Can you sue a body corporate for committee actions you know are beyond their power?

Welcome to 2014.

Last year we started with a newsletter on a lighter note but this year we are going the opposite way, other than for this joke.

What’s the difference between unlawful and illegal? Answer at the end of this newsletter.

Now back on point. The above question is one that has lurked around in the strata management industry for some time.

It has now been conclusively answered, and the answer is no.

It is very rare that a body corporate litigates a matter to the highest court of law in Queensland. We recently took over the proceedings for a body corporate in the Queensland Court of Appeal and won an appeal in a dispute that had its genesis in the last century (as in 1999).

The background

There is no need to delve into the complete history of the matter (which was substantial), but in the briefest of terms, the facts were:

• The Body Corporate and a Manager entered into a typical management rights arrangement (the Agreement);
• In 1999, the Manager’s licence expired and was not renewed. The Manager then operated the letting business without a licence for two years until prosecuted by the Office of Fair Trading (OFT);
• The Committee issued breach notices to terminate the Agreement; and
• As the Manager was unable to remedy its breach and obtain its licence, the Committee (not owners in general meeting) decided to terminate the Agreements in February 2002.

What happened next was:

• The Manager disputed the Committee’s ability to terminate the Agreement;
• After some back-and-forth litigation in the Commissioner’s Office, in May 2003 the Manager (using the voting power it had by owning or controlling about 50% of the lots in the scheme) entered into new management rights agreements with the Body Corporate; and
• The Manager sold its management rights business in November 2004.

The matter might normally have ended there, but it was not to be.

Proving the adage that revenge is a dish best served cold, in February 2008 the Manager commenced proceedings against the Body Corporate for what it asserted to have been an unlawful termination of the Agreement six years earlier.
Amongst other things, the Manager made a claim for $544,230 in damages, which was a significant sum given this was only an 18 lot scheme.

In October 2012, after over four years of litigation, the Supreme Court delivered its judgment. It was a bit of a win for both sides (as these things sometimes prove to be), but the damages judgment given in favour of the Manager was determined at just over $37,000.

Not happy with that outcome, the Manager appealed that decision to the Court of Appeal. The Body Corporate cross appealed.

We had not been involved in the matter until this stage. We were engaged to act for the Body Corporate on what were some very discrete legal issues.

The Court of Appeal unanimously found in favour of our client on every issue in dispute and:

• Dismissed the Manager’s appeal;
• Upheld the Body Corporate’s cross-appeal;
• Set aside the original judgment of just over $37,000; and
• Awarded the Body Corporate its costs of the original proceeding, the appeal and the cross-appeal.

The key issue

A decision of a Committee is a decision of the Body Corporate unless it is a decision on a restricted issue. Restricted issues include those decisions which change the rights, privileges or obligations of owners.

When the Body Corporate and Community Management Act 1997 (BCCM Act) was amended in 2003 it confirmed that the termination of management rights agreements was reserved to be decided at general meeting (meaning a committee is restricted from making a decision on that question). Before that, the BCCM Act was silent, but it was held in earlier proceedings in this matter that the decision to terminate the Agreement was a restricted issue (meaning the Committee should not have made it) because it affected the rights of the Manager as a lot owner.

In the appeal decision the Court of Appeal said that ‘It was clear that [the Committee] were not actually or impliedly authorised to issue [the notice of termination]. Nor, from the factual situation known to the [Manager] or which should have been known to it, was there a basis for concluding that the committee possessed apparent authority to do what was done.’
It followed that:

‘It is difficult to see why the consequences of the committee’s independent, unauthorised behaviour should be sheeted home to the body corporate so as to make it liable in damages.

‘It was clear that they were not actually or impliedly authorised to issue [the termination notice] by the statute which governed the relationship between the parties on this issue. Nor, from the factual situation known to the [Manager] or which should have been known to it, was there a basis for concluding that the committee possessed apparent authority to do what was done.’

So, even though the termination of the Agreement was beyond the Committee’s power, the Manager knew that, or ought to have known that. The Manager was therefore unable to hold the Body Corporate liable for actions it knew the Committee could not take.

Could the committee members be personally liable then?

The next question is whether the committee could be personally liable as a result of the body corporate not being on the hook.  This door remains ever so slightly ajar but the law has not changed from what it was as a result of this case.

A committee member cannot be held civilly liable for an act done or omission made in good faith and without negligence in performing their role as a committee member.

Whether a decision outside a committee member’s statutory authority is made in good faith and without negligence is yet to be tested. As always, these matters turn on the individual facts, so all committee members should make sure they get the right legal advice on contentious matters and have office holders’ insurance in place.

Other lessons learnt

We regularly caution bodies corporate against litigating if it can be avoided. A body corporate can be a terrible litigator because:

• Committees and their priorities change regularly.
• Owners rarely get across the detail enough to understand what is in dispute and why it is worth fighting for.
• Strict decision-making procedures can hamstring a body corporate before it even gets close to a final hearing.

Here is a link to a previous article that considered some of these points.

But there is an exception to every rule. So what was it different for this body corporate? In our view:

• The Committee wasn’t looking for litigation; the litigation found them and they were forced to respond to it to prevent a financially disastrous outcome for all owners.
• The Committee consisted of sophisticated, interested owners that understood the litigation and the process involved.
• There was unity and support amongst the owners in defending the litigation. The Committee kept owners regularly updated and interested in the process.

This was not a case of a body corporate successfully terminating a management rights agreement, as much as any manager operating without a proper real estate licence is open to that.

This is a case that reinforces the limits of a committee’s ability to act for a body corporate and when a body corporate will be held liable for unauthorised acts of the committee. Committees and those dealing with bodies corporate should pay close attention to it.

You can read the appeal decision here.

Now, back to our joke: What’s the difference between unlawful and illegal? One is against the law and the other is a majestic bird of prey that needs to go to the vet. (ill eagle – get it?!)