The Owners - Strata Plan 74602 v Eastmark Holdings Pty Ltd; Eastmark Holdings Pty Ltd v The Owners - Strata Plan 74602

[2015] NSWSC 1981

Supreme Court

New South Wales

Medium Neutral Citation:

The Owners – Strata Plan 74602 v Eastmark Holdings Pty Ltd; Eastmark Holdings Pty Ltd v The Owners – Strata Plan 74602 [2015] NSWSC 1981

Hearing dates:

21 September – 14 October, 23 October 2015

Decision date:

24 December 2015

Jurisdiction:

Equity - Technology and Construction List

Before:

Stevenson J

Decision:

Parties to make submissions as to what further matters remain for consideration and what orders should be made to give effect to these reasons

Catchwords:

STRATA TITLES – mixed residential, commercial, retail and car parking development – allocation of the costs of shared services – proper construction of strata management statement – whether allocation of costs of shared services under strata management statement fair and reasonable – whether strata management statement an unjust contract for the purposes of the Contracts Review Act 1980 – whether strata management statement should be re-written – whether any amendment to strata management statement should be retrospective; EQUITY – fiduciary duty – whether developer of building owed a fiduciary duty to owners corporation – whether developer in breach of fiduciary duty by reason of the registration of the strata management statement – whether there was informed consent – whether developer in breach of fiduciary duty by reason of decisions taken by meetings of the owners corporation after the strata plan and strata management statement registered; CONTRACT – whether building manager or strata manager liable to owners corporation in relation to allocation of costs of shared expenses – whether clauses in contract with strata manager limited quantum of damages and time during which proceedings to be commenced enlivened – whether owners corporation had shown damage arising from alleged breaches of contract; STRATA TITLES – whether owners corporation and owner of remaining lots were members entitled to vote at meeting of the building management committee which approved proposed relocation of shared facilities – whether owners corporation estopped by convention from asserting remaining lot owners not entitled to vote because of non-payment of interest on arrears of levies – whether owners corporation entitled to withhold consent to such proposed relocation following resolution of building management committee approving same – relationship of provisions in strata management statement concerning such resolution and provisions entitling owners corporation to withhold consent in certain circumstances – proper construction of strata management statement – whether owners corporation unreasonably withheld consent to proposed relocation of shared facilities; STRATA TITLES – levies – whether owners corporation in arrears – quantum of arrears – whether electricity recoveries properly charged to owners corporation

Legislation Cited:

Contracts Review Act 1980 (NSW)
Conveyancing (Sale of Land) Regulation 2005 (NSW)
Conveyancing (Sale of Land) Regulation 2010 (NSW)
Corporations Act 2001 (Cth)
Environmental Planning and Assessment Act 1979 (NSW)
Evidence Act 1995 (NSW)
Property, Stock and Business Agents Act 2002 (NSW)
Strata Schemes (Freehold Development) Act 1973 (NSW)
Strata Schemes Management Act 1996 (NSW)

Cases Cited:

Aequitas Ltd v AEFC [2001] NSWSC 14; 19 ACLC 1006
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Brambles Holdings Limited v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153
Breen v Williams (1996) 186 CLR 71
Chan v Zacharia (1984) 154 CLR 178
Commonwealth v Verwayen (1990) 170 CLR 394
Community Association DP No 270180 v Arrow Asset Management Pty Ltd [2007] NSWSC 527
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95
Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46
In the matter of Metal Storm Ltd (subject to Deed of Company Arrangement) [2014] NSWSC 813; 100 ACSR 637
Maguire v Makaronis (1997) 188 CLR 449
Meriton Apartments Pty Limited v The Owners Strata Plan No 72381 [2015] NSWSC 202; 105 ACSR 1
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 325 ALR 188
Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457
Queensland Mines Limited v Hudson (1978) 52 ALJR 399
Re Property Force Consultancy Pty Ltd (In Liquidation) [1997] 1 Qd R 300
Re Steel and Others and The Conveyancing (Strata Titles) Act 1961 (1968) 88 WN (Pt 1) (NSW) 467
Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch)
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] Aust Contract Reports 90-254; 69 NSWLR 603
Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466
The Owners Corporation Strata Plan 70672 v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2011] NSWSC 973
Warman International Limited v Dwyer (1995) 182 CLR 544
Waterman v Gerling Australia Insurance Co Pty Ltd (2005) 65 NSWLR 300
Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522

Texts Cited:

Alex Ilkin, NSW Strata and Community Schemes Management and the Law, (4th ed 2007, Lawbook Co)
J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies, (5th ed 2014, LexisNexis Butterworths)
J W Carter, The Construction of Commercial Contracts, (2013, Hart Publishing)
K Lewison and D Hughes, The Interpretation of Contracts in Australia, (2012, Lawbook Co)
N Seddon, R Bigwood, M Ellinghaus, Cheshire & Fifoot: Law of Contract, (10th ed 2012, LexisNexis)
P W Young, C Croft and M L Smith, On Equity, (2009, Lawbook Co)

Category:

Principal judgment

Parties:

Parties in 2013/239085:
The Owners – Strata Plan No 74602 (Plaintiff)
Eastmark Holdings Pty Ltd (In Receivership) (First Defendant)
1 Denison Street Holdings Pty Ltd (In Receivership) (Second Defendant)
Strata Associates Pty Limited (Fourth Defendant)
Savills (NSW) Pty Limited (Fifth Defendant)

  Parties in 2013/340426:
Eastmark Holdings Pty Ltd (First Plaintiff)
1 Denison Street Holdings Pty Ltd (Second Plaintiff)
The Owners – Strata Plan No 74602 (Defendant)

Representation:

Counsel in 2013/239085:
F Corsaro SC with E Peden and C Bembrick (Plaintiff)
A Leopold SC with E Holmes (First and Second Defendants)
K Rees SC with A Barnett (Fourth Defendant)
M McCulloch SC with R Notley (Fifth Defendant)

 

Solicitors in 2013/239085:
Colin Biggers & Paisley (Plaintiff)
Clayton Utz (First and Second Defendants)
Kennedys (Fourth Defendant)
Wotton + Kearney (Fifth Defendant)

 

Counsel in 2013/340426:
A Leopold SC with E Holmes (First and Second Plaintiffs)
F Corsaro SC with E Peden and C Bembrick (Defendant)

  Solicitors in 2013/340426:
Clayton Utz (First and Second Plaintiffs)
Colin Biggers & Paisley (Defendant)

File Number(s):

SC 2013/239085SC 2013/340426

table of contents

INTRODUCTION	1
The dispute	14
Representation	16
The DOCA	17
The Beau Monde Development	20
The SMS	22
Shared facilities	27
The BMC	51
Appointing a strata manager	53
Appointing a building manager	57
Rights and obligations of members	59
Upgrading and redevelopment	61
Unanimous resolution	62
THE OWNERS CORPORATION’S CLAIM AGAINST EASTMARK AND DENISON STREET	63
Breach of fiduciary duty	63
Breach of fiduciary duty by registering a SMS that was not in the Owners Corporation’s best interests	71
Disclosure in the Sale Contracts	81
Practical difficulties arising from the SMS	88
Electricity	88
The proper construction of cll 2.3 and 6.3	94
Practical difficulties remain	98
Electricity	99
Gas	100
Water	102
Fire services	105
Insurance	108
Breach of fiduciary duty by registration of the SMS?	111
Circumstances leading to creation of the SMS	115
The dispute resolution provision in cl 56	139
Informed consent – disclosure	146
Amendment of the SMS to add category 13	163
Breach of fiduciary duty by procuring the appointment of Bondlake as caretaker, concierge and cleaner – the 21 June 2005 meetings	168
Breach of fiduciary duty by amending by-laws and approving subdivision of lots and converting common property into new lots – the 3 January 2006 meeting	204
Breach of fiduciary duty by appointing Savills as building manager	217
Conclusion in relation to the Owners Corporation’s claim of breach of fiduciary duty	221
Fraud on the minority	222
Rewriting the SMS – Contract Review Act claim	228
The proposed changes to the SMS	240
Electricity – Switchboard C	243
Gas	257
Water	258
Fire services	261
Insurance	263
The other proposed changes to the SMS	275
Is the SMS unjust?	276
Discretionary considerations – delay	290
What should now be done about the Owners Corporation’s CRA claim?	305
Damages	310
THE OWNERS CORPORATION’S CLAIM AGAINST SAVILLS AND STRATA ASSOCIATES - RECEIPT, ALLOCATION AND PAYMENT OF INVOICES BY SAVILLS AND STRATA ASSOCIATES	317
House Lights 1 and House Lights 2	325
OWNERS CORPORATION’S CLAIM AGAINST SAVILLS	330
The Building Management Agreement	330
Alleged contraventions of the BMA	344
Allocation of invoices	346
House Lights 1 and House Lights 2	364
Supervision of Service Contracts	376
Electricity recoveries	382
Conclusion concerning Savills	391
OWNERS CORPORATION’S CLAIM AGAINST STRATA ASSOCIATES	393
Which agreement? The First Agreement	393
A second agreement?	397
The 18 July 2011 meeting of the BMC	399
Conclusion as to which agreements prevail	419
The Owners Corporation’s pleaded case	422
The Administration Terms	440
The Payment Terms	459
The Recovery Terms	475
Conclusions so far	486
Contractual limitations	490
Duty of care	503
Damage	511
Category 13 invoices – alleged over allocation $148,795	513
Mechanical services – alleged over allocation $143,972	539
Gas – alleged over allocation $12,511	549
Fire services – alleged over allocation $224,538	557
Electricity – alleged over allocation $1,216,420	572
House Lights 1 and House Lights 2	573
Electricity recoveries	585
The Owners Corporation’s claim in respect of “other shared facilities”	598
Conclusion concerning Strata Associates	612
EASTMARK AND DENISON STREET’S CROSS-CLAIM AGAINST THE OWNERS CORPORATION	613
Were Eastmark and Denison Street on 25 October 2013 and 10 January 2014 “members entitled to vote”?	626
Was the Owners Corporation on 25 October 2013 and 10 January 2014 a “member entitled to vote”?	641
The Owners Corporation’s challenges to the 16 September 2013 levy resolutions	649
Bad faith	649
Clause 29.4 of the SMS	659
Clause 39.1 of the SMS	662
20 business days’ notice	672
Conclusion as to the BMC meetings	675
Does Eastmark need the Owners Corporation’s consent to the Relocation Proposal?	676
Clause 27	678
The relationship between cl 27.2 and cl 47.1 of the SMS	693
What is the “proposal”?	706
Are the cl 27.2 provisions enlivened? Substantial detrimental effect on shared facilities or access	715
Has the Owners Corporation unreasonably withheld consent?	737
Reasonable costs	745
Conclusion concerning Eastmark and Denison Street’s cross-claim	749
THE LEVY PROCEEDINGS	751
CONCLUSION	757

Judgment

INTRODUCTION

1. These proceedings concern a large mixed development building known as Beau Monde in North Sydney.

2. The Beau Monde complex comprises four separate lots:

1. Lot 1 (the “residential lot”) is known as Beau Monde Apartments and comprises levels 8 to 37 of a high rise tower at the north of the Beau Monde complex, together with its associated underground car parking. Level 37 houses various pieces of equipment which are “shared facilities”;

2. Lot 2 (the “commercial lot”) is known as Beau Monde Commercial and comprises the lower levels of the high rise tower (and associated underground car parking);

3. Lot 3 (the “retail lot”) is a shopping arcade and food court, known as Beau Monde Retail, at the southern end of the complex; and

4. Lot 4 (the “car park”) is known as Beau Monde Car Park and is an underground public car park.

3. The first defendant, Eastmark Holdings Pty Ltd (in receivership) developed the Beau Monde complex pursuant to Div 2B of the Strata Schemes (Freehold Development) Act 1973 (NSW) (the “SSFD Act”).

4. On 25 October 2002 Eastmark entered into a design and construct contract (“the D & C Contract”) with Multiplex Constructions Pty Ltd, now Brookfield Investments Australia Pty Ltd.

5. The works achieved practical completion on 21 March 2005, on which date an interim occupation certificate was issued.

6. On 6 April 2005 a strata plan (“the Strata Plan”) was registered and the plaintiff (the “Owners Corporation”) came into existence pursuant to ss 8 and 11 of the Strata Schemes Management Act 1996 (NSW) (the “SSMA”).

7. At that time Eastmark owned Beau Monde Commercial, Beau Monde Retail and Beau Monde Car Park. It then owned all of the lots in Beau Monde Apartments.

8. On 21 September 2012 Eastmark transferred ownership of Lots 3 and 4, Beau Monde Retail and Beau Monde Car Park, to the second defendant, 1 Denison Street Holdings Pty Ltd (in receivership). Denison Street is a wholly owned subsidiary of Eastmark.

9. The third defendant, Mr Jin Hong Park (“Mr Park”) was the director of both Eastmark and Denison Street at all relevant times. The proceedings against Mr Park have settled.

10. Pursuant to Div 2B of the SSFD Act, a strata management statement dated 4 March 2005 (“the SMS”) was registered for the Beau Monde complex.

11. The SMS provided for the establishment of a building management committee (the “BMC”) which comprises a representative of each of the four Lots, namely Beau Monde Commercial, Beau Monde Retail and Beau Monde Car Park (then Eastmark) and Beau Monde Apartments (the Owners Corporation).

12. On 8 April 2005 the BMC entered into an agreement with the fourth defendant, Strata Associates Pty Ltd, to perform strata management services in respect of the complex. I shall refer to this agreement as the “SA Agreement”. There is controversy, to which I refer below, as to whether the BMC entered into a further (and different) agreement with Strata Associates. Strata Associates terminated its relationship with the BMC on 30 January 2014.

13. Also on 8 April 2005 the BMC entered into a “Building Management Agreement” agreement with the fifth defendant, Savills (NSW) Pty Ltd, to perform building management services in respect of the Beau Monde complex. I will refer to that contract as the “BMA”. The BMA terminated on 29 June 2014.

The dispute

14. In its closing submissions, the Owners Corporation described the dispute in these proceedings as arising out of:

1. Eastmark’s development of the Beau Monde Apartments, including its alleged actions in modifying by-laws and re-subdividing lots and common property in the residential scheme;

2. the terms of the SMS (which, to speak very generally, governs the management and operation of the Beau Monde complex and confers rights and imposes obligations on the owners and occupiers of lots in the building); and

3. the implementation of the SMS by Eastmark, Denison Street, Strata Associates and Savills.

15. In its opening submissions the Owners Corporation stated:

“Of critical significance in the proceedings are the obligations in the SMS that Eastmark caused to be imposed on the Owners Corporation in respect of the payment of, and contributions towards, ‘shared facilities’ in the Beau Monde complex. The lack of proportionality in relation to the levies imposed on the Owners Corporation and the confusion in relation to the operation and management of ‘shared facilities’ is at the heart of the dispute. Further, because lots 2, 3 and 4 have been within the control of the Eastmark entities, they have been able to outvote the Owners Corporation in relation to the operation of the Beau Monde complex.”

Representation

16. Mr Corsaro SC appeared with Dr Peden and Ms Bembrick for the Owners Corporation. Mr Leopold SC appeared with Ms Holmes for Eastmark and Denison Street. Ms Rees SC appeared with Mr Barnett for Strata Associates. Mr McCulloch SC appeared with Mr Notley for Savills. I have been greatly assisted by counsels’ submissions. Much of what follows, especially as to matters of background, is drawn with gratitude from those submissions.

The DOCA

17. On 29 October 2014 receivers and managers were appointed to Eastmark and Denison Street. On 12 and 19 February 2015 voluntary administrators were appointed to Denison Street and Eastmark, respectively.

18. On 5 May 2015 Eastmark and Denison Street entered into a Deed of Company Arrangement (the “DOCA”) with their administrators.

19. On 21 September 2015, on the Owners Corporation’s undertaking not to enforce any judgment without leave, I made an order pursuant to s 444E(3) of the Corporations Act 2001 (Cth) granting the Owners Corporation leave to maintain these proceedings. Hammerschlag J had earlier made similar, albeit more qualified orders, to enable preparation of the case.

The Beau Monde Development

20. Eastmark developed the Beau Monde complex by arranging for the subdivision of the complex by:

1. registration of a plan of subdivision (DP 1078908) so as to create the four development lots (Lots 1 to 4) which it then owned;

2. the further subdivision of Lot 1 by registration of the Strata Plan.

21. Between 2002 and 2005 Eastmark entered into contracts (the “Sale Contracts”) to sell individual apartments in the proposed residential development “off the plan”. The Sale Contracts provided that settlement take place after 8 April 2005.

The SMS

22. Section 28R of the SSFD Act provides that a SMS must be registered in all cases where (as occurred here) a strata development occurs by way of a part building strata scheme. Broadly speaking, a SMS sets out the rules for the administration and maintenance of common areas, shared facilities and other operational aspects of the building.

23. Pursuant to s 28W of the SSFD Act, a registered SMS takes effect as an agreement under seal between, amongst others, lot owners and the owners corporation containing joint and several covenants by lot owners to carry out their obligations under the SMS and to permit the carrying out by the other lot owners of those obligations.

24. Thus, cll 1.1 and 1.2 of the SMS in this case provide:

“1.1   Management of the building

A strata management statement is a set of rules that regulate the management and operation of buildings where part of the building is subdivided by a strata scheme or schemes. These types of strata schemes are called ‘part building strata schemes’. Beau Monde Apartments is a part building strata scheme.

1.2   Rights and obligations

A strata management statement confers rights and imposes obligations on the owners corporations and owners and occupiers of lots in a building in which there is a part building strata scheme. It contains provisions about a wide range of issues including meetings, financial management and the maintenance of shared facilities.”

25. The SMS provides for the establishment of the BMC, as required by s 28S(2) of the SSFD Act.

26. The SMS states that “Beau Monde has four distinct components” and that the owner of each component is to be a member of the BMC and must comply with the SMS. Thus, upon registration of the strata scheme, the members of the BMC were the Owners Corporation in respect of Beau Monde Apartments and Eastmark as owner of Beau Monde Commercial, Beau Monde Retail and the Beau Monde Car Park. Each lot owner has one vote at BMC committee meetings if it is a “member entitled to vote” for the purpose of the SMS (that is, if it was “financial”).

Shared facilities

27. The SMS makes provision for “shared facilities” which are defined in the “Dictionary” in cl 60 of the SMS as:

“(a)    [S]ervices, facilities, machinery, equipment and other items used by two or more members [that is lot owners];

(b)    costs for items like the strata manager [that is Strata Associates] and premiums for insurances effected by the [BMC]; and

(c)    other facilities and services nominated by or according to [the SMS] as shared facilities.

Shared facilities include the items in clause 46.2…and schedule 1 [of the SMS].”

28. Clause 46 of the SMS is headed “Overview of shared facilities” and is in the following terms:

“46.1   What are they?

There are a number of facilities and services in Beau Monde which are:

(a)   used by two or more members; or

(b)   located on the land of a member but used by another member.

These facilities and services are called shared facilities.

46.2   What do shared facilities include?

Subject to the description of each shared facility in schedule 1, shared facilities and costs for shared facilities include:

(a)   plant and equipment which constitute a shared facility;

(b)   any part of Beau Monde that gives access to and from a shared facility by the most direct route or by the rout[e] nominated by the committee acting reasonably;

(c)   pipes, wires, cables and ducts which are connected to or from part of a shared facility, but excluding any of those things which exclusively service a member’s part of Beau Monde;

(d)   any rooms or areas in which shared facilities are located;

(e)   the maintenance, repair, operation, cleaning and replacement of shared facilities;

(f)   parts or consumables used in the maintenance, repair, operation, cleaning and replacement of shared facilities;

(g)   labour used in the maintenance, repair, operation, cleaning and replacement of shared facilities;

(h)   the inspection of shared facilities (if applicable) by a government agency; and

(i)   the certification of shared facilities for the purposes of the law.”

29. Clause 46.7 of the SMS provides:

“46.7 How to apportion costs for shared facilities

Schedule 2 sets out how much each member must contribute towards the costs of shared facilities. The committee must charge members for shared facilities according to schedule 2. If schedule 2 does not make a provision for a charge, then the committee may determine the charge by unanimous resolution.”

30. From 15 April 2005, Schedule 1 of the SMS listed “shared facilities” in 13 categories as follows:

1. building management services;

2. electrical services;

3. fire services;

4. hydraulic services;

5. insurance;

6. mechanical services;

7. roof sign;

8. strata management services;

9. bike racks;

10. security services;

11. loading dock;

12. water consumption;

13. miscellaneous.

31. Schedule 2 of the SMS provides for the “division of costs for shared facilities” and allocates, to each lot owner “the percentages…of the total cost for each shared facility that each member must pay”.

32. It is that allocation of expenses (particularly for electricity) that is at the heart of the dispute in these proceedings.

33. In order to understand the controversy between the parties it is necessary to have regard to the whole of Schedules 1 and 2. The Schedules, when read together, are in the terms annexed to these reasons (Annexure - Schedules 1 and 2 (50.8 KB, pdf)).

34. The SMS thus provides for general descriptions of shared facilities (in the definition in cl 60) and in cl 46.1, states that shared facilities include the matters set forth in cl 46.2, and lists 13 categories of shared facilities in Schedules 1 and 2.

35. The SMS provides no mechanism to allocate the costs of shared services between BMC members otherwise than for those listed in Schedules 1 and 2.

36. However, in my opinion, it does not follow that the only shared facilities at Beau Monde are those listed in Schedules 1 and 2.

37. Clause 46.2 makes clear that there can be shared facilities which are not referred to in the Schedules.

38. There was debate before me as to whether the courtyard fronting onto Berry Street and the commercial car park and roller door entrance to the commercial car park were shared facilities.

39. The Owners Corporation submitted that shared facilities could not include areas in Beau Monde not listed in Schedule 1 or not related to areas listed in Schedule 1 and that, in particular, a shared facility could not include an area of land not identified in Schedule 1.

40. I do not agree.

41. The definition of “shared facilities” in cl 60 includes:

“(a)   [S]ervices, facilities, machinery, equipment and other items used by two or more members;

…

(c)   other facilities and services nominated by or according to [the SMS] as shared facilities”.

42. The definition also states that “shared facilities include the items in cl 46.2”.

43. Clause 46.1 states that shared facilities are those “facilities and services” which are:

“(a)   [U]sed by two or more members; or

(b)   located on the land of a member but used by another member”.

44. Clause 46.2 states that shared facilities include, amongst other things:

“(b)   [A]ny part of Beau Monde that gives access to and from a shared facility by the most direct route;

…

(e)   the maintenance, repair, operation, cleaning and replacement of shared facilities.”

45. In my opinion, both the commercial car park and the courtyard satisfy these definitions.

46. The commercial car park (and the roller door entrance to it) are used by two or more members of the BMC because members of the Owners Corporation must use the commercial car park to access their own car park. The commercial car park is also used to access other shared facilities, such as electrical switchboards.

47. The courtyard is the area at the front entrance of Beau Monde, facing Berry Street. That area is used by two or members for access to the Beau Monde Apartments, Beau Monde Retail and Beau Monde Commercial. The courtyard also provides access to other shared facilities.

48. By reason of cl 46.2(e), the costs of maintenance, repair and operation of the commercial car park and the courtyard are themselves “shared facilities”.

49. The Owners Corporation pointed out that the SMS includes references to “easements” and that there was an easement permitting the Owners Corporation to use both the courtyard and the car park. The Owners Corporation submitted that it would not be necessary for such an easement to exist if shared facilities included such areas as the courtyard and car park.

50. I do not agree. The object of the easements over the courtyard and car park is doubtless to allow lot owners the right to cross the courtyard and pass through the car park to access other parts of the complex. I do not see that as being inconsistent with the courtyard and car park being shared facilities. Indeed, cl 46.9 of the SMS states that “some shared facilities are the subject of easements”, thus demonstrating that the concepts are not mutually exclusive.

The BMC

51. Clause 6 of the SMS provides that the functions of the BMC include:

“(e)    [T]o operate, maintain, renew and replace shared facilities (subject to this management statement);

(f)   to deal with and make decisions about shared facilities according to this management statement;

…

(i)   to monitor the performance of the strata manager;

(j)   to monitor the performance of the building manager and other service providers…”.

52. Clause 6.2 of the SMS deals with “how to make decisions” and is in the following terms:

“The committee may make decisions only according to this management statement and:

(a)   at a properly convened meeting or emergency meeting; and

(b)   by resolution or unanimous resolution.”

Appointing a strata manager

53. Clause 2.3(a) of the SMS provides that the BMC may:

“[A]ppoint a strata manager to assist in the operation and management of Beau Monde and to perform secretarial and financial functions.”

54. Clause 9.1 of the SMS provides that the BMC:

“Has the power to appoint and enter into agreements with a strata manager to assist the [BMC] perform its functions and, in particular, perform the functions of the secretary and treasurer.”

55. The functions of the “secretary and treasurer” are set out in cll 8.2 and 8.3 of the SMS which are in the following terms:

“8.2 The secretary

In addition to the functions elsewhere in this management statement, the functions of the secretary are:

(a)   to convene meetings and emergency meetings;

(b)   to prepare and distribute notices, agendas and minutes for meetings and emergency meetings;

(c)    to serve notices for the committee;

(d)   to answer communications sent to the committee;

(e)   to perform administrative and secretarial functions for the committee;

(f)   to keep records (other than records which the treasurer must keep) for the committee according to this management statement and the Management Act; and

(g)   to make the books and records of the committee available for inspection according to clause 23 (‘Inspecting the books and records of the committee’).

8.3 The treasurer

In addition to the functions elsewhere in this management statement, the functions of the treasurer are:

(a)   to prepare budgets for the administrative fund and sinking fund;

(b)   to prepare outstanding levy certificates;

(c)   to prepare (or arrange for the preparation of) financial statements;

(d)   to prepare (or arrange for the preparation of) audit reports;

(e)   to send notices of administrative fund and sinking fund contributions to members;

(f)    to collect contributions from members;

(g)   to receive, acknowledge, bank and account for contributions and other money paid to the committee;

(h)   to pay accounts; and

(i)   to keep accounting records for the committee.”

56. Clause 9.3 of the SMS provides that the BMC can delegate to the strata manager:

“Some of [sic: or] all of the functions of the [BMC] and the [secretary, treasurer or chairperson of the BMC]”.

Appointing a building manager

57. Clause 2.3(b) of the SMS provides that the BMC may:

“[A]ppoint a building manager to assist in the operation, maintenance and repair of shared facilities.”

58. Clauses 10.1 and 10.2 of the SMS provide for the appointment of a building manager:

“10.1 Purpose of the agreement

The committee has the power to appoint and enter into agreements with a building manager to provide operational and management services for Beau Monde and, in particular, to assist the committee to perform its functions in relation to shared facilities.

10.2 Delegation of functions

Subject to this clause 10, the committee must not delegate its functions to the building manager.”

Rights and obligations of members

59. Clause 17.1 of the SMS provides that each member must “act reasonably and in good faith” in their dealings with the BMC and other members, owners and occupiers of the Beau Monde complex.

60. Clauses 17.2, 17.3 and 17.4 of the SMS are in the following terms:

“17.2 Voting rights

If you are a member, you have the right to vote at meetings and emergency meetings according to part 4.

17.3 Shared facilities

If you are a member you must not interfere with shared facilities other than according to this management statement.

17.4 Maintenance requirements

Except for shared facilities and subject to this management statement, if you are a member you must, at your cost:

(a)   maintain and keep in good repair the part of Beau Monde which you own;

(b)    maintain and keep in good repair the facade and other external finishes, fixtures of fittings in the part of Beau Monde which you own; and

(c)   maintain, inspect and operate plant and equipment owned or used exclusively by you to a standard recommended by the manufacturer or the applicable Australian standard.”

Upgrading and redevelopment

61. Clause 27 of the SMS is in the following terms:

“27.1 Acknowledgment

The members acknowledge that, throughout the life of Beau Monde, upgrading and redevelopment works may take place. The members agree to act reasonably and not unreasonably withhold their consent if a proposal is made to upgrade or develop parts of Beau Monde, in particular, any redevelopment of the Beau Monde Retail, Beau Monde Commercial or Beau Monde Carpark components.

27.2 Change to Beau Monde

If the owner or owners of Beau Monde Commercial, Beau Monde Carpark or Beau Monde Retail propose to redevelop part of [sic: or] all of their stratum lot (including by incorporating land adjacent to or neighbouring Beau Monde) the other members agree to act reasonably and not unreasonably withhold their consent to such a proposal provided that:

(a)   any changes to shared facilities which that member is to use; and

(b)   access to and from their component in Beau Monde;

is [sic] not detrimentally affected to an extent that is substantial. The other members must also act reasonably in agreeing to amend, add to or delete provisions of this management statement as required to give effect to any such upgrade or redevelopment proposal.

27.3 Paying costs

The member proposing an upgrade or redevelopment must pay the reasonable costs of other members in complying with their obligations under this clause 27.”

Unanimous resolution

62. The SMS provides that a unanimous resolution is required to:

1. amend, add to or repeal the SMS: cl 34.4(a);

2. determine a charge not provided for in Schedule 2: cl 46.7;

3. add to, extend, remove, modify or replace a shared facility: cll 34.4(c) and 47.1(e); or

4. amend, add to or repeal a clause about the division of costs for the shared facilities according to cl 48: cl 34.4(d).

THE OWNERS CORPORATION’S CLAIM AGAINST EASTMARK AND DENISON STREET

Breach of fiduciary duty

63. Eastmark was the developer and promoter of the Beau Monde scheme.

64. It is well established that a promoter or developer of a strata scheme may owe the subsequently created owners corporation the recognised proscriptive fiduciary duties: per McDougall J in Community Association DP No 270180 v Arrow Asset Management Pty Ltd [2007] NSWSC 527 at [211] and [225] citing with approval the observations of Else-Mitchell J in Re Steel and Others and The Conveyancing (Strata Titles) Act 1961 (1968) 88 WN (Pt 1) (NSW) 467; see also Meriton Apartments Pty Limited v The Owners Strata Plan No 72381 [2015] NSWSC 202; 105 ACSR 1 per Slattery J at [384].

65. So much was accepted by Eastmark.

66. The proscriptive duties of a fiduciary were summarised by Gaudron and McHugh JJ in their Honours’ familiar observations in Breen v Williams (1996) 186 CLR 71 at 113:

“In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations — not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.”

67. Although the Owners Corporation contended that Eastmark owed it a fiduciary duty “to act with absolute candour and honesty” and to “act in [its] interests in developing the SMS”, there is, in my opinion, no such prescriptive fiduciary duty. Indeed a duty of this nature was rejected, in terms, by McDougall J in Arrow (on which case the Owners Corporation otherwise placed great reliance) at [226].

68. The Owners Corporation referred to the observations of Austin J in Aequitas Ltd v AEFC [2001] NSWSC 14; 19 ACLC 1006 at [343] that:

“As fiduciaries, [company promoters] are required to act in good faith for the benefit of their fledgling company, and to avoid placing themselves in a position where there is a real sensible possibility of conflict between their duty and their personal interest.”

69. I do not understand his Honour to be saying in that passage that fiduciaries owe a prescriptive duty of the kind contended for by the Owners Corporation or that the duties of a fiduciary rise higher than the “no conflict” rule and “no unauthorised benefit” (or “no profit”) rule enunciated in Breen v Williams. As I read his Honour’s observations, he was doing no more than reciting the “no conflict” rule.

70. As developed in its closing submissions, the Owners Corporation contended that Eastmark breached its fiduciary duties because it:

1. registered an SMS “that was not in the Owners Corporation’s best interest”;

2. amended the SMS to add to the Schedules category 13 (the “Miscellaneous” category) which was not in the Owners Corporation’s best interests”;

3. procured that on 21 June 2005 the Owners Corporation appoint Bondlake Pty Limited (trading as Building Management Australia) (“Bondlake”) as caretaker, concierge, and cleaner; and

4. procured that on 3 January 2006 the Owners Corporation:

1. amend the relevant by-laws to add by-law 36 which authorised the installation of air conditioners in two lots owned by Eastmark (lots 240 and 241) and to introduce by-law 37 which authorised balcony enclosures for lots 236, 237, 238, 239, 240 and 241 (all owned by Eastmark);

2. approve a sub-division of lots 49, 120, 130, 185, 201, 223, 238, 239, 240 and 241 (all owned by Eastmark); and

3. convert common property into new lots (248, 249, 250 and 251; all owned by Eastmark), and then to transfer those lots (and thus, the common property) to Eastmark for no consideration.

Breach of fiduciary duty by registering a SMS that was not in the Owners Corporation’s best interests

71. The Owners Corporation alleges that, by registering the SMS, Eastmark acted in breach of its fiduciary duty not to place itself in a position of conflict or to profit by the establishment of the management and operational structure for Beau Monde.

72. The Owners Corporation thus sought to make out a case which is quite different from that considered by Else-Mitchell J in Steel, by McDougall J in Arrow or by Slattery J in Meriton.

73. In Steel, the question was whether irregularities in the conduct of affairs of the body corporate were such as to justify the appointment of an administrator. As Eastmark submits, the discussion of fiduciary duties was incidental to that central question.

74. In Arrow the developer/promoter (Australand) caused the Community Association to enter into a management agreement pursuant to which Australand was paid a very significant and undisclosed “premium”.

75. In Meriton the developer/promoter (Meriton Apartments) caused the owners corporation to enter into a wide ranging and profitable caretaker agreement with Meriton Apartments itself.

76. In Arrow and Meriton the court accepted that fiduciary duties may be imposed in circumstances where the developer/promoter entered into or caused the entry into an agreement from which it profited.

77. That is not the allegation here (at least in this part of the Owners Corporation’s case).

78. In this case, the Owners Corporation contends that Eastmark, as developer/promoter, acted in breach of its fiduciary duty by the very act of registering the SMS.

79. The manner in which the Owners Corporation contended that the SMS is (and was at the date of registration of the strata plan) not in its “best interests” were that:

1. the Owners Corporation, as the owner of one of the four lots at Beau Monde, is only entitled to one vote in four so that it can always be outvoted on “resolutions” by Eastmark and Denison Street, as owner of the remaining lots;

2. changes to the costs of shared facilities can only be made with a unanimous resolution of lot owners;

3. the Owners Corporation’s entitlement to vote is not proportionate to its contributions to levies;

4. items are included in the SMS as “shared facilities” that are not used by the Owners Corporation and not located on the Owners Corporation’s land;

5. the Owners Corporation is obliged to contribute to public liability insurance for shared facilities that are not utilised by the Owners Corporation;

6. there are items included in the shared facilities which the Owners Corporation does not use (those nominated being Switchboards A and B, public liability insurance, retail air conditioning, roof signage, and security services);

7. the inclusion of “Miscellaneous” category 13 “creating confusion as to what costs should be paid as shared facility costs”; and

1. costs of shared facilities have been allocated to the Owners Corporation in circumstances where the Owners Corporation does not use the shared facilities or where it does not use the shared facilities to the extent of the contributions it is required to make to their upkeep.

80. Certain of these matters can be disposed of immediately, as a number of the matters of which the Owners Corporation complains were clearly disclosed to prospective purchasers of lots at Beau Monde in the draft copy of the SMS annexed to the Sale Contracts.

Disclosure in the Sale Contracts

81. The Owners Corporation pointed to the fact that, under the terms of the SMS, it (as the owner of Lot 1) is entitled to only one of four votes at the BMC so that it can “always be outvoted by Eastmark (as owner of Lots 2, 3 and 4)”.

82. This is because of the provisions of cll 17.2 and 32.3 of the SMS and the definition of “member” in the dictionary to the SMS.

83. However, identical clauses appeared in the draft SMS annexed to the contracts whereby the initial lot owners purchased lots off the plan.

84. The Owners Corporation also pointed to cl 48.1 of the SMS which provides that changes to the costs of shared facilities cannot be made without a unanimous resolution of the BMC. But an identical provision (cl 43.1) appeared in the draft SMS annexed to the relevant contracts for sale.

85. In those circumstances, I cannot see upon what basis the Owners Corporation can complain about these aspects of the SMS.

86. In respect of the remaining matters, the Owners Corporation submitted that:

1. Eastmark was in a position of conflict (or likely conflict) in that it had a commercial interest in minimising the contribution made to shared facilities by it as the owner of Lots 2, 3 and 4 (the Commercial, Retail and Car Park lots);

2. upon registration of the SMS, the BMC (and its members) was bound to allocate and seek contributions by the Owners Corporation that did not reflect a fair share of the Owners Corporation’s costs of the facilities at Beau Monde;

3. the terms of the SMS ensured that Eastmark, by reason of its ability to control voting at the BMC, could resolve for the payment of contributions by the Owners Corporation that did not reflect a fair share of the Owners Corporation’s costs of the facilities in Beau Monde that the Owners Corporation actually shared with other lot owners;

4. Eastmark “actually preferred” its own commercial interest to those of the Owners Corporation by registration of the SMS which included terms enabling Eastmark to make resolutions to, in effect, set forth in (c) “with the intention of making use of those terms to advance Eastmark’s commercial interests to the detriment” of the Owners Corporation;

5. Eastmark failed to take account of the fact that the interests of the Owners Corporation required that a SMS which provided “a fair and reasonable transparency” for the implementation of the cost liability relating to shared facilities, and the requirement for proper monitoring of shared facilities to ensure that the Owners Corporation would not be required to contribute for costs of shared facilities that it either did not use, or alternatively, to pay more than its fair share for those facilities;

6. Eastmark failed to take into account that the interests of the Owners Corporation in the SMS required that it have a voting entitlement as a member of the BMC which was commensurate with the level of contribution that was envisaged that the Owners Corporation would be required to pay for the costs of shared facilities in Beau Monde; and

7. Eastmark acted to the detriment of the Owners Corporation by failing to vote to ensure that the SMS properly described the nature of the shared facilities, and how the use of the Owners Corporation would be determined, and to include terms in the SMS to ensure that the Owners Corporation would not be required to pay more than its fair share for the use of facilities which are used in common with other lot owners.

87. Despite the generality of those complaints, the Owners Corporation’s closing submissions focused on what it described as the “practical effect of the SMS terms” on the Owners Corporation, namely the allocation of costs of:

1. electricity, and in particular, that passing through or measured by Switchboard C (which contains what the parties described as the “House Lights 1” and “House Lights 2” meters);

2. gas;

3. water and fire services; and

4. insurance costs.

Practical difficulties arising from the SMS

Electricity

88. In monetary terms the most serious complaint made by the Owners Corporation concerns the allocation of electricity costs arising from Switchboard C.

89. Clause 2.3 of Schedule 1 of the SMS allocates 100 per cent of the electricity costs referable to Switchboard C to the residential lot (Lot 1), and thus to the Owners Corporation.

90. In respect of Switchboard C, cl 2.3 of the SMS states:

“A separate main switchboard (C) is located in the car park of Beau Monde Apartments and services the apartments in that stratum lot. Each apartment is metered by an individual authority meter. House meters cover the common areas”.

91. It is common ground that this description does not accurately reflect the equipment that is in fact serviced by Switchboard C. Switchboard C does not only supply electricity to the Beau Monde Apartments (Lot 1). It also provides electricity for plant, including plant that provides air conditioning to both the residential apartments (Lot 1) and the commercial levels (Lot 2). And some of the plant supplied through Switchboard C is not associated with air conditioning at all, nor referable only to Lot 1; for example supply and exhaust fans in the residential and commercial car parks (part of Lots 1 and 2), cold water booster pumps that service the residential and commercial lots (Lots 1 and 2) and fire services booster pumps that service the residential, commercial, retail and car park lots (Lots 1, 2, 3 and 4).

92. Further, there is a tension between cl 2.3 and cl 6.3 of Schedule 1 of the SMS. Clause 6.3 deals with the costs of the electricity used to service air conditioning delivered to Lot 1 (the residential lot) and Lot 2 (the commercial lot) and allocates those costs according to “consumption”. Clause 6.3 states that:

“Consumption [is] to be paid as per sub-meter reading for Beau Monde Apartments and Beau Monde Commercial.”

93. The tension between cl 2.3 and cl 6.3 is thus that:

1. cl 2.3 states that 100 per cent of electricity passing through Switchboard C is to be allocated to Lot 1, and thus the Owners Corporation; whereas

2. cl 6.3 states that the cost of electricity used to service air conditioning (that also passes through Switchboard C) is to be allocated between Lot 1 and Lot 2 in accordance with the “consumption” of such electricity by those lots (to be measured by sub-meters).

The proper construction of cll 2.3 and 6.3

94. The SMS is deemed by s 28W of the SSFD Act to be an agreement under seal. Thus, a tension between these provisions is to be resolved by applying conventional principles as to contractual construction.

95. As far as concerns internal inconsistency, the authors of K Lewison and D Hughes, The Interpretation of Contracts in Australia, (2012, Lawbook Co) suggest at [9.08] that the relevant principle is that:

“If a clause in a contract is followed by a later clause which destroys the effect of the first clause, the later clause is to be rejected as repugnant and the earlier clause prevails. If, however, the later clause can be read as qualifying rather than destroying the effect of the earlier clause, then the two are to be read together, and effect given to both.”

96. In his work, The Construction of Commercial Contracts, (2013, Hart Publishing) Professor J W Carter states at [13-49], on the question of “resolving inconsistency”:

“An obvious basis for choice of meaning in relation to a particular contractual provision is to achieve harmony with other provisions. For example, in Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522, Gleeson CJ, McHugh, Gummow and Kirby JJ referred (at [16]) to the role of the rule that a contract must be construed as a whole in achieving a construction of the contract which ensures the ‘congruent’ operation of the various components of the whole”.

97. In my opinion, the manner in which cll 2.3 and 6.3 of Schedule 1 of the SMS can be “read together” so as to ensure a “congruent” operation of the SMS is to construe the clauses together so that:

1. the cost of that component of the electricity passing through Switchboard C as services air conditioning in Lots 1 and 2 is to be borne by those lots in proportion to the consumption of electricity by the air conditioning units in those lots; and

2. otherwise, the cost of the electricity passing through Switchboard C is to be allocated to, and borne by the Owners Corporation.

Practical difficulties remain

98. This, however, does not address a number of practical problems.

Electricity

99. The first is that cl 6.3 assumes the existence of sub-meters within Switchboard C able to measure how much electricity each of Lots 1 and 2 use for air conditioning. There are no such sub-meters. It is not possible to measure how much of the electricity passing through Switchboard C for air conditioning is used by Lot 1, as opposed to Lot 2 (and vice versa). There is no explanation in the evidence as to why no sub-meters were installed.

Gas

100. Clause 4.4 of the Schedule to the SMS also allocates gas costs between Lot 1 (residential: the Owners Corporation), and Lots 2 and 3 (commercial and retail: Eastmark) by “consumption”.

101. Again, the clause assumes the existence of sub-meters, which have not in fact been installed at Beau Monde. And again, there is no explanation in the evidence as to why gas sub-meters were not installed.

Water

102. Clauses 4.1 to 4.3 of the Schedule to the SMS deal with “domestic cold water”, “cold water booster pumps” and “hot water”.

103. It is common ground between the experts retained by the Owners Corporation and Eastmark (Mr George Floth for the Owners Corporation and Mr Rodney Clarke for Eastmark) that, to use Mr Clarke’s words:

“The SMS does not reflect the fact that the metered water supply to the residential strata plan services ‘shared facilities’.

…

The residential water supply to Level 37 also supplies water to the cooling towers for air-conditioning, which would be a shared service between Residential Lot 1 and Commercial Lot 2. It also supplies water to the fire services water supply storage tank, which is a shared service between all four stratum lots.”

104. In their joint report Mr Floth and Mr Clarke agreed that the source of water supply to the level 8 swimming pool could not be verified. Mr Clarke said:

“It was not able to be established which of the two metered water supplies (either retail meter or residential meter) services the level 8 equipment consisting of the residential pool, pool plant, showers and toilets, and the residential and commercial hot water system.”

Fire services

105. Clause 3 of the Schedule to the SMS nominates seven separate “fire services” and, for the most part, allocates 65 per cent of the costs of those fire services to Lot 1 and thus to the Owners Corporation. The “method of apportioning costs” in the SMS is the “relative floor areas” of the four lots.

106. Mr Floth and Mr Clarke agreed that it was not appropriate to allocate fire services costs by floor area. Mr Clarke agreed with Mr Floth’s opinion that:

“The costs and charges for shared fire services…should be allocated on an equal basis, as these facilities provide equal benefit for each of the separate lots”.

107. As I understand it, this encapsulated what was described in submissions as a “whole of building approach”, namely that each of the four lot owners in the Beau Monde complex had an equal interest in timely extinguishment of a fire, no matter where in the complex it originated.

Insurance

108. Clause 5 of the Schedule to the SMS allocates 70 per cent of the costs of building and public liability insurance premiums to Lot 1 (the Owners Corporation) (with 12 per cent to Lot 2: commercial, 14 per cent to Lot 3: retail, and 4 per cent to Lot 4: the car park).

109. The basis of the allocation is stated in the SMS to be the “relative proportion of the replacement value” of those four lots.

110. In that regard there is a dispute between the Owners Corporation and Eastmark as to whether the “replacement value” of Lot 1 is 70 per cent of the total, rather than 59 per cent, as opined by the joint experts retained by the parties on this question, Messrs Paul Keating, Grant Silliss and Scott Driscoll. I will return to this below.

Breach of fiduciary duty by registration of the SMS?

111. As I have set out above, the Owners Corporation’s case, as developed in its final submissions, is that Eastmark as promoter and developer of Beau Monde, and thus as a fiduciary, was in a position of conflict because it had a commercial interest in minimising the contribution it, as owner of Lots 2, 3 and 4 (the commercial, retail and car parking lots) made to the costs of shared expenses. It is implicit in that submission that Eastmark had an interest in maximising the contribution made by the residential lots, and thus the Owners Corporation, to those expenses.

112. The Owners Corporation went further, and submitted that Eastmark “actually preferred its own commercial interests” to those of the Owners Corporation.

113. In substance, the Owners Corporation’s case was, to use colloquial, but apposite language adopted by Mr Leopold in oral submissions, that Eastmark “loaded up” the SMS so as to impose a disproportionate and unfair burden for the costs of the shared facilities on the Owners Corporation.

114. I am not satisfied that I should come to this conclusion.

Circumstances leading to creation of the SMS

115. By reason of cl 51(1) of the D & C Contract the builder, Brookfield, was obliged to prepare, amongst other things:

“A strata management statement for the residential stratum lot, which statement is in accordance with the strata management statements in the Principal’s Project Requirements”.

116. My attention was not directed to a “strata management statement” in the “Principal’s Project Requirements” forming part of the D & C Contract. However, those requirements contain detailed provisions concerning electrical, fire protection, hydraulic and mechanical services.

117. Eastmark nonetheless participated in the process of preparation of the SMS and obtained a substantial amount of legal and technical advice. Legal advice was sought and obtained from Mallesons in respect of the SMS. Several drafts of the SMS were developed on the basis of advice received by Eastmark from Mallesons from time to time. Eastmark also received technical advice from consulting engineers, Connell Mott MacDonald, and from project management consultants, Incoll Management. That advice included advice as to the use and design load of proposed shared services.

118. The evidence suggests that, unsurprisingly, the manner in which shared services were to be provided to the Beau Monde complex evolved over time and that, as constructed, the development did not contain shared services precisely of the kind identified in some of those documents.

119. It is true, as the Owners Corporation emphasised in its final submissions, that Eastmark did not call Mr Park or Mr Shin (another director of Eastmark and “project manager” of the development of Beau Monde) to give evidence, notwithstanding the fact that the Owners Corporation had settled its claim against Mr Park and that Mr Shin had sworn two affidavits in the proceedings, one only a number of days before the trial commenced. I must assume that those witnesses, particularly Mr Shin, were not able to give evidence to assist Eastmark’s case.

120. Nonetheless, the documents to which I have referred suggest that Eastmark gave careful consideration to, and obtained professional advice about how shared services were to be accommodated at Beau Monde and about the form that the SMS should take.

121. Eastmark accepted that there can be a breach of fiduciary duty even if the party in a fiduciary position has acted innocently. A fiduciary’s obligation to account for any profit made in breach of duty does not depend on fraud or absence of bona fides (for example, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 144G-145E; Chan v Zacharia (1984) 154 CLR 178 at 199 per Deane J).

122. But, in my opinion, to make out a case of breach of fiduciary duty by Eastmark, the Owners Corporation must do more than show that, as things have turned out, the SMS operates unfairly to the Owners Corporation and thus advantageously to Eastmark (although that fact, if established, may well be relevant to its claim under the Contracts Review Act 1980 (“the CRA”), which I deal with below).

123. To the extent that the SMS does operate to Eastmark’s advantage, the Owners Corporation must show that it obtained that advantage by reason of its position as fiduciary. The Owners Corporation must show, in my opinion, unconscionability on the part of Eastmark, such as to warrant the intervention of equity.

124. The authors (J D Heydon, M J Leeming and P G Turner) of Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies, (5th ed 2014, LexisNexis Butterworths) summarised the principle as follows at [5-255]:

“There is a precondition to the availability of most remedies for breach of fiduciary duty: causation. Thus even if the defendant is a fiduciary, and even if the defendant obtains a benefit at the expense of the principal, the defendant will not be in breach of fiduciary duty if the fiduciary position had no operative part in the gaining of the benefit”.

125. The learned authors cited Re Property Force Consultancy Pty Limited (in liq) [1997] 1 Qd R 300 as authority for that proposition.

126. In Re Property Force Consulting, Derrington J considered the following observations of Mason CJ and Brennan, Deane, Dawson and Gaudron JJ in Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557-588:

“…the authorities in Australia and England deny that the liability of a fiduciary to account depends upon detriment to the plaintiff or the dishonesty and lack of bona fides of the fiduciary…

A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves ‘at a level higher than that trodden by the crowd’. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.

Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably.”

127. Derrington J said:

“The conflict between a trustee’s fiduciary duty and personal interest is relevant where it affects his personal conduct; but in circumstances…where he has no knowledge that gives rise to a conflict of conscience and interest that might affect his conduct, there can be no occasion for the appearance of the duty. Alternatively, his taking advantage of an opportunity or knowledge derived from his fiduciary position would have a direct link between the benefit derived and the fiduciary’s personal conscience if he retained the benefit. This arises as a consequence of the event and does not depend on any dishonesty or lack of good faith at the time of the fiduciary’s conduct; but the matter of conscience is evoked because of the use of the fiduciary’s position in obtaining the benefit in the first place. If that is not the means of obtaining the benefit, there is no relevant issue of conscience.

687. Thus I read cl 27.2 as providing that if either of detrimental affectations (a) or (b) can be established (i.e. that the proposal will have a substantial detrimental effect on the relevant member’s shared facilities or access) then the member can withhold consent “in any way it considers appropriate” (to adopt the language in cl 59.1: that is whether reasonably or not); but that if neither of the detrimental affectations in (a) or (b) is established (that is the proposal will have no substantial detrimental effect on shared facilities or access) then the member can only withhold consent reasonably.

The relationship between cl 27.2 and cl 47.1 of the SMS

693. Clause 27.2 is directed to a circumstance where the owner of Beau Monde Commercial, Retail or Car Park proposes to redevelop part or all of those lots.

694. Clause 47.1(e) is directed to the question of modification or replacement of shared facilities.

695. The Relocation Proposal involves both of these elements; namely the redevelopment of Lots 2, 3 and 4 and the modification of shared facilities. Indeed the proposed redevelopment of Lots 2, 3 and 4 comprises no more than modification of shared facilities by their relocation from Lots 3 and 4 to Lot 2 and, in one case, from one part of Lot 3 to another.

696. The Owners Corporation submitted that cl 27 is a “stand alone” provision and that:

“Clause 47 concerns the change to a shared facility that does not fall within clause 27”.

697. I do not agree.

698. Clause 47 deals with any change to a shared facility; whether or not such change is proposed in the course of redevelopment of all or part of Lots 2, 3 or 4.

699. The effect of the two provisions is that, where a redevelopment proposal under cl 27.2 also involves a modification of shared facilities for the purpose of cl 47.1(e):

1. until such time as there is a unanimous resolution of the BMC pursuant to cl 47 to change or modify a shared facility, a member of the BMC (such as the Owners Corporation) is entitled to withhold its consent if one of the provisos in cl 27.2 is enlivened and, providing they act reasonably, withhold its consent even if neither of those two provisos is enlivened;

2. if that member was not entitled to withhold its consent (other than reasonably) under cl 27, it could be compelled to join in a resolution under cl 47 to modify the shared facility; and

3. if that member was entitled to withhold its consent under cl 27, it could not be so compelled.

700. But it could not have been the intention of the parties to the SMS that where a redevelopment proposal also involved a modification of shared facilities, it would remain open to a lot owner to withhold its consent under cl 27 once there had been a unanimous resolution under cl 47 directed to the same proposal.

701. In that circumstance, cl 27 must give way to cl 47.

702. Had the Owners Corporation actually participated in the resolutions of 25 October 2013 and 10 January 2014, it could hardly argue that it was thereafter entitled to withhold its consent under cl 27.2.

703. The position cannot be different where, as here, the Owners Corporation was not entitled to vote on those occasions.

704. For those reasons, I accept Eastmark’s submission that by reason of the 25 October 2013 and 10 January 2014 resolutions it is, without more, entitled to proceed with the Relocation Proposal. No consent from the Owners Corporation is now necessary.

705. Lest I be wrong in coming to that conclusion, I will now turn to consider the other issues which arise in relation Eastmark’s cross-claim.

What is the “proposal”?

706. The Relocation Proposal is that set forth in the Aurecon Report.

707. The Aurecon Report states, relevantly:

“1. [Denison Street] is proposing to relocate some of the existing services from current locations to new locations as recommended in this report. The services are:

● Fire Sprinkler Pump Room,

● Water Meter,

● Sprinkler and Hydrant Booster Assembly,

● Main Switchroom, and

● Fire Services Mimic Panels and EWIS [Emergency Warning System] Panels

This report demonstrates these changes will have no adverse impact on existing users and compliance with the current codes will be achieved. It is intended that a minimal downtime (if any) is expected as a result of these services being relocated. These services will, once relocated, provde the same level of service to the same users as currently installed, i.e., existing users will suffer no detriment from the relocation.

The proposed location of the booster assemblies will fully meet compliance requirements of Australian Standards for both Fire Hydrants as well as Fire Sprinkler Systems.”

708. The proposal is relocation of existing services from Lots 3 or 4 to Lots 2 or 3. With two exceptions, all of the shared facilities are proposed to be relocated to two car park spaces within basement level B1 of the car park within Lot 2 (the commercial lot).

709. The Owners Corporation apprehends that Eastmark’s purpose in making the Relocation Proposal is to clear the way for a substantial redevelopment of one or more of its lots within Beau Monde.

710. Thus the Owners Corporation submitted:

“…the purpose of the Aurecon 2013 proposal is the preliminary step in the larger development [Eastmark’s] lots to create a large commercial tower next to the existing Beau Monde residential tower…

…

It is apparent that the Eastmark parties have intentionally put forward the 2013 Aurecon proposal in an attempt to remove any argument about the wider issues concerning the development…The true ‘proposal’ is to take the first step in the development. If the particular shared facilities are moved, then the Eastmark parties do not need to seek any further consent to the large development that would dramatically alter the community landscape.

...

The Aurecon proposal was not merely a ‘concept’ but was a subset of a larger development proposed”.

711. On 25 February 2010 the Minister for Planning granted approval pursuant to s 75J(1) of the Environmental Planning and Assessment Act 1979 (NSW) to a “major project” concerning Lots 2, 3 and 4 which involves:

“Demolition of existing buildings and erection of a mixed use development comprising retail/commercial building and a hotel building”.

712. There is some suggestion in the evidence that the Relocation Proposal comprises “enabling works” absent which the “major project” cannot proceed. And the 25 October 2013 resolution recorded that the “relocation” of shared facilities was “in connection with the upgrade and redevelopment of lots 3 and 4”.

713. However that may be, that is not the proposal that the Owners Corporation has been asked to consider. What the Owners Corporation is now asked to consider is that in the Aurecon Report; no more than that.

714. If and when Eastmark makes a proposal to the Owners Corporation under cl 27.2 of the SMS to redevelop Lots 2, 3 or 4 consistently with the Minister’s approval, questions will no doubt arise as to the circumstances in which the Owners Corporation can withhold its consent. But that question does not arise at present.

Are the cl 27.2 provisions enlivened? Substantial detrimental effect on shared facilities or access

715. In par 22(g) of its Response, the Owners Corporation pleaded that it had:

“Received expert and legal advice that the [Relocation Proposal] would detrimentally affect the [Owners Corporation’s] component in Beau Monde”.

716. Eleven named reports and letters were particularised as being the “expert…advice” received.

717. Following objection from Eastmark, those reports and letters were only tendered by the Owners Corporation as going to the question of the reasonableness of the Owners Corporation’s state of mind for the purpose of cl 27 of the SMS.

718. One of those reports was from Dickson Rothschild, who are architects and planners. Shortly before the hearing, correspondence was exchanged between the solicitors for the parties concerning the evidence that Ms Kathleen McDowell, an urban designer and town planner from Dickson Rothschild, would give.

719. On 20 August 2015, Eastmark’s solicitors wrote to the Owners Corporation’s solicitors as follows:

“We accept that it is appropriate that Ms McDowell’s affidavit may be admitted as evidence of your client’s continuing state of mind. However, we do not accept that that evidence may be admitted as ‘confirm[ing] that [your] client act and continues to act reasonably’. The word ‘confirms’ in this subparagraph of your letter strongly suggest that you[r] client seeks to use Ms McDowell’s affidavit as evidence of the fact of the alleged detrimental impact. That is the very thing which led to the revision of paragraph 22(g) in the first place. Please confirm that, in the light of what we have just said, the words ‘and confirms that our client acted and continues to act reasonably’ should be treated as being omitted from your letter.

Once those words are omitted from paragraph 2(c)(i) of your letter, there is no longer any reason for your client to rely on paragraphs 10 to 18 of Ms McDowell’s affidavit. Please confirm that your client will not seek to rely on those paragraphs”. [Emphasis in original]

720. On the same day, the Owners Corporation’s solicitors replied:

“(a)   Paragraphs 10-18 of the affidavit of Ms McDowell will be read as demonstrating an available basis for the reasonableness of our client’s state of mind in relation to clause 27.

(b)   Our client does not intend to litigate whether, as a matter of fact, the proposal is factually detrimental or not.”

721. In final submissions, Mr Leopold characterised this statement as the Owners Corporation’s “disavowal”. Mr Leopold drew the “disavowal’ to my attention repeatedly throughout the course of the trial, including in his opening of Eastmark’s cross-claim concerning the Relocation Proposal. Mr Corsaro made no attempt to resile from it.

722. On the final day of oral submissions Ms Holmes took me to references in the transcript to Mr Leopold’s reference to the “disavowal” at the conclusion of which Mr Corsaro said:

“And having heard that I stand by the submission…there has been no concession, and the first we heard of this was during the course of submissions”.

723. I do not accept that. I regard the statement made by the Owners Corporation’s solicitors on 20 August 2015 as clear and unequivocal. It was not confined in some way to the fate of Ms McDowell’s evidence. Eastmark was entitled to treat it as an unambiguous and unqualified statement, made very shortly before trial, that there was no longer to be any issue about whether the Relocation Proposal was “factually detrimental” to the Owners Corporation. In effect, the Owners Corporation, through its solicitors, admitted absence of detriment. That admission overtook any assertions in the Owners Corporation’s Cross-Claim Response to the contrary.

724. Eastmark was entitled to conduct its case upon that basis. I am not prepared, in those circumstances, to permit the Owners Corporation now to adopt a different position.

725. In its Amended Commercial List Cross-Claim Statement, Eastmark pleaded the notice given on 13 August 2013 on its behalf to the Owners Corporation of the Relocation Proposal as described in the Aurecon Report.

726. In its Commercial List Cross-Claim Response, the Owners Corporation stated, in answer to that allegation that it:

“(a)    admits that [Eastmark] gave a notice as alleged (Notice);

(b)   says that the Notice proposes minor relocation of shared facilities”.

727. In my opinion, the Owners Corporation thereby admitted that the Relocation Proposal involved only a “minor” relocation of shared services.

728. In written submissions, the Owners Corporation contended that this was “merely an admission of the terms of the notice, not its legal effect”.

729. I do not agree. What was admitted, in plain terms, was that that which was proposed in the “Notice” (that is, in the Aurecon Report) represented a “minor relocation” of the shared facilities.

730. And so it is.

731. As I have said, the proposal is to relocate certain services from locations within lots owned by Eastmark and Denison Street to other locations within their lots. No part of the Owners Corporation’s lot will be touched.

732. The Owners Corporation submitted that, for the purposes of proviso (b) in cl 27.2, “access to and from their component in Beau Monde” might include “access” to views. Thus the Owners Corporation submitted:

“Further, ‘access’ (in the phrase ‘access to and from their component’) must be given a wide meaning in the context of the surrounding circumstances at the time of the formation of the SMS. This included the fact that Eastmark as developer advertised Beau Monde as boasting world class views…therefore, a detrimental effect on the views from lots in the Residential Lot would fall within the meaning of clause 27.2(a) [sic: (b)]”.

733. I do not accept that submission. The reference in the SMS to “access” to and from the Owners Corporation’s “component” in Beau Monde clearly means physical access.

734. In any event, there is nothing in the Relocation Proposal that would affect the view from the Beau Monde apartments.

735. In my opinion, neither of the provisos in cl 27.2 is enlivened.

736. It follows in my opinion that, assuming it to be relevant to consider the Owners Corporation’s consent to the Relocation Proposal, the Owners Corporation may only withhold such consent if it is reasonable to do so.

Has the Owners Corporation unreasonably withheld consent?

737. The starting point for consideration of this question are the admissions that the Owners Corporation has made that the proposed relocation of shared services that will result from the Relocation Proposal is “minor” and that will not, as a matter of fact, be detrimentally affected by the proposal.

738. Further, as stated in the Aurecon Report, what is proposed is to:

1. implement the relocation of shared services in a way which would “not detrimentally affect the [Owners Corporation’s] use of the shared facilities, or its access to them”;

2. achieve compliance with the “current codes” and Australian standards;

3. ensure that the services, once relocated, will provide “the same level of service to the same users as currently installed”;

4. procure that installation of the new facilities be completed before disconnection and changeover from, and decommissioning of, the old facilities to be replaced, resulting in no substantial disruptions;

5. replace old assets with assets of equal or better quality and performance; and

6. ensure that rights of access to shared facilities not be impaired and there be no downtime in the operation of them.

739. It is true that Eastmark has not provided the Owners Corporation with what Mr Leopold described as a “fully fledged works program”. But the substance of what is proposed has been revealed and the Owners Corporation must know that before the Relocation Proposal can be implemented a construction certificate for it would have to be issued by the relevant certifying authority. I accept Eastmark’s submission that the Owners Corporation ought reasonably be satisfied that a process will be followed which will be consistent with the relevant legislative and regulatory requirements to ensure that the Relocation Proposal is implemented without unduly incommoding the Owners Corporation. It is, of course, possible to point to risks which might eventuate; but the probability is that they will be dealt with by the time a construction certificate is issued by the relevant authority. It appears to me that the Owners Corporation can have no reasonable concern that a proper process will not be conducted.

740. It appears to me that the Owners Corporation has lost perspective about this aspect of the matter. It is obviously concerned about what the future may hold should Eastmark, following implementation of the Relocation Proposal proceed with the development that is contemplated by the Minister’s approval of the “major project” to which I have referred. There may well be a sound basis upon which the Owners Corporation could reasonably withhold its consent to that proposal; if and when it arises. But that is not a matter now before the Owners Corporation or before me.

741. What is involved in Eastmark’s current proposal is a relatively modest relocation of a relatively small number of shared services, to be done entirely on lots owned by Eastmark and Denison Street, to be done entirely at Eastmark and Denison Street’s cost and which will involve replacing shared facilities which have been in operation now for almost a decade with new facilities.

742. I am not satisfied that the Owners Corporation has acted reasonably in refusing to give its consent to the Relocation Proposal. On the contrary, my opinion is that it has been, and is, unreasonable of the Owners Corporation to withhold its consent to the Relocation Proposal.

743. The final sentence of cl 27.2 of the SMS has the effect that, in these circumstances, the Owners Corporation must also act reasonably in agreeing to amend the provisions of the SMS “as required” to give effect to the “redevelopment proposal”.

744. Therefore if, contrary to my conclusions, the Owners Corporation’s consent to the redevelopment proposal continues to be relevant (notwithstanding the unanimous resolutions of 25 October 2013 and 10 January 2014), the Owners Corporation is now bound to join Eastmark and Denison Street in passing a resolution pursuant to cl 47.1 to approve modification of the shared facilities “as required” by the Relocation Proposal.

Reasonable costs

745. Clause 27.3 of the SMS has the effect of obliging Eastmark and Denison Street to pay the Owners Corporation’s reasonable costs of complying with their obligations under cl 27.2.

746. On 2 September 2015, shortly before commencement of the hearing, both Eastmark and Denison Street gave the Owners Corporation an unconditional undertaking to pay its reasonable costs including in connection with its compliance with its obligations under cl 27.

747. The Receivers of Eastmark and Denison Street have also undertaken that they will personally bear that liability, thus circumventing the requirement that the Owners Corporation prove for its reasonable costs in the DOCA.

748. It is agreed that assessment of those costs should be referred out to an appropriately qualified referee.

Conclusion concerning Eastmark and Denison Street’s cross-claim

749. Eastmark is entitled to the declaratory relief it seeks concerning the Relocation Proposal.

750. The question of costs is to be referred out for determination.

The levy proceedings

751. In these proceedings, heard concurrently with the Owners Corporation’s proceedings, Eastmark and Denison Street seek judgment against the Owners Corporation in the sum of approximately $2 million for arrears of levies.

752. I apprehend that the findings I have made in the Owners Corporation’s proceedings are sufficient to resolve Eastmark’s and Denison Street’s claim in the Levy Proceedings.

753. From the amount claimed there should be deducted the levies purportedly struck at the 8 October 2013 BMC meeting ($694,108.30) and the amount of the electricity recoveries ($993,218.45).

754. Eastmark and Denison Street accept that a further amount of $212,232.82 (that the Owners Corporation has paid directly to creditors) should also be deducted.

755. Questions may also arise by reason of the fact that no levies have been issued to the Owners Corporation since 30 June 2014.

756. I will invite submissions from the parties as to what, if any, further steps need to be taken now to resolve the Levy Proceedings.

CONCLUSION

757. I will now hear submissions as to whether any other matters remain for determination and as to what orders should be made to give effect to these reasons.

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