June 2014

When is a release not a release (and settlement of debt)?

The recent case of Lavin v Toppi [2014] NSWCA 160 is a good reminder to take care when negotiating a settlement to a dispute involving a number of co-defendants or co-sureties. 

Ms Lavin and Ms Toppi were directors and equal shareholders of a company that borrowed money from NAB.  They also guaranteed the facility.  When Ms Lavin entered into a “Deed of Release and Settlement” with the Bank, under which she agreed to pay the Bank less than half the outstanding balance in return for the Bank agreeing to dismiss the proceedings and covenanting not to sue her for the balance.  On the other hand, Ms Toppi reached no agreement with the bank and simply paid the bank the balance of the amount owed by the borrower to the bank.  For a moment there, Ms Lavin must have felt pleased with the result she thought she had managed to achieve for herself.

Unfortunately Ms Lavin’s hard work did not pay off (no pun intended).  After paying a greater amount to the bank than her co-surety, Ms Toppi, commenced proceedings against Ms Lavin seeking equitable contribution from her.  The issue in Leeming JA’s words was –

“Is one co-surety entitled to contribution in equity from another, in circumstances where the creditor has accepted partial payment from the other co-surety, covenanted not to sue that co-surety and agreed to proceedings brought by it against that co-surety being dismissed, when the first co-surety later pays more than the second under her guarantee?”

The short answer is yes.  The co-surety is still entitled in equity to the contribution.  Why?  The Court came to the conclusion for the following reasons.

Conclusions of the Court

  • The settlement between Ms Lavin and the Bank did not deprive Ms Toppi of her right of contribution in equity.  The fact that the Bank and one of the co-sureties reached an agreement could not result in valuable rights being taken away from Ms Toppi behind her back. 

  • A guarantor could agree to qualify or exclude rights of contribution under a guarantee but the terms of the Guarantee did not alter the above equitable position or qualify or exclude rights of contribution.  Furthermore, there was no disentitling conduct by Ms Toppi.

  • A covenant not to sue (in the usual form) does not alter an existing liability.  This is important because Ms Lavin counsel rightly argued that for there to be a right of contribution in equity, the authorities required that the co-ordinate liabilities be of the same nature and to the same extent and that the discharge of the co-ordinate liability conferred a benefit upon the party from whom contribution was sought.  Ms Lavin's counsel then argued that she received no benefit from the payments made by Ms Toppi because of the fact that Ms Lavin entered into the deed of release and settlement.  

In this case, the covenant not to sue did not change the nature of the rights of the parties.  Furthermore, as Ms Lavin’s liability still existed, the extinguishment of that liability by the payments made by Ms Toppi conferred a benefit on Ms Lavin.

For completeness, the Court noted that a dismissal of the proceedings is not the same as judgment for the defendant.

Lessons learnt

This case reinforces the importance of deeds of release documents.  Their terms must be carefully considered and drafted.  If settling a debt owed jointly by two or more parties, as creditor don’t forget to preserve your claim against the co-debtors/surety, if that is intended. 

As a debtor, don’t forget your joint debtor/co-surety has rights of contribution against you.  Those rights of contribution will survive against you unless the debt is released by the creditor or your joint debtor/co-surety is guilty of some disentitling conduct against you (including if she agrees not to exercise those rights against you).

Author: Norman Donato