Second issue: nature of the indemnity
54An obligation to indemnify can arise in a variety of circumstances. The obligation might arise under an express contract, as in this case. It may be implied as in the case of a guarantor and principal debtor. Without any express contract, it is implied that the principal debtor will indemnify the guarantor against the guarantor's liability to the creditor. In such cases equity may grant quia timet relief requiring the principal debtor to satisfy the debt where there is an accrued and fixed liability so as to relieve the guarantor from that liability, it being unreasonable that the guarantor should always have such a cloud hanging over him ( Ranelaugh v Hayes (1683) 1 Vern 189; Nisbet v Smith (1789) 2 Bro. C.C. 579; Ascherson v Tredegar Dry Dock & Wharf Co Limited [1909] 2 Ch 401; Watt v Mortlock [1964] Ch 84; Thomas v Nottingham Incorporated Football Club Limited [1972] Ch 596; Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242; Abigroup Limited v Abignano (1992) 39 FCR 74 at 81-82).
55The present case is not one of principal debtor and surety, both liable to the creditor. Even in such a case, the obligation of the surety will depend on the terms of any express contract that there may be between the surety and principal debtor.
56In McIntosh v Dalwood (No. 4) (1930) 30 SR (NSW) 415, Street CJ (with whom Owen and Long Innes JJ agreed) said in relation to a contract for indemnity (at 418):
" The suggested distinction between contracts of simple indemnity and other classes of contract has in my opinion no basis either of authority or of principle. The test is always the same. In every case the contractual obligation must first be ascertained in order that it may be seen whether an adequate remedy exists at law in the event of a breach. If the obligation is merely an obligation to indemnify a person, in the sense of repaying to him a sum of money after he has paid it, no equitable relief is needed. Damages will provide an adequate remedy. If, however, the obligation on its true construction is an obligation to relieve a debtor by preventing him from having to pay his debt, equity will in such a case give relief in the nature of quia timet relief, and, instead of compelling the party indemnified first to pay the debt, and perhaps to ruin himself in doing so, will specifically enforce the obligation by ordering the indemnifying party to pay the debt. "
57The proper construction of any contract of indemnity must depend upon the terms of the individual contract, considered, where appropriate, in the objective matrix of facts in which the contract was entered into. There can be no rule of law that a particular form of words is necessary in order to conclude that the indemnity is to prevent the indemnified party from suffering loss rather than to compensate the indemnified party for loss he or she has suffered. In every case the proper meaning of a contract of indemnity must be taken from the words the parties have used and the context in which the agreement is made in order to ascertain objectively their intention.
58In Wren v Mahoney [1972] HCA 47; (1972) 126 CLR 212 Barwick CJ (with whom Windeyer and Owen JJ agreed) said of the contract of indemnity in that case that without an express promise by the indemnifier in terms to pay the amount of tax payable by the indemnified party to the Commissioner of Taxation, no cause of action would arise against the indemnifier until the indemnified party had paid the tax payable (at 225). Later his Honour said (at 227) that:
" ... the distinction in my opinion is not between an indemnity against payment and an indemnity against a liability to pay. The distinction is between a promise to indemnify the promisee and a promise given to the promisee for the payment by the promisor of the debt in question. "
59In my view, those statements were directed to the particular contract there in question. They are not to be understood as laying down a principle of law applicable to the construction of any contract of indemnity. In each case what is promised must depend upon the terms of the contract. An indemnifying party may promise to relieve an indemnified party from the burden of having to pay a debt without necessarily expressly promising to pay the creditor. A promise to pay the creditor might be implied from other express terms of the agreement. A promise to prevent the indemnified party from having to pay his debt might be capable of being achieved by means other than paying the debt owed by the indemnified party to the creditor. The indemnifying party might have any number of lawful means of persuading the creditor not to press its claim.
60In the present case the indemnity does not include an express promise by PGO to pay the debt owed by Mr Paterson to the Commissioner of Taxation. For the reasons above I do not consider that the absence of such an express provision is necessarily decisive.
61Mr Pike, who appeared for Mr Paterson, emphasised the definition of " loss " as including any amount payable in respect of a claim against Mr Paterson. He submitted that this showed that the indemnity was to relieve Mr Paterson from his liability without Mr Paterson first having to pay his debt. Mr Smith, who appeared for PGO, emphasised the words that PGO would pay Mr Paterson moneys to compensate for any loss suffered by him arising out of a claim referred to in the first paragraph of the indemnity. The ordinary meaning of compensate is to " make up for ", and this, it was submitted, required that the loss first be paid out.
62PGO did not dispute that the claim made by the ATO was connected to or related to an act committed or omitted to be done by Mr Paterson in his capacity as a director of the companies referred to in Recital 1.
63The punctuation of the first paragraph of the indemnity is important. PGO's promise was not merely to pay to Mr Paterson moneys to compensate for any loss suffered by him arising out of such a claim. If that were the extent of the indemnity then even given the extended meaning of " loss " as including amounts payable in respect of a claim (and not merely amounts paid in respect of a claim), there would be force in the submission that to require PGO to pay the Commissioner of Taxation or Mr Paterson the amount of the penalties for which Mr Paterson is admittedly liable would go beyond compensating him, where no step has been taken to require him to pay those moneys beyond the service of a demand.
64But the opening paragraph of the indemnity is wider. PGO's promise to pay Mr Paterson moneys to compensate for any loss suffered by him arising out of a claim as described is additional to its promise to indemnify Mr Paterson in respect of any loss suffered by him arising out of any such claim. When the word " loss " is read in its defined sense as including an amount payable in respect of the claim and not merely an amount paid in respect of a claim, that indemnity, being additional to the promise to pay moneys as compensation, amounts to a promise to relieve Mr Paterson by preventing his having to pay his debt.
65In my view, the draftsman of the indemnity took a belts and braces approach by providing both a promise to prevent Mr Paterson from suffering loss arising out of a described claim and a promise to compensate him in respect of any such loss. It is true that the promise to compensate for such loss should be unnecessary if PGO fulfilled its promise to prevent the loss from being suffered. But the draftsman dealt with both contingencies. The promise of PGO was not only to indemnify Mr Paterson by paying money to compensate him for loss suffered.
66In these respects the contract of indemnity in this case differs from that considered by the High Court in Wren v Mahoney . There, the deed of indemnity was to keep Mr Mahoney indemnified against all proceedings, actions, claims and demands made by the Commissioner of Taxation in connection with any income tax payable, or which might become payable, by Mr Mahoney (at 216). The majority of the High Court construed that promise as giving rise to a cause of action only after Mr Mahoney had paid an amount of tax (at 225). But in this case, the indemnity covers both a promise to compensate for loss actually suffered, and a promise to indemnify in the sense of preventing a loss from being suffered.
67The context supports this construction. If the indemnity only required PGO to compensate Mr Paterson for amounts he paid to the Commissioner, it would not achieve its intended purpose. The parties' mutual concern, a matter of objective fact, was that Mr Paterson might be bankrupted by his exposure to the penalties. That concern would not be addressed if the indemnity applied only in respect of amounts Mr Paterson paid in respect of the penalties. To the knowledge of both parties he could not pay the amounts for which he was liable. His impecuniosity was the reason for his appointment as a director.
68If the indemnity was only in respect of amounts paid, the deed would not have a sensible operation. If proceedings were brought against Mr Paterson and judgment was obtained against him, execution might be levied for a small sum. Only then, on PGO's submission, would the indemnity come into play. PGO would be required to pay Mr Pongrass that small sum. If he then remitted that sum received from PGO to the Commissioner in further reduction of the debt, the indemnity would again be triggered in respect of the further sum paid. To the extent Mr Pongrass made further payments the indemnity would operate until eventually after repeated payments the debt was discharged. At any time the process could be stopped by Mr Paterson not paying an amount received from PGO under the indemnity to the Commissioner. But in that event, the Commissioner could levy execution and upon doing so successfully, further moneys would become payable under the indemnity. That is not a sensible construction.
69When the deed was entered into Mr Paterson was a defendant in proceedings instituted against him for moneys alleged to be payable by him as a trustee of the PGET. I think it is clear that none of the parties expected that those proceedings need not be defended, or expected that PGO would pay the Commissioner of Taxation the amounts demanded in that suit. But that is because it was understood that Mr Paterson was not liable for the amounts which were being claimed because he was not the trustee of that trust. In the terms of the indemnity, he had not then suffered a loss in respect of that claim because the amount claimed was not an amount payable by him.
70The indemnity contemplated that a claim against Mr Paterson could be defended and provided that defence costs would be included in the indemnity only to the extent they were reasonable and were incurred with the prior written consent of PGO, such consent not to be unreasonably withheld.
71This provision shows that the parties contemplated that a claim might be defended. Defence costs are included in the definition of loss as an addition to the scope of the indemnity beyond amounts payable in respect of a claim. Defence costs might be recoverable under the indemnity because a claim was made in respect of an amount that was not payable by Mr Paterson that had to be defended, or because the parties might choose to defend a claim for an amount that was payable. The latter possibility does not mean that Mr Paterson was not entitled to be relieved against having to pay an admitted debt that was subject to the indemnity.
72I conclude that the indemnity requires PGO to relieve Mr Paterson by preventing his having to pay the penalties for which he is admittedly liable. It is not merely an indemnity to compensate him for any amounts of penalties that he pays to the Commissioner of Taxation.