Small v Body Corporate 324525
[2018] NZHC 19
•30 January 2018
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI TERENGA PARĀOA ROHE
Access to Court file restricted, pending further order of a Judge
(see paragraph [56][c])
CIV-2017-488-82 [2018] NZHC 19
IN THE MATTER OF BRIDGEWATER BAY APARTMENTS,
PAIHIA
BETWEEN
CLARRIE LAWRENCE SMALL and KM TRUSTEE SERVICES LIMITED First Plaintiff
ROBYN KATHLEEN STENT Second Plaintiff
NEVILLE JOHN EADE Third Plaintiff
IVOR MILLINGTON Fourth Plaintiff
ANTHONY JOHN BUTCHER and RUTH BARBARA BUTCHER Fifth Plaintiffs
AND
BODY CORPORATE 324525
First DefendantVIVIENNE ANNE BATH,
PHILIP LEONARD ANDREWS andJOHN NIMMO Second Defendants
Hearing: 29 and 30 November 2017 Appearances:
B E Brill for the Plaintiffs
T J G Allan for the Defendants
No appearance for the Far North District CouncilJudgment:
30 January 2018
CLARRIE LAWRENCE SMALL and KM TRUSTEE SERVICES LIMITED v BODY CORPORATE 324525 [2018] NZHC 19 [30 January 2018]
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 30 January 2018 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Barry E Brill, Paihia, for the Plaintiffs
Grove Darlow, Auckland, for the Defendants
[1] CIV-2013-488-434 Body Corporate 324525 v Far North District Council was a leaky building proceeding brought by the body corporate and owners of the Bridgewater Bay Apartments at Paihia against the local authority and other defendants for damage to common and unit property. While I case-managed the proceeding, it seemed that the substantive hearing would be challenging for all. In addition to the usual complexity of a negligence claim for numerous building defects to be heard over eight weeks, the plaintiffs were divided. There were two groups with separate representation: a majority of seventeen owners and the body corporate, and a smaller group of five owners, the plaintiffs in this case. They had quite different views as to the extent of defects, damage to the apartments and required remedial work. The majority considered that the damage was so serious that far-reaching repairs were required. The minority believed that the defects could be remedied with less extensive work. The groups did not resolve their differences. They had gone to court over the dispute. The minority contended that the course taken by the body corporate and the majority was invalid under the Unit Titles Act 2010.1 They also refused to pay levies for the repairs. The body corporate sued to recover them.2 The prospect of any co- ordinated or agreed approach by all the plaintiffs in the leaky building proceeding did not look good.
[2] I was therefore pleasantly surprised to learn that the case settled after a mediation in April 2017. The local authority made payments in full settlement and a discontinuance was filed. That did not however bring differences between the groups to an end. It started a fresh dispute. The minority says that some of the settlement funds paid to the majority owners properly belong to the body corporate. While they say that the body corporate has been underpaid, they sue to recover money judgments for themselves. The defendants are the body corporate and three of four members of the body corporate committee.3 The minority has not sued all the majority owners
whom they allege to have been enriched at the expense of the body corporate. The
1 For a summary of some of the litigation see Body Corporate 324525 v Stent [2017] NZHC 2857 at [13]-[27].
2 Body Corporate 324525 v Stent [2016] NZHC 2442, [2017] NZHC 2857, [2017] NZHC 2948.
3 There was no explanation for suing only three.
minority sue on what they call the apportionment decision by which the majority owners were paid their share of the settlement payments. They say that the decision was invalid, for having been made by committee members who had a conflict of interest, the decision was unreasonable and the consequence of bias. For a second cause of action, they say that the committee members breached their fiduciary duties for which the body corporate is vicariously liable. The minority says that the matter is so straightforward that it has applied for summary judgment.
Confidentiality of settlement agreements with Far North District Council
[3] The minority and the majority settled separately with the district council. The majority says that the district council made separate agreements with it and the body corporate. The fact of settlement is public knowledge, but not the terms of settlement, especially the amounts paid under the agreements. The parties acknowledge that the settlement agreements provide that the terms of settlement must be kept confidential. Here the plaintiffs know the total amounts paid to the majority and the body corporate, even though they are not parties to those agreements. They have seen accounting records, which they rely on for their claim. The defendants want to refer to the agreements for their defences. But the district council has not waived confidentiality in the agreements.
[4] In a minute of 20 November 2017 I directed that the district council be informed of the hearing and given the opportunity to submit on any application under s 69 of the Evidence Act 2006 to allow disclosure of the agreements. The council did not appear but filed a memorandum advising that it had not waived confidentiality and strongly preferred the settlement amounts not to be disclosed, but also recognising that the court had a discretion in the matter.
[5] There is a public value in upholding confidentiality terms in agreements settling proceedings. Some defendants are prepared to settle proceedings only on terms that the amount of any compromise is kept confidential. That can be a legitimate interest. Likewise many plaintiffs will agree to confidentiality as part of the price of settlement. The assurance of confidentiality encourages settlement in contrast to an open hearing in court and a public judgment deciding the matters in issue. There is a
benefit in parties resolving their disputes by negotiated settlements instead of continuing the disputes to defended hearings. That benefit includes reducing demand on the public resources of the courts and saving expenses, effort and stress for the parties. Upholding settlements and their terms, including as to non-disclosure, gives confidence that parties can safely resolve their disputes by negotiation. That is a value to be protected under s 69 of the Evidence Act, especially s 69(2)(b)(ii):
69 Overriding discretion as to confidential information
(1) A direction under this section is a direction that any 1 or more of the following not be disclosed in a proceeding:
(a) a confidential communication: (b) any confidential information:
(c) any information that would or might reveal a confidential source of information.
(2) A Judge may give a direction under this section if the Judge considers that the public interest in the disclosure in the proceeding of the communication or information is outweighed by the public interest
in—
(a) preventing harm to a person by whom, about whom, or on whose behalf the confidential information was obtained, recorded, or prepared or to whom it was communicated; or
(b) preventing harm to—
(i) the particular relationship in the course of which the confidential communication or confidential information was made, obtained, recorded, or prepared; or
(ii) relationships that are of the same kind as, or of a kind similar to, the relationship referred to in subparagraph (i); or
(c) maintaining activities that contribute to or rely on the free flow of information.
(3) When considering whether to give a direction under this section, the
Judge must have regard to—
(a) the likely extent of harm that may result from the disclosure of the communication or information; and
(b) the nature of the communication or information and its likely importance in the proceeding; and
(c) the nature of the proceeding; and
(d) the availability or possible availability of other means of obtaining evidence of the communication or information; and
(e) the availability of means of preventing or restricting public disclosure of the evidence if the evidence is given; and
(f) the sensitivity of the evidence, having regard to—
(i) the time that has elapsed since the communication was made or the information was compiled or prepared; and
(ii) the extent to which the information has already been disclosed to other persons; and
(g) society’s interest in protecting the privacy of victims of offences and, in particular, victims of sexual offences.
(4) The Judge may, in addition to the matters stated in subsection (3), have regard to any other matters that the Judge considers relevant.
(5) A Judge may give a direction under this section that a communication or information not be disclosed whether or not the communication or information is privileged by another provision of this subpart or would, except for a limitation or restriction imposed by this subpart, be privileged.
[6] As the terms of the settlement agreements are undoubtedly confidential information under s 69(1)(b), I can only order disclosure of the terms in this proceeding if any public interest in disclosing them outweighs the harm in not upholding the confidentiality of settlement agreements generally. I need to decide this question only in the context of the summary judgment application. Different considerations may arise later, as when it may be necessary to set out calculations based on settlement sums. I can decide the summary judgment application without giving that information and without reading the settlement agreements. Because there is no need now to disclose the information, there is no outweighing ground under s
69(2). The agreements and their terms are to remain confidential pending further order of the court. At later stages that may require adjustment, but I need not give any such directions now.
[7] Upholding the confidentiality of the settlement agreements requires further directions. By mistake the defendants’ lawyers sent Mr Brill a copy of one of the agreements. He confirmed that he had not used that copy or disclosed it to anyone
else. I direct him to delete all electronic copies and to destroy any hard copies, if he has not done so already.
[8] As it is possible to ascertain the amounts paid in settlement, access to the court file is restricted, unless expressly authorised by order of a judge. Any party requesting access should anticipate that directions may be made to cover up parts of the pleadings and evidence and that the Far North District Council may be heard on any access request, as well as the parties.4
The parties’ preliminary interlocutory applications
[9] Each side applied for orders attacking some of the evidence of the other as inadmissible. I have not dealt with those applications separately but have had regard only to evidence that I consider is relevant and admissible. As an example, the defendants wanted to refer to matters arising in the mediation, but I have disregarded that as subject to settlement negotiation privilege under s 57 of the Evidence Act 2006 and in breach of the mediation agreement. That does not prevent the defendants from contending later that the matters they wish to refer are within an exception to the privilege.
[10] The plaintiffs applied to strike out defences in the notice of opposition. That was unnecessary. In a summary judgment application a plaintiff needs to show that there are no arguable defences. There is therefore no point in applying separately for strike-out.
[11] The plaintiffs applied for an order barring Grove Darlow from acting for the second defendants, three members of the body corporate committee. In a telephone conference on 20 November 2017 Mr Brill advised that while he reserved his clients’ rights to pursue this matter he would not object to Grove Darlow representing all defendants at the summary judgment hearing. I have therefore not dealt with that
application.
4 See Senior Court (Access to Documents) Rules 2017, rr 11(7) and 12(d).
Facts
[12] In October 2013 the body corporate began the leaky building proceeding CIV-
2013-488-434 against the Far North District Council and others.5 It instructed Grimshaw & Co, lawyers experienced in leaky building litigation. The plaintiffs were the body corporate and all the Bridgewater owners. A general meeting of the body corporate in November 2013 ratified the committee’s decision to start the proceeding. There were then no internal differences among the owners.
[13] That changed in 2014. Mr and Mrs Wheeldon, the owners of unit 204, sold it to Ms Stent. She was aware that the complex suffered weathertightness problems. She made an agreement with the Wheeldons under which they would remain plaintiffs in the proceeding but she would run the case on their behalf and they would share the proceeds of the claim. Her position was different from the other owners’. Their relief was concerned with remedying the defects causing damage to the complex, recovering the costs of repair and associated losses. Ms Stent did not have a claim in her own right. She bought knowing about the defects. The Wheeldons could not sue for costs of repair because they no longer owned the unit. They could sue only for loss of value caused by the defects. Ms Stent’s interest in running the Wheeldons’ case was only in recovering loss of value. For the Wheeldons’ case the scope and cost of repairs could only be relevant insofar as they went to the loss of value.
[14] During 2014 differences grew between the majority and the minority. The minority instructed Mr Brill to act for them in the leaky building proceeding. For the rest of the proceeding the groups had separate representation. In August the minority began the Wheeldon proceeding in which they sought declarations that the body corporate could not undertake repairs on unit property and related relief. They considered that their units did not require repair. On 5 August 2014 a meeting of the body corporate committee considered this new proceeding. It gave instructions for the proceeding to be defended. After noting that Mr Brill was acting separately for
the minority, the committee resolved:
5 One of the others was a company in liquidation. None of the others actively defended the proceeding.
That a separate defect litigation fund be established to fund the defect litigation going forward for those owners who wished to be represented by Grimshaws in the joint action of the Body Corporate and the majority of owners as second plaintiffs. In consideration of the Body Corporate agreeing to act as a first plaintiff in the proceedings on behalf of the continuing second plaintiffs the second plaintiffs agree to meet all costs and expenses associated with the litigation and to indemnify the Body Corporate in relation to any matters associated therewith – in consideration of this the Body Corporate acknowledges that it acts as a bare trustee in the proceedings to the extent of the common property claim relating to the second plaintiffs and as such the Body Corporate would not share in the fruits of any litigation which would go to the successful second plaintiffs in the same proportion which the second plaintiffs shared in the outcome of the proceedings.
(Emphasis added – to be discussed below)
[15] There is some awkwardness with this resolution. The committee made it acting under delegated authority of the body corporate. At best the committee could bind only the body corporate, not any of the owners. All the same, after that resolution the majority paid the body corporate’s costs in the proceeding separately from any levies imposed under the Unit Titles Act. The minority did not contribute to the costs of litigation incurred by the body corporate and the majority. The minority funded their legal costs separately.
[16] On 8 August 2014 Mr Leishman, director of the Boutique Body Corporates Ltd, which gives administrative services to the body corporate, wrote to Mr Brill, recording the arrangement for a separate litigation account to be funded by the majority. He included this:
Whilst the Body Corporate will remain as a first Plaintiff it is clear that it does so as a bare trustee and has no interest in its own right in the proceedings. In consideration of the second plaintiffs indemnifying the Body Corporate and meeting all costs associated with the defect litigation the Body Corporate will not be entitled to share in any fruits of the outcome of these proceedings.
[17] On 15 August 2014 the lawyer acting for the majority in the leaky building case wrote to Mr Brill about the proceeding, including this:
You should also ensure that your clients’ claim includes a claim for your owners’ separate and common property. No doubt your solicitors are aware of the recent obiter comments of Andrews J in this regard. Although we will maintain a claim in respect of al l common pr opert y (because arguably the new Act allows us to do so), it would be prudent for your owners also to claim for their portion of common property as the law is not settled in this area.
[18] The case continued with the body corporate as first plaintiff, the majority owners as second plaintiffs (both represented by Grimshaws), four of the minority as third plaintiffs and the Wheeldons as fourth plaintiffs (represented by Mr Brill).
[19] The body corporate had remedial work carried out on the Bridgewater Apartments. The plaintiffs rely on a statement of evidence by a quantity surveyor for the majority prepared for the substantive hearing in the leaky building case. He says that the total repair costs came to $4,203,048.93 including GST. He allocated
$1,713,153.81 to remedial costs for common property and $2,010,881.89 to costs for unit property of the majority owners. By subtraction, that leaves $479,013.23 for unit property of the minority. The plaintiffs note that the percentage breakdown of the repair costs is 40.76% for common property, 47.84% for unit property of the majority and 11.40% for their unit property.
[20] In their final statement of claim in the building defects case the majority sought these heads of relief:
For the body corporate:
Costs of repair to common property
Interest and costs
For the majority owners:
Each owner’s share of repair costs for their unit property
Consequential losses - $289,695.15
General damages - $580,000
Interest and costs
In their final statement of claim the minority sought these heads of relief:
For the third plaintiffs
Costs of repair for their unit properties
Their share of common property repair costs
Consequential losses - $56,000
General damages - $145,000
Stigma loss - $165,000
Interest and costs
For the Wheeldons
Loss of value - $180,000
General damages - $40,000
Interest and costs
[21] The case was to be heard for eight weeks beginning in July 2017. There was a successful mediation on 20 April 2017, but setting it up took some doing. The district council had been proposing the mediation since late in 2016. The majority was wary, apparently uneasy at how all parties could negotiate a settlement at the same time. It was agreed that the district council would negotiate separately with the majority and the minority. That would work if the groups were making separate claims. But there was an overlap. Both were claiming for the costs of repairs to common property.
[22] This was resolved by an agreement that only the majority would negotiate with the council on common property repair costs. In an email of 20 March 2017 the majority’s lawyer pointed out that the body corporate was the owner of the common property and is entitled to recover for damage to common property. The minority was limited to their own unit property claims. The email included:
Your clients can of course apply to the Body Corporate for their share of any settlement for remedial costs to common property but any sum your clients are entitled to for common property will, as you quite rightly imply, be offset by the amounts your clients owe the Body Corporate (if the summary judgment goes the way of the majority).
The email proposed that the majority including the body corporate would try to settle with the council on the basis of the total of the common property remedial costs plus the majority owners’ unit property claims. The minority would try to settle their unit property claim at mediation.
[23] In a reply email of 29 March Mr Brill said:
On the understanding that your clients will confirm the mediation without further delay, I am instructed to accept the proposal set out in your email of
20 March 2017. I will today inform the FNDC solicitors that the BC is now authorised to pursue all of the claim related to common property repairs. My
clients’ separate CP claims will be withdrawn as from next Friday.
This does not mean that my clients agree with your accompanying premises or comments (which will be the subject of a separate letter).
[24] On the same day Mr Brill sent a separate letter. Among other things he contended that the body corporate was not bringing its claim as legal owner but as trustee or agent for the beneficial owners. The minority had not appointed the body corporate to act for it. They had consistently run a separate claim for their share of the common property repair costs as tenants in common with beneficial interests of 21.5% (the total of the ownership interests of the minority). Accordingly the body corporate’s claim was limited to 78.5% of the common property repair costs. The letter went on to say the arrangement just made assigned some 40% of the minority’s remediation claims into the hands of the body corporate. It said:
Clearly, my clients place very heavy reliance up the fiduciary duty of the BC, as agent/trustee, to take all reasonable steps to maximise their share of returns from the mediation.
It asserted that overall damages recovered for building repairs including fees will need to be apportioned 60:40 as between private and common property and concluded:
My clients look to the BC to protect their respective shares of 40% of any recoveries of the mediation process.
Both sides agree that this letter is not part of the agreement made in the emails. The defendants deny that it has any effect. The minority say that it was an instruction by them as principals to the body corporate as their agent.
[25] Both mediations were successful. The body corporate committee, assisted by Mr Leishman and lawyers, represented both the body corporate and the majority owners, but not the minority.6 The defendants say that the body corporate and the majority owners made separate agreements with the district council, under which each was to receive separate amounts. In the way of compromises the body corporate and the majority did not recover fully for everything they had sued for. The body corporate’s share was 33.43% of the total settlement amounts, the majority owners’
66.57%.
[26] Under the settlements with the majority group the district council made two payments to Grimshaw & Co, one in May 2017 and the other in July 2017, but the amounts did not match a 33.43%-66.57% split of the settlement sums. In June 2017 the body corporate made distributions to owners which involved adjustments to the minority’s accounts with the body corporate because of the settlement payment received by it. Mr Leishman explained the methodology to the minority in an email of 14 May 2017. Here is part, in which I have removed references to settlement amounts:
The methodology applied is:
[i] Identify the share of common property in the settlement…(redacted) (refer settlement agreement with FNDC)
[ii] Allocate the CP between all 22 units [see caveat under] by Ownership
Interest – i.e. the proportions you pay BC levies
[iii] Calculate the total defect litigation costs since the minority undertook private representation (Oct 2015) - $958,840 – see schedule attached with BBCL accounts for each period
[iv] Calculate the share 33.43% of the common property of the BC
settlement with FNDC - $320,540.10
[v] Equally split the $320,540 amongst each owner (all defect litigation levies being raised equally on basis all second plaintiffs equally represented irrespective of share) [see caveat under]
[vi] Apply interest on the uncharged and unpaid levies met by the majority on behalf of all 2nd plaintiffs
6 At an annual general meeting on 28 January 2017 the body corporate delegated to the committee full powers of the body corporate subject to s 108(2) of the Unit Titles Act 2010 and any directions given at a general meeting.
[vii] Deduct from the CP share for each minority unit the share of legal costs and interest on unpaid levies leaving a net figure
[viii[ As agreed the share held will then be transferred against the shortfall in each unit’s building account to give a net balance due
…
Noted above is a caveat around the split of common property – this is because Unit 204 was not a party in the defect litigation (the second plaintiffs being the previous owners the Wheeldons based on their loss of sale) and Ms Stent having purchased with knowledge has no entitlement to share in the common property settlement as advised to the BC by FNDC’s solicitors and according to the principles established by Judge Heath in the seminal Sunset Terraces decision. The committee’s view is the common property award can only be allocated amongst the second plaintiffs with an interest in the common property – they are however aware a different view may be held by Ms Stent and or remainder of some or all of the minority…Should the eventual distribution not include Unit 204 then a further $40,824 can be spread across the remaining 21 units who were represented in the remedial cost claims.
Under the distributions nothing was allocated to Unit 204, Ms Stent. I took the distributions into account in fixing the judgment amounts for the unpaid levies in Body Corporate 324525 v Stent (No 3).7 A letter by Mr Brill dated 23 May 2017 shows that the minority did not accept the proposed distribution.
The misallocation claim
[27] The plaintiffs say that the 33.43% - 66.57% split between the body corporate and the majority owners is a misallocation. Far more should have been paid to the body corporate. The funds the majority received on settlement should have been treated as going only towards reimbursement of repair costs. The body corporate should have received 40% of those costs, but it received less.
[28] There may be an arguable legal basis under which the minority could sue to recover for the body corporate any amounts by which the majority have enriched themselves at the expense of the body corporate – the “fraud on the minority” exception to the rule in Foss v Harbottle.8 The minority has not relied on this, but I deal with it as giving a possible way for assessing the misallocation claim. For reasons
I give below I do not consider that the minority’s causes of action do that. It may be
7 Body Corporate 324525 v Stent (No 3) [2017] NZHC 2948 at [39].
8 Foss v Harbottle (1843) 2 Hare 461.
objected that the rule in Foss v Harbottle is a matter of company law only, but the English courts have accepted that it may be applied to other associations - trade unions and limited liability partnerships.9 There are parallels between companies and body corporates under the Unit Titles Act 2010. In both the entity, company or body corporate, is normally the only person who can sue for wrongs done to it. In both, general meetings (of shareholders or owners) may approve actions that would otherwise be wrongs to the company. Estmanco (Kilner House) Ltd v Greater London Council, which involved a non-profit, non-trading company that owned a block of apartments where each owner held one share, may be seen as linking companies and other property-owning entities.10 Under ss 165 and 166 of the Companies Act 1993 aggrieved shareholders may be given leave to bring a derivative proceeding in the name of the company on a wider basis than was available at common law, but that does not stand in the way of the Foss v Harbottle rule and its exceptions operating in other cases.
[29] In Edwards v Halliwell Jenkins LJ said:11
The rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.
The cases falling within the general ambit of the rule are subject to certain exceptions... It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known
9 Edwards v Halliwell [1950] 2 All ER 1064 (CA), Universal Project Management Services Ltd v
Fort Gilkicker Ltd [2013] Ch 551 and Harris v Microfusion 2003-2 [2016] EWCA Civ 1212.
10 Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2.
11 Edwards v Halliwell at 1066.
as a minority shareholders' action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue. Those exceptions are not directly in point in this case, but they show, especially the last one, that the rule is not an inflexible rule and it will be relaxed where necessary in the interests of justice.
Although the conduct may not be strictly fraudulent, derivative proceedings have been allowed when directors have exercised their powers in a manner which conferred personal benefits on themselves at the expense of the company and other shareholders.12
[30] In this case an argument based on the “fraud on the minority” exception in Foss v Harbottle would say that the majority owners have effective control of the body corporate through their voting power at any general meeting (including the ability to pass any special resolution requiring a 75% majority13), the majority has used its voting power to appoint a committee that excludes any minority owners, the committee members are aligned with the interests of the majority, in the mediation the committee members used their position as representatives of the body corporate and the majority to arrange a settlement that favoured the majority over the body corporate and in a general meeting the majority would approve the settlement made by the body corporate, even though it favours them over the body corporate. That argument would be used to allow the minority to sue derivatively in the name of the body corporate. The defendants would be the majority owners. They have obtained benefits at the expense of the body corporate because of their ability to control voting at a general meeting. It is not a good defence for the majority that the settlement was structured as two separate agreements with the district council. The court is unlikely to be diverted by matters of form.
[31] To succeed on the facts the minority would need to prove a misallocation that favoured the majority. That is not straight-forward. One approach is to assume that
all claims should abate equally. Take this calculation:
12 Alexander v Automatic Telephone Co [1900] 2 Ch 56, Cooks v Deeks [1916] 1 AC 554 (HL),
Daniels v Daniels [1978] 1 WLR 406, Abouraya v Sigmund [2014] EWHC 277 (Ch).
13 Unit Titles Act 2010, s 98(4).
The body corporate’s damages claim $1,713,153.81 37.3% The majority owners’ repair costs
$2,010,881.89
The majority owners’ consequential losses
$289,695.15
The majority owners’ general damages
$580,000
Sub-total - majority owners’ damages
$2,880,577.04
62.7%
Total claims by body corporate and majority
$4,593,730.85
100%
On the assumption that that all claims abate equally, the settlement proceeds should be applied 37.3% to the body corporate and 62.7% to the majority owners. The discrepancy the minority is complaining about is 3.87% - the difference between the body corporate’s share of 37.3% and the 33.43% in [25] above. The defendants would not accept this approach. They would point out that they paid the litigation costs to obtain the settlement (barring any paid by the body corporate before August 2014) and they should be reimbursed by the body corporate to the extent that part of their expenditure has benefited the body corporate. If the body corporate’s share of litigation costs incurred since August 2014, $320,54014, is deducted from its settlement sum and credited to the majority, any discrepancy is reduced to an insignificant amount. In a claim under the exception in Foss v Harbottle the court is unlikely to grant relief when any alleged misallocation is not of any great moment. Given the requirement to obtain leave by showing a prima facie case, a proceeding is unlikely to get past the leave application without showing a case with real substance.15
[32] The assumption that all heads of damage abate equally is just that – an assumption. An examination of the claims may show that there was fat in some16 which can be treated as having been abandoned with other claims less impacted. The minority say that in determining any misallocation the court should consider only the claims for remedial costs. They say that the majority must have jettisoned all their
other claims. That part of their case is unconvincing. They rely on an email by
14 As can be seen from Mr Leishman’s email of 14 May 2017, this amount was derived as 33.43%
of the majority’s total litigation costs. The plaintiffs do not necessarily accept that.
15 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA) at 222.
16 For example, the claim for general damages.
Mr Leishman dated 7 November 2013 to one of the owners (not one of the minority), in which he said:
…There is no reason to suspect you should not recover 100% of the cost to repair (which includes interest on the money you apply to the repair) – to settle you invariably need to give something away and that will likely be the general damages and part of your legal costs – all of the costs generated by the works plus general damages will however go up on the board at the start of any mediation.
That was advice at the start of the leaky building proceeding as to how such claims are typically resolved in mediations. It was well before the mediation in April 2017. At its highest it gives an expectation as to the amount that might be obtained in a negotiated settlement. But it does not mean that on any settlement the body corporate and all the owners would allocate any settlement sums first to repair costs and ahead of other claims and costs. Mr Leishman did not have any authority to give any such commitment on behalf of the body corporate and he did not purport to give a commitment. The minority also say that there was an expectation by all unit owners that in a settlement there would be recovery of all repair costs, even if other parts of the claims were not met. As evidence, that is only assertion and has not been tested. The expectation goes only to the amount of any settlement, not to its allocation among different heads of damage. The minority does not have any evidence that after the mediation the body corporate and the majority allocated all the settlement sums towards remedial costs. In the absence of any such evidence, this part of their case is only an assertion made to fit their case.
[33] The defendants will say at trial that the allocation was reasonable in the circumstances, given a range of contingencies. They refer to litigation risk for matters such as limitation and contributory negligence. I note that these may affect the body corporate and unit owners differently. For example, the council relied on the six-year limitation defence under s 4(1)(a) of the Limitation Act 1950.17 In building defects cases the cause of action accrues when the damage is discoverable. In a unit title complex time may start to run against different owners at different times. In this case there was evidence that damage to common property was detected before damage to
some units.18 Given the variables involved, an argument that the allocation was reasonable has its attractions.
[34] There is unlikely to be a single right way for dividing the district council settlement payments between the majority and the body corporate. At this stage I cannot say that there is one. I suspect that any judge required to decide the merits at a substantive hearing would find it a jury question. The misallocation claim does not give any easy answer. I cannot say that this part of the minority’s case is unarguably correct or that the allocation is clearly unreasonable.
The minority’s claim to the body corporate’s settlement funds
[35] The minority says that they are entitled to a share of the body corporate’s settlement funds. While the body corporate received the funds as a plaintiff, they properly belonged to the unit owners, including themselves. They rely on notions of agency and trust. That requires a consideration of the basis on which the body corporate held the funds.
[36] As the legal owner the body corporate is entitled to sue for damage to common property. Its title as legal owner is clear from s 54 of the Unit Titles Act 2010:
54 Ownership of common property
(1) The common property is owned by the body corporate.
(2) The owners of all the units are beneficially entitled to the common property as tenants in common in shares proportional to the ownership interest (or proposed ownership interest) in respect of their respective units.
(3) Nothing in subsection (2) affects the interests among themselves of the owners of an individual unit.
It is a standard part of legal ownership that the owner may sue a third party in tort for damage to the property. Under s 77(2) a body corporate may do anything a natural person of full age and capacity may do, except as provided in an act. That gives it the power to sue. If a legal owner holds the property on trust, he or she retains the right
to sue third parties in tort for damage. The beneficiary does not have any independent right to sue third parties in tort for damage to the property, at least not without joining the trustee as a party.19 The reference in s 58(2) to unit owners being beneficially entitled to the common property as tenants in common in shares proportional to their ownership interests under s 38 might give the impression that the section creates some form of trust, but that is not the case. The Act sets out extensively the responsibilities, governance, management, powers and duties of a body corporate in Part 2 subparts 12 and 13 without using the language or concepts of trust law. The unit owners’ beneficial entitlements in s 58(2) are triggered in relatively unusual circumstances, as under cancellation of a unit plan.20 A body corporate’s conduct of litigation is ultimately under the control of all unit owners in that they will authorise it in general meeting21 or the committee acting under delegation will authorise it and must report to the body corporate.22 There is no need or ground for separate accountability under trust law.
[37] If litigation produces funds surplus to the body corporate’s requirements, it may distribute them under s 131:
The body corporate may distribute money or personal property in its possession and surplus to its requirements among the unit owners in the same proportions in which the money was raised or the money which was used to pay for the property was raised.
The body corporate’s distribution in June 2017 can be seen as an example. Two points may be noted. The section gives a power, but does not impose a duty. Distributions are made in the same proportions as funds were raised. That is not necessarily the same as paying according to ownership interests under s 38.
[38] In short while a body corporate acts in the interests of unit owners generally in suing a third party in tort for damage to common property, it does so in its own right
as legal owner, not as trustee for unit owners or as their agent. While that is all
19 Baker v Archer-Shee [1927] AC 844 (HL) at 850, Leigh and Sillavan Ltd v Aliakmon Shipping Co
Ltd [1986] AC 785 (HL) at 812, Equity and Trusts in New Zealand 2nd ed Butler et al, 2.2.1.
20 Under s 180(2) on cancellation of a unit plan, the fee simple estate is vested in the owners of the units according to their ownership interests. Counsel advised that this had occurred to some Christchurch developments after the 2011 earthquakes.
21 For delegation see Unit Titles Act 2010, ss 108 - 111.
22 Under the Unit Titles Act 2010, s 114.
reasonably plain, the minority says that on the facts of this case, they were entitled to sue for damage to common property and the body corporate became their trustee or agent.
[39] The evidence shows some misconceptions as to who can sue for damage to common property: the references to the body corporate suing as a bare trustee in the committee’s resolution of 5 August 2014 and Mr Leishman’s letter to Mr Brill of 8
August 2014, Grimshaw & Co’s advice in the letter of 15 August 2014 to Mr Brill include a claim for damage to common property in the minority’s pleading. That may be a hangover from the Unit Titles Act 1972. Section 9 of that act provided that the common property was held by the proprietors of all the units as tenants in common in shares proportional to the unit entitlement in respect of their respective units. It was held that under its power to sue under s 13 a body corporate could bring a proceeding for damage to common property on behalf of unit owners.23 In such a case the body corporate may have been an agent or trustee for the unit owners. But it is not necessary to continue that thinking under the 2010 Act with its express provision that the body corporate owns the common property, not the unit owners. In the light of that, the proposal that the body corporate sue as a bare trustee for damage to common property but have no interest in the proceeds of the claim is at the least very suspect. While it is understandable that the body corporate should reimburse those who funded its litigation costs, the notion that the body corporate should hold the litigation proceeds on trust for them without any interest in them for itself seems to run counter to the purpose of common property, that it is held for the benefit of all owners. Grimshaw
& Co’s advice to Mr Brill to include in the minority’s pleading a claim for common property damage appears cautious – to remove the risk of the defendant raising any objection at trial.
[40] The minority claims that the body corporate became its agent or trustee for their pleaded claim for damages for costs of repair to common property. None of the matters in the last paragraph support that claim; they are no more than misconceptions. The minority also refers to the email exchange between Grimshaw & Co and Mr Brill
on 20 and 29 March 2017. The minority’s case is that when they agreed not to
23 North Shore City Council v Body Corporate 188529 [2010] NZSC 158, [2011] 2 NZLR 289 at
[57]-[58].
negotiate with the district council on common property repair costs but to allow the body corporate to do so, they appointed the body corporate their agent for that claim. They retained an entitlement to a share in the proceeds of any settlement made by the body corporate. Mr Brill’s letter of 29 March requiring the body corporate to protect the minority’s interest is said to be an instruction by the principal, the minority, to the agent, the body corporate.
[41] The email exchange is consistent with another interpretation. Grimshaw & Co did no more than point out that the minority did not have a claim for common property damage, but the body corporate did and it should negotiate resolution of that claim. Mr Brill agreed to that on behalf of his clients. That interpretation does not involve any agency or trusteeship. The email exchange did no more than clear the way for the mediation by deciding that the body corporate alone would negotiate its claim, not the minority.
[42] Moreover, there could not be any agency in the body corporate negotiating the common property claim. As the owner of the common property suing in its own right it did not need authority from the minority. The minority could not sue for damage to the common property and gave nothing away in agreeing that the body corporate would run that claim.
[43] The minority’s case relies on trusteeship as well as agency, but Mr Brill argued mainly on the basis of agency. A trust argument also fails. Agency and trusteeship are distinct:24
The trustee has the full legal property in the whole of the trust fund and the beneficiary has not. Apart from special provisions in particular settlements, which do not affect the general principle, the trustee is not the agent of the beneficiary, who can neither appoint nor dismiss him. She cannot require him to change or forbid him to change the particular investments of the fund.
The body corporate did not hold the common property or its cause of action for damage to it on trust for any unit owners. There was no bare trusteeship. The minority had interests under s 54(2) of the Unit Titles Act, but those were not beneficial interests under a trust. The email exchange of March 2017 did not establish or recognise any
trusteeship between the body corporate and the minority in respect of the common property claim. Any argument that the minority as beneficiaries could direct the body corporate how to exercise its powers as trustee runs into difficulties in the absence of any agency relationship.
[44] In short the body corporate as legal owner of the common property received the settlement funds in its own right, not as trustee or agent for any of the unit owners, including the minority. The minority may have had an expectation that they might receive some of the proceeds, but that was not a legal or equitable interest in any part of the funds.
Other difficulties with the minority’s causes of action
[45] The minority’s case is that under the settlements with the district council the body corporate received less than it ought to have and the majority received more than they were entitled to. On that case the body corporate seems to be the victim. It is curious that the minority sue it for having incurred that loss. They want it to compensate them for not having received enough for itself. There are difficulties with this.
[46] The minority challenge the decisions of the body corporate committee members in the allocation of the settlement funds. In the first cause of action they say that the members breached their duties to the body corporate and to the minority. In the second cause of action they say that the members breached their fiduciary duty to the minority as their principal and that the body corporate is vicariously liable for their actions. The claim that the members owed duties to the minority is contestable. A body corporate committee owes duties to the body corporate but it is questionable whether it also owes general duties to individual unit owners. It is arguable that their position is analogous to that of company directors, who generally owe fiduciary duties to the company, not individual shareholders.25 Once any question of trusteeship or agency on the part of the body corporate goes, it is hard to contend that the body corporate, let alone the body corporate committee, owed any fiduciary duty to the minority.
[47] The plea of vicarious liability on the part of the body corporate for the actions of the committee is misconceived. Under vicarious liability one person is held liable for the torts of another person. Employment is the paradigm for vicarious liability, but it is not limited to that case.26 Here the minority does not say that the committee members committed any tortious wrongs that harmed them. Instead the decisions of the committee members were actions of the body corporate – they acted with delegated authority. For the reasons already given, it is arguable that those decisions do not give the minority any cause of action against the body corporate. While the committee’s decisions bound the body corporate, there is a separate question whether the body corporate has a claim against the committee members for breach of any duties they owed it in making those decisions. But vicarious liability has nothing to do with that.
[48] While it is arguable that the body corporate committee owed duties to the body corporate, the difficulty for the minority is that any breach of duty is actionable by the body corporate, not them. That is an application of the rule in Foss v Harbottle and takes us back to the discussion in paragraphs [27]-[34] above.27 If the minority could bring themselves within the “fraud on the minority” exception, they would recover relief for the body corporate, not for themselves.
[49] The minority has however sought money judgments against both the body corporate and three of the committee members on the basis that their accounts with the body corporate should be adjusted on account of the alleged misallocation of the settlement payments. It is not necessary here to go into the calculations. But it is not clear that even if the minority succeeds on its misallocation claim, they will recover any monetary relief. On their case the body corporate is out of pocket for having received less of the settlement funds than it should have. Even if the allocation between the body corporate and the majority owners is adjusted to give it more, that does not mean more money for the minority. The body corporate will decide what to
do with the funds. For example, it might set the funds aside as reserves for future
26 See generally The Law of Torts in New Zealand, Todd and others, 7th ed, Chapter 22.
27 For authorities holding that directors owe fiduciary duties only to the company, see Re Wicham Shipbuilding, Boiler, and Salt Company (1878) (Ch D 322 (CA) at 328-9, Bath v Standard Land Company Ltd [1911] 1 Ch 618 (CA) at 627, Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 (CA) at 288, Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia [1998] 1 WLR 294 (QB) at 312.
maintenance in a long term maintenance fund under s 117 of the Unit Titles Act. The minority will be paid only if the body corporate makes a distribution of surplus money under s 131. But that is for the body corporate to decide, not the court.
Result
[50] Under r 12.2(1) of the High Court Rules, the plaintiffs can obtain summary judgment only if they show that the defendants have no defences to the causes of action in the statement of claim. For the reasons given above, they have not met that test. There are proper triable issues as to misallocation, whether the plaintiffs have any interest in the body corporate’s settlement payment, whether there was any agency or trust relationship between the plaintiffs and the body corporate, whether the current causes of action are the appropriate pleadings by which to test the plaintiff’s claims, given the difficulties as to standing, and whether the plaintiffs can obtain monetary relief.
[51] The defendants’ notice of opposition also says that plaintiffs consented to the body corporate’s settlement with the district council. Their evidence goes to what occurred in the mediation. They say that this was an agreement under s 57(3) of the Evidence Act 2006, which takes the evidence outside the privilege for settlement negotiations. I do not understand that any consent by the plaintiffs forms any part of the settlement agreement between the body corporate and the district council. Out of caution I have not referred to that evidence. I have decided the application without that defence. The defendants may still run the defence at the substantive hearing and may be able to persuade the trial judge that the evidence is admissible. They will also have to persuade the judge to accept the evidence even though they agreed in the mediation agreement that they would not give evidence about what happened in the mediation.
[52] As to fiduciary duties of body corporate committee members, Mr Allan submitted that their position can be distinguished from company directors’. They must be unit owners. They are invariably lay people and volunteers. They should not be held to the same standards of commercial people. He denied that they were in a
fiduciary relationship with the body corporate. I have not found it necessary for this decision to go into those questions.
[53] In Body Corporate 324525 v Stent (No 2) I held that because of its maintenance and repair responsibilities under s 138 of the Unit Titles Act for building elements and infrastructure in a principal unit, a body corporate could sue a third party in tort for damage to those parts of a principal unit it was required to maintain.28 That is an exception to the general rule that only the legal owner or possessor can sue for damage to property. The decision does not mean that the converse applies – that unit owners can sue for damage to common property.
[54] Under NZI Bank Ltd v Philpott the general approach is to reserve costs when a plaintiff does not succeed on a summary judgment application.29 But that is not an invariable practice. The Court of Appeal indicated that costs may be awarded against an unsuccessful plaintiff where it embarked on the application erroneously in the sense that the rules do not allow the procedure or in the certain knowledge that there is a bona fide question of fact or law which can be determined only after a trial. This is such a case. The plaintiffs have not succeeded mainly because of defects in their own case rather than because of any matters raised by the defendants. Claims for breach of fiduciary duty and for breach of agency causing loss are not standard fare for summary judgment applications.30 Nor is a proceeding to decide how the proceeds of litigation should be divided among the participants in the absence of any agreement. In correspondence before the proceeding between Mr Brill and the body corporate the plaintiffs were clearly told that the body corporate did not accept their contentions. The case was never suitable for a summary judgment application because of the issues. The plaintiffs must have known that. They should pay costs on the application, whatever the outcome of the substantive hearing.
[55] On dismissal of a summary judgment application it is common to direct the defendant to file a statement of defence and to give other case management directions.
28 Body Corporate 324525 v Stent (No 2) [2017] NZHC 2857 at [137]-[150].
29 NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).
30 Mount v Hannay [2014] NZCA 600 at [108], Bosomworth v Pheasant HC Tim CIV 2010-476-250 at [65], [75].
I do not do so in this case, as the plaintiffs may need time to re-assess their case. They may wish to amend their pleadings. I allow for that.
[56] I make these orders:
[a] I dismiss the application for summary judgment;
[b] The plaintiffs are to pay the defendants costs on the application. If the parties cannot agree costs, memoranda may be filed;
[c] While this decision is not suppressed, access to the court file is restricted pending further order of a judge. The Far North District Council is to be given the opportunity to be heard on any application for access;
[d] Mr Brill is to destroy and delete any copies of the settlement agreement between the district council and the body corporate, if he has not done so already;
[e] A case management conference will be arranged on either side requesting it. That is not to stand in the way of the parties filing a joint memorandum setting out proposed case management directions. In default of either, the Registrar is to arrange a conference before the end of June 2018;
[f] Leave is reserved to apply for further directions.
……………………………….
Associate Judge R M Bell
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