Owners-Strata Plan No 50530 v Walter Construction Group Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CONSTRUCTION LIST

55004/2001 -THE OWNERS-STRATA PLAN NO. 50530 v WALTER CONSTRUCTION GROUP LTD (ACN 008 390 074)

Judgment 1 Her Honour: This is an application brought by the defendant pursuant to Part 53 r 2 of the Supreme Court Rules for an order that the plaintiff provide security for costs. 2 The main proceedings involve a claim by the plaintiff against the defendant for the defendant's alleged breach of its duty of care to the plaintiff in respect of the construction and maintenance of a tower building of residential apartments known as the "Hyde Park Towers" in Elizabeth Street, Sydney (the building). 3 The plaintiff is a body corporate under the Strata Scheme (Freehold Development) Act 1973 (the Development Act) and an owners corporation under the Strata Scheme Management Act 1996 (the Management Act). 4 The proceedings were commenced on 14 March 2001. The plaintiff claims an order for payment of $14.3 million in respect of a myriad of alleged construction defects contained in the Schedule to the Summons. The Schedule to the Summons contains claims in relation to the common areas, including lift foyers, communication and electrical service rooms and garbage rooms. It also contains claims in respect of individual units identifying the various locations within each unit about which complaint is made including living/dining area, bedrooms, bathrooms, laundry and kitchen. 5 Part 53 r. 2 provides: (1) Where, in any proceedings, it appears to the court on the application of a defendant - ……. (b) that a plaintiff is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that that plaintiff will be unable to pay the costs of the defendant if ordered to do so; …… (e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so; the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given.

For the benefit of some other person 6 The applicant/defendant submitted that these proceedings are brought not for the benefit of the plaintiff but for the benefit of the 174 unit holders. The respondent/plaintiff submitted that the plaintiff is obliged to properly maintain and keep in a state of good and serviceable repair the common property and any personal property vested in it. It submitted the proceedings are brought for the benefit of others, the unit holders, but also for the plaintiff's benefit. It submitted that one of the "benefits" of the proceedings is to enable the plaintiff to comply with its obligations in respect of the common property. 7 Relevant sections in the Development Act include the following: S 5 body corporate means an owners corporation constituted under s 11 of the Strata Scheme Management Act 1996. strata scheme means: (a) the manner of division under this Act, from time to time of a parcel into lots or into lots and common property and the manner of the allocation under this Act, from time to time, of unit entitlements among the lots, and (b) the rights and obligations, between themselves, of proprietors, other persons having proprietary interest in or occupying the lots and the body corporate, as conferred or imposed by this Act or by anything done under the authority of this Act and as in force from time to time. 18 Vesting of common property on registration of strata plan (1) Upon registration of a strata plan any common property in that plan vests in the body corporate for the estate or interest evidenced by the folio of the Register comprising the land the subject of that plan but freed and discharged from any mortgage, charge, covenant charge, lease, writ or caveat affecting that land immediately before registration of that plan. 20 Body corporate to hold common property as agent for proprietors The estate or interest of a body corporate in common property vested in it or acquired by it shall be held by the body corporate as agent, (a) where the same person or persons is or are the proprietor or proprietors of all the lots the subject of the strata scheme concerned - for that proprietor or those proprietors, or (b) where different persons are proprietors of each of two or more of the lots the subject of the strata scheme concerned - for those proprietors as tenants in common in shares proportional to the unit entitlements of their respective lots. 8 Sections 11 and 12 of the Management Act relevantly provide: 11 Constitution of owners corporation ( 1) The owners of the lots from time to time in a strata scheme constitute a body corporate under the name "The Owners - Strata Plan No X" (X being the registered number of the strata plan to which that strata scheme relates) 12 Functions of owners corporation An owners corporation has the functions conferred or imposed on it by or under this or any other Act . 9 Chapter 3, of the Management Act, deals with the main responsibilities of an owners corporation for a strata scheme. Section 61 provides: 61 What are the key management areas for a strata scheme : (1) An owners corporation has the control, management, and administration of the common property of the strata scheme for the benefit of the owners. (2) The owners corporation has responsibility for the following: (a) maintaining and repairing the common property of the strata scheme as provided by Part 2, ( b) managing the finances of the strata scheme as provided by Part 3, (c) taking out insurance for the strata scheme as provided by Part 4, (d) keeping accounts and records for the strata scheme as provided by Part 5 . (3) Other functions of an owners corporation are included in Part 6. 10 Part 2 of the Management Act deals with maintenance and repairs. Section 62 provides: 62 What are the duties of an owners corporation to maintain and repair property? (1) An owners corporation must properly maintain and keep in a state of good and serviceable repair the common property and any personal property vested in the owners corporation. (2) An owners corporation must renew or replace any fixtures or fittings comprised in the common property and any personal property vested in the owners corporation. (3) This clause does not apply to a particular item of property if the owners corporation determines by special resolution that: (a) it is inappropriate to maintain, renew, replace or repair the property, and (b) its decision will not affect the safety of any building, structure or common property in the strata scheme or detract from the appearance of any property in the strata scheme . 11 Part 3 of Chapter 3 deals with finances of the strata scheme. The owners corporation has an obligation to set up an administrative fund into which it must pay contributions levied on the owners, the proceeds of the disposal of any personal property and any fees paid to the owners corporation including by way of discharge of insurance claims (s 67). It may pay amounts out of the administrative fund for the purposes of the kind for which estimates are made under s 75(1) of the Act which include the maintenance of the common property, the payment of insurance premiums and the meeting of recurrent expenses. It is also able to make payments on a distribution of a surplus in the fund (s 68(1)(b)). Section 68(1)(d) permits the owners corporation to make payments out of the administrative fund "in connection with carrying out its functions under this Act or the By-laws". 12 The owners corporation of a strata scheme of more than 2 lots has an obligation to set up a sinking fund (s.69) into which it is obliged to pay the owners' levied contributions, any amounts by way of discharge of insurance claims which have not been paid into the administrative fund and any amount that is received and not required to be paid into the administrative fund (s.70). 13 The administrative fund is generally used to meet recurrent expenses such as the day to day maintenance of the common property and insurance of the property. The sinking fund is generally used to meet expenses of a capital nature such as painting buildings or replacing fixtures or fittings. 14 Section 72(1) provides: 72 Distribution of surplus money in administrative fund or sinking fund (1) An owners corporation may, in accordance with a unanimous resolution, distribute between the owners any money in its administrative fund or sinking fund that is not, in the opinion of the owners corporation, required for the purposes of either fund. 15 The owners corporation may borrow money and secure the repayment of the money and any interest in such manner as may be agreed by the owners corporation and the lender, otherwise than by charging the repayment on the common property (s 110(1)). 16 Chapter 5 of the Act deals with disputes and orders of adjudicators and the Strata Schemes Board. It sets out the powers of the adjudicators and the Board to make orders to settle disputes about certain matters relating to the operation and management of the Strata Scheme. The steps to be taken in respect of an application for an order in relation to such a dispute are set out in this chapter. 17 Chapter 7 provides relevantly: 227 Owners corporation may represent owners in certain proceedings (1) This section applies to proceedings in relation to common property. (2) If the owners of the lots in a strata scheme are jointly entitled to take proceedings against any person or are liable to have proceedings taken against them jointly, the proceedings may be taken by or against the owners corporation . (3) Any judgment or order given or made in favour of or against the owners corporation in any such proceedings has effect as if it were a judgment or order given or made in favour of or against the owners . (4) A contribution required to be made by an owner of a lot to another owner in relation to such a judgment debt is to bear the same proportion to the judgment debt as the unit entitlement of the contributing owner bears to the aggregate unit entitlement. 228 Structural defects - proceedings as agent (1) An interested person may take proceedings for the rectification of the condition of a part of a building, or a part of the site of a building, if that condition affects or is likely to affect the support or shelter provided by that part to any other part of the building or its site. (2) Any such proceedings may be taken only if: (a) they could have been taken by an owner of a lot or by another person in whom is vested an estate in fee simple in a part of the building or its site, and (b) they have not been taken by the owner or other person within a reasonable time. (3) Any such proceedings are taken by an interested person as agent for the person who might have taken the proceedings and at the cost of the interested person. (4) In this section, interested person means: (a) the owners corporation for the strata scheme for the building or, if part of the building is included in a stratum parcel, of any strata scheme for part of the building, or (b) the lessor of a leasehold strata scheme, or (c) any person in whom is vested an estate in fee simple or, in the case of a leasehold strata scheme, a leasehold estate, registered under the Real Property Act 1900 in any part of the building or its site that is not included in a stratum parcel. 229 Costs in proceedings by owners against owners corporation (1) This section applies to proceedings brought by one or more owners of lots against an owners corporation or by an owners corporation against one or more owners of lots (including one or more owners joined in third party proceedings). (2) The court may order in proceedings that any money (including costs) payable by an owners corporation under an order made in the proceedings must be paid from contributions levied only in relation to such lots and in such proportions as are specified in the order. (3) If a court makes such an order the owners corporation must, for the purpose of paying the money ordered to be paid by it, levy contributions in accordance with the terms of the order and must pay the money out of the contributions paid in accordance with that levy. (4) Division 2 of Part 3 of Chapter 3 (section 78(2) excepted) applies to and in respect of contributions levied under this section in the same way as it applies to contributions levied under that Division. 230 Restrictions on owners corporation levying contributions for expenses (1) An owners corporation cannot, in respect of its costs and expenses in proceedings brought by or against it under Chapter 5, levy a contribution on another party who is successful in the proceedings . (2) An owners corporation that is unsuccessful in proceedings brought by or against it under Chapter 5 cannot pay any part of its costs and expenses in the proceedings from its administrative fund or sinking fund, but may make a levy for the purpose. (3) In this section, a reference to proceedings under Chapter 5 includes a reference to proceedings on appeal. 18 Giles CJ Comm D in Rugby Union Players Association v Australian Rugby Union Ltd NSWSC, 30 July 1997, unreported, said at p. 12: For the purposes of Pt 53 r 2(1)(b) " benefit" is not confined to financial benefit ( Andrews v Caltex Oil Australia Pty Ltd (1982) 60 FLR 261; Upton v TVW Enterprises Ltd (1984) 57 ALR 361). The mere fact that someone other than the plaintiff will benefit from success in the proceedings does not satisfy the rule (for example, where a trustee is necessarily the plaintiff, see Riot Nominees Pty Ltd v Suzuki Australia Pty Ltd (1981) 34 ALR 653; but cf Greener Kahn & Co (1906) 2 KB 374, Semler v Murphy (1967) 2 All ER 185; Upton v TVW Enterprises Ltd ). Conversely, potential benefits to persons other than the plaintiff does not mean that the plaintiff himself is not suing for his own benefit . So in Andrews v Caltex Oil Australia Pty Ltd in seeking relief which would benefit all members of an association the plaintiffs would also receive a commercial or financial benefit, and in Byron Shire Business for the Future Inc v Byron Shire Council (1994) 83 LGERA 59 an association of mainly local businesses seeking to strike down a development consent was held to be suing for its own benefit, not just that of its members, because it would achieve a furtherance of its objectives of preserving the environment and encouraging the success of local businesses. Whether Part 53 r 2(1)(b) is satisfied is a question of fact in the circumstances of each case. 19 Under s.227 of the Management Act an owners corporation is entitled to take proceedings against any person who the owners of lots in the strata scheme are jointly entitled to take proceedings against in relation to common property. Under s 228 the owners corporation, as an interested person, can take proceedings as agent for an owner of a lot for rectification of the condition of certain parts of the building. 20 This case is brought by the plaintiff in respect of both common property and other parts of the building. The plaintiff's standing in relation to those parts of the proceedings other than those relating to common property, is limited by s 228. Although there has been correspondence on the topic between the solicitors for the parties no challenge has been made to the standing of the plaintiff to bring the proceedings. 21 In Andrews v Caltex Oil (Australia) Pty Ltd (1982) 40 ALR 305 Lockhart J in considering the meaning of "benefit" in the equivalent Federal Court Rule said at 308: ..it would be wrong to construe 'benefit' merely in the sense of financial benefit. More important, it is unnecessary, in my opinion, to attribute to the words some fixed meaning necessarily applying to each and every case of the wide and varied cases that come within the court's jurisdiction. Indeed, any such definition may be so general as to be meaningless. In my view, the meaning of 'benefit' is to be gleaned from the character of the particular case before the court. It derives its complexion from the specific statute involved and the circumstances of the case. Its meaning is ambulatory. 22 In Byron Shire Businesses for the Future Inc v The Byron Shire Council & Holiday Villages (Byron Bay) Pty Ltd (1994) 83 LGERA 59 Pearlman J was considering Notices of Motion for Security for Costs in proceedings in which a development consent granted by Byron Council was challenged. Although Pearlman J was satisfied that the applicant, an association incorporated under the Association Incorporation Act 1984, would not derive a financial benefit from the proceedings, her Honour was satisfied it would achieve at least the furtherance of some of its objectives and thus a "benefit" within the meaning of that term in Part 53 Rule 2(1)(b). 23 The owners corporation has control of the common property and can make decisions as to whether it is appropriate to maintain particular items of property. It has an obligation to consider the affect on the safety and appearance of the building structure or common property in making such decisions. The owners corporation is liable at the suit of the owners and on the outcome of such proceedings has obligations pursuant to s 229 of the Management Act. It may also be the subject of proceedings commenced pursuant to Chapter 5 of the Management Act. 24 Any steps that the owners corporation is able to take to assist it in complying with its obligations generally, and in particular so that the prospect of litigation against it is diminished, would be a benefit to the plaintiff. As part of the property in this case is common property, it seems to me that the pursuance of the proceedings will assist the plaintiff in complying with its obligations under the Act. I am satisfied that the plaintiff, if successful in the proceedings, will achieve a furtherance of its obligations under the Management Act of seeking to properly maintain and keeping in a state of good and serviceable repair the common property (ss 61 and 62) and that such is a benefit within the meaning of that term in Part 53 Rule 2(1)(b). 25 In those circumstances the defendant must fail on its application pursuant to Part 53 r. 2(1)(b). The defendant also relied upon r. 2(1)(e). There is no issue that the plaintiff is a body corporate within the meaning of that Rule. The only issue is whether there is reason to believe the plaintiff will be unable to pay the defendant's costs if ordered to do so.

Reason to believe 26 In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 the Full Court of the Supreme Court of Western Australia said, at p. 122, that the applicant is required to establish no more than that the quality of the evidence objectively gives rise to a reason to believe that the plaintiff will be unable to pay the defendant's costs if ordered to do so. In this case the defendant relied upon an exchange of correspondence between the solicitors for the parties as evidence which it submitted, when viewed objectively, establishes there is reason to believe that the plaintiff will not be able to pay the defendant's costs if ordered to do so. 27 On 23 March 2001 the defendant's solicitors advised the plaintiffs' solicitors that the costs of these proceedings were likely to exceed $1 million. They advised that the defendant was "greatly concerned" that the plaintiff would be unable to meet a costs order made against it on failing in these proceedings. The defendant's solicitors then required the plaintiff's solicitors to provide "evidence of your client's capacity to pay a costs order of this magnitude". 28 On 27 March 2001 the plaintiff's solicitors responded as follows: We take issue with your estimate that any potential costs award could exceed $1 million. While the actual costs of defending the application will depend on the way in which you run your case, we believe that an award for costs would be a fraction of the figure you assert . Our client is the body corporate of a large luxury apartment tower. We are instructed that annual body corporate levies - as distinct from special levies - exceed $800,000. In the unlikely event that your client successfully defends the claim, our client would have no difficulty meeting an award for costs, whether by drawing on existing reserves or imposing a special levy . Our client will vigorously defend any application for an order for security for costs. This letter will be tendered in relation to the costs of the hearing. 29 On 29 March the defendant's solicitors wrote in the following terms: The matters you have raised in your letter are not sufficient, in our view, to avoid an order for provision of security pursuant to Part 53 r 2(1)(b) and (e) of the Supreme Court Rules. If the owners corporation is complying with the requirements of the Strata Schemes Management Act 1996 , then any annual body corporate levies should have been determined in accordance with Chapter 3 Part 3 Division 2 of that Act, such that the funds would not be available to meet an adverse costs order. In relation to a special levy, such a levy would require the approval of a majority of unit holders in general meeting, which may not occur (the likelihood of which is reinforced by the fact that the unit holders apparently do not wish to be joined as plaintiffs in the present proceedings). Unless the Defendant is persuaded that the owners corporation has accumulated reserves, or has raised funds by special levy, sufficient to meet an adverse costs order, than an application for security for costs will be made. 30 On 31 May 2001 the defendant's solicitors advised the plaintiff's solicitors that their "failure or refusal to provide any evidence at all" as to their client's ability to meet the costs order "confirms to us there is reason to believe that your client will be unable to pay our client's costs if ordered to do so". The solicitors requested such evidence by 4 June 2001 and stated that such evidence should include but was not limited to: 1. Evidence of the accumulated reserves of the owners corporation of Hyde Park Towers; 2. Evidence that monies have been raised by a special levy upon the owners of Hyde Park Tower; or 3. If monies have not yet been raised by special levy, evidence of the owners corporations ability and intention to impose a special levy for the purpose of meeting a costs order and evidence that such a levy would be paid by the owners. 31 On 4 June the plaintiff's solicitors responded as follows: The body corporate has resolved to robustly prosecute this action, and moreover our client has the requisite financial fortitude to pursue this matter to conclusion. For fear of labouring the point we reiterate for the third time that our client has annual body corporate levies as distinct from special levies which exceed $800,000. We have enclosed the copy of the letter of 27 March 2001. Our client body corporate (comprising 174 unit holders) also has the ability as you are aware to raise special levies when and if it deems necessary. 32 The defendant submitted that the inferences that should be drawn from this correspondence and the absence of evidence of the plaintiff's ability to pay the defendant's costs of the proceedings should be adverse to the plaintiff. In this regard the defendant relied upon the following:

(a) the "rule" in Jones v Dunkel (1959) 101 CLR 298 at 302-321: The unexplained failure to bring before the tribunal some circumstances, document or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstances or document or witness, it brought would have exposed facts unfavourable to the party. (b) What was said by Jordan CJ with whom Davidson and Halse Rogers JJ agreed in Churchills Ltd v Pilcher (1940) 57 WN (NSW) 109, namely: The plaintiff company which is in possession of the whole of the facts has thought it prudent to offer no explanation of the material which has been placed before the court by the defendant. In these circumstances there is no reason why the court should not draw from the applicant's evidence any inference which it can reasonably justify.

(c) What was said by Moffitt J in Pacific Acceptance Corporation Ltd v Forsyth (1967) 2 NSWR 402 at 404 namely: The applicants are entitled in these circumstances to rely on the failure of the respondent to show that there are means to pay the costs if ordered to do so in the future. 33 It is important to remember that the defendant has the evidentiary burden of proving it is entitled to the order it seeks. The party who asserts must prove in order to succeed: Scott Fell v Lloyd (Official Assignee) (1911) 13 CLR 230 at 241; Bankinvest AG v Seabrook (1988) 14 NSWLR 711 at 717 per Kirby P recently referred to in Idoport Pty Ltd v National Australia Bank & Ors [2001] NSWSC 744 Einstein J at p. 30 [60]. 34 The defendant had the capacity to serve a Notice to Produce on the plaintiff for its accounting records and financial statements it is required to keep (s 103 and s 106). It also had the capacity to serve a Notice to Produce on the plaintiff to produce minutes of its Annual General Meetings and any records relating to the charging of levies and estimates of outgoings. None of this was done. 35 The rule in Jones v Dunkel and the statements of Jordan CJ and Moffitt J above referred to, do not persuade me that where a defendant demands evidence and a plaintiff refuses to provide it and puts a defendant to proof in an application such as this, the Court should simply infer adversely to the plaintiff. The adoption of such an approach by the plaintiff may cause some suspicion but what is required here is evidence which, viewed objectively, provides the relevant "reason". Where forensic steps are available to and not taken by an applicant, whose burden it is to prove its case, I am of the view that a Court should be less inclined to draw such an adverse inference. 36 I am of the view that for the defendant to have discharged its burden, it needed to call evidence upon which, viewed objectively, I could be satisfied that the plaintiff was not entitled to raise a special levy to pay the costs or, if able to raise levies in respect of costs, that such levies would not be paid. There is no evidence of any recalcitrance on the part of the unit holders to pay the special levies nor is there any evidence of an inability in any of the unit holders to pay a levied amount of approximately $5,700 or $11,500 depending on whether the costs are $1 million or $2 million. 37 Mr Hunt, for the defendant, argued that the structure of the Management Act prevented the plaintiff from raising a levy to meet the costs of the proceedings should the plaintiff be unsuccessful. In support of this submission he referred to the restrictions in s 230 on the owners corporation levying contributions. I am of the view that this section is adverse to the defendant's submission. The restriction that is expressly stated in s 230 is only a restriction on the owners corporation raising levies in respect of proceedings brought under Chapter 5. There is no other express restriction on the owners corporation levying contributions to pay costs. I am of the view, that there is an entitlement to raise a levy for the payment of costs of these proceedings and that the terms of s 230 reinforces that view. 38 In all of the circumstances I am not satisfied that the defendant has discharged its evidentiary burden. I am not satisfied that the evidence before me viewed objectively gives rise to the requisite satisfaction that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if ordered to do so. 39 The Motion is dismissed. If the parties are unable to agree on an appropriate costs order I will hear argument when the matter is listed for further directions in the Construction List on 7 December 2001, pursuant to the Orders I made on 7 September 2001. ***************************

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