REAL ESTATE SERVICES COUNCIL v ALLIANCE STRATA MANAGEMENT LTD and ORS SUPREME COURT OF NEW SOUTH WALES MEAGHER, SHELLER and POWELL JJA 21-22 March 1994, 8 June 1994 [1994] NSWCA 258 DECLARATION OF RIGHT — STRATA MANAGEMENT — FIDUCIARY DUTIES — IMPERMISSIBLE DELEGATION OF FUNCTIONS- INSURANCE COMMISSIONS — IMPROPER RETENTION — FULL AND PROPER DISCLOSURE — CONTRACTS TO EXCLUDE FIDUCIARY DUTIES — EXCEPTIONS — STATUTORY DUTY — s42AA PROPERTY, STOCK AND BUSINESS AGENTS ACT, 1941 — APPLICABILITY. FACTS: The Real Estate Institute initiated proceedings against Alliance Strata Management and its principle, Mr Scott, alleging that they were not fit and proper persons to hold their respective licences. The main grounds were that the terms of Alliance's strata management agreements entailed an impermissible delegation of functions and the improper retention of insurance commissions. During an adjournment granted by the Magistrate for further matters to be put as to orders, the defendants sought a declaration of right in the Supreme Court on a) the effect of its fiduciary duties between the parties in the circumstances, and b) on the statutory duties created by s42AA of the Property, Stock and Business Agents Act, 1941. The Appellant appealed on the grounds that the declarations made were inappropriate. HELD: (1) Although declaration (a) cleared up a misunderstanding of law in the initial proceedings by indicating that fiduciary duties can be contractually excluded prior to embarking upon the fiduciary occupation, the language used was too general, and unrelated to any particular facts. (2) Declaration (b), dealing with the applicability of s42AA, was appropriately made. (3) (per Powell JA) Declarations of right are only appropriate where the declaration will effectively determine a particular question in issue; discretion to make such declarations to be used sparingly. ORDERS: (1) Appeal allowed to the extent set out in (2); (2) Set aside the declaration of Allen J lettered (a); (3) Otherwise dismiss the appeal. (4) Order the appellant to pay one half of the respondents costs. Meagher JA This is an appeal from Allen J, who took the somewhat remarkable course of making a declaration of right in respect of proceedings currently pending in a Local Court between the appellant as complainant and Alliance Strata Management Limited ("Alliance") and Mr John Alexander Scott as defendants. The complaints against Alliance and Mr Scott are brought under s29 of the Auctioneers and Agents Act, 1941, now called the Property, Stock and Business Agents Act, 1941, alleging against Alliance that it is not a fit and proper person to continue any longer to hold a corporation licence under the Act, and against Mr Scott that being a holder of a strata managing agent's licence under the Act he is not a fit and proper person to continue any longer to hold a licence. In each case there is sought orders cancelling the licences in question and disqualifying the defendants from holding similar licences in the future. The learned magistrate, Mr Harvey, commenced hearing the complaints on | March 1993 and continued to do so for a further twenty five hearing days. On 10 February 1994 he stated the finding which he intended to make and published 2 UNREPORTED JUDGMENTS very lengthy reasons for those findings. He did not proceed to formally give his decision. Instead, he adjourned the matter to enable Alliance and Mr Scott to put further matters and arguments as to what orders should properly be made consequent on his findings. There is no doubt the findings are highly adverse to Alliance and Mr Scott, and would if justified have led to the orders sought by the appellant. Not surprisingly, such orders would have had a catastrophic commercial effect on Strata Alliance and Mr Scott. It is common ground that Alliance has held a corporation licence under the Act since the introduction of the licensing scheme by the Auctioneers and Agents (Amendment) Act, 1980. Since that time Mr Scott has also held a licence, viz. that of a strata managing agent. The business which Alliance is conducting is a strata managing agency, and Mr Scott is its managing director. It has built up a large business. It has agreements with over two thousand bodies corporate; the corporate funds administered by it exceed $80,000,000.00; and it has a large number of branches. The appellant Council had two main grounds of complaint against Alliance and Mr Scott. The first involved the method of appointing managers for corporate bodies. Alliance, in its business, had numerous written management agreements with bodies corporate. It then devised a scheme under which it issued special blocks of shares in its capital which enabled the holder of each block of shares to nominate a manager for a particular body corporate, or series of bodies corporate, any commission receivable by Alliance to be shared by it and the nominee manager. Under this scheme, the remuneration of the nominee manager was the responsibility of the holder of the block of shares in question, the shareholder usually being the family company of the nominee manager. The scheme involved, at least on the face of it, impermissible delegation of functions - particularly as there were many instances where neither the shareholders nor their nominees were licensed under the Act. It would seem that the appellant Council was notified or consulted about some or all aspects of this scheme; and it also seems that Alliance and Mr Scott have undertaken to dismantle the scheme insofar as it contravenes the Act. Its operation took up little time before either Allen J or this Court. The second main ground, and the one which occupied the bulk of the argument before Allen J and this Court, concerned the treatment of insurance commissions. Probably from the time Alliance commenced business it received commissions from insurance companies (or insurance brokers) in respect of insurance effected by it as strata manager on the property of the body corporate. The appellant has taken the stance that these commissions were received improperly in that appropriate disclosure of their receipt by Alliance was never made to the bodies corporate concerned. The learned magistrate's view of the legal status of the commissions can best be understood from Allen J ' s summary of the position: "His worship has taken the view that as a matter of law a managing agent who receives and retains such commission pursuant to a provision in the management contract that he may do so must pay them over (or account to) the body corporate concerned, despite the provision in the management agreement, unless he has made such disclosure to the body corporate of the commission received that it will be placed in the position of being able to give or deny to the managing agent its full and informed consent to the agent retaining the commission received. Indeed, as I understand the judgment, it is implicit in the reasoning that such full and informed consent UFEAL ESTATE SERVICES COUNCIL v ALLIANCE STRATA MANAGEMENT LTD and ORS (Meagher JA) by the body corporate is necessary not only to the agent's right to retain commissions received in the future during the currency of the agreement (which contains the provision that he is entitled to keep them) but also to the retention by him of commissions already received. As I understand the judgment, it is implicit in his Worship's approach that the duty of disclosure as a condition precedent to retention of the commissions, and the need for the fully informed consent of the body corporate then being given to that retention, flows from the fiduciary relationship of principal and agent (body corporate and strata managing agent) - and that fiduciary relationship overrides the entitlement which the agent otherwise would have under the contract with the body corporate." The law on these matters is, I think, hardly in doubt. It may be summarized as follows: first, that for a fiduciary such as an agent to receive a commission for which he does not account is, if that is the totality of the relevant facts, a grave breach of his duty; secondly, if full disclosure is made, and an informed consent given by the person to whom the fiduciary duty is owed, the commission may be retained without impropriety by the fiduciary; and thirdly, if the fiduciary, before embarking on his fiduciary occupation, stipulates for the retention of commissions as the price of his occupation, the rules governing fiduciaries have got nothing to do with the receipt of commissions. In this third category, informed consent is irrelevant, as is disclosure. It is simply a matter of determining in what area of the fiduciary's occupation the usual fiduciary duties arise, and this is determined by the contract between the parties - a contract entered into before any fiduciary relationship existed. The third category is the appropriate category for the facts of this case, and it was his Worship's inability to appreciate this which was categorized - in my respectful opinion, quite correctly - by Allen J as "a fundamental misunderstanding of the law". It is clear enough that not at every point of its existence did Alliance bring itself within the third category I have mentioned. We were shown seven different forms of agency agreement between Alliance and its body corporates. In the case of the earliest four of these - which were dated July 1981, September 1981, November 1983 and July 1984 - no mention is made of the subject at all. As a matter of contract, therefore, they cannot furnish any justification for the retention of insurance commissions. In the fifth and sixth versions of the agency agreements - the specimens shown to us were dated March 1985 and February 1987 - the matter is covered by a clause in the following form: "The Agent may, from time to time, as Agent for Banks, Building Societies and Insurance Companies receive commission which helps offset process of such bodies' documentation" The correct construction to place on such a clause, which even Mr Gyles Q C admitted was not drafted in deathless prose, can only be a matter of speculation; and it is not until its construction is achieved that its ambit of operation can be ascertained. However, in its seventh and final form - and the specimen which we were shown is dated October 1991 - the position is clarified. CL7 of that form reads as follows: "(i) It is acknowledged by the Body Corporate that the Agent has an arrangement with the Insurance Companies specified in Schedule 1 (and such additional or other Insurance Companies as may be notified in writing from time to time by the Agent to the Body Corporate) such that the Agent will receive a commission in the event that the Body Corporate places insurance business with any of such Insurance Companies and it is agreed that the Agent is entitled to retain such commission by way of further remuneration for the performance of the duties specified in CL3(a)." 4 UNREPORTED JUDGMENTS The First Schedule contains the following statement: "Insurance Companies with whom the Agent has a commission arrangement Colonial Mutual General Ins Brokers, Sun Alliance, Adept Ins Brokers, G R E Insurance Ltd, Vanguard Ins Co Ltd, Aetna Life Progressive Property Insurance Agents Pty Ltd." It follows, in my view, that when a body corporate employs Alliance to act as its manager on terms which included CL7 (in the form which I have quoted) Alliance could retain its insurance commission without committing any breach of its fiduciary duties. However, I should make it plain that the view which I have just expressed must be subject to some fairly obvious exceptions: if, for example, the contract itself was vitiated by fraud, undue influence or the like it would be too fragile a plank on which to stand. Again, it would not absolve Alliance from its duty to select an insurer which did not pay it commissions rather than one which did, if it were in the interests of the body corporate to do so. And, if it is necessary to repeat, what is true of the seventh version of the contract is not true of its predecessors. Rather more eccentrically, his Worship seemed disposed to hold that retention of insurance commissions constituted not only a breach of fiduciary duty but also a breach of Alliance's statutory duty. The statutory duty is said to arise from s42AA of the Act. The content of the section may be sufficiently understood from its first subsection, which is in the following form: "42AA. (1) A licensee shall not be entitled to: (a) any remuneration by way of commission, fee, gain or reward for services performed by him in his capacity as licensee; or (b) any sum or reimbursement for expenses or charges incurred in connection with services performed by him in his capacity as licensee, from the person for whom or on whose behalf those services were performed unless: (c) the agreement pursuant to which those services were performed is in writing and signed by or on behalf of: (i) the licensee; and (ii) that person; (d) the agreement contains such terms (if any) as may be prescribed; and (e) a copy of the agreement was served by the licensee on that person within 48 hours of the agreement being signed by or on behalf of that person. It is I think, beyond argument that the section is not dealing with the agent's rights to retain commissions paid by an insurer, or with his duty to account for them. It is dealing with the rights between principal and agent, nothing more. It prohibits Alliance, or any person in Alliance's position, to make any charge on its bodies corporate, unless the latter have agreed in writing to pay such charges. Allen J, again correctly, so decided. That leaves two questions, each of which was in dispute. The first is whether Allen J should have granted any declaratory relief or not. His Honour recited the appropriate principles dealing with this question, and took all relevant factors into account. I cannot see, therefore, how his Honour's exercise of discretion in making a declaratory order can be successfully challenged. The second is whether the declaration which his Honour did in fact make should stand. In my view, it should not. I think his Honour laid down the law admirably, but it does not follow that the declaratory order he made can be supported. The order made should be set out in full. It is as follows: "It is declared that: "(a) Where by the provisions of a management agreement the managing agent is entitled as between him and the body corporate to retain for his own benefit money which he has received from a third party for the placing of insurance business in the performance of his duty to the corporate body under the management agreement and the management agreement does not provide that his right so to retain the money is conditional upon the furnishing by him to the body UREAL ESTATE SERVICES COUNCIL v ALLIANCE STRATA MANAGEMENT LTD and ORS (Powell JA) corporate of information relating to receipt of the money he is entitled so to retain it for his own benefit notwithstanding that he does not furnish any such information to the body corporate. "(b) Money received as principal by a managing agent from a third party for the placing of insurance business in the performance of his duty to the body corporate under the management agreement is not remuneration to him from the body corporate within the meaning of s42AA of the Property, Stock and Business Agents Act, 1941." The declaration lettered (a) resembles an advisory opinion rather than a declaration of right. There is nothing in it which anchors it to any particular facts, or, indeed, to any parties to the litigation. Moreover, its universality of language is unjustifiable. It is not an accurate statement of the law as to any possible set of facts which would come within its terms. It does not, for example, deal with the exceptional matters to which I have referred. Since one may safely trust that the learned magistrate will pay regard to what this Court has to say on the problems confronting him, I do not see the necessity - or even the desirability - of making any declaration in substitution for the existing declaration lettered (a). In my opinion, the following orders should be made: (1) Appeal allowed to the extent set out in (2); (2) Set aside the declaration of Allen J lettered (a); (3) Otherwise dismiss the appeal. (4) Order the appellant to pay one half of the respondents costs. Sheller JA I agree with Meagher JA. Powell JA Although, having read, in draft, the Judgment which has been prepared by Meagher JA, I agree with the Orders which His Honour proposes, and his reasons for so doing, I would wish to add some brief observations of my own as to two matters, they being, first, the desirability, or otherwise, in the case of applications such as this was, of the Court making a declaration of right; and, second, what appear to me to have been the deficiencies in the declarations which were, in fact, made by Allen J. It seems now to be well enough established that the fact that a magistrate, in the exercise of summary jurisdiction, has embarked upon the hearing of proceedings, during the course of which questions of law have arisen, or may arise, which questions of law, either, have been, or, will need to be, determined by the magistrate, and which questions of law were or are, within the magistrate's jurisdiction to determine, does not preclude this Court from making a declaration, or declarations, as to any such questions of law (see, for example, Sankey v Whitlam (1978) 142 CLR 1), and this, whether the application for a declaration be made by the informant or complainant (Acs v Anderson [1974] 2 NSWLR 482; [1975] 1 NSWLR 212; Sankey v Whitlam (supra); Spautz v Williams [1983] 2 NSWLR) or by the defendant (see, for example, Bacon v Rose [1972] 2 NSWLR 793; Shapowloff v Dunn [1973] 2 NSWLR 468; Willesee v Willesee [1974] 2 NSWLR 275; Connor v Sankey [1976] 2 NSWLR 570; Bourke v Hamilton [1977] 1 NSWLR 470; Csidei v Anderson [1977] 1 NSWLR 747). Nonetheless, it seems also to be well enough established that the Court's discretion to make such a declaration should be exercised sparingly, particularly so when the declaration sought relates to a question said to arise in criminal proceedings (see, for example. Shapowloff v Dunn (supra) at 470; Sankey v Whitlam ((supra) at 26), in each of which cases ([1973] NSWLR at 470; 142 CLR at 26) it was said that, once criminal proceedings have begun, they should 6 UNREPORTED JUDGMENTS be allowed to follow their ordinary course unless it appears that, for some special reason, it is necessary, in the interests of justice, to make a declaratory order. Since the decision to grant, or to refuse, a declaration is one which remains in the discretion of the Court, it is not possible to lay down, in advance any general rules governing the exercise of that discretion, as witness the contrasting views of Jacobs P in Shapowloff v Dunn (supra) and Helsham CJ in Eq in Csidei v Anderson (supra) as to the relevance, in the cases with which each was concerned, as to the potential to save time and expense, and the various views which have been expressed (see, for example, Bacon v Rose (supra) per Street CJ in Eq (as he then was); Willesee v Willesee (supra) per Holland J; Csidei v Anderson (supra) per Helsham CJ in Eq) as the relevance, in any particular case, of a right of appeal against any determination which might be made by a magistrate. If any justification for the reluctance of the Court to intervene, on the grounds of a potential saving in time and expense, needs to be found, it is, I suggest, provided by the facts that, despite the declaration which was made, urgently, in November 1973, in Shapowloff v Dunn (supra), it was not until February 1975 when Mr Shapowloff was convicted by the magistrate, that conviction thereafter being the subject of a successful application for statutory prohibition (15th June 1977 Cantor J (unreported)), followed by a successful appeal to the Court of Appeal (Dunn v Shapowloff [1978] 2 NSWLR 235), and, finally, an unsuccessful appeal to the High Court (Shapowloff v Dunn (1980-1981) 148 CLR 72). But, given the wide nature of the Court's discretion in such cases, it seems to me that the Court should decline to make a declaration unless it can be shown that the declaration will effectively determine a particular question which is in issue between the parties to the proceedings which are pending before the magistrate. In the present case, the particular question which, relevantly, was in issue between the parties was, not, what, as a matter of general law, were the rights and obligations, inter se, of a managing agent engaged by a body corporate pursuant to a management agreement containing a term of a particular general type and that body corporate, but, rather, whether the conduct of the managing agent in a particular respect, which conduct may, or may not, have been authorised, or permitted, by one, or more, of the various management agreements which it had, from time to time, entered into, rendered the managing agent unfit to hold a licence. Although it is, in my view, clear that the particular question which, relevantly, was in issue between the parties, could not be determined without a detailed examination of the conduct of the respondent company in relation to each body corporate, and the terms of the management agreement which, at any relevant time, operated to govern the relations between the respondent company and any particular body corporate, the learned magistrate appears to have sought to determine the question by reference to some broad general principle which he conceived to govern the relations of parties to what may compendiously be called "a fiduciary relationship", and, in so doing, fell into error. As has often enough been pointed out, to describe a person as "a fiduciary", or to describe a relationship as "a fiduciary relationship" is, in this day and age, to tell one little as to the nature and extent of the duties, arising from the particular relationship, to which the "fiduciary" is subject - that question can be determined only after a consideration of all the circumstances - including such of the terms of any contract between the relevant parties which modify, or exclude, what might otherwise be duties to which a party to such a relationship would normally UREAL ESTATE SERVICES COUNCIL v ALLIANCE STRATA MANAGEMENT LTD and ORS (Powell JA) be regarded as subject - out of which the relevant relationship has arisen. It was the learned magistrate's failure to appreciate this fact which led him into error. That error having been shown, it was open to Allen J., if he considered it to be desirable so to do, to make a declaratory order if an appropriate form of declaration could be formulated. In determining that the case was one in which, despite the fact that the proceedings had not been determined by the learned magistrate, it was desirable that a declaratory order be made, Allen J. relied, inter alia, upon the fact that the questions debated before him were of public importance, "the consequences (of which) for the strata management industry (were) far reaching", and that, accordingly, it was in the public interest that there be a final determination of those questions without undue delay or expense. Despite the existence of a right of appeal to the District Court from a conviction by the learned magistrate, - which right, if availed of, could involve a hearing de novo, involving another 25, or more, hearing days, and which hearing, because of the many other demands upon the District Court, could be long delayed - it was, in my view, open to Allen J. to hold that those matters made it desirable to make a declaratory order if all appropriate form of declaration could be formulated. It is at this point where I part company with Allen J, for, in my view, while the second of the declarations made by His Honour is, the first of those declarations is not, appropriate. I say this since, while the second of those declarations was effective to determine the issue between the parties as to the proper construction of s42AA of the Property Stock and business Agents Act 1941, the first of those declarations was not effective to determine, as between the parties, the question whether the respondent company's conduct in receiving, and retaining for its own purposes, commissions for the placing of insurance business, was, in all the circumstances, conduct which rendered it unfit to hold a licence - as Allen J. has recorded in his Judgment, the factual issues to be decided by the learned magistrate are complex, there is - or has been - a variety of forms of management agreements between the respondent company and the various bodies corporate for which it has acted, the proper construction the relevant terms of which management agreements has yet to be determined, facts which, as Meagher JA has pointed out make the relevant "declaration" partake more of the character of an advisory opinion that of a declaration of right. Much though I sympathise with his laudable desire to assist the parties - and, also, to serve the public interest - by providing a speedy resolution to these complex, and already protracted, proceedings, and despite my agreeing with Meagher JA that, in the course of his Judgment, Allen J dealt with the general law, insofar as it relates to parties to a relationship such as that which exists between a management agent and a body corporate, in an admirable fashion, I conclude that, for the reasons which I have sought shortly to set out above, it was not appropriate for His Honour to make declaration (a). It is for those reasons that, as I have earlier recorded, I agree with the Orders which Meagher JA proposes. (1) Appeal allowed to the extent set out in (2); (2) Set aside the declaration of Allen J lettered (a); (3) Otherwise dismiss the appeal. (4) Order the appellant to pay one half of the respondents costs. Representation: 8 UNREPORTED JUDGMENTS Counsel for the Appellant: R B Stitt QC/G B Evans Counsel for the Respondent: R V Giles QC.A G Whealy QC/G C Lindsay Solicitors for the Appellant: Gadens Ridgeway Solicitors for the Respondent: Mallesons Stephen Jaques