56 On the basis of the above reasoning, his Honour held that GIO was entitled to equitable contribution from Colemans in the amount of $149,123.45.
57 On appeal, the main contentions of Colemans were that McNally had suffered no relevant loss, GIO had no relevant liability to McNally, and, in any event, if GIO was liable to McNally, the liabilities of GIO and Colemans were not co-ordinate.
58 Mr Robb QC, senior counsel for GIO, submitted that McNally, as principal claimant, suffered a loss at the time of the advance that gave rise to an entitlement on the part of GIO to contribution "because he became indebted to GIO … for the amount of the advance, and the value of his ownership of the mortgaged property was diminished by that amount." Colemans, he submitted, was at the same time liable to McNally for damages in the same amount, being the amount of the advance. Mr Robb submitted that both GIO and Colemans "were in jeopardy of being reduced in their material substance to remedy McNally's loss such that the achievement of the remedy against the one would correspondingly reduce the liability of the other to make good McNally's loss." In regard to the concept of "jeopardy" as giving rise to contribution, he relied on the following statement of Giles JA (with whom Heydon JA agreed) in James Hardie & Company v Wyong Shire Council (2000) 48 NSWLR 679 at 687 to 688:
"So far as the principle [of contribution] requires that persons be under co-ordinate liabilities, it has been said that the notion of co-ordinate liability 'defies exclusive or narrow definition': K Mason and J W Carter, Restitution Law in Australia (1995) at 206 [622]. There are established categories, but what underlies the notion is not common liability to be sued but a common risk the burden of which should, if it falls unequally, be adjusted." [My emphasis]
59 On this basis, Mr Robb submitted that the liabilities of GIO and Colemans were co-ordinate. He submitted that, if contribution were not ordered, equity as between GIO and Colemans would be defeated by the caprice of McNally in suing GIO for orders avoiding the mortgage and the guarantee and indemnity, and in not proceeding against Colemans for damages arising out of its breach of the retainer and negligence.
60 Irrespective of the difficulties in definition, an element of the concept of co-ordinate liabilities undoubtedly is that the party seeking contribution and one or more other parties must be liable to a principal claimant for the same loss, or under a common risk of being required to bear the burden of the same loss.
61 Leaving aside, for the moment, the question whether GIO and Colemans were liable for the same loss (namely, that said to have been suffered by McNally), it is first necessary to examine whether McNally suffered a loss at all.
62 Mr Robb submitted that McNally suffered a loss because he became liable for the advance to his father which was secured by the mortgage over his property. This submission is an essential element of GIO's argument, as if McNally did not suffer a loss, GIO had no liability to him and, hence, no claim for contribution.
63 The submission that McNally suffered such a loss was based, in essence, on the proposition that the mortgage (and the guarantee) was not a nullity and existed with full legal effect until set aside by order of the Court. The mere existence of the mortgage and the guarantee, until they were discharged, together with the advance to McNally's father, was said to constitute a loss to McNally.
64 In Alati v Kruger (1955) 94 CLR 216 Dixon CJ, Webb, Kitto and Taylor JJ explained at 224:
"It is not that equity asserts a power by its decree to avoid a contract which the defrauded party himself has no right to disaffirm, and to revest property the title to which the party cannot affect. Rescission for misrepresentation is always the act of the party himself …. The function of a court in which proceedings are taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio , and, if it is valid, to give effect to it and make consequential orders … "
65 Thus, it is not the court that sets aside a contract entered into as a result of undue influence. The party who has been unduly influenced is required first to discharge that contract and if the discharge is disputed, it is for the court to affirm it or not. As Mr Robb submitted, at least until McNally sought to set aside the mortgage and guarantee, they remained in force and of effect. It was during this period, he argued, that McNally suffered a loss (for which, he submitted, GIO was liable).
66 Mr Donaldson SC, senior counsel for Colemans, pointed to the fact that, before GIO commenced its action for contribution, Cohen J had made an order directing that the mortgage be discharged on the grounds of undue influence. Accordingly, he submitted, by the time the action was commenced, McNally was not suffering from any loss arising out of the mortgage and guarantee and, because, in effect, these instruments are to be taken as having been set aside ab initio, McNally is to be regarded as never having suffered a loss. Hence, GIO, too, is to be regarded as never having suffered a loss arising out of any claim by McNally against it relating to the setting aside of these instruments. On that basis, GIO has no right to a contribution.
67 Mr Robb, in response, relied on Wolmershausen v Gullick [1893] 2 Ch 514 where Wright J held that a surety against whom judgment has been obtained by the principal creditor, but who has paid nothing in respect thereof, can bring an action against a co-surety to compel it to contribute towards the common liability. Mr Robb submitted that Wolmershausen (which has been followed by many courts since it was decided 108 years ago) is authority for the proposition that the right to contribution arises in equity when the liabilities of the co-obligors are ascertained, not when payment is made. He argued, in effect, that, prior to the setting aside of the mortgage and guarantee, the liabilities of GIO and Colemans existed and had been ascertained. Hence, at that stage, McNally had incurred a loss. Therefore, GIO's right to contribution accrued before the mortgage and guarantee were set aside.
68 In Wolmershausen Wright J prefaced his conclusion that a co-surety could claim contribution from another co-surety before the creditor was paid, by referring to several cases where the creditor had first required that payment be made by the co-surety claiming contribution. He then (at 527) adopted a passage from Lindley on Partnership 5th edition at 374 where it was observed that before the passing of the Judicature Acts a right to contribution, arising otherwise than by special agreement, was only enforceable at law by a person who had already sustained a loss (that is, in the case of co-sureties, when the co-surety claiming contribution had already paid the creditor). But, according to the learned author, in equity, persons entitled to contribution could enforce their rights before they had sustained actual loss, provided the "loss was imminent". Thus, in the ordinary case of principal and surety, as soon as the creditor has acquired a right to immediate payment from the surety, the latter is entitled to call upon the principal debtor to pay the amount of the debt guaranteed, so as to relieve the surety from his or her obligation; and where one person has covenanted to indemnify another, an action for specific performance may be sustained before the plaintiff has actually been damnified.
69 In my view, the principles expounded in Wolmershausen do not bear out the submission that the right to contribution arises in equity upon the mere "ascertaining" of the liabilities of the co-obligors. Wright J was dealing with the situation where the principal creditor had obtained judgment against a co-surety, or where the principal creditor's claim had been proved in bankruptcy. In such circumstances, the creditor acquires "a right to immediate payment from the surety". That is, payment to the creditor is due. The surety's loss is "imminent" in this sense. The necessary element in this respect is, therefore, the accrual of a liability to the principal creditor which the co-obligor is obliged to discharge immediately. It is then that the right to contribution arises.
70 The case of a mortgage and guarantee tainted by undue influence (where the mortgagor has taken no steps to set the instruments aside) is not analogous to a case where the principal creditor has obtained judgment against a co-surety. Moving from the general to the particular, it may be said that, until McNally elected to set the GIO mortgage and guarantee aside, any liability that GIO might have owed McNally (even in the broad sense contended for by GIO) was not an accrued liability that obliged GIO to discharge the mortgage and guarantee immediately. No loss to GIO was "imminent" in the requisite sense. Indeed, the question whether GIO would suffer a loss at all remained uncertain until McNally elected to set aside the mortgage and the guarantee.
71 Accordingly, until McNally elected to set aside the instruments in question, the risk of loss to GIO was too remote to found a right to claim contribution from Colemans. Indeed, prior to the setting aside, any claim for a contribution brought by GIO would have been met by Colemans with the valid defence that, as McNally had not sought to set aside the mortgage and guarantee, GIO had suffered no loss.
72 GIO only suffered a loss in any sense when the transaction was avoided. Its loss then was the loss of the monies it had advanced to McNally's father. Its loss was not the loss of the mortgage and the guarantee. As these instruments were set aside ab initio, they are to be regarded as never having been validly entered into. On that basis they never afforded GIO any rights having any value. The avoidance of instruments having no value does not give rise to loss.
73 In my view, therefore, the fact that the mortgage and guarantee were not nullities and existed with full legal effect until McNally set them aside does not mean that until then GIO suffered a loss that entitled it to bring a claim for contribution. Accordingly, I do not accept the submissions made on behalf of GIO in this respect.
74 In any event, in my view, the liabilities of GIO and Colemans were not co-ordinate because they were fundamentally different in character (see Street & Ors v Retravision (NSW) Pty Ltd (1995) 56 FCR 588 at 599).
75 In Street Gummow J observed (at 597) that liabilities arising out of different instruments may be co-ordinate. Further, liabilities that do not arise at the same time or in respect of the same cause of action may be co-ordinate (see also Burke v LFOT Pty Ltd (2001) 178 ALR 161).
76 Nevertheless, as Gummow J observed at (599), relying on Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184, "there is not co-ordinate liability if there is lacking a common burden from joinder of the several obligations by a common end". In BP Petroleum Ltd v Esso Petroleum Co Ltd [1987] SLT 345 at 347 it was said that co-ordinate liability was liability "of the same nature and the same extent".
77 Even if GIO is to be regarded as having incurred a liability to McNally, that liability did not constitute a burden common to both GIO and Colemans. While GIO was liable to submit to the setting aside of the mortgage and guarantee, Colemans had no such liability and, upon the setting aside of the instruments in question, suffered no loss. Moreover, Colemans could only have become liable for the entering into of the mortgage and guarantee if McNally had affirmed their validity, in which event GIO would have had no liability. Put in another way, GIO's liability depended upon the mortgage and guarantee being set aside, but Colemans' liability depended upon the mortgage and guarantee being affirmed. The burdens of each were different, not common. There was no joinder of obligations by a common end or purpose. It follows that there is insufficient commonalty or mutuality in the burden of liabilities to give rise to a right of contribution.
78 Additionally, in my view, there is lacking in these circumstances a basic rationale of the right to contribution, namely, the consequence that the discharge by one co-obligor of its liability to the principal claimant discharges the other (James Hardie & Company v Wyong Shire Council at 687 to 688 per Giles JA, Bonner v Tottenham and Edmonton Permanent Investment Building Society [1899] 1 QB 161 at 176, Meagher, Gummow and Lehane op cit at para 1006). This needs some explanation.
79 It is indeed the case that when the mortgage and guarantee were set aside, any potential liability on the part of Colemans was discharged. But conversely, any payment of damages to McNally by Colemans would have had no effect on any liability by GIO to McNally.
80 The relevant liability of GIO, as submitted, was that it would have to submit to a claim by McNally for the discharge of the mortgage and guarantee. Were McNally to sue Colemans, however, he would have to affirm the mortgage and the guarantee. Otherwise he could not establish that he had suffered any loss through Colemans' breach of contract or negligence. Any payment of damages by Colemans would be predicated on such affirmation having been made. I reiterate that without such affirmation, Colemans would have no liability to McNally. But if such affirmation were to be made, the relevant potential liability of GIO would be negated. Thus, any payment of damages by Colemans, once such affirmation were made, would have no bearing on the position of GIO (GIO having been released from liability by the affirmation).
81 I think it necessary to acknowledge that in Burke v LFOT Pty Ltd the Full Court of the Federal Court assumed that Foster AJ was correct in determining that GIO was entitled to contribution from Colemans. But their Honours made no examination of the relevant facts and issues.
82 I would also comment on one other aspect of this case. In Symons v Williams (1875) 1 VLR (Eq) 199 Barry J said at 216:
"Undue influence is only one of the instances of fraud and undue itself is manifested in a variety of ways … but still it is in all cases bottomed in fraud".