On appeal from the Supreme Court of New South Wales
Representation
M L D Einfeld QC with S M Golledge for the appellants (instructed by Websters Lawyers)
M R Pesman SC with J T Johnson and C E Alexander for the respondents (instructed by Beazley Singleton Lawyers)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Lavin v Toppi
Contribution – Requirement of coordinate liabilities – Where appellants and first and second respondents were co‑sureties of guaranteed debt – Where first and second respondents paid creditor disproportionate amount of guaranteed debt – Where creditor gave appellants covenant not to sue – Whether first and second respondents entitled to contribution from appellants – Whether appellants and first and second respondents shared coordinate liabilities despite creditor's covenant not to sue.
Words and phrases – "contribution", "contribution in equity", "coordinate liabilities", "covenant not to sue", "of the same nature and to the same extent".
FRENCH CJ, KIEFEL, BELL, GAGELER AND KEANE JJ. The question in this appeal is whether a surety who pays a creditor a disproportionate amount of a guaranteed debt is entitled to recover contribution from a co‑surety when the creditor has given that co‑surety a covenant not to sue for payment of the guaranteed debt.
The Court of Appeal of the Supreme Court of New South Wales answered this question in the affirmative, holding that the creditor's covenant not to sue the co‑surety did not release the co‑surety from liability under the guarantee. As a result, all co‑sureties continued to share coordinate liabilities under the guarantee, so that the sureties who paid more than their proportionate share of the guaranteed debt were entitled to recover contribution from their co‑surety[1].
As will appear from the reasons which follow, the Court of Appeal was correct. In addition, the Court of Appeal's conclusion is supported by a broader equitable view of the rights of co‑sureties between each other.
Background
The first appellant ("Ms Lavin") and the first respondent ("Ms Toppi") were directors of, and equal shareholders in, a company, Luxe Studios Pty Ltd ("Luxe"). In 2005, Luxe purchased a property in Liverpool Street, Sydney ("the Liverpool Street property") for the purpose of conducting a photographic studio business. The purchase was funded by a loan of $4.29 million from the National Australia Bank ("the Bank"). Further loans were made by the Bank in 2007 and 2008. In October 2008, the various loans were consolidated into one loan to Luxe in the amount of $7,768,000 ("the loan").
The loan was guaranteed jointly and severally by Ms Lavin, the second appellant (a company associated with Ms Lavin), Ms Toppi, the second respondent (Ms…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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Details
AGLC
Lavin v Toppi [2015] HCA 4
Case
[2015] HCA 4
Decision Date
CaseChat Overview and Summary
The High Court of Australia considered an appeal concerning the right of contribution between co-sureties. The dispute arose after the first and second respondents, who were co-guarantors of a company's debt to the National Australia Bank, paid a disproportionate amount of the guaranteed debt. The appellants, also co-guarantors, argued they were not liable to contribute because the Bank had provided them with a covenant not to sue, which they contended extinguished their liability and thus meant they did not share coordinate liabilities with the respondents.
The central legal issues before the High Court were whether the appellants and the respondents shared coordinate liabilities of the same nature and extent, despite the Bank's covenant not to sue the appellants, and whether the appellants benefited from the respondents' payment of the guaranteed debt. The appellants contended that the covenant not to sue rendered their liability qualitatively different from that of the respondents, which remained enforceable by the Bank. They further argued that, without a practical benefit derived from the respondents' payment, the respondents' claim for contribution should fail, as the doctrine of contribution aims to prevent unjust enrichment.
The High Court dismissed the appeal, affirming the decision of the Court of Appeal. The Court reasoned that a covenant not to sue does not extinguish a liability; rather, it creates a contractual obligation on the covenantor not to enforce that liability. As the appellants' liability under the guarantee remained legally extant, albeit subject to the covenant not to sue, they continued to share coordinate liabilities with the respondents. The Court held that the appellants did benefit from the respondents' payment because it discharged the entire guaranteed debt, thereby removing any remaining liability, even if previously unenforceable, that the appellants might have faced. This equitable view supported the respondents' entitlement to contribution.
The High Court ordered that the appeal be dismissed with costs.
Orders
Orders of the court
Appeal dismissed with costs.
Background
Background to the litigation
As will appear from the reasons which follow, the Court of Appeal was correct. In addition, the Court of Appeal's conclusion is supported by a broader equitable view of the rights of co‑sureties between each other.Background The first appellant ("Ms Lavin") and the first respondent ("Ms Toppi") were directors of, and equal shareholders in, a company, Luxe Studios Pty Ltd ("Luxe"). In 2005, Luxe purchased a property in Liverpool Street, Sydney ("the Liverpool Street property") for the purpose of conducting a photographic studio business. The purchase was funded by a loan of $4.29 million from the National Australia Bank ("the Bank"). Further loans were made by the Bank in 2007 and 2008. In October 2008, the various loans were consolidated into one loan to Luxe in the amount of $7,768,000 ("the loan"). The loan was guaranteed jointly and severally by Ms Lavin, the second appellant (a company associated with Ms Lavin), Ms Toppi, the second respondent (Ms Toppi's husband), and Luxe Productions Pty Ltd (a company jointly owned and controlled by Ms Lavin and Ms Toppi) ("the guarantors"). The provisions of the guarantee were addressed to the guarantors. Clause 6.2 provided relevantly:"You guarantee that the customer [ie Luxe] will pay NAB all the amounts which the customer owes NAB at any time. If the customer does not pay an amount when due, you agree to pay that amount to NAB when NAB demands it." (emphasis in original) Clause 14 of the guarantee was relevantly as follows:"What will NOT end your liability...14.2Your 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...(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...(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". (emphasis in original) Clause 16 of the guarantee provided, relevantly:"You give up certain rights16.1You 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." (emphasis in original) Clause 20 of the guarantee provided:"Your liability is separate to all other security NAB holds20. 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." (emphasis in original)
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
FRENCH CJ, KIEFEL, BELL, GAGELER AND KEANE JJ
His Honour ordered the appellants to pay contribution for the amount claimed (minus a small deduction on account of interest, which is no longer of any moment)[9].[9]Toppi v Lavin [2013] NSWSC 1361 at [50].Decision of the Court of Appeal In the Court of Appeal, the appellants argued that Carr v Thomas was unsupported by authority and clearly wrong in principle. Leeming JA (with whom Macfarlan and Emmett JJA agreed) rejected that argument. Leeming JA concluded[10] that, while the precise question decided by Carr v Thomas had not arisen in any earlier case, the decision in that case was correct as a matter of principle. His Honour said[11]: "In point of principle, a covenant not to sue (in the usual form) does not alter an existing liability. Giving such a covenant means merely that the covenantor is in breach if it does sue."[10]Lavin v Toppi (2014) 308 ALR 598 at 614 [90].[11]Lavin v Toppi (2014) 308 ALR 598 at 611 [73]. Leeming JA proceeded on the basis that the Bank's covenant not to sue was premised on the continuing liability of the covenantees. Because the covenant did not extinguish the appellants' liability under the guarantee, it followed that the appellants and the respondents continued to share liabilities of the same nature and extent so as to entitle the respondents to recover contribution from the appellants. Leeming JA also rejected the appellants' contention that they received no benefit from the respondents' discharge of the balance of their liability to the Bank. His Honour held[12] that, since the appellants remained liable under the guarantee notwithstanding the Bank's covenant not to sue, the appellants benefitted from the respondents' payment of $2.9 million. In this regard, his Honour said[13]:"Prior to the payment, [the appellants were] liable to pay [their] share of the guaranteed debt, albeit that the bank had promised not to enforce it. After the payment, there was no guaranteed debt left to pay."[12]Lavin v Toppi (2014) 308 ALR 598 at 612 [76].[13]Lavin v Toppi (2014) 308 ALR 598 at 612 [76].The appeal to this Court On 12 September 2014, French CJ and Gageler J granted the appellants special leave to appeal to this Court. In this Court, the appellants submitted that the Court of Appeal erred in holding that the respondents and appellants shared coordinate liabilities of the same nature and extent at the time the respondents paid the guaranteed debt. The appellants argued that their liability was "qualitatively different"[14] from the respondents' liability in that the respondents' liability was enforceable by the Bank while the appellants' liability was not. [14]HIH Claims Support Ltd v Insurance Australia Ltd (2011) 244 CLR 72 at 92 [55]. The appellants also argued that the Court of Appeal erred in holding that the appellants benefitted from the respondents' discharge of the guarantee. It was said that the discharge of the guarantee conferred no real or practical benefit on the appellants because, by the time the respondents discharged the guarantee, no liability under the guarantee could be enforced against the appellants. This lack of practical benefit was said to be fatal to the respondents' claim because the purpose of the doctrine of contribution is the prevention of unjust enrichment by one co‑surety at the expense of another.
Ratio Decidendi
Legal Principle Established
Established by:
FRENCH CJ, KIEFEL, BELL, GAGELER AND KEANE JJ