COCKBURN & ORS v GIO FINANCE LTD [2001] NSWCA 177 | Case summary

COCKBURN & ORS v GIO FINANCE LTD [2001] NSWCA 177 | Case summary | Zoe

The impugned transactions 2 In 1987 Michael McNally was rendered a quadriplegic in a car accident. It is convenient to refer to him as the plaintiff although he was not a party to the proceedings that give rise to this appeal. 3 In 1988 the plaintiff's claim for damages arising out of the accident was settled for $1.49 million. The plaintiff was then aged 16. In July 1990 the plaintiff bought his home in Brucedale Drive Baulkham Hills. The following year he purchased an investment property in Windsor Road Baulkham Hills, subject to a mortgage to the State Bank. 4 The plaintiff's father was a trustee of the settlement moneys and he generally administered the plaintiff's affairs. Unfortunately, his duty to look after his son's interests became confused and overridden by his personal interests and the affairs of his business, Movie Mart. The mortgage in favour of the State Bank over the Windsor Road property was given to secure the overdraft account of Movie Mart. 5 Various documents were signed which purported to give the plaintiff a share in the Movie Mart business. The interest may well have been a genuine one, but the father also retained an active involvement and continuing interest in the business, not just as trustee for his son's property. 6 In September 1991 the plaintiff executed various documents in favour of the respondent (GIO) which included a deed of guarantee and indemnity and a mortgage over his two properties. The State Bank loan was refinanced. The appellants (hereafter, the solicitor) acted for the plaintiff in the transaction. The GIO mortgage showed the plaintiff as borrower with his father as guarantor, but the reality was that a significant portion of the moneys advanced were used to pay the debts of the Movie Mart business which was under the control of the father. That business failed very shortly after settlement of the mortgage transaction. 7 Subsequently, the GIO obtained possession of the Windsor Road property and it was sold at auction. However, enforcement of the mortgage over the Brucedale Drive property was restrained on an interlocutory basis pending the determination of proceedings commenced by the plaintiff in the Equity Division in May 1993 (hereafter, the earlier proceedings).

The earlier equity proceedings (including appeals to Court of Appeal) 8 In the earlier proceedings the plaintiff sued GIO as first defendant, the solicitor as second defendant and another firm of solicitors as third defendant. The claim against the third defendant was dismissed and is of no continuing relevance. 9 The earlier proceedings were heard and determined by Cohen J (McNally v GIO Finance Ltd & Ors SC, unreported, 14 September 1994). 10 With a presently immaterial exception, the claim propounded by the plaintiff against the GIO in the earlier proceedings was that the mortgage was vitiated because it was the product of his father's undue influence of which the GIO had constructive notice; and because the mortgage constituted an unjust contract within the Contracts Review Act 1980. The plaintiff pleaded that he was therefore not liable to repay the moneys allegedly still secured by the mortgage. These claims were upheld by Cohen J, who held that the plaintiff was entitled to be relieved from the effect of the outstanding mortgage over his home. An order was made that the GIO deliver to the plaintiff a duly executed discharge of the mortgage. The GIO performed this obligation on 5 October 1994. It subsequently appealed against the order, but that appeal was unsuccessful. 11 For an unknown reason, no order addressed the deed of guarantee and indemnity pursuant to which the plaintiff assumed a primary obligation to pay the GIO the moneys advanced to Movie Mart. Nothing, however, turns on this because the appeal has proceeded on the common assumption that the deed was to be treated in the same manner as the outstanding mortgage. 12 The plaintiff's claim in the earlier proceedings against the solicitor lay in contract and tort based on breach of duty of care. Cohen J held that the partner involved had failed to exercise the necessary skill and care in advising the plaintiff and in allowing the mortgage to be executed. Nevertheless he dismissed the plaintiff's claim against the solicitor "on the basis of the liability of [the GIO].". He had earlier held that the "question of the negligence of the second defendant is only relevant in the plaintiff's case if GIO is not liable". 13 At the trial before Cohen J there was a cross-claim by the GIO against the solicitor based upon misleading and deceptive conduct in relation to a certificate provided by the solicitor in connection with the mortgage transaction; and based upon a common law duty of care said to be owed by the solicitor to the GIO. Cohen J found in the GIO's favour on the claim of misleading and deceptive conduct and it was not necessary to address the negligence claim. He held that the GIO had "suffered the loss of not being able to recover from the plaintiff the balance of the money due and it has incurred the costs of the loan transaction and of the proceedings for possession". The solicitor was ordered to pay the GIO "the damages suffered by it arising out of the orders made against the [GIO] in favour of the plaintiff". The assessment of those damages was referred to a Master. 14 Both the solicitor and the GIO appealed to the Court of Appeal. The appeals were initially heard by a court constituted by Kirby ACJ, Priestley JA and Giles AJA. Judgment was given on 2 February 1996 (Cockburn & Ors v GIO Finance Ltd & Anor Court of Appeal, unreported, 2 February 1996). The leading judgment was given by Priestley JA with whom Kirby ACJ and Giles AJA agreed. Certain matters were left unresolved and were addressed only tentatively towards the conclusion of Priestley JA's reasons. The upshot was that there was a further hearing before a court differently constituted (Priestley JA, Beazley JA and Giles AJA) culminating in a judgment given in 1997 (Cockburn v GIO Finance Ltd & Ors Court of Appeal, unreported, 19 June 1997). 15 The effect of these earlier proceedings in the Court of Appeal may be summarised as follows:

[3]

The plaintiff was held entitled to a common law judgment against the solicitor for the damages recoverable by reason of the solicitor's breach of contractual retainer. The breach was the same as that found by Cohen J. However, unlike the primary judge, the Court of Appeal gave the plaintiff judgment against the solicitor for breach of retainer with damages to be assessed. The assessment was referred to a Master, if the parties were unable to reach agreement. Priestley JA explained that an order against the solicitor was appropriate because the relief to which the plaintiff was entitled was "not necessarily co-extensive with that ordered in his favour against GIO" (judgment at p42. See also at pp47-48). His Honour said (at p48): The correct legal conclusion from the opinions I have reached seems to me to be that the plaintiff is entitled to the equitable relief against GIO which Cohen J granted and is also entitled to a common law judgment against Colemans for the damages recoverable by reason of Coleman's breach of contractual retainer. Whether the money value of the latter is the same as, greater than or smaller than the money value of the equitable relief against GIO is something I would not decide without hearing argument. Argument could be obviated by agreement between all parties, but I do not think anything that has been put before the court would justify us in acting on the basis that the parties are in agreement that, for example, the money value of the two remedies is the same. If the amount that the plaintiff has indicated he is willing to take as satisfying his common law claim is clearly no larger than the money value of the equitable remedy, then the court might properly enter judgment on the proposed basis. I am inclined to think, without having had any assistance on the point, that what the plaintiff has indicated he is prepared to take is no larger than the money value of the equitable remedy. However, I am not clear enough about this view to act upon it. If the other position turned out to be the correct position then the court's order would not be fair to Colemans. It was ordered that payment of any amount found due to the plaintiff by the solicitor should be stayed until a judge of the Equity Division had considered what set-off or allowance, if any, should be made as between the GIO and the solicitor.

22 The nub of his Honour's reasoning was expressed as follows: 29 I find it helpful to analyse the case in the following way. The basic cause of the problem was the undue influence exercised by his father over McNally. As a result of this influence he was induced to make his home available as security for the borrowing of in excess of $ 300,000 from GIO and to incur a personal debt to GIO in that sum together with other payments required from him by the mortgage contract. He incurred this debt and submitted to the security obligations in circumstances where the money borrowed was to be made available to his father for business purposes which involved the risk of its loss, which in fact occurred. The combination of the loan to him and its security by way of a mortgage placed upon the title to his home diminished his legal rights in respect of his home and reduced its value to the extent of the financial obligations imposed by the mortgage. 30 As has been held, GIO was constructively aware, prior to making the loan and obtaining the mortgage, that McNally was dealing with them in relation to these matters whilst under the undue influence of his father. Being in possession of that knowledge it both could and should have, in the interest of McNally, refused to enter into the transaction at all. 31 Mr Cockburn, on behalf of Colemans, was aware that the money was being borrowed for the purposes of the father in circumstances where McNally could be in danger of losing his home. He was also aware of the facts indicating that the transaction was being entered into as a result of influence being brought to bear on McNally by the father. It was found by Cohen J that, had he issued a very strong warning to McNally, then it was most unlikely that McNally would have entered into the transaction. He did not do so and, acted for McNally in relation to the mortgage and provided documentation which facilitated its implementation. 32 In these circumstances both GIO and Colemans could, on the findings of fact made in the proceedings, have prevented the loan and the mortgage. 33 Does this analysis produce the result that GIO and Colemans " are under co-ordinate liabilities to make good the one loss"? 34 Counsel, with commendable diligence, have taken me to a large number of authorities dealing with contribution between co- obligors. In many of them, there is to be found an extensive discussion of earlier cases. I do no propose to enter into any such discussion in this case; nor do I find it necessary to refer to the authorities. I am satisfied, with respect, that I can safely follow the statement made by the learned authors of Meagher, Gummow and Lehane Equity Doctrines and Remedies, 3rd ed, Butterworths, 1992, where they state an overall test as follows:- "…the proper view appears to be that contribution may be recovered where the liabilities of the co-obligors to the principal claimant are such that enforcement by him against either co-obligor would diminish that obligor in his material substance to the value of the liability. Any alternative or additional requirement in the doctrine of contribution of similarity or consubstantial nature between the liabilities to which the co- obligors are exposed would produce intolerable uncertainty and obscure the true objects of the doctrine."

Contribution: general remarks 23 Contribution and its sibling recoupment are common law and equitable rights, although equitable remedies quia timet are available in proper cases (Wolmershausen v Gullick [1893] 2 Ch 514). Contribution is "bottomed and fixed on general principles of justice" and "founded on equality" (Albion at 351, citing Dering). 24 The injustice prevented by an award of contribution or recoupment is the enrichment of the defendant at the expense of the plaintiff actually or imminently liable in part (contribution) or whole (recoupment): see generally Bonner v Tottenham & Edmonton Permanent Investment Building Society [1899] 1 QB 161 at 174 per Vaughan Williams LJ, Armstrong v Commissioner of Stamp Duties (1967) 69 SR(NSW) 38 at 47 per Walsh JA, Mahoney v McManus (1981) 180 CLR 370 at 388 per Brennan J. On this basis, the concept of unjust enrichment has been seen as the underlying principle. 25 The right of contribution depends on matters of substance, not form. Thus, ever since Dering it has been no answer to a claim by one surety against another that their respective contracts with the creditor arose by separate instruments, at separate times, or in circumstances where neither surety knew of or relied upon the existence of the other. And extrinsic evidence can be led to show that one of two debtors is really a surety for the other (AGC (Advances) Ltd v West (1984) 5 NSWLR 590) or, conversely, that two persons apparently commonly liable are in substance each sureties for another's debt (Sherwin v McWilliams (1921) 17 Tas LR 94). 26 A right of contribution need not be based upon a contractual debt (Cummings v Lewis (1993) 41 FCR 559). Obligations imposed by statute may suffice (see eg Armstrong, Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211). 27 There is a group of cases illustrating that a right of contribution may arise even in circumstances that do not involve a liability to be sued: Ruabon Steamship Company v London Assurance [1900] AC 6 at 12 per Lord Halsbury ("equality of payment or sacrifice"); Whitham v Bullock [1939] 2 KB 81 (payment made solely under threat to distrain); James Hardie & Co Pty Ltd v Wyong Shire Council (2000) 48 NSWLR 679 at 688. In Floreani Bros Pty Ltd v Woolscourers (SA) Pty Ltd (1976) 13 SASR 313 at 320, Bray CJ said that: The doctrine [of contribution] is an old one. It exists both at law and in equity, though the right in equity is more extensive than the right at common law. It has been variously formulated. It is clear enough from the classic expositions in Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184 and Stirling v Forrester (1821) 3 Bligh 575; 4 ER 712 that it is not founded on contract but on general principles of equity and justice. I agree with Mr Fisher that it does not depend, in equity at any rate, upon a common liability to be sued. In many of the typical cases, such as the case of goods thrown overboard to save a ship from wreck, or, to take the example in Dering's case (1787) 1 Cox 318 at 320; 29 ER 1184 at 1185, of prisage of wines, when the king had the right in certain cases to take two tons of wine off a ship laden with wine, there was no liability to be sued at all. The various owners of the goods on the ship or of the tons of wine on the ship were merely subject to a common risk of having goods thrown overboard or taken by the royal prerogative.

Submissions in this appeal 31 In this Court, the respondent supported the reasoning of Foster AJ. It relied upon the general principles summarised above, with particular reference to the cases emphasising that contribution depends on matters of substance and not form. 32 The respondent submitted that there was sufficient closeness in the respective positions of the parties viz a viz the plaintiff to mean that when the GIO complied with the order for cancellation and discharge of its security this operated effectively and legally to discharge the solicitor's concurrent contract-based obligation to the plaintiff. Merely because the claim against the solicitor might have been brought in tort does not preclude a right of contribution (Burke at 189). There was, it was submitted, common liability to a single loss measurable in money terms. 33 The respondent further submitted that the plaintiff's election to go against the GIO diminished the latter in its material substance (to use the test suggested by Meagher, Gummow and Lehane at Equity Doctrines & Remedies 3rd ed at s1006). It was merely the election of the plaintiff to seek his remedy against the GIO which meant that no damage flowed in the particular circumstances from the solicitor's breach of its contractual duty of care. We were reminded that the circumstances that co-obligors were free to adopt different methods of discharging their obligations did not mean that the burden to which they were subjected was not a common one so as to attract a claim for contribution (Capita Financial Group Ltd v Rothwells Ltd (1993) 30 NSWLR 619, Street at 597-8). 34 The respondent further submitted that the plaintiff suffered the relevant "one loss" when he entered into the mortgage and the covenant to repay the debt it secured. In the events that happened, that debt was the money advanced to the father's business. Since the mortgage was never void but only voidable, there was a present and enforceable liability (ie a loss) until the formal discharge. It was at all times open to the plaintiff to seek to recover that loss against either the solicitor or the GIO, albeit on different grounds. 35 The respondent places reliance upon the reasoning of Priestley JA in the judgment of 2 February 1996, especially his Honour's conclusion that: The correct legal conclusion from the opinions I have reached seems to me to be that the plaintiff is entitled to the equitable relief against GIO which Cohen J granted and is also entitled to a common law judgment against Colemans for the damages recoverable by reason of Coleman's breach of contractual retainer.

Analysis 37 I accept the appellant's submissions. 38 The mortgage was a piece of paper that evidenced the undue influence, but it did not represent a transaction valid in the eye of equity. It is true that the personal equity asserted by the plaintiff against the GIO was one which could have been lost for a variety of reasons. But the plaintiff had asserted from the outset of the earlier proceedings that he had no liability to the GIO in consequence of the latter's constructive notice of his father's undue influence. The plaintiff's right of rescission stemmed from the act of rescission as distinct from the judicial order declaring its effectiveness. If valid, as it was held to be, the rescission avoided the relevant transaction ab initio (Alati v Kruger (1955) 94 CLR 216 at 224). 39 These matters show why the GIO's submission that there was a loss, let alone "one loss" up to the time of Cohen J's order must be rejected. The plaintiff's disaffirmation of the mortgage over his home was itself affirmed by Cohen J and, as such, it operated from the outset of the transaction (to the extent to which the mortgage was duly rescinded). 40 It followed that the plaintiff was to be treated as never having been indebted to the GIO for the relevant sum. Nor was the value of his ownership in the mortgaged property diminished by that amount. These had been the principal submissions of the GIO on appeal. The relief sought by the plaintiff, obtained before Cohen J and upheld in the earlier Court of Appeal proceedings meant that the plaintiff had established conclusively that he had no relevant liability to the GIO. 41 The order requiring the GIO to hand over a discharge was merely consequential on the valid rescission effected previously by the plaintiff. When the GIO formally discharged the mortgage in accordance with Cohen J's order, it was not meeting a liability to make good a loss or discharge a liability owed, let alone owed concurrently, with the solicitor to the plaintiff. 42 No doubt the cancellation of the mortgage left the GIO poorer. The money that it had advanced earlier to the plaintiff's impecunious father was now totally irrecoverable from any alternative source. But merely because a remedy is given against a defendant that hits it in its pocket is not enough to generate a right of contribution. Were it otherwise, then orders for specific performance or account of profits might generate a claim for contribution, something which (on my understanding) they cannot do. 43 Nor, conversely, is it enough for the GIO to point merely to the advantage accruing to the solicitor by reason of the plaintiff's rescission and the court-ordered cancellation of the mortgage. Something more is required to enliven a right of contribution (see par 30 above). Were it otherwise, a debtor who paid its creditor what was due would have a right to go against its own surety, whereas the converse is true. The GIO's argument puts the cart before the horse by assuming the coordinate liability that is in issue. 44 The respondent points to hypothetical situations where the position might possibly have been otherwise. It posits the situation of the plaintiff pursing the solicitor to substantial judgment by successfully resisting the solicitor's defensive argument that the plaintiff suffered no loss because the mortgage transaction was invalid due to undue influence. An alternative scenario explored what might have happened if the plaintiff had been forced to pursue a money claim against the GIO, eg because the plaintiff did not move until after the GIO had exercised a power of sale under the mortgage. 45 In my view it is unnecessary to consider these hypotheticals. However, the first really points up the basic fallacy in the respondent's position. In the example, the plaintiff is seen to be claiming damages against the solicitor by asserting and ex hypothesi establishing the validity of the mortgage. In the present case the plaintiff pursued his case to judgment against the GIO on the basis of the invalidity of the mortgage and the validity of his own prior disaffirmation thereof. 46 I agree with the orders proposed by Ipp AJA whose reasons I have had the benefit of reading. 47 DAVIES AJA: I agree with Mason P.

(l) After the decision of Cohen J was upheld by this Court, GIO took steps to discharge the mortgage. 52 Foster AJ said: "I find it helpful to analyse the case in the following way. The basic cause of the problem was the undue influence exercised by his father over McNally. As a result of this influence he was induced to make his home available as security for the borrowing of in excess of $300,000 from GIO and to incur a personal debt to GIO in that sum together with other payments required from him by the mortgage contract. He incurred this debt and submitted to the security obligations in circumstances where the money borrowed was to be made available to his father for business purposes which involved the risk of its loss, which in fact occurred. The combination of the loan to him and its security by way of a mortgage placed upon the title to his home diminished his legal rights in respect of his home and reduced its value to the extent of the financial obligations imposed by the mortgage." 53 His Honour found that on the facts both Colemans and GIO could have prevented the loan and the mortgage and asked whether, on this analysis, both were "under co-ordinate liabilities to make good the one loss". The quoted words are from the statement of principle by Kitto J in Albion Insurance Company Limited v Government Insurance Office of New South Wales (1969) 121 CLR 342 at 349 to 350 where his Honour said: "[A] principle applicable at law no less than in equity, is that persons who are under co-ordinate liabilities to make good the one loss (eg sureties liable to make good a failure to pay the one debt) must share the burden pro rata …" 54 Foster AJ applied the test expressed as follows by Meagher, Gummow and Lehane, Equity Doctrines and Remedies 3rd ed Butterworths 1992 at para 1006: "…the proper view appears to be that contribution may be recovered where the liabilities of the co-obligors to the principal claimant are such that enforcement by him against either co-obligor would diminish that obligor in his material substance to the value of the liability. Any alternative or additional requirement in the doctrine of contribution of similarity or consubstantial nature between the liabilities to which the co-obligors are exposed would produce intolerable uncertainty and obscure the true objects of the doctrine". 55 Foster AJ then said: "…the loan and mortgage were not nullities. They existed with full legal effect until set aside by order of the Court. (See Kerr on Fraud and Mistake , 7th ed. p.7 and cases there cited). In my opinion, the true " loss " suffered by McNally occurred when he entered into the arrangements which, at the time of such entry, diminished his financial position and the value of his home. That loss could have been corrected by his obtaining either an award in damages equivalent to the value of the loss, against Colemans or appropriate orders against the lender, GIO preventing it from recovering the debt or enforcing its security. He chose to do the latter and, thereby cast upon GIO the full financial burden of restoring him to a situation from which he had departed only because of breaches of duty owed to him, in different ways, by both GIO and Colemans. In my opinion, viewed this way, the case falls squarely within the broad, general principle relating to contribution, to which I have made reference."

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".

COCKBURN & ORS v GIO FINANCE LTD

At a glance

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Decision date

Before

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Judgment (56 paragraphs)

Parties

Cases Cited (16)

Cited By (7)