Lavin & Anor v. Toppi & Ors [2014] HCATrans 207 (12 September 2014)

Last Updated: 16 September 2014

[2014] HCATrans 207

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S115 of 2014

B e t w e e n -

DOLORES LAVIN

First Applicant

DOLORES LAVIN MANAGEMENT PTY LIMITED ACN 077 840 003

Second Applicant

and

PAOLA TOPPI

First Respondent

NEIL CUNNINGHAM

Second Respondent

BASECOVER PTY LTD ACN 074 145 261

Third Respondent

Application for special leave to appeal

FRENCH CJ
GAGELER J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 SEPTEMBER 2014, AT 12.00 PM

Copyright in the High Court of Australia

____________________

MR M.L.D. EINFELD, QC: If it please the Court, I appear with my learned friend, MR S.M. GOLLEDGE, for the applicants. (instructed by Websters Lawyers)

MR M.R. PESMAN, SC: If it please your Honours, I appear with my learned friend, MR C.E. ALEXANDER. (instructed by Beazley Singleton Lawyers)

MR EINFELD: If the Court please, the requirements for contribution between those with joint liabilities have been restated for Australia by this Court in the recent trilogy of decisions. In Burke v LFOT, in Friend v Brooker and in HIH v Insurance Australia this Court has held that the doctrine requires that the respective parties must be subject to co-ordinate liabilities which must be of the same nature and to the same extent. It is also established by those authorities that the discharge of the burden by one surety – to use the suretyship example – it must confer a commensurate benefit upon the other surety. It is this feature which demonstrates the common interest essential to the entitlement to contribution. Your Honours, in a case of a covenant not to sue, there are two propositions to be considered. The first is that the surety who has received the covenant not to sue such that that surety’s liability becomes effectively irrecoverable at the suit of the creditor may well still have a liability - - -

FRENCH CJ: It is not a release, it is distinguished by - - -

MR EINFELD: It is not a release, certainly not a release, but because it becomes effectively irrecoverable it is not of the same nature and the same extent as the liability of the other surety which remains fully enforceable and recoverable at the suit of the creditor. The second proposition, your Honours, is that the surety who has received the covenant not to sue receives no relevant benefit from the payment by the other surety.

In the court below, Justice Leeming addressed the first question but he answered it simply by concluding that the liability the subject of the covenant not to sue remains. What the Court of Appeal did not do was to take the critical step of ascertaining whether the two remaining liabilities were or not of like nature and extent. That appears from the application book at paragraphs 74 of his Honour’s judgment in which the other members of the Court concurred at page 64, paragraph 74. The essence of the court’s reasoning the ratio of the decisions in three paragraphs 74 to 76. In 74, your Honours will note that the conclusion that:

A covenant not to sue does not alter the liability.

which is acknowledged –

the premise of the covenant is that the liability remains –

also acknowledged –

it is the liability which is the subject of the covenant. There remained a community of interest shared by Ms Lavin and Ms Toppi, at least in the broader sense in which the term was used in equity.

That is the disposition by the Court of Appeal of the question whether the two liabilities – the necessary question, whether the two liabilities remain of the same nature and extent.

FRENCH CJ: You say he uses “community of interest” in too broad a sense?

MR EINFELD: Yes, indeed, in this respect. Community of interest is the concept adopted by this Court by reference to the receipt of the benefit by reason of the discharge of the burden by the paying surety. We will come to that shortly. So that the whole of the reasoning of the Court of Appeal in the judgment is that because the covenant to sue is not the same as a release, therefore, the two liabilities remain of the same nature and extent. In our respectful submission, that completely obviates the necessity to examine that very question which this Court has enunciated and restated in its recent decisions.

GAGELER J: Mr Einfeld, what do you say about the rhetorical question at the end of paragraph 77?

MR EINFELD: The first point is that it does not resolve the present dilemma, your Honour, it does not resolve the question. It, in effect, poses the question which does not – without considering what this Court has said now on several occasions is the prerequisite for determination of whether the liabilities remain co-ordinate and whether the discharge of one by the paying surety endows the other surety with a benefit. So that the question that is asked at the end of 77 simply does not address itself to the criteria which this Court has identified as being those necessary to resolve the question of whether or not the right to contribution remains in this case particularly after receipt of the covenant not to sue.

GAGELER J: You have got two decisions of the New South Wales Court of Appeal against you purportedly applying the criteria but to come to a conclusion against you. Is there any authority you can point to that goes the other way?

MR EINFELD: There is not but the two decisions are this one and the prior one in Carr v Thomas. As Justice Leeming correctly identified, Carr v Thomas was determined on the basis of authority which his Honour accepted was not, in fact, available to found the conclusion to which the Court of Appeal came in Carr v Thomas and, thus, his Honour’s adoption of what we submitted was the correct approach, that is, that it was necessary to consider the matter from a basis of principle rather than by reliance upon authority.

If we are correct that the judgment below miscarried because the court did not have regard to the question – did not determine the question, certainly adversely to us – sorry, did not determine the question by considering the correct criteria, namely, firstly, whether or not the giving or receipt of a covenant not to sue leaves the liability of the surety receiving the covenant as one of the same nature and extent as the surety who has a liability which is entirely at large and totally recoverable.

That decision, we submit, is erroneous and cannot stand as authority for the proposition against us. There is a body of authority in the United States developing that suggests that the time-honoured distinction in this country and England between covenants not to sue and releases is now deserving of reconsideration but that does not really answer your Honour’s question. There is no decision that is squarely in point as his Honour recognised and it was for the reason that there was no authority determinative of the question one way or the other that his Honour accepted that it was necessary to reason it from first principles.

Your Honours, his Honour then turns to the question of “benefit” in 76 and I will return to that in a moment. In our submission, a liability that is for all practical purposes irrecoverable bears a character which is significantly different from a liability which is at large as is the liability – or was the liability of the sureties in this case who did not receive the benefit of the covenant. It is a liability of different nature and it is most certainly a liability to a different extent. Not a question of amount, just the nature of the obligation is entirely different.

May we adopt the terminology of Justice McHugh in Burke v LFOT that the two sureties here post receipt by the applicants of the covenant not to sue were not required to perform substantially the same obligation. If we could very briefly direct your Honours’ attention to the passage in Burke v LFOT at which that appears because it was taken up subsequently by the High Court. It is in [2002] HCA 17; 209 CLR 282. The passage is at 303. It is in paragraph – it commences at paragraph 49 where your Honours will see reference to BP v Esso and in the passage extracted about point 5 of the page, your Honours will note the italicised expression to which his Honour gave emphasis:

the obligation is a common one because each has to perform substantially the same obligation.”

In our submission, where the surety who has received a covenant not to sue for all practical purposes does not have to perform the obligation, that is pay the liability because of the receipt of the covenant not to sue, yet the other surety who makes the final payment does. It cannot be said that the two liabilities relevantly are of like nature and extent as his Honour restates at paragraph 50. Those two passages were adopted and cited with approval but adopted by this Court in HIH v Insurance Australia at the passage to which we have given reference in our written outline and, in our submission, that guides – I am sorry?

GAGELER J: I think I might have just been smiling.

MR EINFELD: Your Honour has a very loud smile. So that, your Honours, in our submission, paragraph 74 which purports to resolve the question does not. The public and commercial and practical significance - - -

FRENCH CJ: You say these are common form provisions?

MR EINFELD: Yes, very common. Can I just deal with benefit then quickly? The benefit question – the requirement for benefit having been enunciated many times including in this Court in the authorities which we have cited at paragraph – in our written outline at page 82, footnote 13, was addressed in paragraph 76 by Justice Leeming and again the resolution of this question is, with respect, unsatisfactory in principle. Simply to say that the discharge of the liability to the creditor confers a benefit because it dispenses with a liability, which remains after the receipt of the covenant not to sue, is not an answer and does not provide a proper analysis of the question.

The correct question is what is, as a matter of substance, the benefit received by, in this case, the applicants who have received a covenant not to sue, what is the practical material benefit as seen by them – to be derived by them from the payment by the other surety? They cannot be sued by the creditor. Their assets are not exposed to the creditor. There is no benefit of any materiality, in our respectful submission, by reason of the paying surety’s discharge of their burden such that the requirement for benefit in

such a case has not been discharged and the Court of Appeal, with great respect, does not provide any reasoning process or any foundation for concluding that it has.

May we just, to conclude, observe that the suggestion below that the time at which co-ordinate liabilities for the purpose of contribution are to be found is the date of the demand by the creditor upon the two sureties or at the latest, as his Honour said, at paragraphs 46 and 47, at the date of the commencement of the proceedings cannot be correct. It is true that that reflects the statement in Glenville Williams and some of the other texts that are extracted, for example, at paragraphs 76 or 77 of the judgment, but it cannot be right. The proposition is denied by the requirement for there to be a relevant benefit received by the surety against whom the claim for contribution is made by reason of the payment made by the other surety. If the payment is made well after demand or after the proceedings commence, it could not be correct that one judges the question of community of interest or co-ordinate nature of the liabilities at any point in time other than the time of payment.

We know from cases like McLean and Albion Insurance in this Court from a long time ago that the right to contribution at common law arises upon payment. The difference between that position and that inequity is that in equity the right arises once the amount of the payment is determinable or ascertainable even if it has not yet been made. That must be so because it is not possible to tell whether or not the paying surety has paid more than his or her or its fair share until the amount of the payment is determined either by the actual payment or by some order or determination. Thus, one has to wait well beyond, in a case such as this, demand and commencement of proceedings in order to determine what benefit – what is the disparity between the payments and what benefit, if any, is to be derived by the surety who has received the covenant not to sue. For those reasons, in our respectful submission, the judgment below miscarried, the reasoning miscarried. The question is one of obvious importance and it warrants a grant of special leave. May it please the Court.

FRENCH CJ: Yes, Mr Pesman.

MR PESMAN: The essential difficulty with the application for special leave in this case arises from the phrase “of the same nature and to the same extent” which is treated by the applicants as being a principle in itself or is, in fact, a direction inquiry. What we say in the present case that expression entails is the nature of the liability is the common obligation of Ms Lavin and Ms Toppi to make payment to the bank in the event of a default by Luxe Studios and the extent of that liability is to make good 100 per cent of the bank’s loss. That is because the expression is directed not to the relationship with the bank but directed to the relationship between the co-sureties inter se.

As much as obvious, with respect, from the BP Petroleum Case relied on in, for example, Friend, and the Court will recall the facts in that case were one of the petroleum companies had a statutory obligation to make good the loss. The other had a contractual obligation and it was the nature and extent of those obligations as between them that founded the right to contribution. So it is, with respect, not correct to say that the liabilities are of a different nature and are not to the same extent, and that is as much as his Honour Justice Leeming found.

The plain fact is that as at 18 May 2011, whether or not it could be enforced, Ms Lavin and her company owed the bank $2.9 million and that liability was discharged entirely by Ms Toppi making that payment. That is the benefit she received, her liability which was still extant was discharged, and to an extent that proposition can be tested by looking at it this way. In 2005, Ms Toppi and Ms Lavin identified, as it turned out wrongly, that what Sydney required was glamorous photographic studios. They incorporated two companies, Luxe Studios and Luxe Productions. They owned those companies equally and they managed those companies jointly. You take it from that that they proposed to share the benefits of those companies if they were successful and equity says that they share the burden. Now, true it is that they marshalled various other entities and human beings to provide security and support of the borrowings of that business - - -

FRENCH CJ: How does that background inform this question which is - - -

MR PESMAN: It informs the question this way. If the Court intervenes in the way that is suggested by the applicants, Ms Toppi will have paid $2.9 million to discharge that common burden. Ms Lavin will have paid $1.35 million to discharge that common burden and the law will change, if the applicants are correct, that that position will maintain because there was a common obligation to make good the bank’s loss for $4.35 million. We paid 2.9 and they paid 1.35. So it will have the effect that while the parties were prepared to share the benefits there will be no sharing of the burden and it is for that reason that liabilities of the same nature and to the same extent.

GAGELER J: You have dealt also with the benefit point, I think?

MR PESMAN: It is, in effect, the same point. The sort of adjectival insertion of words like “practical” or “meaningful” does not alter the fact that the benefit is the discharge of the liability. I think the word in my friend’s submissions is “vestigial”. In the Court of Appeal he used the word “infinitesimal”. But none of those adjectives alter the ultimate outcome which is Ms Lavin had a liability to the bank of $2.9 million which we discharged.

GAGELER J: So the bank could not sue her?

MR PESMAN: Whether or not the bank could sue her or not, and this is the point Justice Leeming makes at paragraphs 74 to 77, the liability was still extant and we discharged it. That, with great respect, conforms obviously with the various statements of principle in Albion and other cases that co-surety should share the burden, pro rata. That is exactly what happened at first instance before Justice Rein and in the Court of Appeal.

Could I just then seek to answer the first question that your Honour Justice Gageler asked my learned friend on the subject of authority? There is, of course, one contrary decision which is Justice McDougall’s decision at first instance in Carr. But other than that, and while it may be that it was dicta or text books, every single time this question has been examined, and his Honour Justice Leeming sets out in some detail those examinations, the conclusion has always been identical and that is the covenant not to sue does not affect the rights of the co-sureties.

As much – to a degree Ms Lavin in entering into the clause set out in paragraph 25 of the judgment at application book 50, although she had started in a position of sharing the burdens with Ms Toppi, she specifically acknowledged by clause 8(c) of the deed she executed that the bank was perfectly entitled to exercise all of its rights against my clients. So she was proceeding on a basis that whatever covenant I get the bank is perfectly within its rights to proceed against Ms Toppi, Mr Cunningham and Basecove. So she was starting from a premise of going back on effect of her obligation to share the burden. If I can say this, if one removes all of the adjectives, the position is clear. There was a liability which we discharged and that is the fundamental basis of contribution in equity.

Can I then briefly turn to the question of when the equity arises? Now, we said in the written submissions that it actually does not matter – that conclusion does not matter if we are correct in the covenant not to sue point, but that should not be taken as an acceptance that there is any doubt about what his Honour said. And while it is true, for example, that the amount of contribution cannot be established as the date of demand, certainly the equity can be enforced in multiple other ways. For example, where a co-surety dies before the question of the ultimate liability to the bank is determined, one can well imagine the ability of a court in equity to grant an injunction to stop the estate being distributed or, for that matter, to grant an asset preservation order, even though the amount is not determined, to ensure that the liability can be met.

There is a similar example arising in the present facts. Before arriving in this Court, the applicants have been running a raft of arguments as to why they should succeed, all of which have now fallen away. But one of them pointed out that at least in the guarantees prior to the 2008 guarantee the company Basecove which is now the third respondent had also been a party. Now, the default position in contribution is that solvent co-sureties contribute pro-rata and the point that was being made was well, there are three on the Toppi side, two on the Lavin side, therefore we are liable for a maximum of 40 per cent. But that default position can be disturbed and was disturbed here for different reasons where, in truth, the underlying transaction is a 50/50 transaction. So, even if one group of parties happens to marshal more co-sureties than the other, nonetheless, the burden is to be shared 50/50 by, as it were, camp.

The reason I say that is, of course, that one of the declarations that could have been sought before any payment was made was the declaration to say that to the extent that we are liable to make payment to the bank, the extent of our liability is 100 per cent as against the bank but 50 per cent in terms of contribution. That was the declaration that could have been sought and granted at any time after the demand was made or the proceedings were commenced. So while, as his Honour observes, it is not necessary finally to determine when the equity arose, it had certainly arisen by the time the proceedings were commenced and his Honour’s decision in that regard is unexceptional.

That being so, when one considers the two aspects of this appeal – actually I might say one more thing. We accept that the covenant not to sue in this circumstance is a commercial commonplace. But we say that militates against a grant of special leave because at the moment, based on authority and the dicta and the persuasive texts, everybody understands what the position is, that is, that the right is not lost. Contrary to paragraph 1 of my learned friend’s submissions that the sky is not falling and the sky will only fall if the Court decides to intervene and we would urge the Court not to do so.

GAGELER J: When will the sky fall on the grant of special leave or if the appeal goes ahead?

FRENCH CJ: Depends which side - - -

MR PESMAN: The sky will fall if the appeal is successful because that will radically alter understood rights of contribution between co-sureties. May it please the Court.

FRENCH CJ: Thank you. Yes, Mr Einfeld.

MR EINFELD: Your Honours, the submission that the relationship for the purpose of contribution is not one which is referrable to the position of the creditor but only as between sureties as a matter of principle is right, save that for two factors; one, in determining the nature and extent of the liability of each of one of two or more co-sureties, it is necessary to determine the nature and scope or extent of that liability, the liability obviously is a liability to the creditor so that the relationship between debtor and creditor has an obvious relevance.

But secondly, and importantly, the very passage from the judgment of Justice McHugh in Burke v LFOT to which we earlier took your Honours focuses not upon that relationship but rather upon the performance by each of the obligors of the obligations which falls upon them and ask the question whether at the relevant time of claim each of them had to perform substantially the same interest. So the question becomes one of the nature of the obligation, not one of the right of the bank or other creditor.

The history of the ventures in this case – briefly cited by our learned friends, in our submission, is unhelpful. The question is almost a pure one of principle. It is untrammelled in this case by any complex factual situation – any factual circumstances or disputes as it has been refined and it is, for that reason, as well, in our respectful submission, an appropriate one for the grant of special leave.

In terms of the suggestion that at the end of the day the respondents will have made a greater contribution to the discharge of the bank’s debt than the appellants is the same one that arises in virtually every contribution case whether it is between insurers, between tortfeasors and other tortfeasors or between tortfeasors and those with a contractual liability and is not to be determined, so this Court has said, including in Friend v Brooker, simply upon some general notion of justice. The question is whether the nature and extent of the respective liabilities are the same and whether or not the discharge of the burden creates a benefit in the other.

Indeed, what our friend describes as being the longstanding authorities and the earlier consideration, he says, of this question on which there, in fact, has been none, because so far as we are aware no one has reviewed – no court has reviewed the question of the effect of a covenant not to sue in light of the statement that the liabilities do require to be of like nature and extent and the discharge of the benefit as the commensurate – the discharge of the burden having the commensurate consequence of benefit is equally no answer to the submissions we make.

Our friend would simply have it that one ought remove the “adjectives” as he puts it. But, of course, that is the question that is thrown up by this special leave application and, in our respectful submission, any appeal that might result. Because the test for contribution has now been stated in terms of comparison of the nature and extent of the liabilities, it requires a qualitative comparison. So much appears from a judgment of this Court in HIH v Insurance Australia at paragraph 55. The decision is reported in [2011] HCA 31; 244 CLR 72, paragraph 55 is at page 92 at which the plurality made reference to the community of interest between obligors as insufficient of itself:

where the obligations in question are qualitatively different, as they are here.

It is our submission that in the case at suit where there is a covenant not to sue there is a qualitative difference so that one cannot dispense with the adjectives and simply say there is a liability and a liability, therefore they are qualitatively alike such that contribution must follow.

Finally, the suggestion that the question of the time at which the co-ordinate liability is required to be found is of no moment cannot be right. Our friends suggest, for example, that in equity one could at an early stage of proceedings seek a declaration that each of the sureties is respectively liable for 50 per cent of the debt. That is not so. This case is a good example. In this particular case, the applicants for special leave filed defences to the bank’s claim asserting – making claims of misleading and deceptive conduct and the like by which they were induced to enter into the guarantee. No such defence was filed by the respondents, so that at that point in time unless and until such a question were tested, absent settlement with one or other party or both, it would not have been possible for the Court to make any such declaration and McLean and Albion stand as authority in this Court for the proposition, as we said earlier in equity, that at least, if not paid before the claim for contribution is made, the quantum of the contribution must firstly be determined in order to determine whether the parties’ contributions are respectively disparate. For those reasons, the application will be granted, in our submission.

FRENCH CJ: Yes, thank you, Mr Einfeld. The Court will adjourn briefly to consider what course it should take.

AT 12.32 AM SHORT ADJOURNMENT

UPON RESUMING AT 12.35 PM:

FRENCH CJ: There will be a grant of special leave in this matter. That would take no more than half a day to a day, Mr Pesman. All right, thank you, the Court will now adjourn to reconstitute for the next matter.

AT 12.36 PM THE MATTER WAS CONCLUDED