The Owners - Strata Plan No 70798 v Bakkante Constructions Pty Ltd

Parties and events prior to commencement of litigation 19The appellant owners corporation is the registered proprietor of land at Pyrmont in inner Sydney being the common property within a strata plan, which includes buildings known as Buildings A, B and C. The buildings are predominantly residential. There are 62 lots in all. The owners corporation has an executive committee, whose chair was at relevant times Mr Murray Groom. 20The building was developed (and originally owned) by Beljen Developments Pty Ltd. The original builder appears to have gone into liquidation during construction, and the building work was completed by the first respondent (Bakkante) and subcontractors retained by it. The second respondent, Dr William Zankin, and his wife own a unit in Building A; the circumstances by which he became joined are described below. 21For the purposes of resolving the challenges made to the conclusions of the primary judge that there was non-compliance with s 80D in both February and May 2009, the following highly abbreviated summary will suffice. 22From 2005 until 2008 there was a lingering dispute between the owner of unit C17 and the owners corporation concerning water penetration (it seems that to the extent that the builder was involved, that was not at the forefront of the dispute). The owner retained a solicitor, who sent a letter of demand to the owners corporation on 31 July 2008. The Executive Committee resolved to notify its insurer and to obtain fee disclosures from solicitors. Mr David Baker, then of the firm Baker McDonell, sent a costs agreement on 8 August 2008. The work described in that agreement was in general terms: "acting in relation to building defects". The letter annexed a "Standard Costs Disclosure", which set out the firm's hourly rates and other charges, and then provided an estimate in these terms (emphasis in original): "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. At this stage it is not possible to estimate costs further without seeing the builder's evidence and determining whether the matter will actually proceed to hearing." 23The owners corporation commenced proceedings in February 2009 in the Consumer, Trader and Tenancy Tribunal (Tribunal) in relation to the claim based on unit C17, and expanded those proceedings in May 2009 to include a much larger claim in respect of common property throughout the building. There was never, prior to 2013, approval of the proceedings by a resolution passed at a general meeting of lot owners. Throughout that time, there were complaints from some lot owners (on the main, those who were associated with the developer, and Dr Zankin) that owners corporation funds were being spent contrary to the Act. 24It seems that on 3 September 2008, Mr Groom signed the costs agreement on behalf of the owners corporation. Under cover of a letter of the same day, the disclosure letter was circulated to lot owners. The primary judge found that the costs estimate was not included, although it was plain from a letter from the owners of eight units dated 10 September who complained about the process that they were aware of the $5000-$6000 estimate. Nothing turns on whether the estimate was or was not included.

February - May 2009: The commencement and expansion of the proceedings, and the annual general meeting 25The claim made by the owner of Unit C17 was resolved at a mediation (on 16 December 2008). The owners corporation's solicitor took steps to obtain two reports from building consultants ROH Consulting Services Pty Ltd (ROH). Those reports identified defects in respect of unit C17 and elsewhere in Building C, and also in Buildings A and B. The reports stated that the total estimated cost of rectification of all defects was around $1,400,000. The most urgent rectification was in connection with the water penetration into unit C17. The cost of that work was estimated at some $147,000. 26Those reports were summarised in a letter of advice to the owners corporation dated 10 February 2009. The solicitor advised that the owners corporation was under a duty to engage suitably qualified tradespersons to rectify the work, that he was of the view that it was not possible for the owners corporation to defer the rectification works, that if the owners corporation determined not to raise a special levy to pursue litigation and failed to repair the works, that could result in a finding that it was "not functioning or not functioning satisfactorily" within the meaning of s 162 such that an adjudicator with "dictator's powers" could be appointed, and that there might be difficulties with the owners corporation's insurance. 27The letter stated that: "the estimated legal costs and disbursements of preparing an action against the builder/developer is estimated to be in the vicinity of $1,600 per unit holder." There were 62 lot owners, so that estimate was around $100,000. 28On 11 February 2009, a notice of annual general meeting was circulated. Item 10 on that notice was: "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." 29The meeting took place on 24 February 2009. Notwithstanding s 80D of the Act, and the item which was proposed for discussion and determination by the general meeting, the owners corporation commenced proceedings beforehand. 30An originating process dated 13 February 2009 and signed by Mr Groom was filed in the Tribunal on around that date. The application was completed in hand and described the applicant as "Murray Groom, Chairperson, The Owners - Strata Plan No 70798". The form stated that the dispute was about a breach of s 18B of the Home Building Act 1989 (NSW) by Bakkante, as set out in the ROH Report dated 11 February 2009 which was provided with the application. The value of the claim was stated to be $147,000. 31It was common ground at the trial that not all members of the executive committee were involved in the decision to commence proceedings. Without descending unnecessarily into the detail of how this occurred, members associated with Bakkante were excluded. 32The trial judge found that the fact that proceedings had been commenced was not disclosed to the meeting on 24 February 2009: at [40]. There was and is a dispute about this. His Honour had regard to the differing recollections of the witnesses, the probability that had that fact been disclosed, it would have been recorded in the minutes, and the inherent improbability of there being an announcement of "the previously unheralded fact of commencement of proceedings to a hostile meeting". 33On appeal, the owners corporation submitted that the factual finding by the primary judge that there was no disclosure of the commencement of proceedings should be overturned. In written submissions it was said that the finding "did not depend on questions as to the witnesses' demeanour, or other advantages that were particular to the primary judge". In oral submissions senior counsel for the owners corporation put the matter much more strongly. He went so far as to describe the findings as "perverse on the evidence that was before his Honour". The owners corporation pointed to the affidavit evidence of Mr Groom and Mr Baker to the effect that they referred to the commencement of proceedings, and to the fact that a witness on whom the trial judge placed reliance in his reasons was regarded by him at the time, when he was being cross-examined on this very point, as "obviously confused". His Honour in fact told counsel then appearing for the owners corporation that, "I am not going to place a lot of weight on his oral evidence unless it is corroborated by contemporaneous documents". His evidence on this issue was described during the hearing of the appeal as being "all over the shop", which is a pithy but not inaccurate description of how it reads. The witness contradicted himself repeatedly. In overview, he said that it had not been disclosed, and that he would have remembered if the litigation had been mentioned by Mr Baker (who was sitting next to him), but earlier he had agreed unequivocally that it had been disclosed. 34All witnesses were giving evidence about what had occurred more than four years previously. There are two objective matters which are of greatest significance on this issue. The first is the fact that proceedings had been commenced and served prior to the general meeting being held. The probabilities are that the members of the executive committee who were not involved in the decision to commence proceedings learnt of that decision shortly after service was effected. Mr Groom gave this evidence in cross-examination: "Proceedings were commenced and then served on the other side, which was the builder. That constitutes most of those persons in the committee who were not directly involved in the decision to do it. That's how they [learned], I would expect." 35The second is the terms of the resolution in fact recorded in the minutes of the meeting, reproduced below, and which were in turn circulated in draft and were relevantly unaltered in that process. 36It may be acknowledged that the primary judge has used language which is strongly critical of some of the owners corporation's witnesses, in particular Mr Groom. However, his Honour had the advantage of seeing Mr Groom and the other witnesses at length, as they were cross-examined by Dr Zankin. I cannot agree that this is a case where the adverse findings do not turn on demeanour; it does not follow from the absence of any express reference to the witnesses' demeanour in his Honour's reasons that demeanour played no part in his resolution of this issue: cf Abalos v Australian Postal Commission (1990) 171 CLR 167 at 179. It is quite plain that his Honour was better placed than this Court to assess what emerged from the conflicting documentary and testimonial evidence. 37That said, the weight of evidence, so far as it may be discerned from the appellate record, suggests that there was some disclosure to the meeting. If that be so, that would undercut some of the force of the findings made against the owners corporation's witnesses. 38However, nothing relevant to the determination of the questions identified for separate determination at the trial turns on whether or not there was informal disclosure to the general meeting. What is plain is that no resolution was passed at the meeting on 24 February 2009 approving the proceedings which had been commenced. 39To the contrary, the minutes of the 24 February 2009 meeting record that: "AMENDED AND RESOLVED that the owners corporation accept the offer of Bikkante Construction Pty Ltd to make good defects in common terrace over unit C17 to the specifications drafted by ROH and that these works start as soon as practically possible as tabled by Bikkante Construction Pty Ltd legal representative, Alistair McKeough. RESOLVED that the Executive Committee would facilitate immediate access for these works. 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." 40The same minutes record this: "12 EXPENDITURE AUTHORISATION: AMENDED AND RESOLVED that the executive committee obtain 3 quotes for any unbudgeted expenditure over $5,000. ... 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." 41As it was submitted by Dr Zankin: "Let's assume for the moment that Pembroke J was perverse. Let's assume that Mr Groom and Mr Baker told everyone at the general meeting which we know from evidence below was attended by 85 to 90% of lot owners, let's assume they were told about the CTTT proceedings. What did they do? They resolved not to go forward. They resolved that they wanted to have another general meeting in April. In the meantime they wanted three quotes from lawyers, they wanted expert reports and they were going to make the decision on the next occasion." 42The extraordinary general meeting scheduled for April 2009 did not take place. In early May 2009, the Executive Committee decided to maintain the existing proceedings. On 11 May 2009, the Tribunal was told by Mr Baker that unless they could be resolved, "the claim is likely to be worth about $1.5 million and the proceedings may need to be transferred". An adjournment was granted. On 20 May 2009, a further costs agreement was received from Baker McDonell, which described the work differently and more accurately: "Act for the Owners Corporation of SP 70798 in relation a claim for defective works to common property and individual lot property against Bakkante Constructions and Beljen Developments." 43A further costs estimate was provided, in these terms: "Stage 2: Advice, conferences with clients, liaising with experts, perusal of expert reports, correspondence with builder's solicitor, reviewing builder's evidence material preparation of affidavits & pleadings, appearing at Court. $8000 - $9000 Stage 3: Preparation for hearing, and briefing of counsel will be assessed once we are aware of builder's case and its commitment to settlement or litigation. $TBA" 44The proceedings were thereafter expanded, in accordance with a resolution of the Executive Committee on 21 May 2009, to include a claim for $1.47 million. It will be recalled that that was the claim which Mr Baker had estimated would cost around $1,600 per lot owner to run, which equates to an estimate of $100,000. No resolution approving the expansion of the proceedings was passed by a general meeting. 45I return to the findings made by the primary judge against Mr Groom and the other witnesses called by the owners corporation. On any view, the owners corporation commenced proceedings, and expanded proceedings, without ever obtaining the approval of a general meeting. The owners corporation had a written estimate of the cost of the expanded proceedings, which amounted to $100,000. It had an estimate of what was described, not inaccurately, as "Stage 1" of the limited proceedings in respect of unit C17. It went on to incur hundreds of thousands of dollars of expenses (by May 2013, $690,000) without the approval of a general meeting. Acknowledging as I do that (a) the executive committee was placed in a very difficult position given the tenor of the advice from its lawyer and (b) that it is at least possible that its members believed that there was compliance with s 80D at the time, it will be clear from what follows that there was a serious and sustained breach of s 80D. 46The owners corporation, especially in its oral submissions on the second day of the appeal, invited this Court to review the adverse findings made by the primary judge of its witnesses, notably Mr Groom, which included that "there was no full and frank disclosure to the general meeting that proceedings were commenced on 13 February". There is also colourful language: the primary judge said that Mr Groom "slipped into a parallel universe" at [25], that "The chairman of the executive committee of an owners corporation is not a law unto himself" at [33] and that "Mr Groom became even more high-handed" at [50]. 47Notwithstanding the criticism implicit in such language, the reasons should not be read as conveying any finding of conscious impropriety. The colourful language from time to time employed by the primary judge eschewed findings with respect to particular conduct or events. It was thus less helpful than it might have been. Moreover, those passages are to be read as consistent with what his Honour said at [57]: "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." 48If more serious findings had been made, then this Court would be confronted by an insuperable difficulty in determining whether the process was fair: cf Ashby v Slipper [2014] FCAFC 15; 219 FCR 322 at [150]. Findings of conscious impropriety appear not to have been put to Mr Groom in cross-examination by Dr Zankin (Bakkante did not cross-examine him). Indeed, the cross-examination would have needed to be specific in respect of particular conduct. No such finding was advanced in the written submissions. The oral submissions were not transcribed. Because of the way the challenge was developed, there was no secondary evidence of what had or had not been put in oral addresses. 49On the material available to this Court, I am not satisfied that the primary judge failed to use, or palpably misused, the advantage he enjoyed of seeing the witnesses. In any event, those findings do not in any way affect the outcome of the motions. It is not necessary to take this point any further.

The proceedings in the Supreme Court 50Subsequently, the proceedings in the Tribunal were transferred to the Technology and Construction List of this Court. Bakkante had at all times contended that the proceedings had been commenced in contravention of s 80D. It did so formally in paragraph 16 of its response. 51On 4 April 2012, Dr Zankin filed a notice of motion in the proceedings, seeking that they be dismissed. Dr Zankin's affidavit made it plain that he relied upon the non-compliance with s 80D. He complained of a near tripling in the quarterly levies he paid, and special levies raised to pay for the litigation. For reasons not plain from the record, that motion came before the primary judge 11 months later, on 4 March 2013 (a footnote to Dr Zankin's submissions stated that his motion had been vacated on the owners corporation's application, and subsequently adjourned twice by consent). On that occasion, after some debate about the sense of determining the issues raised by Dr Zankin on a summary judgment basis, orders were made by consent identifying questions for separate determination, and leave was granted for Dr Zankin to appear, lead evidence and cross-examine (and, in the four day hearing that followed, Dr Zankin took the lead in cross-examining the owners corporation's witnesses). However, Dr Zankin was not made a party by that order. The orders stated that the findings on the separate questions would be determinative of Dr Zankin's motion and paragraph 16 of Bakkante's response. 52The precise terms of the questions, and the answers given by the primary judge by a reserved judgment following a hearing in June 2013, 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? No. 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? Yes. 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 - Yes; and (ii) if yes to (i), did the plaintiff so comply? No. d. has any non-compliance been cured by reason of the resolution of the owners' corporation on 19/12/11? [Not answered] e. Is the consequence of (a) to (d) that the proceedings must be dismissed? Yes." 53It will be seen that the primary judge concluded that s 80D of the Act had been breached and that no exemption applied. 54The fourth question (d) identified for separate hearing by the primary judge was not pressed. The resolution on 19 December 2011 to which it refers is addressed below at [85]. As will become apparent below, that was the result of a deliberate forensic decision by the owners corporation.

The owners corporation's motion after judgment had been delivered 55The primary judge's answer to the last question (e) was that the proceedings must be dismissed by reason of the noncompliance with s 80D. Notwithstanding that answer, the primary judge permitted the owners corporation to move on a motion based on the ratification of the proceedings by a general meeting after judgment had been delivered. Thus it was that there was a second hearing over three days in February 2014. That hearing, like the first, was factually intensive; once again, I have found it possible to resist the temptation to examine the facts in the detail that the parties have presented them in order to resolve this aspect of the appeal. 56There was no dispute that in March and April 2013, in the weeks and months prior to the hearing of the separate questions, active steps were taken with a view to holding an extraordinary general meeting to ratify the litigation. A draft notice and motion were prepared and circulated to some members of the executive committee. The primary judge found that two matters were influential at this stage. One was that the costs incurred were in the order of $690,000 and would have to be disclosed. The other was that there seemed to be a real risk that the motion would fail. Ms Macrossan, a member of the executive committee who was involved in these matters, gave this evidence: "Q. On 24 May 2013 you decided in discussion with Ms Yardin not to take the risk that a ratification motion would fail, correct? A. Correct. Q. You instead decided to take the risk as to the outcome of the case in front of Justice Pembroke without a ratification motion being available? A. Correct." 57After the first judgment was delivered on 19 July 2013, but before orders were entered, a notice of motion was filed seeking to have further questions reserved for separate determination. The substantive order that was sought was that the Court determine whether the contraventions of s 80D as found had been cured by a subsequent ratification passed at a general meeting of the owners corporation on 15 August 2013. That occurred in circumstances when it was clear that unless there were an approval, the proceeding would be dismissed with an adverse order as to costs. 58The primary judge dismissed the motion. He did so having formed the view that the owners corporation had taken a "deliberate and informed choice not to agitate ratification prior to the hearing in June 2013". That would appear to have been the primary factor on which he relied, although his reasons also address other concerns (including the need for there to be finality in litigation, the non-disclosure to the meeting in August of the decision not to seek ratification prior to the four day hearing in June 2013, inadequacy of the disclosure to the meeting in August 2013, legal doubt as to whether the mechanism pursuant to which the meeting was conducted (by the appointment of a strata managing agent pursuant to s 162 of the Act, who exercised powers in accordance with the votes of lot owners) was applicable, the fact that the validity of the August 2013 meeting was itself the subject of other proceedings, and some concerns over conflicts of interest). The final consideration relied upon by his Honour was that there had not been full disclosure to the (new) counsel who had been retained, whose advice was provided to the meeting, including of the fact that in June 2013 a deliberate decision had been taken not to hold a meeting to approve the litigation.

(a) The construction of s 80D and reg 15 59It is plain that when proceedings were commenced, there had been no resolution passed at a general meeting approving them. The same was true when the proceedings were expanded in May 2009. For the reasons given in 2 Elizabeth Bay Road, s 80D requires an owners corporation or its executive committee to obtain approval before commencing litigation. Accordingly, s 80D was complied with only if an exemption applied. 60At relevant times, s 80D of the Act, and reg 15 of the Strata Schemes Management Regulation 2005 (NSW), relevantly provided 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." "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." 61There were 62 lots in the strata scheme, so that the lesser of the two amounts in reg 15(1)(a) and (b) was $10,000. (The equivalent regulation in the Strata Schemes Management Regulation 2010 provides for a calculation of $1,000 per lot or $12,500, whichever is the lesser.) As noted above, the estimated cost of providing specified legal services, described as "Stage 1", at a time when there was merely a claim by the owner of unit C17, had been disclosed. The owners corporation submitted that the deeming provision in reg 15(2) operated in those circumstances, so as to exempt the commencement of proceedings in the Tribunal from the prohibition in s 80D(1). 62As has been observed in 2 Elizabeth Bay Road, the prohibition in s 80D operates quite distinctly in connection with the seeking of legal advice or the provision of legal services, on the one hand, and the initiation of legal action, on the other. The latter involves a third party (the defendant), as well as the owners corporations and its lawyers, and invokes the procedural rules of the court or tribunal. As in that appeal, it is appropriate here to confine attention to the prohibition insofar as it applies to litigation. Accordingly, these reasons do not address whether it is possible, by repeatedly seeking small amounts of legal advice or legal services which do not include initiating or maintaining legal proceedings, each of which is estimated to cost less than $10,000, to fall within reg 15 and thereby avoid the need to obtain approval at a general meeting. 63It is best to commence with the structure of the scheme established by s 80D and reg 15 read together. There is a broad prohibition against the owners corporation commencing legal proceedings without approval at a general meeting. For the reasons given in 2 Elizabeth Bay Road, the approval must be given prior to the litigation being commenced. Recognising that there may be circumstances where that degree of disclosure and oversight is unnecessary, power is given by s 80D(2) to make regulations exempting specified types of legal action from the prohibition. 64Legal action whose estimated cost is relatively small is exempted by reg 15(1). What is relatively small depends on the number of lots in the strata scheme, but is limited by a (low) maximum of $10,000 (now, $12,500). In litigious matters whose costs are capable of being less than that low maximum, a mechanism is put in place to avoid the scope for disputation on whether approval by a resolution passed by a general meeting is required. That is the mechanism in reg 15(2). Thus, accepting that the accuracy of an estimate could be contestable, reg 15(2) goes further and permits a lawyer's estimate which is compliant with the regime established under the Legal Profession Act 2004 (NSW) to be determinative of whether it falls below the relatively small threshold. 65I now turn to the language of s 80D and reg 15. Section 80D(1) refers both to initiating legal action and taking legal action, but it is plain that those terms must bear the same legal meaning. That follows from the ordinary meaning of the provision, and its evident sense. Textually, the word "that" in "taking of that action" is a reference back to the "action" earlier referred to within the same sentence; the action taken is the same legal action initiated by the owners corporation or its executive committee which is forbidden without approval. Semantically, the prohibition upon initiating legal action does not apply if the taking of that legal action is approved; it would make no sense to approve and therefore exempt something which is not forbidden, and it would also make no sense for there to be things falling within the prohibition upon initiating legal action which could not be cured by a resolution approving the taking of legal action. 66In short, "initiating" and "taking" legal action in s 80D(1) refer to the same thing - commencing litigation. 67Regulation 15 must also be read harmoniously with s 80D; the whole point of the regulation is to exempt some classes of conduct from the prohibition in the section. Regulation 15 refers uniformly to "taking" of legal action, but that expression is to be read in the same way as the same words are read in s 80D(1), to be equivalent to "initiat[ing] legal action". 68The key to construing the regulation is to observe that for those reasons it is clear that "taking" legal action in reg 15 bears a cognate meaning with "initiate legal action" in s 80D(1). That is to say, only if the "taking of legal action" in reg 15(1) amounts to "initiate legal action" could reg 15(1) operate to exempt it from the prohibition in s 80D(1). 69Once that is observed, it is plain that it is not possible to avoid the operation of the prohibition in s 80D(1) by identifying merely the early stages in initiating litigation and providing an estimate of the likely costs of those steps. Once litigation has been initiated, the procedural rules of the court or tribunal emphasised by the High Court in Berowra Holdings are engaged, and there are apt to be obligations to take further steps, which will result in additional costs. 70Take the present case. Put to one side the disconnect between the terms of the letter of 8 August 2008 and what the firm had been retained to do (at the time, the position of the owners corporation was purely defensive). What was to happen after the estimated $5,000 - $6,000 was spent and a brief had been delivered to a barrister? There was a possibility that Bakkante might capitulate and a settlement might be reached without any material additional legal costs being incurred. But there was also a possibility, which was far from remote, that additional legal costs would be incurred - the barrister's fees and the costs of responding to the defendant's case and otherwise running the case. That possibility was real, to the knowledge of the estimate's author and his audience. It was explicit in the description given to the estimate: this was but "Stage 1" of the litigation. 71True it is that it may be impossible in any precise way to estimate the total costs, and there may be large difficulties in estimating even a range of the total costs of initiating legal action. Such difficulties are expressly recognised in s 309 of the Legal Profession Act 2004 (NSW), which imposes an obligation to disclose "an estimate of the total legal costs if reasonably practicable or, if that is not reasonably practicable, a range of estimates of the total legal costs and an explanation of the major variables that will affect the calculation of those costs" and "the range of costs the client may be ordered to pay if the client is unsuccessful". It will be seen that those provisions are much more elaborate than reg 15, and are directed to a different purpose. 72Accepting that estimating the total costs of litigation can be very difficult, no such difficulty is involved in the application of reg 15. Regulation 15 raises a binary question: are the estimated costs of the litigation more than $10,000? Moreover, there is no obligation to obtain an estimate in order to comply with reg 15. Regulation 15(2) is but a deeming provision exempting the owners corporation, in a minor class of case, from the ordinary requirement to obtain lot owners' approval before something as inherently risky as litigation is commenced. In every case, the owners corporation may, if it wishes to commence litigation, obtain the approval of lot owners. After all, it is ultimately the lot owners who are liable to be levied to meet the costs to be incurred by the owners corporation. 73In those circumstances, there is no reason to depart from the ordinary meaning and evident purpose of the regulation so as to give to it the operation for which the owners corporation contends, whereby an estimate of only part of proposed litigation may cause the exemption in s 80D(2) to apply. That follows not merely from the ordinary meaning of the "reasonably estimated cost of ... taking the legal action", but also the evident purpose of creating a limited exemption for litigation whose costs are relatively low. 74Where as here a claim for $147,000 was being commenced, it was plain to the solicitors, and it ought to have been plain to the owners corporation, that the costs could exceed $10,000, and do so very substantially. An estimate of $5,000 - $6,000 before a barrister is briefed translates to a certainty that costs of initiating/taking the legal action will exceed $10,000 unless the proceedings are resolved promptly. There was no basis to be confident that an early cheap resolution would occur, especially where as here the ROH report attached to the initiating process identified hundreds of thousands of dollars of work to be rectified, extending beyond unit C17. 75In short, the estimated cost of taking or initiating legal action is not the estimate costs of the first stage of litigation. It is the estimated costs in respect of which payment may be required to be made by the owners corporation. 76It is not necessary to address two related matters arising from the construction of the regulation. The first is whether an estimate of a possible adverse costs order, in respect of which "payment may be required" need be included. (Little turns on this; there will be few cases where a reasonable estimate of costs excluding an adverse costs order would be less than $10,000, but including an adverse costs order would exceed $10,000.) The second is the way by which an estimate falling short of complying with reg 15(2)(a) might be proven.

(b) Contravention of s 80D in February 2009 77On no view did the owners corporation have a reasonable estimate which was less than $10,000 of the costs of the litigation it initiated in February 2009. To the contrary, it was plain that the costs would substantially exceed $10,000 unless the defendants settled at an early stage. 78For those reasons, the primary judge was correct to find that s 80D was breached when the owners corporation initiated legal proceedings in February 2009. In particular, I respectfully agree with what the primary judge said at [72]-[73]: "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. 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]." 79As the primary judge noted, there is some tension with that reasoning and what was said in the quite different circumstances in Madden v Owners SP 64970 [2013] NSWSC 469, which (speaking generally) dealt with the costs of initiating debt recovery proceedings up to default judgment. On the facts of this appeal, there is no occasion to explore in any detail how in such a case reg 15 applies. It is sufficient to observe that on no view does the reasoning in Madden extend to what occurred in the present case, of providing a series of estimates for the costs of parts of the same legal proceedings, each of which was less than $10,000. 80In most cases it will be abundantly clear that the estimated costs of litigation in the nature of a building dispute will include the possibility that it will exceed $10,000, and that it is likely to be a rare case where a lawyer could have such confidence of its prompt resolution that a reasonable estimate of the costs of initiating a building claim will not exceed $10,000 (now $12,500). Owners corporations, and lawyers acting for them, will need to proceed accordingly in order to comply with s 80D.

(c) Contravention of s 80D in May 2009 81The breach of s 80D continued when the proceedings were substantially expanded in May 2009. Despite the expansion of the claim to the common property from one unit to three buildings of the strata scheme, and the nearly tenfold increase in its size, I would not regard the amendments as themselves "initiating" separate legal action. After all, the originating process attached the ROH report which was not confined to unit C17 but dealt with defects to Buildings A and B and elsewhere in Building C. To that extent I agree with the construction for which the owners corporation contends. 82Had there been a resolution approving the initiating of proceedings in the first instance confined to unit C17, but authorising their expansion in accordance with the reports which had by February 2009 been obtained, then it would not have been necessary for a further resolution to have been passed. However, had there been an initial resolution, confined to the initiating legal action confined to unit C17, then the expansion to a $1.4 million claim affecting the common area throughout all three buildings, whose costs had been estimated at $100,000, would have been outside the scope of the resolution, and would have required a further approval for "the provision of any other legal services". I also agree with what Basten JA has written in relation to this question at [6]-[7]. 83Those questions are hypothetical, because the owners corporation commenced proceedings without any resolution from the general meeting at all. All that can be said is that the continuing non-compliance with s 80D became all the more serious when the litigation expanded in May 2009. That in turn will have consequences for the discretionary exercise of power when a court or tribunal is called to determine, in the exercise of its procedural rules, whether proceedings commenced in contravention of s 80D should be stayed or dismissed.

(d) Mr Groom's authority 84There was a separate strand of reasoning supportive of the primary judge's conclusion on breach of s 80D. It was that Mr Groom was not authorised, even by the Executive Committee, to commence proceedings. It was to this issue that a large amount of detail was directed, and some critical findings were made by the primary judge. 85The alleged absence of authority was not pleaded, but was evidently permitted to be a large issue at trial, mostly at the instigation of Dr Zankin. It is ground 1 of the appeal. It is not free from complexity. One reason it is complex is that the Executive Committee was itself divided, and formed a subcommittee, because some of its members were associated with Bakkante. Another is that there is a question whether the resolutions of the Executive Committee could undercut the generally worded resolutions of the general meeting. A third is the effect of a "paper meeting" held on 12 September 2008. A fourth is the effect of a ratification made in December 2011 at an extraordinary general meeting purportedly appointing Mr Baker to act for the owners corporation from 8 August 2008 until 31 August 2010, and from 1 September 2011 [sic] (the same seeming error appears in the resolutions drafted by Mr Baker's firm sent to the strata title manager that afternoon). A fifth is that the validity of that resolution (made unilaterally by the "Senior Strata Manager" of the company appointed, on Mr Groom's application, to exercise all the functions of the owners corporation and the executive committee pursuant to s 162 of the Act in its offices in Taren Point on the other side of Sydney) is itself questionable. No owner participated in or, so far as the record discloses, was given notice of that meeting. The resolutions and the notice appear to have been drafted on the afternoon of 19 December. After the "meeting" had taken place, owners were advised that the extraordinary general meeting "was convened primarily to raise additional funds for your strata scheme". Three special levies, including two totalling $114,852.53, were raised to pay for the costs of these proceedings. The counsel formerly retained by the owners corporation expressed the view at the time "[i]t is questionable, in any event, whether such a motion is even valid and whether such a motion has effect under section 162 powers given recent decisions of the Courts." 86However, irrespective of whether Mr Groom had or lacked authority, or whether authority was retrospectively conferred upon him more than three years later by a manager appointed under s 162, it makes no difference to the answers to the questions reserved for separate determination. 87The four day trial at first instance was confined to questions which were directed to whether there had been compliance with s 80D. What has already been said is sufficient to confirm that there was no compliance. There is no utility in reviewing the questions of Mr Groom's actual and apparent authority, despite the elaborate submissions made on them. The result of that review cannot alter the answer to the question whether s 80D has been breached.

Ground 5: The motion to reopen after judgment 88The owners corporation acknowledged that it needed to identify appellable error in the exercise of a discretionary judgment not to permit the motion (filed after the first judgment had been delivered, but before orders had been entered) to proceed. Its written submissions complained that his Honour's exercise of discretion was affected by his view as to the motivation of members of the Executive Committee, and particularly the suggestion that it had been mismanaged. It was also said that his Honour was wrong to say that the decision not to hold a meeting in 2013 was contrary to (then) senior counsel's advice; his advice was that ratification would be "helpful" but "unnecessary". Finally, it was said that "[e]ven if there were flaws in respect of the 'ratification' by the 15 August Resolution, then the primary judge should have granted an adjournment to permit a further meeting of the lot owners to consider the issue further". 89I do not accept the owners corporation's submissions. A fair reading of his Honour's reasons discloses that what was foremost in his mind was the fact that the owners corporation had, in the weeks prior to a final hearing to determine separate questions, one of which was ratification, decided not to proceed with a resolution approving the litigation, for the reason that it thought that the resolution might or would fail. 90That was sufficient to require the motion's dismissal, assuming (as it was) that it was entertained on its merits (contrary to his Honour's answer to question (e)). Litigation is not to be conducted piecemeal, with the loser being given an opportunity to reverse a forensic decision if it turns out badly. The question whether there was compliance with s 80D was to be determined after a four day trial for the final determination of that and four other questions. The owners corporation is bound by the forensic decision it made prior to that trial. 91I would add that the "ratification" obtained by the owners corporation in August 2013 is very different from that required by s 80D in February 2009. In August 2013, the lot owners were told that the owners corporation "has incurred total costs in respect of the proceedings to date in the order of $750,000". In substance, they were told that subject to the success of an appeal, unless there was ratification, those costs would be wasted and the owners corporation would be ordered to pay the costs of Bakkante and/or Dr Zankin. They were also told that if there were no ratification, the owners corporation's case on appeal might be weakened. This after-the-event approval is very different from what s 80D contemplates (which perhaps explains the actual outcome in August 2013, in contrast to what was feared a few months earlier). However, the consequences of that vote only arise if his Honour is found to have made reviewable error in his discretionary decision, being based on practice and procedure, not to accede to the owners corporation's motion to reopen a final judgment. No such error is disclosed.

Ground 6: Dr Zankin's costs. 92The owners corporation and Dr Zankin both accept there is a difficulty with the orders made by the primary judge in respect of Dr Zankin's costs. On 13 March 2014, his Honour ordered that Dr Zankin pay the other parties' costs of the hearing of 4 March 2013, that otherwise the owners corporation pay the other parties' costs, and that Dr Zankin be excused from his proportionate liability as a lot owner for the costs the owners corporation was ordered to pay. However, in a separate judgment on costs, delivered on 9 September 2013, the primary judge expressed the view that an exempting order under s 229 of the Act was not available, because the proceedings had not been brought by the owners corporation against a lot owner (it will be recalled that Dr Zankin had sought and had been granted leave to participate in the proceedings by seeking as a non-party that they be summarily dismissed). 93The owners corporation submitted that his Honour had been correct when concluding that s 229 did not permit an order excusing Dr Zankin from his proportionate obligation to contribute to levies rendered by the owners corporation, and that order (e) made on 13 March 2014 should be set aside. Dr Zankin conceded that the order could not be reconciled with what his Honour had said in the separate costs judgment. However, he submitted that the owners corporation's notice of motion to reopen, to which Bakkante and he were joined as respondents, amounted to "proceedings brought by ... an owners corporation against one or more owners of lots" within the meaning of s 229, and that at least with respect to the costs of the motion, he was entitled, in accordance with his Honour's reasons in the second judgment, to an order under s 229. 94As is reflected by the fact that no oral submissions were made by any party, this ground scarcely arises. The outcome of this appeal results in a substantial, but not total, victory for Bakkante and Dr Zankin. It follows that it will be necessary to re-exercise the discretion as to costs at first instance in any event. That is done below. The only question which arises is whether and if so to what extent Dr Zankin should have the benefit of an order under s 229. Dr Zankin seeks such an order only in respect of the costs from 4 September 2013. 95Section 229 is a specific power whose exercise impacts not merely the successful lot owner and the unsuccessful owners corporation, but (indirectly) all other lot owners. I consider that s 229 is the only means by which a lot owner with a favourable costs order can be shielded from a partial exposure to meet, by levy, the liability of the owners corporation (which is to say, I do not consider that the general power to order costs goes so far). I respectfully agree with the primary judge (in his September judgment) that s 229 was not directed to situations such as the present where a lot owner chooses to involve himself or herself in litigation between the owners corporation and a third party. The choice to do so inevitably carries with it the possibility that the owners corporation will, if it is unsuccessful, have to bear two sets of costs. Indeed, it is plain that at trial and on appeal on most issues (especially, the cross-examination of Mr Groom) it was Dr Zankin who took the lead role, although his interests and Bakkante's were aligned. Further, I do not think that the position alters depending on whether there is a trial at which a lot owner is permitted to participate, and a motion after the trial to which the lot owner is joined. 96To that extent I would allow the owners corporation's appeal.

Orders 97The answers to questions (a) - (d) given by the primary judge are correct, for the reasons given above. As noted at the outset, the primary judge's answer to question (e) should be set aside, and that question answered as follows: e. Is the consequence of (a) to (d) that the proceedings must be dismissed? The initiation of legal proceedings in contravention of s 80D of the Strata Schemes Management Act 1996 does not necessitate that the proceedings be dismissed, but in the facts of this case, they should be dismissed. 98The owners corporation was substantially unsuccessful at trial and on appeal. The main points on which it succeeded were argued in 2 Elizabeth Bay Road and occupied very little of the hearing. An order which reflects the owners corporation's relative lack of success is that the owners corporation pay 80% of the costs at first instance and on appeal of Bakkante and (but not including 4 March 2013) of Dr Zankin. 99Accordingly the Court should make the following orders: (1) To the extent that, by order entered on 22 July 2013, the trial judge answered separate question (e), "is the consequence of (a)-(d) that the proceedings must be dismissed", "Yes"; set aside the answer and in place thereof answer the question: "The initiation of legal proceedings in contravention of s 80D(1) of the Strata Schemes Management Act 1996 does not necessitate that the proceedings be dismissed, but on the facts of this case, they should be dismissed." (2) With respect to the orders entered on 18 June 2014, set aside order (3) and in place thereof order that the owners corporation pay 80% of the costs of Bakkante Constructions and Dr Zankin, other than the costs of the hearing on 4 March 2013. (3) Otherwise dismiss the amended notice of appeal filed on 11 June 2014. (4) Order that the appellant pay 80% of the costs of both respondents in this Court.

Amendments 25 August 2015 - [16] - "corporations'" amended to "corporation's" [81] - "itself" replaced with "themselves", "buildings" and "building" capitalised [92] - ".)" replaced with ")." 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: 25 August 2015