Did you overstep the mark (or do you need to)?

Given the complexity of the Body Corporate and Community Management Act 1997 and associated legislation, it is likely that committees may overstep the mark from time to time by making decisions beyond their authority.

Likewise, a committee may sometimes pass a resolution with full knowledge that what they are deciding is beyond their power. This commonly occurs in relation to urgent court proceedings, when a committee may authorise the commencement of proceedings, for example before a right to make a claim becomes statute-barred, or the expiry of an appeal period.

There is a way to ‘save’ these committee decisions; having them ratified by the body corporate.

What is the law relating to ratification?

The law relating to ratification is fairly settled. Some important points are as follows:

1. A body corporate in a general meeting can ratify a committee decision; see Body Corporate for Calypso Plaza on Coolangatta CTS 24595 v Larraine Pty Ltd [2014] QCATA 004 at paragraph 12.
2. At the time of ratification, the body corporate must have full knowledge of all the material facts and circumstances pertaining to the committee decision; see Warren v Body Corporate Buon Vista [2007] QCA 160 at paragraph 32.
3. There are three requirements for valid ratification as described in Carroll and Ors v Body Corporate for Palm Springs Residences CTS 29467 [2013] QCATA 21 at paragraph 31:

• the agent (the committee) whose act is adopted must have purported to act for the principal (the body corporate);
• at the time the agent (the committee) acted, the principal (the body corporate) must have been extant and ascertainable; and
• at the time of ratification, the principal (the body corporate) must have been legally capable of doing the act in question.

What is required for ratification?

If a committee finds itself in a position where urgent action is required, then it can consider using the process of ratification.  The process starts with the committee considering whether the required decision could be validly made in a general meeting, by the lot owners. If the answer is yes, then the committee can choose to make the decision, knowing that it is beyond the committee’s decision-making power.

Once the committee decision is made, and it is acted on, the committee members are at ‘maximum risk’ personally; more on this below.

After making the decision, the committee should immediately move to call a general meeting to seek the owners’ ratification of the committee decision.  The committee needs to ensure that the lot owners have full disclosure of the committee’s decision, why it was made by the committee, the risks, pros and cons, costs, and all other relevant information.

If the lot owners ratify the committee’s decision, then the legal effect is that the committee’s decision becomes a decision of the body corporate, as if the decision had originally been made by the body corporate. Importantly, this means that the decision is taken to have been made by the body corporate, at the time the committee made it.

A Common Use

One of the most common uses of ratification, is the committee commencing proceedings on behalf of the body corporate. That usually requires a special resolution. For example, if a limitation period is about to expire, then rather than wait for the necessary special resolution to be passed at an extraordinary general meeting, a committee will pass a committee resolution to authorise the commencement of the proceedings, in the hope that their decision will be later ratified by the body corporate.

While this is a perfectly valid option, committees should be cautious about the possibility that after the proceedings have commenced the defendant may make an application to strike out the body corporate’s proceedings on the basis that they have not been properly authorised.  It is one thing for a committee to be confident of the body corporate later ratifying its decision, however it is another to face a strikeout application without being able to provide any evidence to the court that the necessary general meeting will be called and conducted to ratify the committee’s decision.  In such a case there is a serious risk that the proceedings will be struck out, just as occurred in Body Corporate for 33 Elkhorn Avenue Surfers Paradise v Minimaxi Investments Pty Ltd [2013] QCATA 352.

What if the lot owners refuse to ratify?

Ratification works fine, when lot owners vote ‘yes’, but happens when the vote is ‘no’? The answer will always depend on the circumstances, but the starting point is that the committee decision is unlawful and is taken never to have had effect. Fortunately, there are some provisions of the Act that may assist to help ‘clean up the mess’ in these cases.

For example, if the unlawful committee decision has been relied upon by a third party, to enter into a transaction with the body corporate, and that third party had no notice of the irregularities with the committee decision, then the transaction will be valid and binding on the body corporate. For example, a painter enters into a painting contract approved by the committee, but which is beyond the committee’s spending limit. The painting contract will be binding on the body corporate, even though the committee resolution approving it was void.

Before the more Machiavellian committee members rush out to use this ‘tactic’ to repaint their buildings, they should consider that they can be civilly liable, personally, for decisions that they make which are beyond their role as a committee member, done negligently or in bad faith. ‘Gaming’ the system, will be acting in bad faith. Failing to get legal or other advice can lead to negligence.

Recommendations

Any committee considering making a decision that will require ratification, or who has just discovered they have made a decision beyond their power that needs to be ratified, should promptly seek legal advice.  Committee members should also:

1. always act together, and not alone, except in genuine emergencies;
2. ensure that full and accurate minutes have been taken when acting as a part of the Committee; and
3. ensure that they comply with the requirements for ratification, as described above.

This article has been contributed by Michael Kleinschmidt, Stratum Legal.

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