Bondlake Pty Ltd v The Owners - Strata Plan No 60285

CATCHWORDS: Contract - whether void for illegality - Strata Schemes Management Act 1996 - "initial period" when developer controls owners corporation prior to lot owners having control - s 113(1)(b) prohibits owners corporation from incurring a debt for an amount exceeding the amount then available for repayment of the debt from administrative fund or sinking fund - owners corporation entered into caretaker agreement under which fee was payable - incurred a debt - nothing in funds - whether prohibition on entering into contract meant it was void for illegality - question of construction of s 113 - gave claim over against original which presupposed owners corporation was liable for the debt - qualified sanction for contravention - unlikely invalidity intended - invalidity could operate harshly on innocent persons - on proper construction, not void. D

Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215; CASES CITED: Hurst v Vestcorp Ltd (1988) 12 NSWLR 394; Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410.

Bondlake Pty Ltd - Appellant PARTIES: The Owners - Strata Plan No 60285 - Respondent

S Wheelhouse SC & L Docker - Appellant COUNSEL: P Whitford SC & J Lazarus - Respondent

Deutsch Partners Lawyers Pty Ltd - Appellant SOLICITORS: Snelgrove Boyle Neilson - Respondent

LOWER COURT JURISDICTION: Supreme Court - Equity Division

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41007/04 ED 1844/03

HANDLEY JA GILES JA McCOLL JA

Wednesday 2 March 2005 BONDLAKE PTY LTD v THE OWNERS - STRATA PLAN No 60285 Judgment 1 HANDLEY JA: I agree with Giles JA. 2 GILES JA: Pearlman AJ declared void a contract, described as a caretaker agreement, for the provision of services in the management of a strata title building. The principal question in this appeal is whether the contract was vitiated for illegality by reason of s 113(1)(b) of the Strata Schemes Management Act 1996 ("the Act"). 3 At the material time s 113 of the Act, which has since been amended, provided - "113 Restrictions on powers of owners corporation during initial period

(1) An owners corporation must not, during the initial period, do any of the following things unless the owners corporation is authorised to do so by an order of the Board under section 182: (a) alter any common property or erect any structure on the common property otherwise than in accordance with a strata development contract,

(b) incur a debt for an amount that exceeds the amount then available for repayment of the debt from its administrative fund or its sinking fund,

(c) appoint a strata managing agent to hold office for a period extending beyond the holding of the first annual general meeting of the owners corporation,

(2) An owners corporation may recover from the original owner: (a) as a debt, any amount for which the owners corporation is liable because of a contravention of subsection (1) (b), together with the expenses of the owners corporation incurred in recovering that amount, and

(b) as damages for breach of statutory duty, any loss suffered by the owners corporation as a result of any other contravention of subsection (1).

(3) An owner may recover, as damages for breach of statutory duty, any loss that has been suffered by the owner as a result of a contravention of subsection (1) (other than paragraph (b)).

(4) It is a defence to an action under this section in debt or for damages if it is proved that the original owner: (a) did not know of the contravention on which the action is based, or

(b) was not in a position to influence the conduct of the owners corporation in relation to the contravention, or

(c) used due diligence to prevent the contravention. (5) A remedy available under this section does not affect any other remedy."

Facts 4 On 18 May 1999 strata plan no 60285 was registered for the strata title building "The Carlisle" at 105-113 Campbell Street, Surry Hills ("the property"). The respondent was thereby established as the owners corporation for the strata scheme. 5 The property was a refurbished existing building containing 139 apartments, some with car spaces. The developer which carried out the refurbishment, then called D S Parklane Development Pty Ltd ("Parklane"), owned the parcel the subject of the scheme. Parklane had contracted to sell some of the apartments, and in due course sold them all. It was the "original owner" within the meaning of the Act. 6 The Act prescribed as the "initial period" the period commencing on the day on which the owners corporation was constituted and ending on the day on which there were owners of lots the subject of the strata scheme, other than the original owner, the sum of whose unit entitlements was at least one third of the aggregate unit entitlement. With the transfer of lots the subject of the strata scheme, the initial period expired on either 9 or 10 June 1999. 7 A extraordinary general meeting of the respondent was held on 25 May 1999. At that time Parklane was still the owner of all the lots the subject of the strata scheme. The resolutions passed included - " Motion 3 Undertaking to pay Owners Corporation outgoings RESOLVED that the Owners Corporation note the undertaking to pay outgoings by D S Parklane Developments Pty Limited marked Exhibit B and tabled at the meeting for the period from registration of Strata Plan No 60285 until the earlier of: (a) midnight on 30 June 1999; or (b) seven days after D S Parkland Development Pty Limited serves notice on the Owners Corporation that the undertaking will cease." "Motion 8 Caretaker agreement RESOLVED that, according to By-Law 26, the Owners Corporation: (a) enter into the caretaker agreement in or to the effect of the agreement marked Exhibit D and tabled at the meeting; and

(b) affix its common seal to the caretaker [sic]." 8 The undertaking to which Motion 3 referred was dated 25 May 1999, and was an undertaking to "perform and pay for the obligations of the Owners Corporation" as to maintenance and replacement of common property and the respondent's own personal property and its insurance, for the period stated. 9 The caretaker agreement to which Motion 8 referred was between the respondent and the appellant. It was executed under the common seal of the respondent on 25 May 1999, and it was accepted that it should be inferred that it was entered into on that date. It provided for the appointment of the appellant as caretaker for five years commencing on 28 May 1999, with three options for renewal each for five years. The appellant was obliged to carry out specified duties, essentially of management of the property, in return for a fee and reimbursement of certain costs. The fee for the first year of the agreement was $84,042, with provision for upward adjustment for future years, and the fee was payable by monthly instalments the first of which was due "on the date this agreement starts". 10 As at 25 May 1999 and 28 May 1999 there was no money in the respondent's administrative fund or sinking fund. The first deposit to its bank account was made on 1 June 1999. The authority of an order of the Board was not obtained for entry into the caretaker agreement. 11 An invoice dated 28 May 1999 was issued on behalf of the appellant to the managing agent for the property, which had been appointed at the meeting of 25 May 1999 until the expiry of the respondent's first annual general meeting. The invoice was for $7,828.57 for "Management Fees for Carlisle for the period 28/05/99 to 01/07/99". Parklane paid this amount to the managing agent on or about 1 June 1999 and the managing agent paid it to the appellant's agent on or about 2 June 1999. 12 The first annual general meeting of the respondent was held on 30 June 1999. The managing agent was appointed for a future period. Nothing occurred with respect to the caretaker agreement.

The decision of Pearlman AJ 13 Pearlman AJ held that the appellant had "incurred a debt" within s 113(1)(b) of the Act upon entering into the caretaker agreement, because it had come under an unavoidable obligation to pay at least the $7,828.57 and in her Honour's view also the $84,042 and contingently the fees for further years. She rejected the contention that no debt had been incurred because of Parklane's undertaking and its payment of the $7,828.57. Her Honour held that, s 113(1)(b) otherwise applying, the caretaker agreement was entered into in breach of that provision. 14 After a discussion of principles relevant to vitiation of a contract for illegality, her Honour held that s 113(1)(b) impliedly prohibited the contract whereby the owners corporation incurred the debt and that the legislative intention was that the contract should be void and unenforceable. Her Honour's reasons in this respect were - "68 I turn first to the language of the Act. Section 113 is couched in terms of prohibition; that is, it provides that an owners corporation 'must not' do certain things. One of the "things" that are prohibited is for an owners corporation to incur a debt. If it is accepted, as I think it must be, on the authority of Hawkins v Bank of China , that an owners corporation incurs a debt when it subjects itself to an unavoidable obligation to pay a sum of money at a future time, then it follows that the 'thing' that is prohibited by s 113(1)(b) is a contract that has that effect, that is, a contract whereby the owners corporation subjects itself to such an unavoidable obligation. I do not think it is possible to disassociate the incurring of a debt from the contract whereby the debt is incurred. It is not therefore to the point that another provision of the Act (s 13) permits an owners corporation to enter into a caretaker agreement; a contract, whether it be a caretaker agreement or some other type of contract, will be impugned by s 113(1)(b) if, by its terms and within the meaning of s 113(1)(b), an owners corporation incurs a debt. In my opinion, it follows that, in prohibiting an owners corporation from incurring a debt, s 113(1)(b) impliedly prohibits the contract whereby the owners corporation incurs that debt. Hence, the Act affects the contract in the second of the ways identified by Gibbs ACJ in Yango Pastoral v First Chicago.

69 The language and scope of s 113 is also critical for the legal consequences of contravention of the prohibition. Section 113 does not prescribe a penalty for contravention, but it does provide a remedy. An owners corporation may recover the debt from the original owner pursuant to s 113(2)(a). But nothing in the language of s 113 suggests that that is the only legal consequence or that recovery is the only legal remedy. It is true that the recovery of the amount as a debt and the defence provided to an original owner in s 113(4) are both predicated on a contract being in existence, but s 113(5) cannot be ignored. That subsection contemplates other remedies being available. It is clear and unambiguous in its terms, and it must be given work to do. Hence, I conclude that what is intended, by the language and scope of s 113, is that, whilst recovery of the amount as a debt is an available remedy, unenforceability of a contract made in breach of its provisions is also an available legal consequence.

70 In my opinion, the obvious public purpose of s 113 points to the intention of the legislature that a contract contravening its provisions will be void and unenforceable. The mischief that s 113 intends to avoid is the casting of onerous obligations upon future lot owners. That mischief can be effectively avoided only if no such burden can be cast upon them. One way to achieve that, in a case of contravention of s 113(b)(1), is the recovery of the amount as a debt. But that remedy may not be sufficient. The original owner may not be in existence, or it may not have the means to meet the debt, or it may have a defence under s 113(4). Another way to achieve the avoidance of the mischief is to render the contravening contract void and unenforceable. In my opinion, s 113 contemplates such a legal consequence.

71 I have not lost sight of the fact that rendering the caretaker agreement void and unenforceable will result in a considerable sanction upon the defendant, innocent in the sense that it is not the contravening party. It will lose what is no doubt a valuable commercial right. But that sanction is not, in my opinion, out of proportion to the purpose and object of the Act in protecting lot owners. The necessity for that protection is thrown into stark relief by the facts of this case. Here, the caretaker agreement casts a significant burden upon lot owners. The debt incurred is significant (it involves an annual amount of at least $84,042) and the obligation to pay it continues for a significant period of time (up to 20 years)." 15 Her Honour then held that there could not be severance of some of the payment obligations under the caretaker agreement, leaving the remainder of the contract valid and enforceable. Accordingly, she declared that the contract was void.

Decision on appeal 16 On any view, the respondent became obliged to pay the $7,828.57, and to make payment on 28 May 1999. It is not clear that Parklane's undertaking encompassed payment for that obligation of the respondent, although Parklane did pay, but it does not matter. As between it and the appellant the respondent was obliged to pay, even if Parklane promised the respondent that it would make the payment. Whether or not the debt incurred by the respondent was not only the $7,828.57, but also the $84,042 or the future fees, by entering into the caretaker agreement the respondent incurred a debt within s 113(1)(b). 17 That is sufficient to give rise to the principal question of vitiation by illegality by reason of s 113(1)(b). For the reasons which follow, in my opinion the caretaker agreement was not void for illegality with respect to the debt incurred of $7,828.57. It would not matter if the debt incurred was greater. It is not necessary to decide the extent of the debt incurred, or any question of severance. 18 The statutory prohibition in s 113(1)(b) is upon incurring a debt, not in terms upon entering into a contract. A debt may be incurred without an accompanying contract, or it may be incurred by entering into a contract imposing an obligation to make a payment in stated circumstances. In the latter case, the prohibition upon incurring a debt extends to prohibiting entering into the contract imposing the obligation to make the payment. As Pearlman AJ said in her Honour's reasons [68], the incurring of a debt can not be disassociated from the contract whereby the debt is incurred. 19 Her Honour considered that the Act affected the contract whereby a debt was incurred in the second of the ways identified by Gibbs ACJ in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413, that is, as a contract "which the statute expressly or impliedly prohibits". The appellant submitted that this was incorrect, and that any effect was in the fourth of the ways identified by his Honour, in which the contract "although lawful according to its own terms, may be performed in a manner which the statute prohibits". It submitted that the caretaker agreement did not in its terms require that the $7,828.57 (or any other amount) be paid prior to the availability of a sufficient amount in the administrative fund or sinking fund, and that only in its performance by the respondent's failure to get in money prior to the payment date of 28 May 1999 was the caretaker agreement susceptible to s 113(1)(b). 20 I do not agree. I consider that the respondent incurred a debt of $7,828.57, at the least, on 25 May 1999, although the time for payment was 28 May 1999. The relevant act was incurring the debt, and at the time it was incurred there was nothing in the funds. 21 Pearlman AJ correctly held that s 113(1)(b) impliedly prohibited the contract whereby the owners corporation incurred the debt. However, the language of prohibition of the contract, although often used, should not be misunderstood. Section 113(1)(b) impliedly prohibited entering into the contract whereby the owners corporation incurred the debt, and in that sense prohibited the contract. The language of prohibition of the contract does not carry with it that the contract is, because prohibited, invalid, and a prohibition upon entering into the contract (here, more specifically, the act of incurring the debt) leaves it open that the contract is nonetheless valid and enforceable. 22 Pearlman AJ then addressed the status of the contract, and held that it was the legislative intention that it be void and unenforceable, It is at this point that I respectfully part company with her Honour. 23 In Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd Gibbs ACJ said at 413-4 - "It is often said that a contract expressly or impliedly prohibited by statute is void and unenforceable. That statement is true as a general rule, but for complete accuracy it needs qualification, because it is possible for a statute in terms to prohibit a contract and yet to provide, expressly or impliedly, that the contract will be valid and enforceable. However, cases are likely to be rare in which a statute prohibits a contract but nevertheless reveals an intention that it shall be valid and enforceable, and in most cases it is sufficient to say, as has been said in many cases of authority, that the test is whether the contract is prohibited by the statute. Where a statute imposes a penalty upon the making or performance of a contract, it is a question of construction whether the statute intends to prohibit the contract in this sense, that is, to render it void and unenforceable, or whether it intends only that the penalty for which it provides shall be inflicted if the contract is made or performed.

The question whether a statute, on its proper construction, intends to vitiate a contract made in breach of its provisions, is one which must be determined in accordance with the ordinary principles that govern the construction of statutes. 'The determining factor is the true effect and meaning of the statute' ( St. John Shipping Corporation v. Joseph Rank Ltd . 'One must have regard to the language used and to the scope and purpose of the statute' ( Archbolds (Freightage) Ltd. v. S. Spanglett Ltd .)" 24 Mason J, with whom Aickin J agreed, said at 423 - "The principle that a contract the making of which is expressly or impliedly prohibited by statute is illegal and void is one of long standing but it has always been recognized that the principle is necessarily subject to any contrary intention manifested by the statute. It is perhaps more accurate to say that the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction and that the principle to which I have referred does no more than enunciate the ordinary rule which will be applied when the statute itself is silent upon the question. Primarily, then, it is a matter of construing the statute and in construing the statute the court will have regard not only to its language, which may or may not touch upon the question, but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains." 25 Jacobs J said at 430 - "When a statute expressly prohibits the making of a particular contract, a contract made in breach of the prohibition will be illegal, void and unenforceable, unless the statute otherwise provides either expressly or by implication from its language. The reported cases which support this principle are numerous. I need refer only to one cited in the course of the argument, In re Mahmoud and Ispahani. An example of a case where the statute was held on its true construction to provide otherwise is Batu Pahat Bank Ltd. v. Official Assignee ." 26 In these passages it can be seen that the prohibition is upon making the contract, although that is also expressed as a prohibition of the contract. 27 In Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd the prohibition was upon carrying on a banking business without a licence. It was held that the statute did not prohibit contracts the making of which constituted the carrying on of business, see at 417 (Gibbs ACJ), 426-7 (Mason J), 433-4 (Jacobs J). The case did not get to whether the contracts were valid and enforceable notwithstanding that they were prohibited. It moved to the further question whether the courts would refuse to enforce the contracts, although the contracts themselves were not prohibited, on public policy grounds, an area which has been developed in the later cases of Nelson v Nelson (1995) 184 CLR 538 and Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215. 28 The question in the present case is one of statutory construction, as described in the passages set out above, from the starting-point that s 113(1)(b) impliedly prohibited entering into contracts whereby debts were incurred. It was not suggested that the appellant knew that entry into the caretaker agreement involved contravention of s 113(1)(b), that in enforcing the caretaker agreement the courts would be assisting in the furtherance of an illegal purpose, or otherwise that on public policy grounds (beyond giving effect to the legislature's will as expressed in the Act) the caretaker agreement should not be enforceable. The question of statutory construction must come first. If it was the statutory intention that a contract be valid and enforceable although entry into it is prohibited by s 113(1)(b), there is no public policy reason to strike the caretaker agreement down. 29 In the task of statutory construction it must be remembered that the direct prohibition in s 113(1)(b) was upon incurring a debt, not upon entering into a contract. There may be a debt under a contract which has been fully performed. At issue is not just whether s 113 of the Act invalidated a contract whereby a debt was incurred, but also (and more fundamentally) whether it made irrecoverable a debt incurred contrary to its prohibition. 30 The Act did not expressly provide that such a debt was irrecoverable, or that a contract it prohibited was unenforceable. I do not think that those consequences can be found as a matter of statutory construction. 31 First, other provisions of s 113 were to the contrary. By s 113(2)(a), the owners corporation could recover from the original owner any amount for which it was liable because of a contravention of s 113(1)(b). This presupposed that the owners corporation was liable to the creditor for the debt, and the owners corporation was given a claim over against the original owner. The scheme in this respect was matched in s 113(2)(b) as to any other contravention of s 113(1), and in s 113(3) by giving an owner a claim over in respect of contraventions of s 113(1) other than of s 113(1)(b). 32 The respondent submitted that s 113(2)(a) did not presuppose that the owners corporation was liable to the creditor for the debt. It suggested that the liability to which s 113(2)(a) referred could be a restitutionary liability if the creditor had provided goods or services, consistently with any contractual liability being unenforceable. This does not fit with the words "liability because of a contravention of subsection (1)(b)", by which the liability was for the debt incurred. Nor does it answer the wider scheme, which rested upon loss suffered by the owners corporation or owner. In particular, recovery of loss suffered because of a contravening alteration to the common property would not involve invalidity; the offending alteration would be a fact, and would not be undone by the statute. 33 Secondly, although no penalty was stipulated in the Act for doing anything in contravention of s 113(1), by the scheme last mentioned the legislature provided a sanction upon the original owner and protection to the owners corporation and owners. The sanction and protection were qualified by the defence in s 113(4), and the protection was not complete because the original owner could turn out to be a man of straw. It could not be said, however, that unless there were vitiating illegality s 113(1) expressed a pious hope and no more. Where the legislature chose to give a qualified sanction it is unlikely that it intended that there should be the Draconian sanction of complete invalidity. Particularly is that so when the owners corporation has a defence to a claim over in certain circumstances, but a debt would be irrecoverable even if the original owner has a good defence. It would make no sense to place an innocent creditor dealing with the owners corporation in a worse position that the original owner. 34 Thirdly, I do not think it can be accepted that the legislature intended to visit upon innocent persons dealing with the owners corporation the extreme consequence of irrecoverability of a debt or unenforceability of a contract. It is unnecessary to go beyond s 113(1)(b). Whether the initial period was running would depend on when the strata plan was registered, when there were transfers of lots, and how the unit entitlements added up. Persons extending credit to or entering into contracts with the owners corporation would generally not know whether the initial period was running, or be in a position to find out. Nor would those persons generally know whether the debt would exceed the amount then available from the administrative fund or sinking fund. That would depend not only on the state of the owners corporation's bank account, but also upon other claims upon the funds. It would not be expected that someone such as a tradesman engaged to work on the strata title building should have to enquire into these matters, under pain of inability to recover payment for the services provided. 35 Debts could be incurred during the initial period in a wide range of circumstances, many of the nature last described. Section 113 did not distinguish between major dealings where the creditor should enquire and lesser dealings where that would be unrealistic. Similar considerations would apply as to s 113(1)(c) and (d), albeit perhaps with less force. 36 Pearlman AJ was influenced by s 113(5) of the Act, saying in her Honour's [69] that it must be given work to do. It is debateable whether vitiation by illegality is a remedy within s 113(5). But the provision has plenty of other work to do, and, with respect, I do not think it had the significance seen by her Honour. 37 It would commonly be that, in the immediate period after the registration of a strata plan, the owners corporation would be under the control of the developer of the strata title building. The purpose of s 113 was plainly enough to protect those who thereafter become lot owners from burdensome dealings undertaken by the developer prior to the owners corporation coming under the control of the lot owners. The respondent referred to the second reading speech for the bill which became the Act, in which the Minister described the restrictions during the initial period as a "clear consumer protection issue". Regarding lot owners as consumers, this can readily enough be accepted. 38 Protection of the public is an important factor in determining an issue of illegality, see for example Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd at 414; Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 at 411, 421-2, 442-3. But as those cases recognise, so also is the effect of invalidity upon innocent members of the public. In the present case the question is how the protective purpose was given effect in the Act. The measures provided by the legislature were the statutory proscription supported by a scheme for recovery from the original owner of any debt or loss with which the owners corporation or owners were burdened, not the invalidity of the proscribed dealings. 39 In my opinion, therefore, the caretaker agreement was not void.

2. Set aside the declaration and order for costs made by Pearlman AJ on 5 November 2004.

4. Respondent pay the costs of the summons and the appeal and have a certificate under the Suitors Fund Act if otherwise qualified. 41 McCOLL JA: I agree with Giles JA. **********

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