Owners Corporation Strata Plan 69470 v Owners Corporation Strata Plan 69948 (No 2) - [2017] NSWDC 262

District Court

New South Wales

Amendment notes

Medium Neutral Citation: Owners Corporation Strata Plan 69470 v Owners Corporation Strata Plan 69948 (No 2) [2017] NSWDC 262
Hearing dates: 4 – 7 July 2016; 26 August 2016; 21 October 2016; 3 November 2016, 17, 24 November 2016 (further written submissions), 7 April 2017(supplementary submissions) and 29 June 2017 (further supplementary submissions)
Date of orders: 18 September 2017
Decision date: 18 September 2017
Jurisdiction: Civil
Before: Hatzistergos DCJ
Decision:
(1) Verdict for the Defendant;
(2) Subject to any application to my Associate to relist the matter for any further or other order as to costs the Plaintiff should pay the Defendants costs; and
(3) Exhibits are to be retained for 28 days.

Catchwords:
CONTRACT – STRATA SCHEMES – strata management statement – construction of clauses within statement – whether failure to pay in accordance with statement gives rise to cause of action – BREACH – whether statement breached by failure to pay in accordance with “payment notice” – whether auditor validly appointed

WORDS AND PHRASES – meaning of “duly audited” – “reasonable details” – purpose of having “duly audited payment notice”
JURISDICTION – whether District Court of NSW has jurisdiction to determine claim for equitable contribution – matter remitted to District Court of NSW by the Supreme Court of NSW
Legislation Cited: Civil Procedure Act 2005 (NSW) ss 90, 100 and 144
District Court Act 1973 (NSW) s 134(1)(h)
Evidence Act 1995 (NSW) s 69
Interpretation Act 1987 (NSW) s 35(1)
Strata Schemes (Freehold Development) Act 1973 (NSW) ss 28S, 28U, 28W and sch 1C
Strata Schemes Management Act 1996 (NSW) ss 62, 107, 126, 138, 139, 167, 169, 173, 175 and 226; and ch 5
Uniform Civil Procedure Rules 2005 (NSW) r 36.1
Cases Cited: Blatch v Archer (1774) 1 Cowp 63; 98 ER 969
Bonette v Woolworths (1937) 37 SR (NSW) 142, 150 (
Chan & Anor v Cresdon Pty Ltd (1989) 168 CLR 242
Forbes Engineering (Asia) Pte Ltd v Forbes (No 4) [2009] FCA 675
Hunter’s Hill Council v Minister for Local Government; Lane Cove Council v Minister for Local Government; Mosman Municipal Council v Minister for Local Government; North Sydney Council v Minister for Local Government; Strathfield Municipal Council v Minister for Local Government [2017] NSWCA 188
Idya Pty Ltd v Anastasiou [2008] NSWCA 102
Mahoney v McManus (1981) 180 CLR 370; [1981] HCA 54
McElwaine v The Owners-Strata Plan No 75975 [2016] NSWSC 1589
Optus v Leighton & Ors [2002] NSWSC 327
Owners Corporation Strata Plan 69470 v Charbel CJ Pty Ltd [2004] NSWSC 1286
Owners Corporation Strata Plan 69470 v Owners Corporation Strata Plan 69948 (No 1) [2017] NSWDC 181
Owners Strata Plan 50276 v Thoo (2013) 17 BLR 33,789; [2013] NSWCA 270
Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131
Taouk v Assure (NSW) Pty Ltd [2017] NSWCA 227
The Owners Strata Plan 30695 v Stratacorp [2005] NSWSC 405
The Owners-Strata Plan No 21372 v Banovic (No 2) [2017] NSWSC 734
Category: Principal judgment
Parties: Owners Corporation Strata Plan 69470 (Plaintiff)
Owners Corporation Strata Plan 69948 (Defendant)
Representation:
Counsel:
Mr C Purdy (Plaintiff)
Mr J Young (Defendant)
Solicitors:
Wilshire Webb Staunton Beattie Lawyers (Plaintiff)
Sorenson and Brown Solicitors (Defendant)

File Number(s): 2014/358849
Publication restriction: Nil

Judgment

BACKGROUND - [1]
FACTS - [4]
PLAINTIFF’S CLAIM - [63]
DEFENDANT’S CASE - [72]
IS THE PLAINTIFF’S EQUITABLE CONTRIBUTION CLAIM WITHIN THE JURISDICTION OF THE DISTRICT COURT? - [77]
EQUITABLE CONTRIBUTION - [79]
THE PLAINTIFF’S STANDING AND CAPACITY TO BRING THE CLAIM - [86]
Construction of the SMS in the context of the SSFDA and SMSA - arguments - [91]
Conclusion – construction of the SMS in the context of the SSFDA and SSMA - [108]
Jurisdiction and discretion - [123]

CONSTRUCTION PRINCIPLES - [141]
WAS THE DEFENDANT IN DEFAULT? - [144]
APPOINTMENT OF MANAGERS - [153]
Budget notices and manager’s authority - [160]

APPOINTMENT OF AUDITOR - [171]
EVIDENTIARY STATUS OF AUDIT DOCUMENTS - [177]
DID THE PAYMENT NOTICES PREPARED BY MR WHITEHEAD COMPLY WITH CLAUSE 15.5 OF THE SMS? - [181]
Timing - [183]
Meaning of “duly audited” - [192]
Reasonable details - [199]
Signed by the manager - [203]
What does Part 15.5 of the SMS require? - [206]
Role of Mr Wallace - [217]
Mechanical ventilation - [222]
Management fees and miscellaneous expense items - [225]
80:20 ratio in respect of certain electricity, cleaning, repairs and maintenance, and fire - [232]
Lift and security expenses - [242]
Legal expenses - [252]
Road widening lease - [254]
Levies for payment and receipts - [258]

EVIDENCE OF MICHELLE JONES - [273]
CONCLUSION AS TO DULY AUDITED PAYMENT NOTICE - [298]
CONCLUSION - [308]
ORDERS - [316]

BACKGROUND

The building at 23 – 45 North Steyne, Manly comprises two owners’ corporations [1] which are co-located within it. The dispute the subject of these proceedings involves a claim for payments to the Building Management Committee [2] of which the two OCs are members.
1. Hereinafter referred to as “OC”
2. Hereinafter referred to as “BMC”
The case was first set down for hearing as a four day matter commencing on 4 July 2016. It did not conclude within that estimate resulting in further day of hearing on 26 August 2016. Thereafter oral submissions were delivered on 21 October 2016 and 3 November 2016. The delay in finalising the submissions was brought about in circumstances where the original time estimate was exceeded and other commitments prevented an earlier resumption. The parties thereafter lodged further written submissions on 17 and 24 November 2017.
Following judgment being reserved I reconvened the Court on 7 April 2017 in circumstances outlined in my judgment of 13 April 2017. I then ordered that the proceedings be transferred to the Supreme Court[3] pursuant to s 144(2) of the Civil Procedure Act 2005 (NSW). [4] On 19 May 2017, N Adams J ordered the proceedings be remitted back to this Court pursuant to s 144(3)(b) of the 2005 Act. Further written submissions were thereafter lodged on 29 June 2017. These events have regrettably delayed the finalisation of this matter.
3. Owners Corporation Strata Plan 69470 v Owners Corporation Strata Plan 69948 (No 1) [2017] NSWDC 181
4. Hereinafter referred to as the “2005 Act”

FACTS

The Plaintiff is the OC of the scheme comprising the residential section of the building, being 11 units, with common property on levels 1 – 4. [5] The Defendant is the OC of the scheme comprising the retail section, being two lots on the ground floor, with common property facing the street. [6] The retail scheme also includes areas in the basement and car park levels otherwise part of the residential scheme, namely, a third utility lot underneath the rear entry ramp, two car parking spaces and a grease arrestor room.
5. Hereinafter referred to as the “residential scheme”
6. Hereinafter referred to as the “retail scheme”
Since July 2003, C.G.M.B Co Pty Ltd has been the registered proprietor of Lot 1 in Strata Plan 69948. [7] Mr Matthew Neville and his father, Mr Brian Neville, are directors of C.G.M.B Co Pty Ltd. [8] Since around September 2003, Mr Savva Anastasiou and his brother, Mr John Anastasiou are the registered proprietors of Lots 2 and 3 in the retail scheme. [9]
7. Affidavit of Mr Brian Neville dated 7 September 2015 at [1]
8. Affidavit of Mr Brian Neville dated 7 September 2015 at [1]; and Affidavit of Mr Matthew Neville dated 2 September 2015 at [1]
9. Affidavit of Mr Savva Anastasiou dated 9 September 2015 at [1]
In accordance with the provisions of Part 2, Division 2B of the Strata Schemes (Freehold Development) Act 1973 (NSW), [10] a strata management statement [11] was registered at or around the time of registration of the two strata schemes. [12] Pursuant to s 28W of the SSFDA and its own terms, [13] the SMS has the effect of a deed as between the two OCs (as well as the individual lot owners and lessees).
10. Hereinafter referred to as the “SSFDA”
11. Hereinafter referred to as “SMS”
12. The SMS can be found at Affidavit of Richard Wallace 29 May 2015 at Exhibit RW 1, p21 and at Exhibit 9.1, Report of Ms Michelle Jones dated 16 May 2016
13. Part 1 of the SMS Annexure D.1
An essential element of the shared occupancy of the building as regulated by the SMS is the BMC. Its existence is statutorily mandated[14] and Part 3 of the SMS establishes it. Its membership comprises the two OCs which appoint representatives to attend BMC meetings. Its functions, powers and obligations are set out principally in Parts 5 and 10, and clause13.3 of the SMS. clause13.3(a) of the SMS provides the functions of the BMC to:
14. sch 1C, clause 2 of the SSFDA

13.3 Obligations of the Building Management Committee
(a) Without limiting any other covenant contained in this Statement, the Building Management Committee must:
(1) ensure the proper operation, maintenance, repair, renovation and replacement of the Shared Facilities and the compliance with any statutory authority;
(2) ensure the proper control, management, administration and maintenance of the Shared Areas and the compliance with any statutory authority;
(3) effect and maintain the Insurance on behalf of the Owners;
(4) implement decisions made by the Building Management Committee;
(5) if requested by the Building Management Committee prepare the plan for the Refurbishment Works referred to in clause 14.1;
(6) carry out its obligations in respect of maintenance agreements in accordance with clause 10.3 and administer all Approved Maintenance Agreements;
(7) carry out its obligations in clause 6.2; [15] and
(8) carry out any obligations of the Manager under this Statement.

(b) The Building Management Committee may appoint a suitably qualified person to act as Manager, and delegate to that person the duties referred to in clause 13.3(a)
15. Clause 6.2 requires the BMC’s Secretary to prepare and distribute notices and agendas for the meetings, to prepare minutes and distribute those minutes to the Residential Owners and the Retail Owners within 14 days of the relevant meeting

It is not in issue that the BMC’s functions, powers and obligations, include areas of the building designated as ‘Shared Area’ and the infrastructure, machinery and equipment servicing the building as a whole, designated as ‘Shared Facilities.’
Shared Area is defined in clause 2.1 of the SMS as:

Shared area means in relation to the Building the entrance and entry foyer, the central wall on all relevant levels between the Residential Flat Building and the Retail Shops, the walkways, the plant rooms, the central driveways and its entry and exit ramps, the fire exits from the basement and the façade.

Shared Facility us defined in clause 2.1 of the SMS as:

‘Shared Facility’ or ‘Shared Facilities’ means the services, machinery, equipment referred to in Schedule A and any alterations, additions or replacement of those items which facilities are located in the Shared Area.

The designated Shared Facilities are described in Schedule A of the SMS as fire protections services, hydraulics (being the town water mains, sewer connections and air-conditioning plant and equipment and electrical (external lighting and emergency exit lighting),
The BMC’s obligations include ensuring the proper operation and maintenance of the Shared Facilities and proper maintenance and management of the Shared Areas. [16] The expenses involved in doing so, designated as ‘Shared Area Costs’ and ‘Shared Facility Costs’, are defined in clause2.1 of the SMS as follows:
16. Clauses13.3(a)(1) and (2) of the SMS

2.1 Definitions
‘Shared Area Costs’ means all costs, expenses, fees and other outgoings paid by the Owners or the Building Management Committee (as the case may be) in managing, supervising and maintaining a Shared Area and keeping it secure and includes without limitation all costs in respect of:
(a) services supplied including all charges for electricity, gas, oil and telephone services;
(b) the cleaning, servicing, maintaining and renovation of a Shared Area;
(c) providing, maintaining, repairing and replacing all directional signs including, without limitation illuminated signs;
(d) all costs for the operation and maintenance of the security system;
(e) the amount or amounts payable to the relevant contractor under an Approved Maintenance Agreement;

all other amounts determined by the Building Management Committee by Unanimous Resolution to be Shared Costs.
‘Shared Facility Costs’ means the following expenses in relation to a Shared Facility:
(a) the maintenance, replacement and repair costs;
(b) the amount or amounts payable to the relevant contractor under an Approved Maintenance Agreement; and
(c) all other amounts determined by the Building Management Committee by Unanimous Resolution to be Shared Costs.

The funding of these expenses is regulated by the provisions of Part 15 of the SMS. Clause 15.1 of the SMS requires the OCs to contribute to the Shared Facility Costs and Shared Area Costs. Their contributions are to be their Area Based Percentages as set forth in Schedule B of the SMS, unless the OCs shared facility cost is specified in Schedule A (which it is not). Schedule B is in the following terms:

SCHEDULE B
1 AREA BASED PERCENTAGE FOR COMMON AREAS EXCLUSIVE OF THE CAR PARKING COMMON AREAS
The area based percentage shall be that percentage being a portion of any Owner’s Floor Area to the total Floor Area of the Building (excluding driveways/ramps)

Total Floor Area of the Building (excluding car park & balconies)

2437 Sqm

Floor Area of the Residential Flat Building

1931 Sqm

Floor Area of the Retail Shops

506 Sqm

Residential Flat Building Area Based Percentage

79%

Retail Shop Area Based Percentage

21%

2 AREA BASED PERCENTAGE FOR THE CAR PARKING COMMON AREAS
The area based percentage shall be that percentage being a portion of any Owner’s Floor Area to the total Floor Area of the Building (excluding driveways/ramps).

Total Area of Carspaces

353 Sqm

Area of Residential Flat Building Carspaces

294 Sqm

Area of Retail Shops Carspaces

59 Sqm

Residential Flat Building Carspaces Percentage

83%

Retail Shops Carspaces Percentage

17%

Part 15 of the SMS then sets out the detailed mechanism for the payment of the Shared Facility Costs and Shared Area Costs. Clause 15.2 of the SMS provides:

15.2 Payment of Shared Facility Costs
The Shared Facility Costs and Shared Area Costs and other costs and expenses incurred under this Statement must be paid in accordance with this Part 15 unless otherwise specified in this Statement or agreed by the Building Management Committee.

Clause 15.3 of the SMS provides:

15.3 Budget
(a) The Manager must determine the Budget for each 12 month period commencing on 1 July in any year. For the period from the date of this Statement, until 30 June next the Budget will be proportioned accordingly.
(b) The Budget must be based on the Manager’s estimate, giving reasonable details and include itemised estimated monetary requirements and expenditures of the costs for the 12 month period of:
(1) the Management Fee;
(2) the Shared Facility Costs (with a break up of the applicable part of the Shared Facility Costs);
(3) the Shared Area Costs (with a break up of the applicable part of the Shared Area Costs);
(4) garbage removal costs referred to in Part 16;
(5) Insurance; and
(6) the costs of cleaning and repairs.

(c) The Budget must contain itemised details of:
(1) each item or matter for which an Owner is responsible to contribute to;
(2) each Owner’s proportion of a particular matter or item; and
(3) an amount of that proportion.

Relevantly the SMS further provides:-

15.4 Payment of Owners
(a) The Budget must be submitted to each Owner by 30th June in each year together with a notice of the amount that Owner is responsible for in the 12 month period to which the Budget relates.
(b) Upon receipt of the Budget, each Owner must pay the Manager the payments referred to in clause 15.4(a) in respect of that 12 month period by equal quarterly instalments in advance, no later than the 1st day of October, January, April and July of each year of this Statement excluding the first and last payments which must be proportionate if necessary.
15.5 Statement
As soon as practicable (but no later than forty-two (42) days after the expiration of each 12 month period) the Manager must provide each Owner with a duly audited Payment Notice signed by the Manager specifying the amount for which each Owner is responsible and which were incurred during that 12 month period. The Payment Notice must give reasonable details.
15.6 Adjustments
Within 14 days of the receipt by an Owner of the Payment Notice referred to in clause 15.5, the Owner must pay the Manager the difference (if any) between the amount paid by that Owner in accordance with clause 15.4 and the amount specified in the Payment Notice. If there has been an overpayment by an Owner that amount must be credited against the Owner’s proportion for the next ensuring quarter.
15.7 Obligations of Owners on Default by an Owner
(a) Any amount unpaid by a defaulting Owner is a debt due and owing to the Building Management Committee together with interest at the rate of 2% per annum above the highest overdraft rate from time to time charged by the Commonwealth Bank of Australia or, if that rate is not available, the rate applied by the NSW Supreme Court in respect of judgment debts. The interest is to be computed on a daily basis from the date on which the payment is due until payment in full.
(b) While an Owner remains a defaulting owner:
(1) the Owner is not entitled to exercise a vote at any Building Management Committee meeting; and
(2) the Owner is not entitled to request a meeting of the Building Management Committee under clause 6.1 or submit a proposal to the Building Management Committee under clause 10.1.

The budgeting for the payment of BMC expenses, levying of the parties’ respective contributions and actual payment of the expenses was undertaken by a series of managers on behalf of the BMC.
The Plaintiff asserts these were appointed pursuant to clause 13.3 (b) of the SMS with the details being:

From 29 February 2003 to 19 February 2008 – BCS Strata Management Pty Ltd. [17]

From 19 February 2008 to 30 September 2011 – Robinson Strata Management Pty Ltd; [18] and

From 1 October 2011 to the present – Whelan Property Group Pty Ltd. [19]
17. Hereinafter referred to as “BCS”
18. Hereinafter referred to as “RSM”
19. Hereinafter referred to as “Whelans”

Over the period from 2004 to October 2011, the Plaintiff and the Defendant used the same strata manager as the BMC. As a result, throughout the history of the current dispute, the same manager was acting on behalf of both parties and the BMC.
The Plaintiff’s case is that since the BMC’s inaugural general meeting on 26 November 2003, the payment of Shared Area and Shared Facility Costs and other expenses which ought to have been made to the BMC apportioned between the parties in accordance to the terms of the SMS have been funded to a disproportionate extent by the residential scheme. The Plaintiff asserts it became aware that the residential scheme was bearing this disproportionate burden, after Richard and Elizabeth Wallace became involved in the BMC following the purchase of their lot in the residential scheme on or about 27 June 2007. [20]
20. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [2]
At a meeting of the BMC on 19 February 2008, resolutions were passed to terminate the appointment of BCS and to appoint RSM as the agent for the BMC. [21] Records prepared by BCS handed over showed that the Plaintiff was in arrears in the amount of $13,628 and the Defendant in surplus for $1,848. [22]
21. Affidavit of Mr Brian Neville dated 7 September 2015 at [11]
22. Exhibit 1, Body Corporate Services “Financial Year End Accounts for period 01/07/2007 to 29/02/2008” prepared for the owners of BMC – Villa Mare

The Plaintiff drew attention to the fact that the Defendant’s own accounts showed it was in arrears as at 31 August 2007 in the sum of $7,950. [23] The Defendant submitted that to the extent the accounts for that period are relevant, they at best show that there were inconsistencies, inaccuracies and unreliability in the BMC accounts. [24]
23. Affidavit of Mr Richard James Wallace dated 29 September 2015 at Exhibit RW-74, p 10
24. Defendant’s Written Submissions dated 12 October 2016 at [92]
On 14 May 2009, the Defendant through its solicitor, Mr David Le Page, expressed a claim that it had overpaid “not less than $45,000.” [25]
25. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-8, p 73
At the meeting of the BMC on 14 July 2009, it was resolved not to accept the RSM’s balance sheet and statement of income and expenditure due to “many items being on the residential accounts which belonged to the [BMC].” Even then, there was a resolution not to appoint an auditor. [26]
26. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-14, p 99
The Plaintiff’s position is that the errors by BCS between 2003 and 2008, and RSM resulted in the allocation to the residential scheme of expenses properly characterised as BMC expenses and which should have been paid from BMC funds and allocated according to the appropriate apportionment between the residential and retail schemes under the SMS.
The Plaintiff argues that at no stage until 2009 did the manager follow the procedure mandated by clause 15.5 of the SMS, whereby at the end of the financial year, the BMC accounts are audited to enable adjustment of amounts owed by or owed to the owners. It contends that it can be inferred from the resolution of 22 November 2010, that “audits be undertaken by the strata manager as required” [27] that the BMC had agreed that audits be undertaken otherwise than in accordance with Australian Auditing Standards. [28] This it is said remained the position under the initial appointment of an auditor Mr Alexander Whitehead after Whelans were appointed as managers. [29]
27. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-32, p 237
28. Hereinafter referred to as “ASA”
29. Plaintiff’s Written Submissions in Reply dated 19 October 2016 at [33]
After RSM was appointed, a document described as a ‘payment notice’ was prepared by them for 2009 [30] and appears to have been received on 25 August 2009. [31] This claimed an amount in arrears owing by the Defendant in the sum of $15,217.08.
30. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-18, pp 113 – 114A
31. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [30]
On 18 September 2009, Mr Wallace wrote to the BMC manager requesting a meeting of the BMC to discuss notification of a dispute pursuant to Part 12 of the SMS. A meeting was held however the minutes disclose that it was deadlocked and notification was not agreed. [32] A further meeting was convened on 6 November 2009, however no settlement was reached. [33]
32. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [32] and Exhibit RW-21, p 135
33. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [36] and Exhibit RW-23, p 139
On 27 November 2009, an application was made to Fair Trading to have the dispute mediated. [34] Thereafter an application was lodged with the then Consumer, Trader and Tenancy Tribunal [35] for an order by an adjudicator. [36]
34. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [38] and Exhibit RW-25, p 151
35. Hereinafter referred to as “CTTT”
36. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [39] and Exhibit RW-26, p 153 [ff]
The application to the adjudicator filed by Mr Wallace states the amount of $15,217.09 was ‘eventually paid.’ [37] The Plaintiff cannot explain why Mr Wallace at that stage was under what it termed was a “mistaken impression.” Mr Matthew Neville, whose interest was in Lot 1 of the retail scheme, gave evidence that the “balance brought forward” from previous years shown in Exhibit RW-31 was not due from the retail scheme. [38] The Defendant submitted that Mr Wallace’s admission contradicted the Plaintiff’s claim and the basis for the Defendant being declared unfinanical. [39] Mr Brian Neville stated that he strongly disputed that the Defendant was unfinancial in the 30 June 2009 financial statement and had paid every invoice received. He reiterated this in a letter by him and Mr Steve Anastasiou to the Registrar of the CTTT dated 3 May 2010 stating:

“SP 69948 do not agree.
No invoices from RSM have been unpaid by SP 69948 as at the date of this letter. We have sought confirmation from RSM of any outstanding levies or contributions and should RSM identify any legitimate outstanding items we will pay them immediately.” [40]

Mr Matthew Neville stated that he believed the Defendant disputed the obligation to pay the amount and believed it had not been paid. [41]

37. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-26, p 163

38. Affidavit of Mr Matthew Neville dated 2 September 2015 at [5]

39. Defendant’s Written Submissions dated 12 October 2016 at [94]

40. Affidavit of Matthew Neville dated 2 September 2015 at Exhibit MN-1 at Tab 1, p 3

41. T 234.10 – .34

On 23 February 2010, the solicitor for the Defendant wrote to the Plaintiff seeking to have a dispute of its own referred to the CTTT directly without the matter first going to the BMC as required by clauses 12.2 and 12.3 of the SMS. [42] Mr Wallace on behalf for the Plaintiff responded that no details of the Defendants request had been provided and it had not been discussed by the BMC. He added that the Plaintiff would look favourably on any proposal that can be justified on grounds of fairness. [43]
42. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [41] and Exhibit RW-27, pp 196 – 197
43. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [42] and Exhibit RW-28, p 199
On 2 July 2010, the adjudicator dismissed the application lodged by Mr Wallace stating that the conditions in s 139 of the Strata Schemes Management Act 1996 (NSW) [44] had not been complied with and he did not in any event have power to make orders for payment of damages. [45]
44. Hereinafter referred to as the “SSMA”
45. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [44] and Exhibit RW-30, pp 225 - 230
There was another “payment notice” prepared by RSM annexed to the notice of an Annual General Meeting on 27 October 2010. [46]
46. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-31, p 234
The evidence of Mr Wallace was that in 2010 and 2011 he became increasingly dissatisfied with the performance of RSM and communicated his dissatisfaction in an email dated 28 July 2011. In that email, Mr Wallace objected to the calling of a meeting, and stated:-

“I am personally particularly incensed to have found that Clive has called the AGM of the BMC without any consultation regarding dates and more importantly, without having properly completed the accounts for the financial year.” [47]
47. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [47] and Exhibit RW-33, p 241

In his email to RSM, Mr Wallace asserts that following the 2009 payment notice, the Defendant refused to pay resulting in it becoming a “defaulting owner.” [48] This is a reference to clause15.7 of the SMS.
48. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [47] and Exhibit RW-33, p 241
On this day Mr Wallace stated he received a phone call, subsequently confirmed in a letter 16 August 2011, that RSM had determined to resign. [49]
49. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [48] and Exhibit RW-34, pp 248 – 249
Based on an email dated 18 August 2011, which forwards the internal email from Mr Austin Robinson to Mr Clive Georgeson, dated 16 August 2011, changes were made to the RSM budget and payment notices based on “how Richard thinks they should be.” [50]
50. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [48] and Exhibit RW-34, pp 248 – 249
The agenda prepared for the meeting of 28 September 2011 stated:

“[22] Financial Status of SP69948 on the BMC. The BMC resolves to acknowledge that SP69948 disputes the claim by SP69470 that it is unfinancial because the amounts in dispute relates to works that SP69948 argue were unauthorised and undertaken at the sole discretion of SP69470. SP69948 says it is financial.” [51]
51. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-35, p 255

Mr Wallace agreed that before the meeting he stated in a letter to the Defendant’s solicitors that the Defendant would not have voting rights unless payment was received. He stated that he felt the need to try and discuss the dispute as well as to cover other issues that he felt needed to be covered. [52] When asked whether he felt the need to have them covered because the Defendant was not going to have a vote, Mr Wallace responded:

“A. Because, because – it’s no point in just having – you need to try and find common ground and in order to find common ground you need to try and have a discussion.” [53]

He denied that he meant to “leverage” the Defendant. [54]

52. T 150.49 – 151.9

53. T 151.11 – .15

54. T 151.17 – .18

The BMC minutes of 28 September 2011 document that at that meeting the Defendant was unfinancial. The minutes do not record how this occurred. What the minutes show is that the chairman, Mr Georgeson from RSM, declared that the Defendant was unfinancial and unable to vote. Thereafter the meeting proceeded to deal with a range of matters notwithstanding the Defendant’s opposition. [55]
55. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-36, p 257
In evidence, Mr Wallace confirmed that in his view, the Defendant was not financial from at least 28 September 2011. [56] Mr Wallace stated that he was aware that the payment notices understated the amounts owed by the retail scheme, but stated that the residential owners were “very prepared to be short changed to have this over and done with.” [57] In submissions, the Defendant stated that Mr Wallace knew that the matters relevantly unresolved and accepted that the management of the BMC was in chaos. [58] It referred to an email forwarded to Mr Robinson of RSM, dated 28 July 2011, in which Mr Wallace is recorded as stating:-

“The management of the BMC is in chaos.” [59]
56. T 138.1 – 17
57. T 138.32 – .34
58. Defendant’s Written Submissions dated 12 October 2016 at [108]
59. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-33, p 246

In evidence, Mr Wallace denied that he would use the term “chaos.” [60] When his documented comments were put to him, Mr Wallace agreed that he would have believed it at the time. [61]
60. T 127.25 – .27
61. T 127.35 – .37
Despite the disputed assertion on the part of the Plaintiff that the Defendant was not financial and therefore unable to vote, the meeting of 28 September 2011 proceeded and the Defendant’s input would be recorded as part of the minutes. [62] At that point, Mr Wallace is recorded as having been appointed as the chairman and secretary.
62. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-36, p 257
There were disputed versions as to what took place at the meeting of 28 September 2011. [63] Mr Matthew Neville’s version relating to the Defendant being declared unfinanical added:

“Lot 2 did not agree and disputed this judgement. Lot 2 still refuses to accept the legality of the registered SMS amendments and argues that it is financial according to the original SMS. The meeting proceeded on the understanding that Lot 2’s input and votes would not be counted for resolutions but would be recorded in the minutes of the meeting.” [64]
63. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [49] – [51] and Exhibit RW-36, pp 257 – 261
64. Affidavit of Mr Matthew Neville dated 2 September 2015 at Exhibit MN-27, p 135

There was an agreement for a further meeting of the BMC on 19 October 2011. On 18 October 2011, Mr Matthew Neville requested that the meeting be postponed due to an accident involving Mr Brian Neville which resulted in his hospitalisation. [65]
65. Affidavit of Mr Matthew Neville dated 2 September 2015 at [48] – [49]
This is said to have occurred on 21 October 2011, however only Mr Wallace and Ms Pam Lever, the secretary of the residential scheme, were present. The minutes record a request on behalf of the Defendant that the meeting be rescheduled. [66] The re-scheduling occurred for 24 October 2011, on which occasion, Mr Matthew Neville was in attendance. His version of what occurred was noted up in the minutes. [67] Mr Wallace disputed the version of conversation, but in any event, stated in an email dated 2 November 2011, that the retail scheme did not have voting rights and notations would be regarded as comments. [68]
66. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-38, p 270
67. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-38, p 272
68. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-39, p 280
In an email to Mr Matthew Neville, dated 23 November 2011, Mr Wallace informed him:-

“Whelan Property Services are attempting to get the BMC accounts into proper order. Yesterday, I had a conversation with a Mr Alex Whitehead, Chartered Accountant, who is working on the accounts. It seems that Robinsons have not made proper journal entries for year end adjustments so the accounts are not in line with the Payment Notice. Robinsons have been asked to rectify this oversight.
Until such time as it is done, we can only work on the Payments Notice issued by Robinsons which I have attached below.
Please note that the budgeted contribution is $48,893.30 payable in four quarterly instalments commencing 1st October.” [69]
69. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-41, p 289

On 1 December 2011,the Defendant’s property manager, Mr Brett Rayner wrote to Whelans stating:

“Please note that until such time as audited accounts of the BMC can be provided indicating the current financial position of SP 69948, no further payments will be made. This is of particular concern as the representative of SP 69470 is claiming an amount in arrears in excess of $45,000. As the accounts cannot be reconciled we find this claim difficult to comprehend.” [70]

The email added that there were a number of claimed anomalies in the payment notice. [71]

70. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-43, p 295

71. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-43, p 295

Mr Wallace responded on 21 December 2011, pointing out that the Defendant was refusing to make payment until the accounts were audited but did not consent to pay for it. He pointed out that the accounts would be audited and the cost apportioned between the parties. [72]
72. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-44, p 302
On 20 August 2012, Mr Alexander Whitehead prepared an independent audit report representing the balance sheet as at 30 June 2012. In it he gave a basis for a qualified opinion stating:

“Basis for Qualified Opinion
Under the terms of my engagement I was appointed auditor of Deposited plan 1047991 during the period ended 30 June, 2012 and therefore I am unable to form an opinion as to whether the opening balances are fairly stated.” [73]
73. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-50, p 333

The statement was based on the fact that he examined the accounts only for a nine month period when Whelans became the managers. Mr Wallace accepted that the Defendant did not accept the opening position in the accounts and that the payment notice prepared by RSM of 28 September 2011 represented the bare minimum that was owed to the residential. [74]
74. T 153.26 – .48
Thereafter there was correspondence and various attempts to convene meetings aimed at resolving the issues however these were unsuccessful. [75]
75. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [62] – [81]
The Plaintiff asserts that the BMC appointed an auditor, being an Alexander Whitehead, to prepare payments notices based on audited accounts of the BMC commencing with the financial year ending 30 June 2004. The appointment of Mr Whitehead was opposed by the Defendant at a meeting on 12 February 2014. The Plaintiff nevertheless contends that:

The retail scheme’s opposition to the appointment of an auditor was immaterial as it was not financial at the time of the relevant meeting; and

In any event, on a proper construction of Part 15 of the SMS, the auditing of BMC accounts, whether by a qualified auditor or otherwise, was an obligation of the manager which the BMC had no power to gainsay.

To enable Mr Whitehead to prepare the documents, Mr Wallace personally but also in his capacity as BMC secretary, gathered and collated the records of the BMC.
The records provided by RSM and to Whelans when the latter assumed the role, were said to be not sufficient to enable to the preparation of accounts. This led Mr Wallace to obtain additional source documentation from another lot owner in the residential scheme. [76] He also had recourse to the residential scheme’s own records as they included records of the payment of amounts which ought to have been treated as BMC expenses. The records obtained have been discovered in the proceedings.
76. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [58] and [82] – [84]
Mr Wallace gave evidence that he prepared an Excel spread sheet from this information and compiled profit and loss and balance sheets for the financial years 2004 – 2012 adding into the original BMC financial reports, the BMC expenses that had been made by the residential scheme. [77] The original spread sheets were stated to be no longer available. [78]
77. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [85]
78. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [87]
Mr Wallace stated that on the instructions of Whelans, an independent audit report for the building was carried out for the financial years ended 30 June 2004 – 30 June 2013 by Mr Whitehead and dated 27 May 2014. [79]
79. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [86] and [89] and Exhibit RW-65
Mr Wallace stated that he made himself available to assist the auditor Mr Whitehead in the audit process until May 2014. [80]
80. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [88]
Following completion of the audit process, payment notices for the financial years 2004 – 2013 signed by the manager, Mr Wallace directed them to be issued in June 2014, purportedly pursuant to clause15.5 of the SMS. [81]
81. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [91] and Exhibit RW-65
Each audit report purported to calculate for each financial year the shortfall in contributions made by the Defendant and the amounts by which the Plaintiff had paid in excess of its own contributions, with the shortfall in overpayment being carried over in succeeding financial years and recorded in the BMC loan accounts as a “debit” to the account of the Defendant and a “credit” to the account of the Plaintiff. [82]
82. Amended Statement of Claim filed 4 July 2016 at [13] (Pleadings and particulars)
On or about 6 August 2014, Mr Whitehead prepared what was termed an independent audit report for the financial year ended 30 June 2014, which was issued by the Manager to the parties. [83]
83. Affidavit of Mr Richard James Wallace dated 29 May 2015 at [95] and Exhibit RW-69
On or about 7 August 2015, Mr Whitehead prepared what was termed as independent audit report for the financial year ended 30 June 2015. [84]
84. Affidavit of Mr Richard James Wallace dated 29 September 2015 at Exhibit RW-93

PLAINTIFF’S CLAIM

The Plaintiff relies upon the most recent payment notice for the financial year ending 30 June 2015, the earlier notices being necessary in order to satisfy Mr Whitehead as to the amounts carried forward from previous years. [85]
85. Amended Statement of Claim filed 4 July 2016 at [14A] (Pleadings and particulars)
On this basis, it is claimed that as at 30 June 2015, the cumulative shortfall of the payment of the Defendant’s contribution amounted to $98,706 and the cumulative overpayment of the Plaintiff’s contribution amounted $97,142. [86]
86. Amended Statement of Claim filed 4 July 2016 at [15] (Pleadings and particulars)
The said audit documents were tendered as “duly audited payment notices” which the Plaintiff submitted, had evidentiary significance under s 69 of the Evidence Act 1995 (NSW). [87] It was argued that their provision on a proper construction and application of Part 15 of the SMS triggered the Defendant’s obligation to pay within 14 days the difference between the amount it actually paid during the relevant financial years and those amounts specified in the payment notices.
87. Hereinafter referred to as the “1995 Act”; see: Plaintiff’s Written Submissions dated 16 September 2016 at [23](b)
The Plaintiff’s case as it emerges from the evidence from Mr Wallace, is that the Defendant has frustrated the operation of Part 15 of the SMS by:-

Refusing to pay the sum found by RSM’s audit to be payable to the BMC;

Resisting the Plaintiff invoking the dispute mechanism under Part 12 of the SMS and refusing to allow issues in dispute to be determined by the body then vested with the appropriate jurisdiction, being the NSW CTTT; and

Insisting on provision of audited payment notices under Part 13 of the SMS as a precondition to payment of arrears of contributions, but refusing to:

Either to agree to the appointment of an auditor to prepare such statements or to contribute to the cost of doing so; or

To recognise the legitimacy of the audit once it had been undertaken;

Making no payments whatsoever between 23 May 2011 and 28 June 2013; and

Making such payments as were made on 28 June 2013 and thereafter without reference to budgets prepared by Whelans for the 2013, 2014, 2015 and 2016 financial years and without explanation as to the basis of calculation of the amounts paid. [88]
88. Plaintiff’s Written Submissions dated 16 September 2016 at [16]

The Plaintiff accordingly sought orders:-

That the Defendant pay the sum of $98,706 or such other sum identified as the measure of its default, following the ‘due audit’ of the 2015 accounts of the BMC, for DP 1047991;

That the Defendant pay the sum of $14,649.57 or such other sum due in respect of the BMC budget for the financial year ending 30 June 2015;

Interest pursuant to clause 15.7(a) of DP 1047991 strata management statement, or alternatively pursuant to s 100 of the 2005 Act;

In the alternative, damages;

In the further alternative, an order that an inquiry be held into what payments had been made by the Plaintiff in discharge of the Defendant’s obligations and an order for contribution in respect of amounts so determined;

Costs. [89]
89. Amended Statement of Claim filed 4 July 2016 at [1] – [6] (Relief claimed)

The claim in respect of proposed inquiry under the claim for proposed order 5, was not pressed. [90] The claim in proposed order 1 was pleaded and identified as based in debt, damages and equitable contribution. [91]
90. Plaintiff’s Written Submissions dated 16 September 2016 at [120]
91. Amended Statement of Claim filed 4 July 2016 at [19] – [21] (Pleadings and particulars)
In relation to the sum contained in proposed order 2, the claimed amount of $14,649.57 was said to be payable pursuant to clauses15.6 and 15.7 of the SMS. The amounts comprise instalments levied under the budget and due on 1 July 2015, 1 October 2015, 1 January 2016, and 1 April 2016 being an amount of $20,215.00 but for the amount of $5,600.43 paid, leaving according to the Amended Statement of Claim an amount of $14,649.57 unpaid. In its written submission the Plaintiff acknowledged the difference correctly at $14,614.57. [92]
92. Plaintiff’s Written Submissions dated 16 September 2016 at [26]
The Plaintiff’s argument in this regard is to be found in one paragraph of its written submissions. [93]
93. Plaintiff’s Written Submissions dated 16 September 2016 at [26]
The Defendant correctly draws attention to the fact that clause 15.6 of the SMS relates to non-payment of an amount pursuant to payment notices, and no payment notice has been issued or pleaded in relation to this amount. [94] Therefore, in the absence of any other basis on which this portion of the Plaintiff’s claim can be sustained, the Defendant submits that it must fail.
94. Defendant’s Written Submissions dated 12 October 2016 at [6]

DEFENDANT’S CASE

The Defendant accepts that the BMC appointed BCS as its manager by way of document dated 19 November 2003. However it asserts that this did not delegate to the manager the duty to make any determination in relation to the levying or payment of contributions. [95]
95. Further Amended Defence filed 4 July 2016 at [7](a)
In relation to RSM the Defendant asserts it was not validly appointed as no written agency agreement was annexed to the notice of the of the BMC meeting, no agency agreement was tabled and no written agency agreement was entered into between RSM and the BMC. Further it denies that the BMC effectively delegated its powers and obligations in this regard to the managers. [96]
96. Further Amended Defence filed 4 July 2016 at [7](b)]
In relation to Whelans, it asserts it was not validly appointed as the Defendant was denied voting rights as the Plaintiff incorrectly claimed it was not financial. Further it asserts that no written agency agreement was annexed to the BMC meeting agenda, no agency agreement was tabled at the meeting and no agency agreement was subsequently entered into. Further it asserts that the instrument appointing Whelans did not delegate the authority to make the determination pursuant to clause 15.3(a) of the SMS or provide an estimate pursuant to clause 15.3(b) of the SMS. [97]
97. Further Amended Defence filed 4 July 2016 at [7](c) and [7](d)
The Defendant opposed the relief claimed in the Plaintiff’s proposed order 1, contending:-

The Plaintiff’s claim for equitable contribution [98] can have no application, as the obligations under the SMS were several, not joint, and the doctrine of equitable contribution can have no authority where the obligations of the parties are distinct. [99] It argued that in any event such relief was not in the Court’s jurisdiction as it did not have jurisdiction to deal with a claim for equitable contribution as the claim did not fall within s 134(1)(h) of the District Court Act 1973 (NSW) [100] or any other jurisdictional provision of the 1973 Act. [101]

The Plaintiff had no standing and suffered no loss; [102]

Even if the Court has powers to make the orders sought by the Plaintiff, it should nonetheless exercise its discretion not to do so on the basis of the remedies available pursuant to ch 5 of the SSMA and having regard to the broad inquisitorial and investigative powers of the adjudicator, it was more appropriate that issues between the parties be resolved by the adjudicator. [103]

The claim must fail because the pre-condition to payment, namely the existence of a duly audited payment notice within clause 15.5 of the SMS does not exist, as the document prepared by Mr Whitehead referred as the “Whitehead document” are not duly audited payment notices within the meaning of clause 15.5 of the SMS; [104]

To the extent relevant the Defendant disputes the proper treatment of expense items in the claim. [105]
98. Amended Statement of Claim filed 4 July 2016 at [21]
99. Further Amended Defence filed 4 July 2016 at [20](b) and Defendant’s Written Submissions dated 12 October 2016 at [32] – [34]
100. Hereinafter referred to as the “1973 Act”
101. See Further Amended Defence filed 4 July 2016 at [20](b) (as noted earlier the claim for relief in prayer 5 of the Amended Statement of Claim was not pressed)
102. Defendant’s Schedule of Issues undated at [1] – [2]
103. Defendant’s Schedule of Issues undated at [4] and Further Amended Defence filed 4 July 2016 at [22]
104. Defendant’s Schedule of Issues undated at [5]
105. Defendant’s Schedule of Issues undated at [6] – [11] and Further Amended Defence filed 4 July 2016 at [11](d), [11](e) and [21]

These arguments will be considered in turn.

IS THE PLAINTIFF’S EQUITABLE CONTRIBUTION CLAIM WITHIN THE JURISDICTION OF THE DISTRICT COURT?

The Defendant contended that this Court has no jurisdiction, power or authority to determine the Plaintiff’s claim for equitable contribution on the basis that the claim is not one falling within s 134(1)(h) of the 1973 Act or any other jurisdictional provision of the 1973 Act. [106]
106. Further Amended Defence filed 4 July 2016 at [20](b)
The effect of the order of the Supreme Court of NSW of 19 May 2017 is that this Court may now exercise the jurisdiction to hear and dispose of proceedings including such jurisdiction as is necessary to determine any question in the proceedings. [107] Accordingly so far as this issue arises it is unnecessary to determine the merits of the respective parties’ arguments. This Court now has jurisdiction to order equitable contribution.
107. s 144(4) of the 2005 Act

EQUITABLE CONTRIBUTION

The Plaintiff contends that, to the extent that the two parties have joint and several liability as members of the BMC, to comply with Part 13 of the SMS they should as between themselves contribute proportionately to the to the satisfaction of their obligation in accordance with the principles in Mahoney v McManus. [108] It contends that proportionality is given content by the terms of the SMS and the appropriate contribution is a quantified by the audited payments notice.
108. (1981) 180 CLR 370; [1981] HCA 54
Clause 13.2 (a) of the SMS is in the following terms:

13.2 Nature of Owner’s Obligations
(a) The obligations under this Statement are several and not joint and several, and each Owner must promptly comply with its obligations contained or implied in this Statement.

Although the Plaintiff concedes that clause 13.2 of the SMS characterises the obligations under the SMS as several not joint and several it refers to the s 28W(2) of the SSFDA. Relevantly, this is in the following terms:

28W Effect of strata management statement
(1) A registered strata management statement, as in force for the time being, relating to the management of a building has effect as an agreement under seal containing the covenants referred to in subsection (2) entered into by each person who for the time being is:
(a) a body corporate of a strata scheme for part of the building, or
(b) a proprietor, mortgagee in possession or lessee for the time being of any of the lots in such a strata scheme, and
(c) any other person in whom the fee simple of any part of that building or its site (being a part affected by the statement) is vested for the time being, or the mortgagee in possession or lessee of any such part.

(2) The covenants referred to in this section are:
(a) a covenant by which those persons jointly and severally agree to carry out their obligations under the registered strata management statement as from time to time in force, and
(b) a covenant by which those persons jointly and severally agree to permit the carrying out of those obligations.

The Plaintiff argues that in practical terms the various BMC expenses represent liabilities incurred for benefits accruing to both parties, the providers have to be paid and the extent of the liabilities were satisfied with funds provided by one party. In these circumstances, the principles of equitable contribution are engaged. [109]
109. Plaintiff’s Written Submissions in Reply dated 19 October 2016 at [21] – [22]
The Defendant contends that this is not a case for contribution as the factual scenario is different from that addressed in the authorities where parties are commonly guaranteeing the same debt. In the present case it is said there is a several obligation to pay distinct amounts.
I would not accept the Defendant’s characterisation of the obligation. s 28W(2) of the SSFDA makes clear that the obligations of the parties under the agreement are joint and several. The notion of equitable contribution is based on principles of natural justice. In Mahoney v McManus, [110] a guarantor paid the monies to the company debtor (of which he was a director) rather than direct to the creditor. Gibbs CJ (with whom Murphy and Wilson JJ agreed) stated:

“[18] It should be remembered that the doctrine of contribution is based on the principle of natural justice that if several persons have a common obligation they should as between themselves contribute proportionately in satisfaction of that obligation. The operation of such a principle should not be defeated by too technical an approach to the question whether a surety has paid the creditor, when he has supplied moneys to the principal debtor for the purpose of making such payment.”[111]
110. (1981) 180 CLR 370; [1981] HCA 54
111. (1981) 180 CLR 370; [1981] HCA 54 at [18] (Gibbs CJ with whom Murphy and Wilson JJ agreed)

Consistent with these principles and subject to the terms of the SMS, I see no reason why the equitable contribution cannot be ordered where expenses have been incurred and paid for by a BMC by disproportionate contribution by one strata scheme. The case for whether it is appropriate is considered below.

THE PLAINTIFF’S STANDING AND CAPACITY TO BRING THE CLAIM

The Plaintiff asserts that by the issue of the payment notices, particularly the 2015 payment notice, a debt arose payable by the Defendant on account of its shortfall in contributions mandated by the SMS and enforceable in the only manner realistically and commercially possible, being by an action brought by the Plaintiff. [112] It asserts that a damages claim relies on the Defendant’s failure to pay the amounts due in the payment notices and its breaches of its contractual obligations under clause 15.1 of the SMS. In that respect, the damages payable by the Defendant are said to be impressed with the same obligation on the part of the Plaintiff to apply them to the BMC account. [113]
112. Plaintiff’s Written Submissions dated 16 September 2016 at [144]
113. Plaintiff’s Written Submissions dated 16 September 2016 at [150]
The Plaintiff’s position is that on the proper construction of the SMS, that the phrase “‘debt due and owing to the BMC” in clause 15.7(a) of the SMS must be construed as “a contractual obligation on the part of the delinquent OC enforceable by its co-member of the BMC.” It argues that whether or not such a construction results in a cause of action identical to that of a “debt” at common law is a moot point. [114] It argues that as the cause of action is contractual in origin, based on the terms of the SMS properly construed, it must be enforceable by the Plaintiff as the only other member of the BMC – it is not an obligation to pay the money to the Plaintiff’s own account but rather, to the account of the BMC. The Plaintiff did not contend that s 90 of the 2005 Act and Uniform Civil Procedure Rules 2005 (NSW) r 36.1 of themselves create a cause of action, but rather are a facility for making the necessary orders to achieve the contractual end contemplated. [115]
114. Plaintiff’s Written Submissions in Reply dated 19 October 2016 at [3]
115. Plaintiff’s Written Submissions in Reply dated 19 October 2016 at [4]
The Defendant submits that pursuant to clause 15.7(a) of the SMS, the alleged shortfall in contributions is said to be a debt due and owing to the BMC, which relevantly, is a non-entity in legal terms; and not to the Plaintiff. Accordingly it contends that the Plaintiff’s argument that this was the only manner realistically and commercially possible to enforce fails, because it does not give weight to the context and the position of the SMS within the statutory scheme of the SSFDA and the SSMA. The Defendant submitted that is so as the dispute resolution provision contained in clause 12 of the SMS is binding on the parties and is to be resolved under Chapter 5 of the SSMA. [116]
116. It was not in dispute that references in clause 12.3(c) of the SMS to the “strata schemes commissioner”, “strata schemes board” and “Registrar” were references to the Tribunal adjudicator and Registrar, as appropriate within the meaning of ch 5 of the SSMA.
The Defendant further contends that the nature of the power in s 90 of the 2005 Act requires the Plaintiff to be a creditor and the nature of the case in damages requires that the Plaintiff has suffered loss. It contends that the Plaintiff is not a creditor and does not suffer any loss if the BMC has a shortfall, such that it is entitled to damages. Accordingly at most, the Plaintiff has been held out of its money due to any shortfall in contribution and would be entitled to interest on that amount. [117] The Defendant contended that the Plaintiff’s was attempting to overturn centuries of jurisprudence in relation to standing to sue for debt and damages not owing, but rather allegedly owing to the BMC.
117. Defendant’s Written Submissions dated 12 October 2016 at [11]
To the extent this question remained relevant it depended on an argument based on a construction of the SMS.

Construction of the SMS in the context of the SSFDA and SMSA - arguments

The Plaintiff contends that it does not have an ability to bring its claim for relief within the terms of Chapter 5 of the SMSA, because in its submission, there were no other means that could be identified to enable recovery of the alleged shortfalls in contribution, then it must be the case that the Plaintiff can sue for it in this Court.
The Defendant submits that to the extent that the Plaintiff relies on a commercial construction of the SMS whereby the words of Part 15 are interpreted liberally to enable the recovery of the amounts from the delinquent OC, such a construction is unnecessary because the obligation is not enforceable by the Plaintiff under the provisions of Chapter 5 of the SSMA.
The Defendant contends instead there is another way for recovery of any shortfall.
It is not in issue that Part 12 of the SMS enables the parties to resolve their disputes initially by convening a meeting under clause 12.2 of the SMS and thereafter by referral of the dispute to an adjudicator under Chapter 5 of the SSMA.
Moreover, pursuant to s 126(2) of the SSMA, it is possible to facilitate mediation of a dispute under the SMS, whether or not the SMS provides for conciliation of the dispute or complaint to the Director General.
SSMA s 138(1) to (3) provides:-

138 General power of Adjudicator to make orders to settle disputes or rectify complaints
(1) An Adjudicator may make an order to settle a dispute or complaint about:
(a) an exercise of, or a failure to exercise, a function conferred or imposed by or under this Act or the by-laws in relation to a strata scheme, or
(b) the operation, administration or management of a strata scheme under this Act.

(2) For the purposes of subsection (1), an owners corporation or building management committee is taken to have failed to exercise a function if:
(a) it decides not to exercise the function, or
(b) application is made to it to exercise the function and it fails for 2 months after the making of the application to exercise the function in accordance with the application or to inform the applicant that it has decided not to exercise the function in accordance with the application.

(3) An Adjudicator may not make an order under subsection (1) for the settlement of a dispute or complaint:

(a) dealt with in another section of this Chapter, or
(b) referred to the Tribunal or only within the jurisdiction of the Tribunal, or
(c) relating to the exercise, or the failure to exercise, a function conferred on an owners corporation by this Act or the by-laws if that function may be exercised only in accordance with a unanimous resolution or a special resolution (other than a special resolution under section 62 (3), 65A or 65B), or
(d) that includes the payment by a person to another person of damages.

(Emphasis supplied)

Pursuant to s 138(5) of the SSMA, an application for an order under this section may be made by an “interested person.” No argument was raised to suggest that the Plaintiff would not have been an interested person.
The Plaintiff argues that s 139 of the SSMA expressly deals with disputes between strata schemes in the following terms:-

139 Order for settlement of dispute between adjoining strata schemes
(1) An Adjudicator may make an order to settle a dispute between 2 strata schemes if:
(a) the strata schemes concerned are contiguous, and
(b) the matter in dispute is not regulated by or under any other Act.

(2) An application for an order under this section may be made only by an owners corporation for a strata scheme involved in the dispute.
(3) An order must not be made under this section unless the owners corporation for the other strata scheme involved in the dispute consented to the making of the application for the order (emphasis supplied).

s 28W(8) of the SSFDA provides:-

28W Effect of strata management statement
(8) Chapter 5 of the Strata Schemes Management Act 1996 applies to or in relation to matters arising under the agreement

s 28W(5) of the SSFDA provides that an order under Chapter 5 of the SSMA takes precedent over any inconsistent provision in the SMS.

In light of s 138(3) of the SSMA, the Plaintiff’s argument is that there is no capacity for an adjudicator to make an order as the only power is that contained in s 139 of the SSMA. This it is said to be the case as s 139 of the SSMA deals with disputes between the two strata schemes and the effect of s 138(3)(a) of the SSMA is that such a dispute is outside the scope of the general conferral of power in s 138(1) of that Act. Consequently it contends that an adjudicator’s jurisdiction in relation to disputes between two strata schemes was confined to disputes meeting the following criteria:-

The strata schemes must be contiguous: s 139(1)(a) of SSMA;

The matter in dispute is not regulated by any other Act: s 139(1)(b) of the SSMA;

The application must be made only by an owner’s corporation for a strata scheme involved in the dispute: s 139(2) of the SSMA.

Further, no order could be said to have been made under that section unless the making of the application was consented to by the prospective respondent owners’ corporation.

In this case, the Plaintiff argued that criteria (1) – (3) were satisfied, but the Defendant had indicated that it would refuse to consent to an application under Chapter 5 of the SSMA. [118]
118. Affidavit of Mr Richard James Wallace dated 29 May 2015 at Exhibit RW-59, p 374 and Exhibit RW-60, pp 378 – 379
The Plaintiff argued that s 28W(8) of the SSFDA does not regulate the matter in dispute but rather refers to the SSMA which is the true Act regulating the matter in dispute.
Alternatively it contends that if the matter in dispute is outside the scope of the jurisdiction conferred by Chapter 5 of the SSMA then there is no power and this still satisfies the criteria of not being regulated by or under any other Act for the purposes of s 139(1)(b) of the SSMA.
The Defendant for its part contended that s 139(1)(a) of the SSMA related only to strata schemes were “contiguous” and that was not the case in respect of a building which was the subject of an SMS which were admixed, rather than adjoining or next to the other. [119] Further it argued that s 139(1)(b) of the SSMA only applied if “the matter in dispute is not regulated by or under any other Act” but in this case it was regulated under the SSFDA which by s 28W(8) of that Act, enabled it to be dealt with under Chapter 5 of the SSMA. Accordingly it argued that s 139 of the SSMA had no part to play in the dispute. [120]
119. Defendant’s Written Submissions dated 12 October 2016 at [18]
120. Defendant’s Written Submissions dated 12 October 2016 at [19]
So far as s 138(1)(a) of the SSMA is concerned, the Defendant argued that it referred to by-laws and, by-laws of both the Defendant’s and Plaintiff’s scheme, which expressly obliged the schemes to comply with the SMS. Reference in this regard was made to Owners Corporation Strata Plan 69470 v Charbel CJ Pty Ltd. [121] Accordingly it contended that its dispute in relation to the SMS is a dispute in relation to a by-law within the terms of s 138(1) of the SSMA.
121. [2004] NSWSC 1286 at [23] (Burchett AJ)
The relevant by-laws were not in evidence, however the Plaintiff conceded that the by-laws of each of the OCs incorporated the provisions of the SMS. [122]
122. T 287.12 – .15
The Defendant drew attention to the extensive powers available to an adjudicator under ss 167, 169, 173 and 175 of the SSMA, even though it acknowledged that the adjudicator could not award damages by reason of s 138(3)(d) of the SSMA.

Conclusion – construction of the SMS in the context of the SSFDA and SSMA

The Plaintiff’s submission appears to be predicated on the basis that s 138(3) of the SSMA reduces the scope of the grant of jurisdiction in s 138(1) of the SSMA by being subject to s 139 of that Act. Beyond that the Plaintiff argued that the matter in dispute would not otherwise fall within s 138(1) of the SSMA despite referring to it as a “general conferral.” [123] In oral submissions the point was made that the SSMA was an Act about strata schemes and not stratum parcels. It contended that that function was tacked on as a result of the enactment of Division 2B of Part 2 of the SSFDA. [124]
123. Plaintiff’s Written Submissions in Reply dated 19 October 2016 at [6] – [7]
124. T 289.41 – .43
In respect of disputes the conferral in s 138(1) of the SSMA is confined by reference to subject matter unlike s 139 of the same Act. Nevertheless I accept s 138 (1) of the SSMA can embrace disputes between two OCs. Such is implicit by the interplay between s 138(3) and 139(1) of the SSMA.
The reference to BMC in s 138(2) of the SSMA envisages that the section can apply to a complaint or dispute in relation to an SMS. In this respect the Dictionary provides:

Dictionary
‘Building management committee’ in relation to a strata scheme, means the building management committee established under the strata management statement for the scheme.
‘Strata management statement’ in relation to a strata scheme, means the strata management statement in force for the time being in respect of that strata scheme and registered under:
(a) in the case of a freehold strata scheme, the Strata Schemes (Freehold Development) Act 1973 …

‘Freehold strata scheme’ means a strata scheme under the Strata Schemes (Freehold Development) Act 1973.

Moreover an application in respect of a complaint or dispute under s 138(5) of the SSMA can be made by ‘an interested person’’, which is defined in the Dictionary in relation to a freehold strata scheme as:-

Dictionary
interested person, in relation to a freehold strata scheme, means any of the following:
(a) the owners corporation for the strata scheme;
(b) the chairperson, secretary or treasurer of the owners corporation (or of the executive committee of the owners corporation) of the strata scheme;
(c) a strata managing agent for the strata scheme;
(d) an owner of a lot in, a person having an estate or interest in a lot in, or an occupier of a lot in, the strata scheme.

The terms of s 138 of the SSMA refer to “complaints and disputes,” about specified matters and not disputes at large as in s 139 of the same Act.
Reading the provisions together it can be seen that s 138(3) of the SSMA does not limit the adjudicator’s capacity to deal with a dispute or complaint otherwise falling within s 138(1) of that Act, but rather to prevent the making of an order where settlement of a dispute is dealt with in another section of Chapter 5 of the SSMA. So much appears from the fact that s 138(3) refers to a prohibition on making an order under s 138(1) of the SSMA where the matter is “dealt with in another section or chapter” and the power in s 139(3) refers to the making of an order under “this section.” In other words the power in s 138(1) is for specified disputes or complaints within its terms but beyond that there is a consensual jurisdiction for disputes in s 139 of the SSMA not limited by the subject matter parameters of s 138 (1) of the same Act. On this construction the exclusion in s 139(1) of the SSMA from the consensual jurisdiction makes sense and operates where the matter in dispute is regulated by or under any other Act.
Accepting this construction the question becomes whether the dispute falls the jurisdiction of the adjudicator by reason of s138 (1) of the SSMA and s 28 W (8) of SSFDA.
It was acknowledged that both the Defendant’s and Plaintiff’s schemes by laws obliged them to comply with the SMS. The Defendant’s contention was that a dispute with another scheme’s noncompliance with the SMS could be a dispute in relation to compliance with by-laws albeit that the interested party would be the other OC. On this approach there would be a dispute with the failure to comply with the obligation under the bylaw falling within the meaning of s 138(1) (a) of the SSMA. .
There is force in the argument which delivers a sensible and practical process for resolution of disputes. Accepting it as correct then s 139 (1) of the SSMA has no function to perform in the circumstances of this matter.
So far as Section 139 (1) (a) of the SSMA is concerned I would not accept that the strata schemes in this case, were to use the Defendant’s words, admixed as opposed to contiguous. The heading of the section refers to “adjoining”[125] and the inclusive definition in the Dictionary Part 2 would suggest a broad interpretation. [126]
125. Interpretation Act 1987 (NSW) s 35(1)
126. See Hunter’s Hill Council v Minister for Local Government; Lane Cove Council v Minister for Local Government; Mosman Municipal Council v Minister for Local Government; North Sydney Council v Minister for Local Government; Strathfield Municipal Council v Minister for Local Government [2017] NSWCA 188 at [75] – [106] (Basten JA with whom Macfarlan JA and Sackville AJA agreed) and see especially at [101] (Basten JA with whom Macfarlan JA and Sackville AJA agreed)
The words “regulated by or under” in s 139(1)(b) of the SSMA refer to the “matter in dispute” not the process of making the order which is provided for in chapter 5 of the SSMA. The words ‘by or under’ are to be interpreted as meaning ‘pursuant to or in accordance with.’[127]
127. Chan & Anor v Cresdon Pty Ltd (1989) 168 CLR 242, 249 (Mason CJ and Brennan, Deane, McHugh JJ)
In this instance the matter in dispute is provided for by s 28W (8) of the SSFDA referring to an application “to or in relation to matters arising under the agreement” being the SMS. Schedule 1C(2)(d) of the SSFDA specifies amongst the matters that must be included in the SMS are provision for:

Schedule 1C Strata management statements
2 Matters that must be included
(d) the settlement of disputes, or the rectification of complaints, concerning the management of the building or its site, whether by requiring reference of disputes or complaints to the Director-General or the Tribunal or (with the consent of the person) to any other person for a recommendation or decision or otherwise …

The clause does not limit the matters that may otherwise be incorporated for settlement of disputes and Part 12 of the SMS leaves these at large.
Accepting this construction the matter in dispute can be regarded as regulated by or under s 28 W of the SSFDA so as to invoke the exclusion from the consensual jurisdiction in s 139 (1) (b) of the SSMA..
It follows that I am satisfied that the matter in dispute would fall within Chapter 5 of the SSMA. This however does not determine whether the Court also has jurisdiction in the circumstances.

Jurisdiction and discretion

In the supplementary submissions, the Defendant submitted that the decision in McElwaine v The Owners-Strata Plan No 75975, [128] was authority for the proposition that the SSMA intends that a strata dispute, whether it be an allegation of breach of a statutory duty imposed by the SSMA or a claim at common law, is to be dealt by the adjudication system in Chapter 5 of the SSMA and not independently. [129]
128. [2016] NSWSC 1589 (hereinafter referred to as “McElwaine”)
129. Defendant’s Supplementary Written Submissions dated 17 November 2016 at [2]
This was said to be an extension of the principle in Owners Strata Plan 50276 v Thoo, [130] that no cause of action for a breach of statutory duty exists in relation to a breach of s 62 of the SSMA[131] . This was due to the existence of the adjudication system contained in Chapter 5 of the SSMA.
130. (2013) 17 BLR 33,789; [2013] NSWCA 270 (hereinafter referred to as “Thoo”)
131. s 62 of the SSMA imposes a duty on an OC to maintain and repair property
The Defendant’s argument is that McElwaine provides support for its submission that the construction of the SMS propounded by the Plaintiff should not be accepted as there is another method of resolving the dispute, being by way of Chapter of the SSMA.
To the extent that the Plaintiff characterises its debt as a claim in the nature of specific performance, [132] the Defendant contends that it was still relying on the terms of the SMS and accordingly, is governed by the principles in McElwaine.
132. Defendant’s Schedule of Issues undated at [4] and Further Amended Defence filed 4 July 2016 at [22]
To the extent that the Plaintiff brings its claim in equitable contribution, the Defendant contends that it was seeking to extend the doctrine to the province of strata legislation the Courts have seen fit to circumscribe the causes of action available to parties to a strata dispute on the basis that the SSMA intends for such disputes to be dealt with under Chapter 5 of the SSMA and not independently.
The Defendant further contends that the SMS cannot be construed as giving the Plaintiff a cause of action in damages consistent with the observation in McElwaine and the opinion of Tobias AJA in Thoo that disputes in relation to strata schemes are not to be resolved in a manner that involves the payment of damages.
Finally, the Defendant contends that McElwaine lends support to its submissions that the Court should not exercise its discretion in circumstances where strata disputes ought to be dealt with under Chapter of the SSMA.
The Plaintiff for its part contends that both Thoo and McElwaine involved actions by lot owners against their own OCs. It contended that it did not stand for any proposition that Chapter 5 of the SSMA or the Act as whole, properly construed, precluded parties to a statutory contract from exercising rights against one another arising under that contract. It contends that the statute should not be construed as taking away a common law right unless the intention is clear and the only intention found in Thoo and McElwaine is in claims for damages not to be available for breaches of the OC’s obligations concerning the repair to the common property. [133] The Plaintiff distinguishes McElwaine noting that the economic rationale referred to at [22] does not apply. This is a reference to the following statement:-

“[22] … If there is to be allowed common law claims by unit holders which will have to be met by the owners corporation, that is the sum total of unit holders, it would completely throw out of balance any scheme for ensuring that there is always a fund available to meet the cost of keeping the building in good repair and this tells against there being available to a unit holder a common law cause of action for a matter that would come within Chapter 5 of the SSM Act.”[134]
133. Plaintiff’s Supplementary Written Submissions in Reply dated 24 November 2016 at [4] – [5]
134. [2016] NSWSC 1589 at [22] (Young AJ)

In McElwaine, Young AJ stated:-

“[8] The SSM Act, particularly Chapter 5, contains a number of provisions seeking to deal with the mutual obligations of unit holders and the body corporate aimed at dealing with disputes between unit holders or between unit holders and the owners corporation …”[135]
135. [2016] NSWSC 1589 at [8] (Young AJ)

In adopting this approach, Young AJ referred to the provisions of s 226 (1) of the SSMA, which read:

“Nothing in this Act derogates from any rights or remedies that an owner, mortgagee or chargee of a lot or an owners corporation or covenant chargee may have in relation to any lot or the common property apart from this Act.”

His Honour then stated:-

“[29] Section 226(2) provides:
‘In any proceedings to enforce a right or remedy referred to in subsection (1), the court in which the proceedings are taken must order the plaintiff to pay the defendant’s costs if the court is of the opinion that, having regard to the subject-matter of the proceedings, the taking of the proceedings was not justified because this Act ... makes adequate provision for the enforcement of those rights or remedies.’

[30] In Thoo’s case at [220] Tobias AJA said:
‘[T]here is a distinction to be made between, on the one hand, the preservation of the concurrent jurisdiction of the court pursuant to the old s 146 and the current s 226, and, on the other, the question as to whether a breach of a duty imposed by the legislation on an owners corporation gives rise to a private cause of action for damages for breach of statutory duty.’

[31] Section 226(2) tends to give the view that it is possible for a person to commence proceedings for alleged breach of statutory duty or common law tort of nuisance or negligence and that the only consequence is that if the matter is covered by the SSM Act adequately, the Court is prohibited from giving the plaintiff any costs. I do not know of any decision on subs (2) and none was cited to me. However, it seems to me that in the light of decisions of the Court of Appeal such as Ridis and Thoo, that one would need to read it down so that the legislature recognised that there was a possibility that there might be a right of an owner which was not mandated to be dealt with under the dispute proceedings in Chapter 5 but which could have been brought under Chapter 5 in which case as a failsafe provision deprivation of costs was provided as a disincentive. It seems to me that that is more in accordance with the decisions of the Court of Appeal on the structure of the SSM Act generally than a more expansive view of s 226(2).
[32] Although Tobias AJA in Thoo’s case was speaking in terms of an action to enforce a statutory duty, it seems to me that the interpretation of the scheme of the SSM Act taken by the Court of Appeal leads one to the view that the same applies to a common law duty. The SSM Act intends that disputes, whether or not they are also involving a common law right, are to be dealt with in the adjudication system under the Act and not independently.”[136]
136. [2016] NSWSC 1589 at [31] (Young AJ)

s 226 of the SSMA is not part of Chapter 5 of that Act and is not referred to in s 28W of the SSFDA. Nevertheless s 28W(9) of the SSFDA provides that:

28W Effect of strata management statement
(9) Except as provided by subsection (8), nothing in this section affects any right or remedy that a person may have under a strata management statement apart from a right or remedy under this Division.

Whether this provision should be similarly read down in line with McElwaine was not canvassed in submissions. There is no analogous provision to s 226(2) of the SSMA in s 28W of the SSFDA. In the circumstances, I am prepared to proceed on the basis that the Plaintiff is not precluded from bringing its action notwithstanding what I consider is the capacity to take action under Chapter 5 of the SSMA.

(b) duplication errors which represent 12.7% of total expenses for that financial year and as such represents a material error;
(c) invoices for expenses which I am unable to match to the profit and loss; and
(d) the 2008 profit and loss was prepared on a cash basis notwithstanding that the audited account disclosed accrual based accounting had been adopted.

[19] In respect of the 2012 profit and loss:
(a) for income, I have not identified any documents to support these transactions;
(b) for expenses I have identified and categorised invoices by the type of expense. I compared the total of these invoices to the expenses disclosed in the profit and loss. This resulted in variances. In the absence of a general ledger, I am unable to express any opinion [on] whether the invoices identified and categorised by me represent each transaction comprising the expense category disclosed in the 2012 profit and loss, nor am I able to explain the variances between the source documents and the profit and loss.

[20] As detailed in this report, I have been unable to reconstruct the profit and loss and balance sheet for the 2008 and 2012 financial years based on source documents such as invoices levy notices, bank statements as the documentation provided to me is incomplete.
[21] Based on the documents provided to me and assuming they represent all documents available in respect to the 2008 and 2012 financial years, I do not consider that proper books and records have been kept by the BMC in respect of the 2008 and 2012 financial years.

Then after being requested to comment on the audit that Mr Whitehead had undertaken, Ms Jones stated:-

[24] In respect of each of the financial years 2004 to 2014, Mr Whitehead stated that:
“I have conducted my audit in accordance with Australian Auditing Standards”
“The financial report presents fairly, in all material respects the financial position of Deposited Plan 1047991 … and its financial performance … in accordance with the basis of preparation described in Note 1”

[25] Based on my experience as an auditor, in order for Mr Whitehead to express the above unqualified audit opinion for each financial year, Mr Whitehead would have been required to comply with all Australian Auditing Standards and the relevant Australian Accounting Standards.
……
[27] Based on the documents provided to me and the matters I have identified in respect of the 2008 and 2012 financial years, it is not apparent to me the basis upon which Mr Whitehead has been able to:
(a) undertake his audit in accordance with Australian Auditing Standards; and
(b) issue an unqualified audit opinion that the financial report for those years presents fairly in all material aspects, including:
(i) the profit and loss and balance sheet presented in the special purpose financial report of the DP1047991 (Audited Accounts);
(ii) expenses have been appropriately attributed to the BMC; and
(iii) expenses have been appropriately allocated between Residential and Retail.

Subject to the qualifications expressed in her supplementary report, [307] Ms Jones maintained that additional documentation which she was provided with, did not provide any clarification as to the basis upon which Mr Whitehead was able to undertake his audit in accordance with ASA, and issue an unqualified audit opinion for the financial reports of those years.
307. Exhibit 10, Supplementary Report of Ms Michelle Jones dated 29 June 2016
Ms Jones identified the relevant auditing standards and set out the overall objectives of an independent auditor referable to ASA 200. [308] The conclusion she comes to are as follows:-
308. Report of Ms Michelle Jones dated 16 May 2016 at [113]

[120] As detailed elsewhere in this report:
(a) in respect of to the 2008 and 2012 financial years I have been unable to reconstruct the profit and loss and balance sheets for the 2008 and 2012 financial years based on source documents such as invoices, levy notices, bank statements as the documentation provided to me is incomplete;
(b) I have identified duplication errors in respect of the 2008 financial year which represent 12.7% of total expenses for that financial year, representing a material error;
(c) I have identified invoices for expenses which do not appear to be recorded in the profit and loss; and
(d) I have identified that the 2008 Audited Accounts have been prepared on a cash basis rather than an accrual basis as disclosed in Note 1 to the Audited Accounts.

[121] Based on the documents provided to me and the matters I have identified in respect of the 2008 and 2012 financial years, it is not apparent to me the basis upon which Mr Whitehead has been able to:
(a) undertake his audit in accordance with Australian Auditing Standards; and
(b) issue an unqualified audit opinion that the financial report for those years presents fairly in all material aspects, including:
(i) the profit and loss and balance sheet presented in the Audited Accounts;
(ii) expenses have been appropriately attributed to the BMC; and
(iii) expenses have been appropriately allocated between Residential and Retail. [309]
309. Report of Ms Michelle Jones dated 16 May 2016 at [120] – [121]

Essentially, in Ms Jones’ opinion, it was not possible for an audit, qualified or unqualified to be carried out. She maintained this in cross-examination. On this basis it was submitted that the Whitehead documents were not “duly audited.”
On Ms Jones’ evidence the challenges to the Whitehead documents seem to fall into two distinct categories:-

that her own inability, independently and “from scratch”, to “reconstruct” and “verify” the accounts for the 2008 and 2012 financial years from the documents discovered by the Plaintiff calls into question how Mr Whitehead, complying with relevant ASA, given an unqualified opinion that the accounts present fairly, in all material respects, the BMC’s financial position in those and the other years audited by him; and

that the audited accounts for the 2008 and 2012 years contain errors which appear to have been overlooked by Mr Whitehead.

In his affidavit of 1 July 2016, Mr Wallace referred to Ms Jones’ professed difficulties in reconstructing and verifying the accounts and understanding Mr Whitehead’s unqualified opinion. Despite his personal lack of auditing expertise Mr Wallace annexed copies of relevant Auditing Standards and, by reference to these standards and to his own accounting experience, pointed out certain advantages enjoyed by Mr Whitehead in carrying out his audit which were not available to Ms Jones including:-

access to Mr Wallace and the personnel of Whelans;

recourse to documents such as minutes of meetings providing information as to transactions not available in primary accounting records; and

access and recourse to the records for the entire period of the audit from the 2004 financial year onwards. [310]

Even if a “duly audited Payment Notice” within the meaning of clause15.5 of the SMS required compliance with ASA – which in the Plaintiff’s submission it did not – it was submitted that the above disadvantages under which Ms Jones laboured would explain a great deal in terms of her subjective inability to reconstruct and verify the 2008 and 2012 accounts.

310. Plaintiff’s Written Submissions dated 16 September 2016 at [40]

Ms Jones stated that she did not know what Mr Whitehead had done for the financial years 2004 to 2011 although she understood there was a document prepared by Mr Wallace and adjusted by Mr Whitehead for the purpose of his audit report. For the financial years thereafter she acknowledged that Mr Whitehead had access to a general ledger printed form the computer system operated by Whelan. Accepting that for the years 2004 to 2011, Mr Whitehead had access to the Excel spread sheets prepared by Mr Wallace and for the period from 2012 onwards to computers and personnel at Whelans, Ms Jones did not accept that Mr Whitehead had certain advantages in terms of forming a view about the accuracy of various financial reports.
The Plaintiff submitted that Ms Jones downplayed in her oral evidence the advantages an auditor might gain from evidence from audits of prior or subsequent financial years’ records. It was argued that ASA 500 [311] is quite clear that the auditor is not so confined. What Ms Jones stated however was that you have to make your opinion in respect of the financial information you’re presented with respect to that financial year adding.

“You can’t say that for five years there’s been a pattern and therefore this year is correct. It’s totally inconsistent with all auditing standards. You need to set your materiality level based on that 5 financial year that you’re looking at and you need to obtain audit evidence in respect to that financial year that you’re looking at.” [312]
311. ASA 500 refers to Auditing Standard ASA 500 Audit Evidence issued by the Auditing and Assurance Standards Board
312. T 258.3 – .7

The Plaintiff submitted that Ms Jones downplayed the auditor’s scope for employing professional judgment in attaining reasonable assurance in the face of less than perfect underlying records of account. It submitted that it is that “audit evidence” as defined ASA 500 includes information obtained from sources other than the underlying accounting records so that a deficiency in the latter does not prevent the auditor from attaining reasonable assurance if sufficient information is available from other sources. It drew attention to the definition of “audit evidence” including “accounting records underlying the financial report” and submitted that this could include secondary as well as primary records of account.
The Plaintiff cited paragraph [A9] of ASA 500 referring to “benchmarking data” or “comparable data about competitors.” It submitted that in the context of an OC a competitor may be seen as the equivalent of other OCs. The auditor may in this sense be reasonably certain of the bona fides of a particular transaction because the amount is within an acceptable range known to be paid by other comparable buildings.
To this end the Plaintiff contended that ASA 500 specifically states that “the auditor may decide to select specific items from a population [rather than 100% of the population] and may base the selection on a criterion such as ‘High value or key items’ or ‘All items over a certain amount’ [and not testing those items below that certain amount].” [313]
313. Plaintiff’s Written Submissions dated 16 September 2016 at [44]
The Plaintiff noted that in preceding paragraph of the standard, it stated that “100% testing may be appropriate” when, for example:

the population constitutes a small number of large value items;

there is a significant risk and other means do not provide sufficient appropriate audit evidence; or

the repetitive nature of a calculation or other process performed automatically by an information system makes a 100% examination cost effective. [314]
314. Plaintiff’s Written Submissions dated 16 September 2016 at [45]

In the current matter, the Plaintiff argues that the population of transactions tends to be a large number of small value items rather than a few large value items so the first of these examples does not hold. Nor would the third situation apply. It concedes that whether the second example applies would be a matter for professional judgment on an item by item basis. [315]
315. Plaintiff’s Written Submissions dated 16 September 2016 at [46]
Ms Jones was cross-examined as to the question of the sufficiency of appropriate audit evidence. The transcript records:

“Q. I’m now looking at the ASA 200 again, and this is page 22 of the December 2015 edition at paragraph A33 and it says this:
‘Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion is a matter of professional judgment.’

A. Well that refers to audit risk. Audit risk is inherent risk, control risk and detention risk. Inherent risk is the environment that we’re looking at where we have an environment of parties in dispute and missing records. Control risk, so we can’t rely on that. Control risk is that you’ve got authorisation procedures in place and there are adequate controls in place to make sure all documentation is complete and can be relied on for the audit. We can’t rely on that. So that’s high risk. Then you come down to detection risk and detection risk, because you’ve got high control risk and high inherent risk, then you must do detailed substantive testing in order to make sure that your overall audit risk is at a level which enables you to provide a reasonable assurance on the information you’ve been provided.
Q. You characterised my question as one about audit risk, and I suggest to you it wasn’t, that I quoted from the standard saying “Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level.” Now the consequence of reducing audit risk to an acceptably low level is that the auditor can obtain reasonable assurance as to the accuracy of the financial report, isn’t it?
A. No. When you look at that sentence, that sentence comprises audit evidence and risk, which then gives you, once you’ve got your audit evidence to reduce your audit risk, which then gives you your reasonable assurance that the financial statements are not materially misstated. So when you look at that sentence when it talks about audit evidence you go to ASA 500 and make, make sure you’ve complied with that and got the level of audit evidence that is required to meet the requirements of the audit risk that you have assessed and to go - and audit risk is addressed in ASA 315. And then you get your reasonable assurance with respect to the financial information.” [316]
316. T 258.9 – .43

In relation to Ms Jones’ professed difficulties in reconstructing the income disclosed in the profit and loss statement for the 2008 financial year and, in particular, identifying apportionment of levies raised as between the Plaintiff submitted that Mr Wallace demonstrated how this could be done on the available material and his views on this issue are unanswered.
Ms Jones in her report as to the 2008 profit and loss identified a number of what she described as “expenses recorded in error or duplicate” comprising $12,467. Mr Wallace did not dispute the duplications, although some of the factual assumptions made by Ms Jones were disputed. [317] Neither witness was cross-examined directly in relation to these matters.
317. Affidavit of Mr Richard James Wallace dated 1 July 2016 at [65] – [83]
The Plaintiff submitted that assuming that the Defendant disputed its duty to pay the apportionment of this expenditure, the appropriate course of action was that it make payment of the full amount and then raise the issue in a BMC meeting and, if necessary, instigate the dispute resolution mechanism in the SMS rather than ventilate the matter in Court proceedings
Within the 2012 accounts, Ms Jones identified only one alleged error being the manner in which the proceeds of an insurance claim are recorded. Instead of recording the amount separately as income, the proceeds of the insurance claim have been “netted off” meaning they were simply subtracted from the expense as if it had never existed. [318]
318. Plaintiff’s Written Submissions dated 16 September 2016 at [55]
Ms Jones acknowledged that was no difference to the bottom line. [319] In the Plaintiff’s submission there is no material misstatement.
319. T 259.41 – .45
Ms Jones’ evidence was that there can be material misstatement in an audit which, despite arriving at a correct conclusion, fails to comply with accounting standards as to treatment of particular transactions. She also said that an auditor makes no assumptions as to the purpose for which users of the audited accounts may require them.
The Plaintiff argued that Ms Jones examined the accounts from two years only, being 2008 and 2012. By the time Mr Whitehead was undertaking the relevant work it was the 2013 audited Payment Notice which was the operative document in the sense of the notice that activated the debt obligation under clause 15.5 of the SMS. The Plaintiff submitted that the 2008 and 2012 audits were truly of interest only as to the bottom line is amount carried forward to the next year.
It was argued that the existence of errors did not to constitute evidence that an audit has not been done in accordance with ASA so even if there was an error in the accounts, it did not constitute evidence that the accounts were not duly audited.
The Plaintiff submits that Ms Jones’ evidence as a whole should be treated with caution.

CONCLUSION AS TO DULY AUDITED PAYMENT NOTICE

The prerequisite for the activation of the obligation in clause 15.7 of the SMS is a duly audited payment notice pursuant to clause 15.5 of the SMS and not a duly audited account.
The Whitehead notices are expressed to meet the requirements of s 28S of the SSFDA which has no relevance.
Mr Wallace conceded that he knowingly deceived Mr Matthew Neville as to the need for mechanical ventilation to the garbage room (so as to make this a shared expense) in circumstances where the true reason was because Manly Council was threatening the Plaintiff with an order for removal of illegal enclosures. Whether or not Mr Brian Neville would have agreed to the proposal, what is clear is that the Defendant did not have to agree to incur the cost of this solution. In my view the fact that this occurred reflects poorly on Mr Wallace’s credibility and infects the 2012 payment notice and undermines his credibility.
The insertion in the payment notice of an amount for lift expenses in the circumstances earlier described gives rise to an inference that either Mr Whitehead did not consult the SMS to satisfy himself as to whether it could be incorporated or alternatively did so, excluded it initially and then inserted a claim based on what Mr Wallace requested.
The claim for legal expenses were inserted as part of the 2012, 2013 and 2014 notices but deleted from the 7 August 2015 following instructions from Mr Wallace. This casts doubt over the initial instructions given to the Mr Whitehead by Mr Wallace and the processes adopted
As to the question of security costs there is no evidence that the proposal as submitted, accords with clause 10.1 of the SMS and it is not apparent how these costs came to be included by Mr Whitehead in the payment notice
To the extent they find expression in the payment notice, the duplication errors in 2008 are said to comprise 12.7% of the total expenses of 2008. I would accept that as a relatively small amount of disputed expenditure.
In the case of the 2012 accounts, it is to be emphasised that what is required to be furnished by the manager to each owner is a duly audited payment notice specifying the amount for which each owner is responsible and which were incurred during the 12 month period and giving reasonable detail. [320] To this end the audit is being directed as to the purpose for which the user of the account requires. Accordingly even accepting Ms Jones’ evidence as to there being a material misstatement as to the recording of these proceeds of the insurance payment I would not regard the impact of the misstatement as one that affects the characterisation of the notice as a duly audited payment notice.
320. cl 15.5 of the SMS
Having said that I generally found Ms Jones to be articulate and knowledgeable and I found her evidence persuasive.
Ms Jones was not challenged on her view that in respect of the years she examined the inherent risk was high in the absence of records and disputes between parties. Nor was she challenged as to her view that control risk cannot be relied upon in the circumstances and that detection risk is high due to the absence of control risk and inherent risk. For the reasons she gives I accept that the audit risk was high such that detailed substantive testing is required to ensure that the overall risk is at a level that can provide a reasonable assurance.

CONCLUSION

In the Plaintiff’s written submissions, it was stated that the preparation and issue of the audited payment notices for the years 2004 – 2015 “or at the very least, the 2015 financial year on which the Plaintiff relies directly … gives rise to a debt within the meaning of clause 15.7(a) of the SMS which is enforceable at the suit of the Plaintiff and dischargeable by payment by the defendant to the BMC trust account.” [321]
321. Plaintiff’s Written Submissions dated 16 September 2016 at [24](a)
Overall when one considers the duplications, audit risk, the inclusion of the lift cost, the inclusion of the ventilation cost and the ultimate deletion of the legal expenses I am left to the conclusion that I cannot accept that the process undertaken by Mr Whitehead led to the providing of duly audited payment notice or notices.
Mr Wallace’s involvement was, in my view, clearly partisan and I can have no confidence in his preparation of any materials he is said to have supplied to Mr Whitehead. I accept that he was a representative of the Plaintiff’s scheme however he was also acted as an officeholder of the BMC. Ultimately however it was for Mr Whitehead to satisfy himself the payment notices he prepared were duly audited in accordance with recognised accounting standards and the SMS. I am not satisfied this occurred. This is not to suggest that a duly audited payment notice must be free of any inaccuracy or parties cannot have input into the process by which it is constructed. However any notice must comply with the terms of the SMS. I am not satisfied that the 2015 notice and those sought to be incorporated did so.
This alone would suffice to defeat the Plaintiff’s claim as the 2015 notice was defective leaving aside any question as to its provision, timing and signing by the manager.
The Plaintiff brought a claim in damages based on the Defendant’s failure to contribute to the Shared Area Costs and Shared Facility Costs and pay other expenses mandated by the SMS and further the Plaintiff’s excess contributions to the expenses. [322] This was faintly pressed in written submissions [323] and not raised in oral submissions. The Defendant submitted that such a claim cannot be brought for money to go the credit of the BMC trust account. The claim for damages sustained by the Plaintiff is said to be on the basis that “damages payable by the Defendant are impressed with the same obligation on the part of the Plaintiff to apply them the BMC accounts.” Beyond that however the claim relies on the failure to pay amounts due under the audited payment notices as breaches of contractual obligation under clause 15.1 of the SMS. For reasons stated I am not satisfied this has occurred.
322. Amended Statement of Claim filed 4 July 2016 at [20] (Pleadings and particulars) and Plaintiff’s Statement of Issues undated at [4] and [5]
323. Plaintiff’s Written Submissions dated 16 September 2016 at [150]
The claim in equitable contribution is expressed in the Plaintiff’s submission was one “proportionately” given content by the terms of the SMS. The Plaintiff argued that the appropriate contribution from the Defendant is as quantified in the payment notices and is impressed with the obligation to apply it to the BMC accounts [324] The Plaintiff did not develop this claim in oral submission and in particular did not advance it on a basis absent the existence of a duly audited payment notice. Based on the payment notice(s) defining the obligation between the parties I am not satisfied the case for equitable contribution is made out.
324. Plaintiff’s Written Submissions dated 16 September 2016 at [152]
Although the Plaintiff’s primary claim rested on the most recent audited payment notice as the trigger of the obligation to pay, [325] in oral submissions an argument was presented that it may be possible for the Court to examine the amount for which each owner is responsible so as to provide a basis upon which the debt in clause 15.7 of the SMS could be reduced within the scope of Part 15 of the SMS. [326] How this could occur was not developed.
325. T 312.13 – .15 and Plaintiff’s Written Submissions dated 16 September 2016 at [25]
326. T 320.18 – .29
At the outset the Plaintiff sought leave to file an Amended Statement of Claim. [327] The Defendant opposed leave being granted contending that there is no general allegation of debt and the Plaintiff’s case hitherto been based on non-payment in accordance with clause 15.7 of the SMS requiring a duly audited payment notice under clause 15.6 of the SMS. [328] The Plaintiff clarified its amendment so as to not change the basis of its case being on the foundation of a duly audited payment notice. [329] In those circumstances the amendment was not opposed and leave was granted for a revised pleading.
327. T 1.17 – 1.21
328. T 2.36 – .40
329. ; T 6.30 – .37

ORDERS

For these reasons I order:

Verdict for the Defendant;

Subject to any application to my Associate to relist the matter for any further or other order as to costs the Plaintiff should pay the Defendants costs; and

Exhibits are to be retained for 28 days.

Endnotes

Amendments

22 March 2018 - Paragraph 65 - words "... and further they" removed.

Decision last updated: 22 March 2018

Medium Neutral Citation:	Owners Corporation Strata Plan 69470 v Owners Corporation Strata Plan 69948 (No 2) [2017] NSWDC 262
Hearing dates:	4 – 7 July 2016; 26 August 2016; 21 October 2016; 3 November 2016, 17, 24 November 2016 (further written submissions), 7 April 2017(supplementary submissions) and 29 June 2017 (further supplementary submissions)
Date of orders:	18 September 2017
Decision date:	18 September 2017
Jurisdiction:	Civil
Before:	Hatzistergos DCJ
Decision:	(1) Verdict for the Defendant; (2) Subject to any application to my Associate to relist the matter for any further or other order as to costs the Plaintiff should pay the Defendants costs; and (3) Exhibits are to be retained for 28 days.
Catchwords:	CONTRACT – STRATA SCHEMES – strata management statement – construction of clauses within statement – whether failure to pay in accordance with statement gives rise to cause of action – BREACH – whether statement breached by failure to pay in accordance with “payment notice” – whether auditor validly appointed WORDS AND PHRASES – meaning of “duly audited” – “reasonable details” – purpose of having “duly audited payment notice” JURISDICTION – whether District Court of NSW has jurisdiction to determine claim for equitable contribution – matter remitted to District Court of NSW by the Supreme Court of NSW
Legislation Cited:	Civil Procedure Act 2005 (NSW) ss 90, 100 and 144 District Court Act 1973 (NSW) s 134(1)(h) Evidence Act 1995 (NSW) s 69 Interpretation Act 1987 (NSW) s 35(1) Strata Schemes (Freehold Development) Act 1973 (NSW) ss 28S, 28U, 28W and sch 1C Strata Schemes Management Act 1996 (NSW) ss 62, 107, 126, 138, 139, 167, 169, 173, 175 and 226; and ch 5 Uniform Civil Procedure Rules 2005 (NSW) r 36.1
Cases Cited:	Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 Bonette v Woolworths (1937) 37 SR (NSW) 142, 150 ( Chan & Anor v Cresdon Pty Ltd (1989) 168 CLR 242 Forbes Engineering (Asia) Pte Ltd v Forbes (No 4) [2009] FCA 675 Hunter’s Hill Council v Minister for Local Government; Lane Cove Council v Minister for Local Government; Mosman Municipal Council v Minister for Local Government; North Sydney Council v Minister for Local Government; Strathfield Municipal Council v Minister for Local Government [2017] NSWCA 188 Idya Pty Ltd v Anastasiou [2008] NSWCA 102 Mahoney v McManus (1981) 180 CLR 370; [1981] HCA 54 McElwaine v The Owners-Strata Plan No 75975 [2016] NSWSC 1589 Optus v Leighton & Ors [2002] NSWSC 327 Owners Corporation Strata Plan 69470 v Charbel CJ Pty Ltd [2004] NSWSC 1286 Owners Corporation Strata Plan 69470 v Owners Corporation Strata Plan 69948 (No 1) [2017] NSWDC 181 Owners Strata Plan 50276 v Thoo (2013) 17 BLR 33,789; [2013] NSWCA 270 Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131 Taouk v Assure (NSW) Pty Ltd [2017] NSWCA 227 The Owners Strata Plan 30695 v Stratacorp [2005] NSWSC 405 The Owners-Strata Plan No 21372 v Banovic (No 2) [2017] NSWSC 734
Category:	Principal judgment
Parties:	Owners Corporation Strata Plan 69470 (Plaintiff) Owners Corporation Strata Plan 69948 (Defendant)
Representation:	Counsel: Mr C Purdy (Plaintiff) Mr J Young (Defendant) Solicitors: Wilshire Webb Staunton Beattie Lawyers (Plaintiff) Sorenson and Brown Solicitors (Defendant)
File Number(s):	2014/358849
Publication restriction:	Nil

Total Floor Area of the Building (excluding car park & balconies)	2437 Sqm
Floor Area of the Residential Flat Building	1931 Sqm
Floor Area of the Retail Shops	506 Sqm
Residential Flat Building Area Based Percentage	79%
Retail Shop Area Based Percentage	21%

Total Area of Carspaces	353 Sqm
Area of Residential Flat Building Carspaces	294 Sqm
Area of Retail Shops Carspaces	59 Sqm
Residential Flat Building Carspaces Percentage	83%
Retail Shops Carspaces Percentage	17%