JEWETT INVESTMENTS LTD V BODY CORPORATE 204096 HC AK CIV-2010-404-4236

JEWETT INVESTMENTS LTD V BODY CORPORATE 204096 HC AK CIV-2010-404-4236 1 December 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-4236BETWEEN JEWETT INVESTMENTS LIMITED Plaintiff AND BODY CORPORATE 204096 Respondent Hearing: 30 November 2010 Appearances: F R Barton and S Corban for the Plaintiff S Eden for the Respondent Judgment: 1 December 2010RESERVED JUDGMENT OF ELLIS JThis judgment was delivered by me on 1 December 2010 at 2.00 pm, pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar Solicitors: Hesketh Henry, Private Bag 92093, Auckland 1142 Shieff Angland, PO Box 2180, Auckland 1140[1] The Castle Glade apartment complex has suffered from weather-tightness problems for a number of years. The damage to the units in the complex was significant and costly to repair. [2] Legal action was initiated and funded by the Castle Glade Body Corporate and most of the proprietors of the Castle Glade units. Amongst the named defendants in that proceeding was the plaintiff in this proceeding, Jewett Investments Limited ("Jewett"). Jewett was sued for breach of vendor warranties. Jewett also owned two of the Castle Glade units but did not participate in the proceedings as a plaintiff. [3] Whilst the leaky building proceeding was on foot, the costs of repairs to the complex was met from levies set by the Castle Glade Body Corporate and paid by all proprietors of the units on a pro rata basis. Jewett paid its share of the levies in relation to the two units owned by it. [4] The present proceeding arises out of a recent resolution made by the Body Corporate to impose a further $4,300,000 levy to fund the final stage of the remediation of the Castle Glade complex. Jewett's share of that levy would be $122,120. Jewett contends that the decision to impose the levy was ultra vires because it contravenes s 15 of the Unit Titles Act 1972. [5] In order to assess the validity of that claim it is necessary first to set out certain matters relating to the leaky building proceeding in more detail.The leaky building proceeding[6] In 2008 the proprietors of Castle Glade Apartments who were plaintiffs in the leaky building proceeding ("the participating proprietors") entered into a Conduct and Distribution Agreement with the Body Corporate. The agreement governed the conduct of the leaky building claim and also the distribution of any compensation gained through settlement. Jewett was of course not a party to that agreement. Relevant clauses included:B. The proceeding relates to the recovery of economic loss suffered by the Proprietors following the discovery of defects and damage to their units ("Units") and the common property of the Body Corporate. The economic loss includes the costs of all repair work carried to date and the anticipated further costs of repair work required to the common property and the Units ... C. The Body Corporate is undertaking the remedial works and the Proprietors have been and will be levied for their share of the cost of the remedial works in accordance with their proportion of unit entitlement. ... D. The Body Corporate and the Proprietors wish to agree on the future conduct of the Proceeding and the settlement of any and all claims that the Body Corporate and the Proprietors may have against any person in respect of the loss described in B above including but not limited to the defendants named in the Proceeding, and in particular wish to:• agree on how to pay for the future conduct of the Proceeding;• appoint an owner's committee with appropriate authority to direct and settle the Proceeding; and• appoint an agent for the day-to-day management and administrative aspects of the Proceeding and Remedial Works; and• wish to agree on how any funds received through the Proceeding are to be received and distributed. ... (4.2) The registered proprietors of the Units from time to time are to pay all costs incurred in completion of the Remedial Works to the Body Corporate Secretary which are to be levied by the Body Corporate Secretary in shares equal to their respective unit entitlements in the Body Corporate. ... 11. Settlement Funds11.1 Any funds received in settlement of or as a result of the Proceeding must promptly be: (a) used to firstly pay all outstanding fees and charges in respect of professional advice undertaken to recover funds; and (b) the balance deposited into the trust account of the body Corporate Secretary in the name of the Proprietors or with a law firm selected by the Owners' Committee.11.2 When instructing the Body Corporate Secretary or the law firm to hold the funds referred to in 11.1(b) the Owners' Committee must instruct the Body Corporate Secretary of the law firm: (a) to hold the funds on trust on an interest bearing account or accounts; (b) if advised by the Owners' Committee, put all or part of the funds held onto fixed term interest bearing deposit or deposits for such term or terms as the Owners' Committee directs provided that no fixed term is to exceed four months; (c) not to release the funds (or any part of them) without authority from the Owners' Committee or the meeting of Proprietors contemplated by clause 12. 12. Use of Settlement Funds12.1 Promptly after any settlement of the proceedings, the Owners' Committee must call a meeting of the Proprietors to: (a) advise the Proprietors of the terms of the settlement, and that any distribution must be subject to the terms of that settlement; and (b) determine the process for having the development repaired or repairs completed if this has not occurred already. 12.2 The balance of the settlement monies (if any) after the Remedial Works are completed shall be distributed to the Proprietors in shares equal to the Proprietors' unit entitlements in the Body Corporate (or as may be otherwise required in accordance with the terms of the settlement or as a result of the Proceeding). ... 20. Amendments20.1 Except as otherwise expressly provided in this agreement, no amendment to his agreement will be effective unless it is in writing and signed by all Proprietors.[7] The agreement also established an Owners' Committee to make decisions in relation to the Proceeding and/or any remedial works and to direct and settle the proceeding. [8] In March 2010 the leaky building proceeding was settled. Jewett (as one of the defendants) was a party to the settlement agreement and under it is required to make a modest contribution to the settlement sum. Put briefly, Jewett is jointly andseverally liable (with two other defendants) to the tune of $425,000. The total settlement figure, however, was some $10.5 million (over $17 million having been claimed). [9] Relevantly (for present purposes) the settlement agreement provided at clause 12 that:It is acknowledged that Jewett Investments Limited is not entitled to any portion of the settlement funds by virtue of its ownership of units 12 and/or 64.[10] At the time of settlement the repairs to Castle Glade had only partially been completed. As I have said, Jewett, along with all the other proprietors, had contributed to meeting the costs of those repairs through the meeting of levies imposed by the Body Corporate. [11] Following settlement the Body Corporate called an Extraordinary General Meeting ("EGM") of all Castle Glade unit holders on 27 April 2010. There is some dispute as to whether Jewett received notice of the meeting although there was evidence before me notice had been sent to the company at its normal address. In any event it appears that even if notice had been received by Jewett, its representatives might not have attended the meeting because it was assumed by them that the purpose of the meeting was to discuss the settlement. Jewett had historically been conscious of the potential conflict inherent in its position both as a unit holder and as a defendant in the leaky building proceeding. [12] It was at this EGM that it was resolved that a further levy should be imposed on all proprietors of units in Castle Glade to meet the cost of the remaining repairs. [13] At the same meeting the owners committee established by the Conduct and Distribution Agreement also resolved that the settlement monies that were being held on trust for the participating proprietors (namely the plaintiffs in the leaky building proceedings) should be distributed to those proprietors. The net effect of this was that the cost of the new levy to the participating proprietors would be offset by the distribution of the settlement funds to them. As well, however, the distributionwould reimburse those proprietors for some or all of the historic remedial costs that had already been met through the earlier levies.Jewett's complaint[14] Jewett was unhappy about the new levy. It seems that the company had thought that its contribution to the settlement would be the end of the matter as regards meeting the costs of repairs. As I have said, Jewett therefore seeks a declaration that the decision to impose the levy was in breach of s 15 of the Unit Titles Act, which relevantly provides:15 Duties of Body Corporate... (2) The Body Corporate shall also— (a) Establish and maintain a fund for administrative expenses sufficient in the opinion of the Body Corporate for the control, management, and administration of the common property, and for the payment of any insurance premiums, rent, and repairs and the discharge of any other obligations of the Body Corporate: (b) Determine from time to time the amounts to be raised for the purposes aforesaid: (c) Raise amounts so determined by levying contributions on the proprietors in proportion to the unit entitlement of their respective units. (3) The Body Corporate may, pursuant to a resolution of the proprietors, distribute any money or personal property in its possession and surplus to its current requirements among the proprietors for the time being according to their unit entitlements. ...[15] Essentially Jewett argues that the settlement funds received should have been applied by the Body Corporate to meet the cost of the outstanding repairs to Castle Glade (many of which are required to the exterior and common areas of the apartment complex) prior to any distribution to the participating proprietors occurring. Although Jewett was not a party to the Conduct and Distribution Agreement, it seeks to rely on that agreement, and in particular clause 12, as supporting its position. More particularly Jewett contends that clause 12.2 requiredthe Body Corporate to apply the settlement monies to the cost of repairs first. Jewett says that there has not been (or there is no evidence of) any amendment to clause 12.2 of the Conduct and Distribution Agreement that would permit what has occurred. [16] More specifically, and in terms of s 15(2), Jewett says that the Body Corporate was only entitled to levy proprietors where it had insufficient funds to meet (for example) the costs of the kind referred to in paragraph (a) of that subsection. In the present case, Jewett says that the Body Corporate already had a fund sufficient to meet the cost of repairs namely the settlement monies. The breach of s 15(2) is, in Jewett's submission, supported by the fact that the ancillary decision to distribute also constituted a breach of the Conduct and Distribution Agreement. [17] I am in agreement with Ms Eden for the Body Corporate, however, that Jewett's claim must fail. I say this for the followings reasons. [18] First, Jewett was neither party nor privy to the Conduct and Distribution Agreement and is thus unable to rely on its terms regardless of whether there has been a breach of one or more of those terms by the parties. Jewett accepts that it had no knowledge of the terms of the Conduct and Distribution Agreement at the time it participated in the settlement of the leaky building proceeding. [19] Secondly, the Conduct and Distribution Agreement has not in any event been breached because it makes clear that the cost of repairs had been and would be met in the first instance by levies. Any decision to distribute was a matter of timing only. In any event I consider that clause 12.2 cannot properly be read as requiring the settlement funds to be directly expended on remediating the complex if to do so would have the effect of profiting those who are (expressly) not entitled to the benefit of those funds. [20] Thirdly, the Conduct and Distribution Agreement requires the Body Corporate Secretary to hold the balance of any settlement monies (after the payment of all outstanding professional fees and charges) on trust for the participating proprietors (i.e. those proprietors were the plaintiffs in the leaky buildingproceeding). Those monies do not belong to the Body Corporate and cannot constitute a "fund" that can be used at the Body Corporate's discretion as contemplated by s 15(2). While it may be that the settlement funds were (on one occasion) perhaps carelessly included by the Body Corporate Secretary in the Body Corporate's Statement of Financial Accounts, that act of accounting elision does not alter the legal (or equitable) reality of the situation. [21] Although Mr Barton appeared to accept that the settlement funds were held on Trust by the Body Corporate he seemed to argue that it was irrelevant that the beneficiaries of the Trust were the participating proprietors (and not Jewett). Rather the focus of his argument was that the object of the Trust was the general remediation of Castle Glade and that the Body Corporate was simply required to apply any funds it had to that end and (necessarily), therefore, for the benefit of Jewett. Again, this submission appears to me to cut across by a side wind the express stipulation in the settlement agreement (that was signed by Jewett) that none of the settlement monies are payable to Jewett. [22] For completeness I note that although I had initially understood that Jewett's position was also that the settlement monies could not be distributed under s 15(3), because there was no "surplus" (the settlement funds being required to complete the remediation) that was not an argument that was made before me. It is in any event an argument that would have failed for the reasons given (in relation to s 15(2)) at [20] below. The distribution was made pursuant to the Body Corporate's obligations under the Conduct and Distribution Agreement. Had s 15(3) been engaged, Jewett would have had to be included in any such distribution. Section 15(3) does not apply. [23] Lastly, I also record my acceptance of Ms Eden's submission that even if the settlement monies are properly to be regarded as a relevant "fund" in terms of s 15(2) there is no requirement in that section that the Body Corporate must have expended any existing fund before imposing a further levy. That would not sit easily with commercial reality. Rather, it seems to me that the position is that the Body Corporate needs merely to be satisfied that any further amount sought to be raisedfor the purposes of that fund is reasonably necessary in all the relevant circumstances. That threshold would in my view be met here. [24] Ultimately it seems to me that to the extent that any issue at all can be taken with what has occurred it would necessarily focus on the conflation at the EGM by the Body Corporate of its role qua Castle Glade as a whole and its role qua the leaky building litigation and the Conduct and Distribution Agreement. With hindsight it might have been preferable that the decisions to levy and to distribute had been made separately, with Jewett participating in the former, but not the latter. However that does not seem to me to be an error that has any bearing on the vires of the decision to levy. I am in no doubt that the same two decisions would have been made regardless of whether the processes for arriving at them had occurred separately or together. [25] By way of postscript I also record my view that even if Jewett had been successful in obtaining the declaration sought it would almost certainly turn out to be a Pyrrhic victory. Even on Mr Barton's analysis all that would be required would be for the terms of the Conduct and Distribution Agreement to be amended to enable distribution of the settlement funds to the participating proprietors prior to the completion of the repairs. In light of the fact that all of the participating proprietors have a united (and quite justifiable) interest in ensuring that Jewett does not indirectly reap the benefit of the settlement they have won, Mr Barton's submission that the likelihood of all the proprietors consenting to such an amendment was "remote" does not seem tenable. [26] For all the reasons given Jewett's application is dismissed. The defendant is entitled to costs on a 2B basis. ______________________________ Rebecca Ellis J