Smits v Cugola & Ors

In a complex decision arising out of six different applications brought by the plaintiff and by various defendants in proceedings relating to a number of loans and guarantees, Jackson J was required to address a number of novel issues of law. In resolving those issues, his Honour held that: s 4(2) Mercantile Act 1867 only provides a co-surety with a right of subrogation where the co-surety has paid the relevant debt in full; a right to equitable contribution arises – and time begins to run for limitation purposes – at the time a co-surety pays more than his or her proportion of the relevant debt; and, finally, s 127 Land Title Act 1994 does not confer a power on the Court to amend a caveat.

Jackson J

10 June 2021 (delivered ex tempore)

Background

The parties were engaged in a property development at Yeppoon. The plaintiff and defendants orally arranged for the purchase of land from the prior owner. The transaction involved the plaintiff as a significant contributor of security to the lender on the buyer’s side. [4]. A company, Blue Chip Properties (Qld) Pty Ltd (“BCP”) agreed to buy the land. It borrowed money from the Bank of Queensland (“the BOQ”), in the sum of $7.24 million, and the plaintiff, in the sum of $600,000, to do so. [5]. Each of the four defendants gave guarantees to BOQ for BCP’s liabilities under the facilities provided by BOQ. [15]. The plaintiff also guaranteed payment to BOQ of the amount advanced under the BOQ facilities. [18]. The plaintiff’s guarantee was limited to $3 million, while each defendant guaranteed the full principal amount of $7.24 million. [18]. The plaintiff lodged a $3 million deposit in a BOQ account in support of his guarantee and BCP’s borrowing under the BOQ facilities. [19]. The first and third defendant also each gave guarantees to the plaintiff in respect of the money loaned by him. [15], [21].

The development by BCP was not a success. [6]. BCP defaulted on the facilities in 2008. [7]–[8]. Following the default, BOQ appropriated the plaintiff’s $3 million deposit to the balance of BCP’s indebtedness, acting under the plaintiff’s guarantee. [20]. BOQ appointed receivers and managers in 2011. [7]–[10]. In late 2012 and early 2013, BOQ sold the land to the plaintiff and he was released from further liability to BOQ. [11].

The plaintiff brought proceedings against the four defendants concerning the arrangements between the parties. In this decision, Jackson J addressed a number of issues arising out of applications brought by the plaintiff and defendants. These included:

■  whether a co-surety’s partial payment of a debt was sufficient to enliven s 4(2) Mercantile Act 1867;

■  the time at which an equitable right to contribution arises; and

■  whether the Court has power to amend a caveat under s 127 Land Title Act 1994 (“the LTA”).

Construction of s 4(2) Mercantile Act 1867

The plaintiff alleged that each defendant, together with BOQ, was liable to him as a constructive trustee in respect of the appropriated $3 million (together with other amounts) by operation of, inter alia, s 4 Mercantile Act 1867. [44].

Justice Jackson held that the relevant sub-section was s 4(2). [53]. Section 4(2) Mercantile Act 1867 provides that a person who is a surety for the debt or duty of another or being liable with another for any debt or duty who pays such debt or performs such duty “… shall be entitled to stand in the place of the creditor …” [48].

Tracing the origins of s 4(2) Mercantile Act 1867 ([49]–[64]), Jackson J noted that s 4(2) recognised and enacted a co-surety’s equitable right to contribution where that co-surety pays a debt owing to a creditor. [49]. Accordingly, s 4(2) does not give a surety a right of subrogation where no right of indemnity or contribution exists otherwise under the general law. [50], [57]–[58].

Consequently, his Honour held that the right of subrogation in s 4(2) could only apply in circumstances where a surety has paid a debt in full:

“In my view, on the proper construction of the section, the operation of s 4(2) must be confined to circumstances where the whole of the debt to the creditor is paid. Otherwise, upon payment of only part of the debt, a surety would be entitled to call for assignment from the creditor under s 4(1) and to stand in the place of the creditor against the principal debtor and the other
co-sureties under s 4(2), even though the creditor had not been paid in full. That would not be the proper construction of s 4(2), in my view.” [56].

Having only paid part of the debt, the plaintiff was not entitled to be subrogated to the rights of BOQ pursuant to s 4(2). The plaintiff also had no entitlement to subrogation in equity in respect of BOQ’s rights either. [97].

Time when an equitable right to contribution arises

Another of the claims made by the plaintiff was that he had an equitable right to contribution against the first and second defendants as co-sureties based on his payment to BOQ of $3 million under the guarantee that the plaintiff gave to BOQ. [147]. The first and second defendants contended that this claim should be summarily dismissed as it was statute barred.

Justice Jackson observed that a claim to contribution at law is a cause of action in quasi-contract to which s 10(1)(a) Limitation of Actions Act 1974 (“the LAA”) applies. [148]. A claim for equitable contribution by a surety against a co-surety is not specifically provided for, and so it was necessary to consider whether there was a limitation period that could be applied by analogy. [150]. In his Honour’s view, s 10(1)(a) of the LAA was to be applied by analogy, with the effect that the limitation period was six years from when the cause of action arose. Justice Jackson held that “[t]he equitable right to contribution in a money sum arises when the plaintiff has actually paid more than his or her proportion”. [151].

Given the plaintiff paid more than his proportion of the coordinate liability of the co-sureties at the time when BOQ appropriated his $3 million deposit in 2008, Jackson J held that the limitation period expired in 2014. [152]. The first and second defendants were therefore entitled to summary judgment on this part of the plaintiff’s claim. [153].

Power to amend a caveat under s 127 of the LTA

The plaintiff had lodged a caveat under s 122 of the LTA over the home of the first and second defendants claiming an interest, in effect, as equitable chargee. [175]. The first and second defendants applied for its removal under s 127 of the LTA. [176]. Justice Jackson held that the caveat ought to be removed in respect of the second defendant, as the plaintiff did not have an arguable case as to the interest claimed against her. It was not established, however, that the claim against the first defendant was not arguable. [186].

In contrast to the previous position under s 109 Real Property Act 1861, Jackson J held that s 127 of the LTA did not provide the Court with a power to amend the caveat. [187]. As a consequence of this lack of power, his Honour considered that the appropriate course of action was to order that the caveat be removed – as it was not possible to amend the caveat so that it did not apply to the second defendant’s interest.

S Walpole of Counsel