This article is about how risk is allocated in body corporate decision-making and the consequences of unknowingly carrying that risk.
Three things to know:
- Almost every decision a body corporate makes involves some degree of risk
- Pricing risk is an inexact science
- Being left to carry risk can be stressful and expensive
Who takes on the risk in a body corporate?
There’s an old saying about joining a poker game in Vegas: If you don’t know which of the players is the patsy, then you’re the patsy.
A variation of that theme could be applied to decision making in a body corporate and the handling of risk. In any decision that a body corporate makes, there’s an element of risk. Some of those decisions are minor – which contractor are we using for this $500 job? Others can be major and involve relatively significant assumptions of risk. If there is risk involved in a project and you’re not aware of who is carrying it, it could very well be you.
Carrying risk is all well and good until it comes home to roost, and then the finger pointing starts. If you look at any element of risk as a ball that is being passed from party to party (usually in contract form), the last thing anyone wants is to be the one left holding that ball when the music stops.
As an example, we recently had a client who was negotiating with a company that provides ongoing services for a particular piece of infrastructure in their strata scheme. The company was proposing a new form of contract that included a capping of liability. That cap started at the amount that the body corporate had paid the company under the contract. In effect, if something went wrong that resulted in damages to the body corporate, the amount that the service company was beholden to pay was no more than that the body corporate had already paid under that contract to date. Any cost above that would sit with the body corporate.
That is one big ball of unquantifiable risk landing in the body corporate’s lap right there.
Insurance headaches
The above scenario enters the realm of the ‘unknown unknowns’ of incalculable risk.
And since a body corporate is obliged to inform its insurer of anything that could affect the insurer’s decision to cover the building, that level of unknowable risk from agreeing to a capped liability could have an impact on the overall cost of insurance for the scheme, or even the ability to make a claim with respect to something that the body corporate had contracted away the right to do.
If a body corporate has a financial problem that is not covered by insurance, it simply must raise the money from owners. At that stage the fingers would be fairly and squarely pointed at the committee for simply signing what was served to them without blinking.
What this means for you
Negotiations about the carrying of risk sometimes don’t end happily. It might mean moving to a new service provider, or it might mean engaging with the body corporate’s insurer along with some liability carve outs. But either way, if you are carrying that ball of risk it is much better doing so knowingly than unknowingly.
As you can see, the knock-on effects can be startling.
Other examples abound:
- If a committee doesn’t get two quotes for a repair job that is above the major spending limit, they carry the risk of a lot owner challenging that decision down the track. This can be particularly problematic once a contract has been signed with a contractor. Find our more about spending limit rules here.
- If a committee begins legal proceedings without a special resolution of the body corporate (as is required by law), they leave themselves open to the respondent having the proceedings knocked over because they were incompetent – usually with some horrific costs consequences.
What it comes down to is the body corporate being aware of the risks inherent in any choice and making a considered decision based on that knowledge.
Frank Higginson Redchip Strata Law E: FrankH@redchip.com.au P: 07 3193 0500
This post appears in Strata News #771.
Have a question or something to add to the article? Leave a comment below.
Read next:
- QLD: Q&A Can a body corporate manager lobby owners to influence committee elections?
- QLD: Q&A Body Corporate Financials, Audits and Tax
- QLD: Q&A Body Corporate Decision Making
This article has been republished with permission from the author and first appeared on the Redchip Strata Law website.
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