1. Pursuant to section 119 of the Victorian Civil and Administrative Tribunal Act 1998, I correct paragraph 10 of the Reasons dated 9 October 2018 as follows:
   1. At that time, the Owners were advised by Mr Chris Morrison of Building Advice Conciliation Victoria that JGK had advised him that notwithstanding the defects identified by Mr Kukulka, they "could not help any further as there was a dispute between the developer and JGK".
2. The respondent must pay the applicants' costs of the proceeding, the sum of such costs if not agreed to be assessed by the Victorian Costs Court on a standard basis pursuant to the County Court scale.
3. Having regard to section 115B(1) of the Victorian Civil & Administrative Tribunal Act 1998 and being satisfied that the applicants have substantially succeeded in their claim, the Tribunal orders the respondent to reimburse the applicants for the fees paid, in the amount of $2531.60.

1. This is an application brought by the applicant Owners for their costs of this proceeding and interest.
2. The proceeding involved a claim by the Owners for loss and damage arising from defective work carried out at their property by the builder, JGK. The matter was heard in July, August and September 2018, and final orders were made on 9 October 2018. JGK was ordered to pay the Owners the sum of $96,051[1]. The question of costs, interest and reimbursement of fees was reserved.
3. This application came before me for hearing on 22 January 2019. Mr S. Ryan of Counsel appeared for the Owners and Mr. M. Champion, solicitor, appeared for the builder. The Owners relied on an affidavit from their solicitor, Ms F. Loncar, sworn 18 January 2019 and each party relied on written submissions. I reserved my decision.
4. For the reasons set out below, I allow the application for costs and reimbursement of fees and a limited amount of interest.

1. The Owners made an offer to JGK on 24 August 2017 to accept $100,000 "all-in". They rely on that offer to seek an order for their costs under s.112(2) of the Victorian Civil & Administrative Tribunal Act 1998 ("the Act"), and they also seek their costs incurred prior to the offer being made under s.109.
2. They submit that the order made on 9 October 2018 is no more favourable to JGK than the offer, once the costs that would have been ordered as at the date of the offer are taken into account. Section112 provides relevantly as follows:
   • (1) This section applies if

1. a party to a proceeding... gives another party an offer in writing to settle the proceeding; and 2. the other party does not accept the offer within the time the offer is open; and

1. the offer complies with sections 113 and 114; and

1. 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 subsection (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 -
     1. must take into account any costs it would have ordered on the date the offer was made; and
     2. must disregard any interest or costs it ordered in respect of any period after the date the offer was received.
2. Although the offer was not expressed to have been made under s.112, it was not disputed, and I am satisfied that, the offer complies with the requirements of subsections (1)(a), (b) and (c). It is not a requirement that the offer actually refer to sections 112, 113 or 114[2].
3. Accordingly, the question for determination is whether I am of the opinion that the orders made in the proceeding are not more favourable to JGK than the offer. The amount of the offer ($100,000) is higher than the amount ordered ($96,051). The Owners submit, correctly[3], that pursuant to s.112(3)(a) I must take into account any costs I would have ordered on the date the offer was made, being 24 August 2017. Ms. Loncar has deposed that as at that date, the Owners' legal costs were $21,697.54. They submit that the Tribunal would have ordered costs as at that date, pursuant to s.109 of the Act, and on that basis the offer is more favourable to JGK than the orders made by the Tribunal.
4. I am satisfied that the Tribunal would have ordered costs as at the date of the offer, pursuant to s.109. In particular, I am persuaded by the Owners' reliance on ss.(3)(c), (d), (e). Section 109 provides relevantly:

(1) Subject to this Division, each party is to bear their own costs in the proceeding.

(2) 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.

(3) The Tribunal may make an order under subsection (2) only if satisfied that it is fair to do so, 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);

(v) attempting to deceive another party or the Tribunal;

(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;

(e) any other matter the Tribunal considers relevant.

1. As emphasised by the Supreme Court in the matter of Vero Insurance Limited v Gombac Group[4], the Tribunal should approach the question of entitlement to costs on a step-by-step basis:

(i) The prima facie rule is that each party should bear their own costs of the proceeding.

(ii) The Tribunal should make an order awarding costs being all or a specified part of costs, only if it is satisfied that it is fair to do so; that is a finding essential to making an order.

(iii) In determining whether it is fair to do so, that is, to award costs, the Tribunal must have regard to the matters stated in s.109(3). The Tribunal must have regard to the specified matters in determining the question, and by reason of (e) the Tribunal may also take into account any other matter that it considers relevant to the question.

1. In relying on ss.109(3)(c) (no tenable basis at law) the Owners refer to the following factors:

1. JGK's set off defence was misconceived and based on an unsustainable interpretation of the Domestic Building Contracts Act 1995 (the DBC Act). 2. The fact that JGK made no financial offers at all to the Owners despite acknowledging at least some of the defects existed. This meant that the Owners had little option other than to run the matter to its conclusion, the matter could not be resolved, and JGK relied heavily on its set-off defence which it ought to have known was speculative at best.

1. JGK elected not to join Rand to the proceedings. No explanation was given why it made that election[5]. However, as Rand was still in existence, and as a matter of procedural fairness, the Tribunal could not or ought not make a finding which would affect the rights and obligations of Rand.

1. Very little, if any, factual evidence was led by JGK to support the allegation that Rand was liable to the respondent. The builder relied solely on the evidence of Mr King who knew very little about the development, the Owners' claim and the dispute with Rand. 2. Prior to litigation JGK had relied on the principles supposedly set out in the decision of Accident Compensation Commission v CE Heath Underwriting and Insurance (Aust) Pty Ltd[6]. This position was maintained during the litigation but abandoned in final submissions. In any event, the Owners contend that that decision does not support the principles which JGK maintained. 3. Even if the set off defence had some basis (which it did not) JGK made little effort to establish through evidence the factual grounds to support the defence, and did not join Rand to the proceedings. Accordingly, the defence had no basis at law or fact, and was always going to fail.
2. In relying on subsection 109(3)(d) (the nature and complexity of proceeding), the Owners refer to the following factors:
   1. The matter involved a significant number of defects and expert witnesses.
   2. The defence was a novel legal point which added much greater complexity than a usual building matter. The issue had not been argued in 20 years and the set-off defence consumed a large part of both parties' submissions and required a thorough consideration of legal principles and cross examination of Mr King. This was not a matter that the Owners could have pursued without legal representation, particularly in light of the set-off defence.
3. In relying on subsection 109(3)(e), the Owners refer to the following factors:

1. JGK acknowledged significant defects exist in the premises and were due to its faulty workmanship. However it refused to enter into any meaningful negotiations due to the confidence it had in a defence which had no prospects of success. 2. This has left the Owners in a position where they have had to live in their first home with large amounts of mould and water ingress, and then outlay substantial money for experts, lawyers and Tribunal fees in order to be compensated.

1. The amount of legal costs are substantial and if costs were not awarded the Owners would be deprived of the fruits of litigation which they were forced to take and succeeded in. They rely on Senior Member Walker's comments in Cosgriff v Housing Guarantee Fund Ltd[7] as follows:

"I am going to make an order for costs because I think this is a complex case that was not cheap to bring or conduct. Without wanting to belittle the quantity of money involved, it was relatively modest compared to many building cases. To refuse an order for costs would probably have the effect of depriving the owner of the fruits of conducting, the fruits of litigation where she has been successful. I think they are appropriate matters to take into account in awarding costs."

1. It was not unreasonable for it to have rejected the offer of compromise. At that time, the only expert evidence as to quantum was the report of Mr Ryan of 5 June 2017 which assessed the total cost of the works claimed by the Owners at $62,682.40. 2. Further, the value of the Tribunal's order is actually $84,946 (not $96,051), because the claim for the roof over the pergola should be deducted (as it had not been formulated at the date of the offer) and 10% should be deducted for a year's interest (being the year that elapsed between the offer and the judgement). On that basis, the difference between the amount ordered and the amount of the offer is $15,054. The Tribunal should not accept that even if costs were ordered as at August 2017, the amount of the costs would have exceeded $15,054.

1. Further, the Tribunal would not have ordered costs under s.109 as at the date of the offer, as the Owners had not filed any probative evidence as to the quantum of their claims and the only expert evidence that was available had assessed those claims at less than one third of the amount claimed.

1. Because the interpretation of s.9 of the DBC Act was a current issue, with no decision on point in either Victoria or New South Wales until after this case was considered, it would not be fair to make an order that JGK pay costs under s.109. 2. The Owners were not completely successful, and JGK had some success, in that the amount of the Owners' claim prior to the hearing was in excess of $200,000, at the commencement of the hearing it was in excess of $150,000, and they have recovered significantly less than that sum.
2. Weighing up the matters put by each party, I am satisfied that the Tribunal would have ordered costs as at the date of the offer, pursuant to s.109. I am persuaded by the submissions made by the Owners, as set out above. In particular, I accept that JGK's position was very weak compared with the Owners', and that in light of the way the set-off defence was run (particularly not joining Rand to the proceeding nor being able to prove that Rand was liable to it), it had no tenable basis in fact or law. The proceeding was made complex by JGK's approach to dealing with the claim (despite having admitted that defects existed), and the Owners had no real choice but to engage legal representation.
3. I also accept that the Owners' legal costs as at August 2017 would have exceeded $3949.01 (being the difference between the amount of the offer and the amount ordered). It is apparent from the tax invoices provided by Ms. Loncar that even without the solicitors' costs, their disbursements would have significantly exceeded that amount. The cost of the expert reports alone at that time was $6124.80.
4. I do not accept JGK's submission that I should use a notional effective value of the offer (being $84,946) to assess the difference between it and the amount ordered. The offer is the offer. It is not necessary or appropriate to interpret that in light of subsequent amendments to the claim, or for the passage of time. In any event, I would accept that the Owners' legal costs as at August 2017 exceeded $15,053.19, if taxed on the County Court scale[8]. At the time the settlement offer was sent the pleadings had been completed, experts engaged and reports received, and the proceedings had been to a compulsory conference. Expert reports were $6124.80. Counsel's fees were $3710. The Tribunal's filing fee was $751.40. The amounts invoiced by the solicitors were $11,111.34. On a taxation, the disbursements would be likely to be allowed in full, and even applying the standard basis, the solicitors' fees would be unlikely to be reduced by more than half.
5. Accordingly, by reason of s.12(2) of the Act, the Owners are entitled to their costs from 24 August 2017, and by reason of s.109(2) and (3), the Owners are also entitled to their costs of the proceeding incurred prior to that date.

1. The Owners submit that costs should be ordered on an indemnity basis. They refer to the decision of the Court of Appeal in Velardo v Andonov[9], which held that "all costs" would ordinarily mean standard costs, but that it would be open to the Tribunal in an appropriate case to award costs on a more favourable basis.
2. They rely on the following factors to say this is a matter where such an order would be appropriate:

1. JGK, properly advised, ought to have known the set-off defence had little or nil prospect of success; 2. JGK made little effort to properly prosecute the set-off defence by failing to join Rand or lead sufficient evidence of the alleged set-off. This leads one to infer that the defence had some other ulterior motive;

1. JGK made no offers with respect to the defects it admitted;

1. JGK abandoned its reliance on the legal principles it said founded its set-off defence (Accident Compensation Commission v CE Heath Underwriting and Insurance (Aust) Pty Ltd) at the hearing.
2. The Owners also rely on JGK's refusal of the offer made, submitting that as the offer was put as a Calderbank offer, its rejection should provide a "predisposition" to the award of indemnity costs.
3. The occasions on which the Tribunal has awarded costs on a full indemnity basis indicate that this is a "most unusual award" that is made only in "exceptional circumstances", it should be exercised only in the "rarest of circumstances" and where the conduct of a party "has been so extreme as to be quite vexatious or bloody-minded"[10].
4. In Pacific Indemnity Underwriting Agency Pty Ltd v Maclaw No. 651 Pty Ltd & Anor[11], Ormiston JA held at 33:

"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."

"Of course there may be occasions when it is appropriate to award costs in favour of a successful claimant in Domestic Building List proceedings on an indemnity basis. But those occasions will be exceptional and, broadly speaking, circumscribed by the same criteria as govern the award of indemnity costs pursuant to Rule 63.28(c) of the Supreme Court (General Civil Procedure) Rules 1996."

1. In 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd[12] the Court of Appeal made the following observations about the making of "special costs orders":

"Ordinarily, where costs are awarded they are awarded on a standard basis. However, in some circumstances, it is appropriate to make a special costs order. In Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189 ('Ugly Tribe'), Harper J identified the following circumstances as warranting a special costs order, noting that the categories of circumstances are not closed:

1. the making of an allegation, known to be false, that the opposite party is guilty of fraud;
2. the making of an irrelevant allegation of fraud;

1. conduct which causes loss of time to the court and to other parties;

1. the commencement or continuation of proceedings for an ulterior motive;
2. conduct which amounts to a contempt of court;
3. the commencement or continuation of proceedings in wilful disregard of known facts or clearly established law; and
4. the failure until after the commencement of the trial, and without explanation, to discover documents, the timely discovery of which would have considerably shortened, and very possibly avoided, the trial."

1. The grounds relied on by the Owners for indemnity costs fall particularly within subparagraphs (d) and (f) above. These circumstances were described more fully in Munday v Bowman[13], where Holden CJ gave examples of circumstances which would warrant the ordering of indemnity costs, which included where it appears that an action has been commenced or continued in circumstances where a party properly advised should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive or because of some wilful disregard of the known facts.
2. In the present case, I am not prepared to make that presumption. While I have found that JGK's position was very weak compared with the Owners, it would be a step too far to presume the action was commenced or continued for some ulterior motive or because of some wilful disregard of the known facts or law. I note that had the decision in Owners of Strata Plan 80458 v TQM Design & Construct Pty Ltd been handed down prior to this proceeding, it is likely that the Owners' submission would have been successful.
3. Similarly, although JGK failed to involve Rand in the proceeding, and produced only limited evidence, I am not prepared to say that the defence had no chance of success, such that it falls within one of the categories set out in Ugly Tribe above. With the benefit of hindsight, it is obvious that the evidence was insufficient; however a lengthy witness statement was produced with a significant number of documents attached. It was only during the cross-examination of Mr King that it became obvious he lacked first-hand knowledge of many of the details of the dispute with Rand.
4. In respect of the submission that the rejection of the Calderbank offer should lead to indemnity costs, I do not accept that proposition. When Calderbank offers are used in the courts, the starting point for costs there is that the unsuccessful party should pay the costs of the successful party on a standard basis. The public policy position that Calderbank offers should attract some greater benefit, means that costs on a higher scale should be ordered if the offer is wrongly rejected. Since the amendment to the Supreme Court costs rules in 2014, this now means costs on an indemnity basis. However, the so-called starting point in the Tribunal is that each party should bear its own cost of a proceeding. One step up from that (i.e. the greater benefit) is an order that the unsuccessful party should pay costs on a standard basis.
5. This was expressed by Deputy President Lulham as follows[14]:

"In Court proceedings where costs follow the event, the usual basis for assessing costs is the standard basis, previously called the party/party basis. So to give the offeree an incentive to accept the offer in a Court proceeding, it is appropriate for the offeror to say it will seek indemnity costs. However in the Tribunal, s.109 (1) of the VCAT Act makes clear that there is no presumption that costs follow the event, and so the incentive for an offeree to accept a Calderbank offer can be the offeree's exposure to an award of costs. The incentive is not that the offeree's exposure might increase from standard to indemnity costs, because the starting point in the absence of the offer would be that the parties would bear their own costs.

1. Accordingly, I will order that JGK must pay the Owners' costs of the proceeding, the sum of such costs if not agreed to be assessed by the Victorian Costs Court on a standard basis pursuant to the County Court scale.

1. As the Owners have been substantially successful in their claim, they are entitled under s 115B of the Act to an order that they be reimbursed by JGK the fees paid, in the sum of $2531.60.

1. The Owners seek an order for interest, pursuant to s.53 of the Act. They rely on the comments of Gillard J in Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No.3)[15] about the main objectives of interest:

"There are three main objectives of the award of interest. First, as compensation to the judgement creditor for being out of the funds from the date of commencement of the proceeding until judgement; secondly, to deter judgement debtors from delaying proceedings and thereby having the use of the money for a longer period; and finally, to encourage defendants to make realistic assessments of their liability in a case and to take bone fide steps to compromise the claim."

1. Senior Member Walker considered the circumstances in which interest may be awarded pursuant to s.53 of the Act in Quinlan v Sinclair[16]:

"10. ... There is no guidance in the Act as to the circumstances in which such damages should be awarded, apart from s.53(1) which indicates that it must be "fair" to do so_._

1. It cannot be "fair" to make any order that is not in accordance with the evidence and established legal principles. The tribunal cannot make an award of damages in the nature of interest simply because the section confers the power. Before awarding damages in the nature of interest the Tribunal should satisfy itself that it is appropriate as a matter of law to do so in order to compensate the other party, wholly or partly, for loss and damage suffered as a result of the offending party's breach of the contract. Damages in the nature of interest are damages suffered because the successful party has been deprived of the use of the money but whether an award of such damages is "fair" must be determined in each case."
2. In Khan v Kimitsis trading as Quest Building[17] he held as follows:

"Interest is awarded to compensate the aggrieved party for having been deprived of the amount awarded from the date that it should have been paid until the date of judgement."

1. The Owners concede that they have not yet spent the amounts required to rectify their property (apart from the construction of the pergola roof - as to which see further below) and so have not been "out of pocket". However, they rely on JGK's failure to make realistic assessments of its liability or to take bone fide steps to compromise the claim.
2. I am not satisfied that it would be fair to order interest within the meaning of s.53 of the Act. Applying the objectives set out by Gillard J, the applicant is not out of pocket for rectification costs (apart from the pergola roof). This is not a case where a judgement debtor had the use of money for a longer period by delaying proceedings. As for JGK's failure to make realistic assessments of its liability or to take bona fide steps to compromise the claim, those factors have been taken into consideration in my determination that it must pay the Owners' costs. Accordingly, no interest will be awarded in respect of their claims (apart from the pergola roof).
3. As for the cost of having installed the roof over the pergola, I found that JGK is liable to reimburse the Owners $2609.50. In line with the principles set out in Khan v Kimitsis, interest should be awarded on this amount. I do not accept JGK's submission that interest should not be allowed because the item was not part of the claim until the commencement of the hearing, and so it would not be fair to order interest on an item which had not been claimed. In light of my finding that the Owners incurred the expense of roofing the pergola at the suggestion of JGK, in an attempt to mitigate the water damage, I am satisfied that it is fair that JGK should be liable for interest on that expense.
4. I allow interest at the penalty interest rate from the date the Owners paid this amount, being 23 December 2016[18], to today, which is $591.95.

1. After the decision was handed down, the Tribunal was contacted by Mr Chris Morrison, who advised that contrary to the findings at paragraph 10 of the Reasons, he was at all relevant times employed by Building Advice Conciliation Victoria, and never by the respondent.
2. I raised this matter with the parties at the cost hearing, and neither objected to a correcting order being made. I am satisfied that had the matter been drawn to my attention at the hearing, the correction would at once have been made. Accordingly, an amending order will be made pursuant to s.119.

[1] Waddell v JG King Project Management Pty Ltd [2018] VCAT 1531

[2] Maiden v Simmons [2011] VCAT 1828 at [8]

[3] Metricon Homes Pty Ltd v Sawyer [2013] VSC 518 at [43]

[4] [2007] VSC 117 at [20]

[5] JGK gave evidence as to why it did not sue Rand in 2014; no reason was given as to why it was not joined to this proceeding.

[7] [2006] VCAT 463 at [20]

[8] Rule 1.07 Victorian Civil and Administrative Tribunal Rules 2008

[9] [2010] 24 VR; [2010] VSCA 38 at [47(2)] - the Owners accept that the reference in that decision to costs "on a party-party basis" are analogous now to "standard costs"

[10] See the summary of decisions at paragraph [VCAT.111.80] of Pizer's Annotated VCAT Act, 6th edition

[11] [2005] VSCA 165

[12] [2015] VSCA 216 at [9]

[14] Stalteri v Traralgon Contractors Pty Ltd [2016] VCAT 838 at [93]

[15] [2003] VSC 244 at [60]

[16] [2006] VCAT 1063 at [10] - [11]

[17] [2009] VCAT 912