14 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.
15 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.
16 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]
17 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.
18 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.
19 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".
20 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.
21 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.
22 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.
23 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.
24 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.
25 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.
26 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."
27 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.
28 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".
29 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
30 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.
31 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.
32 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.
33 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.
34 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 (see clause 92) and the (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 which prescribes how costs should be awarded in proceedings in the Tribunal.
35 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.
36 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.
37 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.
38 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".
39 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 [14] its shoes.14
40 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.
41 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.
42 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".
43 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"
44 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.
45 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.
46 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.
47 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]
48 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
49 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".
50 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.
51 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.
52 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.
53 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.
54 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.
55 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]
Whether and to what extent the policy grants an indemnity with respect to costs
56 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: