High Court finds settlement between one co-surety and lender does not affect other co-surety’s right to claim contribution in equity where contribution disproportionate

Lavin & Anor v Toppi & Ors [2015] HCA 4 (11 February 2015)

The decision of the High Court of Australia confirms and explains the application of the equitable doctrine of contribution between co-sureties. It provides a helpful summary of the law in respect of co-ordinate liabilities and the nature of covenants not to sue, all of which should be kept in mind by co-sureties when settling recovery proceedings brought against them by a lender.

  1. Ms Lavin and Ms Toppi were directors of a company that borrowed millions from National Australia Bank (‘NAB’). Lavin and Toppi guaranteed the company’s facility jointly and severally. The company went into receivership and defaulted under the facility.

  1. NAB issued recovery proceedings under the facility against both guarantors. Lavin (alone) issued a cross-claim asserting that the guarantee was unconscionable and an unjust contract.
  1. Lavin entered into a ‘Deed of Release and Settlement’ (‘Deed’) with NAB in respect of NAB’s proceeding and her cross-claim. Under Lavin’s release, Lavin agreed to pay around $1.35m, a sum less than half the amount owing by the company to NAB, in consideration for which NAB gave a covenant not to pursue her for the balance and dismissed its claim against her. Toppi entered no such deed with NAB and, to discharge the guarantee, paid the net balance in full (around $2.9m), a sum more than half the amount sued for and substantially more than Lavin had agreed to pay.
  1. Toppi commenced proceedings against Lavin in the Equity Division of the Supreme Court of New South Wales claiming equitable contribution from Lavin in the sum of around $770,000 (a sum equal to half the difference between the two amounts paid to NAB), and was successful at first instance.
  1. In Carr v Thomas, the New South Wales Court of Appeal held that in the context of directors’ duties, equitable contribution could be claimed by co-directors, under co-ordinate liabilities to the company; a creditor’s covenant not to sue a particular co-surety had no effect on the rights of the co-sureties inter se. In Lavin, the NSWCA found that the NAB’s covenant in the Deed not to sue her (and the dismissal of the proceeding against her) did not extinguish, but in fact was founded upon, her existing liability under the NAB guarantee, which remained enforceable. Accordingly Lavin’s liability under the guarantee was ‘co-ordinate’ (i.e. of the same nature and extent) with that of her co-guarantor Toppi and the principle from Carr could be applied and equitable contribution ordered.
  1. The High Court unanimously dismissed Lavin’s appeal and agreed with the NSWCA in respect of the above reasoning.
  1. In a key ground of appeal, Lavin asserted that contribution could not be ordered in favour of Toppi where Lavin had derived no real or practical benefit from Toppi’s payment of the balance, as the covenant operated to prevent a further claim by NAB against Lavin.

The High Court gave an overview of the rationale behind the right to contribution, noting its concerned with natural justice as between persons with a common obligation. The High Court rejected this ground of appeal as unduly technical, pointing out inter alia that receipt of some benefit is not a precondition to a claim in contribution and underlined equity’s flexibility in preventing unjust enrichment.

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