Padstow Corporation Pty Ltd v Fleming

EX TEMPORE Judgment 1The plaintiff, Padstow Corporation Pty Limited, sued the first defendant, Thomas Maurice Fleming (Mr Fleming Senior), and the second defendant, Thomas John Fleming (Mr Fleming Junior), for amounts allegedly owed by them as guarantors of Hamola Crochet Pty Limited under a commercial property lease between Padstow and Hamola. 2Pursuant to leave granted by the Court, Padstow has discontinued its claims against Mr Fleming Senior. That occurred pursuant to terms of settlement agreed between Padstow and Mr Fleming Senior. 3In the balance of his notice of motion filed on 19 October 2011, Mr Fleming Junior contends that the terms of settlement operate to release him from any liability that he might otherwise have had to Padstow as a guarantor. 4In written submissions, Mr Fleming Junior raised three bases for this contention but abandoned two of them. 5Mr Fleming Junior's remaining claim is that, on a proper analysis, the settlement reached between Padstow and Mr Fleming Senior amounts to a release. 6The correctness or otherwise of that argument turns on the proper construction of the terms of settlement and, in particular, whether they operate as a covenant not to sue Mr Fleming Senior or as a release of the obligation owed to Padstow by both guarantors. 7If they operate as a covenant not to sue, then Mr Fleming Junior's liability to Padstow has not been released or extinguished by the terms of settlement. 8The principles are not in dispute. In James & Ors v Surf Road Nominees Pty Limited & Ors [2004] NSWCA 475 the following was said: [38] "The starting point in consideration of the circumstances in which a joint or joint and several guarantor may be discharged from liability under a guarantee is the principle that the discharge by the principal of the co-guarantor discharges the other co-guarantors. The old authorities explain the principle in terms that " the [guarantee] is not or ceases to be that which [was] guaranteed ": Re Wolmerhausen (1890) 62 LT 541; Smith v Wood [1929] 1 Ch 14, Hancock v Williams & Anor (1942) 42 SR (NSW) 252 at 255; Walker v Bowry (1924) 35 CLR 48. [39] The modern statement of the rule is that the undertaking of a joint or several obligation usually involves an implication the co-guarantees will remain in place for the duration of the guarantee. There may of course be an express provision to that effect. In either case, a release of one guarantor will release the other guarantors from liability, as otherwise there will be a breach of the relevant condition of the guarantee." .... [41] It is a question of construction whether a covenant operates as a 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. In that case, a co-promisor will not be discharged from liability. [42] These principles are uncontroversial. The controversy that usually arises, as it did in this case, is whether a particular provision in a releasing document amounts to a release in law or whether, properly construed, it is a covenant not to sue. The question of construction is not always easy to resolve, leaving the court to search for factors that may determine the matter one way or the other. [43] A number of common threads emerge from the cases. First, where there is a joint obligation, a covenant which is expressed in terms of a release is usually construed as such: Re Wolmerhausen per Stirling J at 545. Secondly, even where there are joint obligations, the terms of the 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 mostly that the parties intended a covenant not to sue. [44] Thirdly, 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. See generally Smith v Wood at 28-32 and Re Wolmerhausen at 545 . " 9See also Carr v Thomas [2009] NSWCA 208 particularly at paragraphs 17, 36, and 37 and Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164. 10Those authorities make it clear that, where the document in question reserves the obligee's rights to proceed against a co-debtor, the document will usually be construed as a covenant not to sue. 11Mr Fleming Junior submits that Padstow's rights as against Mr Fleming Senior under the guarantee have been completely replaced by those arising from the terms of settlement. But that is also a feature of a document construed as a covenant not to sue. While the proceedings remain afoot the obligee looks to the covenant for rights and liabilities. 12Mr Fleming Junior submits that an additional aspect of the terms of settlement that points to them being a release is its absolute certainty about the extent of Mr Fleming Senior's liability. Clause 9 is in the following terms: "If: (a) Mr Fleming Jnr is found liable to Padstow in the Proceedings (including any appeals therefrom); or (b) Padstow recovers from Mr Fleming Jnr an amount greater than the Total Receipts (whether pursuant to a settlement or otherwise); and (c) by reason of the Guarantee, Mr Fleming Snr is liable to pay an amount by way of contribution or indemnity in respect of Mr Fleming Jnr's liability to Padstow ( Contribution Amount ), then Padstow will repay the Contribution Amount to Mr Fleming Snr within 7 days of Padstow receiving the Contribution Amount from either Mr Fleming Snr or Mr Fleming Jnr." 13It is submitted that because of cl 9, the terms of settlement are more than a covenant not to sue. They also contain, it is submitted, an indemnity given by Padstow to Mr Fleming Senior against exercise by Mr Fleming Junior of his right to contribution. It was submitted that the effect of cl 9 is that Padstow has released Mr Fleming Senior from any obligation to contribute to Mr Fleming Junior. 14Clause 9 does not do this, in my view. It is predicated on the continued exercise of a potential liability on the part of Mr Fleming Senior to pay an amount to Mr Fleming Junior by way of contribution. Padstow's liability to repay the Contribution Amount under cl 9 only arises if Mr Fleming Senior "is liable to pay an amount by way of contribution or indemnity in respect of [Mr Fleming Junior's] liability to Padstow." 15Far from "releasing" Mr Fleming Senior from an obligation to contribute to Mr Fleming Junior's liability, cl 9 contemplates that Mr Fleming Senior may well be liable to pay a Contribution Amount to Mr Fleming Junior, and addresses what is to happen, as between Mr Fleming Senior and Padstow, if and when such a liability arises. It is a contractual arrangement between Mr Fleming Senior and Padstow which has no effect on the liabilities or rights of Mr Fleming Junior. 16The proposition that Padstow might pay Mr Fleming Senior more under cl 9 than Mr Fleming Senior has paid to Padstow is flawed. The net effect of cl 9 on Mr Fleming Senior is that he will get back from Padstow the same amount that he has to pay by way of contribution toward Mr Fleming Junior's liability to Padstow. 17There are a number of features that support the contention that the terms of settlement constitute a covenant not to sue and do not operate as a release of Mr Fleming Junior. 18First, the terms of settlement are not expressed as a release. The word "release" is not mentioned in respect of Mr Fleming Senior. While the use of the word is not necessary, it is an indication of a covenant not to sue, particularly where it is specifically stated that Mr Fleming Junior is not released. 19Secondly, the liability is joint and several. 20Thirdly, Padstow expressly covenants in cl 2(a) not to sue in respect of the claims set out in cl 6. 21Clause 2(a) is in the following terms: "With effect from the date Mr Fleming Senior makes the Payment under paragraph 5: (a) Padstow covenants that it shall not sue Mr Fleming Senior in the Proceedings or make any demand, suit or action against him as described in paragraph 6 below." 22Clause 6 is as follows: "With effect from the date Mr Fleming Senior makes the Payment referred to in paragraph 5, Padstow will not make, commence or continue any demand, suit, action or claim against Mr Fleming Senior or T M Fleming & Associates Pty Ltd (TMFA) in relation to the facts or matters the subject of the Proceedings, including any demand, suit, action or claim relating to: (a) the Lease ( Lease ) between Hamola Crochet Pty Ltd ( Hamola ) and Padstow in respect of the property at folio identifier 1/811953 ( Property ) (b) the guarantee of Hamola's obligations under the Lease allegedly given by Mr Fleming Snr ( Guarantee ); and (c) the contract for sale of Property made between Padstow and TMFA on or about 31 May 2004." 23Fourthly, cl 2(b) and 7 expressly reserve the rights that Padstow and Mr Fleming Senior may have had, or have, in respect of any claim in the proceedings against Mr Fleming Junior. 24Clause 2(b) is in the following terms: "The parties also acknowledge that the Payment, plus the assignment of the Debt Balance, represent a compromise of Padstow's claim, and are inclusive of costs, interest, and any GST, and the parties expressly reserve their rights as outlined at paragraph 7 below." 25Clause 7 is in these terms: "Except as expressly provided in paragraph 8 below, neither Padstow nor Mr Fleming Senior's rights, remedies or claims against the second defendant in the Proceedings, Thomas John Fleming (Mr Fleming Junior), are in any way released, extinguished, or limited by these terms; and nothing in these terms precludes Padstow or Mr Fleming Senior from continuing their claims in the Proceedings against Mr Fleming Junior, or against other joint or concurrent tortfeasors (besides Padstow or Mr Fleming Senior)." 26Fifthly, the terms of settlement in cl 9 contemplate Mr Fleming Junior exercising his right for contribution against Mr Fleming Senior. Otherwise the indemnity provided to Mr Fleming Senior would be otiose. 27One rationale for construing a document as providing a release and absolving the co-guarantor of liability is where its effect is to deprive the co-guarantor of the remedy of contribution. The terms of settlement contemplate that this has not occurred because if it had the provision of an indemnity would be otiose. 28And, finally, the fact that proceedings are on foot militates against it being the intention of the parties that Mr Fleming Junior be released from liability. It is apparent from the document and the surrounding circumstances that it was not the intention of the parties to the terms of settlement to release Mr Fleming Junior from liability. 29Mr Fleming Junior's application fails. The balance of the notice of motion is dismissed with costs.