Lavin v Toppi

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.