The recovery of body corporates’ legal costs

December 1st, 2014
x
Bookmark

By Albert Reinecke

It happens every day: A body corporate (or home owners’ association) institutes action against one of its members for account arrears, and simply levies the attorney’s presented costs onto the defendant’s account, often despite vehement protestation on the part of the defaulter.

The argument is that it is pre-agreed – in terms of the Sectional Titles Act 95 of 1986 Management Rule 31.5 (or an equivalent provision in a home owners’ association’s constitution) – that the legal costs incurred by the body corporate will be for the account of the defaulter. Compounding this notion, the body corporate’s attorney may often settle the controversy’s costs with the defaulter on terms that he or she agrees to pay all the legal costs incurred; why should the other owners be out of pocket?

However, this is a fortunate result for the body corporate, as the legal costs incurred by it – in general terms – is never wholly recoverable from the defaulter. The liability of a losing litigant is limited, and cannot exceed a fairly complex threshold. Although Management Rule 31.5 provides that:

‘An owner shall be liable for and pay all legal costs; including costs as between attorney and client …’.

The Appellate Division has held in Ekurhuleni Metropolitan Municipality v Germiston Municipal Retirement Fund 2010 (2) 498 (SCA) para 13 that:

‘… a provision in a contract must be interpreted not only in context of the contract as a whole, but also to give it a commercially sensible meaning … .’

The ‘commercially sensible’ context of the consent to costs requires, firstly, that we should bear in mind that where costs are statutorily regulated, the court must apply such provision. However, Management Rule 31.5 is not so much a peremptory statutory provision, as really only a default, contractual position that can be amended by agreement between the parties.

Secondly, we should distinguish between the various types of costs, as:

  • Costs of remuneration: As costs properly incurred by a practitioner, and presented as ‘attorney and own client’ costs payable by the body corporate to its own legal team.
  • Costs of contribution: As costs recoverable from an opponent intended as an indemnification towards the (remunerative) costs incurred by the client, which can take one of two forms –

–        ‘party and party’ costs, being the typical scale of costs ordered on contribution. These costs are limited to the reasonably necessary attendances and formal exchanges between the parties, and is carved from precedent and promulgated tariff; or

–        ‘punitive costs’, being a more generous, fuller indemnity of contribution. These are ‘attorney and client’ costs, that will include more of the attendances by the attorney on his client, and can even warrant departure from tariff. Punitive costs are considered ‘intermediate’ costs, being more than party and party, but less than attorney and own client costs. Punitive costs are reserved for circumstances where the court feels the need to express its displeasure with the conduct of a litigant, albeit that – as a general approach – they lean away from it.

Thirdly, it must be noted that even where punitive costs are ordered on the ‘attorney and own client’ scale, it is trite (as per Thoroughbred Breeders’ Association v Price Waterhouse 2001 (4) SA 551 (SCA) para 92) that such an order must be interpreted as intermediate ‘attorney and client’ costs. Thus, it really does not matter whether Management Rule 31.5 intended to refer to a contribution of ‘attorney and client’ (intermediary) costs, or ‘attorney and own client’ costs (of remuneration); the contribution to a body corporate’s incurred expenses remains capped (at best) to constitute ‘intermediate’, attorney and client (punitive) costs on contribution.

Although a consent to costs is not prohibited by the common law, the court (both the presiding officer and taxing official) retains a residual discretion to enforce such agreement, and parties cannot by agreement deprive a court of the discretion it has in regard to costs, because (according to Intercontinental Exports (Pty) Ltd v Fowles [1999] 2 All SA 304 (A) para 26) –

‘… a court … would normally be bound to recognise the parties’ freedom to contract and to give effect to any agreement reached in relation to costs. But good grounds may exist … in a party being deprived of agreed costs, or being awarded something less … than that agreed upon.’

As per Ben McDonald Inc and Another v Rudolph and Another 1997 (4) SA 252 (T) at 258H – a taxing official: ‘… is still empowered to enquire into the reasonableness of such agreement.’

Thus, in the light of the above, any consent to costs –

  • cannot really exceed the intermediate threshold inherent to punitive costs;
  • remains in the discretion of both the court and its taxing official; although
  • costs should be awarded (insofar it has been agreed) in the absence of cogent reasons not too (according to Sapirstein and Others v Anglo African Shipping Co (SA) Ltd 1978 (4) SA 1 (A) at 14).

Body corporates are not privileged litigants; they must also pay for their legal representation – albeit collectively – whereupon they can recover from the defaulting owner an adequate indemnification as agreed, or ordered, and forum precedent will dictate what that amounts to. It simply means that:

  • defaulting owners are in the same position as any other litigant;
  • any consent to costs remains subject to the normal principles of contribution; and
  • there is no real magic contained in Management Rule 31.5 (or its derivatives), because it has since the Nel v Waterberg Landbouwers Ko–operatieve Vereeniging 1946 (AD) 597 decision been the case that when one party is ordered to pay the costs of another taxed as between attorney and own client, those costs remain to be taxed on the intermediate basis.

A taxing official is obliged to act on an order that one party is to pay the costs of another taxed as between attorney and own client in exactly the same way as to pay the costs of another taxed as between attorney and client; there is no difference between them (as per Aircraft Completions Centre (Pty) Ltd v Rossouw and Others 2004 (1) SA 123 (W) para 116).

This threshold of contribution is a cornerstone of the principle of access to justice, for a very simple reason: If losing litigants were to be liable for all costs incurred against them, opponents could recklessly litigate from each others’ wallets, and thereby create a risk of losing ‘with costs’ so disproportionately large, nobody but the super-wealthy could risk it.

Because body corporates are so often litigants in their own right, one would think that it is reasonable for them to budget for the difference between what can be recovered (on contribution) from what it will actually cost them (on remuneration) to litigate, via provision in the annual levies. Not unlike gardening and security, the legal team is just another service provider to the body corporate, and the bulk of their costs will have to be shared by all owners. What can be recovered from a specific defaulter – typically on the intermediate, punitive scale when Management Rule 31.5 applies – can go back into the communal fund, but such contribution will rarely be a full indemnification, because of what has been set out above.

Albert Reinecke BA LLB (UJ) is an attorney and costs consultant in Johannesburg and author of The Legal Practitioner’s Handbook on Costs 2ed (2011).

This article was first published in De Rebus in 2014 (Dec) DR 16.