Supreme Court New South Wales

• Medium Neutral Citation: The Owners - Strata Plan No 70798 v Bakkante Constructions Pty Limited [2013] NSWSC 848
• Hearing dates: 13, 14, 17 & 21 June 2013
• Decision date: 19 July 2013
• Before: Pembroke J

Decision

See paragraphs [87] - [88]

• Catchwords: STATUTORY CONSTRUCTION - Section 80D of the Strata Schemes Management Act 1996 (NSW) - meaning and effect; STATUTORY CONSTRUCTION - Regulation 15 of the Strata Schemes Management Regulation 2005 (NSW) - meaning and effect; STATUTORY CONSTRUCTION - effect of contravention - invalidity
• Legislation Cited: Home Building Act 1989 (NSW); Legal Profession Act 2004 (NSW); Strata Schemes Management Act 1996 (NSW); Strata Schemes Management Regulation 2005 (NSW)
• Cases Cited: CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384; Master Education Services Pty Ltd v Ketchell [2008] HCA 38; (2008) 236 CLR 101; Owners SP 46528 v Hall [2009] NSWSC 278; Madden v Owners SP 64970 [2013] NSWSC 469; Project Blue Sky Inv v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
• Category: Separate question
• Parties: The Owners - Strata Plan No 70798 - plaintiff; Bakkante Constructions Pty Limited - first defendant; William Andrew Zankin - second defendant
• Representation: Counsel: P W Gray SC with G Carolan - for the plaintiff; M Pesman - for the first defendant; K Rees SC - for the second defendant; Solicitors: Makinson & d'Apice Lawyers - for the plaintiff; Turnbull Bowles Lawyers - for the first defendant; Jane Crittenden Lawyer - for the second defendant
• File Number(s): 2011/275811

Judgment

1 This is the hearing of separate questions relating to the validity of certain actions taken by the executive committee of an owners' corporation under the Strata Schemes Management Act 1996 (the Act). The impugned actions of the committee are the commencement of proceedings on behalf of the owners corporation against a builder on 13 February 2009 in the Consumer Trader & Tenancy Tribunal (CTTT) and a decision taken on 21 May 2009 to 'amend the building defect application to the CTTT to include the draft Acumen report and other building defect reports as they arise'. The effect of the 21 May decision was to substantially expand the scope and cost of those proceedings.

2 The builder is the first defendant and various persons associated with it are lot owners. At the hearing, it adopted a limited role. The case for invalidity was substantially advanced by Dr Zankin, a non-party lot owner whom I allowed to be joined as the second defendant.

Scheme of the Act

3 Central to the resolution of both questions is the relationship between an executive committee and an owners' corporation. That relationship includes certain restraints that are imposed on the executive committee's conduct by Section 80D of the Act, to which Regulation 15 of the Strata Schemes Management Regulation 2005 operates as a limited exemption.

4 Section 80D of the Act is headed 'Legal action to be approved by general meeting'. It is to be found in Division 3 which is headed 'Restrictions on spending'. Section 80D provides:

80D Legal action to be approved by general meeting

(1) 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 any 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.

(2) The regulations may make provision for or with respect to exempting any type of legal service or legal action from the operation of this section.

5 Regulation 15 provided at the relevant time:

15 Exemptions from need for approval for certain legal action

(1) 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 $750 for each lot in the strata scheme concerned (excluding utility lots), or

(b) $10,000,

whichever is the lesser.

(2) In a case where the cost, or estimated cost, of seeking legal advice, having legal services provided or taking legal action has been:

(a) disclosed by the Australian legal practitioner concerned in accordance with the Legal Profession Act 2004, or

(b) set out in a proposed costs agreement under that Act,

the reasonably estimated cost of seeking the legal advice, having the legal services provided or taking the legal action is taken, for the purpose of this clause, to be the cost or estimated cost so disclosed or set out.

6 The second reading speech relating to Section 80D contains the following luminous passage:

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.

Most strata schemes will include individuals from a broad cross-section of the community with a variety of personal expectations, attitudes and level of involvement. It is impossible to expect that there will always be perfect harmony. The commencement of legal action on matters concerning the scheme is one area where it is certain that a divergence of views will exist.

The Government proposes to minimise the level of internal dispute arising in this area by taking some simple but effective measures.

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.

These new provisions will not only include the initiation of legal proceedings but also the obtaining of legal advice.

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.

(emphasis added)

7 It is apparent from the language of the Act and the Regulation, let alone from the second reading speech, that the broad general object of this statutory regime is to preclude an owners corporation, or an executive committee on its behalf, from incurring substantial legal costs without the approval of lot owners.

Substantial Legal Costs

8 Against that legislative background, this case involves the following startling facts. On 8 August 2008, in circumstances which I will later elaborate, the legal firm of Baker McDonell submitted a costs disclosure agreement to the owners corporation containing an estimate of costs of '$5,000 - $6,000'. It was said to be for 'Stage 1' - something to which I will return. The firm then proceeded to render invoices for amounts which appear to have been untrammelled by any legal or moral recognition of the limitation which that estimate implied. The principal of the firm is Mr Baker. In his evidence, he displayed a disturbing insouciance about the rising total of the invoices issued by his firm. So did the chairman of the executive committee, Mr Groom. Both seemed to think that there was no contravention of the Act or the Regulation. Senior counsel for the owners corporation so submitted.

9 By 13 February 2009, when the executive committee caused the CTTT proceedings to be commenced, the solicitor's estimate had already been exceeded. By 28 February, the cumulative total of invoices rendered was $11,224. When the committee took the decision to expand the proceedings on 21 May, the estimate had been further exceeded. By 30 June 2009, the cumulative total of invoices rendered was more than four times the estimate. By 31 December 2009, the cumulative total was $47,376. By 31 August 2010, it was $71,200 - and still there had been no revision of the original estimate, no further estimate and no approval by the lot owners in general meeting to the costs incurred on their behalf. At the date of the hearing, the cumulative total of invoices rendered to the owners corporation was $260,728, for which estimates had been provided totalling only $39,000.

Establishing the Position

10 The defendants' challenges to validity in this case do not involve a complaint of a wholesale nature. They are concerned with the two specific actions of the executive committee that I described in paragraph [1] above. The first challenge, to the commencement of proceedings in the CTTT on 13 February 2009, raises issues that are primarily factual. The sequence of events amply indicates the force of the complaint.

11 On 23 June 2008, the executive committee resolved as follows:

Motion proposed by the chairperson to engage the services of a building law specialist for the purposes of establishing the position of the Owners Corporation in relation to the C17/common property issue and the obligation of the Owners Corporation to repair common property. The chairperson has volunteered to provide the brief to the Specialist - voted 3/3 (B Yee and S Yee abstain due to conflict) PASSED.

(emphasis added)

12 The context in which that resolution was proposed and passed was a concern about the obligations of the owners corporation resulting from water penetration and damage to Lot C17 and to certain adjacent common property. The purpose of the resolution was to 'establish the position'. The 'common property' referred to was an adjacent roof terrace area.

13 On 31 July the solicitor for the owner of Lot C17 wrote a formal letter of demand to the owners corporation. On 6 August, the executive committee considered the letter of demand and resolved as follows:

Motion 2 - that the Chairman will seek fee disclosures and full quotes from Baker McDonell and Avinder Singh pursuant to sections 80D and 230A of the Strata Schemes Management Act and regulation 15 of the Strata Schemes Management Regulation.

Motion passed 5/5.

Motion 3 - that should the insurance company be in agreement, that Murray [Groom] is authorized to appoint whichever solicitor is most competitively priced based on the quotes obtained per Motion 2 above.

Motion passed 5/5.

14 Later on 6 August, Mr Groom rang the solicitor for the owner of Lot C17 to inform him of the executive committee's decision to appoint a legal representative. He clearly favoured Mr Baker, with whom he appears to have had a subsisting relationship. He referred to Avinder Singh, who was also the subject of the resolution, as 'the other potential legal services provider', and added that 'there is no requirement to obtain more than one estimate of legal fees under the Act but will act in accordance with the resolution regardless'.

15 Mr Baker's cost estimate was dated 8 August. It provided as follows:

3 Estimate of Costs

The following estimate is based on the information available to us to date. It is an estimate, not a quotation and subject to change.

3.1 It is not possible at this time to provide an accurate estimate of the total costs. Instead a range of estimates is provided.

Stage 1: Instructions, Advice, conferences, perusal of expert reports, correspondence with builder, preparation of affidavits & pleadings Up to filing Points of Claim and supporting Affidavit and review builder's evidence material and further appearance at CTTT - $5,000 - $6,000

Stage 2: Preparation for hearing will be assessed once we are aware of builder's case and its commitment to settlement or litigation.

The estimate is only up to Brief to Counsel stage. If the matter does go to hearing we will advise further as to the expected costs at that stage.

16 The resolution originally proposed by Mr Groom, and passed by the executive committee on 23 June, was limited to 'establishing the position' of the owners corporation in relation to a complaint from the owners of Lot C17 and the correlative obligation of the owners corporation to repair the adjoining common property consisting of a roof terrace. The resolution was directed to the obtaining of advice and no more. This is the clear connotation of the phrase 'establishing the position'. As against the owners of Lot C17, it was defensive. The commencement of proceedings by the owners corporation was not at that stage contemplated by the executive committee, let alone authorised.

17 Quite why Mr Baker's description of the Stage 1 work for which he was providing an estimate, was expressed so broadly, is a puzzle. It may be that Mr Groom did not communicate the terms of the resolution to Mr Baker. But on any view, the executive committee had not authorised the 'filing of points of claim' let alone any 'further appearance at CTTT', both of which expressions were used by Mr Baker in his cost estimate. A greater mystery is why, on 3 September, Mr Groom signed and accepted the estimate in the terms proffered by Mr Baker, given the limited terms of the resolution which authorised him to obtain 'fee disclosures and full quotes from Baker McDonell and Avinder Singh'. Whether he actually obtained a quote from Avinder Singh was never revealed.

18 At some time on 3 September, Mr Groom sent Mr Baker's standard costs disclosure to lot owners. It was sent to some by ordinary mail and to others by placing it in their mailbox on the premises. He does not appear to have included the costs estimate. And he does not appear to have informed them that he had already signed and purported to accept the costs estimate.

19 On 4 September, Mr Groom met with Mr Baker and obtained preliminary written advice. He also made contact with the solicitor for the owner of Lot C17 who confirmed that his client would not, for the time being, commence proceedings in the CTTT against the owners corporation. On 12 September, the executive committee held an informal 'paper meeting' at which Mr Groom was authorised 'to give instructions on behalf of the executive committee to Baker McDonnell to assist in the prompt resolution of the matter of the common property/C17 repairs'. This did not enlarge Mr Groom's authority or Mr Baker's retainer. It was merely confirmatory of the existing position.

20 However Mr Groom seemed to have a different idea. On 14 September, he informed some, but not all, of the members of the executive committee as follows: 'I further confirm that I have instructed Baker McDonnell to seek compensation on the part of the owners corporation for all losses/costs to which it is entitled'. He added that if the builder did not respond satisfactorily to a demand from Baker McDonnell, 'the owners corporation will make an application to the CTTT seeking an order that the builder carry out the works as described'.

21 There was now a clear disparity between Mr Groom's sense of what he thought should be done, and what the executive committee had actually authorised him to do. The executive committee had not resolved to commence proceedings against anyone. The strata manager, BCS Strata Management Pty Ltd, clearly understood the position. On 30 October 2008, its representative stated in a letter to all lot owners that, following receipt of the letter of demand from the solicitors for the owners of Lot C17:

In order to limit the owners corporation's exposure to a damages claim and protect the owners as much as possible, the committee resolved to seek legal advice ...

(emphasis added)

22 On 30 October the owners of Lot C17 filed their threatened application in the CTTT seeking an order for rectification of the damage to their property caused by water penetration. On about 2 December, the executive committee obtained a report from ROH Contracting Services Pty Ltd that addressed the extent of damage to Lot C17 and the adjoining common property. On 15 December ROH Contracting Services Pty Ltd provided an estimate of $147,390 to carry out the rectification works recommended in the 2 December report. On 16 December, a mediation took place at the CTTT between the owners of Lot C17, the owners corporation and the builder. An agreement was reached that the builder would provide a response to the ROH report by 2 January 2009.

23 By this stage, the cumulative fees rendered by Baker McDonnell were still within Mr Baker's estimate of $5,000 - $6,000. However, events would soon move in a different direction and the fees would begin to spiral.

A New Direction

24 I have already mentioned that the extent of the authority given by the executive committee to Mr Groom was to appoint a lawyer to 'establish the position' in relation to the demand by the owners of Lot C17. By mid December, the estimated cost of the necessary rectification work had been obtained; the primary responsibility of the owners corporation had been established; and the likely liability of the builder had been determined. When the mediation agreement was reached, the initial task entrusted to Mr Groom had been substantially achieved - within the estimate provided by Mr Baker.

25 However from 18 December 2008, Mr Groom, aided by Mr Baker, commenced to embark on a wider and more expensive path; a path without authority, without a cost estimate and without the financial safeguards to which the lot owners were entitled. In the circumstances, any further material step, such as the commencement of proceedings, required separate consideration by the executive committee, a costs estimate for the purpose of any possible compliance with the exemption in Regulation 15 (assuming that the amount in question, for the work involved, was beneath the threshold), and a resolution of the committee to proceed on that basis. This did not occur. 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.

26 The starting point for this new direction was a meeting on 18 December 2008 between Mr Baker, Mr Groom and some, but not all, of the members of the executive committee. Mr Groom enthusiastically recommended that 'we should get the executive committee to approve getting Robert to look at the rest of the building'. This proposal represented a major expansion of the investigative (and inevitably litigious) work that the lot owners would be required to fund.

27 Nor surprisingly, Mr Baker's self interest ensured that he supported the proposal. He agreed to write a letter to the lot owners. His eventual letter was dated 10 February 2009. It followed the receipt of reports by Peter Verinder, a building consultant (9 February) and Mr McDonald from ROH (10 February). These reports, which were no doubt expensive, canvassed the extent, cost and responsibility for rectification work that was considered necessary for the whole of the building. There was no resolution of the executive committee approving the obtaining of these reports relating to the whole of the building, or the incurring of any professional fees for them.

28 Mr Baker's 10 February letter to lot owners dealt first with the Lot C17 issue, stating that rectification work totalling $147,390 would need to be undertaken immediately. He then added that Mr McDonald had been engaged to 'carry out further investigative work' over the whole of the building; that Peter Verinder had been engaged to advise whether there was any defective work [in the rest of the building] which the builder and developer were liable to rectify; and that the total cost estimate for the rectification work for the whole of the building, including but not limited to Lot C17 and the adjacent common property, was $1.4 million.

29 Mr Baker's letter went on to reiterate the duty on the owners corporation pursuant to Section 62 of the Act; the right to make a claim against the builder and developer pursuant to Section 18B of the Home Building Act; the likely cost to each lot owner of rectifying the defective building work totalling in excess of $1.4 million, namely $23,000; and the likely cost to each lot owner of his firm 'preparing' an action against the builder and developer to recover the sum of $1.4 million, namely $1,600 (being $100,000 apportioned between the 61 lot owners).

30 By February 2009, Mr Jordan had become the strata manager of Strata Plan No 70798. On 11 February, he issued the notice of annual general meeting to be held on 24 February. The notice was accompanied by Mr Baker's letter dated 10 February. Agenda item 10 in the notice set out a motion 'that Baker McDonell be appointed to act for the owners corporation to make a building defect claim and to appoint appropriate experts to substantiate the claim'.

31 Curiously, on 10 and 11 February, Mr Groom and Mr Baker seemed to take matters into their own hands - despite the terms of the notice of meeting. On 10 February, Mr Groom sent an email to Mr Baker saying that he wished to file a claim in the CTTT and sought advice as to how to commence. On the morning of 11 February, Mr Baker sent an email to Mr Groom telling him what was required and saying that a member of his office 'will start the process for you'. Later on 11 February, Mr Baker said in an email to the consultant, Mr McDonald, 'we have now received instructions from Murray Groom to institute proceedings against the builder ...'. This was factually inaccurate.

32 On 12 February, Mr Groom sent an email to some, but not all, of the members of the executive committee. He excluded the representatives of the builder and developer. His email stated that 'BM advises filing a claim with the CTTT seeking the recovery of the costs of repairs [of Lot C17 and adjacent common property]'. He added 'My position is that I agree with BM's proposed course of action to immediately commence proceedings in the CTTT and am ready to instruct it accordingly ...'.

33 On 13 February, without further ado, and in advance of the annual general meeting, Mr Groom then caused the owners corporation to commence proceedings in the CTTT against the builder. He signed the application, describing himself as 'Chairperson, The Owners - Strata Plan No 70798'. The claim was, at that stage, limited to the recovery of $147,000 for the rectification work associated with Lot C17 and the adjoining roof terrace area. Quite why Mr Groom thought he was authorised to take this step on behalf of the owners corporation is unclear. Perhaps he was confused by Mr Baker's broad and unjustified description of his retainer in the fee disclosure agreement. He may have been driven by the pragmatic consideration that the builder had not yet taken any steps to undertake the work that was contemplated by the mediation agreement. But that is beside the point. The chairman of the executive committee of an owners corporation is not a law unto himself.

Annual General Meeting

34 The annual general meeting took place on 24 February. Mr Jordan chaired the meeting and took notes. An unusually high number of lot owners were present in person or by proxy - approximately 85% to 90%. The meeting was boisterous. Many lot owners were unhappy. Mr Groom was aggressive, especially towards members of the Yee family, who represented the builder and developer, who were also lot owners in their own right.

35 The meeting passed the following relevant resolutions:

10 APPOINT BAKER MCDONELL FOR BUILDING DEFECT CLAIM:

RESOLVED to defer the appointment of a Lawyer to act for the owners corporation to make a building defect claim and to appoint appropriate experts to substantiate the claim subject to three fee proposals from specialist Strata lawyers being circulated to all owners for decision at the Extraordinary General Meeting, scheduled for Tuesday 21st April and that building defect reports be circulated to all owners and Beljen Development Pty Ltd upon receipt by the Executive Committee.

(emphasis added)

12 EXPENDITURE AUTHORISATION:

AMENDED AND RESOLVED that the executive committee obtain 3 quotes for any unbudgeted expenditure over $5,000.

13 EXPENDITURE LIMITS:

RESOLVED that the expenditure committee not be permitted to spend more than 10% above the budgeted amount for (unless the owners' corporation lifts the restriction by a resolution). Emergency expenditure, such as blocked drains; excluded.

14 RESTRICTED MATTERS:

RESOLVED that the matters can only be determined in general meeting under section 21(2)(b) of the Strata Schemes Management Act 1996 for the amount $3,000 was decided.

36 It was clear that the lot owners were concerned about the expenses being incurred on their behalf. And they were not prepared to sanction, without further consideration, the making of a building defect claim or the appointment of experts to substantiate the claim. They resolved to re-visit the issue at an extraordinary general meeting to take place on 21 April 2009. They wanted three fee proposals from specialist lawyers, as well as building defect reports, to be circulated to all lot owners and the developer.

37 I am quite satisfied that the resolution of the meeting to 'defer' the appointment of a lawyer to act for the owners corporation to make a building defect claim is accurately set out in the minutes. Mr Jordan prepared the minutes in draft from notes which he took at the meeting, then circulated them to the members of the executive committee for confirmation of their accuracy. There was no comment from anyone nor any controversy whatsoever, about his formulation of the resolution to defer.

38 I should interpolate to mention that there was an ancillary dispute about whether the fact of the commencement of proceedings in the CTTT on 13 February was made known to the annual general meeting. It had of course not been mentioned in the notice of meeting or in Mr Baker's letter dated 10 February. Mr Jordan was confused about when he became aware that proceedings had been commenced and his evidence on the topic was unsatisfactory. His confusion was made worse by questions which asked him to confirm the facts stated in letters and emails of which he was, in most cases, neither the sender nor the recipient and which he had not previously seen.

39 I feel compelled to say that this cross-examination technique can often be unfair. The cross-examination of witnesses on the documents of other persons should be undertaken sparingly and always with an eye to fairness to the witness. It is all too easy to elicit an apparent admission from a pliable witness faced with someone else's document purporting to state a fact as if it were true. But such an admission may be unconvincing and is frequently unhelpful. Mr Jordan's torturous evidence on this topic culminated in the following inconclusive exchange:

Q Your affidavit says that you didn't know until March, doesn't it?

A Yes

Q You told Mr Gray that you did know in February before the annual general meeting, didn't you?

A Yes

Q Which is correct?

A The February, I think the February date, but my confusion here, and forgive me, your Honour, is that legal action had been threatened. I don't know if it had commenced. The letter doesn't say that it commenced, it just says it's threatened unless I'm misreading it.

(emphasis added)

40 However, whatever the state of Mr Jordan's knowledge as to when he first learned of the proceedings, I am satisfied that there was no full and frank disclosure to the general meeting that proceedings were commenced on 13 February against the builder in the CTTT related to the recovery of $147,000 in connection with Lot C17. To the extent that other witnesses including Mr Baker and Mr Groom suggested otherwise, I prefer the evidence of Mr Jordan who denied that any such statement was made. He said that if it had been made, he would have noted it in the minutes of the meeting. Mr Jordan's recollection is, in my view, more probable and more reliable on this issue. After all, Mr Baker should have known, and Mr Groom must have known, that the executive committee had not authorised the commencement of any proceedings. It is improbable that either would have announced the previously unheralded fact of commencement of proceedings to a hostile meeting.

41 To return however to the thread, the annual general meeting was, as I have said, boisterous and the lot owners were concerned about the expenses being incurred on their behalf. What is crystalline is that the will of the meeting was that any action to recover the cost of defective work by proceedings in the CTTT or elsewhere, was to be put on hold pending the receipt of building defect reports and three fee proposals from specialist lawyers. The matter would be considered afresh at an extraordinary general meeting on 21 April 2009. However, notwithstanding the wishes of lot owners, Mr Groom then proceeded to ignore them.

The CTTT Proceedings

42 I have said enough to make clear that the commencement of proceedings in the CTTT on 13 February 2009 was not authorised - not by the executive committee and not by the lot owners. Nor was the commencement of those proceedings formally accepted, or in any sense ratified, at the annual general meeting on 24 February 2009. Quite the opposite. In any event, as I have said, there was no full and frank disclosure at the meeting of the fact that the proceedings had been commenced. Despite what Mr Groom may have wanted, the whole tenor of the meeting, let alone the formal resolution, was to refrain from committing the lot owners to the indeterminate cost and uncertain future of legal proceedings, until further informed consideration and debate was able to take place. The matter was to be re-visited on 21 April.

43 A few weeks later, on 5 March, Mr Jordan, the strata manager, put the matter forcefully and accurately in an email sent to the members of the executive committee:

I am concerned that legal action is being taken without formal Executive Committee approval. (attached)

My concern is that in the advent of a dispute the instructing officer will be responsible for the legal invoices.

I urge you to discuss all legal action and authorise it by formal resolution, in a duly convened meeting, to protect each one of you.

I also note the restrictions imposed by the AGM minutes

Unless mistaken, no fee legal proposal has been submitted to the Executive Committee for approval.

Failure to observe these requirements of the Act could result in any legal matter being rejected as non compliant with the Act

44 Having caused proceedings to be commenced without authority, Mr Groom's position was now even more difficult. On 10 March he sought approval from the executive committee for Mr Baker's firm to be instructed to appear and act at the first directions hearing on 11 March. This was immediately met with the following perfectly reasonable and justifiable response from Gary Yee, who disagreed with the engagement of Baker McDonell for the directions hearing. He stated:

My understanding of the proceedings of the AGM on 24th February 2009 is that:

(a) the Owners were asked to vote on a resolution to appoint Baker McDonnell to commence proceedings for building defects (including those related to C17) against the builder; and

(b) the Owners were overwhelmingly against involving lawyers or starting legal proceedings at that point and they resolved instead to defer the appointment of lawyers until the next EGM on 21 April 2009 where the owners themselves could hear the issues and review the progress on the works undertaken and vote accordingly.

...I am concerned that by contravening the explicit instructions of the Owners Corporation, the Executive Committee opens itself to liability from the Owners Corporation, should there be further legal costs involved.

(emphasis added)

45 Mr Groom's reaction was to send an email to Mr Baker on 11 March saying that he was unsure whether the owners corporation had given adequate instructions authorising Baker McDonell to appear in the CTTT that day. He said that 'the sum total of what I think MAY constitute power is ...'. He then referred to certain documents which mostly recorded or related to the events and resolutions in September 2008. He does not appear, at that stage, to have referred Mr Baker to the foundational resolution of the executive committee on 23 June 2008.

46 Earlier on 11 March, Mr Jordan, the strata manager, had once again made his position clear. He sent an email to the members of the executive committee stating:

The matter scheduled today before the CTTT must be deferred until after the EGM scheduled for 21st April according to the AGM minutes which prevail over any decision of the EC.

(emphasis added)

It is understandable that in the circumstances, Mr Baker did not appear in the CTTT and an adjournment of the proceedings was obtained.

Rancour & Obtuseness

47 The events of the next few months were marked by increasing rancour. Central to what happened was Mr Groom's inability or unwillingness to recognise his error in causing proceedings to be commenced on behalf of the owners corporation; or to accept the opinions expressed by Mr Jordan, the strata manager, or those put forward by representatives of the builder and developer. He was driven by his own perception of what should be done, rather than by the need to take only those actions that represented the will of the lot owners or were duly authorised by the executive committee within the limits of the exemption in Regulation 15.

48 Among other things, Mr Jordan pointed out that Baker McDonell's invoices now exceeded the original fee proposal. He informed the executive committee that any more expenditure by Baker McDonell would 'require formal approval by Executive Committee'. He stressed that the minutes of the annual general meeting must prevail. He emphasised that, absent due authority, the person instructing Baker McDonell would be responsible for the costs incurred. To this last matter, Mr Groom glibly retorted to Mr Baker: 'What is he on about?'

49 In the meantime, the proceedings commenced by the owners corporation were adjourned to 11 May and Mr Baker waited for clarification. On 3 April, his letter to the executive committee said: 'We await your proper instructions'. On 8 April, he sent an email to Mr Groom stating: 'Please advise if we have instructions to act' in relation to a number of summonses to produce documents that he had received.

50 An executive committee meeting was proposed for 17 April. There was an issue about Baker McDonell's fees. A debate ensued about whether the committee could approve payment of the firm's latest bill, which would take the cumulative total of fees rendered over the $10,000 limit prescribed in Regulation 15. Mr Groom became even more high-handed. He described opposing views as 'astounding' and the situation as 'farcical'. He descended into language that was ludicrous and inappropriate, saying in one email on 22 April:

If this scheme were a natural person, it would be a Guantanamo Bay Detention Centre inmate with catatonia and chronic claustrophobia.

51 The adjourned hearing date of 11 May in the CTTT was rapidly approaching. The proposed extraordinary general meeting of lot owners on 21 April - the meeting that was contemplated at the annual general meeting on 24 February - did not eventuate. Mr Baker seems to have been well aware of the limitations of his instructions. He acknowledged as much in an email to Mr Jordan on 24 April where he stated: 'You will recall the OC decided not to engage solicitors at the AGM in relation to further defects being investigated'. In any event, Mr Baker's reference to 'further defects' is mistaken. He should have been aware, especially if he had been shown the minutes of meeting by Mr Groom, that the lot owners decision on 24 February was not confined to 'further defects' but related to any 'building defect claim'.

52 On 28 April, Mr Jordan sent an email to the executive committee with the following proposal:

Could I suggest that the Owners Corporation withdraws the [current] application and that the legal practitioner closes the file.

At the recent AGM of the owners Corporation it was agreed to complete and serve a comprehensive building defect report on the builder and engage a lawyer to initiate proceedings at the CTTT to preserve the rights of the OC if the builder fails to make good on the building defects.

The OC could, if necessary, add unit C17 defects to the above proceedings if this matter is still outstanding.

53 Mr Jordan was in effect suggesting that the current proceedings, (limited to the Lot C17 issues), be terminated with a view to possibly being included later in a broader claim, if that was the will of the lot owners following a comprehensive building defect report. However on 6 May, there was, it seems, a meeting of the executive committee at which it was decided to maintain the existing CTTT proceedings, notwithstanding Mr Jordan's suggestion.

54 There are no minutes of the 6 May meeting but on 7 May Mr Groom instructed Mr Baker to appear in the CTTT on 11 May. On that day, Mr Baker, surprisingly, informed the tribunal that the claim which was the subject of the proceedings 'is likely to be worth about $1.5 million and the proceedings may need to be transferred'. As a consequence, the proceedings were further adjourned.

55 On 12 May the solicitors for the builder wrote to Baker McDonell requesting confirmation of compliance with Section 80D with respect to that firm's appointment. The letter stated:

Our client has expressed concern that the Owners Corporation has not complied with its obligations under that section. Could you please forward minutes of the extraordinary general meeting held on 21st April 2009 in which the appointment of a solicitor was to be decided.

56 On 13 May Mr Baker responded, explaining that there had been no extraordinary general meeting of lot owners on 21 April. Instead, he simply supplied copies of the minutes of the meetings of the executive committee held on 23 June and 12 September 2008. I have referred to these meetings, and their limited scope, in paragraphs [11] - [12] and [19] above.

Expansion of the Proceedings

57 Given the events that had transpired up to May, Mr Groom's subsequent conduct is difficult to fathom. He purported to act in what he thought were the best interests of the owners corporation but he was misguided.

58 On 18 May, Ben Yee, a member of the executive committee and a representative of the builder, sent an email to Mr Groom, Mr Jordan and members of the executive committee stating:

The fee estimate from Baker McDonnell was for $5000-$6000 (excl GST). From the records provided the cumulative fees by month are listed below:

Sept 2008 $3,000

Oct 2008 $4,628

Nov 2008 $4,694.55

Dec 2008 $6,776.85

Jan 2009 $8,991.15

Feb 2009 $13,347.70

Mar 2009 $14,865.15

There are really three issues that arise from the fees above that I think we need to flesh out in the next meeting.

1. Why was the estimate exceeded and on whose authority? If Baker McDonnell had no authority to do so, they shouldn't be paid.

2. It is clear from the records above that the statutory limit ($10,000) for legal expenditure had been exceed before the AGM. To this end, I suggest we seek the strata managers advice on how to handle this breach.

3. The fees are now more than double the original estimated by the solicitor that has been retained. There has been no explanation why.

This puts into doubt the ability of the solicitor to control cost and certainly puts a shadow over the management of the solicitors. I suggest that this matter be discussed a length at the meeting.

59 This appears to have prompted Mr Baker to prepare and submit on 20 May a proposed costs agreement and disclosure for what he called 'Stage 2' of the proceedings:

Stage 2 Advice, conferences with clients, liaising with experts, perusal of experts reports, correspondence with builder's solicitor, reviewing builder's evidence material preparation of affidavits & pleadings, appearing at Court

$8,000 - $9,000

60 There is no evidence that this fee proposal was approved by the executive committee. But at a meeting held on 21 May, the committee resolved as follows:

That the Executive Committee instructs Baker McDonnell to amend the building defect application to the CTTT to include the draft Acumen report and other building defect reports as they arise.

(emphasis added)

That the Executive Committee instructs Baker McDonnell to lodge the Acumen report with the builder and advise the builder that further defects reports will be forthcoming.

That the Executive Committee requests Baker McDonnell to provide a further fee proposal, as foreshadowed in the original building defect fee proposal, for the next stage of prosecuting this matter.

(emphasis added)

61 The decision to 'amend the building defect application to the CTTT' was in conflict with the decision of the annual general meeting of lot owners on 24 February. It ran counter to the decision at that meeting to 'defer the appointment of a lawyer to act for the owners corporation to make a building defect claim'. It transformed a limited action to recover $147,000 in respect of repairs to Lot C17 and the adjacent roof terrace area - which itself had never been duly authorised - to a larger and more substantial action seeking to recover approximately $1.4 million in respect of defects that were said to exist in the whole of the property.

Validity & Consequence

62 The defendants contend that the decisions to commence the proceedings on behalf of the owners corporation on 13 February 2009, and to substantially expand them on 21 May, were invalid and of no effect. The parties propounded a number of separate questions as a vehicle for the resolution of these issues. Those questions were as follows:

a. in commencing the proceedings in the CTTT on 13.2.2009 did the plaintiff comply with the Strata Schemes Act and Regulations

b. did the plaintiff expand the proceedings in the CTTT in about May 2009 to include a claim for building defects for the whole of the common property rather than in relation to unit 17

c. if yes to (b):

(i) was the plaintiff required to comply with section 80D of the Strata Schemes Management Act in respect of that expansion; and

(ii) if yes to (i), did the plaintiff so comply.

d. has any non-compliance been cured by reason of the resolution of the owners' corporation on 19/12/11.

e. Is the consequence of (a) to (d) that the proceedings must be dismissed

63 The ratification issue is no longer pressed by the owners corporation and separate question (d) need not be determined. The focus of the remaining questions is on the application to the facts of Section 80D of the Act and Regulation 15 and the legal effect of the alleged contraventions.

Commencement on 13 February

64 The answer to question (a) is 'no'. Because there was no resolution of the lot owners in general meeting authorising the commencement of proceedings on 13 February 2009, the question is whether the exemption in Regulation 15 applied so as to render valid what occurred. Regulation 15 relevantly provides that the taking of legal action is exempt from the operation of Section 80D 'if the reasonably estimated cost ... of taking the legal action would not exceed ... $10,000'.

65 As at 13 February the executive committee had only authorised the obtaining of advice to 'establish the position' in connection with the claims and demands relating to Lot C17 and the adjacent roof terrace area. The committee did not authorise, or contemplate at that stage, the commencement of proceedings by the owners corporation. Baker McDonell's fee estimate dated 3 September 2008 had already been exceeded. The estimate was $5,000 to $6,000. By 31 January 2009, the cumulative total of invoices for legal fees was $6,885.

66 The commencement of proceedings was a new step, which a duly convened meeting of the executive committee had not yet resolved to take. Nor had it obtained a fee estimate specifically directed to the reasonably estimated cost to the owners corporation of such proceedings. The very question of whether to make a defect claim was on the agenda for the annual general meeting of lot owners to take place on 24 February. On 10 February, Mr Groom himself requested Mr Jordan, the strata manager, to:

please draft a motion for the AGM that, if passed, appoints Baker McDonell to act for the owners corporation and do all that is necessary to make and manage a defects claim on behalf of the owners corporation.

(emphasis added)

67 The subsequent email communications on 12 February between Mr Groom and some of the members of the executive committee, do not constitute a resolution of the executive committee to take legal action for the purpose of Regulation 15. The change between Mr Groom's request to Mr Jordan on 10 February (to draft a motion for the AGM for the appointment of Baker McDonell to make a defects claim) and his willingness on 12 February to immediately cause to be commenced an action making a defects claim, reflects, at best, an excess of enthusiasm. In truth, his actions were inconsistent.

68 What matters is that prior to 13 February 2009, there was no decision of the executive committee to justify Mr Groom's actions in instructing Baker McDonell to initiate proceedings in the CTTT and in signing the application in the CTTT on behalf of the owners corporation. There was therefore nothing to which Regulation 15(1) could apply. And nothing to which the presumption in Regulation 15(2) could attach. Regulation 15 relevantly presupposes two things: (a) a valid decision of the executive committee to take legal action; and (b) a 'reasonably estimated cost' of taking that legal action. There was neither.

69 And the position is not affected by Regulation 15(2). It provides that the 'reasonably estimated cost' will be taken to be the amount disclosed in accordance with the Legal Profession Act or the amount set out in a proposed costs agreement under that Act. But Regulation 15(2) was not triggered in this case. There was no decision by the executive committee to take action; no decision by it to obtain an estimated cost of taking that action; and no decision by it to accept and act upon any such estimate.

70 The only relevant decision of the executive committee was that taken on 23 June 2008, which merely authorised the obtaining of advice to 'establish the position'. The only estimate of costs was that dated 3 September 2008, part of which was outside the scope of the retainer authorised by the executive committee. Insofar as the estimate referred, ambiguously, to 'filing Points of Claim' and 'further appearance at the CTTT' it was non-responsive to the limited resolution of the executive committee reached on 23 June. That resolution circumscribed the limits of the retainer of Baker McDonell.

71 In general terms, Regulation 15 can only meaningfully apply where, relevantly, there has been an actual decision of the executive committee to take specified action, accompanied by a correlative estimate of the legal costs of taking that action. The executive committee must not only apply its collective mind to the taking of the proposed action but must also obtain a reasonably estimated cost of taking that action. In this case, that did not occur.

72 Subject to what I say in the following paragraph, 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, such as the filing of points of claim, the filing of points of defence or the service of experts' reports. 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 the action will be the estimate of the costs that the owners corporation will incur in the proceedings until their final resolution and determination.

73 It may be possible for an executive committee to make a decision to take limited legal action, stopping the action at some artificial point before final disposition. However this will present considerable practical difficulties in arriving at 'the reasonably estimated legal cost of taking the legal action'. The reasonably estimated cost of such a limited and unusual legal action would have to take into account the likelihood that, by stopping at some point before final determination, the owners corporation might well incur an additional liability to the defendants for their costs. In the usual case, once proceedings have been commenced, they will continue until finality and the estimate should reflect that fact. cf Madden v Owners SP 64970 [2013] NSWSC 469 at [56].

Validity of 21 May Decision

74 The answer to the second question is 'yes'. The answer to the third question is 'yes' to (c)(i) and 'no' to (c)(ii). On 21 May 2009 the executive committee undoubtedly resolved to transform the proceedings from a claim for $147,000 arising out of the defects to Lot C17 and the adjacent roof terrace area, to a claim for $1.4 million in respect of the whole building. This was not a decision to 'take legal action' within the meaning of Regulation 15(1). The proceedings had already been commenced. If anything, it was a decision relating to the 'provision of legal services'.

75 The difficulty is that the CTTT proceedings were never authorised and were never validly commenced in the first place. Furthermore, there was an extant resolution of the owners corporation in general meeting on 24 February which prevented the executive committee from acting inconsistently with the will of the lot owners on this issue. By that resolution, the lot owners, who were at that stage overwhelmingly against involving lawyers or starting legal proceedings, agreed to defer the appointment of lawyers to act for the owners corporation 'to make a building defect claim'. By 21 May, the conditions attaching to that resolution had not been satisfied or re-visited by the lot owners in general meeting.

76 Section 21(4) of the Act provides that the decision of the owners corporation prevails in the event of a disagreement between the owners corporation and the executive committee. Before any steps could be taken to sanction, let alone expand, the proceedings commenced on 13 February, the lot owners needed to review the matter. In the circumstances, the executive committee could not act of its own volition in a manner that was at variance with the decision of the owners corporation in general meeting.

77 Regulation 15 was not, in any event complied with. There was no reasonably estimated cost for the provision of legal services for what the executive committee now proposed to embark upon. The decision on 21 May 2009 had the effect of committing the owners corporation to the prosecution of a claim against the builder to recover approximately $1.4 million in respect of defects to the whole of the building. This required a correlative cost estimate; one for the provision of legal services to facilitate the prosecution of such a claim. There was no such thing.

78 Mr Baker's letter of 10 February had suggested, somewhat loosely, that the likely cost of such an action would be $100,000. Yet the proposed costs agreement and disclosure provided by Mr Baker on 20 May - on the day before the executive committee meeting - was nothing more than a cynical attempt to construct an artificial 'Stage 2' with an estimate designed to be less than $10,000. It addressed certain things but whatever it was, it did not purport to be an estimate of the costs (whether reasonable or not) for the provision of the legal services that were necessarily involved in prosecuting the $1.4 million claim to finalisation. I have set out the Stage 2 costs estimate and the resolutions of 21 May in paragraphs [59] - [60] above. That estimate does not, in any event, appear to have been approved.

The Effect of Contravention

79 The result is that the proceedings in the CTTT were commenced on 13 February, and expanded on 21 May, in contravention of the Act. The question that then arises concerns the legal consequence of the findings I have made and the conclusions I have reached. It will be remembered that Section 80D(1) of the Act states that '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 ...'

80 To my mind, this statutory language clearly imports a mandatory quality. The conjunction of 'must' and 'unless' 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. This is apparent, in my view, not only from the statutory language, but also from the scope and object of the whole statute: Master Education Services Pty Ltd v Ketchell [2008] HCA 38 at [26] (2008) 236 CLR 101; Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355. It is also evident when regard is had to the mischief which the statute was intended to remedy: CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 at 408.

81 It is apparent from the Second Reading Speech that a mischief intended to be addressed by Section 80D is the conduct of an executive committee in committing lot owners to a liability for legal expenses, and the uncertainties of litigation, where the reality of diversity of ownership among lot owners may sometimes mean that such a decision is not representative. Absent a resolution of the lot owners in general meeting approving the proposed action, Section 80D therefore represents a complete embargo on the executive committee's power in this respect, unless Regulation 15 applies.

82 Regulation 15 is a limited exemption to that embargo, which only applies when certain conditions are satisfied. The overall intention is to prohibit the executive committee acting without the approval of the lot owners in general meeting, unless the terms and conditions of the exemption are met. If those requirements are not satisfied, the exemption cannot apply, and the prohibition in Section 80D should have full force and effect.

83 The natural corollary of this regime is that actions taken by an executive committee in contravention of Section 80D, and without complying with the requirements for exemption set out in Regulation 15, should be treated as invalid and unauthorised. 'Must' means 'must'. It is an imperative - expressing necessity, obligation and compulsion. There is no halfway house; no reason for attempting to ameliorate the outcome because of the particular consequences in a given case of wasted costs or aborted legal action. Consequences such as those are the inevitable result of invalidity. They cannot control the meaning and effect of the statutory regime. In a case such as this, the executive committee, and particularly its chairman, only have themselves to blame.

84 The owners corporation contended that 'invalidity' was not a discernible legislative purpose; that it could not be distilled from the text, the subject matter or otherwise. It supported its submission by reference to certain statements in the judgment of Kirby J in Owners SP 4652 v Hall [2009] NSWSC 278 at [57] - [58]. However I do not think that those paragraphs assist the owners corporation. In particular, in paragraphs [56] - [58], Kirby J observed that both the heading to Division 3 of Part 3 of the Act and the Minister's Second Reading Speech, suggest a restriction on power, not simply a direction as to the manner of its exercise.

85 The owners corporation also relied on paragraph [65] of that decision, which contains certain obiter observations about the legislative purpose of Section 80D in the context of an action against someone who is not a lot owner. In particular, the owners corporation relied on the statement by Kirby J that 'One would not infer that the legislative purpose of Section 80D was to invalidate the Corporation's actions in such circumstances'.

86 For my part, I do not accept the distinction drawn by Kirby J, nor the reasoning on which it is based. His Honour recognised that the statutory restrictions on spending were included for the benefit of owners, but stated that they were not for the benefit of third parties. I do not see how that distinction can be made to work. The protection of lot owners will be achieved by the knowledge that decisions made in contravention of the Act will be invalidated. The fact that such invalidity may lead to the dismissal of proceedings commenced by the executive committee, can only serve to reinforce the object of the Act. The fact that a defendant to those proceedings may benefit from such dismissal is an incidental and necessary consequence, not a reason for concluding that a different legislative purpose should be inferred. Anything else would lead to confusion and uncertainty.

Orders & Costs

87 The answers to the separate questions set out in paragraph [62] are therefore as follows:

(a) No

(b) Yes

(c) (i) Yes

(ii) No

(e) Yes

88 The plaintiff should pay the defendants' costs of the proceedings. I will however entertain submissions as to costs, if necessary. The parties should agree on consent orders to reflect the answers to the separate questions and such other orders as may be appropriate for disposing of or otherwise dealing with these and the related proceedings.

Decision last updated: 19 July 2013