Australia City Properties Management Pty Ltd v The Owners - Strata Plan No 65111

[2021] NSWCA 162

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Australia City Properties Management Pty Ltd v The Owners – Strata Plan No 65111 [2021] NSWCA 162

Hearing dates:

20, 21 & 22 April 2021

Decision date:

04 August 2021

Before:

Bathurst CJ at [1]; Payne JA at [360]; McCallum JA at [361]

Decision:

(1)   Appeal allowed.

(2)   Cross-appeal dismissed.

(3)   Set aside Order (8) of the orders of the primary judge made on 28 October 2020 and lieu thereof make the following order:

(a)   Declare that the defendant in failing to comply with the procedure set out in cl 10.2 of the Caretaker Agreement breached its obligations under that provision and as a consequence the plaintiff is entitled to damages for such breach.

(b)   Order that judgment be entered for the first plaintiff against the defendant in the sum of $1,007,896.13.

(4)   Remit to the primary judge the question of whether, in the events which have happened, the appellant is required to sell Lot 179 in the strata scheme to the respondent.

(5) Order that the respondent pay the appellant’s costs of the appeal and cross-appeal and have a certificate under the Suitors’ Fund Act 1951 (NSW) if eligible.

Catchwords:

CONTRACTS – termination – breach of term – what constitutes gross negligence and gross misconduct

CONTRACTS – termination – breach of term – implied term – term implied in fact – implied term not to use position to obtain unauthorised benefit – where breach compounded by deliberate deception – gross misconduct

CONTRACTS – termination – breach by terminating party – whether repudiation of contract – whether acceptance of repudiation possible – whether party willing to perform obligations under the contract

CONTRACTS – construction – interpretation – natural and ordinary meaning – no ambiguity – unusual term – Court must give effect to the language used

STATUTORY INTERPRETATION – text, context and purpose of provisions and the mischief they are intended to remedy – Strata Schemes Management Act 1996 (NSW) – Strata Schemes Management Amendment Act 2002 (NSW) – Strata Schemes Management Act 2015 (NSW) – extrinsic material – where purpose of relevant provisions emerges from the Second Reading Speech – savings provisions – Interpretation Act 1987 (NSW) s 30

Legislation Cited:

Interpretation Act 1987 (NSW)

Strata Schemes Management Act 1996 (NSW)

Strata Schemes Management Act 2015 (NSW)

Strata Schemes Management Amendment Act 2002 (NSW)

Cases Cited:

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27; [2009] HCA 41

Attorney-General for the State of Queensland v Australian Industrial Relations Commission (2002) 213 CLR 485; [2002] HCA 42

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36

Batson v de Carvalho (1948) 48 SR (NSW) 417

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187

Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35

Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Foran v Wight (1989) 168 CLR 385; [1989] HCA 51

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

Gooley v Westpac Banking Corporation (1995) 129 ALR 628

Hall v Busst (1960) 104 CLR 206; [1960] HCA 84

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61

L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; [1989] HCA 23

Lee v Lee (2019) 266 CLR 129; [2019] HCA 28

Mann v Paterson Constructions Pty Ltd (2019) 267 CLR 560; [2019] HCA 32

Moschi v Lep Air Services Ltd [1973] AC 331

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

NM Superannuation Pty Ltd v Hughes (1992) 27 NSWLR 26

North v Television Corporation Ltd (1976) 11 ALR 599

Owners of the Ship Borvigilant v Owners of the Ship Romina G [2003] EWCA Civ 935

Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14

R v A2 [2019] HCA 35; 373 ALR 214

Rankin v Marine Power International Pty Ltd [2001] VSC 150; 107 IR 117

Robinson Helicopter Company Inc v McDermott [2016] HCA 22; 331 ALR 550

Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47

SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR 632

Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392

Waldorf Apartment Hotel, The Entrance Pty Ltd v Owners Corporation SP 71632 [2010] NSWCA 226

Willis Australia Group Services Pty Ltd v Mitchell-Innes [2015] NSWCA 381

Texts Cited:

Nil

Category:

Principal judgment

Parties:

Australia City Properties Management Pty Limited (ACN 093 915 738) (Appellant/Cross-Respondent)
The Owners – Strata Plan No 65111 (Respondent/Cross-Appellant)

Representation:

Counsel:
NJ Kidd SC with SR Meehan (Appellant/Cross-Respondent)
SJ Free SC with OR Jones and C Coventry (Respondent/Cross-Appellant)

Solicitors:
Harris Freidman Lawyers (Appellant/Cross-Respondent)
Barry Nilsson Lawyers (Respondent/Cross-Appellant)

File Number(s):

2020/335290

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity Division

Citation:

[2020] NSWSC 1505

Date of Decision:

28 October 2020

Before:

Darke J

File Number(s):

2019/257962

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant, Australia City Properties Management (ACPM) was the Caretaker of an apartment building in the Sydney CBD. The respondent, the Owners of Strata Plan No 65111 (the OC), was the Owners Corporation of that building.

In March 2001, ACPM had entered into an Agreement to perform caretaking services in the building. The term of the Agreement was ten years (to March 2011), with three options to renew of five years each, which would extend the Agreement to March 2026. In 2010, a Deed of Variation was entered into which included a ratchet clause and granted two further options of five years, which would extend the Agreement to March 2036. Another Deed of Variation was entered into in 2015, which provided for one further option of five years and would extend the Agreement to March 2041.

ACPM was the owner of a lot in the building (Lot 179), from which it carried out a number of activities, including its obligations under the Agreement. Lot 179 was located on the ground floor of the building and contained a reception desk, surveillance equipment and an air-conditioning system which provided air conditioning to the common areas.

Various clauses of the Agreement were of particular importance. Clause 9 set out how the OC could terminate the Agreement, including for gross negligence or gross misconduct by ACPM (cl 9.3(iv)). Clause 10 set out a procedure that had to be followed if the OC terminated under cl 9, including granting ACPM the right to sell its interest in the Agreement and Lot 179 (cl 10.2). Clause 18.2 provided that directors and shareholders of ACPM were not to nominate themselves for election to the Strata Committee of the OC.

On 17 August 2019, the OC served ACPM with a Notice of Termination, which alleged that ACPM was guilty of gross misconduct and/or gross negligence in performing its duties. The OC then took possession of Lot 179 and appointed an interim caretaker; however, it did not follow the required procedure under cl 10 of the Agreement, and it asserted that ACPM had no further rights under the Agreement. On 26 August 2019, ACPM purported to accept a repudiation of the Agreement by the OC (and therefore terminate the agreement), on the basis that the OC was in breach of its obligations under cl 10.

ACPM sought loss of bargain damages in the Equity Division of the Court. The primary judge held that ACPM was guilty of gross misconduct or gross negligence in two respects. The first was that ACPM had breached an implied term of the Agreement by not paying for the electricity consumed on Lot 179 (“the electricity breach”), in the context where Mr Wang, a director of ACPM, had also been deliberately deceitful about who was paying for the electricity. The second was that ACPM had breached the Agreement by failing to properly inform the Strata Committee of problems with the fire alarm system in the building (“the fire safety breach”). However, the primary judge held that even though ACPM breached cl 18.2 by allowing two of its directors to nominate themselves for election to the Strata Committee, this was not gross negligence or gross misconduct, as the OC had tolerated the breach (“the cl 18.2 issue”). The primary judge therefore held that the OC was validly able to terminate the Agreement under cl 9 for gross negligence or gross misconduct.

The primary judge held that ACPM was entitled to possession of Lot 179 and awarded damages for the period it had been out of possession. However, although the OC did not follow the process upon termination under cl 10, the primary judge held that its conduct, whilst a breach of cl 10, did not amount to a repudiation of the Agreement. The primary judge would not have awarded ACPM any loss of bargain damages.

Various pieces of legislation had been introduced in NSW after ACPM first entered into the Agreement in 2001, which had the effect of limiting new caretaker agreements to a term of 10 years (although that term could be renewed). One issue was whether the 2010 Deed and 2015 Deed were mere variations of the 2001 Agreement (which the legislation did not apply to), or whether they caused a new Agreement to come into existence, the term of which would be limited to 10 years. This was relevant in determining the amount of damages that ACPM would be entitled to.

ACPM appealed from the primary judge’s decision, including against the findings of gross negligence and gross misconduct. The OC cross-appealed, including against the finding that the breach of cl 18.2 did not constitute gross negligence or gross misconduct. The OC also submitted that, in any event, it was entitled to terminate at general law (outside of cll 9 and 10) for ACPM’s wrongful repudiation of the Agreement.

The Court allowed ACPM’s appeal and dismissed the OC’s cross-appeal.

The electricity breach

1. Having regard to the well-established principles around construction of commercial contracts, there was no right under the Agreement for ACPM to charge the OC for electricity consumed at Lot 179: [88]-[94] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37; Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47, referred to.

1. There was an implied term of the Agreement that ACPM not use its position to obtain an unauthorised benefit from the OC. ACPM breached this implied term: [95]-[98] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Waldorf Apartment Hotel, The Entrance Pty Ltd v Owners Corporation SP 71632 [2010] NSWCA 226; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, considered.

1. ACPM’s conduct in using electricity at Lot 179 without reimbursing the OC amounted to gross misconduct. The breach must be considered in the context of Mr Wang’s deliberate deception. It was not open to the Court to set aside the primary judge’s findings about Mr Wang, which were based at least in part on his assessment of Mr Wang’s credibility: [99]-[107] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Willis Australia Group Services Pty Ltd v Mitchell-Innes [2015] NSWCA 381; North v Television Corporation Ltd (1976) 11 ALR 599, considered.

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22; Lee v Lee (2019) 266 CLR 129; [2019] HCA 28; Robinson Helicopter Company Inc v McDermott [2016] HCA 22; 331 ALR 550, referred to.

The fire safety breach

1. Per Bathurst CJ and Payne JA, McCallum JA dissenting on this point (at [361]): Despite the fact that ACPM breached the Agreement by failing to inform the Strata Committee promptly that the fire alarm system was faulty, the breach did not constitute gross misconduct or gross negligence. This was in circumstances where the fault was ultimately reported and ACPM relied on the conclusions of fire safety testing contractors: [161]-[165] (Bathurst CJ); [360] (Payne JA).

Gooley v Westpac Banking Corporation (1995) 129 ALR 628; Rankin v Marine Power International Pty Ltd [2001] VSC 150; 107 IR 117, referred to.

The cl 18.2 issue

1. The primary judge was correct to find that ACPM did not engage in gross misconduct through its breaches of cl 18.2. Whilst there was no waiver by the OC of ACPM’s breaches of cl 18.2, the primary judge was not in error to conclude that the OC tolerated the breaches. In those circumstances the breaches did not constitute gross misconduct: [217]-[220] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Repudiation and the consequences of termination

1. Although the electricity breach amounted to a repudiation of the Agreement by ACPM, the OC was not entitled to terminate the Agreement outside of cll 9 and 10. This was in circumstances where cl 9.3 was very wide, and it would be difficult to see how repudiatory conduct would fall outside the category of gross misconduct. Clause 9.3 covered not only all breaches but also repudiatory conduct: [285]-[291], [295] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; [1989] HCA 23; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61, referred to.

1. Although cll 9 and 10 were unusual, where there is no ambiguity the Court must give effect to the language, notwithstanding the consequences. Further, following cl 10 would not have an arbitrary or capricious result: [292]-[294] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36, referred to.

1. ACPM was not entitled to terminate on the basis of any wrongful repudiation by the OC, including because ACPM itself was in breach of a fundamental obligation and unwilling to perform its obligations in accordance with the terms of the Agreement: [303] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12; Foran v Wight (1989) 168 CLR 385; [1989] HCA 51, referred to.

1. The primary judge was correct in concluding that the OC’s conduct following termination was not repudiatory, as it was not established that the OC would not be willing to comply with the terms of cl 10 once the correct interpretation of that clause was established. However, ACPM nonetheless is entitled to damages for the value of its interest under the Agreement, as the OC’s failure to follow the cl 10 procedure caused ACPM to lose the value of this interest: [305]-[308] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

The Duration of the Agreement and Damages

1. The determination of issues around the duration of the Agreement depends on the construction of the relevant pieces of legislation, which should be considered having regard to their text, context and purpose and the mischief they are intended to remedy: [330]-[333], [349] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27; [2009] HCA 41; R v A2 [2019] HCA 35; 373 ALR 214, referred to.

1. Even if the Deeds were a variation of the Agreement, that did not mean that a new and different contract did not come into existence. The 2010 Deed and 2015 Deed were “caretaker agreements” under the legislation and limited to a term of 10 years. The term of the Agreement was extended up to 29 April 2025: [334]-[335], [348] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35; Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312, referred to.

1. ACPM is entitled to damages in accordance with the calculations by the primary judge, based on the assumption that the Agreement expired on 29 April 2025: [350]-[355] (Bathurst CJ); [360] (Payne JA); [361] (McCallum JA).

Judgment

1. BATHURST CJ: This is an appeal and cross-appeal from a decision of a judge of the Equity Division of the Court concerning the termination of an Agreement between the appellant, Australia City Properties Management Pty Ltd (ACPM or the Caretaker) and Guihua Lu of the one part, and the respondent/cross-appellant, the Owners of Strata Plan No 65111 (the Owners Corporation or OC) of the other part, whereby ACPM agreed to provide caretaking services for the OC at premises at 569 George Street, Sydney (the Premises).

2. The Agreement (the Caretaker Agreement or the Agreement) was entered into on 30 March 2001 for an initial term of ten years with three options to renew, each of five years’ duration. The Agreement was varied by a Deed of Variation entered into on 23 March 2010 (the 2010 Deed) which, amongst other provisions, granted ACPM two further options of five years, thus extending the total term (including options) to 30 March 2036. A further Deed of Variation was entered into on 29 April 2015 (the 2015 Deed), which granted a further option expiring on 30 March 2041.

3. The primary judge held that having regard to the statutory regime which existed on 23 March 2010, the effect of the 2010 Deed was to limit the total term of the Caretaker Agreement (including options) to a period expiring on 23 March 2020. However, his Honour stated that the effect of the 2015 Deed was to extend the total period to 29 April 2025. Each of ACPM and the OC has appealed against this conclusion. ACPM contended that both the 2010 Deed and the 2015 Deed should be given their full effect, whilst the OC contended that the effect of the statutory regime was to limit the Caretaker Agreement to a period of ten years expiring on 23 March 2020. This is the subject of Issue 21 referred to below. As will be seen, the term of the Agreement is important in determining the extent of any relief to which ACPM may be entitled.

4. On 17 August 2019, the OC served ACPM with a Notice of Termination of the Caretaker Agreement. Of relevance are the following paragraphs in that letter:

“The new strata committee of the Owners Corporation … noticed there are major defects in the active fire management system that raise serious safety concerns.

The strata committee found that this is a result of insufficient funds has [sic] been allocated towards the upgrade and regular maintenance of equipment due to your lack of guidance to the previous strata committee.

In addition, there has been no fire evacuation plan drawn up, no assembly points assigned and no exit strategy plan for all occupants including people with disability.

Your company has been the Building Manager for in excess of 18 years. The residents and the building have been placed at risk with potential loss of life should there be a fire situation. The strata committee must point out that under the caretaker agreement, Schedule 2 Clause 1(n), you are responsible to obtain sufficient fire safety and operational training in order to competently provide proper and professional guidance to the strata committee past or present.

The Committee has since discovered you have been billing the Owners Corporation for Cleaning Contractors and Security Contractors the costs for which are contained in your Caretaker Services Agreement.

…

Given the 18 years your company has been managing the Building, its current state of disrepair, the current health, safety and fire issues and the complete lack of proper management, the strata committee has formed the opinion the Caretaker has been guilty of gross misconduct and/or gross negligence in performing its responsibilities.

…

As per the terms of the caretaker's agreement 10.5 the owners corporation is IRREVOKABLY appointed attorney for the caretakers lots, being lot 179 of SP65111 which consists of the reception and office room behind. Accordingly, entry upon lot 179 will be a trespass.

Your company, its employees, contractors and agents are no longer permitted to enter Lot 179 and any plant room. Entry upon lot 179 or any restricted plant room area will be a trespass.”

5. On 22 August 2019, the owners and residents in the building were notified by the Strata Committee that it had installed a temporary building caretaker and manager in Lot 179. It stated that the new building manager would initially be contracted on a month by month basis and at the next Annual General Meeting or Extraordinary General Meeting all owners of the building would be entitled to vote on the permanent appointment of a new caretaker and the caretaker contract.

6. On the same day, the OC wrote to ACPM nominating itself pursuant to cl 10.2 of the Caretaker Agreement (see [28] below) as the purchaser of Lots 162 and 179. It did not nominate itself as the purchaser of the Caretaker Agreement.

7. Following termination, the OC sought to take possession of Lot 179, one of the lots described in the Caretaker Agreement as the Caretaker Lot. On 19 August 2019, ACPM commenced these proceedings and obtained an ex parte injunction requiring the OC to deliver up possession of Lot 179 by 21 August 2019. However, on that date another judge of the Equity Division ordered ACPM to vacate and deliver up possession of Lot 179 to the OC by 22 August 2019. The primary judge concluded that ACPM was in fact entitled to possession of Lot 179 and ordered the OC to deliver up possession to it, and awarded damages to ACPM to compensate it for being out of possession between the period from 22 August 2019 to the date of judgment. The OC has cross-appealed against this decision. It is encompassed within the matters raised in issues concerning repudiation, ratification and the consequence of termination (see [224]ff below).

8. In support of its entitlement to terminate the Caretaker Agreement, the OC at the hearing relied on a number of matters which were said to constitute either gross misconduct or gross negligence, and which amounted either to conduct that enlivened the contractual right of termination under cl 9.3 of the Caretaker Agreement or constituted repudiatory conduct giving rise to a right of termination at general law. The primary judge found that two of these matters involved either gross negligence or gross misconduct by ACPM. The first of these was the use by ACPM of electricity for the purpose of Lot 179 at the expense of the OC (the Electricity breach). The second was a failure to promptly report defects in the Emergency Warning and Intercommunication System (EWIS) (the Fire Safety breach). ACPM has appealed against these findings. These are the subjects of issues 1 to 5 and 6 to 10 respectively.

9. However, the primary judge rejected the contention made by the OC that the conduct of ACPM in offering its directors for election as office bearers of the Executive Committee (the Strata Committee) in contravention of cl 18.2 of the Caretaker Agreement constituted gross negligence, gross misconduct or repudiatory conduct (the cl 18.2 issue). The OC has cross-appealed against this finding. This is the subject of Issues 10 to 14.

10. ACPM disputed the entitlement of the OC to terminate the Caretaker Agreement. Broadly speaking it was on two grounds. First, the OC did not have a basis for doing so. Second, the OC purported to terminate without the authority of a General Meeting of the OC. ACPM contended that there was no power to do so and the termination thus constituted a wrongful repudiation of the Agreement which it accepted by terminating the Agreement. It contended that the subsequent ratification at a General Meeting was ineffective as ACPM had already terminated for breach and acquired vested rights so as to preclude ratification.

11. In that context there was also a dispute as to the rights of the parties consequent upon the purported termination. Broadly speaking, ACPM contended that the effect of the operation of cl 10 of the Caretaker Agreement was to require the OC to nominate a purchaser of what was described in the Caretaker Agreement as the Caretaker Lot (Lot 179) and the Caretaker management rights under the Caretaker Agreement. The OC denied that there was any obligation upon it to purchase the rights of ACPM under the Caretaker Agreement. However, the OC contended that irrespective of whether cl 10 operated, if termination took place for wrongful repudiation outside the regime of cl 10 then ACPM was obliged to sell Lot 179 to it. These matters are the subject of Issues 15 to 20.

12. The primary judge made the following orders. It should be noted that ACPM was the plaintiff and the OC the defendant:

“The Court:

1.   Declares that on 17 August 2019 the defendant validly exercised a right of termination under cl 9.3 of the Caretaker Agreement entered into by the first plaintiff and the defendant on 30 March 2001 and subsequently varied by two Deeds of Variation made on or about 23 March 2010, and Deeds of Variation made on about 2 April 2013 and 29 April 2015 (‘the Agreement’).

2.   Declares that upon the said termination of the Agreement under cl 9.3, the provisions of cl 10 of the Agreement came into operation and the parties to the Agreement accordingly became bound by the terms of cl 10.

3.   Declares that upon the provisions of cl 10 of the Agreement coming into operation, and in the events that happened, the first plaintiff remained entitled to possession of the Caretaker Lot under the Agreement known as Lot 179 in Strata Plan No 65111.

4.   Orders that order 5 made by Pembroke J on 21 August 2019 be discharged.

5.   Orders that within 7 days the defendant vacate Lot 179 in Strata Plan 65111 and deliver up possession of the said lot to the first plaintiff.

6. Orders that the defendant pay damages to the first plaintiff of $7840, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) of $456.13.

7.   Orders that the defendant pay compensation to the first plaintiff of $24,600 (including interest) pursuant to the usual undertaking as to damages given by the defendant on 21 August 2019.

8.   Orders that judgment be entered in favour of the first plaintiff against the defendant in the sum of $32,896.13.

9.   Declares that the Agreement does not confer any rights upon the defendant that are enforceable personally against the second plaintiff.

10.   Orders that the Further Amended Statement of Claim be otherwise dismissed.

11.   Orders that the Amended Cross-Claim be dismissed.

12.   Grants liberty to the parties to apply in respect of any issues that arise in relation to the performance of obligations pursuant to cl 10 of the Agreement.”

13. The parties helpfully have agreed on a series of issues which encompass the matters raised in the notice of appeal, notice of cross-appeal and notice of contention filed by the OC. It is convenient to deal with the matters by reference to these issues rather than by reference to the grounds of appeal and cross-appeal. Prior to doing so, it is convenient to set out the relevant provisions of the Caretaker Agreement, the Deeds of Variation and the statutory context in which the issues the subject of the appeal have arisen.

The Caretaker Agreement

14. As I indicated, the Caretaker Agreement was entered into on 30 March 2001. Clause 1 of the Agreement provided that the Caretaker was engaged to perform the duties referred to in Sch 2 of the Agreement in a conscientious and workmanlike manner so as to permit the building to be enjoyed to a standard appropriate to a residential development.

15. Schedule 2 set out the obligations of ACPM in detail. Clause 1 of Sch 2 set out what were described as general duties. They included where the Caretaker is a corporation, ensuring that the principal person performing the duties of Caretaker resides in a lot in the building and permitting its substitute from time to time to reside in that unit (cl 1(d) of Sch 2). ACPM acquired Lot 162 in the Strata Plan for this purpose. The right to this unit on termination has not arisen on the appeal.

16. Clauses 1(f), 1(h), 1(n) and 1(s) of Sch 2 are of relevance in the appeal. They were in the following terms:

“1.   GENERAL DUTIES

The Caretaker shall by its employees, contractors or agents:

…

(f)   Report promptly on all things requiring repair and on all matters creating a hazard or danger of which the Caretaker has notice and take remedial action where practicable.

…

(h)   So far as this duty may be consistent with the intentions of the parties to this Agreement, and subject to the approval of the Owners Corporation from time to time, make contracts at the expense of the Owners Corporation for water, electricity, gas, fuel, telephone and other necessary services or such of them as the Owners Corporation deems advisable for the Owners Corporation and place orders for such materials and supplies as are necessary to properly maintain the Complex and all machinery and appurtenances thereto at the expense of the Owners Corporation and the Caretaker shall be under a duty to secure for and credit to the Owners Corporation any discounts, commissions or rebates obtained as a result of such purchases.

…

(n)   Undertake and complete all relevant fire safety and operational training courses, regularly inspect the fire fighting equipment installed within the Complex, arrange for the inspection of such equipment by the Chief Fire Officer at least once in every period of twelve (12) months and arrange for any maintenance or other works with a view to keeping such equipment in efficient working condition in accordance with the Fire Safety Act 1984 provided however that the charges relative to such inspection and out-of-pocket expenses required to keep the said equipment in order shall be borne by the Owners Corporation.

…

(s)   If the Owners Corporation chooses to operate an energy management system for the common areas, the Caretaker shall read all Owners Corporation electricity meters and forward details to the Owners Corporation for processing.”

17. Clause 2 and cl 3 of Sch 2 set out the Caretaker’s cleaning duties and security duties. Of some relevance is cl 2(i) which was in the following terms:

“2(i)   All consumables including pool chemicals, toilet paper, hand towels, light globes and cleaning chemicals are to be purchased by the Caretaker, and invoices should be sent to the strata manager for payment by the Owners Corporation.”

18. Clause 4 of Sch 2 referred to what were described as the Caretaker’s leasing duties. It is unnecessary to set out these duties, but it should be noted that cl 4 expressly provided that the activities the subject of the leasing duties were to be undertaken by the Caretaker at the reasonable direction of the OC.

19. Clause 2 of the Caretaker Agreement provided that the Caretaker was to be paid the sum specified in Item 2 of Sch 1 for the provision of the services. Item 2 of Sch 1 set out two separate items of remuneration, one described as stage 1 being $185,000 per annum, the other as stage 2 being $175,000. The basis of the division is not clear, but it is apparent from subsequent Deeds of Variation that ACPM was being paid the total of the two amounts.

20. Clause 3.1 provided for variation of the remuneration in accordance with variations in the Consumer Price Index, whilst cll 3.2 and 3.3 provided for what was essentially a market review at the commencement of the sixth year of the term and at the expiration of each five year period thereafter. Clause 3.4 provided that the remuneration did not include any payment for the provision of the leasing, managing and selling agency services.

21. Clauses 4 to 7 dealt with the leasing and sales agency.

22. Clause 4 conferred the right on the Caretaker to provide leasing and sales agency services for unitholders. It was in the following terms:

“4.   The Caretaker may provide the following services as agent for owners of lots in the building, at their request and subject to the settlement between the Caretaker and the owners of the terms on which the services are to be provided:

i)   Buying, selling, leasing, assigning or otherwise disposing of lots within the strata scheme; and

ii)   Collecting rents payable in respect of any lease of lots within the strata scheme.

The consideration for the Owners Corporation granting the Caretaker the right to conduct the services is the Caretaker conducting the activities associated and incidental to these services if the Caretaker elects to do so. In no circumstances shall the Owners Corporation be liable to pay the Caretaker remuneration for these services, or to reimburse it for any expenses incurred in providing these services.”

23. Clause 5 provided that services may be conducted from the Caretaker’s Lots in accordance with the by-law, the terms of which were set out in Sch 3. The Caretaker’s Lots were identified in Item 3 of Sch 1 in the following terms:

“Lot and 179 in Strata Plan 65111”

24. Schedule 3 was a by-law (by-law 30) which empowered the OC to enter into an agreement with the Caretaker whose duties may include a letting, property management and sales service.

25. Clause 5.1 of the Caretaker Agreement contained a prohibition on the transfer or sale of the Caretaker’s Lots without the consent of the OC.

26. Clause 6 prohibited the OC from permitting the use of the common property or any other lots for the provision of those services, except in accordance with the terms of the Agreement.

27. Clause 8 provided for three option terms, each of five years’ duration.

28. Clauses 9 and 10 dealt with termination. As they are critical to a number of matters in the proceedings it is necessary to set them out in full:

“Termination

9.1   This Agreement shall continue in force until it is terminated in accordance with and subject to clauses 9 and 10.

Termination by Caretaker

9.2   (i) The Agreement may be terminated by the Caretaker at any time by giving to the Owners Corporation not less than three (3) months' notice in writing;

(ii) The Agreement may be terminated by the Caretaker at any time by notice in writing to the Owners Corporation, should the by-law referred to in Clause 5 be varied or repealed without the consent of the Caretaker.

Termination by Owners Corporation

9.3   The Owners Corporation may terminate the Agreement at any time by notice in writing to the Caretaker if any of the following occur:-

(i)   A breach of the Agreement or of a condition of the by-law referred to in Clause 5 is not remedied by the Caretaker within thirty days after written notice (a 'Default Notice’) has been given to the Caretaker by the Owners Corporation specifying the breach provided that if there is any dispute as to whether a breach has occurred, the matter shall at first instance be referred to mediation under clause 24;

(ii)   A breach of the Agreement or of a condition of the said by-law is repeated by the Caretaker within three months of a similar breach of which a Default Notice was given to the Caretaker;

(iii)   An order is made for the Caretaker to be wound up, or the Caretaker enters into a Deed of Arrangement, or a receiver or receiver/manager is appointed to it;

(iv)   The Caretaker is guilty of gross misconduct or gross negligence in performing its responsibilities;

(v)   At the request of the Developer if the Caretaker is in default of any of its obligations to the Developer pursuant to the Deed of Sale of Caretaker Management Rights or any security arrangements with the Caretaker's Financier and the Developer has made or makes arrangements for the Caretaker's obligations pursuant to this Agreement to be met;

(vi)   The proprietor or one of the proprietors of the Caretaker's Lots, recorded on the folio of the Register comprising that lot, is not the Caretaker or any shareholder or director of any Caretaker company (at any time after sixty days from the date of this Agreement), or is not an assignee under this Agreement (at any time after sixty (60) days from the assignment to it);

(vii)   The Caretaker does not hold any licence (including, if necessary, a restricted real estate agent's licence issued under the Property, Stock & Business Agents Act 1941) or other qualification required for the lawful performance of its responsibilities or exercise of its rights under this Agreement.

9.4   This Agreement may be terminated by the expiration of time.

10.   In the event of termination of this Agreement under Clause 9.3:-

1.   The Caretaker and/or Guihua Lu must sell or cause the owner(s) of the Caretaker’s Lots to sell, together with the Caretaker's interest in this Agreement ('the Caretaker-Management Rights') the Caretaker's Lots to a person nominated by the Owners Corporation;

2.   The Owners Corporation may nominate in writing on or before the date being ninety (90) days after the termination of the Agreement, (‘the Nomination Period’) any person or persons, corporation or corporations (‘the Nominee’) who shall be deemed to have the right of the first refusal to purchase (‘the Right of Pre-emption’) from the owners of the Caretaker's Lots in the building together with the Caretaker-Management Rights at such price and upon such terms as are agreed upon between the Caretaker and the Nominee or, failing such agreement, at such price as is fixed as being the fair market value of the Caretaker's Lots and the Caretaker Management Rights by a valuer appointed for the purpose by the Law Society President and on such terms and conditions as are fixed as being the usual ones applicable in such a transaction by a Solicitor appointed for the purpose by the Law Society President. The exercise of the Right of Pre-emption shall be made in writing and served upon the Caretaker within fourteen (14) days after the date of nomination by the Owners Corporation of the Nominee. If no nomination is made by the Owners Corporation within the Nomination Period or if the Right of Pre-emption so created is not exercised then the Caretaker shall be at liberty to affirm this Agreement and to retain the Caretaker's Lots and the Caretaker-Management Rights or to sell the Caretaker's Lots and to assign the Caretaker-Management Rights in accordance with Clause 21

3.   The parties must continue to perform and fulfill all their obligations pursuant to this Agreement during the Nomination Period.

4.   The Caretaker must admit the Owners Corporation by its agents, servants and contractors to the Caretakers Lots for the purpose of restoring the lots and its fittings and fixtures to a state of good, serviceable and clean repair.

5.The Caretaker irrevocably appoints the Owners Corporation its attorney for the purpose of doing any act or executing any document necessary for or conducive to the discharge of the Caretaker's responsibilities under this Clause 10.

6.   The Caretaker irrevocably consents to the Owners Corporation lodging a caveat over the Caretaker Lots to protect the Owners Corporation[’]s interests pursuant to this Clause 10.”

29. Clause 11 dealt with expenses. It was in the following terms:

“Expenses

11.   Unless otherwise provided for in this Agreement, and with the exception of fittings and fixtures and personal property of the Owners Corporation and any items or materials necessary for the repair of replacement of the common property, the Caretaker at its own expense must provide all products, materials and equipment required for the performance of its letting and caretaking responsibilities.”

30. Clause 18 provided as follows:

“18.1   The Caretaker must not seek or accept instructions from the Owners Corporation about the performance of its responsibilities except from the Owners Corporation’s strata management agent or from a person who has been appointed by the Executive Committee for this purpose.

18.2   The Caretaker, or where the Caretaker is a corporation, any shareholder or director of the Caretaker, shall not offer himself for election as an office bearer of the Executive Committee of the Owners Corporation.”

31. Clause 21 dealt with assignment. It was in the following terms:

“Assignment

21.1   The Caretaker may not assign this Agreement without the consent under seal of the Owners Corporation which consent will not be unreasonably withheld. The Owners Corporation will grant its consent to the assignment of the Agreement to a natural person who is, or to a company whose directors are to the reasonable satisfaction of the Owners Corporation:

i)   Respectable and of appropriate personal qualities;

ii)   Solvent;

iii)   Licenced or capable of becoming licenced and possess qualifications, as required for the lawful performance of the Caretaker's responsibilities under this Agreement;

21.2   A change in the shareholding of the Caretaker which alters the effective control of the Caretaker shall constitute an assignment of this Agreement.

21.3   Upon assignment, the Caretaker must be released and discharged from any further liability under this Agreement but without prejudice to the rights and remedies of either party arising in respect of any matter or thing occurring prior to the date of assignment.”

The 2010 Variation

32. There were in fact two Deeds of Variation entered into on 23 March 2010. The first could be described as clarifying that the substantive parties to the Agreement were the OC and ACPM, not Guihua Lu who was referred to in the Caretaker Agreement as a party. That deed also made it clear that the Caretaker Lots were Lots 162 and 179. It also acknowledged that the remuneration payable to the Caretaker at that time was $609,250 per annum plus GST.

33. The second Deed of Variation, which I have described as the 2010 Deed, granted two additional options bringing the total term out to 30 March 2036. It also varied the market review provisions in cl 3.3 by providing that on any review the remuneration should not be less than that received by the Caretaker in the previous year (the ratchet clause). It should be noted that the 2010 Deed provided that the OC and the Caretaker ratified and confirmed the terms of the Caretaker Agreement as varied by the 2010 Deed.

The 2015 Deed

34. As I indicated, the 2015 Deed provided for an additional option term. It also ratified and confirmed the terms of the Caretaker Agreement as varied by the 2015 Deed.

The statutory context

35. The strata scheme at the time of entering into the Caretaker Agreement was governed by the provisions of the Strata Schemes Management Act 1996 (NSW) (the 1996 Act). Part 4A of Ch 2 of the 1996 Act was introduced by the provisions of the Strata Schemes Management Amendment Act 2002 (NSW) (the 2002 Amending Act) which took effect on 10 February 2003 (the 2002 Amendments). The 1996 Act, among other matters, sought to regulate caretaker agreements. Section 40A of the 1996 Act defined a caretaker in the following terms:

“40A   Who is a caretaker?

(1)   A caretaker is a person who is entitled to exclusive possession (whether or not jointly with another person or other persons) of a lot or common property and assists in exercising any one or more of the following functions of the owners corporation for the strata scheme concerned:

(a)   managing common property,

(b)   controlling the use of common property by persons other than the owners and occupiers of lots,

(c)   maintaining and repairing common property.

(2)   However, a person is not a caretaker if the person exercises those functions only on a voluntary or casual basis or as a member of the executive committee.

(3)   A person may be both a caretaker and an on-site residential property manager.”

36. Section 40B of the 1996 Act dealt with the appointment of a caretaker. Of relevance are ss 40B(1) and (2), which were in the following terms:

“40B   How is a caretaker appointed?

(1)   A caretaker is required to be appointed by an instrument in writing (a caretaker agreement) executed before or after the strata scheme commenced by the caretaker and:

(a)   by the original owner, if executed before the strata scheme commenced, or

(b)   under the authority of a resolution passed at a general meeting of the owners corporation of the strata scheme concerned, if executed after the strata scheme commenced.

(2)   Unless it expires or otherwise ceases to have effect earlier, a caretaker agreement (including any additional term under any option to renew it) expires:

(a)   at the conclusion of the first annual general meeting of the owners corporation, if the agreement was executed by the original owner, or

(b)   when 10 years have expired after it commenced to authorise the caretaker to act under it, in any other case.”

37. Section 183A is also relevant. It provided as follows:

“(1)   The Tribunal may make an order with respect to a caretaker agreement:

(a)   terminating the agreement, or

(b)   requiring the payment of compensation by a party to the agreement, or

(c)   varying the term or varying or declaring void any of the conditions of the agreement, or

(d)   confirming the term or any of the conditions of the agreement, or

(e)   dismissing the application.

(2)   An order under this section may be made only on an application made by the owners corporation for the strata scheme concerned on one or more of the following grounds:

(a)   that the caretaker has refused or failed to perform the agreement or has performed it unsatisfactorily,

(b)   that charges payable by the owners corporation under the agreement for the services of the caretaker are unfair,

(c)   that the agreement is, in the circumstances of the case, otherwise harsh, oppressive, unconscionable or unreasonable.

(3)   Any amount ordered to be paid under this section may be recovered as a debt.”

38. Clause 12 of the transitional provisions contained in Pt 4 of Sch 4 to the 1996 Act provided that s 40B(2) did not apply to caretaker agreements entered into before the 2002 Amendments came into force. Clause 12 of Pt 4 of Sch 4 was in the following terms:

“12   Effect of certain common property management agreements

(1)   Any agreement that was in force immediately before the commencement of Part 4A of Chapter 2 that, if entered into after that commencement, would be a caretaker agreement is taken to be a caretaker agreement appointing a caretaker.

(2)   However:

(a)   the caretaker is not required to be or have been entitled to exclusive possession of a lot or common property either while the agreement is in force or as a precondition to entering into the agreement, and

(b)   section 40B (2) does not apply to such an agreement, and

(c)   an application for an order under section 183A may not be made with respect to such an agreement on the ground that the period for which the agreement is in force is harsh, oppressive, unconscionable or unreasonable.”

39. In the Second Reading Speech in respect of the Bill which became the 2002 Amending Act (Strata Schemes Management Amendment Bill 2002 (NSW)), the following remarks were made (New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 30 October 2002 at 6180):

“The main concern that has arisen over the appointment of caretaker managers by developers is that an owners corporation may be tied to a 25-year contract with little opportunity to challenge its terms. The developer has in effect decided, before there are individual owners within the scheme, what is in the best interests of the owners for the next 25 years. However it is the developer who has received the financial benefit, as the sale of caretaker management rights can be quite a lucrative transaction. The bill provides that no future caretaker management contract will be able to exceed a total period of 10 years. Contracts already in existence, which may have periods in excess of 10 years to go, will be allowed to run their course but from the day this bill becomes law 10 years will be the maximum contract period for new arrangements. If after the 10-year period the parties wish to renew for a further 10 years, that is in order. The important thing is that it will be the owners corporation, with input from individual owners, both investors and owners-in-residence, making a decision on what is desirable rather than a developer with little ongoing interest in the operation of the scheme.”

40. Subsequent to the entry into the 2015 Deed the Strata Schemes Management Act 2015 (NSW) (the 2015 Act) came into force. The 2015 Act repealed the 1996 Act as from 30 November 2016 and substituted the definition of building manager for that of caretaker. The relevant provisions were in the following terms:

“66   Building managers

(1)   A building manager is a person who assists in exercising any one or more of the following functions of the owners corporation:

(a)   managing common property,

(b)   controlling the use of common property by persons other than the owners and occupiers of lots,

(c)   maintaining and repairing common property.

…

67   Appointment of building managers

(1)   A building manager may be appointed for a strata scheme.

…

68   Terms of appointment of building managers

(1)   A building manager agreement (including any additional term under any option to renew it) expires (if the term of the appointment does not end earlier or is not ended earlier for any other reasons):

(a)   at the conclusion of the first annual general meeting of the owners corporation, if the agreement was executed before the meeting, or

(b)   when 10 years have expired after it commenced to authorise the building manager to act under it, in any other case.

(2)   A person may be reappointed as building manager for a strata scheme at the end of the person’s building manager agreement.

(3)   The appointment of a building manager may be terminated in accordance with the building manager agreement, if authorised by a resolution at a general meeting of the owners corporation.”

41. Savings and transitional provisions were contained in Sch 3 of the 2015 Act. Of relevance are cll 3 and 15:

“3   General savings

(1)   Any act, matter or thing done or omitted to be done under a provision of the former Act and having any force or effect immediately before the commencement of a provision of this Act that replaces that provision is, on that commencement, taken to have been done or omitted to be done under the provision of this Act.

(2)   This clause does not apply:

(a)   to the extent that its application is inconsistent with any other provision of this Schedule or a provision of a regulation made under this Schedule, or

(b)   to the extent that its application would be inappropriate in a particular case.

…

15   Caretakers and building managers

(1)   An agreement in force immediately before the commencement of this clause is taken to be a building manager agreement for the purposes of this Act, despite any of the provisions of the agreement, if:

(a)   the agreement provides for the appointment of a person to carry out any of the functions specified in section 66 (1) in relation to the owners corporation for a strata scheme, and

(b)   the primary purpose of the agreement is to provide for that appointment and related matters, and

(c)   the person is not entitled to exclusive possession of a lot or common property in the strata scheme.

(2)   Any such building manager agreement expires 10 years after the commencement of this clause unless the terms of the agreement provide that it expires on an earlier day or the agreement is terminated on an earlier day.

(3)   A reference in any instrument to a caretaker in relation to a strata scheme is taken to be a reference to a building manager in relation to that scheme.”

The electricity breach

42. The matters raised by the parties in respect of the electricity breach comprised Issues 1 to 5 of the agreed issues. They are as follows:

“1   Was the learned trial judge wrong to find that there was an implied term of the Caretaker Agreement that the Appellant (ACPM) not benefit itself by incurring substantial debts payable by the Respondent (OC) through the use of electricity provided to the common property, at least without disclosing this and obtaining consent and/or taking reasonable steps to indemnify the OC? Appeal ground 1(a)

2   If there was such an implied term, was the learned trial judge wrong to find that it was breached by ACPM? Appeal ground 1(b)

3   Was the learned judge wrong to have regard to the statement that had been made by Mr Wang in November 2016 regarding payment for electricity, and was the learned judge wrong to find that Mr Wang had made a dishonest and false statement about who was paying for electricity? Appeal ground 1(c)

4   If ACPM breached the implied term, was the learned trial judge wrong to find that this conduct amount [sic] to gross misconduct in performing its responsibilities within the meaning of clause 9.3(iv) of the Caretaker Agreement? Appeal ground 1(c)

5   Did ACPM’s use of electricity also constitute a repudiatory breach of the Caretaker Agreement? Cross appeal ground 4(a)”

43. It is convenient to deal with Issues 1 to 4 together and then deal with Issue 5 after the other alleged breaches have been dealt with.

The primary judgment

44. The primary judge stated that ACPM had never paid for any electricity supplied to Lot 179 and that there was no separate meter in respect of that supply. He concluded that the cost of such electricity over an 18 year period “may be presumed to be substantial” having regard to the fulltime nature of the Caretaker’s obligations and the electrical appliances used in Lot 179 which included computer equipment and an air conditioning unit.

45. The primary judge referred to the evidence of Mr Robin Wang (Mr Wang), a director of ACPM who was responsible for the management of the obligations of ACPM under the Caretaker Agreement since 2005. Mr Wang’s evidence was to the effect that he knew ACPM was not paying for electricity used in Lot 179. The primary judge noted that Mr Wang was not prepared to concede that he knew the OC was paying for it, although his evidence subsequently indicated that he knew of that fact.

46. The primary judge also referred to an exchange of emails between Mr Wang and a Ms Amy Wang of November 2016. Mr Wang emailed Ms Wang on 2 November 2016 requesting an increase in payment for some additional security services. The email was in the following terms:

“I also forgot to mention in my last email that the Security Royal Corp also uses our offie [sic] facilities during the hours of their work.

This includes uses of water, printing costs; electricity and gas since they're in the reception during the hours of their work.

The prices of utility has also gone up in the past few years. All these costs which we're currently paying for and have not been factored in the second security and overcrowding security rate.”

47. Ms Wang, who at the time was a member of the Strata Committee of the OC, responded to Mr Wang on 3 November making the following inquiry:

“Just a dumb question who owns the space in the reception area (i assume it's common property) and how and who are we recovering the occupancy costs from currently?”

48. Mr Wang replied in the following terms:

“My Amy [sic] owns the reception space which is lot 179 and is currently paying strata levees [sic] and all associated utility costs on it.”

49. It was accepted that “My Amy” was intended to be read “My company”.

50. The primary judge stated that he regarded the evidence of Mr Wang on this topic as ”unimpressive”. He reached the following conclusions:

“[162]   The evidence given by Mr Wang on this topic was unimpressive. He deposed that he had an understanding that the Caretaker was not required to pay for electricity for Lot 179 ‘due to the presence of the air-conditioning unit within Lot 179 and due to ACPM providing caretaking services from Lot 179’. However, there is no apparent basis for such an understanding, and in the witness box he did not seek to uphold it. I do not accept that Mr Wang ever had an understanding that for any particular reason (including the terms of the Agreement), the Caretaker was not required to pay for the electricity supplied to Lot 179. Neither do I accept that he ever assumed that the Caretaker was paying for the electricity. I consider that not only did Mr Wang assume that the Owners Corporation was paying for the electricity, he must have thought that it was almost certain that was in fact the case. I think that in these circumstances Mr Wang was content to stay silent and continue to accept the benefit of the free electricity, even though he did not understand that the Caretaker had an entitlement to the benefit. It no doubt suited Mr Wang that no one from the Owners Corporation ever raised the issue. Moreover, when eventually faced with Ms Wang's query in November 2016, Mr Wang did not respond in a truthful manner but instead stated, falsely, that the Caretaker was paying ‘all associated utility costs’ on Lot 179. The earlier email sent by Mr Wang makes it clear that the utilities under discussion included electricity. That email itself suggests that the Caretaker was paying for electricity supplied to the office (i.e. Lot 179).

[163]   I think that when Mr Wang sent his email on 3 November 2016 in response to Ms Wang he must have known that he was hiding the true position in relation to electricity.”

51. The primary judge also concluded that the Agreement did not entitle the Caretaker to a free supply of electricity to Lot 179. He referred to cl 4 of the Caretaker Agreement which I have set out at [22] above. He noted that the clause provided that the Caretaker was to bear all costs incurred in providing leasing and agency services which were to be predominantly carried out in Lot 179 (PJ [164]).

52. He also referred to cl 11 of the Agreement (see [29] above), stating that the reference to “products” in that clause was wide enough to cover utilities and, at the very least, the clause did not entitle ACPM to a free supply of electricity (PJ [165]). He also rejected the proposition that cl 2(i) of Sch 2 of the Agreement entitled ACPM to charge the OC for electricity (PJ [166]).

53. The primary judge also referred to the decision of this Court in Waldorf Apartment Hotel, The Entrance Pty Ltd v Owners Corporation SP 71632 [2010] NSWCA 226 (Waldorf) in which Hodgson JA (with whom Beazley JA and Macfarlan JA agreed) found an implied term that there was an obligation on the Building Manager under the Building Management Agreement not to benefit itself by incurring substantial debts payable by the Owners Corporation through the use of electricity provided to the common property, at least without disclosure and consent (Waldorf at [53]). The primary judge stated a similar term was to be implied in the Caretaker Agreement. In these circumstances he reached the following conclusion:

“[169]   I think that an obligation to similar effect is implied in the Agreement here. The Caretaker was in breach of that obligation over many years by accepting the benefit of the electricity and remaining silent about the matter. It is no answer that the Owners Corporation did not itself raise the matter, at least prior to November 2016. The breach was compounded in November 2016 by the false statement made in Mr Wang's email to Ms Wang which hid the true position. I was not referred to any evidence that showed that any relevant persons associated with the Owners Corporation were aware of what was going on.

[170]   It is my opinion that in this respect the Caretaker has been guilty of gross misconduct in performing its responsibilities within the meaning of cl 9.3(iv) of the Agreement. The notion of ‘responsibilities’ here encompasses the performance of all of the Caretaker's responsibilities pursuant to the Agreement including the performance of the leasing and sales agency services contemplated by cl 4 (compare cl 11 which refers to ‘the performance of its letting and caretaking responsibilities’). As envisaged by the terms of the Agreement, the Caretaker has made use of Lot 179 as a Caretaker Lot in the carrying out of those responsibilities, and necessarily made use of the electricity supplied to Lot 179 for those purposes. I think it is plain that the Caretaker's conduct in relation to the use of that electricity amounts to misconduct, and the seriousness and scale of the misconduct, extending over many years and at one point involving deliberate deception, renders it apt to describe the conduct as falling within the ordinary meaning of gross misconduct. The Caretaker submitted that in order for any misconduct to be regarded as gross, it had to be serious and flagrant. In my opinion the conduct of the Caretaker in this regard may be so described.”

Summary of conclusions

356. It is convenient at this point to summarise the conclusions I have reached on the issues raised in the appeal.

1. The primary judge was correct in concluding that the conduct of ACPM in its unauthorised consumption of electricity at the expense of the OC was gross misconduct.

2. The failure to report to the Strata Committee on the hazard created by the failure in the EWIS system was not gross misconduct or gross negligence.

3. The contravention of cl 18.2 of the Caretaker Agreement was not gross misconduct.

4. The OC was entitled to terminate the Caretaker Agreement under cl 9.3(iv) of that Agreement.

5. Although the conduct of ACPM in respect of the electricity issue amounted to a repudiation of its obligations under the Caretaker Agreement, the OC was not entitled to terminate outside the procedure laid down in cll 9 and 10 of the Caretaker Agreement. Allied to that conclusion, it was not an implied term that if termination by the OC took place outside the machinery provisions in cll 9 and 10 ACPM was obliged sell Lot 179 to the OC.

6. ACPM was not entitled to terminate the Caretaker Agreement for wrongful repudiation by the OC.

7. The OC, by taking steps to deprive ACPM of the residual rights it had in respect of the Caretaker Agreement by virtue of cl 10.2, breached the Agreement and ACPM is entitled to damages in respect of the loss it has sustained as a result.

8. The primary judge was correct in awarding compensation of $24,600 pursuant to the undertaking as to damages as a result of ACPM being restrained from occupying Lot 179.

9. The primary judge was correct in concluding that ACPM was entitled to damages of $7,840 and interest of $456.13 for lost profits between 17 August and 25 August 2019.

10. Having regard to the 2015 Deed of Variation, the effective expiry date of the Caretaker Agreement was 29 April 2025.

11. The primary judge did not err in concluding that if damages were to be awarded to ACPM for loss of its rights under cl 10.2 of the Caretaker Agreement, a discount of 20 per cent should be applied to take account of the possibility that the NSW Civil and Administrative Tribunal might terminate or vary the Agreement pursuant to s 72 of the 2015 Act.

12. ACPM should be awarded damages in the sum of $975,000.

An issue not decided

357. There remains a question of whether in the events which have happened, ACPM is required to sell Lot 179 to the OC. That question should be remitted to the primary judge for consideration.

Costs

358. As ACPM had significant success in the appeal the OC should be ordered to pay its costs.

Orders

359. I would make the following orders:

1. Appeal allowed.

2. Cross-appeal dismissed.

3. Set aside Order (8) of the orders of the primary judge made on 28 October 2020 and lieu thereof make the following order:

1. Declare that the defendant in failing to comply with the procedure set out in cl 10.2 of the Caretaker Agreement breached its obligations under that provision and as a consequence the plaintiff is entitled to damages for such breach.

2. Order that judgment be entered for the first plaintiff against the defendant in the sum of $1,007,896.13.

4. Remit to the primary judge the question of whether, in the events which have happened, the appellant is required to sell Lot 179 in the strata scheme to the respondent.

5. Order that the respondent pay the appellant’s costs of the appeal and cross-appeal and have a certificate under the Suitors’ Fund Act 1951 (NSW) if eligible.

360. PAYNE JA: I agree with Bathurst CJ.

361. McCALLUM JA: I have had the benefit of reading the Chief Justice’s judgment in draft. Subject to one matter, which does not affect the outcome of the appeal, I agree with his Honour. The issue on which I have reached a different conclusion is whether the fire safety breach amounted to gross misconduct or gross negligence. As this issue is not dispositive, it is not necessary to say more than that, in my respectful opinion, the primary judge was right to find that the failure to report that the fire control panel was playing up and needed to be replaced amounted to gross misconduct or gross negligence, primarily for the reasons his Honour stated and particularly having regard to the potentially catastrophic consequences of a failure to act on such information.

**********

Decision last updated: 04 August 2021