CHALLENGE BANK LTD v MAILMAN

Court of Appeal (NSW)|1992-07-22|Before: Kirby P, Priestley JA, Mahoney JA, Cohen J, Rogers CJ, As Mahoney JA

CHALLENGE BANK LTD v MAILMAN SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

KIRBY P, MAHONEY and PRIESTLEY JJA 21 and 22 July 1992, 14 May 1993

PRACTICE and PROCEDURE - declaration of right - proper circumstances for making declaration - whether relief sought is academic - whether declaration can be fashioned to conclude litigation between parties

Held: (Kirby P and Priestley JA; Mahoney JA dissenting):

(1) The Court will use its large declaratory power to assist parties in commercial and other litigation in the resolution of disputes between them. It will not do so where (a) the only effect of its order is to resolve an academic question of law; or (b) no declaration could be satisfactorily drawn which would deal with the contingencies affecting the circumstances between the parties;

Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421; Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 applied;

(3) Accordingly the parties having fought the issue at trial, should be afforded the opportunity to speak to the terms of the declaration and orders to be made.

Held: (per Kirby P and Priestley JA; Mahoney JA contra): In the circumstances of a partial guarantee, certain guarantors were entitled, upon payment of their proportionate obligations, to an interest in the proceeds of the sale of the security held by the creditor even though it then remained partly unpaid.

Hobson v Bass (1871) LR 6 Ch App 792 (HL); Goodwin v Gray (1874) 22 WR 312 (CA); Ellis v Emmanuel [1876] 1 Ex D 157 (CA); In re Bass; Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12 (QBD) applied and explained.

CONTRACT - guarantee - interpretation of - ambiguities - strict construction of - construction against proponent bank - proper approach to the meaning and obligations of guarantee agreements - Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 (CA); Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 (CA); Bond v Hongkong Bank of Australia Ltd (1991) 25 NSWLR 286 (CA) discussed by Kirby P.

Kirby P This appeal from a declaration and orders of the Equity Division of the Supreme Court (Cohen J) raises three questions:

The obligations and entitlements of the parties under the true construction of an Agreement of Guarantee and Indemnity which they executed;

The availability in the circumstances of relief by way of a declaration as to their legal rights and obligations; and

The extent of other or different relief appropriate to the determination of the first two issues.

Construction of an agreement of guarantee and indemnity The facts are stated in the reasons of Mahoney JA. The background to the proceedings is complicated. It includes an earlier decision of this Court upholding a judgment of Rogers CJ Comm D in favour of Challenge Bank Ltd (the Bank) against Mr and Mrs Mailman (the Mailmans). The particular matter which Cohen J was called upon to decide was, however, quite narrow. It was not without legal difficulty. It concerned the obligations of the Mailmans to the Bank under an Agreement of Guarantee and Indemnity (the agreement) executed by them, and by the other parties named, on 4 March 1988. The Bank and the Mailmans became locked in a financial dispute of some complexity. Those advising the Mailmans considered that a clarification of the rights and duties of the Bank and of the Mailmans under the agreement would facilitate the sorting out of their respective legal positions. This is often done both in the Equity and Commercial Divisions of the Supreme Court. It is frequently a sensible procedure. Parties can then build on the legal determination by the Court concerning their respective rights and obligations. Sometimes they can do so to the benefit of both parties, or at least one party, saving thereby the uncertainty, the delay and the inevitable risks of complex litigation.

As Mahoney JA has pointed out, the Mailmans were two only of a number of Guarantors under the agreement of 4 March 1988. The others were Marloss Twenty Pty Ltd, Mr Graham Burns and Mrs Sarah Burns; Seven Hills Investments Pty Ltd; Airlie Beach Investments Pty Ltd; Louise Developments Pty Ltd and Namliam Pty Ltd. These parties, together with the Mailmans, constituted "the Guarantor" within CL3 of the agreement in respect of moneys advanced and facilities or financial accommodation provided to the company Prime Property Corporation Pty Ltd (Prime). That company was named in the agreement as "the Borrower".

The central obligations apparently assumed collectively by "the Guarantor", ie including the Mailmans, are found in CL2 and CL3 of the Agreement:

The Guarantor hereby guarantees to the Lender the due and punctual performance of all the obligations undertakings and provisions contained in or implied by the Documents other than those imposed on the Lender and hereby indemnifies the Lender against all loss damage costs and expenses suffered or incurred by the Lender as a result of any failure by any person to pay in a due and punctual manner the Debt or any breach of any of the covenants and conditions contained in or implied by the Documents.

The Guarantor shall pay the Debt to the Lender in the manner and at the time specified in the Documents for payment and where not specified upon demand made by the Lender."

It was common ground that Prime defaulted in the performance of its obligations. Demand has been made upon the several parties constituting "the Guarantor", including the Mailmans. It is not disputed in these proceedings that they are liable under the agreement and pursuant to this call. The dispute arises from a rather unusual provision contained in the final clause of the document which carries an interesting heading:

Notwithstanding anything contained in this Guarantee the liability of each of the Guarantors for the Debt is limited as follows:

(b) Graham Robert Burns, Sarah Ann Burns, Seven Hills Investments Pty Ltd and Airlie Beach Investments Pty Ltd jointly and severally as to 25%;

(c) Gregory Robert Mailman, Kerrie Louise Mailman, Louise Developments Pty Ltd and Namliam Pty Ltd jointly and severally as to 25%."

The definition provision in CL1 of the agreement provides, relevantly:

(a) In this Agreement unless the context otherwise requires:

(ii) words importing the singular number shall include the plural and vice versa,

(vi) where more than one person is the Guarantor this Agreement shall bind subject to CL13 those persons jointly and each of them severally and every guarantor who has executed this Agreement is bound,

(vii) the headnotes are for reference purposes only." (emphasis added)

The "Debt" which is limited in CL13 includes the obligation not only for the advance of moneys but for the provision of facilities or financial accommodation by the Bank. The definition of "the Debt" in definition CL1(b)(ii), states:

"The 'Debt' means from time to time the total of all moneys actually or contingently payable by the borrower to the lender pursuant to the document referred to in para(a) of item 5."

Read together that definition includes all of the amounts provided by the Bank to Prime. Any other construction would defy the obvious purposes of the agreement and its terms.

The Mailmans latched onto the "limited liability" provided for in CL13. In short, put in various ways which will be mentioned, they contended that their liability to the Bank was limited (with the companies also mentioned in CL13(c) in which they were interested) to a total obligation as to 25 per cent of the liability for the debt of Prime to the Bank. They made their claim based on an interpretation of the agreement for which they argued. Their stated object was to have it declared that they were entitled to be subrogated, upon discharge of their obligations in accordance with CL13(c), to one-quarter of the benefits of the security held by the Bank over land belonging to Prime. Additionally, they claimed an entitlement to have a quarter interest in Prime's mortgage to the Bank transferred to them.

The Bank argued that the Mailmans were only entitled to assert an interest in the mortgage, or its proceeds after the whole of the debt due to the Bank by Prime had been paid, whether by Prime or by the other Guarantors. Because it was common ground that Prime would not be able to discharge the whole of its debt and because the other Guarantors had not done so, the Bank resisted the claim by the Mailmans to any relief at all, based upon a true construction of the agreement as it contended. Alternatively, the Bank argued that the matter was not one apt for declaratory relief; that the relief actually afforded by Cohen J (following a couple of skirmishes) was inappropriate; and that any claim by the Mailmans to the transfer to them of a quarter interest in the mortgage was unsupported either by the terms of the agreement or by the applicable law.

Whilst dismissing the claim by the Mailmans to have transferred to them an interest in the mortgage over Prime's property, Cohen J held that they were entitled, if they paid out the amount due by them as to the proportion which they

had incurred, to a proportionate share of the proceeds of any sale of Prime's land arising under the security. His Honour determined to make a declaration and orders to give effect to his conclusion. Problems arose from the form of the orders made which it is unnecessary to detail. At the end of the suit, the orders finally entered by Cohen J were as follows:

Upon payment by the Plaintiffs to the Defendant of twenty-five per cent (25%) of the debt, (hereinafter 'the Debt') as that term is defined in a Guarantee and Indemnity dated 4th March 1988 to which the Plaintiffs, the Defendant and others are parties, the Defendant holds Mortgage registered number X436471 on trust as to twenty-five per cent (25%) for the Plaintiffs and as to seventy-five per cent (75%) for the Defendant.

Upon payment by the Plaintiffs to the Defendant of twenty-five per cent (25%) of the Debt, the Defendant pay to the Plaintiffs twenty-five per cent (25%) of the net proceeds of sale of the premises known as 2 Help Street, Chatswood as and when any part of the said proceeds is received by the Defendant.

Judgment in the proceedings in the Commercial Division No 50587 of 1990 be stayed for a period of twenty-eight (28) days from the date of these orders.

It is from this declaration and these orders that the Bank has appealed to this Court. The Mailmans have cross appealed. This outline of the litigation shows the way in which the three issues mentioned at the outset of these reasons are now presented for decision.

Interpretation of guarantees: the rule of strictness Before embarking upon my own analysis of the meaning and effect of the vital CL13 of the agreement, it is appropriate once again to call to mind the rules which govern the approach to be taken by courts in this country to agreements of guarantee.

In the present difficult economic climate the law of guarantee is regularly under the scrutiny of the courts. Such agreements may be (as here) a species of commercial contracts which the courts generally strive to construe "fairly and broadly, without being too astute or subtle in finding defects". See Hillas and Co Ltd v Arcos Ltd (1932) All ER 494 (HL), 503; 147 LT 503, 514; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109; Antaios Compania Naviera SA v Salen Rederierna AB [1985] 1 AC 191 (HL), 201. However, agreements of guarantee have for a very long time been subject to a special rule which the law has devised and applied to them, even where they are commercial in character. The rule is sometimes expressed as that of strictissimi juris. These words merely mean that such agreements are construed strictly so that, for example, a failure of a party to comply exactly with the terms of the guarantee will excuse the guarantor of its liability. See eg Rees v Berrington (1795) 2 Ves Jr 540; 30 ER 765; Bond v Hongkong Bank of Australia Ltd and Ors (1991) 25 NSWLR 286 (CA), 301.

In a number of recent cases, drawing upon United States jurisprudence, I proposed a distinction between such a strict approach to the construction of guarantee agreements where entered between private individuals, members of a family or friends (where the strict rule originated and might still be seen as socially useful) and a different rule for other such agreements of a more plainly commercial character and especially where the guarantor was a so-called "compensated surety". However, my opinion has not prevailed. See eg Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 (CA). The

result has been, in my respectful view, the imposition of a degree of artificiality in the construction of agreements of guarantee and indemnity. I regard Tricontinental as a prime example of the unrealistic results which can follow from imposing upon the modern law of guarantee, particularly in a commercial setting, rules devised by the courts in earlier centuries for quite different reasons.

However that may be, the rule of strict interpretation of the requirements and terms of agreements of guarantee and indemnity must now be taken as the law to be applied in this jurisdiction. I so accepted it in Corumo Holdings Pty Ltd and Ors v C Itoh Ltd and Ors (1991) 24 NSWLR 370 (CA), 379. I approach the construction of CL13 of the agreement in question here with the foregoing rules of strictness held in mind. Any ambiguity in the agreement should be construed in favour of the Mailmans. This is because it was the Bank which prepared the agreement. The Bank is, by reasonable inference, properly and well advised. It can exert its superior economic power to require most borrowers and their guarantors to conform to its specified requirements. In this case, those requirements included the acceptance by the Bank of the "limited liability" which CL13 spelt out and which CL1(a)(vi) underlined.

The proper construction of the limited liability clause Reduced to their simplest form, the arguments of the Mailmans were:

Upon a true construction of the agreement, they guaranteed part only (25%) of the debt of Prime and not (as the Bank submitted) the whole debt but with a contribution limited to 25%;

If (1) were accepted by the Court, the Mailmans claimed a right of subrogation upon the full payment by them of their part of the debt, notwithstanding the fact that the remainder of the debt was unpaid by Prime and/or by the other Guarantors as to their respective proportions; and

If (2) were accepted by the Court, then the Mailmans claimed to receive 25 per cent of the proceeds of the sale of the land mortgaged by Prime to the Bank (or any other income received by the Bank from that land) upon payment in full of their obligation to the extent of their proportion of 25 per cent of Prime's liability under the mortgage. Initially, the Mailmans claimed a conveyance of a 25 per cent interest in the mortgage. However, alternatively, they sought a declaration and order that the Bank held 25 per cent of the proceeds of any sale of the mortgaged land in trust for them and should account to them in respect of 25 per cent of any moneys received, after the Mailmans had discharged their proportionate obligation as they had agreed by CL13 as they construed it.

Before considering whether any relief is available, and, if so, what it should be, it is appropriate to address the substantive issue in contest between the parties. This is the way the matter was litigated before Cohen J. In my view it is the modern way by which courts should approach constructively their task of resolving practical and serious disputes brought to them to be determined according to law. It would be a great misfortune if the resolution of such disputes were unduly controlled by narrow procedural impediments or if the resolution of problems of parties such as those presently before the Court were unduly complicated by procedural obstacles.

There are at least three possible arguments which support the submission which the Mailmans put to the Court concerning their construction of the agreement: 1. CL2 of the agreement provides, essentially, that the "Guarantor" shall pay the "Debt" to the Bank. The word "Guarantor" is given a partial definition in CL1(a)(vi). But, as I have already pointed out, that definition is

expressly stated to be "subject to CL13". Thus, the Guarantors (so described in the plural in CL13) are bound jointly and severally and in the terms of their promise in CL2 and CL3 (set out above) but always subject to the terms of CL13. When, therefore, one wishes to know who the "Guarantor" is who makes the promises contained in the agreement, it is necessary to import into that word, on each occasion when it is mentioned, and in the manner set out in CL13, the three groups of separate Guarantors in respect of whom it is there agreed that their several obligations are limited as stated "notwithstanding anything contained in this Guarantee". So read, I have no hesitation in agreeing with Cohen J that the "Guarantor" in CL3 is, so far as it concerns the Mailmans, a guarantor as to only 25 per cent of the total debt of Prime to the Bank. As I read CL1(a)(vi), it has the effect of stating that where there is more than one Guarantor, they are jointly and severally liable within their particular sub-group amongst the Guarantors. But they are severally liable as between themselves and the other groups. So construed, CL3, which imposes a general obligation to pay the "Debt" to the Bank does not impose upon the Mailmans a duty to pay, or even to await the payment of, the whole debt. Their obligation is, as the heading to CL13 clearly recognised, "limited";

Even if argument (1) were not accepted, it would be my view that the wording of the agreement would be read as a limited guarantee for reasons analogous to those explained by Lord Hatherley LC in Hobson v Bass (1871) LR 6 Ch App 792, 794. Much stress was laid by the Bank upon the decision in In re Sass: Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12. These cases are described in the reasons of Mahoney JA. In my opinion, In re Sass can be distinguished from the present case upon the basis that it concerns a limitation as to recoverability. Hobson was, as here, concerned with a clause which limited the initial liability of the Guarantor. The words "the liability of each of the Guarantors" in CL1(a), and CL13 are not apt to govern what can be recovered from each of the Guarantors. Instead, this is the definition of the very extent of the liability of the Guarantors. In the case of the Mailmans, that liability begins and ends with the obligation to accept liability as to 25% of the debt owed by Prime to the Bank. The drafter of the agreement appears in this case to have followed the directions given in Ellis v Emmanuel [1876] 1 Ex D 157 (CA), 168 where the Court said:

"... agree with what is intimated by Lord Hatherley in Hobson v Bass, that if a creditor, taking a limited security for a floating balance, means it to be a security for the whole of the debt, and not merely for a part, he should take care that this is clearly expressed, for the prima facie construction is the other way, and the Court ought not to split hairs or make nice verbal distinctions on the words used. " I agree with this injunction and the approach which it sanctions. It provides another reason for concluding that, by the present agreement,the Bank (which after all drafted and tendered the document) accepted the limited liability of the Mailmans "as to 25%" of the "Debt" of Prime; and

CL7(a) of the agreement provides that the Guarantor is not, as against the Lender, in any way to claim the benefit or seek the transfer of any security, guarantee or indemnity, or part thereof. However, this subclause is qualified by CL7(c). That subclause contains the phrase "until the Guarantor has paid its proportion of the Debt". To read "its" as requiring the several Guarantors in their particular subclasses to pay the whole of the Debt (ie the entire debt owed by Prime to the Bank) would do violence to the language of the agreement executed by the parties. It would completely undermine the obvious purpose of CL13 with

its carefully crafted provision for limited liability of the respective Guarantors. It would also offend the definition of "Guarantor" as contained in the agreement. Thus I take "'its" in this context to refer, in the case of the Mailmans, only to their proportion of the debt (ie 25%) and not to the entire debt. A similar argument should be noted in respect of CL8(c). This was that the word "liability" must there be construed to have a meaning that fits comfortably with the unusual and special (and apparently added) terms of CL13. Where there is such a special provision limiting the liability of the several Guarantors, it is the duty of the Court to give effect to it and not, as the English Court of Appeal in Ellis remarked, "to split hairs".

I do not have any doubt that this is the correct construction of the agreement between the parties, understood according to its terms, in its commercial setting and simply giving meaning to the words which the parties agreed upon. But to the extent that there are other and arguable constructions of the agreement I go back to the approaches, sanctioned by the law, which govern the construction of special contracts of guarantee. Those approaches reinforce me in the conclusion which I have reached. They support the conclusion which Cohen J expressed.

The Bank complains that this will put the Mailmans in an unduly advantageous position. I cannot answer that complaint in any better way than Cohen J did: "It was submitted for the [Bank] that if one looks at the arithmetical result the [Mailmans] in those circumstances would pay less than they had guaranteed. It is said that if the [Mailmans] were to pay the debt of, say, $5 million and if the property were later sold by the defendant as mortgagee for $12 million, then, on the principles to which I have referred, the [Mailmans] would be entitled to one-quarter of the proceeds, namely $3 million, so that their nett expenditure is only $2 million. This is quite true, and it is the same result which would have come about if the [Bank] had been successful at the auction sale and had sold the property for $12 million. There would have been a shortfall of $8 million, one-quarter of which would have been payable by the [Mailmans]. This merely reflects the purpose of the rule as to entitlement to a proportionate part of the proceeds, namely that where the creditor has taken one of two alternative courses, at the expense of the surety, then the latter is entitled to have an equitable distribution."

The Bank then protested that the Court could not, or should not fashion declaratory relief or orders in the circumstances of this case. With respect, I am not inclined to agree. The Mailmans came to the Equity Division of the Supreme Court for the elucidation of their rights and obligations under the agreement which, with other parties, they executed with the Bank. It has not been contended that their application had a purely theoretical purpose or that its resolution would be wholly moot. Plainly, the Mailmans wish to know where they stand under the agreement so that, armed with the declaration as to their rights, they can raise capital to pay out their obligation as CL13 provides. Thereupon, if this be their right, they would doubtless claim against the Bank, as to their agreed proportion, for any funds which the Bank may recover upon the sale of Prime's mortgaged land. This is an interest which is far from academic. I regard it, on the contrary, as wholly practical.

The Court should not hold back from resolving the contest between the parties which has been fully argued both before Cohen J and now before this Court. There was indeed a legitimate argument between the parties concerning the meaning, effect and obligations of the agreement. Like Cohen J I would resolve

that argument in favour of the Mailmans. Having done so, I am inclined to consider that there are good practical reasons for giving effect to that resolution in the form of an appropriately worded declaration. Courts, in cases of this kind, should assist parties and not frustrate them with procedural excuses.

Similarly, it appears to be appropriate to make orders that the Bank, upon receipt of the proceeds of the sale of the mortgaged land, should account in respect thereof to the Mailmans. Neither in the form of the declaration nor in the terms of the orders which Cohen J made, do I presently see any error.

However, for three reasons I believe that it would be appropriate to allow the parties to speak to the form of the declaration and final orders which should be made by this Court in furtherance of the determination of the substantive matters argued in the appeal:

In case any persons who are not presently before the Court (viz the other persons named as Guarantors) might wish to be heard before any final orders are made;

To permit the parties, if they so wish, to explain the still unexplained or unelaborated proceedings in the Commercial Division and the judgment of that Division which may affect the terms of the final orders; and

Out of respect to the opinion of Mahoney JA, who is of the view that the making of a declaration would be "academic" in the circumstances.

Armed with the determination by the Court of the substantive question in dispute, the parties should have the opportunity to address the Court on the final terms of the declaration and orders to be made to give effect to the decision of the Court in resolving the dispute.

In all other respects I agree with the conclusions which Cohen J has reached and with his Honour's reasons. In particular, I agree that the application by the Mailmans for the transfer of a corresponding proportionate interest in the mortgage "so as to constitute [the Mailmans] and [the Bank] tenants in common in the Mortgage" should be rejected. I also agree with Cohen J that the Bank is not obliged to account for and pay to the Mailmans a corresponding proportion of all rent and other moneys received by the Bank pursuant to the mortgage. The cross appeal should, to the extent that it canvasses these decisions, be dismissed.

The parties should within 21 days of the delivery of these reasons bring in short minutes of the declaration and orders which they invite the Court to make to give effect to its decision.

Mahoney JA Gregory Robert Mailman and Kerry Louise Mailman ("the Mailmans") are partial guarantors of the indebtedness of Prime Property Corporation Pty Ltd ("the Borrower') to Challenge Bank Ltd ("the Bank"). As security for the Borrower's indebtedness, the Bank holds a mortgage over land owned by the Borrower at 2 Help Street, Chatswood ("the mortgage").

The Mailmans claim that they are liable to pay to the Bank only twenty-five per cent of the indebtedness of the Borrower to the Bank; and that (if they pay that proportion of the indebtedness) they are entitled to a transfer to them forthwith of a twenty-five per cent interest in the mortgage held by the Bank and to receive twenty-five per cent of the proceeds of any sale by the Bank of the mortgaged land.

Cohen J held that they were not entitled to a transfer of that interest in the mortgage security but that they were entitled to receive that percentage of the proceeds of sale when the Bank exercised its power of sale under the mortgage. The Bank has appealed to this Court against his Honour's judgment. The Mailmans have cross appealed.

The proceeding has taken a somewhat complicated course. It was heard by Cohen J. On 10 April 1992, his Honour delivered judgment and made orders. Subsequently, application was made to his Honour to make further or other orders. There was additional argument and his Honour made orders consequent upon that argument. Following those orders a further application was made by the plaintiffs for other relief but that application was not acceded to.

The court, on appeal, has heard argument at length. The parties have provided references to some forty authorities. Detailed written submissions have been made. After the conclusion of the argument, the Bank tendered further written submissions, the Mailmans replied and additional arguments were addressed. The submissions made have extended over a wide and, I think, a varying area. Claims and counter-claims have been made on several differing or, at least, alternative bases. The court has been provided with various forms of the declarations which, it is submitted, should be made.

It will be convenient to deal with the arguments, in so far as it is necessary to deal with them, under the following headings: (1) the parties to the proceeding; (2) the nature of the relief sought; (3) the rights and obligations of the Mailmans under the guarantee; and (4) the consequences of payment of twenty-five per cent of the Borrower's indebtedness.

The transactions in respect of which the proceeding is brought involved a number of parties. On 4 March 1988 the Borrower entered into a Bill Acceptance and Discount Agreement with the Bank. The Borrower gave the Bank security for the performance of its obligations under that agreement: it caused to be transferred to the Bank the mortgage it had previously given over the Chatswood land.

On 4 March 1988 a guarantee was given in respect of the Borrower's obligations under that agreement. The guarantee document was given by three groups of guarantors. One of those groups comprised Mr and Mrs Mailman, Louise Developments Pty Ltd and Namliam Pty Ltd. It is the Mailmans' rights and obligations under the guarantee which are in question.

The Borrower defaulted in the performance of its obligations under the agreement. The Bank took possession of the Chatswood land and remains in possession of it. There is, as far as counsel have informed the court, no restriction upon the Bank's selling or foreclosing on the land under the mortgage. It has made attempts to sell but no sale had taken place at the time of the argument before this Court.

Substantial amounts are now owing to the Bank by the Borrower. The total debt of the Borrower to the Bank has increased from time to time by reason of the interest payable under the mortgage. It is now in excess of $20 million and, with interest, will continue to increase. Apart from a comparatively small amount provided by other guarantors, nothing has been paid by the Borrower or the guarantors in reduction of the Borrower's obligations to the Bank.

The Bank has sued the Mailmans on the guarantee. In the Commercial Division of the Supreme Court judgment was, on 17 May 1991, entered for the Bank against the Mailmans for some $3.7 million. On 12 December 1991 an

appeal against that judgment was dismissed by this Court. The amount owing by the Mailmans under that judgment is now in excess of $4 million and interest continues to accrue by operation of the relevant sections of the Supreme Court Act 1970. At the date of the argument of this appeal the Mailmans have paid nothing in satisfaction of the judgment debt.

Provision was made in the guarantee for the limitation of the liability of each of the guarantors under the guarantee. The guarantee provided that:

".., the liability of each of the Guarantors for the Debt is limited as follows:...

(c) Gregory Robert Mailman, Kerry Louise Mailman, Louise Developments Pty Ltd and Namliam Pty Ltd jointly and severally as to twenty-five per cent."

The balance of the liability under the guarantee lay, in similar terms, upon the other two groups of guarantors.

It is apparent from this summary of the facts that if the Mailmans are entitled to relief of the kind claimed, the determination or declaration of their rights in respect of the mortgage and the proceeds of sale of the mortgaged land will, directly or indirectly, affect the position and, I think, the rights of other parties to the transactions. Some or all of the other guarantors are proper and, I think, necessary parties to a proceeding of this kind. It may be that, in a practical sense, the other guarantors are unlikely to dispute or litigate their rights in this regard. Provision is made by the Supreme Court Act 1970 and the Rules to enable rights to be determined and declared in the absence of proper and, I accept, necessary parties. It is not necessary to pursue the circumstances in which this will be done and the effect, or limited effect, which determinations made in the absence of such parties will have: see Pt8 and Pt31 of the Supreme Court Rules.

However, the absence of proper or necessary parties is relevant where the relief sought is essentially in the nature of declaratory relief. It will ordinarily not be appropriate for declaratory relief to be given where, by reason of the absence of interested parties, it is necessary so to qualify the effect of a declaration that the effectiveness or utility of it is limited. It is necessary also to ensure that the form of a declaration made in the absence of parties is not misleading. Those things are of significance in the present case.

The Mailmans' claim involves essentially: (a) that they are liable under the guarantee for only twenty-five per cent of the Borrower's indebtedness; (b) that on payment of that amount, they are thereupon entitled, as on subrogation, to have a transfer of a twenty-five per cent interest in the mortgage and to receive twenty-five per cent of the proceeds of sale of the mortgaged land; (c) that such entitlements should be declared; and (d) that as a consequence of such declarations, orders should be made as to what the Bank should do consequent upon such payment. The proceedings envisage, I think, that if the court makes declarations of the kind sought by the Mailmans, orders can then be sought for accounting by the Bank in respect of the Borrower's indebtedness to it and, prospectively or in due course, for transfer to the Mailmans of the interests or the moneys to which I have referred.

The reason why relief is sought in this form and in advance of payment by the Mailmans of their liability under the guarantee is or includes that the grant of such relief may be of assistance to the Mailmans in obtaining finance with which to discharge their obligations under the guarantee. The suggestion is, inter alia, that if their rights in respect of the mortgage are declared, they may more easily secure that finance. It is not necessary to determine whether that will be so.

The court should, in my opinion, endeavour to assist parties in their commercial activities by reducing to certainty rights which require clarification. It may sometimes do this by declaring rights which otherwise would remain uncertain. If this is done, as the present case suggests, parties may be able to enter into transactions which, because of uncertainty, will not otherwise be open to them: see Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297.

But there are limits to what the court may properly do. The court has inherent power to make such declarations as to the rights of parties as it considers appropriate. S75 of the Supreme Court Act has removed the necessity, if it existed, for there to be consequential relief to support the exercise of the declaratory power: see generally Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421. However, the court will not make declarations upon questions which are, in the circumstances, purely hypothetical: Bruce v Commonwealth Trademarks Label Association (1907) 4 CLR 1569. In Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286, a declaration was sought that a contract had not been validly rescinded. Barwick CJ and Jacobs J pointed out: at 307; that unless parties are agreed on the consequences that flow from a declaration of that kind, "it is generally undesirable that a court should so declare without any orders for consequential relief'. Their Honours referred to s63 of the Supreme Court Act which provides that the court shall grant all such remedies as will, as far as possible, finally determine the controversy between the parties: at 296.

There are two further and associated considerations which are relevant in determining whether, in particular circumstances, a declaration of rights should be made: practicality and parties. If a declaration of rights is to be made it should be able to be made in a form which provides practical assistance or at least clarification. Ordinarily, a declaration does two things: it identifies a factual context and it states the rights which parties have in or as a result of that context. If the statement of either of these is of such complexity that the declaration will not be of practical assistance or will be confusing, the court will ordinarily not make it. The court will ordinarily declare: "If the plaintiff pays $X to the defendant, he is entitled to have the defendant transfer Blackacre to him'. It will ordinarily not make a declaration involving detailed qualification of the circumstances in which that entitlement will arise, for example, where the contingencies affecting the circumstances in which the entitlement will arise involve various possibilities which cannot be appropriately or conveniently stated in a declaration. Similarly, if the nature of the entitlement of the plaintiff upon such payment will vary with, for example, the circumstances or context of the payment, the court will consider carefully whether a declaration should properly be made.

The court will consider also whether and to what extent such a declaration will be binding and operative to determine the instant dispute and whether it may be misleading. Thus, if a determination of rights be made in the absence of proper or necessary parties, the declaration will not, as such, be binding upon the persons not joined. The utility of a declaration binding on some but not all of the parties to a transaction will require careful consideration.

Questions of this kind arise in the present proceeding. In principle, declarations made as to the right to transfer to the Mailmans of an interest in the mortgage or as to payment to them of part of the proceeds of sale will, of course, be binding between the Mailmans and the Bank. But, in principle, it will not bind the Borrower or the other guarantors unless there be circumstances which bring

about such a result. Accordingly, a declaration made in a proceeding between the Mailmans and the Bank alone would not, in principle, protect the Bank against claims by others if it transferred the mortgage interest or paid the relevant money to the Mailmans merely in reliance upon the declaration. It will not - at least, it is doubtful that it will - protect the Mailmans against claims made by other persons not party to this proceeding. Thus, declarations in this proceeding would not prevent other parties to the transactions, eg, other guarantors, obtaining in another proceeding orders inconsistent with the findings in this proceeding. A lender asked to lend on security of the rights of the Mailmans as declared in this proceeding would no doubt proceed with at least caution. It is not necessary to detail the difficulties which are involved in attempting to frame declarations which will take account of the contingencies which may affect the facts on which the rights claimed will arise and the qualifications of the rights which require to be made if the position is to be fully and accurately stated.

For reasons of this nature, I am not satisfied that the present is a case in which declarations should be made of the kind sought. If the declarations sought will not, in principle, provide the basis for orders which will effectively determine the disputes in relation to the transactions in question and permit of consequential orders, for transfer or payment or the like, then, in my opinion, any determination made by the court will be essentially a determination of an academic question of law. I appreciate that such 21 determination by this Court may be of some assistance to the Mailmans in negotiations with the providers of finance. But the difficulties inherent in the determination of academic questions by declaration are well recognised and experience has shown that, special cases apart, such declarations should not be made. I do not think that the declarations sought in the present case should be made.

I do not, by what I have said, mean to qualify the propriety of the making of declarations in the Equity and the Commercial Divisions of the Court. The making of declarations may produce beneficial results. In some cases, that may be done notwithstanding the absence of proper or necessary parties. But this, in my opinion, is not such a case.

THE RIGHTS AND OBLIGATIONS OF THE MAILMANS UNDER THE GUARANTEE: It is, accordingly, not necessary for me to consider the rights and obligations of the Mailmans under the guarantee or the consequences of the payment pursuant to it. However, in deference to the argument submitted by counsel, I shall make some reference, obiter, to what has been argued.

The guarantee is in general terms the guarantee of the indebtedness of the Borrower under the agreement. I shall examine first the liability of the Borrower under the agreement and then the operation of the guarantee by reference to the agreement.

By the agreement, the Bank agreed to "make available to" the Borrower "a Bill Acceptance and Discount Facility": CL2. The limit of the facility was to be $10 million and was to terminate one year from the date of the agreement, 4 March 1988. It was apparently contemplated that the Bank would accept and discount bills drawn by the Borrower: CL3. The intention was that the Borrower would draw bills of $10 million for a period of not less than three months so that the Bank could "derive income in respect of the discounting of bills" as provided in CL3. The effect of this portion of the agreement was that the Borrower would become liable to the Bank for sums which could be quantified by reference to the

terms of the bills drawn and, it may be, other amounts payable under or by reference to them. This portion of the Borrower's liability to the Bank would be able to be quantified.

However the agreement provided for obligations of the Borrower to the Bank of other kinds. "As a separate and independent agreement", the Borrower indemnified the Bank "against all liabilities of any kind whatever (whether actual or contingent) which are incurred by the (Bank) accepting or discounting any Bills pursuant to this Agreement or by reason of the (Bank) drawing accepting endorsing or becoming the payee or other holder of any Bills to which the (Bank) is a party": CLS(a). Provision was made for "default interest": CL6. The Borrower warranted to the Bank a number of matters: CL8. It agreed to pay on demand by the Bank the costs, expenses and other amounts incurred or paid by the Bank in respect of the agreement and the security and the guarantee: CL11. In addition, the Borrower undertook to indemnify the Bank "from and against any expense loss damage or liability... which the (Bank) may incur as a consequence of prepayment the occurrence of any event of default or otherwise in connection with this Agreement, the security and/or any other collateral document or securities", these events to include the matters specified in CL11(i) of the agreement.

Accordingly, in addition to the quantifiable amounts primarily provided for by the agreement, the Borrower was liable under it for damages in amounts which, it would appear, could not be readily quantifiable and which might, at least during the term of the agreement and possibly thereafter, continue to accrue by reason of breach of warranty, indemnity, and the like. Liability in respect of these unquantified liabilities would continue notwithstanding that the Borrower had paid to the Bank the quantifiable amounts in respect of the bills and other commercial documents.

It does not appear whether any such unquantifiable liabilities have arisen or are apt to arise. But it is to be borne in mind that, as I have said, the unquantifiable liabilities will in principle remain outstanding. To obtain a discharge of its liabilities under the agreement, it would be necessary for the Borrower to establish that there were no such unquantifiable liabilities and/or to secure the agreement of the Bank to the discharge of its liability in that regard under the agreement.

The guarantee contains a number of obligations to be observed by the guarantors. The parties to it are the Bank and the three groups of guarantors: the Mailmans are two of the four persons forming the third group. The agreement is expressed to bind "subject to CL13" "those persons jointly and each of them severally and every guarantor who has executed this agreement is bound": CLI1(vi).

It is not necessary to set out all of the relevant terms of the guarantee. It is sufficient to indicate that it contains a guarantee of "the due and punctual performance of all the obligations undertakings and provisions contained in or applied by" the agreement: CL2; an obligation to "pay the debt to the Lender... upon demand by the Lender": CL3; and a provision limiting the liability of the guarantors. That provision is in the following form:

Notwithstanding anything contained in this Guarantee the liability of each of the Guarantors for the Debt is limited as follows:

(b) Graham Roberts Burns,... jointly and severally as to 25%;

(c) Gregory Robert Mailman, Kerry Louise Mailman, Louise Developments Pty Ltd and Namliam Pty Ltd jointly and severally as to 25%."

The guarantee defines "Debt" as follows: "the 'Debt' means from time to time the total of all moneys actually or contingently payable by the Borrower to the Lender pursuant to the document referred to in para(a) of Item 5" (the agreement).

The guarantee contains a number of ancillary provisions. The guarantee is a principal obligation: CL6. It is not to be prejudicially affected by any other security, guarantee or indemnity held by the Bank "... and the Guarantor shall not as against the (Bank) in any way claim the benefit or seek the transfer of any security guarantee or indemnity or any part thereof': CL7(a). The guarantee is not to be affected if the Borrower ceases to be bound: CL7(b).

"(c) All benefits compositions and payments received by the (Bank) from or on account of the Borrower including any dividends upon the liquidation of the Borrower or from any other person or from the realisation or enforcement of any security or guarantee capable of being applied by the (Bank) in reduction of the Debt shall be taken and applied by the (Bank) as payments in gross without any right on the part of the Guarantor to stand in the place of the (Bank) in respect of or to claim the benefit of any moneys so received or to participate in or claim the benefit of any security or guarantee held by the (Bank) until the Guarantor has paid its proportion of the Debt or other the undertakings and provisions on the part of the Borrower contained or implied in the Documents have been fully paid or satisfied and so that in the event of the Guarantor going into liquidation or bankruptcy the (Bank) shall be entitled to prove for the total Debt."

The argument has proceeded on the basis that the judgment obtained by the Bank against the Mailmans does not affect their liability in accordance with the terms of the guarantee or otherwise. It is not clear that this is so. The judgment may affect rights against the Mailmans which had their origin in the guarantee. The judgment is, in a sense, a security for the performance by them of their obligations. The effect of payment under it upon the principal security, the mortgage, may in some circumstances require consideration. These matters have not been explored in argument. If and insofar as the judgment or payment under it may affect the obligations of the parties under the guarantee and/or in respect of the mortgage, that is a matter relevant to the discretion whether to grant declarations of rights of the kind sought. However, I shall put aside these matters and confine what I say to the effect of the guarantee as such.

It is, in my opinion, clear that the effect of the guarantee is that (subject to CL13) each of the guarantors is liable for the whole of the Debt, ie, in respect both of the quantifiable and the unquantifiable obligations of the Borrower under the agreement. To the extent that either of these obligations remains in force, the liability will not be discharged. Accordingly, the fact that the Mailmans paid to the Bank twenty-five per cent of the obligations of the Borrower in respect of its quantifiable obligations under the agreement would not discharge the Mailmans' liability under the guarantee: that liability would continue whilst the unquantifiable liabilities remained outstanding.

In so saying, I have, as I have said, put aside the possible effect of the judgment obtained by the Bank against the Mailmans. The court does not have before it the full details of the claim on which the judgment was based. It has been provided with a copy of the judgment of this Court dismissing the appeal against that judgment and of the trial judge. It is not clear whether that judgment extends to

the unquantifiable liabilities of the Borrower under the agreement. Subject to the merger of the total obligation of the Mailmans to the Bank in the judgment so that no obligation beyond the judgment remains, the Mailmans are faced with the quantification of their obligations to the Bank under the guarantee. Steps were taken by them, before the learned judge, with a view to quantifying that obligation but that result was not achieved. Accordingly, it remains uncertain whether effectively the Mailmans are now in a position fully to discharge their obligations under the guarantee by the tender of a specific sum. In principle, subject to what I have said, their liability in respect of the unquantifiable liabilities of the Borrower to the Bank will remain. This is a fact of significance in determining whether a declaration of the kind sought should be made.

However, I shall, for the purpose of reference to the arguments advanced, assume that the Mailmans are able to ascertain a sum by the payment of which they may satisfy all of their obligations under the guarantee. The arguments have proceeded upon that assumption. It has been submitted that, on that assumption, the Mailmans are entitled to the interest in the mortgage and the payment of the part of the proceeds of sale of the mortgaged property to which I have referred. In the reasons to which I shall refer, I am not, as at present advised, satisfied that they are so entitled.

THE EFFECT OF PAYMENT BY THE MAILMANS UNDER THE GUARANTEE:

I shall refer to the principles by reference to which the Mailmans' case has been advanced. Their rights in respect of the mortgage and the proceeds of sale are based upon subrogation and the doctrines from which it is derived or with which it is associated, eg, marshalling, contribution and the like: see generally Duncan, Fox and Co v The North and South Wales Bank (1880) 6 App Cas | at 10 et seq. The extent to which these doctrines operate in favour of a surety depends upon the Law Reform (Miscellaneous Provisions) Act 1965 s3 and the principles of equity. In general, where a surety has paid or contributed to the payment of the principal debt, he is entitled to be subrogated to or to rights in respect of the securities held by the creditor for the payment of the debt: see McColl's Wholesale Pty Ltd v State Bank of New South Wales (1984) 3 NSWLR 365 and the cases there referred to; Phillips and O'Donovan "The Modern Contract of Guarantee", 2nd ed, at 558 et seq.

Subrogation ordinarily operates in this way where the guarantor has guaranteed the whole of the debt, he has paid the debt, and the obligations of the debtor to the creditor have been fully discharged. But complications arise where this is not so, for example, where the guarantee is a partial guarantee only and/or where the guarantor has not yet paid the creditor under the guarantee. In the present case, the Mailmans' guarantee is, in the sense to which I have referred, limited only to twenty-five per cent, no payment has been made under it, and the creditor's debt remains unpaid. The court has been asked to deal with the appeal and declare the rights of the Mailmans upon the assumption that they will have paid twenty-five per cent of the indebtedness of the company under its agreement with the Bank.

The right of the guarantor to have the present benefit of securities held by the creditor does not arise unless and until the guarantor has paid what is to be paid under the guarantee: re Howe, ex parte Brett (1871) 6 Ch App 838 at 841. I do not mean by this that until payment a guarantor has no rights in respect of the security: he may have the standing to bring proceedings to have his rights declared or to restrain actions or appropriations inconsistent with the rights which

he will have upon discharge of the guarantee: see Dixon v Steel (1901) 2 Ch 602. But, until payment, the guarantor ordinarily will have no proprietary interest in the security and no right to a transfer of any interest in it.

More significantly for present purposes, a guarantor will, in my opinion, have no interest in the security and no right to a transfer of any portion of it unless and until the debt due to the creditor has been fully satisfied. In Duncan, Fox and Co v The North and South Wales Bank at 12, it was said that there was a right to subrogation to securities held by the creditor "when all his just claims are satisfied": see also McColl's Wholesale Pty Ltd v State Bank of New South Wales (1984) 3 NSWLR 365 at 379. This is in accordance with the ordinary understanding of the operation of guarantees. If a guarantor of ten per cent of a debt was entitled, on payment of that amount, to have an immediate ten per cent interest in a mortgage security held by the creditor, the power of the creditor effectively to ensure payment of his debt would be significantly affected. It is, in my opinion, established that the primary purpose in the security is to secure payment to the creditor in full. It is only after payment in full that, special cases apart, the right of the guarantor to have, or have an interest in, the security arises.

However, Mr Libling for the Mailmans has referred to statements in the books which, he submits, support the view that a guarantor derives an immediate proprietary interest in and may be entitled to an immediate transfer of that interest in a mortgage security by reason only of the fact that the guarantor has discharged the guarantee. The submission has been that this position arises notwithstanding that the creditor has not been fully paid. He has referred, inter alia, to Halsbury's Laws of England, 4th ed, Vol 20, paral93, where it is said:

"As soon as the surety has paid to the creditor what is due to the creditor under the guarantee, he is entitled, unless he has waived them, to be subrogated to all the rights possessed by the creditor in respect of the debt, default or miscarriages to which the guarantee relates.

Thus on payment but not before, the surety has a right to the benefit of all the securities (whether known to him or not at the time he became surety) which the creditor has received from the principal debtor before, contemporaneously with or after the creation of the suretyship and whether or not they existed at the time the guarantee was given."

It is true that in some cases and in some texts, there are statements which may be so understood, but, in my opinion, they do not bear the meaning for which the Mailmans contend. Such statements are, I think, made generally in contexts in which it is assumed that, by payment by the guarantor, the creditor's debt will have been satisfied and where there is no occasion to stipulate that the right to an interest or to a transfer of an interest in the security does not arise unless and until the creditor's debt has been satisfied: see Phillips and O' Donovan, op cit, at 562.

Mr Libling relied in this regard upon the decision of Jessel MR in Goodwin v Gray (1874) 22 WR 312. (The decision does not appear to be reported otherwise than in the Weekly Reporter).

"A person who becomes surety for a limited amount of a debt has, on paying the amount for which he is liable, all the rights of a creditor in respect of that amount, and is entitled to share in the security held by the principal debtor for the whole debt."

"Jessel MR said that the case was governed by Thornton v M'Kewan 11 WR 140, 1 H and M 525, and that he might give his judgment in the terms of the headnote to that case, which is as follows: 'Where a limited guarantee has been given, and the limit has been exceeded by the guarantee, who afterwards receives from the estate of the principal debtor a dividend, the guarantor is entitled to the benefit of a proportional part of that dividend on the amount guaranteed, notwithstanding that the unpaid debt greatly exceeds the amount of such guarantee.'

The two deeds must stand as securities for the limited amount of 500 Pounds and interest, and on payment of that amount the plaintiff was to be entitled to a proportionate part of the dividends of the bank shares belonging to Brooker" [the principal debtor].

I do not think that that decision supports the proposition that, on payment of a partial guarantee, the guarantor is then entitled to a proprietary interest, and transfer of the interest, in the security held by a creditor who remains partially unpaid.

In order to understand the decision in Goodwin v Gray, it is necessary to have in mind the issues which are apt to arise in the application of the doctrine of subrogation where the guarantee is a partial guarantee only. There may be issues as to the construction of the partial guarantee; difficulties may arise where bankruptcy or liquidation has supervened; and there may be problems of apportionment of receipts or payments between different debts and liabilities.

The first, the construction of the guarantee, was illustrated by Lord Hatherley LC in Hobson v Bass (1871) LR 6 Ch App 792 at 794. His Lordship said: "If a person guarantees a limited portion of a debt, all the authorities show that if he pays that portion he has in respect of it all the rights of a creditor. The question is, whether the guarantor means, 'I will be liable for 250 of the amount which AB shall owe you' or 'I will be liable for the amount which AB shall owe you subject to this limitation, that I shall not be called upon to pay more than 250 Pound'. The words of the guarantee are so similar to those in some of the cases cited that it would be splitting hairs to distinguish them. The words 'at any time' are material, and I think the meaning of the instrument is 'I guarantee the payment of all goods supplied, but my liability is not to be increased by their amount exceeding 250. When it reaches that sum I am to be a surety for it with all the rights of a surety. It is not then competent to the creditor to say 'I will increase my debt; I will take a dividend on the whole; and though you have paid me the 250, you shall have no rights as a surety until I am paid in full'. It is true that a surety may enter into an obligation to be liable to a limited amount for the ultimate balance remaining after all moneys obtainable from other sources have been applied in reduction of the debt, but a guarantee of that nature must be in a very different form from the present."

In Hobson v Bass, the debtor became bankrupt. The indebtedness was 657. The debt was, by the bankruptcy, converted to a claim under a statutory fund: Franklin's Selfserve Pty Ltd v Commissioner of Taxation (1970) 125 CLR 52. The proof by the creditor was for the whole debt: at 793. A dividend of 68.8.9 was paid by his estate. The question for decision was whether the guarantor, having paid already 250, was entitled to a share of the dividend "bearing the same proportion to the whale of the dividends as 250 to 657": at 793. The Lord Chancellor held that the guarantors were entitled to the proportionate share in the dividends claimed. That decision was arrived at, I think, because of the construction given to the contract of guarantee and because of the effect which

the bankruptcy was seen to have upon the debt. The guarantee, on its proper construction, was for 250 of the total debt of 657, not for 250 as such. On bankruptcy of the debtor, the creditor's debt was converted into a right to claim rateably upon the statutory fund in bankruptcy and the liability of the guarantor was reduced to the ratable equivalent of the 250.

The second issue which may arise relates to the effect of bankruptcy or liquidation upon the creditor's right against the guarantor and the effect which the insolvency laws and the form of proof of debt has Upon such rights. As I have indicated, such an issue arose in Hobson v Bass. It arose also in Ellis v Emmanuel (1876) 1 Ex D 157. The guarantor was held to have guaranteed, as it was described, the whole of the debt, even though his liability was limited to part of it, viz, 1300 of the total debt of 7000: at 160. Because the guarantee was so construed, the guarantor remained liable for the whole of the 1300 and was not entitled to share in the statutory fund on bankruptcy or to participate in any dividend from it.

Similarly, in In re Sass: ex parte National Provincial Bank of England Ltd (1896) 2 QB 12, it was held that, upon the proper construction of the guarantee, the guarantee was for "the whole of the debt": at 15. The provisions of the guarantee entitled the creditor bank to prove in the bankrupt's estate for the whole of the debt and to retain any dividends received (presumably until the debt was fully paid) without giving credit to the guarantor.

A third issue may arise as to the appropriation of payments or benefits received by the creditor. If the debtor owes two debts to the creditor and the creditor receives a payment which he may appropriate to either, questions may arise as to whether he must appropriate the payment to the debt guaranteed by the guarantor or whether he may appropriate it to the other debt, thereby effectively increasing the amount for which he may call on the guarantor. Ellis v Emmanuel has been cited as authority in this regard: see Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd (1929) 43 CLR 247 at 266; Mutual Life and Citizens' Assurance Co Ltd v Commissioner of Taxation (1959) 100 CLR 537 at 555; see also Ward v National Bank of New Zealand (1889) 8 NZLR 10. Questions similar in principle may arise where the creditor, in enforcing the unguaranteed debt, realises and applies to it assets the subject of a security or otherwise available in respect of the guaranteed debt: see Pearl v Deacon (1857) 24 Beavan 186, 53 ER 328; Dixon v Steel (1901) 2 Ch 602. Where the creditor apportions or applies moneys against the interests of the surety, the surety may be entitled to marshal the payments and funds. As to the right of contribution between two debtors: see Scholefield Goodman and Sons Ltd v Zyngier (1984) VR 445.

In Goodwin v Gray, the guarantor, Goodwin had died and his estate was administered by the court. He had, apparently, provided security for his guarantee: at 312. The guarantee was held limited to 500.

The decision of Jessel MR was, inter alia, that on payment of the 500 the guarantor's estate was entitled to "a proportionate part of the dividends of the bank shares belonging to" the principal debtor. This was presumably upon the basis that "the dividends of the bank shares" belonging to the debtor were, or were equivalent to, a dividend "from the estate of the principal debtor" received by the bank. The decision was therefore the application of the doctrine of subrogation to a guarantee of the kind referred to in Hobson v Bass. The guarantor's estate was entitled to receive the proportionate part of the dividends because they had been received by the creditor, not because a partial guarantor

is, in principle, entitled to have a proportionate interest in the creditor's security before the creditor's debt has been paid.

I have referred to these authorities because of the reliance placed upon them by the counsel in argument. I do not think that they support the claim of the Mailmans that, on payment of their partial guarantee and whilst the Bank remains not fully paid, they are entitled to the proprietary interests which are here in question. It is not in question but that, if and when the Bank is fully paid, the Mailmans will be entitled upon subrogation to rights in respect of the mortgage. But the statements made in the cases upon which they have relied were made, in my opinion, in the context of problems of the kinds to which I have referred; so understood, they do not support the more fundamental proposition for which they have been called in aid in the present appeal.

I have dealt with this aspect of the case without expressing a concluded view as to the construction of the guarantee and upon whether the obligation of the Mailmans under it was, in the sense, referred to in Ellis v Emmanuel, of the whole debt or a portion only of it. The court has been informed that the borrower company is in liquidation. It may be that issues will arise by virtue of matters such as those to which I have referred. It does not appear whether they will. It is, in my opinion, undesirable that the court should express opinions as to the construction of the document in anticipation of the outcome of such liquidation, in the absence of all of the parties and without reference to the particular circumstances which may require the decision of such matters.

In my opinion, therefore, the orders made by Cohen J should be set aside. The proceeding should be dismissed. The Mailmans should pay the costs of the Bank before the learned judge and before this Court. They should, if otherwise entitled, have a certificate under the Suitors Fund Act.

Priestley JA The respondents to this appeal, as plaintiffs in the Equity Division, sought against the defendant, now the appellant, a declaration as to the legal effect in one particular respect of a guarantee given by the respondents to the appellant. Relief consequential upon the declaration sought was also claimed.

Cohen J made a declaration giving effect to the substance of the contentions advanced by the respondents concerning the meaning of the guarantee. He refused to grant consequential relief in the form sought by the respondents.

The facts out of which the construction question grew and the law relating to that question, were fully set out by Cohen J. In this court, Kirby P and Mahoney JA have covered the same ground. Taking advantage of what they have written, Ican come straight to what seem to me the two principal matter for consideration in the appeal. The first is the construction question already mentioned, and the second is the appropriateness of making a declaration in the circumstances of the case. In regard to the construction question, and the consequential relief flowing from Cohen J's view of the construction question, I am, like Kirby P, in substantial agreement with the reasoning and conclusions of Cohen J.

The part of the document of guarantee which seems to me to be decisive in supporting the view that Cohen J's construction of the document is the preferable one, is CL7(c), set out at 13-14 of Mahoney JA's reasons. This provision seems to me to say virtually in terms that upon the respondents paying their proportion of what the Borrower became liable to pay to the appellant, the respondents were to stand in the place of the appellant in respect of or to claim the benefit of any moneys received by the appellant or to participate in or to claim the benefit of any security or guarantee held by the appellant. This provision, read in the way Cohen

J has read it, seems to me to fit much more harmoniously with the whole of the document than would be the case if the appellant's construction of the document were to be accepted.

Thus, on the issues argued between the parties at first instance, I am in agreement with Cohen J's conclusions and his order, and thus also am in agreement with the way the President would deal with this part of the case.

The other matter of principal importance in the appeal, namely whether it is appropriate to make a declaration, has been extensively discussed by Mahoney JA. Some of the reasons he has given for the view that a declaration is inappropriate strike me, with respect, as requiring very careful consideration. However, before Cohen J the parties seem to have fought the question of the construction of the document of guarantee without any question being raised about the discretionary aspects of the availability of declaratory relief. There thus seems to me to be strong reason for thinking that in the circumstances they are entitled to have this court's view upon the accuracy or otherwise, as it happens in this case in my opinion the accuracy, of Cohen J's decision on that matter. However, in view of the orders suggested by Kirby P it does not seem to me to be necessary at this stage to reach a conclusion on the question whether a declaration should be withheld for the reasons advanced by Mahoney JA. The orders proposed by Kirby P seem to me, with respect, to be appropriate to meet the concerns expressed by Mahoney JA. I would therefore leave the further consideration of the question concerning the propriety of making a declaration in the case to be dealt with in the course of the procedure suggested by Kirby P's orders. If it then seems necessary or desirable to express an opinion about the

declaration question, it can be done then. I agree with the orders proposed by Kirby P.

The parties within 21 days to bring in short minutes of the declaration and orders which they invite the Court to make to give effect to the decision of the Court.

Counsel for the Appellant: BA Coles QC / CR Newlinds Instructed by: Kemp Strang and Chippindall

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