breach of mr darvall's Duty
99 The applicant submitted that the effect of Mr Darvall's advice of 18 December 1987 was that in the circumstances the trustee had no right to seek contribution or reimbursement from Nawal Nader as a matter of general law and that a claim under the Partnership Act would be subject to "the same principles limiting recovery to payments which have been made". Thus, the proceedings were of no utility. The applicant conceded that in the absence of any suggestion that they should be stood over generally pending payment of some of the outstanding judgment debt from the estate, the trustee's discontinuance of the proceedings was reasonably in conformity with the tenor of the advice and a predictable consequence of it.
100 However, according to the applicant, Mr Darvall's advice was plainly wrong because he failed to pay proper regard to section 24(2)(a) of the Partnership Act and to recognise and apply what is said by the applicant to be a well-established principle supported by a large and accessible body of case law. Section 24(2)(a) is said by the applicant to impose two separate express indemnity obligations: first, against payments made; second, against personal obligations incurred. The applicant submitted that as a matter of construction, the second obligation arises without the need for actual payment.
101 Whilst recognising that at common law a right to contribution only arises when a debtor has actually paid more than its share of a principal debt, the applicant submitted that there exists an equitable principle that a debtor with a right to contribution or indemnity can enforce that right before paying the amount due to the creditor: Lacey v Hill, Crowley's Claim (1874) LR 18 Eq 182 at 191 (Jessel MR); Wolmershausen v Gullick [1893] 2 Ch 514 at 528-9 (Wright J); In re Law Guarantee Trust and Accident Society Limited; Liverpool Mortgage Insurance Company's Case [1914] 2 Ch 617 at 633 (Buckley LJ); British Union and National Insurance Co. v Rawson [1916] 2 Ch 476 at 482 (Pickford LJ) and 486-7 (Warrington LJ); McLean v Discount and Finance Ltd (1939) 64 CLR 312 at 341 (Starke J); Albion Insurance Co Ltd v Government Insurance Office of NSW (1969) 121 CLR 342 at 350-2 (Kitto J); and Firma C-Trade S.A. v Newcastle Protection and Indemnity Association [1991] AC 1 at 28 (Brandon LJ) and 40-1 (Jauncey LJ).
102 This right may be enforced when the principal liability has been ascertained or when payment or loss is imminent: Albion Insurance Co at 351 (Kitto J), a requirement said to be met by a creditor who has obtained judgment against a debtor for the whole amount of the principal debt: McLean at 341 (Starke J); Meagher, Gummow and Lehane, Equity: Doctrine and Remedies, 3rd edition, paragraph [1003]; Lindley on Partnership, 5th edition, at 374; Parkinson, The Principles of Equity, 1996, at 538-9; Goff and Jones, The Law of Restitution, 4th edition, at 311-2.
103 In Mahoney v McManus (1981) 180 CLR 370 at 376, Gibbs CJ said:
The right to contribution arises when a surety has paid or provided more than his proper share of the principal debt, but it may also be enforced by a surety who has not made payment; the circumstances in which a surety who has not made payment may enforce a claim to contribution have not been precisely defined, but it appears that he may at least do so as soon as the creditor has acquired a right to immediate payment from him. The amount of contribution recoverable depends on the number of sureties who are solvent at the time when contribution is sought and on the proportion for which each is liable.
104 The point is well made in a judgment of a Full Court of this Court (Lockhart, Morling and Gummow JJ) in Abigroup Limited v Abignano (1992) 39 FCR 74, in which their Honours held at 83:
It is well and long established in equity that a person entitled to an indemnity may obtain relief from the indemnifying party as soon as the person's liability to the third person arises and before he has made payment himself, except where the contract otherwise provides or certain exceptional circumstances exist: see Re National Financial Co; Ex parte Oriental Commercial Bank (1868) 3 Ch App 791; Wooldridge v Norris (1868) LR 6 Eq 410; Wolmershausen v Gullick [1893] 2 Ch 514 and other cases conveniently collected in Halsbury's Laws of England (4th ed), Vol 20, par 315. The person may therefore, where appropriate, obtain an order to compel the person who has given the indemnity to set aside a fund from which liability may be met (Re Richardson; Ex parte Governors of St Thomas's Hospital [1911] 2 KB 705 per Cozens-Hardy MR at 709) or to pay the amount due directly to the third person (Ascherson v Tredegar Dry Dock and Wharf Co Limited [[1909] 2 Ch 401] or where the giver of the indemnity is under no liability to the third person, in some circumstances even to pay the amount to himself (ie the person entitled to the indemnity): Lacey v Hill, Crowley's Claim (1874) LR 18 Eq 182 per Jessel MR at 191.
105 The applicant argued that Mr Darvall failed to recognise the effect of this particular line of case law. He had been briefed with a copy of and specifically asked about the effect of the judgment in Re Richardson, but had advised that the decision would only become relevant - by grounding an action for contribution against Nawal Nader - once some payment was made by the trustee to the applicant out of the bankrupt estate. The applicant further contended that even the authorities Mr Darvall cited distinguished between the position at law and in equity and made clear that they were dealing with legal not equitable principles. They adverted to the principle that even at law a claimant may obtain a declaration before making any payment.
106 The applicant argued that this incorrect and negligent advice was the cause for the trustee's discontinuance of its proceedings against Nawal Nader in which there were good prospects of successfully recovering half of the bankrupt's liability to the applicant. The applicant said, with some justification, that the critical comments of Waddell CJ in Eq on 19 November 1987 concerning the insufficiency of the evidence in these proceedings may be put to one side because the matter was then at a very preliminary stage with only one affidavit of some eight paragraphs in support of the application. The applicant contended, moreover, that the order for the taking of the partnership's accounts, made one month prior to Mr Darvall's brief, would have been an appropriate vehicle for bringing the obligation to account, for resolving any issue as to the existence or quantum of the obligation, and for enforcing payment. Mr Darvall failed to realise and advise of the utility of that order by neglecting to answer whether there was any procedure available to the trustee or the applicant to enforce a right of contribution or indemnity against Nawal Nader. He also failed to advise generally, as was requested of him.
107 HIH submitted that Mr Darvall identified any claim for contribution against Nawal Nader as premature in that no money could be recovered for the benefit of creditors until a payment was in fact made in partial satisfaction of the judgment debt. Until then equity would only offer a declaration which would not have helped the applicant at all. So far as concerns proceedings under the Law Reform Act, the limitation period expired on 16 July 1987. As Mr Darvall was not furnished with his brief until December 1987, there was no call for him to comment. With regard to his failure to consider or advise of possible proceedings claiming contribution in equity, HIH firstly contended that Mr Darvall was quite correct in concluding that as a matter of law there is no entitlement to recover a judgment debt based on equitable contribution until a payment of some kind has been made by the party making the claim for contribution. Wren v Mahoney, Rankin v Palmer and Re Richardson were all referred to in Mr Darvall's advice.
108 HIH submitted that quia timet/injunctive relief or declarations if a payment is imminent were of no practical utility to the trustee. It argued that the authorities relied upon to support the existence of an equitable principle entitling a debtor to a right to contribution or indemnity to enforce such a right before paying the amount due to the creditor merely support the proposition that until payment is made no more than a declaration can be obtained. Furthermore, the question whether payment can be said to be imminent in circumstances where a judgment has been obtained against a party who then becomes insolvent is by no means clear and is not supported by any of the authorities.
109 The applicant argued in his first set of further submissions that Mr Darvall's advice of 2 August 1990 regarding the trustee's right to seek half of what was paid by dividend out of the estate from Nawal Nader was incorrect, on the basis developed in his second set of further submissions that the advice leads to a piecemeal approach to contribution in direct contrast to Re Snowden (1881) 17 Ch. D. 44, Stirling v Burdett (1911) 2 Ch 418 and Tucker v Bennett (1927) 2 DLR 42. Moreover, the applicant argued that even if he had provided an indemnity to the trustee to proceed against Nawal Nader at this stage, it would have been necessary to apply to the Court to set aside the dismissal of the previous proceedings, which he said had the effect of a judgment of the Court: Part 40 rule 9 Supreme Court Rules. Even if such an application were successful, that course of conduct would have made available to Nawal Nader a range of defences that were previously not relevant, such as laches, acquiescence and waiver. Hence the prospects for success of the second proposed contribution proceeding against Nawal Nader were lower than those first taken. I did not find these submissions at all helpful.
110 According to HIH, Mr Darvall's advice that proceedings claiming contribution in equity offered no practical advantage to the estate is self evidently correct in that the estate would have enjoyed no advantage by having its right to contribution from Nawal Nader declared. More simply expressed, even if the estate had made payments to the applicant in part satisfaction of the judgment debt, it would not have benefited from a declaration against Nawal Nader.
111 Also correct as a matter of law, according to HIH, was Mr Darvall's observation that the existing proceeding was premature in its inception because it would not be until the applicant received a payment by way of dividend from the estate that any monetary judgment against Nawal Nader could be obtained. That this was the view of Mr Darvall is said to be readily discernible through his use of such phrases as "as matters stand at present" and "until some payment is made". Mr McNally's evidence in these proceedings made clear his understanding that this was Mr Darvall's view.
112 HIH submitted that the Partnership Act merely codifies principles of contribution and indemnity available under the general law, as was correctly recognised by Mr Darvall's advice that upon the taking of accounts between partners, the same principles that relate to equitable contribution apply. The logical conclusion of the applicant's contentions of law could mean that a debtor against whom contribution is sought may be required, upon the taking of accounts, to account to a partner for either an equal share or for the full amount of a judgment debt which the partner has not paid. The partner, on receipt of the money, might still not pay the creditor who might then choose to bring separate proceedings against the first debtor, thus exposing him to a double liability. The result is even more absurd in an insolvency situation, HIH said, where upon the taking of accounts, the amount due to the insolvent partner is then distributed rateably amongst unsecured creditors: see Barwick CJ in Wren v Mahoney at 225.
113 The fundamental fallacy in the applicant's view of the law, which HIH submitted that these examples expose, was that it ignored the fact that a creditor is not a party to the taking of partnership accounts. Furthermore, the entitlement under section 24(2)(a) of the Partnership Act is limited to assets of the partnership, again because the creditor is not a party to the account proceedings. Therefore, Mr Darvall's advice that the taking of accounts is not an appropriate vehicle for a disappointed creditor must be true.
114 In its second set of further submissions, the applicant argued that the consent order for the taking of accounts did not survive the dismissal of the proceedings but that if it did, it is not for the applicant to explain why the accounts were not taken. The applicant agreed that this procedure is only available between the partners as against the partnership and was hence not a matter he could pursue. Yet he still argued that the failure to recommend the taking of accounts is a further matter to be held against Mr Darvall. Again these arguments are strained and far away from the central point at issue.
115 Regardless of these legal conundrums, HIH argued strongly that Mr Darvall did not breach his duty of care. Three Queens Counsel, Mr Urquhart, Mr McAlary and Mr Darvall, had different views on the utility of the trustee bringing various proceedings against Nawal Nader. The trustee and its solicitor, both experienced in insolvency litigation and in bankruptcy law generally, carefully considered their advices and then sought further advice from a competent junior counsel, Mr Wilson. In such circumstances, it is very difficult for the applicant to satisfy the Court that Mr Darvall's advice amounted to a breach of his duty.
116 The applicant responded that even if the only obtainable relief was a declaration of a right to contribution, that is not the end of the matter. In fact, the very proceeding on which Mr Darvall's advice was sought was brought in part to obtain such a declaration. A declaration, the applicant contended, would probably have been granted if appropriate evidence had been led. Thus Mr Darvall's advice that the trustee "has no right to seek contribution or reimbursement" was wrong and misleading. Moreover, the attainment of a declaration would have obviated the necessity of establishing liability in any subsequent proceedings in which contribution or indemnity was sought, with a resultant reduction in costs, inconvenience and administrative resources.