Background
Novati Constructions Pty Ltd (NCPL) contracted to construct a 10-unit apartment building for Hulak Coonanbarra Pty Ltd. The contract required security equal to 5% of the contract sum, which could be provided through retention money or two unconditional bank guarantees. Hulak initially retained money from progress payments, but agreed to release those funds after NCPL substituted two ANZ guarantees, each for $312,500.
NCPL intended to give Hulak the original guarantees, but mistakenly delivered colour copies while retaining the originals. Hulak released the retention money on the understanding that it had received effective security. After NCPL entered voluntary administration and later a deed of company arrangement (DOCA), Hulak sought to call on the guarantees but ANZ advised that originals were required. The deed administrators sought judicial advice on whether to give the originals to Hulak, NCPL’s directors, or ANZ for cancellation.
The Court’s Holding
Black J directed the deed administrators that they were justified in delivering the original guarantees to Hulak and would not be justified in delivering them to anyone else. Hulak had an immediate right to possession sufficient to support detinue: NCPL had represented that it had delivered the guarantees, and Hulak had released retention money in reliance on that representation.
The Court also held that, once NCPL knew it had provided copies rather than originals, it was unconscionable for NCPL to assert beneficial ownership of the documents. A constructive trust therefore arose in Hulak’s favour. The DOCA did not bar Hulak’s proprietary claims or prevent the Court from determining the administrators’ application, and the PPSA did not cause Hulak’s rights to vest in NCPL because those rights arose under the general law rather than as an unperfected security interest.
Key Takeaways
- Delivery of an original unconditional bank guarantee may be essential to the beneficiary’s ability to demand payment.
- A contractor cannot retain the original security documents after mistakenly providing copies and receiving the benefit of released retention funds.
- Proprietary rights to documents may survive a DOCA and need not be pursued solely through the deed fund.
Why It Matters
The decision protects the practical function of performance security in construction contracts. It confirms that an insolvency process will not necessarily allow a company to retain documents needed to activate security where the beneficiary released retention money in reliance on an intended substitution.
It also illustrates the utility of judicial advice under s 90-15 of the Insolvency Practice Schedule (Corporations) where administrators hold disputed property and competing parties can fully contest the legal issues.