High Court Rules On Contribution

Entitlement to contribution unaffected by a creditor's covenant not to sue

What You Need To Know

• The Full Court of the High Court of Australia has delivered its decision in Lavin v Toppi [2015] HCA 4.
• The Court unanimously held that a surety who pays more than its share of a guaranteed debt can recover contribution from a co-surety despite that co-surety having the benefit of a covenant not to sue from the creditor.

The High Court of Australia has, in a unanimous judgment, held in Lavin v Toppi [2015] HCA 4 that a surety who pays more than its share of a guaranteed debt can recover contribution from a co-surety despite that co-surety having the benefit of a covenant not to sue from the creditor.

The Facts

Ms Lavin and Ms Toppi were each one of multiple appellants and respondents respectively who had jointly and severally guaranteed a bank loan to acompany. When that company went into receivership, the bank commenced enforcement proceedings against all the guarantors. Lavin (but not Toppi) crossclaimed against the bank and subsequently executed a deed of settlement with it. By that deed, Lavin agreed to pay part of the guaranteed debt and to release the bank from all claims, while the bank covenanted not to sue Lavin on the guarantee.

Toppi later discharged the guarantee by paying the (larger) outstanding balance of the debt, and then claimed contribution from Lavin for half the difference of the sum each had paid. Lavin resisted that claim on the basis that the parties were not under "coordinate liabilities" by reason of the bank's covenant not to sue Lavin. The primary judge and NSW Court of Appeal rejected this argument, and Lavin appealed to the High Court.

Coordinate Liabilities

The rationale of the doctrine of contribution is that people under "coordinate liabilities" with respect to a loss should share that burden pro-rata: Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342 at 349-50 per Kitto J. Contribution thus prevents the unjust enrichment of one person at another's expense: Burke v LFOT Pty Ltd (2002) 209 CLR 282 at [38] per McHugh J.

Lavin argued that there was no coordinate liability because Lavin's liability was different from Toppi's liability: the latter was enforceable by the bank while the former was not. Lavin further argued that the discharge of the guarantee had not practically benefitted her because the bank's covenant not to sue meant that at the relevant time, the guarantee was not enforceable against her.

The Decision

The High Court dismissed the appeal and criticised Lavin's arguments as unduly technical. The bank's covenant not to sue had not extinguished Lavin's liability and therefore the parties continued to have coordinate liabilities to the bank. Toppi's entitlement to contribution was further supported by equitable principles.

Effect of The Covenant Not to Sue

The Court explained that the utility of a covenant not to sue lies in the fact that it does not release liability, and therefore avoids the problem of the release of one co-surety operating as a release of all co-sureties. The idea that a covenant not to sue nevertheless altered the existence of coordinate liabilities for contribution purposes was rejected as unsupported by authority.

The bank's covenant not to sue Lavin had not extinguished Lavin's liability; indeed, the covenant was premised on that liability continuing to exist. Furthermore, Lavin's liability could still be indirectly enforced by the bank, such as by relying on rights of recoupment under any further securities that might exist between the bank and Lavin.

Lavin's argument that the discharge of the guarantee had not practically benefitted her was further rejected on the basis that it treated a benefit requirement as somehow distinct from the need for coordinate liabilities. That too was unsupported by authority and was incorrect in principle having regard to the rationale of contribution in the first place. Toppi's discharge of the guarantee had benefited Lavin because it meant that Lavin had ultimately paid less than her share of the debt.

Equity and Timing of Contribution

There was also a more fundamental basis for Toppi's success. In the Court's view, the "irresistible strength" of Toppi's case was clear in equity: if Lavin's argument was correct then it would mean that the bank could select who bore the common burden of the guarantee. That was contrary to the maxim "equity is equality" and could not be accepted.

The Court also explained that a claim for equitable contribution usually arises before the co-surety makes payment to the creditor. For instance, the Court can make a declaration that a co-surety is entitled to equitable contribution provided that payment is imminent and the co-surety is ready, willing and able to pay. In Lavin v Toppi the bank's call on the guarantees gave rise to an entitlement in equity to contribution. Toppi would therefore have been entitled to a declaration of her right to contribution from that time (even though the right to contribution itself may have been conditional upon her meeting her obligations under the guarantee). Nothing could be done by Lavin or the bank thereafter to defeat this entitlement to contribution; not even the entry into the covenant not to sue.

Implications

The case is significant for two reasons.

First, it confirms that a covenant not to sue does not extinguish an underlying liability but simply enjoins the obligee from suing to enforce its rights. That may be significant if the scope of other rights or liabilities depend upon the continuing existence of the liability the subject of the covenant not to sue.

Secondly, and more significantly, the High Court has, by emphasising the equitable principles underpinning the doctrine, clarified that the entitlement of a co-obligor to equitable contribution is not to be defeated by any discriminatory steps taken by the obligee.