The recent High Court case of Lavin v Toppi  HCA 4 has confirmed the distinction between a covenant not to sue and a release. The High Court held that a covenant not to sue that was given in favour of some (but not all) co-guarantors did not extinguish the liability of those co-guarantors for the guaranteed debt. Accordingly, the remaining co-guarantors who paid a disproportionate amount of the guaranteed debt were entitled to a contribution.
Where a financier is considering a settlement that will not involve all co-guarantors, it should give consideration to structuring the settlement using a covenant not to sue rather than a release to ensure that the liability of all co-guarantors for the guaranteed debt is preserved.
Ms Lavin and Ms Lavin’s company (the “Lavin Guarantors”) together with Mr and Mrs Toppi and Luxe Productions Pty Ltd (the “Toppi Guarantors”) guaranteed a loan from the National Australia Bank (“NAB”) to Luxe Studios Pty Ltd. When demands for payment were not met, NAB commenced legal proceedings against all of the guarantors.
The Lavin Guarantors entered into a deed of release and settlement with NAB. Under the terms of the deed, the Lavin Guarantors agreed to pay $1.35 million and NAB covenanted not to sue the Lavin Guarantors in respect of the outstanding debt. Separately, the Toppi Guarantors paid the balance of the guaranteed debt ($2.9 million), discharging the Lavin Guarantors and the Toppi Guarantors’ obligations to NAB under the guarantee. The Toppi Guarantors commenced proceedings in the New South Wales Supreme Court, claiming contribution from the Lavin Guarantors for the disproportionate payment. The primary judge and the Court of Appeal found in favour of the Toppi Guarantors.
The Lavin Guarantors appealed to the High Court.
The High Court rejected the appeal, finding that the covenant between NAB and the Lavin Guarantors did not extinguish the Lavin Guarantors’ ongoing liability for the guaranteed debt. Indeed, the court noted that the covenant not to sue was in fact premised upon the Lavin Guarantors’ ongoing liability. The Court upheld the finding that the Lavin Guarantors and Toppi Guarantors shared coordinate liabilities to NAB and that the Toppi Guarantors were therefore entitled to recover the relevant contribution from the Lavin Guarantors.