Owners - SP 58631 v Caporale - [2011] FCA 109 - FCA 2011 case summary

Federal Court of Australia|2011-02-15|Before: Adam P, Reeves J

The application for leave to appeal filed on 10 June 2010 be refused. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 688 of 2010

JUDGE: REEVES J DATE: 15 fEBRUARY 2011 PLACE: bRISBANE (HEARD IN SYDNEY)

Relevant considerations in granting leave 3 While I clearly have an unfettered discretion to grant leave, it has been long-established that there are at least two matters to which I should have regard. They are: i) whether there is sufficient doubt about the correctness of the judgment to warrant reconsideration of it by a Full Court; and ii) whether the denial of an opportunity to appeal would involve a substantial injustice if the decision of the primary judge supposed to have been wrong. See Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 ("Décor") at 398-9. 4 In the vast majority of cases, if the judgment that is sought to be appealed involves a substantive right and the applicant can show there is sufficient doubt about its correctness, he or she will generally have little difficulty also showing that substantive injustice would be occasioned if leave to appeal were not to be granted. However, a different attitude is adopted where the judgment sought to be appealed involves a matter of practice or procedure. In that case, as Sir Frederick Jordan observed in Re the will of FB Gilbert (dec) (1946) 46 SR(NSW) 318 at 323: [I]f a tight rein were not kept upon interference with the orders of Judges of first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably, and costs heaped up indefinitely, if a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in Chambers to a Court of Appeal. 5 To similar effect, the Full Court in Décor (at 400) underscored the strong warning given by the High Court in Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 at 177 that "a tight rein" should be kept on such applications. 6 These warnings and admonitions apply with even greater force in this particular application. This is so because, not only does this matter not involve a substantive right, but the point of practice or procedure at issue essentially relates to a question of costs. This is further compounded by the fact that the costs at issue have been increased to about four times their original amount as a result of the processes leading up to, and including, this application.

Factual background 7 To show how this extraordinary situation has come about, it is necessary to set out the factual background of this application in a little more detail. 8 As noted above, the effect of the judgment of Lloyd-Jones FM was to set aside two bankruptcy notices issued by the Owners Corporation against the Caporales. The central point at issue in his Honour's decision was the date of service of those bankruptcy notices. This was so because, under the relevant provisions of the Bankruptcy Act 1966 (Cth), the Caporales had to apply to set aside the bankruptcy notices within 21 days of them being served on them. Since they made their applications on 25 February 2010, service therefore had to have occurred on or after 4 February 2010. 9 On that issue the Owners Corporation contended that the bankruptcy notices were served at about 10.40 pm on 3 February 2010. As a result, it contended that the Caporales' applications to set aside the bankruptcy notices were out of time by a day. To establish this, Mr Edney, the Owners' legal representative, relied upon an affidavit in which he deposed that he served the bankruptcy notices after he finished work on the evening of 3 February 2010. He also claimed that this was supported by a file note he made shortly thereafter, and his draft affidavit of service. 10 Ms Rosa Caporale, the sister of the two Caporale brothers, appeared by leave in the proceedings before the Federal Magistrate. Ms Caporale relied upon an affidavit she had sworn to the effect that she was present at the address where the bankruptcy notices were allegedly served throughout the whole of the evening of 3 February 2010 and the early morning of 4 February 2010, until about 6.45, when she left to catch a plane to Melbourne. She said that she was in a position to observe the letterbox at that address at around 10.40 pm and she did not see anyone put anything in it. Moreover, she said that when she left to go to the airport at about 6.45 on the morning of 4 February 2010, she passed the letterbox and did not see anything in it. 11 The Federal Magistrate considered all this evidence and concluded, as a matter of fact, that the Owners Corporation had failed to establish that the bankruptcy notices were served at about 10.40 on the evening of 3 February 2010. In the final paragraph of his decision, his Honour said, among other things: I do not consider it in the interests of justice to make such a finding when the evidence provided in support of the earlier service time was so poorly presented to the Court. Additionally, I do not consider that a course of continuing these proceedings serves any purpose considering the debts under each Bankruptcy Notice have been discharged by the Applicants.

The legal costs have escalated significantly 12 This final sentence of his Honour's reasons refers to the fact that, on 11 March 2010, the Caporales paid the full amount of the debts due under the bankruptcy notices to the Owners Corporation, ie $7,163.48 on behalf of Mr Tommaso Caporale and $7,146.62 on behalf of Mr Giuseppe Caporale. Thus, as Mr Prowse for the Owners Corporation frankly conceded at the hearing before me, this proceeding has been maintained since that date for the sole purpose of pursuing an order for the costs associated with issuing the two bankruptcy notices. 13 That meant, so Mr Prowse informed me, that in the three weeks (approx) between the payment of the debts and the hearing before the Federal Magistrate on 31 March 2010, the costs incurred in relation to these proceedings escalated from approximately $3,500 to $5,000 to approximately $7,000 to $10,000. To compound this situation further, Mr Prowse also informed me that the costs of pursuing this application in this Court has resulted in the costs further escalating to somewhere in the vicinity of $14,000 to $20,000, or about four times their original amount.

The owners corporation claims it had a fiduciary duty 14 To justify this outcome, Mr Prowse submitted that the Owners Corporation had a fiduciary duty on behalf of the members of the Strata Plan to seek the recovery of these costs, even though the Caporales had discharged the debts the subject of the bankruptcy notices. He relied upon the provisions of the Strata Schemes Management Act 1996 (NSW) ("the Strata Act") and a decision of the New South Wales Court of Appeal in Owners of Strata Plan 36131 v Dimitriou [2009] NSWCA 27 ("Dimitriou"). 15 Dimitriou concerned the recovery by an owners corporation of outstanding levies and expenses under s 80 of the Strata Act. Section 80(1) states that "An owners corporation may recover as a debt a contribution not paid at the end of one month after it becomes due and payable, together with any interest payable and the expenses of the owners corporation incurred in recovering those amounts". Ms Dimitriou, a member of the strata plan, initially disputed the validity of certain contributions, but by the time the matter was dealt with by the Local Court, she no longer denied liability in respect of them. Thus, the only issue before the magistrate was whether s 80 of the Strata Act permitted the owners corporation to claim legal costs as part of the "expenses … incurred in recovering [the contribution] amounts". 16 When the matter eventually came before the New South Wales Court of Appeal, the Court held that the expression "expenses" in s 80 extended to include legal costs. Their Honours also discussed the limitations that might apply to the recovery of such costs. Hodgson JA (at [37] ) held that they could only be recovered to the extent that they were "reasonably incurred and reasonable in amount": see also Basten JA at [64] and Handley AJA at [130]. Furthermore, Hodgson JA held (at [40]) that the owners corporation bore the onus of proving that the costs had been reasonably incurred and were reasonable in amount. Handley AJA also commented (at [130]) that: "[t]he corporation's conduct in commencing recovery proceedings must also be reasonable". 17 The Court of Appeal also considered whether the words "together with", in s 80 of the Strata Act, meant that a claim for expenses, including legal costs, must be made in the same proceedings as the claim for the outstanding contributions. On this issue, Hodgson JA said (at [47]): [P]ayment of arrears of contributions before proceedings are commenced would preclude an action for recovery of associated expenses. However, payment of arrears of contributions after proceedings have been commenced would not preclude continuation of those proceedings to obtain a judgment for expenses including legal costs. [Emphasis in original] 18 See also Basten JA at [106] and Handley AJA at [142].

The Owners corporation has a right not an obligation 19 In my view, Dimitriou is not authority for the proposition that a body corporate in the position of the Owners Corporation has a fiduciary duty to pursue legal costs incurred by it in attempting to recover unpaid contributions. Instead, it is authority for the right of an owners corporation to recover expenses, including legal costs, incurred in proceedings for the recovery of contributions owed to it. However, it is clear from Dimitriou that the owners corporation has no obligation to pursue the recovery of those expenses and legal costs and if it does, it is only able to recover legal costs to the extent that they were reasonably incurred and they are reasonable in amount.

No substantial injustice occasioned if leave refused 20 I do not know what offers (if any) the Caporales made to pay the legal costs associated with the issue of the bankruptcy notices, before the hearing before the Federal Magistrate on 31 March 2010. I asked Ms Caporale about this at the hearing of this application and she was not forthcoming. Mr Prowse said that no such offer was made. He also emphasised the fact that the Owners Corporation was a respondent to the Caporales' applications to set aside the bankruptcy notices and it, therefore, had little control over the situation. 21 Without necessarily deciding the issue, it may have been reasonable, in the absence of some reasonable offer from the Caporales, for the Owners Corporation to incur some further legal costs in an attempt to recover the costs that had already been incurred in issuing the bankruptcy notices. I also do not need to decide whether it was reasonable for the Owners Corporation to continue incurring legal costs when the amount of those costs started to approach the amount that was already at stake. 22 However, once the Owners Corporation decided to make an application for leave to appeal the Federal Magistrate's decision in this Court, different considerations arose. As I have already observed above, those considerations include my deciding whether substantial injustice will be occasioned to the Owners Corporation if I were to refuse it leave and therefore prevent it from continuing this costs pursuit. 23 As I have detailed above, an additional sum of between $10,500 and $15,000 has already been incurred in pursuing the original costs debt of between $3,500 and $5,000. This amount does not, of course, take into account any costs that would inevitably be incurred in the appeal if I were to grant the Owners Corporation's application for leave to appeal the Federal Magistrate's decision. It follows from this that, if I were to grant this application, I would be giving encouragement to a party continuing to incur legal costs out of all proportion to the original costs it is seeking to recover. I would also be condoning the pursuit of litigation for the sole purpose of recovering costs, when the real issue between the parties has been disposed of long ago and, in the process, I would be flaunting the overarching purpose of litigation in this Court, set out in s 37M of the Act, to dispose of litigation quickly, efficiently and inexpensively. 24 For these reasons, I do not consider that the Owners Corporation can show that it will suffer substantial injustice if this application for leave to appeal is refused. Moreover, I do not consider that it is in the interests of justice that this Court should give further encouragement to this costs pursuit. This being so, it does not matter whether the Owners Corporation is able to demonstrate that there is sufficient doubt about the correctness of the Federal Magistrate's decision to warrant it being considered by a Full Court.

conclusion - leave rejected 25 For these reasons, I order that the Owners Corporation's applications for leave to appeal the decision of the Federal Magistrate be refused. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.

Federal Court Act 1976(Cth)

Strata Schemes Management Act 1996(NSW)s 80

Federal Court of Australia Act 1976(Cth)ss 24(1A), 25(2)(a), 37M

Owners - SP 58631 v Caporale

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