LOW & ORS V BODY CORPORATE 384911 HC AK CIV 2010-404-5760

LOW & ORS V BODY CORPORATE 384911 HC AK CIV 2010-404-5760 21 February 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2010-404-5760UNDER Part 19 of the High Court RulesIN THE MATTER OF THE UNIT TITLES ACT 1972BETWEEN COLIN JEE FAI LOW & ORSApplicantsAND BODY CORPORATE 384911First RespondentAND MELVIEW VIADUCT HARBOURLIMITED (IN RECEIVERSHIP)Second RespondentAND LIGHTER QUAY HOTELMANAGEMENT LIMITED (INRECEIVERSHIP)Third RespondentAND GALWAY PROPERTY SERVICESLIMITEDFourth RespondentAND GALWAY AUCKLAND PROPERTYSERVICES LIMITEDFifth DefendantHearing: 14 October 2010Counsel: P G Skelton and R Edwards for ApplicantsNo appearance by, or on behalf of First DefendantS B Thompson for Second RespondentH Cull QC for Fourth RespondentJ K Goodall for Fifth RespondentJudgment: 21 February 2011CIV 2010-404-5760UNDER Part 19 of the High Court RulesIN THE MATTER OF THE UNIT TITLES ACT 1972BETWEEN COLIN JEE FAI LOW & ORSApplicantsAND BODY CORPORATE 384911First RespondentAND MELVIEW VIADUCT HARBOURLIMITED (IN RECEIVERSHIP)Second RespondentAND LIGHTER QUAY HOTELMANAGEMENT LIMITED (INRECEIVERSHIP)Third RespondentAND GALWAY PROPERTY SERVICESLIMITEDFourth RespondentAND GALWAY AUCKLAND PROPERTYSERVICES LIMITEDFifth DefendantHearing: 14 October 2010Counsel: P G Skelton and R A Edwards for ApplicantsNo appearance by, or on behalf of First DefendantS B Thompson for Second and Third RespondentsH Cull QC for Fourth RespondentJ K Goodall for Fifth RespondentJudgment: 21 February 2011JUDGMENT OF HEATH JContentsIntroduction [1]Preliminary issues(a) Service of the proceedings [7](b) The parties' stances [8](c) Is the adopted procedure appropriate? [12]The structure of the Westin development [15]The scheme of the Act [20]The ultra vires principle [27]The Management Agreement(a) The relevant rules [34](b) Competing submissions [38](c) Analysis [41]The Secretarial Services Agreement(a) The relevant rules [67](b) Competing submissions [70](c) Analysis [74]Are other rules ultra vires? [86]Severance of terms [91]Result [96]Introduction[1] Litigation in respect of the Westin Hotel in Auckland continues.1 On this occasion Mr Low and 113 co-applicants, each of whom own serviced apartmentswithin the hotel's unit title complex, seek orders declaring various rules of Body Corporate 384911 (the Body Corporate) ultra vires.2 An attack is also made on two agreements into which the Body Corporate entered in reliance on challenged rules: a building management agreement (the management agreement) and one for the provision of secretarial services (the secretarial services agreement).[2] The Body Corporate was created on 24 April 2007, following deposit of a unit plan under the Unit Titles Act 1972 (the Act). The duties and powers of a body corporate are set out in ss 15 and 16 of the Act.[3] Default rules govern the way in which a body corporate is managed. They are contained in Schedules 2 and 3 to the Act. Those in Schedule 2 may be varied by unanimous resolution, while Schedule 3 rules may be amended by a simple majority.31 For background, see Low v Body Corporate 384911 HC Auckland CIV 2010-404-5280, 2 September 2010.2 The way in which the development came into being and the way in which the hotel is operated are summarised at paras [15]-[19] below.3 Unit Titles Act 1972, s 37(1)-(4) and Schedules 2 and 3.[4] Immediately before deposit of the unit plan, the developer, Melview Viaduct Harbour Ltd (Melview), was the registered proprietor of the land. On deposit, it became the Body Corporate.4 That being so, it was entitled to add to (and did), vary or revoke some of the default rules. The present applicants complain that a number of the changes made to the default rules are ultra vires.[5] Under the powers conferred by the adapted rules, the Body Corporate entered into two agreements. The two agreements are dated 15 May 2007. Both were between the Body Corporate and Galway Property Services Ltd (Galway). They dealt respectively with management of the building complex and the provision of secretarial services. Both Melview and Galway are companies associated with Mr McKenna, the person responsible for the Westin Hotel development.[6] On 30 April 2009, Galway assigned the benefit of the management and secretarial services agreements to a sister company, Galway Auckland Property Services Ltd (Galway Auckland), another McKenna entity.Preliminary issues(a) Service of the proceedings[7] Orders were made requiring service on other parties, including the owners of all other units in the hotel complex. I am satisfied that service has been effected on all parties whom I directed to be served.(b) The parties' stances[8] Sanley New Zealand Ltd, the proprietor of 22 accommodation units, consents to the orders sought. Melview is now in receivership, as is the hotel operator,4 Ibid, s 12(1).Lighter Quay Hotel Management Ltd (Lighter Quay).5 Counsel for the receivers of each of those companies have advised that they abide the decision of the Court.[9] The Body Corporate has taken no steps in relation to the present application. Before the hearing, through its counsel, it indicated that it too abided the decision of the Court.[10] While Galway and Galway Auckland do not oppose declarations that some of the rules are ultra vires, they have been actively opposed to others. They are the companies that will suffer adverse economic consequences if those other orders were made.[11] Both Galway and Galway Auckland have (effectively) conceded that amended rules dealing with two significant aspects are ultra vires. The first relatesto restrictions on a proprietor's right to deal with his or her individual unit byprohibiting the grant of "Letting Service Rights" to anyone other than the hoteloperator or the proprietor of Unit H9 (Melview). The second involves the prohibition on use, lease, or grant of management rights in respect of an individual unit without the consent of the building manager.Is the adopted procedure appropriate?[12] When the proceeding was filed, Mr Low sought leave to proceed by way of an originating application.6 I granted permission on 7 September 2010. That meant that the issues would be determined based on affidavit evidence. Save for exceptional circumstances, there is no cross-examination of witnesses on an application of that type.7[13] While no steps were taken to set aside my order, Ms Cull QC, for Galway, supported by Mr Goodall, for Galway Auckland, submitted that the originating application procedure was inappropriate to resolve any aspects of the proceeding that5 Lighter Quay is also in liquidation. For a discussion of Lighter Quay's role, see paras [17] and [18]below.6 High Court Rules, r 19.5(1).7 Ibid, r 19.14, applying r 9.74(3).involved contested facts. One example given was whether there were good commercial reasons for entering into the management and secretarial services agreements.[14] I accept Ms Cull's submission, in part. To the extent that the Court's inquiryis into the validity of the rules governing the Body Corporate, legal questions arise which can be determined by reference to the Act (including the default rules) and the actual rules adopted by the Body Corporate. However, if the enforceability of either agreement turned on questions of fact and degree that would need to be determined after hearing witnesses, it would be open for the Court to decline to provide any declaration on those issues, as a matter of discretion.8The structure of the Westin development[15] To understand the context in which the present application is brought, it is necessary to explain the structures that were put in place to enable the hotel business to operate.[16] The Westin Hotel is situated on the Viaduct Basin, in central Auckland. The freehold title to the land is owned by Viaduct Harbour Holdings Ltd (Viaduct). On 22 November 2006, that company entered into a ground lease of the land to Melview. Once it had obtained that lease, Melview was able to construct the hotel complex. When the unit plan was deposited,9 Melview obtained a stratum leasehold estate in respect of each of the units and became the Body Corporate.10[17] Melview entered into a sub-lease of each residential unit in favour of Lighter Quay (another McKenna entity) entitling that company to make the units available for use by a hotel operator. In turn, Lighter Quay granted rights in favour of WestinHotel Management LP, to use the premises under the "Westin" hotel brand. In return, Lighter Quay managed the hotel business.8 By analogy, in the context of a summary judgment application, see Russell Management Ltd v Body Corporate 341073 (2009) 6 NZ Conv C 194,699 (HC).9 See para [2] above.10 Unit Titles Act 1972, s 12(1).[18] Melview set about selling most of the leasehold interests in the units to individual investors, subject to the lease in favour of Lighter Quay. For present purposes, I assume (in favour of Galway and Galway Auckland) that before the investors decided to buy the units each obtained appropriate independent legal advice and had the opportunity to view the rules, the two challenged agreements and any other relevant documents that might have affected the interest each was acquiring.[19] There are 173 residential units in the Westin Hotel. Of those, Mr Low and his co-applicants own 114, or 66%. Melview retained ownership of 16 of theresidential units, as well as "management units", comprising facilities such as thehotel restaurant, gymnasium, spa and reception areas. In terms of unit entitlement,11Mr Low and his co-applicants control 55%, while Melview's combined ownership ofresidential and management units represents 24.2%.The scheme of the Act[20] The 1972 Act has been described as a "statutory moulding" of the Torrenssystem of land registration to provide for the ownership of flats and business premises.12 The three purposes that can be gleaned from the Long Title to the Act are:13a) Facilitation of the subdivision of land into units that are to be owned by individual proprietors;b) Facilitation of its subdivision into common property that is to be owned by all unit proprietors as tenants in common; andc) Provision for the use and management of the units and common property.11 Ibid, s 6.12 N R Campbell, G W Hinde and Peter Twist Principles of Real Property Law (LexisNexis, Wellington, 2007) at 858.13 Body Corporate 188529 v North Shore City Council [2008] 3 NZLR 479 (HC) at para [84].[21] The control, management, administration, use and enjoyment of units and common property shown on a unit plan, as well as the activities of the body corporate comprising the proprietors of those units, "while there are more proprietors than 1", are regulated by the applicable rules of the body corporate.14 Subject to any amendment, repeal or addition, the rules applicable to each body corporate are those set out in Schedules 2 and 3 to the Act.15 Schedule 2 rules are in issue, in this case.[22] There are statutory limitations on the ability to amend, add to or repeal any rule. Sections 37(5) and (6) of the Act state:37. Rules...(5) Any amendment of or addition to any rule shall relate to the control, management, administration, use, or enjoyment of the units or the common property, or to the regulation of the body corporate, or to the powers and duties of the body corporate (other than those conferred or imposed by this Act):Provided that no powers or duties may be conferred or imposed by the rules on the body corporate which are not incidental to the performance of the duties or powers imposed on it by this Act or which would enable the body corporate to acquire or hold any interest in land or any chattel real or to carry on business for profit.(6) No rule or addition to or amendment or repeal of any rule shall prohibit or restrict the devolution of units, or any transfer, lease, mortgage, or other dealing therewith, or destroy or modify any right implied or created by this Act.....[23] In World Vision of New Zealand Trust Board v Seal,16 I essayed a discussion of the scheme and purpose of the Act. I adopted much of that analysis in a subsequent judgment, Body Corporate 188529 v North Shore City Council.17 While the latter went on appeal to both the Court of Appeal18 and the Supreme Court,1914 Unit Titles Act 1972, s 37(1).15 Ibid, s 37(2). The way in which the default rules in Schedules 2 and 3 may be added to, amended or repealed are set out in para [3] above.16 World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 (HC) at paras [21]-[52].17 Body Corporate 188529 v North Shore City Council [2008] 3 NZLR 479 (HC) at paras [83]-[102].18 North Shore City Council v Body Corporate 188529 [Sunset Terraces] [2010] 3 NZLR 486 (CA).19 North Shore City Council v Body Corporate 188529 [Sunset Terraces] [2010] NZSC 158.nothing said in any of the judgments delivered in those Courts casts any doubt on my observations about the scheme of the Act.[24] The Act limits the circumstances in which rules may be changed both to protect those who purchase individual units and to allow for the fact that, in some cases, the interests of individual proprietors will diverge. For example, the latter may involve problems in a mixed use development,20 or, as here, the economic divergence of interests in the development and management of the hotel complex. Viewed in that context, the rules can be seen as creating a democratic framework by which all proprietors can make decisions about the way in which common property is managed.21[25] Because a body corporate is responsible for all common property (for example, through its obligations to insure all buildings22 and to keep the common property in a state of good repair23), unanimous agreement is required in respect of amendments to default rules which, otherwise, could be changed for the benefit of a simple majority of owners. Specific remedies are available in the event that some owners are acting unreasonably or to deal with situations in which the body corporate has become dysfunctional.24[26] The duties of a body corporate are set out in s15(1) of the Act. Relevantly, a body corporate must (a) carry out any duties imposed on it by the rules, (b) control, manage and administer the common property and (c) do all things reasonably necessary to enforce the rules.25 A body corporate has all powers "reasonably necessary" to enable it to carry out the duties imposed upon it by the Act and its rules.2620 For example, see World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 (HC) at paras [85] and [86].21 Ibid, at para [28].22 Unit Titles Act 1972, s 15(1)(b).23 Ibid, s 15(1)(f).24 Sections 40 (appointment of administrator), 42 (relief in cases where unanimous resolution required), 43 (relief for minority) and 46 (application to Court to dissolve body corporate and to cancel unit plan). See World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 (HC) at paras [43]-[52].25 Unit Titles Act 1972, s 15(1)(a) and (h).26 Ibid, 16.The ultra vires principle[27] Mr Skelton, for Mr Low, attacks certain rules on the basis that they are beyond the power of the Body Corporate. If particular rules were declared to beultra vires, it may follow that the Body Corporate had no power to enter into either the management or the secretarial services agreement, or both.[28] The ultra vires principle, in relation to bodies corporate, had its origins in company law. In particular, it was used to determine whether a company had power to enter into particular types of contracts. That was done at a time when the law restricted what a company could do in relation to the activities set out in thecompany's Memorandum of Association.27 While, in New Zealand, the ultra viresdoctrine no longer applies to companies,28 the principle continues to be applied to incorporated societies,29 Maori incorporations30 and bodies corporate under the Act.31 As to the latter, I agree with Stevens J's observation, in Body Corporate 201036 v Broadway Developments Ltd,32 that the principle does apply to a Body Corporate under the Act.[29] The rationale for the principle is that those dealing with a corporation have constructive knowledge of publicly available rules governing its activities and ought to be prevented from enforcing any contract that was entered into beyond the powers conferred by the relevant Act and rules.33 Cases involving contracting corporations, controlled by the same human being, will raise questions of actual knowledge.[30] In Bridgecorp Finance Ltd v Proprietors of Matauri X Incorporation,34Fisher J summarised the way in which the principle had been applied to companies,27 For example, under s 14(1)(b) of the (now repealed) Companies Act 1955; see also Cotman v Brougham [1918] AC 514 (HL) at 522.28 Companies Act 1993, ss 16, 17 and 18.29 Cabaret Holdings Ltd v Meeanee Sports and Rodeo Club Inc [1982] 1 NZLR 673 (CA).30 Bridgecorp Finance Ltd v Proprietors of Matauri X Incorporation [2004] 2 NZLR 792 (HC); [2008] 3 NZLR 193 (CA).31 Body Corporate 201036 v Broadway Developments Ltd HC Auckland CIV 2008-404-7966, 14 October 2009.32 Ibid, at paras [27]-[32].33 Section 19 of the Companies Act 1993 expressly states that the constructive notice doctrine no longer applies in that sphere.34 Bridgecorp Finance Ltd v Proprietors of Matauri X Incorporation [2004] 2 NZLR 792 (HC) at para [34].in holding that it continued to apply in respect of other bodies corporate. His summary is paraphrased below and was not the subject of any adverse comment when his judgment was taken on appeal:35a) If a company entered into a contract which was beyond the powers conferred upon it by its Memorandum of Association, the contract was void and could not be saved by the purported ratification of the company;36b) Subject to special issues relating to the indefeasibility of title under the Land Transfer Act 1952, securities given to protect a loan advanced pursuant to such a contract were also void since there was no contractual debt to secure;c) Under the doctrine of constructive notice, a lender was deemed to have knowledge of limitations in the company's objects;37d) Where objects of a company permitted a particular business activity, powers ancillary to that activity could be implied. Thus, a company had an implied power to borrow money and give security if the borrowing was properly incidental to the company's business and was not prohibited by the Memorandum;38 ande) Powers expressed to be independent objects of a company could, in some circumstances, be impliedly ancillary to the other objects in the Memorandum; a provision which is a power and not an object cannot, by inclusion in the Memorandum, be converted from a power into an object.3935 Bridgecorp Finance Ltd v Proprietors of Matauri X Incorporation [2005] 3 NZLR 193 (CA).36 Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653.37 Mahony v East Holyford Mining Co Ltd (1875) LR 7 HL 869 at 893.38 General Auction Estate and Monetary Co v Smith [1891] 3 Ch 432 and Re Badger [1905] 1 Ch 568.39 Introductions Ltd v National Provincial Bank Ltd [1970] Ch 199 at 210 (CA).[31] In Cabaret Holdings Ltd v Meeanee Sports and Rodeo Club Inc,40 the Court of Appeal confirmed that the effect of a lack of power to enter into a contract was that the agreement was void ab initio and was incapable of ratification by the members.41 Delivering the judgment of the Court in that case, Somers J said:42It is not difficult to see that cases may arise in which a company has fully performed its part of a contract into which it had no power to enter and that unless a remedy is afforded an injustice will result to the company. In this situation it has been suggested that resort may be had to other parts of the speeches in the Ashbury Railway Carriage case in which reference was made to the connection between the limitation of liability of members of a company and the limitation of the company's capacity to its expressed objects. The protection of shareholders, creditors and others doing business with the company require that its objects be openly stated in its memorandum and its capacity measured by the statements so made - see (1875) LR 7 HL 667, 678, 691. So Lord Parker of Waddington in Cotman v Brougham [1918] AC 514 said:". . . the statement of a company's objects in its memorandum is intended to serve a double purpose. In the first place it gives protection to subscribers, who learn from it the purposes to which their money can be applied. In the second place it gives protection to persons who deal with the company, and who can infer from it the extent of the company's powers" (ibid, 520).Those remarks both explain the course of the legislation and justify the approach of the Court to it. But it is also claimed that to prevent a company which has fully performed its part of a contract from enforcing the promise of the other contracting party is to stand the rules about ultra vires on their head.As a matter of abstract logic it is difficult to suppose that a contract which it is beyond the power of a company to make, which could have been enforced against the company, which the company could not (before its own performance) enforce against the other party can yet ground a cause of action because that which the company "agreed" to do has been done by it. To interpose a procedural rule that the third party may not plead ultra vireswhere the contract is wholly executed by the company (itself a matter of inquiry and sometimes difficulty) can hardly give life to that which was never born. On the other hand the implication of a promise by the other party arising from that which the company has done may stand differently.[32] An important distinction should be drawn between those cases in which a contract is void ab initio and unenforceable due to the corporation's lack of power to enter into it and the so called "indoor management rule". Under the latter, a person40 Cabaret Holdings Ltd v Meeanee Sports and Rodeo Club Inc [1982] 1 NZLR 673 (CA).41 Ibid, at 674, applying Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 HL 653 (HL) at 672, 673, 679, 688, 691 and 695.42 Ibid, at 675.dealing with a company is entitled to assume that the company's internalrequirements have been complied with and that its officers have acted within the limited of their own authority.43 There is a difference between having constructive notice of the powers conferred on a corporate body (whether by statute or publicly searchable rules) and assumptions that must be made about the scope of the authority granted to officers or employees of a company.[33] In order for the two agreements in issue to be declared unenforceable, the reason must be based on a finding that either the Body Corporate had no power to enter into the agreement or that a term of the agreement contravenes provisions of the Act, if the default rules have not been altered in compliance with s 37. For that reason, I deal first with the enforceability issue, by reference (in turn) to the management and secretarial services agreements.The Management Agreement(a) The relevant rules[34] Under the default rules, a body corporate has power to engage the services of a person or a company to manage the building on behalf of all owners. Rule 11(b) of Schedule 2 provides:11. Subject to any restriction imposed or direction given at a general meeting, the committee may—...(b) Employ for and on behalf of the body corporate such agents and servants as it thinks fit in connection with the control, management, and administration of the common property and the exercise and performance of the powers and duties of the body corporate:....43 Bridgecorp Finance Ltd v Proprietors of Matauri X Inc [2005] 3 NZLR 193 (CA) at [38]-[43].[35] In a large unit development, the engagement of a building manager will be essential, in order to carry out the duties conferred by s 15(1)(h) of the Act; the duty to control, manage and administer the common property.44[36] The relevant default rule is expressed differently in the Body Corporate'srules. Rule 2.3(k) of those rules purports to confer power on the Body Corporate to:(k) appoint and enter into an agreement with any person to provide for the management, control and administration of the Building, the Common Property, Units or any parts thereof and on such terms and conditions as may be agreed with such person and to delegate to such person such of the Body Corporate's powers and rights as itdeems necessary to enable such person to perform his duties properly and to pay a management fee per Unit for such services and recover the management fees pursuant to such agreement by levying contributions;[37] The management agreement was executed in reliance on r 2.3(k). By that agreement, Galway was engaged as building manager for a term of 10 years, from the date on which the hotel business began. An option was given for Galway to require the Body Corporate to enter into a new agreement, the term of which was also to be 10 years.(b) Competing submissions[38] For Mr Low, Mr Skelton submits that the management agreement must be declared void ab initio because:a) Rule 2.3(k) does not provide, in any way, for the third party agreement to be determinable by the Body Corporate. This is different to the rules in Chambers v Strata Title Administration Ltd,45which provided for the removal of a body corporate secretary by unanimous and special resolution. An agreement with a third party which does not allow the Body Corporate to remove the third party, other than for breach, is ultra vires the Act.44 Section 9 of the Unit Titles Act 1972 provides that common property is held by individual proprietors in shares proportional to their unit entitlement, calculated in accordance with s 6.45 Chambers v Strata Title Administration Ltd (2004) 5 NZ Conv C 193,864 (HC).b) The rules entrench the rights of the building manager under the management agreement; making it virtually impossible to terminate the agreement, except by unanimous resolution.c) The appointment of a building manager for 10 years, with a right to a further 10 years, at a fee of $173,000 is not, in accordance with s 37(5) of the Act, an exercise of a power which is "incidental to the performance of duties or powers imposed on the Body Corporate". Itis not reasonably necessary for a building manager to have a contract which locks in this fee for 10 years and which is not determinable by the Body Corporate, except for breach. The Body Corporate had no powers in the rules to enter into an agreement which infringes s 37(5) of the Act.d) The amended rule illegitimately fetters the discretion of the Body Corporate, in the way it exercises its powers of control, management and administration under the Act.46 These powers have been delegated (improperly) to the building manager.[39] In summary, Mr Skelton's contention is that the Body Corporate had no express power under the Act either to enter into the management agreement, to bind itself to a lengthy term, or, otherwise, to delegate its powers or duties to a third party.[40] In opposition, Ms Cull QC, for Galway, submitted that Mr Low's challengesto the management agreement focus on the terms of the agreement rather than the rules pursuant to which they were entered into. She emphasised that the management agreement was entered into pursuant to a rule that is not challenged: r 2.3(k).47 She submitted that, for all material purposes, r 2.3(k) mirrors the default rule set out in Schedule 2 of the Act.4846 Unit Titles Act 1972, s 15.47 Set out at para [36] above.48 Schedule 2, r 11(b), set out at para [34] above.(c) Analysis[41] Rule 2.3(k) of the Body Corporate's rules49 authorises the Body Corporate to enter into an agreement with any person in relation to the management, control andadministration of the "Building, Common Property, Units or any parts thereof". Further, the Body Corporate may enter into such an agreement "on such terms and conditions as may be agreed" with the other contracting party. In doing so, the Body Corporate is entitled "to delegate to such person such of the Body Corporate'spowers and rights as it deems necessary to enable such person to perform his dutiesproperly and to pay a management fee per unit for such services ". The BodyCorporate is also authorised to levy unit owners to pay management fees.[42] Rule 2.3(k) has not been challenged. The question is whether r 2.3(k) in its amended form created a power to enter into the management agreement.[43] The primary issue is whether entry into an agreement for a period as long as 10 years (with an option of a further 10 years to be exercised solely by the manager) were terms to which the Body Corporate could bind subsequent individual proprietors. In broad terms, the Body Corporate has appointed Galway to perform"Building Management Duties" as defined, for the term and the consideration to which the agreement refers.[44] The "Building Management Duties" are not expressed in unequivocal terms but, rather, as a duty on Galway to "use all reasonable endeavours" to perform thefunctions to which cl 3.1 of the management agreement refer. Nothing in the agreement is said to impose any obligation on Galway either to institute any proceedings in any Court of competent jurisdiction or itself to perform any duty of a technical or specialist nature outside the scope of its skill and expertise. Clause 3.3 of the management agreement states:3.3 If [Galway] has used all reasonable endeavours to carry out the Building Management Duties the Manager will have satisfied its obligations under this agreement.49 Set out at para [36] above.[45] Dealing with the Body Corporate's obligations, cl 4.1 of the management agreement provides:4 Duties of the Body Corporate4.1 The Body Corporate must:(a) provide the Manager with copies of all documents necessary to enable the Manager to perform its Building Management Duties including current copies of the Rules, current plans or any other document identifying the location and character of any services or amenities installed or erected on Common Property;(b) do all things necessary to ensure that the Common Property ismaintained in accordance with the Act and the Body Corporate's obligationsunder the Act;(c) effect all necessary service agreements for equipment normally the subject of a service agreement;(d) provide (or reimburse) the Manager for all materials and parts used or supplied in carrying out the Schedule Works;(e) appoint a Body Corporate Representative;(f) do all things necessary to ensure that the Common Property and the Building is maintained in accordance with any statutory or regulatory requirement or any requirement of a Relevant Authority; and(g) provide the Manager with details of any arrangement agreed by the Proprietor of a Retail Unit for the use of a carparking accessory unit attached thereto by the staff or patrons of any business being conducted therefrom.[46] Clause 4.2 purports to prohibit the Body Corporate from employing or contracting with any other person to perform any duty or to provide any service thatGalway is "primarily entitled to perform or provide under" the managementagreement. Further, the Body Corporate purports to bind itself not to "pass anyresolution varying or rescinding (or purporting to vary or rescind) Rule 2.3(k) of" its rules.[47] The provisions dealing with the management fee required the Body Corporate to pay, in the first year of the term, $1000 per unit per annum, plus GST. Any subsequent review was to be adjusted to the higher of a fixed percentage (3%) or one calculated on a specific formula.[48] Clause 32.1 of the agreement provides for the possibility that particular terms might be declared invalid or unenforceable, by permitting severance of such terms from the balance of the conditions in the agreement:32.1 If any provision of this agreement or the application thereof to any person or circumstance is or becomes invalid or unenforceable, the remaining provisions shall not be affected by that event and each provision shall be valid and enforceable to the fullest extent permitted by law.[49] The Schedule 2 default rules refer to obligations of a committee of a Body Corporate. A committee is appointed where there are more than three proprietors.50Until the first Annual General Meeting of the Body Corporate the proprietors of all units constitute the committee.51 Accordingly, the rules that deal with a committee's powers applied to Melview at the time it was sole proprietor.[50] Rule 11 of Schedule 2 lists powers devolved to a committee by the Body Corporate. The democratic nature of the framework by which the Body Corporate acts is reinforced by the opening words to r 11: namely, that the powers conferred onthe committee by that rule are "Subject to any restriction imposed or direction given at a general meeting" of the body corporate. That qualification reflects the need forall proprietors to oversee the activities of the committee and, if appropriate, to direct that certain functions be carried out by the Body Corporate as a whole (rather than its committee) as a check against inappropriate use of a delegated power. By its nature, that oversight must occur before the committee exercises a delegated power. So, it has no retrospective application to an agreement of this type.[51] Subject to that particular oversight, a committee has power to employ "suchagents and servants as it thinks fit in connection with the control, management and administration of the common property, and the exercise and performance of thepowers and duties of the body corporate". That power is conferred in general terms. It provides a wide operational discretion.50 Unit Titles Act 1972, Schedule 2, r 4.51 Ibid, r 5.[52] The terms of cl 4.4 of the management agreement52 suggests that those responsible for preparing and executing the management agreement recognised that the precise terms of r 2.3(k) were sufficiently different from the powers conferred by r 11 of Schedule 2 to require insertion of a provision forbidding the Body Corporate from purporting to vary or rescind that power. That must be seen in the context of an agreement between the Body Corporate (through one McKenna company) with Galway (another McKenna company).53[53] To the extent that the rules and the management agreement purport to remove or limit the right of an individual proprietor to deal with his or her own unit, those provisions must, in my view, be ultra vires.[54] First, the rules are designed (among other things) to enhance "enjoyment" ofindividual units and common property.54 A rule that purports to bind an individual proprietor to a state of affairs in which he or she has lost control over his or her own property is contrary to the scheme of the Act.55[55] Second, even if there were power under the Act for the Body Corporate to regulate the way in which individual units were managed or otherwise dealt with by their proprietors, for the purposes of the proviso to s 37(5), any amendment to theSchedule 2 rules could not be seen as "incidental to the performance of the duties orpowers imposed" on the Body Corporate by the Act because those powers arerestricted to common property and other aspects of the common good.[56] For similar reasons, it was (effectively) conceded that the "Letting Service Rights" purportedly conferred on Galway were ultra vires because they conflicted with the ability of the owner of the unit to determine the arrangements he or she wished to make for tenanting the property.52 Set out at para [52] above.53 See para [5] above.54 Unit Titles Act 1972, s 37(1).55 The right of individual owners to deal with their property as they think fit and the obligation of the Body Corporate to deal with all common property: see Body Corporate 188529 v North Shore City Council [2008] 3 NZLR 479 (HC) at paras [96]-[98].[57] Mr Skelton submitted that the Body Corporate's power to enter into amanagement agreement with a third party was qualified. He submitted that every power conferred by the rules of the Body Corporate must be measured against thetest of whether it was "reasonably necessary" to enable the Body Corporate to discharge its duties under the Act.56[58] With respect, that overlooks the opening words of s 16 of the Act. That section provides:16. Powers of body corporateSubject to the provisions of this Act, the body corporate shall have all such powers as are reasonably necessary to enable it to carry out the duties imposed on it by this Act and by its rules:Provided that the body corporate shall not have power to carry on any trading activities. (my emphasis)[59] It is implicit in s 16 that the powers conferred on the Body Corporate bydefault rules in Schedule 2 are "reasonably necessary". Otherwise, those powers(being part of the provisions of the Act) would not have been expressed as they are. In my view, if an actual rule creates (in material terms) the same powers as one of the default rules, it must be regarded as something "reasonably necessary" to enablethe Body Corporate to carry out its duties.[60] The question whether the Body Corporate had power to enter into a management agreement with Galway for the duration and consideration to which the agreement refers must be determined by reference to any material differences between r 2.3(k) and r 11(b) of Schedule 2.57[61] Rule 11(b) entitles a Body Corporate to employ an agent in connection with"the control, management, and administration of the common property, and theexercise and performance of the powers and duties of the Body Corporate". Oneissue is whether the control, management and administration of common property is disjunctive from the exercise and performance of other powers and duties of the Body Corporate; or, whether the words "exercise and performance of the powers and56 Unit Titles Act 1972, s 16.57 Those rules are set out at paras [34] and [36][36] above.duties of the Body Corporate" refer back to control, management and administrationof common property only.[62] In my view, those powers and duties to which r 11(b) refers are limited to control, management and administration of common property. A construction to the contrary would render otiose the ability of the committee to delegate to one or more of its members such of its powers and duties as it thinks fit and to revoke that delegation at any time.58 The point is that the power of delegation must be to a member of the committee (or to one of the proprietors where there are three or less), while the power to employ an agent for building management purposes necessarily extends to outsiders. I consider that the power of delegation, both to outsiders and members of the Body Corporate, is informed by r 11(d) of Schedule 2 by which the committee retains the right, at any time, to revoke its delegation to members.[63] The ability of the Body Corporate to place restrictions on the powers of the committee or give a particular direction in that regard can only be applicable prior to the agreement being entered into. That is consistent with r 4 of Schedule 2 which makes it clear that, in cases involving more than three proprietors, the statutory delegation of functions to a committee remains subject to the same type of"restriction imposed or direction given at a general meeting of the body corporate".At the time that the management agreement was entered into, Melview was both the Body Corporate and the committee. It did not place any restrictions on the ability to enter into contracts with third parties in relation to the management of the building.59[64] It follows that the reasonableness of the length of the term of the agreement and the fees payable to Galway under it were things that Melview could legitimately decide and carry into execution pursuant to a power sufficiently resembling that contained in r 11(b) of Schedule 2. Subsequent proprietors cannot, in my view, now complain about the terms of the management agreement into which the Body Corporate entered, at Melview's instigation. Each subsequent purchaser had the right to call for any building management agreement to consider its terms. If, after taking advice, intended purchasers elected to proceed, they were bound by its terms.58 Unit Titles Act 1972, Schedule 2, r 11(d).59 Ibid, Schedule 2, r 5.Their remedy, if they did not like the terms of the agreement, lay in their own hands: there was no compulsion for them to buy a unit.[65] In my view, there is no material difference between the power to enter into a management agreement conferred by r 11(b) of Schedule 2 and r 2.3(k) of the actual rules. Each permits the Body Corporate to enter into an agreement on such terms as it thinks fit.[66] In those circumstances, it was open to the Body Corporate to enter into the management agreement. There is no basis to declare that the management agreement is wholly unenforceable. Questions involving individual rules that touch on the terms of the management agreement are considered later.60The Secretarial Services Agreement(a) The relevant rules[67] Rule 30 of Schedule 2 is the default rule dealing with the appointment of a secretary for the Body Corporate and the circumstances in which that appointment may be terminated. Rule 30 must be read in conjunction with the functions of the secretary, as described in Schedule 2. Rules 30, 31, and 31A of Schedule 2 provide:30. A secretary (who may or may not be a proprietor) shall be appointed by the body corporate at its first annual general meeting for such term, at such remuneration, and upon such conditions as it may approve; and any secretary so appointed may be removed by the body corporate, either at a subsequent annual general meeting or at an extraordinary general meeting called for that purpose. At any such meeting the secretary shall have the right to attend and be heard.31. The function of the secretary shall be to keep proper books of account in which shall be kept full, true, and complete accounts of the affairs and transactions of the body corporate and to carry out such other functions as may from time to time be delegated to him by the body corporate.31A. The secretary shall in each year prepare a statement of financial position showing the body corporate's financial dealings during that60 See paras [86]-[90] below.year, and shall, within 6 months after each annual general meeting, send a copy of the latest balance sheet to every proprietor.[68] Rule 30 was amended by r 2.3(l), by which the Body Corporate was given power to(l) appoint and enter into an agreement with any person to provide body corporate management and body corporate secretary services on such terms and conditions as may be agreed with such person and to delegate to such person such of the Body Corporate's powers andrights as it deems necessary to enable such person to perform his duties properly and to pay to such person a body corporate services fee per Unit and recover such fee pursuant to such agreement by levying contributions.[69] The term of the secretarial services agreement was one of 10 years, from the opening date of the hotel business, with a right of renewal for a similar period on terms akin to those found in the management agreement. In addition, the secretary with which the Body Corporate contracted (Galway), was entitled to assign or subcontract its interest under the agreement. Clause 15 provided:15. Assignment/Subcontracting15.1 The Body Corporate Secretary shall not be required to obtain the consent of the Body Corporate to assign or subcontract its interest under this Agreement to Melview Viaduct Harbour Limited or any Related Company or Related Party of Melview Viaduct Harbour Limited or to any entity which joins or replaces the Body Corporate Secretary as trustee of the Galway Trust.15.2 Any assignment subsequent other than that contemplated by clause 15.1 shall require the consent of the Body Corporate which consent the Body Corporate undertakes shall not be unreasonably or arbitrarily delayed or withheld.15.3 Upon an assignment in accordance with this clause 15 the Body Corporate Secretary shall be released and discharged absolutely from any further liability under this Agreement but without prejudice to the rights and remedies of either party arising in respect of any matter or thing occurring prior to the date of the assignment.15.4 The Body Corporate Secretary may subcontract with a third person to observe and perform some or all of the obligations of the Body Corporate Secretary under this Agreement but without releasing the Body Corporate Secretary from observing or performing the obligations of the Body Corporate Secretary under this Agreement.(b) Competing submissions[70] The challenges to the secretarial services agreement can be distilled to three grounds:(a) Rule 2.30 omits the proviso in the equivalent default rule 30,61 which provides that a secretary may be removed at a general meeting of proprietors called for that purpose.(b) An agreement that appoints a secretary on terms that permit the Body Corporate to terminate the secretarial services agreement only for non- performance is ultra vires.(c) That appointment of a secretary for a ten year term with a right of renewal of ten years, at a fixed rate, is ultra vires .[71] Ms Cull, for Galway, observes that there is no challenge to r 2.3(l), which empowers the Body Corporate to enter into an agreement of this type.62 With reference to the alleged failure to comply with default r 30, Ms Cull submits:a) Rule 30 of Schedule 2 is a default position. It is no more than one way of providing for a particular service to be carried out.b) The Act requires a secretary to be appointed but does not prescribe, in a mandatory fashion, the method by which such secretary may be removed. There is no issue of vires in relation to a secretarial servicesagreement that prevents removal of the secretary "other than for non-performance".c) The threshold for the removal of a commercial secretary is much lower under the amended Rule. For a commercial complex such as the Westin Hotel, the notice provisions for breach are onerous on the Secretary.61 Unit Titles Act 1972, Schedule 2, r 30.62 Rule 2.3(l) is set out at para [68] above.d) Under the agreement, a professional Body Corporate secretary has no voting rights at a meeting convened by the Body Corporate to terminate the secretarial services agreement under r 2.30 of the Rules and cl 16 of the services agreement. This is contrasted with a residential proprietor who happens to be the Body Corporate Secretary, who will have voting rights under r 30 of Schedule 2 to the Act.[72] Ms Cull submits that the circumstances in which rules were declared ultra vires in Body Corporate 318556 v Strata Title Administration Ltd63 and Chambers v Strata Title Administration Ltd,64 are distinguishable from the present case.[73] Mr Goodall, for Galway Auckland, adopted, in general terms, the submissions made by Ms Cull. There is no need to refer separately to his submissions.(c) Analysis[74] Rule 30 of Schedule 265 contains the following elements:a) The Body Corporate must appoint a secretary at its first Annual General Meeting;b) The length of the appointment, the remuneration the secretary will receive and other terms of the contract must be approved by the Body Corporate;c) Any secretary so appointed may be removed by the Body Corporate at a subsequent Annual General Meeting or any Extraordinary General Meeting called for that purpose; and63 Body Corporate 318556 v Strata Title Administration Ltd (2009) 10 NZCPR 136 (HC).64 Chambers v Strata Title Administration Ltd (2004) 5 NZ Conv C 193,864 (HC).65 Set out at para [67] above.d) At any meeting called for the purpose of removing the secretary, the secretary has the right to attend and to be heard.[75] A secretary is engaged to carry out general administrative functions and to undertake such other functions as may, from time to time, be delegated to it by a Body Corporate.66 For a body corporate to which the default rules apply, in the absence of an express delegation, the secretary acts as an administrative functionary who relieves individual proprietors from the need to concern themselves with those activities that fall within rr 31 and 31A of Schedule 32.67[76] In Body Corporate 318566 v Strata Title Administration Ltd,68 I said:[27] The intention of r 30 of the default rules is clear. It is for the Body Corporate, at a general meeting, to determine who to appoint as its secretary and the terms on which the secretary will be engaged. The Body Corporate may remove the secretary, at any subsequent general meeting called for that purpose. Understandably, because of the possibility of dissatisfaction among particular owners being spread through rumour or innuendo, the secretary has a right to attend such a meeting and to be heard before any vote is taken as to removal.[77] At a time when Melview was the sole proprietor, the Body Corporate amended r 30 of Schedule 2 by promulgating r 2(3)(l).69 In contrast to the elements of r 30 of Schedule 2,70 r 2.3 may be reduced to the following:a) The Body Corporate may enter into an agreement with any person to provide secretarial services, including those relating to corporate management;b) The terms and conditions of any such agreement are to be determined by the Body Corporate and the person with whom it contracts;66 Unit Titles Act 1972, Schedule 2, r 31.67 Body Corporate 318566 v Strata Title Administration Ltd (2009) 10 NZCPR 221 (HC) at paras [32] and [33].68 Ibid, at para [27].69 Set out at para [68] above.70 Set out at para [74] above.c) The Body Corporate may delegate to the person appointed "such ofthe Body Corporate's powers and rights as it deems necessary to enable" that person to perform the contractual duties properly; andd) The Body Corporate is required to pay a services fee, on a per unit basis, with that fee to be met from contributions levied against each owner.[78] The material differences between the default rule and the actual rule are:a) The ability to remove a secretary at an Annual General Meeting or any Extraordinary General Meeting called for that purpose has been eliminated.b) The powers of delegation, at first blush, go beyond those contemplated by the default rules.71 Rule 3172 is focussed on thesecretary's obligation to keep proper books of account and to carryout such other functions as may from time to time be delegated by the body corporate. Read in context with the obligations set out in default r 31A,73 the obligations cast on the secretary go further than what I described in Body Corporate 318566 v Strata Title Administration Ltd.74c) The actual rule requires the fee to be paid on a "per unit" basis, asopposed to such consideration as may be appropriate for the level of services actually performed by the secretary.[79] Unlike the power to appoint a manager in connection with the commonproperty, the secretary's obligations involve a degree of stewardship over the finances of the Body Corporate. On whatever legitimate terms a secretary has been appointed by a Body Corporate (even at a time when the developer alone constituted71 Unit Titles Act 1972, Schedule 2, r 31.72 Set out at para [68]above.73 Set out at para [67] above.74 Body Corporate 318566 v Strata Title Administration Ltd (2009) 10 NZCPR 221 (HC) at para [27]; set out at para [76] above.that body), the proprietors who subsequently acquire title to individual units are those from whom, from time to time, payment is levied. It is those proprietors "for the time being of all the units comprised in the unit plan" who comprise the body corporate.75 Membership is fluid.[80] In that context, the ability to remove a secretary at will, at an Annual General Meeting or Extraordinary General Meeting, can be seen as an important power designed to enable the individual proprietors to protect their financial interests. While, in the case of the management agreement, I held that it was open to the Body Corporate to contract on such terms as it thought fit, the power to enter into a secretarial services agreement is not so widely expressed in r 30 of Schedule 2. The default rule contemplates that a secretary appointed by a body corporate at the first Annual General Meeting on such terms and conditions as it may approve, may still be removed at a subsequent general meeting by resolution of the proprietors who, at that time, make up the body corporate.[81] That view is consistent with those I expressed in Body Corporate 318566 v Strata Title Administration Ltd,76 to which I adhere. There is a need for the Body Corporate to delegate in express terms those functions to be performed by the secretary that go beyond its acts as an administrative functionary.77 No such express delegation was made. Instead, the Body Corporate purported to authorise, byagreement, "such of the Body Corporate's powers and rights as it deems necessary to enable such person to perform his duties properly".[82] In terms of s 37(5) of the Act, it is necessary to consider whether the amendments to default r 30 are "incidental to the performances or duties or powers imposed on it by [the] Act". In Velich v Body Corporate 16498078, the Court of Appeal, per William Young J, said:[31] At the time rule 2.1(f) was adopted, there was no rule in place which required the body corporate to carry out the functions contemplated by rule 2.1(f) to the extent that they go beyond those required by default rule 1(f). So rule 2.1(f) expanded the powers and duties of the body corporate and75 Unit Titles Act 1972, s 12(2).76 Body Corporate 318566 v Strata Title Administration Ltd (2009) 10 NZCPR 221 (HC)77 Ibid, at para [33].78 Velich v Body Corporate 164980 (2005) 6 NZCPR 143 (CA) at para [31].further, did so appreciably. A rule which appreciably expands the existing powers and duties of the body corporate (as rule 2.1(f) purports to do)cannot fairly be regarded as merely "incidental" to those existing powers and duties.[83] Similarly, in Chambers v Strata Title Administration Ltd,79 Paterson J held, in the context of default r 30, that a power to appoint a management company or professional manager on terms which required such an appointment to be terminatedonly by unanimous resolution of the proprietors was not "incidental to the performance of the duties or powers imposed on the Body Corporate by the Act", interms of the proviso to s 37(5). Paterson J said:[44] Rule 9(f) imposing a power, falls within the amending provisions of s 37(5). It adds or amends the original power in the statutory rules. As such, it will be outside the powers of amendment given to the Body Corporateunless it is "incidental to the performance of the duties or powers imposedon the body corporate by the Act." "Incidental" as used in this contextmeans, in my view, naturally attached to, or arising from, or naturally appertaining to any of the duties and powers set out in the Act. I cannot see that the appointment of a professional manager which can only be terminated by a unanimous resolution of the proprietors is incidental to the performance of any of the duties or powers imposed on the Body Corporate by the Act. A power as defined in the Act is something reasonably necessary to carry out the duties imposed on the Body Corporate. It is not reasonably necessary for a secretary to have a contract that can only be terminated by a unanimous resolution.[84] To adopt the test applied by Paterson J in Chambers: is it reasonably necessary for a secretary to have a contract that removes the ability of those who comprise the body corporate to terminate the secretary's appointment at a generalmeeting?[85] In my view, there is no reason why a secretary should be appointed on suchterms. An important aspect of the owners' oversight of financial matters of concernto them is removed by revocation of that particular part of default r 30. I hold that it was not open to revoke that part of default r 30 that empowers a general meeting to consider removal of a secretary; especially in circumstances where (under default r 30) the secretary is given an express right to attend and to be heard on the proposed removal.80 Because the amended rule gave power to the Body Corporate to enter79 Chambers v Strata Title Administration Ltd (2004) 5 NZ Conv C 193,864 (HC).80 See also Body Corporate 318566 v Strata Title Administration Ltd (2009) 10 NZCPR 221 (HC) at para [27]; set out at para [76] above.into a secretarial services agreement on terms that excluded the general meeting'spower to remove, the secretarial services agreement was entered into ultra vires and is unenforceable.Are other rules ultra vires?[86] I deal in turn with specific rules that remain in issue. They are rr 2.2(j), 2.10(c), 2.30 and 2.69. Although counsel for Mr Low also seeks to challenge r 2.13(f), that was not in issue on the present application and I am not prepared to rule on it in the absence of full submissions from Galway and Galway Auckland. Therefore, no decision is made in respect of r 2.13(f).[87] Rule 2.2(j) requires an individual proprietor to "take all steps and do allthings as shall be lawful and necessary to comply with the provisions of the Building Management Agreement". Having regard to my finding that the managementagreement is enforceable, there can be no objection to a rule that requires an individual proprietor to take steps necessary to comply with the terms of the agreement. One exception to that general principle relates to the "Letting Services Rights" purportedly granted in favour of Lighter Quay by cl 11 of the management agreement. Galway does not oppose a declaration that the rule conferring power for the Body Corporate to enter into an agreement permitting such rights to be given wasultra vires. I propose to direct that cl 11 of the management agreement be severed from the balance of the agreement, for reasons I express later.81[88] Rule 2.10(c) is found within that part of the rules that deals with a committeeof the Body Corporate. The rule requires all matters "other than those which are minor or administrative in nature, to be determined by a majority vote". The rule goes on to clarify that "matters which have been delegated to the Building Managerunder the Building Management Agreement" fall within the rubric of matters which are "minor or administrative in nature". Having regard to my finding on the validityof the management agreement, there is no basis on which r 2.10(c) can be regarded as ultra vires.81 See paras [91]-[95] below.[89] Rule 2.69 deals with the role of the building manager. It provides:2.69 Building Manager: The Building Manager may at its sole discretion assign, subcontract or appoint an agent to perform any or all of its duties and/or to exercise of all of its powers under these Rules. To the extent of such subcontract, appointment or agency, these Rules shall apply to the subcontractor, appointee or agent as if it was the Building Manager.[90] In my view, r 2.69 is ultra vires. The power to appoint a building manager, conferred by r 2.3(k) of the rules entitles the Body Corporate to enter into an agreement with a specified person. The default rules do not contemplate the ability of the person with which the Body Corporate contracts having a discretion to assign, subcontract or appoint an agent, without consent from the Body Corporate, to perform any or all of the duties or powers cast on the building manager by the rules. Applying the test articulated by Paterson J in Chambers v Strata Title Administration Ltd,82 it is not reasonably necessary for a building manager to have a contract that incorporates powers of delegation of obligations such as that. For that reason, r 2.69 is ultra vires. It follows that cl 13.1 of the management agreement is unlawful and unenforceable, in its present form. However, I am prepared to amend cl 13.1 and 13.2 and treat the offending provisions as severable from the balance of the terms.83Severance of terms[91] The secretarial services agreement has been held to be unenforceable. Thus, no question of severance of terms arises. The management agreement is in a different category. It is necessary to consider whether specific terms of the management agreement that reflect rules I have held to be ultra vires should be deleted and severed from the balance of the agreement.84[92] The question of severance was raised for the first time in a memorandum filed by Mr Skelton in reply, pursuant to leave reserved by me, in relation to the form of orders sought. Mr Skelton maintained his primary position that the82 Chambers v Strata Title Administration Ltd (2009) 10 CPR 221 (HC) at para [44]; set out at [83]above.83 See paras [91]-[95][95] below.84 See r 32.1 of the management agreement, set out at para [48][48] above.agreements are void ab initio but, as a fallback position, suggested severance and deletion of offending provisions.[93] I did not hear any significant argument on the question of severance. However, the principles are relatively straight forward. They were summarised by the Privy Council in Carney v Herbert,85 by reference to a test postulated by Jordan CJ in McFarlane v Daniell:86When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without alteringits nature . If the elimination of the invalid promises changes the extentonly but not the kind of the contract the valid promises are severable . Ifthe substantial promises were all illegal or void, merely ancillary promises would be inseverable.[94] The most helpful authority is that of the High Court of Australia, inHumphries v Proprietors of "Surfers Palms North" Group Titles Plan 1955.87 In that case, a body corporate had purported to amend statutory rules so as to provide it with the power to enter into a management agreement with a third party. The agreement contained terms relating to letting services that the Court held were notincidental to the body corporate's statutory duties or powers. As a result, those ruleswere declared ultra vires and unenforceable. The question was whether the whole of the management agreement was invalid or whether the provisions relating to letting services could be severed from it. On the particular facts of that case, the Court held that the whole of the agreement was unenforceable. A useful discussion of the principles applicable to a severance argument in a case of this type can be found in the judgment of McHugh J.88[95] In my view, the provision for letting services and assignment were not so material that they cannot be severed from the balance of the contract. In some ways, the procedure adopted in this case may well have assisted Galway, in that regard. The way in which McHugh J considered severability in Humphries was whether the85 Carney v Herbert [1985] AC 301 (PC) at 311.86 McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345.87 Humphries v Proprietors of "Surfers Palms North" Group Titles Plan 1955 (1994) 179 CLR 597 (HCA).88 Ibid, at 618-622.provision of the letting service was so material and important a part of the bargain between the parties that the body corporate would not have agreed to pay the consideration agreed without that service being provided. There is no evidence on that topic. In the absence of evidence, I am not prepared to make a finding that goes against the interests of Galway.Result[96] I make the orders set out in the Appendix to this judgment, to give effect to my conclusions. The orders shall lie in Court until 5pm on 2 March 2011 to give counsel the opportunity to check whether there are any errors or whether other directions should be made. The form of amended rules (to which Order 7 refers) shall be agreed among counsel or otherwise determined by the Court before the order is sealed.[97] If a memorandum were filed, the Registrar shall convene a telephone conference before me as soon as practicable thereafter and the orders will continue to lie in Court. If no memorandum were filed by that time and the amended rules have been agreed, the orders may be sealed by the Registrar.[98] Costs are reserved. Given that Mr Low has been successful in relation to the alleged invalidity of the secretarial services agreement but unsuccessful in relation to the management agreement, it is preferable that I hear from counsel on costs.[99] The Registrar is directed to convene a telephone conference before me at 9am on the first available date after 28 March 2011. Prior to that conference:a) Counsel for Mr Low shall file and serve a memorandum as to costs. This memorandum shall be filed and served on or before 4 March 2011.b) Counsel for Galway and Galway Auckland shall each file and serve a memorandum responding to that of counsel for Mr Low. This memorandum shall be filed and served on or before 18 March 2011.c) Counsel for Mr Low may file and serve a memorandum in reply. This memorandum shall be filed and served on or before 25 March 2011.[100] I apologise for the delay in delivering this judgment. While there are good reasons, I am conscious that the parties would (not unreasonably) see them as excuses. Parties can (and do) regard their litigation as the most important case with which the Judge is dealing. I am acutely aware of the particular difficulties affecting this development and would have preferred to give judgment earlier, had that been practicable.[101] I thank counsel for their assistance._______________________P R Heath JDelivered at 4.30pm on 21 February 2011.Solicitors:Anderson Creagh Lai, PO Box 106-740, AucklandGilbert Walker, PO Box 1595, Shortland Street, AucklandGreenwood Roche Chisnall, PO Box 25501, WellingtonMinter Ellison, PO Box 3798, AucklandCounsel:P G Skelton, PO Box 4314, Shortland Street, AucklandH Cull QC, PO Box 5947, WellingtonJ K Goodall, PO Box 1778, Shortland Street, AucklandAPPENDIXTHIS COURT ORDERS:1. The following Rules of Body Corporate 384911 are ultra vires the UnitTitles Act 1972 ("Act"):(a) Rule 2.1(f),(h),(i),(k)(i) & (iii), (l), (m), (n)(i)&(ii), (p), (r), (u), (v),(ff),(gg),(hh),(ii),(jj)(ii).(b) Rule 2.2(k)(c) Rule 2.3 (d), m), (n)(d) Rule 2.5 (c)(e) Rule 2.6 (b) & (c)(f) Rule 2.7 (c)(g) That part of Rule 2.8 which provides "and one member representing the Hotel Operator"(h) Rule 2.30(i) Rule 2.32(j) Rule 2.33(k) Rule 2.34(l) Rule 2.42(m) Rule 2.43(n) Rule 2.44(o) Rule 2.55(p) Rule 2.57(q) Rule 2.65(r) Rule 2.68(s) Rule 2.69(t) Rule 3.272. The modification of the rules provided for in Schedule 2 to the Act by deleting rule 12(f) of Schedule 2 to the Act is ultra vires the Act.3. Any grant of Letting Services Rights by Body Corporate 384911 to the Proprietor of Unit H9 and/or Lighter Quay Management Limited (In Rec & In Liq) is void ab initio it having been entered into by Body Corporate 384911 ultra vires its powers under the Act.4. The Building Management Agreement dated 15 May 2007 between the Body Corporate and Galway Property Services Ltd is declared valid and enforceable save that:(a) Clause 11 of the agreement is deleted in its entirety from the balance of the terms on the grounds that the rule pursuant to which the Letting Service Rights were granted is ultra vires the Body Corporate'spowers(b) Clause 13.1 and 13.2 are deleted from the agreement on the grounds that the rule pursuant to which they were agreed is ultra vires the Body Corporate.(c) Clause 3.14 and part of clause 3.2 are deleted from the agreement and severed from the balance of the terms. The valid portion of clause 3.2 that shall remain must read:The Manager shall obtain the consent of the Body Corporate to any assignment or subcontracting of its interest under this agreement. The Body Corporate undertakes not to withhold consent unreasonably or arbitrarily.5. The Body Corporate Services Agreement dated 15 May 2007 between the Body Corporate and Fourth Respondent and as assigned to the FifthRespondent ("Secretary Agreement") is void ab initio having been entered into by the Body Corporate ultra vires its powers under the Act.6. The following rules in Schedule 2 to the Act shall apply in replacement of the ultra vires rules:(a) Rule 1(f) Schedule 2 to the Act(b) Rule 3(d) Schedule 2 to the Act(c) Rule 12(f) Schedule 2 to the Act(d) Rule 30 Schedule 2 to the Act7. The Rules of the Body Corporate 384911, after giving effect to these orders, shall (until otherwise modified, amended or revoked in accordance with theAct), be the Rules attached to this Order and marked "A". [Form of Rules to be agreed among counsel or otherwise be determined by the Court].8. Costs reserved.