The Owners SP No 62327 v Brodyn P/L t/as Time Cost & Quality

Notice of motion filed on 19 September 2013

1. On 19 September 2013, the defendant filed the present notice of motion seeking a number of orders, including seeking leave to amend its defence, and to seek that the plaintiff's claim be struck out or dismissed on account of alleged abuse of process, or alternatively, because of argued non-disclosure of a reasonable cause of action on the pleadings: UCPR r 13.4.
2. On its face, the plaintiff's statement of claim consists of a properly pleaded claim for relief for damages for allegedly defective remedial building works. Consistent with that view, ultimately the lastmentioned claim for relief was not argued by the applicant defendant.
3. On 12 December 2014, in this Court, part of the present motion was heard by her Honour Judge Olsson SC, at which time orders were made regarding the amendment of the defence. At that time, prayers numbered 2 - 5 of the motion (dealing with the claimed relief of strike out or dismissal) were stood over for later determination pending the Court of Appeal delivering judgments in other relevant proceedings heard in that Court on 8 and 9 October 2014.
4. The Court of Appeal delivered judgments in those cases on 5 December 2014: 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409; The Owners - Strata Plan No 70798 v Bakkante Constructions Pty Ltd [2014] NSWCA 410.
5. Following those decisions, some of the issues raised by the present notice of motion have receded, leaving a narrower residual question to be determined.
6. The parties therefore arranged for the motion to be relisted for that residual question to be argued on 27 March 2015. These reasons deal with that narrowed residual question.

Residual question for decision

1. The residual question to be determined for the disposal of the present notice of motion is whether non-compliance by the owners corporation with the provisions of s 80D of the SSMA before commencing legal proceedings, where such non-compliance was subsequently ratified by the owners corporation, provides a proper basis for a finding that the proceedings amount to an abuse of process. That question also requires a consideration of the interests of justice in the circumstances of the case.
2. The related question of whether non-compliance with s 80D of the Act renders the proceedings void at the outset has now receded and no longer requires determination as a consequence of the decisions of the Court of Appeal referred to at paragraph [7] above.

Section 80D

1. Section 80D of the SSMA provides as follows: "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. s 80D"
2. The relevant regulation at the time limited the amount that could be incurred without invoking s 80D to $10,000: Strata Schemes Management Regulation 2005, reg 15.

Evidence

1. The applicant defendant relied upon the affidavit of its solicitor, Jason Cameron, sworn on 19 September 2013. That affidavit, and the voluminous material exhibited to it, was ultimately identified in oral submissions as comprising background material in the context of the new narrowed residual question. The applicant defendant also relied upon two sets of written submissions (MFI "1" and MFI "2").
2. The respondent plaintiff relied upon the following material: 1. An affidavit sworn on 24 October 2013 by Ms Wendy Bure, solicitor; 2. An affidavit sworn on 31 October 2013 by Mr Peter William Poulos, solicitor; 3. An affidavit sworn on 1 November 2013 by Ms Wendy Bure, solicitor; 4. An affidavit sworn on 20 March 2015 by Ms Wendy Bure, solicitor; 5. Written submissions filed on behalf of the respondent plaintiff on 1 November 2013 (MFI "3") together with supplementary submissions of the same date (MFI "4").
3. Both parties also made oral submissions which addressed the identified filed written submissions. On 1 April 2015, the respondent plaintiff forwarded a supplement to its previous submissions.

Submissions of the parties

1. On behalf of the applicant defendant it was submitted that the resolution of the owners corporation to initiate the proceedings was invalid and thus incurable by subsequent purported ratification decisions made by the owners corporation. It was further submitted that as a consequence, the proceedings should be struck out as an abuse of process.
2. In contrast, on behalf of the respondent plaintiff it was submitted that the ratification provisions within the regulatory scheme of the SSMA, duly implemented by the owners corporation in the form of after the event ratification, operated as a mechanism to effectively deal with and counteract any argued initial invalidity on account of any earlier non-compliance with s 80D(1) of the SSMA.

Relevant facts

1. On 2 September 2005, the owners corporation entered into a building contract with the defendant to carry out remedial building works at the subject premises because of a claimed breach of warranty by the builder of the premises.
2. The plaintiff claims that remedial works were allegedly carried out by the defendant in a defective manner resulting in a claim by the plaintiff for damages. For present purposes it is unnecessary to review the alleged defects or the amounts involved in relation to remediation of those defects.
3. Vero Insurance Limited was the underwriting insurer for the statutory warranty pursuant to NSW Residential Construction Warranty Insurance, and it therefore made payments in respect of the remedial works.
4. The builder of the original works the subject of the warranty claim on the insurer, Consolidated Constructions Pty Ltd, had earlier been deregistered after an administrator was appointed for that company.
5. After some dispute, in respect of which the owners corporation obtained legal assistance, the insurer ultimately accepted the warranty claims for the remedial works and agreed to indemnity the owners for those remedial works carried out by the defendant in substitution for the original builder in liquidation. The insurer subsequently paid the defendant for some of the remedial works it carried. However, a point was reached where relations between the defendant and the owners deteriorated and broke down following complaints by the owners over the standard of work carried out by the defendant.
6. On 6 April 2009, the owners and the insurer entered into a duly sealed subrogation agreement which permitted the insurer to commence and conduct proceedings against the defendant in the name of the owners.
7. That agreement was made without a prior resolution of the owners corporation in compliance with s 80D of the SSMA.
8. The owners retained their own solicitor, Mr Peter Poulos to assist them in their dealings with the insurer in relation to a range of other matters calling for legal services and not limited to the dispute with the defendant.
9. On 1 April 2011, Mr Poulos provided the owners with a costs disclosure in the range $5665 - $7480 plus incidentals and disbursements. On 16 July 2013 that costs disclosure was updated to an anticipated total of $9500. Those fees related to three files, only one of which related to the proceedings against the defendant. Accordingly, not all of the amounts covered by those estimates for legal costs related to the present proceedings.
10. The updated costs estimate from Mr Poulos dated 16 July 2013 makes it plain that in addition to the present proceedings, there were other proceedings instituted against Vero Insurance Ltd, and another legal dispute relating to what was described as Stage 2 rectification works.
11. The relevance of the lastmentioned matters is that it is plain that legal costs incurred by the owners in respect of this litigation did not exceed the regulatory threshold of $10,000.
12. The subrogation agreement relevantly provided that the insurer would pay 100 per cent of the legal or other costs incurred by the insurer incidental to the present litigation: clause 2.4 of the subrogation agreement.
13. The subrogation agreement also provided that the insurer would pay for 88.26 per cent of the cost of the remedial works, with the remaining 11.74 per cent to be borne by the owners: Recital D of the subrogation agreement.
14. The insurer has paid out monies in respect of the remedial works and has claimed indemnification for the amounts so paid to the defendant pursuant to cl 56 of the Home Building Regulation 2004.
15. To achieve the recovery of the amounts paid, the insurer has invoked its indisputable right of subrogation to recover those amounts in the name of the owners corporation. As a result, the present proceedings were filed on 17 April 2013.
16. The proceedings were instituted as a result of the decision made by the owners corporation on 29 August 2012 to give effect to the insurer's rights of subrogation. In making that decision, the owners corporation did not observe the pre-requisite embedded within s 80D of the SSMA, that required an authorising resolution be passed at a general meeting of the owners corporation.
17. When the non-compliance of s 80D came to notice, a series of ratifications took place at meetings of the owners corporation. At those meetings, authorisation was obtained for these proceedings to be maintained. Those meetings were as follows.
18. On 5 November 2013, an extraordinary general meeting was scheduled by the owners corporation indicating the meeting was to be held by proxy vote and proxies were requested. That meeting was later rescheduled to take place on 8 November 2013. Subsequently, that meeting was rescheduled to take place at the office of the Strata Managers. In my view, nothing of significance turns on those altered arrangements.
19. On 8 November 2013, the rescheduled extraordinary general meeting of the owners corporation took place. It was resolved that the decision on 29 August 2012 to institute the already filed present proceedings be approved, ratified and adopted, including the appointment of the plaintiff's solicitors to act in those proceedings acting on the instructions of the insurer: Exhibit "A".
20. On 21 March 2014, the applicant defendant sought to raise challenges to the validity and the effectiveness of the ratification resolution passed at the extraordinary general meeting on 8 November 2013, and made submissions challenging the resolution. The owners corporation then sought legal advice and gave consideration to those challenges.
21. On 7 October 2014, at an extraordinary general meeting of the owners corporation, resolutions were carried noting the effect of the previous 8 November 2013 resolution. On 7 October 2014, for more abundant caution, and for the avoidance of doubt, the owners corporation ratified or re-ratified, confirmed and approved the commencement of the present proceedings, as if the proceedings were the proceedings of the owners corporation. A note to those effects was carried.
22. The applicant defendant subsequently sought to raise further doubts about the validity of the resolution of the extraordinary general meeting of the owners corporation held on 7 October 2014. Resolution 3 of that meeting, which was unanimously carried by the votes of 26 lot owners at that meeting, was in the following terms: "… 3. DISTRICT COURT PROCEEDINGS NO. 2013/119079 The Owners Corporation, as an abundance of caution and for the avoidance of all doubt, having regard to the Supplementary Submissions of Brodyn filed on 21 March 2014, resolves to ratify and/or re-ratify\and/or approve and/or confirm the approval of the commencement' of District Court proceedings No 2013/119079 as if those proceedings were its own. CARRIED 4. DISTRICT COURT PROCEEDINGS NO. 2013/119079 The Owners Corporation, as an abundance of caution and for the avoidance of all doubt, having regard to the Supplementary Submissions of Brodyn filed on 21 March 2014, resolves to ratify and/or re-ratify and/or approve and/or confirm the approval of the taking of all steps in the said proceedings taken by or on behalf of the Owners Corporation in connection with the District Court proceedings No 2013/119079 including the prosecution of those proceedings to their finality including any and all appeals, enforcement action, or other subsequent steps necessary or desirable in the prosecution of those proceedings to their finality whether in this court or in any other court as if those actions were its own. CARRIED 5. DISTRICT COURT PROCEEDINGS NO. 2013/119079 The Owners Corporation, as an abundance of caution and for the avoidance of all doubt, having regard to the Supplementary Submissions of Brodyn filed on 21 March 2014, resolves to ratify and/or re-ratify and/or approve and/or confirm the approval of the actions taken by AAI Ltd t/as Vero Insurance and its nominated solicitors and Counsel for the provision of legal advice and services and representation and action in the name of the Owners Corporation in District Court proceedings No 2013/119079. CARRIED …"
23. Notwithstanding those events, the applicant defendant seeks to avoid the plaintiff's claim by arguments based on the initial non-compliance by the plaintiff with s 80D of the SSMA.

Consideration

1. The insurer has brought these proceedings in the name of the respondent plaintiff by way of subrogated authority. In doing so, at the time the proceedings were filed, there had been non-compliance with s 80D of the SSMA.
2. It is beyond dispute that it is an abuse of process for proceedings to be brought in the name of a party without valid authority: 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409, at [60].
3. In the consideration of such circumstances from the perspective of whether proceedings should be struck out or dismissed as an abuse of process, the questions that consequently arise for determination are whether the defect in the process can and has been overcome or cured, and whether such cure results in significant prejudice to the party that would be adversely affected if an order were to be made curing the defect.
4. In my view, although the initiation of the present proceedings was not in compliance with s 80D, such non-compliance was later ratified by the plaintiff respondent. The ratifications that were effected by the owners corporation were directed at the commencement and the continuance of the proceedings. In my view this was a sufficient compliance with the requirements of s 80D in the context that s 80D(1) contemplates a mechanism for approving or ratifying actions that were beforehand taken in non-compliance with that section.
5. The applicant defendant relies upon the decision in 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409, to assert subsequent ratification does not undo the contravention. However, this does not preclude a subsequent validation through ratification.
6. The applicant defendant also relies on paragraph [106] of that decision in support of its position. As I read that paragraph, a distinction is made between a non-compliance of mandatory requirements, which results in invalidity or nullity of proceedings due to limits on jurisdiction, and which necessarily results in dismissal of incorrectly commenced proceedings, and non-compliance that may be considered in the context of the exercise of a discretion to determine whether or not incorrectly commenced proceedings should nevertheless be allowed to continue, in line with procedural principles concerning orders for stays, or summary dismissal, embodied in procedural rules, which also require a consideration of the dictates of justice: s 58(1) of the Civil Procedure Act 2005.
7. In my view, the inclusion in s 80D(1) of the scope for an owners corporation to approve or ratify steps taken incorrectly, places the requirement for the exercise of discretion into the latter category rather than the former category. This then raises the question of whether the circumstances justify the exercise of discretion to excuse the incorrectly taken but subsequently ratified steps.
8. In my assessment, the content of resolution (3) of the extraordinary general meeting of the owners corporation held on 7 October 2014, the chronology of events leading to that resolution, and the underlying documents which included submissions to the owners corporation by the applicant defendant's solicitor, shows that the owners corporation acted within a reasonable time to deal with the problem of non-compliance, and that there has been adequate disclosure to the members of the owners corporation concerning non-compliance with s 80D of the SSMA. In my view this indicates that the ratifications were effective, which reasonably permits excusal of the earlier omission to comply with s 80D.
9. I consider that view to be consistent with the dictates of justice where proceedings were otherwise brought within time and no relevant prejudice appears to have arisen to adversely impact upon the applicant defendant such that the plaintiff should be denied the opportunity of pursuing a determination of its legal rights.
10. The circumstances of this case are very different to those set out in The Owners - Strata Plan No 70798 v Bakkante Constructions Pty Ltd [2014] NSWCA 410. The present proceedings were at an early stage when the fact of non-compliance with s 80D came to notice, unlike in the case cited where the matter had proceeded to trial without ratification of the earlier non-compliance.
11. That factor, together with the fact that the legal costs incurred are less than the reg 15 threshold of $10,000, and the fact of the insurer's indemnity for legal costs, militates in favour of the grant of the relief sought.
12. The owners corporation has proceeded through its insurer. In obtaining the commitment from the insurer to do so, it obtained an indemnity. At no stage were the owners exposed to the potential harm of adverse costs beyond the indemnity, which has been constant. As was observed in 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409, at [61], the "victim" of non-compliance with s 80D was the plaintiff, and not the defendant. I therefore see no sound basis upon which to refuse the exercise of the discretion sought by the owners corporation for validation of the ratifications relied upon to resist the applicant defendant's motion.

Disposition

1. The applicant defendant's motion should therefore be dismissed as the proceedings are validly maintainable by the plaintiff. Therefore, prayers numbered 2 - 4 of the applicant defendant's motion filed on 19 September 2013 seeking dismissal of the plaintiff's proceedings, should be dismissed.

Costs

1. The applicant defendant should be ordered to pay the respondent plaintiff's costs of the dismissed motion. Those costs should be assessed on the ordinary basis unless a party is able to establish an entitlement to some other order, in respect of which I propose to grant liberty to apply.

Orders

1. I make the following orders: 1. The applicant defendant's motion filed on 19 September 2013 is dismissed; 2. The applicant defendant is to pay the respondent plaintiff's costs on the ordinary basis unless otherwise ordered; 3. Liberty to apply on 7 days notice if further or other orders are required.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 April 2015