Obvious Deadline Pty Ltd v Clancy; Clancy v Obvious Deadline Pty Ltd

[2016] NSWSC 1837

Supreme Court

New South Wales

Medium Neutral Citation:	Obvious Deadline Pty Ltd v Clancy; Clancy v Obvious Deadline Pty Ltd [2016] NSWSC 1837
Hearing dates:	28 November – 1 December 2016; further submissions on 5 and 12 December 2016
Decision date:	16 December 2016
Jurisdiction:	Equity
Before:	Stevenson J
Decision:	Guarantor entitled to contribution from co-guarantor of $46,625
Catchwords:	GUARANTEES – where co-guarantor procured payment of debt – where debt overpaid – where part of funds used to pay debt were proceeds of professional negligence proceedings arising from entry by the co-guarantor into the guarantee – what part of amount paid by co-guarantor recoverable from remaining solvent guarantor – where other co-guarantors insolvent – whether proportion of amount recoverable dependent on solvent guarantors when proceedings commenced or when contribution determined
Legislation Cited:	Bankruptcy Act 1966 (Cth)
Cases Cited:	Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342; HCA 55 Duncan Fox & Co v North and South Wales Bank (1880) 6 AC 1 Friend v Brooker (2009) 239 CLR 129; HCA 21 Lavin v Toppi (2015) 254 CLR 459; HCA 4 Mahoney v McManus (1981) 180 CLR 370 Walker v Bowry (1924) 35 CLR 48; HCA 28
Texts Cited:	C Mitchell, P Mitchell, S Watterson, Goff and Jones: The Law of Unjust Enrichment, (9th ed 2016, Sweet & Maxwell) J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies, (5th ed 2014, LexisNexis Butterworths) J O’Donovan and J C Phillips, Modern Contract of Guarantee, (4th ed 2015, Thomson Reuters) S A T Rowlatt, Rowlatt’s Principal and Surety, (1st ed 1898, Sweet & Maxwell
Category:	Principal judgment
Parties:	Obvious Deadline Pty Ltd (Plaintiff/First Cross-Defendant) Robert Llewellyn Clancy (Defendant/Cross-Claimant) SCL Crisp Legal Pty Ltd (Second Cross-Defendant) Glenn Brian Crisp (Third Cross-Defendant) Trout Hall Pty Limited (Fourth Cross-Defendant) John Richard Paul Hunt (Fifth Cross-Defendant) e.law SCL Pty Ltd trading as e.law Legal Services (Sixth Cross-Defendant) Timothy Russell Dewhurst (Seventh Cross-Defendant)
Representation:	Counsel: J P Knackstredt (Trout Hall Pty Limited) L Hammond (Robert Llewellyn Clancy)   Solicitors: Judd Commercial Lawyers (Trout Hall Pty Limited) ITC Law (Robert Llewellyn Clancy)
File Number(s):	SC 2014/381527

Judgment

1. On or about 17 June 2013, the plaintiff, Obvious Deadline Pty Ltd (“the Lender”) advanced $250,000 to SCL Crisp Legal Pty Ltd (“the Borrower)”. The terms of the loan were recorded in a document called “Loan Agreement” made on or about that day.

2. The Borrower was an incorporated legal practice. On 1 October 2013 (some three months after the $250,000 advance), Mr Glenn Crisp, a solicitor, became the sole director of the Borrower. The Borrower was wound up on 30 May 2016.

3. The Loan Agreement included a guarantee of the Borrower’s liability to the Lender by four parties:

1. Mr Crisp;

2. a company associated with Mr Crisp, Trout Hall Pty Ltd;

3. Professor Robert Clancy; and

4. Mr James Clancy.

4. Mr James Clancy entered a Personal Insolvency Agreement under Part X of the Bankruptcy Act 1966 (Cth) on 12 August 2014. He was discharged from that arrangement on 18 November 2016. Mr Crisp became bankrupt on 22 September 2016.

5. The Lender’s claim against Prof Clancy was settled in terms set out in a Settlement Deed executed by him, the Lender, and others on 28 July 2016 (“the July Settlement Deed”). Under the July Settlement Deed, Prof Clancy agreed to “procure” the payment of $550,000 to the Lender. Prof Clancy did “procure” such a payment during August 2016. I will return to that agreement below.

6. When the matter before me commenced, the remaining issues for determination were the Lender’s claim against Trout Hall and Prof Clancy’s claim for contribution against Trout Hall arising from the payment referred to at [5].

7. The Lender sought to recover from Trout Hall the amount it claimed was still owing (despite the payment referred to at [5]) under the 17 June 2013 Loan Agreement.

8. Trout Hall contended that nothing remained owing under the Loan Agreement because:

1. the default interest provisions under the Loan Agreement were void as a penalty;

2. in any event, the Loan Agreement had been varied to provide for lower interest payments; and

3. accordingly, and taking into account the $550,000 payment referred to at [5], not only was there no amount still due under the Loan Agreement, the Lender had been overpaid.

9. On the second day of the hearing, I was told that the claim between the Lender and Trout Hall had settled.

10. On the third day of the hearing, 30 November 2016, the Lender and Trout Hall entered a “Deed of Settlement and Release” (“the November Settlement Deed”).

11. By the November Settlement Deed the Lender:

1. acknowledged that on 10 August 2016 it had received $550,000 “in settlement monies from other parties in [these] Proceedings”;

2. acknowledged that it had received $148,000 “in excess of the monies payable as principal and interest under the Loan Agreement” (on the assumption, stated in a schedule, that interest was to be calculated as if the impugned interest provisions were not in the Loan Agreement, that the Loan Agreement had been varied as Trout Hall contended, and taking into account the $550,000 payment); and

3. released Trout Hall from all claims.

12. On 30 November 2016, by consent, I entered judgment in favour of Trout Hall against the Lender.

13. Prof Clancy’s claim for contribution against Trout Hall then proceeded.

The July Settlement Deed and the payment of $550,000

14. The parties to the July Settlement Deed included the Lender, Prof Clancy, a solicitor, Mr John Hunt, Mr Hunt’s law firm e.Law SCL Pty Ltd and Lawcover Pty Ltd (in its capacity as professional indemnity insurer of the Borrower; which, as I have mentioned was an incorporated law practice).

15. The July Settlement Deed recited:

1. the existence of the Loan Agreement;

2. the claim made by the Lender in these proceedings under the Loan Agreement against the Borrower, Trout Hall, Prof Clancy and Mr Crisp;

3. a claim made by Prof Clancy in a cross-claim in these proceedings against Mr Hunt, his firm e.Law SCL and the Borrower for damages for breach of a duty that each allegedly owed to Prof Clancy to, in effect, ensure that his liability under the guarantee in the Loan Agreement was limited to $125,000; and

4. the agreement of the parties to the July Settlement Deed to resolve those disputes on the basis set out in the deed.

16. That agreement, made without admission of liability by any party, was that, relevantly:

1. Prof Clancy “must procure the payment” of $550,000 to the Lender within 28 days;

2. Lawcover (evidently as professional indemnity insurer for the Borrower) “must pay” the Lender, in accordance with Prof Clancy’s direction, $212,500 within 28 days;

3. e.Law SCL “must pay” the Lender, in accordance with Prof Clancy’s direction, $212,500 within 28 days; and

4. The Lender covenanted not to sue Prof Clancy further under the guarantee.

17. Implicit in the agreement was that Prof Clancy would, himself, pay the Lender the difference between the $550,000 and the sum of the two $212,500 payments to be made by Lawcover and e.Law SCL; namely $125,000.

18. It is also implicit in the agreement that the two amounts of $212,500 represented the fruits of Prof Clancy’s damages claim against the Borrower (represented by Lawcover) and e.Law SCL. Prof Clancy was entitled to receive those funds himself and, if he chose, use them to discharge his liability to the Lender. Instead, Prof Clancy, by the July Settlement Deed, directed that those parties pay those monies to the Lender.

19. e.Law SCL paid the Lender $212,500 on 11 August 2016.

20. Prof Clancy instructed the manager of his superannuation fund to withdraw $125,000 from that fund and use that money to purchase a bank cheque for $125,000 in favour of the Lender. I see no reason to doubt that Prof Clancy was entitled to access his superannuation for this purpose.

21. Prof Clancy’s then solicitor, Mr Michael Garvin gave evidence before me that on 25 August 2016 he attended a “settlement conference” at the office of the Lender’s solicitor. Mr Garvin said he handed the Lender’s solicitor the bank cheque for $125,000 referred to in [20] and witnessed Lawcover’s solicitor hand a bank cheque or trust account cheque for $212,500 in favour of the Lender to the Lender’s solicitor.

22. Mr Knacksredt, who appeared for Trout Hall, directed my attention to a letter sent by Lawcover’s solicitors, Kennedys, to the Lender’s solicitors dated 23 August 2016 (two days before the settlement conference to which Mr Garvin referred) which stated that “we…enclose our Trust Account cheque for $212,500 in favour of [the Lender] representing our client’s contribution to the settlement” and submitted that this letter could not be reconciled with Mr Garvin’s evidence that he saw Lawcover’s solicitor hand over such a cheque at the settlement conference.

23. Mr Knackstredt also cross-examined Mr Garvin to suggest that his recollection was faulty. Mr Garvin rejected that suggestion and said he had a clear recollection of that aspect of the settlement conference (which was, after all, only three months ago).

24. I agree there is a tension between the terms of the letter and Mr Garvin’s stated recollection. Nonetheless, Mr Garvin impressed me as a witness giving honest evidence of his actual recollection of events. I accept his evidence as to what happened at the settlement conference.

25. In any event, even if, as Mr Knackstredt sought to establish, Prof Clancy’s bank cheque of $125,000 was received by the Lender after the two payments of $212,500 from e.Law SCL and Lawcover, those two payments were payments of funds to which Prof Clancy was, by reason of the July Settlement Deed, himself entitled. They represented the agreed proceeds of his damages claim against e.Law SCL and the Borrower which he, as the party entitled to the funds, directed be paid to the Lender.

26. There is no direct evidence as to how or when the Lender applied the funds received from e.law SCL, Lawcover and Prof Clancy.

27. The only insight as to how the Lender applied the funds is a recital in the November Settlement Deed stating that “[o]n 10 August 2016, [the Lender] received $550,000 in settlement monies from other parties in [these] Proceeding[s]”. 10 August 2016 is the day before the Lender received $212,500 from e.law SCL. On any view of the evidence, it received the $212,500 from Lawcover and the $125,000 from Prof Clancy after this date. However, the recital persuades me that I should conclude that the Lender applied the totality of the $550,000 to the amount owing to it by the Borrower on the one occasion (albeit not on 10 August 1016).

28. The Lender was thereby overpaid $148,500. I will return to this.

Prof Clancy is entitled to contribution

29. A claim for contribution is dealt with in equity in accordance with the dictates of “natural justice”. In Friend v Brooker (2009) 239 CLR 129; HCA 21 at [38] French CJ, Gummow, Hayne and Bell JJ stated:

“The ‘natural justice’ in the provision of a remedy for contribution is the concern that the common exposure of the obligors (or ‘debtors’) to the obligee (or ‘creditor’) and the equality of burden should not be disturbed or be defeated by the accident or chance that the creditor has selected or may select one or some rather than all for recovery. Were equity not to intervene, then it would remain within the power of the creditor so to act as to cause one debtor to be relieved of a responsibility shared with another. Equity follows the law in the sense that it does not seek to direct the manner of exercise of the rights of the creditor, but equity does make an adjustment between the debtors. Thus equity does not interfere with the action of the creditor but seeks to ensure the sharing of the burden between those subjected to it.” [Citations omitted]

(See also Lavin v Toppi (2015) 254 CLR 459; HCA 4 at [45].)

30. In Duncan Fox & Co v North and South Wales Bank (1880) 6 AC 1 at 12-13 Lord Selborne said (see J D Heydon, M J Leeming, P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies, (5th ed 2014, LexisNexis Butterworths) at [10-040]:

“The claim certainly has its foundation in the clearest principles of natural justice; for, as all are equally bound and are equally relieved, it seems but just that in such a case all should contribute in proportion towards the benefit obtained by all… And the doctrine has an equal foundation in morals; since no one ought to profit by another man’s loss where he himself has incurred a like responsibility… It would be against equity for the creditor to exact or receive payment from one, and to permit, or by his conduct to cause, the other debtors to be exempt from payment.”

31. The law concerning contribution between co-sureties was summarised by Gibbs CJ in Mahoney v McManus (1981) 180 CLR 370 at 376:

“A surety is entitled to contribution from his co-sureties so that the common burden is born equally and so that no surety is required, as between himself and his co-sureties, to pay more than his due share. The right arises whether the sureties are bound jointly, jointly and severally, or severally, and whether by the same or different instruments, and whether or not the sureties knew of each other's existence, provided that they are liable in respect of the same debt. The right to contribution arises when a surety has paid or provided more than his proper share of the principal debt, but it may also be enforced by a surety who has not made payment; the circumstances in which a surety who has not made payment may enforce a claim to contribution have not been precisely defined, but it appears that he may at least do so as soon as the creditor has acquired a right to immediate payment from him.”

32. Prof Clancy has paid $550,000 to the Lender. As the Lender now accepts (see [11] above), this payment discharged all of the Borrower’s obligations under the Loan Agreement.

33. Prof Clancy paid that sum in his capacity as one of the four guarantors of the Borrower’s obligations to the Lender. Each of those guarantors was under a coordinate liability to meet the Borrower’s obligations. Prof Clancy has discharged those obligations. I do not see what relevance there is in the fact that Prof Clancy did so on a “without admissions” basis (see [16] above).

34. Prof Clancy’s right to seek contribution from his co-guarantors (at least those who were solvent; as to which see below), if it had not arisen earlier, arose when he made the payment (see Mahoney v McManus at 376).

35. Originally, Prof Clancy did not seek contribution in respect of any sum other than the $125,000 that he paid. In his reply submissions, Mr Hammond, who appeared for Prof Clancy, made a faint submission to the effect that Prof Clancy might be entitled to contribution in respect of the two payments of $212,500 made by Lawcover and e.law SCL that Prof Clancy directed be paid to the Lender. I do not accept that submission. Prof Clancy could not seek contribution in respect of the two amounts of $212,500. That is because it would not be equitable for him to receive contribution in respect of those amounts as he has already been indemnified (by Lawcover and e.Law SCL) for them. Indeed, Prof Clancy would be unjustly enriched by any such contribution.

36. But, subject to the question of over-payment, I see no reason why he is not entitled to contribution in respect of the $125,000 that he has paid.

37. The Lender did not, in the July Settlement Deed, release Prof Clancy from his obligations under the guarantee, but merely covenanted not to sue (see [16] above). There can thus be no question of the July Settlement Deed having the effect of releasing the remaining guarantors (see Lavin v Topp at [31]). In any event the Loan Agreement provided that a release by the Lender of any guarantor would not release the other guarantors: cl 16.8. And, even if the other guarantors were released, that would not affect an accrued entitlement to contribution, which “does not depend upon contract, but upon an equity arising out of the mere fact that the parties are sureties for the same principal debt, and in the same engagement with the creditor” (per Starke J in Walker v Bowry (1924) 35 CLR 48; HCA 28 at 59, citing S A T Rowlatt, Rowlatt’s Principal and Surety, (1st ed 1898, Sweet & Maxwell) and see also Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies at [10-160]).

38. I do not see how the release by the Lender of Trout Hall (contained in the November Settlement Deed) could interfere with that entitlement to contribution.

39. At the time of the November Settlement Agreement, Prof Clancy had an accrued right to seek contribution against Trout Hall by reason of his discharge of the debt for which Trout Hall was co-ordinately liable.

40. As the High Court said in Lavin v Toppi at [31], in a corresponding situation, and substituting the names of the parties in these proceedings:

“…[Prof Clancy’s] right to contribution from [Trout Hall] was cognisable in equity even before [Prof Clancy] made [his] disproportionate payment to [the Lender] and could not be defeated by the separate agreement of [the Lender] and [Trout Hall].”

The overpayment

41. I have concluded that, on the one occasion, the Lender applied the $550,000 that Prof Clancy procured be paid to its debt, and was thereby overpaid.

42. The amount in fact due to the Lender represented some 73% of the amount it received (($550,000 - $148,500)/$550,000 x 100 = 73%).

43. Thus, 73% of the $125,000 that Prof Clancy paid to the Lender is attributable to the amount due to the Lender.

44. The balance of 27% was an overpayment by Prof Clancy which, as Mr Hammond accepted in his final submissions, is not recoverable by him from his co-guarantors. Mr Hammond was correct to make this concession. The right to contribution only arises when a guarantor becomes liable to pay more than its fair share of the debt. There is no entitlement to contribution for any amount overpaid: see Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342; HCA 55 at 351 and J O’Donovan and J Phillips, Modern Contract of Guarantee, (4th ed 2015, Thomson Reuters) at [12.1450].

45. Accordingly, the amount in respect of which Prof Clancy can seek contribution from his co-guarantors is 73% of $125,000: i.e. $91,250.

What proportion must Trout Hall contribute?

46. The general rule is that “only solvent co-sureties are required to contribute” (see Modern Contract of Guarantee at [12.1360] citing Mahoney v McManus at 376).

47. Equity directs its attention to the number of solvent co-sureties “at the time when contribution is sought”: for example Gibbs CJ in Mahoney v McManus at 376 and C Mitchell, P Mitchell, S Watterson, Goff and Jones: The Law of Unjust Enrichment, (9th ed 2016, Sweet & Maxwell) at [19-13] and the cases there cited.

48. Mr Knackstredt submitted that the “time when contribution is sought” is the time when a claim by a guarantor for contribution from co-guarantors is made, in the sense of asserted (for example by filing court proceedings) rather than when it is determined.

49. Neither counsels’ researches, nor my own, have revealed any authority dealing directly with this question.

50. Uninstructed by authority, my conclusion is that the justice of the situation requires that the enquiry be made at the time when the question of contribution is being determined: that is now. The relevant principle is that solvent co-sureties must together and equally assume the burden of the debt they have guaranteed (subject to proving in the insolvent estate of any other co-surety and equally sharing the fruits of that exercise: see Modern Contract of Guarantee at [12.1550]). The time to assess how that burden is to be shared must be, in my opinion, at the day of reckoning.

51. There are now only two solvent co-sureties: Prof Clancy and Trout Hall. Mr Crisp was made bankrupt in September 2016. Although Mr James Clancy is now discharged under s 232 of the Bankruptcy Act he is released from provable debts, such as a claim under the guarantee: see s 230(1) of the Bankruptcy Act.

46. Accordingly, my conclusion is that, as there are now only two solvent sureties (Prof Clancy and Trout Hall) they should share equally the burden assumed by Prof Clancy.

47. The result is that Trout Hall should contribute one half of the $91,250 paid by Prof Clancy.

Conclusion

54. The parties should bring in short minutes to give effect to these reasons.

55. I will hear submissions as to costs.

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Decision last updated: 16 December 2016