Neighbour ordered to pay costs after refusing to do the drainage works he had proposed himself (VCAT, 2026)

What happened

The applicants had owned a property in Stanley Court, Inverloch since August 2014. They shared a boundary fence with the respondent. After the respondent did work on his land in about mid-2016 (removing a hedge and putting in a gravel or "hard-stand" driveway along almost the whole length of the common boundary), the applicants said large volumes of water began running off his land onto theirs, rotting the bottom of the fence and threatening their house.

They wrote to the respondent on 7 February 2018, 3 April 2018 and 9 October 2018, each time asking him to install a central drainage system and connect it to the legal point of discharge. He did not answer any of the three letters. Their solicitors wrote again on 16 April 2021 giving him a final chance to agree to do the work. He made no offer to do drainage works at his own cost. In the meantime the relationship had broken down badly: the respondent obtained an interim personal safety intervention order against the second applicant in September 2020, and the Tribunal found that while it was in force he repeatedly reported the second applicant to police when he went to the corner of his own land where the water was said to be flowing. The respondent's application for a 15-year order was refused in October 2021 and the interim order was lifted.

The applicants started a VCAT proceeding on 14 May 2021 under the Water Act 1989 (Vic), claiming damages under section 16 and an injunction under section 19. Each side obtained an expert report. The applicants' plumbing consultant said a concrete channel drain was needed along the whole fence line, discharging to a pit and into the council stormwater system. The respondent's engineer, whose report came a few days before the hearing date, concluded that only a negligible amount of stormwater could reach the applicants' land and that the driveway was suitable. The three-day hearing set for 12 October 2022 was vacated that day because both sides wanted to negotiate.

In late October and November 2022 the respondent put forward his own scope of drainage works: a main agricultural drain running down his side of the fence, four lateral drains across the rear yard feeding into it, and a connection to the existing stormwater outlet. On 8 February 2023 the applicants' solicitor wrote asking him to "carry out whatever works that [the respondent] considers needs to be done on his land to resolve the dispute, as soon as possible", prove they worked with a flood test, and provide a compliance certificate. He did not do the works. The case was then listed for hearing a year later, and settled on 14 February 2024 on terms requiring him to do rectification works, with costs expressly reserved.

What each side wanted

The applicants asked for their costs of the whole proceeding: $119,440.99 in legal costs, $1,029.44 in other legal costs, $47,025 in counsel's fees and $10,722.25 in expert's fees. They argued the respondent could have agreed at the very start to do the works he eventually agreed to, that he conducted the case vexatiously, and that he had no tenable defence; they also relied on two Calderbank offers (settlement offers that can carry costs consequences if refused unreasonably) and on delays after settlement. The respondent cross-applied for his own costs from 8 November 2022, being $8,800 in legal costs, $8,800 in counsel's fees and $3,267 in expert's fees, on the basis that the applicants unreasonably refused his proposed scope of works, which he said was little different in substance from what was finally agreed, and refused a mediation he suggested in February 2023.

What the tribunal decided

VCAT ordered that the respondent must pay the costs the applicants incurred in the proceeding between 1 March 2023 and 14 February 2024. If the parties cannot agree the figure, those costs are to be assessed by the Victorian Costs Court on the County Court scale, on the standard basis. The respondent must also reimburse the applicants $10,722.25 that they paid in expert's costs.

The respondent must additionally pay the applicants' reasonable costs of the directions hearings on 2 June 2022 and 26 September 2022, again assessed by the Costs Court on the County Court scale and standard basis if not agreed. He was given liberty to apply to vary or revoke that third order within 28 days of receiving the orders, and if he does, that order is stayed until further order.

Everything else was refused. Apart from those three orders, the applicants' costs application was dismissed, so there was no order for the costs of the period from 14 May 2021 to 12 October 2022, and none based on the two Calderbank offers. The respondent's costs application for the period from 8 November 2022 was dismissed. The applicants' claim for the costs of their enforcement application filed 28 May 2024 was also dismissed.

Why the tribunal decided it that way

At VCAT the starting point is that each party pays its own costs. Section 109 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic) lets the Tribunal order one party to pay another's costs only if it is satisfied that doing so is fair, having regard to a checklist: conduct that unnecessarily disadvantaged the other side, whether a party unreasonably prolonged the case, the relative strength of the claims, the complexity of the matter, and anything else relevant. The Tribunal noted that those items are aids to deciding what is fair, not rules in themselves, and that ticking one of them is not enough on its own.

For the first stretch of the case, from the application in May 2021 to the vacated hearing in October 2022, the Tribunal found neither side unreasonably prolonged things. The respondent's engineering report, on its face, gave him a respectable basis to resist doing drainage works. The Tribunal said that where a case settles rather than being heard, it generally will not re-examine the merits of a party's position on a costs application, because that would substitute a fresh merits inquiry for the case the parties ended by consent. There are exceptions, for example where an expert report relied on is plainly implausible or lacks the needed detail, but the Tribunal was not satisfied this was such a case. It also held that the costs of the letters sent in 2018 and 2021, before the application was filed, were not costs "in the proceeding" and so could not be ordered.

The turning point was 8 February 2023. Having read the correspondence going back to 2018 in which the applicants repeatedly asked for a central drainage system, the Tribunal found it was unreasonable for the respondent not to take up the applicants' open invitation to do whatever works he thought were needed on his own land. His own proposed scope of works was in the nature of a central drainage system, which was the very thing the applicants had been asking for for years. The Tribunal found that if he had done it, the case would probably not have run past about 1 March 2023. His explanation, that he feared further litigation if the works were not exactly to the applicants' expectations, was rejected: the invitation was open-ended, and if the works had stopped the unreasonable flows the applicants would not have been entitled at law to come after him again. Because the applicants were out of pocket for further legal costs after that date, it was fair to order the respondent to pay their costs from 1 March 2023 to settlement.

The respondent's own claim failed for the mirror-image reason. The Tribunal accepted that the final design was broadly the same in concept as his earlier proposal (the main difference being concrete edging), but found the applicants had in effect accepted his proposal, so they could not be blamed for prolonging the case. The single efficient cause of the delay was his failure to act on their request. The Calderbank offers did not help the applicants either: the first gave only seven days to respond and the terms differed materially from what was finally agreed, and for both offers the agreed scope of works made it impossible to tell whether the applicants ended up better off than the offer. The Tribunal also rejected the argument that the respondent caused the October 2022 or February 2024 hearings to be vacated; both were vacated because the parties were settling. The published text stops part-way through the discussion of events after the settlement, so the full reasoning behind the dismissal of the enforcement application costs is not set out in the material available.

What this means if you are in a similar position

This decision shows how VCAT applies the costs rule in section 109. If you are in a similar position, the thing to understand is that winning a point, or even getting the outcome you asked for in a settlement, does not by itself produce a costs order. The default is that each side pays its own way, and the Tribunal looks for conduct that unfairly dragged the case out. Here the Tribunal would not look behind an expert report that gave the other side an arguable position, even though that position did not survive to a hearing.

It also shows how much weight the Tribunal gave to a single piece of correspondence. The letter that changed the costs outcome was the one inviting the other side to do whatever work he thought was needed on his own land, with a flood test and a compliance certificate to prove it. Once that invitation was on the record and ignored, the Tribunal could identify a date from which the continuing costs were caused by the other side. Equally, the decision shows the limits: letters written before an application is filed are not costs "in the proceeding", and a settlement offer that is open for only a week, or whose terms cannot be compared with the final result, may carry no costs consequences at all.

In water flow, drainage, fencing and similar boundary disputes between neighbours, the step most people take first is a clear written letter to the neighbour that describes the problem, what is causing it, what they are asking to be fixed and by when, kept as a record. If that does not resolve it, an application to the tribunal or court that handles the dispute is the next stage, and the earlier correspondence usually becomes part of the evidence.

How to apply: our step-by-step guide to a VCAT application. More decisions: VCAT cases and neighbour disputes.

Source: Harrison & Anor v Masterman-Smith (Costs) [2026] VCAT 808 (read the full decision). This summary was prepared from the published decision for general information. It is not legal advice, and the tribunal’s own reasons are the authoritative record.