Lavin V Toppi Case Study

I FACTUAL BACKGROUND
In Lavin v Toppi, the High Court of Australia considered the application of equitable contribution for co-guarantors/co-sureties to a loan where a creditor had covenanted not to sue one of the guarantors.
Ms Lavin and Ms Toppi were directors and equal shareholders of the company Luxe Studios Pty Ltd (“Luxe”). In 2005, Luxe purchased a property in Sydney for the purpose of running a photographic studio, funded by a loan from the National Australia Bank (“the Bank”). Further loans were made by the Bank in 2007 and 2008. These were consolidated into one loan for the amount of $7,768,000, which was guaranteed by:
• Ms Lavin and her associated company (“the appellants”);
• Ms Toppi and her husband (“the respondents”); and

• Luxe.
Luxe entered receivership in November 2009, and the Bank commenced an action against the guarantors. Following the sale of the business property, Luxe remained indebted for over $4 million, and the Bank pursued the remaining co-guarantors for the outstanding amount. Ms Lavin brought a cross-claim against the Bank to declare the agreement unenforceable as a result of being either unconscionable, pursuant to the Trade Practices Act 1974 (Cth), or unjust, pursuant to the Contracts Review Act 1980 (NSW). They ultimately entered into a deed of release and settlement in September 2010, under which Ms Lavin paid the Bank $1.35 million in respect to the guaranteed debt as part of a settlement sum. The Bank covenanted not to sue Ms Lavin in relation to the guarantee, however, the deed reserved the Bank’s rights to pursue the other parties for payment of the guaranteed debt.
In early 2011, the sale of Ms Toppi and her husband’s home was used to pay approximately $2.9 million of the guaranteed debt, which discharged their obligations to the Bank. They commenced proceedings in the Equity Division of the Supreme Court of NSW, claiming a contribution sum of $773,661.04 from Ms Lavin, equal to half the difference between the amounts paid by the parties for discharging their guaranteed debt obligations. At both first instance, and in the Court of Appeal, Ms Toppi’s claim was upheld.
II LEGAL ISSUES
The main legal issue for determination was:
Whether a surety who pays a creditor a disproportionate amount of a guaranteed debt is entitled to recover contribution from a co-surety when the creditor has given that co-surety a covenant not to sue for payment of the guaranteed debt.
Underpinning this question were two arguments of the appellants concerning the timing of the covenant not to sue. Broadly, they submitted that:
1. The covenant not to sue meant that the appellants’ liability was ‘qualitatively different’ to the respondents’ liability. Accordingly, their liabilities could not be characterised as being coordinate.
2. The respondents’ discharge of the guarantee conferred no real or practical benefit on the appellants, as the appellants had no liability at the time the respondents discharged the remaining guaranteed debt.
III DETERMINATION AND REASONING
A unanimous judgment was delivered by French CJ, Kiefel, Bell, Gageler and Keane JJ, answering the main question in the affirmative and dismissing the appeal.
In reaching their decision, the court criticised the appellants argument with respect to the timing of the covenant not to sue as being ‘novel and unduly technical’. Applying the reasoning of Gibbs CJ in Mahoney v McManus, the court concluded that the natural justice principles underpinning the doctrine of contribution made such a technical approach unwarranted.
Regarding the coordinate liabilities, after stating that the appellants and respondents were clearly bound to contribute equally to the discharge of the guaranteed debt at the time of Luxe’s default, the court then rejected the appellants’ first argument that the covenant not to sue altered the the qualitative nature of this common burden.

In support of this conclusion, the court cited the reasoning of Williams, emphasising the independence of the right of contribution amongst co-sureties from any present rights of a creditor. In further support, the court considered the specific nature of covenants not to sue, noting that they are not intended to discharge liability, so as to not release all co-guarantors, but rather to prevent any enforceability through legal proceedings. The court resultantly concluded that the covenant not to sue did not extinguish, but in fact assumed the continued existence of the appellants’ and respondents’ shared coordinate liabilities, entitling the respondents to recover

contribution.
Regarding whether or not a benefit was obtained by the appellants as a result of the covenant not to sue, the court re-emphasised that the doctrine of contribution is primarily concerned with ensuring liabilities are borne equally by co-sureties. Following this principle, the court readily rejected the appellants’ second argument, applying the reasoning of McHugh J in Burke v LFOT to conclude that their benefit lay in them being unjustly enriched as a result of the covenant facilitating them paying less than their equal share. To further highlight the indefensibility of the appellants’ argument, the court additionally referred the deed’s reservation of the Bank’s rights to pursue other parties for payment, stating it ‘had a positive effect upon the Bank’s willingness to give the appellants the benefit of the covenant not to sue.’
From this reasoning, the court holistically concluded that a separate agreement between a single co-guarantor and creditor would be unable to defeat the right to contribution. In this regard, the court highlighted the longstanding aim of the doctrine of contribution to prevent creditors from discriminating between co-sureties, stating that the appellants’ argument was premised on inviting the court to deviate from this principle. As part of this conclusion, the court considered that the respondents’ right to contribution was ‘cognisable in equity even before the respondents made their disproportionate payment’ and that its defeat would support the kind of dealing equity seeks to prevent. In support of this broad degree of cognoscibility, the court referred to Starke J’s comment that while the availability of contribution at common law was preconditioned on actual payment, equity would support a claim provided the payment or loss was imminent. Accordingly, the court considered equity to recognise and protect the right to contribution in a more flexible and comprehensive way.
IV NATURE OF EQUITY
The outcome of Lavin v Toppi and the court’s analysis of the doctrine of contribution provides a broad platform for illustrating equity’s imperative of delivering a ‘fair’ result in line with the aims of natural justice. The court readily adopted such reasoning in Lavin v Toppi itself, underlining how equity pursues a fair outcome by effectuating the maxims ‘equity is equality’ and ‘equity follows the law’, underpinned by flexible framework to ensure rights are afforded broad protection.
The importance of achieving equality was unambiguous in the court’s analysis, with repeated emphasis placed on the need for co-guarantors to bear their coordinate liabilities equally, as to prevent the unjust enrichment of one guarantor at the expense of the other. Inherent to achieving this end was the court’s separation of the rights of the creditor and the right to seek contribution, pursuant to the reasoning of Williams. By separating these rights and refusing to accept that the covenant not to sue altered the obligation between the co-guarantors, the court was able to reject the appellants’ invitation to permit discrimination of the co-guarantors by the creditor. The court considered that permitting such discrimination would ‘make a common burden a most gross personal oppression.’ This accordingly demonstrates equity’s willingness to intervene to prevent discriminatory outcomes to parties whose rights and responsibilities should otherwise be equal.
Intersecting with this conclusion is the notion that ‘equity follows the law’ and the court’s requirement to concurrently recognise the validity of the covenant not to sue, whilst preventing it from effecting contribution.

In this regard, the court approved of comments in Friend v Brooker that:
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.
In this way, equity and the doctrine of contribution do not inadvertently create unfairness by restricting the rights of a creditor, but instead strive to achieve a fair outcome within the constraints of common law

framework.
Underlying these conclusions was the flexible approach in reasoning adopted by the court, and its intention of affirming the broad range of applicable claimants and circumstances in which equitable contribution can be raised. This approach was critical to the outcome, as it was the court’s criticism and rejection of the appellants’ argument regarding the timing of the covenant not to sue as ‘novel and unduly technical’ which formed the basis for the appeal’s dismissal. By rejecting the appellants’ obtuse characterisation of both the qualitative nature of coordinate liabilities and the benefits of a covenant not to sue, the court highlighted how equity prefers a common-sense, rather than rigid approach, as to negate the potential for technicalities and complexity to unjustly bar claimants.
Further demonstrating flexible reasoning was the court’s contrast between contribution at common law and in equity. In this regard, the court accepted Starke J’s comment that unlike at the common law’s precondition of actual payment, contribution in equity requires only imminence of the loss. In this way, the court considered that ‘equity recognises and protects the co-surety’s equity to contribution in a more flexible and comprehensive way.’