This appeal concerned equitable contribution between guarantors. The lender settled with one guarantor for less than half what was owed and in return the lender agreed not to sue. The co-guarantor paid the rest and then sued the guarantor who settled. The guarantor who settled argued that the deed of release denied her co-guarantor the right to contribution. The lower court held contribution available and ordered the guarantor who settled to pay half the difference between the two payments to the lender. The guarantor who settled appealed.
The right to contribution arises:
where a “co-ordinate liability” exists, that is, where liabilities are “of the same nature and to the same extent”;
no later than when the Bank demands payment and commences proceedings; and
is not lost if a co-guarantor enters into a settlement deed with the creditor.
The Appeal Court said:
A covenant not to sue (in the usual form) does not alter an existing liability….. For similar reasons,, the payment of the outstanding debt by the other guarantor did confer a benefit. Prior to the payment, Ms Lavin was liable to pay her share of the guaranteed debt, albeit that the Bank had promised not to enforce it. After the payment, there was no guaranteed debt left to pay.
The Appeal Court noted that this precludes one guarantor with the assistance of the creditor from saddling a co-guarantor with a disproportionate amount of liability. The court also held that nothing in the guarantee changed the right to contribution and there was no disentitling conduct.