- In 1987 the Claimant ("Mr Hampton") and the Defendant ("Mr Minns") established Banonbury Homes Ltd ("Banonbury Homes"), the share capital of the company being owned in the proportion 80:20 respectively. They signed a joint guarantee in favour of Barclays Bank plc ("the Bank") to secure the indebtedness of the company to the Bank. Banonbury Homes did not prosper and was later wound up owing substantial sums to the Bank. The Bank then recovered from Mr Hampton substantially all that was owed to it by Banonbury Homes. Mr Hampton now seeks a contribution from Mr Minns equal to one-half the amount he was called upon to pay to the Bank. For the reasons given below, the claim succeeds.
The facts: introduction
- Before his association with Mr Minns, Mr Hampton had been engaged in the property business for a number of years. One of the companies he had been involved with was Banonbury Ltd, which he had owned 50:50 with a Mr Jimmy Mole. In about 1987, for various reasons, these two decided to go their separate ways. It is apparent that Banonbury Ltd had fairly substantial cash resources.
- For his part, Mr Minns had been a land buyer with Bovis Homes and had considerable experience in the acquisition of development sites and the obtaining of the necessary planning permissions and other consents required. In late 1987 Mr Hampton and Mr Minns agreed to set up Banonbury Homes as a property development company. The idea was that suitable sites for residential development would be purchased by the company and, with the help of the combined skills of Mr Hampton and Mr Minns, the company would develop the sites for housing and sell the houses at a profit.
- The intention was that Mr Hampton would introduce at least £300,000 by way of loan capital. He also brought the name "Banonbury" to the association, which was a name that had acquired a certain amount of goodwill in the housing construction sector through the activities of Banonbury Ltd. Mr Minns was not in a financial position to put up any capital. The arrangement agreed so far as he was concerned was that he would be employed by Banonbury Homes and receive a salary of £27,500, plus pension contributions and a company car. This was accepted to be a proper remuneration package for someone in his position and with his skills. In the initial stages at least, Mr Hampton was not to receive any director's fees or salary. The shareholding in the company was divided 80:20 between Mr Hampton and Mr Minns respectively. Both became directors of the company.
- Further loan capital to fund Banonbury Homes' operations was provided, in the first instance by way of borrowing from the Bank. A number of sites were identified and the Bank agreed to lend Banonbury Homes various sums to finance the developments. It is only necessary to refer to two of the sites, namely Old Hill in Chislehurst and Spenser Mews in Dulwich.
- While the Bank's lending was secured by a debenture, it also appears that the Bank wished to have the additional security of a personal guarantee and on June 9, 1988, Mr Hampton and Mr Minns both signed the joint and several guarantee for Banonbury Homes' liabilities which is the subject matter of this action. I will refer to its terms later. There is very little evidence surrounding the taking of the guarantee. Although Mr Minns now accepts that he signed it, his evidence, which was not really challenged, is that he can remember nothing about its execution. Mr Hampton's account is that at one of their meetings with the Bank at its Shepherds Bush office they were both asked to sign a guarantee. He said that Mr Minns used to accompany him whenever a visit to the Bank was made. I accept that this is what happened. A form was duly prepared and sent to Banonbury Homes ' local branch in Chislehurst in Kent, and the executed guarantee shows Mr Hampton's and Mr Minns' signatures as having been witnessed by a representative of the Bank in Chislehurst.
- There is some material in the Bank's records which might appear to question whether the Bank really intended to take a guarantee from Mr Minns, in addition to Mr Hampton, but as no evidence was called on this aspect and since the validity of the guarantee was not challenged by Mr Minns, I must take the guarantee at its face value, subject to the arguments to which I refer later.
- The way in which Banonbury Homes' business was conducted was as follows. Mr Hampton was very much the hands-on operator, in the sense that he was the person who was usually out on site, overseeing the company's actual development activities. Mr Minns worked more in the office, handling not only the acquisition of sites but also, as I have said, obtaining the necessary consents and otherwise handling the administrative side of the company. It was he, for example, who corresponded with the Bank. In the witness box, Mr Minns came over as an intelligent and articulate man. His correspondence with the Bank shows to him to have been fully involved with and informed about the company's affairs.
- There was some dispute about which of them was really in charge of the company. I have little doubt that Mr Hampton, being the person who was to provide funds for the company and the 80% shareholder, would ultimately have had the final say had there been any dispute. However, there is no real evidence that such disputes arose and I find that such decisions as had to be made were reached after discussion and were agreed on by both of them.
- Mr Minns' evidence generally about the financial arrangements in relation to Banonbury Homes was that he regarded Mr Hampton as responsible for any funding required. If the company needed more money then it was Mr Hampton who would find it. While this was obviously so, funding was also obtained from the Bank, which Mr Minns was fully aware of.
- The two sites I have referred to, Old Hill in Chislehurst and Spenser Mews in Dulwich, were developed in different ways:
1. Old Hill was developed by Banonbury Homes as a joint venture which was entered into with a Mr Doug Panormo in early 1989. The reason for this was apparently that by the end of 1988 the property market had taken a down-turn and the company had begun to get into cash-flow difficulties. The joint venture with Mr Panormo was therefore designed to inject some further funding into the Old Hill site. There was little evidence about the terms of the joint venture and they do not matter for the purpose of this action. Work on this site started in about mid-1989.
2. The Spenser Mews site was originally purchased with a loan from the Bank but the project was later re-financed with the aid of further borrowing from the Woolwich Building Society, who took a first charge over the property. Again, both Mr Hampton and Mr Minns personally guaranteed this borrowing. The Bank had a second charge over the property.
- As the development of these and other sites proceeded, the property market turned against the company and its financial position became gradually worse and worse. On August 6, 1990, Mr Hampton and Mr Minns agreed that the position was such that the company could no longer afford to pay Mr Minns, and so he was made redundant. In the light of what is said about this event, I should sate that I am satisfied that this decision was not the unilateral act of Mr Hampton, but rather that it was something which both agreed was the only available course of action open to Banonbury Homes. Its financial position was such that it could no longer afford Mr Minns' wages. Since by this stage acquisition of development sites had ceased and the main object was for Banonbury Homes to extricate itself from its financial difficulties, and complete the development and sale of the sites which it had on its books, it is also clear that there was no longer any real need for Mr Minns' skills. The parting was amicable, and Mr Minns in fact continued to work for the company until about the end of September 1990. He was clearly personally interested in how the company fared, if for no other reason that the Spenser Mews site in particular had been his pet project.
- He also retained his office of director after he was made redundant, although his evidence was that this was an oversight (he eventually resigned on 31 May 1991). He had also been appointed company secretary and he continued actively in this role after his redundancy. This involved a certain amount of work, for example in dealing with the various transfers by the company. His explanation for this was that there was no one else in the company who could really take on the role of company secretary and, as I have said, he retained a personal interest in the company's affairs.
- As I have also said, Mr Hampton and Mr Minns had signed a guarantee in favour of the Woolwich Building Society to secure borrowings for the development of Spenser Mews. On September 20, 1990, Mr Minns signed a further joint guarantee with Mr Hampton to secure an additional loan to the company from the Woolwich Building Society. This guarantee plays no part in the dispute but his apparent willingness to sign it shows Mr Minns' continuing involvement and interest in the company and that relations between the two after Mr Minns' departure were amicable.
- The affairs of Banonbury Homes continued to decline, although no evidence was given as to events during this period. On 21 February 1992, and before either the Old Hill or Spenser Mews sites had been completely built out, the Bank formally demanded repayment from Banonbury Homes of £912,579 odd and on the same day made demand on Mr Hampton and Mr Minns under their joint guarantee. Meanwhile a creditor had presented a winding up petition and, on February 26, 1992, the company was compulsorily wound up. On February 27, 1992, the Woolwich Building Society appointed receivers of Spenser Mews and at about the same time the Bank appointed receivers of Old Hill.
- All of the borrowings from the Woolwich and a substantial amount of the borrowings from the Bank were repaid out of the sales of the properties. Mr Hampton was very much involved in this process and the success of his salvage actions was acknowledged by Mr Day, a senior corporate manager of the Bank, who gave evidence. He said that Mr Hampton had been very cooperative and had worked hard; the Bank was very pleased with what he had achieved. Nevertheless, at the end of the day there was a shortfall for which the Bank turned to Mr Hampton rather than Mr Minns, as I shall explain. In all, he claims that £478,400.36 was paid by him under his guarantee liability, and he now claims half of this from Mr Minns.
- I shall explain in due course in more detail what was the source of the monies paid to the Bank in satisfaction of Mr Hampton 's liability under the guarantee, but for the present it is sufficient to say that it was mostly derived from the proceeds of a property owned by Mr and Mrs Hampton known as the White Lodge, which was sold in May 1992. The Bank had a charge over the property which covered both Mr Hampton 's guarantee liability and other personal borrowings of Mr and Mrs Hampton. Part of these monies were put in a suspense account pending resolution of a Barclays Bank v. O'Brien dispute between the Bank and Mrs Hampton. By November 1993 this dispute had been sorted out and £445,866 odd of these proceeds were applied by the Bank to discharge the indebtedness of Banonbury Homes.
- This still left an amount owing, and in February 1996 the Bank agreed to accept a further £20,000, together with the proceeds of some life policies, amounting in total to £32,533, in satisfaction of Mr Hampton's liability. Mr Hampton paid this sum in March 1996.
- This still left a shortfall of some £51,905 but this was written off by the Bank. Any claim by the Bank to recover this sum from Mr Minns is now statute barred.
- There was a point taken by Mr Shanks, who appeared for Mr Minns, that some of these monies should have been applied in the discharge of other indebtedness which Mr Hampton had to the Bank. The Bank, however, had the power to appropriate the monies in the way in which it did and I therefore reject this submission. I therefore find that £478,400.36 was paid by Mr Hampton to the Bank pursuant to the demand which had been made under the guarantee.
- Following the liquidation of Banonbury Homes, it was dissolved. Few of the company's papers have survived. Mr Hampton said about this that, first, the Official Receiver destroyed his records following conclusion of the liquidation "after 1992 ... and since commencement of these proceedings" and, second, that some of his own documents were destroyed by a fire in 1992.
- No claim was made by Mr Hampton on Mr Minns for a contribution as co-surety until 20 November 1997, and the writ in this action was not issued until March 20, 1998. Mr Hampton's explanation for this is that he had been "knocked sideways" by Banonbury Homes's failure in 1992. He did ask the Bank about "assigning the debt" to him but the Bank told him that it would not do that unless he had paid off the indebtedness completely. It is clear from a letter from his solicitors to the Bank of 21 May 1993, that he had at that time discussed with his solicitor the possibility of claims against his co-guarantor. But his evidence was that it was only in 1987, by which time he had settled with the Bank, and when he was talking with his solicitors, that he was told he might have a claim for contribution against Mr Minns and it was not necessary that he should have waited until the whole liability was paid off. In any event, he said that he had no money to proceed with a claim any earlier. I accept his evidence about this, which was not really challenged.
- As to why the Bank turned to Mr Hampton rather than Mr Minns to make recovery, the position was as follows. As I have said, on 21 February 1992, the Bank sent demands under the guarantees to both of them, referring to the guarantee and setting out the liabilities of Banonbury Homes. The demand sent to Mr Minns was sent to an old address and he did not receive it until a date in March. On 23rd March 1992, I infer shortly after he had received the demand, he telephoned Mr Day at the Bank. Mr Day made a note of their conversation, and as to his reactions to it. Although he had no particular recollection of the conversation, I accept the note as being an accurate record of what was discussed. It states as follows:
"Mr Minns, the unlimited Guarantor calls. ... indicating that he could not remember ever signing a Guarantee for Banonbury Homes Limited. Given that he was a middle aged executive with Bovis Homes we find this hard to believe. He feels that the Bank's security position is weak for the fact that for the last 18 months he has not been working with Banonbury Homes Ltd. We point out to him that this is not an effective guillotining of his liability. We also explained to him the rules of subrogation as between the Bank, Hampton and himself. In terms of background assets this is a married man with two children under 10 with another on the way, owns a property which he owns at £270K with debts outstanding of some £225K. There would therefore little to be gained from this Guarantee and we are also aware that he is guaranteed, this time with his full knowledge and recollection [to] the Woolwich Building Society but there is unlikely to much of a call from this source. We are also aware that Hampton is trying to get involved in negotiations regarding the situation with Brian Sparrow. All in all this is a difficult situation but from where we sit at present we do appear to have a perfectly legal guarantee which we may well attempt to [enforce] should there be a shortfall following the sale of the White House. We have also advised [Mr Minns] that he too should receive independent legal advice as to his position."
- Obviously, and as Mr Day confirmed, the personal details about Mr Minns must have been provided by Mr Minns during the conversation. Mr Day was aware of the concept of subrogation and the extent to which the Bank's form of guarantee permitted this, but was unaware of the possibility of one guarantor obtaining contribution from the other. He said that at that stage the Bank was trying to recover all that it could and he was assessing the situation.
- Mr Minns said in evidence that he does not recall much of this conversation. He did recall the question of subrogation being mentioned and realised that that involved the possibility of Mr Hampton having a claim against him, although he said he was very surprised by this. He accepted that he must have talked with the Bank about his own financial position. In fact, he had to accept that at the time his property was up for sale for £340,000 and that the figure which he gave the Bank of £270,000 was "possibly" pessimistic. What also emerged is that Mr and Mrs Minns sold their property for £320,000 in July 1992, having in May 1992 purchased a new property for themselves which was transferred into the sole name of Mrs Minns. He accepted that the Bank's demand might have played a part in their doing this.
- I do not consider Mr Minns was particularly frank about all this. He had just received a demand from the Bank under the guarantee which must have been a very unpleasant shock. As soon as he got it, he contacted the Bank and did what he could to put the Bank off, by trying to cast doubt on the validity of the guarantee and painting a picture of a person whom it would not be worthwhile to pursue. I don't attach any blame Mr Minns for doing this but he can hardly complain if the Bank took him at his word and went after the rather easier prize of Mr Hampton.
- It is also reasonably clear that the Bank did regard Mr Hampton as an easier prize. The Bank's internal documents show that at the time it was known to the Bank that the White Lodge would soon be completed and up for sale and that there might well be sufficient equity there to repay Banonbury Homes's indebtedness.
The Hollies
- This reasonably straightforward history must now be complicated by a number of other strands in the story. The first complicating strand concerns the dealings with the property known as the White House, Keston. This was a site purchased by Mr and Mrs Hampton personally in late 1988 for £950,000. It consisted of a site of about 2.5 acres on which there stood a large 1930's house. As matters turned out, what was done first was to have a new 5-bedroomed house built for them by Banonbury Homes on a three-quarter acre part of the site, to be known as "The Hollies". The budget for the building costs was said by Mr Hampton to be about £300,000. The Bank provided substantial funding to Mr and Mrs Hampton for the purchase price and the building costs, secured by a charge over the property. The Hollies was duly built by Banonbury Homes between about late 1988 and the summer of 1989. When it was completed, Mr and Mrs Hampton, who had been living in the 1930's house on the site, then moved into it. It was used as a showpiece for what Banonbury Homes could do in the way of construction of domestic housing. It was sold by Mr and Mrs Hampton in October 1991 for £865,000. No doubt some or all of the proceeds went to reduce the Hampton's personal borrowings from the Bank. I shall explain what happened to the other part of the site in due course.
- It is one of the matters of complaint by Mr Minns that Banonbury Homes was not properly paid by Mr Hampton for the work which the company did in building The Hollies. Quite what the total cost of the building works was, and how they were paid for, is indeed something of a mystery. The problem is not helped by the fact that, as I have indicated, virtually none of Banonbury Homes's papers have survived.
- Mr Hampton 's evidence was that there was no JCT or other formal written contract between the Hamptons and Banonbury Homes. Mr Hampton managed the site himself during construction. He said that the total sum charged to him by Banonbury Homes was in the region of £300,000, this being a figure which was agreed between him, Mr Minns and Mr Goymer, the company's contracts surveyor. Mr Goymer did not specifically deal with this when he gave evidence but said that he recorded the building costs on this and other sites but was not concerned with how they were paid for. In fact, three invoices rendered by Banonbury Homes to Mr & Mrs Hampton have survived, although these total only some £80,000. As I have said, to help finance the transaction, Mr and Mrs Hampton had obtained various loans from the Bank. A facility letter from the Bank dated 29 November 1988 includes provision for a "new building loan" to Mr Hampton of £200,000 for the construction of The Hollies. Mr and Mrs Hampton's bank statements show a total of £216,000 being transferred into their current account by way of draw-downs on a home loan from the Bank, and corresponding payments out to Banonbury Homes. These transfers took place between December 1988 and August 1989.
- Mr Hampton's evidence, as it emerged in the witness box, was that he provided the balance of the price of the building works via Banonbury Ltd. It is here that the real obscurity starts. As I have said, the initial agreement was that Mr Hampton would inject capital of at least £300,000 into Banonbury Homes. In his witness statement he states that an initial sum of £100,000 was transferred into Banonbury Homes' bank account from the account of Banonbury Ltd in February 1998. A second payment of £111,000 was made in June 1998 to cover the deposit required for the purchase of Old Hill. In August 1989, a third injection of funds was made by him, this time not apparently via Banonbury Ltd, but from the sale of land in Portugal. Finally, he says that in December 1989 he provided a further sum of £100,000, although the actual source of this was not stated. As far as one can see, the means by which funds arrived via Banonbury Ltd was not by the declaration of a dividend or some other method of transferring funds from Banonbury Ltd into Mr Hampton's beneficial ownership but by Banonbury Homes raising invoices against Banonbury Ltd for various services. Thus there was put in evidence, without objection from either side, a letter from Baker Tilley, accountants, from which it is apparent that they had been asked to supply some of the history regarding the funding of Banonbury Homes, obviously for the purposes of this action, and which reads as follows:
"Prior to the formation of Banonbury Homes Ltd, Mr Hampton was the joint owner, with a Mr J Mole, of Banonbury Ltd, a property development company. In the late 80s, they made a decision to part company and form their own separate companies, of which Mr Hampton's was called Banonbury Homes Ltd. They both funded their new companies by way of charges made to Banonbury Ltd. I have the accounts of Banonbury Ltd for the years ended 31 March 1988 and 1989 which show, under the heading administration overheads, Professional fees land property [sic] the charges of:
1988 £259,178
1989 £452,159
The accounts of Banonbury Ltd were prepared and audited by Friend Boyden & Co, Certified Accountants from Pitsea, Essex. Subsequently my old firm, Barron Rowles Bass, were appointed to act for Banonbury Ltd and, although we queried the allowability for taxation purposes of such charges in the Banonbury accounts, they were subsequently allowed by the Inland Revenue. Our concern was based upon the fact that it was difficult to justify what services the new companies had actually provided to the old companies which would justify the tax deduction, when the sole purpose was the transfer of funds from one company to another.
Barron Rowles Bass, subsequently prepared the accounts of Banonbury Homes Ltd for both the years ended 30 November 1988 and 1989. The 1988 accounts show sales income of some £421,000. In support of this figure, I have a photocopy of the company's sales daybook showing that £380,000 of this income arose from charges to Banonbury Ltd.
It is therefore apparent that this is the manner in which Mr Hampton funded the company."
It does not follow from what Baker Tilley say in this letter that the amounts which were charged by Banonbury Homes to Banonbury Ltd corresponded, even as to part, to the value of work done on the Hollies.
- Mr Hampton confirmed in the course of his evidence in the witness box that he was putting money into Banonbury Homes from Banonbury Ltd. He said that Banonbury Homes was so desperate for money that it just "got paid". The problem is, that if one accepts what the Inland Revenue were apparently asked to accept, then the money which was paid to Banonbury Homes was payment for services rendered to Banonbury and the money "introduced" by Mr Hampton by this route was neither loan capital provided by him nor, of course, payment by Mr and Mrs Hampton for the work done by Banonbury Homes on the Hollies. It is not clear how Mr Hampton himself regarded the true nature of these monies.
- Mr Hampton says that Mr Minns, who was in charge of the administration side of the company, was well aware of the way in which Banonbury Homes was being funded and the construction work for the Hollies paid for. It is certainly the case that no complaint about this aspect of the matter was made by Mr Minns at the time. In the course of his cross-examination, he accepted that he knew that some money for it had come from Banonbury Ltd. He said that he was happy that Mr Hampton should deal with the cost of building The Hollies in any way he wished. It didn't really matter to him where the monies came from. I infer from this that as far as he was concerned it did not matter to him if what was due to Banonbury Homes for its work on The Hollies came from Banonbury Ltd, even by the route of Banonbury Homes raising invoices against Banonbury Ltd for work which it perhaps did not do.
- My conclusion on this issue is that the cost of building the Hollies was indeed about £300,000. Some of the money for this, to the tune of the £216,000 which is shown as coming out of Mr and Mrs Hampton's bank account, came from Mr and Mrs Hampton personally. As to the rest, this was covered by the money which came from Banonbury Ltd, although the way this was dealt with was, to put it at its lowest, irregular. The important point for present purposes, however, is that funds for this work by Banonbury Homes were provided by one means or another, and from sources other than the Bank. That is, the level of the company's borrowing with the Bank was not affected by how the work was actually paid for. The significance of this will emerge later.
White Lodge
- Mr Hampton had been trying to find a purchaser for the existing 1930's house on the other part of the White House site but was unsuccessful. After the construction of The Hollies was completed and he and his wife had moved in there, the existing house was demolished and replaced by a new house, which became know as The White Lodge. This work was carried out between about January 1991 and early 1992 (and thus after Mr Minns had left the company).
- Mr Hampton's evidence as contained in an affidavit sworn for the purposes of Order 14 proceedings was that Banonbury Homes did this work, for which it was paid. This was altered in his witness statement served for the purposes of the trial to say that he and his wife constructed The White Lodge. As developed in the witness box, his case was that this time the work was not done by Banonbury Homes but by subcontractors engaged directly by Mr Hampton and that the work was paid for by him and his wife. Mr Hampton said he acted as site manager, being on-site first thing in the morning and then again at the end of his working day. Mr Hampton said the reason why Banonbury Homes was not engaged to do the work was that it was unable to take it on.
- The budget for the work was again about £300,000. In January 1991, the Bank offered Mr and Mrs Hampton a building loan of two-thirds of this amount. Mr Hampton's evidence was that the cost rose to some £330,000 - £350,000 when fixtures and fittings were all provided for.
- Mr Hampton produced a list of payments which he said were made either from Mr and Mrs Hampton's personal bank account, or an account entitled "White Lodge Account", which he had compiled from cheque stubs and which can be cross-referenced to bank statements. His evidence was that these related mostly to the construction of White Lodge. Thy include substantial numbers of cash payments.
- Of these payments, £10,000 is admitted as being attributable to things other than the White Lodge, leaving the sums said to have been spent on The White Lodge via these payments at £316,000, of which about £72,000 represented cash payments. Of the sums not going to the cost of the works for the White Lodge, Mr Hampton said that £5,518 odd went to pay for the company's works at Spenser Mews (and that he was reprimanded by the company's accountant for this) so that he should in any event be given credit for this amount. There was also some fleeting evidence that Mrs Hampton paid for some of the works from her own resources.
- The case against Mr Hampton in relation to the White Lodge is not, however, that any monies were due to Banonbury Homes for the work which it was contracted to do (because it is accepted that it was not contracted to do any work) but that Mr Hampton wrongfully diverted labour and materials from other sites where Banonbury Homes was working to the White Lodge site. Mr Minns was not of course with the company during this phase of its existence and so the evidence in support of this part of his claim comes from materials obtained on disclosure and from a number of other witnesses who were working for Banonbury Homes at the time.
- Of the documents, Mr Shanks, who appears for Mr Minns, points to the shortfall between the admitted cost and what is shown by the cheque stubs and bank withdrawals, and also to the fact that such a large amount is unallocated "cash".
- Of these witnesses, I have already referred to Mr Goymer, who was employed by Banonbury Homes as a contract surveyor until February 1992. In his witness statement he said that during the construction of The Hollies and The White Lodge labour and materials were transferred from the Old Hill and Spenser Mews sites, although he saw no reason why Mr Hampton should not do this (and in the case of The Hollies, of course, there is no dispute that Banonbury Homes was engaged to do work). In cross examination, he confirmed in particular that labour and materials from the Old Hill and Spenser Mews sites were transferred to The White Lodge site, and one of the reasons why work was not progressing on the Spenser Mews site was that materials which had been paid for were going in "other" directions. Mr Sparrow, who was working on-site at Spenser Mews for Banonbury Homes at the time and helping with sales, gave evidence that the site "was being drained of labour and materials". He was not specific, however, as to where he thought they were going. The only other witness called by Mr Minns on this topic was Mr Joy, who was employed by Banonbury Homes on the Spenser Mews site, but he was unable to say anything to his own knowledge.
- Mr Hampton denies that any of this happened. He accepts that Mr Goymer did some of the initial work in obtaining quotes from contractors and his evidence was that occasionally one of Banonbury Homes' vans might have been used to pick up materials. In general, however, the materials being used on The White Lodge were of a different, and far superior, kind than were being used at the company's other sites. The Woolwich Building Society was monitoring work and payments at Spenser Mews and would have alive to any diversion. His evidence was that a large of amount of cash was used to pay contractors on the White Lodge site because this was what they were demanding: it was known that Banonbury Homes was in financial difficulties and he had no personal financial credibility at the time.
- It is unrealistic not to think it quite possible that some Banonbury Homes materials and labour was occasionally used on the White House site without being paid for by Mr Hampton, and I accept the evidence that it was. The difficulty I have, however, is that there is no real evidence as to the value. I am satisfied, having seen Mr Hampton in the witness box and because it is corroborated by the documentary evidence, that at least £316,000 of the building costs came from Mr and Mrs Hampton, and probably more. Mr Dagnall, who appears for Mr Hampton, submits, however, that even if I am satisfied that there was some diversion of labour and materials, the fact was that over £50,000 of the company's debt was written off by the Bank. It follows that unless the value of the diverted labour and materials was more than this sum, reimbursement to the company by Mr Hampton would not have altered the amount he had to pay to the Bank under the guarantee, even though it might have reduced the company's indebtedness to the Bank. While this argument is not particularly attractive, it has a certain logic about it.
- In the end I conclude that the value of any labour and materials re-directed to the White Lodge site was relatively small, and certainly less than £50,000. To conclude otherwise would be find Mr Hampton guilty of a substantial fraud on the company and I do not believe, having heard Mr Hampton give evidence, that this was the case nor do I consider that the other evidence justifies such a conclusion.
- The White Lodge was sold for £1.4m in May 1992 and from the proceeds from this sale £445,866 was, as I have already explained, applied by the Bank against the Mr Hampton's indebtedness under the joint guarantee.
Mr Sparrow and the promissory note
- Mr Sparrow was also indirectly involved in another area of dispute. In early 1990 he had been made redundant and came to work for Banonbury Homes. He was living in rented accommodation and agreed to purchase Plot 2 on the Old Hill site for £150,000. At that time it was only half-built and as the company was strapped for cash he agreed to lend £85,000 to Banonbury Homes, secured by a promissory note dated 22 May 1990 signed by Mr Hampton and Mr Minns. The terms of the note were that the £85,000 was to be repaid, with interest of £15,000, within 12 months or on completion of his purchase of Plot 2, whichever was the earlier. Both Mr Hampton and Mr Minns were confident that Banonbury Homes would be able to repay the full amount as the Old Hill site was built out.
- Mr Sparrow exchanged contracts to purchase Plot 2 on 9 November 1990. Mr Hampton's and Mr Minns' confident expectations of Banonbury Homes's ability to repay Mr Sparrow were not born out as the company slid further and further into financial difficulty. Meanwhile, Mr Sparrow had moved into Plot 2 without paying the balance of the purchase price. After the company had been wound up and receivers appointed in February 1992, this obviously created a difficulty for him. Mr Sparrow took proceedings against Mr Hampton and Mr Minns to recover what was due under the promissory note. He said, and I accept, that he looked primarily to Mr Hampton to sort the matter out and pay him out of the proceeds of the White Lodge or some other development. There was then a meeting or meetings between Mr Sparrow, Mr Hampton, Mr Minns and Mr Panormo to try and settle Mr Sparrow's undoubted claim. Mr Panormo was there because he was involved in the joint venture at Old Hill. The eventual outcome was that, after negotiations, Mr Sparrow agreed to accept £20,000 from Mr Hampton and £20,000 from Mr Minns in settlement. The detail of all this does not matter and all that is relevant is what was alleged to have been said in the course of the meetings. Mr Minns says that in the course of the first meeting Mr Panormo turned to Mr Hampton and asked whether Mr Minns had any "involvement" with the Bank, the inference being that this might affect what Mr Minns was able to contribute. Mr Hampton said, no. Mr Minns also says that at a subsequent meeting, at which there was an argument about how much Mr Hampton should pay to Mr Sparrow, Mr Hampton used the fact that he was having to deal with the Bank as a reason why he could not pay more. Mr Sparrow, who gave evidence, said that Mr Hampton said words to the effect "It's alright for Denis [i.e. Mr Minns], he hasn't got to deal with the Bank"
- The point of all this is that Mr Minns says that so far as he was concerned this all confirmed his understanding that any liability to the Bank was a matter for Mr Hampton and not him.
- Mr Hampton, for his part, does not remember any such question being asked, and neither does Mr Panormo, who also gave evidence. As far as Mr Hampton was concerned, however, the reality of the situation was that the Bank was indeed looking to him to get repaid. It was looking to the sale of the White Lodge to clear the indebtedness and, I as have indicated, this was indeed the case.
- I am willing to accept that something along the lines was said to the effect that it was Mr Hampton, not Mr Minns, who was being pursued by the Bank, and it was thus he who had to deal with the Bank, not least because it is the truth. I do not accept that anything was said which amounted to a representation by Mr Hampton that the Bank would only be looking to him for payment or, more to the point, that he regarded himself as being the only one of the two who was liable to the Bank. Mr Minns' own evidence did not even go this far.
Mrs McCarthy
- Another area of dispute which I need to deal with concerns the sale of one of the properties on the Spenser Mews site. As I have indicated, receivers of this site had been appointed by the Woolwich Building Society in February 1992, who had a first charge over the property. The Bank's lending to Banonbury Homes was also secured by a second charge on the property. At that stage, a number of the dwelling units had been sold but some remained to be sold. Even though receivers had been appointed, it is clear that Mr Hampton continued to be involved in trying to sell the properties. His evidence was that Unit 3 was difficult to sell, because it backed onto the South Circular. A purchaser was found in the form of Mr Hampton's sister-in-law, Mrs Janice McCarthy. The deal which Mr Hampton agreed with her was to sell it for £140,000, but that £40,000 would be left outstanding on a three year, interest-free loan, secured by a second mortgage. The first £100,000 was raised by a conventional home loan and no doubt went to the Woolwich Building Society. Her husband had been in trouble and she had herself recently been evicted and couldn't afford to pay the balance of the purchase price required.
- There is no criticism of the purchase price of £140,000 but it is said that the arrangement to defer the payment of £40,000 by way of an interest free, three year loan to a relative of Mr Hampton was improper. What should have been done is obtain the best terms available on an arms length transaction.
- In fact, Mr Minns, who remained company secretary, witnessed the execution of the transfer of the property by the company, and Mr Hampton's evidence was that Mr Minns knew perfectly well who the purchaser was, having met Mrs McCarthy at a family christening. The fact that there was a deferred payment would also have been apparent to him from the completion statement which he saw. Mr Minns says that it was only after these proceedings had started that he realised that Mrs McCarthy was Mr Hampton's sister-in-law, or that £40,000 had been left outstanding on an interest-free 3 year loan.
- Mr Hampton's evidence was that the Woolwich Building Society and the Bank were quite happy with the arrangement, since there were no other takers for the property. The involvement of the Woolwich Building Society in all this is not very clear, particular whether it had any interest after the first £100,000. The Bank, however, was certainly aware of what had been agreed, and who the purchaser was. It had been told by Mr Hampton that he would personally pay off the £40,000 loan once The White Lodge had been sold, and it was happy with this arrangement (in the event Mr Hampton could not fulfill this obligation).
- As to all this, I accept that Mr Minns did not know that the purchaser was Mr Hampton's sister-in-law. Although he was aware from the completion statement that £40,000 of the purchase price had been left outstanding, I accept he did not know that this was on a three-year, interest free loan. However, I am not satisfied that the transaction was improper. I accept that this property was difficult to sell and the deal was probably about as good as could be obtained elsewhere in a difficult market. I think that it is significant that the transaction was one which the Bank was fully aware of and expressed no dissatisfaction with. No evidence was led on Mr Minns' behalf as to what might have been obtained for the property on a fully arms-length transaction.
The defences
- I turn now to consider the defences which are raised to Mr Hampton's claim. It is not disputed by Mr Murray Shanks that the general rule is that one of two sureties who pays the whole of what is due under a contract of guarantee is entitled to a contribution of one half of that sum from his co-surety. It is said, however, that:
1. The general rule as to equal sharing of the burden was implicity varied in this case, either to 100:0 or to 80:20 as between Mr Hampton and Mr Minns respectively.
2. The actions of Mr Hampton in failing to pay Banonbury Homes what was due to it in respect of the Hollies, and in diverting labour and materials for the construction the White Lodge, have cumulatively or individually resulted in either:
1. the total discharge of Mr Minns from his liability to contribute; or
2. the reduction pro tanto of his liability to contribute.
3. The Civil Liability (Contribution) Act 1978 applies to contribution claims between co-sureties, with the result that this claim is statute-barred by section 10 of the Limitation Act 1980, which prescribes a two year limitation period for such claims.
4. If this is not correct, and assuming that there is no other limitation period prescribed for such claims by the Limitation Act 1980, then the court should apply a two year limitation period by analogy with section 10.
5. Finally, there is a defence of laches, acquiescence and delay.
Was the usual "equality" rule varied?
- The starting point is the following statement of uncontroversial principles applicable to this area of the law:
1. Where more than one person guarantees to the creditor the payment of the same debt, an equity arises such that if one of them pays more than his due proportion of the debt, he is entitled to a contribution from his co-guarantor or co-guarantors.
2. As between co-guarantors, equity is equality, that is, each should bear an equal burden under the common demand.
3. The right of contribution is not dependent upon agreement, express or implied.
4. These principles are all subject to any contractual terms which may limit or extend the parties' labilities.
See Stimpson v. Smith [1999] 2 All E.R. 833 and Snell's Equity, 13th edition.
- Mr Shanks submits that in this case the normal rule of equality of burden was impliedly altered so as to fall more heavily on Mr Hampton, either as to 100:0 or to 80:20. This happened:
1. At the outset of Mr Hampton's and Mr Minns' association; alternatively
2. When Mr Minns was made redundant.
- Mr Shank's first submission is that as from the outset it was implicit that Mr Minns' liability was not one of equality with Mr Hampton. For this proposition he relies particularly on the decision of the High Court of New Zealand in Trotter v. Franklin [1991] 2 N.Z.L.R 92. The dispute there arose between the three plaintiffs on the one hand, who were in partnership together as solicitors, and the defendant on the other. The parties had taken a lease of office premises and had undertaken other liabilities together, but carried on business separately. The plaintiffs claimed from the defendant one-half of the payments they had made under a joint guarantee, to which the defendant responded that as one of four guarantors he was only liable for a quarter. A submission was made that the prima facie rule of equal sharing could only be displaced by an express agreement to the contrary. Having considered whether the action between co-sureties was founded on equitable principles or an implied promise between them, and come to the conclusion that it was the former, Tipping J. said this, at page 98:
"As the right to contribution is founded in equity the ultimate question is what is a just apportionment between the co-sureties. Ordinarily the justice of the matter will require equality of sharing. Obviously, if the parties have expressly provided to the contrary then justice will require such contrary agreement to be enforced. It seems to me however that equity may well require unequal sharing if the Court can discern by clear implication either that this is what the parties must have intended or that such unequal sharing is necessary to do justice in the particular case."
A little later, he added this:
"I agree with [Counsel's] proposition that equal sharing should not be departed from lightly because in ordinary circumstances co-sureties of the same debt without limitation can be expected to have intended to share equally and it will accordingly be just that they should contribute equally. The real question in the present case is whether or not the evidence supports with sufficient clarity the proposition that the parties implicitly agreed to vary the prima facie position or that justice demands that the prima facie position be departed from."
- There are thus two limbs to the conclusion, first, the possibility of an implied agreement to vary, second, a variation required by the justice of the case. As to the possibility that the parties have implicitly agreed to vary the prima facie position of equality, I take this as no more than a statement of the rule as to implied terms, namely that a term will only be implied where it is either so obvious that it goes without saying or that it is necessary to imply it to give business efficacy to the transaction.
- As to any implication of an agreement to vary the prima facie position in the present case, the starting point must be to consider the position at the date when the guarantee was entered into. The starkness of Mr Shanks' submission is perhaps illustrated by its necessary conclusion that had the Bank pursued Mr Minns rather than Mr Hampton, Mr Minns would have had a claim for a full indemnity against Mr Hampton.
- As to a variation, Mr Shanks points to the fact that Mr Minns's evidence was that he regarded Mr Hampton as being liable for any finance needed for the company. He also relies on the various events which he submits happened later and says that these evidence the fact that in reality Banonbury Homes was Mr Hampton's company, such that he did with it whatever he wanted. He cites Mr Hampton's actions in relation to The Hollies and The White Lodge, Mr Hampton's actions in "making" Mr Minns redundant, the fact that he did so without making any reference to any guarantee liability, his statements made in relation to the affair with Mr Sparrow which he says were consistent only with Mr Hampton being the only person liable to the Bank, Mr Hampton's dealings with Mrs McCarthy, and the fact that no claim was made for a contribution until 1997. I think he would also say that Mr Minns's 20% minority shareholding was in these circumstances an irrelevance, certainly in relation to the argument of an implied agreement for a 100:0 contribution.
- These submissions depend partly on my making findings of fact in Mr Minns's favour, which in several areas I have not done. Mr Minns has the further difficulty that since he has no recollection of the circumstances in which the guarantee was signed, he cannot give any evidence about what may have been the understanding. One is therefore left with the inference that this was a perfectly ordinary case of a bank asking for a guarantee from the two individuals who were to be the shareholders and directors of a company as a condition of making substantial advances to the company. Overall, I do not think the evidence goes anywhere near supporting the implication of the term alleged. It must be remembered that Mr Hampton had, by one means or another, introduced substantial funding to the company but was drawing nothing from it in return for his work. Mr Minns, on the other hand, was receiving a full wage and benefits and had a 20% shareholding in the company, without having introduced any capital himself. No doubt the balance of power and responsibility may have been uneven, but quite where it hung or would have fallen is unnecessary to determine. Neither, in my judgment, do the actions and events which subsequently occurred point, conclusively or otherwise, to the existence of an implied agreement at the outset to vary the normal 50:50 rule. They seem to me to be consistent with the ordinary unfolding of events, as complicated by the company's increasingly desperate financial plight.
- As to the possibility of the subsequent conduct of the parties amounting to a subsequent agreement to vary the right of contribution when Mr Minns was made redundant, it follows that I reject this also. In this context, however, Mr Shanks also cites the decision of the Supreme Court of Canada in Bater v. Kare [1964] S.C.R. 206 for a rather different, or at least additional, proposition. This is that where two parties give a guarantee for the indebtedness of a company they are both involved in then, if one them withdraws totally from the business and transfers his shares to the other, the right of contribution ceases, on the basis that from then on the whole benefit of the guarantee is the other's. There are obviously problems with a proposition stated in such terms, although it may be that some agreement as to the parties' continuing liability as between themselves might be implied if the circumstances warranted it. However, the general proposition clearly has no application to the present case, since Mr Minns did not transfer his 20% shareholding to Mr Hampton.
- As to the suggestion in Trotter v. Franklin that the right of contribution as between co-sureties may be modified if the justice of the case demands it, it is not clear that this represents a correct statement of English law in the absence, for example, of something in the nature of an estoppel. Even it did, however, then for the same reasons that I have concluded that the facts of the case do not point to any agreement to vary the normal 50:50 rule, I would not have held that justice made such a demand in this case, .
Waiver or forfeiture
- Mr Shanks submits in the alternative that the conduct of a surety may be such as to show an intention to waive his right to a contribution or even to amount to a forfeiture of it. As to waiver, in my judgment this would have to be based on some clear and unequivocal representation. See, for example, Woodhouse A.C. Israel Cocoa Ltd S.A. v. Nigerian Produce Marketing Co. Ltd. [1972] A.C. 741, at page 761, as to what is required for a representation to found an estoppel. Since nothing was said between Mr Hampton and Mr Minns about the guarantee, and since all that Mr Hampton's actions would reasonably have indicated to Mr Minns was that the Bank was pursuing Mr Hampton, not him, I do not consider that there was any such representation.
- As to conduct, Mr Shanks relies on a statement from The Modern Contract of Guarantee, Phillips and O'Donnovan, 2nd edition, (1992), where the authors state that:
"A guarantor's right to contribution may be ... forfeited by his failure to perform his duties towards his co-sureties."
The authority cited for that proposition is Steel v. Dixon (1881) 17 Ch D 825 at 832. That case deals with the question of whether a surety who has contracted for some security from the principal debtor is bound to bring that security into account in his dealings with his co-sureties. Having ruled that he must do so, on the basis that as between co-sureties there should be equality of benefit and burden, Fry J. stated:
"In saying that, however, I wish to guard myself against its being supposed that this equity may not in any case be varied or departed from. ... [Cases] may arise in which one co-surety, by reason of his default in performing his duty towards the other, may estop himself from asserting the equity which he would otherwise have had against him."
He concluded that in that case there was "nothing in the conduct of the Plaintiffs ... which can deprive them of the benefit of their right against the co-sureties."
- That passage raises the issue as to what precisely are the duties between co-sureties. Neither Mr Shanks nor Mr Dagnall appeared to be particularly anxious to frame them, although Mr Dagnall was prepared to commit himself as far as to describe them as minimal. Mr Shanks' position was that if Banonbury Homes was not to be regarded as Mr Hampton's own company (which I have held it was not) then the arrangement was to be regarded as a kind of quasi-partnership, with the result that Mr Hampton had to be scrupulous in the way he dealt with the company's affairs, and in particular should not have used the company for his own personal advantage and thereby increased its indebtedness, thus prejudicing Mr Minns' own position vis a vis the Bank.
- One co-surety no doubt owes some duties towards another (a duty to bring benefits into hotchpot as shown by Steel v. Dixon is obviously one). It is, however, unnecessary for make the attempt to categorise them because I am unable to identify any duty in this case which Mr Hampton might have breached on the facts. As to his actions before Mr Minns was made redundant, I have accepted that although the arrangements for payment to Banonbury Homes for work in the Hollies was not all that it should have been, the company did not suffer in the sense that its indebtedness to the Bank was increased. Also, of course, Mr Minns was aware of how the company was being paid and did not object. As to what happened afterwards, again, I have held that Mr Hampton did nothing improper that materially affected the company's indebtedness to the Bank or which therefore increased Mr Minns' potential liability to the Bank.
The Limitation Period for a contribution claim between co-sureties
- As to existence or length of any period of limitation for claims between co-sureties, Halsbury's Laws of England, 4th ed., Vol. 20, deals with the nature of the right and the applicable limitation period as follows (para. 278):
"... the guarantor's primary cause of action against a co-guarantor for contribution is for money paid to the debtor's use at his request. Such a claim is treated as one founded on a simple contract, and so the period applicable is one of six years from the date on which the cause of action accrued. ...
It is not clear whether the Civil Liability (Contribution) Act 1978 applies to claims between co-guarantors."
In Vol. 28, paragraph 875, of the same work it is stated:
"As between co-guarantors, co-contractors, or co-debtors, the statute of limitations runs against the right of contribution of one who has paid more than his share from the time of such payment."
- In Snell's Equity, 13th edition, the nature of the right of contribution is dealt with at paragraph 29-19, quoting Dering v. Earl of Winchelsea (1978) 11 Cox Eq. 318 at 321:
"Right independent of contract. This right of contribution is 'bottomed and fixed on general principles of justice, and does not spring from contract; though contract may modify it'".
Snell then continues:
"Running of time. The Limitation Act 1980 begins to run against the right of contribution from the time when the surety pays more than his proportion of the debt, or possible from the time when his liability to do so is ascertained."
It is not clear from this passage what section of the Limitation Act is considered to be applicable or on what basis, particularly given the previous statement as the nature of the right of contribution which I have quoted. The authority for the proposition is stated in a footnote to be Wolmershausen v. Gullick [1893] 2 Ch 514 and Robinson v. Harkin [1896] 2 Ch 415. The footnote adds:
"[The] Limitation Act 1980, s.10, applies only to claims for contribution in respect of damage under the Civil Liability (Contribution) Act 1978."
- The main point in Wolmershausen v. Gullick was whether a surety against whom judgment had been obtained by the principal creditor, but who had paid nothing under the judgment, could nevertheless maintain an action for a contribution. A separate defence was raised under the Statute of Limitations: the demand had been made by the principal creditor in October 1879 and an adjudication was made against the plaintiff in March 1890; the plaintiff only commenced contribution proceedings against the defendant in 1892. The argument of the defendant was that since a claim against him by the principal creditor was statute barred:
"... the question arises whether a surety who is not statute barred can proceed against a surety who is. The doctrine of contribution is based upon the theory of the sureties being subject to a common burden; but the sureties are no longer subject to a common burden, and this is due to the fault of the Plaintiff, who ought not to have allowed the claim of the bankers to remain pending for ten years without taking steps to inform the Defendants that she intended to enforce contribution against them."
- The limitation point was dealt with very shortly by Wright J, as follows:
"A point was made as to the Statutes of Limitation. The principal creditors' claim was put in 1879. But I think that I must hold that, even if the statute can begin to run before the surety has paid more than his proportion, at any rate it does not run until his liability is ascertained, and that did not occur until 1890."
The fact that the limitation point was dealt with only cursorily in Wright J.'s judgment was noted by O'Brien J. in Gardner v. Brooke [1897] I.R. 6., and who said, at page 11:
"Some doubt arose whether the question was intended to be decided from the brevity of the reference to the statue in the judgment; but the objection in the argument on the same ground as here, and the decision, could not have been made without overruling it. On ordinary rules we could rest our judgment on that authority; but we are all satisfied no less that it was right in principle."
- In The Law of Restitution, Goff and Jones, 5th ed., the authors identify the basis of the right of contribution in equity as being as being unjust enrichment, and thus not depending on contract, and then state:
"In these circumstances, section 5 [of the Limitation Act 1980] would appear to be inapplicable, unless it could be said that, as soon as the claim lies, a debt arises between the parties. However, it may be more persuasive to hold that the equitable doctrine of laches should apply. It is an open question whether equity will then follow the analogy of section 5 of the Limitation Act 1980, when the limitation period is six years, or section 10 ..."
- Preston and Newsom's Limitation of Actions (4th ed.) states, at paragraph 8.7.4:
"The right to contribution between co-sureties is equitable and not statutory. The period is six years and right accrues when the liability to the principal creditor is established: Wolmershausen v. Gullick [1893] 2 Ch 514."
- In the Law of Guarantees, Andrews and Millett, the authors state:
"A surety's claim for contract is not a claim for a speciality debt, but a simple debt, and has a limitation period of six years."
For this proposition, the Limitation Act 1980, sections 5 and 8 are cited in the footnote. The footnote continues:
"Where a claim for a contribution is based upon s.1 of the Civil Liability Contribution) Act 1978, the time limit for the bringing of claims is two years from when the right to contribution accrues: Limitation Act 1980, s.10. However, it is doubtful whether this Act applies to claims to contribution between co-sureties."
- It is against this background that Mr Shanks says that whatever the position may have been, it is now governed by the Civil Liability (Contribution) Act 1978. At first blush, this seems a surprising submission. Section 1 of the Act provides that:
"Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."
The relevant limitation period for such claims is found in section 10(1) of the Limitation Act 1980, which provides that:
"Where under section 1 of the Civil Liability (Contribution) Act 1978 any person becomes entitled to a right to recover contribution in respect of any damage from any other person, no action to recover contribution by virtue of that right shall be brought after the expiration of two years from the date on which that right accrued."
So far as concerns this case, the right would, if the 1978 Act and section 10 of the Limitation Act 1980 are applicable, have accrued on the date when the amount to be paid by Mr Hampton was agreed between him and the Bank. See sub-section 4. This was in January 1996 and these proceedings were not commenced until 20 March 1998.
- Mr Shanks accepts that, although the expression "damage" as used in section 1 of the 1978 Act should be given a wide meaning (see Friends' Provident Life office v. Hillier Parker May & Rownden [1995] 4 All E.R. 260), it is not wide enough to include claims in debt. For example, it is clear that a distinction is drawn in the Act between claims in damages and claims in debt. Thus section 3 provides that:
"Judgment recovered against any person liable in respect of any debt or damage shall not be a bar to an action, or to the continuance of an action, against any other person who is (apart from any such bar) jointly liable with him in respect of the same debt or damage."
- I say that Mr Shanks' submission is surprising because of an instinctive reaction that a person liable under a bank guarantee is liable to the bank in debt, not in damages. That reaction is confirmed by a reading of the Law Commission Report on Contribution of 1977 which lead to the passing of the 1978 Act (Law Com. No. 79). That Report reviewed the existing law on contribution, noting that it could be divided into two, one part being that of contract, quasi contract and rules of equity (amongst which is the right of contribution between co-sureties), the other that which was brought into existence by the introduction of statutory rights of contribution between tortfeasors by section 6 of the Law Reform (Married Women and Tortfeasors) Act 1935. The Report noted that a right of contribution may be created by contract or may be founded in quasi-contract, in which case the amounts or proportions recoverable may be regulated by agreement or, in the absence of agreement, by certain equitable rules which have been developed. The theme which underlies such rules is that persons who are liable to the same demand should share the burden of that liability equally. The Commission had earlier produced a working paper (Working Paper No. 59) in which it had concluded that the equitable rules seemed to work reasonably well where the persons concerned were liable in debt to the same demand but not where they were jointly liable in damages (the Commission's emphasis). Criticism of this conclusion had been received, to the effect that the existing rules could:
"... work unfairly in contribution proceedings between persons jointly liable for the same debt, for example, between persons liable as partners, joint tenants or joint guarantors." (the Commission's emphasis in italics; underlining added)
It was argued that the existing rules, which generally resulted in liability being born equally, could lead to injustice because they did not take account of the part played by each in incurring the debt. The Commission considered that although this argument had attractions, there were points of substance on the other side, and thus:
"Our conclusion, so far as joint debts are concerned, is that it is more important that the rules should be reasonably certain than that the court should have a wide discretion to redistribute the burden of each and every joint debt according to the general merits of the particular case. We accordingly make no recommendation for changing the existing law of contribution as it applies to joint debts."
- The 1978 Act followed the general form of the draft Bill which was attached to the Commission's report and thus intended to give effect to its recommendations. It is also clear from the House of Lords debate on the Bill that the Act was intended to give effect to the Law Commission's recommendations, subject only to certain differences which are not relevant for present purposes.
- Nothing daunted, Mr Shanks submits that the Law Commission fell into error, or at least made a dangerous over-simplification, in apparently categorising joint guarantors as an example of persons being liable for the same debt. He says that the normal rule is in fact that a guarantor is liable under the guarantee in damages, not in debt. For this he relies on the House of Lords authority of Moschi v. Lep Air Services Ltd [1973] A.C. 331. In that case, the plaintiffs had exercised a lien over a company's goods for debts owed by it. In order to secure their release a tripartite agreement was entered into under which the company promised to pay specified sums by instalments and the individual defendant "personally guaranteed the performance by [the company] of its obligation" to make the specified payments. The company failed to make the payments, which the plaintiff then accepted as a repudiation. The question then arose as to whether this discharged the defendant under his guarantee and, in particular, what was the nature of his obligation, whether to guarantee each payment as it became due or to pay damages.
- As to this, Lord Reid said, at p.344:
"I would not proceed by saying this is a contract of guarantee and there is a general rule applicable to all guarantees. Parties are free to make any agreement they like and we must I think determine just what this agreement means.
With regard to making good to the creditor payments of instalments by the principal debtor there are at least two possible forms of agreement. A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. ...
On the other hand, the guarantor's obligation might be of a different kind. He might undertake that the principal debtor will carry out his contract. Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do.
In my view, the appellant's contract is of the latter type. He "personally guaranteed the performance" by the company "of its obligation to make the payments at the rate of £6,000 per week." The rest of the clause does not alter that obligation. ...
I do not get much assistance from the authorities such as they are. I go by the terms of the appellant's contract. I find nothing in the authorities which in any way prevents me from reaching what appears to me to be the natural meaning and effect of this contract. It seems never to have been necessary to make a full analysis of the position in a contract of this kind, and I shall not refer in detail to such indications as there are in the cases, beyond saying that there is no magic in the word guarantee but that the authorities appear to recognise that at least most contracts of guarantee are of this nature."
- Lord Diplock analysed the question in more detail, at page 346:
"... before the Common Law Procedure Acts 1852 to 1860 there were important procedural differences between an action brought to compel performance of the obligation arising from a promise to pay a sum of money for which the form of action was indebitatus assumpsit, and an action brought to recover compensation for the loss sustained as a result of the obligor's failure to perform any other kind of obligation arising out of contractual promises - for which the form of action was a special assumpsit.
In the absence of modern authority it becomes necessary to go back a century or more to see whether a contractual promise by the guarantor to guarantee to the creditor that the debtor would perform his own obligations to the creditor to pay a sum of money to him was itself classified as giving rise to an obligation on the part of the guarantor to pay that sum of money to the creditor if the debtor did not do so, or as an obligation to see to it that the debtor did perform his own obligations to the creditor.
In section 4 of the Statute of Frauds 1677 a contract of guarantee is described in the language of the 17th century as "any special promise to answer for the debt, default or miscarriage of another person." Translated into modern legal terminology "to answer for" is "to accept liability for," and "debt, default or miscarriage" is descriptive of failure to perform legal obligations, existing and future, arising from any source, not only from contractual promises but in any other factual situations capable of giving rise to legal obligations such as those resulting from bailment, tort, or unsatisfied judgments. These words were so construed by Abbott C.J. in Kirkham v. Marter (1819) 2 B. & Ald. 613, 616.
By the beginning of the 19th century it appears to have been taken for granted, without need for any citation of authority, that the contractual promise of a guarantor to guarantee the performance by a debtor of his obligations to a creditor arising out of contract gave rise to an obligation on the part of the guarantor to see to it that the debtor performed his own obligations to the creditor. Statements to this effect are to be found in Wright v. Simpson (1802) 6 Ves.Jun. 714, 734, per Lord Eldon and in In re Lockey (1845) 1 Ph. 509, 511, per Lord Lyndhurst. These are the two cases which are cited as authority for this proposition by Sir Sidney Rowlatt in his authoritative work on Principal and Surety. They can be supplemented by other similar statements, including one in your Lordships' House, which confirm that it was taken for granted that this was the legal nature of the guarantor's obligation arising out of a contract of guarantee: Mactaggart v. Watson (1835) 3 Cl. & F. 525, 540, per Lord Brougham.
It is because the obligation of the guarantor is to see to it that the debtor performed his own obligations to the creditor that the guarantor is not entitled to notice from the creditor of the debtor's failure to perform an obligation which is the subject of the guarantee, and that the creditor's cause of action against the guarantor arises at the moment of the debtor's default and the limitation period then starts to run. It is also why, where the contract of guarantee was entered into by the guarantor at the debtor's request, the guarantor has a right in equity to compel the debtor to perform his own obligation to the creditor if it is of a kind in which a court of equity is able to compel performance: see Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd. [1909] 2 Ch 401. It is the existence of this right on the part of the guarantor that accounts for the rule laid down by Lord Eldon in Samuell v. Howarth (1817) 3 Mer. 272, 278 and approved by your Lordships' House in Creighton v. Rankin (1840) 7 Cl. & F. 325, 346 that where the creditor, after the guarantee has been entered into, gives a contractual promise to the debtor to allow him time to pay the guaranteed debt, the guarantor is discharged from his obligation to the creditor. This is because the creditor by altering the debtor's obligation to him has deprived the guarantor of his equitable right to compel the debtor to perform his original obligation to the creditor, which was all that the guarantor had guaranteed. In contrast, the guarantor is not discharged by the mere voluntary forbearance of the creditor to take steps to obtain timeous performance by the debtor of the obligation which is the subject of the guarantee; for this does not affect the guarantor's equitable right to compel the debtor to perform it.
It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee gives rise that it is not an obligation himself to pay a sum of money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditors' remedy for the guarantor's failure to perform it lies in damages for breach of contract only. That this was so, even where the debtor's own obligation that was the subject of the guarantee was to pay a sum of money, is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit: Mines v. Sculthorpe (1809) 2 Camp. 215.
The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantee the creditor can recover from the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debtor himself as a consequence of that failure. The debtor's liability to the creditor is also the measure of the guarantor's.
Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise. Even the use of the word "guarantee" is not in itself conclusive. It is often used loosely in commercial dealings to mean an ordinary warranty. It is sometimes used to mis-describe what is in law a contract of indemnity and not of guarantee. Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee. Every case must depend upon the true construction of the actual words in which the promise is expressed."
- It might be thought from that passage that Lord Diplock was laying down a general rule as to the legal nature of all guarantees. Such a conclusion appears to receive support from the opinion of Lord Simon of Glaisdale, when he said, at p.352:
"I also agree with the historical analysis made by my noble and learned friend, Lord Diplock: it is important as showing that the liability of a surety at common law always sounded in damages rather than in debt, even when he was guaranteeing a debt."
- In a later passage, at page 357, where Lord Simon was considering an argument that the guarantor had been discharged from further liability once the plaintiff had accepted the company's repudiation, he also said:
"The point is still further reinforced by the historical analysis of my noble and learned friend, Lord Diplock, which shows that the liability of the surety gave rise to an action of special assumpsit not of indebitatus assumpsit, breach therefore sounding in damages and not in debt, even if it was a debt which was guaranteed. ... This is only consistent with the surety's obligation, even when guaranteeing a payment, being not to pay a sum of money in default but to ensure performance of the principal promisor's obligation."
- Between these passages, however, he states, at page 352, under the heading "Construction of the contract":
"The first, and most important, question of construction is to determine what it was that the appellant was guaranteeing. This was, expressly, the performance by the company of certain of its obligations under the contract: it is only convenient shorthand to say that he was guaranteeing payments by the company. In thus guaranteeing performance of obligations, the contract of guarantee was, as will appear, endorsing the common law obligation and liability of a surety, whereas the contract could have modified such common law obligation and liability and substituted some other."
- Lord Kilbrandon said, at page 359:
"In the present case what the appellant guaranteed was "the performance by [the company] of its obligations to make payments at the rate of £6,000 per week." This is the class of undertaking referred to in Rowlatt on the Law of Principal and Surety, 3rd ed. (1936) at p. 143. The learned author points out that as soon as a breach is committed of the duty, performance of which is guaranteed, the surety is immediately liable to the full extent of his obligation, and gives as "the reason for the rule that it is the surety's duty to see that the principal pays or performs his duty as the case may be." ... Non-performance sounds in damages for which the guarantor is liable with recourse."
- Lord Gardiner merely agreed with the other opinions.
- It was the unanimous conclusion of the House of Lords that the obligation which the defendant had undertaken in that case was to guarantee the performance by the company of its payment obligations.
- In my judgment, what follows from the above is that although on analysis a contract of guarantee will often, indeed usually, be one whereby the guarantor promises due performance by the primacy of his obligations, it is necessary in each case to construe the agreement in question. This emerges particularly clearly from the opinion of Lord Reid. Thus, if the guarantor's promise is that a third party will perform specified obligations, then any failure by the third party to do so will mean that the guarantor becomes liable in damages for breach of his promise. If on the other hand, the guarantor's promise is that in certain events he will pay a sum of money, he comes liable in debt once those events have happened.
- The relevant wording of the guarantee in the present case is as follows:
"To BARCLAYS BANK PLC
In consideration of your giving time credit and/or banking facilities and accommodation to [Banonbury Homes] (hereinafter called 'the Principal') I/we the undersigned hereby guarantee the payment or discharge to you and undertake that the undersigned will on demand in writing made on the undersigned pay or discharge to you all moneys and liabilities which shall for the time being be due owing or incurred by the Principal to you ..."
The word "of" should probably be inserted between the words "... the payment or discharge to you" and the words "and undertake ...".
- There are two limbs to this obligation, first, the "guarantee" by Mr Hampton and Mr Minns of the payment or discharge to the Bank of all moneys and liabilities which should be due, owing or incurred by Banonbury Homes to the Bank and, second, an undertaking by Mr Hampton and Mr Minns that they would on demand pay or discharge to the Bank all such moneys and liabilities. Neither Mr Dagnall nor Mr Shanks argues that two separate obligations are created by the guarantee. I agree. See, for example, Sicklemore v. Thistleton (1817) 6 M. & S. 9 and Romain v. Scuba T.V. Ltd [1997] Q.B. 887.
- Mr Dagnall submitted that the second limb was to make clear what the precise nature of the guarantee obligation is, in particular, to pay a sum of money, being whatever it was that Banonbury Homes owed, when demand was made. This construction does not perhaps fit very easily with that part of obligation which states that Mr Hampton and Mr Minns "guarantee the ... discharge to you and undertake that [we] will on demand ... discharge to you all ... liabilities which shall for the time being owing or incurred by" Banonbury Homes to the Bank, if it assumed that this obligation contemplates something different their promise that they will "guarantee the payment ... to you and will on demand ... pay ... to you.. all moneys ... which shall for the time being be due owing ... by the company to the Bank".
- Mr Shanks argues that the single obligation is to be found in the first limb of the guarantee, namely a guarantee by Mr Hampton and Mr Minns of the payment or discharge to the Bank of all moneys and liabilities which should for the time being be due owing or incurred by Banonbury Homes to the Bank. The second limb is merely procedural, that is, it merely stipulates, for the benefit of the guarantors, that a demand must first be made before they become liable to pay damages. He would say, I think, that there is nothing here to take this guarantee out of the general rule which Moschi v. Lep Air Services Ltd establishes.
- That provision for a demand in a guarantee may be procedural, with the effect that until a demand is made the guarantee cannot be enforced by the creditor, and time will not begin to run, is shown by In re Brown's Estate [1893] 2 Ch 300 and Bradford Old Bank Ltd v. Sutcliffe [1918] 2 K.B. 833. In Stimpson v. Smith [1999] 2 All E.R. 833, the guarantors guaranteed payment to the creditor on demand of the liabilities of the principal debtor. The issue was whether one guarantor could claim a contribution from the other where he had paid off the creditor without having been served with a written demand. As to this, Peter Gibson L.J. said:
"Further, provisions in a guarantee that there should be a demand made by the creditor on the guarantor are clearly for the benefit of the guarantor alone (see e.g. Thomas v. Notts Incorporated Football Club Ltd [1972] Ch. 596 at 606 per Goff J.). As such they can be waived by the guarantor, who is not bound to wait for a demand before paying. ..."
- In Romain v. Scuba T.V. Ltd [1997] Q.B. 887, the terms of the guarantee were as follows (cl 5):
"The guarantors ... hereby jointly and severally covenant with the landlords that the lessee will at all times during the continuance of this demise pay the rents hereby reserved and will also duly observe and perform the covenants on the part of the lessee hereinbefore contained and that they will pay and make good to the landlords on demand all losses damages and costs and expenses thereby arising or sustained or incurred by the landlords."
As indicated earlier, one of the arguments was whether this clause contained two obligations (i.e., an obligation of guarantee plus a separate obligation to pay losses, etc., on demand), or whether it was simply an obligation of guarantee with a procedural provision for a demand. As to this, Evans L.J. said:
"The general rule that when the clause provides for a demand to be made then the cause of action arises only when the demand is made is well established: In re Brown's Estate; Brown v. Brown [1893] 2 Ch 300. I do not see any reason for departing from it in the present case. Similarly, the wording of clause 5 does not, in my judgment, create two separate obligations, but only one. Each of the guarantors undertook the obligations of a surety for the covenants of the lessee, and as regards rent the possibly wider liability to pay the amount of the losses etc., but they stipulated for a demand to be made, as they were entitled to do."
- Both Mr Dagnall and Mr Shanks made submissions on these and other authorities as to the effect of the particular clauses in those cases. In the end, however, they both accept that the precise nature of the guarantor's liability remains a matter of construction in each case. I therefore derive little assistance from how other guarantees have been construed in other cases.
- In my judgment, what Mr Hampton and Mr Minns agreed to do, when a demand to do so was made on them, was to pay to the Bank whatever it was that the company owed to the Bank. This obligation created a debt. I of course bear in mind that it is clear from Moschi v. LEP Air Services that just because the obligation guaranteed was to pay a sum of money it does not mean that the liability of the surety sounds in debt rather than damages. But I attach importance to the words of the guarantee by which Mr Hampton and Mr Minns promised to "pay or discharge to" the Bank all moneys, etc., which were due or owing, these being words appropriate for the creation of a debt. This construction seems to me not only to be the natural construction of the agreement but also what I would expect persons of business would understand the obligation to be. I would expect if such a person were called upon to pay damages under the guarantee he or she would respond: I only agreed to pay whatever it was that the company owed, not to pay you damages. Although the measure of damages arising from another's failure to pay a sum of money will usually be precisely that sum, it may not be. For example, it is conceivable that questions of mitigation of the creditor's loss might be raised by the guarantor.
A limitation period by analogy
- If, as I have held, the period prescribed by s.10 of the Limitation Act 1980 does not apply to a contribution claim under this guarantee, then the submission by Mr Dagnall is that the court will apply a six year period by analogy with section 5 of the Limitation Act 1980. Mr Shanks submits that in this event the court should apply a 2 year period by analogy with section 10.
- Section 36 of the Limitation Act 1980 provides that various time limits under the Act shall not apply to any claim for equitable relief, "except in so far as any such time limit may be applied by the court by analogy in like manner as the corresponding time limit under any enactment repealed by the Limitation Act 1939 was applied before 1st July 1940." Amongst the time limits referred to is that prescribed by section 5 for actions founded in simple contract. One of the time limits not included is that prescribed by section 10, being the time limit for claims under the Civil Liability (Contribution) Act 1978.
- Both parties are happy to accept as a starting point the statement from the speech of Lord Westbury in Knox v. Gye (1872) LR 5 HL 656 at 674:
"The general principle was laid down as early as the case of Lockey v. Lockey (1719) Pre. Ch. 518, where it was held that where a Court of Equity assumes a concurrent jurisdiction with Courts of Law no account will be given after the legal limit of six years, if the statute be pleaded. If it could be doubted whether the executor of a deceased partner can, at Common Law, have an action of account against the surviving partner, the result will still be the same, because a Court of Equity, in affording such a remedy and giving such an account, would act by analogy to the Statute of Limitations. For where the remedy in Equity is correspondent to the remedy at Law, and the latter is subject to a limit in point of time by the Statute of Limitations, a Court of Equity acts by analogy to the statute, and imposes on the remedy it affords the same limitation. This is the meaning of the common phrase, that a Court of Equity acts by analogy to the Statute of Limitations, the meaning being, that where the suit in Equity corresponds with an action at Law which is included in the words of the statute, a Court of Equity adopts the enactment of the statute as its own rule of procedure. But if any proceeding in Equity be included within the words of the statute, there a Court of Equity, like a Court of Law, acts in obedience to the statute ... Where a Court of Equity frames its remedy upon the basis of the Common Law, and supplements the Common Law by extending the remedy to parties who cannot have an action at Common Law, there the Court of Equity acts in analogy to the statute; that is, it adopts the statute as the rule of procedure regulating the remedy it affords."
- In Coulthard v. Disco Mix Club Ltd [1999] 2 All E.R. 457, Mr Jules Sher QC, sitting as a Deputy Judge of the High Court, having also cited these passages, said:
"Two things emerge from these passages. First, where the court of equity was simply exercising a concurrent jurisdiction giving the same relief as was available in a court of law the statute of limitation would be applied. But, secondly, even if the relief afforded by the court of equity was wider than that available at law the court of equity would apply the statute by analogy where there was 'correspondence' between the remedies available at law or in equity."
- In Cia de Seguros Imperio v. Heath (REBX) Ltd [2001] 1 WLR 112, Waller L.J. held that section 36 required the court to consider whether a particular limitation period would have been applied by analogy before 1 July 1940. After citing part of the above passage from Knox v. Gye, he went on to cite the following passage from Spry's Equitable Remedies, 5th ed., at page 419, with approval:
"a statute of limitations may be raised by analogy in defence to a claim that is brought in the exclusive jurisdiction of a court of equity, such as in proceedings for the enforcement of a trust, rather than in its auxiliary or concurrent jurisdictions. Here there is no question of merely recognising and giving effect to an abrogation of a right at law or of acting in obedience to a statute that relates to rights at law. Hence it must be seen first whether there is a special statutory provision that affects directly, whether expressly or by implication, the particular equitable right that is in question. But if there is no such provision, the court may decide that the material equitable right is so similar to legal rights to which a limitation period is applicable that that limitation period should be applied to it also. In this latter case the limitation period is said to be applied by analogy, and the principles that govern cases of this kind are that if there is a sufficiently close similarity between the exclusive equitable right in question and legal rights to which the statutory provision applies a court of equity will ordinarily act upon it by analogy but that it will so act only if there is nothing in the particular circumstances of the case that renders it unjust to do so. What is regarded by courts of equity as a sufficiently close similarity for this purpose involves a question of degree, and reference must be made to the relevant authorities. The basis of these principles is that, in the absence of special circumstances rendering this position unjust, the relevant equitable rules should accord with comparable legal rules."
- In the light of the above, I do not accept that the court would apply a two year limitation period by analogy with section 10 of the Limitation Act, since:
1. The two year period prescribed by section 10 did not exist in 1940, and therefore could not have been applied by the court at that time.
2. Since the 1978 Act clearly does not confer a right of contribution between co-debtors, and does not expressly affect the rights of contribution between co-debtors, it would be very surprising indeed if the 1978 Act were nevertheless held by a side wind to require an alteration in the court's approach to the application of a limitation period by analogy in such a case.
3. Parliament, by expressly listing in section 36 those sections of the Limitation Act 1980 to which an analogy may be made, but excluding section 10 from that list, has shown that no analogy with section 10 is appropriate.
- Mr Dagnall also submits that the rights are not closely analagous and also that in order to apply a limitation period by analogy, it is necessary to identify a right at common law which is closely similar to the equitable right, and here what is being relied on is a statutory right. He may be right about this but it is unnecessary in the circumstances to express a conclusion.
- Given that my conclusion is that a two year limitation period is not applicable in this case, and given my conclusions below as to the defence of laches, acquiescence and delay, it is unnecessary to reach any conclusions as to whether the appropriate period is six years, or indeed whether any period is applicable. Submissions have, however, been made on the point and I will therefore state my conclusions.
- I have already set out various statements from the textbooks and authorities as to the position. Most assume that a limitation period of six years applies, for which the main authority is Wolmershausen v. Gullick.
- Mr Dagnall's submission is that the equitable right of contribution is very similar to the legal right which he submits exists between co-sureties. For this he relies first on Wolmershausen v. Gullick. I have already referred to what was the central issue in this case. At p.519, Wright J said this:
"The questions are whether the action can be maintained, and what is the precise extent of the relief (if any) which can be given. By the Roman law, as it stood in the time of Justinian, sureties had, generally speaking, a right to compel the creditor to enforce payment against them pro ratâ only. The superior Courts of common law in this country have never entertained any action for contribution by a surety against his co-surety, except the action for money paid, and from the time of Davies v. Humphreys 6 M. &. 153, which was decided in the year 1840, it has been treated as settled law that the surety cannot maintain this action until he has actually paid more than his own proportion, because this action assumes a debt due and payable to the Plaintiff, and there is no legal debt due and payable, and the creditor may yet enforce payment of the whole balance from the co-surety. Nor did the Courts of common law ever give in the case of co-sureties the equitable relief which they were accustomed to give in many other cases of joint or common liability, by compelling contribution after judgment and before execution by means of a writ of auditâ querelâ or scire facias to limit the creditor's execution to the proper share payable by the particular defendant."
At page 527 he added:
"In Lord Justice Lindley's work on Partnership, 5th ed., p.374, it is observed that 'before the passing of the Judicature Acts, a right to contribution or indemnity, arising otherwise than by special agreement, was only enforceable at law by a person who could prove that he had already sustained a loss. But in equity it was very reasonably held, that even in the absence of any special agreement, a person who was entitled to contribution or indemnity from another could enforce his right before he had sustained actual loss, provided loss was imminent; and this principle will now prevail in all divisions of the Hight Court. ...'"
As I have already pointed out, Wright J. also assumed that the Statutes of Limitation applied to such a claim (see paragraph 74, above)
- From this authority, and also Gardner v. Brooke [1897] 2 I.R. 6, Mr Dagnall extracts the principle that a right of contribution existed between co-sureties at common law, although there were limitations on the effectiveness of the remedy. Equity provided a superior remedy which supplanted the legal remedy in its use, but the legal remedy remained, being an action in debt, or more accurately, for money paid at the implied request of another. The limitation period for that claim was six years, as now provided for by section 5. There is therefore a closely similar claim at common law, and the court should apply the six year period provided for by section 5 by analogy.
- In this, he has the support of the Gough and Jones' The Law of Restitution. At page 399 the authors state:
"It is doubtful whether common law allowed any contribution between co-sureties before the beginning of the nineteenth century. The early cases, which are reported in a cursory fashion, reject such a claim, apparently on the ground that to allow would have been "a great cause of suits." Even when this uncompromising position was abandoned, the claim of a surety to contribution from each of his co-sureties was limited to the total amount owed by the principal debtor, divided by the number of sureties. No adjustment was made if one of the sureties was unable to pay his share because of insolvency. Little hardship was caused by this conservative rule of law, for from the early seventeenth century it had been established in equity that sureties "who can pay must not only contribute their own shares, but they must also make good the shares of those who are unable to furnish their own contribution." This conflict of law and equity was resolved in 1873 in favour of the rules of equity, and the modern law is based on the principles of equity governing the contribution of sureties inter se. The appropriate cause of action is, therefore, an action for contribution in the Chancery Division, when the rights of all the parties will be settled in the same inquiry. However, it is still possible to bring an action at law for money paid to the use of the co-surety, but since 1873 the common law action in this context appears to have fallen into disuse."
- A footnote to this last passage adds:
"Common law judges reconciled satisfactorily to their own minds the principles of contribution with the theory of implied contract... In Craythorne v. Swinburne (1807) 14 Ves. 160, 164, 169, Lord Eldon L.C. concluded: 'that, the principle of equity being in its operation established, a contract may be inferred upon the implied knowledge of that [equitable] principle by all persons, and it must be upon such a ground, of implied assumpsit, that in modern times courts of law have assumed a jurisdiction upon this subject ...' "
- If Mr Dagnall is right, then in the present case, since the guarantee of Mr Hampton and Mr Minns is contained in a single agreement, and since Mr Hampton has paid virtually all that was due under the demand, the claim to a contribution could equally well be based in common law as in equity. He is nevertheless content to base his claim in equity.
- Mr Shanks' riposte is that this theory of implied request has been exploded, and such actions can now been seen to be founded in a claim for restitution for unjust enrichment (see Gough and Jones, The Law of Restitution, page 852). In Westdeutsche Landesbank Girozentrale v. Islington L.B.C. [1996] AC 669, the House of Lord threw out any suggestion that a claim for moneys had and received could today be based on an implied contract. The authors of The Law of Restitution go on to state, in relation to the period of limitation in respect of equitable claims for contribution between co-sureties:
"In these circumstances, section 5 would appear to be inapplicable, unless it could be said that, as soon as the claim lies, a debt arises between the parties. However, it may be more persuasive to hold that the equitable doctrine of laches should apply. It is an open question whether equity will then follow the analogy of section 5 of the Limitation Act 1980 ... or section 10 ..."
I have already held that the analogy of section 10 is not appropriate.
- As is apparent, this passage is dealing with the claim in equity, not at common law. Assuming that the common law claim would now be based in quasi-contract, it would be subject to a six year limitation period under section 5 of the 1980 Act (see Gough and Jones, p.847). In relation to the equitable claim, the court would have therefore in my judgment, before the passing of the Limitation Act 1939, applied the equivalent of section 5 by analogy, the common law right being closely similar. The appropriate limitation period to be applied by analogy in this case is thus six years. Since the action was commenced on 20 March 1998, it is not limitation barred, whatever the precise date from when the six year period started to run in this case.
Laches, acquiescence and delay
- Finally, Mr Shanks argues that there is a defence of laches, acquiescence and delay. There was a dispute as to whether, in a case where the court applies a period of limitation by analogy, such a defence is available. See Snell's Principles of Equity at para. 3-18. I do not find it necessary to reach a conclusion on that issue, because even if I had held that the defence was available, I would not have found it made out on the facts of this case.
- As to the defence, the principles can be found, first, in Lindsay Petroleum Co. v. Hurd L.R. 5 P.C. 221, at p.239:
"Now the doctrine of laches in courts of equity is not an arbitrary or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or where by his conduct and neglect he has, though not perhaps waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapse of time and delay are most material. But in every case, of an argument against relief, which otherwise would be just, is founded upon mere delay, that delay of course not amounting to a bar by any statute of limitations, the validity of the defence must be tried upon principles substantially equitable. Two circumstances, always important in such cases, are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking one course or the other, so far as relates to the remedy."
- In Erlanger v. New Sombrero Phosphate Co. (1873) 3 App. Cas. 1218, at 1279, Lord Blackburn said:
"I have looked in vain for any authority which gives a more distinct and definite rule than this; and I think, from the nature of the inquiry, it must always be a question of more of less, depending on the degree of diligence which might reasonably be required, and the degree of change which has occurred, whether the balance of justice or injustice is in favour of granting the remedy or withholding it."
- This can be summarised by asking whether in all the circumstances it would be unconscionable for a party to be permitted to assert his beneficial right. See Frawley v. Lindley, March 1, 1999 (C.A.) (unreported).
- In the present case, Mr Shanks relies on the following matters which occurred after the demand was made on Mr Minns' and Mr Hampton by the Bank:
1. There was no mention made of the possibility of any claim by Mr Hampton against Mr Minns until the solicitors' letter of 20 November 1997. This was despite the fact that one of the things which Mr Hampton was apparently contemplating in 1993 was contribution proceedings against Mr Minns. See his solicitors' letter of 21 May 1993.
2. Mr Minns was not invited to take any part in any meetings with the Bank or in the attempts to salvage anything from the wreckage of Banonbury Homes.
3. During the period of delay, many of Banonbury Homes' documents have been lost, making it more difficult to pursue his complaints about The Hollies and The White Lodge.
- Reliance it also placed on the statements which are said to have been made by Mr Hampton in relation to the affair concerning Mr Sparrow, as showing that Mr Minns did not understand Mr Hampton to be making any claim against him. I have already stated my conclusions about these exchanges.
- Although the delay in taking proceedings was lengthy, I have held that this was partly as a result of Mr Hampton not having appreciated that he had a claim against Mr Minns and partly the result of the fact that he had no money to take proceedings. Although Mr Hampton did not say to Mr Minns that he would claim a contribution from him when matters were all sorted out with the Bank, neither did he say anything which in my judgment amounted to any representation that he would not claim a contribution. It must also be born in mind that Mr Minns was aware, from his conversation with Mr Day in March 1992, that there was a possibility that Mr Hampton might have some sort of subrogation claim against him. Perhaps understandably, he did not raise this with Mr Hampton, but I do not think it is a factor I should ignore. The absence of Banonbury Homes' papers has obviously hampered Mr Minns' ability to mount an attack on Mr Hampton's dealings in relation to the company but I am not convinced that in the end the presence of such papers as would have come from the liquidators would have altered the prospects of success on that limb of the case. Since the only evidence about the fire which destroyed some of Mr Hampton's papers is that it occurred in 1992, this factor seems to me to be irrelevant to any question of delay after then.
- When asking whether it would be unconscionable for Mr Hampton to rely on his right to a contribution, I also do not think it right to ignore the fact that this was a venture entered into for the joint benefit of each party, that Mr Hampton risked a great deal of his money in it, and that he bore the brunt of the Bank's claim under the guarantee alone. Given that in the end all that can in reality be laid against him is delay in pursuing his claim to contribution, I do not think the claim has become unconscionable.
- There will be judgment for the Claimant accordingly.