Lumley v Oceanfast Marine

[2000] NSWSC 1178

CITATION:	Lumley v Oceanfast Marine [2000] NSWSC 1178
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4692/99
HEARING DATE(S):	29 August 2000
JUDGMENT DATE:	13 December 2000
PARTIES :	Lumley General Insurance Limited (P) Oceanfast Marine Pty Limited (D1) Oceanfast Limited (D2) Ross Stuart Norgard (D3) Bryan Kevin Hughes (D4) Adsteam Marine Charters Pty Limited (D5) Stirling Marine Constructions Pty Limited (D6) Howard Smith Industries Pty Limited (D7)
JUDGMENT OF:	Austin J

COUNSEL :	B A Coles QC with M A Jones (P) J Thomson (D1-D4) G C Lindsay SC (D5-D7)
SOLICITORS:	Baker & McKenzie (P) Blake Dawson Waldron (D1-D4) Freehill Hollingdale & Page (D5-D7)
CATCHWORDS:	INSOLVENCY - proofs of debt in voluntary administration - rule against double proofs - whether creditor and surety can both claim in insolvent administration of debtor when surety has paid creditor under guarantee - whether rule for surety applies to payment in discharge of autonomous obligation - whether payer's proof has priority over creditor's proof, so that creditor may prove only for balance after payment - whether, if creditor may prove for full debt, payer can prove at all
CASES CITED:	Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335 Barclays Bank Ltd v TOSG Trust Fund [1984] 1 All ER 628 Brittain v Lloyd (1845) 14 M & W 762 Edward Owen Engineering v Barclays Bank International [1978] 1 QB 159 Ellis v Emmanuel (1876) 1 Ex D 157 Goodwin v Gray (1874) 22 WR 312 Gray v Seckham (1872) LR 7Ch App 680 Hobson v Bass (1871) LR 6 Ch App 792 Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 IE Contractors Ltd v Lloyds Bank Plc [1990] 2 Lloyd’s LR 496 Loeskow v Avokah Irrigation Pty Ltd (Receiver and Manager Appointed) (Full Federal Court, 7 November 1995, unreported) Moule v Garrett (1872) LR 7 Ex 101 Re a Debtor [1937] 1Ch 163 Re Oriental Commercial Bank, Ex parte European Bank (1871) LR 7 Ch App 99 Re Sass; ex parte National Provincial Bank of England Limited [1896] 2 QB 12 St Martin's Grosvenor Pty Ltd v American Home Assurance Company (NSW CA, 18 March 1977, unreported) The Liverpool (No 2) [1963] P 64 Thornton v McEwan (1862) 1 H & M 525 Western Australia v Bond Corporation Holdings Ltd (No 2) (1992) 37 FCR 150 Westpac Banking Corp v Gollin & Co Limited [1988] VR 397 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443
DECISION:	Separate question answered to effect that creditor may prove for whole debt and payer on performance bond may not prove until creditor is fully satisfied

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

WEDNESDAY 13 DECEMBER 2000

4692/99 LUMLEY GENERAL INSURANCE LIMITED V OCEANFAST MARINE PTY LIMITED & ORS

JUDGMENT

HIS HONOUR:

The proceedings

1   The plaintiff (‘Lumley’) is an insurance company which has issued performance bonds to support the builder's obligations under seven contracts. All of the contracts are for the construction of certain marine vessels, namely tug boats. The purchasers under the tug construction contracts are the fifth, sixth and seventh defendants (‘the Purchasers’). The fifth defendant is the purchaser under Contract 1, the sixth defendant is the purchaser under Contracts 2-6, and the seventh defendant is the purchaser under Contract 7.

2   The first defendant (‘the Builder’) is the builder under the seven tug construction contracts. The second defendant (‘Oceanfast’) has guaranteed the Builder's obligations under the seven contracts, and has entered into a separate deed by which it indemnifies Lumley in respect of the performance bonds. The third and fourth defendants (‘the Administrators’) are the joint and several administrators of the Builder and Oceanfast under a deed of company arrangement.

3   By its statement of claim Lumley complains that the administrators wrongfully:
· disallowed its proofs of debt in the administrations of the Builder and Oceanfast, allowed the Purchasers' proofs of debt, and
· paid dividends to the Purchasers at the rate of 14.72 cents in the dollar of admitted debts.

4   Lumley contends that the Purchasers have been unjustly enriched by the dividend payments to its detriment. It claims relief on the basis that the Purchasers:
· are liable to refund the dividend payments to the Administrators, or
· hold the payments on trust for Lumley, or
· are liable to account to Lumley for the payments.

5 On 21 August 2000 Santow J made an order under Part 31 Rule 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) the Plaintiff; and/or
(b) the Fifth, Sixth and Seventh Defendants,
is entitled to prove in the administration 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.’
6   The case has come before me for the determination of the separate question. I shall express my reasons by reference to Contract 1 and the performance bond issued in support of it. Contracts 1 to 6 are substantially identical, and while Contract 7 is a little different, the differences do not affect my reasoning. The performance bonds are substantially identical to one another. I therefore take the view that the answer to the separate question is the same for all seven tug construction contracts and all seven performance bonds.

Background to the separate question


7   The first six of the seven tug construction contracts were entered into on 8 December 1997. The seventh was entered into on 23 January 1998. Lumley issued performance bonds in respect of the first six contracts on 9 December 1997, and issued a performance bond in respect of the seventh contract on 23 January 1998. Oceanfast and Lumley entered into the deed of indemnity and guarantee on 16 December 1997. I shall examine the terms of these instruments later.

8   The tug construction contracts had reached varying stages of completion on 21 November 1999, when the directors of the Builder and Oceanfast resolved to place those companies in voluntary administration. The Purchasers subsequently cancelled the contracts and on 5 May 1999 they served letters of demand on Lumley demanding payment of the amounts payable under the performance bonds.

9   Lumley paid the full amounts due, adding up to $5,102,276.70 (for simplicity, I shall refer to this sum as $5 million). For the purpose of answering the separate question, I am asked to assume that the Purchasers suffered loss and damage of $15 million as a result of the Builder's breach of the seven contracts.

10   On 25 May 1999 a Deed of Company Arrangement was entered into by the Administrators, the Builder, Oceanfast and Oceanfast Properties Pty Ltd. The Purchasers lodged proofs of debt with the Administrators in respect of the Builder and Oceanfast, in each case claiming the full amount of their loss and damage of $15 million, without any reduction for the payment of $5 million received by them from Lumley. I proceed on the basis that those proofs of debt are valid claims against both companies, subject only to the question whether they should be reduced by $5 million.

11   Lumley lodged proofs of debt totalling $5 million with the Administrators in respect of the Builder and Oceanfast, claiming reimbursement for the payments made to the Purchasers under the performance bonds.

12   The Administrators sought legal advice as to whether the proofs of the Purchasers should be admitted for their full amounts or be reduced by $5 million, and whether Lumley's proofs should be admitted. In an opinion dated 4 November 1999 senior counsel advised that the Purchasers were entitled to prove in respect of the whole of their claims and that Lumley was not entitled to prove. On 18 November 1999 the Administrators notified their rejection of Lumley's proof of debt.

13   Lumley then commenced the present proceedings. The detailed statement of agreed facts produced at the hearing is sufficiently summarised by the above outline, except for an issue (noted below) about whether the performance bonds and deed of indemnity correctly identified Oceanfast (rather than the Builder) as the ‘Contractor’.

The tug construction contract


14   The contract was entered into between the Builder, the Purchaser and Oceanfast. It provides that:
· the Builder is to construct the tug for the basic contract price and supply it to the Purchaser (clause 2);
· progress payments are to be made by the Purchaser at certain specified stages of construction, but the first payment of 15 percent of the basic contract price is to be made on the signing of the contract (clause 9.1);
· the vessel as it is constructed and all components (whether finished or unfinished) appropriated to or intended for the vessel or approved by the Purchaser are the absolute property of the Purchaser, although at the risk of the Builder (clause 22.1);
· the Purchaser is entitled to cancel the contract by notice in writing to the Builder in various circumstances, including where an effective resolution is passed for the administration of the Builder's affairs equivalent to a winding up (clause 25.1);
· Oceanfast guarantees to the Purchaser the due and punctual performance by the Builder of the Builder's obligations under the contract (clause 36).

15   Clause 5 of the contract is in the following terms:
‘5. PERFORMANCE BOND
5.1. 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 a first class insurer or other surety previously approved in writing by the Purchaser to be jointly and severally bound with the Builder in the sum equal to 15 percent of the Australian dollar component of the Basic Contract Price paid to the Builder as specified in Clause 6.1 (a) for the due performance of this Contract, and the said bond shall be substantially in the form of Annexure 2.
5.2. The performance bond referred to in Clause 5 (1) will expire on handover the Vessel to the Purchaser at which point the warranty guarantee (Clause 9(3)) shall become enforceable.’
16   Annexure 2 is a form of performance bond in terms identical with the performance bond in fact issued by Lumley, except that details such as the names of the Contractor and Obligee and the date of commencement are left blank.

The performance bond


17   The performance bond is an instrument signed and issued by Lumley. In its terms the bond instrument identifies a ‘Surety’ (Lumley), a ‘Contractor’ and an ‘Obligee’. In the present case Oceanfast is named as the Contractor and the Purchaser is named as the Obligee. It is noteworthy that the Builder is not named as the Contractor.

18   The principal provisions of the performance bond are as follows:
‘1. At the request of the CONTRACTOR as identified in Item 1 of the Schedule hereto (the ‘Schedule’) and LUMLEY GENERAL INSURANCE LTD (the ‘SURETY’) and in consideration of the OBLIGEE, as defined in Item 2 of the Schedule, accepting this PERFORMANCE BOND (the ‘Bond’) in respect of the performance of the CONTRACTOR under the Contract identified in Item 3 of the Schedule, entered into or to be entered into between the OBLIGEE and the CONTRACTOR 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 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 causes specified in Item 7 of the Schedule.
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.’

19   The performance bond remains in force until the date of issue by the Obligee of a certificate of practical completion (clause 3), and must be returned to the Surety for cancellation on fulfilment of the obligations of the Surety and the Contractor.

20   In some respects the performance bond seems to assume that the Contractor is the person who carries out the works which are supported by the bond. However all seven performance bonds in this case identify Oceanfast rather than the Builder as the Contractor. Some sense could be made of performance bonds in this form because Oceanfast undertakes obligations as a guarantor in the tug construction contracts, and the bonds could be seen to support Oceanfast's performance of its guarantee obligations rather than the Builder's performance of its principal obligations under the contracts. However, the case was argued before me on the basis of a statement of agreed facts according to which the performance bonds are to be treated as relating to ‘default or non-performance of the first and/or second defendant in terms of the conditions’ of the respective tug construction contracts. In other words, I am to assume that the Surety's obligation to pay the Obligee may be triggered by the Obligee's notice of default or non-performance by either the Builder or Oceanfast.

The deed of indemnity and guarantee


21   This is a deed between Lumley as ‘Surety’ and Oceanfast. Oceanfast contracts in two capacities, namely as Contractor and as Guarantor. By clause 2.1 the Contractor unconditionally and irrevocably indemnifies the Surety against all Loss and must upon demand immediately pay the Surety any Loss. ‘Loss’ is defined to mean the aggregate at any time of all payments made and liabilities incurred by the Surety in connection with any bond, guarantee, indemnity or other obligation given or incurred by the Surety to or in favour of any person at the request of the Contractor (including, without limitation, a contract performance bond).

22   By clause 3.1 the Guarantor unconditionally and irrevocably guarantees the punctual performance by the Contractor of its obligations under the deed. The Guarantor must upon demand immediately pay the Surety any Guaranteed Money owing by the Contractor under this deed which is not paid on its due date.

23   A person cannot be surety for the performance of his own obligation. Since Oceanfast is both the Contractor and the Guarantor, the provisions of the deed purporting to impose guarantee obligations on Oceanfast are ineffective. The statement of agreed facts invites the Court to assume that Oceanfast is erroneously described in the deed as the Contractor, but the agreed facts acknowledge that Oceanfast is the entity which agreed, by entering into the deed, to indemnify Lumley against payments made by Lumley connection with the performance bonds. I shall proceed on the basis that Oceanfast has the indemnity obligation under the deed, there is no effective guarantee obligation and the Builder is not a party to the deed.

Autonomous and secondary obligations


24   Suppose that B has or may come to have an obligation to pay money to A, and C promises A to pay A an amount equivalent to the amount B owes or may come to owe A. In commercial law C's obligation may be a secondary or surety obligation, co-extensive with B's obligation, so that C is liable only when B is liable and only to the extent of that liability. Alternatively, C's obligation may be autonomous, so that C must pay A if the conditions stipulated in its contract with A are satisfied. If the only condition of C's payment obligation is that A makes a demand or delivers documents of a specified kind or issues a specified certificate, the payment obligation arises when that condition is satisfied, regardless of the underlying facts - for example, regardless of whether B is in any way in default under its contract with A, and even regardless of whether A is in default under its contract with B: Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443, 459 per Stephen J; see also Chitty on Contracts (27th ed, 1994, Volume II), para 42-008 and cases there cited. The distinction between autonomous and secondary obligations was recognised by the High Court of Australia in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335, especially at 370 per Aickin J, who drew an analogy with promissory notes (as to which, see also Edward Owen Engineering v Barclays Bank International [1978] 1 QB 159), and by Gibbs and Stephen JJ in the Wood Hall case.

25   Autonomous obligations may include such transactions as a documentary credit or standby credit issued by a bank to an exporter on the application of an importer, and a demand guarantee issued by a bank to provide security for the performance of a contract such as a building contract: see A Ward and G McCormack, ‘Subrogation and Bankers' Autonomous Undertakings,’ (2000) 116 LQR 121, 122ff. As Barwick CJ pointed out in the Wood Hall case (at 445), the word ‘guarantee’ is a misnomer in this context (see also Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545, 550). Similar performance ‘guarantees’ may be issued by entities other than banks, such as insurance companies, although when an insurance company is involved the instrument is typically called a performance bond.

26   Although the distinction between an autonomous obligation and a secondary obligation is conceptually clear, it cannot be assumed that every instrument called a performance bond or a bank guarantee is an autonomous obligation, nor that every instrument that uses such words as ‘surety’ and ‘guarantee’ creates only a secondary obligation ( Australasian Conference Association, at 376 per Aickin J). The outcome depends upon the construction of the particular instrument in question: see Australasian Conference Association at 347-8 per Gibbs ACJ; 357ff per Stephen J.

27   The distinction between an autonomous obligation and a secondary obligation might have some significance in the present case. If Lumley's obligation under the performance bond was a secondary obligation in the nature of a guarantee, its entitlement to prove in the administration of the Builder and Oceanfast seems to depend on some subtle rules (explained below) which distinguish between a guarantee of part of a debt and a guarantee of a whole debt to a limited amount. It is unclear whether the same rules apply to an autonomous obligation. The first question to consider is whether Lumley's obligation under the performance bond is an autonomous or secondary obligation.

Were the performance bonds autonomous contracts?


28   Some of the submissions put to me were directed to the question whether the obligation undertaken by Lumley under the performance bonds was or was not a conditional obligation. That, it seems to me, is not quite the question to be answered. The issue is not whether Lumley's payment obligation was subject to conditions, but rather whether the conditions (if any) were merely formal or procedural and capable of being satisfied by the Purchaser regardless of external facts.

29   The obligation undertaken by Lumley in clause 1 of each performance bond was to pay an amount upon demand by the Purchaser. Clause 4 speaks of the Purchaser notifying Lumley in writing that it desires payment to be made of the whole or part or parts of the Bond amount, enclosing a copy of the written notice of non-performance required by clause 1. The written notification referred to in clause 4 is presumably the demand referred to in clause 1. Thus the making of a demand in accordance with the performance bond is a condition of Lumley's payment obligation (‘the demand condition’).

30   The amount to be paid by Lumley under clause 1 was an amount, not exceeding the specified Bond amount, certified by the Purchaser as arising from the default or non-performance of the Contractor in terms of the conditions of the Contract. Thus, Lumley's obligation to pay a specific amount was conditional on the Purchaser certifying that the amount arose from the Contractor's default or non-performance (‘the certification condition’).

31   Clause 2 is a proviso to clause 1. It expands and clarifies the demand condition by making clear that the demand is to be made by a letter of demand from the Purchaser to Lumley. Clause 2 also requires that the Purchaser must ‘first’ (that is, before Lumley's payment obligation arises) give Lumley a written notice stating ‘details’ of the default or non-performance by the Contractor and stating that such default or non-performance arose due to circumstances within the control of the Contractor.

32   In my view clause 2 contemplates that the certification (that the amount claimed arises from the default or non-performance of the Contractor in terms of the conditions of the Contract) will be included in the written notice. By specifying that the written notice and the letter of demand must be delivered to Lumley, and saying nothing about any separate certification, it probably requires by implication that the certification be included in the notice. This conclusion is reinforced by clause 4, which appears to contemplate a single ‘notice of non-performance’.

33   The demand condition is a procedural or formal condition which is entirely consistent with the view that the performance bonds are autonomous contracts. While it would be theoretically possible for an autonomous payment obligation to arise without demand, all of the examples of autonomous obligations mentioned earlier in this judgment are cases where the payment obligation is conditional on a demand being made.

34   As a matter of construction, the certification/notice condition is also of a procedural or formal kind. It does not, in terms, depend on the truth of the underlying facts asserted by the certificate and notice, subject presumably to the implied limitation that the certificate and notice have been given in good faith and not fraudulently. Nor does it require the Purchaser to have made a claim on the Contractor for its loss, in contrast with the performance bonds that were considered by the English Court of Appeal in the IE Contractors Ltd v Lloyds Bank Plc [1990] 2 Lloyd’s LR 496. Clause 1 requires the Purchaser to certify that the amount arises from default, rather than requiring that in fact the amount arises from default. The operative event is the certification. Clause 2 obliges the Purchaser to give a written notice stating certain matters, rather than requiring that the stated matters exist. Again the operative event is the giving of the notice, rather than the existence of the matters stated in the notice. This conclusion is reinforced by clause 4,according to which Lumley undertakes to make payment within seven working days of receipt of the Purchaser's notice ‘notwithstanding any notice given by the Contractor not to pay same’.

35   The performance bond refers to Lumley as ‘the Surety’, and clause 5.1 of the tug construction contract contemplates delivery of a bond from a surety. But the use of the word ‘surety’ as a convenient designation for Lumley cannot alter the construction that emerges from the substantive provisions of the instrument. Nor does it matter that clauses 3 and 7 of the bond define the point of termination by reference to performance by the Contractor.

36   In reaching my conclusion that the performance bonds are autonomous contracts, on their proper construction, I do not rely on any presumption. I note, however, that if there is any presumption in circumstances such as the present, it points in favour of the construction that I prefer. In the IE Contractors case, Staughton LJ observed that there was a ‘bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts’ (at 500), although he noted that the presumption is rebuttable if the meaning is plain.

37   Commercially the arrangement provides a form of indemnity protecting the Purchaser from the financial consequences of default by the Contractor, while protecting Lumley from any obligation to investigate whether the Contractor is really in default. The fact that the performance bond provides a form of ‘security’ to the Purchaser in respect of the Contractor's performance does not entail that the arrangement is a secondary rather than an autonomous contract: Wood Hall , at 445 per Barwick CJ. The cost of providing protection to Lumley is borne by the Contractor, in the sense that if Lumley pays after receiving an incorrect demand and notice, the Contractor has no recourse against Lumley and must fully indemnify Lumley for the payment.

38   The commercial structure of the arrangement is confirmed by clause 2 of the deed of indemnity and guarantee. Clause 2.1 obliges the Contractor ‘unconditionally and irrevocably’ to indemnify Lumley against all ‘Loss’, defined in clause 1.1 by reference to the payment or settlement of claims, rather than payments made by Lumley in consequence of the Contractor's real default. By clause 2.4 (a) the Contractor agrees that Loss includes ‘any payment made on a claim under a Bond which Lumley makes in the belief that it is obligated to make the payment notwithstanding that it may not be so obligated’. This is incompatible with the idea that Lumley's obligation is merely a secondary obligation coextensive with the Contractor's obligation to the Purchaser.

39   In summary, the performance bond is a commercial contract of the kind described by Stephen J in the Wood Hall case (at 457), as follows:
‘Not only does the clear, indeed empathic, language of these guarantees preclude the introduction of any such qualification: to introduce such a qualification would be to deprive them of the quality which gives them commercial currency. 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 according 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’.

40   In my view a payment obligation is ‘unconditional’ in his Honour's sense where there are some conditions for payment (such as the making of a demand or the delivery of a document), as long as the conditions are merely formal or procedural and within the control of the person making a demand.

41   Lumley invites the Court to contrast the performance bond with the unconditional bank guarantee in the Wood Hall case, which was held to create an autonomous obligation. It is true that in that case the bank's undertaking was to pay ‘unconditionally’ on demand. There was no requirement for certification of default by the contractor, and the bank guarantee did not tie the amount to be paid by the bank to the amount of loss arising from a default. But here, as there, the obligation to pay is expressed to depend on nothing more than the receipt of documentation by the payer (a demand in that case, and a letter of demand and notice in this case). In my opinion nothing in the Wood Hall case is an obstacle to the construction of the performance bonds that I favour.

42   The next question is whether, where payment is made to the creditor under an autonomous contract of the kind present in this case,
· the autonomous payer has a right of recovery against the debtor for the amount of the payment;
· the creditor's right of recovery against the debtor is reduced by the amount of payment.

43   Before considering this question, it is necessary to explore the rules governing whether payment of part of a debt by a surety reduces the creditor's right of recovery against the debtor, since it has been suggested that these rules apply by analogy in the case of autonomous payment.

Effect of payment of part of debt by surety


44   If a surety guarantees a quantified part of an ascertained debt, payment of the amount guaranteed discharges the surety's liability to the creditor. If the guarantee has been given at the request of the debtor, the surety has a claim against the debtor for the amount it has paid to the creditor under the guarantee, because the debtor is taken to have expressly or impliedly undertaken to indemnify the surety for performance of the guarantee. Even where there is no express or implied promise by the debtor to indemnify the surety, the doctrine of subrogation comes to the surety's aid and permits it to stand in the shoes of the creditor and assert the creditor's right to prove for the debt it has paid (and to rely, as well, on any collateral securities held by the creditor): Westpac Banking Corp v Gollin & Co Limited [1988] VR 397.

45   The creditor, having received payment of part of the debt, can no longer claim that part against the debtor. Consequently if the debtor is in insolvent administration, the surety is entitled to lodge a proof of debt in respect of that part of the debt paid by it, and the creditor's proof of debt must be limited to the remainder of the debt: Barclays Bank Ltd v TOSG Trust Fund [1984] 1 All ER 628, at 641 per Oliver LJ (appeal dismissed: [1984] AC 643). The outcome is sometimes attributed to the rule against double proofs ( Re Oriental Commercial Bank; ex parte European Bank (1871) LR 7 Ch App 99, 103), but if one analyses the effect of the surety's payment one sees that it partially extinguishes the debt and thereby excludes the creditor from proving for that part, and so it is unnecessary to have recourse to the rule.

46   The position is said to be different where the surety guarantees the whole debt, subject to limitation of its liability to a lesser amount than the whole - for example, the guarantee of a debt up to a stated maximum amount (as in Hobson v Bass (1871) LR 6 Ch App 792) or a ‘whole moneys’ guarantee (as in Westpac v Gollin ). A proof of debt by a surety cannot displace the proof of the creditor unless and until the surety has fully discharged all of its liability to the creditor: TOSG Trust Fund at 641. Consequently the surety cannot lodge a proof of debt at all, even if it has paid the maximum amount payable under the guarantee, since the guarantee was for the whole debt and the whole debt has not been discharged. The creditor is entitled to lodge a proof of debt for the whole debt even though it has received a payment from the surety.

47   The distinction between a guarantee of a quantified part of a debt and a guarantee of a whole debt subject to a maximum limit is not an easy one to apply, but it is well-established: Ellis v Emmanuel (1876) 1 Ex D 157; Loeskow v Avokah Irrigation Pty Ltd (Receiver and Manager Appointed) (Full Federal Court, 7 November 1995, unreported). Curiously, a guarantee of the whole of a fluctuating balance (for example, a guarantee of the debit balance in a current account with a bank) with a limit on the liability of the surety is construed as a guarantee of part only of the debt, rather than of the whole debt subject to a limit. Consequently, upon paying up to the limit of its liability, the surety may lodge a proof of debt for that amount, and the creditor cannot do so. The reason for treating a guarantee of a fluctuating balance differently from a guarantee of a fixed debt is that ‘it is considered inequitable in the creditor, who is at liberty to increase the balance or not, to increase it at the expense of the surety’: TOSG Trust Fund case at 65, citing Ellis v Emmanuel at 163-4.

48   However, this position may be reversed by a contractual stipulation between the creditor and the surety to the contrary. For example, a clause that the guarantee is to be in addition, and without prejudice, to any other securities held on account of the debtor and that it is a continuing security notwithstanding any settlement of account, was held to exclude the surety's right to prove in priority to the creditor: Re Sass; ex parte National Provincial Bank of England Limited [1896] 2 QB 12. But the surety's right is not excluded unless there is a clause which can fairly be construed as a waiver of the surety's rights ( Hobson v Bass ), and such a provision will not be routinely inferred ( Gray v Seckham (1872) LR 7Ch App 680).

49   If the performance bonds had, as a matter of construction, created a secondary rather than an autonomous obligation, then in my opinion the obligation would have been a guarantee of a whole debt subject to a maximum limit, not affected by the ‘fluctuating balance’ principle. It would follow that, the creditors (the Purchasers) not having been paid in full, they could prove for the whole amount of their claims, and the surety (Lumley) would not be able to prove.

50   I would reach this conclusion as a matter of construction of clause 5.1 of the tug construction contract and the terms of the performance bonds itself. Clause 5.1 requires a bond in the sum equal to 15 percent of the Basic Contract Price for the due performance of the contract. If the bond were a guarantee, it would guarantee the whole of the performance of the contract rather than merely a part, and the surety would therefore be liable to pay the Purchasers the whole amount of their loss due to the Builder's default, up to the stated 15 percent limit.

51   That construction is supported by the terms of the performance bond. By clause 1 the Surety undertakes to pay on demand a sum not exceeding the Bond amount which the Purchasers certify as arising from the default or non-performance of the Contractor. The amount demanded must be certified to arise from the Contractor's default but provided that the certification is given, the whole of the Purchaser's loss arising from the default may be claimed, up to the maximum limit set by the Bond amount. The bond is not limited to any specified part of the Purchaser's loss arising from default.

52   The ‘fluctuating balance’ principle would not apply, my view, because this is not a case where the creditor is at liberty to increase the amount claimed at the expense of the surety. Here the amount claimed is limited to an amount arising from the default or non-performance of the Contractor in terms of the conditions of the tug construction contract. That is conceptually quite different from a fluctuating debt such as a bank account in overdraft.

53   In the TOSG Trust Fund case the English Court of Appeal applied the ‘fluctuating balance’ principle, by analogy, to an autonomous payment. Oliver LJ (at 66) saw the case as analogous to a guarantee by the banks of the tour operator's liability to its customers, and said that the case was clearly in the same category as a guarantee of a balance which is going to fluctuate from time to time subject to the limit on the surety's liability. The reasoning appears to have been that the misconduct of the tour operator towards its customers would increase the surety's liability, in the same way as operations on an overdraft account would increase the liability of the guarantor of the account balance. In contrast, in the present case the Purchasers are not in a position to increase Lumley's liability, which depends upon certification of a default by the Contractor.

54   Lumley contended, citing Ellis v Emmanuel , that the prima facie rule is or should be that the payer's obligation is an obligation to pay part only of the debt, rather than the whole of the debt to a maximum amount. In my view it does not matter whether that is correct, because any prima facie construction is adequately displaced by the particular documents in this case. Lumley also submitted that the wording of the documents in this case is close to the wording used in Hobson v Bass and Gray v Seckham , in contrast with the wording used in Ellis v Emmanuel , Re Sass and Westpac v Gollin . I find this submission unhelpful, because it seems to me that the construction adopted in each case depends upon the particular wording used in the document or documents in issue. I am satisfied that my construction is consistent with the principles enunciated in all of those cases.

55   If, therefore, the principles relating to payment of part of a debt by a surety have any application by analogy to a case of autonomous payment, they point to the view that the creditors (the Purchasers in the present case) may lodge proofs of debt undiminished by the autonomous payment, and the autonomous payer may not prove until the creditors are fully satisfied.

Effect of payment of part of debt in satisfaction of autonomous undertaking


56   It is not clear that any of these rules have an application to autonomous obligations. First, there is a question whether the autonomous payer (C, in our example) is entitled upon payment to be indemnified by the debtor (A, in our example). There may be an express contract of indemnity, as in the present case. It may be possible to imply a contract of indemnity from the circumstances, if the payer has entered into the autonomous contract at the request of the debtor. In other cases, it may be necessary to rely on a broader principle.

57   A broad principle which might be relevant is the doctrine of subrogation. The principles of fairness that enable a surety who performs his guarantee obligation by paying the creditor to be subrogated to the creditor's rights against the debtor, might seem equally applicable where an autonomous obligation is paid in satisfaction of a debt or other obligation. Arguments against allowing the doctrine of subrogation to apply to bankers' autonomous undertakings have recently been reviewed and found wanting: A Ward and G McCormack, op cit. However, as the Purchasers submitted, in the absence of an obligation of suretyship, it is unlikely as a matter of authority that a right of subrogation will arise: St Martin's Grosvenor Pty Ltd v American Home Assurance Company (NSW CA, 18 March 1977, unreported, per Samuels JA at 8-9).

58   In the TOSG Trust Fund case Oliver LJ found that a right of subrogation was not available in circumstances broadly similar to the present case. He noted (at 60) that in the case before him, the banks had an express right of indemnity from the tour operator, and said:
‘a right of subrogation arises on equitable principles where otherwise the payer might be deprived of any right of recovery ... and I am far from convinced, all other considerations apart, that the equitable principle applies where the payer has already a full and independent right of recovery against the debtor’.

59   Here, as in that case, the payer (Lumley) had an autonomous obligation and was not a surety, and had an express right of indemnity against the debtor (Oceanfast) under the deed of indemnity and guarantee. Oliver LJ's observations are therefore directly applicable.

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 Garrett (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.’

61   That proposition receives additional support in Brittain v Lloyd (1845) 14 M & W 762; 153 ER 683 and Re a Debtor [1937] 1Ch 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.

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.

64   When the autonomous payer meets its obligation to the creditor by making payment, does the payment reduce the debtor's obligation to the creditor? In the present case, did Lumley's payment to the Purchasers of $5 million reduce Oceanfast's liability to the Purchasers from $15 million to $10 million? The issue did not directly arise in the TOSG Trust Fund case because in that case, the agency took an assignment of the customers' claims against the tour operator before the customers were paid. The question was therefore whether there was any implied contractual term preventing TOSG from impeding the banks' right of indemnity and subrogation by keeping the customers' claims alive and causing the agency to prove in respect of them. It was held that there was no such implied contractual term.

65   As a matter of analysis, the answer in the present case must depend upon the express and implied terms of the contract between Oceanfast and the Purchasers. The tug construction contract, clause 5.1, treats the performance bond as a form of security to the Purchaser for the due performance of the contract by the Builder and Oceanfast. 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. The position may have been different if the tug construction contract identified a particular segment of the payment obligation, and provided for a performance bond that would cover the whole of that segment.

66   The contract being silent on the point, there is no contractual basis for treating the payment as reducing the amount payable to the Purchaser by the Builder and Oceanfast. If B has an obligation to pay $X to A under the contract between them, and C pays $Y to A under a separate autonomous contract, prima facie there is no basis for B to contend that his obligation to A has now been reduced to $X minus $Y. In the present case the autonomous obligation of C (Lumley) is triggered by A (the Purchaser) serving a demand and a notice certifying that the amount demanded arises out of the default of B (the Builder or Oceanfast) under its contract with A, but in my opinion that link does not imply that C's performance of the autonomous obligation reduces B's obligation to A.

67   It follows that both Lumley and the Purchasers are entitled to lodge proofs of debt in the administrations of the Builder and Oceanfast. The next question is whether the rule against double proofs prevents the Administrators from admitting both proofs for dividend purposes.

The rule against double proofs


68   In the Oriental Bank case European Bank accepted some bills of exchange in consideration of an undertaking by Oriental Bank to provide funds to meet them on maturity. Subsequently Oriental Bank endorsed and discounted the bills, and then both banks became insolvent. The holder of the bills lodge a proof of debt in the insolvent administration of each of the banks, and recovered the full amount of the bills. One bank was liable as the acceptor, and the other was liable as the endorser, but each was liable for the amount of the face value of the bills. Then European Bank sought to lodge a proof of debt in the insolvent administration of Oriental Bank for damages for breach of the undertaking to provide funds to meet the bills.

69   The English Court of Appeal held that the new proof should be rejected, because it was for ‘substantially the same debt’ as the obligation of Oriental Bank as endorser to pay the face value to the holder of the bills (per Mellish LJ at 102), and ‘there is only to be one dividend in respect of what is in substance the same debt’(at 103).

70   Part of the reasoning in the Oriental Bank case was that if the parties had been solvent and Oriental Bank paid the face value of the bills to the holder, that payment would have reduced the amount which the Oriental Bank was liable to pay European Bank on the undertaking. It seems to me that if this is the underlying reasoning, the case is not about double proofs at all, but is about the more obvious proposition that if a liability has been discharged, no proof of debt can be lodged in respect of that liability.

71   A clearer explanation of the rule was provided in Western Australia v Bond Corporation Holdings Ltd (No 2) (1992) 37 FCR 150, at 163. There French J remarked that the question was a matter of substance rather than form, and while a claim of a creditor in respect of its debt and the claim of the surety in respect of the debtor's failure to indemnify it are distinct claims, in substance they relate to the same debt. Later he said (at 165):
‘The authorities and the principle which underlie the rule against double proofs 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’.

72   A similar approach was taken in the TOSG Trust Fund case. In that case the plaintiff banks became liable to make payments to TOSG under bonds, by virtue of the failure of a tour operator. TOSG used the funds provided by the banks to pay, inter alias, customers who had pre-paid for holidays but had not taken them, but the customers were required to assign their claims in the liquidation of the tour operator to another entity (‘the agency’) before receiving their compensation. The plaintiff banks proved in the liquidation of the tour operator, relying on a right of indemnity arising upon the issue of the bonds. The agency proved in the liquidation in respect of the claims assigned by the customers. The question was whether both proofs should be admitted, or one should be admitted on the basis that the other would be correspondingly reduced. The English Court of Appeal held that the claims of the banks and the agency were in substance claims to the same debt, and therefore the rule against double proofs applied to prevent the liquidators from entertaining both proofs. The Court held that the banks' proofs should be given priority to the proof by the agency.

73   The Court held that the rule would be more accurately styled a rule against double dividends than a rule against double proofs. If the liquidator were permitted to pay out two dividends on what was essentially the same debt, other creditors of the insolvent entity would suffer (per Oliver LJ at 58). This reasoning assumes that both claimants are entitled to make their claims in the insolvent administration - that is, a payment by one claimant to the other has not reduced the receiving claimant's rights against the debtor. The rule is concerned with equity amongst proving creditors: it ‘stems from the fundamental rule of all insolvency administration that, subject to certain statutory priorities, the debtor's available assets are to be applied pari passu in discharge of the debtor's liabilities’ (at 58).

74   As a matter of logic, if C makes a payment to A in relation to B's liability to A, with the consequence that B is liable to indemnify C in respect of that payment, and notwithstanding the payment, B's liability to A remains undiminished, B's obligations to A and C cannot be obligations in respect of the same debt. If they were, C's payment to A would diminish B's liability to A. When the courts about ‘substantially the same debt’ they have in mind a practical and broad approach which ‘transcends close jurisprudential analysis of the persons by and to whom the duties are owed’ ( TOSG Trust Fund case at 58).

75   Applying that approach, my view is that the claims by the Purchasers and Lumley in the administration of the Builder 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 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 the Builder and Oceanfast to default by the Builder 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. 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 operator's default.

Which claimant has the better right to prove?


78   In the TOSG Trust Fund case Slade LJ (at 82) saw the fundamental issue as turning upon a consideration of the express and presumed intentions of the banks and TOSG at the date when the bonds were finalised. With respect, in the absence of express provisions and grounds for implying contractual terms, it seems to me unhelpful to analyse the problem in terms of intentions which can only be presumed. Oliver LJ held (at 61), in somewhat more direct terms, that the question was to be resolved by the application of ‘equitable principles’, by which I take him to have meant principles of fairness. In applying those equitable principles it was appropriate, he said, to refer by analogy to the rules about part payment by a surety. In the case before him, those rules supported the view that the banks should have priority over the agency. In contrast, I have found that in the present case, the analogy of the surety rules supports the view that the Purchasers should have priority over Lumley.

79   Oliver LJ referred to The Liverpool (No 2) [1963] P 64, in which Harman LJ gave priority to the party who was ‘actually out of pocket’. Oliver LJ said that the found nothing inequitable in allowing the banks, who had ‘paid real money’, to recover a dividend on the sums which they had paid, nor in reducing the proofs of the customers, who had ‘received real money in priority to other creditors’, by the amounts which they had in fact received (at 68). Lumley submits that these observations are applicable to the present case. The most equitable outcome, says Lumley, is to allow it to prove and to require the Purchasers to reduce their proofs of debt by the amount they have received from Lumley, because Lumley has paid ‘real money’ and the Purchasers have received ‘real money’ from Lumley in priority to other creditors.

80   I disagree with this submission. I can see that in the TOSG Trust Fund case 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.

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.

Conclusion

82   In my view the answer to the separate question set for determination by Santow J's order of 21 August 2000 is as follows:
‘Having regard to the rule known as ‘the rule against double proofs’, the Fifth, Sixth and Seventh Defendants are entitled to prove, and receive dividends accordingly, in the administration 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, and the Plaintiff is not entitled to have its proofs of debt admitted, nor to receive dividends, until the claims of the Fifth Sixth and Seventh Defendants are fully satisfied.’
83   I shall direct the Fifth, Sixth and Seventh Defendants to bring in short minutes to reflect these reasons for judgment, and I shall stand the matter over to a date next week in order to hear any argument as to costs and the form of the orders. In view of the conclusions I have reached on the separate question, it may be appropriate for me to make an order dismissing the proceedings.
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Last Modified: 12/29/2000