Paola Toppi v Dolores Lavin

Factual matters relevant to the dispute 7I set out the following factual matters which are not in dispute: (1)The Bank originally lent money separately to each of Toppi, Lavin and Luxe Studios and took guarantees and securities from Toppi, her partner Mr Neil Cunningham ("Cunningham") (the second plaintiff), Lavin and Dolores Lavin Management Pty Ltd ("DLM") (the second defendant): see Exhibit A1 for the various guarantees and securities. The original loan was for the purchase of the property, but it was later expanded to include the cost of renovation and a facility for the conduct of the business by Luxe Productions. Three companies controlled by Toppi and or Cunningham - Basecove Pty Ltd (the third plaintiff) ("Basecove"), FHI Trading Company Pty Ltd ("FHI") and Rock Bottom Music Pty Ltd ("Rock Bottom Music") initially provided security and guarantees to support Toppi's obligations to the bank (see Exhibit A1, Tab 13). DLM (a company controlled by Lavin) also provided a guarantee to the Bank in support of the Bank lending to Luxe Studios and Luxe Productions. In 2008 the Bank decided to consolidate all the loans and the facility into one loan to Luxe Studios and to take one guarantee from Toppi, Cunningham, Lavin, DLM and Luxe Productions Pty Ltd for the debt (see Exhibit A1, tab 17). I shall refer to that guarantee dated 29 October 2008 as "the October 2008 guarantee". Although Basecove was a guarantor with Toppi and Cunningham in November 2006 (see tab 14), May 2007 (see tab 15) and March 2008 (see tab 16) it was not included in the October 2008 guarantee as a guarantor. (2)On 3 March 2010 the Bank issued a demand for payment of Luxe Studio's debt of $7.8M to Lavin, DLM, Toppi and Cunningham. The Bank in June 2010 commenced proceedings in this Court against Lavin, DLM, Toppi and Cunningham claiming $7, 838, 902.82 plus interest. (3)On 8 September 2010, Lavin entered into a deed of settlement with the Bank. The proceedings by the Bank against Lavin came to an end on 30 November 2010 when Lavin and DLM paid $1, 349, 632.09 to the Bank. Sub-clause 8(b) of the deed of settlement was in the following terms: Provided no Event of Default occurs and subject to NAB's receipt of the Settlement Sum, NAB covenants not to make any Claim against DL and DLM 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. And subclause 8(c) was in the following terms: Nothing in this deed, compromises, prejudices or affects NAB's rights against Neil Cunningham, Paola Toppi, Luxe Productions Pty Ltd (ACN118 164 355) and/or Luxe Studios Pty Ltd (ACN 116 330 253) 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 (4)In February 2011 Toppi and Cunningham entered into a contract for sale of their home and on 11 May 2011 the amount of $2.9M was paid out of the proceeds of sale of the home to the Bank. (5)By the time of the Bank's demand in March 2010, Toppi had commenced endeavouring to sell her home. She received an offer of $5.6M in March 2012 but did not sell because she did not want all of the proceeds to go to the Bank (i.e. before the Luxe property was sold): see T47-49 and see Exhibit C pp 43-45. (6)FHI and Rock Bottom have been deregistered: see Exhibit A2, Tabs 35 and 36. (7)By Toppi's payment of $2.9M to the Bank, the balance of the debt of Luxe Studios to the Bank was discharged - the Bank having received previously the net proceeds of the sale of the Luxe property sold for a total price of $4.9M and Lavin's $1.35M. (8)Lavin and DLM have refused to make any contribution to the amount paid by Toppi and Cunningham. The difference between the two amounts is $1.6M and Toppi and Cunningham seek 50% of that differential plus interest on the amount claimed to be due from Lavin. (9)The October 2008 guarantee contains (and all of the guarantees given by Toppi, DLM, Cunningham and Lavin contained similar clauses) the following clauses: Cost and Expenses 7.1 You must pay NAB on demand all the costs, expenses and liabilities NAB incurs in connection with enforcing, attempting to enforce, exercising any power or remedy under, or taking any other action in connection with this Guarantee, the Securities or any other security or other related document given to NAB by you or the customer. These include on a full indemnity basis all ● administration costs including enforcement charges published by NAB; ● legal fees (including the costs of NAB's inhouse legal counsel and external legal fees and expenses); ● advisor's and agent's costs; and ● amounts paid by NAB under any indemnity given by NAB to a receiver appointed by NAB. What will NOT end your liability .... 14.2 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 (b) the fact that the customer, a co-guarantor, or any other person or you are a trustee, nominee, joint holder or joint venturer, or a member of a firm, partnership, committee or association; 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 (iv) receives any dividends out of the estate or assets of the customer, a co-guarantor or of any person; or (d) the fact that any security, guarantee or indemnity held or taken by NAB is void, defective or informal or ranks after any other security or obligation for any reason; or (e) the customer, a co-guarantor or any other person is ever incapacitated; or (f) any credit, banking facilities or other arrangement NAB gives the customer alone or with any other person, is a varied, replaced, extended, stopped, or refused, whether with or without your consent or knowledge; or (g) NAB granting to the customer alone or with any other person, new or additional credit or banking facilities, or the increasing of credit or banking facilities above the Basic Amount, whether with or without your consent or knowledge; or (h) NAB transacting any business with or on account of the customer alone or with any other person whether with or without your consent or knowledge; 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 (j) the cessation of business by any firm or partnership which the customer or you comprise, or any change in its membership. 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. 8The basis on which Lavin resisted Toppi's claim (including Cunningham's claim) for contribution was articulated in submissions by Mr Einfeld QC as follows: (1)The Toppi claim fails for want of proof. (2)The effect of the deed of settlement and the covenant not to sue Lavin was effectively a release of Lavin, although not expressly so described, and discharged Lavin from any further liability to Toppi. (3)Even if contrary to the submission in (2), the covenant not to sue was not effectively a release it nevertheless altered the nature of the obligation owed by Lavin so that Toppi and Lavin's obligations to the Bank were not coordinate liabilities of the same order and content as those of Toppi since Lavin could not be sued by the Bank and Toppi could be sued: see T115.21-23. (4)Toppi has failed to "do equity" because she and Cunningham arranged for Basecove's security to be discharged, and they are therefore not entitled to equitable contribution. (5)Basecove, FHI and Rock Bottom Music are all liable to the Bank and should have been sued as co-guarantors but were not. (6)Toppi delayed in payment of the $2.9M until May 2011 whereas Lavin paid $1.35M in 2010 and Toppi could have paid off the entire debt had she sold her house at the time of the demand. Further she could have paid off the debt at the same time that Lavin paid the $1.35M. (7)Even if otherwise liable, Lavin should not have to pay contribution to the amount paid by Toppi for legal costs of the Bank of $110K because the costs include some costs solely attributable to Toppi and no attempt has been made to dissect the amounts attributable to Lavin and those to Toppi. 9The "want of proof" point contained the following elements: (1)The evidence did not establish that as at 11 May 2011 when Toppi and Cunningham paid the $2.9M their liability and that of Lavin/DLM were coordinate liabilities because of the effect of clause 8(b) of the deed of settlement. (2)It has not been established on the evidence that Toppi paid more then her just proportion of the relevant liability. The first basis relied on for this assertion related to the cross claim brought by Lavin in the proceedings brought by the Bank. In that cross claim Lavin asserted that the Bank procured the guarantee given by her in circumstances that were unconscionable within the meaning of s 51AA and under other legislative provisions and under the general law (see Exhibit A2, tab 29) and that the contract was an unjust contract. The Bank accepted less than half of the full amount claimed against Lavin and it was submitted: (a)It ought be inferred that the Bank attributed value to the cross claim (b)In the absence of any determination by a Court of the issues ventilated by Lavin in her cross claim Toppi has the onus of establishing what value to Lavin was involved in surrendering the cross claim. Difficult as that would be to do, Mr Einfeld conceded, Toppi, he submitted, has not embarked upon such a task, and is not able to establish what is a just contribution to be made by the Lavin and Toppi interest respectively. (3)The second basis for the assertion relied on was that in the proceedings brought by Lavin against Toppi for the taking of partnership accounts, it was clear that Lavin and Toppi were in dispute as to who had paid what monies to the business run by the "partnership". These proceedings were abandoned by Lavin before the hearing but, says Lavin, given that the respective contributions to the business venture have never been determined, Toppi cannot establish that her contributions made were greater than Lavin's and hence cannot establish that a just and equitable apportionment should be based on the amounts they both have in fact paid to the Bank. 10The application of the principles of contribution in relation to sureties has a long history (see for one of the influential statements of its nature the judgment of Lord Chief Baron Eyre in Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; (1787) 29 ER 1184; [1775-1802] All ER Rep 140). Contribution has particular importance in the law of guarantees and insurance but there have been other areas in which the principles have been applied, for example in the area of bills of exchange, joint tenants and tenants-in-common (see Meagher, Gummow and Lehane's Equity: Doctrine and Remedies, 4th ed (2002) Butterworths LexisNexis). The principles of contribution relevant to guarantees have been reiterated many times and one such reiteration can be found in the following passage of the judgment of Gibbs CJ in Mahoney v McManus (1981) 180 CLR 370 at p 376: A surety is entitled to contribution from his co-sureties so that the common burden is borne equally and so that no surety is required, as between himself and his co-sureties, to pay more than his due share. The right arises whether the sureties are bound jointly, jointly and severally, or severally, and whether by the same or different instruments, and whether or not the sureties knew of each other's existence, provided that they are liable in respect of the same debt. The right to contribution arises when a surety has paid or provided more than his proper share of the principal debt, but it may also be enforced by a surety who has not made payment; the circumstances in which a surety who has not made payment may enforce a claim to contribution have not been precisely defined, but it appears that he may at least do so as soon as the creditor has acquired a right to immediate payment from him. The amount of contribution recoverable depends on the number of sureties who are solvent at the time when contribution is sought and on the proportion for which each is liable. As authority for these principles, it is sufficient to refer to McLean v. Discount & Finance Ltd. (1); Albion Insurance Co. Ltd. v. Government Insurance Office (N.S. w.) (2); Halsbury'sLaws of England (3) and Goff & Jones, Law of Restitution (4). 11In Mahoney two directors of a company had given guarantees to creditors of the company. One of the directors paid money to the company which enabled the company to pay its creditors. The first director (Mr Mahoney) then sought contribution from the second director (Mr McManus) as co-surety. The majority (Gibbs CJ, Murphy and Aickin JJ) held that the monies provided by Mahoney were not by way of loan but as a payment to meet his obligations as guarantor although not paid directly to the creditors. Mahoney was therefore entitled to contribution. The minority, Wilson and Brennan JJ, thought that the payments made by Mahoney had the character of loans. Brennan J in dissent said at p 387: A payment to a creditor may discharge the principal debtor's liability and thereby extinguish the surety's liability or it may discharge the surety's liability and thereby oblige the principal debtor to indemnify the surety. It cannot do both. A co-surety's right to contribution cannot arise out of a payment of the former kind; the right to contribution does not arise because the sureties all derive a benefit from the payment made. The right to contribution arises because in the view of equity a creditor ought not exercise his legal rights inequitably, enforcing disproportionate contributions from co-sureties. Starke J in McLean v. Discount & Finance Ltd stated the foundation of the co-surety's equity: "But it is the unequal contribution so enforced that establishes the right to contribution on the part of the party who has provided more than his just proportion." 12In Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 Kitto J, in an oft quoted passage (in insurance surety and other contribution cases), described the principle as follows: ...persons who under co-ordinate liabilities to make good the one loss (e.g. sureties liable to make good a failure to pay the one debt) must share the burden pro rata. 13Mr Pesman contended that there was nothing complex about Toppi's claim for contribution. Toppi (and Cunningham) paid $2.9M to the Bank in comparison to Lavin's (and DLM's) $1.35M. Both Toppi and Cunningham on the one hand and Lavin, and DLM on the other, were liable to repay the debt of Luxe Studios (and, earlier, Luxe Productions) under the guarantees given by them to the Bank and the payment of the $2.9M relieved Lavin and DLM of the liability which both groups of sureties owed to the Bank for the shortfall in the debt of Luxe Studios. The circumstances established, he contended, a classic case for equitable contribution. 14I will deal with the submissions of Mr Einfeld in a different order to that which I have set out above.

The Discharge by the Deed of Settlement 15In Carr v Thomas [2009] NSWCA 208, [24] - [38] per Beazley, Ipp and McColl JJA reversing Resource Equities Ltd v Carr [2008] NSWSC 977, the NSW Court of Appeal held that as between co-sureties the effect of a covenant not to sue is not to deprive a co-surety of a right to seek contribution from the other co-surety who has repaid the debt to the creditor, applying Deanplan Ltd v Mahmoud & Anor [1993] Ch 151 at 170 and Murray-Oates v Jjadd Pty Ltd [1999] SASC 537, (1999) 76 SASR 38. The Court of Appeal said of Murray-Oates: [37] In Murray-Oates v Jjadd Pty Ltd [1999] SASC 537 ; (1999) 76 SASR 38, Wicks J (Doyle CJ and Mullighan J agreeing) noted, at [82], that the release of one of several joint or joint and several promisors operates as a discharge of all. In that case, his Honour noted that such a release was inconsistent with the other promisors being entitled to contribution from the promisor who has been released. That is correct. If the other promisors have also been released from the obligation, there is nothing in respect of which contribution may be claimed. Relevantly, in relation to the present issue, his Honour went on to say, at [83]: 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. (Emphasis added) The same position has been taken in other jurisdictions: see Johnson v Davies [1999] Ch 117 at 127 ; [1998] 2 All ER 649, per Chadwick LJ; Robinson v Tait [2002] 2 NZLR 30 at [75]. [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. 16Mr Einfeld accepted that I am bound by Carr v Thomas but he made it clear that he contends that Carr v Thomas and the other cases to which the Court of Appeal referred have been wrongly decided and that McDougall J in Resources Equities was correct. 17As I am bound by Carr v Thomas I need do no more than record Mr Einfeld's submission that it was wrongly decided, but the approach favoured by the New South Wales Court of Appeal and the South Australian Court of Appeal (and the other cases which they cited in support) has the considerable attraction, I say respectfully, 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. 18In my view the Court of Appeal's decision in Carr v Thomas is relevant not only to the "discharge" point itself (as Mr Einfeld concedes) but is also relevant to two other of Mr Einfeld's points as well. The claim that the liability of Lavin ceased to be coordinate with Toppi's claim because the deed of settlement left Toppi in a position where she alone could be sued by the Bank is entirely inconsistent with the conclusion to which the Court came in Carr v Thomas. Mr Einfeld contended that there was a "subtle" difference between the argument which McDougall J found attractive in Carr v Thomas and an alternative argument which was not advanced in Carr v Thomas, namely that even if the effect of the covenant not to sue was not to discharge the surety, the effect was to render different the liability which the surety who had settled with the creditor now carried and the liability of the surety with whom the creditor had not settled. In my view that contention cannot stand in the face of the conclusion in Carr v Thomas that the right of contribution between joint promisors remained unaffected by a covenant not to sue and that the trial judge had erred in concluding that the surety who had entered into the settlement deed had no common obligation with the first surety. The Bank in this case wanted to pursue Toppi and clause 8(c) was included in the Deed of Settlement between the Bank and Lavin to make it clear that it was not relinquishing its right to do so. For the same reason one of the planks in the "want of proof" argument advanced by Lavin must also be rejected.

Want of Proof 19Mr Einfeld placed considerable reliance on several passages in the judgment of McHugh J in Burke v LFOT (2002) 209 CLR 282. LFOT concerned the purchase of a shopping centre by Hanave Pty Ltd induced by misrepresentations by the vendor and its agent concerning the quality of existing tenants and the non-payment of leasing incentives. The vendors cross claimed against the solicitor who had acted for the purchasers and who was found to have been negligent in his advice to his client and to have breached his retainer. The case therefore involved a party who had contravened s 52 of the TPA seeking contribution from a party who, if sued, would have been liable to his client in tort and contract. At first instance Moore J held that contribution was available and on appeal Heerey and Lehane JJ agreed, Lee J dissenting. The High Court, by a majority, upheld the appeal (Gaudron A-CJ, McHugh, Hayne and Callinan JJ). Gaudron A-CJ and Hayne J founded themselves on the proposition that contribution is based on "natural justice" as explained by Kitto J in Albion and if the vendors were to obtain contribution from the solicitor they "would ultimately receive an amount in excess of the true value of the premises which their misleading conduct caused Hanave to purchase" at [22]. 20McHugh J, agreeing with the result, at [67]-[68] also agreed that: It would be inequitable, however, if Burke [the solicitor] who gained nothing from the transaction and was mislead by LFOT [the vendor], should now have to pay LFOT the sum of $375,000. There is no equality in LFOT gaining $375,000 and Burke losing $375,000 ... merely because LFOT, who wrongly obtained $750,000 from Hanave, has been ordered to repay that sum. McHugh J explained the principles of contribution as followings: [38] Both common law and equity give a person the right to obtain contribution to a payment made by that person in discharging "a common obligation" that is owed by that person and others. In determining whether there is "a common obligation", the traditional test is whether the liability of each party "is of the same nature and to the same extent". Early cases suggested that the common law right arose as a result of an implied contract between the parties. But whether that be right or not -- and if it is, in many cases, it must be the result of a contract imputed to the parties -- the equitable principles now cover the field. Those principles are based on the equitable doctrine of equality. When a person pays more than his or her share of a common monetary obligation, the payment pro tanto discharges the obligation of all who owe the common obligation. In accordance with the maxim that equality is equity, equity requires the common burden to be shared equally so that none of those owing the common obligation will pay more than his or her share of the burden. An order of contribution prevents the injustice that would otherwise flow to the plaintiff by the defendant being enriched at the plaintiff's expense in circumstances where they have a common obligation to meet the liability which the plaintiff has met or will have to meet. [39] In Albion Insurance Co Ltd v Government Insurance Office (NSW), Barwick CJ, McTiernan and Menzies JJ traced the origins of the doctrine of contribution back to the second half of the eighteenth century. Although a distinction was originally maintained between the right of contribution at common law and in equity, the courts in both jurisdictions accepted that the doctrine was "bottomed and fixed on general principles of justice". In Dering v Earl of Winchelsea, Lord Chief Baron Eyre described the underlying justification for such orders: ... in equali jure the law requires equality; one shall not bear the burthen in ease of the rest, and the law is grounded in great equity. [40] His Lordship held in that case that the doctrine of contribution applied in the case of sureties who were severally bound by different instruments to the same principal. Since the sureties had a common interest and a common burden, Lord Chief Baron Eyre held them joined by the common end and purpose of their several obligations to make contribution even though they had executed different instruments at different times. Since that case, it has never been doubted that the right of contribution depends upon matters of substance, not form. 21In [41]-[50] of his judgment in LFOT McHugh J discusses the broader categorises of cases in which contribution has been allowed and some instances where it has not, for example Scholefield Goodman & Sons Ltd v Zyngier [1986] AC 562; [1986] VR 311 in the context of claims for contribution arising out liability owed by B and C to A under different causes of actions, McHugh J at [60] cited with approval what Lee J had said in the Full Court: The grounds of liability and the acts or omissions of the respective parties will differ and different relationships will exist between those parties and the party affected by the separate conduct. Defences that may be raised to the respective acts or omissions will differ markedly and may include cross-claims which raise further issues. In the absence of a single judgment against persons under concurrent liabilities to compensate an injured party, one of those persons cannot apply by cross-claim for an order in equity that the other make contribution to any sum the former has paid in discharge of a judgment or in compromise of litigation. and McHugh J said at [62]: To obtain an equitable order for contribution, his Honour said, the parties to the proceeding must have shared a common burden arising out of a pre-existing relationship. If the parties are not on the same level of liability, there can be no common interest and no common burden with joinder in a common end and purpose by the several obligations. 22It was the passages set out in [21] above to which particular attention was drawn by Mr Einfeld. I do not view what McHugh J or Lee J said in LFOT as providing any assistance to Lavin's case. LFOT is not concerned with co-sureties at all. For a party B, who is liable to A, in say contract, to be able to claim contribution from C who is said to be liable to A in say tort, the liability of C to A in tort must be established. The situation in relation to sureties is quite different. When B and C are co-sureties the liability of C to A (the creditor) is established on proof of the guarantee and existence of the debt at the time of the co-surety paid out A. The principle that there must be "coordinate liabilities" (as the High Court has said in Friend v Booker (2009) 239 CLR 129, 149 [41] is the better nomenclature) is fully accommodated in the case of co-sureties, as they have coordinate liabilities under the guarantee, that is they are liable to perform the same obligation and the liability of each is "of the same nature and to the same extent" to use the terminology in Cockburn v GIO Finance Ltd (No 2) (2001) 51 NSWLR 624. Mr Einfeld also drew attention to what I said in Limit (No 3) Ltd v Ace Insurance Ltd [2009] NSWSC 514, namely that there are a number of cases which make it clear that the fact that both "B" and "C" may be liable to "A" does not necessarily lead to the conclusion that if B is required to pay A, B can then pursue C for contribution: see Zyngier applying Craythorne v Swinburne (1807) 14 Ves 160, (1807) 33 ER 482 and see Re Gasbourne Pty Ltd [1984] VR 801, but none of these cases, which consider the limits of contribution, including Ace or Belan & Anor v Casey (2003) 57 NSWLR 670 at [74] per Campbell J (also relied on by Mr Einfeld), are dealing with a claim by one co-surety against another. 23This leads to a wider point about the "want of proof" argument. It is, in my view, based upon a misconception that a co-surety who has paid more than another co-surety in answer to a demand by the creditor has to disprove possible defences to liability by the other co-surety that are not advanced positively by the other co-surety. Mr Einfeld's contention goes even further than a suggestion made by one author, McGuinness KP, The Law of Guarantee: A Treatise on Guarantee, Indemnity, and the Standby Letter of Credit, 2nd ed, (1996) Carswell at [9.9] noted in O'Donovan and Phillips, Modern Contract of Guarantee (Thomson Lawbook Co. Loose Leaf Service) that there is an onus on a surety to show that nothing has been done to prejudice the rights of the co-sureties: O'Donovan and Phillips' comment on that proposition at [12.1880]: However, it is difficult to see why the plaintiff in a contribution suit should be expected to establish not just her or his claim to contribution but also any defences open to a co-surety. There would appear to be no reason for departing from the normal principle that a defendant is required to establish her or his own defence. 24I share the view expressed by the learned authors of the Modern Contract of Guarantee. I accept that there will be cases in which a co-surety is able to demonstrate that there are reasons why an equitable and fair adjustment of the amounts payable by each co-surety should not depend only on the amount paid by each and a simple division of the total debt divided by the number of co-sureties, but once a surety has established that he has paid a disproportionately larger amount than another surety in respect of a creditors claim on the guarantee, it is the second surety who bears the onus of establishing any defence including an assertion that the lack of proportionality in payment to the creditor ought not be determinative of the amount of contribution to be paid. An example of a case where equitable contribution required something beyond regard to the amount paid by the first surety and the number of co-sureties is Morgan Equipment Company v Rogers (No 2) (1993) 32 NSWLR 467 where the Court accepted that one of the guarantors who had only a 10.5% shareholding in the debtor should not have to bear a higher percentage than that of the liability. In Parker v Alessi & Ors [2011] NSWSC 947 some of the co-sureties had actually had $600K of their own debt paid using the borrowed funds which was held to be relevant in determining the amount of contribution payable and see also the extensive discussion by Bryson J in Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116, 119-127 per Bryson J (as his Honour was then) of the manner in which equitable contribution is determined. Another case of this description cited in Parker v Alessi & Ors and Official Trustee in Bankruptcy v Citibank Savings Ltd is Trotter v Franklin [1991] 2 NZLR 92 to which I shall refer later. If Lavin was able to demonstrate that she had, prior to receiving the demand, paid significant and disproportionate amounts to the Bank in reducing the Luxe Studios debt pursuant to her obligations as a guarantor (as Mr Mahoney did in McManus), those payments would need to be taken into account but I do not accept that having failed to make out such a case (indeed having given no evidence at all) Lavin can rely on Toppi's failure to prove the contrary. 25This links to the cross claim. I do not think that the assertions made by Lavin in her cross claim against the Bank can have any relevance to the claim for contribution by Toppi which is based on the guarantee given by Lavin and on foot at the time of her demand (it not having been set aside in any proceedings brought by Lavin). 26In Morgan the debtor company and two of the guarantors resisted a claim by a bank (Partnership Pacific) for $6M owing in respect of loan facilities provided to the bank. The defence included claims that the guarantee was "wholly vitiated by misrepresentations inducing its execution" and that it had been discharged by acts or omissions of the bank (see p 485D). The bank had accepted $4M (in lieu of the $6M claimed) and the two guarantors who had been sued by the bank paid the $4M and sought contribution from the third guarantor (Mr Rodgers) who had not been joined as a defendant in the proceedings brought by the bank. The guarantors also sought contribution to the costs incurred in resisting the bank's claim as Mr Rodgers held shares in the debtor company. Mr Einfeld relied on the following passage from Morgan at 485: In these circumstances I am of the view that contribution is available in relation to the costs incurred by Morgan Equipment Company International, Mr Morgan and Mr Shea in defence of Partnership Pacific Ltd's claim. The settlement in which Partnership Pacific Ltd accepted less than two-thirds of its claim shows that the defence was reasonable, at least in the sense that it created the occasion for the settlement; the defence was apt to, and did, enure to the benefit of Mr Rodgers in that in practice his co-ordinate liability was reduced to the $4,000,000 of the settlement. It was not suggested that any of the costs had been improperly incurred or that their amount was inappropriate, and the reduction in Partnership Pacific Ltd's claim far exceeded the amount of the costs. In my view equity will require that Mr Rodgers contribute to the costs in the same manner as it requires that he contribute to the $4,000,000. (emphasis added) 27 It can be seen that Giles J (as his Honour then was), in dealing with the question of whether the guarantors who had been sued were entitled to a share of the costs of defending the creditor's claim, gave consideration to whether the defence had produced a benefit to Mr Rodgers thereby making it equitable that he contribute to those costs. His Honour held that it produced a benefit and that Mr Rodgers had to pay 10.5% of those costs. Lavin's cross claim against the Bank may or may not have had some impact on the Bank's decision to take only $1.35M from Lavin but Toppi was not a defendant to the cross claim, its merits or lack thereof were never determined even as between Lavin and the Bank and Toppi obtained no benefit from its advancement by Lavin. 28There may be a question as to whether a surety can raise against another co-surety claims that the creditor obtained the guarantee by reason of unconscionable conduct without joining the creditor and also as to whether the judgment entered by consent in the Bank's case has any bearing on that question but, in my view, the guarantee's enforceability cannot be called into question without a positive case, supported by evidence being advanced by Lavin.

Discharge of Securities 29Lavin and DLM assert that Toppi and Cunningham permitted Basecove to sell the properties which had been given as security for the loans, and that this was disentitling conduct which precludes Topi and Cunningham from recovering equitable contribution. 30There is no doubt that a surety can, by reason of his or her conduct, be disentitled to equitable contribution, or equitable contribution beyond a certain amount. For example in Brookes v Marshall [1996] NSWCA 67 a guarantor was held not entitled to contribution because he had caused the assets of the principal debt to be diverted to a company owned by him with no benefit to the company thereby prejudicing the co-sureties right of indemnity from the debtor company: and see O'Donovan and Philips, [12.1880]. 31The complaint by Lavin and DLM is not that Toppi and Cunningham sold the property, or even the discharge by Basecove of the debt it separately owed the Bank, but the failure of Basecove to pay the surplus of the sale proceeds after repayment of the Bank (in respect of the loan made to it) to reduce the Luxe Productions debt. Lavin and DLM executed the October 2008 guarantee without Basecove as a party. 32Attention was drawn by both Mr Einfeld and Mr Pesman to Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654. Mr Einfeld also referred to Mahoney v McManus and the judgment of Starke J in McLean v Discount & Finance (1939) 64 CLR 312 cited in the passage from Mahoney v McManus set out in [11] above to which I have earlier referred. 33In Buckeridge the High Court unanimously rejected an appeal from the Supreme Court of Western Australia which concerned whether guarantors should have the debt for which they were liable reduced because the creditor had exercised a power to appoint a receiver of a hotel business, which appointment it was said had reduced the value achieved on subsequent sale of the property because losses had been incurred in the conduct of the business by the receiver. Aikin J, with whom Gibbs CJ and Wilson J agreed, held that the guarantors had no rights in relation to the mortgage until they had paid the debt of the hotel (p 670) and because the terms of the guarantee precluded any claim by the guarantor that the creditor had released or dealt with the property provided as security (see p 671). Brennan J (as his Honour then was), with whom Gibbs CJ and Murphy agreed, pointed out that whilst it might be open to a surety to claim a pro tanto reduction of liability based on the impairment of security by a creditor that entitlement is lost if the surety "bargains away his right to complain of the act which occasions the deficiency" (p 675). By the guarantee he held the guarantors had bargained away their rights (see pp 675-676). Brennan J pointed out also that the guarantors had failed to establish that there was any deficiency by reason of the sale of the hotel at a later time (p 676). 34There are a number of difficulties in relation to Lavin's claim in respect of Basecove: (1)By clause 14.2 of the October 2008 guarantee (and it was agreed that the wording of all the other guarantees is identical in effect), Lavin and DLM (and Toppi and Cunningham) bargained away their right to complain about the discharge of security. (2)It was the Bank, not Toppi or Cunningham, who discharged the security. (3)It is by no means clear that the Basecove mortgage was in any event given in support of the Luxe Productions or Luxe Studios debt - the Basecove mortgage is not on its face given in support of those loans but appears to have been given to support a loan to Basecove itself: see Exhibit A2, Tab 23. (4)Lavin and DLM entered into the October 2008 guarantee without insisting that Basecove be made a co-surety. (5)Basecove was not a guarantor under the October 2008 guarantee and the reason for that, it is tolerably clear, is that the Bank accepted that at the time that the October 2008 guarantee was taken the only real estate which Basecove held (Lot 153) was in the process of being sold: see Exhibit B, Tab 8. After the sale of Lot 153 the only asset of Basecove was a parcel of units in the Luxe Studios Unit Trust: see affidavit of Toppi of 14 August 2013, para 21. (6)Basecove was, in any event, clearly part of the Toppi camp and I discuss this point in the context of the joinder of co-sureties below. (7)Even if the fact that Basecove had been permitted to use some of the surplus proceeds from the sale of its mortgaged property was relevant it would not extinguish any liability of Lavin and DLM to contribute but rather would reduce the amount of contribution by the extent to which they were prejudiced if such prejudice were demonstrated: see Buckeridge per Brennan J at p 675 and see Greenwood v Francis [1899] 1 QB 312 at 322 per Collins LJ and see O'Donovan & Philips [12:1880]. 35At one point in closing submissions Mr Einfeld asserted, for the first time, that if the sureties have bargained away their right to complain about release of securities, then no right of contribution is available to the surety who pays more than his or her fair share of the debt which has been guaranteed because without the right of subrogation there can be no right of contribution: see T171-172. Mr Einfeld was unable to proffer any authority in support of what he conceded was a bold submission, although he submitted that it was but an application of "established law" to this guarantee. 36I am not able to accept Mr Einfeld's submission for the following reasons: (8)It is a novel proposition not supported by authority. (9)Underlying it is the proposition that even though a surety cannot resist a claim by the creditor (see Bank of Adelaide v Lorden (1970) 127 CLR 185) he can resist a claim by another surety who has met the creditor's claim. (10)Mr Einfeld's submission seems to treat contribution and subrogation as mutually interdependent. As Mr Pesman pointed out Meagher, Gummow and Lehane at [10.160] draw attention to the fact that "there are clear distinctions between the doctrines of subrogation and contribution" although the analysis cited (Dawson v Bankers and Traders Insurance Co Ltd [1957] VR 491 at 503 per Sholl J) is in the context of insurance law. (11)Essentially contribution is concerned with the rights between parties jointly liable to a third party (creditor, insured, holder of a bill of exchange for example) and subrogation is concerned with the rights which the party meeting the liability to the third party will obtain against another party (for example the debtor or a person who has provided security in support of the loan whether another surety or not) who, until satisfaction of the debt, the creditor or insured could have pursued. The absence or loss of a right of subrogation, even if established, does not preclude a liability in any of the sureties since the liability is a coordinate liability equally affected by the presence or absence of security. This view was expressed by Mann J in Cornfoot v Holdenson (1931) 37 ALR 376 at 377 as follows: It is quite true that the right to subrogation and the right to contribution in some aspects are very closely allied, but it is clear that the right of contribution between sureties is an independent right which may be enforced by independent proceedings such as the present action, without having recourse to any contract or agreement which the defendant may have entered into with the principal creditor, and I can see no reason why the principle of equality which is the foundation of the doctrine of contribution, cannot be fully applied as between two co-sureties, neither of whom has any right to stand in the shoes of principal creditor. Cornfoot is cited by O'Donovan & Philips as authority for the proposition that the Courts will not readily draw an inference that a guarantor has excluded a right of contribution, even if it is clear that his other rights, such as the right of subrogation are excluded: see [12.1200]. (12)The loss of security does not, in any event, discharge the sureties even where the rights have not been bargained away - as mentioned before it only discharges the surety to extent that the surety has been prejudiced by the loss of security. A co-surety under a guarantee by which she has bargained away rights, in my view, cannot be in a better position than one where the co-surety has not bargained away rights. 37Mr Einfeld also drew attention to what was said by the NSW Court of Appeal in Robinson v Campbell (No 2) (1992) 30 NSWLR 503, 508: Equity will not permit legal rights of contribution or indemnity to be enforced where it would be inequitable to do so. a proposition for which a number of cases were cited including Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460 at 480, 488 and 505. In Robinson, the Court regarded the debt for which the appellant was seeking contribution as in truth the appellant's debt, and as between himself and the defendant he was the person primarily liable for the guaranteed debt and hence could not recover contribution although there were additional reasons why the appeal was rejected. The broad principle for which Robinson is relied upon is clearly established by it and Duncan, Fox & Co v North and South Wales Bank (1880) LR 6 App Cas 1 which it applied but has no relevance to the present case.

Other Co-sureties 38Since FHI and Rock Bottom Music have been deregistered the contention that they should have been joined fell away. Another reason that this argument could not succeed is that they were not co-sureties with the Lavin interest but sureties only for Toppi's liability under the guarantee: see Craythorne applied in Zyngier. 39Basecove, unlike FHI and Rock Bottom Music, was in fact a co-surety under two earlier guarantees, although it ceased to be on the October 2008 guarantee. It appears however that Basecove, although not in liquidation, nor deregistered, has no assets beyond units in the Luxe Studios Unit Trust (see para 21 of Toppi's affidavit of 19 August 2013) which it seemed to be accepted in submissions were of no value and both Luxe Productions and Luxe Studios were placed in receivership and liquidation in late 2006. Toppi indicated In any event there was another reason why the failure to claim against Basecove, so that nothing could have been recovered from Basecove if it had been joined, does not assist Lavin. In Trotter v Franklin [1991] 2 NZLR 92, Tipping J concluded that the liability of four guarantors was not to be shared in equal one quarter shares. His Honour said from 98, [21]: The point in the present case is of course that there were four sureties both to the lease and to the bank loan. Mr Randerson accordingly submits on Mr Franklin's behalf that he should only be liable for 25% of the obligations. Mr Asher submits on behalf of the plaintiffs, that when one examines all the circumstances it is an irresistible inference that the plaintiffs should be viewed as one single unit and Mr Franklin as another single unit, this leading to a basis of sharing between them whereby Mr Franklin is liable for 50% of the obligations. There is no doubt that the prima facie rule of equal sharing between co-sureties can be modified or varied by contract. It seems to me that there is no reason why that contract should have to be express. It is in my judgment in accordance with principle that if the Court can find by clear and necessary implication that some certain basis of contribution other than equality was intended or is just between the parties then such basis should be adopted. I agree with Mr Randerson's proposition that equal sharing should not be departed from lightly because in ordinary circumstances co-sureties of the same debt without limitation can be expected to have intended to share equally and it will accordingly be just that they should contribute equally. The real question in the present case is whether or not the evidence supports with sufficient clarity the proposition that the parties have implicitly agreed to vary the prima facie position or that justice demands that the prima facie position be departed from. It is common ground that the parties did not expressly address their minds to the point. Both Mr Trotter and Mr Lewis were quite candid on that matter. They however saw it as clear and obvious from all the circumstances, it being a 50/50 venture between the legal practice and the sharebroking practice, that contribution under the guarantees should similarly be on an equal sharing basis as between the three lawyers on the one side and the sharebroker on the other. 40Some doubt was thrown on the words "or that justice demands that the prima facie position be departed from" (at the end of the first paragraph in the passage from Trotter set out above) in Hampton v Minns [2002] 1 WLR 1 discussed in Alessi at [118]-[119] but as Bergin CJ in Eq in Alessi explained Citibank Savings, was not cited in Hampton and it is not necessary to establish agreement express or implied in order discern the intention of the parties: see also Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741, 752-753 per Hodgson J in which it was held that a surety was entitled to contribution not in equal proportions but in accordance with the agreed shares of profits or losses. 41It is clear that the Lavin and Toppi were 50% shareholders in the Luxe Productions and Luxe Studios business and equal joint venturers. They each enlisted guarantors in support of their borrowing and in the circumstance of this case the number of guarantors each brought in is not significant. I think that it was intended that the co-sureties would share equally and I conclude that the total respective liabilities of the Toppi and Lavin interests should be borne in the same proportions as Lavin and Toppi had in the business, that is as to 50% each.

Interest 42When Toppi paid $2.9M to the Bank it included interest on the debt owed by Luxe Studios to the Bank. Lavin contends that she should not have to pay any interest at all because Toppi could have sold her house very soon after the demand was made by the Bank, and further that once Lavin paid $1.35M, the delay in payment of the outstanding debt to the bank was solely attributable to Toppi. 43There is something ironic about the submission made on behalf of Lavin. It was as open to Lavin to pay out the prospective shortfall of the Luxe debt (i.e. even after proceeds of sale of the property were received by the Bank) as it was Toppi, and when Lavin paid money to the Bank she did not pay half of the shortfall but $800K less than half. It cannot be a defence by a co-surety that the other co-surety could have paid more than he or she did or at an earlier time. Any amount in excess of 50% liability as co-surety paid by the first co-surety is of course claimable against the remaining solvent sureties but the co-surety who has paid the total debt is entitled to interest until the contribution is shared equally. 44On the other hand, Lavin did pay $1.35M earlier than Toppi, and she is, subject to two arguments to which I shall refer below, in my view, entitled to an adjustment. 45Mr Pesman made the point that Lavin should not obtain any reduction in the interest component because: (1)She paid her $1.35M on 29 November 2010 and Toppi paid her $2.9M on 11 May 2011. She had to find more money because Lavin had not paid half of the prospective shortfall known by November because the Luxe Property had been sold in May 2010. (2)In order to find the entire balance Toppi had to sell her house which Lavin did not have to do. 46I have some sympathy for Toppi in that she had to find a lot more money than Lavin did and hence it is not unreasonable that she spent longer in obtaining it but part of that delay stems from Toppi not being able to pay any amount to the Bank without selling her house. I think the earlier payment by Lavin ought be recognised in respect of the interest paid by Toppi. 47Mr Einfeld contended that the formula proposed was unfair to Ms Lavin because Toppi took longer to find the money. The formula which I propose allows a credit against interest on what Lavin actually paid and cures any unfairness but beyond that Lavin cannot complain if she did not pay the full amount of her share. I propose to allow a deduction for 5 months on the basis indicated below. Counsel were in agreement that the figures will need to be calculated and I will permit them that opportunity. 48There should be deducted from the $2.9M an amount equivalent to the interest, at the rate used by the Bank, on the amount paid by Lavin of $1.35M from the date of payment by Lavin to the date of payment by Toppi.

Legal Costs paid to the Bank 49In relation to the legal costs of the Bank, Lavin points to the fact that some at least of the invoices claimed by the Bank (see Exhibit E) or items within them were attributable to Toppi and not her. Again, Lavin has not attempted to establish what proportion of the costs bear that character and Toppi admitted in cross examination that she was not able to say what the various items were for. Since the Bank has claimed the costs on the Lavin/Toppi account and since it is apparent that the costs also include costs wholly attributable to Lavin, e.g. the costs of mediation attended by Lavin the Bank and not Toppi, there is no reason to treat the costs as being other than costs for which both co-sureties are liable.

Conclusion 50In my view Toppi and Cunningham's claim for equitable contribution is soundly based. It follows that subject to the adjustment referred to in [48] Toppi and Cunningham are entitled to recover contribution for half of the difference between what Toppi and Cunningham paid and what Lavin and DLM paid plus interest. The amount payable by Lavin therefore will be $2.9M minus the amount calculated by the process outlined in [48] above, from which the $1.35M paid by Lavin will be deducted, with Lavin being required to pay half to Toppi and Lavin of the balance so derived. Interest on that balance from the date that Toppi paid the $2.9M is payable and will need to be calculated.

Costs 51I will hear the parties on the issue of costs.

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: 18 September 2013