John Anthony Jeans v John Richard Bruce & Ors - [2004] NSWSC 539 - NSWSC 2004 case summary — Zoe

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John Anthony Jeans v John Richard Bruce & Ors

[2004] NSWSC 539

Supreme Court of NSW|2004-07-19|Before: Einstein J

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Court

Supreme Court of NSW

Decision date

2004-07-19

Before

Einstein J

Source

Original judgment source is linked above.

Judgment (525 paragraphs)

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CITATION : John Anthony Jeans v John Richard Bruce & Ors [2004] NSWSC 539 HEARING DATE(S) : 15/06/04, 16/06/04, 17/06/04, 21/06/04, 22/06/04, 23/06/04, 24/06/04, 25/06/04 JUDGMENT DATE : 19 July 2004

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JURISDICTION: Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : Parties to bring in short minutes of order

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CATCHWORDS : Contract - Guarantees - Co-guarantors - Contribution in equity as between contributing co-sureties - Release of one co-surety discharges other sureties as if creditor had released them from their obligations - Whether the availability of equitable contribution depends upon person claiming it having actually paid or being about to be required to pay an obligation from his own money - Whether surety, against whom creditor has obtained judgment on guaranteed debt is entitled to contribution from co-surety before surety has paid that debt-Failure of surety to demonstrate ability and willingness to pay his just proportion of guaranteed debt is factor to be taken into account in determining what, if any, relief is available to the surety in a contribution action - Futility of granting declaratory relief - Covenant not to sue - Whereas release of one of a number of joint, or joint and several, debtors releases all of them from the joint debt, a covenant not to sue does not-Distinctions between release and covenant not to sue - Jurisprudential provenance of rule that an indemnifier is estopped from averring contrary to a judgment handed down in previous relevant proceedings to which his/her indemnified was a party - Whether such an estoppel can arise in respect of a non-party co-guarantor - Principles - Res judicata - Cause of action estoppel - Issue estoppel - Anshun estoppel - General rule that only parties to the proceedings and their privies are bound by a res judicata, subject to a limited exception in respect of a non-party bound by contract to indemnify a party for a liability the subject of the first proceedings - Examination of indemnifier's exception to general rule that only parties and their privies are bound by a res judicata - Evidence - Admissibility by estoppel route Evidence Act 1995 LEGISLATION CITED : Law Reform (Miscellaneous Provisions) Act 1946 Law Society Rules (NSW) Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 Anderson-Berry, Re; Harris v Griffith [1928] Ch 290 Armstrong v Commissioner of Stamp Duties (1967) 69 SR (NSW) 38 Barry v Moroney (1873) 8IrRepCL 554 Belan v Casey (2003) 57 NSWLR 670 Ben Shipping Co (Pte) Ltd v An Bord Bainne (The C Joyce) [1986] 2 All ER 177 Blair & Perpetual Trustee Co Ltd v Curran (Adams' Will) (1939) 62 CLR 464 Bond v Larobi Pty Ltd (1992) 6 WAR 489 Bonner v Tottenham & Edmonton Permanent Investment Building Society [1899] 1 QB 161 Bonser v Cox (1841) 4 Beav 379 Brice & Ors v J H Wackerbarth (Australasia) Pty Ltd [1974] 2 Lloyd's Rep 274 Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 76 ALJR 749 Cacciola & Ors v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691 Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] AC 853 Carl Zeiss Stiftung v Rayner & Keeler Ltd. (No 3) [1970] Ch. 506 Cave v Mills (1862) 7 H&N 913; 158 ER 740 C E Health Casualty & General Insurance Ltd & AMP General Insurance Ltd v Pyramid Building Society (in liq) [1997] 2 VR 256 Central London Property Trust Limited v High Trees House Limited [1947] KB 130 Cheetham v Ward (1797) 1 Bos & P. 630 Cockburn v GIO Finance Ltd (No.2) (2001) 51 NSWLR 624 Codelfa Construction Pty Limited v State Rail Authority (NSW) (1982) 149 CLR 337 Commonwealth v Verwayen (1990) 170 CLR 394 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 CSR Limited v Cigna Insurance Australia Limited & Ors (1997) 189 CLR 345 Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318 Director of Public Prosecutions v Humphrys [1977] AC 1 Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164 Duffield v Scott (1789) 100 ER 628 Edwards v Culcairn Shire Council (1963) 64 SR (NSW) 62 Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88 Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (Receivers and Managers appointed( (in liq) & Ors (1993) 43 FCR 510 Ellesmere Brewery Company v Cooper [1896] 1 QB 75 EWA (a debtor) Re [1901] 2 KB 642 FAI General Insurance Company Ltd v Interchase Corporation Ltd (in liq) (1998) 10 ANZ Ins Cas 61-428 Fireproof Doors Limited, In re v The Company [1916] 2 Ch 142 Foss v Harbottle (1843) 2 Hare 461 Gracechurch Holdings Pty Ltd v Breeze & Anor (1992) 7 WAR 518 Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691 Henderson v Henderson (1843) 3 Hare 100 Hoysted v Federal Commissioner of Taxation (1921) 29 CLR 537 Hunter v Chief Constable of the West Midlands Police [1982] AC 529 CASES CITED : Insurance Exchange of Australia v Dooley & Anor (2000) 50 NSWLR 222 Jackson v Goldsmith (1950) 81 CLR 446 JN Taylor Holdings Limited (in liq) and JN Taylor Finance Pty Ltd (in liq) v Bond & Ors (1993) 59 SASR 432 Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1 Jones v Williams (1841) 8 M & W 349 Jorden v Money [1843-60] All ER Rep 350 Kendall v Hamilton (1879) 4 App Cas 504 King v Hoare (1844) 13 M & W 494 King v Norman (1847) 4 CB 884 Legione v Hateley (1983) 152 CLR 406 Lockyer v Ferryman (1877) 2 App Cas 519 McLean v Discount & Finance Ltd (1939) 64 CLR 312 Mahoney v McManus (1981) 180 CLR 370 Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) L 252 Mercantile Investment & General Trust Company v River Plate Trust, Loan & Agency Company [1894] 1 Ch 578 Mills v Cooper [1967] 2 QB 459 Morrison Rose & Partners v Hillman [1961] 2 QB 266 Murphy & Ors v Abi-Saab & Ors (1995) 37 NSWLR 280 Nicholson v Revill (1836) 4 Ad & El 675 Parker v Lewis (1873) LR8ChApp 1056 Pollak v National Australia Bank Ltd [2002] FCA 237 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 Ramsay v Pigram (1968) 118 CLR 271 R v Inhabitants of the Township of Hartington Middle Quarter (1855) 4 El &Bl 780 Reichel v Magrath (1889) 14 App Cas 665 Roberts v Karr (1809) 1 Taunt 495 Rogers v R (1994) 181 CLR 251 Smith v Crompton (1832) 3 B & Ad 407 South Australian Housing Trust v State Government Insurance Commission (1989) 51 SASR 1 State Bank of New South Wales Ltd v Alexander Stenhouse Ltd & Ors (1997) Aust Torts Reports 81-423 (NSWSC) State of New South Wales v AXA Insurance Australia Ltd (formerly known as Union Des Assurances De Paris IARD) (2002) 54 NSWLR 409 Sterling Engineering Co Ltd v Patchett [1955] AC 534 Street & Halls v Retravision (NSW) Pty Ltd (1995) 56 FCR 588 Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 Duchess of Kingston's Case (1776) 20 State Tr 355 Thompson v Palmer (1933) 49 CLR 507 Trawl Industries of Australia Pty Ltd (in liq) & Ors v Effem Foods Pty Ltd (1992) 36 FCR 406 VACC Insurance Co Ltd v BP Australia Ltd (1999) 47 NSWLR 716 Walker v Bowry (1924) 35 CLR 48 Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 Ward v National Bank of New Zealand Limited (1883) 8 App. Cas 755 Wolmershausen v Gullick [1893] 2 Ch 514 Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242 Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 John Anthony Jeans (Plaintiff) PARTIES : John Richard Bruce (First Defendant) Harpley Nominees Pty Limited (Second Defendant) Advance Publicity Pty Limited (Third Defendant) FILE NUMBER(S) : SC 50104/03 Mr J Ireland QC (Plaintiff) COUNSEL : Mr W Hodgekiss (First Defendant) Mr B Rayment QC, Mr D Kell (Second and Third Defendant) Moloney Lawyers (Plaintiff) SOLICITORS : Gary Cassim & Associates (First Defendant) Efron & Associates (Second and Third Defendant)

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50104/03 John Anthony Jeans v John Richard Bruce & Ors JUDGMENT The proceedings 1 These proceedings are conveniently divided into two separate although related sets of claims. The claims for contribution in relation to the guarantees of 12 June 1998 2 These claims raise a number of issues arising from two documents dated 12 June 1998 under which the plaintiff, Mr John Anthony Jeans and the first defendant, Mr John Richard Bruce purported to guarantee the obligations of Deangrove Pty Limited (Receivers and Manager's Appointed) ["Deangrove"] to the Commonwealth Bank of Australia (in each case "the guarantee"). The guarantees are near enough in identical terms to one another. 3 Each of Mr Jeans and Mr Bruce by different routes have become liable to the Commonwealth Bank following proceedings in the Federal Court of Australia [N 1142/2000] in which each was a cross defendant. The proceedings were settled as between the Bank and Mr Bruce. The Bank proceeded against Mr Jeans obtaining a judgment. 4 Mr Jeans seeks declaratory relief upholding his contention that (to the extent that the guarantee binds him) he has a claim for contribution in equity against Mr Bruce as co-guarantor which right is unaffected by the settlement reached between Mr Bruce and the Commonwealth Bank in the Federal Court proceedings. The claim is one in terms of an alleged entitlement to be reimbursed any sums paid by him to the Bank pursuant to a judgment recovered by the Bank against Mr Jeans in the Federal Court in excess of 50% of the liability of Deangrove to the Bank under the guarantee. 5 Mr Bruce by cross-claim seeks declaratory relief upholding his contention that he has a claim for contribution in equity against Mr Jeans as co-guarantor to be reimbursed any sums paid by him to the Bank pursuant to the Bank's judgment recovered against Mr Bruce in the Federal Court in excess of 50% of the liability of Deangrove to the Bank under the guarantee. The claims relating to the 'Heads of Agreement' 6 Mr Jeans in the summons and Mr Bruce by the cross-claim assert that: · a binding agreement was entered into by Mr Bruce, Mr Jeans, the second defendant, Harpley Nominees Pty Ltd ["Harpley Nominees"] and the third defendant a Victorian company, Advance Publicity Pty Ltd ["Advance" or "Advance Publicity"] in terms of a document called "Heads of Agreement" ["the heads of agreement "] dated 9 August 1999; · under this agreement [if authentic] Mr Bruce has an indemnity from Harpley Nominees and Advance in respect of his obligations under the guarantee, including an indemnity in respect of his obligation to Mr Jeans for contribution as a co-guarantor. 7 The proceedings presently before the Court litigated as a central issue, the circumstances in which the so-called heads of agreement are said to have been entered into. 8 Mr Jeans case as finally put was that on or about early September 1999 a document entitled heads of agreement recording the typewritten date "6 August 1999" was executed (inter alia) between Mr Jeans, Mr Bruce, Harpley Nominees and Advance Publicity. Harpley Nominees and Advance contended that no such document was ever executed on their behalf [nor agreed to] for reasons examined below. [A movement had occurred during the final hearing from the original claim that the document had been signed on or about 9 August 1999 - the matter was litigated accordingly] Clause 6.8 9 Clause 6.8 of the heads of agreement as propounded by Mr Jeans is in the following terms:

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extensive time was taken while Mr Jeans was still in his case, during which submissions on admissibility were received. 12 The central issue concerned the so-called general rule that a judgment is not binding on a person who was not a party to the proceedings in which it was given and the identification of exceptions to this rule. On some authorities those exceptions have been said to arise where an indemnifier may be found to be estopped from denying the validity of a judgment, as for example, when having been given notice of the proceedings. 13 The matter was ultimately dealt with consensually as follows: · the plaintiff was granted leave to further amend the summons; · the defendants were granted leave to further amend their defences to cope with the new amendments to the summons; · the plaintiff was granted leave to file a reply to those defences which reply in the event, turned out to be quite extensive; · directions were given for the parties to have some little time in which to reorganise for the litigation of these new issues; · additional directions with respect to discovery in relation to the new issues were given and complied with; · by reason of the complexities which had arisen in relation to the admissibility questions and in order to explain the courts decision to reserve rulings on the tender of the so-called sensitive documents, a reasonably detailed set of reasons was delivered in the form of an interlocutory judgment. 14 It seems presently unnecessary to repeat the terms of that judgment which is self-explanatory and it is taken as a given that the matters set out in that judgment will wherever appropriate, be read together with this judgment. The amended pleadings which came forward 15 The amended pleadings which then came forward are particularly important and appropriate to be noted. Appendix 'A' to this judgment records the new pleadings. Difficulties involved in determining factual issues 16 This case is an example of the difficulties encountered by a trial judge in explaining both the evidence which was given, as well as the findings of fact. This is primarily because the case of the third and fourth defendants is that the heads of agreement in the form sued upon were never signed on their behalf. However at a particular point in time, as they accept, a single execution page was signed by Mr Herzog and sent by facsimile. 17 An important witness was a solicitor, Mr Butler, whose many disparate communications between the respective entities [proposed to be the parties to the heads of agreement] have been the subject of such close scrutiny. 18 This is a case where forgery as well as very substantial wrongdoing are alleged. A solicitor has been accused of ethical misconduct of the highest order inter alia in claiming to have sent particular correspondence when it is alleged that no such correspondence was sent. 19 In this particular case it is simply not practicable nor possible in explaining factual findings, to avoid going into very considerable detail in relation to which drafts of the heads of agreement were sent to which persons and in descending to specific evidence as necessary. Forgery allegations and allegations of professional misconduct require that treatment. 20 Particular focus is also given to whom were, or were perceived to be, legal advisers to the disparate parties and at what points in time. The background 21 Certain of the background events giving rise to this litigation are not in contention. In the Federal Court proceedings brought by Deangrove as first applicant and Mr Jeans as second applicant against the Commonwealth Bank, the Commonwealth Bank cross-claimed against Deangrove as first cross defendant, Mr Jeans as second cross defendant and Mr Bruce as the cross defendant. Mr Bruce also cross-claimed against the Bank. Neither Harpley Nominees nor Advance Publicity was a party to the Federal Court proceedings. 22 After Mr Bruce had given evidence in the Federal Court proceedings heard by Sackville J, the proceedings between the Bank and Mr Bruce were settled. 23 The Bank maintained and the Federal Court held: · that Mr Jeans executed the guarantee; · that Mr Bruce was liable to the Bank on the said guarantee; and · that Mr Jeans was liable to the Bank in respect of Deangrove's obligations to the Bank. 24 On 16 May 2003 judgment was entered against Mr Jeans in favour of the Commonwealth Bank in the sum of $4,749,813.30. Mr Jeans appealed from the decision at first instance and that appeal was dismissed by the Full Federal Court on 19 December 2003. Mr Jeans has filed an application for special leave to the High Court of Australia which has not yet been heard. The redevelopment in Cairns 25 Mr Jeans was at material times the sole director and a shareholder of Deangrove. That company had entered into various agreements and arrangements in terms of its proposal to acquire land at Holloways Breach, Cairns in Queensland for redevelopment purposes. 26 Mr Bruce's company John Bruce & Partners Pty Ltd ["JBP" or "John Bruce and Partners"] was the registered proprietor of a property at Broadbeach which was being developed. Harpley was the second mortgagee. Suncorp-Metway ["the Metway Bank" or "Suncorp-Metway"] was the first mortgagee. Late 1997/early 1998 - Holloways Beach land 27 In late 1997 or early 1998, Mr Jeans and Mr Bruce agreed that the first defendant or his nominee would acquire a 50% interest in the net profit of the development of the Holloways Beach land. March 1998 28 In March 1998, negotiations were undertaken by Mr Jeans with the Bank for finance in relation to the proposed acquisition of the Holloways Beach land and the construction of a development thereon. Prior to 3 June 1998 29 Prior to 3 June 1998, the Bank proposed that certain securities be delivered by Deangrove, Mr Jeans and Mr Bruce in relation to financial accommodation to be provided to Deangrove by the Bank in respect of the Holloways Beach development. 3 June 1998 30 On or about 3 June 1998, the Bank prepared security documents relating to advances that might be made by the Bank to Deangrove in relation to the proposed land acquisition and development. 31 The security documents proposed and propounded by the Bank to Deangrove included a form of guarantee for execution by Mr Jeans and Mr Bruce in respect of the obligations of Deangrove to the Bank.

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· the undocumented arrangement between his interests and Mr Jeans was that if there was an up-side, that is profit on Deangrove, he would be entitled to 50 percent of that profit; · it was because of that arrangement that Mr Bruce had been willing in June 1998 to give a guarantee to the Commonwealth Bank of Deangrove's obligations. 34 In about February 1999 Mr Bruce had written to Mr Herzog seeking to disband the then relationship between Mr Herzog, Mr Jeans and John Bruce and Partners. 35 Mr Bruce had consulted with Mr Jeans and Mr Butler [who was his usual solicitor during March and April 1999] as to how best to proceed and determined that a special meeting should be arranged and asked Mr Jeans to arrange for such a meeting to be attended by all interested parties and their relevant advisers to negotiate what he described as "an equitable and non-confrontational solution for [John Bruce and Partners]". 36 That meeting had taken place on 19 April 1999 and had been attended by Mr Herzog, Mr Backway, Mr Jeans, Mr McGillvray (an accountant with Mr Bruce), Mr Bywaters (an employee with Mr Bruce) and himself. The background to the meeting included Harpley being under secured [cf letter Mr Herzog to Mr Bruce at page 5 of Exhibit JRB 1 and cross examination of Mr Backway at transcript 417]. The group 37 Mr Backway was the senior finance controller of the group in 1999. The relevant group comprised companies including Advance Publicity [which was apparently a trustee of a trust] and Harpley Nominees [which was itself a trustee for a partnership of two trusts, the beneficial interest in one of which was held by Mr Herzog's wife and in another of which was held by Mr Herzog's sister-in-law]. [Transcript 413] 38 Mr Backway had joined the group in September 1996 and had remained there until August 2000, no one having been appointed to take his place at the precise time when he left. By the time he returned to Australia a successor had been appointed. He had left the country and had returned after approximately 18 months towards the end of 2001. It had become necessary for him to endeavour to locate his former files [which had already been put into different files by another person] so that he had had to endeavour to rebuild his own files. 39 Obviously it goes without saying that there may well have been documents which could not be located or had been misfiled with this background. 40 The meeting of 19 April had discussed the parameters of what was proposed. Mr Herzog had not been prepared to agree with certain proposals set out in earlier letters from Mr Bruce to him of February and March 1999 and had said that John Bruce and Partners had two principal assets [being the Noroton debt and the equity in Deangrove arising from the Holloways Beach development]. Mr Herzog had said that he wanted:

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"As discussed, I have prepared the document as a draft on the basis that separate legal advice will be obtained. The draft has not as yet been submitted to John Bruce who is away until Monday - I would appreciate your thoughts and I will make any necessary changes and submit a copy to John". The difficulties faced by Mr Butler 57 A great deal of the difficulties which faced Mr Butler and in respect of which he was intensively cross-examined concerned the mix and match of the manner in which he had communicated: sometimes with other solicitors and often directly, as by speaking to or writing to Mr Backway and permitting others [as for example Mr Backway] to himself play a part in providing documents or in speaking to others [see for example PX 91 where Mr Backway was to discuss particular letters with Mr Herzog and was to provide a copy of a document to Mr Bruce for his consideration]. 58 It is not putting too fine a point on what actually happened to summarise the matter by describing Mr Butler as the central cog in terms of the initial draft and later changes to the proposed heads of agreement: his sources of information as to which parties had which particular requests and which instructions being somewhat cloudy to say the least. 59 Mr Butler does not seem to have appreciated the need for parties apparently seeking to negotiate at arm's length, to be protected in terms of their own interests, nor the pervasive problems which can arise where one solicitor acts as some sort of conduit: now preparing a draft; now taking an instruction or request from one of the parties to make a change; now taking an instruction or request from another of the parties to make a different change; now receiving a communication from a solicitor acting for one of the parties [Mr Efron acting for Advance [PX 128]] which solicitor makes suggested changes in terms of a draft and requests that Mr Butler contact his office with the response and with a redraft of Agreement] and then proceeding, notwithstanding that request, to communicate directly with that solicitor's client about the matter. [PX 153] 60 It is hardly surprising in such circumstances where problems arise in relation to what is said to have become a legally binding contract, that it becomes so very difficult to disentangle: · what instructions were given and by whom and on what advice; · how and where, if at all, such instructions were implemented; · whether particular instructions were implemented on an informed basis as to all or only some of the parties [and if so, which parties and in what respects]. The genealogy of the heads of agreement 61 A great deal of evidence was adduced in relation to the genealogy of the heads of agreement and although a deal of that evidence is chronicled hereafter, it is not practicable to chronicle all of that evidence in the judgment. Hence the detail given in the judgment is not intended to be exhaustive. Much of it was documentary and is to be found in Exhibit PX. All of the evidence is of course taken into account in the judgment. The central purpose of the heads of agreement 62 Mr Butler gave evidence that at the time he was preparing the heads of agreement in 1999:

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Additional general background 64 It is clear from the evidence given by Mr Backway [transcript 416-418] that: · in about March 1999 a valuation had been carried out of the 19 Broadbeach units by Erin Todd White; · the Suncorp-Metway loan under the first mortgage was for a sum of $1.950 million; · the valuation had produced a figure of $2.235 million with a result that the potential equity in the 19 units to satisfy the claim of Harpley Nominees as second mortgagee was $285,000. 65 Mr Backway accepted under cross-examination that the position was that Harpley Nominees was hopelessly under secured for its loan of $1.230 million, meaning that this investment was, as he believed, precarious at that stage. There were however two other assets of Mr Bruce which had some potential for recovery. The first was the entitlement that Mr Bruce's company was negotiating in terms of acquiring monies from Noroton Holdings. The second was Mr Bruce's entitlement through Deangrove in the Holloway's Beach Development which depended upon a successful financial outcome in that development. 66 There was a further loan of $350,000 which had been made to Mr Bruce's company which was secured by debenture. There had been a default in payment of interest to Harpley Nominees of approximately $136,000. 67 In short the total debts claimed by the Herzog interests were $1,230,950, [being the principal under the second mortgage over the Broadbeach units, $136,000 identified as overdue interest, and the $350,000 owed by way of loan secured by an equitable charge over the assets of the practice]. On those figures there was $1,716,950 owed to the Herzog interests and $285,000 worth of potential equity in Broadbeach [after satisfaction of the first mortgagee] to secure that. 68 Mr Backway gave evidence under cross-examination [transcript 423] that when the draft of the heads of agreement was received under cover of letter of 13 May 1999 [PX 39] he noticed clause 6.8 providing for the general form of indemnity in favour of Mr Bruce by Advance Publicity. His reaction was that such an indemnity should not be provided since the relevant companies in the group were owed $1.7 million so that there seemed to be no possible call for them to give an indemnity. He would have discussed that matter with Mr Herzog. Relationship between Mr Bruce and Mr Jeans 69 Mr Bruce gave evidence that Mr Jeans had been a consultant to Mr Bruce/Mr Bruce's company. Mr Jeans in that capacity had been a business development manager who was supposed open up opportunities for Mr Bruce. His evidence included:

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Rang Geoff Backway. Confirmed receipt of the Amended Heads of Agreement incorporating the matters discussed with him. Has not as yet had am opportunity to consider them in any detail or specifically to discuss with Mr Herzog who has returned from overseas. He will go through the documents and discuss with him with a view to exchange and he and/or Izzi will discuss draft with Graham Efron. Confirmed that Mr Bruce has agreed to the amendments and has executed the Heads of Agreement and is in a position to exchange. Confirmed that if an exchange is effected before Mr Jeans returns from Pt Moresby that the exchange be effected subject to his execution on his return." 107 Mr Butler gave evidence · that it was his invariable practice to use the word "confirm" as meaning "advise". [transcript 133] · that it appeared that what had been forwarded by him on 5 July to Mr Backway was likely to be simply another engrossment in the same terms as included the new pages 3 - 7 in the form enclosed in Mr Butler's facsimile to Mr Backway of 29 June 1999 [now to be found as PX 146 (second page of this pagination)-151]. 108 Mr Butler accepted that as the note of his telephone call to Mr Backway of 8 July recorded, Mr Backway's office had not had an opportunity to consider the amended heads of agreement in any detail and had not discussed it with Mr Herzog. Also that Mr Backway and/or Mr Herzog would discuss the draft with Mr Efron. But Mr Bruce was said to have agreed to the amendments and to have executed the heads of agreement and to be in a position to exchange. Returning to the 5 July letter 109 The second and third defendants contended that there are problems with the letter of 5 July 1999 from Mr Butler to Mr Backway [PX 153]. In this letter Mr Butler was noting that Mr Backway had confirmed that the alterations were acceptable to him. Yet three days later Mr Butler's file note made the point that Mr Backway had not yet had the opportunity to consider the amended heads of agreement in any detail. Mr Butler explained this suggested problem as follows:

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Q. Had you pursued the dealings with Mr Herzog and the drafting of the heads of agreement in the expectation that the finalisation of that document would solve the commercial problem for your company in relation to Suncorp Metway?" A. Yes. [Transcript 210] 116 His evidence was that he had travelled to Suncorp-Metway in Brisbane together with Mr Jeans and Mr Herzog when discussions took place in an endeavour to negotiate a position with the bank. [Transcript 311] Interrupting the chronology to outline the general position which will require to be determined 117 It seems convenient to stop at this point in time and to proceed to examine the central parameters of the stances taken now by one party, and now by another, in relation to the events alleged to have occurred. Mr Butler's initial evidence 118 Mr Butler initially claimed that to his understanding the heads of agreement had been exchanged on 9 August 1999 in Melbourne. He deposed in his first affidavit that he did not hold an original counterpart but that he was provided by Mr Bruce [shortly after 9 August 1999] with a photocopy of the heads of agreement signed [as he had understood it] by Mr Herzog on behalf of the second and third defendants, having been signed in Melbourne. Mr Butler's later evidence 119 He later claims to have located a further file which he then examined to then give evidence of a modified version of what had happened. This is to be found in his second affidavit. He now claimed that on 9 August 1999 he had sent a facsimile to Mr Backway attaching a re-draft of clause 3.2. His now proposition was that on 3 September 1999 he sent a letter to Mr Herzog enclosing with that a number of documents, including three copies of the heads of agreement which had been executed on behalf of all parties save the second and third defendants. He had thereafter received by post, two copies of those heads of agreement, which had been executed by Mr Herzog for and on behalf of the second and third defendants. 120 The case of the second and third defendants denied that they [by medium of Mr Herzog] had ever received the 3 September letter, signed any such heads of agreement or returned them to Sydney. Mr Herzog's evidence 121 Mr Herzog had deposed that: · he was informed by Mr Backway that he had requested certain changes to draft documents; · no copy of the heads of agreement was ever presented to him for signature; · in late July 1999 he had a telephone conversation with Mr Butler who had said that he had fixed the document to the satisfaction of Mr Efron, advised that Mr Bruce was under pressure from the bank to remove the debenture and asked Mr Herzog to sign a page of the document which Mr Butler had faxed to Mr Herzog; · Mr Herzog asked for the page to be sent to him and said that he would sign and fax it back to Mr Butler; · Mr Butler then faxed one-page only of the document to Mr Herzog who signed it and faxed it back to Mr Butler; · Mr Herzog had believed when he signed the document that the document had been amended so as to delete a reference to any guarantee by Mr Bruce in respect of the Deangrove development and believed, based upon what Mr Butler had told him, that the document in other respects was agreed with Mr Efron and Mr Backway; · the purported originals of the agreements bearing the signature of some person on behalf of the second and third defendants had been shown to him and that he did not sign the documents nor was he aware as to who had signed them. 122 Under cross-examination Mr Herzog gave evidence that he glanced through the first draft of the heads of agreement when they arrived and discussed the draft with Mr Backway. He did not notice that clause 6.8 included an indemnity. [Transcript 535] 123 He had also during May 1999 discussed the heads of agreement with Mr Efron. [Transcript 535] 124 His evidence was that he had known in May 1999 and earlier that "there [were] plenty of troubles in Deangrove" as he had learned of this from Mr Jeans. [Transcript 536] 125 Following the conclusion of the cross-examination and before re-examination the Court put some short questions to Mr Herzog and his evidence was as follows:

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HIS HONOUR: Q. From what you said a few seconds ago I rather gathered - correct me if I am wrong - that you were relying in some fashion on Mr Butler to look after this for you in terms of being sure the indemnity was there. I may have misheard you-- A. No, that's it, your Honour. Before the indemnity started, I told Butler that there had to be a security there for me because I [was] handing control of my assets to someone else." [Transcript 336-3 40] 145 Mr Bruce had given evidence under cross-examination that he had not travelled to Melbourne in order to exchange the heads of agreement. He did not believe that there ever had been an arrangement which had been cancelled to that effect. He presumed that he would not have had the ability and the expertise to handle the exchange and he would not have done so because it is something he would have expected his solicitors to do-that is to say he would have expected Mr Butler to act, as he was asked to act, from the 19 April meeting and to stand between and bring the settlement to a conclusion. [Transcript 340-3 41] Evidence given by Mr Efron 146 Mr Efron gave evidence that: · he had given advice to Mr Herzog and to Mr Backway in about May 1999 in relation to a draft heads of agreement which had been forwarded to them by Mr Butler; · he had spoken to Mr Butler about the draft agreement on about 31 May 1999 by telephone; · at the time his client was Advance Publicity and to the best of his recollection Harpley Nominees had not been referred to in the initial draft documentation; · that he had stated to Mr Butler that his client would not under any circumstances indemnify Mr Bruce and that Mr Butler in reply had said that he would have to seek instructions from his client; · that the best of his recollection his last contact with Mr Butler in relation to the heads of agreement was his letter to Mr Butler of 22 June 1999; · that the former solicitor on the record in these present proceedings was the late Mr Duncan who died on 22 February 2004 and had had possession of the original client files and of the files of relating to the heads of agreement and relating to these proceedings. Approximately one week after the death of Mr Duncan, Mr Efron had received a telephone call from Mr Duncan's brother-in-law who had informed him that he had destroyed all of Mr Duncan's file and work-related papers and that there was nothing left. 147 The court has been informed that Mr Duncan died in tragic circumstances and there was no further or other evidence given in relation to how it had come about the these papers had been destroyed. The Court has been informed that no point is taken by any party seeking to examine those circumstances. There was a consensus at the bar table that these proceedings are to be determined upon the basis that the above described client files and files relating to the heads of agreement were simply not available. The court proceeds accordingly. 148 Under cross-examination Mr Efron gave evidence that he spoke to Mr Butler by telephone on 31 May 1999 and very specifically conveyed to Mr Butler that he had very clear instructions to communicate that Advance was not prepared to give an indemnity and there was to be no indemnity. [Transcript 514 - 515] Receiver retires 149 The receiver retired on 9 August 1999. Continuing the chronology 28 July 1999 - Jeans writes to Butler 150 On 28 July 1999 Mr Jeans wrote to Mr Butler in the following terms:

[252]

Q. The questions that His Honour just asked you about, the questions that I was putting to you about Mr Backway having made it clear to you there would be no indemnity. You distinctly deny that? A. Mr Backway, on one occasion I can recall, having said that Advance did not want to give a guarantee, that was in the course of the discussions concerning various drafts of the agreement, but there was never - certainly around this time, the July period, there was no conversation with Mr Backway in those terms . Mr Backway on 29 July, as noted on page 180, said that he would have the deed of the heads of agreement signed by Mr Herzog and faxed back to me. What he faxed back, in fact, was just the last page . I rang him and said, "Jeff, I only got the last page. Can you send the whole document?" He sent the balance of it to me but didn't do it until the following morning." [Transcript 146 - 147] 30 July 1999 - Facsimile from Mr Bruce to Mr Butler 166 By 30 July 1999 a deed clarifying certain disputes between John Bruce and Partners on one hand and Mr Jeans which had been signed on behalf of John Bruce and Partners was sent by facsimile [PX 201] [transcript 314]. Mr Bruce gave evidence that it was after that date that he had signed the heads of agreement document. [Transcript 314] Finding as to the sequence of events which occurred between 28 and 30 July 1999 167 The contemporaneous documents are of considerable assistance in reaching the factual finding as to the sequence of events. The finding is however grounded upon the whole of evidence. What occurred was as follows: · on the afternoon of 28 July 1999, Mr Butler transmitted to Mr Backway an amended draft of the Heads of Agreement. This (for the first time) included Harpley as an indemnifying party under clause 6.8; · on 29 July 1999, Mr Backway telephoned Mr Butler's office and asked for a further copy of page 8 to be faxed to him which was done [PX 182]; · later on 29 July 1999, there was a telephone conversation between Mr Butler and Mr Backway in which Mr Backway said that he had the document which was discussed generally and Mr Backway stated that he would have the Heads of Agreement signed by Mr Herzog [PX 180]; · at 12:23 pm on 29 July 1999, Mr Butler received by facsimile from Mr Herzog's office a single page 12 of the Heads of Agreement bearing what are admitted to be the authentic signatures of Mr Herzog on behalf of advance and Harpley [PX 184]; · at 1:10 pm on 29 July 1999, Mr Backway left a message for Mr Butler to phone him; · Mr Butler later asked that the whole of the Heads of Agreement be retransmitted to him and this was done by Mr Backway the following day 30 July 1999 [PX 185A-185L]. This transmission was a continuous one of 12 pages but the execution page was not resent. This document included the indemnity provision in clause 6.8. Mr Backway gave evidence of certain notations he placed upon the agreement prior to forwarding same by facsimile. Those notations appear on the exhibit. Notably no notation was made to clause 6.8; · there was no conversation as alleged by Mr Backway on 30 July 1999 in which he protested the inclusion of the indemnity provisions in clause 6.8. In this respect there is no file note of Mr Butler which records a telephone call with Mr Backway at all on 30 July 1999. 3 September 1999 - Butler letter to Herzog - Express Post? 168 A further document which went into evidence [PX 287] appears to have been a letter from Mr Butler to Mr Herzog of 3 September 1999 which also has the 'express post' sticker upon it. It was in the following terms:

[262]

"When the form of the Heads of Agreement was finalised faxes were then sent to me by Mr Backway on 29 and 30 July 1999 which provided me with a facsimile copy of the Heads of Agreement signed by Mr Izzy Herzog on behalf of Advance Publicity Pty Limited and Harpley Nominees Pty Limited." 172 In paragraph 7 of his affidavit of 19 September 2003 he had deposed that he did not take part in the subsequent exchange of counterpart documents and understood that this had taken place on 9 August 1999 in Melbourne. [Transcript 152]. His evidence was that his understanding as to the date when exchange had taken place was simply his recollection without looking at the file - he seemed to recall that some document had gone down to Melbourne but he could not say that his recollection was gained by information received from any particular person. [Transcript 153]. His understanding was that it was probably Mr Jeans who had gone to Melbourne to do the exchange. 173 He had also deposed that he did not hold an original counterpart of the heads of agreement. In making that statement in his affidavit he was intending to refer to what was in the files of Jennifer E Darin rather than to his personal position. He had intended to indicate that those files did not contain an original counterpart. 174 The precise position in relation to his searches of the files for the purpose of being able to state [in his affidavit on 19 September 2003] that he did not hold an original counterpart is somewhat complex. The following seems to have been his evidence: · he probably looked at the above described file, as it would have been inappropriate for him to give the evidence which he had in his affidavit without himself or some person upon whom he could rely having searched files; [Transcript 153] · he knew that he had previously made a search for the original counterpart of the document in connection with it being required for District Court proceedings and at that time [2001] had been unable to find a further copy of the original; [Transcript 153 - 154] · parts of the District Court file were presently in court having been released to the solicitors for Mr Herzog who subsequently took over those proceedings; [Transcript 154.50] · a copy of the original document had been provided to counsel briefed in the District Court proceedings [and he believed also to the receiver of John Bruce & Partners who had inspected the file and likely taken a copy of the document] [Transcript 155]. He could not recall having [prior to his making of his first affidavit] furnished a copy of the document to any other person. [Transcript 155] 175 Under cross-examination the following was put to Mr Butler:

[285]

Stepping back to examine the events of 9 August 1999 in perspective 184 The first defendant made a number of submissions in this regard which seem to me to be of substance putting a number of the relevant parameters and facts which obtained at this general point in time into perspective. To the extent that the following statement includes a reference to factual matters the finding of the Court is that those factual matters are proven on the balance of probabilities. 185 In short: · 9 August 1999 was a Monday. On the previous Friday (6 August) Mr Butler had been in touch with Mr Nash of Clayton Utz, Mr Backway and Mr Bruce concerning the proposed settlement with Suncorp-Metway [PX 208]; · the settlement with Suncorp-Metway required the execution of a deed of forbearance by Suncorp-Metway and the execution by Harpley of a guarantee and indemnity in relation to JBP's obligations to Suncorp-Metway under the first mortgage over Broadbeach; · in a commercial sense, the two documents were interdependent. In essence, Harpley was stepping in to give a guarantee an indemnity to Suncorp-Metway as the price of removing the receivers which would then allow a sale to Islands Hotels of the Broadbeach units as intended by Mr Herzog; · at the same time, from Mr Bruce's viewpoint, the discharge which the heads of agreement accomplished in acquitting his obligations to Harpley was fundamental. The heads of agreement also had the effect of assigning in favour of Advance any profits to which JBP or Bruce himself was entitled arising out of his commercial arrangements with Mr Jeans in relation to the Holloway's Beach project. Mr Jeans then became an essential party to the heads of agreement consenting to that assignment. Also, Mr Bruce's guarantee to the CBA was to subsist; · the dealings for the forbearance under the Suncorp-Metway mortgage led to further costs and at Mr Herzog's insistence clause 3.2 of the heads of agreement (as exchanged by facsimile on 30 July 1999) had to be amended to place an additional burden upon Mr Bruce. This change was one required by Mr Herzog and Mr Backway; · on 8 August 1999 (Sunday) Mr Butler had prepared the facsimile attaching a redraft of the deed submitted by Suncorp-Metway. This document was not transmitted by facsimile to Mr Herzog's offices until the morning of 9 August 1999 [PX 209ff]; · on the same morning, Mr Butler had sent to Mr Backway the proposed redraft of clause 3 of the heads of agreement which included a sub-clause 3.2.5 [PX 221]. This change was also sent to Mr Bruce [PX 222]; · the proposed redraft to clause 3.2 was received by Mr Backway who left a telephone message for Mr Butler at 12:45 pm "that it was fine" [PX 224]. At 1:59 pm, Mr Bruce's office sent a facsimile to Mr Butler with his initials confirming the change to that clause [PX 225-226]; · the deed of guarantee and indemnity had been executed in facsimile form by Mr Herzog and other director of Harpley and witnessed by Mr Backway and then returned to Mr Butler's office by facsimile transmission earlier that day [PX 210-219]; · Mr Butler passed on the facsimile executed copies of the deed of forbearance and the deed of guarantee to Mr Nash of Clayton Utz [PX 227].

[422]

3.2 Bruce agrees that he is not entitled to any indemnity in the Proceeding from Advance or Harpley, pursuant to the terms of the Heads of Agreement or otherwise and releases and discharges and indemnifies Advance and Harpley, their officers or employees or their successors or assigns, from any and all actions, claims, suits costs and demands which but for this Deed, Bruce would or may have against Advance or Harpley in the Proceeding or arising out of the Proceeding." [PX 336] The second affidavit of Mr Bruce of 17 June 2004 225 In this affidavit Mr Bruce gave detailed evidence of particular respects in which he as well as the second and third defendants had acted in terms of their obligations by reference to the Heads of Agreement. His evidence was that in discharging particular identified obligations upon the basis that the heads of agreement were executed and operative there would be seen to arise a clear material disadvantage to him if Advance and Harpley Nominees were permitted to depart from what he described as "the operative joint assumption" set out in (paragraph 2) of his affidavit. 226 This affidavit was allowed into evidence subject to and Evidence Act 1995 section 136 limiting order which limited the admissibility to those particular statements of fact which could be strictly proven. Later events and the tender of particular documents [JRB 1, 3-8] have satisfied me that the following particular events are shown and have been proven to have occurred: · "By reference to Clause 2.1 of the HOA Panjang (a unit trust company of which Mr Bruce was sole director) transferred Trust Units to Advance in pursuance to the terms of Clause 4.4.1 of the HOA. · By reference to Clause 3.1 of the HOA, John Bruce and Partners permitted the then existing Floating Charge by Advance over the assets of JBP to be increased to $365,000.00. · By reference to the provisions of Clause 4.1 of the heads of agreement JBP and Mr Bruce assigned the "Noroton Debt" with all the remedies and rights attaching thereto to Advance. Advance subsequently acted on the rights conferred by the heads of agreement and instigated proceedings in the District Court of NSW No. 3293 of 2001 against Mr Bruce and Noroton. These proceedings are being defended by Noroton and are still being pursued by Advance as Plaintiff. The effect of the assignment was to pass control for payment of a $630,000 asset into the hand of Advance. $185,000.00 of this debt has been paid by Noroton to advance pursuant to the assignment. JBP and Bruce have been joined as a party to these proceedings. · By reference to Clause 5.1 of the heads of agreement, JBP assigned and transferred all of its Broadbeach units, referred to in the 1st schedule of the heads of agreement. Under the provisions of Clause 5, the Suncorp Metway mortgage was discharged as against JBP, by reason of an on-sale by Advance as required under the provisions of the heads of agreement. JBP signed the Contracts of Sale at the direction of Advance. The amount due under the Harpley Mortgage, mentioned in Clause 5.6 of the heads of agreement, could not be fully paid; it was necessary to proceed under Clause 5.9.1 which in turn refers to Clause 6 of the heads of agreement. · By reference to the heads of agreement, JBP, allowed control of the Broadbeach units to rest in Advance, consequently it lost the right of negotiation with Purchasers and the right to negotiate with Suncorp Metway. By reason of the Harpley Mortgage deficiency arising out of this sale of Broadbeach, JBP was required to transfer to Harpley its 50% interest in the Deangrove Equity this represented the privotal reason why the deprivation of control in the form of Clause 6.8 of the heads of agreement be provided by Harpley/Advance in respect of the CBA Guarantee. Harpley/Advance controlled the asset and the method of disposal of units, whilst Mr Bruce still carried the Guarantee for the Deangrove Loan. Mr Bruce would not have agreed to the various transactions imposed in the heads of agreement, if Advance/Harpley were not to provide such an indemnity. · On or about 17 July 2000, the second cross defendant retained Jennifer E Darin solicitors to institute proceedings against Noroton Holdings Pty Limited and Australasian Property Limited to recover monies to which those parties were entitled pursuant to the said Heads of Agreement; · Thereafter, Jennifer E Darin solicitors maintained claims on behalf of the second cross defendant against Noroton Holdings Pty Limited and Australasian Property Limited; · On or about 5 September 2000 Jennifer E Darin recovered a sum of $185,000 for the second cross defendant pursuant to its claims against Noroton Holdings Pty Limited and Australasian Property Limited; · Mr Bruce suffered detriment by the permitted and concurred assertion by the second and third cross defendants of an entitlement to recover monies from Noroton Holdings Pty Limited and Australasian Property Limited which prevented and precluded him from any such recovery." The heads of agreement - central finding 227 The balance of probabilities supports a finding that the evidence generally given by Mr Butler in terms of the circumstances concerning the execution of the heads of agreement should be accepted. Notwithstanding the troubled waters which he is shown to have entered: · in agreeing to prepare the draft heads of agreement; · in thereafter continuing in the role of taking instructions from the disparate parties [and then forwarding subsequent drafts]; · in terms of his apparent failure to understand the basic proposition that even without being formally appointed as solicitor for any party, what he was about concerned a likely conflict of interest as between the interests of one group and interests of another,

[424]

without even taking the care to read the earlier pages of those same heads of agreement which had been sent into his office by facsimile. 231 That this occurred in late July simply bespeaks the urgency of the situation on the ground. The signing on that day of the execution page occurred in circumstances in which, unless the heads of agreement were put into place, the receivership posed very real and likely imminent prejudice to the interests of Mr Herzog. Documents are sometimes signed in the heat of the moment. The balance of probabilities favours that explanation to the central issue raised and effectual level in these proceedings. 232 Thirdly, the court is unable to accept the evidence of Mr Herzog as reliable. He was not shown to have a good memory in terms of contemporaneous documents. Under cross-examination he was shown to have given inconsistent evidence in a number of areas. His contention for example that Mr Butler had been his solicitor in relation to the preparation of the heads of agreement is rejected both: · in terms of his own beliefs; · as well as in terms of the fact that neither he nor Advance nor Harpley Nominees ever received a fee note from Mr Butler. 233 Fourthly, there are simply too many problems with the evidence given by Mr Backway for the court to be in a position to accept his evidence as having been reliable. In relation to the important question of whether he had been away from the office on the 28th or the 29th of July, he gave too many versions for the court to be in a position to accept his evidence as reliable. Of course his final affidavit was dated very late in the day. His newest version was given after other oral and documentary evidence had been received, and most particularly after the evidence given by Mr Butler. 234 Whilst it has to be accepted that there were many inconsistencies in the evidence given by most of the witnesses, Mr Backway in this section of the cross-examination of earlier set out in the judgment had failed in paragraph 8 of his affidavit made as recently as 18 June 2004 to contend that there was any conversation after 30 July 1999 in which Mr Butler confirmed to him that there was no indemnity. Paragraph 8 had included:

[425]

"I telephoned Mr Butler's office on 29 July on several occasions asking to speak to him but he was not available and did not ring back. On the following day he returned my call and I said to him words to the effect (a omitting colourful language) "How could you tell Izzy that the agreement was okay when the indemnity clause is still in there?". He said words to the effect "John would not agree to have it removed". I said, "Bob we are owed over $1.6 million by John Bruce and we are not indemnifying him against anything". He said words to the effect that he would seek instructions from John Bruce." 235 Had it been the case that Mr Butler had later come back to Mr Backway and confirmed that there was no indemnity then this would indeed have been a highly significant matter to have been included in the affidavits of Mr Backway. It was not. 236 Fifthly, it is apparent from the evidence that following the sending by Mr Herzog of the single page of the heads of agreement executed by him on 29 July the balance of the pages of the heads of agreement were sent [indeed on the following day] by facsimile to Mr Butler. This is. I accept, quite inconsistent with any suggestion that those remaining pages included an important provision with which the Mr Herzog interests could not agree and had not agreed. 237 Sixthly, the case theory for which the second and third defendants contend is simply too far-fetched - effectively amounting to a conspiracy theory. The evidence does not prove this case. The wrongdoing for which the second and third defendants' case contend, involves an adverse finding against Mr Butler of an entirely different dimension and universe to the finding which is in fact made. Yes, he was either very naive or short-sighted to have imagined, at the inception of the whole project, that playing the role which the parties had asked him to play [in terms of drafting the heads of agreement] was not ripe with difficulties and not to have seen the matter as an accident waiting to happen. Yes, he was either very naive or short-sighted after having received the letter from Mr Efron, to have imagined that he could continue to deal with the two groups of parties where at that time there were different instructions being given by each of them. But to make a finding on the evidence in support of the many pieces of the puzzle which underpin the case of the second and third defendants is altogether another matter. There are after all, only a limited number of possibilities which could provide an explanation as to how the heads of agreement came to be signed. The court can only proceed on the balance of probabilities and on the evidence before it. 238 In terms of the Court's determination of the credit of Mr Butler, even taking into account all of the problems which he faced in cross-examination, I cannot accept from the evidence, nor from his demeanour, that he was involved in the deception and underhand conduct which the second and third defendants case at least on one view, would either attribute to him or regard him as having joined in as a participant. Applying the balance of probabilities test I cannot accept that on the evidence the letters which he swore he had sent to Melbourne by express post were not sent. A finding is made that they were sent. I reject the proposition that underpins the whole of the allegation that these letters are not authentic. Notwithstanding the vigorous cross-examination of Mr Butler the finding is that he was not a party to the type of fraud and deception which would have been involved in the production of the letters and the pretence through the whole of the final hearing that they were authentic. The evidence before the court falls very very far short of even having come close to establishing any such thing. Any suggestion that the court may infer the absence of Mr Jeans from the witness box as proving some involvement by him in this type of fraud and deception is also rejected. 239 Nor can I accept on the evidence that Mr Butler was a party in any sense to the subterfuge for which the second and third defendants contend in terms of the production of the original form of heads of agreement, which unless they came in from Melbourne, had to have been received by his office from someone and by some form of arrangement. Whilst there may be some explanations conceivable [as for example the forgery at the instance of Mr Jeans or Mr Bruce of the signatures of Mr Herzog to the heads of agreement] taking place entirely outside the knowledge of Mr Butler, the evidence falls far short on the balance of probabilities from establishing any such explanations. 240 Further I reject the proposition that Mr Butler was in any fashion a party to serious wrongdoing if the submission is that he knowingly received into his possession the two original versions of the heads of agreement [apparently signed by all parties] in some fashion other than the regular receipt of the documents following their having first been signed in Sydney and then sent to Melbourne and then returned to his office by Mr Herzog interests. 241 Any suggestion that the court may infer the absence of Mr Jeans from the witness box as proving some involvement by him in the fraudulent arranging of forged signatures of Mr Herzog and the production to the office of Mr Butler of the heads of agreement as if coming in from Melbourne, is also rejected. Any suggestion that the court should find that Mr Bruce was involved in such frauds is rejected. Any such cases fall very far short of what was proved. To my mind at least in the state of the evidence regarded as reliable before this Court, any such cases can only be regarded as fanciful in the extreme. 242 These considerations are not in any sense properly addressed as it seems to me by Mr Rayment's submission that the sole focus must be upon whether the second and third defendants had signed the documents recording the typewritten date 6 August 1999 [said to have been despatched to the second and third defendants under cover of the 3 September 1999 letter and said to have been signed by Mr Herzog and returned to the office of Mr Butler]. Certainly that is the question for decision as pleaded. But to so state the proposition is misconceived. 243 The court must proceed upon all of the evidence and is not blinkered in that sense. The fact is that the conspiracy theory [even to the extent that it prays in aid the failure of Mr Jeans to give evidence himself] is simply too far-fetched to be accepted as reliable when weighed against the actual evidence presently before the court. And of course that conspiracy theory and the testing of the propositions put by the second and third defendants must cope with section 140 (2) of the Evidence Act which provides that without limiting the matters that the court may take into account in deciding whether it is satisfied that the case has been proved on the balance of probabilities, the court is to take into account inter alia the gravity of the matters alleged. This is a case where that parameter is of very real significance and is clearly engaged. 244 The second and third defendants have submitted that the Court has [by dint of the fourth paragraph of the letter of 13 September 1999 from Mr Herzog to Mr Bruce PX 307A], a strong indicator in favour of the acceptance of the evidence given by Mr Herzog and by Mr Backway. The proposition is that it is almost certainly quite clear that the Herzog interests would not have: · signed the original of two copies of the heads of agreement replete with the offending clause and proceeded, soon after 3 September 1999, to forward those signed copies to Mr Butler; · only a few days thereafter, have sent the 13 September 1999 letter [making the point that Harpley Nominees, [as Mr Butler was said to have confirmed] had not given any indemnity in relation to the debts of Deangrove including the Commonwealth Bank. 245 Whilst this matter certainly requires to be weighed in the overall consideration of all of the evidence, the case of the second and third defendants places too much emphasis upon one sentence in one letter. Even before this statement in this letter, Mr Herzog had signed the one execution page submitted to him from Sydney and had done so notwithstanding that the offending clause appeared in the earlier pages which were in his office. These were dynamic times and there was urgency involved in the execution of the heads of agreement. Findings on the forgery issue 246 On the balance of probabilities, the handwriting evidence does not establish that the signatures of Mr Herzog were forged. The submission of the second and third defendants that the handwriting evidence does not establish that the signatures were genuine does not carry the case the requisite distance. That the handwriting expert evidence does not decide the matter one way or another is neither here nor there. The court's determination proceeds upon the basis of all of the evidence, the balance of probabilities on that evidence being as the Court finds, that the documents were signed by Mr Herzog.

[429]

"A surety may pay as soon as the demand becomes due and claim contribution. If there is any doubt as to whether the sum is due, the surety should give notice to the co-sureties to defend, make terms or pay their proportions. If the co-sureties do not take any such action, the co-sureties will not be entitled to claim that the surety paid improperly. The absence of notice permits the co-sureties to establish, if they can, that payments could have been resisted. Contribution is of course not possible where a surety pays without being liable to the creditor". 251 The short proposition for which the second and third defendants contend particularly relies upon the last sentence of paragraph Rowlatt: 7-57. The contention [joined in by the first defendant] is that the plaintiff has sworn that he did not sign the guarantee during the Federal Court proceedings both at first instance [on the unsuccessful application to withdraw an admission] and on appeal, and presently continues on the application for leave to appeal to the High Court of Australia, to so contend. The proposition is that there is evidence presently before the court that the plaintiff did not sign the guarantee. The proposition is that the plaintiff not having signed the guarantee is not and never had been a co-surety. The matter is said to be a fortiori. 252 To the extent that a claim is made by the plaintiff that at law [and unless successful before the High Court of Australia] he has been found to be liable on the guarantee and is bound by the finding that he signed the guarantee, the second and third defendants contention is that for the reasons given in their submissions summarised in the interlocutory judgment [reserving on the questions of admissibility of the sensitive documents] there was no issue estoppel binding the first defendant [that is to say preventing the first defendant from denying the finding by the Federal Court in terms of the plaintiff having signed the guarantee]. 253 Part and parcel of the second and third defendants first threshold point seeks to draw a distinction in terms of the issue estoppel questions as between on one hand, the position which obtains between an indemnifier and the person indemnified and on the other hand, the position which obtains as between co-sureties. The second threshold proposition - release of one co-guarantor releases all others 254 The second threshold proposition relies upon the principle that in the case of sureties, joint suretyship is the essential condition of liability of each surety, or as sometimes put, is "part of the consideration of the contract of each". 255 The authorities cited in support of this principle include Walker v Bowry (1924) 35 CLR 48 where a creditor had obtained judgment against the appellant, one of several sureties who under a deed of guarantee had contracted jointly and severally. The appellant, being adjudicated insolvent on the creditor's petition, paid the sum of £800 to the creditor in satisfaction of the judgment debt and the creditor released him from the judgment debt and all claims in respect of it; and the adjudication of insolvency was thereupon annulled. The action was by the appellant against one of his co-sureties for contribution in respect of the sum paid to the creditor. The holding was that the release of the appellant from the judgment debt as effectively discharged the other sureties as if the creditor had released him from his obligations under the guarantee. 256 The judgment of Starke J at 57-58 included the following:

[437]

70 In Mahoney v McManus (1981) 180 CLR 370 at 378, Gibbs CJ (with whom Murphy and Aickin JJ agreed) held that an equity of contribution existed when sureties and a principal debtor were all being pressed to pay a debt, one surety put the principal debtor in funds so that the debt could be paid and the principal debtor paid it. On any precise legal analysis, the surety had not paid the debt yet, even so, the payment made by the surety was regarded as a payment made "under" the guarantee, and a right of contribution was available from the other sureties because of it. Their Honours said: "… the doctrine of contribution is based on the principle of natural justice that if several persons have a common obligation they should as between themselves contribute proportionately in satisfaction of that obligation. The operation of such a principle should not be defeated by too technical an approach to the question whether a surety has paid the creditor, when he has supplied moneys to the principal debtor for the purpose of making such payment." 71 In Cockburn v GIO Finance Ltd (No.2) (2001) 51 NSWLR 624 at 631 Mason P (with whom Davies AJA and Ipp AJA agreed) said: "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 and 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; 86 WN (Pt 2) (NSW) 259 at 266, 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. The right of contribution depends on matters of substance, not form." 72 In Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 76 ALJR 749 at [40] McHugh J said that since the decision of Dering v Earl of Winchelsea in 1787, "It has never been doubted that the right of contribution depends upon matters of substance, not form."

[463]

(ii) $5,000 on or before 1 August 2003; (iii) $5,000 on or before 1 September 2003; (iv) $5,000 on or before 1 October 2003; (v) $5,000 on or before 1 November 2003; (vi) $5,000 on or before 1 December 2003; (vii) $5,000 on or before 1 January 2004. (c) it is acknowledged and agreed that if Mr Bruce fails to make any of the payments specified in sub-paragraph (b) on or before the dates therein specified, then the Bank is at liberty to enforce the judgment against Mr Bruce." 286 The correspondence which is in evidence passing between Mr Bruce and the Commonwealth Bank and the deposit receipts in evidence and general materials where Mr Bruce acknowledged that he had had difficulties in effecting certain of the payments required as part of the settlement arrangements agreed between himself and the bank makes plain that the Bank notwithstanding late payments made outside the 'time is of the essence' term, has accepted the amounts paid and has bound itself to the position that the terms of settlement, insofar as requiring payments to be made to the Bank, are to be regarded as having been honoured. [cf for example use by the Bank of the words "payment…was in satisfaction of short minutes of order" [JRB 2]. 287 The fact is that notwithstanding the terms of the judgment in fact entered against Mr Bruce, the settlement which was achieved was that the claim against him would be compromised upon the basis that he made the payments provided for in the terms of settlement. This was an agreement for full value. 288 The proposition put forward by the second and third defendants is that the Commonwealth Bank effectively bound itself to a promise that in the event that the payments were made, the bank would not enforce the judgment and relevantly for present purposes, amounted to a promise [in that circumstance] to release Mr Bruce from any further or other obligation to comply with the terms of the judgment. Reliance is placed upon the clear authority in support of the proposition that a promise to do something for value is treated in equity as the doing of that thing: cf Fireproof Doors Limited, In re v The Company [1916] 2 Ch 142 at 150. The submission is that in this area of the law the issue turns upon questions of substance and not form and the underlying fairness of the matter requires that it be dealt with without regard to the niceties of whether a judgment is or is not still on the register of judgments. Covenant not to sue 289 The misconception in the submissions of the second and third defendants is to fail to accept the applicability in the present circumstances of this qualification to the rule now in focus. The qualification was explained in the following terms in Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164 at 167 per McLelland CJ in Eq:

[464]

"…if on the true construction of the instrument in which it appears, that which purports to be a release of one of several (or joint and several) debtors was intended not to operate as a release of the whole obligation by reason that other debtors jointly (or jointly and severally) liable with the debtor purportedly released were intended to remain liable then it will be treated not as a release in the strict sense but as a covenant not to sue the debtor purportedly released…. The same qualification is applicable to a purported release of a guaranteed debt, so far as the liability of a surety is concerned." 290 The qualification provides that whereas a release of one of a number of joint, or joint and several, debtors releases all of them from the joint debt, a covenant not to sue does not. The rationale for this qualification is that where there is a single promisor a release will discharge him by putting an end to the obligation, whereas a covenant not to sue does not directly put an end to the obligation but is a contract not to enforce it. A covenant not to sue does not put an end to the obligation except by virtue of the rule against circuity of action. However, if there are several joint, or joint and several, promisors and the creditor sues others than those whom he covenanted not to sue, the rule against circuity of action does not apply and the action will succeed [see G. L. Williams, Joint Obligations, Butterworth & Co (Publishers) Ltd, London, 1949 at para 51]. 291 The distinction between a release and a covenant not to sue was considered recently by the Full Federal Court in Pollak v National Australia Bank Ltd [2002] FCA 237. In Pollak, the Court at BC200200812 [15] - [17] expressed the matter as follows: · the distinction between a release and a covenant not to sue is a question of construction of the contract between the creditor and the joint debtor in light of the surrounding circumstances; · where an instrument purports to release one of two or more joint debtors it will be construed as a covenant not to sue if it discloses an intention to reserve rights against the other joint debtor; · an agreement may constitute a covenant not to sue, rather than a release, even where there is no express reservation of rights against debtors. 292 In my view the terms of settlement properly construed in light of the surrounding circumstances constituted a covenant not to sue rather than a release, even although there was no express reservation of the creditor's rights against the co-surety. The issue is one of impression. Dealing with the fourth proposition 293 In my view this proposition should be rejected. The matter raises a short question of construction. The phrase "in respect of" where first appearing in the later form of clause 6.8 is very wide. There are no indications that the words should be construed narrowly. Nor is there any compelling reason in favour of reading down the meaning of the phrase. I do not regard the passage cited above from Codelfa as applicable in these circumstances. It is trite that the construction exercise is an objective one. 294 Upon its proper construction the later form of clause 6.8 extends to an indemnity covering a liability of Mr Bruce to a co-guarantor. Returning to dealing with the first threshold point 295 Notwithstanding the findings sustaining third threshold point the first of the threshold points remains to be dealt with. I proceed accordingly. 296 It has been argued by the second and third defendants that it is not the existence of the co-ordinate liability of the two sureties that gives right to equitable contribution but rather the existence of the guarantee itself. 297 The plaintiff has contended that the existence of the co-ordinate liability is concluded against Mr Jeans and Mr Bruce by the judgments of the Federal Court. 298 A number of questions of principle of some complexity require to be treated with and of course the questions of admissibility remain to be dealt with. 299 The principal questions which appear to arise for analysis are: · what is the jurisprudential provenance of the rule that an indemnifier is estopped from averring contrary to a judgment handed down in previous relevant proceedings to which his/her indemnified was a party? · can such an estoppel arise in respect of a non-party co-guarantor? Res judicata estoppels generally. 300 It is necessary to return to some basics in terms of res judicata estoppels generally. Origin 301 The proposition that a res judicata may affect the liberty of the parties and their privies to aver issues and/or causes of action in subsequent proceedings is of ancient origin. In Duchess of Kingston's Case (1776) 20 State Tr 355 at 358, for instance, De Grey CJ said the following in respect of the doctrine later termed 'issue estoppel':

[480]

317 Save for this generic theoretical similarity, therefore, it seems plain that in a doctrinal sense the res judicata estoppels are entirely sui generis from their contemporary namesakes. While the rationale of estoppels arising from words or conduct may once have been related, in the same manner as the res judicata estoppels, to the prevention of pleading of facts under the old pleading system, their present overriding policy function of preventing unfairness to individuals is substantially removed from that of res judicata. To this end it is perhaps worth reiterating the statement of Fullagar J above in Jackson v Goldsmith to the effect that res judicata estoppels cannot be 'correctly classified under the heading of estoppel at all', and noting further that Deane and Gaudron JJ in Rogers likewise dictated (at 274) that issue estoppel specifically "ought to be seen, not as a true estoppel, but as a different manifestation of those same policy considerations" underpinning cause of action estoppel (or res judicata in Australian parlance). (See also CSR Limited v Cigna Insurance Australia Limited & Ors (1997) 189 CLR 345 at 394, where Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ noted of Anshun that "the judgments in that case do not proceed by reference to the ordinary principles of estoppel.") 318 It has been suggested academically that it is the historical origins, rather than any present similarity, of res judicata and the true estoppels that have resulted in their continuing classification under the same legal rubric. Specifically, the original function of res judicata was (and indeed to a large extent still is) to preserve the integrity of the judicial record by preventing the court from having to decide the same cause or issue twice; thus the earliest estoppel beyond res judicata, by statement of fact in a deed, was merely an extension of this logic on the basis that facts asserted in a solemn accord were analogous to those determined judicially. Sometime during the nineteenth century, however, and concurrently with the expansion of the true estoppels to comprehend statements of fact simpliciter, the rationale lurched towards the concepts of fairness and justice prevalent today (perhaps with the intrusion of equitable precepts, hastened by fusion towards the end of the century) and away from those underpinning res judicata estoppels. As stated by Spencer Bower, Feltham, Hochberg and Leech at page 10: "By then [the end of the nineteenth century] the underlying policy of estoppel had changed twice: first, from the rationale that the court should not have to decide the same issue twice between the same parties, to the rationale that a party may not resile from a proposition to which he has solemnly and formally assented; and then, from that to the modern rationale that it is unfair for a party to resile from a representation upon which he has induced another to rely if the other will thereby suffer." See also: A M. Prichard, "Tenancy by Estoppel: The Problem and Its Relevance" (1964) 80 Law Quarterly Review 370 at 372. The 'indemnifier's exception' The rule and its development 319 Notwithstanding the general rule that only parties to the proceedings and their privies are bound by a res judicata, it appears settled that a limited exception to this rule, derived from an obiter passage in the ancient case of Duffield v Scott (1789) 100 ER 628, exists in respect of a non-party bound by contract to indemnify a party for a liability the subject of the first proceedings. In Duffield, Scott was the executor of one Balcher's estate, who had covenanted to indemnify Duffield against all debts incurred by Duffield's wife during the currency of a deed of separation. Such a debt was incurred and judgment duly obtained against Duffield, who then sought indemnity from Balcher's estate. While liability for the primary debt was conceded, the executor refused to pay Duffield's costs and expenses of defending the action as notice of it had not been provided, thus depriving the executor of the opportunity to intervene and undertake a defence. While judgment was ultimately for Duffield on the basis that the terms of the deed of indemnity were sufficiently general to encompass incurred costs, and that no specific provision as to notice had been made, Buller J concluded (at 630) by emphasising the practical advisability of giving notice in such instances as:

[495]

"I think that the law with reference to express contracts of indemnity is, that if a person has agreed to indemnify another against a particular claim or a particular demand, and an action is brought on that demand, he may then give notice to the person who has agreed to indemnify him to come in and defend the action, and if he does not come in, and refuses to come in, he may then compromise at once on the best terms he can, and then bring an action on the contract of indemnity. On the other hand, if he does not choose to trust the other person with the defence to the action, he may, if he pleases, go on and defend it, and then, if the verdict is obtained against him, and judgment signed upon it, I agree that at law that judgment, in the case of express contract of indemnity is conclusive. But I apprehend it is conclusive on account of what the law considers the true meaning of such a contract of indemnity to be… by reason of that contract of indemnity, the judgment is conclusive; but in my opinion it is conclusive because that is the meaning of the contract between the parties, for it is unquestionably not the general rule of law that a judgment obtained by A against B is conclusive in an action by B against C." [Emphasis added] 331 Upon this reasoning, therefore, the 'estoppel' referred to by Buller J in Duffield is no estoppel at all. First, as the mere existence of a contract of indemnity does not create a relationship of privity (following King v Norman), no res judicata estoppel can arise to bind the indemnifier to the prior decision. And second, as the judgment is binding upon the indemnifier due to 'what the law considers the true meaning of such a contract of indemnity to be', it is clearly not the case that the refusal of the indemnifier to act sets up an estoppel by representation to the effect that he/she is content to be bound by the resulting judgment. 332 With respect, however, it would appear that Mellish LJ's restriction of Buller J's dicta to instances of express written contracts of indemnity perhaps rests upon a misreading of the latter's use of the expression 'estopped' in Duffield. As is apparent from the above passage, his Lordship's principal concern was to curtail the possible over-expansion of the general rule that it is only parties and their privies who are bound by a res judicata, as if the 'estoppel' set up against the indemnifier was merely an extension of the res judicata estoppel binding upon the injured party and the indemnified. However, a better reading of Duffield is that the estoppel therein described is one ancillary to the principal res judicata estoppel operative upon the parties, derived from the conduct of the indemnifier in representing a contentedness to be bound by the outcome of the proceedings and operating only as against the indemnified. Given that to establish such an estoppel would require proof by the indemnified of all the constituent elements of such an estoppel- representation, reliance, detriment- it is difficult to envisage how in such a circumstance the general rule as to the effect of res judicata estoppels would be either offended nor enlarged. 333 It is thus important for present purposes to note that, given that the proceedings in Parker were upon a breach of trust, Mellish LJ's comments, while emphatic, were strictly obiter. 334 Two decades later in Mercantile Investment and General Trust Company v River Plate Trust, Loan and Agency Company [1894] 1 Ch 578, the appellants Mercantile held debentures in an American land speculation company, which debentures were secured by purported charges over property in Mexico held by the respondents River Plate as trustees for the American company (the charges were, in fact, invalid due to non-registration). Subsequently, the American company was acquired by an English company, whereupon the former assigned to the latter all its assets in consideration of the latter undertaking to provide an indemnity for all its liabilities. A meeting of debenture holders, in which Mercantile refused to participate, then resolved to convert the value of their securities into equity in the English company. Notwithstanding this resolution, Mercantile commenced proceedings for interest in arrears and were successful over the American company's defence (assisted and funded by the English company) that Mercantile were bound by the resolution to cancel the debentures. Proceedings were then brought against the English company as assignees of the debentures, who promptly set up an identical defence as that deployed in the earlier action against the American company. Mercantile responded by submitting, on the authority of Parker, that the English company were estopped from doing so. 335 Romer J began (at 594) by reiterating the well-established point (following King v Norman) that the mere fact that a contract of indemnity was in place between the English and American companies did not in itself render the former a privy of the latter; and this conclusion still followed regardless of the substantial degree of financial assistance that had been provided to the American company during the first proceedings. Moreover, Romer J then went on to confirm and clarify the dicta of Mellish LJ in Parker by holding that no estoppel could arise between Mercantile and the English company as, although the latter had expressly indemnified a party to the prior proceedings, Mercantile was a stranger to that contract. At 595-596, his Honour said:

[496]

"Lastly, it was said that, inasmuch as the American Company defended with the knowledge and approval of the English Company, the latter would be estopped under their covenant of indemnity from disputing the judgment as against the American Company suing them on the express covenant of indemnity. That is quite true. But this is not an action on the covenant of indemnity. The estoppel last referred to is only between the party indemnifying and the party indemnified, and arises only by virtue of a term implied in an express covenant of indemnity , as was pointed out in the case of Parker v Lewis . In the present case, not only are the American Company not suing, but they are not even parties to the action. The Plaintiffs are suing the English company on grounds which, the Plaintiffs maintain, make the English company directly liable to them, and not merely the American company. In such an action I can find no grounds for estoppel merely because the English Company may be estopped as against the American company if and when the latter sue on their covenant of indemnity." [Emphasis added] 336 Next is Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88, the first Australian case in the line of authority and a further decision following the contract-based approach adopted in Parker. An employee of the appellant Edwards was involved in a motor vehicle accident that led to the institution of proceedings against him as vicariously liable for his employee's negligence. As required by the terms of his public liability policy, Edwards notified the appellant insurers of the claim and invited them to assume the defence of the action; the insurers, however, declined to do so and disputed their liability to indemnify. Edwards compromised the proceedings and then commenced against the insurers, seeking to tender the compromise in evidence as conclusive of his right to indemnification. Citing Parker, Davidson J (at 94) shortly stated that "[i]t is clear that proof of a judgment against the plaintiffs would be evidence of legal liability, in the circumstances"; however the significance of this decision in a broader sense lies in its confirmation that the 'estoppel' may arise by prior compromise as much as prior judgment, provided that compromise was shown to be "reasonable" (at 95). 337 However, despite the relatively clarity of the issue following Parker, Mercantile and Edwards, the next two decisions of Cacciola & Ors v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691 and Brice & Ors v J H Wackerbarth (Australasia) Pty Ltd [1974] 2 Lloyd's Rep 274 witness a degree of confusion creeping into the authorities. In Cacciola, the question before the court was the meaning of the expression "legally liable by way of damages" as contained in the appellant's contract of indemnity insurance with the respondent. In finding that it referred to the determination of actual liability flowing from the signing of a judgment, Jacobs JA (with whom Moffitt JA and Taylor AJA generally agreed) emphasised (at 695) that it was only at this stage that the issue of liability becomes conclusive as between the indemnified and the indemnifier:

[499]

"Let me assume that the action between the plaintiff and the defendants is tried first separately. The Judge may give judgment against the defendants on the ground that they were negligent in accepting risks without taking due care. He may say nothing as to whether the plaintiffs were dishonest. Next let me assume that the defendants claim indemnity from the insurers. The insurers may challenge the finding of negligence or they may want to charge the defendants with dishonesty. If the two actions are tried separately, you may get the same questions being tried twice, with possible different results." [Emphasis added] 340 No further explanation for the highlighted passage above was provided, nor was any authority cited. 341 Next, however, comes the seminal case of Ben Shipping Co (Pte) Ltd v An Bord Bainne ("The C Joyce") [1986] 2 All ER 177. The appellants Ben Shipping chartered their vessel 'The C Joyce' to the respondents An Bord under a charterparty which provided (inter alia) that the shipowners were not liable for damage to cargo save for instances of their own negligence or default. However at the insistence of An Bord the pro forma agreement was modified to provide that all bills of lading had to include a clause paramount to the effect that the carriage of the relevant goods was subject to the Hague Rules, thus exposing Ben Shipping to a degree of third party liability notwithstanding the terms of the charterparty. An Bord then used the vessel to shipped bagged milk power to South Africa, and on completion of the voyage the then bill holders complained of damage to the goods and short delivery. Proceedings were commenced against Ben Shipping, who responded by inviting An Bord to take over the defence on the basis of the limitation of liability clause in the charterparty; when An Bord refused, the shipowners settled the litigation against the bill owners and triggered the arbitration clause in the charterparty. The matter thus came before Bingham J in the Commercial Court on a special case stated, namely whether An Bord, on the authority of Duffield, were bound by the prior judgment against Ben Shipping. There was no evidence that Ben Shipping were negligent within the meaning of the charterparty. 342 Bingham J began by citing text from Halsbury's paraphrasing the 'estoppel' in Duffield, and immediately questioned (at 185) its scope in stating:

[501]

"To succeed in their estoppel claim, the shipowners must establish as a matter of law that having given notice to the charters of the claim made against them (the shipowners) in South Africa, and the charters having declined to conduct the defence, they (the charters) are estopped from contesting the liability of the shipowners to the third party in South Africa and the reasonableness of the compromise and the incurring of costs, even though there was no express contract of indemnity and the charterers bona fide and on reasonable grounds challenged the shipowners' right to indemnity and the claim was settled without immediate reference to the charters. I do not think any such principle can be clearly found in the authorities relied on. Nor do I think it desirable to attempt to lay down such a far reaching principle. It is of course good sense and common practice for a defendant to give notice of a claim against him and any proposed settlement to a person against whom he intends to seek indemnity or contribution, if such a person is not joined as a third party. This gives that person the opportunity to raise any points or objections he wishes, and will make it somewhat harder to raise arguments later which he could have raised at the time. It is, however, a large stride from a commonsense tactical practice to a rule of law. The present case is a good example of how unfairly such a rule could work. The charterers did not (it seems reasonable to infer) believe they were bound to indemnify the shipowners against the South Africa claim. Even if one assumes that they were wrong in that belief, it remains the fact that they need have had and in all probability had no knowledge at all of how the cargo damage occurred. Having disassociated themselves from the proceedings they knew nothing of the terms of the settlement. The rule contended for would present the charters with a choice between taking over the defence of a claim which they believed to be nothing to do with them and thereafter (if that belief was falsified) finding themselves bound to indemnify the shipowners against settlement of a claim even though the claim could be shown to be ill-founded or the settlement unreasonable. The authorities support, and I can see virtue in, a much more limited principle, but that would not avail the shipowners here." [Emphasis added] 344 Accordingly his Lordship found that the Duffield estoppel had no operation on the facts, and that An Bord were not precluded from relitigating issues determined by the settlement in the prior proceedings.

[503]

"The shipowners did not argue that the correspondence between themselves and the charters, annexed to the interim award, gave rise to any estoppel by representation. It was not suggested that the charters had made any relevant representation (save of unwillingness to become involved in the South African proceedings in any way) or that the owners had relied on any such representation." [Emphasis added] 347 The effect of this passage is to leave open the possibility of, the insistence in Parker of the existence of a written contract notwithstanding, the setting up of an estoppel by representation by a non-party indemnifier when the facts of a specific case are sufficient to establish all the usual elements of such an estoppel. 348 The next case, South Australian Housing Trust v State Government Insurance Commission (1989) 51 SASR 1, is of note due to its introduction of another doctrine by which a prior judgment can be rendered binding as between an indemnified and indemnifier in subsequent proceedings. The appellant housing trust was sued in negligence arising out of the injury of one of its tenants following the malfunctioning of a gas stove, a claim which was duly notified to the respondents as the trust's indemnity insurers. The insurers, however, denied any potential liability on the basis of an alleged breach of contract by the trust, and thus refused to defend or take part in the proceedings. Judgment was subsequently rendered against the trust, in the course of which facts were established sufficient to show that the trust had failed to take 'reasonable measures' to maintain its household appliances as required by its policy with the respondents. The trust, however, then commenced proceedings against the insurers for indemnity, with the latter seeking to tender the prior judgment as proof of their non-liability over the trust's attempts to relitigate issues already determined. But rather than setting up a defence based upon Duffield or Parker, the insurers submitted that to allow the trust to relitigate determined issues would constitute an abuse of process. Although this defence was ultimately rejected on the ground that there was a sufficient dissimilarity between the issues arising in the second proceedings as compared to the first, King CJ (at 18), with reference to classic authorities such as Reichel v Magrath (1889) 14 App Cas 665 and Hunter v Chief Constable of the West Midlands Police [1982] AC 529, was receptive to its application in an appropriate case:

[506]

"There can be no doubt that, in the present case, both FAI and the valuers will have full opportunity of contesting the question in respect of which the declaration is sought. It would therefore, in my view be an abuse of process to permit either to litigate that question in subsequent proceedings. It follows therefore that the declaration sought would effectively determine the question of FAI's liability to the valuers as between those parties. " 351 However, while concurring with his general conclusion Byrne J was decidedly more cautious than Davies JA in this respect, emphasising (at 74,825) the high bar required to be overcome before the defence of a claim- as opposed to its prosecution -by a non-party to the prior proceedings could be found to be an abuse of process. 352 It is important to note that, as in South Australian Housing Trust and State Bank, their Honours did not discuss Duffield or the above subsequent authorities, nor is there anything in the report to suggest that those cases were put in argument. 353 The abuse of process doctrine as discussed in South Australian Housing Trust, State Bank and Interchase can be distinguished for present purposes. Both the former two decisions concerned attempts by the indemnified in subsequent proceedings to reopen issues determined in the prior, as compared to the situation here under consideration; namely the effect of a res judicata on a non-party indemnifier seeking to defend rather than prosecute a claim. While there is the matter of the broad dictum of Davies JA in Interchase, it would seem, with respect, that the qualifications expressed by Byrne J are especially persuasive. It is difficult to envisage, that is to say, the frivolity or vexatiousness in a defendant merely attempting to litigate issues not before determined in proceedings to which it was a party; rather, if an indemnifier is to be so precluded, the basis of same should more properly lie in the more certain (and indeed, in this context, less strained) legal terrain of contract or estoppel by representation. In addition, there do not appear to be further authorities supporting the broad approach of Davies JA in this respect. 354 Returning to date order, the next case is the critical decision of Ipp J in Gracechurch Holdings Pty Ltd v Breeze & Anor (1992) 7 WAR 518. In that case, Mr and Mrs Breeze were directors of a small proprietary company granted a lese of certain realty by the appellant Gracechurch, secured by the personal guarantees of Mr and Mrs Breeze. In turn, Mr Breeze had undertaken to indemnify Mrs Breeze in respect of any and all liabilities she might incur as a result of the guarantee. After a default on the lease and many convolutions not here relevant, judgment was obtained against Mrs Breeze in proceedings of which Mr Breeze had notice but to which he was not a party, and one of the questions before the court was whether he was bound by that decision. Beginning by citing the general rule that only parties to a proceeding and their privies are bound by the res judicata, Ipp J advanced cautiously (echoing the concerns of Bingham J in Ben Shipping) on the following basis (at 523):

[511]

"Secondly, I think that while correctly holding, as he did, that the insurer would not be able to relitigate the issue of the liability of the directors to the plaintiffs, his Honour overlooked that, notwithstanding that, the insurer in an action to enforce the policy would not be bound, unless a party to these proceedings, by findings of fact in these proceedings as to the nature of the breaches of duty which caused the loss. Those findings, if made binding on the insurer, might well determine whether the causes of the loss were wrongful acts within the meaning of the policy and might have a bearing on whether there had been breaches of the policy." 360 Thus while the first aspect of the proposition put by King CJ is consistent with the decision in Cacciola, the second aspect appears to be an entirely new development. 361 As mentioned above, however, it is a development that has gained considerable support. Thus in C E Health Casualty & General Insurance Ltd & Anor v Pyramid Building Society (in liq) [1997] 2 VR 256, another case in which the claimants sought to join the defendant's indemnity insurers as co-defendants, Ormiston JA rejected this step as unnecessary on the basis that (at 273) "in practical terms proof of liability in the action automatically leads to an obligation to indemnify under an applicable policy, unless the insured has been in breach of one of the conditions of the policy." (See also Phillips JA at 294.) 362 Finally in VACC Insurance Co Ltd v BP Australia Ltd (1999) 47 NSWLR 716 one Geselle was the proprietor of a petrol station successfully sued in negligence, along with the respondents BP as co-defendants, in relation to an accident involving the malfunctioning of a petrol pump. BP then commenced proceedings against Geselle for contribution, which was assessed on the basis of the trial judge's conclusions that the latter had been so reckless in failing to maintain the pump that an award of exemplary damages was justified. Following Geselle's entry into liquidation, BP commenced proceedings against Geselle's public liability insurer, the appellant VACC, pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act, which VACC resisted on the basis that BP were bound to the findings in the contribution proceedings to the effect that Geselle had been so grossly negligent that the policy would not respond. In turn, BP sought to re-open those findings. Citing (inter alia) Parker, Cacciola and C.E. Heath, and distinguishing Lord Denning MR's ambiguous statement in Brice as an unexplained aberration, Fitzgerald JA began by stating (at 723 [26]) that:

[513]

"I cannot discern any basis upon which an insurer could be precluded from asserting a breach of policy against an insured contrary to findings of fact in a proceeding in which judgment had been given against the insured in favour of a third party." 364 Mutatis mutandis, therefore, as the line of authority derived from Parker (references to Duffield and its notion of an 'estoppel' having been discarded) would not preclude the indemnifier from relitigating issues concerning Geselle's negligence to the extent relevant to whether the policy would respond, so it could not preclude an indemnified (BP standing in the shoes of Geselle) from doing likewise. 365 Subsequently, this limited interpretation was affirmed in Insurance Exchange of Australia v Dooley & Anor (2000) 50 NSWLR 222 at [83], per Fitzgerald AJA and State of New South Wales v AXA Insurance Australia Ltd (formerly known as Union Des Assurances De Paris IARD) (2002) 54 NSWLR 409 at [47], per Ipp AJA (with whom Mason P and Giles JA agreed). 366 However, after coming to the above conclusion Fitzgerald JA nonetheless went on in VACC to state (at 724 [29]) that "it does not necessarily follow that an insured is free to relitigate against its insurer findings made against the insured in the proceedings in which the judgment in favour of a third party relied upon by the insured against the insurer was given against the insured." Specifically, his Honour's concern was that the sole basis upon which BP obtained a cause of action against VACC was via the contribution judgment, being a decision which was predicated upon Geselle having been so reckless as to warrant the award of exemplary damages (and, by extension, ensure that its policy with VACC did not respond). Thus for BP to seek to relitigate this issue of recklessness in its proceedings against VACC would be to simultaneously affirm the contribution judgment as providing it with a cause of action and then undermine its factual findings as destroying any chance of success in that action. For Fitzgerald JA (at 725), BP's approbation and reprobation in this manner was clearly unconscionable such that- although the indemnifier's exception had no application- it was estopped from averring contrary to the findings of fact in the contribution proceedings. At 725 [33], his Honour said:

[514]

"It is unnecessary for present purposes to decide whether this is part of the doctrine of estoppel in pais or an independent doctrine: cf Cave v Mills (1862) 7 H&N 913 at 927-928; 158 ER 740 at 746-747, per Wilde B; Edwards v Culcairn Shire Council (1963) 64 SR (NSW) 62 (at 70; 36). While the classic statement concerning estoppel in pais by Dixon J in Thompson v Palmer (1933) 49 CLR 507 at 547; see also Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 676; relates to an inconsistent departure from an assumption which formed the basis of a past exercise of rights not an attempt to act on two inconsistent bases simultaneously, I cannot identify a difference in principle." 367 The significance of this conclusion for present purposes is that it provides a concrete example of the ordinary principles of what his Honour calls estoppel in pais (that is, estoppel by representation of fact) operating in superaddition to the res judicata estoppels to extend the binding effect of a judgment to persons other than the parties or their privies. Moreover, the entities between which that estoppel sprang were not in legal relations in the form of an express contract of indemnity as required by Parker. Accordingly, this aspect of the decision in VACC stands as a practical demonstration of the operation of the form of estoppel by representation identified in legal theory by Bingham J in Ben Shipping and Ipp J in Gracechurch. Conclusions and Observations 368 In light of the above, it can be concluded in respect of the so-called 'disparate propositions' set out above that: · Proposition (d) (abuse of process) can be shortly distinguished on the basis that the authorities applying the doctrine of abuse of process to the present context (South Australian Housing Trust, State Bank and Interchase) concern the situation wherein the indemnified seeks to re-litigate issues determined in proceedings to which he/she was directly a party. In contrast, it would require a strained application of that doctrine to find that an indemnifier was acting frivolously or vexatiously in attempting to reopen matters, by way of defence, determined in prior proceedings to which it was not a party. · Equally, proposition (c) (preclusion arising from contract of indemnity, regardless of notice) can be distinguished on the basis that while many modern authorities do not make mention of the need, expressed in Duffield and Parker especially, for the indemnifier to have had notice and then deliberately elected not to participate, it can be comfortably presumed that this is a product of the nature of modern insurance contracts rather than a deliberate doctrinal shift. It would, that is to say, be manifestly unfair to bind a non-party or non-privy to a res judicata determined without the opportunity for participation or comment by that person. · The prevailing position in the authorities is a combination of proposition (a) (preclusion arises from contract of indemnity, provided that notice and refusal to participate are present) and proposition (e) (preclusion arises from contract, but extends only to the fact of the indemnified's liability). Since the early decisions of Parker and Mercantile and those subsequent, it is clear that the 'estoppel' referred to in Duffield has been inexorably latched onto the contract of indemnity rather than any conduct of the indemnifier in the operative manner of the true estoppels. Moreover the most recent decision in the chain of authorities, epitomised by VACC, have the effect of further limiting the indemnifier's exception to precluding the contestation of the fact of the indemnified's liability to the claimant, but not to previously determined issues relevant to whether the contract of indemnity responds to that liability. While this rule is unquestionably a long way from any notion of the indemnifier being 'estopped' in the true sense of the word, it appears to represent the prevailing state of the authorities at present. · However, this conclusion in no way forecloses the possibility of the exception resting upon proposition (b) (representation from words or conduct). While the authorities disclose no ratio application of this approach, the obiter of Bingham J in Ben Shipping and Ipp J in Gracechurch manifestly contemplate that it is a legitimate perspective to adopt. In addition, the application of an estoppel by representation of fact in VACC provides a practical illustration of how such an estoppel might arise. Further it is clearly supported by Spencer Bower, Turner and Handley who state (at [224]), after quoting the passage from Duffield set out above, that "[t]his type of case involves an estoppel by representation, the indemnifying party representing that he is content to treat any judgment as binding on himself. To a similar effect, in the second edition of that work Spencer Bower and Turner state (at [235]) that: "it is clear that it [ Duffield ] was not intended to suggest that this type of case raises any question of estoppel per rem judicatum at all, the "estoppel" there referred to being an election (implied from conduct and inaction) by the indemnifying party that he was content to treat the judgment in the first action as binding upon himself, though in fact and law, he not being a party thereto, it was not so. "

[518]

373 Finally, it should be noted that, as is the situation in respect of non-party indemnifiers on the authorities of King v Norman, Parker and Gracechurch, the mere fact that a non-party is a co-guarantor with a party is unlikely to provide a sufficient basis for a finding that the former is a privy of the latter, such that the res judicata estoppel binding the party may directly extend to the non-party. As detailed above, Australian authority in the form of Ramsay, as followed recently by the Full Federal Court in Trawl Industries, dictates that the 'basic requirement of a privy in interest is that the privy must claim under or through the person of whom he is said to be a privy'; the focus is on shared legal interests rather than merely shared economic. Accordingly, the only means by which a non-party co-guarantor may be bound by a res judicata to which he or she is not a party is by the operation of the estoppel by representation method described above. 374 The results of the above analysis can be summarised by way of the following propositions: · It is trite law that the only persons subject to a res judicata estoppel are the parties to the relevant proceedings and their privies in title, blood or interest. [I note that in the above analysis unless the specific is substituted for the general, the expression 'res judicata estoppels' is denotative of 'cause of action estoppels' (known commonly to Australian jurisprudence as res judicata simpliciter: Effem Foods v Trawl Industries at 514, per Northrop and Lee JJ), 'issue estoppels' and the doctrine known in England as the 'principle in Henderson v Henderson' and in Australia as 'Anshun estoppel'. Such usage is consistent with that adopted in Spencer Bower, Turner and Handley, The Doctrine of Res Judicata, Third Edition, Butterworths, London, 1996] · However, when a non-party indemnifier (A) is put upon notice that proceedings in respect of a liability cognisable by the indemnity are on foot against his/her indemnified (B) but nonetheless fails to intervene, the binding effect of any resultant res judicata may extend to A on the basis that his/her inaction constitutes a representation to the parties that he/she is content to be bound by the outcome. In such a case, A is not bound to the res judicata as a privy of B; rather, A is bound in his/her own right and as a consequence of a second estoppel set up by the above representation. Alternatively, A is bound by the res judicata as a result of a term implied by law into the contract of indemnity. · Accordingly, a non-party co-guarantor (C) may be bound by a res judicata to which the other guarantor (D) is directly subject on the basis that, by analogy with the above rule in respect of non-party indemnifiers acting with notice of a litigation, C has set up an estoppel by representation to the effect that he/she is content to be bound by the outcome. Applying the analysis to the present facts 375 To my mind the evidence clearly satisfies the criteria necessary to establish the requisite estoppel by representation as against both the first as well as the second and third defendants. On the evidence each of these two sets of parties by their relevant conduct and/or inaction, represented that they were content to treat the judgment in the Federal Court proceedings as binding upon themselves, although in fact and in law, as at the moment when Sackville J published his reasons for judgment, the first defendant was not longer a party to those proceedings, the second and third defendants never having been parties to the proceedings. It would be unjust to allow either of the two sets of parties to now deny that the Federal Court judgment is to be treated as binding upon them. 376 It is unnecessary to examine the position of Mr Bruce who was on notice in every possible way not only of the nature of the proceedings, but also of Mr Jeans unsuccessful attempts to obtain leave to withdraw his admission that he had signed the guarantee. 377 It is also plain on the evidence that the second and third defendants were given formal notice of the claim made against Mr Bruce under his guarantee in the Federal Court proceedings. A letter was written to Mr Herzog by solicitors acting for Mr Bruce on 13 August 2001 [PX 329-330] drawing specific attention to the existence of the Federal Court proceedings and the claim against Mr Bruce under his guarantee. Specific attention was also drawn to clause 6.8 of the heads of agreement. The stance taken by Advance Publicity and Harpley Nominees was to deny that the indemnity was ever executed on behalf of the companies (PX 330A). Further, on 5 September 2001, after some discussions between Mr Bruce and Mr Herzog, an attempt was made by the solicitors acting then for the second and third defendants to obtain a formal release from Mr Bruce and his company and replace the heads of agreement with another document which omitted the indemnity previously found in clause 6.8 [PX 332-340]. However, that document was not executed. 378 Each of the facts pleaded in paragraphs 1-10 and 12-15 and 17 (a)-(d) of the Reply had been clearly proved. 379 In the result the circumstances proven by dint of the facts pleaded in paragraph 1-10 of the Reply give rise to a binding estoppel operative against the first defendant preventing him from asserting: · the invalidity of the respective liabilities of Mr Jeans and of himself under their guarantees; · the invalidity of the liability of Deangrove to the Commonwealth Bank. 380 Further to the detriment of Mr Bruce, the assertion by the second and third defendants of an entitlement to recover moneys from Noroton Holdings and Australasian Property Holdings precluded Mr Bruce from any such recovery operating to his detriment. 381 Further the circumstances proven by dint of the facts pleaded in paragraphs 12-15 and 17 (a)-(d) of the Reply give rise to an estoppel operative against the second and third defendants preventing them from asserting the invalidity of the judgments entered against Mr Jeans, Mr Bruce and Deangrove in the Federal Court proceedings. 382 For the reasons already given the submission of the second and third defendants that the principles as between an indemnifier and a person indemnified have no application to the position as between co-guarantors is rejected. The suggested distinction [in terms of the fact that persons who might in the future be called upon to make equitable contribution as co-guarantors are not required to intervene in pending proceedings against persons who might one day make such a claim against them, even if they are aware of the fact that such proceedings are pending] is on analysis not one of substance. Evidentiary rulings 383 The plaintiff having established the existence of issue estoppels against not only the first defendant, but also the second and third defendants arising from the Federal Court proceedings: · The short minutes of order in the Federal Court proceedings dated 2 April 2003 directing judgment for the Commonwealth Bank against the first defendant Mr Bruce are admissible against him in these proceedings, as they constitute an issue estoppel in respect of the following matters: - the fact that Mr Jeans was a guarantor to the Bank of the debts of Deangrove;