Applicant v Respondent

1 Danielle Lisa Shearman was the owner of lot 2503 on level 25 of the apartment building at 80 Clarendon Street, Southbank. The building, including that lot, was managed under the Owners Corporations Act 2006 (Vic) by Owners Corporation No 1 417405Y.

2 Ms Shearman wished to enlarge a window in her apartment. Her plans involved making changes to the outer wall of the building, which was common property. The applicable Model Rules and Special Rules of the owners corporation prohibited a lot owner from damaging or altering common property without the prior approval of the owners corporation.

3 Ms Shearman sought that approval, which was twice granted, but then rescinded. Five months after that rescission, Ms Shearman went ahead with alterations representing an amended version of those previously granted.

4 The owners corporation considered that Ms Shearman had breached the Model Rules and Special Rules by altering or damaging common property without its prior approval. It made application to the Victorian Civil and Administrative Tribunal under the Owners Corporations Act for orders requiring rectification of the breach, which VCAT made against Ms Shearman's opposition.

5 The Owners Corporations Act provided that an owners corporation must not take action or apply to VCAT in relation to an alleged breach without the dispute resolution process required by the rules first being followed and the owners corporation first being satisfied that the matter had not thereby been resolved. One of the grounds of Ms Shearman's opposition was that, because this had not happened, the tribunal had no jurisdiction or should exercise its discretion to dismiss or strike out the application. The tribunal rejected that submission.

6 Pursuant to s 148(1) and (2) of the Victorian Civil and Administrative Tribunal Act 1998 (Vic), Ms Shearman seeks leave to appeal and, if that leave is granted, appeals on grounds of error of law against the orders made by VCAT. Pursuant to r 4.14(3) of the Supreme Court (Miscellaneous Civil Proceedings) Rules 2008 (Vic), the court has ordered that the application for leave to appeal and the appeal are to be heard and determined at the same time.

7 As pressed at the hearing, the grounds of the appeal are:

(1) VCAT had no jurisdiction to hear and determine the application as the owners corporation had failed to comply with s 153(3) of the Owners Corporations Act, which prohibited it from making the application without following the dispute resolution process in the Model Rules.

(2) Further to ground (1), if (which is disputed) the tribunal had discretion under s 164 of the Owners Corporations Act to dismiss or strike out the proceeding, that discretion miscarried.

Regulation of common property under the Owners Corporations Act

8 As specified in s 1, the main purposes of the Owners Corporations Act are -

(a) to provide for the management, powers and functions of owners corporations; and

(b) to provide for appropriate mechanisms for the resolution of disputes relating to owners corporations;...

9 The functions and powers of owners corporations are specified in pt 2. Under s 4(a) and (b), those functions include managing and administering the common property and repairing and maintaining that property. Under s 4(f)(i) and (iv), the functions also include those conferred by the several provisions of the Owners Corporations Act and any rules of the owners corporation. Under s 6(a)(i) and (iv), an owners corporation has the powers conferred by those provisions and rules. Section 5(a) and (b) requires owners corporations to exercise their functions and powers 'honestly and in good faith' and with 'due care and diligence'.

10 As defined in s 3, 'common property' means land (which is defined in that section to include 'buildings and airspace') that is 'shown as common property on a plan of subdivision or a plan of strata or cluster subdivision'. As in the present case, such plans usually designate the external walls of a building to be common property. There is no doubt that Ms Shearman's alterations involved that property.

11 Division 2 of pt 2 confers powers upon owners corporations in relation to the provision of services to members and occupants. Division 3 confers powers in relation to common and other property. Division 4 confers a power to bring legal proceedings when authorised by a special resolution (s 18(1)). No special resolution is needed in relation to fee recovery proceedings in VCAT (s 18(2)).

12 Part 3 of the Owners Corporations Act deals with the financial management of owners corporations. This includes provisions the maintenance of property for which owners corporations are responsible (div 3) and the maintenance of the common property and the chattels, fixtures, fittings and services relating to such property (s 46(a) and (b)). Section 48(1) empowers owners corporations to require lot owners, by notice, to repair and maintain their lot as regards its outward appearance and the use and enjoyment of others. Owners are required to carry out work specified in the notice (s 48(2)) in default of which the owners corporation may do so (s 48(3)) at the lot owner's expense, recoverable as a debt (s 49(1)).

13 An owners corporation has limited power to make significant alterations to the use and appearance of common property. Under s 52, such alterations cannot be made unless -

(a) the alteration is -

(i) first approved by a special resolution of the owners corporation; or

(ii) permitted by the maintenance plan; or

(iii) agreed to under section 53; or

(b) there are reasonable grounds to believe that an immediate alteration is necessary to ensure safety or to prevent significant loss or damage.

By special resolution, the owners corporation can approve the carrying out of upgrading works for the common property and levying the necessary fees (s 53(1)).

14 Part 7 of the Owners Corporations Act governs the rights and duties of lot owners (and occupiers). Under s 128, the lot owner must comply with the provisions of the legislation and any regulations, as well as any rules of the owners corporation. In relation to the care of lots, lot owners must (by s 129(a)):

properly maintain in a state of good and serviceable repair any part of the lot that affects the outward appearance of the lot or the use or enjoyment of other lots or the common property; ...

By s 130:

A lot owner must not use or neglect the common property or permit it to be used or neglected in a manner that is likely to cause damage or deterioration to the common property.

The right of decoration of a lot owner extends only to the 'interior face of the building' (s 132(1)) and such works as 'curtaining, painting, wallpapering and installing floor coverings, light fittings and other chattels' (s 132(2)). Ms Shearman's alterations involved both the interior and exterior face of the building and extended beyond decorative work to include structural work.

15 Part 8 of the Owners Corporations Act governs the rules of owners corporations. Section 138(1)-(3)empowers owners corporations, by special resolution, to make (or amend) rules for the control, management, administration, use and enjoyment of the common property or of a lot. Rules can be with respect to the matters specified in Schedule 1.

16 Under that Schedule, those matters include the management and administration of common property and services (cl 3.1), the repair and maintenance of common property and services (cl 3.3), the use of and damage to common property (cls 4.1 and 4.5) and the '[e]xternal appearance of lots' (cl 5.2). Rules may also be made in relation to (cl 8):

Dispute resolution, including internal grievance procedures, hearing procedures and communication procedures.

17 Section 139(1) authorises the prescription (by regulation) of Model Rules in relation to any matter in respect of which such rules can be made. Such rules have been prescribed by the Owners Corporations Regulations 2007 (Vic). Under s 139(2) and (3) of the Owners Corporation Act, these Model Rules apply where the owners corporation has not made (or has revoked its) rules and in relation to matters not covered by such rules.

18 The Model Rules that have been prescribed include provisions in relation to damage to common property (cl 3.3) and dispute resolution (cl 6). It is common ground that these rules applied to the owners corporation and Ms Shearman (as the lot owner) in the present case (see s 141(a) and (b)).

19 In relation to damage to common property, cl 3.3 of the Model Rules provides:

3.3 Damage to common property

(1) An owner or occupier of a lot must not damage or alter the common property without the written approval of the owners corporation.

(2) An owner or occupier of a lot must not damage or alter a structure that forms part of the common property without the written approval of the owners corporation.

(3) An approval under subrule (1) or (2) may state a period for which the approval is granted, and may specify the works and conditions to which the approval is subject.

(4) An owner or person authorised by an owner may install a locking or safety device to protect the lot against intruders, or a screen or barrier to prevent entry of animals or insects, if the device, screen or barrier is soundly built and is consistent with the colour, style and materials of the building.

(5) The owner or person referred to in subrule (4) must keep any device, screen or barrier installed in good order and repair.

20 In relation to dispute resolution, cl 6 provides:

6 Dispute resolution

(1) The grievance procedure set out in this rule applies to disputes involving a lot owner, manager, or an occupier or the owners corporation.

(2) The party making the complaint must prepare a written statement in the approved form.

(3) If there is a grievance committee of the owners corporation, it must be notified of the dispute by the complainant.

(4) If there is no grievance committee, the owners corporation must be notified of any dispute by the complainant, regardless of whether the owners corporation is an immediate party to the dispute.

(5) The parties to the dispute must meet and discuss the matter in dispute, along with either the grievance committee or the owners corporation, within 14 working days after the dispute comes to the attention of all the parties.

(6) A party to the dispute may appoint a person to act or appear on his or her behalf at the meeting.

(7) If the dispute is not resolved, the grievance committee or owners corporation must notify each party of his or her right to take further action under Part 10 of the Owners Corporations Act 2006.

(8) This process is separate from and does not limit any further action under Part 10 of the Owners Corporations Act 2006.

21 The owners corporation has made Special Rules which apply in addition to the Model Rules. One relevant to the present case is special rule 1(m), which provides:

without prior consent in writing of the [owners corporation] and then only on the terms and subject to the conditions specified in that consent make or permit to be made any alterations or additions whether structural or otherwise...

It was common ground in the appeal that this rule also applied to the owners corporation and Ms Shearman.

Dispute resolution under the Owners Corporations Act

22 The previous owners corporation legislation was revised in the years leading up to the enactment of the current Act in 2006. The provisions now in place relating to dispute resolution were deliberately adopted by the Parliament at that time. These processes were explained in the Second Reading Speech as follows:

One issue that is critical to all owners corporations, whether large or small, is the need for a comprehensive dispute-resolution system. Under the current legislative scheme, there is no formal complaint-handling system. Dispute resolution options are limited to services available for resolving neighbourhood disputes, or, if a dispute relates to the act, regulations or rules, applying for a formal order from the Magistrates [sic] Court. These options are too limited for the diverse range of disputes and parties operating in today's complex owners corporation environment.

The new scheme will remedy this deficiency by setting out a three-tier approach to dispute resolution. The policy behind this approach is to encourage a sense of personal responsibility in the parties for resolving disputes, sometimes with the assistance of government dispute resolution services, rather than relying on direct state intervention or punitive sanctions to resolve all owners corporation issues.

The first tier is a requirement that the owners corporation must have an internal dispute resolution process, with a default process set out in the model rules which will be drafted with the regulations. The bill also establishes a formal, fair and transparent complaint-handling process which may apply when the informal process fails.

The second tier is the option of conciliation or mediation processes offered by Consumer Affairs Victoria. These processes will be available to parties who are not satisfied with the result of the internal process.

Finally, the bill provides the Victorian Civil and Administrative Tribunal with powers to resolve a broad range of disputes, including the power to impose a civil penalty for breaches of the rules. The parties may only apply to VCAT if the dispute resolution process has been exhausted.[1]

In my view, this explanation accurately reflects the terms of the current legislation as enacted. In the context of the present case, I would draw particular attention to the policy foundation of the dispute resolution scheme, which is 'to encourage a sense of personal responsibility in the parties for resolving disputes'.[2]

23 The provisions of the Owners Corporations Act in relation to dispute resolution are to be found in pt 10. In particular, div 1 makes provision in relation to complaints and procedures. These provisions of pt 10 have a schematic connection with the provisions of pt 11, especially div 1, in relation to the jurisdiction and powers of VCAT with respect to owners corporation disputes. The provisions of the two parts must therefore be read together.

24 The provisions of div 1 of pt 10 in relation to complaints and procedures have been carefully drawn. Section 152(1) confers an entitlement upon a 'lot owner or an occupier of a lot or a manager' to make a complaint to the owners corporation. Such complaints may be made in relation to alleged breaches by those persons of an obligation imposed upon them by the Owners Corporations Act, the regulations or the rules of the owners corporation. Complaints must be in writing in the approved form (s 152(2)). These provisions of s 152 do not empower an owners corporation to make a complaint (about a lot owner, for example). The functions of owners corporations include determining complaints (see the later provisions of div 1 of pt 10).

25 Section 153 governs the actions that may be taken in respect of alleged breaches of the Owners Corporations Act, the regulations or the rules of an owners corporation by a lot owner, manager or occupier. Under s 153(1), the specified actions may be taken in relation to complaints made under s 152 (s 153(1)(a)) or a breach that 'otherwise comes to the attention of the owners corporation' (s 153(1)(b)). The capacity of the owners corporation to take action is thus not confined to breaches alleged in a complaint but extends to breaches that otherwise come to its attention.

26 Where s 153(1) applies, s 153(2) stipulates that the owners corporation 'must decide' whether:

(a) to take action under this Part in respect of the alleged breach; or

(b) to apply to VCAT for an order requiring the person to rectify the breach; or

(c) to take no action in respect of the alleged breach.

It can be seen that taking action under pt 10 or applying to VCAT (or taking no action)[3] are stipulated as alternatives. Taking action under pt 10 refers to the actions specified in ss 155-159, which relate to the internal consideration of the alleged breach within the structure of the owners corporation. Applying to VCAT refers to the actions specified in pt 11, which relate to the external consideration of the alleged breach within the structure of the tribunal.

27 The actions under pt 10 which the owners corporation may take are designed to be responsive to complaints under s 152. When the decision is to take such action, the complainant must be notified (with reasons) (s 154(1) and (2)). Where the action is to give notice[4] to rectify a breach (s 155(1)), the alleged breach must be specified (s 155(2)). The procedure extends to giving notice in relation to breaches that are not rectified (s 156), final notices (s 157) and (generally) reporting to annual general meetings of the owners corporation (s 159).[5] Action under pt 10 was not taken in the present case. Rather, the owners corporation made application to VCAT under pt 11.

28 A critical provision of the Owners Corporations Act for giving effect to the policy of encouraging a sense of personal responsibility in the parties for resolving disputes is s 153(3), which provides:

An owners corporation must not take action under this Part or apply to VCAT for an order in relation to an alleged breach unless-

(a) the dispute resolution process required by the rules has first been followed; and

(b) the owners corporation is satisfied that the matter has not been resolved through that process.

It was Ms Shearman's contention that the owners corporation made the application to VCAT in breach of the requirements of this provision because the dispute resolution process required by the rules was not followed and it did not reach the requisite state of satisfaction.

29 Under div 1 of pt 11 of the Owners Corporations Act, VCAT has a general jurisdiction to hear and determine 'a dispute or other matter arising under this Act or the regulations or the rules of an owners corporation that affects an owners corporation' (s 162). Such disputes include disputes or matters relating to (s 162):

(a) the operation of an owners corporation; or

(b) an alleged breach by a lot owner or an occupier of a lot of an obligation imposed on that person by this Act or the regulations or the rules of the owners corporation; or

(c) the exercise of a function by a manager in respect of the owners corporation.

30 Applications for resolution of an owners corporation dispute can be made by (among other persons) lot owners and owners corporations (s 163(1)). A lot owner may make application on behalf of an owners corporation (s 163(1A)). In the present case, the application to VCAT was made by the owners corporation; Ms Shearman, as the relevant lot owner, was named as the other party.

31 VCAT has a wide range of powers in relation to applications for resolution of disputes. In particular, it may make an order dismissing or striking out an application (s 164) and make various kinds of determinative orders (s 165). Its powers to make determinative orders are very general and extend to making 'any order it considers fair' (s 165(1)) as well as orders requiring a party to do or refrain from doing something or to comply with the Owners Corporations Act, the regulations or the rules of the owners corporation (s 165(1)(a) and (b)). In making orders, the tribunal must consider the following (s 167):

(b) an act or omission or proposed act or omission by a party;

(c) the impact of a resolution or a proposed resolution on the lot owners as a whole;

(d) whether a resolution or proposed resolution is oppressive to, unfairly prejudicial to or unfairly discriminates against, a lot owner or lot owners;

32 In the present case, VCAT determined, by order, as follows (as material to the appeal):

1 The Tribunal declares that the Respondent is in breach of Rule 3.3(1) of the model rules contained in Schedule 2 of the Owners Corporation Regulations 2007.

2 The Tribunal declares that the Respondent is in breach of 1(m) of the special rules of the Owners Corporation No. 1 417405Y.

3 The Respondent must, at her own cost, within 90 days reinstate and repair the damage to the common property, being all works done to widen and lower the window as set out in the plan from L&L Luxury Projects dated 9 September 2013.

It is from these orders that Ms Shearman here appeals.

33 VCAT's power to dismiss applications is stipulated in s 164 of the Owners Corporations Act as follows:

VCAT may make an order dismissing or striking out an application by an owners corporation for an order requiring the rectification of a breach referred to in section 153 if it is satisfied that the owners corporation has not complied with that section.

It was this provision that Ms Shearman relied upon in the proceeding before VCAT. Contrary to her submissions, VCAT declined to dismiss the application of the owners corporation upon the ground that it had not complied with s 153(3).

Did VCAT have jurisdiction to hear and determine the application?

34 Under the first ground of appeal, Ms Shearman contended that VCAT did not have jurisdiction to hear and determine the application. This submission was based upon the requirements of s 153(3). Ms Shearman submitted that, as the owners corporation had not followed the dispute resolution process required by the Model Rules and satisfied itself that the matter had not thereby been resolved, it was prohibited from making the application to VCAT and the tribunal had no jurisdiction to hear and determine the application.

35 In the determination of this ground of appeal, the first question that arises is whether the dispute resolution required by the rules had first been followed. In my view, in the present case there was no dispute resolution process required by the rules for the owners corporation to follow and it did not breach the requirements of s 153(3). When the owners corporation made the application to VCAT, Ms Shearman had not activated that process.

36 As set out above, the dispute resolution procedure in the Model Rules applies to disputes involving 'a lot owner, manager, or an occupier or the owners corporation' (cl 6(1)). Therefore the process may be activated in relation to a dispute between a lot owner and the owners corporation, which was the nature of the dispute in the present case. But the process begins with the preparation of a written statement setting out the complaint in the approved form by '[t]he party making the complaint' (cl 6(2)). Where, as here, there is no grievance committee, the 'owners corporation must be notified of any dispute by the complainant', regardless of whether it is an immediate party to the dispute (cl 6(4)). The parties must then meet to discuss the matter in dispute within 14 working days (cl 6(5)). If no resolution is achieved, the owners corporation must notify each party of his or her right to take further action under pt 10 of the Owners Corporations Act. None of this occurred in the present case because Ms Shearman did not make a complaint and thereby activate the dispute resolution process. Therefore, before taking action under pt 10 or applying to VCAT for an order in respect of the alleged breach, the owners corporation had no obligations under s 153(3).

37 In Ms Shearman's submission, the dispute resolution process had to be followed even though she had not activated that process because the owners corporation was in dispute with her in respect of the alleged breach of the Model Rules and the Special Rules. I do not accept this submission. Certainly, there was an issue before the owners corporation concerning the alleged breach of those rules by Ms Shearman. But that issue did not arise because any lot owner had made a complaint under s 152 (see s 153(1)(a)) or under the dispute resolution procedure. The issue otherwise came to the attention of the owners corporation (see s 153(1)(b)). The owners corporation then had to decide whether to take action in relation to the alleged breach, apply to VCAT or take no action (see s 153(2)(a), (b) and (c)), which it did by deciding to make application to VCAT. As no dispute resolution process had been activated by Ms Shearman under cl 6 of the Model Rules, the owners corporation was not prohibited by s 153(3) from making that application.

38 Because cl 6(1) applies in relation to disputes between lot owners and owners corporations (among other disputes), Ms Shearman (as a lot owner) could have activated the dispute resolution process by making a complaint against the owners corporation under cl 6(2).[6] If she had done so, s 153(3) would have operated to impose a mandatory obligation upon the owners corporation not to take action under pt 10 or apply to VCAT under pt 11 for an order in respect of the alleged breach without the dispute resolution process first being followed and the owners corporation first being satisfied that the matter had not been thereby resolved. But she did not do so.

39 As submitted by the owners corporation, the prohibition in s 153(3) operates for the benefit and protection of lot owners. While the internal dispute resolution process in the Model Rules is an important element of the general dispute resolution scheme established by the Owners Corporations Act (see above), s 153(3) is only engaged when that process has been properly activated. Otherwise the owners corporation may take such action as the legislation otherwise authorises.

40 I would therefore dismiss the first ground of appeal upon the basis that the obligations in s 153(3) were not engaged. However, if (contrary to this conclusion) those obligations were engaged, I would also reject Ms Shearman's submission that the failure of the owners corporation to comply with s 153(3) meant that the application to VCAT did not confer any jurisdiction upon the tribunal to hear and determine the dispute.

41 It may be accepted that, where it applies, s 153(3) imposes a mandatory obligation not to take action under pt 10 or apply to VCAT under pt 11 for an order in relation to the alleged breach unless the requirements of paras (a) and (b) of s 153(3) have first been satisfied. That the obligation not to take action is mandatory as regards owners corporations follows from the words 'must not take action'.

42 It is a different question whether an application made to VCAT in breach of the obligation in s 153(3) confers any jurisdiction as regards the tribunal. It was common ground in the appeal that the applicable principles in relation to the determination of this question were stated in Project Blue Sky Incorporated v Australian Broadcasting Authority[7] by McHugh, Gummow, Kirby and Hayne JJ as follows:

An act done in breach of a condition regulating the exercise of a statutory power is not necessarily invalid and of no effect. Whether it is depends upon whether there can be discerned a legislative purpose to invalidate any act that fails to comply with the condition. The existence of the purpose is ascertained by reference to the language of the statute, its subject matter and objects, and the consequences for the parties of holding void every act done in breach of the condition.[8]

43 As submitted by Ms Shearman, in accordance with these principles a case can be made that failing to follow s 153(3) of the Owners Corporations Act was intended to deprive VCAT of jurisdiction in relation to the application. The express terms of that provision, the purposes of the Owners Corporations Act (see especially s 1(b)) and the policy of the legislation of encouraging a sense of personal responsibility in the parties for resolving disputes point in this direction.

44 However, the provisions of s 164 of the Owners Corporations Act make very clear that a failure by an owners corporation to comply with s 153(3) before making application to VCAT in relation to an alleged breach does not deprive the tribunal of jurisdiction to hear and determine the application. Despite the mandatory terms of s 153(3) as regards the actions that may be taken by owners corporations, s 164 is expressed in permissive terms as regards the jurisdiction and powers of the tribunal. Section 164 provides that VCAT 'may' make a dismissal or strike-out order. Section 164 thereby confers a discretion[9] to dismiss or strike out an application where s 153 has not been complied with. This necessarily implies that the tribunal has jurisdiction in respect of the application: an order dismissing or striking out an application is an order made in the exercise of VCAT's jurisdiction with respect to an application. It is therefore manifestly not the intention of the legislature that non-compliance with s 153(3) operates to deprive VCAT of that jurisdiction. I reject Ms Shearman's submission that s 153(3) and other provisions of the Owners Corporations Act indicate a contrary intention.[10] I think the intention of the legislature was to give effect to the policy of encouraging a sense of personal responsibility in the parties for resolving disputes by conferring a discretionary dismissal and strike-out power on the tribunal, not to deprive it of jurisdiction as such.

45 The first ground of appeal must therefore be dismissed.

Did the exercise of VCAT's discretion miscarry?

46 Ms Shearman submitted (in the alternative) before VCAT that the application of the owners corporation should be dismissed or struck out in the exercise of the tribunal's discretion under s 164 of the Owners Corporations Act by reason of non-compliance with s 153 in various respects. VCAT rejected this submission. Under the second ground of appeal, Ms Shearman contends that VCAT's discretion miscarried, but only in respect of the alleged non-compliance by the owners corporation with the obligation imposed by s 153(3).

47 I have reached the conclusion, for the reasons given above, that the owners corporation did not fail to comply with its obligation under s 153(3) because, when it made application to VCAT, there was no dispute resolution process in place that the rules required to be followed. That process had not been activated by Ms Shearman. If that conclusion is correct, the second ground of appeal must be dismissed. In case this conclusion is not correct, I will here determine that ground.

48 I have also reached the conclusion, for the reasons given above, that VCAT has jurisdiction with respect to an application made by an owners corporation that has failed to comply with s 153(3) in respect of the alleged breach. Under the legislative scheme, the issues raised by such non-compliance may be dealt with by the exercise of the tribunal's discretion under s 164.

49 The question of law raised by the second ground of appeal is whether the exercise of the discretion conferred by s 164 miscarried in the instant case. Ms Shearman submitted that the discretion did miscarry because it was not open to VCAT to conclude that following the dispute resolution processes in the Model Rules would have been futile. VCAT's conclusion in this regard was purely subjective. It should not have engaged in speculation about the utility of any dispute resolution process as this was for the owners corporation to decide under s 153(3)(b). It should have dismissed or struck out the application because there was no reason why the dispute resolution processes should have not been followed. It did not have regard to the purposes of the Owners Corporations Act, which included providing appropriate mechanisms for resolution of disputes (s 1(b)), and the intention of the legislation that, where possible, disputes should be resolved internally within owners corporations before application is made externally to VCAT.

50 As submitted by the owners corporation, in addressing these issues the court must be mindful that it is not reviewing the exercise of VCAT's discretion on the merits. Sections 153(2)(b) and 162 of the Owners Corporations Act confer original[11] jurisdiction upon VCAT; the court's appellate jurisdiction under s 148(1) of the Victorian Civil and Administrative Tribunal Act is confined to determining whether the tribunal committed an error of law when exercising that jurisdiction. The applicable principles in this regard have been discussed in a number of well-known authorities to which the parties in the present case made reference.[12] As accepted by the parties, for the purposes of the present case these principles were sufficiently expressed by Dixon, Evatt and McTiernan JJ in House v R[13] in the analogous context of appellate consideration of the exercise of a judicial discretion:

The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.[14]

51 VCAT declined to exercise the discretion in s 164 to dismiss or strike out the application upon the basis set out in the following passages from its reasons for decision:

1. Given the issues of trust and the breakdown of confidence by either party it is open to the Tribunal to conclude that any dispute resolution procedure if followed would have been futile given that the respondent had already completed the works. I propose not to exercise my discretion in this matter.
2. It is correct to say that there has not been any dispute resolution procedure undertaken in this matter. However, this does not permit a lot owner to proceed with work 5 months after there was a rejection by the OCM.
3. ...
4. By way of comment only, I note that there has been some animosity between the lot owner and the applicant. In hindsight good effective communication may have alleviated this.

Contrary to the submissions of the owners corporation, I do not interpret these reasons for decision as being wholly based upon a finding of fact about the relationship between the parties. I think VCAT was influenced primarily by the consideration that Ms Shearman 'had already completed the works' and that failing to follow a dispute resolution process 'does not permit a lot owner to proceed with works 5 months after there was a rejection by the' owners corporation. It did, however, take into account the relationship between the parties.

52 The reasons for decision do, however, reveal that VCAT acted upon the basis of a wrong principle and without regard to an important relevant consideration. The wrong principle was that the tribunal was simply at large when exercising the discretion in s 164 to dismiss or strike out the application. As a matter of law, the exercise of the discretion was constrained by the purposes and objects of the Owners Corporations Act, including the prescription of 'appropriate mechanisms for the resolution of disputes', as specified in s 1(b). The relevant consideration was the importance of internal resolution of owners corporation disputes, particularly as reflected in s 153(3) (see also cl 6 of the Model Rules), which gives effect to a legislative policy of encouraging a sense of personal responsibility in the parties for resolving disputes (see above). Interpreted and applied according to law, s 164 requires recognition of the principle of internal resolution of owners corporation disputes to which the legislation gives effect and proper consideration of that principle in the exercise of the discretion to dismiss or strike out an application.

53 I cannot see in VCAT's reasons for decision any evidence that, when declining to exercise the discretion in s 164, it recognised that principle and properly considered that consideration. The approach of the tribunal appears to have been to exercise the discretion simply by reference to the facts of the individual case, particularly the nature of the breach and the poor relationship between the parties.

54 Further, while not suggesting that such matters as '[lack of] trust and the breakdown of confidence' and the existence of 'some animosity' between the parties are necessarily irrelevant to the exercise of the discretion in s 164, I must observe that significant disputes are often resolved between parties who lack trust and confidence in each other, or who exhibit animosity towards each other, because they come to the conclusion that their interests are advanced by doing so. In my view, in the proper exercise of the discretion in s 164, VCAT would not lightly conclude otherwise.

55 Finally, VCAT does not appear to have taken into official account the nature of the responsibilities that owners corporations have under the Owners Corporations Act. I have already referred to their functions and powers under pt 2 and their duties and responsibilities under pt 3. The provisions of pt 5 regulate the meetings and decisions of owners corporations, which must be conducted and made with the specified formality. I have also pointed out that s 5(a) and (b) requires owners corporations to carry out their functions and powers 'honestly and in good faith' and with 'due care and diligence'. By these and other provisions, owners corporations are expected to act in an objective manner. It is in this context that the legislation, in s 153(3) particularly, intends to encourage a sense of personal responsibility in the parties, including owners corporations, for resolving disputes. Therefore, in an application for dismissal or strike out under s 164, any suggestion that an owners corporation should be permitted to make application to the tribunal without complying with the mandatory requirements of s 153(3) by reason of its poor relationship with a lot owner must be carefully scrutinised to ensure that the owners corporation is not avoiding its statutory responsibilities and that the legislative policy of encouraging internal dispute resolution is not being subverted.

56 For those reasons, if the owners corporation did have an obligation under s 153(3) to comply with a dispute resolution process required by the Model Rules, I would have upheld ground two of the appeal, which is that the discretion of the tribunal under s 164 miscarried. But I repeat my conclusion that, because Ms Shearman did not activate any such process, there was no requirement under those rules for such a process to be followed by the owners corporation before making application to VCAT.

57 This appeal raised significant issues in relation to the importance of giving effect to the principle of the Owners Corporation Act that owners corporation disputes should be internally resolved. Ms Shearman had reasonable prospects of establishing that VCAT did not have jurisdiction to hear and determine an application where, contrary to s 153(3) of that Act, the owners corporation had not first exhausted the dispute resolution process required by the Model Rules or alternatively that VCAT had improperly exercised its discretion in s 164 by declining to dismiss or strike out the application because the owners corporation in the present case had not done so. By reference to the established principles,[15] I will therefore grant leave to appeal under s 148(1)(b) of the Victorian Civil and Administrative Tribunal Act.

58 However, Ms Shearman did not activate the dispute resolution process in the Model Rules in the present case. In that circumstance, there was no dispute resolution process that the owners corporation was required by s 153(3) to follow before making application to VCAT. Even if the owners corporation had not complied with its obligations under that provision, the tribunal would have had jurisdiction in relation to the application. While the tribunal did not properly exercise its discretion to decline to dismiss or strike out the application upon the basis of the owners corporation's alleged non-compliance with s 153(3), the obligations imposed by that provision were not engaged because the dispute resolution process in the Model Rules had not been activated.

59 The appeal will therefore be dismissed. I will hear the parties in relation to costs.

[1] Parliament of Victoria, Parliamentary Debates, Legislative Assembly, 20 July 2006, 2488 (Rob Hulls, Attorney-General)

[3] Where no action is taken, notice must be given to any complainant under s 152, setting out the reasons (s 154(1) and (2)).

[4] The notice must be in writing and in the approved form (s 155(3)) and be given to the person alleged to have committed the breach (s155(1)).

[5] The Director of Consumer Affairs has certain powers of conciliation and mediation (not arbitration and determination) under div 2 of pt 10.

[6] The terms of cll 6(1) and 6(4) make clear that an owners corporation may be a party to a dispute.

[7] (1998) 194 CLR 355.

[9] Interpretation of Legislation Act 1984 (Vic) s 45(1).

[10] Ibid s 4(1)(a).

[11] See s 41 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic).

[12] See Minister for Aboriginal Affairs & Anor v Peko-Wallsend Ltd &Ors [1986] HCA 40; (1986) 162 CLR 24, 39-42 (Mason J, Gibbs CJ and Dawson J agreeing); Minister for Immigration and Citizenship v Li & Anor [2013] HCA 18; (2013) 249 CLR 332, 336-7 [75]-[76] (Hayne, Kiefel and Bell JJ).

[13] [1936] HCA 40; (1936) 55 CLR 499.

[15] See Secretary to the Department of Premier and Cabinet v Hulls [1999] VSCA 117; [1999] 3 VR 331 (Phillips JA, Tadgell and Batt JJA agreeing); Myers v Medical Practitioners Board [2007] VSCA 163; (2007) 18 VR 48 (Warren CJ, Chernov JA and Bell AJA agreeing).