McDonough v The Owners Strata Plan No 57504

Supreme Court of NSW|2014-11-21|Before: Brereton J

Judgment 1HIS HONOUR: On 21 February 2013, the present defendant Owners Corporation commenced proceedings in the Local Court against the present plaintiff Ms McDonough, who was the proprietor of Unit 602 in the strata plan, for arrears of strata levies payable in respect of her lot. Ms McDonough filed a cross-claim for damages for an alleged breach of (NSW) Strata Schemes Management Act 1996, s 62, and sought the transfer of the proceedings to the District Court on the ground that her cross-claim exceeded the jurisdictional limit of the Local Court. On 12 November 2013, Ms McDonough filed an amended cross-claim in the District Court proceedings, still claiming damages for alleged breaches of s 62. 2On the eve of the hearing of the District Court proceedings, which was appointed for 30 July 2014, Ms McDonough paid the outstanding levies, so that only her cross-claim remained for determination. The cross-claim relied on a line of first instance cases which had held that an owners corporation's duty under s 62 to maintain the common property was owed to each lot owner, and that its breach gave rise to a private cause of action for damages for breach of statutory duty [Lubrano v The Proprietors of Strata Plan No 4038 (1993) 6 BPR 13,308; Lin v The Owners - Strata Plan No 50276 [2004] NSWSC 88; (2004) 11 BPR 21,463; Seiwa Pty Ltd v The Owners of Strata Plan 35042 [2006] NSWSC 1157; (2006) 12 BPR 23,673; Nicita v Owners of Strata Plan 64837 [2010] NSWSC 68]. On the morning of the hearing in the District Court, the Owners Corporation advised that it would rely on the recent decision of the Court of Appeal in The Owners Strata Plan 50276 v Thoo [2013] NSWCA 270, which overruled that line of authority and held that a breach of s 62 by an owners corporation does not give rise to an action for damages for breach of statutory duty. Ms McDonough obtained an adjournment, and now, by summons filed on 8 October 2014, applies for an order pursuant to (NSW) Civil Procedure Act 2005, s 140(1), that the proceedings be transferred to the Supreme Court, and for leave to amend the cross-claim to add claims for damages for negligence, and for equitable compensation for breach of trust. 3While the District Court plainly has jurisdiction in respect of the proposed negligence claim (the amount of the claim being well within the jurisdictional limit of $750,000), and while the Owners Corporation is prepared to accept that the District Court has jurisdiction in respect of the equitable claim and undertake not to dispute jurisdiction, the plaintiff is concerned that there is doubt as to jurisdiction in respect of the equitable claim, and an appreciable risk that that Court would consider itself bound to transfer the matter to the Supreme Court pursuant to Civil Procedure Act, s 144(2), which provides that the District Court must transfer proceedings in its equitable jurisdiction to the Supreme Court, if it decides that it lacks, or may lack, jurisdiction to hear and dispose of them. However, the Owners Corporation contends that the proposed claim for equitable compensation is, in the light of Thoo, so plainly untenable that the proposed amendment should not be allowed, in which case there would be no cause for removal of the proceedings. The Owners Corporation also contends that the proposed negligence claim is untenable and the amendment to add it should not be allowed. 4Accordingly, the issues are: (1)Does the District Court have jurisdiction in respect of claims for equitable compensation for breach of trust where the subject matter exceeds $20,000? (2)Is the proposed equitable claim untenable? (3)Is the proposed negligence claim untenable?

Does the District Court have jurisdiction in respect of claims for equitable compensation for breach of trust where the subject matter exceeds $20,000? 5(NSW) District Court Act 1973, s 134, gives the District Court a limited equitable jurisdiction, in the following terms: (1) The Court shall have the same jurisdiction as the Supreme Court, and may exercise all the powers and authority of the Supreme Court, in proceedings for: (a) the foreclosure or redemption of a mortgage or the enforcing of any charge or lien where the amount owing in respect of the mortgage, charge or lien does not exceed $20,000, as determined by the Court, (b) the specific performance, rectification, delivery up or cancellation of any agreement for: (i) the sale or purchase of any property at a price not exceeding $20,000, or (ii) the lease of any property the value of which does not exceed $20,000, as determined by the Court, (c) an order under section 3 of the Testator's Family Maintenance and Guardianship of Infants Act 1916 (as in force immediately before that Act was amended by the Succession Amendment (Intestacy) Act 2009) or a family provision order under Chapter 3 of the Succession Act 2006, (d) relief against fraud or mistake where the damage sustained or the estate or fund in respect of which relief is sought does not exceed $20,000 in amount or value, as determined by the Court, (e) the execution of a trust or a declaration that a trust subsists, where the estate or fund subject or alleged to be subject to the trust does not exceed $20,000 in amount or value, as determined by the Court, or (f) the administration of the estate of a deceased person, where the estate does not exceed $20,000 in amount or value, as determined by the Court, or (g) any application under the Property (Relationships) Act 1984, or (h) any equitable claim or demand for recovery of money or damages, whether liquidated or unliquidated (not being a claim or demand of a kind to which any other paragraph of this subsection applies), in an amount not exceeding the Court's jurisdictional limit. 6Because of the terms of s 134(1)(e), the District Court plainly does not have jurisdiction in respect of the declaration of a trust where the subject matter exceeds $20,000. The proposed amended cross-claim seeks declarations that the Owners Corporation committed breaches of trust in respect of the common property, and I accept that the District Court would not have jurisdiction to grant such declarations. However, the substantive claim Ms McDonough wishes to bring is for equitable compensation for the breaches of trust, and the declarations are entirely unnecessary surplusage, and if the claim for declaratory relief were the only basis on which it were suggested that the District Court was not the appropriate forum, I would not make a transfer order. The more difficult question is whether, as Ms McDonough contends, such doubt attends the jurisdiction of the District Court to entertain the claim for equitable compensation for breach of trust that it is preferable that the proceedings be removed into the Supreme Court, which unquestionably has jurisdiction. 7Under s 134(1)(h), the District Court has jurisdiction to award equitable compensation up to $750,000 in respect of any equitable claim for recovery of money or damages, other than a claim of a kind to which any other paragraph of s 134(1) applies [Commonwealth Bank of Australia v Hadfield [2001] NSWCA 440; (2001) 53 NSWLR 614]. Ms McDonough's claim is one for equitable compensation, but the trust property (being the common property) exceeds $20,000 in value. If the claim is covered by s 134(1)(h), it is within the jurisdiction of the District Court; but if it is caught by s 134(1)(e), it is not. 8Because s 134(1)(h) expressly excludes claims to which any other paragraph applies, the essential question is whether apart from s 134(1)(h), the District Court would have had jurisdiction, under s 134(1)(e), to award equitable compensation for a breach of trust (albeit limited to a trust the property of which does not exceed $20,000). It is important to read each paragraph of s 134(1) in the context of the introductory words of the subsection, namely "The Court shall have the same jurisdiction as the Supreme Court, and may exercise all the powers and authority of the Supreme Court, in proceedings for ...". The way in which s 134 works is not simply to give jurisdiction to the District Court in, relevantly, claims for the execution of a trust, but to give it the same jurisdiction and all the powers and authority that the Supreme Court has in such proceedings. Thus the question is not simply whether a claim for compensation for breach of trust is a claim for "the execution of a trust, or a declaration that a trust subsists", but whether in proceedings for the execution of a trust the Supreme Court would have had jurisdiction to award equitable compensation: if so, such jurisdiction is given to the District Court by s 134(1)(e), and such a claim falls outside s 134(1)(h). 9Some assistance in answering that question is given by other paragraphs of s 134(1). For example, with reference to s 134(1)(b), in proceedings for specific performance, the jurisdiction powers and authority of the Supreme Court include the award of equitable damages in addition to or in lieu of specific performance. With reference to s 134(1)(d), it is plainly contemplated that the relief for fraud or mistake may be or include equitable damages. Similarly, with reference to s 134(1)(e), in proceedings for the execution of a trust, the jurisdiction powers and authority of the Supreme Court include the award of equitable compensation for breach of trust. 10It follows that a claim for equitable compensation for breach of trust is a claim to which s 134(1)(e) applies. Such a claim is therefore excluded from s 134(1)(h). The District Court would therefore not have jurisdiction to hear and dispose of Ms McDonough's proposed equitable claim. At the very least, it is arguable that that is the case, and pursuant to Civil Procedure Act, s 144(2), the District Court would be bound to transfer the proceedings to the Supreme Court on the basis that it may lack jurisdiction to hear and dispose of them. Accordingly, if amendment to add the proposed equitable claim would be permitted, the proceedings should be transferred to this Court.

Is the proposed equitable claim untenable? 11In simplified terms, the proposed equitable claim is to the effect that (1) the Owners Corporation holds the common property upon trust for the lot owners, including Ms McDonough; (2) in breach of trust the Owners Corporation, (a) preferred its own interests to those of the lot owners (including Ms McDonough), or allowed its own interests to come into conflict with those of the lot owners, by failing to perform repairs to the common property adjacent to her lot, until it had recovered damages from the builder with which it could fund the repairs without having to raise funds from lot owners by levy, and (b) departed from the terms of the trust by failing to perform its obligation, imposed by s 62, to maintain and repair the common property. 12The proposed equitable claim has its genesis in the following passage in judgment of Tobias AJA in Thoo: 135 The interest of a lot owner as an equitable tenant in common is a product of the statutory provisions concerning the relationship of the owners corporation to the common property. Because it holds the common property as "agent" in the manner specified in s 20(b) of the 1973 Act, the owners corporation holds it upon trust for the several lot owners from time to time in proportion to their unit entitlements - albeit on the footing that a lot owner's equitable interest cannot be dealt with except in conjunction with the lot: s 24(2). 136 It is because the owners corporation holds the common property as trustee under a statutory trust that it is possible to identify the equitable interests of the lot owners in the common property. And it is the owners corporation's status as trustee that may be regarded as the source of general law duties additional to the statutory duties to which it is subject: cf The Owners -Strata Plan No 43551 v Walter Construction Group Limited [2004] NSWCA 429; (2004) 62 NSWLR 169 at [42]-[48] per Spigelman CJ, with whom Ipp and McColl JJA agreed. 137 However, those general law duties do not include positive duties or, more precisely, duties to act in any positive way. They are negative duties not to profit or benefit from the trust, not to prefer one's own interests, not to allow one's own interests to come into conflict with those of the beneficiaries, not to impeach the title of the beneficiaries, not to depart from the terms of the trust and not to delegate the trust except as permitted by its terms. 138 Thus the general law duties are necessarily confined so that they do not conflict with any of the statutory duties of the owners corporation. To put this another way, the general law duties complement the statutory duties but cannot modify them. 139 The statutory duties of an owners corporation are, by and large, concomitants of its statutory functions. The general nature of the functions is suggested by s 61 of the 1996 Act, which I have recorded at [45] above. As they relate to the common property, the functions defined by the 1996 Act are principally to manage and control that property for the benefit of the owners (s 61(1)(a)); to repair and maintain the property (s 62); to add to or alter the property (or erect a new structure on it) if so authorized under s 65A; to license a lot owner to use common property in a particular manner if so authorized under s 65B; and to grant access to the common property for fire safety inspection purposes (s 65C). 140 Some of the functions necessarily imply concomitant duties. The functions under ss 61(1)(a), 62 and 65C are of this kind. Others, such as those under ss 65A and 65B, entail a discretion exercisable if and when the necessary authorization has been given. Functions of the latter kind are also created by the 1973 Act (see, for example, ss 25, 26 and 27). These statutory functions and duties with respect to the common property are concerned with that property as it exists from time to time. The duty to repair, for example, will become exercisable periodically as deterioration occurs or defects arise. 141 The negative quality of such general law duties as arise from the trustee status of the owners corporation with respect to common property is emphasized by s 21 of the 1973 Act: "Common property shall not be capable of being dealt with except in accordance with the provisions of this Act and the Strata Schemes Management Act 1996." 142 The expression "deal with", used in relation to property, is wide. It would clearly include any action required to be taken by the owners corporation pursuant to ss 62(1) and (2), subject to the passing of a special resolution pursuant to s 62(3). In that respect any equitable right of a lot owner to require the owners corporation to replace the MEVS, as Dr Thoo seeks, would be trumped by a valid special resolution passed pursuant to s 62(3). The purpose of s 21 is clearly to preclude any form of action by the owners corporation in relation to the common property that is not contemplated and expressly permitted by the strata titles legislation. 143 Thus, the circumstance that the lot owners have equitable interests as tenants in common of the common property does not of itself impose any duty upon the owners corporation. Rather, it has significance as among the owners themselves. It is their status as equitable tenants in common that gives them rights of enjoyment of the common property. In Bull v Bull at 237, Denning LJ suggested that the rights of equitable tenants in common are the same as those of legal owners in common so that "[e]ach of them is entitled to the possession of the land and to the use and enjoyment of it in a proper manner. Neither can turn out the other; but if one of them should take more than his proper share the injured party can bring an action for an account." ... 145 The important point for present purposes is that the rights and obligations of equitable tenants in common as regards the use and enjoyment of land exist only among themselves. Their status as equitable owners is not the source of any right against or obligation of the trustee who holds the land upon trust for them. The rights that they have against the trustee and the obligations the trustee owes to them derive from the trust and the relationship of trustee and beneficiary. It follows that if the owners corporation, duly and faithfully performing the terms of the trust as embodied in the 1973 and 1996 Acts, acknowledges the interests of the lot owners as a body in the common property and performs the functions otherwise imposed upon it by statute, any complaint that the activities of one owner impair another owner's enjoyment of the common property is a dispute to which the owners corporation, as trustee, is a stranger. 146 Furthermore, it is not the case in any event that the lot owners as tenants in common of the common property would be entitled at any time to enjoy the use of that property equally or in the proportion of their unit entitlements or to the extent necessary for them to carry out a particular use of their lot: Platt v Ciriello [1998] 2 Qd R 417 at 432 per Ambrose J. As indicated above, a lot owner cannot be excluded from the common property, but the owner is not entitled to require the owners corporation in its capacity as a trustee to provide the owners with any particular share of the common property (subject only to the owner's ability to obtain exclusive use rights pursuant to and in accordance with the provisions of ss 51 and 52 of the 1996 Act). 147 For the foregoing reasons, Dr Thoo's case stands or falls on the application of s 62(2) of the 1996 Act. It gains no foothold against the Owners Corporation outside its statutory remit. In any case, as stated at [142] above, in my view Dr Thoo's case based on his alleged equitable right to access the MEVS and to require the Owners Corporation to upgrade the system to meet his reasonable needs would be trumped by a valid resolution passed pursuant to s 62(3). It is to that issue that I now turn. 13Barrett JA concurred with Tobias AJA, but added: 20 A statute may cause property to be held upon trust, including "trusts unlike any previously known" and which "cannot be held invalid on the ground of perpetuity or any other ground": Re Christchurch Inclosure Act (1888) 38 Ch D 520 at 530. In the present context, it is the statutory designation of the owners corporation as an "agent" holding the common property "on behalf of" the lot owners that leads to the conclusion that an owners corporation is a trustee. 21 That designation is made in a statute that imposes positive duties with respect to the trust property but says little about prohibitions. The prohibitions are left to be derived mainly from the fiduciary quality of the relationship that the Act creates between the corporation and the lot owners. The relationship imports, by necessary implication, the proscriptive duties of fiduciaries but creates no basis for the imposition of prescriptive duties independent of those the legislation creates. 14From the above can be distilled the following relevant propositions. (1) An owners corporation holds the common property upon trust for the lot owners as equitable tenants-in-common pro rata to their unit holdings. (2) As a trustee, the owners corporation has, as well as its statutory duties, certain general law duties of a trustee, which complement and do not modify its statutory duties. (3) Those general law duties do not include duties to act in any positive way, but are negative duties: not to profit or benefit from the trust, not to prefer its own interests, not to allow its own interests to come into conflict with those of the beneficiaries, not to impeach the title of the beneficiaries, not to depart from the terms of the trust and not to delegate the trust except as permitted by its terms. (4) The circumstance that the lot owners have equitable interests as tenants in common of the common property does not of itself impose any duty upon the owners corporation, but has significance only as among the owners themselves; their rights against the trustee and the obligations the trustee owes to them derive from the trust and the relationship of trustee and beneficiary. 15What Tobias AJA explains, in substance, is that while the owners corporation is a trustee of the common property, it is a bare trustee, without active duties to perform in that capacity. While it would be a breach of trust for it to deal with the trust property inconsistently with its trust status, qua trustee it has no positive obligations in respect of the property. The statutory obligation to maintain common property under s 62 is not a term of the trust, and no breach of trust is involved in breaching that duty. 16It follows that no departure from the terms of the trust is involved in failing to maintain the common property as required by s 62. That way of putting the proposed equitable claim amounts to no more than a contention, irreconcilable with the proposition in Thoo that the statutory trust imposes no positive duties and cannot modify the statutory duties, that s 62 is a term of the trust. Insofar as the proposed equitable claim relies on departure from the terms of the trust by failing to maintain the common property, it is untenable. 17Moreover, the proposed "preference of its own interest" and "conflict of interest" cases confuse the limited trustee obligations of an owners corporation with its statutory obligations. Its purely negative trustee obligations, such as they are, are concerned with its function as legal owner of the common property, and do not extend to its maintenance (which is a non-trust, statutory obligation). By way of illustration, it would be a breach of trust for an owners corporation to sell - or mortgage - common property for its own benefit and contrary to the interests of the lot owners. But the lot owners have no equitable right to enforce s 62. As no breach of trust is involved in failing to maintain trust property (although in breach of s 62), it cannot be a breach of trust to delay or defer such maintenance, and in deciding to do so - for whatever reason - the owners corporation does not prefer its own interest to those of the lot holders qua beneficiaries. Because maintenance of the property is not an aspect of the owners corporation's trust obligations, there is no conflict of interest, in its trustee capacity, in deferring doing so. 18The proposed equitable claim seeks to erect a claim for equitable compensation on a breach of s 62 by colouring it as a breach of trust, either simpliciter (insofar as the claim relies on a departure from the trust), or as a conflict of interest. But s 62 is not a term of the (purely negative) trust; it is not a trust obligation and gives rise to no corresponding equitable right in Ms McDonough. The proposed claim identifies no conflict with any equitable interest of Ms McDonough (the s 62 obligation not being an equitable obligation), or with the owners corporation's duty as trustee. 19The proposed equitable claim is untenable, and an amendment to add it claim would therefore be refused.

Is the proposed negligence claim untenable? 20While resolution of this issue is unnecessary to determination of the transfer application, it has been fully argued and it would be unsatisfactory to leave it to be argued again in the District Court. 21The proposed negligence claim is that (1) the owners corporation owed Ms McDonough a duty of care to maintain and repair the common property adjacent to her lot, (2) in breach of that duty the owners corporation failed to repair defects in the common property adjacent to the lot, (3) as a result damage was sustained to her unit, including damage to timber floors, and rotting of carpet and underlay; (4) the owners corporation ultimately took incomplete steps to rectify the defects, leaving the lot in a condition that was not fit for occupation; and (5) Ms McDonough was unable to lease the unit and suffered damage being the loss of rent and cost of repairing damage to her unit. 22It is established that, at least in respect of personal injury, an owners corporation, qua occupier of common property, owes a duty of care to entrants, including lot owners, and that the content of that duty can be informed, though it is not governed, by s 62 [Ridis v Proprietors of Strata Plan 10308 [2005] NSWCA 246; (2005) 63 NSWLR 449, [90]]. Ms McDonough wishes to contend that the owners corporation also owes a duty of care to lot owners in respect of property damage to their lots, such as might be occasioned by failure to maintain or repair common property adjacent to a lot. Given that a lot is a cubic space surrounded by common property, that proposition is not self-evidently hopeless, and Ridis provides some indication as to how such a duty may coexist with the statutory duties in s 62. 23The defendant's essential submission was that Ms McDonough's claim was one for purely economic loss, and that it was not maintainable - in the light of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 - because she was not "vulnerable" in the relevant sense. In Brookfield Multiplex the High Court applied Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515, to hold that in a case of pure economic loss arising from latent defects in a building, vulnerability - a plaintiff's inability to protect itself from the defendant's want of reasonable care - was a necessary integer of a duty of care [per Hayne and Kiefel JJ, [57]]. It was absent in Brookfield Multiplex, because the construction of the building and the subsequent sale of parts of the buildings were regulated by contracts, which contained terms regulating the quality of the building work, and this denied vulnerability on the part of the subsequent purchasers of apartments within the building. 24In the present case, the proposed amended pleading includes an allegation that as a lot owner, Ms McDonough was vulnerable to a failure by the Owners Corporation to use reasonable care in relation to the maintenance of common property adjacent to her unit. Further particulars of that allegation have been provided by correspondence. While not all the particulars provided have apparent merit, it is self-evident that a lot owner - who typically acquires from a previous lot owner, not the body corporate - may not be in a position to protect herself by contract from the ongoing acts and omissions of the owners corporation. The Owners Corporation argued that such protection was afforded by the alternative remedies available under the Act, but I am not persuaded that this is so clearly an answer to the allegation of vulnerability that it should be regarded as untenable. 25Moreover, I am unpersuaded that this is a case of pure economic loss. The damage in respect of which Ms McDonough claims includes physical damage to her lot, and the economic loss she claims is consequent upon the physical damage, which is said to have rendered the lot untenantable. That is no more "pure economic loss" than is the loss of wages suffered by a plaintiff in a personal injuries case. 26Accordingly, I am unpersuaded that the proposed negligence claim is doomed to fail, and had I been persuaded that the proceedings should have been removed, I would have allowed that amendment. However, as the proceedings will remain in the District Court, it will be for that Court to make any requisite formal order in that respect.

Conclusion 27My conclusions may be summarised as follows: 28In proceedings for the execution of a trust, the jurisdiction powers and authority of the Supreme Court include the award of equitable compensation for breach of trust. It follows that a claim for equitable compensation for breach of trust is a claim to which District Court Act, s 134(1)(e), applies, and is therefore excluded from s 134(1)(h). The District Court would not have jurisdiction to hear and dispose of Ms McDonough's proposed equitable claim. Accordingly, if amendment to add the proposed equitable claim would be permitted, the proceedings should be transferred to this Court. 29The proposed equitable claim seeks to erect a claim for equitable compensation on a breach of s 62 by colouring it as a breach of trust, either simpliciter (insofar as the claim relies on a departure from the trust), or as a conflict of interest. However, s 62 is not a term of the trust, and the proposed case identifies no conflict of interest on the part of the Owners Corporation with any equitable interest of Ms McDonough, nor with any duty owed by it qua trustee. The proposed equitable claim is untenable, and an amendment to add it would therefore be refused. 30I am unpersuaded that the proposed negligence claim is doomed to fail, and had I been persuaded that the proceedings should have been removed, I would have allowed that amendment. However, as the District Court unquestionably has jurisdiction in respect of it, there is no occasion to transfer the proceedings to this Court, and it will be for the District Court to make any requisite formal order for amendment. 31The Court orders that the summons be dismissed, with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 December 2014

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