On 19 July 2013, Justice Pembroke of the Supreme Court of NSW delivered a
judgment in the case of The Owners – Strata Plan No. 70798 v Bakkante
Constructions Pty Limited [2013] NSWSC 848. The case concerns an Owners
Corporation’s obligation to properly authorise the commencement of legal
proceedings in accordance with Section 80D of the Strata Schemes Management
Act 1996 (“the Act”).
On the application of the owner of a Lot, Dr William Zankin, his Honour
dismissed proceedings which had been commenced under the Home Building Act
1989. The proceedings were originally commenced in the Consumer, Trader and
Tenancy Tribunal by the Owners Corporation in 2009. Dr Zankin successfully
contended that the commencement of the proceedings was not authorised by the
Owners Corporation. I acted for Dr Zankin in the proceedings.
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His Honour found that legal costs of $260,000 had been incurred by the
Owners Corporation, despite its solicitors providing written estimates of
costs of only $39,000. It was found that the chairman of the Owners
Corporation, Mr Murray Groom, aided by Mr David Baker, solicitor from
Makinson & d’Apice Lawyers, commenced proceedings in the name of the Owners
Corporation against Bakkante Constructions Pty Limited (“the builder”) in
relation to defects in the common property which affected unit C17 in the
building. The Executive Committee and Owners Corporation had not resolved
to commence the proceedings in accordance with the Act. His Honour found
that “Mr Groom and Mr Baker slipped into a parallel universe, causing the
lot owners to become increasingly committed to legal expenses which they had
not approved and action which they had not authorised”.
The Owners Corporation resolved on 24 February 2009, at its annual general
meeting, to defer the commencement of proceedings against the builder, and
to accept the builder’s offer to carry out rectification works. However, in
the days prior to that meeting, Mr Groom had instructed Mr Baker to commence
proceedings in the Tribunal on 13 February 2009.
At the annual general meeting, Lot owners were not informed that proceedings
had already been commenced.
As at 13 February 2009, the Executive Committee had only resolved to obtain
advice “to establish the position of the Owners Corporation” in relation to
building defects. It had not resolved to commence proceedings, and had not
obtained an estimate of legal costs to take legal proceedings.
The commencement of the proceedings on 13 February 2009 was not authorised
by the Owners Corporation.
In May 2009, the Tribunal proceedings were expanded to include a claim for
defects affecting the whole of the common property and not just unit C17.
This was done without approval by the Owners Corporation.
The Tribunal proceedings were transferred to the Supreme Court of New South
Wales in 2011.
Under Section 80D of the Act, an Owners Corporation or executive committee
of an Owners Corporation must not seek legal advice or the provision of any
other legal services, or initiate legal action, for which payment may be
required unless a resolution is passed at a general meeting of the Owners
Corporation approving the seeking of the advice or services or the taking of
that action. The regulations may make provision for exempting any type of
legal service or legal action from the operation of Section 80D. Regulation
15 presently provides:
The seeking of legal advice, the provision of legal services or the taking
of legal action is exempt from the operation of section 80D of the Act if
the reasonably estimated cost of seeking the legal advice, having the legal
services provided or taking the legal action would not exceed:
(a) an amount equal to the sum of $1,000 for each lot in the strata scheme
concerned (excluding utility lots), or
(b) $12,500,
whichever is the lesser
As at February 2009, the figure was $10,000.
The judgment contains a number of important statements about the steps which
should be taken before the commencement of Court proceedings.
In particular, it says that Regulation 15 can only meaningfully apply where
there has been an actual decision of the executive committee to take
specified action, accompanied by an estimate of the legal costs of taking
that action from a solicitor.
This did not occur in the present case.
Also of significance was his Honour’s statement that “the reasonably
estimated cost of taking action by commencing proceedings cannot be
artificially minimised by requesting the solicitor to provide a costs
estimate up to some arbitrary point.Litigation does not work like that.
Once proceedings are commenced, they continue until dismissed or
discontinued or judgment is obtained. In the usual case, the reasonably
estimated cost of taking action will be the estimate of the costs that the
owners corporation will incur in the proceedings until their final
resolution and determination..In the usual case, once proceedings have been
commenced, they will continue until finality and the estimate should reflect
that fact.”
In other words, it is not appropriate for a solicitor, when asked to
commence legal proceedings for an Owners Corporation, to provide an estimate
of the legal costs to take only several limited steps in the proceedings.
The estimate must be a written estimate of the total costs of running the
proceedings to a conclusion.
His Honour said that Section 80D of the Act “clearly imports a mandatory
quality” which “provides a compelling linguistic indication that the purpose
of the legislation is that an act done in contravention of Section 80D (or
Regulation 15) will be invalid.”
His Honour concluded that actions taken by an executive committee in
contravention of Section 80D, and without complying with the requirements of
Regulation 15 should be treated as invalid and unauthorised. His Honour
said that the word “must” in Section 80D, means “must”.
In ignoring the section, his Honour said that the executive committee, and
particularly its chairman, only have themselves to blame.
The proceedings were dismissed. They are now out of time and cannot be
recommenced.
The Owners Corporation, which has incurred several hundred thousand dollars
in legal costs to its own solicitors, Makinson & d’Apice, has been ordered
to pay the builder’s costs and Dr Zankin’s costs.
The significance of the case for solicitors who regularly act for Owners
Corporations, and for Owners Corporations, is that when contemplating the
commencement of legal proceedings, a written estimate of costs of
proceedings to their conclusion, should be obtained, and if this estimate
exceeds the amount specified in Regulation 15 (which is presently $12,500),
the proceedings must not be commenced until and unless an Owners Corporation
in general meeting has approved of the proceedings being commenced.
The principles expressed in his Honour’s decision reflect exactly the
objectives expressed in the second reading speech to the NSW Parliament
concerning Section 80D; namely:
“Concern has been expressed that prior to commencing action individual
owners should be made aware of the cost of legal action and the likelihood
of success….
Firstly, if legal action of any type is being contemplated, the estimated
cost of the action is to be provided in writing to all owners in accordance
with the Legal Profession Act. A meeting of the owners corporation must be
called before the action can actually commence to ensure that everyone can
have a say if they wish….
Executive committees will effectively be prevented from undertaking legal
action under their own initiative thus removing the possibility that claims
will be made that a committee has not acted in the interests of all owners
and added to existing conflict rather than dissipated it.”
Justice Pembroke’s decision enforces the legislative intention which was
clearly expressed in this speech.
