Can the action be maintained?
38 Let me turn to Ground (b). Ground (b) essentially argued that a failure to comply with s 80D (and the exemption under Reg 12C) was not fatal. That failure did not provide a defence to a third party, such as Mr Hall. The action should not have been dismissed.
39 Counsel for the Owners referred to Australian Broadcasting Corporation v Redmore Pty Ltd [1989] HCA 15; (1988) 166 CLR 454. By s 70(1) of the Australian Broadcasting Corporation Act 1983 (Cth), the Corporation was told that it "shall not, without the approval of the Minister" enter into a contract exceeding $500,000. The Corporation negotiated a Tenancy Agreement with Redmore Pty Limited without first obtaining the Minister's approval. A dispute arose. The ABC then sought to deny the existence of the agreement, by reason of the absence of approval. The issue was whether the Corporation could be held to its contract. The majority (Mason CJ, Deane and Gaurdon JJ) (Brennan and Dawson JJ dissenting) held that it could. Their Honours said this: (at 457)
"As the judgments in the courts below demonstrate, the question whether s 70(1) should be construed as confining power or as directory of the manner of its exercise is a finely balanced one. The words of the sub-section are not compelling either way. In strict terms, they are directory. They speak of the exercise ('shall not ... enter into a contract'), rather than the existence, of power. Their direction is to the ABC and not to an innocent outsider having contractual dealings with the ABC, who would be likely to act on the basis that the ABC would have complied with any statutory duty to obtain the approval of its responsible Minister before purporting to enter into a contract of a kind which required such approval. ... "
40 The majority thereafter examined the structure of the Act, stating the following: (at 457)
"As a matter of general structure, provisions of the Act which in terms confer or confine the actual powers of the ABC are collected in Pt IV which is headed 'Powers and Duties of the Corporation'. ... "
41 Their Honours continued: (at 458)
"Section 70 of the Act appears in Pt VI which is headed 'Finance'. That Part contains no express reference to the grant or confinement of powers. To the contrary, and putting to one side s 70 itself and s 69(2), Pt VI is plainly concerned with the provision of funds and the institution of a system of governmental controls, checks and supervision in relation to the expenditure by the ABC of those funds in the performance of its functions and the exercise of its powers as defined and conferred by provisions in other parts of the Act. ... "
42 Thereafter the majority said this: (at 459)
"It can therefore be seen that both the general structure of the Act and the context provided by the other provisions of Pt VI, particularly s 69(2), support a construction of s 70(1) which sees the sub-section as directory (to the ABC) about the manner of exercise of powers conferred and confined by other provisions and as not concerned to confine the actual content of those powers or to invalidate or render unenforceable contracts with innocent outsiders made in the exercise of them. That construction of s 70(1) is also supported by the legislative history of the sub-section."
43 The result, in the view of the majority, did not reduce s 70(1) to a "pious admonition". It imposed a statutory duty upon the officers of the ABC, breach of which constituted misconduct and would call for a report from the Auditor General (at 459/60).
44 Mr Harris SC, for Mr Hall, responded by taking the Court to Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355, which identified the issues which must be addressed when determining the effect of breaching a condition regulating the exercise of statutory power. McHugh, Gummow, Kirby and Hayne JJ said this: (at 388/89)
"An act done in breach of a condition regulating the exercise of a statutory power is not necessarily invalid and of no effect. Whether it is depends upon whether there can be discerned a legislative purpose to invalidate any act that fails to comply with the condition. The existence of the purpose is ascertained by reference to the language of the statute, its subject matter and objects, and the consequences for the parties of holding void every act done in breach of the condition. Unfortunately, a finding of purpose or no purpose in this context often reflects a contestable judgment. The cases show various factors that have proved decisive in various contexts, but they do no more than provide guidance in analogous circumstances. There is no decisive rule that can be applied ( Howard v Bodington (1877) 2 PD 203 at 211, per Lord Penzance); there is not even a ranking of relevant factors or categories to give guidance on the issue."
(emphasis added)
45 Their Honours added: (at 390/1)
" ... That being so, a court, determining the validity of an act done in breach of a statutory provision, may easily focus on the wrong factors if it asks itself whether compliance with the provision is mandatory or directory and, if directory, whether there has been substantial compliance with the provision. A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid. This has been the preferred approach of courts in this country in recent years, particularly in New South Wales ... In determining the question of purpose, regard must be had to 'the language of the relevant provision and the scope and object of the whole statute'. ... "
(omitting references) (emphasis added)
46 Counsel for Mr Hall then addressed each issue. He drew attention to the language of the statute. He emphasised many of the same matters referred to by the learned Magistrate. Section 80D of the Strata Act used mandatory language ("must"). It was, as his Honour found, analogous to s 192 of the Legal Profession Act which had been held to provide a complete defence to any action not preceded by full compliance (cf Zizza v Seymour [1976] 2 NSWLR 135 at 139; Conder v Silkbard [1999] NSWCA 459 at [26]-[29]). Section 245 of the Strata Act stated clearly that no agreement or arrangement can "annul, vary or exclude any of the provisions of (the) Act". There was no provision the equivalent of s 1322 of the Corporations Act 2001 (Cth), which ameliorated or modified its mandatory terms.
47 The second issue suggested by Project Blue Sky concerned the subject matter and the objects of the statute. Section 3 of the Strata Act stated that the objects were the management of strata schemes and the resolution of disputes arising in connection with the management of those schemes. The objective of the legislative scheme (which included s 80D, s 230A and Reg 12C) was expressed by the Minister in the Second Reading Speech in these terms: (Hansard 4.12.03)
"Another new initiative will be in relation to the commencement of any form of legal action by executive committees. Concern has been expressed that prior to commencing action individual owners should be made aware of the cost of legal action and the likelihood of success. Most strata schemes will include individuals from a broad cross-section of the community with a variety of personal expectations, attitudes and level of involvement. It is impossible to expect that there will always be perfect harmony. The commencement of legal action on matters concerning the scheme is one area where it is certain that a divergence of views will exist. The Government proposes to minimise the level of internal dispute arising in this area by taking some simple but effective measures. Firstly, if legal action of any type is being contemplated, the estimated cost of the action is to be provided in writing to all owners in accordance with the Legal Profession Act.
A meeting of the Owners' Corporation must be called before the action can actually commence, to ensure that everyone can have a say if they wish. These new provisions will not only include the initiation of legal proceedings but also the obtaining of legal advice. Executive committees will effectively be prevented from undertaking legal action under their own initiative, thus removing the possibility that claims will be made that a committee has not acted in the interests of all owners and added to existing conflict rather than dissipat(ing) it. "
(emphasis added)
48 The object of s 80D, according to counsel for Mr Hall, was as follows:
"The object of the section is quite plainly to ensure that legal proceedings are not commenced unless all owners know of it in advance and have 'a chance to have a say in it'. They should also be told the cost of the action and its likelihood of success. The owners corporation must consult with them before legal proceedings are initiated: they must be given the opportunity to veto that action, or obtain further advice as to whether it ought be taken, before the action is commenced."
49 The third matter, on the Project Blue Sky test, concerned the consequences of holding void every act done in breach of s 80D. According to counsel for Mr Hall, if s 80D were not held to be a complete defence, then it may as well not be there. There would be no sanction. The Court should therefore conclude that compliance was mandatory. Absent compliance, there was no authority for the action, as the learned Magistrate held. That was certainly the position in respect of unit holders such as Mr Hall. But it was also, according to counsel for Mr Hall, the position in respect of an outsider, such as the plumber, who may be sued by the Corporation. The Owners' Corporation (assuming they were in time) could then seek authority. It could convene a general meeting and pass an appropriate resolution, if that was the wish of unit holders. Fresh proceedings could then be commenced. The learned Magistrate had been correct.
50 Counsel for the Owners' Corporation responded that such a construction would be attended by great inconvenience. The provisions were directory, not mandatory.
51 Dealing with these submissions, Australian Broadcasting Corporation v Redmore Pty Ltd (supra), was considered again by the High Court in Master Education Services Pty Ltd v Ketchell [2008] HCA 38; (2008) 82 ALJR 1322. Master Education Services was a franchisor and Ms Ketchell a franchisee. Ms Ketchell was sued for unpaid franchise fees. She had, however, entered the franchise agreement without first having been provided with a written statement where she acknowledged that she had received, read and had a reasonable opportunity of understanding the franchising Code of Conduct. Entry into a franchise agreement, in such circumstances, involved a breach of the code. The Trade Practices Act 1974 (Cth) provided, in s 51AD, that a "corporation must not, in trade or commerce, contravene an applicable industry Code". The Court of Appeal of New South Wales held that the contract was illegal and unenforceable.
52 The High Court (Gummow ACJ, Kirby, Hayne, Crennan and Kiefel JJ) upheld the appeal. It was, the Court said, a question of statutory construction whether a statutory prohibition operated to prohibit a contract. Here, the purpose of s 51AD was to promote compliance with the Code by providing, in effect, that non-compliance will amount to a contravention for which there are remedies under the Trade Practices Act, Pt VI. It was no part of the scheme, and unnecessary for the purposes of the section, to strike down a contract made by a non-complying franchisor.
53 The Court dealt with the situation where the prohibition under the statute was directed at one party only. It said this:
"[16] As was pointed out in the passage from Yango Pastoral Co v First Chicago, cited in Australian Competition and Consumer Commission v Baxter Healthcare, it does not always follow from a prohibition directed to one party to an agreement that the contract is void. In Yango Pastoral Co v First Chicago the statutory prohibition in question prohibited a corporation from carrying on any banking business without an authority to do so, and provided a daily penalty for contravention. It was held that securities taken by a corporation which contravened that provision were not rendered void and unenforceable by the Act. Gibbs ACJ observed that it was directed not at the making or performance of particular contracts, but at the carrying on of any banking business.
[17] The statutory provision considered in Australian Broadcasting Corporation v Redmore Pty Ltd was addressed to the ABC and enjoined it not to enter certain classes of contract without the approval of the Minister. The section did not specify any penalty. The section was concerned with the manner of exercise of powers conferred by other provisions of the statute and was not directed to outsiders having contractual dealings with the ABC. It followed that the failure by the ABC to observe its internal procedures was no answer to an action against it for breach of such a contract."
(references omitted)
54 The Court later said this:
"[26] ... As was pointed out in Project Blue Sky Inc v Australian Broadcasting Authority, it is necessary to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid. In determining the question of purpose, regard must be had not only to the language of the relevant provision but also to the scope and object of the whole statute.
[27] It was pointed out in Archbolds (Freightage) Ltd v S Spanglett Ltd that, if a court too readily implies that a contract is forbidden by stature, it takes it out of its power to provide remedies according to the circumstances of the case. ... "
(references omitted)
55 What, then, was the purpose of s 80D of the Strata Act (in combination with s 230A and Reg 12C)? Was it to invalidate any act that failed to comply with the prescribed conditions? The language of the statute ("must") is important but not determinative. In Master Education Services the statute also used the word "must", but the purpose was not to render unenforceable franchise agreements that did not comply with the Code. Likewise, in ABC v Redmore Pty Ltd (supra), the word "shall" (which is a strong word although less forceful than "must") did not render the contract unenforceable at the suit of an innocent third party contracting with the ABC. Such a party would have assumed that the Corporation had obtained the necessary approval.
56 Here, the learned Magistrate placed some importance upon the structure of the Act, and the fact that s 80D was one of a series of provisions introduced at the same time, designed to provide openness and democracy within the strata body (Judgment - Ex A: p 6). Section 80D was contained in Chapter 3 headed "Key management areas". Section 61(1)(b) provided that an Owners' Corporation "has, for the benefit of the owners, the administration of the strata scheme concerned" (emphasis added). By s 61(2)(b), the Owners' Corporation is given responsibility for managing the finances of the strata scheme. Division 3 of Pt 3, which included s 80D, is headed "Restrictions on spending". That suggests a limitation upon power, not simply a direction as to the manner of its exercise (cf ABC v Redmore Pty Ltd (supra at p 459) (supra para [42]).
57 On the other hand, other sections within Division 3 may undermine the impression created by the heading. Section 80A, for instance, dealt with a monetary limitation imposed upon the executive committee by the Annual General Meeting in respect of expenditure. The section required that the executive committee must not exceed the amount determined, subject to defined exceptions which may be characterised as emergencies. Would a contract made by the executive committee for the provision of services to the Corporation, which exceeded that limit, be invalid or unenforceable? As in ABC v Redmore Pty Ltd, you would not expect the person dealing with the executive committee to be aware of the limitations upon its authority. The prohibition is directed to one party only, that is, the executive committee. On the authority of ABC v Redmore and Master Education Services (paras [16]-[17]), s 80D would appear to be directory rather than mandatory.
58 Let me move to the second aspect which Project Blue Sky suggested was capable of shedding light on the purpose of the statute, namely, the subject matter and objects of the legislation. The purpose of these provisions was expressed forcefully by the Minister in the Second Reading Speech (supra para [47]). It was recognised that the commencement of legal proceedings had the potential to cause disputation and to disrupt the strata body. It was an issue likely to generate strong views, for and against. The legislative scheme was designed to arm unit holders with the facts. Section 230A required that any estimate of costs from lawyers should be circulated within seven days. Unless the expenditure were less than $10,000, the matter had to be dealt with at a general meeting (s 80D). The executive committee, according to the Minister, would be "effectively prevented from undertaking legal action under their own initiative". Her words suggest a restriction on power. Section 33 of the Interpretation Act 1987 requires a section to be interpreted so as to promote the objects of the section.
59 The third aspect of the Project Blue Sky test concerned the consequences for the parties in holding void every act done in breach of the statutory requirements (at 388/9) (supra para [44]). Counsel for Mr Hall suggested that, unless the provision were construed as mandatory, there would be no sanction in respect of a breach. Certainly no sanction was provided by the Act, in contrast to the position in Master Education Services Ltd, where there were sanctions under the Trade Practices Act. No doubt, unit owners could demand that those responsible account for their actions (whether the executive committee or the managing agent or both), taking action under the rules to replace the committee or terminate the agent's retainer. That is a sanction of sorts, although it does not address the consequences of the decision taken without reference to unit owners.
60 There is one consequence which I should mention. If the action were dismissed for non-compliance with s 80D (as happened here), and if costs were awarded against the Corporation (as the Cross Summons contends should have happened here), unit holders would be obliged to pay such costs. However, an order could be made (and is sought by Mr Hall in his Cross Summons) that the unit owner should be exempted. Yet, all unit holders had been deprived of their say, not simply Mr Hall.
61 As mentioned, counsel for the Owners' Corporation argued that the interpretation favoured by the learned Magistrate would be attended by great inconvenience. The section is general and not confined to unit holders. The plumber, if sued, could take the point.
62 Section 80D is concerned with the retention of lawyers to perform work, which may be costly. The section is not confined to taking legal action. There must be a resolution of the general meeting when seeking legal advice, the provision of legal services, or the initiation of legal action. In the context of a strata scheme, it would be unusual for legal advice to exceed $10,000, so that generally such matters would come within the exemption provided by Reg 12C. The same is probably true of most legal services (such as drawing a deed). So usually a resolution would only be required under s 80D when the Owners' Corporation initiated legal action.
63 That being the context, what inconvenience, if any, attends an interpretation of s 80D as a mandatory requirement, where the consequence of failure to seek authorisation (when the point is taken) is that the action must be dismissed? The inconvenience is that of having to seek the unit holders' authorisation in general meeting and start again. How often would the point arise? Before there can be any objection to the Corporation's capacity the defendant must know, or reasonably suspect, that the procedure required by s 80D has not been observed. It may be assumed that a unit holder would know or have the means of determining that the correct procedure had not been followed. No estimate may have been circulated as required by s 230A. No general meeting may have been called, where the issue was identified and discussed. No resolution may have been passed, as required. These would be matters known to unit holders, just as they were known to Mr Hall.
64 Would a plumber, sued by the Owners' Corporation, be in a position to take the same point, and thereby frustrate or at least postpone, the determination of his liability? As a practical matter, the situation is unlikely to arise. The plumber would ordinarily not know of any failure to comply with s 80D or Reg 12C and would have no means of finding out. Were he to subpoena the Corporation, he would require a legitimate forensic purpose in order to gain access to its documents. Absent information provided to him that something was amiss, such a subpoena directed to the Owners' Corporation would be a fishing expedition (Attorney General for NSW v Chidgey [2008] NSWCCA 65, per Beazley JA).
65 What if the plumber had information (presumably provided by a unit holder) and was in a position to demonstrate that the procedure identified in s 80D had not been followed? The restrictions on spending in Division 3, including s 80D have been included in the Act for the benefit of owners (s 61(1)(b) and s 61(2)(b)). They are not for the benefit of third parties. In an action by the strata body against the plumber, it must prove that it is a body incorporated under s 11(1) of the Strata Act. It is not obliged to prove that the Corporation has authority to bring the action. In the context of an action against someone who is not a unit holder, the issue is irrelevant. One would not infer that the legislative purpose of s 80D was to invalidate the Corporation's action in such circumstances.
66 Accordingly, the inconvenience in giving the provision a mandatory interpretation, which the terms of the section suggest, is not substantial. In my view the Owners' Corporation lacked the capacity to bring its action against Mr Hall, a unit holder, having failed to comply with s 80D and not being able to bring itself within the exemption provided by Reg 12C. The learned Magistrate was right to dismiss the action. Ground (b) of the Summons therefore fails.