Liu v Gu

Supreme Court of NSW|2020-08-05|Before: Henry J

Judgment

On 24 February 2020, the plaintiff commenced these proceedings against the defendants claiming the amount of $1,000,000 (Additional Amount), interest and indemnity costs pursuant to a guarantee and continuing indemnity contained in a deed of settlement and release entered into by the plaintiff, the defendants, i-Prosperity Capital Pty Ltd (IPC) and i-Prosperity Waterside Rhodes Pty Ltd (IPW) on 2 July 2019 (Deed).
On 3 July 2020, the first and second defendants reached a settlement with the plaintiff and consented to judgment in favour of the plaintiff for $1,100,000 inclusive of costs being entered against them in the proceedings.
On 5 August 2020, the plaintiff's claim against the third defendant (Ms Li) was listed before me for hearing. At the hearing, Ms Li did not dispute that she jointly and severally guaranteed payment to the plaintiff of the Additional Amount and accrued interest under the Deed or that those amounts have not been repaid to the plaintiff by IPC or the defendants.
However, by her amended commercial list response filed on 5 August 2020, Ms Li contends that she has been discharged from liability under the guarantee in circumstances where her co-guarantors (the first and second defendants) and IPC were released from their obligations under the Deed by their settlement with the plaintiff. This contention raises the issue of whether, on its proper construction, the terms of settlement between the plaintiff, the first and second defendants and IPC operated as an immediate release of their liabilities to the plaintiff and discharge of the Deed or as a covenant not to sue (the release issue).

Background

Between 2017 and 2019, the plaintiff provided finance to IPW in connection with the amalgamation and development of a series of residential lots located in Rhodes, New South Wales.
The financing arrangements were documented in a facility agreement dated 17 May 2017 between the plaintiff, IPW and the defendants that provided for a loan facility with an initial drawdown limit of $32,000,000 and for the defendants to give individual guarantees by way of separate agreements (Facility Agreement) and an amendment deed made on or about 21 March 2019 that varied the Facility Agreement (Amendment Deed).
On 2 July 2019, the plaintiff, IPW, IPC and the defendants entered into the Deed, pursuant to which the plaintiff agreed to accept the amount of $41,115,785.77 (Compromise Amount) and the Additional Amount to settle what was due to her under the Facility Agreement and the Amendment Deed: cl 2.
By clauses 3, 4 and 5 of the Deed, IPC agreed to pay the Additional Amount by no later than 18 December 2019 plus interest at a rate of 5% per annum which accrued daily from the date of the Deed.
Clause 6 of the Deed provides: 6. Guarantee (a) Each Guarantor unconditionally and irrevocably guarantees payment to the Secured Party of the Additional Amount. If the Company does not pay the Additional Amount, and any accrued Interest, by on or before 18 December 2019 in accordance with this document, then the Guarantors agree to pay the Additional Amount, and any accrued Interest, to the Secured Party on demand from the Secured Party (whether or not demand has been made by the Secured Party on the Company). A demand may be made at any time and from time to time. (b) This guarantee is a continuing indemnity and extends to all of the Additional Amount, and any accrued Interest and other money payable under this document. Each Guarantor waives any right it has of first requiring the Secured Party to commence proceedings or enforce any other right against the Company or any other person before claiming from the Guarantor under this document.
Under the Deed, the plaintiff was the Secured Party, the defendants were each a Guarantor and IPC was the Company.
Clause 13 relates to the amendment and variation of rights under the Deed and provides that the Deed can only be amended or replaced by another document executed by the parties and that a right may only be waived in writing in a document which has been executed by the party giving the waiver.
By clause 17, IPW agreed to indemnify the plaintiff against all costs and expenses incurred in connection with any steps required by the plaintiff to enforce the Deed, including legal expenses on a full indemnity basis.
Clause 18(a) relates to the operation of the Deed and provides that the Deed contains the entire agreement between the parties about its subject matter and that any previous understanding, agreement, representation or warranty relating to that subject matter was replaced by the Deed and had no further effect.
Although the Compromise Amount was paid to the plaintiff, IPC failed to pay the Additional Amount by 18 December 2019 as required by clauses 3 and 4 of the Deed.
By letters dated 15 January 2020, the plaintiff made demands on IPC and each of the defendants to pay the Additional Amount and interest by 24 January 2020. No payments were made to the plaintiff in response to those demands.
The plaintiff commenced these proceedings against the defendants on 24 February 2020, seeking judgment for the Additional Amount plus interest and an order for indemnity costs pursuant to the guarantee and continuing indemnity contained in clause 6 of the Deed.
On 23 March 2020, the defendants (who were at that time represented by the same solicitors) filed a commercial list response in which they denied that the plaintiff had made demands on them and IPC, denied that they had failed to comply with the demands and denied that the Additional Amount and interest were owed to the plaintiff. It is not apparent from the commercial list response the basis on which the defendants denied those matters.
On 15 April 2020, Ms Li changed solicitor. From that time, she was represented by the solicitor who appeared on her behalf at the hearing.
On 6 May 2020, the plaintiff commenced proceedings in this Court to wind up IPC, having previously issued a statutory demand to IPC for the Additional Amount.
During June 2020, the parties legal representatives engaged in without prejudice negotiations to see whether the plaintiff's claims against the defendants in these proceedings and against IPC in the winding up proceedings could be resolved by consent.
As part of the without prejudice negotiations, the plaintiff's solicitor proposed settlement terms in a letter dated 24 June 2020 addressed to Landerer & Company, the solicitors for the first and second defendants and IPC.
The 24 June letter stated that the plaintiff was willing to accept the instalment arrangement which had been proposed by Landerer & Company's clients but wanted settlement terms to operate as set out in the letter. Pausing here, the details of what had been proposed by Landerer & Company are not in evidence.
Because of their importance in this case, the settlement terms proposed by the plaintiff's solicitor in the 24 June letter are set out in full below: 1. By on or before 3 July 2020 the defendants must consent to orders being made in the Guarantee Proceedings that: (a) judgment be entered in favour of the plaintiff against each of the defendants for the sum of $1,100,000 inclusive of costs; (b) the listing of this matter for final hearing on 5 August 2020 is vacated; and (c) the parties have liberty to apply on 3 days' notice. 2. The plaintiff will not take any steps to enforce this judgment or otherwise seek any additional recoveries from the defendants provided that the following instalments are paid into the plaintiff's nominated bank account in full without counter-claim, set-off or cross demand: Description Amount Due Date First instalment $AUD300,000 10 July 2020 Second instalment $AUD300,000 31 August 2020 Third instalment $AUD500,000 31 October 2020 TOTAL $1,100,000.00

In the event that the first instalment is paid in full without counterclaim, set-off or cross-demand on 10 July 2020, [the plaintiff] and [IPC] will consent to orders that the Winding Up Proceedings be discontinued with no orders as to costs. 4. In the event that the first instalment is not paid in full without counterclaim, set-off or cross-demand by on or before 10 July 2020: (a) [the plaintiff] will be free to immediately enforce and otherwise seek the recovery of the judgment she has obtained against each of the defendants in the Guarantee Proceedings; (b) [IPC] will consent to orders in the Winding Up Proceedings that it be wound up and a liquidator appointed; and (c) [IPC] nor any of the defendants will take any steps to oppose any relief or orders sought by [the plaintiff] in the Winding Up Proceedings and hereby waive their rights (if any) to do so. 5. In the event that the first instalment is paid but there is a subsequent default in paying the second or third instalments: (a) [the plaintiff] will be free to immediately enforce and otherwise seek the recovery of the judgment she has obtained against each of the defendants in the Guarantee Proceedings provided credit is given for any instalments she has received; (b) the balance of all unpaid instalments will become immediately due and payable by [IPC] in full without counterclaim, set-off or cross-demand; (c) [IPC] and each of the defendants will become jointly and severally liable to indemnify [the plaintiff] for any costs incurred by [the plaintiff] in seeking the recovery of the unpaid instalments and taking any advice on her options thereto; and (d) Landerer & Company are immediately authorised to accept service on behalf of each of the defendants under rule 10.6 of the Uniform Civil Procedure Rules 2005 (NSW). 6. Subject to paragraphs 4 and 5 of this letter, payment of the Settlement Sum will: (a) be accepted by [the plaintiff] in full satisfaction and release of any claims she has against [IPC] or any of the defendants including the judgment she obtains against the defendants in the Guarantee Proceedings; and (b) act as a bar to any proceedings or any other recovery action which may be commenced by [the plaintiff] against the defendants or [IPC] in connection with this letter. 7. This letter constitutes the entire agreement between the parties and will be taken to supersede any previous agreements which were entered into by the parties including the Deed of Settlement and Release. 8. This letter can be produced and relied upon as a binding agreement between the parties in any subsequent proceedings commenced by [the plaintiff] or in the Guarantee or Winding Up Proceedings.
The 24 June letter stated that the offer was open for acceptance until 12 noon on 2 July 2020.
On 1 July 2020, the plaintiff's solicitor sent an email to the solicitor for the first and second defendants and IPC, copied to the solicitor for Ms Li, asking whether "your clients" are prepared to consent to orders that provide for judgment to be entered in favour of the plaintiff against each of the defendants for the sum of $1,100,000 inclusive of costs. The email attached consent orders in those terms which provided for the legal representative of the first and second defendants to sign on their behalf and for Ms Li's legal representative to sign on her behalf.
On the morning of 3 July 2020, the plaintiff's solicitor received acknowledgements signed by each of IPC and the first and second defendants that they agreed to be bound by the terms of the 24 June letter and short minutes of order consenting to judgment against the defendants. The acknowledgements were dated 1 July 2020 although the evidence indicates that the solicitor for IPC and the first and second defendants did not have instructions to send them to the plaintiff's solicitor until 3 July 2020.
Also on the morning of 3 July, the plaintiff's solicitor sent an email to Ms Li's solicitor attaching the proposed consent orders, the 24 June letter and a draft acknowledgment and asked if Ms Li was prepared to agree to the consent orders and sign the acknowledgement.
In his reply email, Ms Li's solicitor noted that the first and second defendants had agreed to pay the judgment sum and requested that the proceedings against Ms Li be dismissed, withdrawn or at least postponed until the timeframe for payment had expired. The plaintiff's solicitor responded that day, stating that the plaintiff's claim against Ms Li would not be discontinued, that the first and second defendants consent to judgment had no impact upon that claim and that the plaintiff intended to press for judgment against Ms Li at the hearing scheduled for 5 August 2020.
In light of Ms Li's position, on 3 July 2020, orders by consent were made by the Court for judgment against the first and second defendants (and not "the defendants") in the amount of $1,100,000 inclusive of costs in favour of the plaintiff.
The first instalment amount of $300,000, as contemplated by paragraph 2 of the 24 June letter, was not paid by 10 July 2020.
On 20 July 2020, the plaintiff proceeded with her application in the winding up proceedings and orders were made by the Court for IPC to be wound up in insolvency and for liquidators to be appointed: In the matter of i-Prosperity Capital Pty Ltd (ACN 605 317 360) [2020] NSWSC 1116. According to an affidavit from the plaintiff's solicitor, the plaintiff intends to lodge a proof of debt in the winding up of IPC for the Additional Amount plus interest which the plaintiff claims is owing to her under the Deed.
On 30 July 2020, Ms Li's solicitor wrote to the plaintiff's solicitor and asked for a copy of the settlement agreement pursuant to which the judgment had been entered. By email dated 31 July 2020, the plaintiff's solicitor forwarded to Ms Li's solicitor a copy of the 24 June letter and the acknowledgements signed by IPC and the first and second defendants.
On 3 August 2020, the plaintiff applied for a writ for the levy of property to be issued against the first and second defendants to enforce the judgment.
According to the plaintiff's affidavit relied on at the hearing, as at 31 July 2020, she had not recovered any part of the Additional Amount or interest from her enforcement of the judgment or as part of the liquidation of IPC.

Did the settlement operate to release Ms Li from the guarantee?

Legal principles

The general principle is that the release of one guarantor operates as a release of co-guarantors of the same debt: Walker v Bowry (1924) 35 CLR 48; [1924] HCA 28 (Walker v Bowry) at 58. As Starke J stated at 58: In the case of sureties, the principle is that the joint suretyship is the "essential condition of the liability" of each, or, as the Judicial Committee phrase it, "part of the consideration of the contract of each". Does it make any difference that the creditor has pursued one surety to judgment on a joint and several guarantee, and then released [them] from the judgment debt? The judgment itself does not affect [their] right to indemnity from the principal or to contribution from [their] co-sureties. The equities arising from the relationship of principal and surety still subsist. But, in releasing the judgment debt, the creditor just as surely discharges the "joint suretyship" and also the arrangement that both should be bound to the creditor as if [they] released all claims upon the guarantee itself. The creditor has broken the essential condition of liability of the other sureties, and thereby discharged them. [citations and footnotes omitted]
The principle that a joint and several guarantee will usually involve an obligation that all parties remain parties does not require that all parties remain liable on the guarantee. Where a creditor covenants not to sue a co-guarantor or affects a compromise with a co-guarantor falling short of an absolute release, the other joint and several guarantors are not discharged. A creditor can avoid releasing a remaining guarantor if the agreement with a co-guarantor, such as a settlement, is structured as a covenant not to sue rather than a release. A covenant not to sue does not affect the underlying liabilities of the other guarantors who will remain liable: Lavin v Toppi (2015) 254 CLR 459; [2015] HCA 4 (Lavin v Toppi) at 470-471; James v Surf Road Nominees Pty Limited [2004] NSWCA 475 (James v Surf Road) at [40]; James Donovan and John Phillips, Modern Contract of Guarantee (4th ed, 2004, Thomson Reuters, looseleaf) at [8.300].
It is a question of construction whether a settlement agreement operates as an absolute release or a covenant not to sue. If, upon its proper construction, in the context of the whole document in which the covenant is found, an intention is found not to release all joint and several promisors, that will point to a covenant not to sue: James v Surf Road at [41].
In James v Surf Road, the Court of Appeal recognised that the question of construction as to whether a particular provision in a document amounts to a release in law or whether it is a covenant not to sue is not always easy to resolve and identified, at [43]-[44], three factors that may determine the issue as follows: 1. where there is a joint obligation, a covenant which is expressed in terms of a release is usually construed as such; 2. even where there are joint obligations, the terms of a document containing the release may indicate that what was intended was a covenant not to sue. If any intention to reserve rights against the other co-promisors is found expressly or impliedly in the document containing the release, then it is most likely that the parties intended a covenant not to sue; and 3. the Court may have regard to the surrounding circumstances in determining whether what was intended was a release or a covenant not to sue the party who bears a joint or joint and several liability.
Where a document purports to release a joint debtor and contains in terms a reservation of rights against the other joint debtor, the document should be construed, not as a release, but as an undertaking not to sue with the result that the right to proceed against the co-debtor is reserved. Language importing an absolute release may be construed as a covenant not to sue where that intention appears. If an agreement falls within the qualification, in that it expressly or impliedly reserves rights against a joint debtor, there is no room for the application of the principle of construction that as between two mutually repugnant provisions in a deed or other contract, the earlier prevails over the later. Rather, the qualification provides the basis for the proper construction of the agreement or deed to enable a right to proceed against a co-debtor: Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164 (Dorgal v Buckley) at 167; Carr v Thomas [2009] NSWCA 208 (Carr v Thomas) at [16]-[19].
An agreement may constitute a covenant not to sue rather than a release, even where there is no express reservation of rights against other debtors: Pollak v National Australia Bank Limited [2002] FCA 237; [2002] FCAFC 55 (Pollak v NAB) at [16] referring with approval to Murray-Oates v Jjadd Pty Limited (1999) 76 SASR 38; [1999] SASC 537 at 54.

Consideration and decision

Ms Li contends that, on or about 1 July 2020, the plaintiff, the first and second defendants and IPC entered into a settlement agreement on the terms of the 24 June letter. She submits that the agreement operated to release the first and second defendants from their obligations under the Deed as guarantors and to bring the Deed to an end and, as a consequence, she was also released from her obligations under the Deed as a co-guarantor, relying on the common law principle that the release of one guarantor operates as a release of co-guarantors of the same debt. She also submits that the agreement meant she lost her right of contribution from the first and second defendants and her right of indemnity from IPC.
In support of this submission, Ms Li relies on paragraphs 6 and 7 of the 24 June letter.
Ms Li argues that paragraph 6 operated as a release because it provided that payment of the settlement sum would be "in full satisfaction and release of any claims" and act as a bar to further proceedings. She also submits that clause 6 effects a release as it is a promise in equity for value that should be treated as the doing of that thing, relying on the principle from In Re Fireproof Doors Limited, Umney v The Company [1916] 2 Ch 142 (Fireproof Doors) at 150.
Ms Li also argues that the effect of paragraph 7 was to immediately extinguish the plaintiff's' rights and obligations under the Deed, as the Deed was "superseded". She says that, as it was superseded, the Deed was abandoned and no longer formed any part of the agreement between the parties to the settlement.
Ms Li submits that, as the Deed was no longer an agreement between them, the first and second defendants and IPC must have been released from the Deed, with the consequence that she was also released. Ms Li also submits that the entry of judgment is immaterial because clause 7 was not conditional and provided for the Deed to be superseded prior to judgment being issued, at which time the only rights that existed were those contained in the settlement agreement itself, rather than under the Deed.
At the hearing, the plaintiff accepted that she reached an agreement with the first and second defendants and IPC on the terms of the 24 June letter. But, the plaintiff contends that the settlement agreement did not operate to release the first and second defendants or IPC or bring the Deed to an end, in the way Ms Li contends.
The plaintiff submits that no releases of liabilities to the plaintiff have been given to the first and second defendants as judgment was entered against them and writs of levy of property have been issued. She also submits that any release of IPC and the first and second defendants was expressed to be conditional on payment of the instalments and, as they were not paid, there has been no release of IPC or the first and second defendants and, thus, no release of Ms Li.
The plaintiff also submits that there could be no release of Ms Li as she never acknowledged or otherwise became a party to the settlement agreement.
In my view, the plaintiff's submissions should be accepted. When read as a whole and in context, I do not consider that the settlement agreement had the effect contended by Ms Li with the result that she was released from her obligations to the plaintiff to pay the Additional Amount plus interest pursuant to the guarantee under the Deed or that she lost her right of contribution from the first and second defendants.
Paragraph 1 of the 24 June letter required the first and second defendants to consent to the entry of judgment against them on the plaintiff's cause of action in these proceedings in the sum of $1,100,000 inclusive of costs. That represented the quantum of the first and second defendants' liability to the plaintiff pursuant to the guarantee in clause 6 of the Deed, namely the Additional Amount and accrued interest, and some allowance for the plaintiff's legal costs. In other words, the settlement agreement required the first and second defendants to agree for their existing liabilities to the plaintiff under the Deed, as sued on in these proceedings, to be converted into an enforceable judgment.
As Ms Li accepted at the hearing, paragraphs 2 to 5 of the 24 June letter are more akin to covenants not to sue, rather than covenants to release.
Paragraph 2, which provides for the instalment regime, is expressed in clear terms as a covenant not to enforce, rather than a release.
Paragraph 3 provided for the winding up proceedings against IPC to be discontinued by the plaintiff if the first instalment amount was paid in full by 10 July 2020 but did not provide for any release of the plaintiff's claim on which the relief sought in the winding up proceedings was based, namely the plaintiff's statutory demand for IPC to pay her the Additional Amount.
Paragraphs 4 and 5 of the 24 June letter deal with the consequences if the instalments were not paid on time or at all. In my view, their terms demonstrate an intention not to release the first and second defendants or IPC from their liabilities to the plaintiff as they confirm the plaintiff's right to enforce the judgment obtained in these proceedings and pursue her claims against IPC in the winding up proceedings.
Paragraphs 2 to 5 are, therefore, indicative of an agreement on the part of the plaintiff not to enforce the judgment or her claims in the winding up proceedings pending satisfaction by way of the instalment payments. A covenant not to enforce a judgment is to be equated with a covenant not to sue: Pollak v NAB at [24].
Paragraph 6 is drafted as a conditional release. It was only upon payment of the "Settlement Sum" that the plaintiff agreed to release her claims against the first and second defendants and IPC and for them to be able to rely on the settlement agreement as a bar to proceedings. "Settlement Sum" is not defined in the 24 June letter, but I take it to mean the amount of the judgment, in respect of which payments were to be made in accordance with the instalment regime referred to in paragraph 2.
Paragraph 6 is expressed to be subject to paragraphs 4 and 5, making clear that the releases and the bar to proceedings provided for were not to take effect if any of the events contemplated by paragraphs 4 and 5 occurred, namely any default in paying the instalments on time or at all. The express conditionality of the releases and bar to proceedings are not consistent with the settlement agreement being construed as providing for an immediate release of the plaintiff's rights under or discharge of the Deed, in the way Ms Li contends.
The terms of the prospective releases in paragraph 6 are also at odds with Ms Li's contention that all liabilities under the Deed had been extinguished or released upon entry into the settlement agreement. The prospective release in relation to the first and second defendants was expressed to include the judgment. That judgment included the first and second defendant's liabilities as existing by the plaintiff's cause of action in the proceedings, seeking recovery of the Additional Amount plus accrued interest pursuant to the guarantee under the Deed. While the plaintiff's claims the subject of the prospective release in respect of IPC are not described, the references to the winding up proceedings in the earlier paragraphs suggest an intention for the release to encompass the plaintiff's claims against IPC under the Deed for payment of the Additional Amount.
I am also not persuaded by Ms Li's alternative submission that paragraph 6 should be interpreted as a binding release because it operated as a promise in equity for value and should be treated as the doing of the thing referred to. There are two issues with that submission.
First, Einstein J considered and rejected a similar submission in Jeans v Bruce [2004] NSWSC 539 (Jeans v Bruce). In that case, terms of settlement between a creditor and co-guarantor included an agreement to accept a significantly lesser sum than the amount of judgment, which sum was subsequently paid. The second and third defendants argued that the creditor's promise not to enforce the judgment amounted to a promise to release the co-guarantor, which should be treated in equity as the doing of that thing because it was a promise to do something for value. His Honour rejected that submission on the basis that it failed to accept the applicability of the qualification that, whereas a release of one of a number of joint, or joint or several debtors, releases all of them from the joint debt, a covenant not to sue does not: at [289]. His Honour construed the terms of settlement in that case as a covenant not to sue despite there being no express reservation of the creditor's rights against the other co-guarantor: at [292].
His Honour's approach is consistent with the authorities referred to above, which provide that the Court should construe the settlement agreement to determine whether the plaintiff covenanted not to sue (or not to enforce judgment) and affected a compromise falling short of an absolute release, or whether it provided for an immediate release of the parties rights and liabilities under the Deed as Ms Li submits.
Second, unlike in Fireproof Doors and Jeans v Bruce, it seems to me that, in this case, there has been no value given for the doing of the thing that Ms Li contends should be treated as a binding promise, namely the release. In Fireproof Doors, the party seeking to obtain the benefit of the promise, relevantly an agreement to issue debentures, had provided the money in exchange for the documents purporting to give her security and one of the documents was subject to an irregularity. Similarly in Jeans v Bruce, the co-guarantor had paid to the creditor the compromise amount. Here, no payments have been made to the plaintiff to satisfy the judgment or her claim to the Additional Amount or interest under the Deed.
Ms Li's submissions on the effect of paragraph 7 are based on that paragraph providing for an immediate and fundamental alteration of the first and second defendants and IPC's liabilities under the Deed, a complete release before the judgment was issued and the bringing to an end of the Deed from that time. In my view, that submission adopts an unduly narrow approach to construing paragraph 7.
Paragraph 7 states that the 24 June letter constitutes the entire agreement and supersedes all previous agreements, including the Deed. By its terms, it provides for the Deed to be replaced or supplanted by the terms of the settlement agreement. That said, paragraph 7 does not say that the Deed was to have no further effect, as clause 18 of the Deed does. Nor is it expressed as a release of all of the plaintiff's rights and claims under the Deed, including those in respect of Ms Li.
Ms Li's construction also seems to me to be at odds with the other terms of the settlement agreement that recognise the plaintiff's ongoing claims and the first and second defendants' liabilities, as guarantors under the Deed, to pay the Additional Amount and accrued interest and the nature of the conditional releases.
As Gibbs J stated in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 at 109: [T]he primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.
The Court may also have regard to the surrounding circumstances in determining whether what was intended by paragraph 7 and the other parts of settlement agreement was a release or a covenant not to sue: James v Surf Road at [44].
As stated above, the settlement agreement required consent judgment to be entered in favour of the plaintiff in these proceedings. Rather than agreeing to a material variation or providing a new promise to the plaintiff in substitution for and by way of release of liabilities under the Deed, the consent judgment was on terms that reflected the first and defendants' obligations under the Deed (and those of IPC) to pay to the plaintiff the Additional Amount and interest.
I do not accept Ms Li's submission that the judgment was immaterial because it was entered after the settlement agreement and paragraph 7 operated as an immediate release. It was a condition of the settlement agreement for the first and second defendants to consent to orders for judgment being made against them in respect of the plaintiff's cause of action in these proceedings on terms as provided for by the 24 June letter. Further, as events transpired, the first and second defendants' consent to judgment was given at the same time as they agreed to be bound by the 24 June letter. Once the consent orders were made, the plaintiff's rights and the first and second defendants' liabilities in respect of the Additional Amount and interest under the Deed, as sued on in these proceedings, merged into and were subsumed by the judgment, with the plaintiff's rights converting into that of a judgment creditor and the first and second defendants' liabilities converting into those of judgment debtors: James Donovan and John Phillips, Modern Contract of Guarantee (4th ed, 2004, Thomson Reuters, looseleaf) at [10.3150]; Walker v Bowry at 55-56 (Isaac ACJ).
Thus, in practical terms, rather than operating as a release, the settlement agreement provided for the replacement of the first and second defendants' liability to pay the Additional Amount and accrued interest to the plaintiff under the Deed with a liability to pay the same amounts pursuant to a judgment.
The common law rule is that a judgment against one joint and several guarantor does not discharge the several liability of the other: Dorgal v Buckley at 167. To the extent the terms of the settlement agreement superseded the Deed and provided for judgment, there was no release of any rights the plaintiff has to pursue Ms Li as a co-guarantor to judgment under the Deed: Glanville Williams, Joint Obligations: A Treatise on Joint and Joint and Several Liability in Contract, Quasi-Contract and Trusts in England, Ireland and the Common-Law Dominions (1949, Butterworth & Co) at [48].
The rule against double satisfaction that precludes the plaintiff from recovering more than the guaranteed amounts under the Deed does not prevent judgment being entered against Ms Li on the plaintiff's cause of action in these proceedings. It simply means that, to the extent the consent judgment against the first and second defendants is satisfied or the plaintiff recovers any money in IPC's liquidation, the plaintiff will not be able to recover that amount from Ms Li pursuant to any judgment that might be entered against her: Dorgal v Buckley at 167.
The settlement agreement also provides new rights and obligations that replace or supplant those in the Deed as it provided time for payment of the judgment sum and for a release of the plaintiff's claims against the first and second defendants and IPC if that sum was paid in accordance with the instalment regime. In other words, the settlement agreement did not provide for an immediate accord and satisfaction, but was an accord and conditional satisfaction of the plaintiff's claims against the first and second defendants and IPC for payment of the Additional Amount and accrued interest that did not operate to discharge or release those claims unless and until there had been performance of what had been agreed to be done to extinguish the first and second defendants' and IPC's liabilities: Pollak v NAB at [22]; Osborn v McDermott [1998] 3 VR 1 at 10-11.
The circumstances surrounding the entry of the settlement agreement include the plaintiff's pursuit of her claims under the Deed in these proceedings against Ms Li and the first and second defendants and her claim against IPC by way of the statutory demand for the Additional Amount and the winding up proceedings. Ms Li is not a party to the settlement agreement, although she was provided with an opportunity to accept it. In correspondence, the plaintiff's solicitors made clear to Ms Li's solicitors that the plaintiff did not give up her claims against Ms Li notwithstanding judgment was to be entered against the first and second defendants and time was provided for payment.
The fact that Ms Li is a party to these proceedings militates against an interpretation that it was intended for the settlement agreement to operate as a discharge and release of Ms Li from all liability under the Deed: Padstow Corporation Pty Ltd v Fleming [2011] NSWSC 1337 (Padstow v Fleming) at [28]. The context at [77] also leads me to conclude that the absence of an express reservation of rights for the plaintiff to pursue her claim against Ms Li in these proceedings does not support paragraph 7 or the other aspects of the settlement agreement being construed as a release, rather than a covenant not to enforce the judgment or sue.
Clause 13 of the Deed also provides that it can only be replaced or amended by another document executed by the parties. As the plaintiff submits, Ms Li was not a party to the settlement agreement and is not bound by its terms.
Having regard to all of the above, I do not interpret the words in paragraph 7 that the letter supersedes the Deed as operating as an immediate discharge or abandonment of the Deed, a release of the first and second defendants and IPC from the plaintiff's claims to recover the Additional Amount and accrued interest, or to effect a release of Ms Li from her liabilities to the plaintiff under the Deed. Rather, I read paragraph 7 as confirming that the terms of the 24 June letter supplanted those in the Deed as between the plaintiff, the first and second defendants and IPC only and not in every respect, in circumstances where the terms of the 24 June letter maintained the plaintiff's continuing right to pursue recovery of the Additional Amount and accrued interest against the first and second defendants by the judgment, recognised the plaintiff's continuing claims against IPC and provided for a conditional release of the plaintiff's claims against them.
The settlement agreement preserved the plaintiff's rights under the Deed against the first and second defendants by way of judgment and structured the settlement terms as a covenant by the plaintiff not to enforce that judgment or take steps against IPC in the winding up proceedings if certain conditions were met. It was only on satisfaction of those conditions, relevantly the payment of the judgment sum by way of instalments that the first and second defendants and IPC were to be released from the plaintiff's claims against them. As events happened, no payments were made and no release has been given.
In my view, the settlement agreement falls short of an absolute and immediate release of the plaintiff's claims against the first and second defendants and IPC in respect of their liabilities under the Deed and does not operate to bring the Deed to an end as against Ms Li. As a consequence, Ms Li's liability as a co-guarantor under the Deed is preserved and the settlement agreement does not affect a release of the rights of contribution as between the defendants as co-guarantors or rights to an indemnity from IPC: Padstow v Fleming at [11]; Carr v Thomas at [38]; Lavin v Toppi at [2]-[3].
It follows that Ms Li's defence to the plaintiff's claim that she has been released by operation of law from the Deed and her obligations to the plaintiff as a guarantor fails. As she has not advanced any other defence to the plaintiff's claim, judgment should be entered against Ms Li for the Additional Amount and accrued interest.

If the settlement agreement operates to release the first and second defendants and IPC, does Ms Li remain liable to the plaintiff?

As I have concluded that the settlement agreement did not operate as a release, it is not strictly necessary for me to deal with the alternative arguments that the plaintiff and Ms Li advanced as to whether she remains liable to the plaintiff under the Deed. However, in case I am wrong, I have said something about those arguments, although my reasons are necessarily brief as the parties' submissions did not deal with the issues in a detailed way.
The plaintiff submits that, even if the settlement agreement operated as a release of the first and second defendants or IPC, Ms Li remains liable to the plaintiff under the Deed for two reasons.
First, she says that the terms of clause 6(b) of the Deed are sufficient to preserve the guarantee in the event IPC and the first and the second defendants have been released themselves.
Second, the plaintiff submits that it is open to construe clause 6 of the Deed as an indemnity in addition to a guarantee.
In support of her first submission, the plaintiff relies on the principle that a clause in a contract of guarantee can preserve a right of action against a guarantor where there has been a release, composition or other arrangement in respect of the debt between the creditor and principal debtor: Perry v National Provincial Bank of England [1910] 1 Ch 464 (Perry v National Provincial Bank) at 473; Bank of Adelaide v Lorden (1970) 127 CLR 185; [1970] HCA 59 (Bank of Adelaide v Lorden).
In each of Perry v National Provincial Bank and Bank of Adelaide v Lorden the Court considered the clauses in question to determine whether the words used were apt to provide for the preservation of rights and held that they did. In Perry v National Provincial Bank, the relevant clause expressly provided that the creditor could compound with, give time for payment, and accept compositions from and make any arrangements with the debtors or any of them without affecting their rights under the mortgage given by the surety. In Bank of Adelaide v Lorden, the guarantee expressly provided that the creditor could compound with the customer or come to an arrangement with the customer's creditors without affecting, impairing or releasing the guarantor's liability under the guarantee.
Clause 6(b) of the Deed contains no express stipulation or recognition that the plaintiff might reach a compromise with, release or discharge IPC or that the liability of the defendants (as guarantors) to pay the Additional Amount and accrued interest would continue despite such action. Rather, the part of clause 6(b) on which the plaintiff relies provides for a waiver by Ms Li of any right she has to first require the plaintiff to commence proceedings or to enforce any other right she might have against IPC or the first and second defendants before claiming against the defendants under the Deed.
In the absence of any words indicating some reservation of rights, I do not consider that clause 6(b) operates as a composition clause of the nature recognised by Perry v National Provincial Bank and Bank of Adelaide v Lorden or that the clause is sufficient to preserve the guarantee to enable the plaintiff to pursue Ms Li if I had concluded that IPC and the first and the second defendants had been released by the settlement agreement. Nor do I accept the plaintiff's submission that such an interpretation deprives the clause of any practical effect. Clause 6(b) has work to do as it enables action to be taken by the plaintiff to recover the Additional Amount and accrued interest against one of the defendants prior to, and in the absence of, any action being taken against IPC or the other defendants.
As to the second submission, the plaintiff relies on the wording of clause 6(b) that states "this guarantee is a continuing indemnity". Ms Li takes issue with this and submits that clause 6 should be interpreted as a guarantee only.
The distinction between a guarantee and an indemnity was considered by the Court of Appeal in Canty v PaperlinX Australia Pty Ltd [2014] NSWCA 309 (Gleeson JA, Barrett and Emmett JAA agreeing). The principles the Court identified can be summarised as follows: 1. a guarantee is a binding promise of one person (the guarantor) to be answerable for the debt or obligation of another person (the principal debtor) if the principal debtor defaults. The principal debtor is primarily liable, whereas the guarantor assumes a secondary obligation: at [38]; 2. a contract of indemnity is a contract by one party to keep the other harmless against loss. Under an indemnity, the person assumes a primary and independent liability to make good a loss, which is not dependent upon the continuing liability of the principal debtor: at [39]; 3. the distinction between a guarantee and indemnity is that a promise to pay a creditor if the principal debtor defaults in payment is a guarantee and a promise to keep a person indemnified independently of whether the principal debtor defaults is an indemnity: at [39]; and 4. whether a document provides for a guarantee or an indemnity will depend upon the true construction of the actual words used in which the promise is expressed. The use of the words "guarantee" or "indemnity" may be an indication of the intentions of the parties but are not decisive: at [41] and [42].
Applying those principles in this case, I am inclined to the view that clause 6 does not provide for a separate and distinct obligation to pay the Additional Amount and accrued interest to the plaintiff by way of an indemnity, in addition to the guarantee provided for by clause 6(a). I come to this view for the following reasons.
First, the Deed provides that the primary obligation to pay the Additional Amount and accrued interest rests on IPC pursuant to clauses 3, 4 and 5, rather than on the defendants under clause 6.
Second, while clause 6(a) provides that the defendants unconditionally and irrevocably guarantee payment, their obligation to pay the Additional Amount and accrued interest under that clause arises in the event that IPC fails to pay those amounts by 18 December 2019 and demand is made on them by the plaintiff.
Third, clause 6(b) refers to "this guarantee" being a continuing indemnity which suggests that the clause is more likely to be interpreted as being in aid of or a further description of the obligations that arise under the guarantee provided for in clause 6(a), rather than a primary and independent liability to pay the Additional Amount and accrued interest irrespective of any default by IPC.
Fourth, the defendants' liability under clauses 6(a) and (b) to pay the Additional Amount and accrued interest is coextensive and coterminous with the primary liability of IPC to pay those amounts. To the extent the plaintiff has the benefit of any ancillary indemnity under clause 6(b), it would seem to only extend to other monies payable under the Deed, such as for enforcement costs and expenses under clause 17.
Fifth, the word "indemnity" appears once in the body of clause 6(b). There is also an absence of other language to suggest that an indemnity in respect of the Additional Amount and accrued interest was intended, such as wording that provides for the defendants to keep the plaintiff harmless from any loss that arises under the Deed irrespective of any default by IPC or IPW, or that the defendants are each liable, as principal debtors, and that they agree to pay the Additional Amount, accrued interest or the other monies to the plaintiff at any time on demand.
Sixth, to the extent there is some ambiguity, the clause would be likely to be construed against the plaintiff in favour of Ms Li: Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 28.
As I would have concluded that there was no separate indemnity in relation to the Additional Amount and accrued interest, Ms Li's further argument that, if the Court were to find that clause 6 creates both a guarantee and indemnity, then the plaintiff breached an implied term that she would not do anything that would have had the effect of releasing the first or second defendants or both, from their obligation as co-sureties under the Deed, does not arise.
Nonetheless, I find it difficult to accept how such a term could be implied into the Deed if clause 6 also provided for an independent promise to indemnify the plaintiff that would not have been discharged in circumstances where the first and second defendants were released from their obligations under the guarantee but had not paid the Additional Amount or accrued interest. To my mind, the implication of such a term would be inconsistent with an express term providing for a continuing and separate indemnity obligation to pay those amounts that would operate irrespective of any compromise arrangements reached with other guarantors.

Costs and orders

The plaintiff seeks an order for costs on an indemnity basis pursuant to clause 6 of the Deed. In my view, such an order is appropriate in circumstances where clause 6(b) of the Deed provides for Ms Li to pay any other money payable under the Deed and clause 17 provides for legal expenses in connection with the enforcement of the Deed to be paid on a full indemnity basis.
As to the order for judgment against Ms Li, the evidence on the application is that the Additional Amount plus interest calculated at the rate provided for by clause 5 of the Deed amounts to $1,055,131.49 as at 31 July 2020. Ms Li did not object to that evidence or make any submission that the Court should not accept the calculation as accurate.
For these reasons, I make the following orders: 1. Judgment for the plaintiff against the third defendant in the amount of $1,055,131.49. 2. The plaintiff's costs of the proceedings are to be paid by the third defendant on an indemnity basis, as agreed or assessed.

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: 28 October 2020

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