Note: Commonwealth Bank of Australia (Lender), the successor of Bank of Western Australia, funded the construction of apartments by Fortia Funds Management Ltd (Developer/Beneficiary). Developer/Beneficiary hired Parkview Qld Pty Ltd (Builder) to construct the buildings. Lender was authorized to pay Builder directly by drawing down on the original loan when authorized by Developer/ Beneficiary. The contract required Builder to provide Developer/Beneficiary with security which could be in the form of cash retention from progress payments or a bank guarantee. The retention money was to be held on trust, with any interest earned to be utilized in accordance with the contract. The contract also included a clause requiring Developer/Beneficiary, at Builder's request, to provide Builder with reasonable information to confirm that the security or retention moneys were held in trust at all time.

Builder chose to authorize cash retention throughout the life of the contract. When the cash retained reached AUD 1.2 million, Builder delivered to Lender a bank guarantee issued by ANZ Banking Group Ltd (Guarantor), in favor of Developer/ Beneficiary. Builder exchanged the guarantee for the money accumulated up to that point, but continued to authorize cash retention for the remainder of the contract. Lender, with Developer/Beneficiary's authorization, issued a bank check to Builder for the required amount.

At the conclusion of the building contract, Builder discovered that Developer/Beneficiary had not set aside any retention money. Developer/Beneficiary was in liquidation in bankruptcy at the time of the trial, and its liquidator had released Guarantor from its obligations by informing it that the guarantee was no longer needed. Builder sued Lender for proceeds regarding the retention moneys trust. Builder sought to hold Lender liable as constructive trustee of the retention moneys. The Supreme Court of New South Wales, Stevenson, J., ruled that Builder had failed to establish its case in respect to Lender.

Builder argued that Lender had no right under the building contract to hold assets of the retention moneys trust except as assignee of those assets. Builder went on to argue that in accepting the guarantee and paying the equivalent retention moneys to Builder, Lender acted as a trustee de son tort. Builder alternatively argued that Lender's conduct in relation to the bank guarantee implied that "the retention moneys existed and were held or controlled by it."

The court ruled that Lender had no responsibility to monitor whether Developer/Beneficiary maintained a retention fund, and that holding on to the bank guarantee for Developer/Beneficiary did not suggest that Lender intermeddled in the retention moneys trust. Furthermore, the court ruled that even if Lender constituted itself a trustee of the bank guarantee, Lender would not thereby became a trustee of the retention moneys trust generally. The court noted that Builder was not without remedy because at all times Builder had the right to seek information from Developer/Beneficiary confirming that the retention money had been set aside.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.