Communal life in the trenches

Of late, the Australian middle class – and not many opt for inclusion in the other two classes – has become more adapted to communal living in what we used to call ‘flats’ than used to be the case.  Intense urban development has led to large blocks of units that have ‘common property’ and human interactions that have to be managed. 

The law was changed to allow for ‘strata titles’ to individual units, and the incorporation of a body to manage, if that’s the term, the whole shebang.  That is the ‘body corporate,’ now styled ‘owners corporation’ (without the apostrophe), and there is usually a managing agent appointed to do the managing.  It normally reports to a committee of apartment owners.

What could be simpler?

Yet when you mention the term ‘body corporate’ or ‘managing agent’ to a lawyer or someone in real estate, you get a roll of the eyes, an intake of breath, and a sigh.  It is not hard to see why.

There you have the indicia of lawyers’ nightmares.  People living together and needing tolerance, restraint, and co-operation – all in short supply in our public life.  The old law feels out of place; the new law is worse, and written by people who have never set foot in a court or been humiliated there; the bureaucracy, if you find one, does not know or want to know.  The room for bush lawyers – at either end – is scary, and any talk of a common fund looks like a honey pot to people of low calibre – and it is forever remarkable the way that they find each other out at the same level.  Law dissolves into lore, and as Yeats remarked, the best lack all conviction and the worst are full of passionate intensity.

And that’s before you get to ethnic and class differences in the owners, and the cleavage in ages – between those who are unsafe unless they are looking at themselves in their cell-phone, and the aged, like me, who regard the makers of Facebook and Twitter as on a par with Hitler and Stalin, and hopefully destined to meet the same fate.

And it’s before you get to the role of the manager, who is there to make money, and the role of the committee, who are not there for the money, and who don’t want or need to get sucked into the hands-on management any more than is entirely necessary. 

There is room there for buck-passing and blame-dodging of the order of our national past-time that we have all just watched so horrifyingly in the Robodebt Royal Commission.

The managers have to be licenced by a government office.  They are represented by the Strata Community Association.  Its website says:

Strata Community Association (SCA) is the peak body for Industry Managers, Lot Owners, Tenants and Stakeholders living in or affected by Strata Title, Body Corporate, Community Title and Owners Corporations.

SCA proudly fulfils the dual roles of a professional institute and consumer advocate.  SCA has in excess of 3,300 members who help oversee, advise or manage a combined property portfolio with an estimated replacement value of over $1.2 trillion.

So, this body, SCA, says that it is the peak body not only for managers, but for owners and tenants.  And it is proud to be both a ‘professional institute’ – only God knows what that might mean – and a ‘consumer advocate.’ 

Insofar as they see themselves as my advocate, and holding the same office for other owners, do they not see a conflict of interest as wide and deep as the Grand Canyon?  It would be like the AMA saying it represents both doctors and patients.  Or Centrelink saying it represents both the Government and the sore afflicted.  Or Scott Morrison and Stuart Robert saying that in the Robodebt scheme they showed equal fealty to God and Mammon on those mornings when they prayed together at Parliament House.

(I shall return later to the phrase ‘professional institute.’)

The SCA says one in four Victorians are ‘living in or affected by’ Owners’ Corporations.  That means the managing agents that belong to the SCA play a large part in Victorians’ lives.  They are people of power – or, as they are wont to say now, ‘influence.’  They are probably in a position to have more influence on how people live in and around their homes than the local government.  This is important when we come to look at how responsible to owners and tenants they are under the terms of their appointment as managers.

Nor is the SCA to be found wanting in pride.  It says its members ‘empower’ lot owners and ensure compliance with laws.  ‘The Code of Professional Conduct raises the bar to maintain ethical standards and members are held accountable through a robust complaints process.  Members benefit from the Standard Contract of Appointment.’

You bet they bloody do – and it’s tough banana for the rest of us.

Commercial lawyers looking at this contract for the first time might think they have landed on Mars – or Beijing, Moscow, or downtown Tbilisi.  They would see the contract as designed to achieve two objects – to allow the manager to charge like a wounded bull, and to leave the manager accountable for nothing.  It is one of the most blatantly loaded contracts I have seen in a life in the law.

We can deal quickly with the fees.  There is a flat fee and extras for specific items, some of which are to be charged on a time basis.  It is the kind of robotic scale that can lead to accounting of such a creative nature that it could only subsist between parties in a relationship of absolute trust.  That does not often happen in dealings in real estate between owners and agents.  The prospects of a corporate manager agreeing to pay its staff on a similar basis is one of the following – nil, nought, zero, and zilch.

What then are the obligations of the manager?  In what sense is the manager accountable to owners and tenants?  What remedies do the owners have if the manager breaks the contract – or even just refuses to perform its part?

And you need to remember that the contract is only with the body corporate.  Lot owners or occupiers cannot go to law to enforce the management contract.

Clause 7 is in U S style verbiage.

7.1 To the extent permitted by law the Owners Corporation hereby releases and indemnifies the Manager and holds the Manager harmless from and against all actions, omissions, claims, demands, losses, costs, damages and expenses (including without limitation reasonable legal costs on a solicitor and own client basis) (“the loss”) in relation to or arising directly or indirectly out of the performance or non performance by the Manager of any services or the exercise of its functions and powers pursuant to this Appointment or otherwise from any cause of action including negligence and including without limitation:- 7.1.1. defects or dangers arising in or out of the Owners Corporation Property; 7.1.2. arising from the failure of the Owners Corporation to supply adequate information and advice or direction when requesting work to be performed by the Manager; 7.1.3. arising from goods or services provided by or to third parties at the request of the Manager provided that such request was made in accordance with the provisions of this Appointment; 7.1.4. arising from the handling or storage of goods, products or chemicals; 7.1.5. resulting in death, bodily injury, damage to property or economic loss suffered by any person or persons whatsoever including members and occupiers of the property or part thereof; except to the extent that such loss is caused by or contributed to by the Manager’s dishonesty or fraud. 7.2 If the Manager breaches its obligations in relation to the services and the Owners Corporation has contributed to the Manager’s breach, the Owners Corporation agrees to indemnify the Manager.

Before looking at that, what are the kinds of remedies that the law can usually offer to a party when the other party breaks their promise?

There are four channels.  The contract may allow a degree of self-help, by allowing, say, a lender to sell mortgaged property or appoint a receiver over a company.  If the breach is such that the party in breach shows they will not go on with the contract, the other party can terminate the agreement.  In some cases – that would almost never apply here – the innocent party could ask the court to order the party in breach to perform the contract.  Or the innocent party can pursue the contract breaker in a claim for damages. 

The last is by far the most common avenue that is pursued.  You can put to one side court orders or contractual stipulations for self-help in the present context.

What clause 7 is intended to do, ‘to the extent permitted by law’ (that is, I think, unless the court otherwise orders), is to take away from the owners the last remedy – and so, effectively leave it with just the right to sack the manager.  And no right to claim monetary compensation – no matter how gross the breach.

The manager is saying ‘You promise not to sue me for breach of contract or negligence – you must show dishonesty or fraud in order to get compensation from me’. 

The manager hardly needed that carve-out or proviso.  If you suffer loss because of the fraud or dishonesty of someone, your lawyer will advise you to sue the bastards – if they are worth suing.  You didn’t need a contract to tell you that you are free to do so.

Before we look at the extent to which the law might permit such a promise to stand, let us stand back a little, and consider the setting.

Anti-trust law is not my strong suit, but consider this.  

A group of participants in a market have the power to dominate it to the point of holding a monopoly.  The market is controlled and rendered exclusive by government licensing.  The service providers combine to form standard terms of agreement between suppliers of their services and those wishing to purchase them.  The object and effect of one term is twofold.  It reduces competition between suppliers.  And it imposes hardship on purchasers by depriving them of basic common law rights in a manner that would not have been accepted by parties negotiating at arms’ length in a free market.

What do our competition laws have to say about this?

Well, then, what does the relevant statute (Owners Corporations Act, 2006)have to say that bears on this issue?

For obvious reasons, the act says that a manager must hold PI insurance – s 119(5) and s 185A.  If clause 7 means that a manager can only be sued for fraud or dishonesty, that object of the act will be entirely frustrated – no PI policy extends to fraud or dishonesty.  (I doubt whether an attempt to do that would be lawful.)  Most managers will be shells.  Their capital will be $2 – not enough to buy one cigarette.  The act was meant to ensure that managers could be held to account in money terms in claims for compensation for breach of the management agreement.  The result is that the other party has no effective remedy for breach of contract by the manager – at least not one that gives them financial compensation.

The act (s 122 (1) (b)) says a manager ‘must exercise due care and diligence in the performance of’ its functions.  What then is the remedy for breach of this statutory duty if clause 7 is left intact and enforced according to its terms?  Can parties effectively contract out of it?

Then up pops something else in the act – which is as jumbled in its terms as the contract.  The act (ss 162 and 165) says VCAT can determine a dispute about whether a term of the contract of appointment of the agent is fair – and says VCAT can vary any term of the contract – or declare it to be void.  

The first provision – s 162 (d) – would, in the language of Kant, appear to presuppose that terms of the contract should be fair.  But so far as I have seen, the phrase just falls out, pat.  (My computer is not telling me that the term appears before in this act, and I see no link to the Australian Consumer Law).

And given that the act (s 122 (1) (a)) says that the agent must act honestly and in good faith, the court or tribunal might be left to ponder the distinction between dishonesty, bad faith, unfairness, and – as we are about to see – unconscionable conduct. 

And the structure of s 162 (d) may give rise to an issue of onus – is it up to the manager to show that the term is fair, or the body corporate to show that it is unfair

All of which should be about as fruitful as Medieval Schoolmen asking how many angels can dance on the point of a needle.

Well, then, to what extent will the law permit the manager to rely on clause 7 to defeat a claim by the owners’ corporation for damages for breach of contract?  (I may here say that if a court found that the manager owed a duty of care to the lot owners, clause 7 would not protect it.  You cannot contract out of a liability owed to a party with whom you have no contract.)

In my view, it is more likely than not that the court, or VCAT, would hold that this exemption clause should not be enforceable at all.  The court could so rule on the basis that the clause is unconscionable within the terms of the consumer laws, if not the general law, aided in the case of VCAT by its power to find that a clause is unfair.  

I put to one side the chance that a court might hold that the clause is unenforceable at common law because its object and effect is to negate an essential part of the law governing the conduct of managers.  I also put to one side the argument that if this clause is given literal effect, the consideration moving from the manager is illusory, so that there is no contract at all (on which point lawyers might look at MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125).  The contract may after all be described as the contract you have when you don’t want a contract.

I say that I think it more likely than not that a court would strike down this clause under the consumer laws – because what use are they if this clause can be enforced?

In a contract for the supply of services, is it fair for the supplier to put forward a contract in standard form, provided by its trade representative, that has the effect:

This form of contract provides a term, and we hope that the law allows this term, that you will not be able to sue us for damages if we breach the contract.  It is up to you to inquire what prospects we might have of achieving that result if you agree to this term in the contract.

But, as usual in the law, there is no certainty in that opinion – it is a prediction that is yet to be fulfilled.  In the meantime, the game will go on with the ball up in the air.  And someone may have to part with a fortune to bell the cat.

This is dreadful for bodies corporate and lot owners – which is to say, about one quarter, according to SCA, of people in Victoria.  Who is to say that their home is not built on juristic sand?

I referred earlier to the phrase ‘professional institute’.  Whatever else you might say about clause 7, it is not one that would be put forward by someone practising a profession.  Intrinsic to the notion of a profession is a sense of vocation or calling; a body of learning; and a collegiate commitment to a professional ethic which ultimately puts the public interest above the profit motive.

As it happens, the Victorian AAT, the predecessor of VCAT, had something to say about this in 1985.  It ruled that nursing was a ‘profession’.  It referred to the Shorter English Dictionary.  It said that a nurse is relevantly ‘a person, usually a woman, who attends or waits upon the sick; now especially one trained for this purpose’ and that a profession is relevantly ‘a vocation in which a professed knowledge of some department of learning is used in its application to the affairs of others, or in the practice of an art founded upon it; applied especially to the three learned profession of divinity, law and medicine…’(War Nurses Memorial Centre v Comptroller of Stamps (1985) I VAR 120, 127.)  A glance at the Macquarie Dictionary shows that meaning still obtains.

Some might say that this is just a case of a lawyer being snooty – as they are wont to be.  And it is easy to leer and jeer about the fees charged by silks and surgeons.  But even the most fervent members of the SCA would not seek to compare their calling to that of our nurses, and the Australian impulse to drag down doctors and lawyers tends to evaporate when people have their life, health, liberty, wealth, or reputation on the line.

And at the risk of circularity, no professional would seek to put in their retainer an exclusion clause like clause 7 of the SCA standard form of retainer.

This form of contract proffered by managers of strata title blocks looks to me to be an insult to the people to whom it is put – a substantial part of the population of Victoria.  And it’s about time they were called out. 

But I fear that the consumers – the body corporates and owners and tenants – will not get anywhere until they form an association which can stand up to SCA and its members, and at least give a semblance of a level playing field and equality of bargaining power.

And this is all terrible for committees.  If the manager can’t be relied on, residents will turn to the committees, and the national penchant for buck passing and denial of responsibility, will go unchecked.  The committees will be like MPs called on to fix a mess left by the public servants – agitated and unhappy – for cause.

In the meantime, the issue is of sufficient public importance to warrant the close attention of governments, both state and federal.

Finally, the version of the contract before me says that it is ‘recommended’ by SCA and ‘approved’ by CAV.  The last is very interesting and we await the versions of events from SCA and CAV.  They are not likely to be in line.

Strata titles – owners corporations – managing agent – body corporate – exemption clauses.

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