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Court of Appeal Confirms an Owners Corporation Can Ratify Decisions by Executive Committees to Commence Legal Proceedings

On 2 December 2013, we reported on the Supreme Court decision of Justice Hammerschlag supporting our advice to the Gazebo Apartments owners corporation that it should:

(a) immediately file proceedings to protect its rights against the Developer to recover damages for breach of the statutory warranties under the Home Building Act 1989 which were shortly to expire; and

(b) move as soon as possible to ratify that decision to commence the legal proceedings by adopting a resolution at a general meeting of the owners corporation.

The Developer, 2 Elizabeth Bay Road Pty Limited (2EBR), a company owned and controlled by Syd Fischer, appealed against that decision to the Court of Appeal.

On Friday, 5 December 2014, the Court of Appeal unanimously dismissed 2EBR's appeal with costs awarded against 2EBR.

The Issues in this Case

Section 80D of the Strata Schemes Management Act 1996 (SSMA) relevantly provides that "an owners corporation or an executive committee … must not seek legal advice … 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 the taking of that action". 

At issue in the case before the Court of Appeal was the proper meaning of section 80D and how that "prohibition" operates.  Chiefly the Court was asked whether the actions of the Gazebo owners contravened section 80D and, if so, what the consequences were regarding the principal litigation that had been initiated.

The Decision

After examining the context and purpose of section 80D, all 3 Justices held that the section had an implied time-based element that meant that, in order avoid contravention, the owners corporation had to pass the required resolution before proceedings were commenced.

Justice Leeming in particular noted that, despite the section's use of the phrase "unless a resolution is passed" (instead of "resolution has first been passed", found in other sections of the legislation) suggesting that the timing of the resolution might not be important, the context and purpose of the section nonetheless showed that Parliament meant for the owners corporation's resolution to come before the initiation of proceedings.

The Court of Appeal Justices reasoned that the purpose of the section (and its surrounding provisions) was to give the owners effective oversight over the use of their collective funds.  Therefore, to allow the executive committee to delay owners corporation's approval until after proceedings had already commenced (and legal expenses started to build), would greatly diminish the ability of the section to achieve its purpose.

The Court, however, was clear in stating that section 80D of the SSMA does not automatically and permanently deny the owners corporation from continuing proceedings just because those proceedings were initiated before an approving resolution was passed. 

Power to Ratify

The Court of Appeal held that the commencement of the proceedings was within the corporate power of the owners corporation and the failure to obtain a resolution of the owners corporation in general meeting before doing so did not render the commencement of proceedings a nullity.  It was within the power of the owners corporation to ratify the decision of the executive committee to commence the proceedings. The Court held that to have found otherwise would have meant that a third party wrongdoer would have been able to take advantage of a section designed to protect lot owners to the detriment of those lot owners. 

Justice Basten put it this way:

"The purpose (or at least the primary purpose) of section 80D is neither to provide protection to third parties, nor to confer rights on third parties:  the protection is directed to lot owners.  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.  Indeed, depending on the circumstances, the result may be to confer an unintended benefit on a tortfeasor [wrongdoer] or party otherwise in breach of its legal obligations, to the detriment of the lot owners."

Implications for the Future

It will be up to the relevant court or tribunal in any particular case to exercise its discretion whether to stay or dismiss proceedings.  In determining whether or not to dismiss proceedings commenced without an owners corporation resolution, the Court of Appeal identified the issues which a court or tribunal should consider as:

(a) whether the breach of section 80D had been cured;

(b) if it has not been cured, will it be cured promptly; and

(c) was the breach inadvertent (because, say, of an irregularity in the approval process) or deliberate. 

"In the present case, the contravention was promptly cured, and before the procedural rules of the court were invoked for its summary dismissal": Leeming JA at [108].

For the future, where proceedings are commenced without the owners corporation first resolving to do so, particularly where it is necessary to act quickly to protect owners corporations' rights, a general meeting should be convened to ratify that action as quickly as possible.  It would be preferable if that resolution were to be adopted by owners in general meeting before the statement of claim or summons commencing the proceedings is actually served on the defendant. In that way, the owners corporation will avoid any question of the defendant filing a motion to dismiss before the owners corporation has had the chance to ratify the commencement of the proceedings by a resolution in general meeting.

The case is recorded as: 2 Elizabeth Bay Road Pty Ltd v The Owners – Strata Plan No. 73943 [2014] NSWCA 409.  The principal case relating to the actual building defects claim remains to be decided.

Should you have any questions in relation to the article or any other matters please do not hesitate to contact Beverley-Hoskinson or Jessica Bates in our office

Beverley Hoskinson-Green
Partner
02 9233 9064

bhoskinson@makdap.com.au

Jessica Bates
Senior Associate
02 9513 9522

jbates@makdap.com.au