Owners corporations seeking to recover legal costs

In Coshott v The Owners of Strata Plan No 48892 [2006] NSWSC 308, an owners corporation sued Mr Coshott for unpaid contributions and legal costs incurred in earlier Local Court and bankruptcy proceedings.

On appeal, Coshott sought to argue, inter alia,[1] that:

• A claim for recovery of expenses has to be brought in the same proceedings as the claim for those contributions. This argument required reading the words “together with” in s.80 to mean that the claim for costs and a claim for levies had to be brought ‘together, that is, in the one action’.
• The other argument raised in relation to costs was that the costs incurred in the bankruptcy proceedings were not proceedings for the recovery of a debt.[2]

Cooper AJ rejected both these argument: “In my view the clear wording of the subsection is to vest in the owners corporation the right to recover as a debt the unpaid contributions, interest and the expense incurred in recovering those amounts. There is nothing in the subsection to say that they have to be claimed within the one action”.[3]

In relation to the second argument, Copper AJ held that the judgment and accordingly costs associated with the bankruptcy were recoverable.[4]

In Owners of Strata Plan 63800 v Wolfe and Ors [2007] NSWSC 204, Malpass AJ was not required to decide the issue of whether the word “expenses” in s.80 included legal costs. He nonetheless ventured the following (obiter): “It [s.80] would appear to be intended to enable an owners corporation to recover expenses other than legal costs (including expenses that might not otherwise be recoverable).it seems to me that full ambit of the word is far from clear.”[5]

In Dimitrious v The Owners of Strata Plan 36131 [2008] NSWSC, the facts of the case were as follows:

• Dimitrious lodged a claim in the Consumer Trader and Tenancy Tribunal (CTTT) disputing the validity of certain levy contributions raised. Prior to the completion of the CTTT proceedings, the owners corporation sued in the Local Court for contributions of $1,214.93.
• The Local Court proceedings were stayed pending the outcome of the CTTT hearing which was later dismissed. The owners corporation then pressed on with its Local Court proceedings but amended its claim to include an amount of almost $8,000 in respect of costs, a substantial portion of which related to the CTTT proceedings.

On the issue of whether the owners corporation was entitled to claim the costs of the CTTT hearing, the magistrate in the Local Court held: “It is the determination of this court that the provisions of s.80 of the Strata Scheme Management Act 1996 entitles the plaintiff to include in its claim all the proper and reasonably incurred legal expenses in relation to the recovery of the relevant unpaid contributions…”

When considering that question on appeal, Malpass J (as foreshadowed in Wolfe’s case) came to a different view, holding. “s.80 was not intended to be a vehicle to recover legal costs and disbursements generated by proceeding s found on the statutory debt (the contributions).”[6]

In coming to this view his Honour relied on two factors:

1. Section 80 was not intended to usurp the usual “settled principles and provisions of other legislation (including the Uniform Civil Procedure Act 2005 and the Legal Profession Act 2004)”.That is, the usual principles of costs orders apply to owners corporations as to any other litigants and s.80 was not intended to change that; and
2. The express wording of s.80: “If Parliament had intended that ‘expenses’ be read to include costs and disbursements it would have clearly said so”.[7]

The owners corporation appealed against the decision of Malpass AJ.[8] The appeal raised three issues:

1. Does the word “expenses” in s.80 of the Act include legal costs and disbursements? ;
2. Are there any limitations on legal costs and disbursements that may be recovered? ; and
3. Must such legal costs be sought in proceedings in which the contributions themselves are claimed?

The appeal bench comprised Hodgson JA, Basten JA and Handley AJA.

Hodgson JA found that the word “expenses” in s.80 did include legal costs “The ordinary meaning of the word plainly extends to money expended by way of legal costs and disbursements, and indeed legal costs and disbursements are likely to be the most significant expenses that an owners corporation incurs in recovering contributions.”[9]

His Honour then found that s.80 makes the expenses themselves a debt recoverable independently of any discretionary order for costs a court may make.[10]

When considering whether there were any limitations on legal costs and disbursements that may be recovered, his Honour posed two questions:

1. Does s.80 extend to the difference between party and party costs and amounts actually expended?
2. Should some costs be excluded, for example in the present case, the costs incurred in the CTTT proceedings?

When considering the first issue, his Honour analysed the three different bases upon which costs may be assessed under statutory provisions: solicitor and own client, party and party, and indemnity costs.

His Honour then considered the criteria for each and came to the view that “the onus is on an owners corporation to prove that the cost and disbursements it claims have been reasonable in amount”.[11]

His Honour concluded that the appropriate cost regime to apply is the party-party cost scale and that there would be “little scope for proceedings that seek a difference between party-party costs and expenses actually incurred”.[12]

On the second issue, that is whether the CTTT costs could be recovered, his Honour found that the issues turned on the character of the costs; that is, were they costs incurred in recovery of contributions? His Honour raised as an example a situation where a lot owner raised a bona fide challenge to a contribution on the basis that it benefits come unit owners. Assuming this challenge is ultimately rejected by the tribunal, his Honour expressed the view that such expenses were not expenses incurred in the recovery of a contribution.[13]On the faces before him, his Honour concluded that as the question of characterisation was not raised before the magistrate, the court could not find the magistrate was in error in allowing those costs.

On the final question; that is, whether proceedings for expenses must be made in the same proceedings as the contribution, his Honour found that they do, and then set out how this might be achieved. His Honour suggested that an owners corporation could come to the hearing in a position to prove their costs, including the costs of the hearing, together with an estimate of the costs of enforcements.[14] If such evidence were not available. The owners corporation could apply for an adjournment (which may or may not be granted). Alternatively, the magistrate could, under s.353(2) of the Legal Profession Act, have the question of legal expenses referred for assessment, His Honour then also expressed obiter that an owners corporation could seek an order reserving liberty to apply in the same proceedings to preserve his right to claim enforcement costs in circumstances where these are substantially greater than originally estimated.

Basten JA found that the word “expenses” does include costs paid to lawyers, and agreed with Hodgson and Handley that such costs are limited to such expenses as are properly incurred and reasonable in amount.[15] His Honour then went on to consider the interrelationship of s.80 with other provisions dealing with legal costs in courts and the tribunal, and raised two questions:

• Where s.80 uses the word “expenses” (which included legal costs), are the costs limited to amounts recoverable under an order of court in which the litigation has been brought?
• Does s.80 impinge on the protection available to those required to pay legal costs?

In determining the answer to the first question, his Honour noted that in 1996 when the Act was enacted, the Supreme, District and Local Courts were entitled to award costs in their “discretion”, but that the Local Court sitting in its Small Claims Division has no power to award costs against a party to proceedings.[16] This raised the question whether s.80 of the Act impliedly repealed s.34 (1) of the Local Court Act (by, in effect, entitling the Small Claims Division to make orders for costs).If it did, his Honour noted that it did so by way of “side wind”, rather than expressly.[17]

His Honour also found that within the Act itself, there were “internal” inconsistencies in relation to matters heard before an adjudicator (under the Act, these are disputes with respects to the operation, administration or management of a strata scheme) or an appeal to the board from an adjudicator’s decision.

Section 176 of the Act provided that an adjudicator cannot “make an order for the payment of costs”. Similarly, where a party appealed to the board (in accordance with s.192 of the Act) against an adjudicator’s decision, the board could not make, “any order for costs except as specifically authorised by this Act, or in relation to an order dismissing an application”.[18] His Honour considered whether s.80 could be constructed as specific authorization, but concludes that he “would not be satisfied that s.80 is specific authorization for the purpose of s.192.”[19]

The anomaly in the Act whereby s.80 entitles an owners corporation to recover as a debt costs incurred, and the prohibition against awarding costs by an adjudicator or a board constituted under the Act could be resolved in one of five ways, according to his Honour:

1. “Expenses” does not include legal costs (Dimitriou’s argument). His Honour rejected this interpretation;
2. ”Expenses” should be read down so as not to include costs before adjudicators or tribunals. His Honour rejected this argument, noting that it could extend to costs which were not recoverable in court proceedings or which a court has expressly declined to award;
3. A variation of the second way is that matters before the board or an adjudication are not costs “incurred in recovering” unpaid contributions;
4. “Expenses” included legal costs otherwise recoverable; or
5. The entitlement of an owners corporation in respect of expenses includes all legal costs whether awarded or refused by a court or tribunal or merely unavailable by reason of other provision.

In looking at the fifth construction (the one most favorable to an owners corporation), his Honour found it inconsistent with other provisions in the same Act,[20] the preferable construction being s.80 costs are limited to debt recovery costs or costs recoverable by order of a court of competent jurisdiction.

Having resolved the internal inconsistencies, his Honour then turned to consider whether s.80 permitted recovery of costs incurred in the Small Claims Division and the “implied repeal” argument. His Honour ultimately held that there is no “contrariety” between s.80 and sections in other legislation precluding courts or tribunals from awarding costs.[21] The provision can read together so that s.80 in limited to costs otherwise recoverable. In considering whether s.80 overrides the general costs provisions in other courts,[22] his Honour held: “It is unlikely that s.80 was intended to curtail in this way the rights of those who might have to pay legal costs to have those costs assessed in accordance with the Legal Profession Act”.[23]

In summary, on the issue of the scope and ambit of s.80, Basten AJ found:

• An owners corporation is not entitled to costs incurred before the Tribunal constituted under the Act because:
  • (a) these are not “recovery” costs; and/or
  • (b) s.192 of the Act precluded such recovery.

Handley AJA agreed with Hodgson and Basten that s.80 includes legal expenses.[24]

In considering the issue of “inconsistencies” between s.80 on the one hand and the provision s in the Act that preclude the making of costs orders, his Honour took the view that “no question of implied repeal arises. Section 80(1) does not enable the tribunal to make an order for costs where a contribution is challenged, not does s.192 limit the application of s.80. The two provisions can stand together.”[25]

The test is whether the costs are incurred in recovery of the contribution levy. When looking at the restrictions on the Small Claims Division capacity to award costs, again his Honour did not see s.80 of the Act and s.34(1A) of the Local Court (Civil Claims) Act as competing . The answer is that an owners corporation which incurs costs in recovering a contribution includes those costs in its principal claim and the Small Claims Division then gives a judgment for a “debt which includes an amount for legal expenses”.[26]

On the issue of whether the claim for costs must be brought with the claims for contributing to which they relate, his Honour held (obiter) that it must, because the “ordinary meaning” of “together with” requires the linked subjects to both be resent at the relevant time”.[27] His Honour added that payment of contributions and interest after proceedings were commenced would not terminate the right of the corporations to continue those proceedings to recover its expenses because it had a complete cause of action to recover those items when the proceedings commenced.[28]

The court held unanimously that:

• The word “costs” in s.80 of the Act included legal costs;
• The costs had to be reasonably incurred; and
• An owner was entitled to call for and assessment of the costs.

The court did not, however, resolve whether costs should be allowed on an indemnity or party/party basis or whether costs could be claimed in separate proceedings from the action for contributions.

Accordingly, an owners corporation should include in any action for contributions an amount for costs (provided they can be shown to be reasonable) and should be ready at any contested heating to provide an estimate of its costs or, seek an order that the costs be assessed before final judgment is entered (per Hodgson’s judgment).

As strata contributions are now a frequent part of the litigation landscape, it is foreseeable that the matters left open by Dimitriou may result in further appeals in the future.

[1] Coshott also raised an issue of res judicata/anshun estoppel. This argument failed and is not strictly speaking relevant to this paper.

[2] The owners corporation had attempted to file a creditor’s petition but another party has already done so. It seems therefore that the owners corporation appeared as a supporting creditor.

[3] [83-85].

[4] [121].

[5] [19].

[6] [30].

[7] [23];An argument could be made the other way, that is, by not defining the kind of expensed s.80 was intended to cover, it could include legal costs.

[8] Owners of Strata Plan 36131 v Dimitriou [2009] NSWCA 27 (25 February 2009).

[9] [33].

[10] [34]: Is also referred to in the second reading speech which noted, “when going to court to recover unpaid contributions plus any interest due, the body corporate will now be able to recover the costs of the action. It is unjust that other owners in the scheme, who have kept their levy payments up-to-date, have to foot the bill for any court action against someone failing to pay up.”

[11] [40].

[12] Having relied on the second reading speech in coming to the view that “expenses” included legal costs, it may be seen as anomalous that his Honour did not come to the view that the correct basis for the recovery of costs would be an indemnity basis.

[13] On one view, establishing the validity of a levy is fundamental to its recovery.

[14] [48].

[15] [64].

[16] Section 76 Supreme Court Act 1970 (NSW); s.148B District Court Act 1973 (NSW); s.34(1) Local Court (Civil Claims) Act 1970 giving the discretion; and s.34(1) Local Court (Civil Claims) Act prohibiting the Small Claims Court from making costs orders.

[17] [75].

[18] [79], [80].

[19] [81].

[20] [85].

[21] [89].

[22] That is, does s.80 entitle recovery of costs not awarded by a court, such as the ‘gap’ between party/party and solicitor/client costs?

[23] [98].

[24] [116].

[25] [122].

[26] [127].

[27] [138].

[28] [142]. Thus does not cater for situations where costs are incurred but no proceedings commence, that is, costs for letters of demand or other pre-commencement costs.