Willis & Anor v Teparyl Pty Ltd & Ors [2010] VSCA 318

2 The appeal was brought against a judgment entered in favour of the lessor's solicitors as a result of a negative answer to a question set down for preliminary determination. The substance of the question that was so answered in the negative was as follows:

Does the deed made 24 February 2006 (Release) between [the lessor] and [the original lessee] and [the original lessee's guarantor] have the effect as pleaded [by the assignee's guarantors] of releasing [them] from all and any obligations to the lessor?

3 The essence of the argument that failed below and that was advanced again on appeal was that the assignee's guarantors were released from liability to the lessor under their guarantee by reason of the fact that the lessor had released the original lessee's guarantor from all liability under his guarantee and therefore under the lease. The primary basis of the argument was that the assignee's guarantors had a right of contribution vis-à-vis the original lessee's guarantor which they had lost as a result of the release in his favour by the lessor. The lessor said that, if the release had the effect so contended for by the assignee's guarantors, then the solicitors for the lessor were liable to the lessor in negligence.

4 By a Lease made 14 April 2003, the lessor demised to the lessee certain business premises in Warrigal Road, Mentone for a term of ten years, with certain options of renewal. The lease provided, inter alia, that the lessee would not assign the lease without the lessor's prior consent and obliged the lessee, in order to obtain such consent, to covenant that he should not in any way be released from his liability under the lease. The lease defined the word 'Lessee' to include the assigns of the lessee. Annexed to the lease was a guarantee and indemnity of the same date executed by the sole director of the lessee (who also happened to be the sole director of the lessor).[1] The guarantor guaranteed the due and faithful payment of all moneys and performance of all obligations on the part of the lessee to be paid and performed as stipulated in the lease and the guarantee further provided that it was a continuing guarantee that would continue during the term of the lease and during any assignment or transfer thereof.

5 A document entitled 'Transfer and Variation of Lease' was executed on 3 August 2003 by the lessor, the original lessee (described therein as the 'old tenant'), an assignee (described therein as the 'new tenant' - R B Andrews Pty Ltd),[2] the two guarantors of the assignee (described therein as the 'new tenant's guarantors') and the original lessee's guarantor (described therein as the 'old tenant's guarantor'). Under the transfer, the original lessee transferred the lease to the assignee, with all options, as from 8 August 2003. The transfer provided that the assignee must pay the rent and do everything else required by the lease for the remainder of the lease. The transfer further provided that the assignee indemnified the original lessee so that the original lessee would not be responsible for breaches of the lease by the assignee but that the transfer did not end the obligations of the original lessee under the lease until the end of the lease (unless the lease provided otherwise).

6 The transfer contained the following provisions upon which particular reliance was placed by the appellants:

6. OLD TENANT'S GUARANTOR STILL LIABLE

This transfer does not end the obligations of the old tenant's guarantor under any guarantee or indemnity. Unless the guarantee or indemnity provides otherwise, those obligations continue until the end of the lease, but do not continue into any period of overholding after the lease ends, nor into any renewed term.

8. GUARANTEE AND INDEMNITY

The new tenant's guarantor -

8.1 Guarantees to the landlord and to the old tenant that the new tenant will pay the rent promptly and will do everything the lease requires.

8.2 Agrees that this guarantee is a continuing guarantee ...

8.3 Must indemnify the landlord and the old tenant so that they suffer no harm from breaches of the lease by the new tenant, including losses resulting from the insolvency or winding-up of the new tenant.

9. ACKNOWLEDGMENT BY OLD TENANT'S GUARANTOR

The old tenant's guarantor by signing this transfer acknowledges that its obligations to guarantee the old tenant continue.

7 Finally, by a deed made 24 February 2006 ('the Release'), the lessor released and discharged the original lessee and the original lessee's guarantor 'from any and all obligations and all claims and demands whatsoever which [the lessor] or any person whomsoever claiming under, through or on behalf of [the lessor] may have or claim to have against [the original lessee and the original lessee's guarantor] pursuant to the Transfer'.[3]

8 The learned trial judge said that, as between the lessee and the assignee, the ultimate liability to the lessor lay with the assignee and that, in those circumstances, the lessee, if it paid the rent and other moneys due, might seek indemnity from the assignee, but the assignee, if it paid, could not seek indemnity from the lessee. It followed, his Honour said, that, if the lessor released the assignee, this would release the lessee but the release of the lessee would not affect the liability of the assignee to the lessor. His Honour went on to say that the position of the guarantors was similar. He said that the lessee's guarantor was severally liable with the assignee's guarantors but that the assignee's guarantors, as sureties for the ultimately liable party, could not seek contribution for rent and other moneys paid by them from the lessee or its guarantor 'so that release of those parties did not increase the burden of the assignee's guarantors'.

9 His Honour concluded that the release of the lessee or of the lessee's guarantor did not affect the liability of the assignee's guarantors to the lessor and that the release:

... does not affect their entitlement to contribution from the lessee or the lessee's guarantor; they never had such entitlement. Nor did the 2006 release effect a material variation in the rights of the assignee's guarantors or any loss or diminution of their security.

10 In relation to a further argument put on behalf of the assignee's guarantors, his Honour said:

The further argument put on behalf of the assignee's guarantors, that the 2006 release was a breach of an implied term as to the continuation of the liability of the lessee and the lessee's guarantor must also fail. The guarantee provided by the assignee's guarantors contains no express provision to that effect. I would not infer such a term since the continuing liability of the lessee and the lessee's guarantor to the lessor would confer no benefit upon the assignee's guarantors. There is therefore no cause to imply such a term. In any event, for reasons which I have set out, the 2006 release did not change the obligation guaranteed by the assignee's guarantors.

11 In my opinion, the position of the appellants is contrary to common sense and I am glad to say, for the reasons set out below, that it is also contrary to law and equitable principle.

12 The short answer to the appellants' contentions is that the original lessee's guarantor and the assignee's guarantors were not co-sureties because they were not guarantors to the lessor of the same principal debtor or, for that matter, of the same debt (even if, in the instant case, the amount of their liability would have been calculated by reference to the same arrears of rent, etc). To put it another way, the liability of the original lessee's guarantor and the liability of the assignee's guarantors were not 'coordinate liabilities' because the respective liabilities did not arise from a 'common obligation' and because the liabilities were not 'of the same nature and the same extent'.[5] Accordingly, there was no entitlement to contribution as between them.

13 The difference in the nature and extent of the liabilities of the original lessee's guarantor and the assignee's guarantors respectively can be explained by reference to the difference in nature of the liabilities that they guaranteed. The liability of the original lessee related to all liability under the lease for the duration of the whole term thereof whereas the liability of the assignee related only to that part of the term that was assigned to it. However, in respect of that part of the term that was assigned to it, the assignee was ultimately liable and bound to indemnify the original lessee with respect to any breach of the lease committed during the duration of the assignment. In the present case, the assignee expressly indemnified the original lessee under the terms of the Transfer but the original lessee would have had, in any event, a right of recoupment in equity - the original lessee would have been entitled to recoup from the assignee any amount paid to the lessor on account of breaches of the lease occurring during the period of the assignment and for which the assignee was therefore responsible. Furthermore, the express provisions of the Transfer took this aspect one step further because, pursuant to cl 8.3, the assignee's guarantors were obliged to indemnify not only the lessor but also the original lessee in relation to breaches of the lease by the assignee. In the light of all of that, there could be no justification for the assignee's guarantors having an entitlement to contribution against the original lessee's guarantor based on the notions of fairness, equity, natural justice and the prevention of unjust enrichment that underlie the doctrine of contribution.[6] Indeed, such an entitlement would be contrary to all of those notions.

14 Because the assignee's guarantors would have had no entitlement to contribution as against the original lessee's guarantor, they were not prejudiced and their rights were not affected by the Release and therefore the conduct of the lessor in giving the Release did not discharge them from liability. I would add that the assignee had no basis to complain of the Release of the original lessee because the assignee would have been bound to indemnify the original lessee with respect to defaults for which the assignee was responsible - how could the assignee's guarantors be in any better position?

15 In my opinion, the foregoing analysis is supported by the authorities.

16 The proposition that, for the purpose of contribution, co-sureties must be guarantors of the same principal debtor or the same debt is supported by what was said by Lord Chief Baron Eyre in Sir Edward Deering v The Earl of Winchelsea[7] and by Lord Russell CJ in Ellesmere Brewery Co v Cooper[8] and by Starke J in McLean v Discount & Finance Ltd.[9]

17 Moule v Garrett[10] is authority for the principle that an original lessee has a right of recoupment in equity as against a subsequent assignee who is ultimately responsible for the relevant default. In that case Cockburn CJ said that:

the premises which are the subject of the lease being in the possession of the defendants as ultimate assignees, they were the parties whose duty it was to perform the covenants which were to be performed upon and in respect of those premises. It was their immediate duty to keep in repair, and by their default the lessee, though he had parted with the estate, became liable to make good to the lessor the conditions of the lease. The damage therefore arises through their default, and the general proposition applicable to such a case as the present is, that where one person is compelled to pay damages by the legal default of another, he is entitled to recover from the person by whose default the damage was occasioned the sum so paid ...

Whether the liability is put on the ground of an implied contract, or of an obligation imposed by law, is a matter of indifference: it is such a duty as the law will enforce. The lessee has been compelled to make good an omission to repair, which has arisen entirely from the default of the defendants, and the defendants are therefore liable to reimburse him.[11]

18 The right of recoupment described in Moule v Garrett was extended, in Becton Dickinson UK Ltd v Zwebner[12] to the case of an assignee's guarantor. In that case, the plaintiff assigned the unexpired residue of its lease of business premises. The assignee covenanted with the plaintiff to pay the rent and perform the lessee's covenants. Under a separate instrument, the defendant covenanted with the lessor that the rent under the lease would be paid by the assignee. The assignee defaulted and later went into liquidation. The lessor demanded and received payment from the plaintiff which then demanded payment from the defendant. The plaintiff obtained summary judgment against the defendant and the defendant's appeal was dismissed.

19 It was held by McNeill J that, although the defendant's covenant was with the lessor and not with the plaintiff, the assignee had the ultimate responsibility for the debt and that responsibility had been guaranteed by the defendant. Since the defendant's obligation was prior to that of the plaintiff, his was the primary and the plaintiff's was the secondary obligation. Accordingly, the defendant had no arguable defence in law to the plaintiff's claim. This case is thus authority for the proposition that the original lessee has a right of recoupment not only against the assignee but also against the assignee's guarantor. The judge referred to Moule v Garrett and to In Re Downer Enterprises Ltd.[13] In that case Pennycuick V-C said:[14]

The general principle here, I think, is not in doubt, namely, that if A and B are liable to a creditor for the same debt in such circumstances that the ultimate liability falls on A, and if B in fact pays the debt to the creditor, then B is entitled to be reimbursed by A ...

20 McNeill J noted that Pennycuick V-C found ambiguity in the phrases 'primary' and 'secondary' liability and preferred 'ultimate' to 'primary'. He said that there was no question but that the assignee was 'ultimately' liable for the rent etc and that the defendant had the prior liability as the assignee's guarantor. He further referred to what was said by Pennycuick V-C that 'this right of reimbursement, which carries with it the right of subrogation is not confined to the case of a guarantee, but applies in any case where there is a primary and secondary liability for the same debt'.[15] McNeill J concluded that the defendant fell squarely within the category of those from whom reimbursement could be sought. His obligation to the creditor (lessor) was without question prior to that of the plaintiff (lessee).

21 Finally, in Becton, McNeill J referred to the obiter dictum of Sir Nicholas Browne-Wilkinson V-C in Kumar v Dunning:[16]

When, as in the present case, the lease has been assigned on the terms that the sureties will guarantee performance by the assignee of the lease, justice and common sense ought to require the sureties, not the original tenant, to be primarily liable in the event of default by the assignee.

22 The principle stated in Becton was approved and applied by the New South Wales Court of Appeal in Karacominakis v Big Country Developments Pty Ltd.[17] That case concerned certain business premises and involved numerous parties including a lessor, an original lessee, an original lessee's guarantor, first assignees, second assignee, third assignee and third assignee's guarantors. The Court decided numerous issues on the particular complex facts of the case that are unnecessary to outline. It is sufficient to note that the Court applied Becton in deciding that the original lessee and the second assignee had a right of recoupment against both the third assignee and the third assignee's guarantors and that, accordingly, the third assignee and its guarantors had no entitlement to indemnity or contribution from any relevant party.[18]

23 The line of authorities relating to the right of recoupment illustrates that the court will take into account the ultimate responsibility of a party for the default in question. It has also been recognised that the question of culpability is relevant to determining whether particular liabilities are to be treated as 'coordinate liabilities' for the purposes of contribution. In Burke v LFOT Pty Ltd,[19] Gaudron A-CJ and Hayne J said that the requirement that the liability be 'of the same nature and to the same extent' was 'apt to include notions of equal or comparable culpability and equal or comparable causal significance' and that:[20]

The same consideration may have some bearing on the law's acceptance that contribution cannot be obtained if the person against whom contribution is sought is entitled to indemnity from the applicant.

24 In that regard, as noted earlier,[21] in the present case the assignee's guarantors expressly indemnified the original lessee in relation to any breaches of the lease by the assignee.

25 For the foregoing reasons, I consider that the assignee's guarantors had no right of contribution as against the original lessee's guarantor. The principal argument by the appellants therefore fails.

26 The appellants argued, in the alternative, that, as a result of the lessor granting the Release, they were discharged from their guarantee. Reliance was placed upon the principle stated in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[22] relating to when a creditor's conduct would discharge a surety. However, the appellants accepted that the relevant principle was correctly stated in

that case[23] to the effect that 'the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety' and that the creditor had to show that his conduct could not in any circumstances have increased the surety's risk. That, in my opinion, is the present case - the Release could not in any circumstances have increased the risk accepted by the assignee's guarantors.

27 Finally, as the trial judge also stated, there was no express promise in favour of the assignee's guarantors that the guarantee from the original lessee's guarantor would continue and there was no reason for implying such a promise. In any event, the breach of such a promise whether express or implied could not cause loss or damage to the assignee's guarantors and would not increase their risk.

[1] Although this matter of the sole directorships was mentioned by the appellants, no argument was advanced suggesting that it made any relevant difference.

[2] The assignee company subsequently became insolvent thus triggering the present litigation.

[3] I note that the respondent did not seek on appeal to rely upon an argument of construction that was rejected by the trial judge to the effect that the words 'pursuant to the Transfer' meant that the Release did not discharge the original lessee and its guarantor from the obligations under the lease.

[4] Teparyl Pty Ltd v Willis [2009] VSC 259.

[5] See, for example, Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129, 148; HIH Claims Support Ltd v Insurance Australia Ltd [2010] VSCA 255, [24] and cases therein cited.

[6] See Craythorne v Swinburne [1807] EngR 343; (1807) 14 Ves 160, 171; [1807] EngR 343; 33 ER 482, 486 (Lord Eldon); Albion Insurance Co Ltd v Government Insurance Office of New South Wales [1969] HCA 55; (1969) 121 CLR 342, 350-351 (Kitto J); Mahoney v McManus [1981] HCA 54; (1981) 180 CLR 370, 378 (Gibbs CJ); Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129, 148; HIH Claims Support Ltd v Insurance Australia Ltd [2010] VSCA 255, [22].

[7] [1787] EngR 40; (1787) 2 Bos & P 270; 126 ER 1276.

[8] [1896] 1 QB 75, 79.

[9] (1939) 64 CLR 312, 341.

[10] (1872) LR 7 Ex 101 (Court of Exchequer Chamber: Cockburn CJ, Willes, Blackburn, Mellor, Brett and Grove JJ).

[11] (1872) LR 7 Ex 101, 103-104 (emphasis added).

[12] [1989] 1 QB 208.

[13] [1974] 1 WLR 1460.

[14] [1974] 1 WLR 1460, 1468.

[15] [1974] 1 WLR 1460, 1468.

[16] [1989] QB 193, 201.

[17] [2000] NSWCA 313 (Giles JA, Handley and Stein JJA agreeing).

[18] [2000] NSWCA 313, [242]-[246].

[19] [2002] HCA 17; (2002) 209 CLR 282.

[20] [2002] HCA 17; (2002) 209 CLR 282, 293.

[21] See [13] above.

[22] [1987] HCA 15; (1987) 162 CLR 549.

[23] [1987] HCA 15; (1987) 162 CLR 549, 559.