The commerciality of strata litigation

The decision to engage in litigation is a very serious one. Litigation is expensive, uncertain and time consuming. It is never something to be undertaken lightly, especially when it is what could be considered somewhat of a representative action – or one in which other people’s money is being spent.

At the end of every piece of unsettled litigation there is going to be a loser. No matter how good you think your case may be, or what your ‘silk’ says, if the judge is forced to make a decision you stand a risk of losing.

The recent Merrimac Heights decision is a salutary lesson in why bodies corporate should be reluctant to litigate.

The whole matter started out over a contract for maintenance of private yard areas of 150 units for a cost of just under $43,000 a year plus CPI. There was 12.5 years remaining on the term. It is probably fair to say that the quantum of the contract would have come under scrutiny the next time the resident manager went to top up their agreements.

The body corporate believed it could source the same services for all lots for a lower amount, stated to be $11,700 per annum.

Using the crystal ball, making no allowance for CPI, and assuming on the next variation of the agreement there would have been a price reduction, or stabilisation – the maximum cost of the contract differences to the body corporate was probably between $300,000 to $350,000 over the remaining term. This is $186 per owner per year, or $3.58 a week. Not even a cup of coffee.

The body corporate purported to terminate the agreement. The resident manager (as it must with its back against the wall) commenced proceedings. A tick over two years later, after 9 days in the Supreme Court, the judgment comes down and the body corporate loses on every single argument.

The body corporate must now pay its own costs (which would have to be around $500,000), wear a judgment of $59,200 for damages for breach of contract, and will no doubt also bear at least half of the resident manager’s costs of probably a similar amount to their own. In my estimation, the body corporate will be down at least $800,000 which is more than twice as worse off financially than it could have hoped for if it had won.

This is only the monetary cost. The cost to the community in terms of anger, resentment and abuse, the reputational damage of the looming special levies, and the subsequent loss of capital value to every unit owner will be far more. Time will only tell.

Other than legal arguments about technicalities and interpretation of legislation, there was no allegation that the resident manager had not performed the duties properly. They had clearly done their job. This was also a management rights arrangement where owners in general meeting (as opposed to the developer) had previously extended the agreements. The resident manager was blameless.

In litigation, the outcome sought must be a commercial one, and one that justifies the risks involved.

Was this one worth it for the body corporate?