Community Association DP No 270180 v Arrow Asset Management Pty Ltd

[2007] NSWSC 527

CITATION:	Community Association DP No 270180 v Arrow Asset Management Pty Ltd & Ors [2007] NSWSC 527
HEARING DATE(S):	16/4/07, 17/4/07, 18/4/07, 19/4/07, 24/4/07
JUDGMENT DATE :	30 May 2007
JURISDICTION:	Commercial List
JUDGMENT OF:	McDougall J at [1]
DECISION:	See para [275] of judgment
CATCHWORDS:	COMMUNITY SCHEMES – management agreement made during initial period – whether effect of management agreement disclosed in community management statement – whether management agreement ratified at first annual general meeting of community association – whether implied ratification might be sufficient – whether management agreement terminated at end of first annual general meeting – whether community association incurred a debt during the initial period by entering into management agreement – whether community association entitled to recover debt or damages from original proprietor - ESTOPPEL – conventional estoppel – whether community association estopped from asserting that management agreement terminated at end of first annual general meeting – estoppel by deed - where deed of assignment of manager’s rights and obligations – whether community association estopped by deed from asserting that management agreement terminated at end of first annual general meeting - EQUITY – fiduciary obligations – whether developer of community scheme is a “promoter” – whether developer owes fiduciary duties to community association – nature and extent of duties – where developer during initial period causes community association to enter into management agreement with third party – where third party pays developer a premium – where management agreement provides for “excessive” remuneration to third party – whether breach of fiduciary duties – whether developer liable to account to community association for premium -
LEGISLATION CITED:	Community Land Development Act 1989 Community Land Management Act 1989 Strata Schemes (Freehold Development) Act 1973 Strata Schemes Management Act 1996 Trade Practices Act
CASES CITED:	Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 Aequitas v A.E.F.C. (2001) 19 ACLC 1006 Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2006) 55 ACSR 1 Bondlake Pty Ltd v The Owners – Strata Plan No 60285 [2005] NSWCA 35 Breen v Williams (1996) 186 CLR 71 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 Consul Development Pty Limited v D.P.C. Estates Pty Limited (1975) 132 CLR 373 Emile Erlanger and Others v The New Sombrero Phosphate Company and Others (1878) 3 App Cas 1218 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd and Others (2001) 37 ACSR 672 Hawkins and Others v Bank of China (1992) 26 NSWLR 562 Hospital Products Limited v United States Surgical Corporation and Others (1984) 156 CLR 41 Hudson Property Group Pty Ltd v Community Association DP 270238 [2005] NSWCA 374 Kak Loui Chan v Zacharia (1984) 154 CLR 178 Maguire and Another v Makaronis and Another (1997) 188 CLR 449 Moratic Pty Ltd v Lawrence James Gordon & Anor [2007] NSWSC 5 Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357 Pilmer and Others v Duke Group Limited (In Liquidation) and Others (2001) 207 CLR 165 Queensland Mines Limited v Hudson (1978) 52 ALJR 399 Reading v Attorney General [1951] AC 507 Re Steel and Others and The Conveyancing (Strata Titles) Act 1961 (1968) 88 WN (Pt 1) (NSW) 467 Ryledar Pty Ltd & Anor v Euphoric Pty Ltd [2007] NSWCA 65 Securities and Exchange Commission v Chenery Corporation (1943) 318 US 80 Tracy and Others v Mandalay Proprietary Limited (1953) 88 CLR 215 Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 Warman International Limited and Another v Dwyer and Others (1995) 182 CLR 544
PARTIES:	Community Association DP No 270180 (Plaintiff) Arrow Asset Management Pty Limited (First Defendant) Bondlake Pty Limited (Second Defendant) Australand Consolidated Investments Pty Limited (Third Defendant)
FILE NUMBER(S):	SC 50168/04
COUNSEL:	F C Corsaro SC/ D B Studdy (Plaintiff) J S Wheelhouse SC (First and Second Defendants) N Perram SC/J S Emmett (Third Defendant)
SOLICITORS:	McLaughlin & Riordan (Plaintiff) Deutsch Partners Lawyers Pty Ltd (First and Second Defendants) Mallesons Stephen Jaques (Third Defendant)

COMMUNITY ASSOCIATION DP No 270180 v ARROW ASSET MANAGEMENT PTY LTD & ORS [2007] NSWSC 527

INDEX TO JUDGMENT

Para
The issues	5
The legislative scheme	6
Disclosure in relation to the management agreement	16
The inaugural Special General Meeting	18
The Management Agreement	21
Negotiations for the agreement	21
Terms of the agreement	27
Mr Andrew Veron’s evidence in relation to the agreement	30
Australand’s undertaking	39
The first Annual General Meeting	40
The caretaker agreements	47
The deed of assignment	55
Proposals for “assignment” of the management agreement	55
The deed of assignment	66
Mr Veron’s evidence in relation to the assignment	69
The expert evidence	75
The Association’s expert evidence	76
The defendants’ experts	92
Other matters	104
Conclusion	105
Approach to the issues	107
Issue 7(a): disclosure	108
Issues 7(b), 17 and 18: ratification	110
Issues 8 and 9: termination of the management agreement	126
Issues 10 and 11: incurring a debt during the initial period	127
The decision in Bondlake	136
Analysis – the first month’s instalment	142
Analysis – future liability	154
Conclusion	160
Issues 12 to 15, 19, 20, 24 to 27: effectiveness of the assignment; estoppel	161
Estoppel by representation	163
Promissory estoppel	168
Estoppel by convention	170
Issue 15	188
Estoppel by deed	189
Estoppel in the face of a statute	195
Issues 21, 22 and 23: characterisation of the deed of assignment	198
Issue 28: true value of the services under the management agreement	201
Issues 29 to 32: contravention of the Trade Practices Act	203
Issues 1 and 2:	205
Australand’s duties to the Association	206
The decision in Re Steel	210
Fiduciary obligations: the principles	216
Application to this case	224
Disclosure	235
Unanimous consent	251
Conclusions	256
Issues 4, 5, 6 and 6A: equitable compensation, account of profits, damages	259
Summary of conclusions	267
Relief	268
Order	275

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

Wednesday 30 May 2007

50168/04 COMMUNITY ASSOCIATION DP No 270180 v
ARROW ASSET MANAGEMENT PTY LTD & ORS

JUDGMENT

1 HIS HONOUR: “Balmain Cove” is a large residential development on the southern shores of Iron Cove, adjacent to the Iron Cove Bridge. It was developed by the third defendant (Australand – known at the relevant time as Walker Consolidated Investments Pty Ltd) in stages pursuant to the Community Land Development Act 1989 (the CLD Act). The plaintiff (the Association) is the community association for Balmain Cove.

2 The Association entered into a Site Management Agreement (the management agreement) with the first defendant (Arrow) on 2 December 1998. On about 30 June 2000, the Association, Arrow and the second defendant (Bondlake) entered into a “Deed of Assignment of Agreement” (the deed of assignment) whereby Arrow, with the consent of the Association, purported to assign to Bondlake all Arrow’s rights and obligations under the management agreement.

3 The Association now contends that the management agreement came to an end on 28 July 1999 – the date of its first annual general meeting – and that the deed of assignment was therefore ineffective. Arrow and Bondlake dispute both contentions and say in addition that the Association is estopped from raising them.

4 Further, the Association says that Australand, as the developer of Balmain Cove, owed the Association fiduciary and common law duties, and breached them when, in consideration of payment from Arrow to itself, it caused the Association to enter into the management agreement.

The issues

5 The parties agreed that the real issues for decision were as follows:

“1. Whether the third defendant (“Australand”), when it caused the plaintiff (the “Association”) to enter into the Site Management Agreement (the “SMA”) with the first defendant (“Arrow”) on 2 December 1998, owed the Association a fiduciary duty to:
(a) Act with absolute candour and honesty to the Association;
(b) Not to place self [sic] in a position of conflict or to profit from contracts entered into between the Association and Arrow, without proper disclosure;
(c) Act in the best interest of the Association in the exercise of a power or discretion affecting the Association’s interests;
(d) Not to act to the detriment of the Association; and
(e) To disclose relevant matters to the Association to enable it to make an informed and impartial decision about whether to enter into the SMA.
2. Whether Australand as at 2 December 1998 owed the Association a duty of care to avoid it suffering economic loss.
3. If the answer to questions 1 and/or 2 is yes, did Australand’s conduct in causing the Association to enter into the SMA with Arrow breach its fiduciary duty and/or its common law duty?
4. If the answer to question 3 is yes, in so far as breach of fiduciary duty is concerned, is the Association entitled to equitable compensation from Australand being the difference between the amount payable under the SMA and an amount payable under an agreement entered into at arm’s length as at 2 December 1998?
5. If the answer to question 3 is yes, in so far as breach of fiduciary duty is concerned, is Australand also liable to account to the Association for the profit of $190,000 it made by causing the Association to enter into the SMA?
6. If the answer to question 3 is yes, in so far as breach of common law duty is concerned, is Australand liable in damages to the Association for economic loss, the measure being the difference between the amounts paid by the Association under the SMA and the amounts that would have been paid on an arm’s length transaction entered into as at 2 December 1988 [sic: obviously, 1998]?
6A. If:
(a) the Site Management Agreement terminated; and
(b) the first and second defendants establish that the plaintiff is not entitled to rely on that fact;
then the question is whether the loss suffered by the plaintiff is caused by the actions of the third defendant or its own actions.
7. (a) Was the effect of the SMA disclosed in the Association’s Community Management Statement registered on 27 November 1998 within the meaning of s.24(2)(a) of the Community Land Management Act, 1989 (the “CLMA”)? and
(b) Was the SMA ratified at the first Annual General meeting of the plaintiff?
8. If the answer to question 7(a) and (b) is no, then did the SMA terminate at the end of the Association’s first annual general meeting on 28 July 1999?
9. If the answer to question 8 is no, then why not?
10. By entering into the SMA, did the Association incur a debt during the “initial period” for an amount in excess of the amount then available for repayment of the debt from the administrative fund or the sinking fund of the Association?
11. If the answer to question 10 is yes, is Australand liable to the Association pursuant to s.23(5)(a) or (b) of the CLMA?
12. Was the assignment of the SMA from Arrow to Bondlake on 30 June 2000 ineffective?
13. If the SMA terminated on 28 July 1999, can the conduct of the Association pleaded in paragraphs 18 and 19 of Arrow’s Response and paragraphs 18 to 20 of the second defendant’s (“Bondlake”) Response give rise to the alleged estoppels?
14. If the answer to question 13 is no, were the payments made by the Association to Arrow and Bondlake made under a mistake of law requiring Arrow and Bondlake to make restitution to the extent of the payments exceeding the true benefit received by the Association?
15. If the answer to question 13 is yes, do the estoppels cease to have any operation from the time when Arrow and Bondlake were on notice that the Association believed the SMA had been terminated?
16. If the SMA terminated on 28 July 1999, what is the value of the true benefit of the services received by the Association from 2 December 1998 to date?
17. In relation to 7(b) above, does the term “ratification” in s.24 include implied ratification?
18. If yes to question 17, does the conduct of the plaintiff amount to ratification in accordance with s.24?
19. Did the conduct of the plaintiff and the first defendant prior to and after 28 July 1999, create an estoppel (promissory or conventional) which either (a) precludes the plaintiff from now asserting that the SMA was not unenforceable at all times prior to the execution of the deed of assignment on or about 20 June 2000, or (b) precludes the plaintiff from now asserting that the SMA was not unenforceable at all times after 31 August 1999?
20. If yes to question 19(a) or (b), will the first defendant suffer detriment if the plaintiff is permitted to depart from that conduct?
21. Was an agreement made on 30 June 2000 between the plaintiff and the second defendant that in consideration of the plaintiff paying to the second defendant the regular duties fee, the second defendant would perform the obligations under the SMA as if it was named “site manager” in the SMA?
22. Was there a separate and new agreement created by the novation of the SMA by 30 June 2000?
23. Was there a separate and enforceable agreement between the plaintiff and the second defendant made on or about 30 June 2000 by deed that the second defendant would perform the obligations under the SMA as if it was named the “site manager” in the SMA?
24. Did the following:
(a) The assignment of the SMA from the first defendant to the second defendant effective 30 June 2000;
(b) The plaintiff’s consent to that assignment; and
(c) The continued operation of the SMA subsequent to the assignment,
create an assumption that the SMA was valid and enforceable and capable of assignment?
25. If yes to question 24, has the second defendant relied upon the assumption to its detriment?
26. If yes to question 24, is it unjust to allow the plaintiff to depart from the assumption?
27. Did the second defendant and the plaintiff in executing the deed of assignment on or about 30 June 2000 conduct themselves on the common assumption that the deed of assignment created a new agreement between the plaintiff and the second defendant such that an estoppel (promissory or conventional) now prevents the plaintiff from denying that assumption?
28. Has the plaintiff established that the true value of the services provided under the SMA was other than the regular duty fee paid by the plaintiff from time to time?
29. Has the plaintiff contravened the Trade Practices Act 1974 (Cwth) (“TPA”) by conduct comprising representations to the first and/or second defendants that the SMA is binding and enforceable; or
30. If the answer to question 29 is yes:
(a) Is the first defendant entitled to relief under sections 80, 82 or 87 of the TPA? and
(b) Is the second defendant entitled to relief under s.80, s.82 or s.87 of the TPA? or
(c) In respect of the second defendant, that it was additionally bound to perform the duties and obligations of the SMA under a fresh agreement as if it was named as the site manager in the SMA and was entitled to receive the remuneration there-under.
31. If the answer to either 30(a) or 30(b) is yes, [to] what relief is either the first defendant or second defendant entitled?
32. In the event that an injunction in favour of either the first or second defendant is declined in the exercise of the Court’s discretion, although the basis of an injunction is made out, is either the first or second defendant entitled to equitable damages?”

The legislative scheme

6 The CLD Act provides for the staged development of land into parcels for separate development or disposition, with those parcels retaining an interest in common facilities or property. The parcels created may be developed both horizontally, through further subdivision in the traditional way, and vertically, in accordance with the Strata Schemes (Freehold Development) Act 1973.

7 When a community plan is registered, there is constituted a corporation with the corporate name “Community Association D.P. No … “, with the number being that of the deposited plan (see s 25(1) of the CLD Act). A community association thus incorporated has the functions given to it by the Community Land Management Act 1989 (the CLM Act).

8 Because land subdivided by a community plan may be further divided, both horizontally and vertically, there may be a number of other associations that have management functions with respect to different parts of the overall parcel – precinct associations, neighbourhood associations and owners’ corporations.

9 Section 5(1) of the CLM Act provides that a community association constituted pursuant to s 25(1) of the CLD Act “is a community association for the purposes of this or any other Act”. Subsection (4) declares a community association “to be an excluded matter for the purposes of s 5F of the Corporations Act 2001 … in relation to the whole of the Corporations legislation.”

10 By s 5(2) of the CLM Act, the members of a community association are the proprietors of each community development lot that has not been further subdivided, and any precinct or neighbourhood association or owners’ corporation in respect of lots that have been further subdivided.

11 By s 5(4) of the CLD Act, there is to be registered with any community plan a “community management statement”. By s 13(1) of the CLM Act, such a community management statement binds the community association, each subsidiary body within the community scheme (ie, the precinct or neighbourhood associations or owners’ corporations) and all proprietors, lessees, occupiers etc of development lots, neighbourhood lots or strata lots within the community scheme.

12 The CLM Act seeks to limit the activities of associations during their “initial period”. That expression is defined in s 3 of the CLM Act. It is unnecessary to set it out because one of the few things on which the parties to these proceedings are agreed is that the management agreement was made during the initial period for the community scheme of which the Association is the community association. In essence, the initial period expires when the developer of the scheme loses control of at least one third of the unit entitlements in the scheme – ie, after the developer becomes unable to muster the votes for a special resolution.

13 Section 23 restricts the powers of an association during its initial period. Subsection (1) restricts among other things its power of borrowing, and subs (5) gives a right of recovery against the developer in the event of breach:

“23 Restriction on powers during initial period

(1) During the initial period for its related scheme, an association may not, unless an order made under subsection (4) otherwise provides:
(a) incur a debt of an amount in excess of the amount then available for repayment of the debt from the administrative fund or sinking fund, or
(b) borrow money or give security for the repayment of money, or
(c) make, amend or repeal a by-law creating restricted property.

…

(5) An association may recover from the original proprietor under the relevant scheme:
(a) as a debt—any liability incurred by the association because of a breach of subsection (1), (2) or (3), or
(b) as damages—any loss suffered by the association as a result of such a breach.”

14 Section 24 of the CLM Act restricts the kinds of management agreements that an association may make during its initial period. In essence, any such agreement made during the initial period terminates at the end of the first annual general meeting unless its effect was disclosed in the management statement, or unless it is ratified at the meeting:

“ 24 Termination of certain agreements

(1) This section applies to an agreement with a person (other than a public authority) for the continuing provision to an association, or to the members of an association, of services or recreational facilities.

(2) If, during the initial period for a scheme, an association enters into an agreement to which this section applies, the agreement terminates at the end of the first annual general meeting of the association unless:
(a) its effect was disclosed in the association’s management statement before the transfer of any lots in the scheme, or
(b) it is ratified at the meeting.
(3) An association is guilty of an offence if:

(a) during the initial period, it enters into an agreement to which this section applies, and
(b) the agreement would terminate at the end of the first annual general meeting of the association unless ratified at the meeting, and
(c) the association did not, before entering into the agreement, inform the other party, or each of the other parties, to the agreement that it would so terminate.
Maximum penalty: 5 penalty units.
(4) In this section:
services does not include the services of a managing agent.”

15 Section 50 of the CLM Act empowers associations to appoint managing agents and delegates functions to managing agents by appointment, or by instrument in writing authorised at a general meeting of the association.

Disclosure in relation to the management agreement

16 Clause 42 of the community management statement for Balmain Cove noted that the Association had power to enter into agreements including for “management, operation, maintenance and other services for Community Property and subsidiary property … services or amenities to owners and occupiers … and … services or amenities to Community Property and Subsidiary Property.”

17 Clause 43 sought to make disclosure in relation to the management agreement. Clause 43.1 noted that the Association intended to make the agreement. Clause 43.4 noted the term of the agreement, and cl 43.5 dealt with the remuneration payable under it. Clause 43.6 set out the duties of the site manager and cl 43.8 dealt with other rights. I set out the relevant provisions of cl 43:

“ 43 Agreement with the Site Manager
Initial period disclosure
43.1 The Community Association intends to enter into an agreement with the Site Manager during the initial period. The effect of the agreement is disclosed in this by-law for the purposes of section 24 of the Act.
…
Terms of the agreement
43.4 The term of the agreement may be up to ten years with two options of up to five years each. The agreement may have provisions about:
(a) the rights of the Community Association and Site Manager to terminate the agreement early; and
(b) the Site Manager’s rights to assign the agreement.
43.5 The Site Manager’s remuneration for the first year of the agreement will not exceed $200,000. The Site Manager’s remuneration for subsequent years of the agreement may be increased by 5% or by the Consumer Price Index (All Groups) for Sydney (whichever is higher).
Site Manager’s duties
43.6 The Site Manager’s duties may include:
(a) caretaking, supervising and servicing Community Property, Restricted Subsidiary Property and other Subsidiary Property for which the Community Association is responsible;
(b) supervising the security, cleaning, repair, maintenance, renewal or replacement of Community Property, Restricted Subsidiary Property and other Subsidiary Property for which the Community Association is responsible;
(c) providing services to the Community Association, Subsidiary Bodies, owners and occupiers including, without limitation, the services of a handyperson, room cleaning and servicing, food and non-alcoholic drink service;
(d) providing a letting, property management and sales service for owners and occupiers (at the cost of owners or occupiers);
(e) supervising, controlling and regulating employees and contractors of the Community Association as required by the Community Association;
(f) supervising Balmain Cove generally; and
(g) doing anything else that the Community Association agrees is necessary for the operation and management of Balmain Cove.
43.7 The Site Manager must comply with the Community Association’s reasonable instructions about performing its dues [sic: obviously, duties] under the agreement.
Letting and tenancy management service
43.8 The Site Manager may have the sole right to enter into an agreement with the Community Association to conduct a letting service and a tenancy management service and to provide ancillary services.
43.9 Despite by-law 43.8, the agreement must contain an acknowledgment by the Site Manager that owners and occupiers:
(a) are not bound to use the letting services, property management services and ancillary services provided by the Site Manager, and
(b) may use the person of their choice to provide those services.
… . “

The inaugural Special General Meeting

18 The community plan for Balmain Cove was registered on 27 November 1998. On 2 December 1998, when Australand owned all the lots in the community scheme (I interpose that there was no evidence to suggest that any contract for sale for any lot, or interest in a lot, had been made as at 2 December 1998), what was called the inaugural special general meeting (SGM) of Australand was held. That meeting was attended by Mr Matthew Crews of Australand (or its parent company), representing the only member of the community scheme at that time, and Ms Cathy Laws of Mallesons Stephen Jaques (Mallesons), who were Australand’s solicitors.

19 The business transacted at the inaugural SGM included the following:

(1) The appointment of Dynamic Property Services (DPS) as the Association’s strata managing agent, and the delegation of functions to DPS;

(2) Noting an undertaking given by Australand to pay the Association’s outgoings from the date of registration of the community plan until one month after Australand notified the Association that the undertaking would terminate;

(3) Resolving, in light of that undertaking, to determine contributions to the administrative and sinking funds at “$Nil”;

(4) Resolving that the executive committee of the Association (see s 27 of the CLM Act) be constituted by the appointment of Mr Crews as the nominee of all relevant parties; and

(5) Resolving that the Association enter into the management agreement with Arrow.

20 The management agreement appears to have been made on the same day – 2 December 1998.

The Management Agreement

Negotiations for the agreement

21 Arrow was formerly known as Astor Apartment Management Pty Limited, part of the Astor Management Group. That group was controlled by Mr Ken Gresham (who was at the relevant time the CEO of the group) and Messrs Andrew and Luke Veron. The Astor Management Group provided consulting and management services to residential apartment buildings. Some of the buildings managed by it were occupied by proprietors or lessees, and others were operated as hotels.

22 On 17 April 1997, Mr Gresham of the Astor Management Group wrote to Mr David Edelstein of Walker Corporation Limited (Walker Corporation, the holding company of, among others, the third defendant) concerning “Management Rights – Balmain Cove”. That letter provided (omitting formal parts) as follows:

“I write to confirm our terms as follows:
1. We will purchase a retail space (shop) for our on-site management office at nett value exchanging on 2.5% deposit.
2. We will require either exclusive or contractual rights of use of some common and community areas.
3. We will require Walker Corporation to put in place of [sic] a ten year management agreement.
4. Appropriate By-Laws and rules will need to be put in place so that we may carry out our duties unimpeded.
5. We will consult with you in the design of common areas, security systems, handover book, budgeting and any other appropriate issues.
6. The PABX will be leased by the Community resulting in no cost internal calls eg. to the building manager and low cost calls locally and internationally. The cabling costs are inclusive of the lease and co-ordinated with the builder as they would with Telstra.
7. The management service facility and it’s [sic] supporting By-Laws are put in place at the inaugural meeting. Systems remain the property of the Community under control of the manager.
8. Our fee to the Community will be $580.00 per lot plus approved other expenses rising annually by the CPI or 5% (whichever is greater).
9. We will pay Walker Corporation the sum of $140,000 for the management rights for Balmain Cove upon registration [of] the appropriate by law and signing of the Management Agreement.
The detail of services and rights under the agreement need to be finalised, however, we feel sure that the decision to contract with the Astor Group will be one which enhances this excellent project.
Please confirm your acceptance of our offer.”

23 On 27 May 1997, Mr Gresham wrote again to Mr Edelstein, as follows (again omitting formal parts):

“We have reconsidered our offer in our letter of 17th April 1997 to increase the consideration payable in Item 9 to $190,000.
… “.

24 On 11 August 1997, Mr Haig Conolly of the Astor Management Group, wrote to Mr Mark Randall of Walker Corporation, introducing to Mr Randall “the full range of Astor Management Group Services”.

25 There is no direct evidence of any express acceptance of the revised offer, nor any evidence of any written agreement between Walker Corporation and Arrow. The absence of that evidence was explained by Mr Michael Newsom, the General Counsel and Joint Company Secretary of the holding company of Australand (affidavit sworn 10 April 2007, paras 5 to 7):

“…
5. Documentary investigations conducted by the third defendant during the discovery phase of the proceedings indicated that the records and files Australand had received from Walker in relation to the Balmain Cove project were incomplete.
6. In addition, my inquiries revealed that Australand no longer employed any personnel who had been closely involved in the events relating to the site management rights in 1998 and 1999.
7. As a result, the third defendant does not have a complete evidentiary record of the events forming the basis of the plaintiff’s claim in the Amended Summons. The third plaintiff does not have any documents which identify the process by which the decision to appoint the first defendant was made. Further, the third defendant does not have any contemporaneous records indicating what the fair market value of the site management rights was at the relevant time.”

26 Mr Newsom was not challenged on this (or any other) part of his evidence.

Terms of the agreement

27 It is not necessary to set out in detail all the relevant terms of the management agreement. The parties accept that (to adapt the wording of s 24(1) of the CLM Act) the agreement was one for the continuing provision to the Association, or its members, of services or recreational facilities. The term of the management agreement was ten years. Arrow was given two options for renewal, each for a period of five years.

28 Clause 5 requires more attention, since it bears on issues 10 and 11. I set it out so far as it is relevant:

“ 5 Regular Duties Fee
Paying the fee
5.1 The Community Association must pay the Regular Duties Fee to the Site Manager according to this clause (and clause 6 if the Community Association and the Site Manager agree to vary the Regular Duties Fee).
Calculating the fee
5.2 The Regular Duties Fee for the first year of this agreement is the amount shown in item 3 of schedule 1.
5.3 The Site Manager must calculate the Regular Duties Fee for the second and subsequent years of this agreement by this formula:
Previous Regular Duties Fee x Current CPI
Previous CPI

[I omit the definitions of the terms in this formula.]
5.4 The Regular Duties Fee cannot be less than it was in a previous year. If the increase calculated under clause 5.3 is less than 5%, then the Regular Duties Fee for that year is the Previous Regular Duties Fee increased by the percentage shown in item 4 of schedule 1.
5.5 [Sets out some exclusions from the fee.]
Dates for paying the fee
5.6 The Community Association must pay:
(a) the first instalment of the Regular Duties Fee on the date this agreement commences; and
(b) after the first instalment, the Regular Duties Fee in equal instalments on the first day of each month.
5.7 The Community Association must adjust instalments if they are not for a full month.
5.8 [Dealt with disputes].”

29 Schedule 1 specified that the regular duties fee for the first year was $168,200; and that the minimum percentage increase in a year was 5%.

Mr Andrew Veron’s evidence in relation to the agreement

30 Mr Andrew Veron swore three affidavits. Two were sworn on 26 September 2006: one in his capacity as a director of Arrow, and the other in his capacity as a director of Bondlake.

31 In paras 5 and following of the former, Mr Veron (as from this point on I shall call him) dealt with events up to the making of the management agreement and afterwards, in relation to payment. He referred to discussions that he said he had had with Mr Crews of Walker Corporation and concludes as follows in para 8:

“8. During my discussions with Matt Crews in relation to the SMA as outlined above, in my mind Mr Crews was representing The Walker Group which was at that time in my mind effectively acting as the Community Association of Balmain Cove in all dealings with me regarding the SMA. As a consequence of the matters referred to above, it was my belief that the Walker Group, acting as the Community Association of Balmain Cove:
(a) considered that the disclosure contained in the Community Management Statement of the SMA was adequate to satisfy any legal requirement associated with the SMA; and
(b) considered that by reason of that disclosure the SMA was valid, binding and enforceable according to its terms and was in all respects in order,
in reliance upon which I caused the First Defendant to complete its agreement with The Walker Group.”

32 Mr Veron was cross-examined on that evidence. He accepted that Arrow had solicitors acting for it in relation to the acquisition of the management rights (T 216.50, T 218.10). Mr Veron accepted that his solicitor’s role was to look after “the legalities of the transactions” (T 228.5) and to ensure “that whatever [he was] doing was done properly and that [his] company was protected” (T 228.15). Nonetheless, Mr Veron asserted that he did not rely on his solicitor to advise whether sufficient disclosure of the management agreement had been made in the community management statement, or whether it was safe for Arrow to pay to Australand the consideration of $190,000 for the grant of the management agreement (T 228.30-.55). He explained this by saying that he was speaking to Walker Corporation and DPS, and that he relied on what they had told him to pay the consideration (T 229.1-.17):

“A. Because to settle the proposition, I was speaking to Walker Corporation and I spoke to the strata agents, and it was after those discussions that I released the funds.

HIS HONOUR
Q. Do you mean by that that you relied on what you'd been told by Walker Corporation and the strata managing agent when you on behalf of Arrow agreed to release the funds?
A. The $190,000, yes.

CORSARO
Q. That was advice that you received from Mr Cruz, who was from the Walker Group. Is that right?
A. Yes, when he requested it, I then contacted the strata agents.”

(The reference to “Mr Cruz” should be read as a reference to Mr Crews of Australand, referred to in para 8 of Mr Veron’s affidavit.)

33 Mr Veron did not suggest in his oral evidence that he understood that Mr Crews, or Australand, was “acting as the community association of Balmain Cove”.

34 Mr Veron plainly sought in cross-examination to play down his knowledge of s 24 of the CLM Act. He had however said the following in para 5 of his affidavit sworn on behalf of the first defendant:

“Prior to the First Defendant’s entry into the SMA, I was aware from both discussions with the First Defendant’s then solicitors, and from discussions with David Edelstein and Matt Crews of The Walker Group, that there was a requirement that the SMA be disclosed in the Community Management Statement of the Plaintiff, which would be a document registered at the Land Titles Office and disclosed to all purchasers of individual lots in the development.”

35 In cross-examination, Mr Veron sought to disavow this evidence. He denied that it was likely that he had become familiar with s 24 as at 2 December 1998, and said that he had not “been exposed to it” at that time (T 222.23-.38). He reaffirmed this at T 223.1-.11 (averring that he was “fair dinkum” in giving this evidence). When confronted with paragraph 5, and having considered it, he said “I’ll have to go with my affidavit” (T 224.34). However, having made that concession, Mr Veron sought again to withdraw from it (see for example T 226.11-.40 where, apart from effectively disavowing paragraph 5 once more, he also disavowed his evidence at T 222.23-.38 that I have referred to above).

36 I deal in paras [69] to [74] below with Mr Veron’s evidence relating to entry into the deed of assignment. I formed the very strong impression, both from reading the two affidavits to which I have referred, from observing him in the witness box and considering the evidence that he there gave, that Mr Veron is a man who is prepared to say whatever he thinks might be conducive to the success of his litigious enterprise. I formed the very clear view that expediency, rather than veracity, was the lodestar by which Mr Veron plotted his evidentiary course. That tendency was demonstrated not only in the evidence to which I have referred in this section of my reasons, but also in the evidence to which I refer in paras [69] and [70] below.

37 I have come to the conclusion that Mr Veron is not a witness whose evidence I can accept unless it is corroborated by other, acceptable, evidence, is consistent with the probabilities objectively ascertained, or is against interest. In reaching that conclusion I have taken into account also Mr Veron’s demeanour in the witness box. I would hesitate to reject anyone as a credible witness simply on grounds of demeanour. However, to the extent that a consideration of demeanour is relevant, it certainly does not assist Mr Veron in this case.

38 My view as to the acceptability of Mr Veron’s evidence relates not only to his evidence concerning the entry into, and payment of the consideration relating to, the site management agreement and the entry into the deed of assignment. It relates to the whole of his evidence.

Australand’s undertaking

39 I have referred (in para [19(2)] above) to Australand’s undertaking to pay the Association’s outgoings. The evidence relating to the undertaking and its performance was somewhat sketchy. Nonetheless, it appears to be the case that Australand honoured the undertaking and met all the Association’s liabilities (including those to Arrow under the management agreement) until the Association was in a position, through the establishment and funding of its administrative and sinking funds, to meet those expenses itself.

The first Annual General Meeting

40 The first annual general meeting (AGM) of the Association was held on 28 July 1999. There is some dispute as to whether the notice of that meeting was given to members of the Association. That notice (leaving aside for the moment the question as to whether it was given) included items of business relating to contributions and ratification of an agreement. Those items (two and four respectively) read as follows:

“2. To decide whether amounts determined as contributions to the administrative fund and sinking fund should be confirmed or varied.
The Community Association must have two funds:
(a) an administrative fund to cover management fees, insurance premiums, community property maintenance and other day to day running costs according to clause 13 in schedule 1 of the Act; and
(b) a sinking fund for long term capital replacements of community property according to clause 13 in schedule 1 of the Act.
At this stage, the Community Association has not determined administrative fund or sinking fund contributions. Dynamic Property Services Pty Ltd will table a proposed budget at the meeting to help the Community Association assess its administrative and sinking fund costs.
…
4. To decide whether an agreement to which section 24 applies should be ratified.
Section 24 applies to agreements with a person for the continuing provision to the Neighbourhood Association of services or recreational facilities. The section does not apply to agreements with public authorities or a Managing Agent.
Agreements under section 24 terminate at the first Annual General Meeting unless:
(a) the agreement was disclosed in the community management statement; or
(b) the agreement was ratified by the Community Association at the first Annual General Meeting.
There are no other agreements under section 24.”

41 The wording of item 4 – particularly, the word “other” - is somewhat obscure, given that neither item 4 nor anything else in the notice discloses that the business to be transacted at the meeting included consideration of the ratification of any agreement. Presumably, it was intended to refer to the agreement with Howitt Solutions (see the following paragraph). Be that as it may, there was no notice given to members that the business of the meeting would include consideration of the ratification of the management agreement.

42 The minutes of the first AGM record the following resolutions in relation to items 2 and 4:

“ CONTRIBUTIONS :
(a) RESOLVED that contributions be determined in accordance with Section 76(a) of the Strata Schemes Management Act 1996 for the twelve month period from 1st July 1999.
(i) to the Administrative Fund for the sum of $597,475.83; and
(ii) to the Sinking Fund for the sum of $20,000.
…
SECTION 24 :
RESOLVED that the agreement entered into with Howitt Solutions on 8th June 1999 be ratified for cleaning and landscaping at Balmain Cove.”

43 There was a dispute in the evidence as to whether DPS had tabled a “Proposed Budget” at the first AGM, as contemplated by item 2 of the notice. The Association called its former Chairman, Mr Ronald Glew. Mr Glew denied that any budget had been tabled at the first AGM. Whilst I have no doubt that Mr Glew sought to give evidence truthfully and accurately to the best of his ability, I think that his memory must have failed him in this. There was evidence that DPS had prepared a budget, the various components of which (in relation to the administrative fund) added up to the precise sum of $597,475.83 referred to in the minutes.

44 It is difficult to accept that the members of the Association would have voted to create an administrative fund of almost $600,000 without requiring some justification of the amount. It is even more difficult to accept that they would have voted to create the administrative fund in the precise figure that was the subject of the resolution unless they had been guided by the draft budget that, according to the notice of meeting, DPS was to prepare and table.

45 In my view, the inference that the draft budget was tabled, and formed the basis of the resolution, is near inescapable. Thus, notwithstanding Mr Glew’s testimony to the contrary and my view of his honesty, I draw that inference.

46 The first item in the draft budget related to “On Site Management”. It read as follows:

“ Administration Fund
On Site Management $ 168,200.00
Manager ]
Secretary ]
Assistant ]”

The caretaker agreements

47 Arrow entered into a number of agreements appointing people to the position of “On Site Manager/Caretaker of “Balmain Cove”.” The first such agreement was made on 6 November 1998. Mr Tony Claridge was the nominated caretaker. He was to be paid $25,000 per annum and was to have the use of an unfurnished two bedroom apartment in Balmain Cove. This was apartment 5 (or lot 12) in a building known as “The Knoll”, which lot Australand had sold to Arrow by contract dated 30 October 1997.

48 Mr Claridge was required to work “a forty hour week … spread across Monday to Friday and Saturday mornings”. However, by the terms of the appointment, he recognised “that the nature of being “On Site” [would] require [him] to be available or contactable outside these hours, so there is an inherent flexibility in these working hours.” No doubt to assist in his being available or contactable, Arrow was to supply Mr Claridge with a mobile phone.

49 Arrow undertook to contribute superannuation at “the minimum requirement as set by Superannuation Guarantee Legislation.”

50 On 13 July 2000, after the deed of assignment had been made, Bondlake agreed to employ Mr Claridge in the same role as, hitherto, he had been employed by Arrow. His remuneration was increased to $26,260. Otherwise, I think, there was no significant change to the terms of employment, although it was acknowledged that Mr Claridge would have the use of a car space (no doubt, he had enjoyed this luxury de facto under the previous regime).

51 On 1 March 2001, Mr Claridge was replaced by Mr David Warren. Mr Warren was appointed as “Building Manager of “Balmain Cove”.” His salary was $35,000 per annum. He too enjoyed the rent free use of an apartment. This was said to lead to “an overall package of $58,100 per annum.” Presumably, Mr Warren enjoyed the benefit of some superannuation contributions. The letter appointing Mr Warren did not specify the number of hours to be worked, or when they were to be worked. Nor did it deal with availability outside those hours.

52 On 16 November 2001, Bondlake appointed Mr Joshua Smith and Mrs Adriana Smith to be “On Site Manager/Caretaker of Balmain Cove.” They were to be paid $35,000 per annum plus superannuation, and to have the benefit of rent-free accommodation. The printed text of the letter specified the working hours in the same way as they had been specified for Mr Claridge. However, a handwritten annotation, initialled by someone unidentified, reads:

“Joshua – 40 hrs
Adriana – 25-30 hrs.”

53 Arrow had purchased a commercial unit in the Balmain Cove development, known as lot 11. That lot had a floor area of approximately 65 square metres. It was used as the office from which the caretakers from time to time have performed their duties.

54 The evidence of Mr Theodore Stamoulis, a valuer retained by the defendants, was that the rental value of the residential apartment (apartment 5, or lot 12) ranged from $22,880 per annum in 1998-1999 to $26,004 in 2005-2006. According to Mr Stamoulis, the rental value of the commercial unit (lot 11) ranged from $20,231.25 per annum in 1998-99 to $24,881.88 in 2005-06. Mr Stamoulis was not cross-examined.

The deed of assignment

Proposals for “assignment” of the management agreement

55 On 10 August 1999, Mallesons wrote to the Association. Mallesons advised that Arrow “has entered into an agreement with Max Management Pty Ltd to sell its rights under the site management agreement to Max”. They stated that “completion of the Agreement [to sell] is subject to the approval by the Community Association to the assignment of the Site Management Agreement to Max.” They asked the Association to indicate, in substance, what information it would require to consider the assignment.

56 After various dealings which it is not necessary to recount, DPS wrote to Mallesons on 15 September 1999 informing them that the Association refused its consent to the assignment. There were further dealings thereafter, apparently directed to persuading the Association to change its mind. Ultimately, on 24 November 1999, the Association resolved to consent to the assignment subject to a number of specified conditions. DPS notified Arrow of that resolution by letter sent the following day. However, on 28 January 2000, Arrow notified the Association that Max Management had decided not to proceed with the assignment.

57 The Association then turned its attention to “purchasing the Site Services Agreement”. At some stage, it communicated to Arrow its interest in this proposition.

58 On 4 February 2000, Arrow notified the Association that it proposed to assign the management agreement to Bondlake. On 8 February 2000, Arrow confirmed to the Association that Bondlake would continue to employ Mr Claridge as on site manager/caretaker.

59 It is apparent that the Association was dissatisfied with aspects of Arrow’s performance of its obligations (or what the Association perceived to be Arrow’s obligations) under the management agreement. On 10 February 2000, Mr Glew, in his capacity as chairman of the Association, wrote to Arrow setting out detailed allegations of non performance by Arrow of its obligations under the management agreement, and calling on Arrow to perform. Arrow replied to some aspects of that letter on 14 February 2000. Mr Glew replied on 18 February 2000, disputing that Arrow had complied with its obligations. He also requested information as to the assignment to Bondlake.

60 On 25 February 2000, Arrow provided a substantial amount of information to the Association. That information was considered at a meeting of the executive committee held on 29 February 2000. The outcome of that meeting is obscure. In any event, there was further correspondence, both about the proposed assignment and about the prospect of the owners’ corporation’s buying out the management agreement. This correspondence culminated in a letter from Arrow to the Association dated 23 May 2000, threatening legal action. That letter stated, relevantly:

“…
We are becoming increasingly frustrated at the neglect or refusal of the Community Association to properly address our notice relating to assignment of our interest under the Site Management Agreement.
In the circumstances we have no alternative but to press the matter of assignment, if necessary by means of legal action or alternate dispute resolution.
On advice, we will be giving the Community Association a fresh notice under clause 14.4 of the Site Management Agreement. You should receive this shortly.
We believe that the Community Association has had ample opportunity to conclude the “continuing” investigations that you have been referring to since at least 5th March 2000.
…”

61 The executive committee met again on 5 June 2000. Relevantly, it resolved to “establish a working group to respond to the request for assignment of the Site Management Agreement … “. The members of that working group included Mr P Hennessy (a barrister, and one of Her Majesty’s Counsel) and Mr F Cahill (a solicitor).

62 On 27 June 2000, Mr Glew wrote to Arrow, notifying it that the Association would “grant approval for the Site Services Agreement … to be assigned to Bondlake” subject to a number of specified conditions.

63 Arrow, whilst disputing that all those conditions could be imposed, nonetheless prepared a draft deed of assignment and sent it to the Association. Mr Cahill gave advice on that draft deed. He expressed the view that what was proposed was a novation and not an assignment:

“However, the “Deed of Assignment of Agreement” is really a novation of the Site Management Agreement and it is not at law an “assignment”. This is because under clause 2 the Transferor assigns to the Transferee “ … the rights, powers and obligations of the Transferor under the Agreement”. (emphasis in original)
In the legal process of novation, a new contract is created and the old one is terminated. This means that the Transferee and the Community Association effectively enter into a new agreement. That new agreement would be subject to GST from its inception.”

64 As the last sentence indicates, the particular focus of Mr Cahill’s concern was liability for GST.

65 Mr Cahill also advised that one clause of the draft deed could be deleted, because it was dealt with in the management agreement. The Association conveyed that comment to Arrow.

The deed of assignment

66 The deed of assignment is undated, but appears to have been made on or about 30 June 2000. The parties were Arrow, Bondlake and the Association. The recitals to the deed read as follows:

“A. The Transferor is the site manager under the Agreement.
B. The Transferor wants to assign to the Transferee all of the interests, rights and obligations of the Transferor under the Agreement.
C. The Community Association agrees to the assignment.”

67 Clauses 2, 3, 4 and 5 of the deed read as follows:

“ 2 Assignment
The Transferor as beneficial owner, assigns to the Transferee from an [sic] including the Effective Date all the rights, powers and obligations of the Transferor under the Agreement.
3 Consent by the Community Association
3.1 The Community Association releases the Transferor from compliance with the obligations of the Transferor under the Agreement from but excluding the Effective Date.
4 Covenants and acknowledgments by Transferee
The Transferee agrees to comply with all the Transferor’s obligations under the Agreement from and including the Effective Date for the term of the Agreement as if the Transferee had been named in the Agreement as the site manager.
5. Undertakings and indemnities
5.1 The Transferee indemnifies the Transferor against any liability or loss arising from, and any costs, charges and expenses incurred in connection with the non-compliance of the Transferee with its obligations under this deed including, without limitation, legal costs and expenses on a full indemnity basis or solicitor and own client basis, whichever is the higher.
5.2 The Transferor indemnifies the Transferee against any liability or loss arising from, and any costs, charges and expenses incurred in connection with the non-compliance of the Transferor with its obligations under the Agreement up to the Effective Date including, without limitation, legal costs and expenses on a full indemnity basis or solicitor and own client basis, whichever is the higher.”

68 By cl 1.1, the “Effective Date” was defined to mean 30 June 2000.

Mr Veron’s evidence in relation to the assignment

69 In his affidavit sworn on behalf of the second defendant, Mr Veron gave evidence of an understanding that the agreement between the Association and Bondlake “was in effect a new agreement … the terms of which were the same terms contained in the SMA plus the additional terms and conditions that the plaintiff required as conditions of the assignment and [Bondlake] agreed to accept” (affidavit sworn on 26 September 2006 on behalf of the second defendant, para 12). I consider that to be a self serving statement not based on or reflective of any actual state of mind as at the relevant time.

70 Mr Veron also gave evidence of the significance to him of what he said was his understanding, engendered by acts of the Association, that the Association considered the management agreement to be valid (paras 15 and 16 of the same affidavit):

“15. As a consequence of the fact that the Plaintiff:
(a) formally consented to an assignment of the SMA from the First Defendant to the Second Defendant; and
(b) relied on the terms and provisions of the SMA both in dealing with and in delaying the request for that assignment; and
(c) was a party to and executed the Deed of Assignment of the SMA from the First Defendant to the Second Defendant.
I had no doubt in my mind and believed that the Plaintiff considered that the SMA was in all respects valid, binding and enforceable according to its terms. It would simply not have made sense to me that the Plaintiff would consent to an assignment of the rights in the SMA from the First Defendant to the Second Defendant and join in a formal Deed of Assignment of the SMA as a consenting party if the Plaintiff did not believe in all respects that the SMA was valid, binding and enforceable between the Site Manager and the Plaintiff according to its terms.
16. Had I not believed that the Plaintiff considered the SMA to be in all respects valid, binding and enforceable according to its terms, I would never have caused the Second Defendant to:
(a) accept an assignment of the SMA from the First Defendant; or
(b) execute the Deed of Assignment; or
(c) assume the obligations and liabilities of Site Manager under the SMA; or
(d) accept and assume the obligations and liabilities of and connected with the additional terms and conditions imposed by the Plaintiff as conditions of assignment; or
(e) pay to the First Defendant the sum of $125,000.00 for the assignment of the rights in the SMA.”

71 However, in cross-examination, Mr Veron gave somewhat inconsistent evidence. He said repeatedly that, having entered into the management agreement and paid the consideration of $190,000 for it, there was in his mind a valid agreement and he had no reason ever to doubt its validity. He then gave the following evidence bearing on his state of mind leading up to the assignment to Bondlake (T 233.18-234.26):

“Q. Do you agree that there was no reason ever to think about the site management agreement's validity from that time on?
A. What time, the time?

HIS HONOUR
Q. The time when you paid the money to the Walker Corporation for the purchase of the management rights?
A. No I don't believe, I can't recollect an issue in terms of it at this stage.

CORSARO
Q. And in thinking about the question it [sic: presumably, “of”] its validity ever again, correct?
A. No I would, as I mentioned when we were looking to sell the agreements it was put forward. We had a number of prospective parties that were negotiating on the purchase of the management rights and one of them, which we contracted with was Blessington Judd and Andreones and which we had the purchases utilised. They did not have an issue with the validity of the agreement. We had a number of other parties we were dealing with that looked at the agreements. Nobody called the agreement into question, its validity or the issues around it so, no, I didn't have an issue. The management rights were put on the open market and the open market and the open market was--

Q. Thank you so you would say to his Honour in the light of everything you have just said, from the moment you paid the money and settled on the transfer of the unit there was no reason for you ever again to think about the validity of that agreement, correct?
A. No I mentioned I had all the agreements and everything checked. At the time us or Arrow Management had taken over from Mr Gresham, there were issues within the company and I had all the items and looked at all the items within the company, I had spent a considerable period of time doing that. We had fresh agreements coming online, we had all these different buildings and I had the agreement, I looked at and I had looked at the details I had no reason to call it into question. I can't recall taking specific advice as to it but I may have.

Q. And when was that, that you had the agreements looked at by others by Blessington Judd for example?
A. We didn't have Blessington Judd look at the agreement. Max Management had Blessington Judd look at the agreement. They acted for the purchaser. We recommended Andreones as a strata solicitor that had the best expertise in the field.

Q. So I take it then your position is this, from the moment that you paid the money and settled on the transfer of the unit, you moved forward and provided the services on the basis that you had a valid agreement in place and because, from that time on, no one ever alerted you to any difficulty you had no reason to even think the agreement was invalid?

A. When you say no one alerted me, are you talking in respect to issues of numbers of CAs? I can't recall a specific instance of issue.

Q. Do you agree or disagree with the proposition I put to you?
A. I will agree with the proposition.”

72 Mr Veron said that he had had the management agreement and others reviewed at the time he and his brother bought out Mr Gresham (T 234.35; the words “which you” at line 35 should read “reviewed”). He then gave the following evidence (T 234.39-.56):

“Q. Am I to understand nothing in that review caused you any concern about the validity of the site management agreement which is the subject of this case?
A. No.

Q. And do I take it from that, that when it was assigned from Arrow to Bondlake, you did not concern yourself at all with the question of validity?
A. No.

Q. And you did not even have in mind as an issue at that time the issue [sic: presumably, “of”] the validity?
A. No.

Q. And nothing in the course of that transaction as between Arrow and Bondlake entered your mind either way on the topic of validity?
A. No.”

73 The clear inference from Mr Veron’s evidence in cross-examination is that the topic of validity of the management agreement did not cross his mind after Arrow paid the sum of $190,000 to Walker. To the extent that the agreement was reviewed, it was, plainly enough, the outcome of that review on which Mr Veron relied, and not (as he would seek to suggest in paras 15 and 16 of his affidavit) some implied representation made by the Association.

74 In my view, this aspect of Mr Veron’s affidavit evidence is another example of his willingness to give evidence by reference to considerations of expediency rather than veracity. A consideration of this aspect of his affidavit and oral evidence confirms the view that I have expressed above as to his credibility.

The expert evidence

75 The Association and the defendants called expert evidence, seeking to quantify the value of the services provided by Arrow or Bondlake (as the case may be) to the Association under the management agreement.

The Association’s expert evidence

76 The Association called Messrs Nicholas Ferrara and Harn Goh of Rider Hunt Terotechnology (NSW and ACT) Pty Ltd. Messrs Ferrara and Goh prepared a joint report dated 11 April 2006, and Mr Ferrara prepared a report in reply dated 15 March 2007.

77 The methodology adopted by Messrs Ferrara and Goh was to build up a total “current market value” of the services by using a formula that divided the whole value into the caretaker’s salary (38% of the total), overhead costs (21%) and profit margin (41%).

78 They sought to derive the first component by comparing the relative value of the caretaker’s work under the site management agreement with that of a “facility manager”. This rather unusual methodology involved comparing what they saw to be the “core competencies” of the caretaker under the management agreement with the core competencies of a “practitioner” facility manager, in six different areas.

79 By definition, the practitioner was assigned a total “effective competency factor” of 600 (100 points, for want of a better word, for each of the 6 core competencies). Messrs Ferrara and Goh concluded that a caretaker under the management agreement would score (if that is the right word) a total effective competency factor of 305.

80 Messrs Ferrara and Goh thus assessed the value of the caretaker’s role under the management agreement as worth 305/600 of the services of a facility manager practitioner. For the year 2006, and by reference to what they said was a survey recognised in the discipline of facility management, they concluded that a facility manager practitioner’s salary would be $107,980. (This involved taking a salary figure for the previous year from the survey and increasing it by what they said was an applicable percentage, 15%.) They thus concluded that, applying the proportion 305/600, the nominal value of the caretaker’s services would be $54,890, which they rounded out to $55,000.

81 Messrs Ferrara and Goh considered the hours that they thought would be required to perform the caretaker’s duties under the management agreement. They concluded that it would take 32.71 hours per week to do this. Apparently, they either did not appreciate, or ignored, the consistent requirement for the caretaker to work a 40 hour week, and the obligation to be “available or contactable outside [those] hours” (see para [48] above). Messrs Ferrara and Goh took the view that a facility manager practitioner would work a 40 hour week. Thus they prorated their derived value of $55,000 by 32.71/40.0 to arrive at an adjusted value of $44,976 for the caretaker services, which they rounded off to $45,000. They said that there could be variance of plus or minus 20%, giving a range of $36,000 to $54,000.

82 Messrs Ferrara and Goh sought to ascertain the allowance that should be made for overhead costs. They concluded that it was $24,415 per annum, which they rounded off to $25,000. This included an allowance for 25 square metres of office space at a rental of $300 per square metre per annum; and it included other obvious and proper overhead or on costs. It did not, however, include any allowance for the value of the residential apartment supplied rent free to the caretakers from time to time.

83 Messrs Ferrara and Goh then returned to their view that an appropriate profit would be 41%. They calculated the dollar amount of this not by taking 41% of what they said was the total for salary and overheads and adding it to that total to obtain a grand total. Instead (see para [77] above), they assumed that salary and overheads would amount to 59% of the total cost, divided the total for salary and overheads by 59 and multiplied it by 100. I have to say that I find this rather puzzling. If it were appropriate to use that methodology then I do not understand why it was not applied consistently. Given their view that salary would constitute 38% of the total “cost components”, one would think that their methodology would require the derived salary figure to be divided by 38 and multiplied by 100, without the need to itemise and cost overheads. But they were not cross-examined on this, and I do no more than note the curiosity.

84 There are at least four major flaws in the methodology adopted by Messrs Ferrara and Goh. Three of those are practical and one is conceptual.

85 I have adverted to two of the practical flaws above. Their methodology does not take account of the requirement for the caretaker to work a 40 hour week, and to be on call outside those working hours. Nor does it take account of the value of the accommodation provided rent free to the caretaker (a benefit which is even more valuable to the caretaker than the dollar value of the rent free use, because it is a pre-tax benefit). Further, as to the first matter, if it were the case as the evidence suggests – see para [52] above – that Mr and Mrs Smith were required to work between them in excess of 40 hours per week, then the prorating exercise undertaken by Messrs Ferrara and Goh is even less sustainable.

86 The third practical flaw is that, although Messrs Ferrara and Goh purported to build up their assessment of the hours required having had the benefit of a view of Balmain Cove, they appear to have made their assessment of times on a theoretical or a priori basis, rather than undertaking it on a site specific basis. In other words, they did not assess the times taking into account whatever particular features there were of the Balmain Cove site that might have an impact on the time required for performance of the various tasks that they analysed.

87 The conceptual flaw in their methodology relates to the choice of a facility manager practitioner as the yardstick by which to measure the value of the caretaker’s services. The evidence showed that facility manager status encompassed three, ascending, levels of skill: practitioner, manager and leader. Not surprisingly, the competency requirements increased as one ascended the ladder (a manager was required to have more competencies than a practitioner, and a leader to have more competencies than a manager). It is obvious that the level of responsibility would increase as one ascended the ladder. However, the methodology used by Messrs Ferrara and Goh had the necessary consequence that a leader who was employed in a role that demanded of him no more than the six core competencies of a practitioner would be paid the same as the practitioner, notwithstanding his greater seniority, competency and (presumably) experience. Further, the methodology led to the result that the practitioner, manager or leader would be paid at the same rate regardless of the size of complexity of the facility under management. Mr Goh was loath to accept that this was a defect; but Mr Ferrara (after some struggle) did so: see for example T 178.50, 179.45-180.55 and 183.15-184.30.

88 There are other problems too with the methodology of Messrs Ferrara and Goh. For example, the evidence showed that facility managers (at the practitioner level) were paid more in New South Wales than in other States. Messrs Ferrara and Goh however used the national average, notwithstanding that the services were to be performed in this State. Further, the evidence showed that the amount paid varied according to the kind of “site” that was managed. Again, however, Messrs Ferrara and Goh used the average.

89 Messrs Ferrara and Goh did not seem to think that it was appropriate to go into the marketplace and seek to ascertain what was being paid for services of the kind provided by Arrow or Bondlake (as the case may be) under the management agreement. It may be that it would have been difficult to obtain this evidence – or, at least, to obtain enough to lead to reliable conclusions. It may be that, as a result, building up a total cost by valuing the components is an appropriate methodology. But the flaws in their methodology are such that I do not accept their evidence.

90 Mr F C Corsaro SC, who appeared with Mr D B Studdy of counsel for the Association, submitted that the only relevant result of the flaws to which I have adverted was that Messrs Ferrara and Goh had overvalued the services. It may be that some of the flaws lead to that result – for example, use of the salary level of a facility manager practitioner as the appropriate yardstick. But other flaws do not – for example, disregard of the actual hours and site conditions, and of the value of the rent free accommodation.

91 In the result, although accepting (as I have said) that it may be appropriate to analyse the cost of the services by costing their individual components, and allowing a reasonable profit, I do not accept the evidence of Messrs Ferrara and Goh as to the value of those services. Nor do I accept that, regardless of the flaws in their methodology, I can be confident that the cost could be no more than that assessed by them.

The defendants’ experts

92 The defendants called three experts: Mr Delwyn Linkhorn, Mr Terry Short and Mr Stamoulis (to whose evidence I have referred in para [54] above).

93 Messrs Linkhorn and Short sought to value the services provided by Arrow or Bondlake (as the case may be) under the management agreement. Mr Stamoulis sought to ascertain the rental value of the residential accommodation (apartment 5) and the office accommodation (lot 11). As I have said, Mr Stamoulis’ evidence was unchallenged. I accept it, although it should be noted that his valuation of the office was of the whole area (65 square metres), and it was accepted by all the other experts after a conference that the actual area required for performance of the caretaker’s duties was 25 square metres. Thus, in principle, it might be open to Bondlake (and might have been open to Arrow) to partition lot 11 in some way, and to turn the 40 square metres not required for performance of the caretaker’s duties to account in some other way. This was not explored in the evidence, although Mr Linkhorn said that, having regard to the configuration of lot 11, he doubted that it would be practicable.

94 Mr Linkhorn sought to identify the various tasks that the caretaker would perform, and to cost them by deriving a time value for their performance. Mr Short sought to identify the overhead and on costs that a site manager such as Arrow or Bondlake would incur relating to performance of the site manager’s duties under the management agreement. However, Mr Short went further and “broadly checked Mr Linkhorn’s estimates” (T 286.40).

95 In principle, as I have indicated, the methodology of Messrs Linkhorn and Short may produce an appropriate indication of the value of the management services. However, there are flaws in their approach: more specifically, flaws in Mr Linkhorn’s approach.

96 Mr Linkhorn listed out what he said were the duties that a caretaker would be required to perform under the management agreement, and estimated the time that in his opinion would be taken for their performance. He concluded that performance of those duties would require a “total site manager’s weekly minimum weekly labour content” of 70.526 hours. He then selected what he thought was an appropriate yardstick, namely the Real Estate Industry (Clerical and Administrative) State Award, decided that a Grade 5 employee under that award would provide an appropriate yardstick, and thereby fixed on a full time salary of $700.50 per week as the starting point for his calculations. He deduced an hourly rate of $17.31 from this, and applied that to his total calculation of hours to produce a labour cost, for the duties required under the management agreement, of $89,978.19 in the 2005/2006 financial year. (To enable this to be related to the amounts actually paid to Messrs Claridge and Warren and Mr and Mrs Smith: the equivalent figure deduced by Mr Linkhorn for the 1998-1999 year was $73,081.64, increasing by approximately $2,000 to $3,000 per year thereafter.)

97 To this figure, Messrs Linkhorn and Short then added what they said was an appropriate amount for “operating costs that would be required to carry out the duties as per the Site Management Agreement for Balmain Cove”. Those amounts included the rental value of the residential apartment and the office, and other obvious and appropriate allowances. They then assigned alternative profit margins of 25% and 40% of the total cost thus derived (this being their opinion of the likely range of profit margins) to derive a total value for the services.

98 The outcome of their conclusions demonstrated that, with a 25% profit margin, the amount actually payable under the management agreement always exceeded the valuation. If however one took a profit margin of 40%, the amount payable was less than their valuation for the first three years, but a little more for the fourth year, with the margin (of actual over estimated) increasing steadily thereafter: a reflection of the power of annual compounding. In this context, I note that Messrs Ferrara, Linkhorn and Short agreed, after conferring, that 41% was an appropriate allowance for profit.

99 I have three principal concerns with this methodology. The first two relate to Mr Linkhorn’s quantification of the number of hours of labour required. In essence, he was valuing the caretaker’s duties. There was no evidence that the caretakers could not perform their duties broadly within the allotted hours under their agreements. (I recognise that there is some latent ambiguity in this proposition, in the case of Mr and Mrs Smith, if it is proper to regard them as having been required to perform a combined total of 65 to 70 hours per week. However, there was no evidence that this is in fact what the notation to which I have referred in para [52] above meant. Nor is there any indication of the separate duties (if any) to be performed by Mrs Smith.)

100 The second matter, also connected with the subject of hours required, relates to Mr Linkhorn’s understanding of the extent of the duties required under the management agreement. It would appear that Mr Linkhorn assumed that duties (for example, in relation to “Recreational Facilities”) related to the whole of the Balmain Cove site. However, on a proper construction of the relevant provisions of the management agreement and the community management statement, those duties relate only to such facilities as are located on “Lot 1”. At least in terms of area, lot 1 is a relatively small part of the overall site; and there was evidence that there were “Recreational Facilities” located on the Balmain Cove site other than on lot 1. Thus, I think, Mr Linkhorn’s estimate of hours may involve some over-allowance, because the components include matters outside the caretaker’s responsibility.

101 The third matter relates to the yardstick. When pressed, Mr Linkhorn was unable to offer any logical justification for the choice of the award to which he referred. Nor was he able to explain why a figure derived from that award might be appropriate when the evidence showed that a number of people had agreed to perform the caretaker’s duties for the figures to which I have already referred, and had apparently done so freely and voluntarily. (The value of the rent free accommodation can be disregarded, because that is a matter expressly taken into account, and incorporated into the total cost of services, in Mr Short’s part of the calculations.) In particular, Mr Linkhorn was unable to explain why he used the award that he did rather than an award that specifically included caretakers: the Miscellaneous Workers’ General Services (State) Award. As to the award selected by Mr Linkhorn: he could not indicate why, in his view, the duties that might be performed by a person under the award relied on by him could be equated to the duties performed by a caretaker under the management agreement. As to the latter award: Mr Linkhorn said that his researches had not uncovered the award.

102 Thus, whilst in principle I accept Mr Linkhorn’s (and Mr Short’s) methodology, I do not accept the outcome. It might be noted that if Mr Linkhorn has wrongly estimated the cost of the labour content, then that error will flow on to so much of Mr Short’s calculations as relate to on costs (superannuation, replacement caretaker during annual leave, payroll tax and other on costs).

103 Having said that, I think that the result of what I see as shortcomings in the exercise undertaken by Mr Linkhorn would lead to overstatement of the true value of the services. Whether this means that the total cost (including a 40% profit) would exceed the actual cost for the first three years, I cannot say. But I can accept the conclusion flowing from the figures provided by Messrs Linkhorn and Short, that, at least from year 4 on, the actual amount payable under the management agreement has exceeded the true value of the services performed under it, and that the margin between the two is likely to increase thereafter during the remaining life of the agreement (including, if the options are taken up, any further terms). The adjustment of the profit margin from 40% to the agreed figure of 41% does not affect the substance of this conclusion.

Other matters

104 Each of the experts (apart from Mr Stamoulis) sought to characterise the features of the management agreement, including its term (with options) and ratchet compounding remuneration in qualitative ways. To the extent that they sought to suggest that something was or was not “grossly” excessive, or “unfair”, I rejected that evidence. I did however allow it as evidence to the effect that in their experience, they had not come across such terms.

Conclusion

105 Thus, I conclude, on the whole of the expert evidence, that:

(1) The term of the agreement (10 years with two further options, each of five years and given to the manager only) is, and was at the time the agreement was made, unusual in the relevant industry.

(1) The revenue stream fixed by the agreement itself, in the form of the Regular Duties Fee, was perceived to be sufficiently valuable to justify the payment of a premium for the opportunity to earn it; or

(2) The additional remuneration that might be earned by reference to the agreement – including the revenue that might be derived from performance of the Letting Services – was so perceived (see para [233] below); or

(3) The combination of those actual and possible revenues was so perceived.

229 For present purposes, it does not seem to me to matter which of the three explanations is correct. Whichever is correct, the opportunity to earn the revenue – the opportunity for which the premium was paid – was an opportunity derived from entry into the management agreement. The management agreement was made by the Association, not by Australand. If a premium was to be paid for the making of that agreement, it should have been paid to the Association and not to Australand.

230 Because the consideration for the Association’s entry into the management agreement was paid to Australand and not to the Association, it was in Australand’s interests to ensure that the terms of that agreement were sufficiently generous to justify the consideration. However, Australand’s duty to the Association required that the management agreement be made on the best terms commercially available to the Association.

231 There was a clear conflict between Australand’s interest and its duty. Australand’s interest was to extract the maximum price from Arrow. That conflicted, or might conflict, with its duty to the Association: to get the benefit of management services at the most reasonable terms commercially available. Further, to the extent that the management agreement provided for an “excessive” remuneration (see para [105(4)] above), Australand acted to the detriment of the Association in causing it to enter into the management agreement on the terms contained in that agreement.

232 There can be no doubt that Australand made a profit by causing Arrow to enter into the management agreement. In substance, Australand sold to Arrow the benefit of the rights created (or that would be created) pursuant to the management agreement. Australand did this by causing the Association, for a payment not to it but to Australand, to give away its right to secure management services on the open market, and on such terms (including as to remuneration and duration) that it might be able to negotiate. In this context, it is worth bearing in mind that, whatever may be the shortcomings in the expert evidence, it is plain, following from what I have said in para [105] above, that the management agreement is more than generous to the manager. Indeed, it can hardly be supposed that Arrow would have agreed to pay $190,000 for the rights unless it thought it were getting the opportunity to make a reasonable return not just on the cost to it of performing its obligations under the agreement but also on the premium of $190,000 that it paid.

233 I should mention that Mr Veron sought to explain this by saying that the real value of the management agreement lay not in the remuneration for the Regular Duties, but in the opportunity to provide “Letting Services”. Although there is no doubt that the management agreement does entitle the manager to perform those services (see clause 9), there is no evidence of their extent or profitability. There is no reason to treat this evidence in any way differently to Mr Veron’s other evidence; but even if (contrary to what I have said in para [37] above) I were to accept it, it would not assist Australand, for the reasons given in paras [228] to [230] above.

234 Thus, I conclude that:

(1) Australand put itself in a position where its interest conflicted with its duty to the Association;

(2) Australand thereby breached the fiduciary duty that I have found it owed to the Association (see para [226] above); and

(3) Australand garnered a profit for itself, in the form of the premium of $190,000, through its exploitation of its control of the Association.

Disclosure

235 In some cases, what is prima facie a breach of the fiduciary duty not to make a profit may be cured by adequate disclosure. Australand did not suggest that it had disclosed to the Association the relevant terms – including, specifically, the consideration payable and paid – of its agreement with Arrow for the “sale” of the management rights. It did however rely on disclosures in relation to the management agreement that, it submitted, were made to prospective purchasers.

236 The question thus arises as to what is meant by “adequate disclosure” in the specific context. To my mind, that question is not to be answered either in the abstract or simply by reference to cases such as those involving sales by the promoter to the company of the promoter’s own property (see for example the seminal case of Emile Erlanger and Others v The New Sombrero Phosphate Company and Others (1878) 3 App Cas 1218). The first step is to identify those to whom the “proper disclosure” is required to be made. The second is to consider, by reference to the specific duty and the particular facts of the case, what it is that should be disclosed. That exercise is to be undertaken bearing in mind that the question is not whether there is a duty to disclose but, rather, whether such disclosure as has been made negates an existing breach of duty (see para [241] below).

237 Further, where there is a relevant statutory scheme, an examination of the nature and sufficiency of the disclosure should take into account the statutory scheme, including in particular in this case the requirements of s 24 of the CLM Act.

238 Australand submitted that it was open to it to make adequate disclosure either by disclosure of all relevant facts to a completely independent board of directors (which did not occur in this case), or by such disclosure to the existing and potential members of the Association. It relied on what Austin J said in Aequitas v A.E.F.C. (2001) 19 ACLC 1006 at 1060 [293], where his Honour accepted the statement of principle in the 6th Edition of Gower, Principles of Modern Company Law:

“The position therefore seems to be that disclosure must be made to the company either by making it to an entirely independent board or to the existing or potential members as a whole. If the first method is employed the promoter will be under no further liability to the company, although the directors will be liable to the subscribers if the information has not been passed on … . If the second method is adopted disclosure must be made in the prospectus, or otherwise, so that those who are all or become members, as a result of the transaction in which the promoter was acting as such, have full information regarding it. A partial or incomplete disclosure will not do; the disclosure must be explicit.”

239 In essence, Australand submitted that adequate disclosure was made to prospective purchasers of the terms of the management agreement, and that no more was required. It relied on:

(1) The statements in clause 43 of the community management statement, this being a document required to be, and that the evidence suggests was in fact, attached to contracts for sale; and

(2) The proposition that the management agreement itself was disclosed to purchasers because it was annexed to the minutes of the inaugural SGM.

240 It is I think likely that intending purchasers would have become aware of the existence of the management agreement, and that they could have ascertained its terms had they so desired. However, none of the disclosures that was made would have alerted any prospective purchaser to the fact that Arrow considered the rights given to it by the management agreement sufficiently valuable to pay $190,000 to Australand for Australand’s service in causing the Association to enter into the management agreement.

241 It is necessary to bear in mind the role of informed consent in this context. As the majority (Brennan CJ, Gaudron, McHugh and Gummow JJ) put it in Maguire and Another v Makaronis and Another (1997) 188 CLR 449 at 467, a fiduciary has “no duty as such … to obtain an informed consent … . Rather, the existence of an informed consent would … negate what otherwise was a breach of duty.”

242 Informed consent would require, at a minimum, the disclosure of all relevant information: Queensland Mines Limited v Hudson (1978) 52 ALJR 399 at 403. I say “at a minimum” because, as the majority pointed out in Maguire at 466, “[w]hat is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given … .”

243 In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd and Others (2001) 37 ACSR 672, Spigelman CJ said at 693 [124] that the word “relevant” in this context “imports … an objective standard.” On this approach, disclosure of the premium of $190,000 would be material if, viewed objectively, that information could bear in a rational way on a prospective purchaser’s consideration of the terms of the management agreement.

244 Australand submitted that it was not necessary for prospective purchasers to know of the payment of the premium. It said that what was relevant to them was “full information about the present value and future liabilities of the … Association” (final submissions, para 73). It relied on the statement by Hutley JA in Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 at 847 that “a person subject to a fiduciary duty to provide information can escape liability by showing that the information which he failed to disclose could not have caused any change in the attitude of the principal.”

245 There are difficulties in the application of this observation to the facts of the present case. Firstly, what Hutley JA said was predicated on the existence of “a fiduciary duty to provide information”. For the reasons given by the majority in Maguire at 467 (see para [241] above), this is not such a case; it is instead a case where a breach of a negative or proscriptive duty may be overcome by the provision of appropriate information. Secondly, as Spigelman CJ pointed out in Fexuto at 694 [134], Hutley JA’s formulation “appears to focus on issues of causation, not informed consent”, and therefore raises the application of the reasoning in Brickenden v London Loan & Savings Co [1934] 3 DLR 465.

246 Nonetheless, I think, what Hutley JA said in Walden may be taken as stating in effect a negative test of relevance: information may be regarded as irrelevant if its disclosure would not have caused any change in attitude. On this analysis, his Honour’s observation lends some support to the approach that I have stated in para [243] above.

247 Australand’s submission fails to take account of the fact that the subject of the assessment is the management agreement as a whole, and not just “the present value and future liabilities of the … Association”. Prospective purchasers could well wish to understand not only the benefits and obligations that the management agreement conferred and imposed on the Association, but also the value of those benefits to the Association. I think that it could well be material to an assessment of the management agreement to know that the original manager perceived the income streams that might flow under it as sufficiently valuable to warrant the payment of a substantial premium for the grant of the agreement. A purchaser armed with that information could well conclude that the Association might be overpaying for the benefits that it would receive under the agreement, and that his or her liability (by way of levies) might be inflated to accommodate that overpayment.

248 It is one thing to say that levies are high because of the wide range and high quality of the services provided. It is quite another to say that levies are high because payment for such services as are provided is being made at an inflated rate. Whilst it may be accepted that the ultimate question for a prospective purchaser is the amount of the levies, that cannot be extricated from the purposes for which the levies are paid, and the value of the underlying benefits.

249 In substance, Australand’s approach to this question does not focus on the nature of the breaches of fiduciary duty that I have found. It focuses on one aspect of that breach – the management agreement – but ignores the other aspect – the agreement with Arrow, including payment and receipt of a premium for Australand’s services in causing the Association to enter into the management agreement. Australand’s submissions assume that the only relevant disclosure required is in relation to the terms of the management agreement. They do not address what seems to me to be the critical feature: that the management agreement had its genesis in a separate agreement undertaken by Australand in breach of its fiduciary duty to the Association.

250 Thus, I conclude, the breach of duty that I have found is not negated by disclosure.

Unanimous consent

251 Australand appeared to rely alternatively on the doctrine of unanimous consent. It submitted that there had been full disclosure to its current “member” – ie, itself – at the time of the impugned conduct. No doubt, Australand knew (as prospective purchasers did not) the full details of the transaction. Australand accepted that the doctrine of unanimous consent may not be applicable to a breach of fiduciary duty alleged against a promoter. However, it submitted, the general principle relating to unanimous consent should apply in this case.

252 There is no doubt that the unanimous consent of shareholders in a company may authorise or validate an action of the directors of that company which otherwise would be voidable, as involving a breach of fiduciary duty. See (to cite one case out of many) Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357 at 386 [264] and following, where Lander J (with whom Millhouse and Duggan JJ agreed) discussed the rule, its application and exceptions to it. His Honour pointed out at 387 [270] that there was no need for a formal decision of the shareholders; informal consent could be sufficient; and this is so a fortiori where the corporation has but one shareholder.

253 The only “unanimous consent” that might be inferred in this case was that given by Australand at the time it owned all the unit entitlements in the community scheme. But, as the promoter cases make clear, the consent of the promoter does not excuse a breach of fiduciary duty. That was the whole point of the decision in Erlanger. The reason why that is so was explained by Lord O’Hagan in Erlanger at 1255 as depending on the obligation to have “careful regard to the protection of future shareholders.”

254 Australand’s submissions on this point depended on the proposition that the full disclosure that was required to be made was full disclosure only of the terms of the management agreement. For the reasons that I have given above, I do not accept that submission. Full disclosure required revelation of the fact that Arrow had paid a premium of $190,000 to Australand for Australand’s services in causing the Association to enter into the management agreement.

255 It is therefore not necessary to explore in detail the extent to which, or the ways in which, the principles relating to unanimous consent might qualify the principles relating to promoters’ duties. It is sufficient to observe that if disclosure by the defaulting fiduciary promoter to itself is sufficient, the promoter cases could not have been decided as they were.

Conclusions

256 Thus, I conclude:

(1) Australand was in substance the promoter of the security scheme;

(2) In that capacity, Australand was obliged not to permit its own interest to conflict with its duty to the Association;

(3) Australand breached that duty by receiving the premium of $190,000 for causing the Association to enter into the management agreement; and

(4) That breach of duty has not been negated by disclosure to prospective members of the Association;

(5) Nor has it been negated by the unanimous consent of the members of the Association at the time the breach occurred.

257 On that basis, it is not necessary to consider the alternative common law duty of care (the subject of issue 2).

258 Issue 1 should be answered “yes, as to the duties alleged in paras (b) and (d) but not otherwise”; issue 2 should be answered “does not arise”; and issue 3 should be answered “yes, as to the fiduciary duties identified in the answer to issue 1”.

Issues 4, 5, 6 and 6A: equitable compensation, account of profits, damages

259 The Association submitted that it was entitled to receive from Australand:

(1) Equitable compensation, being the loss suffered by the Association from entry into the management agreement; and

(2) An account of the profit made by Australand when it caused the Association to enter into the management agreement.

260 It is clear that the range of remedies for breach of fiduciary duty includes both equitable compensation and account of profits. See Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4th Edition, Meagher, Heydon and Leeming, 2002) at [5-245], [5-260]. However, as the Court pointed out in Warman at 559, the remedies are in the alternative (I omit citations):

“Ordinarily a fiduciary will be ordered to render an account of the profits made within the scope and ambit of his duty. Of course, if the loss suffered by the plaintiff exceeds the profits made by the fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary. That election will bind the plaintiff.”

261 In the present case, there are two difficulties with the remedy of equitable compensation. The first relates to s 24(2) of the CLM Act. The second relates to the less than satisfactory state of the expert evidence.

262 The effect of s 24(2) is that the management agreement terminated at the end of the first AGM. It is at least arguable that the loss to which equitable compensation might be directed should stop when, in accordance with s 24(2), the management agreement terminated. (By reason of Australand’s undertaking, there was no loss up until this time.) The Association did not address this difficulty in its submissions.

263 The second question is one of proof. The claim for equitable compensation is framed (see prayer 5 of the amended summons) as a claim for “the difference between the amount found as the true benefit received and the amount actually paid” for the services rendered to the Association under the management agreement. The deficiencies in the expert evidence are such that it is not possible to assess “the true benefit received” (or, perhaps more accurately, the value of that true benefit). Nor does the evidence permit any assessment to be made on the basis of comparison with an “arm’s length” agreement. (Nor, for that matter does the expert evidence permit the quantification of the present value of the amounts paid and payable under the management agreement according to its terms.)

264 Thus, in my view, the appropriate remedy is an account of profits. That is a remedy appropriate to secret commission cases (see eg Reading v Attorney General [1951] AC 507); the present case is in many ways similar to the secret commission cases. Further, as pointed out in para [220] above, it is not necessary, before awarding an account of profits, to demonstrate that the beneficiary has suffered loss equal to the amount of the profit made by the fiduciary – or, indeed, any loss at all.

265 It is unnecessary to consider the question of damages for breach of a common law duty of care; but the difficulties of proof to which I have adverted in connection with equitable compensation would apply equally in this context also.

266 Thus, I conclude that issue 4 should be answered “no”; issue 5 should be answered “yes”; issue 6 should be answered “does not arise”; and issue 6A should be answered “does not arise”.

Summary of conclusions

267 For convenience I set out each of the issues, together with its answer:

(1) Whether the third defendant (“Australand”), when it caused the plaintiff (the “Association”) to enter into the Site Management Agreement (the “SMA”) with the first defendant (“Arrow”) on 2 December 1998, owed the Association a fiduciary duty to:

(a) Act with absolute candour and honesty to the Association;

(b) Not to place self in a position of conflict or to profit from contracts entered into between the Association and Arrow, without proper disclosure;

(c) Act in the best interest of the Association in the exercise of a power or discretion affecting the Association’s interests;

(d) Not to act to the detriment of the Association; and

(e) To disclose relevant matters to the Association to enable it to make an informed and impartial decision about whether to enter into the SMA.

Answer: Yes, as to the duties alleged in paras (b) and (d), but not otherwise.

2. Whether Australand as at 2 December 1998 owed the Association a duty of care to avoid it suffering economic loss.

Answer: Does not arise.

3. If the answer to questions 1 and/or 2 is yes, did Australand’s conduct in causing the Association to enter into the SMA with Arrow breach its fiduciary duty and/or its common law duty?

Answer: Yes, as to the fiduciary duties identified in the answer to issue 1.

4. If the answer to question 3 is yes, in so far as breach of fiduciary duty is concerned, is the Association entitled to equitable compensation from Australand being the difference between the amount payable under the SMA and an amount payable under an agreement entered into at arm’s length as at 2 December 1998?

Answer: No (but on the basis that the evidence does not permit any such quantification).

5. If the answer to question 3 is yes, in so far as breach of fiduciary duty is concerned, is Australand also liable to account to the Association for the profit of $190,000 it made by causing the Association to enter into the SMA?

Answer: Yes (save for the word “also”).

6. If the answer to question 3 is yes, in so far as breach of common law duty is concerned, is Australand liable in damages to the Association for economic loss, the measure being the difference between the amounts paid by the Association under the SMA and the amounts that would have been paid on an arm’s length transaction entered into as at 2 December 1988 [sic: obviously, 1998]?

Answer: Does not arise.

6A. If:

(a) the Site Management Agreement terminated; and

(b) the first and second defendants establish that the plaintiff is not entitled to rely on that fact;

then the question is whether the loss suffered by the plaintiff is caused by the actions of the third defendant or its own actions.

Answer: Does not arise.

7.(a) Was the effect of the SMA disclosed in the Association’s Community Management Statement registered on 27 November 1998 within the meaning of s.24(2)(a) of the Community Land Management Act, 1989 (the “CLMA”)?

Answer: No.

(b) Was the SMA ratified at the first Annual General meeting of the plaintiff?

Answer: No.

8. If the answer to question 7(a) and (b) is no, then did the SMA terminate at the end of the Association’s first annual general meeting on 28 July 1999?

Answer: Yes.

9. If the answer to question 8 is no, then why not?

Answer: Does not arise.

10. By entering into the SMA, did the Association incur a debt during the “initial period” for an amount in excess of the amount then available for repayment of the debt from the administrative fund or the sinking fund of the Association?

Answer: Yes, at least as to the first month’s instalment of the Regular Duties Fee payable under the management agreement.

11. If the answer to question 10 is yes, is Australand liable to the Association pursuant to s.23(5)(a) or (b) of the CLMA?

Answer: No.

12. Was the assignment of the SMA from Arrow to Bondlake on 30 June 2000 ineffective?

Answer: No.

13. If the SMA terminated on 28 July 1999, can the conduct of the Association pleaded in paragraphs 18 and 19 of Arrow’s Response and paragraphs 18 to 20 of the second defendant’s (“Bondlake”) Response give rise to the alleged estoppels?

Answer: Does not arise.

14. If the answer to question 13 is no, were the payments made by the Association to Arrow and Bondlake made under a mistake of law requiring Arrow and Bondlake to make restitution to the extent of the payments exceeding the true benefit received by the Association?

Answer: Does not arise.

15. If the answer to question 13 is yes, do the estoppels cease to have any operation from the time when Arrow and Bondlake were on notice that the Association believed the SMA had been terminated?

Answer: Does not arise; but if it did, it should be answered “No”.

16. If the SMA terminated on 28 July 1999, what is the value of the true benefit of the services received by the Association from 2 December 1998 to date?

Answer: Does not arise; but if it did, it should be answered “The evidence does not permit an assessment to be made”.

17. In relation to 7(b) above, does the term “ratification” in S.24 include implied ratification?

Answer: Unnecessary to decide.

18. If yes to question 17, does the conduct of the plaintiff amount to ratification in accordance with S.24?

Answer: Unnecessary to decide; but if it were, it would be answered “No”.

19. Did the conduct of the plaintiff and the first defendant prior to and after 28 July 1999, create an estoppel (promissory or conventional) which either (a) precludes the plaintiff from now asserting that the SMA was not unenforceable at all times prior to the execution of the deed of assignment on or about 20 June 2000, or (b) precludes the plaintiff from now asserting that the SMA was not unenforceable at all times after 31 August 1999?

Answer: Yes, as to conventional estoppel.

20. If yes to question 19(a) or (b), will the first defendant suffer detriment if the plaintiff is permitted to depart from that conduct?

Answer: Yes.

21. Was an agreement made on 30 June 2000 between the plaintiff and the second defendant that in consideration of the plaintiff paying to the second defendant the regular duties fee, the second defendant would perform the obligations under the SMA as if it was named “site manager” in the SMA?

Answer: Does not arise.

22. Was there a separate and new agreement created by the novation of the SMA by 30 June 2000.

Answer: Does not arise.

23. Was there a separate and enforceable agreement between the plaintiff and the second defendant made on or about 30 June 2000 by deed that the second defendant would perform the obligations under the SMA as if it was named the “site manager” in the SMA?

Answer: Does not arise.

24. Did the following:

(a) The assignment of the SMA from the first defendant to the second defendant effective 30 June 2000;

(b) The plaintiff’s consent to that assignment; and

(c) The continued operation of the SMA subsequent to the assignment,
create an assumption that the SMA was valid and enforceable and capable of assignment?


Answer: Unnecessary to answer.

25. If yes to question 24, has the second defendant relied upon the assumption to its detriment?

Answer: Unnecessary to answer.

26. If yes to question 24, is it unjust to allow the plaintiff to depart from the assumption?

Answer: Unnecessary to answer.

27. Did the second defendant and the plaintiff in executing the deed of assignment on or about 30 June 2000 conduct themselves on the common assumption that the deed of assignment created a new agreement between the plaintiff and the second defendant such that an estoppel (promissory or conventional) now prevents the plaintiff from denying that assumption?

Answer: Yes, as to conventional estoppel.

28. Has the plaintiff established that the true value of the services provided under the SMA was other than the regular duty fee paid by the plaintiff from time to time?

Answer: Yes, in that the evidence does show that from about the fourth year of the term of the management agreement the Regular Duties Fee was excessive; but the evidence does not permit an assessment to be made of the extent to which it was excessive.

29. Has the plaintiff contravened the Trade Practices Act 1974 (Cwth) (“TPA”) by conduct comprising representations to the first and/or second defendants that the SMA is binding and enforceable;

Answer: Unnecessary to answer.

30. If the answer to question 29 is yes:

(a) Is the first defendant entitled to relief under sections 80, 82 or 87 of the TPA? and
(b) Is the second defendant entitled to relief under s.80, s.82 or s.87 of the TPA? or
(c) In respect of the second defendant, that it was additionally bound to perform the duties and obligations of the SMA under a fresh agreement as if it was named as the site manager in the SMA and was entitled to receive the remuneration there-under.


Answer: Does not arise.

31. If the answer to either 30(a) or 30(b) is yes, what relief is either the first defendant or second defendant entitled?

Answer: Does not arise.

32. In the event that an injunction in favour of either the first or second defendant is declined in the exercise of the Court’s discretion, although the basis of an injunction is made out, is either the first or second defendant entitled to equitable damages?

Answer: Does not arise.

Relief

268 The relief claimed by the amended summons included:

(1) A declaration that the management agreement “came to an end” at the conclusion of the first AGM, by operation of s 24 of the CLM Act.

(2) A declaration that there was nothing that could have been assigned by Arrow to Bondlake pursuant to the deed of assignment.

(3) A declaration that Bondlake has and had no right to provide services to the Association, and the Association has no corresponding obligation to pay Arrow, “under the [deed of] assignment or otherwise”.

(4) A declaration of the true benefits received by the Association from Arrow and Bondlake.

(5) Equitable compensation representing the difference between the true value of those benefits and the amounts actually paid.

(6) A declaration that Australand owed the Association fiduciary and common law duties of care.

(7) A declaration that Australand breached those duties.

(8) Damages for breach of duty.

(9) An account of profits, with an order for payment.

269 The parties’ submissions did not deal in detail with the Association’s various claims for relief.

270 As to the first declaration sought: I have concluded that the effect of s 24(2) of the CLM Act is that the management agreement did terminate at the end of the first AGM. However, since I have concluded that the Association is estopped from asserting this, a declaration to the effect prayed would lack utility. For the same reason, no declarations should be made as sought by prayers 2 and 3 of the amended summons.

271 As to prayers 4 and 5: for the reasons that I have indicated, the evidence does not permit an assessment of the relevant amounts. Thus (as to prayer 4) no declaration should be made; and (as to prayer 5) no order can be made. In addition, as to prayer 5, there is a problem flowing from the estoppel (as raised by issue 6A).

272 I have concluded that Australand did owe the Association a fiduciary duty, that it breached that duty by, for reward to itself, causing the Association to enter into the management agreement, and that the breach has not been negated by adequate disclosure. I have not concluded that Australand owed or breached any common law duty of care. Again, there seems to me to be no utility in making a declaration of breach, particularly in circumstances where the appropriate remedy is an account of profits, where the amount of the profit is clear and where it is not necessary, for the taking of those accounts, to make a declaration setting out the terms of the duty and its breach.

273 As to prayers 8, 9 and 10: there should be no award of damages. There should however be an account of profits and an order for payment.

274 The result would appear to be that the proceedings should be dismissed as against Arrow and Bondlake, but that the Association should succeed against Australand to the extent just indicated. In the ordinary way, costs should follow the relevant events. However, I think, the appropriate course is to give the parties an opportunity to consider these reasons, and to direct the parties to bring in short minutes of order to give effect to these reasons. If the parties cannot agree on the form of the orders to be made, or as to costs, then I will hear further argument.

Order

275 Thus, I make the following orders:

(1) Stand the proceedings over for mention at 9.30 am on Wednesday 20 June 2007.

(2) Direct the parties to bring in short minutes of order to give effect to these reasons.

(3) Reserve for further consideration the question of costs.

(4) Direct any party seeking orders for costs to notify the party or parties against whom the orders are sought of the orders sought and in brief the reasons why they are sought; any such notification to be given within 14 days of the date of publication of these reasons; a copy of any such notification to be delivered to my associate.
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