The Owners of Metro Inn Apartments Strata Plan 11880 v Transmetro Corporation Ltd - [2000] WASC 293

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: THE OWNERS OF METRO INN APARTMENTS STRATA PLAN 11880 -v- TRANSMETRO CORPORATION LTD [2000] WASC 293

CORAM: OWEN J

HEARD: 5 OCTOBER 2000

DELIVERED : 1 DECEMBER 2000

FILE NO/S: CIV 2086 of 2000

BETWEEN: THE OWNERS OF METRO INN APARTMENTS STRATA PLAN 11880
Plaintiff
AND
TRANSMETRO CORPORATION LTD (ACN 001 809 043)
Defendant

Catchwords:

Corporations - Bodies corporate created under Strata Titles Act 1985 - Validity of management agreement entered into by strata company - Whether management agreement void as ultra vires the strata company - Whether Strata Titles Act 1985 empowered strata company to enter into management agreement - Interpretation of provisions of management agreement

Real property - Strata and related titles and occupancy - Capacity and powers of strata company constituted by s 32 of Strata Titles Act 1985

Legislation:

Strata Titles Act 1985 (WA), s 32, s 35, s 37, s, 42, s 47

Result:

Preliminary issues determined

Representation:

Counsel:

Plaintiff: Mr D M Stone
Defendant: Mr M J Buss QC & Ms N M Johnston

Solicitors:

Plaintiff: Williams & Hughes
Defendant: Talbot & Olivier

Case(s) referred to in judgment(s):

Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 HL 653
Birstar Pty Ltd v Proprietors "Ocean Breeze" Building Units Plan No 4745 [1997] 1 Qd R 117
Bonanza Creek Gold Mining Company Ltd v Rex [1916] 1 AC 566
Dynevor Pty Ltd v The Proprietors, Centrepoint Building Units Plan No 4327, unreported; SCt of Qld (C of A); No 138 of 1994; 12 May 1995
Humphries v The Proprietors "Surfers Palms North" Group Titles Plan 1955 (1992-94) 179 CLR 597
Hurst v Vestcorp Ltd (1988) 12 NSWLR 394
Keighley Maxsted & Co v Durant [1901] AC 240
Morrison v The Shire of Morwell [1948] VLR 73
Proprietors Unit Plan No 52 v Gold (1993) 116 ALR 638
Re The Honey Pool of Western Australia (No 2) (1988) 14 ALCR 621
Rothmans of Pall Mall (Australia) Limited v The Australian Broadcasting Tribunal (1985) 5 FCR 330
State Drug Commission of New South Wales v Chapman (1987) 12 NSWLR 447
The Owners of No 1 Village Drive v Johnson, unreported; SCt of Tas; A40 of 1995; 24 July 1995
Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410

Case(s) also cited:

Attorney-General v Manchester Corporations [1906] 1 Ch 643
Western Australia v Watson [1990] WAR 248
JW Monsell trading as Westwood Tyre Service Moruya v Team Link Management Pty Ltd (1997) 8 BPR 97,641

OWEN J: This is the trial of preliminary issues concerning the validity of a management agreement entered into by a body corporate created under the Strata Titles Act 1985 ("the Act") for the management of a hotel complex.

Background

On 19 July 1984 Strata Plan 11880 was registered covering 61 lots in a building that was either constructed or re‑furbished as a hotel complex known as Paradise Hill Hotel in East Perth. The complex consists of 56 accommodation units, four administration units and one lot which is used as a restaurant and function centre. By virtue of s 32 of the Act, upon the registration of the strata plan a body corporate with perpetual succession came into being under the name "The Owners of Paradise Hotel Strata Plan 11880". Later on, the name was changed to "The Owners of Metro Inn Apartments Strata Plan 11880". This entity, which I will call "the Strata Company", is the plaintiff.
By 1991, Beneficial Finance Corporation Ltd ("Beneficial") had effective control over most, but not all, of the accommodation units. This was because the registered proprietor, Pelias Investments Pty Ltd, had defaulted under lending arrangements which it had with Beneficial and Beneficial was in a position to exercise its rights, probably as a mortgagee in possession.
On 24 May 1991, Beneficial, as mortgagee of the strata units over which it had control, entered into a deed with the Strata Company giving the Strata Company authority to manage those units. I will call this document "the BFA Deed". In or about May 1991, the owners of the strata units (other than those over which Beneficial had control) each entered into a deed with the Strata Company also giving to the Strata Company authority to manage the relevant units. I will call these deeds the "OOA Deeds".
On 24 May 1991, and pursuant to the BFA Deed and the OOA Deeds, the Strata Company entered into a written agreement with the defendant ("the Management Agreement") by which, using the description in the recitals, it employed the defendant "as its agent to provide certain services to [it] in connection with the operation of the [hotel complex] including the management and marketing of the hotel". The term of the agreement is said to be 10 years from 1 December 1990 with two successive renewal options, each for 10 years. The options to renew fall to be exercised at least six months before the expiration of the term and are conditioned on the defendant not being in breach of its obligations.
The initial term is due to expire on 30 November 2000. On 16 May 2000 the defendant purported to exercise the first option to renew the terms. The Strata Company is resisting the defendant's attempts to do so. The basis of the resistance is twofold. First, the Strata Company says that it did not have the power to enter into any of the BFA Deed, the OOA Deeds or the Management Agreement either pursuant to the Act or its by‑laws. Accordingly, those deeds or agreements are void and of no effect. Secondly, the Strata Company alleges that the defendant was at all material times, and remains, in breach of the Management Agreement and is thus not entitled to exercise the option to renew the term.
The Strata Company has issued a writ in which it seeks a declaration that the Management Agreement is void and of no effect and that the purported exercise of the option is of no effect. It also claims damages for the breaches of the Management Agreement. For its part, the defendant denies that it has breached the Management Agreement. It also says that there is no want of power that affects any of the deeds or agreements. According to the defendant, it has validly exercised the option to renew the term.
For the sake of completeness, I should add that the Management Agreement also provided for the four administration units to be purchased by the defendant, with an option for the Strata Company to re‑acquire them on the termination of the Management Agreement. The accommodation units are, therefore, not part of the management arrangement. The same can be said of the restaurant and function centre which is Lot 61 on the Strata Plan.

The Preliminary Issues

It is against that background that I now turn to the preliminary issues. I am concerned solely with the question of want of power in the Strata Company to enter into the deeds or agreements. I am not concerned with any issues relating to alleged breaches of the Management Agreement by the defendant. The three preliminary issues are as follows:
1.Is the Management Agreement ultra vires the Strata Company and void in that the Strata Company did not have power to enter into the Management Agreement?
2.Did the Strata Company have power pursuant to the Act, its by‑laws or at law to enter into the Management Agreement and, if not, what are the consequences?
3.In any event, are any of the terms referred to in the Management Agreement void and, if so, can they be severed?
The first of these questions is, I think, at large. The way the propositions were argued, they would affect any strata body corporate that sought to enter into a management arrangement of this nature covering the entire complex on behalf of the owners of individual lots. The second question has elements of the general and the particular. As counsel for the plaintiff put it in oral argument, the real question is whether this Strata Company had power to enter into this Management Agreement. The question of severance, which is at the heart of the third issue, only arises if the want of power is particular rather than general.

The Provisions in the Deeds and the Agreement

Before considering the three preliminary issues, I need to describe the structure of the BFA Deed, the OOA Deeds and the Management Agreement and their material provisions. I need also to set out the relevant statutory framework. In this respect, it is common ground that the questions fall to be considered under the Act in the form in which it stood in May 1991.
The logical starting point is the BFA Deed. It recites that Beneficial wishes to authorise the Strata Company to take charge of and to manage the Units as serviced apartments on behalf of Beneficial and in accordance with the terms of the deed and that the Strata Company agrees to do so. The most material provision in the BFA Deed is cl 4, which I will set out in full:
"4.1The Owner hereby authorised the Strata Company to take charge of the Units and the Furnishings as from the date of execution hereof and to enter into a management contract in respect of the Units in the form or similar form to the Management Contract annexed hereto with the manager nominated therein.
4.2The Owner further authorises the Strata Company that, in dealing with the appointed person or corporation to carry out the management of the Units as serviced apartments as aforesaid, the Strata Company may act as a principal and not as an agent for the Owner of the Units as though the Strata Company were the beneficial owner of the Units and Furnishings provided however that the Strata Company shall ensure that the person or corporation so appointed to carry out the management of the Unit as a serviced apartment shall provide to the Strata Company a full account for all proceeds received arising from the management of the Units and Furnishings and that the Owner will receive the full benefit thereof less those charges which may properly be deducted by the Strata Company pursuant to this Authority."
The form of the "Management Contract annexed hereto" (referred to in cl 4.1) is, for all material purposes, the same as the Management Agreement. Clause 7 provides that all proceeds received by the Strata Company from the management of all of the strata units under management are to be divided between the several owners according to their proportionate unit entitlements. Clause 11 is relevant to the severance argument. It provides that a finding of invalidity as to any particular term is not to affect the validity or operation of the remainder of the document. Clause 15 provides that Beneficial is to indemnify the Strata Company against, among other things, costs and expenses arising out of the Strata Company having entered into a management contract under the deed.
The OOA Deeds recite, in cl 2.4, the existence of the BFA Deed and contain, as an annexure, a copy of the latter document. They also recite, in cl 2.5 and cl 2.6, that the owner concerned has agreed to purchase a strata unit from Beneficial and that it is a condition of the purchase that the owner must execute a deed "confirming the authority of the Strata Company to ... manage the Unit in accordance with [the BFA Deed] and this Deed". Once again, the central provision is cl 4 and I will set it out in full:
"4.1The Owner hereby authorises the Strata Company to take charge of the Unit and the undivided right of the Owner to use the Common Property and the Furnishings as from the date of execution hereof and if not already appointed to appoint a suitable serviced apartment management company to take charge of and to manage the Unit and the Furnishings as a serviced apartment in accordance with the terms of this Deed and the Deed of Authority.
4.2In addition to the foregoing, the Owner authorises the Strata Company to exercise an absolute and unfettered discretion as to which person or corporation the Strata Company shall appoint to assist the Strata Company in the management of the Unit as a serviced apartment provided however that the Strata Company shall make all reasonable enquiry to determine that any person or corporation so appointed shall be experienced and fit and proper to carry out management of the Unit in accordance with the terms hereof.
4.3The Owner further authorises the Strata Company that, in dealing with the appointed person or corporation to carry out the management of the Unit as serviced apartments as aforesaid, the Strata Company may act as a principal and not as an agent for the Owner of the Unit as though the Strata Company were the beneficial owner of the Unit and the Furnishings provided however that the Strata Company shall ensure that the person or corporation so appointed to carry out the management of the Unit as a serviced apartment shall provide to the Strata Company a full account for all proceeds received arising from the management of the Unit and that the Owner will receive the full benefit thereof less those charges which may properly be deducted by the Strata Company pursuant to this Authority.
4.4The Strata Company may use the Furnishings and may from time to time sell or dispose of any or all such items and replace such items from time to time provided upon termination of this authority there shall be left in the Unit furnishings (free of encumbrances) in similar description and number to the Furnishings."
Clauses 7 (distribution of income), 11 (invalidity) and 14 (indemnity) are in the same terms as the provisions relating to the same subjects that are contained in the BFA Deed and which I have already described.
It is sufficient to say for these purposes that the Management Agreement defines "the Hotel" as the land and buildings comprising Lots 1 to 61 on the Strata Plan (although there is a query against Lot 61 and the administration units) and the fixed equipment in the buildings. It also defines "Operating Terms" as (in effect) the initial term of 10 years together with the options.
Throughout the Management Agreement the Strata Company is referred to as "the Owner" and the defendant is called "the Operator". Clause 4.1 provides:
"The Owner hereby appoints the Operator and the Operator hereby agrees to serve the Owner as Operator of the Hotel during the Operating Term on the terms and conditions contained in this Agreement."
Clause 4.2 carries the heading "Authorisation" and commences with the words:
"The Owner hereby empowers and authorises the Operator in the name and on behalf of the Owner from time to time during the Operating Term and subject to the provisions of this Agreement to do the following things and the Operator shall ... ".
It then sets out the types of things that are to be expected in management arrangements, such as the granting of licences and other forms of occupancy and the employment of staff. In particular, it requires the defendant to open a separate bank account called "the Hotel Operating Account" and to pay into it all fees and other moneys payable by licensees and occupiers and to pay from it the Hotel operating expenses: see also cl 5.7. Clause 5.1 appears in an article entitled "Duties of Operator". It provides:
"5.1To Conduct the Hotel
The Operator shall conduct the Hotel on behalf of the Owner solely for the operation of a Hotel:
(a)In accordance with the provisions of this Agreement;
(b)In a proper and businesslike manner and to a standard appropriate to the Hotel;
(c)With the intent that the Hotel will be preserved as an asset to the Owner or such persons or corporations as the Owner may represent, and
(d)So far as shall be consistent with objectives (a) (b) and (c) so as to achieve optimum financial gain for the Owner."
Under cl 6 and cl 10, it is the obligation of the Strata Company to cause the Hotel to remain available during the term for operation by the defendant and to meet specified capital expenditures. Pursuant to cl 9, the defendant is entitled to receive a basic management fee calculated as a percentage of Hotel revenues. It is also entitled to an incentive fee which is to be calculated as a percentage of the gross operating profit from the Hotel operations.
I need, I think, to explain in a little more detail, the financial arrangements that are reflected in the various agreements. I will start with the Management Agreement. Clause 4.2(c) obliges the defendant to establish a separate bank account in the name of the Strata Company. The account is to be operated by signatories approved by the Strata Company. Under cl 4.2(d) and (h) and cl 5.7, all income received from the operation of the Hotel is to be paid into that account and all operating expenses are to be paid from it. There are fixed charges, such as rates and taxes, that are the responsibility of the Strata Company. Clause 6.3 provides that the Strata Company is to pay them but if there is a credit balance in the Hotel Operating Account the Strata Company can direct the defendant to pay them from that account.
Clause 7 provides for the preparation by the defendant of annual plans or budgets for the operation of the Hotel dealing with day‑to‑day operations, capital requirements, marketing and working capital contributions. There are comprehensive provisions detailing the process for approval of the plans and for the incurring of expenditure in excess of a budget in certain circumstances. There are also comprehensive financial reporting requirements in cl 8. Under cl 9 the entitlement of the defendant to fees, the way and the order in which it can take fees and make other payments from the Hotel Operating Account, and the method of adjusting those charges on a monthly and an annual basis are set out. Clause 10 makes it clear that the Strata Company is responsible for capital expenditure. Under cl 11.2 and cl 11.3, the defendant is to provide sufficient working capital to accomplish the intended purposes and such moneys are to be regarded as an interest-free loan by the defendant to the Strata Company.
Clause 21.1 obliges the Strata Company to indemnify the defendant against claims, demands, suits and proceedings in respect of liabilities properly incurred by the defendant while acting in accordance with the Management Agreement. There is a cross‑indemnity in cl 21.2 by which the defendant is to indemnify the Strata Company against all claims arising from the defendant acting outside the provisions of the Management Agreement.
All proceeds received by the Strata Company from the management of the Hotel on behalf of each owner is to be divided between the owners according to their individual proportionate unit entitlements as a fraction of the total unit entitlement of all owners who have authorised the Strata Company to act on their behalf: OAA Deeds cl 7.1, BFA Deed cl 7.1.

The Statutory Framework

Section 3 of the Act defines "strata company" as "a body corporate constituted under section 32". That section is, relevantly, in these terms:
"32(1)Upon the registration of a strata plan, the proprietors from time to time shall constitute a strata company by the name of 'The Owners of [the name of the building]' and the number of the strata plan allocated to it, by the Registrar of Titles, on the registration, and a strata company shall be a body corporate with perpetual succession and a common seal.
…
(3)A strata company ¾
(a) is capable of suing and being sued;
(b)shall be regulated in accordance with this Act and the by-laws in force in respect of that strata company;
(c)is not subject to the Companies (Western Australia) Code; and
(d)may do and suffer all things that bodies corporate generally may, by law, do and suffer and that are necessary for or incidental to the purposes for which a strata company is constituted."
Section 35 is entitled "Duties of strata companies". It requires the strata company to enforce the by-laws and to control and manage the common property for the benefit of all the proprietors.

Section 36 requires a strata company to establish a fund for administrative expenses that is sufficient for the control and management of the common property, for the payment of any premiums of insurance and the discharge of any other obligation of the strata company. It authorises the strata company to raise money by levying contributions on proprietors in proportion to the unit entitlements of their respective lots. The section also authorises the company to establish a reserve fund for the purpose of accumulating funds to meet contingent expenses, other than those of a routine nature, and other major expenses of the strata company likely to arise in the future. Again, there is authority to raise money for those purposes by levying contributions on the proprietors in proportion to the unit entitlements of their respective lots.
Section 37 is entitled "Powers of strata company" and it includes the following provisions:
"(1)A strata company may ¾
(a)purchase, hire or otherwise acquire personal property for use by proprietors in connection with their enjoyment of the common property or for use by the strata company in the performance of its functions;
(b)sell or otherwise dispose of personal property owned by it;
(c)borrow moneys required by it in the performance of its functions;
(d)secure the repayment of moneys borrowed by it, and the payment of interest thereon, by negotiable instrument, or mortgage of unpaid contributions (whether imposed or not), or mortgage of any property vested in it, or by a combination of those means;
(e)invest any moneys in its administrative fund or reserve fund in any manner permitted by law for the investment of trust funds or in any investment prescribed;
(f)where the strata company considers it necessary, effect a compromise of any action for the recovery of money due to the strata company;
(g)make an agreement with any proprietor or occupier of a lot for the provision of amenities or services by it to that lot or to the proprietor or occupier of that lot; and
…"
Section 39 confers on the strata company power "by its agents, servants or contractors" to enter upon any part of the land comprised in the strata plan for the purpose of carrying out certain specified works and for the purpose of carrying out inspections to ensure compliance with the by-laws. In that respect, s 42 provides that a strata company may make by-laws for its corporate affairs and for the control, management, use and enjoyment of the lots, the common property and the land comprised in the strata plan. By virtue of s 44 (which is entitled "Functions of Councils") the functions of a strata company are, subject to the Act and to any restriction imposed or direction given at a general meeting, to be performed by the council of the strata company. In turn, the council of a strata company is constituted and is to perform its functions in accordance with its by-laws.
By‑law 8(2)(b) provides that the council may employ on behalf of the strata company such agents and employees as it thinks fit in the control and management of the common property and the exercise and performance of the powers and duties of the strata company.
Both parties referred to s 47, which imposes statutory restrictions on the powers of the council. In the form in which it stood at the relevant time, it provided that unless otherwise determined by a special resolution of the strata company, the council could not undertake expenditure exceeding an amount established by a formula. It is common ground that the maximum amount permitted by s47(1) is well below the figures involved in the arrangement between the Strata Company and the defendant. Section 47(2) provides the mechanism for obtaining approval to expend in excess of the prescribed maximum. Section 47(3) provides that subsection (1) does not apply to, among other things, a payment "in discharge of any liability incurred in respect of an obligation of the strata company authorised by the strata company in general meeting".

The Ultra Vires Question

In the law relating to corporate regulation the ultra vires doctrine is one of considerable antiquity. It has been described in this way: "… a company incorporated by or under statute can pursue only those objects which are expressly authorised and possesses only those powers which are expressly or implicitly conferred upon it, implied powers being restricted to those which are reasonably incidental to the accomplishment of its authorised objects": Gower's Principles of Modern Company Law, Gower, 4th ed (1979) at p160. I take the first of the preliminary questions to be primarily concerned with the objects for the which a strata corporation is constituted. It is a question of the capacity of the corporation to enter into the impugned transaction. Of course, questions of capacity and powers will often overlap, as they do, I think, in this case.
The doctrine of ultra vires was abolished, so far as concerns companies incorporated under the Companies (Western Australia) Code, by amendments which came into force on 1 January 1984. The legislature can be taken to have been aware of this change at the time when it enacted the Act in 1985.
At first glance s 32(3)(d) is of very wide import. The words used are: "A strata company … may do and suffer all things that bodies corporate generally may, by law, do and suffer and that are necessary for or incidental to the purposes for which a strata company is constituted". The question is: what does the law, in general, permit bodies corporate to do?
Companies, or corporations, can be categorised in a variety of ways. One way is to look at the basis for their formation. In terms of capacity, the authors of Ford's Principles of Australian Corporations Law, Ford, 8th ed (1997) pars 12.050 ‑ 12.070 distinguish between "statutory corporations" and "chartered corporations". The latter type is of no relevance to this application. In relation to the latter, the authors say:
"In contrast to chartered corporations, a corporation created by or by virtue of a statute has, in general, no legal capacity beyond that necessary for the purposes for which it has been created unless the statute shows a legislative intention to create a corporation with a wider capacity: Bonanza Creek Gold Mining Co Ltd v R [1916] 1 AC 566; Re Honey Pool of Western Australia (No 2) (1988) 14 ACLR 621. A statute creating or authorising the creation of a corporation was not read as assimilating the new corporation to a common law corporation in relation to power to make contracts and dispose of property: Baroness Wenlock v River Dee Company (1883) 36 ChD 675. … [I]n the case of companies the Corporations Law shows that intention by giving them the capacity of a natural person."
Gower, op cit at pp5 ‑ 7, refers to "registered companies", "statutory companies", "chartered companies" and "cost-book companies". Again, the last two categories are of no relevance in the present context. The difference between the two texts lies in whether companies registered under the Corporations Law are regarded as being "statutory corporations" or whether they are in a separate category. Ford says the former and Gower the latter. I must say that I prefer the categorisation in Gower, although it probably does not matter a great deal. A corporation created under a general enabling statute, such as the Act, would be regarded as a statutory corporation under either definition. Having said that, I think there is a further refinement to which I will turn shortly.
In Halsbury's Laws of England, 4th ed, Vol 9 par 1333 the question of power is dealt with in this way:
"Then powers of a corporation created by statute are limited and circumscribed by the statutes which regulate it, and extend no further than is expressly stated therein, or is necessarily and properly required for carrying into effect the purposes of its incorporation, or may be fairly regarded as incidental to or consequential upon those things which the legislature has authorised. What the statute does not expressly authorise is to be taken to be prohibited.
The application of the principle is illustrated by a series of authorities relating to railway companies. …
A company which is incorporated by special Act of Parliament to carry out a particular undertaking for the benefit of the public is not entitled to sell its undertaking, or land which is required for the purpose of the undertaking, nor may it alter its objects so as to assume power to abandon the undertaking."
The leading case cited in Halsbury is Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 HL 653. Ashbury was the subject of consideration by the Judicial Committee of the Privy Council in Bonanza Creek Gold Mining Company Ltd v Rex [1916] 1 AC 566, to which Ford has referred in the passage that I have set out. In Bonanza Creek, Viscount Haldane, in delivering the opinion of the Council, explained that Ashbury stood for the proposition that it was inapposite to construe the powers of a statutory corporation by analogy to the powers of a corporation created by charter. His Lordship said, at 578:
"For to look at that analogy is to assume that the Legislature has had a common law corporation in view, whereas the wording may not warrant the inference that it has done more than concern itself with its own creature. Such a creature, where its entire existence is derived from the statute, will have the incidents which the common law attach if, but only if, the statute has by its language gone on to attach them. In the absence of such language they are excluded, and if the corporation attempts to act as though they were not, it is doing what is ultra vires and so prohibited as lying outside its existence in contemplation of law. The question is simply one of interpretation of the words used." [emphasis added]
I think that for these purposes the reference to "the common law" is a reference to corporations constituted by charter.
In Re The Honey Pool of Western Australia (No 2) (1988) 14 ALCR 621, s 5(2)(c) of the relevant statute read: "The [company] … is capable of doing and suffering all such acts and things as bodies corporate may lawfully do and suffer". Nicholson J considered the relevant law, relying on the passage from Halsbury that I have set out, the older English authorities cited in Halsbury and more recent English and Australian authorities which have confirmed the principles. However, his Honour did not refer to the changes to the ultra vires doctrine brought about by the 1 January 1984 amendments and nor did he refer to Australian authorities decided after that date. His Honour said, at 625:
"The applicants contend that full effect should be given to the plain words in this section. For them it is contended that because a company can sell and transfer its undertaking, so can the Honey Pool. For the participants it is said that the section cannot be so read as to destroy the Act. For the applicants it is said that to read the Act in that way is to treat the Honey Pool as if in fact it were a public authority.
In my opinion the section cannot be read as if it were enacted independently of the remaining provisions of the Act. It does not have the effect of vesting in the Honey Pool the freedom to act as if it were a body corporate without statutory power."
The decision is, with respect, clearly correct. The Honey Pool wished to transfer the whole of its undertaking, property and liabilities to an unlisted public company and also to effect its dissolution without a formal winding up. If it were to do so, it would be to divesting itself of powers and duties that the legislature had entrusted to it and it would be acting in a manner incompatible with the due exercise of its powers and the discharge of its duties. In Morrison v The Shire of Morwell [1948] VLR 73 O'Bryan J had expressly held that a local council could not take steps that would have this effect.
But I am not sure that Honey Pool necessarily stands in the way of a finding that, in this case, the question of capacity must be found against the defendant. It must, as Viscount Haldane said in Bonanza Creek, depend on the proper interpretation of the words used in the particular statute. I accept that there is not a great deal of difference between the words "acts and things … bodies corporate may lawfully do", used in s 5(2)(c) of the Honey Pool legislation, and "things that bodies corporate generally may, by law, do" as used in s 32(3)(d) of the Act. Nonetheless, as Nicholson J pointed out in Honey Pool at 624, the task is not to assess capacity in a vacuum but to "identify the relevant powers". It is only by considering the powers that the corporation exercises or purports to exercise that the question of capacity can be properly and finally determined.
There is a further point of distinction which suggests to me that the category of statutory corporations may need to be refined a little further in the light of modern developments. It may be necessary to distinguish what might be called a single or limited purpose corporation, set up under a special Act of Parliament, from a statutory corporation that is constituted under a general enabling statute. The Honey Pool of Western Autralia is (or was) a classic example of the former. It has an element of public interest in the sense that it is designed to exercise regulatory functions, albeit of a commercial nature and perhaps also of direct relevance to a section of the public rather than to the public generally. Another example of this type of corporation is the East Perth Redevelopment Authority constituted pursuant to s 6 of the East Perth Redevelopment Act 1991. Once again, there are elements of the public interest and of administrative efficacy in the reason for the existence, and the nature and functions, of the body. This raises specific issues that demand that powers and functions be confined. There may be similar considerations that arise in broader enabling statutes, for example the Building Societies Act 1976 because that too has regulatory authority in the public interest. But these considerations are of less import in enabling statutes such as the Act. As counsel for the defendant pointed out, the Act has to cater for a whole range of ventures including a simple duplex residence, home unit developments of varying sizes, mixed purpose developments incorporating residential and commercial properties, and resort or hotel complexes like the Metro Inn Apartments. All of this, it seems to me, supports the need for a flexible approach which depends essentially on the language of the enabling statute.
In my view, there is a respectable argument that when the legislature used the phrase "things that bodies corporate generally may, by law, do" in the Act, it did not have it in mind to limit the phrase "by law" so as to exclude the application, if appropriate, of the modern doctrine of capacity and power reflected in the Corporations Law. The doctrine of ultra vires has also changed dramatically. As I have already said, the legislature must be taken to have been aware of these developments. The predecessor to the Act, the Strata Titles Act 1966, contained no equivalent to s32(3)(d). Instead, s 13(3) of the 1966 version had sub‑sections to the same effect as s 32(3)(a), (b) and (c) of the Act but nothing that equates to s 32(3)(d). That being so, there could be very little argument that, under the 1966 Act, capacity fell to be determined by the common law because "what the statute does not expressly authorise is to be taken to be prohibited". But the legislature must be taken to have intended something by the introduction of s 32(3)(d). I can see no warrant for a construction that requires the sub‑section to be read down so that the phrase "bodies corporate generally" does not include companies registered under the Companies (Western Australia) Code (now the Corporations Law) and that the phrase "by law" does not include modern statutory law.
This is not to say that the principles enunciated in the quote from Halsbury have been put at nought. It is essentially a question of statutory interpretation and each piece of legislation falls to be examined separately. It depends on the language that the legislature has used. To determine whether a strata company under the Act has the capacity of a natural person, it would still be inapposite to draw an analogy between corporations of that type and the common law position applicable to charter companies. If that result follows, it does so because of the construction of the statute and not by resort to common law principles.
Having considered s 32(3)(d) as a whole, and in the context of the Act as a whole, I think a strata company has the capacity of a company registered under the Corporations Law and hence the capacity of a natural person. This, it seems to me, is in accord with the natural and ordinary meaning of the words used in the statute. It is not necessarily at odds with Honey Pool because there the restriction arose from the nature of the powers sought to be exercised rather than from the constitutional capacity of the corporation to do so.
I have not overlooked the fact that in Humphries v The Proprietors "Surfers Palms North" Group Titles Plan 1955 (1992-94) 179 CLR 597 (a case to which I will refer in detail shortly) McHugh J said, in relation to the Building Units and Group Titles Act 1980 Qld (which is the equivalent Queensland legislation and to which I will refer as "QAct"), that as the Companies Act 1961 (Qld) did not apply to or in respect of a body corporate constituted under QAct, the doctrine of ultra vires applied to such a body corporate. But there are two relevant points of distinction between s 32 of the Act and s 27 of the QAct, at least as it stood in 1994. First, the Queensland provision says that the Companies Act "does not apply to or in respect of a body corporate constituted under this Act" while the Act says "a strata company … is not subject to the Companies (Western Australia) Code". Secondly, s 27(3) of the Queensland legislation (which is the equivalent of s 32(3)(d)) is quite different. It says:
"Subject to this Act the body corporate shall have the powers, authorities and duties and functions conferred or imposed on it by or under this Act or the by-laws and shall do all things reasonably necessary for the enforcement of the by-laws and the control, management and administration of the common property."
That, it seems to me, is a section dealing with, and only with, powers and does not purport to equate the strata company with bodies corporate generally, so far as concerns the things that it may do or suffer.
Once again, however, questions of capacity and power overlap. While I have interpreted s 32(3)(d) in a broad sense so far as concerns capacity, it is not at large. The sub‑section is in two parts and they must be read together. A strata company "may do and suffer all things that bodies corporate generally may, by law, do and suffer and that are necessary for or incidental to the purposes for which a strata company is constituted". The word "and" that I have italicised is clearly conjunctive. While a strata company may have the capacity of a natural person, that capacity can be exercised or utilised only in relation to things that are necessary for or incidental to the purposes for which the company exists. That brings squarely into focus the question of powers.
However, and subject to the discussion on power upon which I am about to embark, the answer to the first preliminary question is: No.

Powers Conferred by the Act and the By-Laws

The "purposes" for which a strata company is constituted are not expressly stated in the Act. From time to time the Act refers to "duties" (for example, s 35), "powers" (for example, s 37) and "functions" (for example, s 44 in relation to the Council of the strata company). The term "purposes" must, I think, encompass all of these concepts.

There is no doubt that a primary focus of the strata company is the management and control of the common property. This much follows from s 35(1)(b), which requires the strata company to "control and manage the common property for the benefit of all the proprietors" and s 35(1)(c) which obliges it to keep in good and serviceable repair and maintain the common property, including fixtures and fittings.
One of the issues that has been raised is whether this primary focus on management of the common property is in fact (subject to any express provision in the Act) effectively the sole "purpose".
There are, of course, other statutory provisions that are not expressly confined or related to management of the common property. Section 36(1) requires the strata company to establish a fund sufficient for the control and management of the common property and the payment of insurance premiums. But it also includes funds sufficient for "the discharge of any other obligation of the strata company". Section 32(2) permits (without obliging) the strata company to establish a reserve fund to meet contingent expenses and other expenses likely to arise. Counsel for the defendant submitted, and I accept, that the structure of the Act suggests that the fund referred to in s 36(1) is not the only fund or account that the company may establish. Thus, it does not follow from that provision that the strata company could not set up an account or deal with funds arising form the management arrangement.
Section 37 contains wide powers for the company to acquire, sell and dispose of personal property, borrow money (including on a secured basis), invest moneys standing to its credit in the administrative or reserve funds, and compromise actions. Importantly for the resolution of the Preliminary Issues, s 37(1)(g) also provides that a strata company may make an agreement with any proprietor or occupier of a lot for the provision of amenities or services by it to that lot, or to the proprietor or occupier of that lot.
Section 42(1) provides that a strata company may make by-laws "for its corporate affairs and for the control, management, use and enjoyment of the lots, the common property and the parcel". It is to be seen that the by-law making power is not confined to the common property. Schedule 1 to the Act contains a set of model by-laws. Under s 42(2) they are deemed to be the by-laws of the strata company although they can be amended, repealed or added to. There are no relevant changes to the by-laws so far as concerns the Strata Company.
Under s 44 the functions of the strata company are, generally speaking, to be performed by the council. The only relevant by-law is 8(2)(b), which deals with the activities of the council. It provides that the council may employ, on behalf of the strata company, such agents and employees as it thinks fit in connection with the control and management of the common property and the exercise and performance of the powers and duties of the company. This is important for two reasons. Once again, it envisages that there are powers and duties that extend beyond the management of the common property. It also envisages that the strata company may engage, and act through, agents. There are other references in the Act to the strata company engaging, and acting through, agents. I mention, by way of example, s 37 in connection with the carrying out of works.
The case for the defendant can be summarised in a relatively succinct way. It is that the BFA Deed and the OAA Deeds are agreements with the proprietors of lots for the provision of amenities or services by the Strata Company to the lots, or to the proprietors or the lots, and for the control and management of the common property for the benefit of all the proprietors. They are, therefore, within the scope of the "purposes" for which a strata company is constituted. The Management Agreement is simply an appointment by the Strata Company of an agent in connection with the exercise of the powers and duties of the Strata Company and is thus authorised by by-law 8(2)(b).
A question which arises is whether, in terms of s 32(3)(d), the various agreements are "necessary for or incidental to" these purposes. The word "necessary" is governed by the concept of reasonableness. In State Drug Commission of New South Wales v Chapman (1987) 12 NSWLR 447, in an admittedly different statutory context, Allen J said this, at 452:
"As to the word 'necessary' it does not have, in my judgment, the meaning 'essential'. The word is to be subjected to the touchstone of reasonableness. The concept is one as to what reasonably is necessary in a commonsense way. As Pollack CB said in Attorney‑General v Walker (1849) 3 Ex 242:
'It may be stated as a general rule that those things are necessary for the doing of a thing which are reasonably required or which are legally ancilliary to its accomplishment.'
I do not consider any closer defintion than that should be attempted. The word speaks for itself."
This dicta was cited with approval by the Full Court of the Federal Court in Proprietors Unit Plan No 52 v Gold (1993) 116 ALR 638 at 640 ‑ 41 in relation to the ACT legislation governing unit titles which authorised the strata company to recover expenditure for works that had been "rendered necessary" in certain nominated circumstances.
The word "incidental" means casually met with, or occurring in fortuitous or subordinate conjunction with, something else. In judging this, regard must be had to the whole of the arrangements and to the intention of the parties: Rothmans of Pall Mall (Australia) Limited v The Australian Broadcasting Tribunal (1985) 5 FCR 330 at 347.

The Agreements

One of the issues raised by counsel for the plaintiff was that the agreements did not constitute the Strata Company providing amenities and services to the lot or the owner because it was always contemplated that the defendant would actually manage the venture.
There is no doubt that this was in contemplation. It seems to be an inevitable inference from the known facts that the OAA Deeds, the BFA Deed and the Management Agreement were signed at around the same time. However, it does not follow that the Strata Company was without obligations in relation to the provision of services.
I have already referred to cl 2.4, cl 2.5 and cl 2.6 of the OAA Deeds. I think it is important to note (from cl 2.4) that a copy of the BFA Deed is annexed to the OAA Deeds. It is common ground that when the BFA Deed was signed it had annexed to it a copy of the Management Agreement. Accordingly, the OAA Deeds incorporate the form of both the BFA Deed and the Management Agreement. The recital in cl 2.6 contains a confirmation by the owners of "the authority of the Strata Company to … manage the [units] in accordance with the terms of the [BFA Deed] and this Deed". By cl 4.1 the owners authorise the Strata Company to "take charge of the Unit and the undivided right of the owner to use the Common Property" and, if it has not already done so, to appoint an agent to take charge of and manage the unit. By cl 4.2 the owners authorise the Strata Company to exercise an unfettered discretion in choosing the agent "to assist the Strata Company in the management of the Unit". It does not say "to manage the unit". The words used are : "to assist the Strata Company in the management of the unit". These words have to be given a meaning. I think that, properly construed, the arrangement is for the Strata Company to be responsible for providing the contemplated amenities and services, albeit through the agency of a "suitable serviced apartment management company".
It can be put in a slightly different way. The lot proprietor has retained the Strata Company as its agent to take charge of the unit, the owners' interest in the furnishings and the common property, and to manage them for the owners' benefit. The lot proprietor has further authorised the Strata Company to retain another contractor with suitable expertise as a contractor to assist it in the exercise of the contemplated management functions.
The BFA Deed is essentially in the same form. I have already mentioned that a copy of the Management Agreement was annexed to the BFA Deed (see cl 4.1). The recital confirms the owners' wish to authorise the Strata Company to take charge of and to manage the units as serviced apartments on its behalf. Clauses 4.1 and 4.2 are in different terms to cl 4.1 and cl 4.2 of the OAA Deeds but they are relevantly to the same effect.
The Management Agreement contains a recital of the authority given by the owners to the Strata Company for the latter to enter into the agreement. Recital A is a little curious. It recites the desire of the Strata Company to employ the defendant as its agent to provide services to the Strata Company in connection with the operation of the Strata Company's hotel. The description of the premises as "the Strata Company's hotel" is perhaps inapposite. It would be difficult to characterise the interest of the Strata Company as akin to ownership or to anything else that would justify the description that the Paradise Hill Hotel (or Metro Inn Apartments) is "its hotel". I do not think anything much turns on it. It may be no more than a reflection of cl 4.3 of the OAA Deeds which permit the Strata Company to contract with the agent as a principal rather than as an agent for the individual lot proprietors. The obvious intent, and certainly the effect, of this provision is to ensure that there would be no privity of contract between the defendant and an individual owner arising from the Management Agreement. This is also reflected in cl 5.1(c) of the Management Agreement, which obliges the defendant to conduct the Hotel "on behalf of the [Strata Company] solely for the operation of a Hotel" and "with the intent that the Hotel will be preserved as an asset to [the Strata Company] or such persons or corporations as [the Strata Company] may represent".
There is very little authority bearing on the issue that I have to decide. Both parties referred to Humphries and invited me to draw from that case support for their respective positions. As I have already said, there are significant differences between QAct s 27(3) and s 32(3)(d) of the Act. Section 37(2) of QAct is in similar terms to s 37(1)(g) of the Act. In Humphries a body corporate entered into a management agreement under which, in consideration of a lump sum annual payment, the manager agreed to ensure that the property was properly maintained and administered and kept in good repair. One of the manager's specific duties was to conduct a letting agency for the letting of units in the property for such of the owners as should require the service.
The Court held that the body corporate had no power to enter into a contract for the provision of letting services to proprietors. The letting services provision was not severable from the remainder of the contract and the entire agreement was void. Brennan and Toohey JJ said at 604:
"The powers of a body corporate are confined chiefly to management and control of common property, and expenditure of the funds of the body corporate on the provision of services for individual proprietors is not sanctioned merely because the services are available to all proprietors who wish to use them. A power to provide such services is not incidental to the body corporate's statutory duties or powers.
…
Nor was there any agreement under s 37(2)(a) which might have been implemented by procuring another person to provide a letting service for particular lot proprietors or occupiers. It was therefore beyond the powers of the body corporate to enter into a contract to procure the provision of services [of that kind]." [emphasis added]
Deane and Gaudron JJ came to the same conclusion but of a slightly different reason. Their Honours noted that the argument of the contractor that the letting services clause was in the interests of the proprietors generally. They went on to say, at 608:
"Nonetheless, the fact remains that only those proprietors who wished to let their townhouses would obtain any direct practical benefit from the availability on the premises of a letting agency. Examination of the powers of the body corporate to expend its funds discloses that those powers do not encompass the payment of remuneration for the conduct of such an agency from a unit in the complex.
Any payment to the Manager in pursuance of [the remuneration clause] of the Agreement would necessarily be made from the body corporate's administrative fund established and maintained under s 38 of the [QAct]."
Their Honours went on to consider whether the payment of the manager's remuneration from the administrative fund was authorised by s 38(3) as being "for the purpose of … carrying out its powers, authorities, duties and functions under this Act". These things were, their Honours held, confined to the management and control of the common property. The letting services contract was not an incident of or reasonably necessary for the control and management of the common property and was therefore void. It was not severable.
McHugh J also based his conclusion largely on the fact that third party rights were being affected. His Honour said, at 614:
"Unquestionably, s 37(1)(a) and (c) authorise a body corporate to enter into a contract to maintain and administer the common property. But nothing in those paragraphs confers any authority on a body corporate to enter into an agreement to pay money to a person in consideration of that person providing a letting service for the benefit of unit proprietors. They confer power in relation to the common property . They do not confer a power to enter into an agreement with a third party which affects the lots of other individuals as well as the common property."
McHugh J also pointed out that the agreement gave the manager the exclusive right to provide letting services in the complex. This exclusivity was inconsistent with the right of other proprietors to conduct lawful business from their lots.
Humphries has been applied in later cases. Dynevor Pty Ltd v The Proprietors, Centrepoint Building Units Plan No 4327, unreported; SCt of Qld (C of A); No 138 of 1994; 12 May 1995 also concerned a letting services contract. But the dispute in that case was of an entirely different nature. The body corporate had insisted on payment of $50,000 in return for its consent to the contractor selling its business and assigning its rights under the contract. It was an action for money had and received. In that case the letting services contract had been the approved by a unanimous resolution of the proprietors. Macrossan CJ and McPherson JA recognised that this may place it in a different category to Humphries, although the arrangement was held to be void on other grounds. Pincus JA noted that the parties had simply assumed that the arrangement was of the same character as that in Humphries because of the provisions for the payment of remuneration.
The plaintiff also referred to The Owners of No 1 Village Drive v Johnson, unreported; SCt of Tas; A40 of 1995; 24 July 1995. That case involved management fees paid by a body corporate which were, in part, for services in relation to land that was not part of the strata plan at all. In other words, it was land that was neither part of a lot nor of the common property. Not surprisingly, the management agreement under which the fees were claimed was held to be void on the authority of Humphries. But it provides no assistance in the resolution of the dispute with which I am confronted.
There are important points of distinction between the situation in Humphries and that which applies in this case. First, leaving to one side the four administration units and the restaurant and function centre, all of the proprietors have expressly authorised the Strata Company to manage the units and to enter into the Management Agreement. This is the effect of the BFA Deed and the OAA Deeds. I think it follows from the portion of the dicta of Brennan and Toohey JJ that I have italicised that their Honours recognised that this would make a difference. In Humphries there was no agreement between the individual lot proprietors and the body corporate. McHugh J was concerned that the letting services agreement would affect the lots of other individuals and that its exclusivity would, at least impliedly, fetter the right of the individual to arrange its own tenancies. That concern would be of lesser import if the individual proprietor had (as here) expressly consented to and authorised the transaction. In relation to the administration units, the owner (being the defendant) is also a party to the whole arrangement. That leaves the restaurant and function centre, Lot 61. There was no evidence as to who owns that lot. However, it seems to me not to alter the situation because Lot 61 is expressly excluded from the entire arrangement. It is defined as the "excluded area" (see cl 1.8 and item 8 of the Schedule to the Management Agreement) and is not a part of the Hotel for the purposes of the arrangement.
The second point of distinction relates to the financial provisions. I will say more about the validity of the financial terms later. It is sufficient to say at this stage that there are no individual lot proprietors who suffer a financial detriment because moneys are being taken from the administrative fund and they are receiving no services in return. This was the major concern expressed by Deane and Gaudron JJ. I accept the submission made by counsel for the defendant that the Act does not limit a strata company to two funds, namely an administrative fund and a reserve fund. Here, the Management Agreement expressly requires the operations of the Hotel to be conducted through an account established especially for the purpose. There is nothing in the agreed facts to suggest that the administrative fund is otherwise affected.
For these reasons, and despite the conclusion arrived at in that case, I do not think that Humphries compels the result that the arrangements made in this case are necessarily void.
Counsel for the plaintiff submitted that these agreements did not fall within s 37(1)(g) because the "services" of a hotel proprietor are provided to hotel guests and members of the public as much (if not more) than to the lot proprietors. However, I think this is too specific or confined in its understanding of the entire arrangement. Clause 1.2 of the BFA Deed refers to the premises as "accommodation units" and defines the building as the "Hotel". Clauses 2.4 and 2.5 refer to the desire of the owner to have the units managed as "serviced apartments". So too does cl 4.2. In the OAA Deeds, cl 2.4 refers to the operation of the units "as a Hotel". Clauses 4.1 and 4.3 mention the property being managed as "serviced apartments". This is the basis of the arrangement and it is reflected in the Management Agreement. Obviously, hotel facilities have to be offered to, and attract, members of the public. Otherwise the commercial objectives of the venture would not be met. But these agreements are about the management of the venture. Management services are offered to the lot proprietors, not to members of the general public.
I wish to leave to one side for the moment the financial provisions in the Management Agreement. I will return to them later. In my view, the effect of the Management Agreement, the BFA Deed and the OAA Deeds can be summarised as follows. The lot proprietors (other than the owners of the administration units and Lot 61) engaged the Strata Company to manage the common property, within the meaning of s 35(1)(b), and to provide "amenities" and "services", within the meaning of s 37(1)(g), to their lots or to themselves as proprietors. The lot proprietors authorised the Strata Company to sub‑contract its obligation to provide those amenities and services without creating any privity of contract between the lot proprietors and the sub‑contractor. Pursuant to that authority and by virtue of the Management Agreement, the Strata Company sub‑contracted its obligations to the defendant without creating any privity of contract between the lot proprietors and the defendant. It was not outside the purposes for which a strata company is incorporated for the Strata Company to enter into the BFA Deed and the OOA Deeds and it was thus within power for it to do so under s 32(3)(d) and s 37(1)(g). For the reasons which I have already given, it is not inimical to this conclusion about power that the administration units and Lot 61 are not within the agreements.

The Strata Company was empowered to enter into the Management Agreement for the following reasons. A body corporate can only act through servants or agents. The functions of a strata company are, subject to the Act and to any restrictions imposed or directions given at a general meeting, to be performed by the council. Under by-law 8(2)(b) the council is empowered to employ, on behalf of the strata company, agents to perform the powers and duties of the body corporate. Accordingly, the Strata Company was acting within power when it sub‑contracted its management and other obligations under the BFA Deed and the OAA Deeds. Alternatively, the Strata Company was empowered to enter into the Management Agreement in that the sub‑contract arrangement was "necessary for or incidental to" the performance of its obligations.
On this basis, and subject to what I am about to say concerning the finance provisions, the answer to the second preliminary issue is: The Company did have power under the Act, the by-laws, and generally at law, to enter into the Management Agreement.

The Finance Provisions

Counsel for the plaintiff went through the provisions of the Management Agreement and submitted that for many of them there was no authority given by the proprietors to the Strata Company for the latter to engage an agent to perform the services. But the gravity of that objection falls away somewhat because the OAA Deeds authorised the Strata Company to engage an agent to manage the premises "in accordance with the terms of … the Deed of Authority" (cl 4.1). The Deed of Authority is, of course, the BFA Deed. In turn the BFA Deed incorporates the form of the Management Agreement. Accordingly, there is an indirect authorisation by the lot proprietors of each of the provisions of the Management Agreement.
I have given careful consideration to the finance provisions of the various agreements because, it seems to me, that this is the area of greatest concern is relation to the arguments about power. It was the impact of the finance provisions in the letting services contract in Humphries which was central to the argument about power.
It is necessary to see how financial matters are dealt with in the Act. There are two fundamental principles which seem to arise from the structure of the Act. First, imposts made by the body corporate for the administration fund and for the reserve fund must be levied in proportion to the unit entitlements of the owners' respective lots (s 36(1)(c) and (2)(c)). Secondly, there are restrictions on the ability of the body corporate to expend funds in excess of a prescribed amount without the express approval of lot proprietors (s 47).
I do not think the various agreements contain anything inimical either to the letter or the spirit of the first of those principles. The funds arising from the hotel operations are not dealt with through either the administration fund or the reserve fund. However, it seems to me to arise from the scope and purpose of the Act that if the body corporate is to be involved in arrangements of this nature it would need to account to the owners in accordance with the legislative proscriptions. To that extent its dealings with lot proprietors ought to be on the proportionate basis. But that is exactly how the agreements are designed to work: see cl 7.1 of each of the BFA Deed and the OAA Deeds.
Counsel for the plaintiff submitted that the financial obligations which the Strata Company had undertaken in relation to this arrangement were beyond power. He gave numerous examples. Clause 6.3 obliges the Strata Company to pay the "fixed charges". The term "fixed charges" is defined in cl 1.10(b) to include "financial charges payable by the owner with respect to moneys borrowed or funds raised with respect to the Hotel". Counsel asked rhetorically: by virtue of what power can the body corporate borrow or raise money for a Hotel? A similar point is made in relation to working capital being treated as a loan by the defendant to the Strata Company in accordance with cl 11.3. I think the answer to this objection is that there is clear borrowing power in the Act. Section 37(c) authorises a strata company "to borrow moneys required by it in the performance of its functions". The question still remains: is the entry into the BFA Deed and the OAA Deeds and the Management Agreement by the Strata Company for the stated purposes within power or not? I do not think the existence of contractual terms about the borrowing of funds assist in deciding whether or not the arrangement is within power.
Counsel for the plaintiff also submitted that, on a fair reading of the agreements, it is the Strata Company that bears the risk of trading losses being incurred in the course of operations. I think this is a fair reading of cl 21.1 of the Management Agreement, depending on whether the trading losses were "properly incurred" by the defendant acting in accordance with the terms of the document. But that is a risk in any venture. The critical question requires a characterisation of the true rights and responsibilities of the respective parties under the Act and under the contractual documents. There are other problematic areas of a similar nature. One is in relation to the approval process for budgets. Under cl 7 the Strata Company can withhold approval to the capital budget and certain elements of the marketing budget. If it were to do so, the parties would be in dispute and the difference of opinion would be submitted for binding determination by an outside party under cl 16. Counsel for the plaintiff submitted that it was beyond power for the Strata Company to cede the authority finally to determine expenditure to a third party.
But I think the most significant point, and it is one that I have not found easy to determine, is whether the whole financial arrangements fall foul of s 47. To a very large extent, the issues raised in the previous paragraph are connected with this issue.
It is common ground that the level of expenditure required by the Management Agreement is well in excess of the maximum permitted levels calculated by the formula set out in s 47(1). That sub‑section provides, relevantly, that unless otherwise determined by a special resolution of the strata company, the council shall not undertake expenditure exceeding the prescribed level. Section 47(2) sets out the procedure by which approval to expenditure exceeding the prescribed level is to be sought and obtained. There are saving provisions in s 47(3). The relevant one is s 47(3)(c) which provides that the limitation does not apply to the expenditure of moneys "in discharge of any liability incurred in respect of an obligation of the strata company authorised by the strata company in general meeting".
On the surface, s 47 is clearly in favour of the construction contended for by the plaintiff. The section evidently restricts the payment of moneys above what is a small amount except on conditions. The Management Agreement involves expenditure on a large scale and does not follow the statutory conditions. What, then, is the answer?
Counsel for the defendant put the argument on two bases. First, that what was prohibited by the section was actual expenditure of money, that is the physical paying out of cash, rather than the incurring of a liability that would eventually be satisfied by the payment of money. There is a certain attraction in this argument. The legislature has chosen to use the phrase "undertake expenditure". It could have, but did not, use a phrase such as "incur a debt". The latter phrase incorporates the notion of sustaining or becoming liable for money: see Butterworths Australian Legal Dictionary, 1997, p585. However, it is a little difficult to reconcile that construction with s 47(2)(b). That sub‑section stipulates that for certain "proposed" expenditures it is necessary to submit to the meeting of strata company called to consider it, at least two tenders. The notion of a tender suggests that no binding agreement for the provision of the service or the purchase of the asset which will result in a liability to pay money.
However, there is a second limb to this argument. Counsel argued that the effect of s 47(3)(d) (which I have already described) envisaged that the actual disbursement of money, in respect of a liability incurred without the prior approval that had not been the subject of a special resolution under s 47(1), could be the subject of ratification. I think this is correct. Otherwise, it is hard to see where s 47(3)(c) could operate. It is not suggested by either party that the expenditures envisaged by the Management Agreement were ratified at a general meeting of the Strata Company under s 47(3)(c). There is simply no evidence on the point. But its importance is that the section itself contemplates a process of ratification that would save the expenditure of moneys necessary to satisfy a liability that had previously been "incurred" in the sense that I have mentioned.
Counsel for the defendant submitted that it was important to remember that the contentious point here relates to power. It is necessary to construe the statute and the contractual provisions to see whether there is a want of capacity in relation to the arrangements. It may be that the members of the council have breached their duties to the Strata Company by incurring a liability without proper regard to s 47(1). But this does not necessarily mean that the body corporate lacks the power to enter into the arrangement.
It is trite law that the mere fact that a contract is prohibited by statute does not necessarily mean that the contract is void and unenforceable. As Gibbs CJ said in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 414:
"The question whether a statute, on its proper construction, intends to vitiate a contract made in breach of its provisions, is one that must be determined in accordance with the ordinary principles that govern the construction of statutes. 'The determining fact is the true effect and meaning of the statute' (St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 at 286). 'One must have regard to the language used and to the scope and purpose of the statute' (Archbold's (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 at 390)."
A contract entered into by an agent in excess of power can be ratified by the principal: Keighley Maxsted & Co v Durant [1901] AC 240. Even acts done by a fiduciary in a situation where there is an abuse of power can (in effect) be ratified, as for example under the equitable doctrine of release. I am fully aware that there is no evidence that ratification occurred in this case. However, it emphasises that the doctrine of ratification is of wide import. The legislature has seen fit to contemplate that ratification may occur. This suggests to me that the legislature did not intend that a contract entered into in breach of s 47(1) (assuming that to be the case) would be void and unenforceable. This disposes of the question of power. If it has not in fact been ratified, different considerations might arise. But this would be a matter for another day.
The second basis on which counsel for the plaintiff put the case on this point relies on the characterisation of the rights and obligations of the respective parties. The financial obligations of the Strata Company are not its personal obligations. They are obligations that, as between the Strata Company and the lot proprietors, were entered into on behalf of and as agent for the lot proprietors. Even though there was no privity of contract between the individual lot proprietors and the defendant, the obligations were nonetheless obligations undertaken by the Strata Company as agent for the lot proprietors. Counsel submitted that s 47 was concerned with the expenditure by a strata company on its own account from the administrative fund or the reserve fund. It was not concerned with the expenditure of moneys as agent for the lot proprietors pursuant to an agreement entered into under s 37(1)(g). Counsel submitted that I should find support for this interpretation in the existence of the indemnity that the Strata Company had received from the lot proprietors under cl 15 and cl 14 of the BFA Deed and the OAA Deeds respectively.
I have a difficulty with this argument. It depends on the characterisation of the obligations as not being obligations of the Strata Company. True it is that the Strata Company is the agent of the lot proprietors. It is also true that the defendant must be taken to have known of the existence of the lot proprietors and of the authority that they had delivered to the Strata Company (see Recital B of the Management Agreement). To that extent, the defendant was dealing with an agent but in a situation where there was a disclosed principal. But the fact is that the Strata Company was contracting with the defendant as a principal. So much appears from the tenor of the Management Agreement itself, read in conjunction with cl 4.2 of the BFA Deed and cl 4.3 of the OAA Deeds. There was good reason for this, namely to avoid privity of contract for the protection of the lot proprietors. But the Strata Company cannot have it both ways. If it is a principal, albeit acting as such on behalf of other parties, the obligations must be considered as personal. The very fact that there is an indemnity tends to support this view. The lot proprietors are not principal obligees. A liability arises for them only if they are called upon under the indemnity. The very nature of an indemnity suggests a first-line liability that has arisen in the entity that has the benefit of the indemnity.
Counsel for the defendant referred to the discussion on sub‑agency in Halsbury's Laws of England, 4th ed (reissue), Vol 1(2) pars 69 to 71. It seems to me that this situation fits into the second class mentioned in par 70, namely, sub‑agents employed with the express or implied authority of the principal, but between whom and the principal there is no privity of contract. In such cases it is only the agent, and not the sub‑agent, who is responsible to the principal. But this does not limit the nature of the rights and obligations as between the agent and the sub‑agent, which fall to be determined according to conventional principles.
I prefer the first of the two bases on which the argument was put. On that basis, but not without some hesitation, I have concluded that the financial arrangements do not offend s 47 (or any other provision) of the Act so far as concerns power or capacity to enter into the contractual arrangements.

Severance

It is strictly unnecessary to move to the third preliminary question because I have not found that the documents, or any portions of them, are invalid. I will, however, say something very briefly on the issue.
A finding that a provision in a contract is void or unenforceable does not, of itself, mean that the entire clause or the whole contract falls away. The principles relating to severance are well known: see Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 per McHugh J at 443 ‑ 44. The question is whether the impugned portion or portions are so connected with the other parts of the clause or the contract that to remove it or them would alter the nature of what remains.
That these general principles relating to severance would apply to a case such as this follows from Humphries at 604 ‑ 05 and 618 ‑ 19. This was also recognised in Birstar Pty Ltd v Proprietors "Ocean Breeze" Building Units Plan No 4745 [1997] 1 Qd R 117.
If I am wrong in my conclusion that the agreements are fundamentally flawed because of a lack of capacity in a strata company, then no question of severance could arise. If there is a lack of power because, for example, the agreements are not necessary or incidental to the control or management of the common property and are not agreements coming within s 37(1)(g), the same result would apply. They would be fundamentally flawed because they were not within the "purposes" for which a strata company is constituted.
The arguments about the financial provisions may well be seen as significant in the conclusion concerning capacity and power. However, they have a further significance. As I have already said, the greatest area of vulnerability in these agreements lies in the financial arrangements. The plaintiff invited me to find the financial provisions, or some of them, void and unenforceable. Had I done so, but in a way that fell short of rendering the entire arrangement invalid for want of capacity or power, I would have found that the agreements could not be saved by the doctrine of severance. The financial provisions go well beyond the remuneration payable to the defendant. They affect the capital works on the premises, contributions to the reserve fund, and the budgets. To have severed any of the financial provisions would undoubtedly have altered the nature of what remains.

Conclusion

In my opinion the preliminary questions should be answered in this way:
1. Is the Management Agreement ultra vires the Strata Company
and void in that the Strata Company did not have power to enter into the Management Agreement?
Answer: No.
2. Did the Strata Company have power pursuant to the Act, its
by‑laws or at law to enter into the Management Agreement and, if not, what are the consequences?
Answer: The Company did have power under the Act, the
by-laws and generally at law to enter into the
Management Agreement.
3. In any event, are any of the terms referred to in the Management
Agreement void and, if so, can they be severed?
Answer: None of the relevant terms are void.