Lavin v Toppi

Court of Appeal (NSW)|2014-05-05|Before: Macfarlan JA, Emmett JA, Leeming JA

Institutes of Justinian, 3.20.4 Sir Nathaniel Lindley, The Law of Partnership, (4th ed 1878, Sweet & Maxwell) D Marks and G Moss (eds), Rowlatt on Principal and Surety, (6th ed 2011, Sweet & Maxwell) Glanville Williams, Joint Obligations, (1949, Butterworths) Category: Principal judgment Parties: Dolores Lavin (First Appellant) Dolores Lavin Management Pty Limited (Second Appellant) Paola Toppi (First Respondent) Neil Cunningham (Second Respondent) Basecove Pty Limited (Third Respondent) Representation: Counsel: M Einfeld QC with S Golledge (Appellants) M R Pesman SC (Respondents)

Solicitors: Websters Solicitors (Appellants) Beazley Singleton Lawyers (Respondents) File Number(s): 2013/297015 Decision under appeal Court or tribunal: Supreme Court of New South Wales Citation: [2013] NSWSC 1361 Date of Decision: 18 September 2013 Before: Rein J File Number(s): 2012/119962

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Headnote [This headnote is not to be read as part of the judgment] This appeal concerns equitable contribution as between co-sureties. The first appellant, Ms Lavin, and first respondent, Ms Toppi, were directors and equal shareholders of a company Luxe Studios, which borrowed from National Australia Bank Ltd (Bank). Ms Lavin and Ms Toppi (and others associated with them) guaranteed Luxe Studios' obligation to repay the loan. Following its default on the loan, the Bank sued Luxe Studios. The Bank reached a settlement with Ms Lavin, reflected in a "Deed of Release and Settlement" (Deed), in which she repaid less than half of the outstanding balance, and in return the Bank agreed to dismiss the proceedings and covenanted not to sue her. Ms Toppi subsequently paid the outstanding balance. Having paid a greater amount to the Bank than her co-surety, she brought proceedings against Ms Lavin seeking equitable contribution. Ms Lavin argued that the Deed and subsequent dismissal of the Bank's proceedings had the effect of denying her co-surety the right to contribution. She submitted that the Bank's covenant not to sue had altered Ms Lavin's liability so that it was no longer "co-ordinate", and that Ms Toppi's subsequent payment of the outstanding loan amount did not benefit her. Further, she submitted that Ms Toppi's disentitling conduct had deprived her of the right to contribution. The judge at first instance held that contribution was available to the co-surety, following Carr v Thomas [2009] NSWCA 208. The Court of Appeal held, dismissing the appeal:

The doctrine of equitable contribution applies where a "co-ordinate liability" exists (as distinct from a "common obligation", which reflects the narrower approach to contribution at common law), that is, where liabilities of co-sureties are "of the same nature and to the same extent": [40]-[41]. Bonner v Tottenham and Edmonton Permanent Investment Building Society [1899] 1 QB 161 and Friend v Brooker [2009] HCA 21; 239 CLR 129 applied.
The right to contribution came into existence no later than when the Bank demanded payment from, and commenced proceedings against, the sureties: [42]-[47]. Friend v Brooker [2009] HCA 21; 239 CLR 129 applied.
A surety's right to contribution is not lost if a co-surety enters into a settlement deed with the creditor: [48]. Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 applied.
Nothing in the terms of the guarantees qualified or detracted from the surety's right to contribution: [51]-[54]. Hancock v Williams (1942) 42 SR (NSW) 252, Bank of Adelaide v Lorden (1970) 127 CLR 185 referred to.
The nature of coordinate liabilities and the effect of a covenant not to sue, discussed: [55]-[80]. Deanplan Ltd v Mahmoud [1993] Ch 151, Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574, Johnson v Davies [1999] Ch 117, Murray-Oates v Jjadd Pty Ltd [1999] SASC 537; 76 SASR 38, Watts v Aldington [1999] L&TR 578, Robinson v Tait [2002] 2 NZLR 30 considered. Carr v Thomas [2009] NSWCA 208 approved.
Distinction between giving of judgment and dismissal of proceedings and Civil Procedure Act 2005 (NSW), s 91, considered: [81]-[83]
No disentitling conduct arose which would have precluded Ms Toppi from seeking contribution from Ms Lavin: [84]-[89].

Judgment

MACFARLAN JA: I agree with Leeming JA.
EMMETT JA: This appeal is concerned with rights of contribution as between co-sureties. The first appellant, Ms Dolores Lavin, and the first respondent, Ms Paola Toppi, embarked on a joint venture involving the business of a photographic studio. The business was conducted through Luxe Studios Pty Ltd (the principal debtor). The principal debtor borrowed monies from National Australia Bank Ltd (the Bank) for the purposes of its business. On 29 October 2008, each of Ms Lavin and Ms Toppi, and persons and companies associated with them, entered into a guarantee of the obligations of the principal debtor to the Bank (the Guarantee).
The principal debtor defaulted and the Bank made demands under the Guarantee on Ms Toppi, Ms Lavin and the other guarantors. When the demand was not met, the Bank commenced proceedings against all of the guarantors, including Ms Toppi and Ms Lavin. Ms Lavin and the second appellant, Dolores Lavin Management Pty Ltd (a company associated with her), filed a cross-claim against the Bank, alleging unconscionable conduct on the part of the Bank in connection with the granting of the Guarantee.
On 8 September 2010, Ms Lavin and the second appellant entered into a Deed of Release and Settlement with the Bank (the Deed). By the Deed, Ms Lavin agreed to pay the Bank a sum of money (the Settlement Sum). Relevantly, clause 8 of the Deed provided that, upon execution, Ms Lavin unconditionally and absolutely released the Bank from all claims that she might have against the Bank. That clause also said that, provided that no event of default occurred, and subject to the Bank's receipt of the Settlement Sum, the Bank covenanted not to make any claim against Ms Lavin under the Guarantee. Clause 8 also said that the parties would in those circumstances file a consent judgment in the proceedings commenced by the Bank whereby:

the statement of claim as against Ms Lavin would be dismissed, and
Ms Lavin's cross-claim against the Bank would be dismissed.

The Settlement Sum was paid and the orders contemplated by the Deed were made by consent. The Settlement Sum did not fully discharge the obligations of the principal debtor to the Bank. There remained outstanding a sum in excess of $2,900,000 owing by the principal debtor to the Bank.
On 18 May 2011, Ms Toppi and interests associated with her paid to the Bank the balance of the amount owing by the principal debtor. Ms Toppi and the interests associated with her then commenced proceedings against Ms Lavin, and the interests associated with her, in the Equity Division of the Supreme Court seeking recovery of a sum equal to half of the difference between the amount paid by the Lavin interests and the amount paid by the Toppi interests in discharge of the obligations of the principal debtor to the Bank. Ms Toppi's claim was based on the doctrine of contribution.
The doctrine of contribution is of some antiquity and may have entered English law through the law merchant and the Court of Admiralty. The general doctrine of contribution forms part of the common law, applicable at law no less than in equity. The basic principle is that persons who are under coordinate liabilities to make good the one loss must share the burden pro rata. That basic principle was accepted by both law and equity as one dictated by natural justice (see Albion Insurance Co Ltd v Government Insurance Office of NSW [1969] HCA 55; 121 CLR 342 at 349-350).
The doctrine may have entered the common law through the law merchant and the concept of general average, being the principle that general contribution is to be made by all parties or interests towards a loss or expense that is voluntarily sustained or incurred for the benefit of all. That principle is said to be derived from the jurisprudence of Rhodes (see Digest, 14.2 and Raoul Colinvaux (ed), Carver's Carriage by Sea (13th ed, 1982) vol 2, pars 1347-1350, dealing with the York-Antwerp Rules of General Average). More specifically, similar, though not identical, principles existed in the Roman law of suretyship.
Under Roman law, where there was a plurality of sureties, each was liable for the whole amount and the principal creditor could sue whomever he pleased. However, the principal creditor could be compelled to limit his claim against each surety who was solvent to the pro rata share of the surety. In that regard, the Roman scheme was analogous to the scheme of the proportionate liability legislation to be found in Pt 4 of the Civil Liability Act 2002 (NSW). However, under Roman law, if the principal creditor recovered the whole amount from one surety, that surety must bear the loss alone, subject to his entitlement to reimbursement from the principal debtor (Institutes, 3.20.4). The principal debtor was required, if requested to do so by any surety who was prepared to pay the guaranteed debt in full, to transfer to that surety the cause of action that the principal debtor had against all the other sureties (Digest, 46.1.17). Where there were two or more sureties for the same sum, if the principal creditor claimed the full amount from one surety, who paid in full without taking an assignment of the cause of action against the other surety or sureties, the other surety or sureties were released and could not be sued, either by the principal creditor or the co-surety who had paid, because the debt was extinguished by the payment (Digest, 46.1.39).
I have had the advantage of reading in draft form the proposed reasons of Leeming JA. I agree, for the reasons proposed by his Honour, that the appeal should be dismissed with costs.
LEEMING JA: The principal question in this appeal is shortly stated. Is one co-surety entitled to contribution in equity from another, in circumstances where the creditor has accepted partial payment from the other co-surety, covenanted not to sue that co-surety and agreed to proceedings brought by it against that co-surety being dismissed, when the first co-surety later pays more than the second under her guarantee?
The primary judge held, in a reserved judgment delivered promptly after a three day trial, that contribution was available in equity, partly on the basis of arguments not challenged on appeal, but substantially on the basis that he was bound by Carr v Thomas [2009] NSWCA 208. On appeal, it was submitted that Carr v Thomas should not be followed, as it was "clearly wrong". For the reasons which follow, that submission should be rejected, and the appeal dismissed.

Factual background

Save in relation to one aspect of the alternative ground of appeal which was not addressed orally, there were no disputed facts.

(a) The loan and the guarantees

In 2005 Luxe Studios Pty Ltd borrowed some $4.29 million from National Australia Bank Ltd (Bank) to acquire a property in Liverpool Street, near the Sydney CBD. The first appellant, Ms Dolores Lavin, and the first respondent, Ms Paola Toppi, were directors and equal shareholders of Luxe Studios. There was a further borrowing in 2007 and refinancing in March 2008. Fresh guarantees were obtained by the Bank in October 2008 from each of Ms Lavin, the second appellant Dolores Lavin Management Pty Ltd (DLM) (a company associated with her), Ms Toppi, her husband, Mr Neil Cunningham, who is the second respondent, and Luxe Productions Pty Ltd (another company jointly owned and controlled by Ms Lavin and Ms Toppi).
Argument on the appeal proceeded on the basis that it was sufficient to refer to the obligations of and payments by the co-sureties Ms Lavin and Ms Toppi. I shall follow that course where there is no scope for confusion. Some references to Ms Lavin in what follows will include references to her company and co-surety DLM, and likewise some references to Ms Toppi will include references to her husband and co-surety Mr Cunningham.
Ms Lavin and Ms Toppi executed a guarantee in the same terms. The primary obligation was to pay the Bank all the amounts which Luxe Studios owed the Bank at any time: cl 6.2. At first instance and on appeal, Ms Lavin relied on cl 14.2 which was headed "What will NOT end your liability" and which so far as was relevant was in these terms: Your obligations under this Guarantee are not affected by anything that might otherwise affect them under the law relating to sureties, including: (a) any change in the legal capacity, rights or obligations of the customer, a co-guarantor, any other person or you; or … (c) the fact that, in relation to any amounts which the customer owes NAB or any security (whether given by the customer, you or a co-guarantor), guarantee or indemnity for them, NAB: (i) obtains a judgement against the customer, a co-guarantor or any other person; or (ii) gives up, releases, varies or exchanges, or fails to obtain, perfect, register or realise, or deals in any other way with the security, guarantee or indemnity; or (iii) grants time or any other concession to, or compounds or compromises with, or does or omits to do anything which affects the obligations of, the customer, a co-guarantor or any other person to NAB or to you; or … (i) the fact that any amounts which the customer owes NAB may not be recoverable from the customer, a co-guarantor or any other person for any reason; or …"
Ms Lavin also relied on cl 16.1 and cl 20 of the guarantees, which were in these terms: You give up certain rights 16.1 You waive any rights which you have as surety at any time which may be inconsistent with the provisions of this Guarantee or which would restrict NAB's rights or remedies under it. Your liability is separate to all other security NAB holds 20. Despite any rule of law or equity to the contrary: (a) this Guarantee is additional to every other security, guarantee, indemnity, right and remedy NAB holds (including from you) now or later; and (b) this Guarantee and NAB's rights and remedies under it and any other security, guarantee, indemnity, right, remedy or instrument which NAB has at any time continue to exist separately and do not merge with or affect each other.

(b) The borrower defaults and the appellants settle with the Bank

Receivers were appointed to Luxe Productions and Luxe Studios by this Court on 11 November 2009. On 8 January 2010, the Bank appointed other receivers to the Liverpool Street property. That property was ultimately sold for $4.93 million in May 2010. Although the net proceeds were paid to the Bank, there remained outstanding indebtedness in excess of $4 million.
In June 2010 the Bank commenced proceedings against all guarantors, seeking money judgments against them and possession of mortgaged properties owned by the guarantors. Ms Lavin and DLM filed a cross-claim against the Bank; Ms Toppi and Mr Cunningham did not. (Before the primary judge, but not on appeal, Ms Lavin relied upon that cross-claim in support of her submission that her liability was not coordinate with that of Ms Toppi. It is not necessary to say anything more of it.)
In 2010 Ms Lavin entered into a Deed of Release and Settlement (Deed) with the Bank. The settlement involved Ms Lavin promising to sell two properties (at Darlinghurst and Potts Point), discharging her existing indebtedness to the Bank from the proceeds of sale, paying a further $1.35 million in partial discharge of her obligations under the guarantee and releasing the Bank.
Because the payment by Ms Lavin turned upon two properties first being sold, the Deed made provision for various eventualities. The Deed required Ms Lavin to provide signed copies of documents described as "Consent Judgments" (which were annexed to the Deed) to the Bank, and provided for those documents to be filed in certain circumstances.
Speaking generally, various events of default entitled the Bank to obtain "Consent Judgment C", which was judgment against Ms Lavin and DLM in a money sum and judgment for possession of the Darlinghurst and Potts Point properties. However, if Ms Lavin's existing indebtedness was discharged and the $1.35 million paid on or before 7 December 2010 and there was no event of default, then the Deed provided for two things to occur: the filing of consent orders, and the granting of a covenant not to sue. Ultimately, this Court was told that the $1.35 million was paid and there were no events of default, so both of those things did occur.
It is necessary to deal with each of those two eventualities more precisely. In relation to the first, by cl 7(e) of the Deed, the Bank was required to file "Consent Judgment D". "Consent Judgment D" comprised two documents, each headed "Consent Judgment". The first contained orders that the Statement of Claim as against Ms Lavin and her company be dismissed with no order as to costs. The second contained a consent order that Ms Lavin's and her company's cross-claim filed 22 July 2010 be dismissed with no order as to costs.
The second eventuality was central to Ms Lavin's claim at first instance and on appeal that her liability was no longer "coordinate". Clause 8 of the Deed was headed (not entirely accurately), "Release". Clause 8(a) contained a release effective upon execution of the Deed by Ms Lavin. Clause 8(b) was a conditional covenant not to sue: "Provided no Event of Default occurs and subject to NAB's receipt of the Settlement Sum, NAB covenants not to make any Claim against [Ms Lavin and her company] in respect of the Guarantee, the Darlinghurst Mortgage and the Potts Point Mortgage as security for the Guarantee or any matter arising out of or referred to in the Proceedings, and file Consent Judgment D in the proceedings."
Clause 8(c) was in these terms: "Nothing in this deed, compromises, prejudices or affects NAB's rights against Neil Cunningham, Paola Toppi, Luxe Productions … and/or Luxe Studios … whatsoever, including without limitation in respect of the Guarantee, Guarantee Indebtedness, any mortgage and charge security provided by those parties in respect of the Guarantee Indebtedness and the Proceedings, all of which rights are expressly reserved by NAB."
There were no events of default under the Deed, and the payment was made, so that orders in accordance with "Consent Judgment D" were made. Relevantly for present purposes, the Bank's Statement of Claim was in that fashion dismissed by orders made by consent by a Registrar of this Court on 13 December 2010. There was no dispute that the condition precedent to the Bank's covenant not to sue was satisfied.

In March 2011, Ms Toppi and Mr Cunningham entered into a contract for the sale of their home and, on 18 May 2011, the outstanding amount owing under the guarantees of some $2.9 million was paid by them out of the proceeds of sale to the Bank.
Ms Toppi and Mr Cunningham sued Ms Lavin and DLM seeking equitable contribution. There were other parties to the proceedings, and other claims, which need not be addressed. In relation to the claim for contribution, there were defences raised by Ms Lavin which were determined adversely to her by the primary judge and not sought to be agitated on appeal. Moreover, the primary judge rightly regarded himself as bound by Carr v Thomas. The result is that the submissions on appeal diverged from those made at first instance.
The primary judge ordered contribution in the amount of $726,308.50 against Ms Lavin and DLM. (That is slightly less than half the difference between the two payments made to the Bank by Ms Lavin and Ms Toppi, because the earlier payment was made some six months before the latter, giving rise to an adjustment for interest.)

The parties' submissions on appeal

Carr v Thomas allowed an interlocutory appeal from the summary dismissal of a claim for contribution by one director against another, both of whom had been sued by their company for breaches of their duties as directors. The company compromised its claim with one of the directors, resulting in a covenant by it not to sue and orders by consent that the proceedings brought by the company against that director be dismissed. This Court's joint judgment concluded at [38]: "In our opinion, McDougall J erred in concluding that as a result of the respondent entering into the Settlement Deed, he had no common obligation with the appellants to REL. The respondent's liability to REL was not released or in any way extinguished by the Settlement Deed. As that liability (if established) still subsists, then, provided it is also established that the liability is a co-ordinate liability, the appellants are still entitled to claim contribution from the respondent."
The submissions of Mr Einfeld QC, who appeared with Mr Golledge for the appellants, invited this Court to overrule or distinguish Carr v Thomas. They contained five strands.
First, Mr Einfeld reviewed the High Court authorities on contribution in equity, notably Albion Insurance Co Ltd v Government Insurance Office of NSW (1969) 121 CLR 342, Burke v LFOT Pty Ltd [2002] HCA 17; 209 CLR 282 and Friend v Brooker [2009] HCA 21; 239 CLR 129, to which he added, in reply, HIH Claims Support Ltd v Insurance Australia Ltd [2011] HCA 31; 244 CLR 72. He noted that the High Court had said that the term "co-ordinate liabilities" was to be preferred to "common obligation" (Friend v Brooker at [41]; HIH Claims Support at [45]). He emphasised two main propositions. The first was the requirement that the co-ordinate liabilities be "of the same nature and to the same extent" (Burke at [15] and [38]; HIH Claims Support at [39]). The second was that it was essential that the discharge of the co-ordinate liability conferred a benefit upon the party from whom contribution was sought.
Secondly, in point of principle, Mr Einfeld submitted that once the Bank had covenanted not to sue Ms Lavin, her liability was not "of the same nature and to the same extent" as that of Ms Toppi. Nor did she receive a benefit when Ms Toppi and Mr Cunningham paid the remaining $2.9 million to the Bank in 2011.
Thirdly, at the level of authority, Mr Einfeld said that Carr v Thomas was clearly wrong, and unsupported by the authorities on which it was expressed to be based. Carr v Thomas was said to be clearly wrong because it proceeded on the basis that the primary judge had assumed that a covenant not to sue extinguished the surety's liability. He relied on the passage at [29] summarising the reasoning of the primary judge ("As he had no liability he would receive no benefit from any success by [the company] in its claim against the appellants") and the conclusion at [38] reproduced above. He said that the four decisions relied upon, Deanplan Ltd v Mahmoud [1993] Ch 151, Murray-Oates v Jjadd Pty Ltd [1999] SASC 537; 76 SASR 38, Johnson v Davies [1999] Ch 117 and Robinson v Tait [2002] 2 NZLR 30, merely contained dicta to the effect that a covenant not to sue a co-surety preserved a right of contribution, but none determined the point, which should be decided in Ms Lavin's favour in point of principle.
Fourthly, Mr Einfeld said that Ms Lavin's position was a fortiori because she not merely had a covenant not to sue, but also by the "Consent Judgment" her liability had merged in the judgment. Although the same was seemingly true in Carr v Thomas (see at [7]), that had played no part in the Court's reasoning, which was accordingly distinguishable.
Fifthly, an alternative ground of appeal was maintained, that Ms Toppi's disentitling conduct deprived her of a right to contribution, although no oral submissions were directed to it.
Mr Pesman SC, who appeared for the respondent, said that although at law Ms Toppi enjoyed no right of contribution until in fact she had paid more than her proper share, her right arose in equity when once "a liability of one of several to pay more than [her] fair share has been ascertained": Albion at 351. Hence, no later than when the Bank demanded the full amount of Luxe Studios' indebtedness following its default from each guarantor, each enjoyed rights of contribution in equity against the others. He then asked, rhetorically, how could a private compromise between one co-surety and the Bank deny Ms Toppi's right of contribution? He accepted that a right to contribution could be lost by a surety's agreement (which could be express or implied) or disentitling conduct, but maintained that there was no way in which the right could be lost by conduct in which Ms Toppi played no part (and indeed of which she might perhaps be wholly unaware).
Mr Pesman maintained that this was a very straightforward case of coordinate liabilities, that Carr v Thomas was right or in any event not plainly wrong, and (in relation to the alternative ground of appeal) that there was no disentitling conduct on the facts.

Reasoning

The principal ground raised in this appeal should be dismissed for two reasons. The first is the point crisply made by Ms Toppi. The second is that the consideration at the level of first principle which Ms Lavin invited this Court to undertake confirms the correctness of the result in Carr v Thomas. I deal with each in turn below.

(a) The settlement between Ms Lavin and the Bank did not deprive Ms Toppi of her right to contribution in equity

Contribution is one of the clearest examples of doctrines which, prior to 1 November 1875 in England and 1 July 1972 in New South Wales, were well developed but divergent at common law and in equity. Putting to one side the procedural advantages in chancery (as to which see Tucker v Bennett (1927) 60 OLR 118 at 124-125; [1927] 2 DLR 42 at 47-48), there were large substantive differences, of which two are presently relevant.
First, contribution at law required "a common liability to be sued for that which the plaintiff had to pay, and an interest of the defendant in the payment in the sense that he gets the benefit of the payment either entirely … or pro tanto". However, it was sufficient in equity for there to be "community of interest in the subject-matter to which the burden is attached which has been enforced against the plaintiff alone, coupled with benefit to the defendant, even though there is no common liability to be sued". Those passages are from the judgment of Vaughan Williams LJ in Bonner v Tottenham and Edmonton Permanent Investment Building Society [1899] 1 QB 161 at 174, and were approved by the High Court in Friend at [44].
Secondly, contribution at law required actual payment of more than the just proportion, while contribution in equity was available in some circumstances in advance of payment: see Friend at [52]. As earlier noted, this was central to Mr Pesman's principal point.
Albion was a pre-Judicature appeal from the Supreme Court of New South Wales. Hence the force of Kitto J's reference at 351 to a right as to whose nature "law and equity were at one … though the doctrine of equality operated more effectually in a court of equity than in a court of law, and there were differences as to the mode and conditions of its application". Those differences continued in New South Wales until 1972, as may be seen in the reasons of Walsh JA in Armstrong v Commissioner of Stamp Duties (1969) 69 SR (NSW) 38 at 48-49.
These substantive differences in principle were "conflicts" or "variances" resolved in favour of equity by the Judicature legislation (in England, by s 25(11) of the Judicature Act 1873 (UK) and in New South Wales by s 5 of the Law Reform (Law and Equity) Act 1972 (NSW)). This was appreciated contemporaneously: hence the title of a section in Sir Nathaniel Lindley's 4th edition of The Law of Partnership, published in 1878, at 768: "Of some former differences between contribution at law and in equity" (emphasis added). He wrote: "Before the passing of the Judicature acts, a right to contribution or indemnity, arising otherwise than by special agreement, was only enforceable at law by a person who could prove that he had already sustained a loss. But in equity it was very reasonably held, that even in the absence of any special agreement, a person who was entitled to contribution or indemnity from another could enforce his right before he had sustained actual loss; and this principle will now prevail in all divisions of the High Court." (citations omitted)
The first substantive difference mentioned above is the reason that the High Court in Friend at [41] stated that the broader term "co-ordinate liabilities" should be preferred over "common obligation"; the latter reflects the narrower, superseded approach at common law.
The effect of the second substantive difference mentioned above is that it must be right, save perhaps for a question arising from the construction of the guarantee, to contend that Ms Toppi enjoyed a right to contribution when the Bank made its demands, and indeed when the Bank commenced proceedings against both her and Ms Lavin. That right would not have been available at common law, because it pre-dated payment by Ms Toppi, but existed only in equity. However, the judicature legislation meant that it would have been open to Ms Toppi to file a cross-claim against Ms Lavin seeking contribution from her in the event that both were found liable on their guarantees. Likewise, it would have been open to Ms Lavin to file a cross-claim against Ms Toppi. And, if there was any dispute about it, either would also have been entitled to declaratory relief that they were entitled to contribution against the other, in the event that she paid more than her share.
It is not necessary in order to resolve this appeal to identify with precision the circumstances when relief is available in advance of payment, which at least in part reflects equity's power to grant relief quia timet. Nor was it necessary to do so in Friend v Brooker: see at [54]-[61]. It is sufficient to hold that, absent some disentitling conduct (as to which see the alternative ground addressed below), relief would have been available, no later than when the Bank demanded payment from and commenced proceedings against Ms Lavin and Ms Toppi on their identical guarantees in respect of Luxe Studios' default.
How then was that existing right lost by Ms Lavin settling with the Bank? The answer is that it could not be lost in that way. Just as liabilities are not to be forced upon people behind their backs, as Bowen LJ said in Falcke v Scottish Imperial Insurance Company (1886) 34 Ch D 234 at 248, valuable equitable rights are not to be taken away behind Ms Toppi's back in circumstances such as this. Essentially the same reasoning was deployed in Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15 at [13].
That result has the considerable attraction, to use the words of the primary judge at [17], with which I respectfully agree: "of precluding one surety, with the assistance of the creditor, from being able to saddle other sureties with a disproportionate amount of liability. The Bank took $1.35M from Lavin but the approach for which Mr Einfeld contends would equally apply if the Bank took only $35K from Lavin."
His Honour's language draws upon equity's animating concern in this field. It has long been established that the "established principles of a Court of Equity" require "that the surety shall not have the whole thrown upon him, by the choice of the creditor not to resort to remedies in his power": see the reasons of Lord Selborne LC in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 12, citing the argument of Sir Samuel Romilly accepted by Lord Eldon in Craythorne v Swinburne (1807) 14 Ves 162; 33 ER 482.

(b) The effect of cl 14.2

The question then is whether the terms of the guarantee altered the position. The plain intent of cl 14.2(b) and (c) was to preserve the position of the Bank notwithstanding it released another co-surety, or if judgment were entered against another co-surety, or if the Bank promised not to sue another co-surety. Clauses to this effect are familiar to the law.
Jordan CJ and Halse Rogers J said in Hancock v Williams (1942) 42 SR (NSW) 252 at 256 that: "if that [surety] agreement provides that the obligee may release co-guarantors, or may release securities taken for the guaranteed obligation, or may vary the terms of that obligation, the exercise by him of those rights does not affect the liability of the guarantor." This is an aspect of a broader proposition: that by appropriate language, the liability of a guarantor may be continued notwithstanding that it would otherwise be discharged as a matter of general law (for example, by the creditor entering into a composition with the debtor, as in Bank of Adelaide v Lorden (1970) 127 CLR 185 at 191-193 (Barwick CJ, with whom Windeyer and Gibbs JJ agreed and Walsh J agreed on this issue)). The more recent authorities were collected by Campbell JA, with whom Giles and Hodgson JJA agreed, in Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 at [91].
It is also clear that persons may agree to qualify or exclude rights of contribution. Accordingly it is necessary to have regard to the terms of the guarantee.
However, cl 14.2 is not expressed to qualify a surety's right to contribution. Clause 14.2 is within Part D which is headed "Your liability". Clause 14 is headed "What will NOT end your liability" and the chapeau to cl 14.2 is "Your obligations under this Guarantee are not affected by anything that might otherwise affect them under the law relating to sureties …". There is no reason for that language not to bear its ordinary meaning, as confined to the contractual rights and obligations of the surety vis-à-vis the Bank. That language is not expressed to say anything about the equitable rights of sureties amongst themselves, including in relation to contribution. There is no reason to construe the language broadly so that it purports to detract from the surety's erstwhile rights to contribution. Nothing in cl 16.1 or cl 20 alters the position.

Ms Lavin was, with respect, correct in her submission that although the decisions on which this Court relied in Carr v Thomas contained persuasive dicta, they were not decisions squarely on the question of a right to contribution.
In Deanplan, Judge Paul Baker QC sitting as a High Court judge said at 170 that: "A covenant not to sue is not a release. It is merely a contract between the creditor and the joint debtor which does not affect the liabilities of the other joint contractors or their rights of contribution or indemnity against their co-contractor."
However, the case was not one of contribution, nor were the decisions reviewed cases on contribution. Although this Court in Carr v Thomas said that the proposition extracted above was supported by Commercial Bank of Tasmania v Jones [1893] AC 313, the Privy Council's short advice says nothing about contribution.
In Murray-Oates at [83], Wicks J, with the agreement of Doyle CJ and Mullighan J, said: "As an alternative to the giving of a release, a promisee may enter into a covenant with one or more joint promisors not to sue. Such a covenant will not affect the right of the promisee to recover from promisors who do not have the benefit of the covenant not to sue. Of course, such a covenant is not as effective as a release as the right of contribution between joint promisors remains unaffected. The promisee could sue a promisor who does not have the benefit of the covenant not to sue. That person, having paid the debt would be entitled to recover contribution from the other promisors notwithstanding the fact that the promisee may have given them covenants not to sue."
Again, the decision was not one involving contribution, nor did any authority cited in the judgment turn on contribution.
There are other Australian examples of dicta, including at the intermediate appellate level, endorsing these propositions. Without seeking to be exhaustive, a Full Court of the Federal Court, constituted by Branson, Weinberg and Dowsett JJ, did so in Pollak v National Australia Bank Ltd [2002] FCA 237 at [15]-18]. Further, one aspect of the reasoning of Bathurst CJ in Pritchard v DJZ Constructions Pty Ltd [2012] NSWCA 196 at [81] is to the same effect. His Honour postulated that a covenant not to sue might have been given and said of it, "That would not affect the guarantors' right to contribution".
Some care must be taken in reviewing the English decisions and texts after Deanplan, for three reasons. First, the common law rule that judgment against a surety or a settlement involving a release of a surety constitutes a release of the co-sureties has in part been abrogated by s 3 of the Civil Liability (Contribution) Act 1978 (UK) (and, in Victoria, by s 24AA of the Wrongs Act 1958 (Vic)), insofar as the rule turned on a judgment. There is no counterpart in New South Wales.
Secondly, in Watts v Aldington, a decision of the Court of Appeal delivered in 1993 but seemingly only reported in The Times, 16 December 1993 and [1999] L&TR 578, Steyn and Simon Brown LJJ were critical of the remnants of the rule that survived the Civil Liability (Contribution) Act 1978 (regarding it as a "trap for the unwary" and a "juridical relic"), and recognised an additional exception, namely, where the agreement contained a reservation of rights against those not party to the settlement. The current position is described in Gladman Commercial Properties v Fisher Hargreaves Proctor [2013] EWCA Civ 1466 at [21]-[24] and in D Foskett, The Law and Practice of Compromise, (Sweet & Maxwell, 7th ed 2010) at 130-136. That text refers at 134 to the passage from Deanplan extracted above and adds that: "This statement must now be read subject to the judgments of the Court of Appeal in Watts v Aldington in which the categorisation of the agreement as a release or a contract not to sue was said no longer to be called for." Bearing that in mind, in Johnson v Davies [1999] Ch 117 at 124, Chadwick LJ for the Court of Appeal said that the passage from Judge Paul Baker QC in Deanplan was "[a]n authoritative statement of the general rule of law as to the release of co-debtors". After dealing in some detail with Watts v Aldington, his Lordship at 127 said (of the position where the creditor A compromises with its debtor B but not with C, whose liability was joint and several with that of B): "the relevant question is whether the agreement between A and B precludes A from enforcing the debt owed by C. It is in B's interest that the agreement should have that effect - because, if it does not, C will be in a position (if he pays the debt which he owes to A) to seek contribution from B."
Thirdly, the law in Australia has diverged from that in England and New Zealand following the decision in Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574.
In Thompson at 581-582, Brennan CJ, Dawson and Toohey JJ cited the proposition stated by A L Smith LJ for the Court of Appeal in Duck v Mayeu [1892] 2 QB 511 at 513 that "a release granted to one joint tortfeasor, or to one joint debtor, operates as a discharge of the other joint tortfeasor" and contrasted it with a covenant not to sue: "On the other hand, where there was a mere covenant not to sue one joint tortfeasor, as opposed to a release under seal or by accord and satisfaction, the covenant did not preclude recovery against the other joint tortfeasors. As a consequence, courts were reluctant to construe an agreement with one tortfeasor as a release rather than a covenant not to sue." (citations omitted)
Their Honours held that the common law rule that a release of one joint tortfeasor operates as a discharge of any other joint tortfeasors had been abrogated by legislation of the form of s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
Gummow J (with whose reasons in this respect Gaudron J agreed) reached the same conclusion. His Honour reproduced at 609 a larger portion of the reasons of A L Smith LJ in Duck v Mayeu at 513, including his Lordship's statement: "It has also been held that a covenant not to sue one of two joint debtors does not operate as a release to the other joint debtor, Hutton v Eyre, the reason being that the joint action is still alive. We have found no case in which it has been held that a covenant not to sue releases a joint tortfeasor; and in our judgment the principle upon which it has been held that such a covenant does not release a joint debtor applies to the case of a joint tortfeasor." (citations omitted)
The divergence is made clear by the decision of the New Zealand Court of Appeal, constituted by five judges, in Robinson v Tait [2002] 2 NZLR 30, which expressed some (restrained) criticism of the Thompson at [60], noted it was not necessary to determine the appeal to determine the correctness of Thompson and observed at [66] that there was no New Zealand counterpart to the Civil Liability (Contribution) Act 1978 (UK). Even so, the joint judgment of Keith, Blanchard and McGrath JJ referred with approval to all of the passages extracted above which were relied on in Carr v Thomas.
It follows that there is some force in aspects of Ms Lavin's submissions about the quality of support given by the authorities relied on in Carr v Thomas. They are not decisions squarely on the point; instead they are decisions which contain dicta supportive of the point. And not all aspects of the law in England and New Zealand in the more recent decisions apply in Australia. However, none of those reservations is to the point unless the conclusion be wrong in principle.
In addition to those statements, the presiding judge referred the parties to statements in the standard texts which supported the result and reasoning in Carr v Thomas. Glanville Williams (as one might expect), addressed the question carefully, in Joint Obligations (Butterworths, 1949). At 108 he made the point that there is a threshold question as to the nature of the covenant not to sue - is it a covenant merely not to sue the co-surety with whom the creditor has reached a compromise, or is it a covenant not to sue the other co-surety? If the latter, then at least in some cases the other co-surety can enforce it as a defence to a claim by the creditor, in which case "no question of contribution would arise". Moreover, if the covenant were that nobody shall sue the co-surety who has settled with the creditor, then: "it seems that D1 may, to avoid circuity of action, claim an injunction against P to prevent him from claiming such a sum against D2 as would be recoverable by D2 against D1 by way of contribution."
But those are unusual covenants not to sue. Glanville Williams added that in the usual case the covenant would merely be a covenant not to sue D1. In that case: "[I]t should not save D1 from having to bear his share of contribution payable to the other joint debtors who are subsequently sued."
The same position is stated in Rowlatt on Principal and Surety (6th ed, Sweet & Maxwell, 2011, D Marks and G Moss (eds)) at 209, although the passage needs to be read on the basis that, following Watts v Aldington, what matters is not whether there is a release or a covenant not to sue, but merely whether the settlement reserved the creditor's rights against co-sureties: "A discharge of a surety with a reservation of the creditor's rights against co-sureties operates to preserve intact the right of the latter, when sued, to have contribution from the first surety, notwithstanding the so-called 'discharge'".
The position in summary is that Carr v Thomas is supported by dicta in a range of appellate decisions over a lengthy period of time, and statements in highly regarded texts. This Court was not taken to any decisions which were to the contrary. Nevertheless, the argument was advanced at the level of principle, and it remains necessary to address it at that level.

(d) The effect of a covenant not to sue upon a co-surety

In point of principle, a covenant not to sue (in the usual form) does not alter an existing liability. Giving such a covenant means merely that the covenantor is in breach if it does sue. True it is that in some circumstances, the covenant could be pleaded in bar as a release, and in any event, it could amount to a good equitable defence, enforceable in appropriate circumstances by injunction: McDermott v Black (1940) 63 CLR 161 at 186-188 (Dixon J); Baxter v Obacelo Pty Ltd [2001] HCA 66; 205 CLR 635 at [66]-[68] (Gummow and Hayne JJ). This does not detract from the fundamental difference between releasing a primary liability, and making a promise in respect of that primary liability.
I return to Ms Lavin's submission that it is necessary that the liabilities, in order to be "co-ordinate" so as to support a right to contribution, be "of the same nature and to the same extent". A covenant not to sue does not alter the liability. Indeed, the premise of the covenant is that the liability remains; it is the liability which is the subject of the covenant. There remained a community of interest shared by Ms Lavin and Ms Toppi, at least in the broader sense in which the term was used in equity.
Ms Lavin invoked the maxim that equity looks to the substance, rather than the form, and said that Ms Lavin's liability once she had the benefit of the covenant not to sue, was "infinitesimal" - for the Bank could not enforce any further liability against her. However, in HIH Claims the application of this maxim was rejected in a similar context at [47]. Moreover, Ms Lavin's submission clashes with well-settled principles. As Glanville Williams said at 165: "The right of contribution among co-debtors is independent of any present right of the principal creditor. Thus the right of contribution exists although the right of the principal debtor has become statute-barred."
For similar reasons, and contrary to Ms Lavin's submissions, the payment by Ms Toppi of the outstanding indebtedness of some $2.9 million did confer a benefit upon Ms Lavin. Prior to the payment, Ms Lavin was liable to pay her share of the guaranteed debt, albeit that the Bank had promised not to enforce it. After the payment, there was no guaranteed debt left to pay. Moreover, as Glanville Williams said at 165-166: "The right of contribution … does not depend on a present common obligation between the debtor who pays the debt and the debtor against whom (or whose estate) contribution is sought. It is enough that the joint or joint and several obligation existed at some period in the past."
The context in which the distinction between a release and a covenant not to sue has mostly arisen has been where the issue was the claim of the creditor against the other surety, rather than one surety's right of contribution against another. There was no challenge to the proposition that a covenant not to sue a surety does not prevent a creditor from suing a co-surety. (Indeed, in light of the passages in Thompson reproduced above, it may be doubted whether it would have been open to Ms Lavin to do so; those passages are both "seriously considered" and "long established"; cf Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 239 CLR 89 at [134] and see the consideration by Ward J in Ying v Song [2009] NSWSC 1344 at [17].) If the primary obligation of surety vis-à-vis creditor remains, why should the position in relation to the secondary obligations of co-sureties amongst themselves be altered?
Finally, I turn to the balance of the submission that this Court had erred in Carr v Thomas by failing to appreciate that the primary judge had relied upon the inability to enforce a liability, as opposed to the extinction of the liability. I respectfully disagree.
On a fair reading, the primary judge was not pointing to a distinction between a liability and a liability which could be enforced. The dispositive reasoning of the primary judge in Resource Equities Ltd v Carr [2008] NSWSC 977 was at [37]-[38] as follows (emphasis added): "In those circumstances, it seems to me to be inevitable that the effect of the deed of release, even reading it as no more than a covenant not to sue, is that since the deed was executed or since the joint orders were made (and I repeat that it does not matter which date is chosen) Mr Thomas had no liability to REL which could be enforced against him by REL in respect of the subject matter of the proceedings. It follows that if REL succeeds against Messrs Carr and Purves, and they pay REL, Mr Thomas will receive no benefit. He will receive no benefit because no contingent (or for that matter crystallised) liability that he has to REL will have been satisfied, either completely or pro tanto, by the payment. That is because he has no such liability.
In consecutive paragraphs the primary judge referred to "no liability which could be enforced" and "no contingent liability" and "no such liability". His Honour was not, as I read the reasons, making the distinction on which Ms Lavin relied.

Dismissal of proceedings does not alter the position

The fourth strand of Ms Lavin's submissions may be dealt with concisely, when once it is appreciated (as Macfarlan JA pointed out in argument) that ss 90 and 91 of the Civil Procedure Act 2005 (NSW) preserve a vital distinction between the giving of judgment and the dismissal of proceedings. The latter section makes it clear that a dismissal: "does not, subject to the terms on which any order for dismissal was made, prevent the plaintiff from bringing fresh proceedings or claiming the same relief in fresh proceedings."
Although the orders dismissing the Bank's statement of claim and Ms Lavin's cross-claim were made in a form headed "Consent Judgment", that heading is insufficient to deprive the orders of their ordinary operation. The orders are what are entered into the Court's computerised court record system and thereafter take effect by reason of r 36.11(2) of the Uniform Civil Procedure Rules 2005. Moreover, regard may be had to the form of "Consent Judgment C", which is the immediately preceding page in the Deed. That is an order by consent for "judgment for the plaintiff against the first defendant and the fourth defendant in the amount of $_____ plus interest". The Deed contains provisions for calculating the amount. In short, where the parties intended a judgment to be obtained, they did so in terms. There is no warrant in those circumstances for construing the order to dismiss proceedings as an order for judgment in favour of the defendant. Nor is there warrant for considering that the terms in which the order has been made displace the operation of s 91.
It follows that, as Mr Einfeld properly acknowledged in the event that his submission based on "subject to the terms on which any order for dismissal was made" were rejected, the making of orders in accordance with the terms of the Deed did not alter the position.

No disentitling conduct

This final, alternative ground of appeal was based on the proposition that the mortgage provided by Basecove Pty Ltd (a company controlled by Ms Toppi and Mr Cunningham) secured the indebtedness of Luxe Studios, and that: "by procuring the discharge of the Basecove Mortgage and then failing to pay to the Bank in reduction of the Debt the net proceeds of sale of the property the subject of the Basecove Mortgage, the Respondents disentitled themselves in Equity to contribution from the Appellants." This ground turns on some factual matters predating the guarantees on which the proceedings below were based which have not been explained so far.
The primary judge found (at [7(1)]) that Basecove was a guarantor in November 2006, May 2007 and March 2008, but was not included in the October 2008 guarantee. Basecove mortgaged property to secure its obligations to the Bank. That property was sold, but not all of the proceeds of sale were used to pay down the parties' indebtedness to the Bank.
Ms Lavin accepted that Basecove had not executed a guarantee in October 2008, but relied on earlier guarantees and a mortgage it had provided which was an "all monies" mortgage. Ms Lavin's written submissions stated that: "Whilst [Basecove] had not signed the 2008 Guarantee, there was no finding by the primary judge, and none was justified on the evidence, that earlier guarantees had been discharged or released".
The premise to the argument is not made out. At [39] the primary judge said that Basecove "was in fact a co-surety under two earlier guarantees, although it ceased to be on the October 2008 guarantee". That is to be read not merely as a finding that Basecove did not execute the last guarantee, but also as a finding that Basecove was no longer a guarantor of the (refinanced) indebtedness of Luxe Studios.
What is more, that finding was amply open on the evidence. It suffices to observe that Basecove was not sued by the Bank, nor did any of the co-sureties who were sued by the Bank file a cross-claim seeking contribution against Basecove.
More fundamentally, the source of the right to contribution on which Ms Toppi relied was the fresh guarantees entered into in 2008. Basecove provided no such guarantee. The fact that a former co-surety did not pay over the whole of the proceeds of sale of property to the Bank, in circumstances where the continuing debtor and its co-sureties entered into a new agreement with the Bank, does not disentitle the continuing co-sureties from contribution against each other. This ground of appeal should be dismissed.

Orders

The result is that far from being "clearly wrong", Carr v Thomas was correctly decided. There was no disentitling conduct. Accordingly, I propose that the appeal be dismissed, with costs.

Amendments 25 March 2015 - In [44] the word "provide" deleted and "prove" inserted. In [52] the word "the" in quote deleted and "that" inserted. In [65] the duplicate word "that" deleted. In [66] the reference to page 609 inserted after "His Honour reproduced", and reference to page 513 inserted after Duck v Mayeu. In [67] the reference to [68] in Robinson v Tait replaced with reference to [66]. In [79] the words "reasoning of the" deleted, and reference to Resource Equities Ltd v Carr [2008] NSWSC 977 inserted after "primary judge was". DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 March 2015

(UK) Civil Liability Act 2002(NSW)

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