Verschuur v Vynotas Pty Ltd [2004] VSC 130

2. By summons dated 16 September 2003, the plaintiff seeks an order pursuant to s. 33V of the Supreme Court Act 1986 (Vic) ("the Act") that the Court approve the settlement of this group proceeding. The settlement is contained in a Deed made between the parties on 29 August 2003 ("the Deed of Settlement").

5. Section 33V of the Act provides:

"(1) A group proceeding may not be settled or discontinued without the approval of the Court.

(2) If the Court gives such approval, it may make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement or paid into Court."

10. The Deed of Settlement of which approval is sought provides for the payment of a substantial sum. Although the Deed of Settlement does not make provision as to how this "Settlement Sum" is to be spent, it is not in dispute that the money (apart from costs) is intended to be spent on rectification of the residential development which is the subject of the group proceeding. As will be seen, it is that intention, in essence, which has given rise to a conflict of interest within the group. In order to explain the problem, it is necessary to refer to the nature of the proceeding and the background to it.

14. The proceeding was commenced by writ dated 15 November 2002. The Statement of Claim endorsed on the writ states that the proceeding is a group proceeding brought pursuant to Part 4A of the Act and that the plaintiff sues "on behalf of himself and as a representative of all persons ("the group members"), other than the defendants, who own, or have at any time owned, any lot on registered plan of subdivision No. 324041E ("the Registered Plan of Subdivision")" and goes on to say that the plaintiff and the group members claim damages in negligence and contract in respect of design and construction defects in the Victoria Albert Town Residence constructed on the land situated at 400 Victoria Parade and 190 Albert Street, East Melbourne ("the development"), being the land comprised in the Registered Plan of Subdivision and also in respect of defects and errors in the Registered Plan of Subdivision.

17. The Statement of Claim says that the plaintiff and all of the group members allege causes of action in negligence and that the plaintiff and some group members ("the original purchasers") allege causes of action for breach of standard form contracts of sale under which they purchased their lots on the Registered Plan of Subdivision. The contracts of sale were allegedly made with the second defendant ("Norwich") through its agent, the first defendant ("Vynotas").[1] Vynotas is a wholly owned subsidiary of Norwich.

20. The Statement of Claim says that from about 1993 to 1998, the defendants undertook the design, construction, promotion, marketing and sale of the development and that, in particular, the defendants acquired the land, registered the plan of subdivision, promoted and marketed the development as a "prestigious, superior quality residential development with, inter alia, a superior quality finish and facilities befitting such a development", entered into contracts of sale with the original purchasers for the sale of lots on the Registered Plan of Subdivision and caused to be designed and constructed the building works comprising the development.

23. The Statement of Claim pleads written and implied terms of the contracts of sale - namely, that the development should substantially accord with the architectural plans attached to contracts of sale, should be completed in accordance with the Building Code of Australia and in accordance with the Schedule of "Construction Details, Fittings and Finishes" attached to the contracts of sale, and should be completed in a proper and workmanlike manner. It is next alleged that each of these terms was broken in that the works were "defective" (particulars of the defects were to be provided separately). It is then alleged that the original purchasers have suffered loss and damage comprising the cost of rectification, the diminution in the value of the lots (in the case of original purchasers who retain their lots) and loss of profits on sale (in the case of original purchasers who have sold their lots). The cost of rectification is alleged to be in the order of $13M and a cost breakdown is set out in Schedule A to the Statement of Claim.

26. In order to explain the nature of the defects alleged, some of the major items listed in Schedule A should be mentioned. There is an estimate of $5,818,000 in relation to repairs and remedial works identified by an architect, including remedial works to 144 apartments (which is the total number of apartments in the development). Other major items include an estimated $1,448,000 for making the building watertight and painting the external render and an estimated $1,404,000 for reconstructing the courtyards and new landscaping in those areas. Further items listed include works to bring certain items to the originally advertised standard, safety matters, hydraulic engineer's remedial works, electrical engineer's remedial works, mechanical remedial works, structural and civil engineer's remedial works, security remedial works and overheads, administration expenses and GST.

29. The Statement of Claim then moves on to the allegations in negligence. As a basis for the existence of a duty of care, it is alleged, inter alia, that the defendants promoted and marketed the development as a prestigious, superior quality residential development with a superior quality finish and facilities befitting such a development and knew, or ought reasonably to have known, that persons who purchased lots on the Registered Plan of Subdivision would reasonably rely upon the defendants to ensure that all reasonable care and skill was taken and used to design and construct the development as promoted and marketed and in a proper and workmanlike manner. The Statement of Claim goes on to plead a duty of care accordingly. I note that the formulation of the factual basis for the alleged duty of care puts some emphasis upon the relationship between the defendants and the original purchasers, as opposed to subsequent purchasers, but that no consequential differentiation is made, in the allegations of either duty of care or of negligent breach of that duty, between original purchasers and persons who subsequently purchased lots.

32. The Statement of Claim then alleges that negligently and in breach of the said duty of care, the defendants failed to take and use the reasonable care and skill of the kind referred to.

35. The particulars of negligence allege a general failure by the defendants to use adequate care or skill to ensure that the development was designed and constructed "without defects". Consequent loss and damage is then alleged, and the particulars of loss and damage given in relation to the breaches of contract claim are repeated.

38. The Statement of Claim then moves on to allege defects and errors in the Registered Plan of Subdivision, the details of which it is unnecessary to mention, save that there appears to be a claim in relation to certain car parking spaces, the relevance of which will appear when I come to Deed of Settlement. The Statement of Claim concludes with a general claim for damages by the plaintiff on his own behalf and on behalf of group members.

42. The development comprises 144 apartments, including 8 penthouses, 6 sub-penthouses and 130 one and two bedroom apartments. The plan of subdivision was registered in or about February 1995. There are four bodies corporate involved with the development, but the main one is Body Corporate Plan No. 324041E (No. 1). For convenience, I will in most cases use the term "the Body Corporate" to refer either to the four bodies corporate or to the principal body corporate, because it is not relevant to distinguish between them. Every lot owner is a member of the Body Corporate. At all relevant times, Binks & Associates Pty Ltd has been the Body Corporate manager. The plaintiff is the current chairman of the Body Corporate Committee. He has been a member of that Committee at all relevant times, and is one of the original purchasers ("original owners") of an apartment.

45. According to the plaintiff, the development was advertised and promoted by Norwich as a high quality project. The development was completed in late 1996 and purchasers progressively took possession of their apartments. Soon after completion, the Body Corporate approached Norwich regarding alleged defects in the development. In the first eighteen months, various defects in the development allegedly began to manifest themselves. For example, water penetration into the building was a problem, both through the balconies and the building fabric. There was flooding in the courtyards and the overall finish of the development was allegedly poor.

48. Graham Allan Buckett was a member of the committee of the Body Corporate from 5 August 1996 to 25 May 1998 and Chairman of the Committee from 16 June 1997 to 25 May 1998. Mr Buckett's company, Hannan's Star Pty Ltd ("Hannan's Star"), was the owner of Lot 130 from 17 July 1996 until its sale in August 2001. Mr Buckett did not reside in the apartment and it was occupied by tenants.

51. The Body Corporate formed a sub-committee or sub-committees to address the problems arising from all identified defects.

54. On 4 March 1997, a "circular to all owners" was sent by the Body Corporate, requesting authority for the Committee to pursue defects in the common property through the Committee.

57. In May 1997, in the Chairman's report to the Annual General Meeting, it is recorded that sub-committees were set up to investigate the various defects and that negotiations with the first defendant were continuing. At each subsequent Annual General Meeting, the Chairman's report outlined the status of negotiations with the first defendant.

60. On or about 14 May 1999, the Body Corporate distributed a circular to "Original Apartment Owners". The circular noted that it had been sent to all apartment owners, but said "please ignore if you are a subsequent owner". The circular advised that the Committee was "continuing its efforts to achieve resolutions to matters considered to be building defects or shortfalls/misrepresentations in respect to the initial marketing and promotion of your property." Original owners were requested to contact a nominated solicitor for further information and the circular concluded "Please note that this invitation only applies to original purchasers of apartments at the Victoria Albert Town Residence, that is those owners who purchased from developer Vynotas P/L."

63. In a Body Corporate Committee report to the Annual General Meeting on 26 May 1999, the Committee said that its outlook for the future was that, inter alia, "In the coming year your committee will successfully negotiate with Norwich Union's Vynotas a settlement to cover repair costs of initial defects and omissions in the Victoria Albert Town Residence".

66. The Body Corporate engaged the services of Archicentre Limited (an architects' advisory service) which produced a report on the defects dated 1 September 1999 ("the Archicentre report"). The Archicentre report identified a number of areas of serious concern, including problems relating to air conditioning and kitchen exhausts (smells were permeating through the building), courtyard draining and waterproofing, water penetration, corrosion of installations (due to large water leaks) and a number of design issues and maintenance issues.

69. On 22 February 2001, a deed was entered into between the present defendants and the Body Corporate ("the 2001 deed"). The 2001 deed recites that the defendants and the Body Corporate have been involved in discussing certain disputes in relation to the development and have agreed to "progress the discussions relating to and management of the Disputes on the terms and conditions" set out in the deed. The 2001 deed says that the Disputes comprise "Building Items" (items set out in the Archicentre report and in a schedule to the deed), "Omissions" (items allegedly represented by the defendants but not included in the development), "Individual Items" (individual unit owners' complaints, claims and issues in respect of the construction of their individual units), "Regulatory Items" (regulatory deficiencies), "Maintenance Items" (maintenance and service issues), "Procedural Items" (relating to manuals) and "Future Items" (any item identified by an expert or any defect that became evident under work carried out under the terms of the deed) and all matters associated with or connected with each Dispute.

72. The 2001 deed then contains an acknowledgment by the defendant that the Disputes are bona fide complaints by the Body Corporate, but that the developer has not had the opportunity to fully investigate them. The deed then provides that the defendants agree that any Dispute for which they are responsible will be rectified by them and that once any Dispute is resolved, the defendants will be released fully and finally from that Dispute. The deed then sets up a Project Control Group which was to meet regularly to oversee the process of managing the resolution of the disputes, obtain expert advice and generally manage the process set up by the deed. The Project Control Group included a representative from each of the Body Corporate and the defendants and, for decisions of the Project Control Group to be binding, both representatives had to vote in favour of that decision.

75. The 2001 deed then sets out timed stages for the process of identifying disputes, formulating methods of resolution and reaching agreement upon rectification work. It is unnecessary to state the details.

78. Clause 8 of the 2001 deed entitled "Extending Limitation Of Actions Period" provides:

"(a) the Developer [ie, the defendants] agrees that this deed will be evidence of its consent, to the extent permissible by law, to an extension of any limitation period pursuant to which the body corporate must bring any cause of action against the Developer it alleges it has in respect of any Dispute.

(b) the Developer will not raise as a defence in any subsequent legal proceedings in respect of a Dispute, or otherwise seek to rely upon the limitation provisions of the Trade Practices Act 1974, Fair Trading Act 1999 or Limitation of Actions Act 1958, brought within the period of 4 calendar months from the day upon which this deed terminates in respect of that Dispute, for any claims by the body corporate under the Trade Practices Act 1974 or Fair Trading Act 1999, or any claims governed by the Limitation of Actions Act 1958."

83. Clause 9 of the 2001 deed provides for the deed's termination in various circumstances including agreement or resolution of a Dispute, but with an overriding provision for termination at the expiration of 18 calendar months from the date of the deed.

86. Clause 12(d) of the 2001 deed contains a warranty by the Body Corporate that it had lawful authority to bind not only itself but also "the members of the each body corporate to this deed in respect of matters affecting or connected with the common property...and that the body corporate's actions in respect of common property Disputes are binding upon its members...".

89. Certain experts were engaged pursuant to the 2001 deed. One of the experts so engaged by the parties was an architect (Vincent Chrisp) who, after a site inspection conducted in 2001, compiled a list of defects. The architect inspected 92 apartments and 43 of those apartments were identified by him as sustaining some sort of water damage. 56 of the 92 apartments had damage of one kind or another to the floors and 37 apartments had defects relating to the shower facilities. When all of the experts had completed their reports, a quantity surveyor, Baglin Partners, estimated the cost of rectifying the defects, and that cost formed the basis of subsequent claims.

92. I interpolate that by letter dated 8 April 2001 from Hannan's Star (signed by Mr Buckett) to the Body Corporate, Hannan's Star, as owner of Lot 130, agreed "to be bound by the settlement terms negotiated" by the Body Corporate with the defendants and also enclosed "a notice regarding a development defect in our apartment for inclusion in your negotiated settlement." The notice claimed the sum of $1380 for the cost of repairs in the bathroom of the unit. In all the circumstances there is no basis for any contention that, by making this claim, Hannan's Star was saying, or could be taken to have been saying, that it had suffered no loss and damage other than the sum of $1380. This was merely an additional claim notified to the Body Corporate. I next note that Hannan's Star sold its unit by contract of sale dated 4 June 2001 and the sale was settled on 3 August 2001.

95. By letter dated 23 July 2001 to the Body Corporate Committee, Hannan's Star stated, inter alia:

"It is noted that the agreed processes provide for the developer, at its sole discretion to resolve each issue by way of rectification work or monetary compensation. It is understood that Committee would prefer rectification, whilst the developer may prefer compensation. The question arises as to whom (beneficially) compensation would be payable in the event the developer opts for the compensation alternative. Options include:

a) Capital repayment to original purchasers against the advertised development plans;

c) Operating cost offset against ongoing quarterly Body Corporate contributions.

To minimise future conflicts, we recommend that Committee resolve this issue ASAP."

103. The Hannan's Star letter of 23 July 2001 went on to argue that compensation should be payable to those parties that originally purchased against the advertised development plans because they suffered the loss rather than subsequent buyers who had already benefited "by buying units at "discounted" prices due to inherent defects and diminished common property". The letter warned of disagreement, the extent and intensity of which would increase with time. It does not appear that there was any substantive response to this letter.

106. At this point I note that the 2001 deed terminated without achieving a resolution of the disputes. Discussions took place over a lengthy period (both before and after the termination of the 2001 deed) between the Body Corporate and the first defendant, but the matters in dispute were not resolved and, as a result, a number of proceedings were instituted.

109. On 18 April 2002, all of the bodies corporate commenced a proceeding (No. 5232 of 2002) in the Supreme Court against the defendants alleging that the defendants owed a duty of care to the bodies corporate in relation to the design and construction of the development, including the common property and all resources contained therein. Numerous defects were listed as arising from the negligence of the defendants and the bodies corporate claimed damages. Claims for damages were also made in relation to errors in the plan of subdivision. However, the writ dated 18 April 2002 was not served at that time. The bodies corporate on the same date commenced a proceeding against the defendants in the Victorian Civil and Administrative Tribunal ("VCAT") in relation to the same causes of action. In the VCAT proceeding, the defendants filed a Defence and Counterclaim which, inter alia, made allegations that numerous of the defects alleged related to "matters not part of the common property". The defendants also contended that VCAT did not have jurisdiction pursuant to the Domestic Building Contracts Act 1995 (Vic). The sub-committee formed by the Body Corporate decided to commence this group proceeding and to serve the writ in proceeding no. 5232 of 2002 and not to continue with the VCAT proceeding. That decision was implemented, and the VCAT proceeding was struck out by consent on 15 August 2002.

112. The Body Corporate Committee reported to the Annual General Meeting of members on 28 August 2002 that:

"Although a Deed was established and a project control group activated, it took a long time for all investigating consultants to report. The results were a confirmation that substantial rectification works were needed in areas such as water penetrations, tanking, many quality issues, safety and security etc. Under the Deed Norwich made an offer we were unable to accept. Currently we are negotiating with Norwich on another offer which we assume will be a vast improvement on the earlier attempts to settle, and I believe that the developers are genuine in their attempts to settle. Due to the fact that the sum total of rectifications alone are reported to be in excess of $10 million, the committee has steadfastly resolved to pursue through the courts the costs and rectification required to be done. Since the legal battles are complicated, drawn out and costly, both parties to this dispute are aware that a fair settlement is preferred, however the body corporate cannot afford not to pursue legal action unless settled fairly. To this end we have been advised by legal counsel to add a Group (Class) Action to our current court action."

116. By letter dated 2 November 2002 from Hannan's Star to the Body Corporate Committee, Mr Buckett contended that, in entering the 2001 deed, the Body Corporate "acted for and on behalf of a class of parties that acquired their residences directly from Vynotas thus necessarily relying upon "off the plan" contracts with, and representations made by, Vynotas to those parties" and that Hannan's Star was and remained one of that class. Mr Buckett contended that the Body Corporate had "an irrefutable fiduciary duty to act fairly and exclusively for all those comprising" the class of original owners. The letter went on to state that the fact that the Body Corporate Committee was considering, in relation to any settlement reached, the submission of same to the "current members" for approval, suggested that the Body Corporate Committee may have misunderstood or forgotten to whom its fiduciary duty was owed. On 15 November 2002, the Body Corporate Committee conveyed its view that it owed no such fiduciary duty to Hannan's Star, but did not explain its view.

Events since the commencement of the proceeding

120. As I have already said, this group proceeding was commenced on 15 November 2002, and it was entered in the Building Cases List. Negotiations between the parties continued.

123. On 30 January 2003, a special General Meeting was held at which the members of the Body Corporate resolved (by a large majority with a small number of abstentions) to accept a settlement of not less than $4.7M together with the provision of an additional 12 car park spaces, and on such other terms as might be agreed or approved by the committee. That meeting was addressed by Mr Andrew Hugh Denehy of Gadens Lawyers, the solicitors for the plaintiffs. Mr Denehy informed the meeting of the state of settlement negotiations with the defendant and of an offer which had made by the defendants but which was not as yet capable of acceptance. He said that that offer had followed a process of agreeing a scope of works which was then to be priced. A scope of works had been agreed and a detailed assessment of the costing was being undertaken by consultants. Mr Denehy informed the meeting that any settlement would need Court approval. Mr Denehy said that it was difficult to go into detail as to the desirability of concluding a settlement because a representative of the defendants (being an owner of some units) was in attendance. Mr Denehy also said that if the settlement amount was insufficient then the additional costs would be borne by apartment owners in accordance with their lot liability, and, while at that time a final cost for the agreed scope of works could not be assessed, the amount of $4.7M was put forward in a spirit of compromise.

126. A number of directions hearings were adjourned as a result of continuing negotiations. At the directions hearing on 20 June 2003, consideration was given to the adequacy of the plaintiff's further and better particulars of his Statement of Claim, and the question of the giving of the notice[2] of commencement of the proceeding and of the right of group members to opt out was also raised. On 24 July 2003, confidential Heads of Agreement were executed by representatives of the parties and this fact (but not the Heads of Agreement) was disclosed by an affidavit of Mr Denehy sworn 31 July 2003. A formal Deed of Settlement was anticipated. The plaintiff's representatives were not ready to proceed at the directions hearings on 1 August 2003 and 29 August 2003, on which latter date the proceeding was adjourned for directions to 19 September 2003.

129. On 29 August 2003, the Deed of Settlement was executed.

132. The Deed of Settlement provides for a settlement by the defendants (with a full denial of liability) both of the Body Corporate proceeding and the group proceeding. As part of the settlement, the deed provides for the transfer to the Body Corporate of 12 car parks, being land identified in the deed. The deed further provides for payment of the Settlement Sum, conditionally upon approval by a special general meeting of the Body Corporate and the approval of the Court pursuant to s.33V of the Act.

135. The Settlement Sum is defined as the aggregate of two amounts: the first amount is the sum of $4,727,154 (subject to certain potential deductions) and the second amount is referred to as the "Residual Sum"(see Cl. 2.4(e) and (f) of the Deed). The obligation to pay the Settlement Sum is to be satisfied by delivery of a cheque to the "Plaintiffs" (defined as the Body Corporate and the Group members collectively) made payable to the Body Corporate within 10 business days of the said approvals being obtained.

138. Clause 2.1(e) of the Deed of Settlement provides:

"(e) The parties acknowledge that the Settlement Sum is based on the Scope of Works [the scope of works is contained in Attachment A to the Deed]. However, the Plaintiffs acknowledge that:

(i) the Developer makes no representations or warranties in relation to the expenditure of the Settlement Sum, and in particular any expenditure or the adequacy of any expenditure on the works specified in the Scope of Works; and

(ii) the Plaintiffs will make no Claim against the Developer of whatsoever nature and kind and in any way arising out of, connected with or incidental to the expenditure of the Settlement Sum whether in respect of the works specified in the Scope of Works or otherwise."

144. By Clause 2.4(a) of the Deed of Settlement, the Plaintiffs acknowledge that the first amount comprised in the Settlement Sum includes amounts in respect of works on individual apartments (as described in an identified report), an amount for the provision of a new range hood for each apartment and an amount for air conditioning calculated by reference to works being conducted on 95 apartments. The reason for this acknowledgment appears from the following parts of Cl. 2.4, which provide for a specified deduction from the Settlement Sum in respect of each "current apartment owner" who elects to opt out of the group proceeding. So although the Deed of Settlement does not provide for any specified application by the Body Corporate of the Settlement Sum received, it is clear that the parties were assuming that specified amounts would be expended, or would be available to be expended, on individual apartments. Hence for each opting out by a current apartment owner, a specified monetary deduction is provided for.

147. In relation to the second amount comprised in the Settlement Sum ("the Residual Sum"), it is made up of various amounts for costs including certain unpaid costs payable by the Body Corporate to consultants in relation to the negotiation of the settlement and legal costs.

150. The Deed of Settlement contains wide releases and indemnities to protect the defendants and a bar to any future proceeding by the Body Corporate or any of the group members (other than those who have opted out).

153. Attachment A to the Deed of Settlement contains the Scope of Works upon which the Settlement Sum was based (see Cl. 2.1(e)). The Scope of Works, as the name suggests, is primarily a list of items relating to rectification work and is directed at the concerns of current apartment owners (but is by no means restricted to work on individual apartments). There is no reference to the question of any compensation being payable to original owners who are no longer current owners in the development. Attachment A also contains a table headed "Apartment summary" which gives a breakdown, apartment by apartment, of that segment of the cost of the works (totalling $1,078,133). The values of those parts of the works to be done to individual apartments vary quite substantially between apartments.

156. By letter dated 15 September 2003 to the Committee members of the Body Corporate from Mr Denehy (of the plaintiff's solicitors), legal advice was given concerning the Deed of Settlement. The solicitors advised that the settlement was one which was in the interests of the Body Corporate and the group members, and that it should be accepted. The first reason given was that the amount to be paid represented a reasonable assessment, according to expert advice, of the cost of carrying out extensive rectification works to the development. Those works included, in particular, extensive waterproofing works to courtyards and individual apartments. Another reason given was that a Court was unlikely to award damages beyond the reasonable costs of repairing the defects and associated consequential loss. It was said that a measure based on "diminution in value" was not relevant as the defects could be identified and had been valued. The solicitors explained why the Settlement Sum was substantially less than the amount claimed. The solicitors then referred to the various risks, delays and very substantial costs involved in continuing with the proceeding. In the course of an extensive discussion of the risks involved, reference was made to the question of the extent of any duty of care owed by the defendants to subsequent purchasers under Bryan v Maloney[3] and also to the question of what kind of damage, if any, had been suffered by subsequent purchasers. Reference was also made to problems affecting group members, arising from the Limitation of Actions Act.

159. The plaintiff filed the said summons dated 16 September 2003 (supported by affidavits) seeking approval of the form and content of a Notice of Commencement and Opt Out Notice, approval of the Deed of Settlement and relevant consequential directions. An affidavit provided some evidence as to the changing ownership of units from their original sale until about June 2003 and the names and current addresses of group members, so far as could be ascertained. An affidavit of Mr Denehy proposed methods of serving and advertising the Notice and, inter alia, deposed:

"18. The group members who are current owners of apartments in the Development will receive the notice within a very short period of time. I am informed by the Plaintiff and believe that as a group, they have been informed frequently regarding the defects and the status of negotiations with Norwich...

19. The group members who are past owners of the Development will not receive compensation from the settlement. The settlement negotiations have always been on the basis that any resolution of the dispute was to rectify defects in body corporate property. Many of the past owners would be aware of the dispute due to the ongoing negotiations with Norwich by Bodies Corporate and the subsequent information from the Bodies Corporate to members because [from] the time when they were members they would have received information provided to members. Past owners have the option to pursue their individual claims with Norwich if they choose to opt out...."

165. On 19 September 2003, the Court approved the form and content of a Notice of Commencement and Opt Out Notice and fixed the time by which a group member might opt out at 4pm on 17 October 2003. The Notice was required to be given to all past and current lot owners by post and by advertisement. The summons, including the application for approval of the Deed of Settlement, was otherwise adjourned to 31 October 2003. The approved Notice set out the background to and the nature of the proceeding, advised of the Deed of Settlement and stated that the settlement did not involve the actual receipt of moneys by individual owners, but that it was intended that all settlement moneys would be paid to the Body Corporate and utilised in rectifying defects within the Development, including the common property and individual apartments. The Notice stated that it was not proposed that past owners be paid any moneys under the settlement. The Notice advised of the right of any group member to object to the settlement which required the approval of the Court and of the availability of a copy of the Deed of Settlement to any interested group member. Finally, the Notice advised of the right to opt out and what was involved in that.

168. On 24 October 2003, an objection to the proposed settlement terms, signed by Mr Buckett, was filed by Hannan's Star. The essence of the objection stated was that the proposed settlement did not provide compensation to group members who were "off-the-plan" buyers of apartments and who had resold their apartments and who had suffered loss and damage and that the settlement was therefore unfair and inequitable. The Notice pointed out that subsequent purchasers had been able to inspect their apartments and associated common property in an "as-constructed" condition, and the price that they paid related to that condition.

171. When the matter came again before the Court on 31 October 2003, an affidavit of Mathew Owen Sherwell, a solicitor employed by the plaintiff's solicitors, showed that there were 143 current lot owners (excluding Vynotas) and 99 former lot owners. A number of the former lot owners had given opt out notices. The only objection to the Deed of Settlement was from Hannan's Star, which was not legally represented but Mr Buckett attended in person. Orders were made on 31 October 2003 for the exchange of affidavits and outlines of argument between the plaintiff, the defendants and Hannan's Star Pty Ltd and the matter was otherwise adjourned to 28 November 2003. The time for a group member to opt out was extended to 4pm on 24 November 2003.

174. An affidavit of Mr Denehy dated 7 November 2003 was filed on behalf of the plaintiff, setting out the history of negotiations and the involvement of Hannan's Star and Mr Buckett. In substance, the affidavit sought to show that Hannan's Star had been aware of the approach taken by the Body Corporate, that Hannan's Star's loss was minimal and that Hannan's Star had made no contribution to costs since the sale of its apartment, the proceeding having been funded by Body Corporate fees. It was put that Hannan's Star was entitled to opt out of the settlement and pursue any claim it might have.

177. An affidavit of Mr Buckett sworn 17 November 2003 was filed. Mr Buckett deposed that he had tertiary qualifications in engineering and in commerce, and prior to his retirement, had worked for 37 years as a professional engineer and manager, primarily within the Australian mining, minerals processing and bulk materials handling fields. His experience included many years involvement in dispute resolution and litigation in those fields as an owner-representative, contractor and consultant. The affidavit contains a detailed history of the involvement of Hannan's Star and Mr Buckett personally in the development, the dispute and the negotiations, but in the end, I do not think that anything turns on these details. The final point made in the affidavit, by way of argument rather than anything else, is the same point made in the notice of objection initially filed by Hannan's Star.

180. An additional affidavit of Mr Denehy sworn 25 November 2003 provided further historical material. A further affidavit of the same deponent sworn 26 November 2003 produced Senior Counsel's opinion that the settlement was reasonable and in the interest of the Bodies Corporate and Group Members. However the opinion was very short, and did not attempt to analyse any conflict of interest between the current owners and original owners who had sold their apartments.

183. When the matter returned to Court on 28 November 2003, Hannan's Star was legally represented for the first time, by Mr Shand QC. I indicated to the parties that I considered that a Senior Counsel's opinion should be obtained as to the reasonableness of the proposed settlement in the light of the position of original owners who had sold their apartments. The matter was left on the basis that the parties would agree on the terms of an order but, in the event, some matters could not be agreed and the order was finally made on 19 December 2003 after hearing further argument. The order provided for further affidavits to be filed and also provided that the solicitors for Hannan's Star should retain Senior Counsel to advise upon whether the proposed settlement was "fair and reasonable in relation to the interests of present and former members of the Group who are not current owners of a unit". The costs of obtaining the advice were to be paid in the first instance by the plaintiff. A notice in the form attached to the order was to be given to original but not current owners of apartments. The notice again advised of the group proceeding and the application for approval of a settlement, but then referred to the objection by Hannan's Star and the essence of it, and gave those persons an additional opportunity to opt out by 4pm on 27 February 2004 or to file a notice of objection supported by any affidavit. The notice invited those persons to seek legal advice, either from Hannan's Star's solicitors or from their own solicitors, and referred to various associated matters.

186. An affidavit of Dagnija Balmford sworn 3 February 2004 was filed on behalf of the plaintiff containing further details as to the history of the matter and of the proceedings. The affidavit emphasised that, at all times, the aim of the Body Corporate Committee "was that funds recovered would be utilised to rectify defects". The affidavit further deposed that the Body Corporate had paid all legal costs in respect of the group proceeding (which had been combined with the costs incurred by the Body Corporate in the other proceedings) and that the Body Corporate had incurred and had paid, or was in the process of paying, total costs in the sum of $453,236.25. These costs were additional to costs which had been reimbursed through arrangements reached with the defendants and were mainly incurred from June 2001 onwards. The Deed of Settlement was likely to yield (from part of the Residual Sum as defined) the sum of $61,361.95, so that the Body Corporate would not be reimbursed for the balance, namely the sum of $391,901.30. The legal and consultants' costs incurred by the Body Corporate, to the extent not reimbursed by the defendants (as above set out), were paid out of the general funds of the Body Corporate, but in January 2004, the members of the Body Corporate had been levied to cover a shortfall of about $100,000.

189. A further affidavit of Mr Buckett sworn 3 February 2004 was filed on behalf of Hannan's Star. Mr Buckett deposed that Hannan's Star had lost an estimated $106,530 as a consequence of the defendants' breaches of contract and negligence in the design and construction of the development, comprised of $48,700 for "defects and omissions in the Apartment" and $57,830 for "the Apartment's [proportional] share of defects and omissions" in the common property.[4] Alternatively, Mr Buckett deposed that Hannan's Star had suffered a loss of value (ie, profit) upon resale. He made reference to the price gain obtained by Hannan's Star compared with price gains generally in the area over the same period, which were considerably greater.

192. Although some aspects of Mr Buckett's affidavit, including his calculations and methodology, were subsequently criticised[5] in an affidavit of the plaintiff sworn 23 February 2004, I am persuaded that Mr Buckett's affidavit does demonstrate that Hannan's Star has a seriously arguable case in relation to quantum of loss and damage of some substance suffered by it, either by way of rectification costs or by way of loss on resale. Hannan's Star's case may reasonably be taken, in my view, as broadly similar to damages claims for the costs of rectification which might be made by each original owner. In the case of original owners, the Hannan's Star claim for loss of profit would be broadly similar to that which might be made by any original owner who subsequently sold an apartment.

195. An affidavit of Mr Sherwell, sworn 12 March 2004, was filed in order to update the position concerning group members. The affidavit said that there were now 99 former owners of the apartments of whom 77 were original owners. However for various reasons (eg, deregistration of companies) there were 66 former original owners whose interests needed to be considered at this stage. Mr Sherwell provided a table [6] which read as follows:

2. Former owners not being original owners [25]

200. I note that 29 out of 66 former original owners have opted out, and that no further objection has been filed by any group member, although there is some evidence of dissatisfaction with the proposed settlement by some former owners.

203. I have considered the contents of various other affidavits filed herein (so far as relevant) but it is unnecessary to refer specifically to them, except to a further affidavit of Mr Buckett to which I will refer in due course.

206. Pursuant to paragraph 3 of the Court's Order dated 19 December 2003, advice from Senior Counsel (Mr David Levin QC) dated 12 March 2003 was provided. Mr Levin advised that in his opinion, the Deed of Settlement was "not fair and reasonable in relation to the interests of present or former members of the group who are not current owners of a unit." The principal matters taken into account by Mr Levin in so advising may be summarised as follows:

* the legal problems of establishing any cause of action against the defendants by the Body Corporate; * the legal and factual problems of establishing any cause of action against the defendants by current owners who are not original owners; * the intent to benefit current owners, whether or not they were original owners, and the intent not to provide any benefit to original owners who are not current owners; * the risks and problems which would be faced by any former original owner who had opted or was to opt out of the group proceeding; * the significance of those causes of action pleaded which could enure (if at all) only for the benefit of original owners.

211. It was submitted in writing on behalf of the plaintiff that the settlement was in the interests of the Body Corporate and of the group members for the reasons expressed in Mr Denehy's letter of advice dated 15 September 2003.[8]

In addition, Counsel for the plaintiff stressed the extent of the work undertaken by the Body Corporate to assemble the evidence of defects and the likely causes thereof and the extent to which those defects related to the common property. It was submitted that the endeavours of the Body Corporate had always been directed to achieving rectification of defects and not the pursuit of compensation for individual apartment owners, and that the benefits of the settlement would be enjoyed by original owners to the extent that they remained owners. A number of good reasons for preferring a settlement over continuing litigation were mentioned. It was submitted that Hannan's Star, the only objector, should be given a further opportunity to opt out of the proceeding, after which it would have the same rights to pursue individual action as did the other former owners who had already opted out. Submissions were made about what Mr Buckett knew and what he was entitled to expect arising out of the negotiations, but even if those submissions were correct (which I doubt), it does not seem to me that they are of relevance to the question as to whether the proposed settlement is fair and reasonable in the interests of the group members.

216. Mr P Santamaria SC, on behalf of the plaintiff, submitted that it was of real significance that, the former original owners having been given a further notice and an opportunity to obtain legal advice and representation, there was only one objector before the Court, namely, Hannan's Star. The former original owners, apart from Hannan's Star, had either opted out of the proceeding or elected not to object to the Deed of Settlement. Senior Counsel for the plaintiff proposed orders, in those circumstances, which approved the Deed of Settlement but provided for an inquiry as to the fair and reasonable compensation which should be made payable to Hannan's Star out of the Settlement Sum.

219. It was further submitted on behalf of the plaintiff that there was at least a respectable argument that the limitation period had already expired by the time that this group proceeding had commenced. This factor was relevant to the question of whether the settlement should be approved. Further, it was argued that if the limitation period had expired, it had expired for all group members, but if it had not, then those who opted out were not thereby prejudiced.

222. It was submitted that there was no injustice involved in an order which made provision for compensation for Hannan's Star but did not make provision for any of the other former original owners, who had shown no interest in obtaining compensation after being given a number of opportunities to object or put in a claim.

225. In the course of argument, it was submitted on behalf of the plaintiff that the Court might, in the exercise of its discretion, make it a condition of its approval of the settlement that each original owner be paid the sum of $2500 (no doubt in recognition of the special position of original owners).

229. Senior Counsel for the defendants adopted the submissions advanced by the plaintiff and supported the orders proposed by the plaintiff.

233. Mr Shand QC, who appeared for Hannan's Star, submitted that the Court should not approve the proposed settlement, or alternatively, should require the settlement moneys to be paid to the Body Corporate as a stakeholder and distributed by the Body Corporate in a manner to be determined by the Court. Mr Shand submitted that the proposed settlement was not fair and reasonable having regard to the claims of the former original owners who were to receive no benefit under the settlement, but who had better claims than current owners who were not original owners. He said that a conflict of interest had developed from the time when the Body Corporate had begun to investigate the defects, at which time all or most of the apartment owners were original owners. Over time this position had changed and there were now conflicts of interest between the various categories of group members. The solicitors acting for the plaintiff had thereby been placed in an invidious position and bore a heavy burden to justify the exclusion of any segment of group members. The proceeding was not prosecuted for the benefit of the "building" but for the benefit of all members of the group.

236. Mr Shand submitted that the original owners had not lost their causes of action, or caused their recoverable losses to be reduced or eliminated, by selling their apartments. In contrast, those subsequent purchasers who were current owners had dubious causes of action. Mr Shand further submitted that opting out was an unfair alternative for the former original owners for a number of legal and practical reasons.

239. Mr Shand said that Hannan's Star did not object to the global settlement amount or suggest that it was inadequate. The objection was to the manner of distribution in so far as the interests of former original owners were ignored.

242. Submissions in this matter were made on 19 March 2004. The hearing continued on 22 March 2004, when a further affidavit of Mr Buckett was filed on behalf of Hannan's Star. In that affidavit, Mr Buckett endeavoured to show some ways in which the Settlement Sum (apart from costs) might be distributed. Without going into the details, the essence of his approach was as follows. He started by allocating the amount attributable to each of 144 apartments based on the Schedules provided by the Body Corporate, and then apportioning the amount attributable to the common property in accordance with the lot entitlements. By analysing the data as to current and former original owners, he said that the proportion of the value of the proposed settlement attributable to current original owners was 44.4% and attributable to former original owners was 55.6%. This calculation is probably misleading because it seems likely that there is a considerable cost involved in the performance of rectification works over the whole building in order to render it watertight for the benefit of current owners who were original owners. It would seem that this cost will be the same irrespective of the number of current owners who are also original owners. Mr Buckett then produced a number of further calculations to show what ought or could be distributed to various group members based on a number of scenarios. Mr Shand relied upon this material to indicate how the Settlement Sum might fairly be distributed.

The role of the Court under s.33V of the Supreme Court Act

246. I would respectfully adopt what has been said about the role of the Court in the following cases.

249. In Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250, 258, Branson J said:

"Section 33V(1) of the Federal Court Act provides as follows:

"A representative proceeding may not be settled or discontinued without the approval of the Court."

The purpose intended to be served by s33V(1) is obvious. It is appropriate for the Court to be satisfied that any settlement or discontinuance of representative proceedings has been undertaken in the interests of the group members as a whole, and not just in the interests of the applicant and the respondent. In my view, s33V proscribes not only complete settlement of proceedings without the approval of the Court, but also settlement of claims against a joint respondent, or settlement of any substantive claim against a respondent."

255. In Lopez v Star World Enterprises Pty Ltd [1999] FCA 104; (1999) ATPR 41-678 the court approved the settlement of a group proceeding. Finkelstein J said that the principal task was to assess whether the compromise was a fair and reasonable compromise of the claims made on behalf of the group members, in particular, of those group members who were not represented by solicitors and counsel. He said that it was true that any group member might opt out, but many members would remain without a real appreciation of what this entailed. The task of the court was an onerous one, His Honour said, especially where the application was not opposed. The court would inevitably have to rely heavily on the legal representatives of the applicants whose clients' interests would not always be coincident with the interests of the group as a whole.

258. Williams v FAI Home Security Pty Ltd (No. 4) (2000) 180 ALR 459 was a group proceeding in which the applicants were those persons who entered into a sales contract with the first respondent to purchase an alarm system, who entered into a loan contract with the second respondent to finance the purchase of the alarm system, who relied on certain representations by the first respondent and who suffered loss as a result. An agreement was reached to settle the proceeding subject to the court's approval. Terms of the settlement included payment of $1000 to each of the applicants' solicitors' clients (numbering 495) plus $415,000 for costs. The offer of settlement covered only the solicitors' clients, namely those in the group who had fee and retainer agreements with the solicitor. The Federal Court dismissed the application because members of the group were excluded from the settlement without being given notice and an opportunity to be heard. It was said that the court must determine whether it is just to approve the settlement in the interests of all group members (at least where those detrimentally affected had not been notified).

"Ordinarily the task of a court upon an application such as this, is to determine whether the proposed settlement or compromise is fair and reasonable, having regard to the claims made on behalf of the group members who will be bound by the settlement. Ordinarily in such circumstances the Court will take into account the amount offered to each group member, the prospects of success in the proceeding, the likelihood of the group members obtaining judgment for an amount significantly in excess of the settlement offer, the terms of any advice received from counsel and from any independent expert in relation to the issues which arise in the proceeding, the likely duration and cost of the proceeding if continued to judgment, and the attitude of the group members to the settlement. In In re General Motors Corporation Pick-Up Truck Fuel Tank Products Liability Litigation [1995] USCA3 325; 55 F.3d 768 (3rd Cir. 1995) at 785 the United States Court of Appeals for the Third Circuit referred to the nine-factor test it had adopted:

"...to help district courts structure their final decisions to approve settlements as fair, reasonable and adequate as required by Rule 23(e) [which requires court approval for settlement of class actions]. See Girsh v Jepson [1975] USCA3 523; 521 F.2d 153, 157 (3d Cir. 1975). Those factors are: (1) the complexity and duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining a class action; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement in light of the best recovery; and (9) the range of reasonableness of the settlement in light of all the attendant risks of litigation."

(See also County of Suffolk v Long Island Lighting Co [1990] USCA2 643; 907 F.2d 1295 (2nd Cir. 1990) at 1323, 5 Moore's Federal Practice 3rd ed at p 23-348). This nine-factor test is equally helpful in the Australian jurisdiction and I find it a useful guide in considering the present proposed settlement."

267. However, Goldberg J went on to say that the settlement was complicated by the fact that the offer was not being made to all of the members of the group. It was limited to the clients of the solicitors acting for the applicants. This may be compared with the present case where the settlement benefits only those who currently own an apartment in the development_._ Goldberg J considered that, the action having been brought to advance the interests of all members of the group, they should not be removed from that action (which had a more likely potential to vindicate their rights than if they were forced to sue as individuals) - especially where no notice of the proposed settlement had been given to them. There was a conflict of interest between those who could obtain a benefit under the settlement rather than have the proceeding continue and those who would benefit, if at all, only if the proceeding continued.

270. Similar sentiments to the foregoing were expressed in King v AG Australia Holdings Pty Ltd [2002] FCA 872 at [35]- [46]. In Tasfast Air Freight v Mobil Oil [2002] VSC 457, Bongiorno J said at [4]:

"The principles upon which s.33V is based might be said to be those of the protective jurisdiction of the Court, not unlike the principles which lead the Court to require compromises on behalf of infants or persons under a disability to be approved."

275. It is obvious that an appropriate settlement of this potentially difficult and lengthy piece of litigation is very desirable. A settlement would avoid significant risks and costs, both for the plaintiff and the group and for the defendants, and would achieve early finality for all concerned. Moreover, the expenditure of moneys upon the elimination of the defects and omissions in the development is at first blush an attractive solution. However, having heard the submissions of the parties, I am satisfied that the proposed settlement is unfair and unreasonable in relation to the interests of original owners who have sold their apartments.

278. The Deed of Settlement is not on its face discriminatory as between members of the group, but it was common ground that it must be read in the light of the intention of the Body Corporate to spend the bulk of the Settlement Sum on rectification works and not to provide any monetary compensation to former owners.

281. It was suggested on behalf of Hannan's Star that the Court might approve the settlement pursuant to s.33V(1) of the Act, but then make such orders as it saw fit with respect to the distribution of the settlement moneys pursuant to s.33V(2) of the Act. However, it seems to me that the settlement which is envisioned by the Body Corporate and the defendants fundamentally involves the rectification of building defects and omissions and the non-payment of any amounts (at least any of significance) to individual members of the group, thus leaving former original owners without any, or any real, compensation. An important reason for recommending the settlement, which was advanced by Mr Denehy in his letter of 15 September 2003 to the Body Corporate Committee, was that the amount to be paid represented a reasonable assessment of the cost of the necessary rectification works. Apart from that reason, the other reasons advanced in that letter went to the reasonableness of a settlement in general and not to the mode of application or distribution of the money.

284. A further matter stressed by Counsel for the plaintiff was the extent of the work undertaken by the Body Corporate to assemble evidence of defects and to advance the proceeding to the stage of settlement. That matter leads me to think that any settlement should fully reimburse all of the costs incurred by the Body Corporate, but that matter cannot determine the question of the fairness and reasonableness of the settlement. It must be remembered that the Body Corporate and its Committee were working on behalf of all members of the group as defined in the Statement of Claim, and not merely those members who happened, from time to time, to be the current owners of the apartments.

287. Counsel for the plaintiff acknowledged that the claim for compensation by Hannan's Star was entitled to be recognised subject to appropriate inquiry and verification, but in my opinion it would be unreasonable to disregard the possible claims of other former original owners merely because they had taken no positive action (or, for that matter, had opted out[9]). A major aspect of the Court's role with regard to the settlement of group proceedings is to protect the interests of unrepresented group members.

290. It was not contended (subject to Statute of Limitations arguments) that former original owners had necessarily lost all of their causes of action by selling their apartments. It may be arguable that former original owners have lost contractual claims by taking a transfer from Vynotas, but that is far from clear. It remains seriously arguable that former original owners would, on appropriate evidence, be able to establish their tortious claims for damages based either upon the cost of rectification or upon any proven loss of profit on resale. It may be that the claims of former original owners are on the whole worth less than the claims of current original owners, but this too is far from clear. What is clear is that the causes of action of subsequent owners are based upon a much shakier foundation than that of the original owners. It is inappropriate to canvass the law in relation to the duty of care which might be owed by developers to subsequent purchasers, save to say that it is doubtful that there is any duty of care in respect of defects which were apparent (ie, not "latent") at the time of purchase.[10] It was not contended in respect of the class of subsequent purchasers generally that the defects complained of were latent at the respective dates of purchase, although the dates of purchase in respect of each subsequent owner were not the subject of evidence. It can therefore be seen that those current owners who are not original owners would derive a benefit from the proposed settlement which was not justified by the strength of their causes of action, whereas the denial of any benefit to former original owners fails to recognise the potential strength of their claims. I think that the points made by Mr Levin QC are well made.[11]

295. The solicitors for the plaintiff have in reality put forward this Deed of Settlement for approval at the instance of and in the interests of the current owners of the apartments only.

298. If a distribution of the Settlement Sum primarily amongst all original owners would be unsatisfactory to the plaintiff (after appropriate consultations), then I do not think that the Court should approve this settlement. The Court should not make different orders as to distribution, along the lines, say, of one or other of the scenarios suggested by Mr Buckett in his last affidavit, if this is opposed by the plaintiff. Rather, the Court should refuse to approve the settlement in those circumstances. On the other hand, if the plaintiff (after appropriate consultations) considered that the Settlement Sum remained appropriate even if it were applied or distributed for the primary benefit of all original owners, then no doubt the settlement could be approved with an appropriate set of provisions in relation to application or distribution thereof. Such a distribution might provide for a full reimbursement to the Body Corporate of all costs expended or incurred, plus interest perhaps, and for the transfer of the car spaces, and then seek to divide the balance in some fair and reasonable fashion amongst all original owners including, I think, those original owners who have opted out but wish to be reinstated. It might be necessary to estimate the loss of profit (if any) suffered by former original owners as at the date of each sale by such owner in order to reach a reasonable compensation figure for each former original owner which could be taken into account along with all other relevant factors in a distribution of the total sum available. One such relevant factor might be the cost required to deliver a watertight building to the current owners who are original owners. Obviously there are a number of variables and it is not really for the Court to determine them or, at least, not without further material or without further submissions.

301. My present intention is that the Court should dismiss the application for approval of the settlement, but I am prepared to stand the application over for a further period in order that the plaintiff's advisers might consider the position and consult as appropriate.

[1] I note that paragraph 5 of the Statement of Claim misdescribes Norwich as the first defendant and Vynotas as the second defendant.

[4] Mr Buckett produced a very detailed tabulation supporting these amounts, primarily based on the consultants' reports and estimates obtained by the Body Corporate and relied up by it in formulating the Statement of Claim and in arriving at the Settlement Sum. Putting aside an allowance for "inflation", Mr Buckett's figures resulted in a sum of $43,680 for defects and omissions directly related to the Apartment formerly owned by Hannan's Star.

[5] In an affidavit of Mr Buckett sworn 12 March 2004, some of these criticisms were accepted and others disputed.

[6] The table treats the owners of each lot as one group member per lot and does not take account of co-owners or owners with more than one lot.

[7] This excludes 7 former owners that are companies which are "not listed, or deregistered".

[8] See paragraph [[] above.

9] In the circumstances created by this judgment, it will probably be appropriate to give former original owners who have opted out an opportunity to be reinstated as group members - see s.33J(6) of the Act.

[10] See Bryan v Maloney (1995) 182 CLR 609; Zumpano v Montagnese [1997] 2 VR 525; Goulding v Kirby [2002] NSWCA 393; Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16.

[11] See paragraph [[] above.