HARPLEY NOMINEES PTY LTD & ANOR v JEANS & ANOR

The current proceedings 20 The present proceedings were commenced in the Equity Division by a summons filed on behalf of Mr Jeans on 5 August 2003, some two and a half months after judgment was given in the Federal Court proceedings by Sackville J and some five months before the Full Court of the Federal Court dismissed the appeal. The defendants in the proceedings were Mr Bruce, Harpley Nominees and Advance Publicity. 21 The relief originally sought in the Equity proceedings was substantially contained in five proposed declarations which in substance sought confirmation that, as co-guarantor to the Bank, Mr Bruce was obliged to reimburse the plaintiff (Mr Jeans) for any amount paid by the plaintiff in excess of 50% of the liability of Deangrove to the Bank and that, pursuant to the 1999 agreement, the current Appellants were obliged to indemnify Mr Bruce against any such liability. The summons was amended on 21 June 2004, but only to insert a pleading as to the effect of the judgment and findings of the Federal Court, following the dismissal of the plaintiff's appeal by the Full Court. 22 After a hearing which took eight days to complete, the primary judge handed down judgment on 19 July 2004: John Anthony Jeans v John Richard Bruce & Ors [2004] NSWSC 539. His Honour made the following declarations: 1. A valid and binding agreement was made between the plaintiff, the first, second and third defendants in terms of the document entitled "Heads of agreement" dated 9 August 1999 and executed by those parties in or about September 1999. 2. Upon the proper construction of clause 6.8 of the Heads of Agreement, the second and third defendants are obliged to indemnify the first defendant from and against all liability incurred by the first defendant in respect of his guarantee dated 3 June 1998 given to the Commonwealth Bank of Australia for the debts of Deangrove Pty Limited. 3. The plaintiff and the first defendant are co-guarantors of the liability of Deangrove Pty Limited to the Commonwealth Bank of Australia. 4. The indemnity provided under clause 6.8 of the Heads of Agreement extends to: (a) all moneys paid by the first defendant to the Commonwealth Bank of Australia pursuant to the judgment obtained by the Commonwealth Bank of Australia against the first defendant in proceedings N1142 of 2000 in the Federal Court of Australia entered on 3 April 2003; (b) all legal costs incurred by the first defendant in those Federal Court proceedings; (c) any liability of the first defendant to make contribution for any payments made by any co-guarantor of the debt due to the Commonwealth Bank of Australia by Deangrove Pty Limited.

His Honour further referred to the Master questions concerning the sum presently due and payable by the Appellants to Mr Bruce and ordered that the Appellants pay Mr Bruce the sum so certified. 23 There was some debate as to why his Honour referred the quantification to a Master. However, the answer appears to be found in a cross-claim filed by Mr Bruce, who was not represented during the hearing of the appeal. That cross-claim sought a declaration that the present Appellants were obliged to indemnify him (Mr Bruce) against all liabilities incurred under the guarantee and sought an order for "all necessary inquiries and accounts between the parties". Although the only sum which had, at the date of judgment, been paid under the guarantees was the $50,000 paid by way of judgment debt by Mr Bruce, there was some suggestion (although not apparently reflected in the pleadings) that the Appellants claimed that other amounts were payable to them by Mr Bruce, which they sought to have set off against their liability with respect to the payment made by him to the Commonwealth Bank. His Honour may also have had in mind possible claims for interest, although no such claim was expressly raised on behalf of Mr Bruce. 24 It may be noted that Mr Jeans originally sought a declaration that Mr Bruce was obliged to reimburse him for any sum paid by him to the Bank "in excess of 50% of the liability of Deangrove to the Bank under the guarantee". However, the summons did not in terms seek a declaration that the present Appellants were liable to indemnify Mr Bruce in respect of the obligation of contribution, but merely to indemnify against "all liabilities incurred by the first defendant under the guarantee". Declaration 4(c) made by his Honour makes it clear that the indemnity provided under clause 6.8 of the agreement extends to any liability of Mr Bruce to make contribution for any payment made by Mr Jeans. 25 By their notice of appeal, the Appellants sought to set aside the judgment below on several bases. First, they argued both that Mr Jeans was not a guarantor of the Deangrove liability to the Bank or, alternatively, given his own evidence on oath that he did not sign the guarantee, that he should not be permitted to obtain relief in this Court based on the conclusions reached in the Federal Court proceedings that he was a guarantor. 26 Secondly, the Appellants resist the conclusion reached by the primary judge that clause 6.8 of the 1999 agreement provided an indemnity to Mr Bruce, in relation to any equitable contribution he might be required to make to Mr Jeans. 27 Thirdly, the Appellants challenged his Honour's conclusions with respect to the settlement between Mr Bruce and the Commonwealth Bank. The effect of the settlement, they contended, was that Mr Bruce had no further liability to the Bank under the guarantee and hence the obligation of the Appellants to indemnify him under clause 6.8, was at an end. 28 Fourthly, the Appellants submitted that on discretionary grounds the primary judge should not have granted relief. Relief should have been refused because:

(a) Mr Jeans had not demonstrated any capacity to pay money owed to the Bank, or any likelihood of being able to make payments in the future; (b) Mr Jeans should not have been allowed to pursue a claim based on the existence of an obligation under the guarantee in this Court whilst he was seeking to deny the existence of such a liability in the Federal Court and the High Court, and (c) Mr Jeans had no relevant interest in the obligation of the Appellants to indemnify Mr Bruce, nor in determining the nature or extent of that obligation. 29 In written submissions filed in preparation for the hearing of this appeal, the Appellants sought to raise a further ground of appeal, namely that the primary judge erred in finding that they were party to the 1999 agreement. Leave to amend the notice of appeal in this respect was granted on 18 July 2005, but the Court indicated at the hearing of the appeal that it wished to hear from the parties first on the grounds originally pleaded, so that the question of the Appellants' adherence to the 1999 agreement would only be addressed later, and if necessary.

Discretionary refusal of relief 30 Although it may be necessary to say something about the factual and legal issues litigated at some length below and reagitated on appeal, it is convenient to deal first with the argument that relief should have been refused to Mr Jeans in the exercise of the Court's discretion, whatever the proper answer to the factual and legal issues. That is because, on a finding of fact made by the primary judge and not challenged on appeal, there was no prospect that the asserted rights would arise. 31 Thus, the third issue identified and addressed by the trial judge was the absence of any payment, or likelihood of payment by Mr Jeans in satisfaction of his debt to the Commonwealth Bank. At [258] his Honour referred to "the evidence before the Court which is to the effect that the plaintiff has not been shown to have actually paid nor to be about to pay the obligation from his own moneys". His Honour continued: "On the evidence he clearly has no possibility of so doing." 32 His Honour reached that conclusion in the knowledge that Mr Jeans had been served with a bankruptcy notice. He further concluded that Mr Jeans had "clearly failed to prove that there is any prospect whatever of his meeting" his obligations under the guarantee: at [282]. Although there was comment in the course of argument on the appeal by counsel for Mr Jeans that the prospects of payment might not be as bleak as suggested, the factual finding made by his Honour was not challenged and this Court should act on the basis that it was correct. Indeed, there was no evidential basis presented for thinking otherwise. The conclusion reached by his Honour on the basis of this finding was that a declaration sought in the following terms should not be made: "3. A declaration that the first defendant [Mr Bruce] is obliged to reimburse to the Plaintiff [Mr Jeans] any sums paid by the plaintiff to the Bank pursuant to the Bank's judgment recovered against the Plaintiff in the said Federal Court proceedings in excess of 50% of the liability of Deangrove to the Bank under the guarantee." 33 Despite that, his Honour made a declaration in the following terms: "4. The indemnity provided under clause 6.8 of the Heads of Agreement extends to: … (c) any liability of the first defendant to make contribution for any payments made by any co-guarantor of the debts due to the Commonwealth Bank of Australia by Deangrove Pty Ltd." 34 Since Mr Jeans had no prospect of paying more than half the debt due to the Commonwealth Bank, these proceedings bore a distinct air of unreality. The fact that no right to any specific contribution from Mr Bruce had arisen, was relied upon by the Appellants to contend that a proper exercise of the Court's discretion would deny declarations of the kind sought by Mr Jeans, even if there were a legal basis for the rights asserted. In so far as the rights depended on the 1999 agreement, that contention was said to be accentuated by the fact that the 1999 agreement conferred no rights on Mr Jeans, nor did it impose any liabilities on him. He was a party to it, but the reason for that did not clearly appear, either from its terms or from its recitals. The air of unreality was further enhanced by the fact that Mr Jeans relied upon his obligation to the Bank, whereas the Appellants challenged it, and supported their challenge by tendering an affidavit sworn by Mr Jeans in the Federal Court proceedings denying that he had signed the guarantee, which evidence he neither contradicted nor explained. 35 The primary judge noted in relation to a right to contribution in such circumstances at [276]: "There appear to be conflicting lines of authority as to whether or not a surety, who has not paid, and is not able to pay, the guaranteed debt, is entitled to contribution from a co-surety."

It is not entirely clear why the question arose in that form. Declaration 3, sought by Mr Jeans as set out at [32] above, only asserted a right to contribution by way of reimbursement of sums paid by him in excess of 50% of the liability of Deangrove to the Bank. His Honour's conclusion on the facts meant not merely that no liability to make an actual payment had arisen, but that it was not imminent. The real question in those circumstances was whether any of the declarations sought by Mr Jeans should have been made, given that each was a step to establish a contingent right, which depended on the making of a payment of which his Honour found there was "no possibility". 36 The right to make a claim for contribution from a co-surety was discussed in Mahoney v McManus (1981) 180 CLR 370. No issue arose as to a prospective claim for contribution, but Gibbs CJ stated the relevant principle, in which he was joined by Murphy, Aickin and Wilson JJ, at 376: "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 the contribution is sought and on the proportion for which each is liable." 37 His Honour referred to McLean v Discount and Finance Ltd (1939) 64 CLR 312 at 328, where Latham CJ stated: "A surety who has paid more than his share of the debt as between himself and his co-sureties is entitled to compel them to contribute in proportion to their respective liabilities. … The right of a surety to actual payment of money by way of contribution arises when the surety has actually paid more than his share. Until it is clear that he has paid more than his proportion he has no equity to receive contribution … ."

Starke J stated at p 341: "At common law, no doubt, a surety could not maintain an action for contribution or money paid until he had actually paid more than his just proportion of the principal debt. But the authorities support the view that in equity the right to contribution can be declared before actual payment is made or loss sustained provided that such payment or loss is imminent ( Wolmershausen v Gullick (1893) 2 Ch 514)). A judgment against a surety for the whole amount of the principal debt justifies such a declaration, as does the allowance of a claim by the principal creditor against the estate of a deceased surety … . The apprehended loss or overpayment thus appears sufficiently imminent, and the court acts quia timet … ."

For each of these propositions, his Honour referred to Wolmershausen v Gullick (1893) 2 Ch 514. (A similar proposition is found in the judgment of Kitto J in Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342 at 351.) 38 Reference was also made by Starke J to Re Anderson-Berry (1928) Ch 290, a case in which the proceedings were taken by the sureties because the principal debtor was threatening to distribute the assets of the deceased without taking account of the debt. 39 Wolmershausen was a case in which the plaintiff was the executrix of a person who had gone surety with others for a bank loan to a company. One defendant was dismissed from the proceedings on the basis that his liability was caught by a composition under the Bankruptcy Act. With respect to the other, Wright J stated at pp 518-519: "The principal defence of the other Defendant is that the Plaintiff is not entitled to maintain this action until she has paid more than her proportion, or at any rate until she has paid her proportion. The Plaintiff is willing to pay her proportion, but she insists that the actual payment of it is not a condition precedent to her right to sue, and says that any rate she is not obliged to pay the whole in the first instance and then sue for reimbursement."

At p 527 Wright J continued: "In Lord Justice Lindley's work on Partnership (5th ed, p 374), it is observed that 'before the passing of the Judicature Acts , a right to contribution or indemnity, arising otherwise than by special agreement, was only enforceable at law by a person who could prove that he had already sustained a loss. But in equity it was very reasonably held, that even in the absence of any special agreement, a person who was entitled to contribution or indemnity from another could enforce his right before he had sustained actual loss, provided loss was imminent; and this principle will now prevail in all divisions of the High Court. Therefore a person who is entitled to be thus indemnified against loss is not obliged to wait until he has suffered, and perhaps been ruined, before having recourse to judicial aid." 40 More recently, in Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242, the relevant authorities were reviewed by Needham J. Of Wolmershausen his Honour stated at 245C: "What the Court decided was that a surety against whom judgment has been obtained by the principal creditor for the full amount but who has paid nothing in respect thereof, can maintain an action against the co-surety to compel him to contribute towards the common liability. That is clearly predicated upon the basis that the plaintiff will be forced to pay his share of the amount due and that therefore he is entitled to indemnity against the co-surety for the balance."

His Honour then concluded (at p 245F): "In respect of these claims, therefore, it seems to me that the plaintiff would be entitled to the declaration and order only if he had paid the full amount or had paid his share of the amount, or satisfied the Court that he was willing, able and prepared to pay that amount. As none of those facts exist in the present case, it seems to me that the plaintiff is not entitled to those orders." 41 None of these authorities is authority for the proposition that a surety, albeit one who has suffered a judgment against him for the full amount of the debt, can obtain contribution from a co-surety in circumstances where he is not able to make payment and indeed, payment is "not possible" because he is, in effect, insolvent. In such a case, payment could not be said to be "imminent". 42 The primary judge considered that Woolmington was an illustration of "one line of authority": that line of authority was to be contrasted with another line of authority illustrated by Bond v Larobi Pty Ltd (1992) 6 WAR 489 (Owen J): [2004] NSWSC 539 at [277]-[278]. 43 In Bond, Owen J asked the question "When does the right to contribution arise?" in circumstances where, as he was prepared to assume, the plaintiff was not ready, willing and able to pay the debt: p 501. After reviewing the authorities, he stated at p 503: "Leaving the Woolmington case to one side for the moment, there is nothing in any of the other authorities which is directly in point. Noting the prospective orders made in Wolmershausen and Kent cases and the quia timet order in Re Anderson-Berry (supra), I can see no reason in principle why a demonstration of willingness and ability to pay should be a condition precedent to the accrual of the cause of action. The Woolmington case certainly suggests that there is such a condition. One criticism which was made of the decision is that it is in conflict with the dicta of Gibbs CJ in Mahoney v McManus . I do not believe that this is so. The learned Chief Justice expressly left open the definition of the pre-requisites for claiming contribution before payment. Willingness and ability to pay might well be regarded as such a pre-requisite." 44 His Honour then continued: "In my opinion, the argument advanced by the defendants on this point overlooks the distinction between the accrual of the cause of action and the nature of the relief granted. It seems to me, as a matter of general principle, that the right to contribution, in the sense of the cause of action, accrues once there is a judgment against the surety regardless of whether the judgment has been satisfied or whether the surety is willing and able to pay it. The circumstances in which the cause of action might accrue before judgment is matter which is not necessary for me to decide. On the other hand, whether the plaintiff is willing and able to pay the debt, or at least his just proportion, is a matter which could be relevant to, and may well govern, the relief which a court will grant. It seems to me that the Woolmington case be explained on this basis and so too can the prospective orders made in the other cases to which I have referred." 45 In the judgment of the primary judge, these separate propositions have been run together and there was no reference to willingness and ability to pay as a relevant pre-requisite. In Woolmington Needham J did not refuse relief on a discretionary basis. The time of accrual of a liability and questions of the appropriateness of any discretionary relief must be kept separate. 46 In Cockburn v GIO Finance Ltd (No. 2) Ipp AJA concluded that the right to contribution arises upon the accrual of a liability to the principal creditor, which the guarantor is legally obliged to discharge immediately: [2001] 51 NSWLR 624 at [69]. Presumably mutual obligations of contribution between co-guarantors would then arise, although there could be no liability for a specific sum until one guarantor had paid more than his or her equitable proportion. In any event, assuming that a liability on the part of Mr Bruce did arise when judgment was entered against Mr Jeans in the Federal Court, at the suit of the Commonwealth Bank, it will be a provable debt in Mr Bruce's bankruptcy: Bankruptcy Act 1966 (Cth), s 82(1). As noted in Mahoney v McManus (in the passage quoted at [36] above) the right to recover contribution may depend upon the solvency of the co-surety "at the time when the contribution is sought". That fact, and the ultimate discharge of the liability of the bankrupt surety, will not affect the liability of the other co-surety: Bankruptcy Act, s 153(1) and (4). In other words, Mr Bruce's bankruptcy does not affect Mr Jeans' liability, but it does provide a further discretionary consideration militating against the grant of relief. 47 In these circumstances relief should be refused on discretionary grounds for the reasons discussed by Owen J in Bond v Larobi. It is not necessary to decide other questions.

Conclusions 48 In the exercise of the Court's discretion, the relief sought by Mr Jeans should not have been granted on his application. It is true that Mr Bruce also sought declarations in similar form against the Appellants, by way of cross-claim, but they appear to have been brought defensively, against the event that Mr Jeans was successful against him. He did not appear on the appeal to defend the orders made below, nor was any argument put to the Court as to why relief should be granted on his cross-claim if it were inappropriate to be granted on the application of Mr Jeans. 49 The other substantive order made by his Honour was to refer the matter to the Master to inquire into and certify the sums presently due to be paid by the Appellants to Mr Bruce pursuant to the declaration concerning the effect of the indemnity. The cross-claim brought by Mr Bruce did not in fact seek payment of any amount, but merely sought an order "for all necessary inquiries and accounts between the parties". Further inquiries and accounts would involve Mr Bruce's trustee in expense. Because his trustee in bankruptcy did not appear to uphold that order, and because it was made consequentially upon declarations which should be set aside, that order should also be set aside. The remaining orders made by his Honour involved either stays or costs orders. They too must fall with the substantive relief. 50 It follows that there is no cause to continue the hearing of the appeal to deal with the factual challenge to the finding of the primary judge that the agent of the Appellants in fact executed a form of the 1999 agreement containing the indemnity in clause 6.8. 51 Accordingly I would propose the following orders:

(2) Set aside the declarations and orders made in the Equity Division on 13 August 2004 in proceedings no. 50104 of 2003.

(3) In lieu thereof, order that the summons filed on behalf of the First Respondent (John Anthony Jeans) be dismissed with costs.

(4) Order that the cross-claim filed on behalf of the Second Respondent (John Richard Bruce) be dismissed, with no order as to costs.

(5) Order that the First Respondent pay the Appellants' costs of the appeal.

(6) Grant the First Respondent a certificate under the Suitors' Fund Act 1951 (NSW) in relation to the appeal. **********

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