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NSW Strata Title Reform – the new statutory liability for strata committee members – will it affect your insurance?

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16 Jun 2016

In the second half of 2016, the reforms to Strata title laws will come into force in New South Wales.[1]  These include new statutory duties laid upon members of the executive committee of a strata plan. 

The new duty – section 37 SMA

The new general statutory duty is set out in section 37 of the Strata Management Act 2015 (NSW) (the SMA):

It is the duty of each member of a strata committee of an owners corporation to carry out his or her functions for the benefit, so far as practicable, of the owners corporation and with due care and diligence.” 

This duty has no equivalent under the existing strata title legislation in NSW.

The “good faith and proper purpose” defence – section 260 SMA

The duty is qualified by the “good faith and proper purpose” defence granted under section 260(1)(b) of the new Act.  But will this defence be available in a situation where a strata committee acts honestly but mistakenly beyond its authority?  Arguably, such an act is not done “for the purpose of executing functions under the Act” as required by section 260 SMA.  Such honest but mistaken acts can occur when a strata committee does something which the SMA does not authorise it to do, or it fails to carry out some required step such as getting approval by a resolution from the owners corporation in general meeting.

Existing duties at common law

Members of strata committees are already under duties imposed at common law.  As Barrett JA observed in the case of Elizabeth Bay Road, a strata committee owes fiduciary and other general law duties to the owners corporation in the same way as directors owe such duties to their company, yet the analogy is incomplete, since strata committee members are not “the repository of powers and functions distinct from those exercisable by the owners corporation”.[2]  This contrasts with the directors of a company who have powers distinct from those of the company or its shareholders, and who accordingly come under greater scrutiny by the courts in the exercise of those powers. 

The new duty arguably goes further than common law or duties imposed on company directors

This attitude may also be discerned in the wording of the new duty imposed on strata committee members by section 37 SMA.  There is no general duty to exercise all powers in good faith and for a proper purpose, as is imposed on directors and other officers of companies by section 181(1) of the Corporations Act 2001 (Cth) (CA).  And the requirement to exercise functions with “due care and diligence” appears to be generally similar in effect to section 180(1) CA. 

However, in one respect the duty imposed on a strata committee by section 37 SMA appears to go further:  The requirement that any exercise of functions must be “for the benefit, so far as practicable, of the owners corporation” appears to be an objective test.  In other words, one must consider whether each act of the strata committee has resulted in an actual benefit for the owners corporation.  The intention of the strata committee does not appear to be relevant (except insofar as it may offer the good faith and proper purpose defence in section 260 SMA), nor is it ameliorated by the “business judgment rule” available to company directors and officers in section 180(2) CA.

In such a situation, if for any reason the defence in section 260 is not made out, then the strata committee and its members face potential liability for a failure of their acts to result in benefit to the owners corporation.  This appears to go further than analogous obligations laid on company directors and officers by the Corporations Act.

What should strata committee members do?  Some suggestions:

  1. Always check that actions being taken are authorised for a strata committee under the SMA or other relevant Act.  If in doubt as to whether a resolution of the owners corporation is required, obtain it.
  2. Check that the insurance held by the owners corporation covers liability of office bearers.  This is not compulsory under either the old or the new Strata Management Acts.
  3. If such office bearers’ liability cover is held by the owners corporation, check that it extends to actions taken without authority.  For example, some policies contain an exclusion in words to the effect: “The insurer will not pay for any event when a member or former member of the committee acted outside the authority held by that member”.  This arguably would not cover a situation where the strata committee honestly but mistakenly believes that they are acting within the scope of their authority.  Yet this is precisely the situation where insurance is required, not least to cover the legal costs of defending a claim.

 

Michael Mitchell

Principal

Keypoint Law

 

[1] The commencement date was previously set at 1 July 2016 but has been put back to later in the year. 

[2]  Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409 at para 29 per Barrett JA.  Note that the judgment refers to members of the executive committee under existing legislation, rather than the term used under the new Act, which is strata committee.