CASE NOTE: Lavin v Toppi
The High Court of Australia (HCA) in Lavin v Toppi unanimously affirmed that a creditor’s covenant not to sue one co-guarantor does not extinguish another co-guarantor’s right to claim equitable contribution.
I MATERIAL FACTS
Ms Lavin and Ms Toppi were directors and equal shareholders of Luxe Studios Pty Ltd (Luxe). In 2005, Luxe purchased a property for the purpose of operating a photographic studio. The purchase was funded by a loan from the National Australia Bank (NAB). Further loans were made by the bank in 2007 and 2008. These liabilities were consolidated into one loan of $7,768,000 in October 2008, which was jointly and severally guaranteed by Ms Lavin and her company (“Lavin”) and by Ms Toppi and her husband …show more content…
In finding for Toppi, the HCA’s reasoning was underpinned by the fundamental equitable maxims; equity is equality and equity follows the law. The operation of these maxims sheds further light on the rationale for the HCA’s conclusions and, more broadly, helps to explain the nature of equity.
The doctrine of contribution reflects the ‘natural justice’ that equity seeks to provide, by ensuring that parties sharing common obligations contribute proportionally to the fulfilment of that obligation. Thus, the doctrine of contribution is intrinsically linked with the maxim ‘equity is equality’. In Lavin v Toppi, the HCA affirmed that once a creditor called upon the payment of a guarantee by co-sureties, the right of a co-surety to contribution cannot be defeated by any actions of the creditor. Lavin’s assertion that the covenant not to sue extinguished the coordinate liability they shared with Toppi was considered by the court to be an ‘an invitation to accept that it is in the power of the creditor to select his own victim; and, upon motives of mere caprice or favouritism, to make a common burden a most gross personal oppression’. This argument was dismissed as it constituted precisely the type of prejudicial dealing that equity aims to prevent. In general, the notion ‘equity is equality’ dictates …show more content…
According to Vaughan Williams LJ in Bonner, the common law principle of contribution ‘requires a common liability to be sued for that which the plaintiff has to pay, and an interest of the defendant in the payment’. In contrast, his Lordship suggested that the principles of equity were wider and would apply even where there is no ‘common liability to be sued’. On this view, whilst a covenant not to sue could extinguish the right to contribution at common law, it does not have such an effect in equity. Moreover, whilst the common law requires payment of a disproportionate sum to precede the claim for contribution, equity considers this unjust and instead acts quia timet, providing a remedy where unequal payment is sufficiently imminent. Compared to the common law, equity protects the right to contribution in a more comprehensive way, which is consistent with its focus on justice and
The High Court of Australia (HCA) in Lavin v Toppi unanimously affirmed that a creditor’s covenant not to sue one co-guarantor does not extinguish another co-guarantor’s right to claim equitable contribution.
I MATERIAL FACTS
Ms Lavin and Ms Toppi were directors and equal shareholders of Luxe Studios Pty Ltd (Luxe). In 2005, Luxe purchased a property for the purpose of operating a photographic studio. The purchase was funded by a loan from the National Australia Bank (NAB). Further loans were made by the bank in 2007 and 2008. These liabilities were consolidated into one loan of $7,768,000 in October 2008, which was jointly and severally guaranteed by Ms Lavin and her company (“Lavin”) and by Ms Toppi and her husband …show more content…
In finding for Toppi, the HCA’s reasoning was underpinned by the fundamental equitable maxims; equity is equality and equity follows the law. The operation of these maxims sheds further light on the rationale for the HCA’s conclusions and, more broadly, helps to explain the nature of equity.
The doctrine of contribution reflects the ‘natural justice’ that equity seeks to provide, by ensuring that parties sharing common obligations contribute proportionally to the fulfilment of that obligation. Thus, the doctrine of contribution is intrinsically linked with the maxim ‘equity is equality’. In Lavin v Toppi, the HCA affirmed that once a creditor called upon the payment of a guarantee by co-sureties, the right of a co-surety to contribution cannot be defeated by any actions of the creditor. Lavin’s assertion that the covenant not to sue extinguished the coordinate liability they shared with Toppi was considered by the court to be an ‘an invitation to accept that it is in the power of the creditor to select his own victim; and, upon motives of mere caprice or favouritism, to make a common burden a most gross personal oppression’. This argument was dismissed as it constituted precisely the type of prejudicial dealing that equity aims to prevent. In general, the notion ‘equity is equality’ dictates …show more content…
According to Vaughan Williams LJ in Bonner, the common law principle of contribution ‘requires a common liability to be sued for that which the plaintiff has to pay, and an interest of the defendant in the payment’. In contrast, his Lordship suggested that the principles of equity were wider and would apply even where there is no ‘common liability to be sued’. On this view, whilst a covenant not to sue could extinguish the right to contribution at common law, it does not have such an effect in equity. Moreover, whilst the common law requires payment of a disproportionate sum to precede the claim for contribution, equity considers this unjust and instead acts quia timet, providing a remedy where unequal payment is sufficiently imminent. Compared to the common law, equity protects the right to contribution in a more comprehensive way, which is consistent with its focus on justice and