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Body Corporate 396711 v Sentinel Management Limited [2012] NZHC 1957 (8 August 2012)

Last Updated: 21 August 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-007754 [2012] NZHC 1957

UNDER the Declaratory Judgements Act 1908

IN THE MATTER OF the Unit Titles Act 2010

BETWEEN BODY CORPORATE 396711

First Plaintiff

AND DENNIS JOHN ANSLEY Second Plaintiff

AND SENTINEL MANAGEMENT LIMITED Defendant

Hearing: 3 and 5 October 2011

Counsel: T J Rainey and J P Wood for Plaintiffs

N R Campbell for Defendant

Judgment: 8 August 2012

_{RESERVED JUDGMENT OF WOOLFORD J}

This judgment was delivered by me on Wednesday, 8 August 2012 at 11:00 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Rainey Law, Solicitors, Auckland

Alexander Dorrington, Solicitors, Auckland

BODY CORPORATE 396711 & OR V SENTINEL MANAGEMENT LIMITED HC AK CIV 2010-404-007754 [8 August 2012]

Contents

Introduction ..........................................................................................................[1] Factual background .............................................................................................[7] The Pleadings......................................................................................................[19] Statutory Framework ........................................................................................[22] UTA 1972 – title ...................................................................................................[24] UTA 1972 –governance........................................................................................[27] UTA 2010 – title ...................................................................................................[30] UTA 2010–governance.........................................................................................[32] First Cause of Action – validity of the amended rules ....................................[33] Counsels’ submissions .........................................................................................[34] Legal Principles – amendment .............................................................................[36] Application – Schedule 2 rules.............................................................................[47] Application – Schedule 3 rules.............................................................................[56] Conclusion............................................................................................................[61] Second Cause of Action – ultra vires UTA 1972 ..............................................[62] Counsels’ submissions .........................................................................................[63] Legal Principles – ultra vires...............................................................................[65] Ultra vires the UTA 1972 .....................................................................................[69] Ultra vires the rules .............................................................................................[73] Framing the legal arguments in this case ............................................................[75] Legal principles – severance................................................................................[79] Application – ultra vires.......................................................................................[83] The Letting Service...............................................................................................[84] The Real Estate Sale Service ..............................................................................[100] The Sentinel Residents Service ...........................................................................[102] The Management Service ...................................................................................[103] Conclusions – ultra vires terms..........................................................................[114] Application – severance .....................................................................................[115] Conclusion – second cause of action .................................................................[121] Third Cause of Action – breach of vendor’s duties ......................................[122] Counsels’ submissions .......................................................................................[124] Legal principles – vendor’s duties to purchaser ................................................[126] Legal principles – Dishonest assistance ............................................................[134] Legal principles – relief .....................................................................................[137] Legal principles – affirmation............................................................................[139] Application – vendor’s duties to purchaser .......................................................[140] Application – dishonest assistance.....................................................................[149] Application – relief.............................................................................................[156] Application – affirmation ...................................................................................[159] Conclusion..........................................................................................................[160] Fourth Cause of Action – breach of promoter’s duties ................................[161] Counsels’ submissions .......................................................................................[162] Legal principles – promoter’s duties .................................................................[164] Legal principles - remedy...................................................................................[176] Legal Principles – affirmation ...........................................................................[181] Application – promoter’s duties.........................................................................[182] Application – dishonest assistance.....................................................................[198] Application - remedy ..........................................................................................[199]

Conclusion..........................................................................................................[202] Fifth Cause of Action – unconscionable bargain...........................................[203] Counsels’ submissions .......................................................................................[204] Legal principles – unconscionable bargain .......................................................[206] Application – unconscionable bargain ..............................................................[207] Conclusion..........................................................................................................[201] Sixth Cause of Action – Section 140 UTA 2010 .............................................[211] Counsels’ submissions .......................................................................................[212] Legal principles – section 140 UTA 2010 ..........................................................[214] Legislative History .............................................................................................[215] Comparable statutory provisions .......................................................................[216] Interpretation .....................................................................................................[219] Comparable legal standards: harsh and unconscionable .................................[221] Comparable legal standards: oppressiveness....................................................[222] Comparable legal standards: unconscionability ...............................................[225] Application – time period ...................................................................................[232] Application – harsh and unconscionable ...........................................................[246] Conclusion..........................................................................................................[267] Result .................................................................................................................[269] Relief ..................................................................................................................[270] Costs ..................................................................................................................[272]

Introduction

[1] The Sentinel is a 30 storey residential complex containing 117 apartments and a number of retail shops situated in Takapuna on Auckland’s North Shore. It is a unit title development.

[2] The first plaintiff, Body Corporate 396711 (the Body Corporate), is the

building’s body corporate initially constituted under the Unit Titles Act 1972 (UTA

1972). The second plaintiff, Dennis John Ansley, owns one of the apartments in the building. The defendant, Sentinel Management Limited (SML), is the building manager and a party to a long-term management agreement with the Body Corporate which was entered into when both parties were controlled by the sole director and shareholder of the development company.

[3] According to the plaintiffs, although the management agreement ostensibly relates to the management of the common property in the building, in substance it confers valuable rights on SML which have significantly reduced the Body Corporate’s ability to manage the building within the democratic framework created by the Unit Titles Act 2010 (UTA 2010), the successor statute to the UTA 1972.

[4] The plaintiffs’ case is that the management agreement is invalid and unenforceable. They say there are several alternative grounds on which the Court can reach that conclusion. The first and most orthodox ground is that several provisions of the management agreement are ultra vires the UTA 1972 and, because these provisions cannot be severed from the remainder of the provisions, the agreement is wholly void. A related issue is the validity of amended rules for the Body Corporate which were deposited with the District Land Registrar on

14 February 2008. It is said that the rules were not amended in accordance with s 37 of the UTA 1972 and accordingly the amended rules have not been validly adopted.

[5] The second ground relates to the circumstances in which the Body Corporate agreed to enter into the management agreement with SML. A large number of apartments had been conditionally sold prior to completion of the building and it is

said that the development company held title to those apartments as constructive trustee for the purchasers as at the date of the management agreement. By exercising the development company’s power as the sole member of the Body Corporate to enter into the agreement, it is said that the sole director and shareholder breached his fiduciary duty to those purchasers. Alternatively, it is said the development company was in a position analogous to a promoter and owed the Body Corporate fiduciary duties, including the duty not to allow its own interests to conflict with the interests of the Body Corporate. Finally, it is said that as at the date of the agreement the Body Corporate was acting under a disability and unable to act in its own best interests because it was under the complete control of the sole director and shareholder of the development company. The agreement was therefore an unconscionable bargain.

[6] The third ground is an express statutory right of cancellation of agreements entered into by developers which was introduced by s 140 of the UTA 2010. This allows “the appropriate decision maker” to cancel a service contract entered into during the “control period” if the contract is harsh or unconscionable.

Factual background

[7] At all material times the land on which the Sentinel was built was owned by Takapuna Village Limited (TVL). TVL was the developer of the Sentinel and as such was the initial owner of each of the apartments when the unit plan for the development was deposited and the titles to the units issued. The sole director and shareholder of TVL was Richard John Martin.

[8] The second plaintiff, Mr Ansley, entered into a written agreement with TVL on 15 December 2003 to purchase an apartment in the building. The sale and purchase agreement was conditional on:

(a) TVL obtaining a minimum level of sales of apartments by

30 November 2005;

(b) TVL being satisfied it would obtain all necessary building, subdivision and other consents by 30 April 2006;

(d) Title to the unit being issued.

The initial conditions in the sale and purchase agreement were met and the development proceeded. The Sentinel was essentially completed in early 2008.

[9] On 7 February 2008, a unit plan for the Sentinel was deposited with the District Land Registrar. Upon deposit of the unit plan, the Body Corporate was incorporated under the provisions of the UTA 1972 and the titles to the apartments were issued to TVL, which became the sole registered proprietor of the apartments and sole member of the Body Corporate.

[10] On its incorporation the Body Corporate was governed by the default rules provided in Schedules 2 and 3 of the UTA 1972.

[11] On 13 February 2008, Mr Martin signed a Notice of Change of Rules for the Body Corporate which stated that on that day, 13 February 2008, the rules for the Body Corporate were amended by the adoption of the rules annexed to the notice and furthermore that the amended rules had been duly authorised and approved by unanimous resolution of the all the proprietors who constituted the Body Corporate. The amended rules were received by the District Land Registrar on 14 February

2008. On 15 February 2008 the amended rules were recorded on the supplementary record sheet for the Body Corporate.

[12] On 14 February 2008, with practical completion of his apartment and the issue of title to it, the sale and purchase agreement between Mr Ansley and TVL became unconditional and Mr Ansley became the equitable owner of his apartment.

[13] On 18 February 2008, the Body Corporate held its first general meeting. The only persons in attendance were Mr Martin and the Body Corporate secretary,

Mr Plummer. The minutes of the meeting record that the Body Corporate by unanimous resolution resolved that:

1. The Rules of the Body Corporate attached are to be registered in relation to Body Corporate No: 396711 and are ratified and confirmed.

...

3. That the Body Corporate enter into the Building Management Agreement with Sentinel Management Limited in the form attached to this Minute.

The minute was signed by Mr Martin. The management agreement between the Body Corporate and SML was signed by Mr Martin for the Body Corporate and Mr Martin for SML. SML was at that time wholly owned by its sole director, Mr Martin.

[14] On 22 February 2008, settlement of the units in the building which had been pre-sold began. Mr Ansley settled the purchase of his apartment on 27 February

2008.

[15] The shares in SML, which had been held by Mr Martin, were sold later that year to Freestyle Property Group Limited (Freestyle). The directors of Freestyle had been involved by Mr Martin in arranging management services for the Sentinel prior to the completion of the building.

[16] In a meeting of the Body Corporate held on 13 April 2010 the proprietors of units in the development were asked to consider the possibility of legal action to challenge the validity of the management agreement. A legal opinion was obtained by some members of the Body Corporate’s committee. A legal opinion from SML’s advisors was also presented and the directors of Freestyle addressed the meeting. The matter was put to a vote and a majority ultimately concluded that solicitors should be instructed to challenge the agreement.

[17] The management agreement consists of a core obligation, which is the provision of management services in return for the payment by the Body Corporate of the management fee. There is no challenge to the reasonableness of the

management fee itself. The term of the management agreement is an initial period of ten years and is renewable twice at the option of SML. If SML chooses to renew the agreement it will exercise management rights and provide management services to the Body Corporate for a period of 30 years.

[18] The plaintiffs allege that the provisions which dictate the length of the term and the way the management fee is set have created a further collateral benefit for SML. It created a valuable bundle of management rights that could be sold directly or passed on indirectly through the sale of shares in SML. In or around February

2010 SML valued its business (comprising the management rights under the agreement, its letting rights and real estate rights for the apartments in the Sentinel, and its office and storage unit in the building) at $1.77 million when the business was offered for sale.

The Pleadings

[19] In their amended statement of claim, the plaintiffs split up the three broad grounds of complaint identified above and claim declaratory relief in respect of six causes of action, namely:

(a) That the amended rules of the Body Corporate are invalid having been adopted in an irregular manner;

(b) That the management agreement entered into between the Body

Corporate and SML is ultra vires the UTA 1972;

(c) That the management agreement is unenforceable as it was entered into as a result of a breach of trust arising between the vendor and the purchaser which SML knowingly assisted;

(d) That the management agreement is unenforceable as it was entered into as a result of a breach of the promoter’s fiduciary duty to the Body Corporate in which SML knowingly assisted;

(e) That the management agreement is unenforceable as it constitutes an unconscionable bargain; and

(f) That the management agreement is harsh and unconscionable under s 140 UTA 2010.

[20] In reply the defendant denies the first to sixth causes of action and raises a defence of affirmation to the third to sixth causes of action. It also raises an affirmative defence, relating to jurisdiction, to the sixth cause of action in that the proceeding, having been commenced under the previous Act, is to be determined as if the UTA 2010 had not been passed.

[21] During the course of the hearing, the defendant did not pursue its defence to the sixth cause of action turning on the jurisdiction to apply the provisions of the UTA 2010. The defence of affirmation in relation to the sixth cause of action was also not maintained at trial.

Statutory Framework

[22] The UTA 1972 was enacted to provide New Zealand with a statutory scheme for interests in shared forms of real property, most often within a single building which is divided into a number of different commercial or residential units. Property lawyers had previously relied on a number of different schemes in order to share the

ownership and occupation of multi-storey buildings or flats.1 The Act provided what

is effectively a code in respect of multi-unit property arrangements.

[23] Over time deficiencies became apparent in the UTA 1972 as new situations arose. For that reason Parliament passed the UTA 2010. That provides a new system for the creation of new unit title developments as well as new rules relating to the administration and management of existing unit title developments. The commencement date of the new Act was 20 June 2011. Part 5 Subpart 5 of the UTA

_{2010 deals with the transition from the old Act to the new
Act.}

1 G W Hinde, N R Campbell and P Twist Principles of Real Property Law (LexisNexis, Wellington,

2007) at ch 14.

UTA 1972 – title

[24] The following illustrates how a unit title development might proceed under the provisions of the UTA 1972.2

[25] A unit title development begins with the selection of a piece of land, normally held by its proprietors in a fee simple estate under the Land Transfer Act 1952,3 upon which the development will be built. The developer of the property then constructs the building or buildings which are to be divided up into units. Funding such construction up-front might not be economically feasible so a developer might put into place conditional contracts for sale of the units on completion of the development.4 The way in which the underlying estate is to be developed into units

is set out in a unit plan denoting the boundaries of units and the common property.5

[26] Prior to the plan being deposited each principal unit6 in the development is assigned a unit entitlement which determines the proportionate rights and responsibilities of the unit in relation to the development as a whole.7 Upon a plan being deposited, the original land title is cancelled and two things may occur:

(a) The District Land Registrar may issue a certificate of title covering the whole of the stratum estate in the development to the proprietor of the land;8 or

(b) The Registrar may issue a separate certificate of title in respect of each of the principal units to the registered proprietor.9

Ultimately, each unit will usually receive its own title either immediately on the deposit of the plan or prior to sale.

2 _{See also: Disher v Farnworth [1993] 3
NZLR 390 (CA) at 393.}

3 _{Unit title developments on leased land are
possible under the UTA 1972, Part 2.}

4 Staged developments became possible under subsequent legislation (Unit Titles Amendment Act

_1979).

5 _{UTA 1972, ss 3 and 4.}

6 _{UTA 1972, s 2.}

7 _{UTA 1972, s 6.}

8 _{UTA 1972, s 8(1)(a).}

9 UTA 1972, s 8(2).

UTA 1972 –governance

[27] The UTA 1972 provides that once the unit plan is deposited and titles issued then the proprietor, or proprietors, of the units come together to form a body corporate.10 Some of the rights, responsibilities and powers of the body corporate are addressed directly in sections of the Act.11 In particular, the duties of the body corporate in s 15 are of key importance.

[28] Section 37 of the Act provides for the making of rules to govern body corporates.12 These rules provide an elaboration of the duties, rights and responsibilities of the body corporate and of proprietors. The default rules for body corporates are provided in Schedules 2 & 3 of the Act.13 The difference between the two sets of rules lies in the fact that the rules under Schedule 2 (Schedule 2 rules) may only be modified or revoked by a unanimous resolution of proprietors;14 those in Schedule 3 (Schedule 3 rules) may be amended or repealed by simple resolution.15

There are important limitations on the type of amendments that may be made to the rules which are to be found in s 37(5) and (6).

[29] The Schedule 2 rules might well be termed “constitutional” as they do a great deal of the work in defining the way in which the governance structures of the body corporate operate such as by defining voting rights and committee structures. The Schedule 3 rules relate largely to the quiet enjoyment of units. The body corporate must notify any changes to either set of rules to the District Land Registrar (under s 37(7)) and any such amendments do not have any effect until the notification has

_{been lodged.}

10 _{UTA 1972, s 12.}

11 _{UTA 1972, ss 13-16.}

12 _{UTA 1972, s 37(1).}

13 _{UTA 1972, s 37(2) & (3).}

14 _{UTA 1972, s 37(3).}

15 UTA 1972, s 37(4).

UTA 2010 – title

[30] While there are substantial revisions to the process of establishing unit title developments in the UTA 2010, the process of creating new stratum titles from an original title under the new Act is much the same as under the old Act.16

[31] The UTA 2010 does, however, superimpose the concept of a “control period” on the initial management of the development. The control period is defined in the UTA 2010 and encompasses the period between the deposit of the plan and the point at which the share of votes in the body corporate held by the developer (or by

entities associated with the developer) drops below 75 per cent.17

UTA 2010–governance

[32] In a similar way to the previous Act, a body corporate is created under the UTA 2010 when the unit plan is deposited.18 Its members are the owners from time to time of the units.19 The UTA 2010 contains a more extensive definition of the rights, powers and responsibilities of the body corporate and of proprietors.20

Matters that were previously dealt with by the rules and which were therefore vulnerable to amendment are now to be found within the Act. These may still be supplemented by rules and there are now default rules prescribed in regulations.21

Amendments may now be made by an ordinary resolution.22 No rules may be made

that exceed the scope of the responsibilities defined by the primary provisions of the

_{UTA 2010.}23

16 _{UTA 2010, ss 16-18.}

17 _{UTA 2010, s 6.}

18 _{UTA 2010, s 75.}

19 _{UTA Act 2010, s 76.}

20 _{UTA 2010, s 77 – 86.}

21 _{Unit Titles Regulations 2011.}

22 _{UTA 2010, s 105 – 106.}

23 UTA 2010, s 106(1) & (2).

First Cause of Action – validity of the amended rules

[33] As noted above the Body Corporate rules for the Sentinel were purportedly amended by a Notice of Change of Rules signed on 13 February 2008. Both the Schedule 2 and 3 rules were replaced by modified sets of rules. The procedural validity of these amendments has been challenged.

Counsels’ submissions

[34] Mr Rainey, for the plaintiffs, submitted that the fact that the decisions were made by a sole proprietor did not dispense with the need for formality. He stressed the need for a body corporate to keep minutes of its unanimous resolutions,24 and the requirement that notices of change certify that the rules have been duly amended.25

In regard particularly to the Schedule 3 rules, Mr Rainey stressed the requirement for a general meeting to amend them and argued that this requirement was also implicit in the procedure for amending the Schedule 2 rules.26 Mr Rainey submitted, on the basis of authority,27 that the rule relating to unanimous assent had no application in this case.

[35] Mr Campbell, for the defendant, submitted that amendment of the Schedule 2 rules did not require a general meeting given the definition of unanimous resolution found in the Act.28 In regard to the Schedule 3 rules, he submitted that the wording of the section could be read non-exhaustively to allow for amendment other than at a general meeting and, particularly, by unanimous resolution. Even were there some procedural irregularity, Mr Campbell submitted that this could be cured by the

_{unanimous assent of the
proprietors.}29

24 _{UTA 1972, sch 2, r 12(b).}

25 _{UTA 1972, sch 1, form 4.}

26 _{UTA 1972, s 37(3) & (4).}

27 _{Fifer Residential v Gieseg (2005) 6
NZCPR 306 (HC).}

28 _{UTA 1972, s 2.}

29 Chambers v Strata Title Administration Ltd (2004) 5 NZCPR 299 (HC).

Legal Principles – amendment

[36] The provisions relating to the amendment of body corporate rules are found, in the first instance, in s 37 of the UTA 1972:

37 Rules

(1) Except as otherwise provided by this Act, the control, management, administration, use, and enjoyment of the units and the common property shown on a unit plan, and the activities of the body corporate that comprises the proprietors of those units, shall, while there are more proprietors than one, be regulated by the rules for the time being applicable to that body corporate.

(2) Subject to any amendment or repeal thereof or addition thereto the rules applicable to each body corporate shall be those set out in Schedules 2 and 3 to this Act.

(3) The rules in Schedule 2 to this Act and any additions thereto or amendments thereof may be added to or amended or repealed in relation to any body corporate by unanimous resolution of the proprietors and not otherwise.

(4) The rules in Schedule 3 to this Act and any additions thereto or amendments thereof may be added to, amended, or repealed in relation to any body corporate by resolution of the body corporate at a general meeting.

(5) Any amendment of or addition to any rule shall relate to the control, management, administration, use, or enjoyment of the units or the common property, or to the regulation of the body corporate, or to the powers and duties of the body corporate (other than those conferred or imposed by this Act):

Provided that no powers or duties may be conferred or imposed by the rules on the body corporate which are not incidental to the performance of the duties or powers imposed on it by this Act or which would enable the body corporate to acquire or hold any interest in land or any chattel real or to carry on business for profit.

(6) No rule or addition to or amendment or repeal of any rule shall prohibit or restrict the devolution of units, or any transfer, lease, mortgage, or other dealing therewith, or destroy or modify any right implied or created by this Act.

(7) No addition to or amendment or repeal of any rule pursuant to subsection (3) or subsection (4) of this section shall have effect until the body corporate has lodged a notification thereof in form 4 in Schedule 1 to this Act with the

Registrar, and the Registrar has recorded it appropriately on the supplementary record sheet.

[37] Unanimous resolution is defined in s 2 of the UTA 1972 as follows:

Unanimous resolution, in relation to a body corporate, means—

(a) A resolution which is passed unanimously at a general meeting of the body corporate at which every proprietor is present and votes either in person or by proxy; or

(b) A resolution which is passed unanimously at a general meeting of the body corporate by every proprietor who is present and votes either in person or by proxy, and agreed to within 28 days after the date of the meeting by every other proprietor who was entitled to be present and vote at the meeting, or by his successor in title if he has ceased to be a proprietor after the meeting; or

[38] The parties sought to rely on decisions of this Court touching on irregularities in the amendment of body corporate rules. There are two key decisions: Chambers v Strata Title Administration Ltd and Fifer Residential v Gieseg.30

[39] In Chambers v Strata Title Administration Ltd amended rules were drawn up prior to the deposit of the unit plan. The unit plan was deposited on 15 December

1997 and the body corporate came into being but the amended rules were not notified at that time. The developer was the sole proprietor at the time of deposit and incorporation. It was only on 4 June 1998 that the rules were registered. Between December 1997 and 4 June 1998 several other persons became registered proprietors of units in the development. As Paterson J explained:

[27] On 5 September 1997 Mr Chapman-Smith [the future secretary to the body corporate] wrote to Mr Finn [one of the developer’s solicitors] stating, amongst other things:

I enclose in duplicate an updated set of rules for Body Corporate

183930 signed under seal together with front and backing sheets suitable for lodgment in the LTO.

The reference to “signed under seal” was a reference to the “Notice of Change of Rules” which was purportedly signed under the common seal of Body Corporate 183930 and the signature attesting to the affixing of that common seal was Mr Chapman-Smith’s. Mr Chapman-Smith’s evidence was

30 Chambers v Strata Title Administration Ltd (2004) 5 NZCPR 299 (HC); and Fifer Residential v

Gieseg (2005) 6 NZCPR 306 (HC).

that he affixed the common seal as it was “normal practice and ensures that immediately upon the developer exercising its power to choose to lodge the rules for registration it or its agent can do so”. While nothing turns on this point, I note that the Body Corporate did not come into existence until 15

December 1997, and it is difficult to see, common practice or not, how a

Body Corporate can execute a document before it comes into existence.

[28] Mr Chapman-Smith assumed that the Rules in form R03 were registered at or shortly after the Body Corporate came into existence on 15

December 1997...

It was not until late May 1998 that Mr Chapman-Smith discovered, on receipt of a letter from Mr Finn, that the Rules had not, in effect, been registered. The evidence is unsatisfactory as to what happened to the original document sent by Mr Chapman-Smith to Mr Finn on 5 September 1997. On receipt of Mr Finn’s letter of 25 May 1998, Mr Chapman-Smith sent two further sets of R03 to Mr Finn for registration. Somewhat surprisingly, Mr Finn could not say whether or not his firm registered the Rules on 4 June

1998. I suspect it is likely that his firm did, but this point is immaterial to the matters which I am required to determine. The application attached to the Rules when they were registered on 4 June 1998 was dated 15 December

1997.

[40] Certain of the proprietors attempted to maintain that the amendment on

4 June 1998 was invalid. Paterson J summarised that argument as follows:

[29] Against this background, Mr Ferguson for the owners, submitted that the Rules are invalid because they were a replacement by way of amendment of the statutory rules in the Second Schedule to the Act and, as such, they were not approved by unanimous resolution of the proprietors of the Body Corporate. The first annual general meeting of the Body Corporate took place on 3 August 1998. Those minutes contain no reference to an amendment to the statutory rules. At the time the Body Corporate came into existence on 15 December 1997, Ambrico [the developer] was the registered proprietor of the units on DP183930A. There was no evidence that Ambrico, as the only proprietor at the time, passed a resolution to amend the statutory rules. Further, it was submitted that the Rules registered on 4 June 1998 were not adopted in accordance with s 37(3) of the Act because by that date several purchasers had become registered proprietors of units and they did not participate in any resolution adopting the Rules.

[41] Paterson J noted that it would be possible, on the basis of established authority,31 to hold that the registration was valid, though irregular, if:32

(a) the act of registration was honest and intra vires the powers of the corporation; and

31 _{Bobbie Pins Ltd v Robertson [1950]
NZLR 301 (SC).}

32 Chambers v Strata Title Administration Ltd at [32].

(b) the unanimous consent of the proprietors (as members of the corporation) could be found at the time the body corporate acted.

[42] This was so because if the unanimous agreement of the proprietors existed at the time the act was done then they could also, at that time, have unanimously agreed to waive the formality required to effect the amendment.

[43] The matter saving the unanimous agreement in Chambers, where additional proprietors who would have objected to the amendment were present at the 4 June

1998 registration date, was contractual. The additional proprietors had signed agreements for sale and purchase of the units that bound them to agree to rules that the developer might make.33

[44] In Fifer Residential v Gieseg the Court was confronted with a situation in which the developer had lodged the amended rules and the application to deposit the unit plan at the same time on 14 April 2000. The unit plan was deposited, titles issued and the body corporate was incorporated on 20 April 2000.34 As Hansen J noted:

[51] Until a unit plan is deposited, there are therefore no proprietors and no body corporate with the ability to amend the rules under s 37(3) or (4). In the present case, they did not come into existence until 20 April. The prior attempt to amend the rules was therefore of no effect. An amendment to any rule pursuant to subs (3) or subs (4) of s 37 does not have effect until the body corporate has lodged a notification with the Registrar and the Registrar has recorded it in accordance with s 37(7). As, after 20 April, there was no attempt to further amend the rules, the amendments relied on by Fifer have never come into existence. The rules of the body corporate are those set out in the Second and Third Schedules to the Act.

[52] Fifer relied on the decision in Chambers (supra) and the unanimous assent rule as validating the amendments.

[45] However, Hansen J considered that Chambers could be distinguished:

[53] Paterson J held that the unanimous assent rule applied to bind the body corporate to the change of Rules. The transaction was intra vires and honest and had the assent of all corporators. The principle in Bobbie Pins Limited v Robertson [1950] NZLR 301 applied. The assent of all corporators was achieved through their agreement as purchasers of the units to accept

33 _{At [7], [8] and [31]-[32].}

34 Fifer Residential v Gieseg at [49].

and adopt the Rules. The failure to pass a formal resolution was held therefore to be an irregularity which did not invalidate the Rules (see in particular at [31]-[32]). The circumstances in this case are distinguishable in two critical respects. First, the Rules have not been registered since the body corporate came into existence. There is no transaction capable of being validated. Secondly, as discussed in [49]-[51] above, the respondents are not contractually bound to assent to the new Rules as they were in Chambers. The unanimous assent rule has no application in this case.

[46] Both High Court Judges and counsel in this case placed reliance on the unanimous assent principle as described in Bobbie Pins Ltd v Robertson.35 That principle has also been affirmed by the Court of Appeal:36

In support of this [principle], [counsel] referred to several cases stemming from Parker & Cooper Ltd v Reading [1926] 1 Ch 975. In that case the issue was the validity of a debenture given intra vires for good consideration but without a valid directors' resolution. All the shareholders had however assented to it, and Astbury J held, consistently with a line of earlier authority, that that was sufficient. It is to be noted that the question was not whether the act of the shareholders bound the company but whether the act of the company was duly authorised. It was a question of that kind that arose in the other cases upon which counsel relied: Bobbie Pins Ltd v Robertson [1950] NZLR 301, In re Duomatic Ltd [1969] 2 Ch 365 (both concerning the payment of directors fees) and Swiss Screens (Australia) Pty Ltd v Burgess (1987) 11 ACLR 756 (allotment of shares). These cases are but examples of the well-recognised principle that failure to comply with the formalities prescribed for the exercise of a company's powers is cured by the assent of all its members. The company's act is valid and binding if they all concur in it.

Application – Schedule 2 rules

[47] The amended rules are valid for the following reasons:

(a) No particular procedure was required except that the decision be made unanimously.

(b) If a particular procedure was required then the defect could be cured by the unanimous assent principle.

35 _{Bobbie Pins Ltd v Robertson [1950]
NZLR 301 (SC).}

36 Wairau Energy Centre Ltd v First Fishing Company Ltd (1991) 5 NZCLC 67,379 at 4-5. See further: Westpac Securities Ltd v Kensington [1994] 2 NZLR 555 (CA); and Nicholson v Permakraft (New Zealand) Ltd (in liquidation) [1985] 1 NZLR 242 (CA).

[48] When the Body Corporate came into existence on 7 February 2008 the default rules found in Schedules 2 and 3 of the UTA 1972 were applicable to the Body Corporate.37 However, those rules did not regulate the activities of the Body Corporate so long as TVL remained the sole proprietor.38 Had there been any other proprietors, the default Schedule 2 and Schedule 3 rules, which in effect remained in

suspension during this period of sole proprietorship, would have regulated the conduct of the Body Corporate.

[49] The decision to amend the Schedule 2 rules clearly required a unanimous resolution under s 37(3) UTA 1972 and could not be made otherwise. The UTA

1972, by itself, does not place any formalities around the making of that decision; that is done by the rules in force at the time. As the rules did not at the time regulate the governance of the Body Corporate, no particular procedure needed to be followed in making the decision to amend.

[50] In addition, s 3 UTA 1972 provides that the decision of a sole proprietor shall be regarded as a unanimous resolution.

[51] TVL decided on or prior to 13 February 2008 to amend the Schedule 2 rules, as is evidenced by the notice of change form signed on that date. TVL made a further decision to change the rules on 18 February 2008 at the meeting which followed the registration.

[52] Given that there were no particular formal requirements around the exercise of the sole proprietor’s decision (which serves as a unanimous resolution), the decision made on or prior to 13 February 2008 was effective to change the Schedule

2 rules.

[53] Even if that was not the case and the resolution of 18 February 2008 is the operative document, it would still appear that the rules were validly amended. This

_{is because the unanimous assent rule does apply in this case.}

37 _{UTA 1972, s 37(2).}

38 UTA 1972, s 37(1).

[54] Fifer Residential v Gieseg can be distinguished from the present case. In Fifer there was no body corporate in existence when the purported amendment was made. Here the Body Corporate had come into existence when it attempted to amend the rules. Equally in Fifer there was no effective registration of the amended rules once the body corporate had come into existence. Chambers v Strata Administration is also different. In that case the rules were registered after the formal resolution to register them by the proprietor had been made. In this case registration may have been made before the formal resolution.

[55] Nonetheless, the unanimous assent rule has currency in this case as, despite the failure to pass a formal resolution to register the rules until after registration, the Body Corporate’s act was one that was intra vires, in good faith and had the unanimous assent of all its corporators.

Application – Schedule 3 rules

[56] Given that the rules, while technically applicable to the Body Corporate, did not regulate it whilst TVL remained the sole proprietor, TVL need only have complied with s 37(4) UTA 1972 to amend the Schedule 3 rules.

[57] The fact that s 37(4) includes the requirement that the proprietors come together in a general meeting does not defeat the effect of the unanimous assent rule.

[58] While the statutory requirement to hold a meeting cannot be excluded by the unanimous assent rule it can, nevertheless, be rendered largely nugatory. The powers relating to the requirements for the calling of a general meeting are to be found in rr 14 – 20 of the default Schedule 2 rules and are also in the amended rules at rr 14 –

20. There are some small variations to the default rules in the amended rules of the

_{Body Corporate but these are not relevant in this
case.}39

39 Given the findings in relation to the amendments to the Schedule 2 rules, the question of which rules were in force at the time of any amendment to Schedule 3 might arise in some cases but need not be considered here given the similarity between the default and amended rules.

[59] There is a requirement to allow seven days notice for the calling of a general meeting.40 Evidently it is doubtful whether such a thing could have happened given that the Body Corporate came into existence on 7 February, purported to notify the change of rules on 13 February and held what was said to be a general meeting on

18 February to “ratify” the rules.

[60] Objection might have been taken to the failure to notify the meeting but either that failure cannot invalidate the meeting or it can be waived by the corporators under the unanimous assent rule. While procedurally imperfect, the Schedule 3 rules were validly amended.

Conclusion

[61] The first cause of action fails. While there were procedural irregularities in the amendment of the rules they would have been cured by the rule of unanimous assent which applied to the Body Corporate at the time of the amendments.

Second Cause of Action – ultra vires UTA 1972

[62] The second cause of action pleaded by the Body Corporate is that provisions of the management agreement are ultra vires the rules of the Body Corporate and the powers of a body corporate generally as set out in the UTA 1972.

Counsels’ submissions

[63] The plaintiffs submit that certain provisions of the agreement are ultra vires the powers of the Body Corporate and that it could not therefore have entered into them. While they accept that the Body Corporate may appoint a building manager and enter into an agreement with the manager to organise and pay for management services, the plaintiffs point to a number of provisions of the agreement that they submit are ultra vires the powers of the Body Corporate. In their amended statement

_{of claim and in their closing submissions the plaintiffs provided a long
list of clauses}

40 Default r 16 and amended r 16.

and sub-clauses that they submitted were ultra vires. I do not propose to list those here but will deal with them when I come to apply the law to the facts of the case. Some of the central objections, however, related to the letting service, the real estate sale service, the Sentinel residents service and the provisions providing for them. Equally the plaintiffs questioned the validity of provisions more closely connected to the role of managing the building which, it is said, detract from the mandatory duties of a body corporate under the UTA 1972 and some of which are said to not be incidental to or reasonably necessary for the functioning of the Body Corporate.

[64] Counsel for the defendant accepted that one part of the agreement (relating to concierge services which have already been stopped) was likely ultra vires. However the defendant maintains that the nature of the services and the exclusivity provided in respect of the letting service, the real estate sale service and the Sentinel residents service are not ultra vires. The defendant also maintains that the aspects of the building management arrangements complained of are incidental to and reasonably necessary to the performance by it of duties under the UTA 1972 and the rules. The precise arguments on each point are dealt with below.

Legal Principles – ultra vires

[65] The nature of the ultra vires principle and its relationship to the UTA 1972 was discussed by Heath J in Low v Body Corporate 384911:41

[28] The ultra vires principle, in relation to bodies corporate, had its origins in company law. In particular, it was used to determine whether a company had power to enter into particular types of contracts. That was done at a time when the law restricted what a company could do in relation to the activities set out in the company’s memorandum of association. While, in New Zealand, the ultra vires doctrine no longer applies to companies: the principle continues to be applied to incorporated societies, Maōri incorporations and bodies corporate under the Act. As to the latter, I agree with Stevens J’s observation, in Body Corporate 201036 v Broadway Developments Ltd, that the principle does apply to a body corporate under the Act.

[66] In the case of body corporates under the UTA 1972, the phrase ultra vires

_{may have two distinct aspects. It may mean that:}

41 [2011] 2 NZLR 263 (HC).

(a) That some amendment or addition to the rules modifying the duties or powers of the body corporate is ultra vires the Act; or

(b) That the body corporate has entered into transactions or agreements, or otherwise acted in a way that is ultra vires the powers of the body corporate set out in the rules.

[67] This Court has, on numerous occasions, accepted that the power to review the rules and the actions of a body corporate includes the power to determine whether terms of contracts made by the body corporate are intra vires.42

[68] I will come to the way in which this case has been pleaded but, in brief, both aspects of the ultra vires principle are present in this case.

Ultra vires the UTA 1972

[69] The first aspect, whether the rules under which the Body Corporate operates are ultra vires, may be dealt with by reference to the relevant parts of ss 15(1), 16 and 37(5) and (6):

15 Duties of body corporate

(1) The body corporate shall—

(a) Subject to the provisions of this Act, carry out any duties imposed on it by the rules:

...

(f) Keep the common property in a state of good repair:

(g) Comply with any notice or order duly served on it by any competent local authority or public body requiring repairs to, or work to be performed in respect of, the land or any building or improvements thereon:

(h) Subject to this Act, control, manage, and administer the common property and do all things reasonably necessary for the enforcement of the rules:

42 Body Corporate 201036 v Broadway Developments Ltd (2010) 11 NZCPR 627 (HC); Low v Body Corporate 384911 [2011] 2 NZLR 263 (HC); and Russell Management v Body Corporate No 341073 (2008) 10 NZCPR 136 (HC).

...

16 Powers of body corporate

Subject to the provisions of this Act, the body corporate shall have all such powers as are reasonably necessary to enable it to carry out the duties imposed on it by this Act and by its rules:

Provided that the body corporate shall not have power to carry on any trading activities.

37 Rules

...

(6) Provided that no powers or duties may be conferred or imposed by the rules on the body corporate which are not incidental to the performance of the duties or powers imposed on it by this Act or which would enable the body corporate to acquire or hold any interest in land or any chattel real or to carry on business for profit.

...

[70] Amendments to the rules are possible but it is also possible for amendments to the rules to exceed the limited corporate role that Parliament has defined for body corporates. In Velich v Body Corporate 16498043 the Court of Appeal held that an amendment to the rules which purported to require owners to seek the body corporate’s consent for non-structural additions or alterations to their units was ultra vires in that it differed significantly from the default rule and was not “incidental” to

the existing powers and duties of the body corporate. As the Court of Appeal explained, the wording of ss 15 and 37 imposes limits on the extent to which the default rules can be modified:

[28] Under s 37(5) amendments of, or additions to, the rules must relate to:

43 Velich v Body Corporate 164980 (2005) NZCPR 143 at [28] – [30]. See further: Chambers v Strata

Title Administration Ltd at [41]-[43].

(a) The control, management, administration, use, or enjoyment of the units or the common property; or

(b) The regulation of the body corporate; or

[29] Rule 2.1(f) undoubtedly relates to “the powers and duties of the body corporate”. For this reason it is within the scope of the proviso to s

37(5). Accordingly it is only valid if the new powers and duties conferred

can fairly be seen as “incidental” to the performance of powers and duties

imposed on the body corporate by the Act.

[30] The only duty imposed by the Act which could be invoked to justify rule 2.1(f) is that provided by s 15(1)(a), “to ... carry out any duties imposed on it by the rules”. As a matter of common sense, it is only powers and duties which are extant at the time of the rule change which are relevant. So the only new powers or duties which may be conferred by rule change on a body corporate are those which are “incidental” to existing powers and duties.

...

A rule which appreciably expands the existing powers and duties of the body corporate (as rule 2.1(f) purports to do) cannot fairly be regarded as merely “incidental” to those existing powers and duties.

[71] In Chambers v Strata Title Administration Ltd a new rule entrenching the position of an administration company as secretary, such that it could only be removed by unanimous resolution, was ultra vires as it was not incidental to the powers or duties under the Act. As Paterson J noted:

[44] Rule 9(f) imposing a power, falls within the amending provisions of s 37(5). It adds or amends the original power in the statutory rules. As such, it will be outside the powers of amendment given to the Body Corporate unless it is “incidental to the performance of the duties or powers imposed on the body corporate by the Act”. “Incidental” as used in this context means, in my view, naturally attached to, or arising from, or naturally appertaining to any of the duties and powers set out in the Act. I cannot see that the appointment of a professional manager which can only be terminated by a unanimous resolution of the proprietors is incidental to the performance of any of the duties or powers imposed on the Body Corporate by the Act. A power as defined in the Act is something reasonably necessary to carry out the duties imposed on the Body Corporate. It is not reasonably necessary for a secretary to have a contract that can only be terminated by a unanimous resolution.

[72] Similarly in Body Corporate 318566 v Strata Title Administration Ltd44 the Court ruled ultra vires a rule entrenching the position of the company appointed as secretary and entitling it to exercise proxies on behalf of members who were not present at body corporate meetings.

Ultra vires the rules

[73] The second aspect of the ultra vires principle relates not to the legality of the provisions but the legality of acts done in the purported exercise of power pursuant to those provisions. The objector in such a case takes no issue with the scope of powers conferred on the body corporate but merely objects to the way in which the body corporate has acted beyond their scope.

[74] The consideration of the agreement in this case follows from the following basic propositions:

(a) In order for a body corporate to act in a certain way it must be empowered to do so;

(b) In order for the body corporate to have that power that power must be derived from some duty;

Framing the legal arguments in this case

[75] In this case the parties have framed their arguments as a challenge to and defence of, respectively, the validity of the terms of the management agreement. However, in substance the challenge is one to the validity of the amended rules. This is because the rules contain provisions that purport to allow the Body Corporate to contract in ways which the proprietors have objected to in their challenges to the

_{management agreement.}

44 Body Corporate 318566 v Strata Title Administration Ltd (2009) 10 NZCPR 221 (HC).

[76] In this case to take the plaintiffs’ arguments as a test of simply whether the making of the management agreement is intra vires the amended rules without examining whether those rules are intra vires the UTA 1972 would be to ignore the substance of the case and the way in which it was argued.

[77] For this reason I will focus first on the provisions in the amended rules that purport to underlie the provisions of the management agreement to which the plaintiffs object. If I find that those amended rules are ultra vires the UTA 1972 then there will consequentially be no power to make the corresponding terms of the agreement and those terms will be invalid.

[78] If I find that an amended rule is valid then it will be necessary to consider whether it is reasonably necessary for the Body Corporate to have the power to enter into the corresponding terms of the agreement in order to carry out the duties imposed by that rule. This involves consideration of whether the terms are incidental to the performance of duties in the amended rules.

Legal principles – severance

[79] The Courts have traditionally held that contractual provisions which fail as a result of being ultra vires are void or invalid and may be severable from the remainder of the contract.45

[80] The principal New Zealand authority on this point cited by both counsel was

Low in which Heath J observed:

[93] I did not hear any significant argument on the question of severance. However, the principles are relatively straightforward. They were summarised by the Privy Council in Carney v Herbert, by reference to a test postulated by Jordan CJ in McFarlane v Daniell:

When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature ... If the elimination of the invalid

45 Russell Management v Ltd v Body Corporate No 341703 at [62]-[68]; Low v Body Corporate

384911 at [91]-[95]; Body Corporate 201036 v Broadway Developments Ltd; and Gilbert v About

Body Corporates Limited HC Auckland CIV-2009-404-2046, 23 June 2009 at [35]-[37].

promises changes the extent only but not the kind of the contract the valid promises are severable ... If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.

[94] The most helpful authority is that of the High Court of Australia, in Humphries v Proprietors Surfers Palms North Group Titles Plan 1955. In that case, a body corporate had purported to amend statutory rules so as to provide it with the power to enter into a management agreement with a third party. The agreement contained terms relating to letting services that the Court held were not incidental to the body corporate’s statutory duties or powers. As a result, those rules were declared ultra vires and unenforceable. The question was whether the whole of the management agreement was invalid or whether the provisions relating to letting services could be severed from it. On the particular facts of that case, the Court held that the whole of the agreement was unenforceable. A useful discussion of the principles applicable to a severance argument in a case of this type can be found in the judgment of McHugh J.

[81] The comments of McHugh J are particularly useful given the relative similarity between the situation in the High Court of Australia case and the present case. The High Court’s judgment in Humphries and the cases cited therein suggest that the following features of a contract may make severance impossible:

(a) Where the invalidity of the provisions leads to a mutation in the kind of the agreement rather than its extent;46

(b) Where the valid and invalid terms are so inter-dependent or so much the part of one whole as to be inseparable;47 or

(c) Where the term is to be regarded as so central to the agreement, so much the heart and soul of it, that the parties would not have made the bargain in the first place.48

[82] The same principles are also set out at greater length in the judgment of the

Privy Council in Carney v Herbert,49 which was also cited in the judgment of

_{Heath J in Low.}

46 _{[1994] HCA 21; (1994) 179 CLR 597 at 618-619.}

47 _{At 604-605 and 618-619.}

48 _{At 609 and 618-619.}

49 [1985] 1 AC 301.

Application – ultra vires

[83] The provisions to which the plaintiffs object can be divided into the following categories:

(a) Those relating to the letting service;

(b) Those relating to the real estate sale service;

(d) Those relating to the way in which the management agreement is to be carried out and the roles and responsibilities of the respective parties; and

(e) Other miscellaneous provisions.

The Letting Service

[84] The default rules contain no provisions for a service of this type. The following provisions of the amended Schedule 2 rules deal with the letting service:

Second Schedule Rules

1. A proprietor shall:

...

(k) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate, or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall only be one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.

...

2. The Body Corporate shall:

...

(i) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall be only one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.

3. The Body Corporate may:

...

(h) Enter into a building management agreement with a management company or professional manager for the carrying out and management of all or any such duties of the Body Corporate and the provision of concierge services to the Proprietors at such remuneration and upon such terms and conditions as are stipulated including:

...

(iii) The reserving to the manager of the exclusive right to operate a letting service business from the Property:

...

(viii) Granting to the manager the right to erect signage on the property for the purposes of promoting the letting service, the real estate sale services and other additional services that the manager may provide to Proprietors with the consent of the Body Corporate (such consent not to be unreasonably withheld).

[85] The plaintiffs contend that the exclusive right to operate the letting service is not incidental to the exercise of the duties of the Body Corporate and should be considered ultra vires.

[86] The defendant argues that the exclusive right to perform the letting service is intra vires. The defendant has pointed out that use of the letting service by the proprietors is not mandatory and that the service has not been forced upon proprietors in that manner. Instead Mr Campbell argued that the effect of the relevant amended rules is merely to give the company the exclusive right to offer letting services from (or on), rather than in respect of, the property. The effect is to prevent other proprietors or the Body Corporate from operating these services from their units or the common property.

[87] The defendant relies on r 3(d) of the amended rules. This rule does not differ in substance from r 3(d) of the default Schedule 2 rules. In the amended rules it provides:

3. The Body Corporate may:

...

(d) Enter into any agreement with a Proprietor or an occupier of any unit for the provision of amenities or services by it to the Unit or to the Proprietor or occupier.

[88] There are a number of cases concerning the provision of letting services alongside management services. In Russell Management,50 Russell Management acquired the rights to exclusively manage a complex as well as the right to provide an on-site letting service which the proprietors were bound to use if they wished to let their units51 and for which Russell Management was entitled to charge proprietors a commission for letting their units. Lang J stated:

[50] Counsel for the plaintiffs contended that the new rules had a counterpart in r 3(d) of the default rules. That rule provided as follows:

3. The Body Corporate may -

...

(d) enter into any agreement with a proprietor or an occupier of any unit for the provision of amenities or services by it to the unit or to the proprietor or occupier:

[51] Counsel contended that this rule mirrored to some extent the wording used in new r 2.39(a). Moreover, the body corporate granted [Russell Management] the rights to operate exclusive letting service by means of an agreement with the proprietor of Unit 1. That agreement gave the occupier of Unit 1 [Russell Management] the right to provide a letting service for all proprietors.

[52] In reality, however, the new rules go well beyond r 3(d) of the default rules. The new rule empowers the body corporate to enter into an agreement with a third party under which that third party receives an exclusive right to let all of the units in the complex for up to 30 years. Such a power is, in my view, substantially different, and much wider, than a power permitting the body corporate itself to provide amenities or services to individual proprietors and units at their request. The letting service is not provided in the present case by the body corporate. Rather, it is provided by the third party. Moreover, individual proprietors have absolutely no say in

50 _{Russell Management v Body Corporate No
341093 (2008) 10 NZCPR 136 (HC).}

51 At [52],[53] and [62].

relation to the letting service. They cannot request that it be provided or not provided. They are required to accept that the letting agency nominated by the body corporate shall have the exclusive right to let out their units.

[53] Furthermore, I do not see how the power to enter into an exclusive letting service can realistically be viewed as being incidental to the powers and duties that the body corporate possessed before the rules were amended.

[89] In Humphries v Proprietors “Surfers Palms North” Group Titles Plan 195552 the High Court of Australia considered a scheme where the management agreement required the manager to conduct a letting agency which proprietors could use should they wish to. The provision of the letting service was part of the bundle of duties which the manager was contracted to provide for a fixed (non-apportioned) remuneration. The manager did, however, appear to be free to impose any additional charge or commission for the services.

[90] The majority of High Court held that the expenditure of funds by the body corporate to the manager for making available to the proprietors the letting service was not one that was reasonably necessary for carrying out the body corporate’s functions.53 McHugh J went further and considered that the agreement was void not only on the expenditure argument but also because the exclusive power to carry out a letting service would be inconsistent with the property rights of the other proprietors, including a right to carry on lawful business.54 As McHugh J observed:

Unquestionably, s 37(1)(a) and 37(1)(c) authorise a body corporate to enter into a contract to maintain and administer the common property. But nothing in those paragraphs confers any authority on a body corporate to enter into an agreement to pay money to a person in consideration of that person providing a letting service for the benefit of unit proprietors. They confer power in relation to the common property. They do not confer a power to enter into an agreement with a third party which affects the lots of other individuals as well as the common property.

Furthermore, nothing in ss 27 and 37 authorises an agreement which gives the manager the exclusive right to carry on the business of letting units in a complex. The exclusivity provisions of the agreement are also inconsistent with the right of other proprietors to conduct lawful businesses from their lots. If a body corporate has power to enter into an agreement giving exclusive rights to a particular person in relation to the use of the lots and common property, it must also have the implied power to prevent proprietors from enjoying those rights. The making of the exclusive arrangement by

52 _{[1994] HCA 21; (1994) 179 CLR 597.}

53 _{At 602 and 608.}

54 At 614.

itself cannot interfere with the rights of the proprietors. Some further power is needed to enable a body corporate to carry out its implied undertaking that it will prevent the proprietors of lots from exercising those rights. However, apart from the by-law making power ... nothing in the Act authorises a body corporate to interfere with the rights of proprietors in respect of their lots.

Moreover, by implication, the terms of s 37(2) exclude the making of an exclusive letting agreement of the kind involved in this case. By authorising an agreement with a proprietor for the provision by the body corporate of services to his or her lot, it impliedly excludes a power to make an agreement with a third party to provide services to that lot and also impliedly excludes any general power in the body corporate to interfere with the rights of proprietors in respect of their lots. That subsection also tends to indicate that services for the benefit of a proprietor are to be paid for by the proprietor and not out of the funds contributed by the other proprietors.

The general powers conferred on the body corporate by ss 27(3) and 37 are, therefore, insufficient in my opinion to enable the body corporate to enter into an agreement which would require the body corporate to act in a way which would affect the rights and obligations of proprietors in respect of their lots.

[91] In Atrium Management v Quayside Trustee Ltd (in rec & in liq)55 the Court of Appeal dealt with an appeal from a refusal to grant summary judgment. One of the central issues on the appeal was the validity of a clause in a management agreement which gave the building manager the exclusive right to operate an on-site letting service which proprietors could choose to use while at the same time acknowledging that the proprietors were free to engage an off-site agent to arrange letting of their units.56 The Court of Appeal made reference to Russell Management and noted:57

Lang J held in Russell Management that it was ultra vires for a body corporate to grant a manager exclusive rights to operate an on-site holiday letting service over an entire development because this was in breach of ss

37(5) and 37(6) of the Unit Titles Act 1972. Atrium had learned of the decision in August 2009.

[92] Dismissing the appeal the Court remarked that:58

The decision in Russell Management was not an unforeseen contingency. While we accept that a change in the law which renders the performance of a contract impossible may amount to frustration, the decision in Russell Management did not change the law. Rather, that decision involved the interpretation of the Unit Titles Act in accordance with settled principles. In terms of that Act, parts of cl 12 of the draft management agreement were

55 _{[2012] NZCA 26.}

56 _{At [8].}

57 _{At [9].}

58 At [22].

ultra vires the powers of the body corporate from the outset even if the parties did not appreciate that. Accordingly, we need not consider this argument further.

[93] The effect of the provision in this case is different to two of the above examples. Here the cost of the letting service is separate from the general management fee and so the problem of non-user proprietors contributing, which persuaded the majority of High Court of Australia in Humphries, is not present. The service is also not exclusive in the sense seen in Russell Management. In that case the agreement was doubly exclusive in the sense of:

(a) Compelling the body corporate not to allow any other person to operate a letting service from the development; and

(b) Restricting proprietors’ ability to engage another person to let their property by empowering Russell Management alone to do this.

[94] The argreement in this case is exclusive in the (a) sense only. The arrangement in this case is, however, the same as that seen in Atrium Management. In Atrium Management the Court of Appeal approved Lang J’s judgment in Russell Management and held on that basis that, the terms of the contract, being akin to those in Russell Management, the exclusivity provisions were thus ultra vires.

[95] The arguments in favour of holding that the rules relating to the exclusive provision from the site of the letting service are intra vires are the lack of authority on the point (setting aside the Court of Appeal’s remarks in Atrium Management), the force of r 3(d), the fact that under s 37(5) amendments may generally be made to the rules to affect the use of units and that the amended rule in this case is properly incidental to the duties and powers of the body corporate (s 37(6)).

[96] Some examples of the limits that may be placed on the use of units are to be found in the default Schedule 3 rules:

A proprietor or occupier of any unit shall not—

(a) Use or permit his unit to be used for any purpose which is illegal or may be injurious to the reputation of the building:

(b) Make undue noise in or about any unit or common property:

(c) Keep any animal on his unit or the common property without the prior consent of the committee of the body corporate, or, if there is no committee, of the body corporate

...

(e) Use his unit or permit it to be used in such manner or for such purpose as to cause a nuisance or disturbance to any occupier of any unit (whether a proprietor or not) or the family of any such proprietor.

[97] The above rules all provide, in general terms, for the harmonious enjoyment of units within the development. The Body Corporate’s duties and powers to restrict the use of units are limited in this respect. Any amendment, such as one limiting the use of units so as to preserve an exclusive business right, must be shown to be incidental to the duties and powers in the UTA 1972 and, as the Court of Appeal has

made clear,59 the ambit of the default rules is an important indicator of this. I am of

the view that a duty on the Body Corporate to confer an exclusive business right on one proprietor by restricting the use of units by others cannot be said to be incidental to the functions of the Body Corporate.

[98] The reliance on r 3(d) may be misplaced as that rule is also subject to the proviso that any service agreed under it be reasonably necessary to enable the Body Corporate to discharge its duties under the Act, that is to say s 15, the rules and any amendments to them that fall within the narrow ambit of being incidental to the performance of the existing duties.

[99] This does not, of course, mean that SML has no right to undertake the letting service from the property. It has the right to do so as a proprietor provided that its activities do not fall foul of any of the rules restricting uses which have an impact on

_{other persons’ enjoyment and use of their units.}

59 Velich v Body Corporate 164980 at [29] – [31].

The Real Estate Sale Service

[100] The following provisions of the amended Schedule 2 rules deal with the real estate sale service:

Second Schedule Rules

1. A proprietor shall:

...

(k) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate, or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall be only one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.

...

2. The Body Corporate shall:

...

3. The Body Corporate may:

(iv) The authorising of the manager to provide exclusively additional services from the property to the Proprietors and occupiers of units including but not limited to the provision of real estate sale services and other additional services to the Proprietors upon terms and conditions to be agreed between the manager and the Proprietors or

occupiers with any proceeds generated to be the property of the manager;

...

[101] The exclusivity provisions relating to and the incidence of the real estate sale service are similar to the letting service. The default rules contain no provisions for a service of this type. As another restriction on the rights of other proprietors to use their units and one which cannot be shown to be incidentally linked to the central powers and duties of the Body Corporate, it is ultra vires. Again, nothing prevents SML from continuing to operate this service but its exclusivity cannot be maintained.

The Sentinel Residents Service

[102] The same provisions of the amended Schedule 2 rules deal with the Sentinel residents service. The provisions providing for exclusive use of the premises to provide the Sentinel residents services are, in my opinion, similarly ultra vires.

The Management Service

[103] The essential provisions in the amended rules relating to the management service are:

Second Schedule Rules

1. A proprietor shall:

...

(j) Not interfere or obstruct the manager from performing the manager’s duties or carry out any activity reserved to the manager under the management agreement or interfere with or obstruct the manager from using any part of the common property necessary for use by the manager.

(k) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate, or

letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall be only one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.

...

2. The Body Corporate shall:

...

3. The Body Corporate may:

...

(i) The reservation exclusively to the manager to provide the usual building and property management services for the Body Corporate and concierge services to the Proprietors;

(ii) An indexing of the management fee and concierge fee to increases in the Consumer Price Index;

...

(v) A reasonable term of management rights including a right of renewal at the option of the manager having regard to the investment undertaken by the manager;

(vi) An obligation for financial contribution towards the accommodation costs of the manager;

(vii) Such other terms as are usual for such management agreements in New Zealand and Australia for managed and serviced apartments;

...

(ix) Enabling the manager to assign the management agreement by way of security to any recognised lender without the consent of the Body Corporate and obtain from the Body Corporate such acknowledgements that may be required by the lender in relation to such assignment.

...

Subject to any restriction imposed or direction given at a general meeting, the committee may:

...

(b) Employ for and on behalf of the Body Corporate such agents and servants as it thinks fit in connection with the control, management, and administration of the common property, and the exercise and performance of the powers and duties of the Body Corporate and of these rules;

[104] A building management agreement will in many cases be a practical necessity as the committee of a body corporate will be unable to execute all the tasks required of it by itself. Rule 11(b) of the amended rules is in fact merely a reproduction of r 11 of the default Schedule 2 rules in the UTA 1972.

[105] Given that r 11(b) is clearly intra vires, I turn to consider whether the Body Corporate’s agreement to terms of the management agreement was a lawful exercise of the power conferred under this provision.

[106] Aspects of cl 3.1(a) of the management agreement were challenged by the plaintiffs. That clause provides that SML as manager is to use all reasonable endeavours to perform the tasks (termed “scheduled works” in the agreement) listed in the first schedule to the agreement. The impugned tasks are:

(a) To be available for attendance as required between normal working hours and whenever reasonably required outside normal working hours to cover an emergency situation (Task 2);

(b) To keep itself fully appraised of the rules (Task 5); and

[107] Task 2 ensures that proprietors will have someone to contact during the day who can attend at the property (the manager need not always be there), Task 5 ensures that SML knows the scope of its responsibilities and those of the proprietors and ensures that it is in a position to enforce them on behalf of the Body Corporate if necessary, and Task 9 ensures that SML can be called upon to attend and explain matters at Body Corporate meetings when necessary. None of these tasks appear problematic or beyond those powers reasonably necessary that may be exercised by the Body Corporate in the employment of a person in connection with the control, management and administration of the common property by the Body Corporate. The challenged aspects of this clause are intra vires.

[108] Clause 3.1(d) of the agreement requires SML to supervise people performing works on its behalf. The plaintiffs have argued that the evidence shows that individual property management agreements have been entered into with a number of proprietors and that SML in supervising its employees performing the additional services mentioned means that this clause operates in a way that goes beyond the scope of what is permitted under the statutory scheme. This argument lacks substance. Insomuch as SML’s employees, agents or contractors are providing services for the management of the building it is clearly reasonably necessary that they be properly supervised in order to ensure the duties in s 15 are met. Where SML’s employees are also providing personal property management services then proper operational separation, on the part of SML will however be necessary to ensure it does not contractually breach this clause of the agreement. This clause is intra vires.

[109] Clause 8 of the Agreement provides that the Body Corporate is required to permit SML to attend any meeting of the Body Corporate and the company is entitled to be heard on any matter touching on its duties which arises at the meeting. In this case the provision is moot as SML is a proprietor of one unit and thus entitled to attend and be heard anyway. I am therefore not required to decide this point.

[110] The plaintiffs also challenge cl 23 of the agreement which provides:

23. INDEMNITY

23.1 Except in the event of a wilful default by the Management Company, the Body Corporate indemnifies and saves harmless the Management Company and each of its employees, officers, agents or contractors from and against all actions, claims, demands, losses, costs, damages and expenses (including without limitation reasonable legal costs on a solicitor and own client basis) properly incurred by the Management Company in carrying out its Duties or as instructed from time to time by the Body Corporate.

[111] The duties mentioned in that clause are defined as those found in cl 3.1 of the agreement (including the tasks in the first schedule). Without repeating it in full, cl 3.1 deals with SML’s duties, the responsibilities of SML to the Body Corporate, and the management of the common property. Insomuch as it is necessary to identify a source for these provisions I consider that they flow from the rules allowing the Body Corporate to enter into a building management agreement (r 3(h)) and the rule allowing the committee of the Body Corporate to employ persons for the purpose of managing the common property and exercising the functions of the Body Corporate (r 11(b)). Rule 3(h) provides that any management agreement may be “at such remuneration and upon such terms and conditions as are stipulated”.

[112] The plaintiffs did not address the issue of indemnity in depth. However, it is not difficult to conceive of situations in which power to indemnify SML might reasonably be necessary. For example, in the case of an entry into a proprietor’s unit to enforce the Body Corporate rules which is met by the proprietor bringing an action in trespass against an SML employee, SML might reasonably expect to recover the costs of the legal defence. This indemnity can, of course, be bargained for (the Body Corporate might instead pay a higher price for the management contract instead of providing the indemnity) but the power to indemnify SML in performing certain duties under the rules is one that can be conceived of as reasonably necessary. This term is intra vires.

[113] The plaintiffs have also challenged a number of other provisions of the agreement in the statement of claim and their opening submissions. In their closing submissions the plaintiffs suggest that the other provisions of the management agreement that were challenged by the Body Corporate in the amended statement of claim are of “no essential value” to the Body Corporate. I am not certain what is

meant by that phrase and in the absence of detailed argument I am prepared to treat them as intra vires.

Conclusions – ultra vires terms

[114] In sum, the following key provisions of the agreement are ultra vires by way either of being outside the scope of powers validly conferred on the body corporate or because they derive from duties which are ultra vires the UTA 1972:

Management Agreement

4.2 restriction on Body Corporate contracting any person other than SML to provide any service that SML is entitled to provide under the agreement and agreement by the Body Corporate that SML is exclusively authorised to provide the letting service, concierge service, the Sentinel resident service and the real estate sale service from the property.

11.1 the Body Corporate grants SML the exclusive right to exercise on the property the letting service.

11.2 the Body Corporate must take all reasonable steps to ensure that there is no interference with the exclusive right of and the exercise by SML of the letting service.

11.6 the Body Corporate shall not without the consent of SML

(a) authorise any person nor itself exercise the letting service on the property.

(b) grant use of any part of the property (other than to SML) for the purpose of allowing any person to exercise the letting service.

11.7 If any person other than SML attempts to use any part of the property for the purpose of providing a letting service then the Body Corporate must take steps to bring about the immediate termination of the competing letting service.

12.1 the Body Corporate grants SML the exclusive right to exercise on the property the Sentinel resident services and real estate sale service.

12.2 the Body Corporate must take all reasonable steps to ensure that there is no interference with the exclusive right of and the exercise by SML of the Sentinel resident services and real estate sale service.

12.5 the Body Corporate shall not without the consent of SML

(a) authorise any person nor itself exercise the Sentinel resident services and real estate sales services on the property.

(b) grant use of any part of the property (other than to SML) for the purpose of allowing any person to exercise the Sentinel resident services and real estate sale services.

12.6 If any person other than SML attempts to use any part of the property for the purpose of providing Sentinel resident services and real estate sale services then the Body Corporate must take steps to being about the immediate termination of that competing service.

Application – severance

[115] This case can be distinguished from Humphries60 on one important ground. In Humphries there was an agreed payment of a yearly management fee for the provision of all the services in the agreement, including the management company making available the letting service. The obligations of the management company for which the body corporate was paying were compulsory and were funded from a bulk sum.

[116] In this case there is a distinction. From the structure of the agreement in this case it is clear that the bundle of obligations for which the Body Corporate is paying are the management services. The company then has the option to operate the letting, real estate sale and Sentinel residents services in a manner ancillary to its core responsibilities. The Body Corporate is only bound to permit the company to do so (cl 4.1(c)) and not allow the exclusive rights to be breached (cl 4.2). It is not bound to pay for the services. The rights and obligations under the building management sections of the agreement and those relating to the letting service are not part of an inseparable group of rights.

[117] The other basis upon which the plaintiffs argued that the provisions were incapable of severance was that they constituted so central a part of the agreement that the defendant would never have had an intention to enter into the agreement in

_{their absence. The plaintiffs in this case submit that the exclusive
arrangements are}

60 Humphries v Proprietors “Surfers Palms North” Group Titles Plan 1955 [1994] HCA 21; (1994) 179 CLR 597 (HCA).

so important to the financial viability of the agreement that SML would not have agreed to enter into the agreement without them.

[118] It seems from the evidence given by Mr Hayes, one of the directors of SML, that the services relating to building management which are provided under the agreement are of limited profitability. Rather the profit in the enterprise comes from agreements entered into between apartment owners and SML to provide the additional services for which exclusivity is envisioned in the agreement. Mr Rainey’s submission was that, therefore, the removal of the exclusivity of provision of these services would negate SML’s motivation for entering into the contract since SML’s profit margins were dependent on the provision of additional services under the exclusive use provisions.

[119] I am not certain that that accurately represents the likely position. The opportunity to provide such services from a location within the building and with the benefit of the familiarity that being the building manager would provide were obviously key considerations in SML’s decision to enter into the contract. Looking at the situation objectively, they alone might have provided a significant advantage to SML and brought in a flow of business from proprietors. The exclusivity provisions were an additional and substantial sweetener but they would not have been the only element in a party’s decision to enter into the management contract which also allowed for the possibility of providing additional services. Even without the exclusivity, there are still important reasons why a commercially sensible party would enter into this transaction. The exclusivity was not necessarily the dominant element or “heart and soul” of the agreement. That the agreement is now less valuable to SML and might in the long run prove to be unsustainable does not automatically mean that SML would not have entered into it in the absence of the invalid terms.

[120] In any event, cl 31.1 provides that if any provision of the agreement is invalid or unenforceable, the remaining provisions shall not be affected and each provision shall be valid and enforceable to the fullest extent permitted by law. The invalid provisions above (and any consequentially invalid provisions) can be severed from the agreement.

Conclusion – second cause of action

[121] The second cause of action is partially successful. Certain provisions of the agreement are declared invalid but to the extent that the remainder of the agreement is valid those terms can be severed from it.

Third Cause of Action – breach of vendor’s duties

[122] The third cause of action put forward in the plaintiffs’ submissions is for breach of fiduciary duties said to arise in a constructive trust arrangement created by the agreement for sale and purchase of units in the Sentinel and the dishonest assistance of SML in that breach.

[123] The developer (and vendor) was not named in this proceeding and no remedies were sought against it. The developer did not appear to argue the question of liability though these matters were ably addressed by Mr Campbell since SML’s liability was contingent on the developer’s liability. Needless to say, the findings in this judgment are dependent on the evidence before the Court and are relevant to the declarations and remedies sought in respect of the agreement. They do not, as a matter of law, bind the developer.

Counsels’ submissions

[124] Mr Rainey, for the plaintiffs, submitted that the vendor of land under an unconditional contract was to be regarded as the trustee of the land as the purchaser is its equitable owner. The vendor is thus to be regarded as owing the core duties of a fiduciary towards the purchaser including duties of good faith and loyalty. These fiduciary duties were, allegedly, breached by the making of the management agreement that the vendor participated in and which led to a profit for the vendor at the expense of the purchaser to whom he owed a duty not to engage in self-dealing. SML, in its turn, dishonestly assisted in the breach of these fiduciary duties and should be deprived of the benefit of the agreement.

[125] Mr Campbell submitted that the acknowledged principle that equitable ownership passed to the purchaser did not mean that the full range of fiduciary duties applied to the vendor. The duty of loyalty central to trustee-beneficiary relationships did not carry over into this context. However, if there was a breach of a duty then the dishonest assistance of SML could not be established on the facts. The relief sought was also, in Mr Campbell’s submission, problematic in that it would only be available to the purchasers (here Mr Ansley) not to the Body Corporate. Lastly, there was a strong argument that the agreement had been affirmed.

Legal principles – vendor’s duties to purchaser

[126] The Court of Appeal in Bevin v Smith61 considered the equitable position of parties under a contract for sale of land:62

For these reasons we consider that an equitable interest in land should, and does, pass under a conditional contract of the kind involved here, even though specific performance of the contract in the strict sense is not available. We agree with the recent Australian authorities to the effect that the equitable estate passes when equity will, by injunction or otherwise, prevent the vendor from dealing with the property inconsistently with the contract of sale, ie inconsistently with the purchaser's contingent ownership rights. It will be sufficient if the Court will order specific performance of the contract subject to the contingency. As McMorland points out (para 10.03), the purchaser's estate will remain contingent pending fulfilment or waiver of the condition. The interest will cease if the contract were avoided for failure of the condition, in the same way as the interest may come to an end in several other situations: upon cancellation for breach; or upon non-payment of the purchase price.

We stress that whether the equitable interest has passed must always depend on the terms of the contract itself. There will be some conditional contracts, particularly those subject to true conditions precedent, where the parties cannot be regarded as intending that equitable title will pass to the purchaser until the condition is waived or fulfilled. In the end it must be remembered that by saying the equitable title has passed, equity is doing no more than recognising that the purchaser must have acquired rights which should be protected in an appropriate manner. The sui generis nature of the trust arising under a contract for the sale and purchase of land has long been recognised (see eg Wall v Bright (1820) 1 Jac & W 494, 499). In the end equity must act according to the nature of the contract and the practical situation of the parties.

61 _{[1994] 3 NZLR 648.}

62 At 666.

[127] The ratio in this case has been applied on a number of occasions. McDonald v Isaac Construction Co Ltd63 affirmed the principle in Bevin that caveatable equitable interests in land can be acquired pursuant to conditional contracts. Where the parties intend to be bound and remain bound subject to the fulfilment of the condition, equitable interests can arise by means of that contract. This formulation of Bevin has been applied numerous times.64

[128] There is case law confirming the applicability of this ratio to unit title developments. Nicholson v Morning Star (St Lukes Garden Apartments) Ltd65 concerned the relationship between a vendor and purchaser of a unit title apartment. Mr Nicholson purchased an apartment from Morning Star Ltd. Plans showing facilities that were to be developed, such as a car park and common areas of landscaping, were annexed to the purchase agreement. After Mr Nicholson settled

his purchase, considerable changes were made by Morning Star Ltd to the original proposals. For example, carparking and access were reduced whereas the number of apartments increased. Two years after settlement, Mr Nicholson lodged a caveat against the land comprising the future development units of the complex. Morning Star Ltd contended that Mr Nicholson was not entitled to caveat the future development units because he had no beneficial interest in them.

[129] Associate Judge Doogue found that there was an arguable case that Mr Nicholson had a contractual entitlement to the common property that was shown as part of the future development units and that substantially changing the character of those areas would constitute a breach of contract. This gave him a sufficient equitable interest in the land to justify a caveat. This conclusion flowed from the statement in Bevin v Smith that equity prevents the vendor from dealing with the property inconsistently with the purchaser’s contingent ownership rights.

[130] The parties were substantially in agreement that an equitable relationship arose in these circumstances. The nature and extent of the equitable obligations

_{assumed by the vendor is a more difficult point, however. The use of
the expression}

63 _{[1995] 3 NZLR 612 at 619.}

64 Canterbury Finance Ltd v Sagar Trust Ltd (1997) 3 NZ ConvC 192,571 (HC); and Bhana v

_{Westpac Banking Corp (2003) 4 NZ ConvC 193,794 (HC).}

65 (2008) 6 NZ ConvC 194,618.

“constructive trust” in these circumstances suggests the possible application of the

law relating to fiduciaries, of which express trustees are a paramount example.

[131] However, as the Court of Appeal in Bevin v Smith noted, the position is not directly analogous to an express or bare trustee. The Court of Appeal cited Wall v Bright,66 in which it was said that:67

Now, though there is a great analogy in the reasoning, with respect to the will of a naked trustee and that of a constructive trustee, on the ground of the impropriety of their attempting to dispose of the estate, yet for many purposes they stand in different situations. A mere trustee is a person who not only has no beneficial ownership in the property, but never had any, and could, therefore, never have contemplated a disposition of it as of his own. In that respect he does not resemble one who has agreed to sell an estate, that up to the time of the contract was his. There is this difference at the outset, that the one never had more than the legal estate, while the other was at one time both the legal and beneficial owner, and may again become the beneficial owner, if any thing should happen to prevent the execution of the contract; and in the interim, between the contract and conveyance, it is possible that much may happen to prevent it. Before it is known whether the agreement will be performed, he is not even in the situation of a constructive trustee ; he is only a trustee sub modo, and provided nothing happens to prevent it. It may turn out that the title is not good, or the purchaser may be unable to pay ; he may become bankrupt, then the contract is not performed, and the vendor again becomes the absolute owner ; here he differs from a naked trustee, who can never be beneficially entitled. We must not, therefore, pursue the analogy between them too far.

The agreement is not for all purposes considered to be completed. Thus, the purchaser is not entitled to possession, unless stipulated for; and if he should take possession, it would be a waiver of any objection to the title the vendor has a right to retain the estate in the mean time, liable to account if the purchase is completed, but not otherwise. Till then it is uncertain whether he may not again become sole owner; the ownership of the purchaser is inchoate and imperfect ; it is in the way to pass, but it has not yet passed. If the purchase-money has not been paid, the purchaser cannot cut timber on the estate; a court of equity will restrain him at the instance of the vendor. In this respect he is not in a situation similar to that of a naked trustee without a remnant of property, but has for certain purposes a power over the beneficial estate.

[132] This position as to the qualified or limited nature of the trusteeship (if indeed it can be called that)68 maintains in England and Wales.69

66 _{[1820] EngR 472; 1 JAC & W 494, 37 ER 456
(Chancery).}

67 _{At 459.}

68 Gino Dal Pont Equity and Trusts in Australia (5th ed, The Lawbook Company (Thomson Reuters), Sydney, 2007) at [38.145]; and Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Brookers, Wellington, 2009) at [13.2.5] and [13.2.6].

69 Jerome v Kelly [2004] 1 WLR 1409 (HL) at [29]-[32].

[133] Reference was also made to the Australian authority of Chang v Registrar of Titles.70 In that case three Judges of the High Court determined a land transfer matter on essentially procedural grounds, holding that an order vesting property held by a trustee in the appellants was not available. The Court did however make some remarks on the nature of trusteeship in the circumstances, noting obiter that:71

It is true that a vendor at the stage of contract where the contract is enforceable by specific performance has at times been described as a trustee: see, for example, Shaw v Foster (1872) LR 5 HL 321; Lysaght v Edwards (1876) 2 Ch D 499; and if by that no more is meant than that the purchaser is regarded by equity as the beneficial owner of the estate of which the vendor is the legal owner then there is no difficulty in describing the vendor as a trustee. However, if by such a description it is sought to transpose into the law of vendor and purchaser the law governing the rights and duties of trustees, statutory or otherwise, considerable difficulties arise. The present case is an example of the confusion which can arise from giving this description to a party to a contract for the sale of land assumed to be capable of specific performance simply because he has the obligation under the contract to transfer property to the other party on completion of the contract and because equity regards the other as beneficial owner. Where there are rights outstanding on both sides, the description of the vendor as a trustee tends to conceal the essentially contractual relationship which, rather than the relationship of trustee and beneficiary, governs the rights and duties of the respective parties.

Legal principles – Dishonest assistance

[134] In this case the plaintiffs seek to hold SML liable as an accessory to the purported breach of equitable duties under the third, fourth and fifth causes of action. The following is thus relevant to SML’s liability under all of those heads.

[135] The law relating to accessory liability for breach of equitable duties is largely

to be found in the Privy Council’s decision in Royal Brunei Airlines v Tan:72

[I]n the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.

70 _{[1976] HCA 1; (1976) 137 CLR 177 (HCA).}

71 _{At 190.}

72 [1995] 2 AC 378 at 389.

Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.

[136] Subsequent decisions in Twinsectra Ltd v Yardley73 and Barlow Clowes International Ltd v Eurotrust International Ltd74 were considered by the Supreme Court in Westpac New Zealand Ltd v MAP and Associates Ltd.75 The Supreme Court there remarked that:

[27] The key ingredient in the cause of action for dishonest assistance is the need for a dishonest state of mind on the part of the person who assists in the breach of trust. We agree with the statement in Barlow Clowes that such a state of mind may consist in actual knowledge that the transaction is one in which the assistor cannot honestly participate. But it may also consist in what we would describe as a sufficiently strong suspicion of a breach of trust, coupled with a deliberate decision not to make inquiry lest the inquiry result in actual knowledge. For the purpose of this alternative, it is necessary that the strength of the suspicion that a breach of trust is intended makes it dishonest to decide not to make inquiry. That state of mind, which equity equates with actual knowledge, is usually referred to as wilful blindness. It involves shutting one’s eyes to the obvious and can thus fairly be equated with the dishonesty involved when there is actual knowledge.

Legal principles – relief

[137] There was limited argument in this case about the form of relief that should be granted in this case and against whom it would be granted. The situation in this

_{respect is complicated by the interposition of the Body Corporate. In
this case the}

73 _{[2002] UKHL 12, [2002] 2 AC 164.}

74 _{[2005] UKPC 37, [2006] 1 WLR 1476.}

75 [2011] NZSC 89, [2011] 3 NZLR 751.

vendor alleged to be in breach has not in fact entered into the management agreement himself but has used voting rights accruing to him to compel the Body Corporate into an agreement with a third party (SML).

[138] In the case of a breach a fiduciary duty such as the plaintiffs have pleaded, the trustee will be liable to the purchasers as a fiduciary for compensation. It seems unlikely that the purchasers have any remedy against the Body Corporate given that there is no fiduciary or other relationship between the two. Nor can the Body Corporate be totally equated with the interests of the vendors or the third party at the time. The party assisting the breach of trust (SML) might also be made liable. In its case the remedy seems likely to be compensatory.

Legal principles – affirmation

[139] Given my doubts about the ability to impeach the agreement under this cause of action, I do not think it is necessary to engage with the arguments about affirmation.

Application – vendor’s duties to purchaser

[140] The parties agree that the purchasers of the units under the contracts had an equitable interest in the units once the unit plan had been deposited and titles had issued. The parties, however, disagree on the scope of that interest and the duties attaching to it.

[141] As both the Court of Appeal and the High Court of Australia have emphasised the contractual terms of the sale and purchase are likely to be important in any case such as this and are likely to shape the role of the vendor as a sort of trustee. The contract for sale and purchase in this case provided that:

9.2 The Vendor may procure the Body Corporate to enter into a building management agreement with such party as the Vendor may nominate prior to settlement, on usual and reasonable commercial terms.

[142] In this case it is said that:

(a) The property is the subject of a constructive trust with the vendor constituted as trustee;

(b) The vendor as constructive trustee owes a full range of fiduciary duties to the purchasers; and

(c) The vendor owed the purchaser a fiduciary duty not to deal with the property in a way from which the vendor would benefit (whether framed as a duty of loyalty or against self-dealing).

[143] The first of these propositions is undisputed. The second cannot be supported on the basis of the authorities. They demonstrate that the trusteeship of a vendor is, for good reason, a limited one. The vendor retains certain rights that go with the immediate possession of the land as well as a more contingent beneficial interest to the land which will reassert itself should the contract fail. The purchaser has a “contingent ownership right” arising from the contract for sale and purchase with

which the vendor will be prevented from interfering.76 The incidences of the

relationship are such as to limit the application of fiduciary principles.

[144] The vendor in such a situation is accountable to the purchaser for certain matters, such as gains made in capital, but is free to take advantage of rights flowing from possession so long as those do not affect the contingent ownership interest in the estate.77 Bevin v Smith is an example of the vendor benefiting from the possession of the estate in a way adverse to the contingent interest of the purchaser. There is thus some analogy between that case and the present where the vendor has used their (principally) possessory interest prior to settlement (the votes in the Body Corporate) to affect a situation which bears on the contingent proprietary interest of

the purchaser. This might, other matters notwithstanding, have given rise to a claim against TVL for breach of its duties in respect of the purchasers’ equitable interests (whether this is described as a breach of a fiduciary duty or the equity in the

_{contingent interest does not seem to matter).}

76 _{Bevin v Smith at 665.}

77 Wall v Bright at 459.

[145] However, as the Court of Appeal made clear in Bevin v Smith, the equitable interest arising as a result of the contract for sale and purchase is dependent on the contract and is one that is moulded to the nature of the particular situation. The Court of Appeal noted, in the second paragraph of the passage cited above, the importance of the contract in two respects:78

(a) The contract will be important in determining when the equitable interest arises (“whether the equitable interest has passed will always depend on the terms of the contract itself”) ; and

(b) The contract will be important in determining the nature of the duties attaching to the equitable interest (“equity must act according to the nature of the contract and the practical situation of the parties”).

[146] It should be clear from this that the parties to the contract are, therefore, able to modify the extent of the duties attaching to the equitable interest by way of the contract for sale and purchase. A contract might provide, for example, for the vendor to take the benefit of some capital interest in the land (such as drawing water from an aquifer for their adjoining land) during the period where the equitable interest exists in return for a lower purchase price or some other benefit to the purchasers. The purchasers cannot, of course, then proceed to pursue the vendor for dealing with the property inconsistent with the trustee’s duty to preserve the capital (or not to benefit from the capital of the property).

[147] In this case the purchasers have agreed to allow the vendor to take advantage of certain rights attaching to the long-term interest in the property, those being the voting rights in the Body Corporate, for the purpose of entering into the management agreement on “usual and reasonable commercial terms”.

[148] I consider that while an equitable interest in the units was created by the contract for sale and purchase the scope of that equitable interest was not so as to impose the full range of a trustee’s duties upon the vendor. While there was certainly

_{a duty on the purchaser not to deal with the land in such a way as to
cause harm to}

78 Bevin v Smith at 665.

the purchasers’ contingent rights, in this case the terms of the contract entitled the vendor to exercise the Body Corporate’s rights to enter into the agreement with the management company.

Application – dishonest assistance

[149] In this case it has been accepted that TVL constituted a sort of trustee for the purposes of the law of dishonest assistance. While I consider that there was no breach of the constructive trust imposed on the vendor, in the event that I am wrong I consider whether SML could be said to have dishonestly assisted that breach.

[150] In this case the director of the trustee TVL, Mr Martin, was also the initial director of SML, which is alleged to have assisted in the breach. The parties have accepted that the actions of Mr Martin can essentially be equated with the actions of the vendor and of SML.

[151] It is well recognised that liability for dishonest assistance does not depend on the existence of a dishonest trustee.79 The vendor’s liability for breach of trust is strict and could be triggered by a mistaken interpretation of the equitable interest of the purchaser. In those circumstances the trustee will be liable for breach of trust but will not be regarded as dishonest.

[152] There is no suggestion of dishonesty in respect of Mr Martin qua trustee’s conduct in this case. He and TVL appear to have proceeded on the basis that the purchasers’ equity was limited (either inherently or by reference to the contract).

[153] Despite there being an “honest” breach by a trustee, there is still potential for dishonest assistance in that breach. As Lord Nicholls observed for the Privy Council:80

Take the simple example of an honest trustee and a dishonest third party. Take a case where a dishonest solicitor persuades a trustee to apply trust property in a way the trustee honestly believes is permissible but which the solicitor knows full well is a clear breach of trust. The solicitor deliberately

79 _{Royal Brunei Airlines v Tan [1995] 2
AC 378 at 384.}

80 At 384.

conceals this from the trustee. In consequence, the beneficiaries suffer a substantial loss. It cannot be right that in such a case the accessory liability principle would be inapplicable because of the innocence of the trustee. In ordinary parlance, the beneficiaries have been defrauded by the solicitor. If there is to be an accessory liability principle at all, whereby in appropriate circumstances beneficiaries may have direct recourse against a third party, the principle must surely be applicable in such a case, just as much as in a case where both the trustee and the third party have been dishonest. Indeed, if anything, the case for liability of the dishonest third party seems stronger where the trustee is innocent, because in such a case the third party alone was dishonest and that was the cause of the subsequent misapplication of the trust property.

The position would be the same if, instead of procuring the breach, the third party dishonestly assisted in the breach. Change the facts slightly. A trustee is proposing to make a payment out of the trust fund to a particular person. He honestly believes he is authorised to do so by the terms of the trust deed. He asks a solicitor to carry through the transaction. The solicitor well knows that the proposed payment would be a plain breach of trust. He also well knows that the trustee mistakenly believes otherwise. Dishonestly he leaves the trustee under his misapprehension and prepares the necessary documentation. Again, if the accessory principle is not to be artificially constricted, it ought to be applicable in such a case.

[154] This scenario raises the fascinating possibility of whether Mr Martin acting mistakenly but honestly qua trustee could nonetheless appreciate in his capacity as a director of SML that to contract with the vendor in control of the Body Corporate could nonetheless appreciate that his conduct was lacking in probity by failing to enquire fully into his honest but mistaken belief as a trustee.

[155] Fortunately that point does not arise. I consider that if a breach of trust had been made out there would be good grounds for showing that SML appears to have acted conscientiously, albeit with a commercial motive, in arranging to provide the management services.

Application – relief

[156] The relief sought in this cause of action is, in the words of the plaintiffs’ amended statement of claim, “a declaratory order that the Sentinel Management may not force the Body Corporate to perform its obligations in the Management Agreement”. Since I have found that there was no breach of the equitable obligations attaching to the contract for sale and purchase it is not strictly necessary to consider what form of relief would have been necessary.

[157] However, Mr Campbell for the defendant is correct in pointing out that the pleaded form of relief provokes some difficulties. The first is the identity of the parties for whom relief is sought. Those who would have been wronged by the breach of trust were the purchasers, the wrong being to procure the Body Corporate to enter into the management agreement. Had I found dishonest assistance, SML would also have been liable. While I do not decide the point, any wrong by the vendor would not seem to create any equitable right entitling the Body Corporate to relief against the vendor or the defendant.

[158] The second is, if it is accepted that the Body Corporate has a right to relief, whether a declaration would be an appropriate form of order against the liable trustee in these circumstances. Rescission or equitable damages might be a more appropriate form of relief where a contract has been entered into in breach of trust. In the case of rescission the interests of third parties, including the other proprietors who were not represented in this proceeding would need to be taken into account. Only by showing both a breach of a fiduciary duty and SML’s dishonest assistance in entering into the contract might the plaintiffs seek to undo it. As against the vendor, the relief could not touch upon the contract as the vendor was not a party to it. As against the dishonest assistor, equitable damages or some other monetary remedy is a possibility. A remedy which sought to undo the contract, such as rescission, would need to be shown to be appropriate in these circumstances, taking into account the interests of third parties such as the other proprietors.

Application – affirmation

[159] I have not considered whether the Body Corporate can be said to have affirmed the agreement.

Conclusion

[160] The third cause of action fails. I consider that there was no breach of a vendor’s equitable duties to a purchaser under the contract for sale and purchase. Further, in these circumstances there would not have been dishonest assistance in the breach.

Fourth Cause of Action – breach of promoter’s duties

[161] The fourth cause of action seeks to apply, by analogy, the equitable rule that fiduciary duties apply as between the promoter of a company and the company to the circumstances of this case.

Counsels’ submissions

[162] Mr Rainey, for the plaintiffs, submitted that the developer of the Sentinel was, in law, analogous to a company promoter, and that the developer thus owed fiduciary duties to the Body Corporate under a well-recognised line of authority. TVL is said to have breached its duty not to benefit from its responsibilities by causing the Body Corporate to enter into the agreement. SML is said to be liable for having dishonestly assisted this breach of fiduciary duty.

[163] In reply Mr Campbell submitted, in the first instance, that the developer was not a promoter. In any case even it was a promoter, its fiduciary duties were limited by the terms of the management agreement and alternatively that the agreement was on usual and reasonable commercial terms. Lastly, even in the case of a breach of duties through the entry into the agreement, Mr Campbell submitted that the agreement had been affirmed.

Legal principles – promoter’s duties

[164] There is considerable authority on the duty of company promoters not to profit at the expense of the company which they are forming. In Erlanger v New Sombrero Phosphate Company81 the House of Lords considered this principle in a case where a syndicate of promoters had secured the lease of an island for £55,000, formed a company to which the lease was sold for £110,000 and in which shares were then advertised to the public. The company took an action in its own name to

_{rescind the contract or to recover the difference between the purchase
prices. Their}

81 (1878) 3 AppCas 1218 (UKHL).

Lordships held that the promoters owed fiduciary duties to the company. As Lord

Penzance noted:82

A contract of sale effected under such circumstances is, I conceive, upon principles of equity liable to be set aside. The principles of equity to which I refer have been illustrated in a variety of relations, none of them perhaps precisely similar to that of the present parties, but all resting on the same basis, and one which is strictly applicable to the present case. The relations of principal and agent, trustee and cestui que trust, parent and child, guardian and ward, priest and penitent, all furnish instances in which the Courts of Equity have given protection and relief against the pressure of unfair advantage resulting from the relation and mutual position of the parties, whether in matters of contract or gift; and this relation and position of unfair advantage once made apparent, the Courts have always cast upon him who holds that position, the burden of shewing that he has not used it to his own benefit.

[165] Lord O’Hagan also directly endorsed the existence of a fiduciary relationship between the promoters and the company:83

I think that the promoters in this case failed to remember the exigencies of their fiduciary position, when they appointed directors who were in no way independent of themselves, and who did not sustain the interests of the company with ordinary care and intelligence.

[166] Lastly, in his judgment, Lord Blackburn set out the nature of the plaintiff company’s case and the core of the argument that the Lords were being asked to address:84

[The plaintiffs] ... said that when the vendors promoted and formed a company for the purpose of purchasing at that price, they were not entitled to treat that company as a stranger. As promoters of a company they stood in a fiduciary position towards the company they were creating, and that the bargain between the promoters and that company could not stand unless more was done for the purpose of protecting the interest of that company than was done in this case.

[167] After considerable reflection, his Lordship accepted the core argument made for the plaintiffs, concluding:85

Having acquired the property, the syndicate resolved to form a company for the working of the produce of the island, and to make over the purchase to that company. They became promoters of the company, and prepared the

82 _{At 1229 - 1230.}

83 _{At 1255.}

84 _{At 1268.}

85 At 1283-1284.

necessary documents for its formation, and issued a prospectus to the public with the view of inducing the public to take up its shares. In doing this the syndicate changed the position it originally held, and put itself in a fiduciary relation to the company which it was engaged in forming. It thus became incumbent on the promoters not only to make a full disclosure of the position they as owners of the property which they proposed to sell to the company held in regard to that property, but also to make arrangements, by the appointment of competent officials, and otherwise, for enabling the company to form an independent judgment as to the propriety of purchasing the property of the promoters, and of the value of that property, and the price to be paid for it. I agree with your Lordships in thinking that the promoters failed in their duty in this respect

[168] The Erlanger decision has been accepted in New Zealand and references to the fiduciary relationship between promoters and companies that it affirms can be found in decisions of the High Court and the Court of Appeal.86 These references are comparatively limited because, as counsel pointed out, modern company and securities law usually provides statutory rights and remedies which are more easily pleaded than an action for breach of a fiduciary duty.

[169] Counsel for the plaintiffs cited Australian authority87 holding that a developer of a unit title development is a promoter vis-à-vis the development and owes fiduciary duties to the body corporate that is ultimately constituted for the development.

[170] In Community Association DP No 270180 v Arrow Asset Management Pty Ltd and Ors the developer Australand had created a development known as Balmain Cove in the inner suburbs of Sydney. At the time of the deposit of the community plan (the unit plan equivalent) Australand owned all of the lots in the development. There appear to have been no contracts for sale of the lots in place prior to the

registration of the community plan.88

[171] Australand caused the community association (the body corporate equivalent)

_{for Balmain Cove to enter into a site management agreement with Arrow
Asset}

86 See Coleman v Myers [1977] 2 NZLR 225 (HC & CA) at 268; Houghton v Saunders (2008) 19

_{PRNZ 173 (HC) at [77] - [83]; and Saunders v Houghton [2010] 3
NZLR 331 (CA) at [101]-[105].}

87 Community Association DP No 270180 v Arrow Asset Management Pty Ltd and Ors [2007] NSWSC 527. See also: Radford v The Owners Of Miami Apartments, Kings Park Strata Plan 45236 [2007] WASC 250; and Michael Kleinschmidt “Falling short of the target: Some implications of fiduciary duties for developer practice in Queensland and New South Wales” (2011) 19 APLJ 263.

88 Arrow Asset at [1]-[4] & [18]-[20].

Management. Arrow signed another contract with Autraland under which it paid

$190,000 directly to the developer for the rights it gained from the management contract. The decision to enter into the management agreement and the terms of the management agreement were available to search by intending purchasers of the units. However, the agreement providing for payment of the sum of $190,000

between Arrow and Australand was not available to intending purchasers.89

[172] McDougall J, in the New South Wales Supreme Court, held that the developer did owe fiduciary duties to the association:90

[I]t is appropriate to regard the developer of a community scheme as being, vis-à-vis the community association, in a position analogous to that of a promoter of a company. It follows that the relationship between the developer and the community association is a fiduciary relationship.

[173] The developer in that case did not however strongly contest the existence of a fiduciary relationship.91

[174] The Judge then considered the sum of $190,000 paid to Australand by Arrow for causing the community association to enter into the site management agreement. This situation produced a clear conflict and breach of duty as he found:

[230] Because the consideration for the Association’s entry into the management agreement was paid to Australand and not to the Association, it was in Australand’s interests to ensure that the terms of that agreement were sufficiently generous to justify the consideration. However, Australand’s duty to the Association required that the management agreement be made on the best terms commercially available to the Association.

[231] There was a clear conflict between Australand’s interest and its duty. Australand’s interest was to extract the maximum price from Arrow. That conflicted, or might conflict, with its duty to the Association: to get the benefit of management services at the most reasonable terms commercially available. Further, to the extent that the management agreement provided for an “excessive” remuneration (see para [105(4)] above), Australand acted to the detriment of the Association in causing it to enter into the management agreement on the terms contained in that agreement.

[175] There is no New Zealand authority on the status of those responsible for unit title developments as promoters.

89 _{Arrow Asset at [224].}

90 _{Arrow Asset at [225].}

91 Arrow Asset at [209].

Legal principles - remedy

[176] In a case such as this where a contract has been procured in breach of fiduciary duties there may be a choice of remedies.

[177] In Erlanger their Lordships were faced with a clear choice between rescission of the contract and equitable compensation for the difference between the initial price of the island as purchased by the syndicate and the price at which they onsold it to the company.

[178] The effect of rescission as their Lordship’s made clear in Erlanger is to restore the parties to the position in which they were initially in by setting aside the contract ab initio. In that case, as a transfer of property was in issue, the remedy was simply to require the company to transmit the property back to the promoters and for the promoters to repay the whole of the money paid by the company for it. This was so even though the value of the lease had dropped below the ₤55,000 that the syndicate had initially paid for it.

[179] The judgment also makes it clear that the rescission of the contract in such a way is, at least in equity, a discretionary one. The majority of the House were in favour of granting the remedy with the Lord Chancellor, Lord Cairns, dissenting as to the outcome as he considered either laches or acquiescence might have deprived the company of any right to rescission.

[180] There was limited argument in this case as to the appropriateness of the remedies that might be granted, particularly in respect to rescission. It is far from clear from the authorities whether rescission as a remedy can be exercised and be effective without the assistance of the Court. This point would have had a direct bearing on the argument that the Body Corporate had elected to affirm or had acquiesced in the agreement procured through breach. In the absence of argument as to the remedies available and their effect, and given the matters dealt with in the sixth cause of action, it is not necessary to discuss these points in detail or reach any conclusion on the matter of affirmation.

Legal Principles – affirmation

[181] The argument for affirmation in this case must be that the corporation affirmed the agreement since the promoter’s duty was owed to the corporation and not to individual purchasers. The argument in relation to affirmation raised by Mr Campbell for the defendant need not be considered on this cause of action either, though I note that it would have raised an interesting argument as to the timing of the Body Corporate’s knowledge of its legal rights.

Application – promoter’s duties

[182] Of the plaintiffs only the Body Corporate is concerned by this cause of action. TVL is said to be in the position of a promoter while the Body Corporate is the equivalent of the nascent company. Counsel recognised that this argument is a novel one in New Zealand’s law.

[183] The positions of a promoter and that of a developer are not in all respects alike. A developer’s relationship with purchasers is likely to be on a much firmer footing than between a promoter and purchasers of stock due to the fact that contracts for sale and purchase of the land carry very significant obligations in their own right.

[184] The corporate structures and the control exercised by the respective corporators also differ. The appointment of the directors of a company may not depend entirely upon voting rights even though they exercise considerable power; the disconnection between management and members may be considerable. In contrast, the voting entitlement which accrues to proprietors is inalienable and provides a direct means of control over the activities of the body corporate. Considerations of size and physical proximity mean that relations between the body corporate’s committee and the remaining proprietors are also likely to be more responsive and direct.

[185] In addition, the way in which a benefit is alleged to have been obtained in this case is different. In Erlanger the promoters benefited from the sale of an over-

priced commodity to the company. In this case the developer has incorporated a company, taken advice on the services to be provided and then signed a contract for the provision of those services by his service company on what is claimed are preferential or unfair terms. He has then sold the shares in that company, and thereby the benefit of that contract, to another person at what is said to be a premium thus personally profiting him.

[186] The historical context leading to the recognition of the promoter’s duty is also important. While companies have subsequently become subject to more stringent regulation and legislative oversight they were not as closely controlled at the time of the events in Erlanger and the courts might rightly have been regarded as protecting the interests of investors in a somewhat chaotic and opaque market. By contrast

body corporates under the UTA 197292 are subject to the regulation and oversight

provided by a legislative scheme which closely defines their roles and responsibilities.

[187] McDougall J in Arrow Asset noted the differences inherent in the two types of arrangement and referred to the provisions of the New South Wales legislation that provided protection for the infant body corporate in respect of agreements entered into. 93 Similar protective provisions now exist under the UTA 2010. The Judge was nonetheless satisfied that there was a sound analogy between the positions of a developer and a promoter and that the circumstances of the relationship could found a fiduciary relationship.94

[188] The only pleaded fiduciary duty in this case is the duty against self-dealing which is the same duty that was in issue in the promoters’ cases. The application of other fiduciary obligations to developers is not in issue in this case.

[189] Counsel for SML rightly pointed out that the recognition of new classes or instances of fiduciary relationships is not lightly to be undertaken and must turn on

_{more than mere proximity or a sense of
fairness.}95 _{Mr Campbell also submitted
that}

92 _{And arguably to a much greater degree under
the UTA 2010.}

93 _{Arrow Asset at [224].}

94 _{Arrow Asset at [224].}

95 Disher v Farnworth [1993] 3 NZLR 390 (CA) at 399.

the Supreme Court’s decision in Chirnside v Fay96 has a tendency to limit fiduciary relationships to situations in which the central relationship is one of trust and confidence and that the purchasers in this case were not entitled to place such trust and confidence in the developer.

[190] In the joint judgment of Blanchard and Tipping JJ in Chirnside v Fay, their Honours made a number of observations about the underlying assumptions or principles upon which fiduciary obligations might rest. Their Honours distinguished between what they regarded as inherently fiduciary relationships and other relationships which the Courts were willing to recognise as importing a fiduciary character on a more case by case analysis according to a number of possible underlying considerations. While a number of these relationships are characterised by a rapport which involves a clear and express confidence in another that will be enforced by equity, in others an imbalance in the relationship may produce a reliance of one party upon the other to exercise power on its behalf and safeguard its

interests.97

[191] The underlying principle in the imposition of a fiduciary duty on promoters is clear from the cases. As the statement of Lord Penzance quoted above suggests, the imposition of a fiduciary relationship in these circumstances turns upon the creation or existence of a relationship in which the fiduciary is in a position or relation with another which tends to give the promoter an unfair advantage or considerable power over that other.

[192] By analogy to the promoters cases and having regard to the underlying principle that the Body Corporate was, at an early stage of its existence, in a position of disadvantage vis-à-vis the developer, I accept that there was a fiduciary relationship between the developer and the Body Corporate under which TVL had a duty not to engage in self-interested transactions to the detriment of the interests of

_{the Body Corporate.}

96 _{Chirnside v Fay [2007] 1 NZLR 433 at
[73]-[75].}

97 Chirnside v Fay at [78]-[80] and [83]-[85].

[193] In dealing with another company which was also controlled by its director, TVL breached this duty.

[194] Mr Campbell has submitted that the contract for sale and purchase of the units which includes a clause permitting the vendor to set up a management agreement means that a fiduciary duty should not be superimposed and in the event that it was, should serve to limit that fiduciary duty. Clause 9.2 provided:

9.2 The Vendor may procure the Body Corporate to enter into a building management agreement with such party as the Vendor may nominate prior to Settlement, on usual and reasonable commercial terms.

[195] The presence of that clause does not militate against the existence of a fiduciary relationship. While there is a degree of overlap in the subject matter of the clause and that of the fiduciary relationship, the identities of the parties and the remedies available are different.

[196] The contract for sale and purchase exists as between the developer and the initial purchasers of the units. Subsequent owners would have no right to complain about the terms of the agreement. In addition, the only remedy likely to be available to the purchasers would be monetary and could not serve to impeach the management agreement. While this might serve as a disincentive to the developer it is not so complete a form of legal protection as is afforded by the fiduciary relationship.

[197] The fiduciary relationship allows the body corporate itself to take action subsequent to the initial purchase of units in the development and allows it a direct means of challenging an agreement that results from an unfair trading practice. Such an approach is not available on the basis of the contractual clause alone.

Application – dishonest assistance

[198] Given that this cause of action directly concerns the contract between the company and the Body Corporate, that contract may be rescinded or remedies granted simply on the basis of that breach of fiduciary duty. The pleading that SML dishonestly assisted in the breach seems to add little to the questions the Court is

required to consider when assessing whether a breach occurred and what remedy might otherwise be appropriate.

Application - remedy

[199] In this case the Body Corporate has not sought equitable compensation for the breach of fiduciary duty. The plaintiffs have sought “a declaration that the Management Agreement cannot be enforced against the Body Corporate”.

[200] Whether this amounts to a plea that the Court order the rescission of the contract or merely seeks to have the Court confirm that the contract is void or voidable as having been procured in breach of a fiduciary duty is not entirely clear.

[201] While ultimately this point need not be determined, given the outcome of the sixth cause of action, the following matters would have needed to be considered if rescission were in issue. Any finding that the contract was rescinded ab initio would have required the parties to consider whether ancillary orders concerning payments to SML for its services thus far, the fate of SML’s unit in the building or the lease agreed to were all dealt with. A declaration of the sort sought by the plaintiffs would not be appropriate as it would only free the Body Corporate from its obligations while leaving SML tied to its obligations.

Conclusion

[202] The fourth cause of action succeeds in that the developer was in a fiduciary position to the body corporate which it breached by self-dealing. The likely remedy would have been rescission of the contract with ancillary orders to restore the parties to their original position insomuch as possible.

Fifth Cause of Action – unconscionable bargain

[203] The fifth cause of action pleads that the management agreement is, as far as the Body Corporate is concerned, an unconscionable bargain.

Counsels’ submissions

[204] Mr Rainey submitted that, on well established legal principles, the agreement entered into between SML and the Body Corporate was an unconscionable bargain as it was under the complete control of Mr Martin and he did not act to protect its interests. SML is said to have actively known of this disability and to have taken advantage of it. SML, it is said, has no way to show that the transaction was nonetheless fair and reasonable and ought to be upheld.

[205] Mr Campbell, for Sentinel, accepted the principles of law set out by the plaintiffs but disputed their application in this particular case. He submitted that it is difficult to understand how, in a situation where one person controls both parties to an agreement, a disability can be said to exist in one and not the other. Mr Campbell further submitted that there was no marked imbalance, no unconscionable exploitation of the disability and lastly that the agreement had been affirmed.

Legal principles – unconscionable bargain

[206] Counsel accepted the summary of principles relating to unconscionable

bargains in the Court of Appeal’s decision in Gustav v Macfield Ltd.98

[30] We do not propose to analyse these authorities in detail. Rather, we derive the following principles from them. The principles stated are not exhaustive, but are sufficient for the purposes of this case.

1 Equity will intervene to relieve a party from the rigours of the common law in respect of an unconscionable bargain.

2 This equitable jurisdiction is not intended to relieve parties from “hard” bargains or to save the foolish from their foolishness. Rather, the jurisdiction operates to protect those who enter into bargains when they are under a significant disability or disadvantage from exploitation.

3 A qualifying disability or disadvantage does not arise simply from an inequality of bargaining power. Rather, it is a condition or characteristic which significantly diminishes a party’s ability to assess his or her best interests. It is an open-ended concept. Characteristics that are likely to constitute a qualifying disability or disadvantage are

98 Gustav v Macfield Ltd [2007] NZCA 205 at [30].

ignorance, lack of education, illness, age, mental or physical infirmity, stress or anxiety, but other characteristics may also qualify depending upon the circumstances of the case.

4 If one party is under a qualifying disability or disadvantage (the weaker party), the focus shifts to the conduct of the other party (the stronger party). The essential question is whether in the particular circumstances it is unconscionable to permit the stronger party to take the benefit of the bargain.

5 Before a finding of unconscionability will be made, the stronger party must know of the weaker party’s disability or disadvantage and must “take advantage of” that disability or disadvantage.

6 The requisite knowledge may be that of the principal or an agent, and may be actual or constructive. Factors associated with the substance of a transaction (for example, a marked imbalance in consideration) or the way in which a transaction was concluded (for example, the failure of one party to receive independent advice in relation to a significant transaction) may lead to a finding that the stronger party had constructive knowledge. So, in the particular circumstances the stronger party may be put on enquiry, and in the absence of such enquiry, may be treated as if he or she knew of the disability or disadvantage.

7 “Taking advantage of” (or victimisation) in this context encompasses both the active extraction and the passive acceptance of a benefit. Accordingly, as Tipping J said in Bowkett at 457, an unconscionable victimisation will occur where there are:

... circumstances which are either known or which out to be known to the stronger party in which he has an obligation in equity to say to the weaker party: no, I cannot in all good conscience accept the benefit of this transaction in these circumstances either at all or unless you have full independent advice.

8 If these conditions are met, the burden falls on the stronger party to show that the transaction was a fair and reasonable one and should therefore be upheld.

Application – unconscionable bargain

[207] The plaintiffs accept that Mr Martin effectively controlled the Body Corporate. Personally he was under no disability yet the plaintiffs say the Body Corporate was because Mr Martin favoured his interests in SML over those of the Body Corporate.

[208] I do not consider that the Body Corporate was under a disability because of decisions taken by Mr Martin about various aspects of the agreement. The disability or disadvantage which is at the heart of the unconscionable bargain doctrine must relate to the capacity of the affected party to reach proper reasoned decisions. Here, Mr Martin was clearly able to reach proper reasoned decisions both for the Body Corporate and for SML.

[209] The plaintiffs submit that Mr Martin’s interest in the development was inherently at odds with the Body Corporate’s interest citing Arrow Asset Management. The fact that Mr Martin may have had fiduciary duties to the Body Corporate does not of itself mean that the unconscionable bargain doctrine is engaged. Mr Martin’s bargaining abilities are to be attributed to both SML and the Body Corporate for the purposes of assessing whether the Body Corporate was acting under a disability. Here there was an equality of bargaining power. Mr Martin was acting for both parties.

Conclusion

[210] The fifth cause of action fails. I consider that there was no unconscionable bargain in that Mr Martin was capable of reaching proper reasoned decisions on behalf of the Body Corporate.

Sixth Cause of Action – Section 140 UTA 2010

[211] The sixth cause of action concerns the applicability and meaning of s 140 of the Unit Titles Act 2010 which allows the Court to terminate agreements which are “harsh or unconscionable”.

Counsels’ submissions

[212] For the plaintiffs, Mr Rainey’s submissions supported a plain reading of s 140(5) which would deal with any question of the application being time-barred.

Relying on the context and purpose of the Act,99 his submission was that in order for the contract to be harsh or unconscionable, it need only be unfair to the Body Corporate or not within its best interests and that the agreement contained numerous terms that could be considered unfair.

[213] Mr Campbell submitted that the time restraints found elsewhere in the section could be implied, or could be shown by the language of the section, to apply equally to s 140(5). He also suggested that it was extraordinary that the compensation remedy was limited while the termination remedy was not. His submission also relied on the context of the Act to suggest that something more than mere unfairness or unreasonableness would be necessary. He also submitted that something more than the types of oppressive behaviour identified under other Acts of Parliament should apply when interpreting the language of the section.

Legal principles – section 140 UTA 2010

[214] Section 140 of the UTA 2010 reads in full:

140 Compensation for, or termination of, service contracts

(1) This section applies to a service contract—

(a) to which the body corporate of a unit title development is a party; and

(b) that was entered into before the date that the control period ended in relation to the unit title development concerned.

(2) The appropriate decision-maker may, on the application of the body corporate, require a person, or, as the case may be, persons, described in subsection (3) to pay compensation to the body corporate if it appears to the appropriate decision- maker that the body corporate has suffered loss or damage because that person has, or, as the case may be, those persons have, failed to comply with section 139.

(3) The persons referred to in subsection (2) are—

_{(a) the original owner:}

99 UTA 2010, ss 3 & 139.

(b) an associate of the original owner who was a member of the body corporate during the control period.

(4) An application under subsection (2) must be made within 3 years after that date that the control period ended.

(5) The appropriate decision-maker may, on an application made by the body corporate, make an order terminating the service contract if it appears to the appropriate decision- maker that the contract is harsh or unconscionable.

In the case of a service contract made before the commencement of the Act only the remedy of termination provided for in s 140(5) is available.100 Neither counsel nor further research could show any concrete authority on this provision in New Zealand.

Legislative History

[215] No comparable provision was present in the UTA 1972. Looking to the history of the UTA 2010 reveals that what would become s 140 was present, in substance, from the introduction of the Unit Titles Bill.101 The Select Committee’s report on the Bill makes no comment on the meaning of the words “harsh” and “unconscionable” in the context of the clause.

Comparable statutory provisions

[216] No equivalent provision occurs in the equivalent ACT or Victoria legislation. The NSW legislation provides that measures may be taken to terminate or seek compensation for a caretaking agreement that is harsh or unconscionable102 but no useful case law on that provision is apparent.

[217] In New Zealand the “harsh or unconscionable” standard is found in a small number of Acts. The Disputes Tribunal has, for instance, the power to make

_orders:103

100 _{UTA 2010, s 229.}

101 _{Unit Titles Bill 2008 (212-1), cl
124.}

102 _{Strata Schemes Management Act 1996, s
183A.}

103 Disputes Tribunal Act 1988, s 19(1)(e).

(e) Where it appears to the Tribunal that an agreement between the parties, or any term of any such agreement, is harsh or unconscionable, or that any power conferred by an agreement between them has been exercised in a harsh or unconscionable manner, the Tribunal may make an order varying the agreement, or setting it aside (either wholly or in part)...

[218] The same expression also appears in residential tenancies law. The Tenancy Tribunal has an identical power to make orders in respect of residential tenancy disputes.104 There appear to be no cases that elaborate on the standard to be applied in respect of the words “harsh and unconscionable” in these contexts.

Interpretation

[219] The lack of statutory guidance to be found in the UTA 2010 means that the Court must fall back on other tools of interpretation. The first of these is the Interpretation Act 1999 which provides:

5 Ascertaining meaning of legislation

(1) The meaning of an enactment must be ascertained from its text and in the light of its purpose.

(2) The matters that may be considered in ascertaining the meaning of an enactment include the indications provided in the enactment.

(3) Examples of those indications are preambles, the analysis, a table of contents, headings to Parts and sections, marginal notes, diagrams, graphics, examples and explanatory material, and the organisation and format of the enactment.

[220] In this Act, the relevant features of the Act are its purpose section,105 the context provided by s 139, which creates a duty on the original owner (most often the developer) to exercise reasonable, skill, care and diligence and act in the best interests of the body corporate when concluding any service contracts, and the other

_{subsections of s 140.}106

104 _{Residential Tenancies Act 1986, s
78(1)(f).}

105 _{UTA 2010, s 3.}

106 UTA 2010, s 140(1) & (2).

Comparable legal standards: harsh and unconscionable

[221] There is the use of equivalent statutory words in one context which has been the subject of judicial comment. The same phrase was to be found in the English Moneylenders Acts of 1900 and 1927. The House of Lords, in a case concerning the interpretation of the 1900 Act, described the circumstances giving rise to harshness and unconscionability, which the Lords treated as unified and indistinct in the

context of the Act:107

The result I have arrived at may therefore be summarized as follows: Excessive interest of itself is sufficient to render a contract harsh and unconscionable. Proof of excessive interest may of itself, therefore, be sufficient to entitle the debtor to relief. What amounts to excessive interest is to be determined by the tribunal in each case, the question of risk being a material matter for consideration. When excessive interest is apparently established, any facts that tend to shew that such excess does not render the contract "harsh and unconscionable" should be proved in evidence by the lender. This burthen is on him. Such appearing to me to be the construction that should be put upon the Money-lenders Act, and applying it so construed to the facts of the present case, I entertain no doubt of the correctness of the judgments delivered by Kekewich J. and by the Court of Appeal.

Comparable legal standards: oppressiveness

[222] The standard of “harsh or unconscionable” referred to in the Act may be contrasted with other forms of words used in similar statutes, which have been the subject of consideration by the courts.

[223] Counsel for SML referred to the standard of oppressiveness and the powers of the courts under the Credit Contracts and Consumer Finance Act 2004. The relevant provisions of that Act are:

118 Meaning of oppressive

In this Act, oppressive means oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.

120 Reopening of credit contracts, consumer leases, and buy-back transactions

107 Samuel v Newbold [1906] 1 AC 461 at 473-474.

The Court may reopen a credit contract, a consumer lease, or a buy-back transaction if, in any proceedings (whether or not brought under this Act), it considers that—

(a) the contract, lease, or transaction is oppressive; or

(b) a party has exercised, or intends to exercise, a right or power conferred by the contract, lease, or transaction in an oppressive manner; or

...

124 Guidelines for reopening credit contracts, consumer leases, and buy-back transactions

In deciding whether section 120 applies and whether to reopen a credit contract, consumer lease, or buy-back transaction, the Court must have regard to—

(a) all of the circumstances relating to the making of the contract, lease, or transaction, or the exercise of any right or power conferred by the contract, lease, or transaction, or the inducement to enter the contract, lease, or transaction (as the case may be); and

(b) the following matters if they are applicable:

(i) whether the amount payable by the debtor under the contract, lessee under the lease, or occupier under the transaction is oppressive (whether or not on default by the debtor, lessee, or occupier):

(ii) if a debtor, lessee, or occupier is in default under the contract, lease, or transaction, whether the time given to the debtor, the lessee, or the occupier to remedy the default is oppressive, having regard to the likelihood of loss to the creditor, lessor, or transferee:

(iii) if the creditor has required, as a condition of the full prepayment of a credit contract, that the debtor pay a certain amount, whether the amount is oppressive having regard to the expenses of the creditor and the likelihood that the amount repaid can be reinvested on similar terms:

(iv) if the creditor, lessor, or transferee has refused to release part of any security interest relating to the contract, lease, or transaction, or has agreed to the release subject to conditions, whether the refusal is, or the conditions are, oppressive, having regard to the obligations secured by the security interest and the extent of the security that would remain after the release; and

[224] The Supreme Court recently had occasion to comment on the standard of oppressiveness embodied in the Act and observed:108

[46] A credit contract or other transaction to which Part 5 of the Act applies may be reopened as oppressive when it might not necessarily have been set aside as unconscionable by a court of equity. For example, in equity it is necessary to show that the borrower was under a special disability or disadvantage. As Arnold J remarked, the scope of oppression under the Act is broader than the equitable doctrine of unconscionability. That follows from the fact that the definition of “oppressive” is wider than unconscionable conduct and includes a “breach of reasonable standards of commercial practice”. The Court of Appeal has correctly said in Greenbank New Zealand Ltd v Haas that the various words which together form the definition of the term “oppressive” all contain different shades of meaning but they all contain the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice. That sets an objective standard. A contract or course of conduct may therefore, as Arnold J also said, be treated as oppressive even though the party whose conduct is said to be oppressive may be (subjectively) blameless because the party is simply following industry practice. Where that practice is in breach of reasonable standards, compliance with it will not immunise a lender. It is for the courts rather than the industry to set the standard. But that assumes a situation in which the lender knows of the matter found to give rise to oppression or knows something which should have put it on inquiry.

Comparable legal standards: unconscionability

[225] The word unconscionable is one which can attract a variety of different meanings.109 It has strong links to the system of equity developed in the Court of Chancery but its meaning, even in that context, is far from clearly defined. It should also be remembered that Parliament’s intention, when using the word, may be to invoke wider principles of fairness and conscience divorced from the equitable definition(s).

[226] The grounds required to establish that an agreement is an unconscionable bargain are discussed above. The law of unconscionable bargains is a clear and defined equitable doctrine that relies upon the existence of a specific disadvantage or

_{disability on the part of one party.}110 _{Beyond that specific doctrine, however, the}

108 _{GE Cutodians v Bartle [2010] NZSC
146, [2011] 2 NZLR 31.}

109 Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214

CLR 51 (HCA) at [38]-[45] and [159]. See further: Gino Dal Pont “The Varying shades of

_{‘Unconscionable’ Conduct – Same Term, Different
Meaning” (2000) 19 ABR 135.}

110 Hart v O’Connor [1985] 1 AC 1000 (PC), [1985] 1 NZLR 159 at 1024.

word unconscionable is prone to be used in a number of different ways.111 To some degree the word unconscionable also serves as a general label for behaviours or situations where, under different doctrinal heads, equity has traditionally been recognised as willing to intervene:112

Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage, e.g., a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two.

[227] In general the equitable notion of unconscionability does not go so far as to encompass generalised forms of moral wrong or conduct that the Court considers unfair.113

[228] However, it is not clear that either the narrow concept of an unconscionable bargains or the wider notion of unconscionability at equity necessarily relate to or serve to limit the statutory definition. One instance of the use of the word unconscionable in statute, which has produced a considerable body of case law, is in the Australian Consumer Law114 which includes the following provisions:

20 Unconscionable conduct within the meaning of the unwritten law

(1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.

111 _{Royal Brunei Airlines v Tan [1995]
1 AC 378 (UKHL) at 392; and John McGhee (ed) Snell’s}

_{Equity (32}nd _{ed, Sweet &
Maxwell, London, 2010) at [8-004].}

112 _{Commercial Bank of Australia v Amadio
[1983] HCA 14; (1983) 151 CLR 447 (HCA) at 461.}

113 Nichols v Jessup [1986] 1 NZLR 226 (CA) at 232-233 & 235; and Attorney-General of New South

_{Wales v World Best Holdings Ltd [2005] NSWCA 261, (2005) 63 NSWLR
557 at [120].}

114 The Australian Consumer Law is to be found in the Competition and Consumer Act 2010 (Cth), Sch 2 and applies as as if it were a Federal Act pursuant to s 131 of that Act.

(2) This section does not apply to conduct that is prohibited by section

21.

21 Unconscionable conduct in connection with goods or services

(1) A person must not, in trade or commerce, in connection with:

(a) the supply or possible supply of goods or services to a person

(other than a listed public company); or

(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

...

(4) It is the intention of the Parliament that:

(a) this section is not limited by the unwritten law relating to unconscionable conduct; and

(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and

(c) in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:

(i) the terms of the contract; and

(ii) the manner in which and the extent to which the contract is carried out;

and is not limited to consideration of the circumstances relating to formation of the contract.

[229] The predecessor to s 21 of the Australian Consumer Law was s 51AB Trade Practices Act (Cth) 1974. There are a number of reported decisions in which Australian Judges have sought to apply the concept of unconscionability embedded in the section and have commented on its meaning.

[230] In Zoneff v Elcom Credit Union Ltd the Federal Court of Australia commented on how unconscionable behaviour within the Act should be understood:115

Further the conduct referred to in [the section] must be, in all the circumstances, unconscionable. The cases have not sought to define unconscionability nor is it appropriate so to do because the criteria to be applied will depend upon all the circumstances. Nevertheless, in general terms, it may be said that conduct will be unconscionable where the conduct can be seen in accordance with the ordinary concepts of mankind to be so against conscience that a court should intervene. At the least the conduct must be unfair. It invites comparison with doctrines of equity: cf. Blomley v. Ryan [1956] HCA 81; (1954-1956) 99 C.L.R. 362 and Commercial Bank of Australia Ltd. v. Amadio & Anor [1983] HCA 14; (1983) 151 C.L.R. 447 where inequality of bargaining power or absence of the ability to bargain freely will be relevant to the finding that there has been an unfair advantage taken by one person of the other.

[231] The New South Wales Court of Appeal in interpreting a section modelled on the Trade Practices Act also had occasion to comment on the meaning of “unconscionable” behaviour in retail leasing matters:116

The Ministerial second reading speech ... indicates a similar concern to distinguish what is unconscionable from what is merely unfair or unjust. Even if the concept of unconscionability in s 62B of the Retail Leases Act is not confined by equitable doctrine, as the decisions under s 51AC of the Trade Practices Act (Cth) suggest, restraint in decision-making remains appropriate. Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was “fair” or “just”, it could transform commercial relationships in a manner which the Minister expressly stated was not the intention of the legislation. The principle of “unconscionability” would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises.

...

There is a suggestion that the Tribunal in the present case may have adopted an unacceptably low standard. After setting out its conclusions, the Tribunal found: “we consider the conduct of WBH to be quite unacceptable ... having regard to normal industry standards and practices” (at [69]). It then proceeded to determine what were called “the legal issues”, including unconscionability, by identifying which of the considerations in s 62B(3) of the Retail Leases Act were applicable without further analysis of matters of fact and degree that need to be considered when applying a test of

115 (1990) ATPR 41-009 at 51,158. The section of the Act dealing with unconscionable conduct was at that time to be found in s 52

116 Attorney-General of New South Wales v World Best Holdings Ltd [2005] NSWCA 261, (2005) 63

NSWLR 557 at [121] and [123]-[125].

unconscionability. If, as appears likely, a test of “unacceptable conduct”

were adopted, this is a far lower standard than unconscionability.

...

Parliament did not intend that “unconscionability” claims could be made so readily as to virtually take the place of retail tenancy claims. They needed to meet a high standard of moral obloquy.

The best way of ensuring that this eventuality did not occur was, it appears, the vesting of the jurisdiction in persons whose cast of mind is such that they would not be tempted to take the easy course of avoiding the complexities of the legal rights and obligations of a situation and resorting, virtually in the first instance, to what has appropriately been called the formless void of a general discretion.

Application – time period

[232] On its face the statute provides that an application for compensation under the Act must be made within 3 years of the control period ending (s 140(4)). That restriction on the time for making an application does not appear, on the face of the statute, to apply to applications under s 140(5) to cancel the agreement. The defendant has, however, submitted that such is implicit in the structure of the section.

[233] The defendant’s argument that the application of s 140(5) is subject to the same time period as s 140(2) is not compelling for a number of reasons.

[234] The first is that the plain words of the statute do not support the imposition of a time limit on applications where none is evident in s 140(5) itself. The time limit imposed in relation to s 140(2) requires its own subsection (s 140(4)), makes explicit reference to s 140(2) and follows after s 140(2) (but precedes s 140(5)); it appears as a piece of clear and explicit drafting. Had Parliament wished to apply a time limit to

140(5) it might have done so by inserting a reference to s 140(5) into s 140(4) or by creating another subsection (following s 140(5)) and by including an explicit reference to (5) in that section.

[235] Mr Campbell’s argument that the “an application made” under s 140(5) is the same as “the application of the body corporate” under s 140(2) and “an application” under s 140(4) does not detract from this analysis. To hold that the application mentioned in s 140(5) is merely a limb of the application made under s 140(2) and

thus subject to the time limit in s 140(4) simply on the basis of the different uses of articles preceding the noun is not supportable.

[236] The conclusion that the time limit does not apply is supported by other parts of the Act. Section 229, in providing that service contracts entered into prior to the UTA 2010 may be challenged under s 140(5) but not s 140(2), suggests that they are different remedies and subject to different rules, at least in so much as time is concerned.

[237] Some aid is also gained from the concept of the “control period” created by the Act. To impose a three year time limit following the control period for cancellation in the context of existing developments makes little sense. Compare the following examples:

(a) A unit development created by the deposit of a plan on 1 January 2005 for which a 10 year service agreement is signed at the same time, meaning that the control period ends on 1 June 2005; and

(b) A unit title development created on 1 January 2008 with a 10 year service agreement signed at the same time, whose control period ends on 1 June 2008.

[238] Both body corporates would be taken as constituted under the old Act and s 229 would apply to them. However, if the defendant’s argument is correct, then upon commencement of the new Act one would have the right to contest the terms of its service contract while the other would not. There is nothing in the Act to suggest that this somewhat arbitrary distinction in outcomes should prevail.

[239] There is some force in Mr Campbell’s submission that the fact that a time limit applies to s 140(2) but not to s 140(5) is extraordinary. That what might be seen as the stronger remedial position, termination, is unlimited, while the lesser remedy of compensation is not, can however be explained.

[240] As several commentators have noted, the limitation period imposed on s

140(2) may relate to the way in which the power of the developer as the initial sole proprietor has, at times, been misused:117

Notoriously, on a unit title development being created, developers enter into service contracts with body corporate managers in consideration for receiving a “one-off” capital fee, sometimes of considerable proportion. This may commit the body corporate to a non-reviewable service contract for a considerable period of time. Thus, the body corporate shortly after incorporating may be saddled with a considerable burden of expensive management fees, whilst the developer, having pocketed the one-off fee, exits from the development.

[241] Where such conduct occurs s 140(2) will be particularly useful in holding the developer to account. Indeed the original developer or its associates are the only persons targeted by the section and no direct remedy is provided against the service provider. A remedy which is limited in time will both encourage the non-developer owners to act promptly to address agreements made by the fledgling body corporate and also provide some limits and some certainty for the developer that, following the three year period, there is no chance of monetary redress.

[242] The target in s 140(5) is different as the remedy lies essentially against the service provider. Section 140(5) is meant for a number of different situations:

(a) It may be that the contract entered into contains provisions that are not in the body corporate’s best interests, and which are challenged within the time limit but which are incapable of being financially compensated by the developer in which case termination is the proper remedy;

(b) It may be that the contract entered into well serves the body corporate’s commercial or economic interest yet contains terms relating not to the economic aspects of the building’s management but also gives other powers to the contractor. For instance if the contract allows the contractor to do things that are overly intrusive or which

_{interfere with the proper administration of the development. In
many}

117 Rod Thomas Brookers – Unit Titles Handbook 2011 (Thomson Reuters, Wellington, 2011) at 35.

cases the ultra vires ground may be the best way to challenge these provisions but in some cases the power of termination under s 140(5) might be more useful; or

(c) In some cases the service contract may appear perfectly sound in both commercial terms and the powers it gives to the contractor at the outset. However, it is entirely possible that some event might intervene which renders the service contract no longer sound and which gives it a harsh or unconscionable effect.

[243] The first situation above would not be affected by a time limit. The second situation arguably would not either, provided the body corporate detects the potential for powers to be used abusively at an early stage.

[244] However, in the last example a time limit on the power to terminate the contract would deprive the body corporate of a remedy. While careful drafting of service contracts and protective contractual provisions (such as price review mechanisms and force majeure clauses) can protect against many changes of circumstance and, freedom and the security of contracts are important aims, there are particular features of the unit titles system of ownership that may make it advisable for the courts or a tribunal to be able to exercise an ongoing power of termination in the right circumstances. Rejecting the time limit would also mean that s 140(5) can be applied and serves a useful purpose in the case of contracts entered into subsequent to the post control period three year limit.

[245] For these reasons, the time limit found in s 140(4) should not apply to an application under s 140(5).

Application – harsh and unconscionable

[246] The first point is to consider whether the words “harsh” and “unconscionable” should be treated as conceptually unitary or as separate. An approach that treated them as separate is certainly possible given the use of the conjunction “or” and the fact that most service contracts will have different aspects.

A court or a tribunal may need to consider both the details of the financial transaction (“the commercial aspect”) in the contract and the range and nature of powers and responsibilities given to the service provider and their intrusion on the rights and powers of the proprietors and the body corporate (“the powers aspect”).

[247] I would hold that in order for a service contract to be unconscionable under the Act that the decision-maker need not identify the specific grounds giving rise to the equitable concept of an unconscionable bargain nor need there be a specific (long-established) ground of equitable intervention such as estoppel or undue influence, all of which come under the heading of unconscionable in its larger, but still equitable, sense.

[248] There are a number of points that argue against importing these narrower equitable definitions into the statute. First, to have enacted a section merely to affirm that these particular types of contract can be set aside on existing equitable grounds seems to serve no purpose. Secondly, there is the coupling or pairing of the words “harsh” and “unconscionable”. From this I take that Parliament intended something more than the merely equitable grounds.

[249] Thirdly, there is the use of the same combination of words in other New Zealand statutes and the particular contexts in which those Acts operate.118 Those statutes govern the activities of tribunals whose role is to apply law and legal principles in a more general, less strictly rule-bound fashion. I also note that, in respect of the jurisdiction under s 140(5), the Tenancy Tribunal is also an “appropriate decision-maker”.

[250] While an argument might be made that there are reasons for holding the Tribunal to narrower legal principles in respect of unit titles arrangements than in respect of residential tenancies, I am not prepared to read this into the plain words of the statute especially when the larger meaning is supported by other reasons.

[251] Lastly there are policy reasons which might support diluting the normally strict contractual approach to the bargains of parties (and hence the limited grounds

118 Residential Tenancies Act 1986 & Disputes Tribunals Act 1988.

of equitable intervention) which would normally apply. Service contracts for the management of unit title developments operate in an atypical contractual context. They are not necessarily arms-length transactions, they will normally have a long period of interaction between the parties and they may involve significant powers in respect of people’s homes and the common space surrounding them. Such a context suggests that wider grounds of intervention than traditional contract law provides may be justified.

[252] I would not draw a formal division between the commercial aspect of a service contract and its powers aspect as far as the two terms, harsh and unconscionable, are concerned. However, I would note that the standard of harshness is likely to be more relevant to the commercial aspect of the service contract and in that respect I would hold that the contract must in commercial terms, not be oppressive in the way that that term is understood under the CCCFA.

[253] The “powers aspect” of the contract will normally fall to be assessed on the standard of unconscionability. This is a high standard and one to be exercised judicially but it is not the same as any of the equitable standards mentioned above. In this respect the conduct must be more than unacceptable, unreasonable, unjust or unfair. There must be an intrusion on the rights of proprietors or on the functioning of the unit title development that can be regarded, when seen through the eyes of society as a whole, as so against conscience as to justify the Court’s intervention. Simple unfairness, unreasonableness or commercial unsoundness will not suffice, something like “moral obloquy” or outrageousness comes closer to expressing the nature of the reaction and the view that the Court must take of the transaction in order to justify relief.

[254] The application of this standard of unconscionability is likely to be of limited effect. Powers conferred on the management company that provoke a reaction in the Court so strong as for it to feel satisfied that a severe moral wrong has been done or that the conduct is highly outrageous are likely to be comparatively rare. In addition, many of these instances will be caught by, and more readily arguable under the ultra vires principle than under the ground of unconscionability. For example, this would be the case where the service contract includes provisions which constitute an

unconscionable interference with the proprietors’ expectations of privacy within their units or the common property.

[255] Turning to the pleaded terms in the management agreement I consider whether they are harsh (oppressive) or unconscionable in the senses I have outlined above.

[256] The following terms of the agreement are specifically said to be harsh and unconscionable:

Management Agreement

5.4 the management fee is to be adjusted annually by the annual percentage change in the CPI.

14.1 the agreement may be terminated by the Body Corporate only on limited grounds c.f.

15.1(d) the agreement may be terminated by SML at any time upon giving three months notice.

“Expiry Date” means the date 10 years after the commencement date except if SML renews the agreement then the expiry date is at the end of such renewed period.

20.1 SML may require the Body Corporate to enter into a new agreement.

20.3 the new agreement is to be identical with this agreement except that the term of the new agreement is to be 10 years with one further right of renewal for a new agreement of 10 years (total term 30 years from commencement date).

[257] Mr Rainey, for the plaintiffs, also characterised the tone of the agreement in general as one that is unreasonably one-sided, unfairly priced and overly beneficial to SML.

[258] Mr Campbell, for the defendant, submitted that there was nothing harsh in the termination rights because the owners of the management rights are often owner/operators in which case the agreement will bear some analogy to an employment agreement. A director of SML, Mr Hayes, justified the length of the total term on the basis that a purchaser of the business required a long term to defray

the capital cost of purchasing the business and the commitment of moving into the complex.

[259] In assessing whether the management agreement is harsh or unconscionable, I start with the proposal dated 20 February 2007 made by Freestyle, the company which subsequently bought the shares in SML, to the developer that Freestyle be contracted from March 2007 to assist in the establishment of a management business for the management of the Sentinel and the provision of services to Sentinel residents. It is evident from the proposal that it was intended to sell the management rights “at a premium price”. The proposal also stated “As our end goal is to maximise the sale price is important to “value add” to a potential buyer”. The contract subsequently entered into between Freestyle and SML provided that a bonus would be paid to Freestyle if SML sold the business within 18 months of the opening date for a sum greater than $700,000. A bonus of $100,000 was payable if the net sale price exceeded $900,000.

[260] When advertised for sale in 2010 by SML, the management rights were valued at $1,770,000 for the business and $150,000 for the office and storage. The management rights term was specified as 10 years plus 2 x 10 year right of renewal commencing 2008 while the yield was said to be approximately 24%. The value of the business arose out of the agreement with the Body Corporate. It could be said to be at the expense of the Body Corporate.

[261] While the plaintiffs do not allege that the management fee in itself is unreasonable, the agreement between SML and the Body Corporate is obviously of value. It seems much of that value arises from the additional services provided by SML, being the letting service, the real estate sale service and the Sentinel residents service. I have already found that the provisions of the agreement restricting others from offering such services from the building are ultra vires. The fact that these provisions are ultra vires is a factor I can take into account when assessing whether overall the agreement is harsh or unconscionable under s 140 UTA 2010.

[262] As to the length of term of the management agreement, Heath J in Low v

Body Corporate 384911 held that the appointment of a building manager for 10

years, with a right to a further 10 years was not ultra vires. The UTA 2010 was not then in force so Heath J did not consider whether the length of term of the agreement was harsh or unconscionable under s 140 UTA 2010. Heath J stated:119

Each subsequent purchaser had the right to call for any building management agreement to consider its terms. If, after taking advice, intended purchasers elected to proceed, they were bound by its terms. Their remedy, if they did not like the term of the agreement, lay in their own hands: there was no compulsion for them to buy a unit.

[263] In Russell Management Ltd & Anor v Body Corporate No 341073120 the amended rules allowed the Body Corporate to enter into a management agreement for a term of 10 years with four rights to renew for four further terms of 10 years each. Lang J stated:

[43] The body corporate argues that this rule is ultra vires because of the potential length of the term of the agreement.

[44] I agree that the agreement will potentially be in existence for a very long time. There must therefore be an issue as to whether it a management agreement for such a lengthy term could be reasonably necessary.

[45] It is noteworthy, however, that the body corporate has the right to terminate the agreement in the usual way for non-performance. The plaintiffs may also be able to establish that a lengthy term is appropriate in contracts of this type. For that reason I do not consider that this particular issue should be determined using the summary judgment procedure. It should instead be determined at trial.

[46] The position is, however, significantly different so far as the other two rules are concerned.

[264] The potential length of term of the agreement in the present case may not be unusual. The explanation given is that a purchaser of the business would require a long term to defray the capital cost of purchasing the business but it makes little sense from the point of view of the Body Corporate. The second plaintiff stated, in the course of evidence:

It strikes me that whatever security a professional manager might require it cannot be commensurate with locking the unit owners out for a generation. I would have thought some significantly shorter term would have adequately catered to both sides of the agreement.

119 _{At [64].}

120 Russell Management Ltd & Anor v Body Corporate No 341073 (2008) 10 NZCPR 136 (HC).

[265] The difference in termination rights is justified on the basis that owners of management rights are often owner/operators in which case the agreement will bear some analogy to an employment agreement. However, I consider that this is not a proper analogy. The agreement is essentially a commercial arrangement not an employment contract. In any event, the question could be asked what employment contract provides security of employment for 30 years.

[266] I have concluded that the agreement is harsh or unconscionable in terms of s

140(5) UTA 2010 because of the combination of its ultra vires clauses, the potential length of its term and the difference in termination rights. It was designed to maximise profit for SML in a way which has restricted the rights of apartment owners to manage the building through the Body Corporate.

Conclusion

[267] The sixth cause of action succeeds. I consider that the management agreement is harsh or unconscionable in terms of s 140(5) UTA 2010. Mr Campbell, for the defendant, submitted that if the agreement is found to be harsh or unconscionable, that merely gives the Court a discretion to terminate. Mr Campbell submitted that I should not terminate the agreement because of the disadvantage to Freestyle, who purchased the business in 2008 without knowledge of the objections now raised by the owners. There was also no complaint as to the reasonableness of the remuneration or the quality of the services being provided. Finally, Mr Campbell submitted that if there are any ultra vires provisions, they can be severed from the agreement, which is preferable to termination under s 140(5).

[268] However, Freestyle assisted the developer in setting up the management business in 2007 before Sentinel was completed. Freestyle proposed the end goal of selling the management rights at a premium price. They were to be paid a substantial bonus if a certain sale price was achieved. They are in part the authors of the scheme. Further, although the ultra vires provisions can be severed from the agreement, I consider that the potential length of the term and the difference in termination rights are equally objectionable. I, therefore, consider the only option is to terminate the agreement.

Result

[269] The plaintiffs have:

(a) Failed in respect of the first cause of action;

(b) On the second cause of action, succeeded in respect of the following rules which are ultra vires:

(i) Rule 1(k) insofar as it applies to the letting service, real estate sale service and other additional services (namely the Sentinel residents service);

(ii) Rule 2(i) insofar as it applies to the letting service, real estate sale service and other additional services (namely the Sentinel residents service);

(iii) Rule 3(h) insofar as it refers to concierge services; (iv) Rule 3(h)(ii) insofar as it refers to concierge services; (v) Rule 3(h)(iii) in its entirety;

(vi) Rule 3(h)(iv) in its entirety;

(i) Clause 3.2 in its entirety;

(ii) Clause 4.2 insofar as it relates to the exclusive services; (iii) Clause 6.1 - 6.4 in their entirety;

(iv) Clause 10.4 insofar as it relates to the exclusive services;

(v) Clauses 11.1, 11.2 and 11.6 in their entirety; (vi) Clauses 12.1, 12.2 and 12.6 in their entirety; (vii) Clause 16.1 in its entirety.

(d) Since those terms are severable, the management agreement would otherwise be valid;

(e) On the third cause of action, the plaintiffs have not shown a breach of trust or dishonest assistance;

(f) On the fourth cause of action the Body Corporate has shown a breach of a fiduciary duty which would entitle it to relief;

(g) On the fifth cause of action the plaintiffs have not shown an unconscionable bargain;

(h) On the sixth cause of action the Body Corporate has shown that the service contract is oppressive and should be terminated.

Relief

[270] The conclusions above will largely involve declarative relief. The parties should consult upon the terms of the order necessary and particularly whether any other rules or clauses are rendered consequentially invalid as a result of this judgment. Leave is reserved to apply for clarification on any of those matters.

[271] In respect of the termination of the agreement, I appreciate that the parties may wish to negotiate transitional arrangements or that SML may wish to appeal. In order to allow time for those things to occur, termination of the agreement will take effect on a date 28 days from the date of this judgment unless the Court orders otherwise.

Costs

[272] Overall, the plaintiffs have been successful. If the question of costs cannot be agreed, then memoranda on costs should be submitted by the plaintiffs within 21 days of the date of this judgment and a reply is to follow from the defendants within

10 days. A hearing may be necessary. I would ask the parties to consider the position of the Body Corporate and Mr Ansley vis-a-vis costs.

.....................................

Woolford J

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