Yeoman Credit Ltd v Latter

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

WESTERN AUSTRALIA DISTRICT REGISTRY VG 792 of 1995

EX TEMPORE REASONS FOR JUDGMENT The applicant ("Seapeace") has applied by motion for orders under O 13 r 2 of the Federal Court Rules ("the Rules") that it have leave to amend the application and statement of claim filed in this matter and for an order under O 5 r 1 and O 6 rr 2 and 8 of the Rules, that Donald Brian Johnston ("Johnston") be joined as a respondent to the proceedings. The application for leave to amend was not opposed in substance and orders will be made accordingly. The proceedings arise from a ship building and sale agreement ("the Principal Contract") made between Seapeace and the first respondent ("Meridian") in March 1991, whereby it was agreed, inter alia, that Meridian would enter a contract ("the Building Contract") with the second respondent ("Oceanfast") for Oceanfast to construct for Meridian a large, ocean going, twin-hulled motor yacht described in the Principal Contract and would sell that vessel to Seapeace. At the same time, deeds of guarantee and indemnity, expressed to be in consideration of Seapeace entering the Principal Contract, were executed by Johnston and Oceanfast in favour of Seapeace. Under the deeds Johnston and Oceanfast agreed, inter alia, to keep Seapeace indemnified against all losses incurred by reason of a breach of the Principal Contract by Meridian, and Johnston agreed to keep Seapeace indemnified against all losses incurred by reason of a breach by Oceanfast of the Building Contract. The thrust of the applicant's case, is that, as a consequence of relying upon misrepresentations made by Meridian and Oceanfast, and as a consequence of Meridian and Oceanfast acting in breach of their respective contractual obligations, and as a result of negligent conduct on the part of Oceanfast and the third respondent, Seapeace has suffered loss and damage. Seapeace seeks to join Johnston for the purpose of obtaining a declaration that Johnston is liable to indemnify Seapeace for some of the loss it has suffered. The relevant clause relied upon reads as follows : "(1) The Guarantor hereby expressly guarantees to Seapeace the full, prompt and complete performance and observance by the Seller and the Builder of all the terms, covenants, conditions express or implied in the Principal Contract and the Building Contract and on the part of the Seller and the Builder to be performed and observed and the Guarantor hereby expressly agrees to indemnify and keep Seapeace fully indemnified from and against all or any claims, losses, actions, damages, costs and expenses suffered or incurred by Seapeace by reason of the Seller's and/or Builder's default, breach or non-performance or non-observance of any of the terms, covenants and conditions express or implied in the Principal Contract and the Building Contract (emphasis added)." Seapeace submits that the second limb of the clause should be construed as an indemnity as distinct from a guarantee, the significance of the distinction being that in a contract of indemnity, the indemnitor is primarily liable to the indemnified party irrespective of whether a third party makes default, whilst in a contract of guarantee, the guarantor assumes a secondary liability for the default of another who remains primarily liable: Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 831; Total Oil Products (Aust) Pty Ltd v Robinson [1970] 1 NSWLR 701 at 703; O'Donovan J & Phillips J, The Modern Contract of Guarantee (Sydney: LBC Information Services, 1996). Relying on this distinction, it is the applicant's further submission, that because the liability of the indemnitor is primary in nature, an action may be initiated against the indemnitor without first establishing that loss has been suffered. It is not disputed that an indemnitor is primarily liable to the indemnified party in accordance with the terms of the indemnity. A contract of indemnity is a contract by one party to keep the other harmless against loss, and the obligation of the indemnitor is not dependent on the existence of a debt of another: Clipper Maritime Ltd v Shirlstar Container Transport Ltd [1987] 1 Lloyd's Rep 546 at 555; Harburg India Rubber Comb Co v Martin [1902] 1 KB 778 at 784. The principle was stated by Gibbs CJ, Mason and Aicken JJ in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 595-596 and accepted by Sheppard J in ANZ Banking v Turnbull & Partners (1991) 33 FCR 265 at 273-274: "Although the right to an indemnity arises on payment of the liability to which it relates and not before, this is not a bar to the litigation as between a defendant and a third party... . It has been repeatedly affirmed that one of the peculiarities of third party procedure is that it enables litigation on the indemnity to take place before there is any liability: Horden-Richmond Ltd v Duncan [1947] 1 KB 545 at 552; Bitumen & Oil Refineries (Australia) Ltd v Commissioner for Government Transport (1955) 92 CLR 200." However, a cause of action against the indemnitor generally will not accrue until the party indemnified actually suffers loss or incurs a liability to which the indemnity applies: Collinge v Heywood (1839) 9 Ad & E 633; McGillivray v Hope [1953] AC 1 at 10 per Lord Tomlin; Bosma v Larsen [1966] 1 Lloyd's Rep 22 (QB); Bradley v Eagle Star Insurance Co Ltd [1989] 1 All ER 961 at 965; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514. Thus to initiate proceedings against the indemnitor before the loss or liability of the indemnified party has been established may be premature, unless the circumstances require quia timet orders to be sought. In considering whether the Court should exercise a discretion under the Rules to join a third party in a particular instance, consideration must be given to whether the joinder of the party is necessary for the complete adjudication of all the issues raised in the matter. Consistent with s 22 of the Federal Court Act 1976 (Cth), the Rules providing for third party procedures and the joinder of indemnitors, facilitate the hearing and determination of a contest between a respondent and a third party in conjunction with the determination of liability between the respondent and an applicant, thereby avoiding an unnecessary multiplicity of proceedings: Trade Practices Commission v Queensland Aggregates Pty Ltd (1981) 38 ALR 217 per Franki J; Horden-Richmond Ltd v Duncan [1947] 1 KB 545 at 552 per Cassels J; Nickels v Parks (1948) 49 SR (NSW) 124; Port Melbourne Authority v Anshun Pty Ltd (1981) 147 (CLR) 589 at 595; Australia Mutual Provident Society v GEC Diesels Australia Ltd [1989] VR 407. If there is no evidence that the liability of the indemnitor to the party who seeks to join the indemnitor as a party will be disputed once liability of the party sued has been established and it does not appear that the worth of the right of the indemnity is at risk, there may be no reason for the Court to order that the indemnitor be joined if no more is sought than a declaration of the indemnitor's liability: Re Anderson-Berry, Harris v Griffith [1928] Ch 290, CA. Such a joinder may serve no useful purpose and cause significant cost and inconvenience to the indemnitor. No evidence has been brought before the court in the present case to suggest that the liability of the indemnitor will be disputed or that the worth of the right of indemnity of Seapeace may be at risk, however, for the following reason I am satisfied that it is appropriate that leave to join Johnston should be granted. It is likely that the scope of Johnston's liability under the deed will depend upon the resolution of the question of the proper construction of the deed and upon the outcome of the issue raised between Seapeace and Meridian as to the scope of the Principal Contract. A significant part of the Seapeace claim against Meridian relates to alleged breaches of terms of the Principal Contract, said by Seapeace to be implied terms of that contract. Given that the content and construction of the Principal Contract will affect directly the liability of Johnston, it is appropriate to join Johnston as a respondent so that his interest in that issue can be litigated at the same time as other issues in the proceeding. An order will be made accordingly. I certify that this and the preceding three (3) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee

Solicitor for the Applicant: Allan Pocock & Associates