Peter A Clarke

In Friend v Brooker [2009] HCA 21 the High Court, in again taking issue with the New South Wales Court of Appeal, has undertaken a useful review of equitable principles vis a vis co ordinate liability. It has again opted for a stricter construction of equitable principles.

Facts (pars [10] – [ 37])

The facts are quite prosaic and depressingly familiar for those in small business. The Plaintiff/Respondent (Brooker) and Defendant/Appellant (Friend) establish an engineering business together, operating through a company. The Company performs a large job for the sum of $2.5million, in this case for a Council. The account is disputed, at least in part. This results in a liquidity crisis made all the more precarious because the Company’s indebtedness was secured by mortgages over Brooker and Friend properties. Brooker turns to a third party, a friend, for finance. The friend, through a company, loans Brooker $350,000 securing it with a mortgages over properties owned by Brooker family members as well as a guarantee by Brooker. Of the sum lent $330,000 was applied to discharge the Company’s debts. The Council ultimately made payment of a significant amount of the monies outstanding, $900,000, to the company as per a settlement. Brooker, not surprisingly, wants to apply that sum to his outstanding indebtedness which had blown out to $1.1million.

The trial judge dismissed Brooker’s claim and found there was no agreement. The Court of Appeal found, by a 2 – 1 majority, that Friend was liable in equity to contribute though on slightly differing grounds. The President found there was a common obligation arising out of the facts while McColl found there was a fiduciary obligation which required each director to meet an equal share of the capital contribution.

The Decision

Per French CJ, Gummow, Hayne & Bell.

The majority, in a comprehensive analysis, stated that in contribution matters equity is concerned with the equality of exposure of obligers (debtors) to an obligee (creditor). Equity intervenes to ensure that the debtors share a common burden, for example where a creditor seeks to recover only against one debtor, but not where all the obligers may derive some benefit. For equity to apply there must be a co ordinate liabilities regarding a debt (pars 38 & 39). The Court made it clear that it is not necessary to have a common design between debtors for there to be equity for a contribution claim (par 42). That is the key distinction between this cause of action and a claim for contribution at common law (par 43).

As is its way, the current High Court refrained from determining what “community of interest” is sufficient to attract an equitable claim save to say that equity looks to the substance and not merely to the legal form (par 47). Their Honours specifically rejected the Court of Appeal’s formulation that equitable contribution is not confined by legal structures, finding that formulaation as being too abstract. To emphasise that point their Honours specifically stated that the doctrine does not apply merely because the claimant’s payment operates to the financial benefit of the other party (par 48). The absence of a common legal burden militates against an application of the doctrine of equitable contribution. Further undermining Brooker’s claim, in the court’s view, was the fact that there was no imminent threat regarding his indebtedness. On the facts Brooker wasn’t required to repay the entire loan. Equity acts quia timet where the apprehended overpayment is sufficiently imminent (par 52). Unfortunately their Honours sidestepped enunciating specific and distinct principles regarding quia timet powers in contribution suits and resolving what they acknowledged as being uncertainties in the case law (see pars 54 – 61). That is a matter for the Court’s consideration at another time. The court rejected Brooker’s formulation of “common design” for equitable contribution, which the court described as “.. where the equity is found not in the relationship of obligee and co-obligers, but simply in commonality of benefit from the operation of that design.” The court rejected this proposition by reviewing and critisising and then restricting the application of the decision upon which it is based: the judgement of Cooper J in Cummings v Lewis (see pars 63 – 83 for the detailed analysis).

A claim of common design should have some concrete basis arising out of the relationship between the parties beyond shareholding in a company through which a business is conducted (see par 90). Their Honour’s commentary on and rejection of the finding of a fiduciary duty was dealt with briefly with the court accepting Friend’s submission (pars 84 – 86)

Per Heydon J.

His Honour concurred with the majority decision. His analysis was an analysis on more specific issues, such as the inadequacy of the pleadings (par 96 – 100) and the methodology of the Court of Appeal.

Issues

This is a very useful consideration of a very specific claim in equity. The Court continues with a black letter and conservative application of the principles. The Court of Appeal’s more expansive approach has been specifically rejected. Unfortunately the Court has not, as its current approach, sought to provide any detailed formulation beyond general analysis even when acknowledging confusion in the state of the case law.