed the insurers' arguments that it should not look at context. It then referred to the insurers' argument based on Spencer v Dowling, stating:[15]
"In my view that latter decision says nothing at all to the contrary. It is clear, when the whole of the judgment of Winneke P. is read, that the President was speaking in a very specific context -- that of s 47(2) of the Equal Opportunity Act 1984 (Vic). His remarks on that sub-section can have no bearing on the decision in this case, concerned as it is with particular Terms of Settlement".
"... there was nothing here in these bills which looked to me to be untoward or obviously unreasonable."
* the phrase appears in agreements to settle disputes in which a number of issues were in dispute and were compromised in the settlement;
* the compromises were made in proceeding brought in a prima facie no cost jurisdiction;[19]
* in a compromise, a party would not agree to provide 100 percent of the very thing claimed;
* if the parties had intended a higher measure of cost to apply they could have, and should have specified "indemnity costs" or "solicitor/client costs";
* so far as the offer was concerned, it should be construed in the context of the provisions of the Act, particularly sections 112 to 115, which regulate procedure for settlement offers, their acceptance and the cost consequences of non acceptance, being the VCAT equivalent to offer of compromise procedures under rule 26 of the Supreme Court Rules. An offer under those Rules carries with it payment of costs on a party/party basis, the intent being to encourage and facilitate settlement of legal proceedings - so to with offers under the Act.
"the balance of authority in litigious matters is that "reasonable legal costs" meaning costs fixed as between solicitor and client rather than upon a full indemnity basis."
"A claim made upon a statutory compensation fund is perhaps neither one situation nor the other. In my view however it more closely resembles litigation in the situation of a claim made under an insurance policy."
He had earlier noted that he had based his decision in Reid's case:[28]
"particularly upon the fact that I was construing a policy of indemnity insurance and to give it any meaning other than the one to which I ascribed it would lead to the beneficiary of the indemnity not being fully indemnify."
Counsel emphasised that in the present case the claim is based on the settlement terms and is not a claim made directly pursuant to a policy.
"Ultimately, it is a matter of construing the words of the indemnity in cl 18.02. It seems to me that the language of the indemnity, in particular its reference to all costs and expenses, means costs on a solicitor/client basis."
The court approved the statements in Halsbury's Laws of England that ordinarily an indemnifier would be liable for the full costs as between solicitor and client.[31]
* the fact that the settlement terms related to issues arising under an exclusion in an indemnity insurance contract;
* the indemnity insurance was provided pursuant to consumer protection legislation;
* the protection was intended to cover costs incurred in non-litigious situations as well as litigious situations;
* the interpretation expressed in Reid's case was of long-standing at the time the terms of settlement were entered into;
* 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 policies;
* 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 moneys 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.[33] 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.
"release and forever discharge each other from and against all claims, actions, demands, causes of action, liabilities or costs of any description which they have or but for these terms would have had arising out of or in one anyway related to the subject matter of the proceeding."
"with as little formality and technicality, and determine each proceeding with as much speed, as the requirements of this Act and the enabling enactment and a proper consideration of the matters before it permit".
It must, of course, act fairly, according to the substantial merits of the case and is bound by the rules of natural justice.[36]
[1] Gordian Run Off Ltd was formerly known as GIO and was referred to in the proceedings as GIO.
[2 ] Building Act 1993 Part 9 Division 3; Ministerial Order, Victorian Government Gazette, s 115, 1.10.96.
[3] If inconsistent, the builder and owner would have been entitled to rely on the Order, which prevails; see cl 13 of policy.
[7 ] It also sought the costs and expenses on alternative bases but was successful on its primary basis.
[19] Victorian Civil and Administrative Tribunal Act, s 109.
[32] [1996] VSC 51; [1997] 2 VR 127. Winneke, P said (at 146):
"The nature and content of the "costs [reasonably incurred]" which the board is empowered to award under section 47 is undefined. Its meaning must be derived from the context of the legislation in which the power is conferred ..."
"The expression "costs reasonably incurred" could be construed as referring neither to party and party or to solicitor and client costs, but I do not think that that construction should be adopted."
[33] It was for similar reasons that the Court of Appeal in Spencer v Dowling, above, construed the expression "costs reasonably incurred" in their context to mean costs on a party party basis; eg, at 146.
Pacific Indemnity Underwriting Agency Pty Ltd
Maclaw No 651 Pty Ltd [2003] VSC 40
(1991) 24 NSWLR 116
The appeal against the order for interest on costs succeeded. The appeal otherwise failed. The judge invited counsel’s submissions before making final orders ([234], [237]).