Supreme Court changes tack on legal cost deposits

There’s a growing trend in legal actions in Australia that has recently intruded into the strata area – litigants being asked to provide security for costs before legal action can commence.

The idea behind it, generally speaking, isto protect the defendants in legal actions where they have won but the plaitiff can’t or won’t pay their legals costs.

‘What if I win and have costs awarded but the losing party declares themselves bankrupt?’ says the defendant. “I’ve won but I have to pay all my legal costs in defending myself.”

To get around this possibility of litigants taking a punt on legal action, but walking away from their debts if they lose, the defendants can ask the court to order that the plaintiff deposits a substantial amount of money before the case starts to prove they can pay if need be.

However, this can also have the effect of deterring legitimate cases where the plaintiff might have to come up with hundreds of thousands of dollars, just to get their case to court.

Now, as reported by our sponsors Sachs Gerace Broome on their website, it had often been assumed that costs security orders could not be awarded against an Owners Corporation because it could always pay costs, if ordered to do so.

However, this was turned on its head two years ago in the case of Owners Strata Plan 64415 v Serman, when the Supreme Court of New South Wales ordered that OC to provide security of $180,000 for the following reasons:

1. A special levy had been raised to pay debts of the Owners Corporation but, because some lot owners had not paid their contributions, the Owners Corporation was in a negative net asset position;
2. The Owners Corporation had a relatively small sum in its administrative fund compared to the estimate of an adverse costs order and its cash reserves were insufficient to meet a costs order if one was made;
3. If a costs order was made against the Owners Corporation, it would need to raise a substantial special levy from lot owners and it could take a considerable period of time to raise that levy and recover the contributions from all the lot owners;
4. The Owners Corporation has no real property of its own;
5. All lot owners were not prepared to give undertakings to pay any levies; and
6. The strata committee had not already determined to raise a special levy to meet any adverse costs order.

Now there can be little doubt that this “put your money where your mouth is” tactic can dissuade parties with a legitimate case from pursuing it, just as often as it is employed to protect defendants from “hit and run” litigants who may have less convincing cases and be planning to declare bankruptcy if they lose.

So has this changed the rules for strata schemes – will you need to find the money to pay for a loss before you even start proceedings?

No, because in a more recent case, even though the OC didn’t have enough money in the bank, the Supreme Court ruled that they’d be able to raise it if they needed to.

Again, from the Sachs Gerace Broome website, the case of The Owners – Strata Plan 87265 v Saaib,  the Owners Corporation brought proceedings against a builder, Mr Saaib, for allegedly failing to comply with statutory warranties when carrying out building work to the common property.

Mr Saaib asked the Supreme Court to make an order requiring the Owners Corporation to pay security for his costs because the Owners Corporation had a significant deficit in its funds, as it had borrowed funds from a litigation funder to finance the litigation against Mr Saaib.

When considering whether to make the order sought by Mr Saaib, the Court considered a number of factors, including:

1. If the Owners Corporation was unsuccessful in the litigation, the lot owners who stand behind the Owners Corporation could not shirk the burden of a costs order.
2. Mr Saaib had reasonable grounds for delaying almost two years in bringing an application for security for costs after the Owners Corporation commenced proceedings against him, because the Owners Corporation had given him cause for concern by breaching Court directions to serve its evidence.
3. If an order for security for costs was made, it would not frustrate the legal proceedings. There was no evidence from the Owners Corporation that they could not satisfy the order for security for costs by levying each of the lot owners.

The factor which ultimately persuaded the Court to not make an order for security for costs was because the Owners Corporation’s poor financial position was due to the defects in the common property which required repair, and this was allegedly attributable to Mr Saaib.

“This case highlights that the Court is reluctant to make an order for security for costs in building defect claims where the Owners Corporation would not be in the position it is in if it had it not been for the builder’s conduct,” says the Sachs Gerace Broome website.

“However the other factors considered by the Court do show that a potential security for costs order is a risk that every Owners Corporation should consider before it commences Court proceedings. Sachs Gerace Broome has considerable experience in assessing the risk of a security for costs order and can advise Owners Corporations on how to manage and eliminate that risk.”