Winning the battle and losing the war – liability for legal costs despite a successful claim

In the recent decision on 15 October 2021 of Demiri v Zalzly (Costs) (Building and Property) [2021] VCAT 1196, the Victorian Civil and Administrative Tribunal (VCAT) held that although an owner had validly terminated the building contract, he was liable for the builder’s legal costs on an indemnity basis as he had:

1. in the earlier substantive proceedings, failed to prove that his costs to complete the works exceeded the builder’s claim for works performed prior to termination; and
2. withheld information that would have materially reduced the scope of the dispute.

The upshot was that the owner had to bear its own legal costs and a substantial proportion of the builder’s legal costs. As the case ran for three years and involved experts, a 6-day hearing on the merits and a costs hearing on the papers, these costs would likely have been substantially more than the $85,548.00 that the owner could have paid the builder at the outset to dispose of the matter.

The outcome is a sobering reminder that parties should carefully consider the true value of their provable claims before embarking on litigation and that VCAT will not shy away from imposing indemnity costs where a party’s conduct during the proceedings warrants it.

What happened?

The parties entered into an HIA Building Contract to construct two side-by-side townhouses in Altona (Contract).

On 9 April 2021, Senior Member Davis held that the owner was entitled to terminate the Contract on the basis that the builder had repudiated by claiming payment for a stage of work that was incomplete in breach of s40(2) of the Domestic Building Contracts Act 1995 (Vic) (DBCA).¹

Briefly, under s40(2) a builder of a major domestic building may not demand, recover or retain more than prescribed percentages of the contract price for certain stages of the works, being the base, frame, lock-up and fixing stages (as defined in the section).² Doing so where the building has not, in fact, reached the relevant stage of completion can be a repudiatory breach entitling the owner to terminate the contract.³

Senior Member Davis found that the builder’s demand for payment in respect of the frame stage in circumstances where the works had not reached that stage was repudiatory, which entitled the owners to terminate and recover damages. Damages in such instances usually include any additional costs incurred by an owner in completing the works compared to if the contract had continued (ie the difference between the total costs incurred in completing the works and the original contract’s price). Damages can also include rectification of defects, and liquidated damages in some cases.

However, the owner’s claim for damages based on the costs of engaging a second builder to complete the works was found to be inflated, and its claims for liquidated damages and defective work were found to be without merit. The net result was that the owner’s costs to complete was actually lower than the original contract sum by $85,548.00. Senior Member Davis held that this amount represented the builder’s entitlement to payment for work completed prior to termination and the owner was ordered to pay this amount to the builder.

Undiscouraged by this outcome, the owner sought to recover his legal costs, arguing that it had, at least, succeeded on its argument that it was entitled to terminate. The Tribunal took a different view.

What did the Tribunal find?

Senior Member Davis first outlined the applicable principles in relation to costs orders in VCAT. Under section 109(3) of the Victorian Civil and Administrative Tribunal Act 1998 (VCAT Act), no order for legal costs can be made in VCAT unless the Tribunal considers that it is fair to do so having regard to a list of factors, which include:

1. the conduct of the parties;
2. whether a party had unreasonably prolonged the proceeding;
3. the relative strengths of the parties’ respective claims;
4. the nature and complexity of the proceedings; and
5. any other matter the Tribunal considers relevant.

While the language of section 109(3) suggests that costs are the exception to the rule, the discretion afforded under the section is such that, in practice, costs are often awarded against a particular party.

Owner’s claim for costs

While the owner was entitled to terminate on what Senior Member Davis regarded as a technicality, in substance, the owner’s monetary claim was entirely unsuccessful, whereas the builder had recovered a significant amount.

The owner relied on two written ‘Calderbank’ offers. Such an offer allows a party to recover its legal costs where its opponent fails to do better at trial than the terms of the offer. Under the principles in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) [2005] VSCA 298,⁴ the Tribunal may also consider whether it was reasonable for a party to have rejected the offer, having regard to a number of factors, which include:

1. the stage of the proceeding at which the offer was received;
2. the time allowed to the offeree to consider the offer; and
3. the extent of the compromise offered.

The first offer, for $4,000.00 was irrelevant as the builder had clearly been more successful. The second somewhat improved offer for $100,000.00 was however also disregarded. Firstly, it was only open for acceptance for two days. Secondly, it was made four days before the hearing. Under s114 of the VCAT Act, the minimum period that an offer can be open for is 14 days. Thirdly, the $100,000.00 offer was inclusive of interest and costs. The principal sum of $85,584.00 plus interest ($27,459.00) and the likely costs award would have far exceeded the offer.

The owner’s claim for costs was therefore dismissed.

Builders’ claim for costs

The builder’s claim was successful. Senior Member Davis had regard to the following matters which arise for consideration under section 109(3) of the VCAT Act:

Deceptive and vexatious conduct

The owner had over a lengthy period resisted orders for discovery of documents supporting his claim for amounts allegedly spent to complete the build following termination. When these were eventually provided (during the hearing and after the builder had closed its case) they revealed that the costs paid were, in fact, materially lower than claimed against the builder. Senior Member Davis considered that, had this been disclosed earlier, a considerable amount of expert evidence could have been dispensed with.

Furthermore, Senior Member Davis found that the owner had failed to bring to the builder’s attention a defect which the builder could have, at the time and prior to termination, rectified with relative ease. The owner’s claim for this defect consumed a significant amount of time during the hearing.

The owner’s conduct in relation to these matters was found to be deceptive and vexatious for the purposes of section 109(3)(a)(v) and (vi) of the VCAT Act.

Relative strengths of the parties’ claims

The builders’ claim was strong while, apart from the technical matter of section 40 of the DBCA which could have been determined relatively easily, the owner’s claims were comparatively lacking.

Nature and complexity of the proceeding

Relying upon the guidance in Sweetvale Pty Ltd v Minister of Planning [2004] VCAT 2000, the nature and complexity of the case made it fair to order cost due to the following:

1. complex issues that requiring expert evidence;
2. the increased complexity due to the owners failure to give discovery;
3. if costs were not awarded, this would deprive the successful party, that is the builders, of the fruits of the successful litigation; and
4. the practice of routinely awarding costs in a particular type of proceeding, thus making an award of costs more predictable.

Indemnity costs

Senior Member Davis held that while indemnity costs were rare in the Courts and ever rarer still in the Tribunal, the owners conduct left a lot to be desired, particularly in relation to deceptive and vexatious matters referred to above. Indemnity costs were therefore appropriate.

The upshot was that the owner had to bear its own legal costs and a substantial proportion of the builder’s legal costs. There is little doubt that these costs would have eclipsed the $85,548.00 that the owner could have paid the builder at the outset.

The outcome is a sobering reminder that parties should always carefully consider the true value of their provable claims before embarking on litigation and that non-disclosure of information having a material impact on the duration of proceedings could carry indemnity costs.

How can HWLE help you?

HWL Ebsworth Lawyers has expertise in advising builders and owners of their rights and obligations in a building dispute. Please contact Leighton Moon or Paul Graham of our Construction and Infrastructure team with any enquiries.

This article was written by Leighton Moon, Partner, Brian Rom, Special Counsel and Eleanor Ng, Solicitor.

¹Demiri v Zalzly (Building and Property) [2021] VCAT 323.
²Under s40(4), exceptions apply where warnings have been issued by the builder in the form set out under Domestic Building Contract Regulations 2007.
³Barbour v Australian Elegant Homes Pty Ltd [2018] VCAT 1242 at [93].
⁴Which in turn apply principles in in the English decision of Calderbank v Calderbank [1975] 3 All ER 333 from which these offers get their name.