Westlake Villas [2005] QBCCMCmr 321 (10 June 2005)

Last Updated: 2 August 2005

REFERENCE: 0386-2005

ORDER OF AN ADJUDICATOR

MADE UNDER PART 9 OF CHAPTER 6

BODY CORPORATE AND COMMUNITY MANAGEMENT ACT 1997

Number of Scheme:	23115
Name of Scheme:	Westlake Villas
Address of Scheme:	241 Horizon Drive WESTLAKE QLD 4074

TAKE NOTICE that pursuant to an application made under the abovementioned Act by

The Body Corporate

I hereby order that: 1. The body corporate is authorised to hold an extraordinary general meeting on 24 June 2005 at which the committee can put forward a motion seeking that owners authorise payment of an amount claimed by Herdlaw Solicitors for outstanding legal fees; 2. The body corporate must allow owners until 10am on 20 June 2005 to provide any other motions for consideration at the above meeting; 3. The body corporate must post notice of the above meeting to owners by no later than 6pm on 20 June 2005. I further order that the body corporate must immediately post of copy of this order and reasons for decision to all owners. I further order that the application for an order authorising committee expenditure on legal fees in excess of the relevant limit for committee expenditure is dismissed.

STATEMENT OF ADJUDICATOR’S REASONS FOR DECISION - REF 0386-2005

"Westlake Villas" CTS 23115

Application

Westlake Villas Community Titles Scheme (Westlake Villas) is a 49 lot scheme under the Body Corporate and Community Management Act 1997 (Act) and the Act’s Standard Module Regulation (Standard Module). The scheme is designed for residential purposes.

This application is by the body corporate (applicant) seeking an order of an adjudicator to authorise the committee to engage in spending required to meet an emergency. Submissions from the committee were to the effect that the committee engaged Herdlaw Solicitors (Herdlaw) on behalf of the body corporate to defend a District Court application for alteration of lot entitlements being taken against the body corporate (lot entitlements application). It is submitted that the amount of legal costs was originally anticipated to be within the relevant limit for committee expenditure but these costs subsequently significantly exceeded that amount and Herdlaw is threatening to sue the body corporate for the remainder of these costs.

Background concerning litigation against bodies corporate

This office has become aware of a number of situations in which different bodies corporate have failed to effectively manage litigation taken against them. In this instance, the body corporate for Westlake Villas ultimately decided neither to support or oppose the District Court application being made against it but incurred costs of possibly over three times the amount originally estimated and now faces the threat of separate litigation by its former lawyers for recovery of those costs.

It is common knowledge that litigation can be very expensive, particularly if poorly managed. Further, a body corporate for a community titles scheme may face some special obstacles in dealing with litigation. In particular, no single owner has statutory authority to manage litigation on behalf of the body corporate and approval of legal spending will normally require a meeting of owners for which at least 21 days’ notice is usually necessary. The person bringing litigation against the body corporate will normally be able to find out how much money owners have authorised to be spent on defending the litigation and this may provide a tactical advantage. If payments or damages are being sought from the body corporate then any settlement will also normally need to be authorised by owners in general meeting after at least 21 days notice. It is unworkable for a settlement to be negotiated in general meeting so the usual alternative would be for an interested owner to negotiate a settlement on behalf of the body corporate subject to that settlement being subsequently authorised in general meeting.

Whenever litigation is brought against a body corporate, the body corporate will be liable for any judgement made against the body corporate as well as any legal expenses and the amount of any settlement agreed to by the body corporate. It is owners who contribute funds to the body corporate. It is therefore appropriate for owners to make the decisions whenever the body corporate is likely to exceed the limit for committee expenditure through legal expenses or through agreement to a settlement.

As a first step when a body corporate is threatened with litigation, it may be prudent for a committee to seek some preliminary advice (up to its spending limit) on:

1.	The body corporate’s potential liability;
2.	Possible legal costs; and
3.	An amount appropriate for an offer of settlement.

If legal costs or any settlement amount is likely to exceed the committee’s expenditure limit then the committee should prepare for a general meeting. Appropriate steps would include:

1. Preparing a motion to adopt a settlement deed – A settlement deed can be made subject to approval of owners in general meeting and signed by committee members on that basis. The committee can also tell the person suing the body corporate of time frames involved and require a settlement proposal to be delivered by a certain date to allow a notice of meeting to be sent within a reasonable time. Alternatively, owners could vote that an offer of settlement be lodged with the court to protect the body corporate’s position in respect of costs. The court can also be asked to extend timeframes to facilitate the body corporate obtaining necessary information and meeting to agree on an offer of settlement;
2. Preparing a motion to set up a "fighting fund" – The explanatory material for this motion may provide estimates of the amount needed to defend the litigation. However, it may be a significant tactical advantage for the owners to approve a significantly higher amount than that estimated to avoid needing an additional resolution if costs go above those originally estimated. Provision for the adoption of a generous fighting fund would not have been made in the annual budgets but owners can vote on instalments over a long period time to raise this money for the administrative fund (Standard Module, 95(2)(c)). Raising this fund by instalments may assist owners in managing their affairs. Further, proposing to raise this fund by instalments does not mean that all money proposed to be raised will need to be spent. Owners can still keep track of legal expenses as they are incurred and consider subsequent motions to make alternative settlement offers or cease legal representation. However, the adoption of a large fighting fund may act as a deterrent to the person bringing the litigation against the body corporate and prevent that person taking any tactical advantages from low expenditure limits;
3. Preparing a motion to engage legal representation – Two quotations should be put forward if spending is likely to be above the major spending limit. It is unlikely that lawyers could provide a fixed fee quotation for litigation so the hourly rate and experience of the lawyers will be more relevant than any non-binding estimate given. It would be prudent for the body corporate to nominate someone to deal with the lawyers. The body corporate can write to its lawyers stating this person has no authority to incur expenditure above the estimate given. Rather, the body corporate can request regular updates of expenditure and that any change to the estimate be provided in writing in sufficient time for the body corporate to call a general meeting at which it can consider authorising the new estimate and consider another settlement offer.

By taking these steps, owners place themselves in a position to appropriately defend or settle litigation taken against their body corporate. One complication is that owners need information about prospects of a successful defence to make an informed decision about an appropriate settlement agreement or appropriate spending on the defence. This information is obviously highly confidential and may not be appropriate for distribution with a notice of meeting. Some owners may be willing to vote simply on the committee recommendation but others may wish to speak with committee members and could be provided with the information on a confidential basis.

The body corporate should also endeavour to keep the court informed of any timeframes needed if the court has discretion in making directions relating to the litigation or if an adjournment is sought. However, even if the above steps are taken, there are likely to be occasions when a body corporate needs to incur unexpected emergency expenditure. In those circumstances, the body corporate can apply to this office and may obtain the benefit of an order allowing emergency expenditure and authorising a reduced notice period for calling a general meeting at which further expenditure can be authorised. However, such application should be made prior to the expenditure being incurred rather than after the expenditure is incurred and the bill requires payment.

Of course, the comments above are of a general nature and a body corporate should properly consider its position in the light of its individual circumstances.

History of application

This application seeks an order authorising payment of legal fees to Herdlaw that significantly exceed the committee’s expenditure limit. The fees have already been incurred and the body corporate did not make any application to this office seeking authorisation to incur this expenditure at the relevant time. It now being several weeks after this expenditure was incurred it seems difficult for the body corporate to establish that an adjudicator should make an order authorising the spending because the spending is required to meet an emergency (Standard Module, 103(1)(c)). Some questions may also be raised regarding whether committee members acted beyond power in purporting to authorise this expenditure at the relevant time (Standard Module 26,103). Therefore, it seems that the spending should be put to owners in general meeting for authorisation.

However, there does seem to be a new sense of urgency in that Herdlaw is now threatening to sue the body corporate for failure to pay Herdlaw’s legal fees in respect of the lot entitlements application.

The present application was lodged on 27 May 2005. On 8 June 2005, I held a teleconference with:

•	Anne Freeman, a committee member who had been involved in defending the lot entitlements application brought against the body corporate;
•	Grahaem Duff, the committee member who had brought the lot entitlements application against the body corporate; and
•	Robert Herd, the principal of Herdlaw.

At this teleconference, the complicated circumstances leading up to the application were discussed. From what I understand:

•	In December 2004, the committee engaged Herdlaw to act on behalf of the body corporate in defending the lot entitlements application. At that stage the estimated total fees and costs were $5,000 which was within the relevant limit for committee expenditure of body corporate funds;
•	On 20 December 2004 the court gave directions in relation to the lot entitlements application. Robert Herd stated that these directions, potentially as subsequently amended, were to the effect that the directions be distributed to all owners by 1 February 2005, lot owners be given the opportunity to join as defendants by 14 February 2005 and affidavit material relied upon by the body corporate be filed by 28 February 2005. I note that these directions gave limited time periods and that the committee would have needed to act quickly if relevant information was to be obtained and owners were to be given an opportunity to consider that material and possible steps for the body corporate to take in respect of the application;
•	On 21 December 2004, a junior at Herdlaw telephoned the chairperson of the body corporate to say that the body corporate needed an independent reviewer, David Midwood, to consider the lot entitlement report. The chairperson, Lesley Layton, states in a subsequent email to the body corporate manager that she gave verbal approval subject to the costs remaining below the original $5,000. The chairperson also states in this email that an extraordinary general meeting would need to be held by 1 February 2005 and that full information regarding these requirements would be emailed to her on 22 or 23 December. However, the chairperson said she did not receive any emails and that, on returning from the United Kingdom in mid January 2005, she discovered that this junior had left Herdlaw;
•	On 4 January, David Midwood was engaged to provide an expert report (Midwood report). Robert Herd said that this report was to be provided by the end of January in time for a meeting of owners;
•	On 31 January, legal fees in the amount of $3,710 had been incurred by the body corporate;
•	A meeting of owners was proposed for 1 February 2005 but this meeting was delayed until 25 February due to delays in receiving the Midwood Report;
•	On 14 February 2005 Robert Herd attended court to seek amendments to the court’s directions he said were necessary because the Midwood Report had still not been received and Grahaem Duff had refused to consent to amendment of the directions. Grahaem Duff disputed whether application was necessary on the basis that he had previously consented to an amendment and the body corporate’s affidavit material was not needed to be filed for a further couple of weeks. Robert Herd stated that the extension was necessary not just for filing the affidavit material but also to give owners an opportunity to consider the Midwood report before deciding if they wanted to join as parties. This application was adjourned by consent until 16 February 2005;
•	On 16 February 2005 Robert Herd attended court and obtained an amendment of the court’s directions;
•	On 25 February an "unofficial" meeting of owners was held. Robert Herd said that this meeting was unofficial to limit the costs and timeframes that would have been involved in calling an extraordinary general meeting. He said that at the time of this meeting he thought that his fees were still within the $5,000 limit and that he had agreed to a fixed amount to attend this meeting and only charged that fixed amount even though the meeting went for two hours;
•	On 3 March 2005, Robert Herd sent a second account dated 28 February 2005 to the body corporate. This account brought fees to a total of over $9,000. In the letter enclosing the account, Robert Herd stated that the account had exceeded the committee limit, the account was higher than anticipated due to two court appearances required by Grahaem Duff’s refusal to consent to an extension of time, and the options for the committee were to either call an extraordinary general meeting to approve the expenditure or obtain a declaration from an adjudicator that it was reasonable in the circumstances for the committee to exceed the expenditure limit. During the teleconference, Robert Herd stated that he was not aware that his fees had exceeded the committee spending limit until the bill was drawn which would have been at the end of February or the start of March;
•	On 7 March 2005 the committee met and became aware the legal expenditure had exceeded the committee spending limit. Anne Freeman said that the committee was divided on whether to call an extraordinary general meeting to authorise the expenditure or apply for a declaration from an adjudicator;
•	On 14 March 2005, Anne Freeman sent an email to Robert Herd. Anne Freeman said that she was not sure what to do but that she sent an email telling Robert Herd that the committee wanted him to proceed to file the affidavit material for the body corporate but that he should try to keep costs to a minimum because costs already exceeded what the committee was authorised to spend;
•	On 11 April 2005 the committee had a subsequent meeting at the premises of the body corporate manager, Stewart Silver King and Burns (SSKB). Anne Freeman said that at around that time the committee resolved to pay Herdlaw up to the committee expenditure limit and apply to an adjudicator to authorise the additional expenditure. However, she said that SSKB was asked to make that application on the body corporate’s behalf and failed to do so; and
•	Mid to late April 2005 – Anne Freeman said that Grahaem Duff refused to accept the lot entitlements proposed by the body corporate and Robert Herd said the cost to defend the application would be $40-50,000. As there was no major difference between the lot entitlements proposed by Grahaem Duff and the lot entitlements proposed under the Midwood Report the committee resolved neither to oppose or accept the application and the court made an order on 28 April 2005 accepting the lot entitlements proposed by Grahaem Duff.

By email dated 26 May 2005, the chairperson wrote to Robert Herd stating that:

•	Advice had been received from the Commissioner’s Office via SSKB that payment of Herdlaw’s account could not be made without the consent of all lot owners as it is a matter for a general meeting of all lot owners and compounded by the fact that the owners have had no previous knowledge of the account;
•	An extraordinary general meeting had been put in place and the account was expected to be paid in full prior to 30 June 2005; and
•	The committee sought extension of Herdlaw’s magnanimous offer of a 15% discount on payment of the account.

By letter dated 26 May 2005, Robert Herd wrote to the chairperson stating that:

•	A suggestion from SSKB that the two court appearances were unnecessary was considered to be defamatory of the firm;
•	The work was required to be performed as a result of court timeframes and he believes the Commissioner had not been properly briefed;
•	The committee was aware the expenditure limit was exceeded when they instructed him on 14 March 2005 to perform further work and file the affidavit material. In these circumstances, expecting him to perform work and delay payment is unreasonable;
•	The offer of the discount was now withdrawn and interest will now be charged on the outstanding balance of $5,304.52; and
•	Herdlaw must now issue proceedings against the body corporate meaning a further amount of $1,000 will be added for filing fees and the costs of issuing the claim. Should the body corporate wish to defend the proceedings it will incur further costs which they would estimate to be in the thousands of dollars.

Anne Freeman said that the body corporate therefore cancelled the annual general meeting at which it was proposed to consider payment of Herdlaw’s account and lodged this application seeking authorisation of an adjudicator for payment of the account.

Decision

Applicable law

The relevant provisions of the legislation provide that the committee may carry out a proposal involving spending above the relevant limit for committee expenditure, being $125 per lot:

•	If the spending is specifically authorised by ordinary resolution of the body corporate (Standard Module, 103(1)(a)); or
•	If an adjudicator is satisfied that the spending is required to meet an emergency and authorises it under an order made under the dispute resolution provisions (Standard Module, 103(1)(c)).

Another provision discussed in the teleconference is that:

• If a person, honestly and without notice of an irregularity, enters into a transaction with a member of the committee for the body corporate for a community titles scheme or a person who has apparent authority to bind the body corporate, the transaction is valid and binding on the body corporate (Act, 310).

Spending limit exceeded

The committee engaged Herdlaw to provide legal services, allegedly subject to Herdlaw advising the committee if expenses were to exceed the amount of $5,000. Any expense below $6,125 would have been within the committee limit for expenditure. For the reasons outlined above, this expenditure rapidly exceeded $9,000 (or $13,000 including the Midwood Report), apparently without anyone being aware of this increase in expenditure. Herdlaw suggested the committee call an extraordinary general meeting to approve the expenditure or alternatively obtain a declaration from an adjudicator to authorise the committee to exceed the expenditure limit. However, it appears this was not done and the committee simply asked Herdlaw to continue to prepare and file affidavit material but to keep the costs to the minimum given that the expenditure limit had already been exceeded. Further costs of around $3,000 were incurred pursuant to this instruction.

Spending required to meet an emergency

The body corporate should have sought authorisation from owners in general meeting or sought an order authorising emergency expenditure prior to incurring expenditure in excess of the committee limit.

The legal fees were incurred prior to this application being lodged. The emergency in question now appears to have passed.

There may be a new "emergency" in the sense that Herdlaw is now threatening to sue the body corporate for recovery of the fees. However, it is not obvious on the material before me that the body corporate needs to pay the amount claimed by Herdlaw to meet this emergency. The material and statements made in respect of this application raise a number of questions and disputes about what has occurred. These include:

•	A claim that the agreement between the body corporate and Herdlaw was subject to verbal assurances that costs would remain below $5,000;
•	A claim that the costs of the Midwood report were to be included in these costs remaining below the original $5,000 and that Herdlaw should be responsible for any payment for this report. In this respect, the chairperson claims that Robert Herd was horrified when told that the Midwood account was in excess of $4,000 and said that the body corporate should pay $1,500 only. Robert Herd said that it was not in his brief to negotiate the cost of the Midwood report and that if he made any comment that it was only worth $1,500 that would have been as a result of the report being late and other costs being incurred;
•	Questions about responsibility for fees going to over $9,000 (or $13,000 including the Midwood Report) without prior notice to the committee;
•	Questions about whether committee members should be personally liable for around $3,000 in fees incurred after they became aware that fees exceeded the committee’s expenditure limit. This question may involve the body corporate’s insurer in respect of officeholder liability and may also raise questions about any liability of SSKB and Herdlaw as professional advisors to the body corporate. In particular, whether SSKB was instructed to bring an application for an adjudicator to authorise the spending but failed to do so.

In conclusion, I consider the question of payment to Herdlaw is something that must be considered by owners and I am not satisfied that there is any specific amount that would be appropriate for me to authorise the committee to make as spending required to meet an emergency.

Anne Freeman made statements in the teleconference to the effect that the committee members volunteer their time, were faced with a difficult situation, and relied heavily on their professional advisors. She was of the opinion that Herdlaw should be paid for the work it had done and that owners would vote to authorise this payment. Robert Herd stated that he was willing to wait a couple of weeks before receiving payment and indicated that he was willing to forego interest if payment was made by the end of the month.

However, Robert Herd indicated that if he was not paid shortly he would sue the body corporate for payment on the basis he was a person who, honestly and without notice of an irregularity, entered into a transaction with members of the committee (Act, 310). When questioned about whether he had notice of irregularity Robert Herd made a statement to the effect that he had no notice at the relevant time and it was up to the body corporate to ensure it complied with the legislation. In any event, he indicated that he could make a claim based in restitution for a quantum meruit payment for services he performed for the benefit of the body corporate.

The body corporate therefore finds itself again faced with the prospect of litigation. In these circumstances, I am willing to make an order that will facilitate a reduced notice period to allow owners in general meeting to consider if they wish to avoid the threat of litigation by paying the amount claimed by Herdlaw. Anne Freeman appeared confident that owners would vote to authorise this payment and it may be prudent for owners to approve this payment to avoid the risk of further expenses being incurred in defending litigation. However, there is a risk that owners will vote against the payment. Therefore, it may be prudent for owners to obtain independent legal advice about potential liability, possible legal costs, and an appropriate settlement offer should owners vote against full payment. If owners wish to submit any motions of this nature at the upcoming meeting then they will need to act very quickly to meet the timeframes set out above for calling the meeting on short notice.

Order

For these reasons, I will make an order allowing for an extraordinary general meeting on a reduced timeframe at which owners will have an opportunity to vote to pay Herdlaw the amount claimed and to consider any other motions proposed by owners.