Humphries v Proprietors Surfers Palms North Group Titles Plan 1955

High Court of Australia|1989-01-31|Before: McHugh JJ, Toohey JJ

High Court of Australia Brennan, Deane, Toohey, Gaudron and McHugh JJ. Humphries v Proprietors Surfers Palms North Group Titles Plan 1955 [1994] HCA 21

The respondent is a body corporate constituted under the Building Units and Group Titles Act 1980 Q ("the Act") for a property known as "Surfers Palms North". The appellants are the assignees of a management agreement dated 31 January 1989 between the body corporate as owner and the appellants' assignor, Bartlett Researched Securities Ltd. ("Bartlett"), as manager. Bartlett was the developer of the property and, at the time when the management agreement was made, it was the sole proprietor of the lots delineated in the group titles plan. The management agreement contained a clause (cl. 8) entitling the manager to an annual remuneration of $60,000 payable monthly and indexed to the All Groups Consumer Price Index. On 17 January 1991 a deed of assignment was executed by Bartlett, the appellants and the body corporate whereby Bartlett assigned all its rights under the management agreement to the appellants and the appellants agreed to perform the duties specified in the management agreement. The appellants sued the body corporate in the Supreme Court of Queensland to enforce the management agreement.

The appellants had acquired one of the lots in the group titles plan. They had started to perform the management duties specified in the agreement. They were paid the stipulated remuneration for a time but a dispute broke out between them and the body corporate. On 26 February 1991 at the annual general meeting of the body corporate a resolution was passed challenging the validity of the management agreement and refusing to make any further payments pursuant to that agreement.

On 7 June 1991, the appellants commenced the action claiming, inter alia, remuneration under the management agreement. On 22 November 1991, they purported to exercise an option to extend the term of the management agreement from 31 January 1992 for a further three years. The period in respect of which remuneration was claimed at the trial commenced on 10 February 1991 and extended to the elapsed portion of the period of the extension purportedly effected by the appellants' exercise of the option.

On 1 February 1992 at the annual general meeting of the body corporate a motion was passed, purportedly pursuant to s. 50(9) of the Act, terminating the appointment of the appellants as managers.

The body corporate denies any liability to the appellants under the management agreement on two grounds: first, that the management agreement was void ab initio and, secondly, that, if the management agreement was valid, it was terminated by the resolution passed on 1 February 1992. The appellants, on the other hand, assert that the management agreement is valid and subsisting and that it was not susceptible of termination pursuant to s. 50(9) of the Act. The body corporate succeeded on its first ground before the Court of Appeal but would have failed on the second. The appeal relates to the first ground; but, if the appellants should succeed on that ground, the body corporate seeks special leave to raise and rely upon the second ground. It is convenient first to consider the question whether the management agreement was invalid.

The body corporate challenges the validity of the management agreement on the ground that among the duties which that agreement purports to impose on the manager is a duty which the body corporate has no power to perform, namely, the duty of conducting a letting agency for the owners of those lots who require that service. The body corporate submits that it has no power to commit its funds for this purpose.

Clause 8 of the management agreement specifies the lump sum remuneration which the body corporate promises to pay the manager for the performance of the duties specified. Those duties are specified in general terms by cl. 1:

Scope of the Manager's Duties - The Manager shall be responsible (to the Owner) to at all times ensure that the Property is properly maintained and administered and kept in good repair, and shall attend to the secretarial requirements of the Owner (as will be involved in the discharge of the Owner's functions pursuant to the Act). The Manager shall be responsible to the Owner for the care and maintenance and administration of the Property in terms of this Agreement. Clause 2 then sets out specific duties including cl. 2(r). The relevant parts of cl. 2 read as follows: Specific Duties to be Performed by the Manager - Without limiting the generality of the Manager's duties as described in Clause 1 of this Agreement some of the Manager's specific duties and functions shall be as follows: -

(r) Letting Agency - The Manager shall conduct, from his unit, a letting agency for the letting of townhouses on the Property for such owners of the townhouses, as shall require that service, or with prior written approval of the Owner arrange with a licensed real estate agent or agents to provide a letting agency for the lettings. The Manager shall ensure that at all times he is properly licensed to perform these functions having regard to the provisions of the Auctioneers and Agents Act 1971 (as amended) and any other relevant legislation or requirements of other governmental or semi-governmental authorities from time to time.

The remuneration prescribed by cl. 8 is not apportioned among the several duties which, by the terms of the management agreement, the manager is to perform. The promise to pay was therefore made in consideration in part of the manager's promise to provide the letting agency. The submission that a body corporate's funds could not be expended in the payment of remuneration for the provision of this service found favour with the Court of Appeal. Their Honours said:

Whether or not a body corporate has power to appoint a letting agent to provide a service to individual proprietors who seek to avail themselves of it, no power to expend the body corporate's funds in payment of the letting agent for such services to individual proprietors has been identified.

To ascertain the relevant limit on the powers of a body corporate, the provisions of the Act conferring powers must be construed in context. The Act provides, inter alia, for the registration of building units plans and group titles plans (s. 9). The land comprised in each group titles plan is divided into lots and common property [1] . The Act provides for the constitution of the proprietors of the lots delineated in a group titles plan as a body corporate (s. 27). The powers, authorities, duties and functions of the body corporate are prescribed by or under the Act or the by-laws of the body corporate (s. 27(3)), and the proprietors are liable to pay contributions levied by the body corporate (s. 32) in the amounts which, in the opinion of the body corporate, are necessary to meet its actual and expected liabilities in respect of items of legitimate expenditure (ss. 38A, 38B).

"group titles plan" is defined by s. 7 to mean "a plan which - (a) is described in the title or heading thereto as a group titles plan; (b) shows the land comprised therein as being divided into lots and common property; and (c) complies with the requirements of section 9, and includes a plan of resubdivision of a lot or common property or a lot and common property in a group titles plan registered under this Act."

The chief duties of a body corporate are set out in s. 37(1) of the Act; s. 37(2) sets out powers which, in the discretion of a body corporate, it may exercise. Apart from specific paragraphs relating to the care of the personal property of the body corporate and the provision of a mail box, the duties of a body corporate imposed by s. 37(1) relate either to what is or is part of the common property or to fixtures or fittings in one lot intended to be used for the servicing or enjoyment of any other lot or of the common property. None of the duties extends to the provision by the body corporate of services to the proprietors of individual lots.

The powers of a body corporate conferred by s. 37(2) include the power specified in par. (a) of that sub-section:

(a) enter into an agreement, upon such terms and conditions (including terms for the payment of consideration) as may be agreed upon by the parties thereto, with a proprietor or occupier of a lot for the provision of amenities or services by it to the lot or to the proprietor or occupier thereof.

Section 37(2)(a) authorizes the making of an agreement for the provision of services "to the lot or to the proprietor or occupier thereof"; it does not authorize the making of an agreement with a person other than the proprietor or occupier of the lot to whom or to which the body corporate is to provide the services. Neither the broadly stated duties imposed by cl. 1 nor the particular duty imposed by cl. 2(r) of the management agreement falls within this paragraph. The body corporate did not enter into an agreement with the proprietor or occupier of any lot to provide the services of a letting agency for the benefit of that proprietor or occupier. Had it done so, it would have had authority to perform that agreement by employing an agent or servant (such as the appellants) to provide the services contracted for: see Fourth Schedule, cl. 1. However, if an agreement had been made with particular proprietors or occupiers, it would not have been a proper exercise of the body corporate's powers to require the funds raised by contribution from all proprietors to bear the cost of provision of the service for particular proprietors or occupiers. In any event, cl. 2(r) of the management agreement was not made in implementation of any agreement made under s. 37(2)(a) between the body corporate and an individual lot proprietor or occupier. None of the other powers conferred by s. 37(2) authorizes the making of an agreement for the conduct of a letting agency for the benefit of those proprietors of individual lots who might require such a service.

The appellants seek to uphold the management agreement by pointing to the by-law making power conferred on a body corporate by s. 30. That section authorizes the amendment of the pro forma by-laws contained in the Third Schedule "for the purpose of the control, management, administration, use or enjoyment of the lots and common property the subject of the plan" (s. 30(2)). Whatever the scope of that power may be, it does not avail the appellants in this case. There was no by-law made which might have authorized the body corporate to secure the provision of the services of a letting agency for the proprietors of the individual lots. In general, the Third Schedule does not authorize a body corporate to provide services to individual lots although cl. 10 impliedly authorizes a body corporate to provide a garbage disposal service for individual lots. If cl. 10 is an exception to the general scheme of the Third Schedule, the exception is explicable by the common interest of all proprietors and occupiers in the removal of garbage from any part of the premises.

In Coastalstyle Pty. Ltd. v Proprietors, Surf Regency Building Units Plan 4246 [2] , Thomas J. stated his view to be that the making of a letting agreement (similar to the present management agreement) "is within the general management powers of a Body Corporate for the benefit of unit holders", but he noted that that view was contrary to an assumption made by the Full Court in a case in which his Honour had agreed with the principal judgment [3] and from which he did not "feel free to depart". When Coastalstyle went on appeal to the Court of Appeal, the attack on the letting agreement seems to have focused on the granting to the letting agent of special privileges in respect of the common property. The Court of Appeal said [4] :

By s. 37(1)(a), a body corporate is required to "control, manage and administer the common property for the benefit of the proprietors" and, by s. 27(3), it is required, subject to the Act, to "do all things reasonably necessary" for that purpose. These are extensive powers and, except where the Act otherwise expressly provides, there seems no reason to exclude from their ambit a power in the body corporate to grant exclusive use or enjoyment, or special privileges, in respect of the common property for the purpose of a business engaged in on behalf of the proprietors of the units in the building. Provided that the service provided by the business is available for the benefit of all proprietors, it seems unimportant that some may choose not to participate. The passage cited suggests that it is within the ordinary powers of a body corporate to provide services for the proprietors of individual lots who wish to use those services. With respect, we are unable to agree. The powers of a body corporate are confined chiefly to management and control of common property, and expenditure of the funds of the body corporate on the provision of services for individual proprietors is not sanctioned merely because the services are available to all proprietors who wish to use them. A power to provide such services is not incidental to the body corporate's statutory duties or powers. 1. Unreported; 20 December 1991; p. 17. 2. Victorian Professional Group Management Pty. Ltd. v Proprietors Surfers Aquarius Building Units Plan No. 3881 [1991] 1 Qd R487. 3. Coastalstyle Pty. Ltd. v Proprietors, Surf Regency Building Units Plan 4246 (unreported; Supreme Court of Queensland; 12 October 1992), pp. 11-12.

In our opinion, there was no statutory power authorizing, and there was no by-law which might have authorized, the respondent to conduct a letting agency for the benefit of those proprietors of lots who might require that service or to procure another person to conduct such a letting agency. Nor was there any agreement under s. 37(2)(a) which might have been implemented by procuring another person to provide a letting service for particular lot proprietors or occupiers. It was therefore beyond the powers of the body corporate to enter into a contract to procure the provision of services of the kind stipulated in cl. 2(r) of the management agreement. The principle, as Lord Selborne stated it in Ashbury Railway Carriage & Iron Co. v Riche [5] , is that "a statutory corporation, created by Act of Parliament for a particular purpose, is limited, as to all its powers, by the purposes of its incorporation as defined in that Act."

The appellants submitted that, if cl. 2(r) were held to be ultra vires the body corporate, cl. 2(r) is a term severable from the remainder of the management agreement which is otherwise enforceable. Reliance was placed on the judgment of Jordan C.J. in McFarlane v Daniell [6] :

A valid promise is none the worse for being associated with a void promise from which it is severable; and although a promise which is wholly void cannot be enforced, a promise partly void but not illegal is capable of being enforced to the extent to which it is severable and valid. Again, a promise in consideration of a number of promises some only of which are void, although not illegal, is inherently capable of being enforced: Marks Bros. v Park [7] . If, however, it is made conditionally upon the prior or concurrent performance of all the promises by the other party, whether enforceable or void, it may be unenforceable unless the condition of performance of the void promises is in fact fulfilled. It was submitted that the appellants in this case are in the same position as the employee in McFarlane v Daniell who was held entitled to recover his remuneration under a contract of employment although the remuneration was payable in consideration, inter alia, of a promise on his part in unreasonable restraint of trade (and therefore a void promise). So, it was said, the manager under the management agreement may recover the stipulated remuneration although it is payable in consideration, inter alia, of the unenforceable promise contained in cl. 2(r). But the two cases are dissimilar. In McFarlane v Daniell , the invalidity of the promise in unreasonable restraint of trade arose because the law would not enforce such a promise against the promisor; but, as the promisor's promise was not illegal, there was no legal inhibition against the enforcement of the promisee's promise to pay the stipulated remuneration. In the present case, the invalidity arises not because it is against the policy of the law to enforce a promise such as that contained in cl. 2(r) against the promisor but because the Act prohibits the incurring of an obligation by the promisee to disburse the funds of the body corporate for purposes which it is not empowered to pursue. 1. (1938) 38 S.R. NSW 337, at p. 347. The case was cited with approval as to the severability of illegal promises in Carney v Herbert [1985] AC. 301, at pp. 310-311; see also Cheshire and Fifoot's Law of Contract, 6th Aust. ed. (1992), ch. 13, pp. 536-537. 2. (1914) 18 C.L.R. 1, at p. 13.

Section 38 of the Act provides for the establishment and maintenance of two body corporate funds: an administrative fund and a sinking fund. Sub-section (3) prohibits a body corporate from disbursing moneys from its administrative fund

(a) meeting its liabilities referred to in section 38A(1); or

(b) carrying out its powers, authorities, duties or functions under this Act.

Substituting s. 38A(2) for s. 38A(1), s. 38(6) imposes a limitation in similar terms on the disbursement of the sinking fund. The liabilities referred to in s. 38A(1) and (2) do not include a liability to pay for the provision of a letting agency in the circumstances of this case.

If the disbursement of the body corporate's funds for the purpose of procuring the provision of a letting agency is prohibited, the incurring of an obligation to disburse funds for that purpose is beyond the powers of the body corporate. The body corporate is thus incapable of providing consideration for the manager's promise contained in cl. 2(r).

The appellants pointed to some evidence to show that the more burdensome tasks imposed on the manager by the management agreement related to the maintenance of the common property - a matter which fell within the duties and powers of the body corporate. But it is not possible to treat the promise to pay remuneration as divisible between purposes on which the body corporate is authorized to disburse its funds and purposes for which the disbursement of its funds is forbidden. It is not suggested that the provision of a letting agency was of such minimal significance as to be immaterial.

In Mann v Edinburgh Northern Tramways Co. [8] , Lord Watson said in reference to a company created by a private Act of Parliament:

it is beyond the power either of promoters or of directors or of shareholders to apply the moneys of the company which are devoted by statute to special purposes to any purpose which is not sanctioned by the provisions of the Act of incorporation. In that case, the company in effect entered into a contract to pay two of its promoters £17,000 to defray the expenses of securing the passing of the private Act of incorporation. Those expenses were authorized by the Act but the payment of £17,000 would leave a surplus in the promoters' hands and the company had no authority to provide such a benefit. It was immaterial that the surplus might be large or small or that the payment was in part for a legitimate purpose. As the agreement was to pay the entire sum of £17,000 for purposes which included an unauthorized purpose, the agreement was held invalid [9] . 1. [1893] A.C. 69, at p. 83. 2. See ibid., at pp. 82, 83, 84.

Similarly, the body corporate's promise in cl. 8 of the management agreement to pay an entire sum as remuneration for the performance of duties including those specified in cl. 2(r) was not authorized by the Act. The appellants cannot therefore enforce the remuneration clause against the body corporate. This conclusion does not mean, of course, that the appellants were not entitled to payment for the services which they rendered to the body corporate and which the body corporate was authorized to procure. But the appellants' entitlement to payment for what might be termed the legitimate services was not an entitlement enforceable under cl. 8 of the management agreement. The appellants were entitled in restitution to be paid for the legitimate services rendered to the body corporate at its request, being services for which the body corporate was entitled to disburse its funds.

However, that was not the relief which the appellants sought in the action. The appellants sought a declaration that the management agreement is subsisting, either in toto or shorn of any invalid terms. Their pecuniary claim was, as counsel put it, "for a debt of accruing salary under the agreement ". As the agreement is unenforceable, the appellants' action fails.

As the appellants' action fails on the ground advanced by the Court of Appeal, it is unnecessary to determine the body corporate's application for special leave to appeal on the ground that the management agreement constituted an "agreement between a body corporate and a body corporate manager" appointed pursuant to s. 50 of the Act and was terminated by the resolution of 1 February 1992.

The background to this appeal, the facts involved in it and the relevant statutory provisions are set out in the joint judgment of Brennan and Toohey JJ. and the judgment of McHugh J. The central issue is whether cl. 8 of the Management Agreement of 31 January 1989 ("the Agreement") was, by reason of the inclusion in the Agreement of cl. 2(r), ultra vires and void.

By cl. 2(r), the "specific duties to be performed by the Manager" under the Agreement included the "conduct, from his unit, [of] a letting agency for the letting of townhouses on the Property for such owners of the townhouses, as shall require that service". Clause 8 provided that the annual remuneration of the Manager should be $60,000 adjusted in accordance with the All Groups Consumer Price Index for Brisbane. The combined effect of cl. 2(r) and cl. 8 was that the "duties" for the performance of which the body corporate promised to pay the Manager's annual remuneration included that of conducting the letting agency.

The Court of Appeal concluded that cl. 2(r) required letting services to be supplied by the Manager to individual proprietors free of charge to the particular proprietor. We respectfully disagree with that conclusion. In our view, cl. 2(r) required the Manager to conduct a letting agency whose services would be available to those proprietors who should "require" them but did not preclude the Manager from charging a fee or commission to those proprietors who utilized those services in leasing particular units. That construction lends greater plausibility to the appellants' argument that cl. 2(r) was in the interests of proprietors generally. Nonetheless, the fact remains that only those proprietors who wished to let their townhouses would obtain any direct practical benefit from the availability on the premises of a letting agency. Examination of the powers of the body corporate to expend its funds discloses that those powers did not encompass the payment of remuneration for the conduct of such an agency from a unit in the complex.

Any payment to the Manager in pursuance of cl. 8 of the Agreement would necessarily be made from the body corporate's administrative fund established and maintained under s. 38 of the Building Units and Group Titles Act 1980 Q ("the Act"). Section 38(3) expressly prohibits any distribution from that administrative fund:

(a) meeting its liabilities referred to in section 38A(1); or

(b) carrying out its powers, authorities, duties or functions under this Act.

It is not suggested that the provisions of s. 38A(1) are applicable. That means that the effect of s. 38(3) was that payment of remuneration to the Manager for carrying on the letting agency was beyond the powers of the body corporate unless the payment could be justified as being "for the purpose of carrying out its powers, authorities, duties or functions under [the] Act". The powers, authorities, duties and functions of the body corporate under the Act are, as s. 27(3) expressly states, those "conferred or imposed on it by or under [the] Act or the by-laws".

By s. 37(1)(a) of the Act, a body corporate is required to "control, manage and administer the common property for the benefit of the proprietors". Section 27(3) empowers a body corporate to "do all things reasonably necessary" for that purpose. Wide though those powers of control, management and administration may be, they are confined to the common property. They simply do not extend to the making of a contract binding the body corporate to pay "remuneration" to the proprietor of a particular unit or townhouse as consideration for the conduct by that proprietor "from his unit" of a letting agency whose services would be available to any proprietors who desired, as individuals, to lease their townhouses. Entry into such a contract is neither an incident of, nor reasonably necessary for, the control, management or administration of the common property. As Brennan and Toohey JJ., and McHugh J. demonstrate in their judgments, there was no other provision of the Act which either expressly or impliedly authorized the body corporate to enter into such a contract or to expend its funds in the payment of such remuneration. Nor was there any by-law of the body corporate which conferred such authority. That being so, cl. 8 of the Agreement involved contravention of s. 38(3) of the Act and was ultra vires the body corporate to the extent that it required the application of the funds of the body corporate in the payment of remuneration to the Manager for conducting the letting agency "from his unit".

The material in evidence does not sustain a conclusion that the provision of the letting agency was such an insignificant component of the duties of the Manager for which the body corporate agreed to pay the base remuneration of $60,000 per annum that it can be disregarded. Nor is there any basis for a finding that a particular proportion or amount of that annual remuneration can be attributed to the Manager's promise to conduct a letting agency. That being so, we agree with the conclusion of the Court of Appeal that cl. 8 cannot be saved by any process of severance or reading down. It follows that the clause was, in its entirety, ultra vires and void.

Our conclusion that cl. 8 was void in its entirety makes it unnecessary that we address the question of the validity of other clauses of the Agreement. The whole Agreement necessarily falls with cl. 8. It is also unnecessary that we address the question which the respondent sought to raise in its application for leave to cross-appeal.

The principal issue in this appeal is whether a body corporate, constituted under the Building Units and Group Titles Act 1980 Q ("the Act"), has power, in the absence of an appropriate by-law, to enter into an agreement by which it pays money to a person in consideration of that person conducting a letting agency for the benefit of those owners of lots in the complex who require that service.

The appellants contend that a body corporate constituted under the Act has such a power by virtue of its general statutory responsibility to control, manage and administer the common property. The respondent body corporate denies that there is such power and contends that, in the absence of a special by-law conferring power, such an agreement is ultra vires and void.

On 31 January 1989, the body corporate entered into a building management agreement ("the Agreement") with Bartlett Researched Securities Ltd. ("Bartlett") in respect of a complex at the Gold Coast called "Surfers Palms North". The body corporate agreed that Bartlett should act as building manager on behalf of the body corporate for an initial period of three years and at a commencing salary of $60,000 per annum. The obligations and benefits of the Agreement ran for an initial term of three years (cl. 10) with an option to renew for a further three years (cl. 14). No by-law of the body corporate expressly conferred power on it to enter the Agreement. The Agreement was assigned by Bartlett to the appellants (Mr. and Mrs. Humphries) by a Deed of Assignment executed on 17 January 1991. At the same time, the appellants purchased unit 1 in the complex.

On 28 November 1990, the body corporate served a letter on the appellants claiming that the Agreement was ultra vires the body corporate. However, the appellants went into possession of their unit and commenced to provide the management services under the Agreement. On 26 February 1991, the body corporate sent a letter to the appellants purporting to determine the Agreement. On 13 March 1991, the body corporate changed the locks on the garden shed and pool shed, frustrating the continued attempts of the appellants to perform most of their duties under the Agreement. On 22 November 1991, the appellants gave notice to the body corporate, pursuant to cl. 14 of the Agreement, of their intention to extend the term of the Agreement for a further period of three years, from 31 January 1992 to 30 January 1995. The body corporate has refused to pay for any services since 10 February 1991. At the annual general meeting of the body corporate on 1 February 1992, a motion was passed purporting to terminate the appointment of the appellants as building managers. In purporting to terminate the Agreement, the body corporate relied on s. 50(9) of the Act.

The appellants have rejected the purported termination. They deny that s. 50(9) of the Act entitled the respondent to terminate the Agreement. They contend that the Agreement did not appoint them as the "body corporate manager" within the meaning of that sub-section.

Specific duties of the Manager were listed in cl. 2. Apart from cl. 2(r), the sub-clauses were principally concerned with the care, maintenance and control of the common property. Clause 2(r), however, provided for a letting service in the following terms:

Letting Agency - The Manager shall conduct, from his unit, a letting agency for the letting of townhouses on the Property for such owners of the townhouses, as shall require that service, or with prior written approval of the Owner arrange with a licensed real estate agent or agents to provide a letting agency for the lettings. The Manager shall ensure that at all times he is properly licensed to perform these functions having regard to the provisions of the Auctioneers and Agents Act 1971 (as amended) and any other relevant legislation or requirements of other governmental or semi-governmental authorities from time to time. The respondent contends that this sub-clause is ultra vires the body corporate.

Clause 6 was a curious clause. Under it, the Manager granted "to all members of the [body corporate], their tenants, licensees and invitees the right to use the facilities on the common property at such times and upon such conditions as the Manager may impose from time to time". Clause 12 provided that the management and letting duties of the Manager under the Agreement would be carried out from Lot 1. It also provided that that lot should be the only lot "in the property from which management of the property and letting of units in the property takes place". Clause 9 provided that the body corporate should not permit any other person or corporation to conduct on the property any business similar to that carried on by the Manager under the Agreement. Clause 8 provided a lump sum remuneration to the Manager of $60,000 per annum payable monthly in arrears. The sum was to be increased annually in accordance with the All Groups Consumer Price Index. No proportion of the sum was allocated to any particular duty.

In proceedings commenced in the Supreme Court of Queensland, the appellants sought a declaration that the Agreement dated 31 January 1989 subsisted between themselves and the respondent and that the respondent was bound by its terms. They also sought an order that their damages be assessed. The appellants' case substantially succeeded at first instance. The learned trial judge, Derrington J., held that cll. 2(r), 9 and 12 were ultra vires the body corporate but could be severed from the rest of the Agreement. He declared that, with the exception of those clauses, the Agreement would have subsisted between the parties until 1 February 1992. However, he declared that the Agreement had been terminated as and from 1 February 1992 by notice given by the body corporate to the appellants pursuant to s. 50(9) of the Act. His Honour ordered the body corporate to pay damages for its breach of the Agreement, and he remitted the action to the District Court at Brisbane for the assessment of the damages together with interest thereon.

The Court of Appeal set aside the orders made by Derrington J. The Court was of the opinion that the Agreement did not depend on, and was not made under, s. 50 of the Act. Accordingly, if the Agreement was valid, the respondent could not terminate it pursuant to s. 50(9) of the Act. The Court was also of the opinion that it was unnecessary to consider the validity of cll. 6, 9 and 12 because, "if objectionable, they are plainly severable [10] ". However, the Court held that cll. 2(r) and 8, taken together, were ultra vires and could not be severed from the Agreement. The Court said:

There can be no question of severability and, since clause 8 forms the very basis of the appellants' claim to damages, their action must fail.

As I have said, the central issue in the present case is whether in Queensland, in the absence of an authorizing by-law, a body corporate formed under the Act has power to enter into an agreement by which it pays money to a person in consideration of that person conducting a letting agency for the benefit of those owners of lots in the complex who require that service. In my opinion, a body corporate has no such power. Nothing in the Act expressly authorizes such an agreement or the payment of moneys to a letting agent for services rendered to individual proprietors. Nor can such a power be implied. Indeed, the implication to be drawn from the Act is that a body corporate has no such power in the absence of an authorizing by-law.

Section 9 of the Act provides for the registration of group titles plans. A group titles plan means a plan which is so described and which shows the land comprised therein as being divided into lots and common property and which complies with s. 9 of the Act (s. 7(1)). Section 9 requires, inter alia, that a group titles plan delineate the lots and common property and distinguish the lots by numbers. Upon registration of the plan, the proprietors of the lots become a body corporate (s. 27(1)). Section 32 authorizes the body corporate to levy contributions from the proprietors. They are to be paid into an administrative fund and a sinking fund (s. 38). Moneys are not to be disbursed from those funds except to meet the liabilities incurred by the body corporate in performing its duties and functions or exercising its powers and authorities under the Act (ss. 38, 38A). The Companies Act 1961 Q does not apply to or in respect of a body corporate constituted under the Act (s. 27(2)). Consequently, the doctrine of ultra vires applies to such a body corporate.

Subject to this Act the body corporate shall have the powers, authorities, duties and functions conferred or imposed on it by or under this Act or the by-laws and shall do all things reasonably necessary for the enforcement of the by-laws and the control, management and administration of the common property.

The principal duties imposed on a body corporate by the Act are set out in s. 37 of the Act. That section also confers powers on a body corporate. So far as relevant, s. 37 provides:

(a) control, manage and administer the common property for the benefit of the proprietors;

Unquestionably, s. 37(1)(a) and (c) authorize 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 authorizes 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 [11] . 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 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 (see below), nothing in the Act authorizes a body corporate to interfere with the rights of proprietors in respect of their lots.

See, e.g., the Auctioneers and Agents Act 1971 Q, s. 42(2).

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 authorizing 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 sub-section 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.

However, the appellants contend that the intended width of the powers conferred by ss. 27(3) and 37 can be seen from the definition of prescribed arrangement [12] in s. 7 of the Act and from the licence provisions of s. 42 of the Auctioneers and Agents Act 1971 Q. Paragraph (e) of the definition of prescribed arrangement in s. 7 of the Act includes an agreement "for the conduct of a business upon the parcel (whether upon a lot or the common property) of letting of lots on behalf of any proprietors of lots". Section 42 of the Auctioneers and Agents Act requires a person carrying on a letting business of the kind involved in the present case to be licensed. Where the business is restricted to the letting of lots in a building in which the applicant resides, however, there is an exemption from certain requirements (s. 42(2)(a)) if the applicant has an office in that building (s. 42(2)(b)) and has entered into an agreement in writing with the body corporate authorizing the applicant to carry on the business (s. 42(2)(c)). Contrary to the contention of the appellants, these provisions are not a statutory recognition of a general power in a body corporate to enter into a letting agreement of the kind in issue in the present case. They assume the making of a valid agreement, but they are silent as to how such an agreement can be validly made.

Section 49(2) of the Act requires an original proprietor to give to a prospective purchaser a statement setting out details of any prescribed arrangement.

The conclusion that the general powers conferred by ss. 27 and 37 did not authorize the making of the Agreement is confirmed by s. 30(2) of the Act which provides:

Save where otherwise provided in subsections (7) and (11), a body corporate, pursuant to a special resolution, may, for the purpose of the control, management, administration, use or enjoyment of the lots and common property the subject of the plan, make by-laws amending, adding to or repealing the by-laws set forth in the Third Schedule or any by-laws made under this subsection. That sub-section indicates that the body corporate can interfere with the rights of proprietors in respect of their lots only by means of by-laws passed in accordance with the Act. The general powers conferred by ss. 27 and 37 are insufficient for this purpose.

The Third Schedule to the Act contains specific by-laws, but none of those by-laws authorized the making of the Agreement. Nor has the body corporate exercised the power conferred by s. 30(2) to make a by-law giving it power to enter into an arrangement containing cll. 2(r), 9 and 12 of the Agreement.

Section 30(7) is another indication that the body corporate had no power to enter into the letting clauses of the Agreement. It provides:

Without limiting the generality of any other provision of this section, a body corporate may, with the consent in writing of the proprietor of a lot, pursuant to a resolution without dissent make a by-law in respect of that lot conferring on that proprietor the exclusive use and enjoyment of, or special privileges in respect of, the common property or any part thereof upon such terms and conditions (including the proper maintaining and keeping in a state of good and serviceable repair of the common property or that part of the common property, as the case may be, and the payment of money by that proprietor to the body corporate) as may be specified in the by-law and may, in like manner, make a by-law amending, adding to or repealing any by-law made under this subsection. Section 30(7) ensures that, without the concurrence of all proprietors, no proprietor or group of proprietors is to obtain special privileges at the expense of other proprietors. This sub-section is necessary to safeguard the position of proprietors, because the Act imposes an unlimited liability on the proprietors for all liabilities properly incurred by the body corporate (s. 38A(1)(c); s. 38B). By requiring the enactment of a by-law, s. 30(7) ensures that the rights and obligations of proprietors arising from ownership of their lots can only be affected by an appropriate resolution directed to the particular subject matter. When read with s. 30(2), the terms of s. 30(7) indicate that the body corporate has no implied power under s. 27(3) or s. 37 to make a letting agreement of the kind in question in the present case.

While the general powers conferred by ss. 27 and 37 authorize the body corporate to enter into contracts concerning the common property, the learned trial judge was correct in saying:

It would be surprising indeed if a general power to contract for the benefit of proprietors could be implied in favour of the body corporate in such a way as to subvert these protective provisions relating to by-laws.

Such a result would assume that the power of contract implied by s. 37(1)(a) overrides the rights of the proprietors over their lots and the common property. This is quite unacceptable.

The appellants relied on the decision of the Supreme Court of Queensland in Coastalstyle Pty. Ltd. v Proprietors Surf Regency Building Units Plan 4246 [13] to support the validity of the Agreement. They submitted that that decision was distinguishable from the earlier decision of that Court in Victorian Professional Group Management Pty. Ltd. v Proprietors Surfers Aquarius Building Units Plan No. 3881 [14] . Surfers Aquarius concerned the granting of a letting agreement which gave a person the sole right to carry on the business of letting and selling in relation to a certain block of units. It required the person to maintain and staff a reception desk in its own premises (lot 2) or within the common area and contained a covenant that the defendant body corporate would not grant a lease or licence in respect of any part of the common property to a competitor. The Full Court (Connolly J., with whose judgment Thomas and Ambrose JJ. agreed) held that these covenants conferred special privileges on and contemplated the exclusive use of part of the common property by the proprietor of lot 2 and was in contravention of s. 30(7) of the Act. Consequently, the agreement was ultra vires the defendant.

Unreported; 20 December 1991. 2. [1991] 1 Qd R. 487.

In Coastalstyle [13] , Thomas J. resiled from his concurrence in Surfers Aquarius but felt constrained to follow the decision. His Honour pointed out that the power to make by-laws pursuant to s. 30 of the Act was discretionary. He was of the opinion that it was not the only source of power to enter a letting agreement. His Honour said [15] :

I prefer the view that a letting agreement such as that in the present case is within the general management powers of a Body Corporate for the benefit of unit holders and that the assumption in the Surfers Aquarius Case (in which I concurred) is incorrect My preferred view is that the correct construction of s. 30(7) confines it to special arrangements in favour of proprietors, generally of the kind referred to in the words in brackets in that sub-section. However it is not a matter upon which I feel free to depart from a Full Court decision, notwithstanding my preference to the contrary. 1. Unreported; 20 December 1991. 2. Unreported; 20 December 1991; p. 17.

On appeal in that case [16] , the Full Court held that it was not necessary to review the correctness of the decision in Surfers Aquarius. The Court considered that the body corporate had power to enter the letting agreement under the general powers conferred by ss. 37(1)(a) and 27(3). It said [17] :

These are extensive powers and, except where the Act otherwise expressly provides, there seems no reason to exclude from their ambit a power in the body corporate to grant exclusive use or enjoyment, or special privileges, in respect of the common property for the purpose of a business engaged in on behalf of the proprietors of the units in the building. Provided that the service provided by the business is available for the benefit of all proprietors, it seems unimportant that some may choose not to participate. 1. Coastalstyle Pty. Ltd. v Proprietors Surf Regency Building Units Plan 4246 (unreported; Supreme Court of Queensland; 12 October 1992), p. 13. 2. ibid., at p. 12.

However, for the reasons that I have already given, where a body corporate wishes to affect the rights and obligations of an individual proprietor in respect of his or her lot, a by-law is required. Furthermore, if a service directly affects an individual lot, then contrary to the opinion of the Full Court in Coastalstyle , the fact that it is for the benefit of all the proprietors does not entitle the body corporate to act without the authority of a by-law.

In my opinion, the body corporate had no power to enact cl. 2(r), 9 or 12, the clauses concerned with the letting of lots. Furthermore, cl. 2(r) has to be read with cl. 8 which provided for the remuneration of the Manager. Accordingly, cll. 2(r), 9 and 12, and so much of cl. 8 as authorized expenditure by the body corporate on the letting service, were ultra vires the body corporate. But does this mean, as the Court of Appeal held, that the entire Agreement was void? Or is the correct view that the clauses relating to the letting service can be severed from the Agreement leaving the remainder of the Agreement enforceable?

In the case of promises that are invalid, the general test for determining whether they are severable from the agreement of which they form part was laid down by Jordan C.J. in McFarlane v Daniell [18] in a passage approved by this Court in Thomas Brown & Sons Ltd. v Fazal Deen [19] and by the Privy Council in Carney v Herbert [20] . Jordan C.J. said [21] :

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 promises changes the extent only but not the kind of the contract, the valid promises are severable. However, this is not an exclusive test. The test of severability is a flexible one. "There are not set rules which will decide all cases" [22] . 1. (1938) 38 S.R. NSW 337. 2. (1962) 108 C.L.R. 391, at p. 411. 3. [1985] A.C. 301, at pp. 310-311. 4. McFarlane (1938), 38 S.R. NSW, at p. 345. 5. Carney [1985] AC. 301, at p. 309.

Clauses 2(r), 9 and 12 of the Agreement are wholly void. They must be treated as if they were not part of the Agreement. Furthermore, carrying out the letting service required by cl. 2(r) was part of the consideration for the payment of $60,000 per annum to the Manager provided for in cl. 8. Part of the funds of the body corporate, therefore, was required to be spent on an unauthorized object. That means that cl. 8 is partly invalid and, if it is to remain part of the Agreement, must be read down. However, the crucial question is whether deleting cll. 2(r), 9 and 12 from the Agreement and reading down cl. 8 changes only the extent of the Agreement or whether it changes its nature. If the nature of the Agreement is not changed, the appellants would be entitled to recover damages against the body corporate for any wrongful deprivation of their right to earn their remuneration under the Agreement.

The conduct of the letting service was one of nineteen specified duties listed in cl. 2. In evidence, the other duties, which included the maintenance and management of the common gardens (said to be between four and a half and six acres) and the large pool and spa, were estimated to require eighty hours work per week in the summer and forty or fifty hours per week in the winter. On the evidence, the conduct of the letting service was not a large part of the Manager's duties. Accordingly, it seems unlikely that the parties considered the duty of letting to be a dominant element of the Agreement. It was not the "heart and soul" of the Agreement [23] .

Amoco Australia Pty. Ltd. v Rocca Bros. Motor Engineering Co. Pty. Ltd. (1975), 133 C.L.R. 331, at p. 342; [1975] A.C. 561, at p. 578.

If cll. 2(r), 9 and 12 could be considered independently of cl. 8, they would be severable. This accords substantially with the view of Derrington J. However, as the Court of Appeal pointed out, the remuneration payable under cl. 8 was a lump sum annual payment which was not apportionable among the various duties. If cl. 2(r) was severed from the Agreement, the Manager would be receiving the same remuneration for less work. So the critical issue is whether, having regard to the connexion between cl. 2(r) and cl. 8, the invalid promise contained in cl. 2(r) is severable from the rest of the Agreement.

The mere fact that a lump sum payment is provided in consideration of the performance of a range of duties, some of which are unenforceable, is not of itself a bar to severance. In Goodinson v Goodinson [24] , a contract between a husband and wife, who had separated, provided for the payment of a weekly sum by way of maintenance from the husband in consideration of the wife indemnifying him against all debts incurred by her, not pledging his credit and not taking any matrimonial proceedings in respect of maintenance. The English Court of Appeal held the last promise was void because it was an attempt to oust the jurisdiction of the courts. However, it held that it did not vitiate the rest of the contract because it was not the main consideration furnished by the wife. Somervell L.J. said [25] :

In the present case I think that there is ample consideration to support this agreement apart from the covenant not to sue, and to enable it to be enforced as against the husband in the way in which the wife seeks to enforce it in these proceedings. In McFarlane [26] , an actor was held entitled to enforce a promise to pay remuneration under a contract of employment that contained restrictive covenants by the actor that were void as being in restraint of trade. Similarly, in Carney [27] , as part of a composite transaction for the sale of shares in a company, payment was to be secured by the defendant's guarantee and provision of mortgages over the property of a subsidiary company. The provision of the mortgages was illegal under s. 67(1) of the Companies Act 1961 NSW. The Judicial Committee held that the provision of the mortgages, although illegal and void, was ancillary to the overall transaction and severable. The defendant was, therefore, liable to the plaintiffs for the unpaid instalments of the purchase price. 1. [1954] 2 Q.B. 118. 2. ibid., at pp. 123-124. 3. (1938) 38 S.R. NSW 337. 4. [1985] A.C. 301.

These three cases show that a contract to pay a lump sum may be enforceable even though part of the consideration for that sum is void and the payment was not apportioned in respect of the various considerations given for it. However, I do not think that they require the conclusion that cl. 2(r) can be severed from the rest of the Agreement in the present case.

Carney is distinguishable from the present case on the ground that the provision of the mortgage security in that case was for the exclusive benefit of the plaintiffs. The defendant was not prejudiced if the Agreement was enforced without the security being furnished. Their Lordships said [28] :

Subject to a caveat that it is undesirable, if not impossible, to lay down any principles which will cover all problems in this field, their Lordships venture to suggest that, as a general rule, where parties enter into a lawful contract of, for example, sale and purchase, and there is an ancillary provision which is illegal but exists for the exclusive benefit of the plaintiff, the court may and probably will, if the justice of the case so requires, and there is no public policy objection, permit the plaintiff if he so wishes to enforce the contract without the illegal provision. 1. [1985] A.C., at p. 317.

McFarlane [29] is also distinguishable. Although the void restraint was part of the consideration for the payment of remuneration to the plaintiff in that case, the defendant had not alleged that the plaintiff had failed to comply with the restraint, void though it was. Jordan C.J. said [30] :

if such a defence had been raised the plaintiff might have been able, for aught I know, to prove that he had complied with all the restraints imposed on him by the defendant, iniquitous though the defendant now contends them to be. There would be no reason why the plaintiff should not prove this if it became material. 1. (1938) 38 S.R. NSW 337. 2. ibid., at p. 349.

Goodinson , however, is not readily distinguishable from the present case. It is an authority for the proposition that, if part of the consideration for the promise of a payment is void but not illegal, the promise is enforceable as long as the void consideration was not the main consideration for the promise. But if this proposition was applied generally, it might often lead to injustice. In many cases, without the void consideration, the defendant might not have entered into the agreement or promised to pay the amount of money in question. It is not just that the defendant should have to perform a promise or promises which would not have been given but for the giving of the void consideration.

In my opinion, in cases where a provision in a contract is void, is not for the exclusive benefit of the party seeking to enforce the contract, and is part of the consideration for an indivisible promise of the defendant, the proper test for determining whether the void provision is severable from the indivisible promise is that formulated by the Full Court of the Supreme Court of Victoria in Brew v Whitlock [No. 2] [31] . In that case, the Full Court said that [32] "once the conclusion is reached that the invalid promise is so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it", the invalid promise should be treated as inseverable from the contract.

In the present case, cl. 2(r) was not for the exclusive benefit of the appellants. So the question is whether the provision of the letting service was so material and important a part of the bargain between the parties that the body corporate would not have agreed to pay the sum of $60,000 per annum without that service being provided. Unless that question is answered in the negative, the promise contained in cl. 2(r) must be regarded as inseverable from the promise contained in cl. 8 of the Agreement.

In evidence, Mr. Humphries said that the "letting is only of a permanent nature, so it doesn't require a lot of work. Basically, it is the collecting of rent, either weekly, fortnightly, monthly - whichever the people prefer to pay - and doing any minor repairs on behalf of any unit owners". He defined a "permanent" letting as meaning a letting of "three months or longer". Mr. Humphries also testified that the letting work was still being carried out at the date of trial even though the body corporate had purported to terminate the Agreement. However, the materiality of the promise to provide the letting service cannot be determined by the amount of letting actually carried out. There is no evidence before the Court as to what part of the Manager's duties was expected to be taken up with the letting arrangements at the time that the Agreement was made. It may be that the parties contemplated that more would be done than has turned out to be the case. Significantly, in his evidence, Mr. Humphries said, "I don't holiday let, when people come for only one or two weeks, which requires a far greater amount of work involvement in the letting side of it." Yet the terms of cl. 2(r) would indicate that he was obliged to let units on behalf of proprietors whether the lettings were of a permanent or holiday nature.

Upon the evidence, it is not possible to conclude that the body corporate would have paid the Manager $60,000 per annum without its promise to provide the letting service. Indeed, common sense suggests that it is unlikely that a body corporate acting rationally would have done so. The appellants have therefore failed to establish that cl. 2(r) was severable.

At a glance

Court

Decision date

Before

Source

Judgment (106 paragraphs)

Parties