Controversial legislation to avoid a major taxpayer funded payout to the East West Link consortium has begun to be drafted by top Victorian officials.

Leader of the Government in the upper house Gavin Jennings confirmed that department officials had been instructed to draw up a bill to limit the amount of compensation the state will have to fork out to the consortium contracted to build the road tunnel.

In question time on Wednesday, Mr Jennings was asked if the Department of Premier and Cabinet, Department of Treasury and Finance or parliamentary counsel had been given instructions to draft legislation to limit compensation "liabilities" around the cancellation of the East West Link contracts.

Mr Jennings confirmed officials had been asked to draft legislation.

Premier Daniel Andrews has never ruled out the use of legislation to avoid a huge compensation bill.