Securities and guarantees are commonly used in both the private
and public sectors in contracts for the provision of goods and
services. The Australian National Audit Office's Better
Practice Guide for Developing and Managing Contracts,
recommends securities and guarantees as useful "where
significant amounts of money are involved or where a substantial
payment is to be made to the contractor prior to the acceptance of
the goods and services".
The recent High Court decision in Lavin v Toppi
reinforces the rights of contribution accorded to co-sureties and
the effect of a covenant not to sue obtained by one of
them–both critical features of a security and guarantee
The first appellant (Lavin) and first respondent (Toppi) were
directors of, and equal shareholders in, Luxe Studios PL (Luxe).
Luxe purchased a property in central Sydney with funding via a loan
from National Australia Bank (Bank), which was guaranteed jointly
and severally by Lavin and Toppi and other parties associated with
them. After Luxe went into receivership some years later and asset
sales were insufficient to discharge the debt, the Bank commenced
proceedings against all guarantors for the outstanding amount.
Lavin and the other appellants later entered into a deed of
release with the Bank whereby the Bank agreed not to sue the
appellants for the debt provided Lavin paid a settlement sum
comprising $1.35 million for the guaranteed debt. This was carried
out, and following Ms Toppi's payment of what remained of the
guaranteed debt in early 2011, the guarantors' obligations to
the Bank were discharged. The respondents then commenced
proceedings in the Equity Division of the NSW Supreme Court
claiming contribution from the appellants in an amount equal to
half the difference between the respective amounts they had each
paid in discharging the guarantee.
The appellants resisted the claim on the basis that, at the time
the respondents had paid the balance of the guaranteed debt, the
appellants were no longer indebted to the Bank because their
covenant not to sue from the Bank had been performed.
High Court decides
At first instance, on appeal in the NSW Court of Appeal and
ultimately the High Court, the appellants' argument was
rejected. The courts' decisions centred around two key
far from extinguishing the appellants' liability for the
guaranteed debt, the Bank's covenant not to sue, in fact
assumed the continuing existence of such a liability, and
the respondents' right to contribution from the appellants
continued to be recognisable in equity throughout the various
payments each party had made and could not be defeated by a
separate agreement between the appellants and the Bank.
The High Court emphasised the legal and equitable foundations of
the right to contribution as a facet of natural justice whereby
those who share a liability to make good a debt must share that
burden pro-rata, and went on to characterise the appellants'
argument as "both novel and unduly technical" and
incapable of defeating the natural justice principle invoked by the
doctrine of contribution.
Implications for agencies
This decision highlights the importance courts will give to the
principles of equity and natural justice underpinning the rights
and obligations of co-sureties under a guarantee, and the inability
of external arrangements made by some only of the co-sureties to
detract from the operation of these principles.
When considering using security and guarantee clauses in
contracts, agencies can be confident that the common obligation of
guarantors to contribute equally to discharging a debt they are
bound jointly and severally in respect of, will be enforced
regardless of any other arrangements the creditor may make with
some only of the debtors, such as a covenant not to sue.
We would like to acknowledge the contribution of Megan
Peterson to this article.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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This decision has implications for Government authorities and corporations, and for private sector project proponents.
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