Allianz Australia Insurance Ltd v Probuild Constructions

SWSC 697 at [266]-[270] Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 Maxcon Constructions Pty Ltd v Vadasz (2018) 264 CLR 46; [2018] HCA 5 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Mulley v Hayes (2021) 286 FCR 360; [2021] FCA 1111 Oliver v Nine Network Australia Pty Ltd [2019] FCA 583 Owners of Strata Plan 58161 and Hanssen Pty Ltd [No 2] [2023] WASAT 7 Parrwood Pty Ltd v Trinity Constructions (Aust) Pty Ltd [2020] NSWCA 172 Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 Re Universal Distributing Co Ltd (in Liq) (1933) 48 CLR 171; [1933] HCA 2 Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52 State of Queensland v Epoca Constructions Pty Ltd [2006] QSC 324 Stiassny v North Shore City Council [2008] 1 NZLR 825; [2008] NZ CCLR 7 Stiassny v North Shore City Council [2009] 1 NZLR 342; [2008] NZCA 522 Thurin v Krongold Constructions (Aust) Pty Ltd [2022] VSCA 226 Tradigrain SA v State Trading Corporation of India [2005] EWHC 2206 (Comm); [2006] 1 Lloyd's Rep 216 Texts Cited: Explanatory Memorandum (as replaced), Personal Property Securities Bill 2009 (Cth) P Davenport, Construction Claims (4th ed, Federation Press, 2020) N Denys and R Clay (eds), Hudson's Building and Engineering Contracts (14th ed, Sweet & Maxwell, 2020) E McKendrick, Goode on Commercial law (5th ed, Penguin Books, 2016) Category: Principal judgment Parties: Allianz Australia Insurance Ltd (Appellant) Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement) (First Respondent) Salvatore Algeri (as joint and several deed administrator Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement)) (Second Respondent) Jason Mark Tracy (as joint and several deed administrator Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement)) (Third Respondent) Matthew James Donnelly (as joint and several deed administrator Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement)) (Fourth Respondent) David Michael Orr (as joint and several deed administrator Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement)) (Fifth Respondent) Representation: Counsel: J Giles SC / A Campbell (Appellant) H N G Austin KC / D Krochmalik (Respondents)

Solicitors: DLA Piper Australia (Appellant) King & Wood Mallesons (Respondents) File Number(s): 2022/368018 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity Citation: Allianz Australia Insurance Ltd v Probuild Constructions (Aust) Pty Ltd [2022] NSWSC 1601 Date of Decision: 23 November 2022 Before: Stevenson J File Number(s): 2022/304260

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

JUDGMENT

1. LEEMING JA: This appeal concerns whether the appellant (Allianz) has any entitlement to $7.7 million paid by May21 Pty Ltd to the solicitors of the first respondent (Probuild), who thereafter paid the $7.7 million to their client. The payment was made pursuant to a Settlement Deed between May21 and Probuild following the appointment of administrators to the latter. Probuild had earlier promised in cl 2.6 of a Deed of Indemnity to which it and Allianz were parties, and pursuant to which Allianz undertook to issue performance bonds on Probuild's request, that it would hold "Surplus Bond Moneys" it received from May21 on trust for Allianz. Allianz's claim turns on two issues: 1. Was the settlement sum of $7.7 million paid by May21 to the solicitors for Probuild in two tranches "Surplus Bond Moneys" within the meaning of cl 2.6 of the Deed of Indemnity? 2. If so, did the trust created by cl 2.6 vest in Probuild by reason of ss 267 or 267A of the Personal Property Securities Act 2009 (Cth), after administrators were appointed to Probuild?
2. I agree with Adamson JA that both questions should be resolved favourably to Allianz and that the appeal should therefore be allowed. I agree with the orders her Honour proposes. I prefer to state my own reasons, partly because I give different emphasis to the contractual language, and partly for the reasons given by Callaway JA in a not dissimilar context in Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 at 831 in that the second issue involves important questions of commercial law which are not as well settled as they might be. Adamson JA's reasons relieve me from the need to reproduce most of the clauses in the Deed of Indemnity and the Settlement Deed.

Factual background

1. The primary facts are uncontroversial. May21 entered into a Building Contract with Probuild in October 2017 in relation to a development in Melbourne. The Building Contract was based on AS 4300-1995, and made provision for the provision of two performance bonds, each in the amount of 2.5% of the Contract Sum. The Contract Sum was in the order of $690 million. A few days beforehand, Probuild (and some other related companies) entered into a Deed of Indemnity with Allianz, in which Probuild agreed to indemnify Allianz for any loss suffered by it as a result of issuing any performance bonds, and undertook that any "Surplus Bond Moneys" received by it would be held on trust for Allianz and returned to Allianz forthwith. Allianz in due course issued two performance bonds, each in the amount of $17,266,092.05, in favour of May21. Slightly more than four years later, on 23 February 2022, Probuild entered voluntary administration, which was an event of default under the Building Contract. On 24 March 2022, May21 called on the bonds in full, and Allianz paid the $34,532,184.10 million to May21 the following day, as well as demanding pursuant to the indemnity in the Deed that Probuild pay it the full value of the bonds.
2. There ensued a dispute between Probuild and May21 along familiar lines. May21 claimed that Probuild's breach entitled it to damages in excess of $84 million. Probuild claimed that it was entitled to be paid for work done under the Building Contract in excess of $37 million. Probuild exercised its rights under the Building and Construction Industry Security of Payment Act 2002 (Vic). The result was an adjudication dated 16 May 2022 in Probuild's favour of $12,181,271.30. Probuild was prima facie entitled to obtain a certificate which was enforceable as if it were a judgment, but without prejudice to the parties' rights on a final hearing of the claims on which it was based (the regime is described in more detail in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 at [3]-[18], especially, in relation to the enforceability of a certificate but without prejudice to the parties' rights determined at a final hearing, at [17]-[18]). Handley JA writing for this Court said in Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd (2005) 62 NSWLR 385; [2005] NSWCA 49 at [22]: It is clear that the Act confers statutory rights on a builder to receive an interim or progress payment and enables that right to be determined informally, summarily and quickly, and then summarily enforced without prejudice to the common law rights of both parties which can be determined in the normal manner.

Litigation in the Supreme Court of Victoria between May21 and Probuild

1. By proceedings commenced in the Supreme Court of Victoria on 27 May 2022, May21 sought to quash that determination on the basis of jurisdictional error or error of law on the face of the record.
2. By originating motion filed on 30 May 2022, May21 sought interlocutory relief preventing the issue of a certificate and any other steps by way of enforcement. Orders were made on 31 May 2022 whereby Probuild undertook not to take steps to enforce the determination in its favour, and May21 undertook to pay $12,181.271.30 into Court.
3. May21's challenge was never determined, nor was it the subject of argument in this Court. However, I do not wish my silence to be taken as some form of tacit endorsement that all aspects of it were soundly based. To the contrary, much is difficult to reconcile with settled principle.
4. For example, ground 3 was a claim confined to error of law on the face of the record, but that is inconsistent with what was held by the High Court in Probuild and the other decisions mentioned above. As presently advised, I am unaware of any difference in the Victorian legislation which could even arguably render that reasoning inapplicable.
5. Ground 1 of May21's challenge was a claim based on the proposition that the adjudicator was exercising judicial power. But it is extremely difficult to see how the streamlined regime, with no oral hearing, and a determination by an adjudicator who need not be legally qualified and which does not resolve the parties' dispute could constitute an exercise of judicial power, especially in light of the views expressed in Birdon Pty Ltd v Houben Marine Pty Ltd and State of Queensland v Epoca Constructions Pty Ltd.
6. The primary basis upon which it was said that there was an exercise of judicial power in respect of a matter arising under Chapter III of the Constitution was that "[t]he parties to the adjudication were corporations registered under and created by the Corporations Act 2001 (Cth) and so their rights and liabilities owe their existence to federal law", relying on Mulley v Hayes (2021) 286 FCR 360; [2021] FCA 1111. True it is that an obiter passage in that judgment at [11], citing an earlier obiter statement by the same judge in Oliver v Nine Network Australia Pty Ltd [2019] FCA 583, states that that view is arguable. Those views have been held to be incorrect both within the Federal Court (DJ Builders & Son Pty Ltd (in liq) v Queensland Building and Construction Commission [No 3] [2021] FCA 1041 at [16]) and by the Victorian Court of Appeal in Thurin v Krongold Constructions (Aust) Pty Ltd [2022] VSCA 226 at [116]-[117]. Lest any such arguments be made opportunistically in some other forum which is not a "court of a State", as indeed occurred in Western Australia: see Owners of Strata Plan 58161 and Hanssen Pty Ltd [No 2] [2023] WASAT 7, it is as well to note that it was rejected at [43] by a tribunal over which Pritchard JA presided as "not capable of legal argument". As presently advised, I respectfully agree.

Allianz's proceedings in the Supreme Court of New South Wales

1. The Deed of Indemnity was governed by the law of New South Wales and provided that the parties submitted to the non-exclusive jurisdiction of courts of that State. Allianz commenced proceedings in the Commercial List on 12 October 2022. They were heard on a final basis some 5 weeks later, on 17 November 2022, and determined on 23 November 2022: Allianz Australia Insurance Ltd v Probuild Constructions (Aust) Pty Ltd [2022] NSWSC 1601. An appeal was filed on 6 December 2022, an interlocutory regime was put in place on 13 December, with the appeal being listed for hearing in the second week of March 2023.
2. Allianz made no attempt to identify any connection between the $34,532,184.10 paid by it to May21 pursuant to the performance bonds, and the $7.7 million paid by May21 to Probuild pursuant to the Settlement Deed. Probuild stressed that the $7.7 million reflected a commercial compromise, the reality that May21's much larger claim against Probuild was worthless given Probuild's financial circumstances, and the additional promise it gave to facilitate completion of the development. Allianz said that none of that mattered, that the additional promises merely reflected the working out of Probuild's existing contractual obligations, and that its entitlement to the $7.7 million turned on the fact that it was an amount paid by May21 to Probuild at a time when, consensually, it had been established that May21 had no claim to that amount.
3. "Surplus Bond Moneys" were defined in the Deed of Indemnity to mean: any money paid by [Allianz] in relation to a Bond in excess of the amount required by [May21] to meet the contractual obligation which the Bond supports (and "Surplus Bond Moneys" received by [Probuild] will include amounts payable by [May21] to [Probuild] as reimbursement of, or as damages arising from, [May21's] receipt of Surplus Bond Moneys.
4. The primary judge accepted Probuild's submission that the clause was to be divided into two halves: "any money paid by the surety in relation to a bond" and, separately, "in excess of the amount required by the beneficiary to meet the contractual obligation which the bond supports", each of which had to be satisfied before Allianz could establish the existence of any "Surplus Bond Moneys". His Honour identified those two elements at [28]-[30] and noted at [32], prior to undertaking the legal analysis, that during oral submissions "it emerged that there was little dispute about this". His Honour then considered that the $7.7 million was "an overall settlement compromising a range of financial and practical imperatives on the part of both Probuild and May21" (at [65]), and that Allianz had failed to establish a sufficient connection between its payment of the bond moneys and Probuild's receipt of the $7.7 million under the Settlement Deed so as "to warrant what I consider to be necessary to conclude that, in substance, the receipt was from that payment": at [69].

The construction of the definition of "Surplus Bond Moneys" in cl 2.6

1. I respectfully disagree with the construction of cl 2.6 adopted by the primary judge. Dividing the definition into two halves is not the natural way of construing the clause merely as a matter of impression, at least to my eyes. Instead, as Mr Giles SC emphasised, the definition on its face requires answering a single question: "Has there been an amount paid on the bond which can be seen or, perhaps more accurately, is seen at the time of receipt by Probuild as having been in excess of the amount required by the beneficiary?"
2. But disputes as to the legal meaning of contractual language tend not to be satisfactorily resolved merely by assertions based on matters of impression. After all, a "first blush" grammatical and ordinary meaning may be displaced by a "'less' grammatical and 'less' ordinary meaning": 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 (2014) 88 NSWLR 488; [2014] NSWCA 409 at [85]. The starting point of explaining reasons for the legal meaning of the definition is a grammatical and syntactical parsing of its wording, which is more subtle than it may appear, as well as being something on which the primary judge does not appear to have enjoyed the benefit of full submissions. It will be seen that a division of the definition in cl 2.6 into two elements does not accord with its grammatical construction. Nor does it accord with its evident commercial purpose.

Text - "any" and "excess"

1. I start with the text. The syntactical structure of the definition is that the opening words "any money" are followed by two qualifying clauses ("paid by [Allianz] in relation to a Bond" and "in excess of the amount required by [May21] to meet the contractual obligation which the Bond supports") and then followed by a further extending limb of the definition, being the words in brackets. The words in brackets may be passed over for the time being, because they do not affect the syntax of what precedes them.
2. There are two reasons why, simply as a matter of parsing of the language, I cannot accept the construction advanced by Probuild. The first turns on "any". The second turns on "excess".
3. "Any" is a word which bears a range of meanings. In the adjectival sense deployed in the definition, it captures all things falling within the terms to which it applies, although countenancing the possibility that there are none, as was noted in Fitness First Australia Pty Ltd v Fenshaw Pty Ltd (2016) 92 NSWLR 128; [2016] NSWCA 207 at [45]. Thus, "Please return any overdue library books" is a request which contemplates the possibility that the people to whom the request is directed have no overdue books on loan, but that if they do, then all such books are to be returned.
4. The words "any money" may as a matter of grammar merely apply to the immediately following clause ("paid by [Allianz] in relation to a Bond"). But they are also capable of extending to the second clause ("in excess of the amount required by [May21] to meet the contractual obligation which the Bond supports"). A restaurant might have a rule to the effect that "Any money paid in tips by customers in excess of $100" is to be shared equally between the front-of-house and the kitchen; if so it is clear that "any money" applies to "in excess of $100". Clause 2.6 is similar to the restaurant's rule in an important way. Except on a night when no patron tips, there will always be some money paid in tips. Ordinarily, the critical question would be whether the tips totalled more than $100; exceptionally, if there are no tips, then the rule has no application. Likewise the premise of the definition in cl 2.6 is that money has been paid by Allianz in relation to a bond. Otherwise the clause can never apply. The important question is whether any money out of the moneys paid by Allianz in relation to a bond answers the description in the second clause. It is therefore wrong to divide the clause so as to confine the operation of "any" to the words "money paid by [Allianz] in relation to a Bond", thereby excluding the operation of "any money" from its effect on the relevant part of the definition, namely, "in excess of the amount required by the beneficiary to meet the contractual obligation which the Bond supports". It is those later words which on a natural reading of the language drive the operation of the definition. The point I am seeking to make is nothing more and nothing less than that it would be wrong to confine the operation of the word "any" to words which invariably will be satisfied if the clause applies.

Commercial purpose

1. Neither party placed any great weight upon any other provisions in the Deed of Indemnity for the purpose of construction, and so I turn to the commercial purpose. I do so applying what was recently restated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27], by reference to Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]: It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.
2. The premise of cl 2.6 is that a call has been made on a bond. The Building Contract required performance bonds to be unconditional bank guarantees or insurance bonds or otherwise as May21 agreed. Argument in this Court proceeded in accordance with the explanation given by Morison J in Cargill International SA v Bangladesh Sugar and Food Industries Corp [1996] 4 All ER 563 at 568-571 (including by reference to Australian authorities) that the bond is to be paid without question absent a lack of good faith, but ordinarily there will be an accounting at a later date between the parties which will finally determine their rights and obligations. At that later stage, it may be determined that an overpayment has been made, which is recoverable by the indemnifier (Probuild) from the beneficiary (May21). His Lordship concluded at 571: As a matter of general principle, therefore, in the light of the commercial purpose of such bonds, the authorities to which I have referred and the textbook comments, I take the view that if there has been a call on a bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party may hold the amount recovered in trust for the bank, (where, for example, the bank had not been paid by him) but that does not affect his right to bring the claim in his own name.
3. I shall return to the second sentence in that passage when dealing with the notice of contention. An appeal was dismissed, with no doubt being cast upon the matters mentioned above: Cargill International SA v Bangladesh Sugar and Food Industries Corp [1997] EWCA Civ 2757; [1998] 2 All ER 406. Potter LJ, who delivered the leading judgment of the Court of Appeal, referred to the "considerably commercial advantages" conferred by a performance bond as follows at 413: Not only does the buyer have an unquestionably solvent source from which to claim compensation for a breach by the seller, at least to the extent of the bond, but payment can be obtained from the seller's bank on demand without proof of damage and without prejudice to any subsequent claim against the seller for a higher sum by way of damages. In these circumstances the obligation to account later to the seller, in respect of what turns out to be an overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties.

The notice of contention

1. If was common ground in this Court that if and when Surplus Bond Moneys were received by Probuild, Probuild held them on trust for Allianz, on terms that it must forthwith pay them to Allianz. There is no reason to doubt that the parties, when they identified specific property and used the language of "trust", are to be taken to have meant what they said: cf Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588; [2000] HCA 25 at [34]-[35].
2. Indeed, cl 2.6 confirms the position which would obtain even in the absence of an express declaration of trust, if what was suggested by Morison J in Cargill be correct. There can be no doubt in light of cl 2.6 that as between Probuild and Allianz, Probuild at all times held Surplus Bond Moneys on trust in favour of Allianz.
3. A more precise analysis of the trust might be significant in some other case. The agreement between May21 and Probuild required the amount to be paid into the King and Wood Malleson's trust account, with half not to be released until certain conditions (relating to the assistance provided by Probuild) were satisfied. Thus when the trust in cl 2.6 was first constituted, the trust property was Probuild's merely equitable interest in the money (ie the debt owed by its solicitor's bank to its customer the law firm). There is no difficulty in a trust of equitable property. However, there is a longstanding question as to the legal nature of the beneficiary of a trust declaring itself a trustee, which may be encapsulated in the question: is there a sub-trust or does the person in the position of Probuild "disappear from the picture", to use the Upjohn J's language in Grey v Inland Revenue Commissioners [1958] Ch 375 at 382, reviewed and endorsed by Barrett J in ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue [2003] NSWSC 697 at [266]-[270]. If, in accordance with what Barrett J considered and which appears now also to be supported by Halloran v Minister Administering National Parks and Wildlife Act 1974 (2006) 229 CLR 545; [2006] HCA 3 at [72], Probuild were not regarded as holding its equitable interest in the funds in King and Wood Mallesons' trust account as a bare trustee, but instead had dropped out of the picture, it would be difficult to see how the PPSA could apply. However, after this was raised during the hearing, Allianz explicitly renounced any reliance upon the point, on the basis of how the case had been run. I shall therefore put to one side the position prior to 2 September 2022. Thereafter, Probuild became the legal owner of the Surplus Bond Money, holding it - subject to the effect of the PPSA - on trust for Allianz.

Orders

1. For those reasons, the appeal should be allowed and orders made as sought by Allianz. The appeal required leave pursuant to s 444E of the Corporations Act 2001 (Cth), which was granted without opposition during the hearing. The effect of allowing the appeal will be to discharge order 1 made on 13 December 2022 preventing the respondents dealing with the $7.7 million (save for their first ranking entitlement). I agree with the orders proposed by Adamson JA. If any party seeks a further order as to costs or interest (the notice of appeal sought a special order, but no basis so far as I can see was developed in Allianz's submissions), application may be made within 14 days in accordance with UCPR Pt 36.16.
2. MITCHELMORE JA: I have had the benefit of reading the draft reasons of Adamson JA and the orders her Honour proposes, and the reasons of Leeming JA. I agree with the orders proposed by Adamson JA for the reasons given both by her Honour and by Leeming JA.
3. ADAMSON JA: The appellant, Allianz Australia Insurance Ltd (Allianz), appeals against the judgment of Stevenson J (the primary judge) dismissing its claim for a declaration that the first respondent, Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement) (Probuild), holds the sum of $7.7 million paid to it by May21 Pty Ltd (May21), on trust for Allianz.
4. The second to fifth respondents are the deed administrators, appointed pursuant to the deed of company arrangement executed in respect of Probuild on 21 July 2022.
5. The single ground of appeal is as follows: "On the proper construction of the deed of indemnity dated 25 September 2017 (Deed of Indemnity) and the deed of settlement dated 6 July 2022 (Settlement Deed) and in the events that have happened, the primary judge should have found that the amount paid under the Settlement Deed represented Surplus Bond Moneys (as defined in the Deed of Indemnity)."

The facts

1. The facts, which were largely uncontested, principally derive from a series of agreements to which either May21 or Probuild, or both, was a party.

The building contract between May21 and Probuild

1. May21, as principal, and Probuild, as contractor, entered into a contract on 2 October 2017 whereby Probuild would perform works for May21 with respect to a project known as the West Side Development (the building contract). Clause 5.2 of the building contract required Probuild to provide 5% of the contract sum in the form of two performance bonds each totalling 2.5% of the contract sum. The purpose of this "security" was, by cl 5.1, to "ensur[e] the due and proper performance" by Probuild of its obligations to May21 under the building contract.
2. Clause 5.6 of the building contract provided, in substance, that May21 had a right of recourse to the security (including, where relevant, to convert it to cash) at any time and that Probuild was prohibited from enjoining May21 in any way from its right to recourse the security.
3. Clause 42 of the building contract provided for payment claims at particular junctures in the performance of the building contract. Clause 42.1 relevantly provided that payment did not amount to evidence of the value of work or an admission of liability but "shall be a payment on account only, except as provided under cl 42.6."
4. Clause 42.6 provided for a final certificate to be issued by the Superintendent (a defined term) following receipt of Probuild's final payment claim. Fourteen days after issue of the final certificate, May21 was obliged to release the security provided: cl 42.6. May21 was not otherwise authorised to release the security.
5. Clause 42.8 entitled May21 to deduct from moneys due to Probuild any money due and payable to it from Probuild, irrespective of whether there was a dispute about its right to set off.
6. The effect of cll 44.2, 44.3 and 44.4 was that, if Probuild entered into a deed of company arrangement (which constituted, by definition, a substantial breach) and May21 considered that damages may not be an adequate remedy, May21 was entitled to give Probuild a notice to show cause why May21 should not take the work out of the hands of Probuild and terminate the building contract.
7. Clause 44.4 also provided that if May21 took the works out of the hands of Probuild and/or terminated the building contract, Probuild would not (subject to exceptions) be entitled to any further payment. In such circumstances, Probuild was required to assign or novate contracts with sub-contractors and third parties and make available for collection plant and materials and documents it had produced in connection with the performance of the building contract. In that event, Probuild was required to return to May21 "immediately" any of May21's property. Under cl 44.5, May21 was also entitled to use Probuild's construction plant and documents without compensation but was obliged to return them on completion.

The deed of indemnity between Probuild and Allianz dated 25 September 2017

1. Parties, including Probuild and Allianz, entered into a deed of indemnity on 25 September 2017.
2. In cl 1.1, Probuild unconditionally and irrevocably indemnified Allianz for all loss suffered by it as a result of issuing a performance bond at Probuild's request and agreed to pay, on demand, the amount of such loss to Allianz.
3. Clause 2.6 of the deed provided: "2.6 Surplus Bond Moneys (a) The lndemnifier [in this case, Probuild] undertakes in favour of the Surety [Allianz] that: · (i) any Surplus Bond Moneys received by it will be held on trust in favour of the Surety and must be returned to the Surety forthwith; and (ii) it will hold all right, title or interest in Surplus Bond Moneys for the benefit of the Surety. (b) If required by the Surety, the lndemnifier will authorise and direct a beneficiary that may receive Surplus Bond Moneys to pay those Surplus Bond Moneys directly to the Surety. (c) For the purposes of this clause 2.6, 'Surplus Bond Moneys' means any money paid by the Surety in relation to a Bond in excess of the amount required by the beneficiary to meet the contractual obligation which the Bond supports (and 'Surplus Bond Moneys' received by an lndemnifier will include amounts payable by a beneficiary to an lndemnifier as reimbursement of, or as damages arising from, the beneficiary's receipt of Surplus Bond Moneys)."
4. It was common ground that, on 24 November 2017, at Probuild's request, Allianz provided two performance bonds to May21 in accordance with cl 5 of the building contract.
5. On 23 February 2022, Probuild went into voluntary administration. On 4 March 2022, May21 served a notice on Probuild, pursuant to cl 44.11 of the building contract, to take the remaining works away from Probuild. May21 engaged a new contractor to perform the works. On 25 March 2022, May21 demanded payment from Allianz under the bonds. Allianz paid May21 $34.5 million in accordance with the two bonds.
6. There were disputes between Probuild and May21. On 13 May 2022, May21 claimed to be entitled to approximately $84 million in damages arising from Probuild's breaches of the building contract.

The adjudication and determination

1. Probuild lodged a claim of $37.85 million for adjudication pursuant to the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOPA). On 16 May 2022, Probuild obtained an adjudication determination (the determination) in its favour for $12.18 million. May21 commenced proceedings in the Supreme Court of Victoria for judicial review of the determination. Further, May21 alleged that Probuild was liable to it for damages of $78.54 million (a slight reduction from its claim made on 13 May 2022).
2. On 3 June 2022, May21 paid an amount of $12.18 million into court, pending determination of its application for judicial review, in accordance with an order made in the proceedings.

The settlement deed between May21 and Probuild dated 6 July 2022

1. Ultimately, on 6 July 2022, May21 and Probuild entered into a settlement deed.
2. Because of the emphasis placed by both parties on the recitals to the settlement deed (which were accepted by the parties to these proceedings to be accurate), they are reproduced in full: "A. [May21] and Probuild are parties to a contract dated 2 October 2017 (Contract) for design and construction works (Works) at West Side Place (Stage 1) at 250 Spencer Street, Melbourne VIC 3000 (Project). B. On 23 February 2022, Probuild entered into voluntary administration and on 4 March 2022, [May21] issued a notice to take the remaining works out of Probuild's hands. C. A dispute arose between [May21] and Probuild (Dispute) relating to the parties' entitlements to various claims under the terms of the Contract and otherwise at law. D. On 16 May 2022, a determination was made by an adjudicator in respect of Probuild's February Payment Claim under the Building and Construction Industry Security of Payment Act 2002 (Vic) (reference 2022ADJTVICA057) awarding Probuild with $12,181,271.30 plus GST and adjudicator's fees (Adjudication Determination). E. [May21] has alleged that it has suffered loss and damage of $78,536,277.00 arising from the Project. F. By proceeding number S ECI 2022 01984 commenced by [May21] in the Supreme Court of Victoria (Proceeding), [May21] sought, among other things, judicial review of the Adjudication Determination and an injunction restraining Probuild from enforcing the Adjudication Determination. G. Pursuant to Orders made by Justice Riordan in the Proceeding, on 31 May 2022 [May21] paid $12,181,271.30 (inclusive of GST) into Court with respect to the Adjudication Determination. H. Without admission of liability, [May21] and Probuild have agreed to settle the Dispute and the Proceeding on the terms set out in this Deed."
3. May21 agreed to pay Probuild $7.7 million, including GST (the settlement sum) (cl 2.1). Clause 2.2(d) of the settlement deed provided that, of the funds which had been paid into Court, $7.7 million was to be paid to the trust account of Probuild's solicitors; and the balance was to be paid to the trust account of May21's solicitors.
4. Clause 2.2(e) provided: "Upon receipt of the funds set out in clause 2.2(d)(ii)(A) into [Probuild's solicitors' trust account], the parties acknowledge and agree that [Probuild's solicitors] may release: (i) $3,850,000.00 (inclusive of GST) to Probuild promptly upon receipt; and (ii) $3,850,000.00 (inclusive of GST) to Probuild upon the earlier of: (A) Probuild: achieving all outcomes contemplated under clause 4.1; or (B) 31 August 2022."

The issues between the parties

1. Allianz contended that the disputes between May21 and Probuild resulted in an agreement (reflected in the settlement deed) that May21 had $7.7 million more than it was entitled to and that, accordingly, it had to "repay" it to Probuild, which then held it on trust for Allianz because, on that analysis, Allianz has necessarily paid too much (as determined in retrospect) when it complied with the performance bonds at the request of May21 and paid $34.5 million to May21.
2. Allianz contended that the settlement sum was "Surplus Bond Moneys" within the meaning of cl 2.6(c) of the deed of indemnity and that, accordingly, Probuild held it on trust for its benefit pursuant to cl 2.6(a). It submitted that the commercial object of imposing a trust for the benefit of Allianz on any "surplus" money received by Probuild from May21 was to give effect to the parties' intention that the money paid to Probuild was not money which Probuild was entitled to retain for its own benefit but could only ever hold for the benefit of Allianz. Allianz argued that the purpose of the clause was to ensure that Probuild would never receive the money beneficially and that any surplus would be reimbursed to Allianz even if Probuild became insolvent.
3. Probuild argued that Allianz was required to establish and had not established that the money that May21 paid Probuild was, first, money paid by Allianz; second, in relation to performance bonds; and, third, in excess of the amount required by May21 to meet the contractual obligations which the performance bonds supported. As to the first element, Probuild contended that the source of the $7.7 million was the sum of $12.18 million which May21 had paid into court in accordance with a court order.
4. As to the second element, Probuild contended that the money was not paid "in relation to performance bonds" because it had been paid as a compromise of Probuild's payment claim under SOPA pursuant to its statutory right to a progress payment (for works completed but not yet paid for), which did not depend on any net indebtedness from May21 to Probuild and was quantified by reference to the application of a statutory formula to the building contract. May21 argued that the settlement sum paid pursuant to the settlement deed (being the $7.7 million) represented the resolution of a "broader relationship" between Probuild and May21.

The judgment

1. The primary judge, at [32], identified two factual questions: whether the $7.7 million received by Probuild: 1. represented the amount of its "contractual obligation" to May21 under the building contract; and 2. represented, corresponded to, or was referable to, the $34.5 million which Allianz paid to May21 on 25 March 2022 in excess of that contractual obligation.
2. The primary judge accepted at [52] that, although it was not clear what the parties sought to achieve by cl 3.1(g) of the settlement deed, cl 3.1(g) indicated that the parties had taken into account the $34.5 million which Allianz paid to May21 pursuant to the bonds.
3. The primary judge said at [54] that the inference was open that Probuild and May21 intended that the $7.7 million payable by May21 to Probuild pursuant to the settlement deed represented the excess of that required to meet May21's claims against Probuild under the building contract. However, the primary judge considered, at [55], there to be "other possibilities".
4. Another possibility which the primary judge identified was that the $7.7 million was "referable" to the $12.18 million (being the adjudication determination) and indicated that Probuild agreed to compromise that amount by accepting a reduction in that amount, notwithstanding that it had an immediate right to enforce that determination, subject to the outcome of May21's application for judicial review (the prospects of which were not the subject of evidence). The primary judge also referred, at [58], to the difficulties which May21 would be likely to encounter in prosecuting its claim for $78.5 million in damages in Probuild's administration, as well as May21's interest in obtaining Probuild's co-operation in the resumption of work by the replacement builder (through the non-monetary obligations provided for in cl 4 of the settlement deed, which were not contained in the building contract).
5. The primary judge concluded, in respect of (1) above: "64 In the circumstances, I do not see how I could conclude that the Settlement Deed bespoke the parties' agreement that the Settlement Sum of $7.7 million was the amount in excess of Probuild's 'contractual obligation' to May21. 65 Rather, it was an overall settlement compromising a range of financial and practical imperatives on the part of both Probuild and May21. 66 Accordingly, Allianz has failed to demonstrate that the $34.5 million it paid to May21 under the Bonds was an amount 'in excess of the amount required' to be paid to May21 "to meet the contractual obligation which the Bond supports" and has thus failed to establish that the Settlement Sum represents Surplus Bond Moneys for the purpose of cl 2.6 of the Deed of Indemnity."

The ground of appeal

1. Mr Giles SC, who appeared with Ms Campbell for Allianz, put, in substance, that its arguments, which were rejected by the primary judge, ought to have been accepted. He relied on the fact that the sum of $7.7 million paid under the settlement deed comprised a final resolution between Probuild and May21 of all claims or amounts payable under the building contract and took into account the $34.5 million which Allianz had paid to May21 on the bonds when called on to do so. Thus, he submitted that the sum of $7.7 million represented the amount by which the $34.5 million paid pursuant to the bonds had exceeded May21's entitlement and was, therefore, Surplus Bond Moneys.
2. Mr Giles contended that the primary judge had, incorrectly, attributed significance to the actual intentions of Probuild and May21 in arriving at the settlement when determining the question whether the $7.7 million comprised Surplus Bond Moneys, since the question was an objective one. He submitted that May21's promise to pay Probuild $7.7 million was inconsistent with an objective intention (on the part of either) that May21 would retain all of the $34.5 million paid by Allianz in response to May21's call on the bonds.
3. Mr Giles further submitted that the primary judge had posited the wrong question by asking whether payment under the performance bonds was the sole reason the $7.7 million was paid. He contended that a trust under cl 2.6(a) of the deed of indemnity was created when an excess was paid, irrespective of the label placed on it by May21 and Probuild.
4. In response, Mr Austin KC, who appeared with Mr Krochmalik on behalf of Probuild, contended that the primary judge was correct for the reasons his Honour gave. It also relied on its notice of contention (which will be addressed below).
5. Probuild refuted Allianz's claim on two bases: first, that the settlement deed was not a final account between Probuild and May21 under the building contract but a "global commercial compromise" of a "much wider suite of rights and liabilities"; and, secondly, that to qualify as Surplus Bond Moneys, the settlement sum must have originally been paid by Allianz in relation to a bond and that this had not been established. Mr Austin placed particular significance on cl 4 of the settlement deed and the non-monetary obligations which it imposed on Probuild.

The appeal ground

1. The principles which apply to the construction of commercial contracts were identified by the primary judge and are not in dispute. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37, the plurality (French CJ, Nettle and Gordon JJ) said at [46]-[49]: "46 The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. 47 In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. 48 Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. 49 However, sometimes, recourse to events, circumstances and things external to the contract is necessary. …" [Footnotes omitted.]
2. I consider that the primary judge erred in requiring a greater connection to be proved between, on the one hand, the payment of $7.7 million by May21 to Probuild, and, on the other, the payment of $34.5 million pursuant to the bonds than was established by the evidence and, in particular, the settlement deed. While there were several disputes between Probuild and May21, there was no other relationship between Probuild and May21 other than the one which arose under the building contract. Thus the only reason money was paid by May21 to Probuild was because their respective rights and obligations under the building contract had merged into the rights and obligations under the settlement deed, the purpose of which was to resolve all disputes between them arising from the building contract.
3. To require the type of proof which the primary judge found was lacking in the present case was inimical to the commercial purpose of the deed of indemnity, which was designed to give Allianz a beneficial interest in "any money paid by [Allianz] in relation to a Bond in excess of the amount required by [May21] to meet the contractual obligation which the Bond supports (and 'Surplus Bond Moneys' received by [Allianz] will include amounts payable by [May21] to [Probuild] as reimbursement of, or as damages arising from, [May21's] receipt of Surplus Bond Moneys)" (emphasis added): cl 2.6(c) of the deed of indemnity.

The notice of contention

1. In its notice of contention, Probuild relied on the following ground: "The primary judge ought to have concluded that, if the amount paid to the First Respondent (Probuild) pursuant to the deed of settlement dated 6 July 2022 (Settlement Amount) was in fact, on receipt by Probuild, held on trust by it in favour of the Appellant (Allianz) as 'Surplus Bond Moneys' by reason of the operation of the Deed of Indemnity dated 25 September 2017 (Deed of Indemnity) (as Allianz contended below and contends in this Court), then: (a) clause 2.6(a) of the Deed of Indemnity created a security interest over 'Surplus Bond Moneys' (as defined) within the meaning of subsection 12(1) of the Personal Property Securities Act 2009 (Cth) (PPSA); and (b) given that the said security interest was, at all relevant times, unperfected by registration (or otherwise), this security interest vested in Probuild upon payment of the Settlement Amount to Probuild by operation of section 267, alternatively, section 267A of the PPSA."
2. Before addressing the submissions, it is necessary to identify the relevant provisions of the PPSA.
3. Section 12(1) of the PPSA defines "security interest" as follows: "(1) A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property)."
4. It was common ground that none of the other sub-sections in s 12 of the PPSA (including s 12(2)(g) which provides that a security interest includes an interest in personal property provided by "a trust receipt" if the payment, in substance, secures payment or the performance of an obligation) expressly applied in terms to the present case.
5. Section 151(1) of the PPSA prohibits the registration of a financing statement or a financing charge statement unless the person applying to register the statement believes on reasonable grounds that the person described in the statement "is, or will become, a secured party in relation to the collateral". The first example given under s 151(1) is where the collateral is "all present and after-acquired property" (of the grantor). This provision was relied on by Mr Austin in support of a submission that a "security interest" can be created in property that has not been received at the time the interest is created and may not be received (see the discussion below).

Proposed orders

1. I propose the following orders: 1. Allow the appeal. 2. Set aside the orders of the Court below and, in lieu thereof, make the following orders 1. Declare that, subject to order (2)(b) below, the first respondent holds the sum of $7.7 million on trust for the appellant. 2. Declare that the trust in order (2)(a) above is subject to a charge in favour of the second to fifth respondents in the amount of $1,157,557.64 (excluding GST). 1. Unless a written application for a different order is made within 14 days, the respondents to pay the appellant's costs of the appeal and of the proceedings in the Court below.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 March 2023