Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd

[2001] NSWCA 479

CITATION:	Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd & Ors [2001] NSWCA 479
FILE NUMBER(S):	CA 40009/01
HEARING DATE(S):	7 September 2001
JUDGMENT DATE:	20 December 2001
PARTIES :	Lumley General Insurance Limited - Appellant Oceanfast Marine Pty Limited - First Respondent Oceanfast Limited - Second Respondent Ross Stuart Norgard - Third Respondent Bryan Kevin Hughes - Fourth Respondent Adsteam Marine Charters - Fifth Respondent Stirling Marine Constructions Pty Limited - Sixth Respondent Howard Smith Industries Pty Limited - Seventh Respondent
JUDGMENT OF:	Priestley JA at 1; Beazley JA at 11; Giles JA at 96

LOWER COURT JURISDICTION :	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S) :	4692/99
LOWER COURT JUDICIAL OFFICER :	Austin J

COUNSEL:	Appellant: T F Bathurst QC/M A Jones 1-4 Respondents: J E Thomson 5-7 Respondents: G C Lindsay SC
SOLICITORS:	Appellant: Baker McKenzie 1-4 Respondents: Blake Dawson Waldron 5-7 Respondents: Freehill Hollingdale & Page
CATCHWORDS:	Insolvency - rule against double proofs - money paid under bank bonds - whether money paid reduced debt of primary creditor.
CASES CITED:	Moule v Garrett (1872) LR 7 Ex 101 Barclays Bank v T.O.S.G Trust Fund Limited [1984] 1 AC 626 Ellis v Emmanuel (1876) 1 Ex D 157 Westpac Banking Corporation v Gollin [1988] VR 397 Brittain v Lloyd (1845) 14 M & W 762 Re a Debtor [1937] 1 Ch 163 Thornton v McEwan (1862) 1 H& M 525 Goodwin v Gray (1874) 22 WR 312 Wood Hall v The Pipeline Authority (1979) 141 CLR 443 Bachmann Pty Limited v BHP Power NZ Ltd [1999] 1 VR 420 Kvaerner John Brown Ltd v Midland Bank plc [1988] CLC 446 Re Oriental Commercial Bank, Ex parte European Bank (1871) LR 7 Ch App 99 Western Australia v Bond Corporation Holdings Ltd (No 2) (1992) 37 FCR 150 Ex parte National Provincial Bank of England, In re Rees (1881) 17 Ch Div 98 Farrow Finance Co Ltd v ANZ Executors & Trustee Co Ltd (1997) 15 ACLC 529 Day and Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd (1982) 150 CLR 85 Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) (1978) 141 CLR 335 Comdell Commodities Ltd v Siporese Trade SA (1997) 1 Ll R 424 Cargill International SA v Bangladesh Sugar and Food Industries Corporation (1996) 4 All ER 563 Thornton v M'Kewan (1862) 1 H & M 525 Goodwin v Gray (1874) 22 WR 312 Karacominakis v Big Country Developments Pty Ltd (2000) NSWCA 313 re Sass, ex parte National Provincial Bank of England Ltd (1896) 2 QB 12 re Fenton, ex parte Fenton Textile Association Ltd (1931) 1 CH 85
DECISION:	Appeal allowed; See para 176

CA 40009/01
PRIESTLEY JA
BEAZLEY JA
GILES JA


Thursday, 20 December 2001

LUMLEY GENERAL INSURANCE LIMITED v OCEANFAST MARINE PTY LIMITED & 6 ORS

FACTS

The appellant (Lumley) was the payer under a number of performance bonds provided to the purchasers, at the request of Oceanfast Marine which was the builder under a series of tug boat construction contracts. Oceanfast Marine and its guarantor Oceanfast went into voluntary administration resulting in a loss of approximately $15 million to the purchasers of the tug boats. Pursuant to the performance bonds Lumley made a payment to the purchasers of $5 million. Both sought to prove in the administration of Oceanfast Marine and Oceanfast, Lumley for $5 million and the purchasers for $15 million. The administrators rejected Lumley’s proof of debt and accepted that of the purchasers.

Lumley commenced proceedings in the Equity Division of the Supreme Court claiming that it was entitled to have its proof of debt admitted. Austin J held that that ‘having regard to the rule against double proofs’ the purchasers were entitled to prove and Lumley was not.

On appeal Lumley claimed that the rule against double proofs did not apply and that the payment by Lumley should be treated as a pro tanto discharge of the purchasers’ debt. In the alternative, they submitted that equity required the purchasers’ proofs to be excluded to the extent they had received payment. The consequence on either approach was that the purchasers could prove for $10 million and Lumley for $5 million. The purchasers’ primary position was that the contractual arrangements did not give priority to Lumley’s claims over the claims of the purchasers. As a result there was nothing inequitable about the outcome which required the purchasers to be fully paid before Lumely could recover in the administration.

HELD per Giles JA (Priestley JA agreeing)
(i) The terms of the contracts, and in particular the performance bond was significant in determining the amount the purchasers could prove in the administration.

(ii) Lumley’s payment of $5 million was in partial satisfaction of the purchasers claim for $15 million. Accordingly, the purchasers could prove in the administration of Oceanfast Marine for only $10 million. Lumley could prove for its $5 million: Moule v Garrett (1872) LR 7 Ex 101. Accordingly, the rule against double proofs did not apply.

(iii) In the administration of Oceanfast, Lumley was entitled to prove for the $ 5 million under the deed of indemnity and no question of double proofs arose.

per Beazley JA dissenting
(i) The rule against double proofs applied.

(ii) In this case the terms of the contracts governed the outcome. There were no provisions directed to protecting Lumley’s position in the administration.

(iii) Accordingly, the purchasers should be entitled to prove in priority to Lumley.

ORDERS
(i) Appeal allowed.

(ii) The order dismissing the proceeding should be set aside.

(iii) The answer to the separate question should be set aside, and it should be answered that the plaintiff is and the fifth, sixth and seventh defendants are not entitled to prove in the administrations of the first and second defendants for the amount referred to in the plaintiff’s proofs of debt identified in paragraph 15 of the Statement of Claim.

(iv) Consequential declarations and/or orders will be required to dispose of the proceedings, and the proceedings should be remitted to the Equity Division for such further hearing or the making of declarations and orders as may be appropriate.

(v) The respondents should pay the appellant’s costs of the appeal and of the trial, and have a certificate under the Suitors’ Fund Act 1951 (NSW) if qualified.

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40009/01
SC 4692/99
PRIESTLEY JA
BEAZLEY JA
GILES JA


Thursday, 20 December 2001
LUMLEY GENERAL INSURANCE LIMITED v OCEANFAST MARINE PTY LIMITED & 6 ORS
JUDGMENT

: The materials necessary for consideration in the decision of this appeal and the relevant authorities are set out and discussed in the separate reasons of Giles JA and Beazley JA.

2 Basing myself on them, I come directly to the aspect of Austin J’s reasons which, I respectfully think involves an inconsistency, which, when recognised, leads me to arrive at a different conclusion from his Honour.

3 One of the steps in Austin J’s reasoning to his conclusion was stated in the following three paragraphs of his reasons:

“60. As I understand Lumley’s submissions, there was no attempt to put Lumley’s rights against the Builder and Oceanfast on the basis that it was entitled by subrogation to displace the Purchasers’ entitlement to prove. Instead, reliance was placed on the writings of some commentators (for example, Goff and Jones, The Law of Restitution (5th ed, 1998) at 437ff; Chitty on Contracts para 42-065), to seek to derive a broad, independent principle from Moule v Barrett (1872) LR 7 Ex 101, where Cockburn CJ said (at 104):
‘Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability ; under such circumstances the defendant is held indebted to the plaintiff in the amount.’ (My underlining, for later reference.)
61. That proposition received additional support in Brittain v Lloyd (1845) 14 M & W 762; 153 ER 683 and Re a Debtor [1937] 1 Ch 163, and in the context of sureties Thornton v McEwan (1862) 1 H & M 525 and Goodwin v Gray (1874) 22 WR 312. There is nothing in these cases to suggest that the principle must be qualified in the context of insolvency and proofs of debt. On balance, it seems to me that the authorities support the existence of the principle contended for by Lumley.
62. In the present case, Moule v Garrett and the other cases support the right of Lumley to claim reimbursement from the Builder, notwithstanding the absence of any contractual indemnity by the Builder in Lumley’s favour.”

4 Elsewhere in his reasons the trial judge held that the purchasers were entitled to prove for the full $15 million. This conclusion necessarily involved the step that the purchasers’ right of recovery against the Builder was not reduced by the amount Lumley had paid to the purchasers under the performance bond. The principal reason given by Austin J for this conclusion was stated in par 65 of his reasons:

“The contract does not say, or imply, that payments made under the performance bond in partial satisfaction of the Purchaser’s contractual right of recovery, from the Builder and Oceanfast in respect of the Builder’s default, reduce the obligations of the Builder and Oceanfast to compensate the Purchaser in respect of the default.”

5 The conclusion that the payment by Lumley to the purchasers did not reduce the purchasers’ right of recovery from the Builder and Oceanfast was a step in Austin J’s reasoning upon which his conclusion depended. It is also a step which seems to me, with respect, to be in conflict with his application of the rule from Moule v Garrett, cited in his par 60 (set out above), and which he relied on, and, in my opinion, correctly so. That rule in terms was based upon the payment having been made which is referred to in the underlined part of the citation. Rewriting the underlined part of the citation in terms of the present case, it reads: “So that the Builder and Oceanfast obtain the benefit of the payment (by Lumley) by the (partial) discharge of the liability of the Builder and Oceanfast”.

6 Once it is accepted that the rule based on Moule v Garrett is applicable in the present circumstances, as I do, it follows that the liability of the Builder and Oceanfast to the purchasers was discharged to the extent of the $5 million payment to the purchasers by Lumley.

7 It seems to me to follow directly from this that the purchasers were entitled to prove for $10 million, Lumley was entitled to prove for $5 million, that these were separate debts, and that no question of double proof was involved in the case.

8 The case seems to me in its essential respects to be directly analogous to Barclays Bank Limited v T.O.S.G. Trust Fund Limited [1984] 1AC 626, as analysed in the House of Lords by Lord Templeman, with whose opinion the other Lords all agreed. Although the House of Lords reached the same decision as the Court of Appeal, Lord Templeman’s reasoning was quite different from that of Oliver LJ, upon whom Austin J to a significant extent appears to have relied in the present case.

9 An interesting feature of Lord Templeman’s opinion is that no earlier authority was named in it. It was very closely based on the commercial facts and documentation in the case. His method provides a salutary reminder that in cases such as T.O.S.G. and the one now before this court, the decision must always rest upon the court’s view of the facts and the meaning of the documents in the case. Rulings made by courts in similar cases will be helpful in deciding any case, and the help will be greater depending upon the closeness of the facts and the authority of the courts in the earlier cases; but it is not the earlier cases which ultimately dictate the later results, it is the court’s understanding of the facts and documents in each particular case which controls the decision.

10 I agree with the orders proposed by Giles JA.

: The appellant (Lumley) was the payer under a number of performance bonds provided to the fifth to seventh respondents (the purchasers), at the request of the first respondent, Oceanfast Marine, which was the builder under a series of tug boat construction contracts entered into with the purchasers. There were seven contracts in all. Six were in identical terms. The seventh, whilst not in identical terms, had no material differences for present purposes.

12 The second respondent, Oceanfast, guaranteed the obligations of Oceanfast Marine under the construction contracts. It also entered into a separate deed by which it indemnified Lumley in respect of its obligations under the performance bonds.

13 Prior to the completion of the tug boat contracts, Oceanfast Marine and Oceanfast resolved to place their companies in voluntary administration, appointing the third and fourth respondents as joint and several administrators (the administrators) under a Deed of Company Arrangement entered into on about 25 May 1999. The purchasers subsequently cancelled the tug boat contracts, sustaining a loss of approximately $15 million, comprising liquidated damages under the contract; costs of assessors in determining the state of the vessels on termination of the contract; and additional costs of completing the tugs by a new contractor.

14 The purchasers gave notice to Lumley in accordance with the terms of the performance bonds. Lumley paid the full amounts payable thereunder in a total sum of approximately $5 million.

15 Both the purchasers and Lumley sought to prove in the administrations of Oceanfast Marine and Oceanfast, the purchasers for $15 million and Lumley for $5 million. The administrators rejected Lumley’s proof of debt and accepted that of the purchasers. A dividend of about 14 cents in the dollar was declared. Accordingly, even if the purchasers are entitled to prove for $15 million as well as retain Lumley’s payment of $5 million, they will not recover their $15 million in full.

16 Lumley commenced proceedings in the Equity Division of the Supreme Court, seeking declaratory and other consequential relief to the effect that it was entitled to have its proof of debt admitted in the sum of $5 million and to receive a dividend.

17 On 21 August 2000 Santow J made an order under Pt 31 R 2 of the Supreme Court Rules for the determination of the following separate question:

“WHETHER, having regard to the rule known as ‘the rule against double proofs’:


(a) [Lumley]; and/or

(b) the [purchasers],

is entitled to prove in the administration of [Oceanfast Marine and Oceanfast for the amount referred to in [Lumley’s] proofs of debt …”

18 The separate question was determined by Austin J who held:

“Having regard to the rule known as ‘the rule against double proofs’ [the purchasers] are entitled to prove, and receive dividends accordingly, in the administration of [Oceanfast Marine and Oceanfast] for the amount referred to in the [their] proofs of debt … and [Lumley] is not entitled to have its proofs of debt admitted, nor to receive dividends, until the claims of the [purchasers] are fully satisfied.”

19 Lumley appeals from the decision of Austin J.

The Documents

20 It is convenient at this point to deal with the various contracts between the parties. It is also convenient to point out that the matter proceeded before Austin J on an agreed basis which explained how the contracts were to operate. I will refer to those matters as necessary.

The Tug Construction Contract

21 Each tug construction contract was entered into between Oceanfast Marine, one of the purchasers and the guarantor, Oceanfast. Lumley was not, of course, a party to the construction contract. Under the contract, provision was made for progress payments, but with provision for a first payment at the time of commencement of construction: cl 9.1. The vessel became the property of the purchaser from the commencement of the contract: cl 22.1.

22 Relevantly for present purposes, the builder was required to obtain a performance bond: cl 5. That clause provided:

“Unless upon or before the execution of this Contract any other arrangement satisfactory to the Purchaser is mutually agreed in writing between the parties hereto the Builder shall at its own cost obtain and deliver to the Purchaser at the time of execution of this Contract the bond of an insurer reasonably acceptable to the Purchaser or any other surety previously approved in writing by the Purchaser to be jointly and severally bound with the Builder in the sum equal to 10% of the Basic Contract Price for the due performance of this Contract , and the said bond shall be substantially in the form of Schedule 2.” (emphasis added)

The Performance Bond

23 Pursuant to this provision, Lumley issued performance bonds in relation to each contract. Clause 1 of the performance bond provided:

“1. … [Lumley] … agrees to pay on demand any sum or sums which may from time to time be demanded by the OBLIGEE to an amount not exceeding the Bond amount as specified in Item 4 of the Schedule which the OBLIGEE certifies arises from the default or non-performance of the CONTRACTOR in terms of the conditions of the CONTRACT, excluding default or non-performance arising from clauses specified in Item 7 of the Schedule.”

24 The ‘contractor’ identified in Item 1 of the Schedule to the performance bond was Oceanfast, not Oceanfast Marine, the builder, as might have been expected. However, the case was argued before the trial judge on the basis that the performance bonds were to be treated as relating to “default of non-performance of [Oceanfast Marine and/or Oceanfast] in terms of the conditions of the respective tug construction contracts”. As his Honour said:

“In other words, I am to assume that [Lumley’s] obligation to pay the Obligee may be triggered by the Obligee’s notice of default or non-performance by either [Oceanfast Marine] or Oceanfast.”

The reference to “obligee” was of course a reference to the purchasers.

25 The other relevant provisions of the performance bonds were:

“2. Provided that the OBLIGEE shall first give written notice to the CONTRACTOR stating details of such default or non-performance by the CONTRACTOR stating that such default or non-performance arose due to circumstances within the control of the CONTRACTOR and that such written notice be delivered to the SURETY together with a letter of demand from the OBLIGEE to the SURETY.
…
4. Should the SURETY be notified in writing that the OBLIGEE desires payment to be made of the whole or part or parts of the Bond amount and enclosing a copy of the aforementioned notice of non-performance by the CONTRACTOR, the SURETY undertakes that it will make payment to the OBLIGEE within seven (7) working days of receipt of such notice notwithstanding any notice given by the CONTRACTOR not to pay same.
5. The SURETY may at any time without being required so to do pay the OBLIGEE the Bond amount less any amount or amounts it may previously have paid under this Bond or such lesser sum as may be required and specified by the OBLIGEE and thereupon the liability of the SURETY hereunder shall immediately cease. Should the OBLIGEE confirm in writing that the CONTRACTOR has fulfilled the conditions of the CONTRACT this Bond shall be null and void and of no further force and effect.”

Deed of Indemnity and Guarantee

26 Under the deed of indemnity and guarantee, Oceanfast guaranteed Lumley “against all loss”: cl 2.1 and was required “upon demand immediately [to] pay [Lumley] any loss”.

27 Bond was defined to mean “any bond … given … by [Lumley] to or in favour of any person at the request of the Contractor (including … any … performance bond …)”: cl 1.1.

28 Loss was defined in cl 1.1 to mean:

“the aggregate at any time of all payments made and liabilities incurred by [Lumley] in connection with a Bond including, without limitation:
payments by [Lumley] of claims under a Bond;
…
payments made or actual or contingent liabilities incurred by [Lumley] with the intention of limiting its potential liability under a Bond; and
costs and expenses paid, and actual and contingent liabilities of any nature incurred, in connection with any claim under a Bond,
but excluding any amount paid or payable to a reinsurer or co-surety.”

29 Oceanfast was identified in the Deed as both the guarantor and the contractor. As his Honour observed, a party cannot guarantee its own performance. In the agreed facts, the Court was asked to assume that Oceanfast was erroneously described as the Contractor. The reference should have been to Oceanfast Marine. Oceanfast, however, was the entity which had agreed to indemnify Lumley against payments made by Lumley in connection with the performance bonds. His Honour thus proceeded on the basis that Oceanfast had the indemnity obligation under the deed, that there was no effective guarantee obligation and that Oceanfast Marine was not a party to the Deed.

Letter of Demand

30 After Oceanfast Marine and Oceanfast went into voluntary administration, each of the purchasers issued a letter of demand on Lumley, pursuant to the terms of the Performance Bond. The letter was in the following terms:

“We refer to the … Performance Bond …
…
Clause 1 of the Bond states that the Surety undertakes covenants and agrees to pay on demand any sum or sums which may from time to time be demanded by the Obligee to an amount not exceeding the Bond amount as specified in item 4 of the Schedule ($730,436.80) which the Obligee certifies arises from the default or non-performance of the Contractor in terms of the conditions of the Contract.
Certain Notices of Cancellation and Consequences of Cancellation dated 29 April 1999 have been given to the Contractor. In compliance with Clause 2 of the Bond, the Notice of Cancellation contained details of the default and non-performance by the Contractor. In further compliance with Clause 2 of the Bond, paragraph numbered 2 in the Notice of Cancellation stated that such default or non-performance arose due to circumstances within the Contractor’s control. In further compliance with Clause 2 of the Bond, the Notice of Cancellation is included with this Letter of Demand.
…
Pursuant to Clause 4 of the Bond, the Obligee hereby notifies the Surety that the Obligee desires payment to be made of the whole of the Bond and calls upon the Surety to honour its undertaking to make payment of the said amount … within seven (7) working days of the receipt of this notice.
In compliance with Clause 1 of the Bond the Obligee hereby certifies that the amount of which the Obligee desires payment … arose from the default or non-performance of the Contractor in terms of the conditions of the Contract.”

Case Argued Before Trial Judge Compared With Case Argued On Appeal

31 Before the trial judge, Lumley had argued that its obligations under the performance bonds were not autonomous obligations. Accordingly, in order to determine which party had priority, it was appropriate to apply, by analogy, the principles which applied to sureties. Those principles require some elaboration.

32 It is well established that when a creditor claims payment of a debt from a solvent debtor, the creditor is required to give credit for the amount it has received from the guarantor. It is equally well established that in the case of an insolvent debtor, certain technical rules operate: see Ellis v Emmanuel (1876) 1 Ex D 157; Westpac Banking Corporation v Gollin [1988] VR 397 at 402-403. Those rules are as follows.

33 First, in the case of a guarantee for the whole of the debt but where the amount payable under the guarantee is limited to a particular amount, the right to recover on insolvency does not arise until the creditor has been satisfied as to 100 cents in the dollar. Accordingly, there is no pro tanto distribution of any monies received from the insolvent debtor and the guarantor is not entitled to prove.

34 Secondly, in the case of a guarantee of the whole of the debt, subject to a fluctuating balance up to a monetary limit, the guarantee is treated as being the same as a guarantee of part of the debt. In that case, as is the case with the guarantee of part of a debt, there will be a pro tanto distribution so that the guarantor is entitled to prove in competition with the creditor. The reason for this rule is, apparently, that it is seen as inequitable to allow the creditor to impose additional liability on the guarantor as a result of the fluctuating balance: see Ellis v Emmanuel at 163-164.

35 Lumley now disavows its approach at first instance that the performance bond involved a secondary obligation, accepting that the obligation is autonomous and says the surety rules have no role to play. Alternatively, it submits that if the analogy is apposite, his Honour applied the wrong analogy. The correct comparison was with that of a guarantor who had guaranteed part only of a debt or with a guarantor giving a guarantee up to a monetary limit but with a fluctuating balance. In either case, it would be entitled to prove in the administrations.

Findings of the Trial Judge

36 Austin J found that the performance bonds involved autonomous obligations on the part of Lumley and were not in the nature of a surety. His Honour further held that, subject to the rule against double proofs, Lumley had restitutionary rights against Oceanfast Marine in respect of the amounts paid under the performance bonds: see Moule v Garrett (1872) LR 7 Ex 101. See also Brittain v Lloyd (1845) 14 M&W 762; 153 ER 683; Re a Debtor [1937] 1 Ch 163; Thornton v McEwan (1862) 1 H&M 525; Goodwin v Gray (1874) 22 WR 312. As against Oceanfast, Lumley had an express right of indemnity under the deed of indemnity and guarantee. Those rights were the basis upon which Lumley said it was entitled to prove in the administrations of Oceanfast Marine and Oceanfast. Leaving aside the issue whether the rule against double proofs has any application in this case, all parties accept these findings.

37 His Honour held that the rule against double proofs applied in determining the respective parties’ rights to be admitted to proof so as to require that one claimant be given priority over the other. Subject to the matter raised by the purchasers in their Notice of Contention, all parties accept that finding. In their Notice of Contention, the purchasers contend that the purchasers and Lumley are each entitled to prove for the full amount of their respective claims – namely $15 million and $5 million. Neither Lumley nor the administrators support this approach. If it becomes necessary to determine the point raised in the Notice of Contention and it is made out, the effect is that the rule against double proofs would have no operation in the present case.

38 His Honour then turned to consider the question as to which claimant had the better right to prove in the administration of Oceanfast Marine and Oceanfast and held that the purchasers had the prior right to prove. His conclusion was derived essentially from the terms of the contract entered into between the parties. He said at para 81:

“The present case is purely commercial. I cannot see anything inequitable about an outcome that requires the Purchasers to be fully paid before Lumley can recover in the insolvent administrations, bearing in mind that the whole purpose of the performance bonds was to provide security to ensure that the Purchasers’ financial interests were protected in the transaction. It would have been open to Lumley to negotiate a different outcome contractually but it did not do so. It accepted a contractual structure which did not give priority to its claim over the claims of the Purchasers. It was in a position to adopt a fee structure that would reflect its exposure. Lumley has no ‘equity’ to upset the commercial outcome.”

39 I have mentioned above the argument advanced by Lumley at the hearing that the performance bond did not involve an autonomous obligation, but rather that it imported a secondary obligation so that the rules relating to sureties should be applied. In relation to that argument, his Honour stated that it was “not clear that any of these rules have an application to autonomous obligations”. However, if the principles governing sureties were analogous, he considered that those principles also favoured the view that the purchasers had priority over Lumley. In expressing that view, his Honour considered that the relevant comparison was with the guarantee of a whole debt subject to a maximum limit not affected by the “fluctuating balance” principle. It followed on the application of this principle that, as the purchasers had not been paid in full, they could prove for the whole amount of their claims and Lumley could not prove.

40 It is useful at this point to refer to the principles which his Honour applied in reaching his conclusion as to the nature of the obligation under the performance bond.

Autonomous Obligation

41 His Honour considered that the performance bond was an autonomous obligation of the kind described in Wood Hall v The Pipeline Authority (1979) 141 CLR 443 by Stephen J at 457. I will refer to that passage shortly. It should first be noted that Barwick CJ also found that the contracts in that case did not give rise to the relationship of suretyship. His Honour said at 445:

“The circumstance that the purpose of the cash deposit or its documentary substitute is as a security for the due performance of the contract or the contract work does not, in my opinion, involve either the Bank or the owner in any of the obligations or rights of suretyship. … The bank documents are really in the nature of an unconditional bond to pay money on demand up to a stated maximum amount, being expressed, for example, in cl 2 of the said deed.”

42 Stephen J described the nature of the bond as being equivalent to a cash payment. He said at 457, in the passage to which Austin J referred:

“Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is ‘as good as cash’ can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being ‘as good as cash’ in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 171, Lord Denning recently described the performance guarantee as standing ‘on a similar footing to a letter of credit’.”

See also Gibbs J at 451.

43 It is perhaps convenient at this point to also refer to the material relied upon by Lumley in further support for the characterisation of the performance bond as involving an autonomous obligation. Senior counsel submitted that the performance bond was akin to a stand-by credit: see Documentary Credits Jack, Malek and Quest, 3rd Ed 2001 at Ch 12. The authors note at 12.1 that the usual functions of standby credits, demand guarantees or performance bonds:

“is to enable one party to a contract to obtain money from a reliable source, usually a bank, when the other party has failed, or is alleged to have failed, to perform the contract or some aspect of it. They are often used in construction contracts as security for any liability of the contractor to the employer.”

44 The authors classify a performance bond as an “independent guarantee”. The purpose of a standby credit or an independent guarantee is usually to give security against the applicant’s breach of contract, not to enforce his performance: see Bachmann Pty Limited v BHP Power NZ Ltd [1999] 1 VR 420. The authors note that in the case of both standby credits and independent guarantees, as is the case with commercial credits, the obligation to pay arises on presentation of the documents specified in the contract and that undertaking is autonomous. This, it was submitted, was significant as the payer under the Bond, (here Lumley) is not concerned with the status of the underlying transactions, in this case those between Oceanfast Marine and Oceanfast and the purchasers. It also appears, and it follows, that the obligations arising under a standby credit and performance bond may only be resisted in the case of fraud: see Kvaerner John Brown Ltd v Midland Bank plc [1998] CLC 446 at 449.

45 By contrast, a contract of guarantee is:

“an accessory contract by which the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated.”

46 The liability of a guarantor, therefore, is conditional on the non-performance of the guaranteed party or collateral to the underlying contract.

47 As I have said, all parties now accept that Lumley’s obligation under the performance bond was autonomous.

Rule Against Double Proofs

48 His Honour then applied the rule against double proofs.

49 The rationale of the rule against double proofs was stated by Mellish LJ in Re Oriental Commercial Bank, Ex parte European Bank (1871) LR 7 Ch App 99 at 103-104, namely:

“… there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts.”

50 In Western Australia v Bond Corporation Holdings Ltd (No 2) (1992) 37 FCR 150 at 163, French J observed:

“The question whether two claims arise out of the same liability is a matter of substance not of form. It may be said that the claim of a principal creditor in respect of its debt and the claim of a surety in respect of the debtor’s failure to indemnify it are distinct. But in substance they relate to the same debt.”

51 French J further remarked at 165:

“The authorities and the principle which [underlie] the rule against double proof support the view that the substantial relationship between the liabilities asserted and the amounts thereby claimed in the rival proofs is of greater importance than the legal grounds upon which they are sought.”

52 However, as his Honour pointed out at 164 the rule has nothing to say as to which of two competing creditors had the better right to claim.

53 Austin J reasoned that, applying the approach that the rule against double proofs was concerned to ensure that dividends were not payable in respect of substantially the same debt:

“75 … the claims by the Purchasers and Lumley in the administration of [Oceanfast Marine] and Oceanfast are claims to substantially the same debt. Consequently the administrators of the Builder and Oceanfast cannot pay a dividend which admits both claims.
76 This is because the Purchasers’ and Lumley’s claims against the Builder and Oceanfast are both related to the Builder’s default under the tug construction contracts. The Purchasers’ claim against Oceanfast arises because Oceanfast guaranteed the performance of the tug construction contracts by the Builder and became liable on the guarantee when the Builder defaulted and cause(sic) them to suffer loss. Lumley’s claim against Oceanfast arises because Oceanfast indemnified it against a loss incurred when Lumley met the Purchasers’ demand for payment. While Lumley’s loss was not directly caused by the Builder’s default, it was connected to the default because the Purchasers’ notice to Lumley under the performance of bonds was required to contain a certificate that the amount demanded by the Purchasers arose from the Builder’s default, and was also required to contain details of the default. The position may well have been different if, for example, Lumley was simply obliged to pay a specific amount to the Purchaser on demand, without any need for a certificate of default.
77 The linking of the claims of Lumley and the Purchasers against [Oceanfast Marine] and Oceanfast to default by [Oceanfast Marine] is sufficient, in my view, to make it unfair to the other creditors of the Builder and Oceanfast to permit dividends to be paid on both claims. The rule against double proofs therefore applies to require that one claimant be given priority over the other.

54 His Honour considered that his conclusion was consistent with the decision in Barclays Bank Limited v T.O.S.G. Trust Fund Ltd [1984] AC 626. He said:

“My conclusion is consistent with the decision in the TOSG Trust Fund case. There the bonds were regarded as autonomous obligations but they were conditional, relevantly, on notification that the tour operator could not carry out its obligations. The banks’ obligation under the bonds was held to relate to substantially the same debt as that claimed by the assignee of the customers who lost their holidays through the tour operators default.”

55 In reaching that conclusion, his Honour rejected Lumley’s reliance on T.O.S.G and in particular, on the notion that it was equitable first, that Lumley be entitled to prove and secondly, to require the purchasers to reduce their proof by the amount they had recovered from Lumley “because Lumley [had] paid ‘real money’ and the purchasers [had] received real money from Lumley in priority to others”.

Lumley’s Argument On Appeal

56 Lumley’s argument on appeal involved three essential propositions. First, it submitted that the rules governing sureties do not apply.

57 Secondly, Lumley submitted that the rule against double proofs does not apply. The premise for this submission was that the payment by Lumley to the purchasers should be treated in the same manner as when the debtor was solvent, namely as a pro tanto discharge of the purchaser’s debt. On this approach there were either two separate debts or, probably more accurately, two parties claiming for separate components of the same debt. Accordingly, the purchasers would prove for their debt – which on this approach would be $10 million, and Lumley for its claim of $5 million.

58 Thirdly, Lumley submitted that equity requires that the purchasers’ proofs be excluded to the extent they have received payment – in this case the $5 million paid by Lumley under the performance bond, leaving Lumley to claim for the $5 million. It relies upon T.S.O.G in support of this submission.

Should There Be Any Analogy With The Position Of A Surety?

59 Senior counsel for the appellant approached the appeal on the basis that his Honour had endorsed and applied the analogy with the position of a surety on an insolvency. That is not strictly correct. His Honour dealt with that argument but expressed the view, as set out above, that it was unclear whether the rules had any application in the case of autonomous obligations.

60 On the appeal, none of the parties supported the proposition that the principles relating to sureties on insolvency should be applied. The rules are technical and not necessarily logical. Further, as senior counsel for Lumley pointed out, there is no justification for the rule in circumstances where the creditor (here the purchaser) received a real benefit as a result of Lumley performing its obligations under the performance bond.

61 Lumley submitted alternatively, that if the surety analogy was appropriate, Lumley’s claim was analogous to the guarantee of part of the debt. In particular, it was said there was no express provision guaranteeing the whole of the debt: cf Ex parte National Provincial Bank of England, In re Rees (1881) 17 Ch Div 98.

62 There is no reason in principle to apply rules which relate to a secondary obligation to autonomous obligations. This is even more so when those rules are universally acknowledged to be unduly technical and obscure. Accordingly, I do not consider it necessary to determine whether his Honour’s reasons on this point are correct.

Does the Rule Against Double Proofs Apply?

63 In my opinion, the rule against double proofs does apply. In this regard I would adopt the reasoning of Austin J at paras 75 – 77, set out earlier in my reasons at para 53. That leaves the question as to how the two proofs should be treated in this case.

Rule To Apply In Respect of Autonomous Obligations

64 Lumley submitted that the rule to apply was one which recognised the fact of payment to the purchasers. It was submitted that it did not matter how that rule was characterised, whether it be by determining that there had been a pro tanto reduction of the debt or as a matter of doing justice between two competing claims. On either basis Lumley should be entitled to prove in the liquidation of the builders for its $5 million and the purchasers for $10 million.

65 All parties acknowledged that there was no direct authority on point. Lumley submitted however, that the T.O.S.G. case provided some assistance.

66 T.O.S.G. was a company established by a group of travel agents and tourist operators for the purpose of providing financial assistance to travellers should they be left stranded, or having paid for holidays be left without their arrangements being able to be fulfilled, where their travel agent had for some reason, for example due to liquidation, defaulted in the provision of the travel services. The funding for the scheme was provided by means of bank bonds or other securities provided by the travel agents in favour of T.O.S.G.

67 Barclays and a number of other banks had provided bank bonds to T.O.S.G. at the instance of Clarksons. At the time of giving the bonds, Barclays and the banks had obtained counter indemnities from Clarksons. Clarksons went into liquidation, leaving clients without their contracted travel services. T.O.S.G. thus called up the bonds which were duly paid. Although T.O.S.G. had a complete discretion (within the parameters of its charter) as to the use of the monies paid under the bond, it in fact used those monies to make payments to the holidaymakers and other customers of Clarksons who had suffered a loss. As a condition of payment, the Clarksons’ clients were required to assign such rights as they had against Clarksons to a government agency. That agency had a statutory obligation to make payments to stranded and other customers of failed travel agencies and tourist operators.

68 The Banks sought to prove in the liquidation pursuant to their counter indemnities for the amounts paid by T.O.S.G. to the Clarksons’ clients. The agency sought to prove in respect of the assigned customer claims to the extent it was out of pocket pursuant to its statutory obligations to those clients. The Clarksons’ liquidators contended that the two proofs reflected the same debt and by operation of the rule against double proofs, only one proof could be lodged. The Bank and the agency each sought declaratory relief that their respective debts should be admitted and that of the other rejected.

69 At first instance, all parties proceeded on the basis that the rule against double proofs applied. Nourse J considered that the surety analogy applied or alternatively that a “broad equity” applied. On the surety analogy, his Honour found that the bank was analogous to a creditor who had guaranteed the whole debt up to a monetary limit. On the application of “broad equity principles” his Honour considered the result was to be derived from the intentions of the parties as deduced from their contracts. On either basis, his Honour held that the banks were not entitled to prove in the liquidation. This decision was reversed on appeal.

70 On appeal to the Court of Appeal the question whether the case involved a case of double proofs was raised. In dealing with that question, Oliver LJ at 636 referred to the operation of the rule against double proofs in these terms:

“It is simply whether the two competing claims are, in substance , claims for payment of the same debt twice over. … the rule against double proofs in respect of two liabilities of an insolvent debtor is going to apply wherever the existence of one liability is dependent upon and referable only to the liability to the other and where to allow both liabilities to rank independently for dividend would produce injustice to the other unsecured creditors.
… and stems from the fundamental rule of all insolvency administration that, subject to certain statutory priorities, the debtor’s available assets are to be applied pair passu in discharge of the debtor’s liabilities. … A simpler test, perhaps, is to postulate the question – what would the position be as regards the payment of the liabilities in respect of which proofs have been lodged if the debtor were now solvent?”

provides an example. There Mellish LJ observed at 102:

“It appears to me clearly that it is substantially the same debt; because if all parties had been solvent, whatever sums the Oriental Commercial Bank might have paid to the Agra Bank, although they would have paid it, no doubt, for the purpose of performing the contract they had entered into by their indorsement, yet, substantially, whatever sums they might have paid to the Agra Bank would have gone in reduction of the sums which the Oriental Commercial Bank had promised to pay the European Bank. In that case the Oriental Commercial Bank could never had been called upon to pay these bills twice over. It would have made no difference that they had entered into two contracts with two separate parties that they would pay the bills … It is clear that they would have performed both contracts by paying the bills once …”

72 Oliver LJ considered that the rule against double proofs did apply. In determining how the rule should be applied, his Honour relied upon the following features of the transaction. The bonds given by the banks to T.O.S.G. could be called up by T.O.S.G. upon the happening of a nominated event – here the liquidation of Clarksons. However, T.O.S.G. was not obliged under the terms of the bond to pay the monies for any purpose associated with the nominated event. The banks had also taken an independent charter of indemnity from Clarksons. Oliver LJ at 639 reasoned the matter this way:

“Suppose that no counter-indemnity had been sought or given and disregard altogether Clarksons’ insolvency. The banks undertake, for what they no doubt regard as an adequate consideration, to provide moneys to a third party in a certain event. If the event occurs and if some part of the moneys are applied in fact in paying debts of Clarksons, by what title could the banks claim, in effect, a recoupment for which they never stipulated as part of the original consideration? I can see none.”

73 Oliver LJ at 645 also considered that the surety analogy was applicable but, contrary to the finding of Nourse J, found that the relevant rule was the second of those referred to in Ellis v Emmanuel, namely, that of the guarantee of the whole of a debt subject to a fluctuating balance up to a monetary limit.

74 It followed on the application of this rule that the banks were entitled to prove in priority to the agency.

75 Oliver LJ then dealt with the matter on the “broad equity” approach. Nourse J’s reasoning in that regard was as follows:

“But in the end I do not need to rely on the analogy at all. I agree with [counsel] that the decisive feature of the present case is the trust fund’s power to recoup to the customers any shortfall remaining after they had received all available dividends in Clarksons’ liquidation. Once you get to that stage it is apparent that it would indeed be most inequitable for the banks to claim, as against the customers, a rateable proportion of any dividends receivable or received by them. This is not a narrow equity, but a broad one. And it is a surer basis for decision than any mere analogy.”

76 Oliver LJ found however, at 647-648:

“… I cannot, for my part, share the [trial] judge’s view that there is anything inequitable in allowing the banks who have paid real money to recover a dividend on the sums which they have paid and in reducing the proofs of the customers, who have received real money in priority to other creditors, by the amounts which they have in fact received. Leaving aside, for the moment, the suretyship analogy, if the amounts of the customers’ claims had been equal to or less than the bond moneys, there could be no question whatever that the banks were entitled to prove for what they had paid. What is there then in the fact that the customers’ debts exceed the amount of the bond moneys that displaces the banks’ claims? It is only the rule against double proof and that brings one back to the suretyship analogy. If one discards that as a guide, one is left with competitive claims between a class of creditors (the banks) who are out of pocket to the full nominal amount of their claims and a class of creditors (the customers) who are in fact out of pocket to an extent less than the full nominal amount of their claims because of their receipt of the banks’ money. … I can see no equity which dictates that the customers’ claims should be preferred.”

77 Kerr LJ did not endorse the surety analogy and for the reasons given by Oliver LJ considered the banks could prove to the exclusion of the agents. Slade LJ applied the surety analogy.

78 Lumley submits that the reasoning of Oliver LJ grounds support for its primary submission that it is entitled to prove for the amounts paid under the performance bonds. It had paid “real moneys” and the purchasers had correspondingly received “real moneys”.

79 In the House of Lords, the view was taken that the arrangement did not involve any notions of surety and therefore those principles did not apply. Lord Brightman at 668 took the view that there was no impediment to the banks claiming under their counter indemnity whether pursuant to the rule against double proofs or otherwise.

80 Lumley, however, particularly draws attention to the speech of Lord Templeman at 672-673, as being apposite to their case:

“In my view, upon the true and simple construction of the bond and the indemnity, when T.O.S.G. paid £ 1,000 of Barclays’ money to a customer whose claim against Clarksons amounted to £1,000, the claim of that customer against Clarksons was extinguished and there became vested in Barclays an indisputable claim against Clarksons for £1,000 under the indemnity. If T.O.S.G. paid £200 to a customer whose claim was £1,000, then the customer could thereafter only claim and prove for the balance of £800 and Barclays could claim and prove under its indemnity for £200. By the indemnity Clarksons agreed to repay to the banks every penny that the banks paid under the Bond and that T.O.S.G. paid to the customers.
In the event, T.O.S.G. extinguished claims of Clarksons’ customers to the extent of £1,268,000 and the banks became entitled to prove for £1,268,000 under their indemnities.

81 His Lordship concluded at 674:

“But equity, broad or narrow, does not overlook the distinction between a debt and a dividend on a debt, nor does it enable T.O.S.G. to ignore or modify the legal rights of the banks under the bonds and the indemnities. ... The liquidators will pay the dividends on £1,268,000 to the banks because the banks provided that sum pursuant to the bonds in discharge of the liabilities of Clarksons to its customers, and because the banks became entitled to be indemnified by Clarksons pursuant to the indemnities. The liquidators will pay to the agency dividends on the sums which the agency provided in discharging further liabilities of Clarksons to its customers.”

82 Lumley submits the same position should apply here, the basic proposition being that the purchasers should not be entitled to receive more than 100 cents in the dollar. It was also submitted that in cases such as Westpac, and T.O.S.G. it was assumed there should be a pro rata reduction of the debt.

83 Austin J rejected Lumley’s submissions on this point. He considered that on the facts in T.S.O.G.:

“considerations of equity may well have pointed to preferring the banks over the customers, since the customers’ claims had been artificially preserved by an assignment notwithstanding that the customers were paid out, and their claims were now being asserted for the benefit of the agency rather than the customers. Moreover, the arrangement in that case was a public compensation scheme involving non-commercial considerations.”

84 His Honour thus preferred to base his decision on the nature and purpose of the transaction entered into.

85 With respect to his Honour, I do not necessarily see any relevant point of distinction in the fact that the agency’s obligations to pay the customers arose under a public compensation scheme. However, as was submitted by Oceanfast Marine, Oceanfast and the administrators, T.S.O.G. is distinguishable because in that case there was an express stipulation in the bonds for the return of any surplus. There was no such reservation here.

86 This very much brings one back to determining whether the answer is to be found in the terms of the contracts between the parties. This was the position of Oceanfast Marine, Oceanfast and the administrators. They contend that the actual result arrived at by his Honour for the reasons expressed in para 81 of his judgment is correct. They further point out that notwithstanding that the obligation is autonomous, the Court cannot be blind to the fact that the obligation is payable against the due performance of the contract: see cl 5(1). In other words, the arrangements between the parties provided a means whereby the purchasers had available the equivalent of cash, should it happen that there was default or non-performance of the tug construction contract.

87 Senior counsel for the administrators also submitted that it was appropriate to establish some prima facie rule which gives effect to the commercial purpose of the bonds as explained in Wood Hall. In support of this submission, the administrators say that Lumley was best placed to price the credit risk that it was assuming when it issued the bonds. It would be expected that the risk would be reflected in the fee which it charged for the facility.

88 Likewise, the purchasers’ primary position is that the trial judge’s decision is correct for the reasons given by Austin J in para 81 of his judgment. They contend that the money paid to them under the Performance Bonds were ‘collateral benefits’ which they are entitled to retain for their own benefit. They point out that the law has always recognised the availability of two forms of compensation for one loss: see Farrow Finance Co Ltd v ANZ Executors & Trustee Co Ltd (1997) 15 ACLC 529 at 553. They submit that in issuing the bonds Lumley accepted autonomous obligations, providing the purchasers with an equivalent of cash, without reserving any right to undermine the commercial operation of the bonds by lodgement of a competing proof of debt.

89 It is clear that there are competing arguments either way in this matter. There is force in each argument. Both may be put simply. On the one hand, there is the contention of Lumley that there should be a pro tanto reduction of the purchasers’ claim, because they had already received from Lumley a portion of the “loss” for which it sought to prove. On the other hand, there is the argument that the parties entered into a commercial arrangement, the purpose of which was to provide security against breach so that the obligee ought to be entitled to the full benefit of the contract without reduction of its rights against the debtor.

90 A number of considerations point to the second of these approaches as being the appropriate one to adopt. First, in the cases which have dealt with the rule against double proofs, other than in surety situations, emphasis has been given to the circumstances of the particular case: see T.O.S.G per Slade LJ at 660 (cited with approval by French J in Western Australia v Bond Corporation):

“Difficulty may well arise in determining whether, in any given case, two proofs are in respect of what is in substance the same debt. Though various broad tests have been canvassed by both Bar and Bench in argument in this case, I have, for my own part, found none of them wholly satisfactory. The question can, I think, only be determined by reference to the particular facts of the case before the court, bearing in mind that it is the substance of the relevant liability, rather than the form, on which attention must be concentrated .” (emphasis added)

91 In this case, the “particular facts of the case” are to be derived initially from the contracts between the parties. The following features of those transactions which are relevant are as follows. First, Lumley’s obligation under the performance bond is a joint and several one with Oceanfast Marine. Secondly, Oceanfast Marine could not “stop” or “undermine” the obligation to pay (cl 4). Thirdly, Lumley was able to pay out the bond and thus bring to an end its obligation without being required to do so (cl 5). Fourthly, as Lumley could have attained the position it now asserts by a relevant contractual provision, the terms of the contract should govern the outcome. Finally, under the Deed of Indemnity and Guarantee, Oceanfast guaranteed Lumley against “all loss” (cl 2.1), being the “aggregate at any time of all payments made and liabilities incurred by [it] in connection with [the performance bond]” (cl 1.1).

92 This combination of provisions highlights certain essential features of the transaction. The bonds were required so as to provide the purchasers with security against loss should there by default by Oceanfast Marine. The provisions of the performance bonds were directed to that end. There were no provisions directed to protecting Lumley should its restitutionary rights against Oceanfast Marine prove to be inadequate or worthless. This is underscored by the fact that Lumley sought to protect its position, that is, to recover any payment made under the bond by obtaining the indemnity from Oceanfast. The fact that the right was also rendered worthless because of Oceanfast’s insolvency is not to the point.

93 I have come to the conclusion, therefore, that the second of the two views is preferable and that the purchasers should be entitled to prove in priority to Lumley. The consequence in this case is that Lumley will not be entitled to prove in the liquidation as there are insufficient funds to meet the purchaser’s claim of $15 million.

94 It also follows on the view I have reached it is unnecessary to determine the Notice of Contention.

95 Accordingly, the appeal should be dismissed with costs.

: Beazley JA has described the contracts between the parties. Although there were seven transactions, it was common ground that they were relevantly identical and could be treated as one transaction. In what follows I have done so by compressing the separate contracts and the separate bonds into one contract and one bond, by compressing the separate contracting parties with Oceanfast Marine into the one contracting party Adsteam, and by combining the losses of the separate contracting parties into one figure and the payments under the separate bonds into one figure.

97 The broad question can be stated as follows. Oceanfast Marine contracted to build a tug boat for Adsteam. Its parent company Oceanfast guaranteed performance of Oceanfast Marine’s obligations under the contract. The contract required that Oceanfast Marine provide to Adsteam an insurer’s bond for the due performance of the contract. Lumley issued the bond. Oceanfast indemnified Lumley in respect of its obligations under the bond. Oceanfast Marine and Oceanfast went into voluntary administration and Oceanfast Marine failed to complete performance of the contract. Adsteam incurred losses of $15 million. Adsteam made demand under the bond and was paid $5 million. Which of Adsteam and Lumley can prove in the administrations of Oceanfast Marine and Oceanfast and for what amount?

159 The trial judge noted that Lumley did not claim to be subrogated to Adsteam’s rights against Oceanfast Marine. That position was expressly maintained on appeal.

160 However, his Honour upheld Lumley’s claim to “reimbursement from Oceanfast Marine notwithstanding the absence of any contractual indemnity by [Oceanfast Marine] in Lumley’s favour”. He did so on what was described as “a broad, independent principle” derived from Moule v Garrett (1872) LR 7 Ex 101 and finding support in Brittain v Lloyd (1845) 14 M & W 762; 153 ER 683; Thornton v M’Kewan (1862) 1 H & M 525; (1862) 71 ER 230; Goodwin v Gray (1874) 22 WR 312 and re a Debtor (1937) 1 Ch 163. His Honour cited from Moule v Garrett at 104 -

“Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount.”

161 His Honour then said -

“63 If the autonomous payer has a right of indemnity against the debtor by virtue of a contract or the principle in Moule v Garrett , then it can lodge a proof of debt in the insolvent administration of the debtor for the amount that it has paid. The principle in Moule v Garrett does not say that the autonomous payer's right of recovery from the debtor has a lesser priority than the creditor's right of recovery. Where the autonomous payer relies on a contractual right of indemnity against the debtor, it is possible that the contract may expressly or impliedly limit the payer's right by preventing the payer from proving in the insolvent administration of the debtor in competition with the creditor. In the present case, however, there is no such express term in the deed of indemnity and guarantee, and I can see no basis for implying one. Therefore in many cases, including the present case, there will be no relevant contractual restriction on the autonomous payer's right to lodge a proof of debt in the insolvent administration of the debtor.”

162 The reference to the “deed of indemnity and guarantee”, that is, Oceanfast’s indemnity, is a little curious. If it did not provide a basis for Lumley to claim upon Oceanfast Marine, it is not easy to see how it could have limited Lumley’s entitlement to prove in the administration of Oceanfast Marine. Be that as it may, in the appeal all concerned accepted that, subject to the rule against double proofs, Lumley can claim the $5 million from Oceanfast Marine by virtue of the principle derived from Moule v Garrett. In the circumstances, that should be accepted for the purposes of the appeal.

163 The acceptance of this basis for Lumley’s entitlement to prove reflects back upon Adsteam’s receipt of the $5 million in partial satisfaction of its claim for $15 million. If Oceanfast Marine was not liable to pay the $5 million, and more particularly if payment of the $5 million by Lumley did not discharge Oceanfast Marine’s liability, the equitable principle in Moule v Garrett could not operate. That Oceanfast Marine obtained the benefit of the payment by the discharge of its liability was the occasion for equity to impose on it the burden of recoupment (see recently Karacominakis v Big Country Developments Pty Ltd (2000) NSWCA 313 at [239] – [241]). With respect, there may have been inconsistency in regarding Adsteam as able to prove for the full $15 million, yet regarding Lumley as able to prove (subject to the rule against double proofs) for the $5 million because Oceanfast Marine’s liability to Adsteam had to that extent been discharged.

Is There Any Qualification to These Entitlements to Prove?

164 The decision thus far is that Adsteam can prove in the administration of Oceanfast Marine for $10 million and Lumley can prove in the administration for $5 million. If that be so, the rule against double proofs does not arise.

165 Had Lumley been a credit insurer and paid the insured amount, ordinarily Adsteam would still have been entitled to claim the full $15 million but would have held any excess recovered on behalf of Lumley, and Lumley would have been subrogated to Adsteam’s rights against Oceanfast Marine. As earlier noted, Lumley did not claim to be subrogated to Adsteam’s rights against Oceanfast Marine, and principles of insurance law were not taken up in the appeal.

166 There was considerable reference, before the trial judge and in the appeal, to the law relating to guarantees. If the bond were treated as a guarantee by Lumley of Oceanfast Marine’s liability under the contract, some well established but at times technical rules could come into play. As applied to the parties, and attempting to adapt the rules to apply by analogy to a guarantee of liability rather than a guarantee of a debt, they would be -

(a) if the guarantee is of the whole of Oceanfast Marine’s liability to Adsteam, Adsteam can still prove in the administration of Oceanfast Marine for $15 million and in conformity with the rule against double proofs Lumley can not prove for $5 million under its implied indemnity;

(b) if the guarantee is of the whole of Oceanfast Marine’s liability to Adsteam but limited to $5 million, the position is as in (a);

(c) if the guarantee is of a quantified part of Oceanfast Marine’s liability to Adsteam, $5 million, Adsteam can prove in the administration of Oceanfast Marine only for $10 million and Lumley can claim $5 million from Oceanfast Marine under its implied indemnity; and
(d) if the guarantee is of the whole of Oceanfast Marine’s liability to Adsteam but limited to $5 million, but the liability is in the nature of a fluctuating balance, it is regarded as a guarantee of a quantified part of the liability and the position is as in (c).

167 For the underlying general propositions in the law regulating to guarantees it is sufficient to refer to Ellis v Emmanuel (1876) 1 Ex 157; re Sass, ex parte National Provincial Bank of England Ltd (1896) 2 QB 12; re Fenton, ex parte Fenton Textile Association Ltd (1931) 1 Ch 85; Barclays Bank Ltd v TOSG Trust Fund Ltd (CA); and Westpac Banking Corporation v Gollin & Co Ltd (in liquidation) 1988 VR 397. I emphasise the possible distortion in stating the propositions in a form adapting them to a guarantee of liability. The distinction between a guarantee of a quantified part of a debt and a guarantee of the whole of a debt but limited in amount to less than the whole, even before any adaption to a guarantee of liability rather than a guarantee of a debt, is elusive. It is justified on the basis that in the former case the debt guaranteed is separate from the whole debt. The justification for the further nicety of a guarantee of a fluctuating balance need not be explored.

168 For present purposes, if the bond were treated as a guarantee by Lumley of Oceanfast Marine’s liability under the contract, and if the guarantee were of the whole of Oceanfast Marine’s liability to Adsteam but limited in amount to $5 million, Adsteam could prove for $15 million and Lumley could prove for nothing. On the other hand, if the bond were treated as a guarantee by Lumley of Oceanfast Marine’s liability under the contract, and if the guarantee were only of a quantified part of the liability, Adsteam could prove for $10 million and Lumley could prove for $5 million; and if in some manner a fluctuating balance were brought into the picture, the result would be the same.

169 Before the trial judge Lumley and Adsteam both submitted that the law relating to guarantees should be applied by analogy to the bond, although they differed in its application. The trial judge considered that if the law relating to guarantees applied by analogy to the bond, then “the principles relating to payment of part of a debt by a surety” pointed to the view that Adsteam could prove for the full $15 million undiminished by receipt of the $5 million. His Honour did not decide whether or not the analogy should be adopted.

170 The positions of Lumley and Adsteam changed to some extent on appeal, although neither abandoned reliance on the law relating to guarantees. It is sufficient to explain why I do not think there is a viable analogy.

171 Put shortly, the bond was not a guarantee Despite the reference in cl 5(1) of the contract to the insurer being jointly and severally bound with Oceanfast Marine, the bond itself was not a promise that Lumley would answer for the debt or obligations of Oceanfast Marine. It was a promise that Lumley would pay money to Adsteam if Adsteam demanded payment and provided a copy of a notice of non-performance and a particular certification. It recorded a primary obligation on Lumley’s part, and the description of a guarantee would have been a misnomer (see Wood Hall Ltd v The Pipeline Authority at 445).

172 The certification was grounded in non-performance of the obligations of Oceanfast Marine, but as between Adsteam and Lumley failure in performance was not the reason for payment. Indeed the money could be paid by Lumley without demand, even before failure in performance. As I have earlier said, the bond was a commercial arrangement under which, in return for the consideration it received, Lumley gave a commitment to Adsteam. As between Adsteam and Lumley the true position as to failure in performance was of no significance. Any resemblance to a guarantee is so remote that there is no warrant for seeking to take up the law relating to guarantees, particularly the technical rules earlier described which in any event can not readily be adapted to the relationship between Lumley, Adsteam and Oceanfast Marine.

173 In the result, therefore, the conclusion that the $5 million was received by Adsteam in partial satisfaction of its claim for $15 million is determinative of the proofs in the administration of Oceanfast Marine. There is no question of double proofs. Adsteam can prove for $10 million and Lumley can prove for $5 million.

174 There was a suggestion in the hearing of the appeal that Lumley’s case on appeal so differed from its case at the trial that it should not be permitted to put the former case. There was some change in stance, but in my opinion not outside the issues at all times under consideration or such that Lumley’s submissions on appeal should not be received.

Proofs in the Administration of Oceanfast

175 This may be dealt with briefly in the light of what has already been said. Adsteam can prove for only $10 million, because its entitlement against Oceanfast as guarantor of Oceanfast Marine’s performance of its obligations under the contract can not rise higher than its entitlement against Oceanfast Marine. Lumley can prove for $5 million under Oceanfast’s indemnity, quite apart from Moule v Garrett. The potential for the rule against double proofs is greater, because Lumley has under the indemnity a ground for proof not linked with the extent of Oceanfast Marine’s liability to Adsteam, but again there is no question of double proofs.

The Result

176 In my opinion the answer given by the trial judge to the separate question was incorrect. The appeal should be allowed. The order dismissing the proceeding should be set aside. The answer to the separate question should be set aside, and it should be answered that the plaintiff is and the fifth, sixth and seventh defendants are not entitled to prove in the administrations of the first and second defendants for the amount referred to in the plaintiff’s proofs of debt identified in paragraph 15 of the Statement of Claim. Consequential declarations and/or orders will be required to dispose of the proceedings, and the proceedings should be remitted to the Equity Division for such further hearing or the making of declarations and orders as may be appropriate. The respondents should pay the appellant’s costs of the appeal and of the trial, and have a certificate under the Suitor’s Fund Act if qualified.

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