The New South Wales Supreme Court recently handed down its decisions in 2 Elizabeth Bay Road Pty Ltd v The Owners – Strata Plan No 73943 [2014] NSWCA 409 (‘2 Elizabeth Bay’) and The Owners – Strata Plan No 70798 v Bakkante Constructions Pty Ltd [2014] NSWCA 410 (‘Bakkante’).

2 Elizabeth Bay and Bakkante make four findings of particular significance for solicitors accepting instructions from owners corporations seeking to commence legal proceedings:

1. Commencing proceedings without a resolution of the owners corporation is a breach of s 80D of the Strata Schemes Management Act 1989 (NSW)

In 2 Elizabeth Bay, the respondent owners corporation brought proceedings against the appellant developer for defective building work on the common property of the building.

The appellant developer contended that failure to meet the requirements of s 80D, by not obtaining approval prior to the commencement of proceedings, rendered the subsequent proceedings liable to be dismissed.

The court found that initiating proceedings without prior approval by resolution at a general meeting amounted to a breach of s 80D.

Leeming JA agreed with the developer’s submission that, in the context of s 80D, ‘the verbs “seek” and “initiate”…carry with them a temporal order’.

The court considered that, when approval is obtained before legal advice has been sought or legal services have been provided or legal action has been initiated, ‘the general meeting has a real choice’ – to either approve the work to be done and the incurring of expenses, or to disapprove that course. By contrast, ‘if legal advice or legal services have already been provided or (especially) if legal action has been commenced, then the choice for the general meeting is quite different’.

Similarly, in Bakkante, the owners corporation commenced proceedings in February 2009 in in relation to a claim based on a particular unit, ‘Unit 17’. In May 2007 those proceedings were expanded to a much larger claim in respect of common property throughout the building.

These proceedings were in breach of s 80D as, prior to 2013, the proceedings were not approved by the passing of a resolution at a general meeting of lot owners.

 

2. A breach of s 80D does not necessarily cause the proceedings to be invalid or a nullity

In 2 Elizabeth Bay the court held that proceedings brought in contravention of s 80D were not invalid and need not necessarily be struck out.

Basten JA considered the purpose of s 80D is ‘…neither to provide protection to third parties, nor to confer rights on third parties: the protection is directed to lot owners’.

On that basis, he found:

‘At least where the lot owners favour continuation of the proceedings, from which they may anticipate obtaining a benefit, that purpose will not be promoted by having the proceedings dismissed on the motion of the other party’.

Barrett JA was in agreement with Leeming JA that ‘S 80D is a provision that controls or regulates the exercise of an owners corporation’s power to sue but does not deny or restrict its corporate capacity’ (see The Owners – Strata Plan 5709 v Andrews [2009] NSWCA 189).

Leeming JA found there to be no sound basis for construing s 80D as jurisdictional, in the sense either of taking away part of the court’s jurisdiction, or impairing the owners corporations’ capacity and right to invoke the court’s jurisdiction. He held to construe s 80D in that way:

‘…would indiscriminately qualify common law rights, as well as statutory rights, and do so irrespective of whether proceedings were commenced in a tribunal or a court, and, especially, it would do so irrespective of whether the breach is minor (and, potentially, even purely technical and unintentional) and wholly cured, or flagrant’.

He found that where proceedings are commenced in breach of s 80D:

‘…a plaintiff with the capacity and the right to do so has invoked the jurisdiction of a court or tribunal but has done so contrary to a statutory prohibition which does not deny jurisdiction to the court or tribunal or require the jurisdiction to be exercised in any particular way’.

 Accordingly, where a defendant alleges that the plaintiff’s action was initiated without authority, so that the plaintiff’s lawyers have no proper retainer, a question is raised as to whether the action should be allowed to proceed to trial. It is not a substantive defence.

The reasoning in 2 Elizabeth Bay was followed in Bakkante. The trial judge found that the fact that proceedings had been commenced was not disclosed to the owners corporation meeting on 24 February 2009. Rather, at that meeting:

 ‘They resolved not to go forward…they wanted to have another general meeting in April. In the meantime they wanted three quotes from lawyers…expert reports and they were going to make the decision on the next occasion’.

On that basis, the primary judge concluded that the owners corporations’ actions ‘should be treated as invalid and unauthorised’, and that ‘[t]he protection of lot owners will be achieved by the knowledge that decisions made in contravention of the Act will be invalidated’.

However, on appeal it was held that ‘…for the reasons given in 2 Elizabeth Bay Road, this aspect of the primary judge’s reasons…proceeds on an incorrect view of the law’.

The court in Bakkante accepted that a breach of s 80D would not necessarily render proceedings invalid or a nullity.

 

3. A breach of s 80D can be remedied by ratification at a general meeting

The breach of s 80D can be remedied by ratification at a general meeting. In 2 Elizabeth Bay, a distinction was drawn between:

1. Transactions purportedly undertaken by a corporation that the corporation has no power to undertake; and
2. Transactions where the corporation has the necessary power, but the instrumentality by which it purportedly acted when exercising the power was not competent to exercise it.

Transactions that fall into the first category cannot be ratified (see Ashbury Railway Carriage & Iron Co Ltd v Riche (1875) LR 7 HL 653).

However, the court recognised that those in the second category ‘can be ratified by a competent instrumentality’, which ‘retrospectively clothes what was done with authority’ (Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673).

In the exercise of discretionary power, deciding whether the breach has been remedied, the court will engage in ‘familiar procedures relating to stays and summary dismissal within…procedural rules,’ and will consider:

• Whether the breach has been cured;
• If it has not been cured, will it be cured reasonably promptly, and
• Whether the breach was inadvertent (because, say, of an irregularity in the approval process) or deliberate.

The breach was considered to be cured in 2 Elizabeth Bay as the Owners Corporation acted quickly upon becoming aware of the breach. The Owners Corporation’s resolution ratified the decision to commence proceedings, and accordingly it was appropriate to dismiss the appellant developer’s motion

By contrast, in Bakkante a calculated and deliberate decision was made to not put a motion before the owners corporation to ratify the decision prior to hearing for fear of the motion failing.

This delay in obtaining a resolution proved fatal for the Appellant owners corporation:

‘… the owners’ corporation seeking to ratify the initiation of the legal proceedings by a motion passed at a general meeting…some two months after the hearing before the trial judge and approximately four weeks after the delivery of judgment, should not have been entertained’.

The court found, relying on 2 Elizabeth Bay:

‘…contravention of s 80D(1) does not necessarily lead to the proceedings being struck out. However, for the reasons given by Leeming JA, it was appropriate to dismiss the proceedings in this case’.

The court further considered that:

‘…the continuing non-compliance with s 80D became all the more serious when the litigation expanded in May 2009. That in turn will have consequences for the discretionary exercise of power when a court or tribunal is called to determine, in the exercise of its procedural rules, whether proceedings commenced in contravention of s 80D should be stayed or dismissed’.

 

4. Exemptions from the need for approval under s 80D
   

Regulation 15(1) of the Strata Schemes Management Regulation 2005 (NSW) provides exemptions from the need for approval for certain legal action, where the estimated cost would not exceed an amount equal to the sum of $750 for each lot of the strata scheme, or $10,000.00, whichever is the lesser. In Bakkante, the court found that the exemption did not apply as:

‘…a claim for $147,000 was being commenced, it was plain to the solicitors, and it ought to have been plain to the owners corporation, that the costs could exceed $10,000, and do so very substantially’.

The court found that:

‘…the estimated cost of taking or initiating legal action is not the estimate costs of the first stage of litigation. It is the estimated costs in respect of which payment may be required to be made by the owners corporation’.

These requirements in respect of estimates reflect the fact that, once commenced, legal proceedings must continue to resolution.

Conclusions

These cases bring clarity for Owners Corporations concerned about the proper process to be undertaken when commencing legal proceedings and should assist in the correct motions being considered at an early stage.