The Owners - Strata Plan 60285 v Bondlake Pty Ltd

[2004] NSWSC 1037

Reported Decision: (2005) NSW ConvR 56-114

Supreme Court

CITATION:	The Owners - Strata Plan 60285 v Bondlake Pty Ltd [2004] NSWSC 1037
HEARING DATE(S):	8 October 2004
JUDGMENT DATE:	5 November 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Pearlman AJ
DECISION:	Declaration that caretaker agreement void
CATCHWORDS:	STRATA SCHEME - caretaker agreement - meaning of "incur a debt" - whether debt incurred in initial period without available funds - whether agreement illegal - UNENFORCEABILITY - principles - scope and purpose of statutory prohibition - whether recovery of debt only consequence of illegality - whether unenforceability a legal consequence - public policy
LEGISLATION CITED:	Strata Schemes Management Act 1996 s 113
CASES CITED:	Bank of China v Hawkins (1991) 7 ACSR 262 Bans Pty Ltd v Ling and Ors (1995) 16 ACSR 404 Burmic Pty Ltd v Goldview (2003) 2 Qd. R 477 Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217 Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215 Hawkins and Ors v Bank of China (1992) 26 NSWLR 562 Hurst and Ors v Vestcorp Ltd (1988) 12 NSWLR 394 Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612 Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 Nelson and Anor v Nelson and Ors (1995) 184 CLR 538 Owners - Strata Plan No 51487 v Broadsand Pty Ltd [2002] NSWSC 770 Owners - Strata Plan No 56443 v Regis Towers Real Estate Pty Ltd (2003) 58 NSWLR 78 Powell and Anor v Fryer and Anor (2001) 37 ACSR 589 Re Beckwith; ex p Power and Power (1993) 43 FCR 256 Russell Halpern Nominees Pty Ltd v Martin (1987) WAR 150 Shepherd and Ors v Australia and New Zealand Banking Group Ltd and Anor (1996) 20 ACSR 81 Stammers v Akron Securities Ltd (1997) 24 ACSR 498 Thomas Brown and Sons Ltd v Fazal Deen and Anor (1962) 108 CLR 391 Thomas v Regal West Pty Ltd (12 November 1990, Brownie J, Supreme Court, Commercial Division, unreported) Yango Pastoral Company Pty Ltd and Ors v First Chicago Australia Ltd and Ors (1978) 139 CLR 410
PARTIES :	The Owners - Strata Plan 60285 (Plaintiff) Bondlake Pty Ltd (Defendant)
FILE NUMBER(S):	SC 1844/03
COUNSEL:	P R Whitford SC/ J Lazarus (Plaintiff) J S Wheelhouse SC (Defendant)
SOLICITORS:	Snelgrove Boyle Neilson (Plaintiff) Deutsch Partners Lawyers Pty Ltd (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

PEARLMAN AJ

5 NOVEMBER 2004

1844/03 THE OWNERS – STRATA PLAN 60285 v BONDLAKE PTY LTD

JUDGMENT

Introduction

1 In these proceedings, the plaintiff seeks a declaration that an agreement made between the plaintiff and defendant is void. The basis for its claim is that, by entering into that agreement, the plaintiff incurred a debt for an amount which exceeded the amount then available for repayment of the debt from its administrative fund or its sinking fund, contrary to the prohibition in s 113(1)(b) of the Strata Schemes Management Act 1996 (“the Act”).

The facts

2 The plaintiff is an owners corporation constituted under the Act in relation to a strata title building located at 105 – 113 Campbell Street, Surry Hills, known as “The Carlisle”. The strata plan, numbered 60285, was registered on 18 May 1999.

3 On 25 May 1999, the inaugural extraordinary general meeting (“the inaugural meeting”) of the plaintiff was held. At that date, a company called D.S. Parklane Development Pty Ltd (“D S Parklane”) was the original owner (as defined in the Act), and it was the only lot owner represented at the meeting. It is common ground that, at that date, the initial period (as defined in the Act) was still in force and did not expire until either 9 or 10 June 1999.

4 The minutes of the inaugural meeting disclose a resolution, called motion 8, whereby the plaintiff resolved to enter into an agreement known as a “caretaker agreement”. Its relevant provisions are as follows:


(1) It is expressed to be entered into between the plaintiff and the defendant;

(2) It is undated on its cover sheet, but the seal of the plaintiff was affixed on 25 May 1999;

(3) It provides for the appointment of the defendant to undertake the duties and perform the services specified;

(4) The term of the agreement was for five years, commencing on 28 May 1999;

(5) Clause 15.1 conferred upon the defendant an option to require the plaintiff to renew the agreement for three further successive terms of five years, the last of which was stipulated to end on 27 May 2019;

(6) Clause 4.1 cast on obligation on the plaintiff to pay to the defendant “the Regular Duties Fee” according to clauses 5 and 6. Clause 5.1 repeated that obligation, and clause 6 made provision for a variation of the Regular Duties Fee;

(7) The Regular Duties Fee for the first year of the agreement was stipulated to be $84,042. There was provision for escalation of the fee for the second and subsequent years based principally on the Consumer Price Index (“CPI”);

(8) Clause 5.6 provided that the plaintiff must pay the first instalment of the Regular Duties Fee on the date the agreement starts, and thereafter in equal instalments on the first day of each month;
(9) Clause 16 contained provisions whereby the plaintiff might terminate the agreement. Relevantly, one of those circumstances was specified as being where the defendant breaches the agreement and such breach continues for more than 28 days after notice specifying the breach.

5 Prior in time to the passing of motion 8 at the inaugural meeting, another resolution was passed, numbered motion 3, whereby the plaintiff resolved to note an undertaking to pay outgoings given by D S Parklane. That undertaking was dated 25 May 1999. It was addressed to the secretary of the plaintiff and relevantly provided as follows (D S Parklane being erroneously referred to throughout as “Parkland”):

D. S. Parkland Development Pty Limited, the original owner of all lots in Strata Plan No 60285, undertakes to perform and pay for the obligations of the Owners Corporation on the conditions in this undertaking. In particular, D. S. Parkland Development Pty Limited undertakes to perform and pay for the obligations of the Owners Corporation to:
(a) maintain common property;
(b) when necessary, replace fixtures and fittings in common property;
(c) when necessary, replace personal property that belongs to the Owners Corporation; and
(d) effect Owners Corporation insurances.

D. S. Parkland Development Pty Limited gives this undertaking on these conditions:
(a) the Owners Corporation will not levy contributions for its administrative fund and sinking fund while the undertaking is in force;
(b) the Owners Corporation is not liable to repay D. S. Parkland Development Pty Limited the money it spends because of the undertaking; and
(c) the undertaking does not affect any contractual rights of D.S. Parkland Development Pty Limited may have to recover costs from purchasers.

This undertaking is for the period from registration of Strata Plan No. 60285 until the earlier of:
(a) midnight on 30 June 1999; or
(b) seven days after D.S. Parkland Development Pty Limited services notice on the Owners Corporation that the undertaking will cease.

6 The first instalment of the Regular Duties Fee (which covers the period from the commencement of the caretaker agreement on 28 May 1999 until 1 July 1999) was calculated at $7828.57. This amount was paid by D S Parklane to the then managing agent of the plaintiff about 28 May 1999, and an identical amount was paid by the managing agent (on behalf of the plaintiff) to the agent of the defendant about 31 May 1999.

7 Another resolution of the inaugural meeting was motion 5 relating to contributions. It was resolved to determine contributions for both the administrative fund and the sinking fund, collectively payable in equal instalments commencing on 1 July 1999.

8 On 30 June 1999, the first annual general meeting (“the annual meeting”) of the plaintiff was held. A resolution was passed confirming the amount of contributions and their manner of payment in terms substantially identical to the resolution about those matters passed at the inaugural meeting. The minutes of annual meeting record, under the heading “Accounts”, the following: “ As the Owners Corporation did not accrue any income or expense there were no accounts in accordance with Section 103 of the Strata Schemes Management Act 1996”.

The relevant statutory provisions

9 The Act has been amended since the events that I have described took place. Consequently, the provisions of the Act to which I refer in this judgment are those in force when those events took place.

10 Section 113 of the Act relevantly provided as follows:

S 113 Restrictions on powers of owners corporation during initial period

(1) An owners corporation must not, during the initial period, do any of the following things unless the owners corporation is authorised to do so by an order of the Board under section 182:
(a) alter any common property or erect any structure on the common property otherwise than in accordance with a strata development contract;
(b) incur a debt for an amount that exceeds the amount then available for repayment of the debt from its administrative fund or its sinking fund,
(c) appoint a strata managing agent to hold office as such for a period extending beyond the holding of the first annual general meeting of the owners corporation;
(d) borrow money or give securities.
(2) An owners corporation may recover from the original owner:
(a) as a debt, any amount for which the owners corporation is liable because of a contravention of subsection (1)(b), together with the expenses of the owners corporation incurred in recovering that amount, and
(b) as damages for breach of statutory duty, any loss suffered by the owners corporation as a result of any other contravention of subsection (1).
(3) …
(4) It is a defence to an action under this section in debt or for damages if it is proved that the original owner:
(a) did not know of the contravention on which the action is based, or
(b) was not in a position to influence the conduct of the owners corporation in relation to the contravention, or
(c) used due diligence to prevent the contravention.
(5) A remedy available under this section does not affect any other remedy.

11 Pursuant to ss 66 and 69 respectively an owners corporation was required to establish an administrative fund and a sinking fund, to pay into those funds contributions levied on and paid by owners of lots, and to make authorised payments out of those funds.

12 The dictionary to the Act contained two relevant definitions. First, it defined “ the original owner” in relation to a freehold strata scheme (which is the type of scheme in this case) as “… the person by whom the parcel the subject of that scheme was held in fee simple at the time of registration of the strata plan to which the scheme relates”. Secondly, it defined “ the initial period ”, in relation to an owners corporation, as “… the period commencing on the day on which that owners corporation is constituted and ending on the day on which there are owners of lots the subject of the strata scheme concerned (other than the original owner) the sum of whose unit entitlements is at least one-third of the aggregate unit entitlement”.

13 Finally, for the purpose of the application of those provisions of the Act to these proceedings, three matters should be noted. First, there being no evidence to the contrary, I have proceeded on the assumption that no authorisation was furnished by the Board as provided for in the opening words of s 113. Secondly, as I have noted above, D S Parklane was the original owner at the time when the inaugural extraordinary general meeting was held. Thirdly, the initial period did not expire until either 9 or 10 June 1999.

The issues

14 Two issues arise for determination in this case.

15 First, was the caretaker agreement entered into in contravention of s 113(1)(b)? This issue in turn requires the determination of three sub-issues – (a) did the plaintiff “incur a debt” within the meaning of s 113(1)(b) properly construed; (b) if so, was the debt incurred within the “initial period”; and (c) did the amount of the debt exceed the amount then available for repayment of debt from the plaintiff’s administrative or sinking fund?

16 The second issue is the consequence that arises if a contravention is found. The plaintiff seeks an order that the caretaker agreement is void. The defendant resists the making of such an order, and claims, in the alternative and in the event that it is found that the caretaker agreement is void, that its offending provisions are severable from the remainder of the agreement.

17 I deal with each issue in turn.

Contravention

Incur a debt

18 The expression “incur a debt” within the meaning of s 113 of the Act (either in its current and previous forms) does not appear to have been the subject of judicial consideration. Counsel did not cite any such authorities and my own researches have not revealed any. However, in the context of company law, and, in particular, in the context of insolvent trading, there have been many decisions on the meaning of that expression in company law statutes, and it will be necessary to refer to some of those decisions.

19 The leading authority is Hawkins and Ors v Bank of China (1992) 26 NSWLR 562. In that case, the question for determination was whether, by entering into a guarantee in favour of a bank, a company incurred a debt within the meaning of s 556 of the Companies (New South Wales) Code. The resolution of the question depended upon the proper construction of the expression “incurs a debt” within that section, which, in summary, imposed civil and criminal liability upon the directors and managers of a company in circumstances where immediately before the debt was incurred there were reasonable grounds to expect that the company would not be able to pay its debts as they became due. The Court of Appeal (Gleeson CJ, Kirby P and Sheller JA) held that a company “incurs a debt” within the meaning of s 556 when it enters into a guarantee by which it subjects itself to a conditional but unavoidable obligation to pay a sum of money at a future time. Gleeson CJ said (at p 572):
The words “incurs” and “debt” are not words of precise and inflexible denotation. Where they appear in s 556 they are to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes.
“Debt” is capable of including a contingent liability … Dictionaries define “debt” as a liability or obligation to pay or render something. Such a liability may be conditional as well as present and absolute…
Similarly, the word “incurs” takes it meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that “debt” may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time …
20 In Hawkins v Bank of China , the Court of Appeal did not purport to provide an exhaustive exposition of the meaning of the expression “incurs a debt”, a fact which was noted by Bryson J (as he then was) in Shepherd and Ors v Australia and New Zealand Banking Group Ltd and Anor (1996) 20 ACSR 81 at 88). However, at least as a guide in approaching the task of construing the expression “incurs a debt”, Hawkins v Bank of China may be taken as authority for the following general propositions:


(1) Regard must be paid to the context, and to the statutory purpose of the legislation in which the expression appears;

(2) The expression must be applied in a practical and commonsense fashion;

(3) The word “debt” is capable of including a contingent liability;

(4) The word “incurs” is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved is uncertain.


21 Hawkins v Bank of China has been applied in that broad and general way by Bryson J in Shepherd v ANZ Bank (involving money paid as deposits under failed construction contracts, in the context of s 556) and in a previous decision, Bans Pty Ltd v Ling and Ors (1995) 16 ACSR 404 (rent paid under a lease, also in the context of s 556 and following a review of relevant authorities at pp 406 – 408). It was applied by Olsson J (with whom Duggan and Williams JJ agreed) in the decision of the Full Court of South Australia in Powell and Anor v Fryer and Anor (2001) 37 ACSR 589 at 598 – 599 (involving liability for statutory imposts, in the context of s 558 of the Corporations Law). Similarly, it was applied in that broad and general way by Ipp J (when sitting as a member of the Full Court of Western Australia) in Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217 at 231 – 233 and particularly at 234 (involving pay roll tax, also in the context of s 556 and following a review of the relevant authorities).

22 A slightly different approach was taken by Cooper J in the Federal Court in Re Beckwith; ex p Power and Power (1993) 43 FCR 256, where, at pp 269-271, his Honour was considering whether the conditions for the operation of s 592(1) of the Corporations Law, (being the successor to s 556(1) and in relevantly similar terms) had been made out in relation to the company which incurred the particular debt. After referring to and citing from the judgments in Hawkins v Bank of China and Russell Halpern Nominees Pty Ltd v Martin (1987) WAR 150, Cooper J said, at p 271:
The essential consideration which led to the decision in each of these cases was that upon execution of the document the company had subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time. The debt has been incurred because the company by entering the agreement had created an unavoidable obligation.

23 Russell Halpern Nominees Pty Ltd v Martin and Anor, a decision of the Full Court of Western Australia, concerned an action brought by a landlord (again under s 556) seeking recovery of money representing rent under a lease from tenants of whom the respondents were the directors. The lease had been entered into at a date before the enactment of s 556, and the appellant’s principal claim was that s 556 had retrospective effect so that the tenants had “incurred a debt” for the purposes of s 556 when they entered into the lease and became obliged to pay rent due under it. In rejecting the claim that s 556 had retrospective effect, Burt CJ turned to the alternative claim for so much of the rent that had accrued and was unpaid after the date of the enactment of s 556 upon the basis that the debt was incurred from time to time as the rent became payable under the lease.

24 At p 153, Burt CJ (with whom Smith J agreed) said:
… the proposition is that a tenant holding premises for a term “incurs a debt” within the meaning of s 556(1) of the Code upon each and every rent day. I do not think that to be correct … In a case such as this, when the term of the lease has not expired and when the landlord is holding the tenant to the agreement so that the tenant, whether in occupation of the leased premises or not, becomes liable to pay rent on the agreed rent days, I do not think that any relevant act on the part of the tenant beyond his entering into the lease in the first instance can be identified. And that being so, I do not think that it can be said that a tenant company “incurs a debt” within the meaning of the subsection whenever a present liability to pay rent is created by the tenant’s covenant operating upon the passage of time.

25 Olney J dissented, but at p 156 stated: “… For the same reasons as have been expressed by Burt CJ I am of the opinion that for the purpose of s 556(1) the companies “incurred (the) debt” represented by the rent due under the lease when it entered into the agreement for lease …” .

26 In the judgment at first instance in Hawkins v Bank of China (see Bank of China v Hawkins (1991) 7 ACSR 262 at 268) Rogers CJ in Comm Div doubted whether Burt CJ had gone so far as to express the view Olney J attributed to him. In Commissioner of Taxation v Pollock at p 232, Ipp J noted that doubt, but expressed the view, somewhat tentatively, that, by using the words “… beyond his entering into the lease in the first place …”, Burt CJ was arguably saying that, by entering into the lease, the tenants were incurring a debt, and therefore a contingent debt to pay rent in the future could give rise to the incurring of debts under s 556(1).

27 In Shepherd v ANZ Bank at p 89, Bryson J said:
… For rent the position was broadly established by the decision … in Russell Halpern Nominees Pty Ltd v Martin … Rent is treated as incurred at the time when the lease is entered into, even though time must elapse before rent becomes payable and various possible events … might have intervened to prevent the rent ever becoming due. Further the amount may not be clearly foreseeable because of the provisions for periodic review and adjustment …

28 I have dwelt at some length on the decision in Russell Halpern Nominees v Martin because the facts there under consideration are analogous in an important respect to the facts in this case. There, the obligation was to make periodic payments of rent. In this case, the caretaker agreement cast an obligation upon the plaintiff to make periodic payments of the Regular Duties Fee subject to periodic adjustment.

29 Of course, it is inescapably plain that all the authorities to which I have referred arise in a context different to the present. They were each concerned with company law and a provision relating to insolvent trading. Mr Whitford SC, appearing for the plaintiff, submitted that there is no reason why the principles set out in them should not be equally applicable to task of construction in the present case. Mr Wheelhouse SC, appearing for the defendant, submitted on the contrary that the particular context of these authorities makes their application to the present case inappropriate.

30 In my opinion, the general propositions that I have sought to draw from Hawkins v Bank of China are apt, in my opinion, to guide the task of construction in the present case. The requirement to consider the underlying purpose and object of a statute is an unexceptional tenet of statutory interpretation, and is legislatively enshrined (Interpretation Act 1987, s 33). And the propositions rest in reality upon the plain and ordinary meanings of the words “debt” and “incur”. As I have tried to show, the cases have all applied those propositions in a broad way to determine whether very different agreements and transactions fell within the expression “incur a debt” within the meaning of the particular statutory provision. Furthermore, each of s 556(1) of the Companies Code and s 113 of the Act are similar in at least one respect – they each provide a mechanism for the recovery of the money representing the debt if it was incurred in the stipulated circumstances.

31 Accordingly, bearing the general propositions I have outlined in mind, I turn to consider, first, the statutory purpose of s 113, and, secondly, the context in which that section is invoked in the present case, and, in particular, the relevant provisions of the caretaker agreement.

The statutory purpose

32 The first point to note about s 113 is that the restrictions that it imposes on the owners corporation operate during the initial period. That is a period when the original owner, that is, the developer of the residential flat building to which the strata scheme relates, wholly controls the strata scheme. The corollary is, of course, that it is a period when the ultimate occupants of the building, the ultimate owners of lots, have not yet acquired their unit entitlements.

33 The second thing to note is that the restrictions relate to matters of importance and ongoing consequence, namely, alterations to the common property, incurring a debt exceeding the available amount in the administrative and sinking funds, appointing a strata management agent for a period beyond the first annual general meeting, and borrowing money or giving securities. It is clear that each of these things, if done within the initial period, would cast a substantial burden upon ultimate lot owners who could not have had any notice that those things or any of them were intended, and who have had no voice as to whether or not the those things should occur. Contrast the position of an owners corporation doing any of these things after, rather than before, the expiry of the initial period. Then there will be lot owners holding at least one-third of the aggregate unit entitlement who will be entitled to notice of a meeting and to vote at it, and, pursuant to s 108 of the Act, prospective purchasers of lots would be entitled to access to the owners corporation’s records so as to have notice before they buy of any burden already in place.

34 In the Second Reading Speech on the passing of the Act, the Minister for Community Services had this to say (Hansard, Third Series, Vol 255 at p 6961):
A change has been included in the bill to apply to what is known as the initial period, which is the early stage of a strata scheme’s existence. It is the time between the registration of the scheme and the point at which one-third of the lots in the scheme have been sold. The developer, or original proprietor, is restricted from taking certain decisions in that period when a minority owner could be adversely affected … The only way to get exemption from the restrictions is to obtain an order from the Supreme Court. It is a clear consumer protection issue and although there have been calls to remove the concept of the initial period, it has been retained. However … applications may be made instead to the Strata Titles Board …

35 I take it, for the reasons I have set out, that the legislative purpose of s 113 is wholly beneficial. It is to protect ultimate lot owners from onerous or adverse obligations affecting them and brought into existence at a time when they are unable to have any influence on whether or not those obligations should be incurred.

The context in the present case

36 The plaintiff points to its obligation under the caretaker agreement to pay the Regular Duties Fee in equal monthly instalments commencing on the date the agreement starts, that is, from 28 May 1999, and the fact that the fee is set out $84,042 for the first 12 months (with an immediate payment of the first instalment) and is subject thereafter to adjustment. It also draws attention to the fact that the term of the agreement is five years and that it contains an option to renew the agreement for three further terms of five years each.

37 The plaintiff accordingly contends that, by entering into the caretaker agreement, the plaintiff incurred a debt within the meaning of s 113(1)(b) in the amount, at the very least, of $84,042 (of which $7828.57 was payable immediately), and, although the Regular Duties Fee over the remainder of the term cannot be ascertained with precision at the time of commencement of the agreement, since it is subject to CPI adjustment, nevertheless the plaintiff, by agreeing to pay the Regular Duties Fee over the life of the agreement, incurred a debt in excess of $84,042.

38 The defendant’s case is that no debt was incurred when the caretaker agreement was entered into. Mr Wheelhouse based this contention on a number of propositions. First, he drew attention to the terms of the undertaking given by D S Parklane whereby it undertook to “… pay for the obligations … ” of the defendant. Secondly, he pointed to the fact that the undertaking was in existence at the time the inaugural meeting was held, as it was noted in motion 3, and he pointed to the fact that, in the course of the inaugural meeting, the plaintiff resolved to note the undertaking at a point in time prior to resolving, in motion 8, to enter into the caretaker agreement. Thirdly, he drew attention to the fact that the first instalment of $7828.57 was paid by D S Parklane and thereafter remitted in satisfaction of the plaintiff’s obligation under the caretaker agreement on 31 May 1999, being a date before the expiry of the initial period. Fifthly, he pointed to the resolution recorded in the minutes of the annual meeting that at that time the plaintiff had not accrued any expense. Lastly, he drew attention to the provisions of the caretaker agreement, whereby the only amount immediately payable upon its commencement was the first instalment of $7828.57 and thereafter all further payments were contingent upon performance of the stipulated duties by the defendant under pain of termination as provided in cl 16.

Did the plaintiff incur a debt?

39 At the time it entered the caretaker agreement, the plaintiff incurred an obligation to pay the Regular Duties Fee in the manner and upon the terms set out. Other than in respect of the first year of the term, the amount of the Regular Duties Fee could not be precisely ascertained (because it was liable to adjustment), but nevertheless, at least in relation to the first year of the term, the plaintiff incurred an absolute and unavoidable obligation to pay the Regular Duties Fee. Its obligation continued for the remainder of the terms contemplated by the option to renew, but in this case its obligation, whilst remaining unavoidable, was contingent upon the exercise of the option to renew by the defendant in the manner specified in the option to renew. The debt remained a debt incurred despite its contingency in these circumstances. Furthermore, in my opinion, the obligation to pay the Regular Duties Fee remained an unavoidable obligation, despite the right of the plaintiff to terminate the caretaker agreement for breach. The right to terminate was simply an incidental right invested in the plaintiff in the interests of due performance of the caretaker agreement.

40 I reject the contention that no debt was incurred by reason of the undertaking given by D S Parklane and payment of the first instalment made pursuant to that undertaking. There are a number of reasons for so doing. In the first place, the plain words of the caretaker agreement extend the obligation to pay the Regular Duties Fee beyond payment of the first instalment. Clause 5.1 so provides, and cl 5.6 merely deals with the times at which equal monthly instalments must be paid. Secondly, the words of the undertaking are not clear and unambiguous. They simply require D S Parklane to “… perform and pay for the obligations of …” the plaintiff, particularly in relation to specified matters, none of which refers to an obligation to pay debts incurred. But even if the undertaking did mean that D S Parklane was obliged to pay the plaintiff’s debts, it was only for a period expiring on 30 June 1999. That would cover the first instalment, but on the view I have taken, the obligation to pay, incurred at the time when the caretaker agreement was executed by the plaintiff, went beyond the first instalment. Thirdly, the undertaking could hardly have avoided the plaintiff’s obligation to pay the Regular Duties Fee. That obligation was incurred in favour of the defendant, and failure to pay would no doubt have invested a cause of action in the defendant against the plaintiff. The undertaking merely provided a source of funds for payment of the first instalment.

41 In these circumstances, it matters not (for the purpose of determining if a debt was incurred) that the plaintiff resolved to note the undertaking at a point in time before it resolved to enter into the caretaker agreement. Similarly, it matters not that D S Parklane met the provisions of the undertaking by providing funds to pay the first instalment, and it matter not that, presumably by reason of that payment, the plaintiff resolved at the annual meeting that it had not accrued any expense.

42 Nor do I think that the position changes by reason of the fact that the caretaker agreement is for a term with an option to renew for successive terms. Whether the caretaker agreement is properly characterised as a contract with an irrevocable offer which becomes binding upon acceptance, or whether it is properly characterised as a concluded conditional contract subject to the exercise of the option, the position remains the same (see, generally, Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 at 73-76). The caretaker agreement remains a binding contract containing, on the part of the plaintiff, unavoidable obligations, some of which are contingent.

43 I find, accordingly, that at the time it executed the caretaker agreement, the plaintiff incurred a debt within the meaning of s 113(1)(b) of the Act.

Was the debt incurred within the initial period?

44 The determination of this issue can be shortly stated. The debt was incurred at the time the plaintiff entered into the caretaker agreement, which, on its face, was 25 May 1999. At that time, the initial period was in force. Accordingly, the debt was incurred within the initial period.

Did the debt exceed the amount then available in the administrative and sinking funds?

45 At the relevant date, 25 May 1999, there were no amounts at all in the administrative fund or the sinking fund. Payment of contributions to those funds was not required to commence before 1 July 1999.

46 On any view, therefore, the debt was incurred for an amount that exceeded the amount then available for repayment of the debt from the administrative or sinking funds.
47 Thus, on the view that I take, namely, that the debt incurred by the plaintiff when it entered into the caretaker agreement was represented by the whole of the Regular Duties Fee for the first term of the caretaker agreement and any further terms arising out of exercise of the option to renew, it is plain that the debt was in the amount of at least $84,042 and, depending upon the option to renew contingency and the application of the CPI adjustment, was potentially in excess of $1,600,000.

48 If I was wrong in that view, and the debt was limited only to the obligation to pay the first instalment, and therefore amounted to $7828.57, then the position is the same – there were no amounts in the administrative and sinking funds at the relevant date. For the reasons I have set out in par 40, I reject the view that the undertaking given by D S Parklane had the effect that, since D S Parklane was to meet the amount of the first instalment, no debt at all was incurred.

Conclusion

49 For the foregoing reasons, I find that the caretaker agreement was entered into in breach of s 113(1)(b) of the Act. I find that the conditions stipulated by that section were all in place – without the authorisation of the Board, the plaintiff did, during the initial period, incur a debt for an amount that exceeded the amount then available for repayment of the debt from its administrative fund or its sinking fund.

50 Accordingly, the next issue arises – what are the consequences of the contravention of s 113(1)(b) of the Act?

Is the caretaker agreement void?

51 The plaintiff asserts that the consequence of the contravention of s 113(1)(b) is that the caretaker agreement is void and unenforceable by reason of its illegality. The defendant’s response is that, properly construed, s 113(1)(b) does not disclose a legislative intention that unenforceability is a consequence of contravention. I shall return to consider these contentions in more detail, but first it is necessary to review the relevant principles.

52 In Yango Pastoral Company Pty Ltd and Ors v First Chicago Australia Ltd and Ors (1978) 139 CLR 410 at 413, Gibbs ACJ said as follows:
There are four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful: (1) The contract may be to do something which the statute forbids; (2) The contract may be one which the statute expressly or impliedly prohibits; (3) The contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; or (4) The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits.
53 His Honour went on to, at pp 413 – 414, to specify the proper approach to the task of construing whether the enforceability of a contract may be affected in the ways he had identified. He said:
The question whether a statute, on its proper construction, intends to vitiate a contract made in breach of its provisions, is one which must be determined in accordance with the ordinary principles that govern the construction of statutes. “The determining factor 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 (Archbolds (Freightage) Ltd v S Splanglett Ltd ((1961) 1 QB 374 at 390). One consideration … is the protection of the public … but … that … is not the only test.

54 If the statute imposes a penalty for contravention of its provisions, then it is necessary to construe the statute to determine if the legislature intended the penalty to be the only consequence of contravention, or whether the legislature intended that the contract should also be void and unenforceable as a consequence of the contravention. As Mason J pointed out in Yango Pastoral Company v First Chicago, at p 429, “… [t]here is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished …”.

55 In Nelson and Anor v Nelson and Ors (1995) 184 CLR 538 at pp 612-613, McHugh J turned his attention to the fact that, if a court withholds relief because of an illegal transaction, it necessarily imposes a sanction on one of the parties to the transaction that will deprive that party of his or her property rights. In the following passage at p 613, his Honour stated the applicable principles as follows:
… courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.
56 There are cases where the statute does not expressly or impliedly prohibit the contract, but the courts may not enforce the contract “… because it is a contract associated with or in the furtherance of illegal purposes …” per Jacobs J in Yango Pastoral v First Chicago at p 432. Such a case, for example, is Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215. In that case, a driller contracted with an owner of land to drill some bores. The drilling of the bores was, however, unauthorised by reason of the failure of the owner to obtain the required permits. Upon a suit by the driller seeking to recover money under the contract, the owner claimed that the contract was unenforceable by reason of its illegality. The High Court held that the contract was not unenforceable. After stating the fact that the driller himself had not committed any offence, McHugh and Gummow JJ in a joint judgment at p 227 went on to say:

The question then becomes whether, as a matter of public policy, the court should decline to enforce the contract because of its association with the illegal activity of the owner in, if not causing, then at least suffering or permitted the construction and drilling of bores … without the grant to the owner of permits … The refusal of courts in such a case to regard the contract as enforceable stems not from express or implied legislative prohibition but from the policy of the law, commonly called public policy … Regard is to be had primarily to the scope and purpose of the statute to consider whether the legislative purpose will be fulfilled without regarding the contract as void and unenforceable …

57 Their Honours found, at p 227, that unenforceability of the contract in that case would prejudice an innocent party without furthering the objects of the legislation.

58 In the same case, at pp 251-2, Kirby J noted that the position would have been different if what had been involved had been a specific agreement between the parties deliberately to breach the particular statute. In such a case, his Honour said, there would be a strong argument to support the proposition that, on public policy grounds, the court might refuse relief. A similar line of reasoning seems, with respect, to have been adopted by McPherson JA in giving the principal judgment of the Queensland Court of Appeal in Burmic Pty Ltd v Goldview (2003) 2 Qd. R 477. In that case, the plaintiff entered into a contract with the defendant whereby the latter granted the former a licence to use the roof of the defendant’s premises to display a billboard advertisement. The defendant subsequently removed the advertisement without the consent of the plaintiff, and the plaintiff sued the defendant for damages for breach of contract. The advertisement had been erected without council approval as required by a local planning law. In holding that the contract was unenforceable, McPherson JA, at par 26, said as follows:
The statutory prohibition … is, when read with the definition of ‘advertiser’ … imposed on each of (the defendant) as the building owner and (the plaintiff) as the exhibitor of the advertisement. They each knew there was no intention on the part of the other to obtain the approval of the Council, and did not themselves intend to do so. Instead they intended that the advertisement be exhibited without any such approval. This is what made their agreement a contract to do an act prohibited by statute, which the courts will not enforce.

59 For application of the principles I have endeavoured to set out, reference may be made to Hurst and Ors v Vestcorp Ltd (1988) 12 NSWLR 394, Stammers v Akron Securities Ltd (1997) 24 ACSR 498 and Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612, but it is unnecessary for present purposes to examine these decisions in detail.

60 Reference, however, must be made to two decisions relied upon by the plaintiff, being decisions that directly deal with strata schemes under the provisions of predecessors to the Act. For the reasons that I set out, I do not find either of these decisions determinative in resolving the present problem, but they are each illustrative of the willingness of the Court to declare certain agreements under the Act to be void. The first decision is Thomas v Regal West Pty Ltd (12 November 1990, Brownie J, Supreme Court, Commercial Division, unreported). The issue was whether the appointment of a managing agent was void for illegality on the ground that it was made in breach of the requirement of s 78 (1AA) of the Strata Titles Act 1973 that a body corporate shall not appoint a person as managing agent unless the person is the holder of a strata managing agent’s licence. His Honour did not expressly refer to any of the principles or authorities that I have set out above (except, as to a question of severability, Hurst v Vestcorp ). Indeed, it was unnecessary to do so, since, as pointed out on p 5 of the judgment, the defendant had never held such a licence and the defendant conceded that an agreement to appoint it as managing agent would be void for illegality. In these circumstances, the decision turned, not on illegality, but on construction of the relevant contract to determine the correctness of the defendant’s contention that, for various reasons, the agreement was not an appointment of a managing agent as such, but a delegation of powers and duties.

61 The second decision is that of Hamilton J in Owners – Strata Plan No 51487 v Broadsand Pty Ltd [2002] NSWSC 770. That case also concerned an appointment of a managing agent made in breach of the requirement for a licence in s 78(1AA) of the Strata Titles Act 1973. There was a related issue – the appointment was made in contravention of s 66 (a predecessor to s 113, the section under consideration in the present case) by reason of the fact that, during the initial period, it appointed the managing agent for a period extending beyond the first annual general meeting of the body corporate (cf s 113(1)(c)). Hamilton J held that the agreement was void for illegality by reason of the contravention of both s 78(1AA) and s 66 (1)(d). He did so without reference to any of the principles or authorities that I have set out, and, once again, it was not necessary to do so, because, as noted in par 33, once it was found that the agreement fell within s 78(1AA), the defendant only faintly argued that it did not contravene the section. For that reason, perhaps, his Honour’s conclusion on these two issues was short. At par 33, his Honour said: “ I share the view expressed by Brownie J in the Regal case supra that an agreement entered into in defiance of the statutory proscription effect by s 78 (1AA) is void for illegality. Accordingly, I hold that the agreement in this case is void for illegality because the entry into it was in contravention of s 78(1AA). In my view, for the same reason, the contract is proscribed by s 66(1)(a) and void for contravention of that provision”.

62 Finally, for completeness, I note the decision of the Court of Appeal in Owners – Strata Plan No 56443 v Regis Towers Real Estate Pty Ltd (2003) 58 NSWLR 78, because it was a decision cited in argument. That case also dealt with contravention of the Act in its relation to a strata scheme. The issue was whether the owners corporation had, in contravention of s 13(3), delegated any of its functions to a managing agent. In pars 27 – 36, Hodgson JA, with whom Handley and McColl JJA agreed, examined the particular agreement in some detail, and came to the conclusion that it did not amount to a delegation of function in contravention of s 13(3). Hence, the question of the consequences of illegality did not arise, and the case does not assist in the resolution of the present issue.

The competing claims

63 The plaintiff claims that the caretaker agreement falls within one or other of the first of the two ways whereby a contract may be unenforceable identified by Gibbs ACJ in Yango Pastoral v First Chicago (see par 52) – that is, the caretakers agreement is either a contract to do something which s 113(1)(b) forbids, or the caretakers agreement is one which s 113(1)(b) impliedly prohibits.

64 The plaintiff points to the evident purpose of s 113(1)(b), namely, the protection of lot owners. That protection requires that a contract pursuant to which debts are incurred in excess of the available funds not be enforceable. It is insufficient for that protection that an owners corporation simply have a right of recovery from the original owner as a debt any amount for which the owners corporation is liable by reason of its contravention of s 113(1)(b). It is insufficient, for example, because the original owner may have a defence under s 113(4). Furthermore, by reference to other remedies in s 113(5), the legislature obviously intended that a right to recover a debt or damages was not an exhaustive statement of remedies available to an owners corporation for breach of s 113(1)(b).

65 The defendant contends that the caretaker agreement does not fall within any of the ways identified by Gibbs ACJ in Yango Pastoral v First Chicago. The entering into a contract as such is not prohibited by s 113(1)(b) – what is illegal is the incurring of a debt. In particular, it is said, the entering into a caretaker agreement is permitted by the Act – s 13(1) permits an owners corporation to employ such persons as it thinks fit to assist it in the exercise of any of its functions – and nothing in s 113 prevents such a contract being entered into during the initial period. The mischief which s 113(1)(b) aims to avoid is the incurring of a debt; and the statute avoids that mischief by providing for a right of recovery of the amount as a debt from the original owners.

66 The defendant points to the sanction of unenforceability as disproportionate. The defendant is an innocent party, and to hold the caretaker agreement as unenforceable would deprive it of rights, a sanction out of proportion to the public purpose s 113 is intended to achieve.

Is the caretaker agreement void?

67 The resolution of this issue is difficult, and I have given it anxious consideration. Ultimately, for the following reasons, I have concluded that the caretaker agreement is void.

68 I turn first to the language of the Act. Section 113 is couched in terms of prohibition; that is, it provides that an owners corporation “must not” do certain things. One of the “things” that are prohibited is for an owners corporation to incur a debt. If it is accepted, as I think it must be, on the authority of Hawkins v Bank of China , that an owners corporation incurs a debt when it subjects itself to an unavoidable obligation to pay a sum of money at a future time, then it follows that the “thing” that is prohibited by s 113(1)(b) is a contract that has that effect, that is, a contract whereby the owners corporation subjects itself to such an unavoidable obligation. I do not think it is possible to disassociate the incurring of a debt from the contract whereby the debt is incurred. It is not therefore to the point that another provision of the Act (s 13) permits an owners corporation to enter into a caretaker agreement; a contract, whether it be a caretaker agreement or some other type of contract, will be impugned by s 113(1)(b) if, by its terms and within the meaning of s 113(1)(b), an owners corporation incurs a debt. In my opinion, it follows that, in prohibiting an owners corporation from incurring a debt, s 113(1)(b) impliedly prohibits the contract whereby the owners corporation incurs that debt. Hence, the Act affects the contract in the second of the ways identified by Gibb ACJ in Yango Pastoral v First Chicago.

69 The language and scope of s 113 is also critical for the legal consequences of contravention of the prohibition. Section 113 does not prescribe a penalty for contravention, but it does provide a remedy. An owners corporation may recover the debt from the original owner pursuant to s 113(2)(a). But nothing in the language of s 113 suggests that that is the only legal consequence or that recovery is the only legal remedy. It is true that the recovery of the amount as a debt and the defence provided to an original owner in s 113(4) are both predicated on a contract being in existence, but s 113(5) cannot be ignored. That subsection contemplates other remedies being available. It is clear and unambiguous in its terms, and it must be given work to do. Hence, I conclude that what is intended, by the language and scope of s 113, is that, whilst recovery of the amount as a debt is an available remedy, unenforceability of a contract made in breach of its provisions is also an available legal consequence.

70 In my opinion, the obvious public purpose of s 113 points to the intention of the legislature that a contract contravening its provisions will be void and unenforceable. The mischief that s 113 intends to avoid is the casting of onerous obligations upon future lot owners. That mischief can be effectively avoided only if no such burden can be cast upon them. One way to achieve that, in a case of contravention of s 113(b)(1), is the recovery of the amount as a debt. But that remedy may not be sufficient. The original owner may not be in existence, or it may not have the means to meet the debt, or it may have a defence under s 113(4). Another way to achieve the avoidance of the mischief is to render the contravening contract void and unenforceable. In my opinion, s 113 contemplates such a legal consequence.

71 I have not lost sight of the fact that rendering the caretaker agreement void and unenforceable will result in a considerable sanction upon the defendant, innocent in the sense that it is not the contravening party. It will lose what is no doubt a valuable commercial right. But that sanction is not, in my opinion, out of proportion to the purpose and object of the Act in protecting lot owners. The necessity for that protection is thrown into stark relief by the facts of this case. Here, the caretaker agreement casts a significant burden upon lot owners. The debt incurred is significant (it involves an annual amount of at least $84,042) and the obligation to pay it continues for a significant period of time (up to 20 years).

Severability

72 The defendant claims that the offending provisions of the caretaker agreement are severable. This claim is put on the basis that unenforceability should be limited to the first instalment of the Regular Duties Fee. It is that payment which relates to the initial period. It was said that, if the remedy provided to the plaintiff were to be fashioned in this manner, then the overall purpose of the caretaker agreement, that is, to provide services to the plaintiff as contemplated by s 13 of the Act, would be preserved.

73 However, I cannot accept this claim. The unavoidable obligation cast upon the plaintiff by the caretaker agreement is not simply to pay the first instalment of the Regular Duties Fee, it is to pay the whole of the Regular Duties Fee at some future time. And it would not be possible, in my view, to sever that obligation from the remainder of the caretaker agreement without altering the whole nature of the agreement, which is for the provision of services for a fee ( Thomas Brown and Sons Ltd v Fazal Deen and Anor (1962) 108 CLR 391 at 411).

Conclusion

74 For the foregoing reasons, I have concluded that the plaintiff is entitled to the orders which it seeks.

75 I make the following formal orders:


(1) I declare that the “caretaker agreement” made between the plaintiff and the defendant which commenced on 28 May 1999 is void.

(2) I order the defendant to pay the costs of the plaintiff as agreed or as assessed.

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Last Modified: 11/09/2004