2 Elizabeth Bay Road Pty Ltd v The Owners Strata Plan No 73943 [2014] NSWCA 409

What the court decided

The respondent, The Owners Strata Plan No 73943, called here the owners corporation, sued the appellant, 2 Elizabeth Bay Road Pty Ltd, called here the developer, over allegedly defective building work on the common property of its building in Elizabeth Bay [71]. The claim was for breach of the warranties implied under section 18B of the Home Building Act 1989 (NSW) [71].

The executive committee decided to commence the proceedings, which began in November 2012 [9], [72]. The appeal was argued on the footing that a seven-year limitation period applied; the occupation certificate was dated 22 November 2005 [72]. It was common ground that no general meeting had then approved the litigation [73]. The need to comply was drawn to the solicitors' attention in December 2012, and in January 2013 the committee decided to wait for the annual general meeting on 7 March 2013 rather than convene an extraordinary one [74]. A resolution approving the proceedings was passed at that annual general meeting [9], [74].

The developer applied to have the proceedings struck out or dismissed, and the primary judge, Hammerschlag J, refused [1], [75]. His Honour considered that the section on its plain wording accommodated fulfilment by a later resolution [75]. With leave, the developer appealed from the dismissal of its motion [76].

Leeming JA wrote the principal reasons, with which Basten JA agreed while adding supplementary reasons [1], [8]. Barrett JA agreed with Leeming JA that section 80D regulates the exercise of an owners corporation's power to sue without denying its capacity, and for that reason held that the developer was not entitled to the order it sought [10]. He held further that the later resolution ratified the commencement [65]. The appeal was dismissed with costs [66], [110].

On construction, Leeming JA rejected the owners corporation's argument that the word "unless" stipulated a condition rather than a time [79], [81]. His Honour held that the prohibition on initiating legal action carries a temporal order [84]. That reading was strengthened by the provision's purpose of giving the general meeting a real choice before liabilities for fees and costs are incurred [86]. The provision is therefore contravened if legal action is initiated without a prior approving resolution, unless an exception applies [88]. That construction departed from the primary judge's, although Leeming JA upheld his conclusion [75], [88], [108].

On consequences, Leeming JA applied the considerations drawn from Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; 225 CLR 364 as summarised in his reasons [97]–[104]. Those considerations, he said, pointed to the discretionary procedural rules of the court or tribunal [95]. He concluded that the section is not jurisdictional and does not impair the owners corporation's capacity to sue [105]. Non-compliance engages the familiar procedures for stays and summary dismissal [106].

Leeming JA said the matters that will loom large in that discretion are whether the breach has been or will reasonably promptly be cured and whether it was inadvertent or deliberate [107]. He doubted that a court could properly stay or dismiss proceedings for a transient non-compliance on which nothing turned, such as a defective approval rectified immediately [107]. Equally, he found it difficult to see how a court could do otherwise where an owners corporation was fully aware of the provision, made no effort to comply and had no intention of seeking approval at a general meeting [107]. Intermediate cases, he said, may be highly contestable [107]. Here the contravention was promptly cured before the court's procedural rules were invoked for summary dismissal [108]. Although the primary judge had construed the section differently, his conclusion was upheld; the developer did not submit to the contrary [108].

Leeming JA did not decide whether the later resolution ratified the commencement, inclining to the view that the construction of section 80D would determine that question [109].

Basten JA reasoned that the section protects lot owners, not third parties, so that at least where they favour continuing, dismissal on the other party's motion would not serve its purpose [5]. He added that no question as to any discretionary power of the court arose on the appeal [7]; the developer did not contend that the result should differ on Leeming JA's approach [108].

Barrett JA observed that section 80D lacks the words "has first been passed" found in two other provisions [40]. He nonetheless treated legal action initiated by the committee without the resolution as taken without authority [52], [59]. He disagreed with Owners SP No 46528 v Hall [2009] NSWSC 278, where Kirby J had held that an owners corporation suing a unit holder lacked capacity for want of compliance [48], [50]–[51]. That act was within the corporation's power, so a later general meeting resolution could ratify it [52], [59]. He held that the March 2013 resolution did so [65]. Leeming JA agreed with what Barrett JA wrote on Hall and on an earlier Court of Appeal decision [105].

Why it matters

All three judges accepted that proceedings commenced without the approving resolution were not, for that reason, void or invalid [7], [51], [106]. On Barrett JA's reasoning, which Leeming JA adopted, the result is the same whether the defendant is a stranger or a lot owner [51], [105]. Leeming JA, with whom Basten JA agreed, held that commencing without prior approval contravenes the section and engages the procedural powers of the court or tribunal rather than mandating dismissal [1], [88], [106].

In my view, an owners corporation should pass the resolution before lawyers are retained for payment and before anything is filed, since the section reaches legal advice and services as well as legal action [77], [84]. Where a limitation period is close, a general meeting should be called rather than waiting for the next annual one.

Leeming JA left open the consequences of seeking legal advice or services without approval [89]. Nor did he address whether an injunction may restrain an owners corporation from suing in breach [96].

The decision applied the New South Wales provision as it then stood [77]. Readers must check the legislation now in force in New South Wales and the Victorian position, which this decision does not address.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.