Westpac Banking Corporation (Bank) funded Bronte
Properties Pty Ltd's (Developer) purchase and development of a
property into a block of units. The terms of the funding agreement
provided that the Developer was required to seek the Bank's
consent prior to entering into any pre-sale contracts for the
units. The Bank took a mortgage over the property as
The Developer engaged ZH International Pty Ltd
(Builder) as its builder. During the course of
construction, the Developer experienced cash flow difficulties and
was unable to make initial progress payments of approximately $750k
to the Builder. In response to this, an arrangement was reached
between the Developer and the Builder whereby the construction
would continue on the basis that Builder would be sold one of the
units for $1.3m less any amounts owing under the construction
contract. The sale price of $1.3m was substantially below market
value. That sale arrangement was documented in a sale of land
The Developer did not seek the Bank's consent to the sale of
land contract, but the Bank subsequently became aware of it. The
Bank advised the Developer that it reserved its rights in relation
to the sale of land contract. The Bank did not say anything to the
Builder (with whom it was in contact generally in relation to the
development) at that time.
After the development had been completed, the Builder was owed
approximately $1m by the Developer. A director of the Builder moved
into the unit that was the subject of the sale of land contract,
but no payment was made by the Builder to the Developer for the
balance owing of around $300k. The Developer and the Builder
subsequently fell into dispute and the Developer attempted to
retake possession of the unit.
At around this time, the Developer defaulted under its funding
agreement with the Bank. The Bank commenced proceedings against the
Builder and its director to obtain possession of the unit under its
The Builder and its director defended the Bank's claim on
the basis that the Bank was bound by the sale of land contract, and
unable to rely upon its rights under the mortgage, as it had failed
to notify the Builder that it was unlikely that it would have
allowed the sale of land contract to ever complete in circumstances
where it knew that the Builder was continuing with construction in
reliance upon that contract. The Builder and its director argued
that the Bank's conduct was unconscionable and misleading and
In rejecting the arguments of the Builder and its director, the
court held that:
The Bank had not consented to the sale of land contract and was
entitled to simply reserve its rights as mortgagee without saying
The Bank did not owe any 'duty to speak' which would
have required it to inform the Builder of its position at the time
of becoming aware of the sale of land contract.
If the Builder continued the construction on the assumption
that the Bank would discharge its mortgage to enable the sale of
land contract to complete, that assumption was not caused by
anything done by the Bank.
This decision demonstrates that secured creditors are ordinarily
entitled to simply reserve their rights in respect of transactions
that may impact upon their securities and are not required to
explain their position to the parties to those transactions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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