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Manchester Securities Limited v Body Corporate 172108 [2017] NZCA 527 (17 November 2017)

Last Updated: 23 November 2017

IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 Appellant
AND
 Respondent
BETWEEN
 Appellant
AND
 Respondent
Hearing:
28 September 2017
Court:
French, Cooper and Brown JJ
Counsel:
M C Harris and H E McQueen for Manchester Securities Limited T J G Allan and S F Powrie for Body Corporate 172108
Judgment:


JUDGMENT OF THE COURT

A Manchester Securities Limited’s appeal in CA120/2017 is dismissed.

  1. In CA120/2017 Manchester Securities Limited must pay Body Corporate 172108 costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.
  1. Body Corporate 172108’s appeal in CA372/2017 is dismissed.
  1. In CA372/2017 Body Corporate 172108 must pay Manchester Securities Limited usual disbursements and 50 per cent of costs for a standard appeal on a band A basis. We certify for second counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by French J)

Introduction

[1] In 2011 Heath J settled a scheme of remediation under s 48 of the Unit Titles Act 1972[1] to repair a leaky high rise apartment complex known as Hobson Apartments.[2] The scheme was designed to achieve a balance of the competing interests of the owner of the top floor, Manchester Securities Ltd (Manchester), and the remaining unit owners represented by Body Corporate 172108.
[2] Two years later the Body Corporate applied for a variation of the scheme under s 48(6) of the Unit Titles Act on the grounds that a major costs blow out had rendered the scheme unjust. Section 48(6) provided that the High Court “may from time to time cancel, vary, modify, or discharge any order made by it under this section”.
[3] The application was granted by Fogarty J.[3] The Judge varied the scheme by removing a cap that had been placed on Manchester’s liability for the cost of the repairs and by reinstating the default statutory scheme. The variation rendered Manchester fully liable to contribute to the cost of repairing common property on all levels of the building, the amount of its contribution to be calculated in accordance with its ownership interest.[4]
[4] Manchester now appeals that decision in appeal CA120/2017. In a separate appeal, CA372/2017, the Body Corporate appeals Fogarty J’s subsequent costs decision.[5]

Background

[5] Hobson Apartments is a 12 storey unit title development in Central Auckland with an unusual feature. The exterior of levels 1–11 is common property owned by the Body Corporate but not the exterior of the 12th floor. Almost all of the 12th floor is private property owned by Manchester. This came about because the 12th floor which is aesthetically and physically different from the rest of the building was constructed separately after the rest of the building had been completed. The 12th floor has a penthouse, Unit 12A, which covers the entire floor. The only common property on the 12th floor comprises the lift and stairwell shafts, ducts and a small recessed area at the rear on the eastern side.
[6] Unit 12A is the largest and most valuable unit in the complex. The ownership interest or unit entitlement of unit 12A is 11.88 per cent.[6]
[7] As at October 2009, the building had suffered damage as a result of severe water ingress. The Body Corporate applied under s 48 of the Unit Titles Act for a scheme of remediation empowering it to carry out repairs under a single building contract to the whole of the complex, including private property as well as common property. Without a court sanctioned scheme, the default position under the Unit Titles Act was that the Body Corporate could only undertake repair associated with common property.[7]
[8] In terms of cost allocations, the Body Corporate wanted Manchester to meet the costs of repair associated with Manchester’s private property plus 11.88 per cent of all repairs undertaken in respect of common property.
[9] Manchester opposed the application. It wanted to repair all of level 12 itself, and not be required to contribute to the cost of any other work. At that time, it was thought the leaks to the structure were principally emanating from the failure of the cladding in levels 1–11. Apart from the small area on the east, the exterior cladding of level 12 was heavy sandstone tile protected by overhanging eaves. Sandstone cladding was superior to the different cladding (mostly Harditex) used on the other levels and, following invasive testing, was assumed not to be leaking. It was known there was some leaking of the roof on level 12 but that was considered relatively minor, only requiring modest repairs. Manchester argued that in those circumstances it would be inequitable to require it to subsidise the cost of repairing common property below as well as paying for the repair work to level 12. It asked the Court to exclude level 12 from any repair solution that involved a single contract to the whole building.
[10] The terms of the scheme were settled in four judgments issued by Heath J between 3 March 2010 and 10 February 2011.[8]
[11] In his first judgment, Heath J articulated the basis on which he would be prepared to approve a scheme. Notwithstanding Manchester’s objections, he considered it would be in the interests of all concerned for there to be a single contractor appointed to undertake all work, a single work programme and if feasible a single building consent to cover all work.[9] He acknowledged that level 12 was in private ownership but was also mindful of the fact that inadequate work on level 12 would impact on the other owners.[10] To accommodate Manchester’s understandable concern to have some control over the repairs to level 12, the Judge said Manchester should be able to appoint a joint project manager for the level 12 work.[11]
[12] As regards the cost allocation, Heath J noted the unusual ownership structure but also noted that Manchester would obtain benefit from the repair of the common property on the lower levels.[12] Weighing up the competing interests, he considered a fair solution would be to require Manchester to contribute to the repairs of the common property as well as paying for the level 12 work but on the basis its liability would be capped at 11.88 per cent of the total costs of repairs to the whole building.[13]
[13] On the indicative figures provided to the Judge, the total cost of repairs including both common and individual property for the entire building was estimated at $6.25 million. That comprised $5.75 million for the repairs to levels 1–11 and $500,000 for the repairs to level 12.[14] Capping Manchester’s liability at 11.88 per cent of the total cost of repairs (that is 11.88 per cent of $6.25 million) meant on these figures that Manchester would contribute $242,500 to the levels 1–11 common property work after expending $500,000 on the level 12 work.[15]
[14] Justice Heath acknowledged that his proposed formula (11.88 per cent of the total cost of repairs to the whole building including repairs to private property) represented a departure from the default scheme under the Unit Titles Act but considered it justified in the circumstances.[16] As already mentioned, under the default statutory scheme, Manchester would have been required to pay for its own private work plus contribute 11.88 per cent of the repairs to all common property at all levels.
[15] The Judge ordered the parties to prepare and file a draft amended scheme in accordance with the principles he had articulated.[17] In a subsequent minute dated 30 March 2010, he identified two additional issues which might potentially impact on the final terms of the scheme.[18] The first was whether the Body Corporate wanted to defer the repair work pending trial of proceedings it had issued against the Auckland City Council over the water damage.[19] The Body Corporate subsequently confirmed that it did want to defer the repairs.
[16] The second issue was whether Manchester wanted to proceed with what had been termed the “half-way house” option for the repairs to level 12.[20] The Body Corporate had obtained a building consent that entailed a complete re-clad of the entire building. An expert retained by Manchester was of the view re-cladding on level 12 was unnecessary and that little or no repair work was required. Another expert suggested a compromise halfway house solution which involved replacing the decks on level 12 but retaining its sandstone cladding and only re-cladding the walls on the eastern face where the same Harditex cladding as used in levels 1–11 had been applied. The re-cladding product was to be Dimondek 400 and/or Alucomat.
[17] Manchester subsequently decided not to adopt the halfway house solution but said it would proceed on the basis of the original building consent which as mentioned entailed a complete re-cladding of all levels. Manchester further advised Heath J that the delay arising from the Body Corporate’s decision to defer the repairs was highly prejudicial to it. It wanted to commence repair work on level 12 immediately.
[18] As the Judge noted in his second judgment, the decisions made by the parties since his first judgment meant the options of a single building programme, a single contractor, and joint project managers were no longer available.[21] The Judge made some amendments to the draft, but did not alter the formula for fixing Manchester’s overall contribution to the total repairs authorised by the scheme. That remained at 11.88 per cent (the Manchester costs formula).
[19] The Judge’s third judgment has no significance on appeal and the fourth judgment was a costs decision which we address later when discussing the appeal in CA372/2017.
[20] The order sanctioning the final terms of the scheme was sealed on 13 April 2011.
[21] For the purposes of the appeal, one of the most important provisions in the scheme was cl 21. It provided for Manchester’s share of the total cost of the repairs of the entire building as well as the carrying out of repairs to level 12 by Manchester. The clause distinguished between two categories of repair work on level 12: “Manchester Work” and the “remaining work”.
[22] Clause 21.9 stated that the interaction between the level 12 work and the repairs to the rest of the building “contemplates full co-operation between Manchester and the Body Corporate”.
[23] Unfortunately, as Fogarty J put it, the scheme did not go “according to plan”.[22] There were lengthy delays, cost escalations and a notable absence of “full co-operation”.[23]
[24] The Body Corporate commenced the repairs to levels 1–11 on 23 July 2012. They were completed on 12 December 2013 at a total cost of $8,131,002. That represented a 41 per cent increase on the original estimate of $5.75 million. The main reason for the cost increase was the discovery of more rotten timber than anticipated and unexpected structural steel problems. Under the scheme, the Body Corporate had the responsibility of differentiating the costs of remediating the common property from the costs of repair to the individual units. Its expert calculated the cost of remediating the common property at levels 1–11 in the sum of $4,968,306 or 61 per cent of total construction cost.[24]
[25] The remediation required to level 12 also turned out to be more extensive than expected. Serious structural defects were discovered in May and August 2011. As at May 2012, the cost of the repairs to level 12 was estimated to have increased by 150 per cent from the original estimate of $500,000. Manchester undertook some limited temporary repair work but did not obtain a building consent for the permanent remediation until May 2015.[25] The work — which includes some redevelopment — has still not been completed.
[26] As at the date of the hearing before Fogarty J in August 2016, the likely cost to repair level 12 was estimated to be in the order of $2.6 million, a 430 per cent increase in cost from the original estimate of $500,000.[26] On that basis, the final cost of repairs to the whole building is likely to approach something close to $10.7 million ($2.6 million plus $8,131,002) as compared with the original $6.25 million.
[27] Because the work to level 12 is still not completed, it is impossible to know with any degree of certainty what the final total cost of repairs to the whole building will be. However what can be said with certainty is that whatever the final figure turns out to be, the repairs to level 12 private property will exceed 11.88 per cent of that figure. It follows that under the scheme approved by Heath J, Manchester will not be required to make any payment to the Body Corporate. Not only will other owners therefore have to contribute more to the common property on levels 1–11, they will also be required to make a payment to Manchester in respect of the repair to the common property on level 12. The latter is estimated to cost $217,865.20.[27]
[28] On 18 March 2013, the Body Corporate applied for an order varying the scheme so as to avoid that outcome which it says is unjust and outside the contemplation of the parties and Heath J when the scheme was settled.

Fogarty J’s decision

[29] In granting the application to vary the scheme, Fogarty J made the following key findings:
[30] The Judge concluded by formally ordering Manchester to pay to the Body Corporate, for the benefit of the unit holders of levels 1–11, the sum of $321,264.79 plus GST as a provisional sum. That sum to be adjusted upon completion of remediation of the common property on level 12 to the extent that the estimate of $217,865.20 varies.[37]

Arguments on Manchester’s appeal — CA120/2017

[31] Counsel for Manchester, Mr Harris advanced several grounds of appeal.
[32] According to Mr Harris, Fogarty J’s conclusion that the costs over-run justified a variation and that the blame lay with Manchester was based on a misunderstanding of the original scheme and the evidence. In particular, the Judge had misunderstood the cost sharing arrangements and the parties’ respective responsibilities including the scope of the repair each was tasked with undertaking.
[33] Mr Harris also argued the Judge had misapplied the authorities when settling the terms of the variation and had ordered a variation that was neither logically nor fairly connected to the cost over-runs.
[34] In support of these various arguments, Mr Harris identified a number of errors in the judgment. These included a misstatement of the costing formula created by cl 21, an incorrect assumption that Manchester had adopted the halfway house repair proposal when it had not, and a failure to appreciate that under the original scheme it was the Body Corporate’s responsibility to do the cl 21.8 work (the Dimondek 400 and Alucomat re-cladding), not Manchester’s. Manchester only assumed the responsibility to do that work 18 months later in October 2011 at the request of the Body Corporate. This was significant because the cl 21.8 work turned out to be more extensive and complicated than anyone anticipated and was a significant driver of delay and the increase in costs.
[35] Mr Harris further contended that in the absence of any counterfactual evidence as to what the cost of repairing level 12 would have been had the Body Corporate carried out the work under a single contract, Fogarty J was not in a position to assess the magnitude of the cost increases and therefore could not rely on that as grounds for variation. There was no such counterfactual evidence and that was a fatal gap in the Body Corporate’s case. Mr Harris argued it was likely the Body Corporate would have suffered the very same delays and costs increases as Manchester.
[36] In Mr Harris’s submission, no fair reading of the evidence could support the finding that Manchester was guilty of dilatory remediation. Financial pressures had nothing to do with the delay because they had all been resolved by August 2011. On the evidence, the main cause of delay was the fact that the scope of Manchester’s level 12 work expanded considerably when it discovered the roof needed replacing and when it assumed the cl 21.8 work. Manchester did not initially press to be able to use the Body Corporate scaffolding to do the cl 21.8 work but neither it nor the Body Corporate fully appreciated the extent of the technical challenges and associated costs in scaffolding level 12 independently of the main repair. Then, when Manchester did request access to the scaffolding, it was denied by the Body Corporate who also declined to allow its contractor to do any work for Manchester on level 12.[38] Further, while the Body Corporate scaffolding was in place it physically prevented Manchester from making any progress.
[37] Mr Harris invited the Court to infer that the Body Corporate’s intransigence was due to Manchester refusing to pay an interim levy which an arbitrator later found had been unreasonably imposed by the Body Corporate. The levy in question was issued in July 2012. It was an interim levy for a contribution to the costs of the repairs, which were about to start. Manchester refused to pay. Its objection was the levy had been calculated on the basis of tenders obtained in November 2011 which Manchester claimed were clearly deficient both as regards scope of work and price for the level 12 work. Manchester considered it was unlikely under the 11.88 per cent costs formula that any net contribution would be payable by it to the Body Corporate and therefore wanted to withhold payment until the final wash up.
[38] It was a central theme of Mr Harris’ submission that far from the costs overrun defeating the logic and justice of the scheme, the 11.88 per cent costs formula was adopted in anticipation that the total costs, and ratio of Body Corporate costs to Manchester costs, was likely to change. That being the case, incurring greater costs than anticipated should not and could not justify a variation.

Analysis

Was a variation justified?

[39] We accept there are some misstatements of the evidence in Fogarty J’s judgment as identified by Mr Harris. We also accept that the figures used by Heath J in 2010 were indicative only and that both he and the parties contemplated there would be cost increases as invariably happens in repair projects.
[40] However we are not persuaded that those matters vitiate Fogarty J’s decision to vary the scheme. The fundamental reason for that decision in our view still holds good. As Fogarty J recognised, what marks this case out is not the fact of costs increases which would have been anticipated but the sheer magnitude of those increases as compared with those contemplated by the author of the scheme. That is the correct “counterfactual”. On anyone’s view of it, a 430 per cent increase is a radical change of circumstances. As Fogarty J put it, the actual expenditure and the ongoing expenditure is “simply in another scale from that presented to the High Court back in 2010”.[39]
[41] Further, as Fogarty J also recognised, it was undeniably part of the logic of the scheme that Manchester would benefit from the common property repairs to levels 1–11 and therefore should make some contribution to the cost of those repairs.[40] That was the whole purpose of the formula. We are confident Heath J would never have sanctioned a scheme whereby Manchester paid nothing for that benefit but instead received a windfall at the expense of the other unit holders.
[42] The scheme was also predicated on the assumption that the level 12 repairs (with the exception of the Dimondek 400 and Alucomat cladding) would be completed immediately and before the repairs to levels 1–11 commenced. As Mr Cummins accepted in crossexamination, Heath J would never have contemplated that level 12 would still be under construction six and a half years later.
[43] Simply put, there can be no doubting that the scheme has gone badly awry.
[44] As to who was to blame for that state of affairs, in our view the cost increases are so huge, they would of themselves have justified a variation. We note too that as in many disputes, there appears to have been fault on both sides. However, looking at the evidence in its entirety and making allowances for events beyond Manchester’s control, such as the discovery of major roof problems, we consider Manchester must take the lion’s share of the blame. Its conduct can fairly be described as dilatory and prevaricating.
[45] The facts speak for themselves. In under two years, the Body Corporate which had also been confronted with unexpected problems and design choices obtained a resource consent, an amendment to its building consent and effected major repairs to 11 levels. The Body Corporate did all of that in less time than it took Manchester to obtain its first resource consent for the level 12 works. As mentioned, as at 2017 the Manchester work is still not completed. In evidence, Mr Cummins accepted that the construction process followed by Manchester — stopping and starting and still going years later — was the “most uneconomical way to do construction”.
[46] Having justified to Heath J its case for going it alone on the grounds of avoiding delay, it was incumbent on Manchester to proceed with alacrity. We consider Mr Harris’ submissions overstate the consequences of undertaking the cl 21.8 work. We do accept that the discovery of the major roof problem was a significant setback. But after being made aware of that, Manchester turned down overtures from the Body Corporate to come in under a single contract. It assured the Body Corporate it could and would do any repairs at level 12 (including the cl 21.8 work) using a gantry crane, rather than scaffolding.
[47] Mr Cummins accepted in cross-examination there was no reason why he could not have indicated to the Body Corporate in 2011 that he wished to have access to their scaffolding. Justice Fogarty’s finding that the cost of having to erect, maintain and remove separate scaffolding on level 12 was a primary driver of the cost over-run was amply supported by the evidence and has not been challenged on appeal.
[48] As counsel for the Body Corporate Mr Allan pointed out, by the time Manchester finally decided to request the use of the Body Corporate’s scaffolding in June 2012, the Body Corporate had already committed itself to a contract and a tight time frame after a long and expensive process. In contrast, even at that date, Manchester was still uncertain about the detail of its repair programme. It had been unable to provide the Body Corporate with any timeline. It had not finalised its design. It did not have any resource consent let alone a building consent. Its temporary repairs had failed. Its building consent was not in fact obtained until a year later and then abandoned. By that time the Body Corporate scaffolding was due to be dismantled. Those facts also render it unlikely the presence of the Body Corporate’s scaffolding was a significant factor in Manchester’s delay.
[49] We accept the levy dispute that arose in mid-2012 may well have played a part in the Body Corporate’s decision to refuse Manchester access to its scaffolding and contractor in late September 2012. However, it was Manchester’s dilatoriness, not the levy that was the prime reason. Further, although Manchester later won the arbitration, it was required to pay the levy up front before proceeding to arbitration. It did not do so, in breach of the original scheme. Clause 13.3 of the scheme expressly provided “[n]o Owner shall be entitled to withhold payment of a Levy on the basis that the matter is in the process of dispute resolution.” Manchester’s failure to pay anything would not have given the Body Corporate cause for confidence. In our view, the evidence shows the Body Corporate was genuinely concerned about the risks and costs associated with allowing Manchester access and had reason to be.
[50] We therefore agree with the Judge’s finding that Manchester was guilty of dilatory remediation. Whether this was due to financial pressures or not is irrelevant.

The nature of the variation ordered

[51] As mentioned, the variation adopted by Fogarty J was to reinstate the default statutory scheme regarding cost allocation, thereby rendering unit owners liable to contribute to the remediation of common property on the basis of their unit entitlement. In favouring that approach, the Judge relied on the decision of this Court in Tisch v Body Corporate 318596.[41] Tisch was decided after Heath J’s four judgments in this case.
[52] On appeal, Mr Harris submitted that Fogarty J misapplied Tisch in three key respects:
[53] In Tisch, this Court traversed the history and underlying policy of s 48 of the Unit Titles Act. It rejected submissions that s 48 gave the Court an unfettered and open ended discretion to do what is fair and that the Judge at first instance should have ignored the body corporate rules.[43] Rather, the Court said “[t]he starting point must be that unit holders should adhere to the statutory scheme they bought into, and to the body corporate rules they agreed to abide by”.[44] It followed that the terms of any remediation scheme should only depart from the scheme of the Act and from the body corporate rules “no more than is reasonably necessary to achieve what is fair as between unit owners in the circumstances.”[45]
[54] Justice Fogarty quoted these and other passages from Tisch. He stated that the effect of the reasoning in Tisch was “that the Court cannot lightly depart from the scheme of the Unit Titles Act”.[46] The Judge went on to say:[47]

At the core of that scheme is the proposition that repair and maintenance of common property is a burden shared by all unit holders in proportion to the unit entitlement. It matters not what other costs such unit holders have to bear in respect of repair and maintenance to their units.

[55] We consider those to be correct observations and there is nothing in Tisch and the subsequent authorities to suggest otherwise. The criticism that the Judge’s interpretation was not sufficiently nuanced is unfounded.
[56] As for the Judge’s failure to consider the body corporate rules, the reason Manchester says this is significant is because the rules pertaining to Hobson Apartments contain provisions (the changed rules) that depart from the default body corporate rules under the Act.[48] One of these changed rules is r 4 which purports to extend the Body Corporate’s responsibility for repairing the building exterior beyond the common property. Mr Harris argued that had Fogarty J taken this into account, he could not have concluded Tisch required him “to reinstate the policy of the Act.”
[57] The argument is an unattractive one. Previously, Manchester had asserted to Heath J that r 4 along with the other “changed rules” was ultra vires and that the rules to be applied were the default statutory rules. Manchester made that assertion in its efforts to prevent the Body Corporate from carrying out the repairs on level 12, something the Body Corporate could not do without a court sanctioned s 48 scheme if r 4 were invalid. The Body Corporate had reluctantly accepted Manchester’s assertion that r 4 was invalid. That was why it had made its application for a court sanctioned scheme under s 48 in the first place.
[58] We agree with Mr Allan that having claimed r 4 was unlawful in a bid to control its own repairs, it ill-behoves Manchester now four to five years into a redevelopment to switch course and pray in aid the very rule it once eschewed. As Mr Allan also pointed out, there is no evidence indicating that had it not been for the perceived invalidity of r 4 Manchester would have foregone its redevelopment opportunity and permitted the Body Corporate to repair level 12. We note further that r 4 said nothing about the cost allocation which was the critical variation issue. In all these circumstances, we consider this argument is without merit.
[59] We note too the inconsistency between Manchester’s about-turn regarding r 4 and its criticism of Fogarty J for allegedly acting as if he were dealing with a blank slate and failing to take account of “the injustice that can be caused by retrospectively altering rules and undermining legitimate expectations”. Mr Harris submitted that once Fogarty J was satisfied a case for variation was made out, he simply attempted to reinstate the Act ab initio. This, Mr Harris said, was wrong. The Judge should have considered relief that took account of what had already happened.
[60] A related argument was that the Judge’s variation remedy was not “logically or fairly connected to the alleged ‘wrong’ of cost over-runs”. In Mr Harris’ submission, the Judge’s “hindsight counterfactual” (looking at what Heath J would have sanctioned had he and the parties known what they now know) was unhelpful and unfair. Unfair, because it wrongly assumed it was just to undo the consequences of decisions taken under the original scheme when the decisions themselves — by which we understand Mr Harris means the actual repair work undertaken in reliance on the scheme — cannot be undone.
[61] That argument might have more force if the delay and costs were due to events completely beyond the control of Manchester but, for the reasons already traversed, we are satisfied that is not the case.
[62] The Judge did not address relief until after reviewing the history of the scheme and the events of 2010 to 2016, and after making findings with which we agree as to who bore primary responsibility for the delay and the costs over-run. In light of those findings, his conclusion that it would be simply unjust, not to mention inconsistent with the original scheme, for the consequences of Manchester’s dilatory remediation to be borne by the other unit holders was unassailable. It was not a blank slate approach.
[63] We note too that before making the final orders, the Judge considered but rejected alternative options that were based on the estimates of costs before Heath J. He rejected these in light of the actual history of events.[49]
[64] We conclude that criticism of Fogarty J for failing to take into account he was varying an existing scheme as opposed to settling a new one is also unfounded.

Was arbitration, not variation the appropriate remedy?

[65] The original scheme contained a dispute resolution clause providing for arbitration. In the High Court, Fogarty J rejected Manchester’s argument the dispute over repair costs should go to arbitration. The Judge rejected the argument on two grounds. First, neither party had applied for a stay of the proceedings and had submitted to the jurisdiction of the Court. Secondly, an arbitrator would not have jurisdiction to amend the scheme.[50]
[66] On appeal, Mr Harris acknowledged an arbitrator would have no jurisdiction to amend a court ordered scheme but submitted variation was not necessary to give the Body Corporate an effective remedy for its complaint that other owners were being saddled with the costs of dilatory remediation. Such costs he said could be quantified and excluded by experts under the arbitration provision. As it was, the Judge’s decision to bypass the arbitration provision resulted in a remedy that was seriously disproportionate to the “wrong” of cost over-runs. Mr Harris further submitted that Fogarty J was wrong to say Manchester had not applied for a stay.
[67] We accept the Judge erred in saying there had been no application for a stay. However, the application that was made was unsuccessful and Manchester did not appeal. [51] In our view, the unforeseen scale of the costs blow out and its effect on the logic of the scheme rendered arbitration inappropriate. We agree with Fogarty J that in order to achieve a just outcome, amendment was required.

Was there a proper basis for ordering an interim payment?

[68] As mentioned, Fogarty J ordered Manchester to make an immediate payment of $321,264.79 plus GST. On appeal Mr Harris submitted the order should be set aside for two reasons. First, it had not been applied for. Secondly, the calculation was based on costings for levels 1–11 that are in dispute.[52]
[69] We do not accept those submissions. In our view, the Judge was fully entitled to order an interim payment of his own initiative rather than wait until Manchester completed its level 12 repairs as Manchester considered should happen. There was no certainty as to that date and, as the Judge was aware, Manchester had refused to pay any building or annual operating levies. Manchester was not prejudiced. It was on notice that the Body Corporate considered its contribution to the cost of
levels 1–11 common property repairs should be fixed at $322,525. The terms of Fogarty J’s order allow for subsequent adjustment. The disputed items are not significant.

Conclusion on Manchester’s appeal

[70] We are satisfied the logic of the original scheme collapsed as a result of the subsequent events. What was fair on the information before Heath J was rendered patently unjust, necessitating an amendment. Further, there is nothing on the record that persuades us Fogarty J was wrong to amend the scheme in the way he did. We too would have come to the same conclusion.
[71] Manchester’s appeal is accordingly dismissed.

Body Corporate’s appeal against costs decision — CA372/2017

[72] In his fourth judgment Heath J was required to deal with the costs of the s 48 scheme proceedings. The Body Corporate had argued Manchester should bear all of its own legal costs while remaining liable as a unit owner to contribute to the Body Corporate’s costs. Justice Heath rejected that argument because despite the fractious relationship he considered each had meritorious arguments and it was necessary for the Court to intervene and find a solution to balance their competing interests. Justice Heath directed that the solicitor-client costs of each should be pooled and treated as costs of the scheme with the consequence they would be paid out of levies based on unit entitlements. (the 2011 costs order).[53]
[73] At the conclusion of his judgment amending the scheme, Fogarty J sought submissions regarding costs on the variation application, having indicated a provisional view that costs should follow the event and be awarded on a 2B basis in favour of the successful unit holders.[54] In a subsequent costs judgment, he duly awarded costs on that basis under the High Court Rules.[55] There is no appeal from that costs award.
[74] More controversially in his costs judgment, Fogarty J also set aside Heath J’s 2011 costs order. Justice Fogarty considered he had jurisdiction to do that because Heath J had made his costs order not under the High Court Rules but under s 48 of the Unit Titles Act. It was therefore an order amenable to amendment or cancellation by another High Court judge under s 48(6). In Fogarty J’s view, leaving the 2011 costs order in place would be completely inconsistent with the consequences of his amendments to the scheme. The varied scheme was, he said, “almost completely at odds with the scheme approved [by Heath J] in judgment number 4”.[56] Having held the 2011 costs direction should not be left in place, Fogarty J went on to say:[57]

Justice, however, requires some applications of the direction that the solicitor and own client costs and disbursements of both the Body Corporate and Manchester... shall be regarded as costs of the scheme. To the extent that [the 2011 costs order] has been applied between the parties by the Body Corporate prior to March 2013, I do not think those applications should be disturbed.

...

However from 18 March 2013 [the date the Body Corporate filed its application for a variation], in my view it would be quite unjust for Manchester’s legal and client costs [sic] in opposition to the application to vary the Scheme, to be allocated pursuant to [the 2011 costs order].

[75] It was the Body Corporate that asked Fogarty J to set aside the 2011 costs order. However, it is also the party that has appealed his costs judgment because it is unhappy with the Judge’s decision to preserve the 2011 costs order in relation to any pre-18 March 2013 applications. It argued that whether or not the parties have applied the 2011 costs order has no bearing on whether the Court should set aside the 2011 costs order under s 48 for the purpose of ensuring that aspect of the scheme is consistent with the variation order. Justice Fogarty has therefore, it was submitted, taken an irrelevant factor into account.
[76] The Body Corporate also argued the preservation of pre-18 March 2013 applications was based on a misunderstanding of the facts. It said the 2011 costs order has in fact never been applied. Although the Body Corporate did at one point give a credit to Manchester for its solicitor-client costs in terms of the 2011 order, it expressly did so on a “without prejudice” basis.
[77] For its part, Manchester sought to support what it describes as “the decision to leave the 2011 costs order in place” on grounds other than those relied on by Fogarty J. Some of the “other grounds” identified by Manchester are grounds which bear on whether Fogarty J was entitled to set aside the 2011 costs order at all. For example, it was argued he lacked jurisdiction due to the matter not being specifically pleaded. If that was what Manchester wanted to argue, it should have filed a notice of appeal.
[78] The only issue properly before us is whether in the exercise of his discretion the Judge erred in imposing the qualification he did on his order setting aside the 2011 costs order. That in turn raises two questions, the first of which is whether past applications of the 2011 costs order were a relevant factor to take into account. Contrary to the submissions made by the Body Corporate, we consider reliance on expectations is a matter that bears on the fairness of the variation and accordingly was highly relevant.
[79] The second question is whether the credit of $132,605.62 which was given to Manchester for its legal costs on 11 September 2012 qualifies as an application when it was made on a without prejudice basis. We were told that this is the only pre18 March 2013 application. The credit in question was made in the context of the dispute about the building levy and came about in the following way.
[80] It will be recalled that in 2012 Manchester was withholding payment for levies on the basis it was likely to be entitled to a set off from the Body Corporate under the scheme for its level 12 repairs. On 11 September 2012, the Body Corporate advised Manchester it reserved its right to challenge the quantum of Manchester’s level 12 works and invoked its right to arbitrate the matter under the dispute resolution clause. It went on to say:

At this stage it seems sensible to defer the reference to arbitration until all remediation is complete (in case there are other issues requiring arbitration). Without prejudice to the right the Body Corporate will credit your building levy account with the sum of $132,605.62.

[81] In our view, this was an application and accordingly Fogarty J did not make a mistake of fact. The right that was being preserved — that is, the right to which the credit was without prejudice — was the right to arbitrate the quantum of the repair work on level 12. It was not the right to apply for a variation of the costs allocation under the scheme itself. The credit is therefore preserved by Fogarty J’s decision.
[82] This conclusion renders it unnecessary for us to consider another argument raised by Manchester that preserving the credit was justifiable on the grounds the Body Corporate had already received payment of costs under its settlement with the Auckland City Council. Suffice it to say we consider the argument problematic because apart from anything else the settlement was a global one and in an amount less than the Body Corporate’s claim exclusive of costs.
[83] The Body Corporate’s appeal against Fogarty J’s cost judgment is dismissed.

Outcome

[84] Manchester Securities Limited’s appeal in CA120/2017 is dismissed. There is no reason why costs should not follow the event. In CA120/2017 Manchester Securities Limited must pay Body Corporate 172108 costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.
[85] Body Corporate 172108’s appeal in CA372/2017 is dismissed. As regards costs in relation to this appeal, counsel agreed that because the argument was a very narrow one and occupied very little hearing time, the usual costs for a standard appeal should be abated. In CA372/2017 Body Corporate 172108 must pay Manchester Securities Limited usual disbursements and 50 per cent of costs for a standard appeal on a band A basis. We certify for second counsel.





Solicitors:
Gilbert Walker, Auckland for Manchester Securities Limited
Grove Darlow & Partners, Auckland for Body Corporate 172108

[1] The Unit Titles Act 1972 was repealed and replaced by the Unit Titles Act 2010, which came into force on 20 June 2011.

[2] Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 3 March 2010 [first Heath J decision]; HC Auckland CIV-2009-404-6868, 19 August 2010 [second Heath J decision]; HC Auckland CIV-2009-404-6868, 31 August 2010 [third Heath J decision]; and HC Auckland CIV-2009-404-6868, 10 February 2011 [2011 costs decision].

[3] Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 329 [variation decision].

[4] Known as unit entitlement under the former statute, ownership interest is the relative value of the unit in relation to the others: Unit Titles Act 1972, s 6; and Unit Titles Act 2010, s 38.

[5] Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 1252 [2017 costs decision].

[6] This includes both the principal unit 12A and the associated accessory unit, a carpark.

[7] Tisch v Body Corporate No 318596 [2011] NZCA 420, [2011] 3 NZLR 679 at [29]–[31].

[8] See above n 2.

[9] First Heath J decision, above n 2, at [30].

[10] At [29].

[11] At [31].

[12] At [43] and [45].

[13] At [49].

[14] At [47].

[15] At [49].

[16] At [43].

[17] At [52].

[18] Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 30 March 2010.

[19] At [7].

[20] At [8].

[21] Second Heath J decision, above n 2, at [6] and [12].

[22] Variation decision, above n 3, at [25].

[23] At [25].

[24] Figures in this paragraph are inclusive of GST.

[25] A building consent was obtained earlier, but was later amended.

[26] Variation decision, above n 3, at [34] and [148]. While Fogarty J gives the figures exclusive of GST, we have added the GST for consistency within this judgment.

[27] This estimate is exclusive of GST.

[28] Variation decision, above n 3, at [67].

[29] At [79].

[30] At [49].

[31] At [147].

[32] At [146].

[33] At [156]–[157].

[34] At [149] and [151].

[35] At [153].

[36] At [155].

[37] At [157].

[38] In evidence, the Body Corporate secretary claimed the contractor had told him he did not want to do any work for Manchester. The contractor himself was not however called to give evidence.

[39] Variation decision, above n 3, at [148].

[40] See for example at [67].

[41] Tisch, above n 7.

[42] Berachan Investments Ltd v Body Corporate 164205 [2012] NZCA 256, [2012] 3 NZLR 72; Body Corporate 95035 v Chang [2012] NZHC 1512; Law v TAN Corporate Trustee Ltd [2012] NZCA 620, [2013] 1 NZLR 651; LV Trust Holdings Ltd v Body Corporate 114424 [2012] NZHC 3578; and Body Corporate 114424 v LV Trust Holdings Ltd [2014] NZCA 21.

[43] See Tisch, above n 7, at [14] and [71].

[44] At [31].

[45] At [49].

[46] Variation decision, above n 3, at [78].

[47] At [78].

[48] See Unit Titles Act 1972, schs 2 and 3.

[49] Variation decision, above n 3, at [148].

[50] At [72]–[77].

[51] Body Corporate 172108 v Manchester Securities Ltd [2013] NZHC 2441.

[52] The figures include the cost of closing in the balconies, which Manchester says was outside the scheme, and costs in respect of which the Body Corporate was insured.

[53] 2011 costs decision, above n 2, at [14] and [16].

[54] Variation decision, above n 3, at [159].

[55] 2017 costs decision, above n 5.

[56] At [23].

[57] At [24] and [25] (footnote omitted).

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