Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd & Ors [2001] NSWCA 479 (20 December 2001)

Last Updated: 7 February 2002

NEW SOUTH WALES COURT OF APPEAL

CITATION: Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd & Ors [2001] NSWCA 479

FILE NUMBER(S):

40009/01

HEARING DATE(S): 7 September 2001

JUDGMENT DATE: 20/12/2001

PARTIES:

Lumley General Insurance Limited - Appellant

Oceanfast Marine Pty Limited - First Respondent

Oceanfast Limited - Second Respondent

Ross Stuart Norgard - Third Respondent

Bryan Kevin Hughes - Fourth Respondent

Adsteam Marine Charters - Fifth Respondent

Stirling Marine Constructions Pty Limited - Sixth Respondent

Howard Smith Industries Pty Limited - Seventh Respondent

JUDGMENT OF: Priestley JA Beazley JA Giles JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 4692/99

LOWER COURT JUDICIAL OFFICER: Austin J

COUNSEL:

Appellant: T F Bathurst QC/M A Jones

1-4 Respondents: J E Thomson

5-7 Respondents: G C Lindsay SC

SOLICITORS:

Appellant: Baker McKenzie

1-4 Respondents: Blake Dawson Waldron

5-7 Respondents: Freehill Hollingdale & Page

CATCHWORDS:

Insolvency - rule against double proofs - money paid under bank bonds - whether money paid reduced debt of primary creditor.

LEGISLATION CITED:

DECISION:

Appeal allowed

See para 176

JUDGMENT:

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40009/01

PRIESTLEY JA

BEAZLEY JA

GILES JA

Thursday, 20 December 2001

LUMLEY GENERAL INSURANCE LIMITED v OCEANFAST MARINE PTY LIMITED & 6 ORS

FACTS

The appellant (Lumley) was the payer under a number of performance bonds provided to the purchasers, at the request of Oceanfast Marine which was the builder under a series of tug boat construction contracts. Oceanfast Marine and its guarantor Oceanfast went into voluntary administration resulting in a loss of approximately $15 million to the purchasers of the tug boats. Pursuant to the performance bonds Lumley made a payment to the purchasers of $5 million. Both sought to prove in the administration of Oceanfast Marine and Oceanfast, Lumley for $5 million and the purchasers for $15 million. The administrators rejected Lumley's proof of debt and accepted that of the purchasers.

Lumley commenced proceedings in the Equity Division of the Supreme Court claiming that it was entitled to have its proof of debt admitted. Austin J held that that `having regard to the rule against double proofs' the purchasers were entitled to prove and Lumley was not.

On appeal Lumley claimed that the rule against double proofs did not apply and that the payment by Lumley should be treated as a pro tanto discharge of the purchasers' debt. In the alternative, they submitted that equity required the purchasers' proofs to be excluded to the extent they had received payment. The consequence on either approach was that the purchasers could prove for $10 million and Lumley for $5 million. The purchasers' primary position was that the contractual arrangements did not give priority to Lumley's claims over the claims of the purchasers. As a result there was nothing inequitable about the outcome which required the purchasers to be fully paid before Lumely could recover in the administration.

HELD per Giles JA (Priestley JA agreeing)

(i) The terms of the contracts, and in particular the performance bond was significant in determining the amount the purchasers could prove in the administration.

(ii) Lumley's payment of $5 million was in partial satisfaction of the purchasers claim for $15 million. Accordingly, the purchasers could prove in the administration of Oceanfast Marine for only $10 million. Lumley could prove for its $5 million: Moule v Garrett (1872) LR 7 Ex 101. Accordingly, the rule against double proofs did not apply.

(iii) In the administration of Oceanfast, Lumley was entitled to prove for the $ 5 million under the deed of indemnity and no question of double proofs arose.

per Beazley JA dissenting

(i) The rule against double proofs applied.

(ii) In this case the terms of the contracts governed the outcome. There were no provisions directed to protecting Lumley's position in the administration.

(iii) Accordingly, the purchasers should be entitled to prove in priority to Lumley.

ORDERS

(i) Appeal allowed.

(ii) The order dismissing the proceeding should be set aside.

(iii) The answer to the separate question should be set aside, and it should be answered that the plaintiff is and the fifth, sixth and seventh defendants are not entitled to prove in the administrations of the first and second defendants for the amount referred to in the plaintiff's proofs of debt identified in paragraph 15 of the Statement of Claim.

(iv) Consequential declarations and/or orders will be required to dispose of the proceedings, and the proceedings should be remitted to the Equity Division for such further hearing or the making of declarations and orders as may be appropriate.

(v) The respondents should pay the appellant's costs of the appeal and of the trial, and have a certificate under the Suitors' Fund Act 1951 (NSW) if qualified.

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40009/01

SC 4692/99

PRIESTLEY JA

BEAZLEY JA

GILES JA

Thursday, 20 December 2001

LUMLEY GENERAL INSURANCE LIMITED v OCEANFAST MARINE PTY LIMITED & 6 ORS

JUDGMENT

1 PRIESTLEY JA: The materials necessary for consideration in the decision of this appeal and the relevant authorities are set out and discussed in the separate reasons of Giles JA and Beazley JA.

2 Basing myself on them, I come directly to the aspect of Austin J's reasons which, I respectfully think involves an inconsistency, which, when recognised, leads me to arrive at a different conclusion from his Honour.

3 One of the steps in Austin J's reasoning to his conclusion was stated in the following three paragraphs of his reasons:

"60. As I understand Lumley's submissions, there was no attempt to put Lumley's rights against the Builder and Oceanfast on the basis that it was entitled by subrogation to displace the Purchasers' entitlement to prove. Instead, reliance was placed on the writings of some commentators (for example, Goff and Jones, The Law of Restitution (5th ed, 1998) at 437ff; Chitty on Contracts para 42-065), to seek to derive a broad, independent principle from Moule v Barrett (1872) LR 7 Ex 101, where Cockburn CJ said (at 104):

`Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount.' (My underlining, for later reference.)

61. That proposition received additional support in Brittain v Lloyd [1845] EngR 1283; (1845) 14 M & W 762; 153 ER 683 and Re a Debtor [1937] 1 Ch 163, and in the context of sureties Thornton v McEwan (1862) 1 H & M 525 and Goodwin v Gray (1874) 22 WR 312. There is nothing in these cases to suggest that the principle must be qualified in the context of insolvency and proofs of debt. On balance, it seems to me that the authorities support the existence of the principle contended for by Lumley.

62. In the present case, Moule v Garrett and the other cases support the right of Lumley to claim reimbursement from the Builder, notwithstanding the absence of any contractual indemnity by the Builder in Lumley's favour."

4 Elsewhere in his reasons the trial judge held that the purchasers were entitled to prove for the full $15 million. This conclusion necessarily involved the step that the purchasers' right of recovery against the Builder was not reduced by the amount Lumley had paid to the purchasers under the performance bond. The principal reason given by Austin J for this conclusion was stated in par 65 of his reasons:

"The contract does not say, or imply, that payments made under the performance bond in partial satisfaction of the Purchaser's contractual right of recovery, from the Builder and Oceanfast in respect of the Builder's default, reduce the obligations of the Builder and Oceanfast to compensate the Purchaser in respect of the default."

5 The conclusion that the payment by Lumley to the purchasers did not reduce the purchasers' right of recovery from the Builder and Oceanfast was a step in Austin J's reasoning upon which his conclusion depended. It is also a step which seems to me, with respect, to be in conflict with his application of the rule from Moule v Garrett, cited in his par 60 (set out above), and which he relied on, and, in my opinion, correctly so. That rule in terms was based upon the payment having been made which is referred to in the underlined part of the citation. Rewriting the underlined part of the citation in terms of the present case, it reads: "So that the Builder and Oceanfast obtain the benefit of the payment (by Lumley) by the (partial) discharge of the liability of the Builder and Oceanfast".

6 Once it is accepted that the rule based on Moule v Garrett is applicable in the present circumstances, as I do, it follows that the liability of the Builder and Oceanfast to the purchasers was discharged to the extent of the $5 million payment to the purchasers by Lumley.

7 It seems to me to follow directly from this that the purchasers were entitled to prove for $10 million, Lumley was entitled to prove for $5 million, that these were separate debts, and that no question of double proof was involved in the case.

8 The case seems to me in its essential respects to be directly analogous to Barclays Bank Limited v T.O.S.G. Trust Fund Limited [1984] 1AC 626, as analysed in the House of Lords by Lord Templeman, with whose opinion the other Lords all agreed. Although the House of Lords reached the same decision as the Court of Appeal, Lord Templeman's reasoning was quite different from that of Oliver LJ, upon whom Austin J to a significant extent appears to have relied in the present case.

9 An interesting feature of Lord Templeman's opinion is that no earlier authority was named in it. It was very closely based on the commercial facts and documentation in the case. His method provides a salutary reminder that in cases such as T.O.S.G. and the one now before this court, the decision must always rest upon the court's view of the facts and the meaning of the documents in the case. Rulings made by courts in similar cases will be helpful in deciding any case, and the help will be greater depending upon the closeness of the facts and the authority of the courts in the earlier cases; but it is not the earlier cases which ultimately dictate the later results, it is the court's understanding of the facts and documents in each particular case which controls the decision.

10 I agree with the orders proposed by Giles JA.

11 BEAZLEY JA: The appellant (Lumley) was the payer under a number of performance bonds provided to the fifth to seventh respondents (the purchasers), at the request of the first respondent, Oceanfast Marine, which was the builder under a series of tug boat construction contracts entered into with the purchasers. There were seven contracts in all. Six were in identical terms. The seventh, whilst not in identical terms, had no material differences for present purposes.

12 The second respondent, Oceanfast, guaranteed the obligations of Oceanfast Marine under the construction contracts. It also entered into a separate deed by which it indemnified Lumley in respect of its obligations under the performance bonds.

13 Prior to the completion of the tug boat contracts, Oceanfast Marine and Oceanfast resolved to place their companies in voluntary administration, appointing the third and fourth respondents as joint and several administrators (the administrators) under a Deed of Company Arrangement entered into on about 25 May 1999. The purchasers subsequently cancelled the tug boat contracts, sustaining a loss of approximately $15 million, comprising liquidated damages under the contract; costs of assessors in determining the state of the vessels on termination of the contract; and additional costs of completing the tugs by a new contractor.

14 The purchasers gave notice to Lumley in accordance with the terms of the performance bonds. Lumley paid the full amounts payable thereunder in a total sum of approximately $5 million.

15 Both the purchasers and Lumley sought to prove in the administrations of Oceanfast Marine and Oceanfast, the purchasers for $15 million and Lumley for $5 million. The administrators rejected Lumley's proof of debt and accepted that of the purchasers. A dividend of about 14 cents in the dollar was declared. Accordingly, even if the purchasers are entitled to prove for $15 million as well as retain Lumley's payment of $5 million, they will not recover their $15 million in full.

16 Lumley commenced proceedings in the Equity Division of the Supreme Court, seeking declaratory and other consequential relief to the effect that it was entitled to have its proof of debt admitted in the sum of $5 million and to receive a dividend.

17 On 21 August 2000 Santow J made an order under Pt 31 R 2 of the Supreme Court Rules for the determination of the following separate question:

"WHETHER, having regard to the rule known as `the rule against double proofs':

(a) [Lumley]; and/or

(b) the [purchasers],

is entitled to prove in the administration of [Oceanfast Marine and Oceanfast for the amount referred to in [Lumley's] proofs of debt ..."

18 The separate question was determined by Austin J who held:

"Having regard to the rule known as `the rule against double proofs' [the purchasers] are entitled to prove, and receive dividends accordingly, in the administration of [Oceanfast Marine and Oceanfast] for the amount referred to in the [their] proofs of debt ... and [Lumley] is not entitled to have its proofs of debt admitted, nor to receive dividends, until the claims of the [purchasers] are fully satisfied."

19 Lumley appeals from the decision of Austin J.

The Documents

20 It is convenient at this point to deal with the various contracts between the parties. It is also convenient to point out that the matter proceeded before Austin J on an agreed basis which explained how the contracts were to operate. I will refer to those matters as necessary.

The Tug Construction Contract

21 Each tug construction contract was entered into between Oceanfast Marine, one of the purchasers and the guarantor, Oceanfast. Lumley was not, of course, a party to the construction contract. Under the contract, provision was made for progress payments, but with provision for a first payment at the time of commencement of construction: cl 9.1. The vessel became the property of the purchaser from the commencement of the contract: cl 22.1.

22 Relevantly for present purposes, the builder was required to obtain a performance bond: cl 5. That clause provided:

"Unless upon or before the execution of this Contract any other arrangement satisfactory to the Purchaser is mutually agreed in writing between the parties hereto the Builder shall at its own cost obtain and deliver to the Purchaser at the time of execution of this Contract the bond of an insurer reasonably acceptable to the Purchaser or any other surety previously approved in writing by the Purchaser to be jointly and severally bound with the Builder in the sum equal to 10% of the Basic Contract Price for the due performance of this Contract, and the said bond shall be substantially in the form of Schedule 2." (emphasis added)

The Performance Bond

23 Pursuant to this provision, Lumley issued performance bonds in relation to each contract. Clause 1 of the performance bond provided:

"1. ... [Lumley] ... agrees to pay on demand any sum or sums which may from time to time be demanded by the OBLIGEE to an amount not exceeding the Bond amount as specified in Item 4 of the Schedule which the OBLIGEE certifies arises from the default or non-performance of the CONTRACTOR in terms of the conditions of the CONTRACT, excluding default or non-performance arising from clauses specified in Item 7 of the Schedule."

24 The `contractor' identified in Item 1 of the Schedule to the performance bond was Oceanfast, not Oceanfast Marine, the builder, as might have been expected. However, the case was argued before the trial judge on the basis that the performance bonds were to be treated as relating to "default of non-performance of [Oceanfast Marine and/or Oceanfast] in terms of the conditions of the respective tug construction contracts". As his Honour said:

"In other words, I am to assume that [Lumley's] obligation to pay the Obligee may be triggered by the Obligee's notice of default or non-performance by either [Oceanfast Marine] or Oceanfast."

The reference to "obligee" was of course a reference to the purchasers.

25 The other relevant provisions of the performance bonds were:

"2. Provided that the OBLIGEE shall first give written notice to the CONTRACTOR stating details of such default or non-performance by the CONTRACTOR stating that such default or non-performance arose due to circumstances within the control of the CONTRACTOR and that such written notice be delivered to the SURETY together with a letter of demand from the OBLIGEE to the SURETY.

...

4. Should the SURETY be notified in writing that the OBLIGEE desires payment to be made of the whole or part or parts of the Bond amount and enclosing a copy of the aforementioned notice of non-performance by the CONTRACTOR, the SURETY undertakes that it will make payment to the OBLIGEE within seven (7) working days of receipt of such notice notwithstanding any notice given by the CONTRACTOR not to pay same.

5. The SURETY may at any time without being required so to do pay the OBLIGEE the Bond amount less any amount or amounts it may previously have paid under this Bond or such lesser sum as may be required and specified by the OBLIGEE and thereupon the liability of the SURETY hereunder shall immediately cease. Should the OBLIGEE confirm in writing that the CONTRACTOR has fulfilled the conditions of the CONTRACT this Bond shall be null and void and of no further force and effect."

Deed of Indemnity and Guarantee

26 Under the deed of indemnity and guarantee, Oceanfast guaranteed Lumley "against all loss": cl 2.1 and was required "upon demand immediately [to] pay [Lumley] any loss".

27 Bond was defined to mean "any bond ... given ... by [Lumley] to or in favour of any person at the request of the Contractor (including ... any ... performance bond ...)": cl 1.1.

28 Loss was defined in cl 1.1 to mean:

"the aggregate at any time of all payments made and liabilities incurred by [Lumley] in connection with a Bond including, without limitation:

payments by [Lumley] of claims under a Bond;

...

payments made or actual or contingent liabilities incurred by [Lumley] with the intention of limiting its potential liability under a Bond; and

costs and expenses paid, and actual and contingent liabilities of any nature incurred, in connection with any claim under a Bond,

but excluding any amount paid or payable to a reinsurer or co-surety."

29 Oceanfast was identified in the Deed as both the guarantor and the contractor. As his Honour observed, a party cannot guarantee its own performance. In the agreed facts, the Court was asked to assume that Oceanfast was erroneously described as the Contractor. The reference should have been to Oceanfast Marine. Oceanfast, however, was the entity which had agreed to indemnify Lumley against payments made by Lumley in connection with the performance bonds. His Honour thus proceeded on the basis that Oceanfast had the indemnity obligation under the deed, that there was no effective guarantee obligation and that Oceanfast Marine was not a party to the Deed.

Letter of Demand

30 After Oceanfast Marine and Oceanfast went into voluntary administration, each of the purchasers issued a letter of demand on Lumley, pursuant to the terms of the Performance Bond. The letter was in the following terms:

"We refer to the ... Performance Bond ...

...

Clause 1 of the Bond states that the Surety undertakes covenants and agrees to pay on demand any sum or sums which may from time to time be demanded by the Obligee to an amount not exceeding the Bond amount as specified in item 4 of the Schedule ($730,436.80) which the Obligee certifies arises from the default or non-performance of the Contractor in terms of the conditions of the Contract.

Certain Notices of Cancellation and Consequences of Cancellation dated 29 April 1999 have been given to the Contractor. In compliance with Clause 2 of the Bond, the Notice of Cancellation contained details of the default and non-performance by the Contractor. In further compliance with Clause 2 of the Bond, paragraph numbered 2 in the Notice of Cancellation stated that such default or non-performance arose due to circumstances within the Contractor's control. In further compliance with Clause 2 of the Bond, the Notice of Cancellation is included with this Letter of Demand.

...

Pursuant to Clause 4 of the Bond, the Obligee hereby notifies the Surety that the Obligee desires payment to be made of the whole of the Bond and calls upon the Surety to honour its undertaking to make payment of the said amount ... within seven (7) working days of the receipt of this notice.

In compliance with Clause 1 of the Bond the Obligee hereby certifies that the amount of which the Obligee desires payment ... arose from the default or non-performance of the Contractor in terms of the conditions of the Contract."

Case Argued Before Trial Judge Compared With Case Argued On Appeal

31 Before the trial judge, Lumley had argued that its obligations under the performance bonds were not autonomous obligations. Accordingly, in order to determine which party had priority, it was appropriate to apply, by analogy, the principles which applied to sureties. Those principles require some elaboration.

32 It is well established that when a creditor claims payment of a debt from a solvent debtor, the creditor is required to give credit for the amount it has received from the guarantor. It is equally well established that in the case of an insolvent debtor, certain technical rules operate: see Ellis v Emmanuel (1876) 1 Ex D 157; Westpac Banking Corporation v Gollin [1988] VR 397 at 402-403. Those rules are as follows.

33 First, in the case of a guarantee for the whole of the debt but where the amount payable under the guarantee is limited to a particular amount, the right to recover on insolvency does not arise until the creditor has been satisfied as to 100 cents in the dollar. Accordingly, there is no pro tanto distribution of any monies received from the insolvent debtor and the guarantor is not entitled to prove.

34 Secondly, in the case of a guarantee of the whole of the debt, subject to a fluctuating balance up to a monetary limit, the guarantee is treated as being the same as a guarantee of part of the debt. In that case, as is the case with the guarantee of part of a debt, there will be a pro tanto distribution so that the guarantor is entitled to prove in competition with the creditor. The reason for this rule is, apparently, that it is seen as inequitable to allow the creditor to impose additional liability on the guarantor as a result of the fluctuating balance: see Ellis v Emmanuel at 163-164.

35 Lumley now disavows its approach at first instance that the performance bond involved a secondary obligation, accepting that the obligation is autonomous and says the surety rules have no role to play. Alternatively, it submits that if the analogy is apposite, his Honour applied the wrong analogy. The correct comparison was with that of a guarantor who had guaranteed part only of a debt or with a guarantor giving a guarantee up to a monetary limit but with a fluctuating balance. In either case, it would be entitled to prove in the administrations.

Findings of the Trial Judge

36 Austin J found that the performance bonds involved autonomous obligations on the part of Lumley and were not in the nature of a surety. His Honour further held that, subject to the rule against double proofs, Lumley had restitutionary rights against Oceanfast Marine in respect of the amounts paid under the performance bonds: see Moule v Garrett (1872) LR 7 Ex 101. See also Brittain v Lloyd [1845] EngR 1283; (1845) 14 M&W 762; 153 ER 683; Re a Debtor [1937] 1 Ch 163; Thornton v McEwan (1862) 1 H&M 525; Goodwin v Gray (1874) 22 WR 312. As against Oceanfast, Lumley had an express right of indemnity under the deed of indemnity and guarantee. Those rights were the basis upon which Lumley said it was entitled to prove in the administrations of Oceanfast Marine and Oceanfast. Leaving aside the issue whether the rule against double proofs has any application in this case, all parties accept these findings.

37 His Honour held that the rule against double proofs applied in determining the respective parties' rights to be admitted to proof so as to require that one claimant be given priority over the other. Subject to the matter raised by the purchasers in their Notice of Contention, all parties accept that finding. In their Notice of Contention, the purchasers contend that the purchasers and Lumley are each entitled to prove for the full amount of their respective claims - namely $15 million and $5 million. Neither Lumley nor the administrators support this approach. If it becomes necessary to determine the point raised in the Notice of Contention and it is made out, the effect is that the rule against double proofs would have no operation in the present case.

38 His Honour then turned to consider the question as to which claimant had the better right to prove in the administration of Oceanfast Marine and Oceanfast and held that the purchasers had the prior right to prove. His conclusion was derived essentially from the terms of the contract entered into between the parties. He said at para 81:

"The present case is purely commercial. I cannot see anything inequitable about an outcome that requires the Purchasers to be fully paid before Lumley can recover in the insolvent administrations, bearing in mind that the whole purpose of the performance bonds was to provide security to ensure that the Purchasers' financial interests were protected in the transaction. It would have been open to Lumley to negotiate a different outcome contractually but it did not do so. It accepted a contractual structure which did not give priority to its claim over the claims of the Purchasers. It was in a position to adopt a fee structure that would reflect its exposure. Lumley has no `equity' to upset the commercial outcome."

39 I have mentioned above the argument advanced by Lumley at the hearing that the performance bond did not involve an autonomous obligation, but rather that it imported a secondary obligation so that the rules relating to sureties should be applied. In relation to that argument, his Honour stated that it was "not clear that any of these rules have an application to autonomous obligations". However, if the principles governing sureties were analogous, he considered that those principles also favoured the view that the purchasers had priority over Lumley. In expressing that view, his Honour considered that the relevant comparison was with the guarantee of a whole debt subject to a maximum limit not affected by the "fluctuating balance" principle. It followed on the application of this principle that, as the purchasers had not been paid in full, they could prove for the whole amount of their claims and Lumley could not prove.

40 It is useful at this point to refer to the principles which his Honour applied in reaching his conclusion as to the nature of the obligation under the performance bond.

Autonomous Obligation

41 His Honour considered that the performance bond was an autonomous obligation of the kind described in Wood Hall v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 by Stephen J at 457. I will refer to that passage shortly. It should first be noted that Barwick CJ also found that the contracts in that case did not give rise to the relationship of suretyship. His Honour said at 445:

"The circumstance that the purpose of the cash deposit or its documentary substitute is as a security for the due performance of the contract or the contract work does not, in my opinion, involve either the Bank or the owner in any of the obligations or rights of suretyship. ... The bank documents are really in the nature of an unconditional bond to pay money on demand up to a stated maximum amount, being expressed, for example, in cl 2 of the said deed."

42 Stephen J described the nature of the bond as being equivalent to a cash payment. He said at 457, in the passage to which Austin J referred:

"Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is `as good as cash' can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being `as good as cash' in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 171, Lord Denning recently described the performance guarantee as standing `on a similar footing to a letter of credit'."

See also Gibbs J at 451.

43 It is perhaps convenient at this point to also refer to the material relied upon by Lumley in further support for the characterisation of the performance bond as involving an autonomous obligation. Senior counsel submitted that the performance bond was akin to a stand-by credit: see Documentary Credits Jack, Malek and Quest, 3rd Ed 2001 at Ch 12. The authors note at 12.1 that the usual functions of standby credits, demand guarantees or performance bonds:

"is to enable one party to a contract to obtain money from a reliable source, usually a bank, when the other party has failed, or is alleged to have failed, to perform the contract or some aspect of it. They are often used in construction contracts as security for any liability of the contractor to the employer."

44 The authors classify a performance bond as an "independent guarantee". The purpose of a standby credit or an independent guarantee is usually to give security against the applicant's breach of contract, not to enforce his performance: see Bachmann Pty Limited v BHP Power NZ Ltd [1998] VSCA 40; [1999] 1 VR 420. The authors note that in the case of both standby credits and independent guarantees, as is the case with commercial credits, the obligation to pay arises on presentation of the documents specified in the contract and that undertaking is autonomous. This, it was submitted, was significant as the payer under the Bond, (here Lumley) is not concerned with the status of the underlying transactions, in this case those between Oceanfast Marine and Oceanfast and the purchasers. It also appears, and it follows, that the obligations arising under a standby credit and performance bond may only be resisted in the case of fraud: see Kvaerner John Brown Ltd v Midland Bank plc [1998] CLC 446 at 449.

45 By contrast, a contract of guarantee is:

"an accessory contract by which the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated."

46 The liability of a guarantor, therefore, is conditional on the non-performance of the guaranteed party or collateral to the underlying contract.

47 As I have said, all parties now accept that Lumley's obligation under the performance bond was autonomous.

Rule Against Double Proofs

48 His Honour then applied the rule against double proofs.

49 The rationale of the rule against double proofs was stated by Mellish LJ in Re Oriental Commercial Bank, Ex parte European Bank (1871) LR 7 Ch App 99 at 103-104, namely:

"... there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts."

50 In Western Australia v Bond Corporation Holdings Ltd (No 2) (1992) 37 FCR 150 at 163, French J observed:

"The question whether two claims arise out of the same liability is a matter of substance not of form. It may be said that the claim of a principal creditor in respect of its debt and the claim of a surety in respect of the debtor's failure to indemnify it are distinct. But in substance they relate to the same debt."

51 French J further remarked at 165:

"The authorities and the principle which [underlie] the rule against double proof support the view that the substantial relationship between the liabilities asserted and the amounts thereby claimed in the rival proofs is of greater importance than the legal grounds upon which they are sought."

52 However, as his Honour pointed out at 164 the rule has nothing to say as to which of two competing creditors had the better right to claim.

53 Austin J reasoned that, applying the approach that the rule against double proofs was concerned to ensure that dividends were not payable in respect of substantially the same debt:

"75 ... the claims by the Purchasers and Lumley in the administration of [Oceanfast Marine] and Oceanfast are claims to substantially the same debt. Consequently the administrators of the Builder and Oceanfast cannot pay a dividend which admits both claims.

76 This is because the Purchasers' and Lumley's claims against the Builder and Oceanfast are both related to the Builder's default under the tug construction contracts. The Purchasers' claim against Oceanfast arises because Oceanfast guaranteed the performance of the tug construction contracts by the Builder and became liable on the guarantee when the Builder defaulted and cause(sic) them to suffer loss. Lumley's claim against Oceanfast arises because Oceanfast indemnified it against a loss incurred when Lumley met the Purchasers' demand for payment. While Lumley's loss was not directly caused by the Builder's default, it was connected to the default because the Purchasers' notice to Lumley under the performance of bonds was required to contain a certificate that the amount demanded by the Purchasers arose from the Builder's default, and was also required to contain details of the default. The position may well have been different if, for example, Lumley was simply obliged to pay a specific amount to the Purchaser on demand, without any need for a certificate of default.

77 The linking of the claims of Lumley and the Purchasers against [Oceanfast Marine] and Oceanfast to default by [Oceanfast Marine] is sufficient, in my view, to make it unfair to the other creditors of the Builder and Oceanfast to permit dividends to be paid on both claims. The rule against double proofs therefore applies to require that one claimant be given priority over the other.

54 His Honour considered that his conclusion was consistent with the decision in Barclays Bank Limited v T.O.S.G. Trust Fund Ltd [1984] AC 626. He said:

"My conclusion is consistent with the decision in the TOSG Trust Fund case. There the bonds were regarded as autonomous obligations but they were conditional, relevantly, on notification that the tour operator could not carry out its obligations. The banks' obligation under the bonds was held to relate to substantially the same debt as that claimed by the assignee of the customers who lost their holidays through the tour operators default."

55 In reaching that conclusion, his Honour rejected Lumley's reliance on T.O.S.G and in particular, on the notion that it was equitable first, that Lumley be entitled to prove and secondly, to require the purchasers to reduce their proof by the amount they had recovered from Lumley "because Lumley [had] paid `real money' and the purchasers [had] received real money from Lumley in priority to others".

Lumley's Argument On Appeal

56 Lumley's argument on appeal involved three essential propositions. First, it submitted that the rules governing sureties do not apply.

57 Secondly, Lumley submitted that the rule against double proofs does not apply. The premise for this submission was that the payment by Lumley to the purchasers should be treated in the same manner as when the debtor was solvent, namely as a pro tanto discharge of the purchaser's debt. On this approach there were either two separate debts or, probably more accurately, two parties claiming for separate components of the same debt. Accordingly, the purchasers would prove for their debt - which on this approach would be $10 million, and Lumley for its claim of $5 million.

58 Thirdly, Lumley submitted that equity requires that the purchasers' proofs be excluded to the extent they have received payment - in this case the $5 million paid by Lumley under the performance bond, leaving Lumley to claim for the $5 million. It relies upon T.S.O.G in support of this submission.

Should There Be Any Analogy With The Position Of A Surety?

59 Senior counsel for the appellant approached the appeal on the basis that his Honour had endorsed and applied the analogy with the position of a surety on an insolvency. That is not strictly correct. His Honour dealt with that argument but expressed the view, as set out above, that it was unclear whether the rules had any application in the case of autonomous obligations.

60 On the appeal, none of the parties supported the proposition that the principles relating to sureties on insolvency should be applied. The rules are technical and not necessarily logical. Further, as senior counsel for Lumley pointed out, there is no justification for the rule in circumstances where the creditor (here the purchaser) received a real benefit as a result of Lumley performing its obligations under the performance bond.

61 Lumley submitted alternatively, that if the surety analogy was appropriate, Lumley's claim was analogous to the guarantee of part of the debt. In particular, it was said there was no express provision guaranteeing the whole of the debt: cf Ex parte National Provincial Bank of England, In re Rees (1881) 17 Ch Div 98.

62 There is no reason in principle to apply rules which relate to a secondary obligation to autonomous obligations. This is even more so when those rules are universally acknowledged to be unduly technical and obscure. Accordingly, I do not consider it necessary to determine whether his Honour's reasons on this point are correct.

Does the Rule Against Double Proofs Apply?

63 In my opinion, the rule against double proofs does apply. In this regard I would adopt the reasoning of Austin J at paras 75 - 77, set out earlier in my reasons at para 53. That leaves the question as to how the two proofs should be treated in this case.

Rule To Apply In Respect of Autonomous Obligations

64 Lumley submitted that the rule to apply was one which recognised the fact of payment to the purchasers. It was submitted that it did not matter how that rule was characterised, whether it be by determining that there had been a pro tanto reduction of the debt or as a matter of doing justice between two competing claims. On either basis Lumley should be entitled to prove in the liquidation of the builders for its $5 million and the purchasers for $10 million.

65 All parties acknowledged that there was no direct authority on point. Lumley submitted however, that the T.O.S.G. case provided some assistance.

66 T.O.S.G. was a company established by a group of travel agents and tourist operators for the purpose of providing financial assistance to travellers should they be left stranded, or having paid for holidays be left without their arrangements being able to be fulfilled, where their travel agent had for some reason, for example due to liquidation, defaulted in the provision of the travel services. The funding for the scheme was provided by means of bank bonds or other securities provided by the travel agents in favour of T.O.S.G.

67 Barclays and a number of other banks had provided bank bonds to T.O.S.G. at the instance of Clarksons. At the time of giving the bonds, Barclays and the banks had obtained counter indemnities from Clarksons. Clarksons went into liquidation, leaving clients without their contracted travel services. T.O.S.G. thus called up the bonds which were duly paid. Although T.O.S.G. had a complete discretion (within the parameters of its charter) as to the use of the monies paid under the bond, it in fact used those monies to make payments to the holidaymakers and other customers of Clarksons who had suffered a loss. As a condition of payment, the Clarksons' clients were required to assign such rights as they had against Clarksons to a government agency. That agency had a statutory obligation to make payments to stranded and other customers of failed travel agencies and tourist operators.

68 The Banks sought to prove in the liquidation pursuant to their counter indemnities for the amounts paid by T.O.S.G. to the Clarksons' clients. The agency sought to prove in respect of the assigned customer claims to the extent it was out of pocket pursuant to its statutory obligations to those clients. The Clarksons' liquidators contended that the two proofs reflected the same debt and by operation of the rule against double proofs, only one proof could be lodged. The Bank and the agency each sought declaratory relief that their respective debts should be admitted and that of the other rejected.

69 At first instance, all parties proceeded on the basis that the rule against double proofs applied. Nourse J considered that the surety analogy applied or alternatively that a "broad equity" applied. On the surety analogy, his Honour found that the bank was analogous to a creditor who had guaranteed the whole debt up to a monetary limit. On the application of "broad equity principles" his Honour considered the result was to be derived from the intentions of the parties as deduced from their contracts. On either basis, his Honour held that the banks were not entitled to prove in the liquidation. This decision was reversed on appeal.

70 On appeal to the Court of Appeal the question whether the case involved a case of double proofs was raised. In dealing with that question, Oliver LJ at 636 referred to the operation of the rule against double proofs in these terms:

"It is simply whether the two competing claims are, in substance, claims for payment of the same debt twice over. ... the rule against double proofs in respect of two liabilities of an insolvent debtor is going to apply wherever the existence of one liability is dependent upon and referable only to the liability to the other and where to allow both liabilities to rank independently for dividend would produce injustice to the other unsecured creditors.

... and stems from the fundamental rule of all insolvency administration that, subject to certain statutory priorities, the debtor's available assets are to be applied pair passu in discharge of the debtor's liabilities. ... A simpler test, perhaps, is to postulate the question - what would the position be as regards the payment of the liabilities in respect of which proofs have been lodged if the debtor were now solvent?"

71 In re Oriental Commercial Bank provides an example. There Mellish LJ observed at 102:

"It appears to me clearly that it is substantially the same debt; because if all parties had been solvent, whatever sums the Oriental Commercial Bank might have paid to the Agra Bank, although they would have paid it, no doubt, for the purpose of performing the contract they had entered into by their indorsement, yet, substantially, whatever sums they might have paid to the Agra Bank would have gone in reduction of the sums which the Oriental Commercial Bank had promised to pay the European Bank. In that case the Oriental Commercial Bank could never had been called upon to pay these bills twice over. It would have made no difference that they had entered into two contracts with two separate parties that they would pay the bills ... It is clear that they would have performed both contracts by paying the bills once ..."

72 Oliver LJ considered that the rule against double proofs did apply. In determining how the rule should be applied, his Honour relied upon the following features of the transaction. The bonds given by the banks to T.O.S.G. could be called up by T.O.S.G. upon the happening of a nominated event - here the liquidation of Clarksons. However, T.O.S.G. was not obliged under the terms of the bond to pay the monies for any purpose associated with the nominated event. The banks had also taken an independent charter of indemnity from Clarksons. Oliver LJ at 639 reasoned the matter this way:

"Suppose that no counter-indemnity had been sought or given and disregard altogether Clarksons' insolvency. The banks undertake, for what they no doubt regard as an adequate consideration, to provide moneys to a third party in a certain event. If the event occurs and if some part of the moneys are applied in fact in paying debts of Clarksons, by what title could the banks claim, in effect, a recoupment for which they never stipulated as part of the original consideration? I can see none."

73 Oliver LJ at 645 also considered that the surety analogy was applicable but, contrary to the finding of Nourse J, found that the relevant rule was the second of those referred to in Ellis v Emmanuel, namely, that of the guarantee of the whole of a debt subject to a fluctuating balance up to a monetary limit.

74 It followed on the application of this rule that the banks were entitled to prove in priority to the agency.

75 Oliver LJ then dealt with the matter on the "broad equity" approach. Nourse J's reasoning in that regard was as follows:

"But in the end I do not need to rely on the analogy at all. I agree with [counsel] that the decisive feature of the present case is the trust fund's power to recoup to the customers any shortfall remaining after they had received all available dividends in Clarksons' liquidation. Once you get to that stage it is apparent that it would indeed be most inequitable for the banks to claim, as against the customers, a rateable proportion of any dividends receivable or received by them. This is not a narrow equity, but a broad one. And it is a surer basis for decision than any mere analogy."

76 Oliver LJ found however, at 647-648:

"... I cannot, for my part, share the [trial] judge's view that there is anything inequitable in allowing the banks who have paid real money to recover a dividend on the sums which they have paid and in reducing the proofs of the customers, who have received real money in priority to other creditors, by the amounts which they have in fact received. Leaving aside, for the moment, the suretyship analogy, if the amounts of the customers' claims had been equal to or less than the bond moneys, there could be no question whatever that the banks were entitled to prove for what they had paid. What is there then in the fact that the customers' debts exceed the amount of the bond moneys that displaces the banks' claims? It is only the rule against double proof and that brings one back to the suretyship analogy. If one discards that as a guide, one is left with competitive claims between a class of creditors (the banks) who are out of pocket to the full nominal amount of their claims and a class of creditors (the customers) who are in fact out of pocket to an extent less than the full nominal amount of their claims because of their receipt of the banks' money. ... I can see no equity which dictates that the customers' claims should be preferred."

77 Kerr LJ did not endorse the surety analogy and for the reasons given by Oliver LJ considered the banks could prove to the exclusion of the agents. Slade LJ applied the surety analogy.

78 Lumley submits that the reasoning of Oliver LJ grounds support for its primary submission that it is entitled to prove for the amounts paid under the performance bonds. It had paid "real moneys" and the purchasers had correspondingly received "real moneys".

79 In the House of Lords, the view was taken that the arrangement did not involve any notions of surety and therefore those principles did not apply. Lord Brightman at 668 took the view that there was no impediment to the banks claiming under their counter indemnity whether pursuant to the rule against double proofs or otherwise.

80 Lumley, however, particularly draws attention to the speech of Lord Templeman at 672-673, as being apposite to their case:

"In my view, upon the true and simple construction of the bond and the indemnity, when T.O.S.G. paid £1,000 of Barclays' money to a customer whose claim against Clarksons amounted to £1,000, the claim of that customer against Clarksons was extinguished and there became vested in Barclays an indisputable claim against Clarksons for £1,000 under the indemnity. If T.O.S.G. paid £200 to a customer whose claim was £1,000, then the customer could thereafter only claim and prove for the balance of £800 and Barclays could claim and prove under its indemnity for £200. By the indemnity Clarksons agreed to repay to the banks every penny that the banks paid under the Bond and that T.O.S.G. paid to the customers.

In the event, T.O.S.G. extinguished claims of Clarksons' customers to the extent of £1,268,000 and the banks became entitled to prove for £1,268,000 under their indemnities.

81 His Lordship concluded at 674:

"But equity, broad or narrow, does not overlook the distinction between a debt and a dividend on a debt, nor does it enable T.O.S.G. to ignore or modify the legal rights of the banks under the bonds and the indemnities. ... The liquidators will pay the dividends on £1,268,000 to the banks because the banks provided that sum pursuant to the bonds in discharge of the liabilities of Clarksons to its customers, and because the banks became entitled to be indemnified by Clarksons pursuant to the indemnities. The liquidators will pay to the agency dividends on the sums which the agency provided in discharging further liabilities of Clarksons to its customers."

82 Lumley submits the same position should apply here, the basic proposition being that the purchasers should not be entitled to receive more than 100 cents in the dollar. It was also submitted that in cases such as Westpac, and T.O.S.G. it was assumed there should be a pro rata reduction of the debt.

83 Austin J rejected Lumley's submissions on this point. He considered that on the facts in T.S.O.G.:

"considerations of equity may well have pointed to preferring the banks over the customers, since the customers' claims had been artificially preserved by an assignment notwithstanding that the customers were paid out, and their claims were now being asserted for the benefit of the agency rather than the customers. Moreover, the arrangement in that case was a public compensation scheme involving non-commercial considerations."

84 His Honour thus preferred to base his decision on the nature and purpose of the transaction entered into.

85 With respect to his Honour, I do not necessarily see any relevant point of distinction in the fact that the agency's obligations to pay the customers arose under a public compensation scheme. However, as was submitted by Oceanfast Marine, Oceanfast and the administrators, T.S.O.G. is distinguishable because in that case there was an express stipulation in the bonds for the return of any surplus. There was no such reservation here.

86 This very much brings one back to determining whether the answer is to be found in the terms of the contracts between the parties. This was the position of Oceanfast Marine, Oceanfast and the administrators. They contend that the actual result arrived at by his Honour for the reasons expressed in para 81 of his judgment is correct. They further point out that notwithstanding that the obligation is autonomous, the Court cannot be blind to the fact that the obligation is payable against the due performance of the contract: see cl 5(1). In other words, the arrangements between the parties provided a means whereby the purchasers had available the equivalent of cash, should it happen that there was default or non-performance of the tug construction contract.

87 Senior counsel for the administrators also submitted that it was appropriate to establish some prima facie rule which gives effect to the commercial purpose of the bonds as explained in Wood Hall. In support of this submission, the administrators say that Lumley was best placed to price the credit risk that it was assuming when it issued the bonds. It would be expected that the risk would be reflected in the fee which it charged for the facility.

88 Likewise, the purchasers' primary position is that the trial judge's decision is correct for the reasons given by Austin J in para 81 of his judgment. They contend that the money paid to them under the Performance Bonds were `collateral benefits' which they are entitled to retain for their own benefit. They point out that the law has always recognised the availability of two forms of compensation for one loss: see Farrow Finance Co Ltd v ANZ Executors & Trustee Co Ltd (1997) 15 ACLC 529 at 553. They submit that in issuing the bonds Lumley accepted autonomous obligations, providing the purchasers with an equivalent of cash, without reserving any right to undermine the commercial operation of the bonds by lodgement of a competing proof of debt.

89 It is clear that there are competing arguments either way in this matter. There is force in each argument. Both may be put simply. On the one hand, there is the contention of Lumley that there should be a pro tanto reduction of the purchasers' claim, because they had already received from Lumley a portion of the "loss" for which it sought to prove. On the other hand, there is the argument that the parties entered into a commercial arrangement, the purpose of which was to provide security against breach so that the obligee ought to be entitled to the full benefit of the contract without reduction of its rights against the debtor.

90 A number of considerations point to the second of these approaches as being the appropriate one to adopt. First, in the cases which have dealt with the rule against double proofs, other than in surety situations, emphasis has been given to the circumstances of the particular case: see T.O.S.G per Slade LJ at 660 (cited with approval by French J in Western Australia v Bond Corporation):

"Difficulty may well arise in determining whether, in any given case, two proofs are in respect of what is in substance the same debt. Though various broad tests have been canvassed by both Bar and Bench in argument in this case, I have, for my own part, found none of them wholly satisfactory. The question can, I think, only be determined by reference to the particular facts of the case before the court, bearing in mind that it is the substance of the relevant liability, rather than the form, on which attention must be concentrated." (emphasis added)

91 In this case, the "particular facts of the case" are to be derived initially from the contracts between the parties. The following features of those transactions which are relevant are as follows. First, Lumley's obligation under the performance bond is a joint and several one with Oceanfast Marine. Secondly, Oceanfast Marine could not "stop" or "undermine" the obligation to pay (cl 4). Thirdly, Lumley was able to pay out the bond and thus bring to an end its obligation without being required to do so (cl 5). Fourthly, as Lumley could have attained the position it now asserts by a relevant contractual provision, the terms of the contract should govern the outcome. Finally, under the Deed of Indemnity and Guarantee, Oceanfast guaranteed Lumley against "all loss" (cl 2.1), being the "aggregate at any time of all payments made and liabilities incurred by [it] in connection with [the performance bond]" (cl 1.1).

92 This combination of provisions highlights certain essential features of the transaction. The bonds were required so as to provide the purchasers with security against loss should there by default by Oceanfast Marine. The provisions of the performance bonds were directed to that end. There were no provisions directed to protecting Lumley should its restitutionary rights against Oceanfast Marine prove to be inadequate or worthless. This is underscored by the fact that Lumley sought to protect its position, that is, to recover any payment made under the bond by obtaining the indemnity from Oceanfast. The fact that the right was also rendered worthless because of Oceanfast's insolvency is not to the point.

93 I have come to the conclusion, therefore, that the second of the two views is preferable and that the purchasers should be entitled to prove in priority to Lumley. The consequence in this case is that Lumley will not be entitled to prove in the liquidation as there are insufficient funds to meet the purchaser's claim of $15 million.

94 It also follows on the view I have reached it is unnecessary to determine the Notice of Contention.

95 Accordingly, the appeal should be dismissed with costs.

96 GILES JA: Beazley JA has described the contracts between the parties. Although there were seven transactions, it was common ground that they were relevantly identical and could be treated as one transaction. In what follows I have done so by compressing the separate contracts and the separate bonds into one contract and one bond, by compressing the separate contracting parties with Oceanfast Marine into the one contracting party Adsteam, and by combining the losses of the separate contracting parties into one figure and the payments under the separate bonds into one figure.

97 The broad question can be stated as follows. Oceanfast Marine contracted to build a tug boat for Adsteam. Its parent company Oceanfast guaranteed performance of Oceanfast Marine's obligations under the contract. The contract required that Oceanfast Marine provide to Adsteam an insurer's bond for the due performance of the contract. Lumley issued the bond. Oceanfast indemnified Lumley in respect of its obligations under the bond. Oceanfast Marine and Oceanfast went into voluntary administration and Oceanfast Marine failed to complete performance of the contract. Adsteam incurred losses of $15 million. Adsteam made demand under the bond and was paid $5 million. Which of Adsteam and Lumley can prove in the administrations of Oceanfast Marine and Oceanfast and for what amount?

98 There are mathematically a number of possible answers to the broad question, but the particular question ordered for separate determination was confined to three possible answers. It came down to whether, in each administration, Adsteam can prove for $15 million and Lumley for $5 million; Adsteam can prove for $15 million and Lumley for nothing; or Adsteam can prove for $10 million and Lumley for $5 million.

99 The particular question included "having regard to the rule known as `the rule against double proofs'". That is a rule to the effect that only one dividend will be paid in an insolvent administration for what is in substance the one debt, see for example re Oriental Commercial Bank, ex parte European Bank (1871) LR 7 Ch App 99 at 103-4; Day & Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd [1982] HCA 20; (1982) 150 CLR 85 at 100; Barclays Bank Ltd v TOSG Trust Fund (1984) 1 AC 626 at 637-8, 649, 659-60 (CA); Western Australia v Bond Corporation Holdings (No 2) (1992) 37 FCR 150 at 161-4. The rule, of course, throws up which of the creditors claiming in respect of the one debt is to be preferred. It is part of the question, and does not provide an answer to the question.

The Contract in More Detail

100 Oceanfast Marine agreed to build the tugboat for a stated Basic Contract Price as adjusted in accordance with the contract to arrive at a Final Contract Price.

101 By cl 9(1) of the contract progress payments of stated percentages of the Basic Contract Price were to be made. The first progress payment was to be made upon execution of the contract "and delivery of the performance bond referred to in cl 5", being the bond earlier mentioned. The penultimate progress payment, taking the progress payments to 95 per cent of the Basic Contract Price, was to be made upon the launching of the tug boat "to the satisfaction of the Purchaser's Representative". The last payment of the remaining 5 per cent of the Basic Contract Price was to be made "upon receipt by the Purchaser of the bank guarantee referred to in Clause 9(5) hereof and acceptance by the Purchaser of the handover of the Vessel in accordance with this Contract".

102 Clause 12 of the contract provided for modifications and consequential increase or decrease in cost, with a machinery for ascertaining the adjustment to the Basic Contract Price, if necessary by arbitration. By cl 12(5), any adjustment was to be specified in the account referred to in cl 7(2), and if an increase was to be paid upon completion of the modification and if a decrease was to be deducted from the relevant progress payment or repaid, in each case subject to any outstanding arbitration.

103 Clause 7 of the contract provided for payment of the Final Contract Price -

"7. FINAL CONTRACT PRICE AND ACCOUNT

(1) The Final Contract Price for the Vessel shall be the Basic Contract Price as adjusted in accordance with the provisions of this Contract and the Final Contract Price shall be paid by the Purchaser to the Builder as herein provided.

(2) The Builder shall within a reasonable period (not exceeding 14 days) after the delivery of the Vessel submit to the Purchaser an account showing in detail the amount payable to the Builder under this Contract, all amounts paid to the Builder by the Purchaser under this Contract and the balance payable to or by the Builder, and any such balance shall, if it has become payable by the terms of this Contract, be paid within 14 days after submission of the said account."

104 Clause 5, dealing with the performance bond, read -

"5. PERFORMANCE BOND:

(1) Unless upon or before the execution of this Contract any other arrangement satisfactory to the Purchaser is mutually agreed in writing between the parties hereto the Builder shall at its own cost obtain and deliver to the Purchaser at the time of execution of this Contract the bond of an insurer reasonably acceptable to the Purchaser or other surety previously approved in writing by the Purchaser to be jointly and severally bound with the Builder in the sum equal to 10% of the Basic Contract Price for the due performance of this Contract, and the said bond shall be substantially in the form of Schedule 2.

(2) The performance bond referred to in clause 5(1) will expire on the date of handover of the Vessel to the Purchaser provided that an enforceable guarantee or bond is provided under clause 9(3) [sic: in fact 9(5)]."

105 The form of performance bond in Schedule 2 to the contract named Lumley as the insurer, and appears to have reproduced a standard Lumley wording. The bond issued by Lumley, which I will shortly set out, was in that form. Although cl 5(1) of the contract referred to the "insurer ... or other surety" being "jointly and severally bound with the Builder ... for the due performance of this Contract", the form of bond was not framed in that way. The form of bond also provided for its expiry "at 4.00 pm on the date of issue by the obligee or the obligee's representative of the certificate of final practical completion", but the contract had no provision for such a certificate and by cl 5(2) the bond was conditionally to expire on the date of handover of the tug boat.

106 Clause 9(5) and (6) dealing with the bank guarantee read -

(5) The Builder shall of its own cost at the time of acceptance by the Purchaser of handover of the Vessel in accordance with this Contract provide to the Purchaser a bank guarantee from an Australian bank substantially in the form of Schedule 3 (the "Bank Guarantee") whereby the bank undertakes to pay to the Purchaser on demand any sum or sums not exceeding in the aggregate 5% of the Basic Contract Price that may become payable by the Builder to the Purchaser under Clause 21 hereof, or the bond of an insurer reasonably acceptable to the Purchaser or other surety previously approved in writing by the Purchaser to be jointly and severally bound with the Builder in the sum equal to 5% of the Basic Contract Price that may become payable by the Builder to the Purchaser under clause 21 hereof.

(6) In the event of the said Bank Guarantee or insurance bond being drawn down by the Purchaser the matter will be referred to arbitration unless the parties otherwise agree. If the arbitrator subsequently rules in favour of the Builder the Purchaser will pay interest on the drawn down money until this money is repaid. The interest rate applicable will be the ANZ Bank Reference Interest Rate (as published weekly in the Australian finance Review) applicable to the period concerned."

107 Clause 21 of the contract, referred to in cl 9(5), provided for a maintenance period in respect of which Oceanfast Marine would rectify matters discovered and notified or pay the reasonable cost of rectification, plus a warranty in relation to the main engines and other equipment. The form of bank guarantee in the contract was an agreement by the bank to pay money on demand.

108 Clause 33 was an arbitration clause in wide terms. It included that no payment due or payable under the contract should be withheld on account of arbitration proceedings "except to the extent that such payment is the subject to [sic] the arbitration proceedings".

109 Save so far as the prescription of the form of bond did so, the contract did not provide for when Adsteam could demand payment under the bond or what it must or could do with the money received either when it demanded payment or when, as the bond allowed, payment was made without demand.

Oceanfast's Guarantee

110 Oceanfast's guarantee was concise, contained in cl 35 of the contract -

"35. OCEANFAST LIMITED GUARANTEE:

The guarantor has consented to the Builder entering into this Contract and guarantees to the Purchaser the due and punctual performance by the Builder of the Builder's obligations under this Contract."

The Bond

111 The body of the bond issued by Lumley was in the terms -

"1. At the request of the CONTRACTOR as identified in Item 1 of the Schedule hereto (the `Schedule') and [sic] LUMLEY GENERAL INSURANCE LIMITED (the'`SURETY') and in consideration of the OBLIGEE, as identified in Item 2 of the Schedule, accepting this PERFORMANCE BOND (`the Bond') in respect of the performance of the CONTRACTOR under the Contract as identified in Item 3 of the Schedule, entered into or to be entered into between the OBLIGEE and the CONTRACTOR the SURETY undertakes covenants and agrees to pay on demand any sum or sums which may from time to time be demanded by the OBLIGEE to an amount not exceeding the Bond amount as specified in Item 4 of the Schedule which the OBLIGEE certifies arises from the default or non-performance of the CONTRACTOR in terms of the conditions of the CONTRACT, excluding default or non-performance arising from causes specified in Item 7 of the Schedule.

2. Provided that the OBLIGEE shall first give written notice to the CONTRACTOR stating details of such default or non-performance arose due to circumstances within the control of the CONTRACTOR and that such written notice be delivered to the SURETY together with a letter of demand from the OBLIGEE to the SURETY.

3. This Bond will commence on the Date of Commencement as specified in Item 5 of the Schedule and is to remain in force until expiry of the Bond, as specified in Item 6 of the Schedule.

4. Should the SURETY be notified in writing that the OBLIGEE desires payment to be made of the whole or part or parts of the Bond amount and enclosing a copy of the aforementioned notice of non-performance by the CONTRACTOR, the SURETY undertakes that it will make payment to the OBLIGEE within seven (7) working days of receipt of such notice notwithstanding any notice given by the CONTRACTOR not to pay same.

5. The SURETY may at any time without being required so to do pay the OBLIGEE the Bond amount less any amount or amounts it may previously have paid under this Bond or such lesser sum as may be required and specified by the OBLIGEE and thereupon the liability of the SURETY hereunder shall immediately cease. Should the OBLIGEE confirm in writing that the CONTRACTOR has fulfilled the conditions of the CONRACT this Bond shall be null and void and of no further force and effect.

6. Any notice by the OBLIGEE under this Bond shall have been properly given if signed by the OBLIGEE or the OBLIGEE'S representative, identified in Item 8 the Schedule, and delivered in a letter addressed to the SURETY at its address specified in Item 9 of the Schedule such claim for payment shall be subject to laws of the legal jurisdiction specified in item 10 of the Schedule.

7. This bond is neither negotiable nor transferable and shall be returned to the SURETY and the CONTRACTOR. In the event that the Bond is unable to be returned to the SURETY upon expiry, the OBLIGEE is to provide written confirmation that the contractor's obligations under the CONTRACT have been fulfilled and that the SURETY has no further liability under the Bond."

112 The Schedule to the bond contained identifications and specifications as indicated in the body of the bond, including in Item 6 the provision for expiry to which I have already referred. Item 7 excluded -

"Circumstances which the Obligee reasonably agrees are beyond the control of the Contractor including, but not limited to, acts of god, war, rebellion, insurrection, sabotage, epidemic, nuclear explosion or nuclear contamination."

113 The company identified in Item 1 in the Schedule to the bond was Oceanfast, not Oceanfast Marine. The trial judge said, referring to Oceanfast Marine as the Builder -

"Some sense could be made of performance bonds in this form because Oceanfast undertakes obligations as a guarantor in the tug construction contracts, and the bonds could be seen to support Oceanfast's performance of its principal guarantee obligations rather than the Builder's performance of its principal obligations under the contracts. However, the case was argued before me on the basis of a statement of agreed facts according to which the performance bonds are to be treated as relating to `default or non-performance of the first and/or second defendant in terms of the conditions' of the respective tug construction contracts. In other words, I am to assume that the Surety's obligation to pay the Obligee may be triggered by the Obligee's notice of default or non-performance by either the Builder or Oceanfast."

114 This was and is not entirely satisfactory. Any default or non-performance under the contract by Oceanfast Marine would be different from any default or non-performance under the contract by Oceanfast. Only one contractor was identified in the bond. One would expect it to have been Oceanfast Marine. I do not think the separate question should have been ordered with the alternatives, without determination by agreement or otherwise of the correct identification of the contractor.

115 All arguments on appeal treated Oceanfast Marine as the only relevant contractor. As I later record, the decision of the separate question led to disposal of the proceedings, and in the circumstances it seems to me that that enables this Court to proceed on that basis.

Oceanfast's Indemnity

116 The indemnity was by deed. It named Oceanfast as the first party, identified as "Contractor"; Oceanfast as the second party, identified as "Guarantor"; and Lumley as the third party, identified as "Surety". It was separately executed by Oceanfast as the first two parties.

117 The recitals to the deed were -

"RECITALS

A The Contractor and the Guarantor have requested the Surety to consider from time to time applications by the Contractor to issue Bonds and, if the Surerty shall in its absolute discretion think fit, to grant any one or more of such applications.

B The Surety has agreed to that request on the condition that the Contractor and the Guarantor enter into this deed (among its other requirements)."

118 "Bond" was defined in the deed in ample terms, in essence any bond or like obligation given or incurred by the Surety to anyone at the request of the Contractor. "Loss" was defined to mean "the aggregate at any time of all payments made and liabilities incurred by the Surety in connection with a Bond" and to include, amongst other things, "payments by the Surety of claims under a Bond".

119 The operative clauses of the deed relevantly provided -

"2 INDEMNITY AND PAYMENT OF LOSS BY CONTRACTOR

2.1 Unconditional indemnity

The Contractor:

unconditionally and irrevocably indemnifies the Surety against all Loss; and

must upon demand immediately pay the Surerty any Loss.

...

3. GUARANTOR'S GUARANTEE OF CONTRACTOR'S OBLIGATIONS

3.1 Unconditional guarantee

The Guarantor unconditionally and irrevocably guarantees the punctual performance by the Contractor of its obligations under this deed. The Guarantor must upon demand immediately pay the Surety any Guaranteed Money owing by the Contractor under this deed which is not paid on its due date.

Unconditional indemnity

The Guarantor unconditionally and irrevocably indemnifies the Surety against all losses, damages, costs, charges, liabilities and expenses which the Surety may at any time suffer or incur directly or indirectly because:

(a) it does not for any reason recover from the Contractor any Guaranteed Money or any money which would be Guaranteed Money but for:

(i) the fact that any agreement between the Surety and the Contractor or another person is void, voidable or wholly or partially unenforceable; or

(ii) any release of the Contractor;

(b) the Surety has to disgorge any money paid to or received by it and credited against Guaranteed Money; or

(c) the Contractor or a Guarantor fails to pay any Guaranteed Money when payable.

The Guarantor must upon demand immediately pay the Surety any amount of loss, damage, cost, charge, liability or expense so indemnified."

120 There was a curious naming of Oceanfast, apparently intentionally, as both Contractor and Guarantor. The trial judge said -

"23 A person cannot be surety for the performance of his own obligation. Since Oceanfast is both the Contractor and the Guarantor, the provisions of the deed purporting to impose guarantee obligations on Oceanfast are ineffective. The statement of agreed facts invites the Court to assume that Oceanfast is erroneously described in the deed as the Contractor, but the agreed facts acknowledge that Oceanfast is the entity which agreed, by entering into the deed, to indemnify Lumley against payments made by Lumley connection with the performance bonds. I shall proceed on the basis that Oceanfast has the indemnity obligation under the deed, there is no effective guarantee obligation and the Builder is not a party to the deed."

121 Again this was and is not entirely satisfactory. That Oceanfast Marine indemnified Lumley as well as Oceanfast could have been significant, as that could have provided a contractual ground for Lumley to prove in the administration of Oceanfast Marine. One would expect Oceanfast Marine to have been the party identified as Contractor. Once more I do not think the separate question should have been ordered without determination, by agreement or otherwise, of the correct parties. The basis on which the trial judge proceeded was, however, expressly affirmed in the arguments on appeal as the basis to be adopted. For the same reasons as before, I consider that this Court can proceed on that basis.

Demand on Lumley

122 Oceanfast Marine and Oceanfast went into voluntary administration in February 1999. Oceanfast Marine ceased to perform the contract. In April-May 1999 (different dates for the separate contracts) Adsteam gave to Oceanfast Marine notice constituting notice of non-performance as referred to in the bond and duly terminated the contract. It then made demand on Lumley. The demand met the requirements of the bond, including certification that "the amount of which the Obligee desires payment ... arose from the default or non-performance of the Contractor in terms of the conditions of the Contract".

123 The $5 million earlier mentioned is a round figure for the payments demanded and paid under the separate bonds. It was paid at the end of May 1999. There was no evidence of how Adsteam dealt with the $5 million when received.

124 The $15 million earlier mentioned is a round figure for the combined losses of the separate contracting parties with Oceanfast Marine under the separate contracts, the contracting parties being compressed into Adsteam in these reasons. The trial judge recorded, referring to those contracting parties as the Purchasers, that "For the purpose of answering the separate question, I am asked to assume that the Purchasers suffered loss and damage of $15 million as a result of the Builder's breach of the seven contracts." Yet again this was and is not entirely satisfactory. The separate question should not have been answered on an assumption. An answer that Adsteam can prove in the administration of Oceanfast Marine for $15 million or $10 million means just that: it does not mean that Adsteam might be entitled to prove if it has suffered loss. The answer binds all parties. Had the separate question itself incorporated an assumption, there would have arisen the general principle that a court will not decide a hypothetical question.

125 In this instance, however, in the appeal all parties agreed that subject to the outcome of the appeal Adsteam was entitled to prove for $15 million in the administrations. That is, the suffering of losses of $15 million recoverable as damages for breach of contract was admitted, the assumption became fact at the appellate level, and the separate question can therefore properly be answered.

The Administrations

126 Lumley lodged proofs of debt for $5 million in the administrations of Oceanfast Marine and Oceanfast. Adsteam lodged proofs of debt for $15 million in the administrations. The administrators accepted Adsteam's proofs for $15 million and rejected Lumley's proofs for $5 million.

127 In December 1999 a dividend of 14.72 cents in the dollar was paid. Adsteam did not receive and will not receive anything like the $15 million for which it was admitted to proof. It will receive less if Lumley is also admitted to prove for $5 million, and even less if its proof is reduced to $10 million. Lumley will receive something if it is admitted to prove for $5 million, and more if Adsteam's proof is reduced to $10 million. Hence the separate question.

The Separate Question

128 The separate question as framed is -

"WHETHER, having regard to the rule known as `the rule against double proofs':

(a) [Lumley]; and/or

(b) [Adsteam] is entitled to prove in the administration of [Oceanfast Marine and Oceanfast] for the amount referred to in [Lumley's] proofs of debt identified in paragraph 15 of the Statement of Claim."

129 The trial judge answered the question -

`Having regard to the rule known as `the rule against double proofs', [Adsteam is] entitled to prove, and receive dividends accordingly, in the administration of [Oceanfast Marine and Oceanfast] for the amount referred to in the [Lumley's] proofs of debt identified in paragraph 15 of the Statement of Claim, and [Lumley] is not entitled to have its proofs of debt admitted, nor to receive dividends, until the claims of [Adsteam] are fully satisfied."

130 His Honour suggested that it followed that the proceedings brought by Lumley should be dismissed. The parties brought in short minutes of orders which so provided, and the proceedings were dismissed. It appears that the parties were agreed that it followed that the proceedings should be dismissed, save that his Honour noted that Lumley "wishes to preserve its entitlement to prove and to seek appropriate relief in the event that any successful appeal is brought from my determination of the separate question" and "does not want to be seen to consent to that order if consenting might prejudice its rights in these respects".

131 It may be that this course should not have been taken when the separate question had been decided on the assumption and basis earlier mentioned in relation to who was the contractor in the bond and who had the indemnity obligation under the deed. But it seems to me that the parties' concurrence in the dismissal of the proceedings included agreement that Oceanfast Marine was the only relevant contractor and only Oceanfast had any relevant obligation under the deed: it cured the unsatisfactory aspects of ordering the separate questions. The reservation by Lumley did not detract from that agreement.

The Approach to the Separate Question

132 It is convenient to concentrate on proof in the administration of Oceanfast Marine. The principles considered can then be applied to proof in the administration of Oceanfast.

133 It must first be decided whether, apart from the rule against double proofs, Adsteam can prove in the administration and for how much; and whether, apart from the rule against double proofs, Lumley can prove in the administration and for how much. Depending on what is decided, the rule against double proofs may or may not arise.

Adsteam's Proof in the Administration of Oceanfast Marine

134 Adsteam had a claim against Oceanfast Marine for $15 million. It was entitled to payment of $5 million under Lumley's bond upon making demand, certifying that the sum demanded arose from failure by Oceanfast Marine duly to perform the contract, and providing a copy of the notice of non-performance given to Oceanfast Marine. It made demand under the bond. It received the $5 million. Adsteam can prove in the administration because it is owed either $15 million or $10 million by Oceanfast Marine. What must be decided is for how much it can prove.

135 The trial judge asked whether Lumley's payment of $5 million to Adsteam reduced the liability of "Oceanfast" to Adsteam from $15 million to $10 million. In his Honour's nomenclature Oceanfast was the company I have called Oceanfast. His Honour said -

"65 As a matter of analysis, the answer in the present case must depend upon the express and implied terms of the contract between Oceanfast and the Purchasers. The tug construction contract, clause 5.1, treats the performance bond as a form of security to the Purchaser for the due performance of the contract by the Builder and Oceanfast. The contract does not say, or imply, that payments made under the performance bond in partial satisfaction of the Purchaser's contractual right of recovery, from the Builder and Oceanfast in respect of the Builder's default, reduce the obligations of the Builder and Oceanfast to compensate the Purchaser in respect of the default. The position may have been different if the tug construction contract identified a particular segment of the payment obligation, and provided for a performance bond that would cover the whole of that segment.

66 The contract being silent on the point, there is no contractual basis for treating the payment as reducing the amount payable to the Purchaser by the Builder and Oceanfast. If B has an obligation to pay $X to A under the contract between them, and C pays $Y to A under a separate autonomous contract, prima facie there is no basis for B to contend that his obligation to A has now been reduced to $X minus $Y. In the present case the autonomous obligation of C (Lumley) is triggered by A (the Purchaser) serving a demand and a notice certifying that the amount demanded arises out of the default of B (the Builder or Oceanfast) under its contract with A, but in my opinion that link does not imply that C's performance of the autonomous obligation reduces B's obligation to A."

136 The reference to the liability of Oceanfast, not that of Oceanfast Marine, and the early reference to "the contract between Oceanfast and the Purchasers" distinct from "the tug construction contract", is curious. His Honour's analysis is complicated by attempting to accommodate both the liability of Oceanfast Marine and the liability of Oceanfast, both being taken up in the paragraphs I have set out. The substance of the analysis, however, is that because the contract for building the tug boat does not provide for Lumley's payment to reduce the primary liability of Oceanfast Marine to Adsteam or the secondary liability of Oceanfast to Adsteam, Adsteam can still prove for $15 million.

137 Focussing on the liability of Oceanfast Marine, I prefer a different emphasis. Adsteam claimed an entitlement to be paid $15 million by Oceanfast Marine. If Oceanfast Marine had paid $5 million to Adsteam in response to Adsteam's claim, its liability to Adsteam would have been reduced accordingly. Adsteam received $5 million, from Lumley but referable to its claimed entitlement. Why should the $5 million not go in partial satisfaction of Adsteam's claimed entitlement? Seeking a positive contractual provision that the payment reduced the amount payable by Oceanfast Marine to Adsteam perhaps left out of account that the contract could less explicitly have or contribute to that result.

138 The contract will be significant, perhaps determinative, in deciding for how much Adsteam can prove in the administration. It is important to distinguish between the contract between Oceanfast Marine and Adsteam, and the bond embodying a different arrangement between Oceanfast Marine, Adsteam and Lumley.

139 In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) [1978] HCA 45; (1978) 141 CLR 335 a bank guarantee was provided in lieu of the retention fund. The money was demanded and received. The retention fund was "security that the Builder shall carry out his obligations under this contract", and it was held that the use of the money was governed by a clause by which the proprietor could "have recourse to any security provided by the Builder". It was held that in the events that had happened the contract permitted the proprietor to use the money to pay sub-contractors, and any money left over after all the builder's obligations had been discharged would be payable to the builder.

140 The bank had claimed priority over the builder, and in that connection Gibbs ACJ, with whom Jacobs and Murphy JJ agreed, said (at 353) -

"The payment by the Bank was not a provisional payment, or a payment on account; the money was provided as a security and was used for that purpose. In all these circumstances it should be concluded that the intention of the parties to the guarantee was that the money was to form part of the general assets of the appellant, to be used as it wished, subject only to an obligation to account (to Mainline) for any surplus. No stipulation to repay the money to the Bank can be implied."

141 The issue was not whether the bank's money went to satisfy the proprietor's claimed entitlement against the builder, and at this point in the reasons his Honour referred to the intention of the parties to the bank guarantee. But he saw the money as part of the general assets of the proprietor, "to be used as it wished, subject only to an obligation to account to [the builder] for any surplus". The nature of the obligation to account to the builder was not explored, although it must have rested in the contract between them.

142 Stephen and Aickin JJ, to the contrary, saw the money only as a fund on which the proprietor could call, and in particular Aickin J (at 371) rejected the view that calling upon the bank guarantee reduced the amount payable by the proprietor to the builder.

143 The guidance in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) in the present case can not be said to be firm. It does underline, however, the need to look to the contract between Oceanfast Marine and Adsteam in deciding whether the $5 million went in partial satisfaction of Adsteam's claimed entitlement. In the same vein, in Wood Hall Ltd v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 it was held that the money received by the proprietor under a so-called bank guarantee provided in lieu of a cash fund was held on the same terms as the cash fund.

144 In the present case the contract made no provision for a retention fund. The Basic Contract Price was to be paid progressively, and in full at the time of handover of the tug boat. There was to be adjustment of the price in the course of performance of the contract, upwards or downwards, subject to any outstanding arbitration. The bond was to be replaced upon handover by the bank guarantee. The bank guarantee was to be one under which demand could be made for "any sum or sums ... that may become payable by the Builder to the Purchaser under Clause 21 hereof".

145 While generally operating as security for Oceanfast Marine's performance of the contract, the bond was not expressly taken up in the contract when it might have been expected. Clause 11 of the contract provided for deduction from the next progress payment of the cost of rectification of defective work. Clause 15 provided for Oceanfast Marine to make at its own expense all adjustments, amendments or alterations found necessary as a result of sea trials to make the tug boat comply with the contract. By cl 18 liquidated damages for delay could be payable by Oceanfast Marine. By cl 24 Oceanfast Marine indemnified Adsteam against liability for infringing intellectual property rights. By cl 25, in some circumstances of cancellation of the contract Oceanfast Marine had to repay to Adsteam all money paid to it, and in other circumstances of cancellation it could have to reimburse certain expenses incurred by Adsteam. At none of these points was there reference to the bond or to money received by demand under the bond as a source of payment or reimbursement to Adsteam. Nor was money received by demand under the bond part of the accounting for which cl 7(2) provided. And, as I have said, the contract did not say what Adsteam must or could do with the money once received from Lumley.

146 Clause 5(1) described the bond as something to make Lumley jointly and severally bound with Oceanfast Marine. Since the contract prescribed the form of bond, the form of bond may then be looked to. It did not make Lumley jointly and severally bound with Oceanfast Marine, and the terms of the form of bond must take precedence for the light they shed on whether Lumley's payment reduced the liability of Oceanfast Marine to Adsteam.

147 The bond followed the form of bond in the contract, and it is convenient to refer directly to it. Lumley had to pay "the bond amount" to Adsteam without demand. In theory it could do so before anything was payable by Oceanfast Marine to Adsteam and when nothing might ever be payable. But Lumley had to pay Adsteam on demand, and that is what occurred in the present case. The effect of payment could differ according to the occasion for payment. It is necessary to focus on payment on demand.

148 The demand had to follow notice of non-performance to Oceanfast Marine. It had to be accompanied by a copy of the notice of non-performance, and by certification by Adsteam that the amount demanded arose from Oceanfast Marine's non-performance. As between Adsteam and Lumley whether there had been non-performance, and what amount (if any) truly arose from any non-performance, was of no significance. Subject only to fraud, Lumley had to pay regardless, see Wood Hall Ltd v The Pipeline Authority. But when payment was received by Adsteam pursuant to the demand, it seems to me, the general operation of the bond as security for Oceanfast Marine's performance of the contract ceased. To that time the operation of the bond as security was by providing a sure source of money for payment to Adsteam if Adsteam claimed that there had been failure in performance. When payment was received by Adsteam there was no longer any question of that security. The money was in Adsteam's hands.

149 It was intended between Oceanfast Marine and Adsteam that Lumley would pay Adsteam $5 million when Adsteam claimed an entitlement to be paid at least that sum by Oceanfast Marine by reason of Oceanfast Marine's failure duly to perform the contract. The money when paid was not said to be held by Adsteam as a fund to which Adsteam could have recourse if it wished. Adsteam received money from Lumley under an arrangement it had required Oceanfast Marine to put in place, and in my opinion the preferable view is that it received the money as if paid by Oceanfast Marine in partial satisfaction of its claim. As earlier noted, in the present case the claim was sound in that, subject to the outcome of the appeal, the suffering of losses of $15 million recoverable as damages for breach of contract was admitted.

150 That Adsteam received the money in this way is supported not only by the occasion for payment and the absence of any limiting provision in the contract. There was broadly parallel operation of the contract in relation to money demanded pursuant to the bank guarantee. That money had to be payable by Oceanfast Marine to Adsteam (cl 9(5)), but if on arbitration it was found not to have been payable it had to be repaid with interest (cl 9(6)). That is, the money became Adsteam's money, even if Adsteam might have to pay it back. Dispute between Oceanfast Marine and Adsteam over liability for the money received under the bond or the bank guarantee is not inconsistent with the money satisfying the true liability, and the rights of Oceanfast Marine and Adsteam are not exhausted by the payment on demand (cf Comdell Commodities Ltd v Siporese Trade SA (1997) 1 Ll R 424; Cargill International SA v Bangladesh Sugar and Food Industries Corporation (1996) 4 All ER 563 (Morison J)[1997] EWCA Civ 2757; ; (1998) 1 WLR 461 (CA)).

151 Although the circumstances were quite different, receipt of money from a third party in satisfaction of the debtor's claimed liability to the creditor was the basis of the decision in Barclays Bank Ltd v TOSG Trust Fund in the House of Lords.

152 The facts were complex. In essence, banks gave bonds to an organisation established to alleviate the loss to tourists in the event of failure of a member tour operator; a member tour operator failed; the organisation made demand under the bonds and received money; the organisation used the money to meet tourists' claims on the tour operator; and the tourists' claims in the liquidation of the tour operator were assigned to a statutory agency. The banks had indemnities from the tour operator. There was potential conflict between the banks and the agency in proving in the liquidation of the tour operator.

153 In the Court of Appeal the conflict was resolved by the rule against double proofs and equitable considerations. In the House of Lords, however, it was resolved on the basis that the payments to the tourists satisfied their claims, so that the agency did not have an entitlement to claim in competition with the banks. Lord Templeman, with whose speech the other members of the House agreed, summed up (at 672-3) -

"In my view, upon the true and simple construction of the bond and the indemnity, when TOSG paid £1,000 of Barclay's money to a customer whose claim against Clarksons amounted to £1,000, the claim of that customer againt Clarksons was extinguished and there became vested in Barclays an indisputable claim against Clarksons for £1,000 under the indemnity. If TOSG paid $200 to a customer whose claim was £1,000, then the customer could thereafter only claim and prove for the balance of £800 and Barclays could claim and prove under its indemnity for £200. By the indemnity Clarksons agreed to repay to the banks every penny that the banks paid under the bond and that TOSG paid to the customers.

In the event, TOSG extinguished claims of Clarksons' customers to the extent of £1,268,000 and the banks became entitled to prove for £1,268,00 under their indemnities."

154 His Lordship later said (at 675) -

"It was argued below, with a wealth of erudition, that the proofs submitted by the banks and the agency in respect of £1,268,000 paid by TOSG to the customers were double proofs of the same debt and that the priority between those double proofs fell to be determined by equitable rules. In my view there were two mutually exclusive debts, namely the debt which Clarksons owed the customers under their contracts and the debt which Clarksons owed the banks under their indemnities. Payment by TOSG reduced the customers' debts by £1,268,000 and increased the banks' debt by the like sum. The customers could not assign to the agency the right to prove for debts which had been discharged. There is no double proof. The proof submitted by the agency must be rejected."

155 The equivalent to satisfaction of the tourists' claims in the present case is partial satisfaction of Adsteam's claim upon Oceanfast Marine, and of course the issue is whether Adsteam received the money paid by Lumley in partial satisfaction of its claim. But if it did, it can prove for only $10 million in the administration of Oceanfast Marine.

156 For the reasons I have given, in my opinion the $5 million was received by Adsteam in partial satisfaction of its claim for $15 million. Oceanfast Marine could dispute its liability to Adsteam for the $15 million, or for as much as or even the whole of the $5 million, but it would do so as a claimant from Adsteam of money paid to Adsteam, and not as a claimant competing with Adsteam to a fund held by Adsteam. Adsteam can prove in the administration of Oceanfast Marine for only $10 million.

Lumley's Proof in the Administration of Oceanfast Marine

157 It does not follow that Lumley can prove for $5 million. Whence comes any claim by Lumley upon Oceanfast Marine?

158 It was common ground that Lumley issued the bond at the request of either Oceanfast Marine or Oceanfast, and received consideration for doing so. There was evidence that Oceanfast paid Lumley "premiums" totalling approximately $160,079.31. There was a commercial arrangement under which, in return for the consideration it received, Lumley gave a commitment to Adsteam. There was no evidence that the arrangement included that, if Lumley made payment under the bond, it could recover an equivalent amount from Oceanfast Marine. On the contrary, it appears that the arrangement was that it could recover from Oceanfast under that company's indemnity.

159 The trial judge noted that Lumley did not claim to be subrogated to Adsteam's rights against Oceanfast Marine. That position was expressly maintained on appeal.

160 However, his Honour upheld Lumley's claim to "reimbursement from Oceanfast Marine notwithstanding the absence of any contractual indemnity by [Oceanfast Marine] in Lumley's favour". He did so on what was described as "a broad, independent principle" derived from Moule v Garrett (1872) LR 7 Ex 101 and finding support in Brittain v Lloyd [1845] EngR 1283; (1845) 14 M & W 762; 153 ER 683; Thornton v M'Kewan (1862) 1 H & M 525; (1862) 71 ER 230; Goodwin v Gray (1874) 22 WR 312 and re a Debtor (1937) 1 Ch 163. His Honour cited from Moule v Garrett at 104 -

"Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount."

161 His Honour then said -

"63 If the autonomous payer has a right of indemnity against the debtor by virtue of a contract or the principle in Moule v Garrett, then it can lodge a proof of debt in the insolvent administration of the debtor for the amount that it has paid. The principle in Moule v Garrett does not say that the autonomous payer's right of recovery from the debtor has a lesser priority than the creditor's right of recovery. Where the autonomous payer relies on a contractual right of indemnity against the debtor, it is possible that the contract may expressly or impliedly limit the payer's right by preventing the payer from proving in the insolvent administration of the debtor in competition with the creditor. In the present case, however, there is no such express term in the deed of indemnity and guarantee, and I can see no basis for implying one. Therefore in many cases, including the present case, there will be no relevant contractual restriction on the autonomous payer's right to lodge a proof of debt in the insolvent administration of the debtor."

162 The reference to the "deed of indemnity and guarantee", that is, Oceanfast's indemnity, is a little curious. If it did not provide a basis for Lumley to claim upon Oceanfast Marine, it is not easy to see how it could have limited Lumley's entitlement to prove in the administration of Oceanfast Marine. Be that as it may, in the appeal all concerned accepted that, subject to the rule against double proofs, Lumley can claim the $5 million from Oceanfast Marine by virtue of the principle derived from Moule v Garrett. In the circumstances, that should be accepted for the purposes of the appeal.

163 The acceptance of this basis for Lumley's entitlement to prove reflects back upon Adsteam's receipt of the $5 million in partial satisfaction of its claim for $15 million. If Oceanfast Marine was not liable to pay the $5 million, and more particularly if payment of the $5 million by Lumley did not discharge Oceanfast Marine's liability, the equitable principle in Moule v Garrett could not operate. That Oceanfast Marine obtained the benefit of the payment by the discharge of its liability was the occasion for equity to impose on it the burden of recoupment (see recently Karacominakis v Big Country Developments Pty Ltd (2000) NSWCA 313 at [239] - [241]). With respect, there may have been inconsistency in regarding Adsteam as able to prove for the full $15 million, yet regarding Lumley as able to prove (subject to the rule against double proofs) for the $5 million because Oceanfast Marine's liability to Adsteam had to that extent been discharged.

Is There Any Qualification to These Entitlements to Prove?

164 The decision thus far is that Adsteam can prove in the administration of Oceanfast Marine for $10 million and Lumley can prove in the administration for $5 million. If that be so, the rule against double proofs does not arise.

165 Had Lumley been a credit insurer and paid the insured amount, ordinarily Adsteam would still have been entitled to claim the full $15 million but would have held any excess recovered on behalf of Lumley, and Lumley would have been subrogated to Adsteam's rights against Oceanfast Marine. As earlier noted, Lumley did not claim to be subrogated to Adsteam's rights against Oceanfast Marine, and principles of insurance law were not taken up in the appeal.

166 There was considerable reference, before the trial judge and in the appeal, to the law relating to guarantees. If the bond were treated as a guarantee by Lumley of Oceanfast Marine's liability under the contract, some well established but at times technical rules could come into play. As applied to the parties, and attempting to adapt the rules to apply by analogy to a guarantee of liability rather than a guarantee of a debt, they would be -

(a) if the guarantee is of the whole of Oceanfast Marine's liability to Adsteam, Adsteam can still prove in the administration of Oceanfast Marine for $15 million and in conformity with the rule against double proofs Lumley can not prove for $5 million under its implied indemnity;

(b) if the guarantee is of the whole of Oceanfast Marine's liability to Adsteam but limited to $5 million, the position is as in (a);

(c) if the guarantee is of a quantified part of Oceanfast Marine's liability to Adsteam, $5 million, Adsteam can prove in the administration of Oceanfast Marine only for $10 million and Lumley can claim $5 million from Oceanfast Marine under its implied indemnity; and

(d) if the guarantee is of the whole of Oceanfast Marine's liability to Adsteam but limited to $5 million, but the liability is in the nature of a fluctuating balance, it is regarded as a guarantee of a quantified part of the liability and the position is as in (c).

167 For the underlying general propositions in the law regulating to guarantees it is sufficient to refer to Ellis v Emmanuel (1876) 1 Ex 157; re Sass, ex parte National Provincial Bank of England Ltd (1896) 2 QB 12; re Fenton, ex parte Fenton Textile Association Ltd (1931) 1 Ch 85; Barclays Bank Ltd v TOSG Trust Fund Ltd (CA); and Westpac Banking Corporation v Gollin & Co Ltd (in liquidation) 1988 VR 397. I emphasise the possible distortion in stating the propositions in a form adapting them to a guarantee of liability. The distinction between a guarantee of a quantified part of a debt and a guarantee of the whole of a debt but limited in amount to less than the whole, even before any adaption to a guarantee of liability rather than a guarantee of a debt, is elusive. It is justified on the basis that in the former case the debt guaranteed is separate from the whole debt. The justification for the further nicety of a guarantee of a fluctuating balance need not be explored.

168 For present purposes, if the bond were treated as a guarantee by Lumley of Oceanfast Marine's liability under the contract, and if the guarantee were of the whole of Oceanfast Marine's liability to Adsteam but limited in amount to $5 million, Adsteam could prove for $15 million and Lumley could prove for nothing. On the other hand, if the bond were treated as a guarantee by Lumley of Oceanfast Marine's liability under the contract, and if the guarantee were only of a quantified part of the liability, Adsteam could prove for $10 million and Lumley could prove for $5 million; and if in some manner a fluctuating balance were brought into the picture, the result would be the same.

169 Before the trial judge Lumley and Adsteam both submitted that the law relating to guarantees should be applied by analogy to the bond, although they differed in its application. The trial judge considered that if the law relating to guarantees applied by analogy to the bond, then "the principles relating to payment of part of a debt by a surety" pointed to the view that Adsteam could prove for the full $15 million undiminished by receipt of the $5 million. His Honour did not decide whether or not the analogy should be adopted.

170 The positions of Lumley and Adsteam changed to some extent on appeal, although neither abandoned reliance on the law relating to guarantees. It is sufficient to explain why I do not think there is a viable analogy.

171 Put shortly, the bond was not a guarantee Despite the reference in cl 5(1) of the contract to the insurer being jointly and severally bound with Oceanfast Marine, the bond itself was not a promise that Lumley would answer for the debt or obligations of Oceanfast Marine. It was a promise that Lumley would pay money to Adsteam if Adsteam demanded payment and provided a copy of a notice of non-performance and a particular certification. It recorded a primary obligation on Lumley's part, and the description of a guarantee would have been a misnomer (see Wood Hall Ltd v The Pipeline Authority at 445).

172 The certification was grounded in non-performance of the obligations of Oceanfast Marine, but as between Adsteam and Lumley failure in performance was not the reason for payment. Indeed the money could be paid by Lumley without demand, even before failure in performance. As I have earlier said, the bond was a commercial arrangement under which, in return for the consideration it received, Lumley gave a commitment to Adsteam. As between Adsteam and Lumley the true position as to failure in performance was of no significance. Any resemblance to a guarantee is so remote that there is no warrant for seeking to take up the law relating to guarantees, particularly the technical rules earlier described which in any event can not readily be adapted to the relationship between Lumley, Adsteam and Oceanfast Marine.

173 In the result, therefore, the conclusion that the $5 million was received by Adsteam in partial satisfaction of its claim for $15 million is determinative of the proofs in the administration of Oceanfast Marine. There is no question of double proofs. Adsteam can prove for $10 million and Lumley can prove for $5 million.

174 There was a suggestion in the hearing of the appeal that Lumley's case on appeal so differed from its case at the trial that it should not be permitted to put the former case. There was some change in stance, but in my opinion not outside the issues at all times under consideration or such that Lumley's submissions on appeal should not be received.

Proofs in the Administration of Oceanfast

175 This may be dealt with briefly in the light of what has already been said. Adsteam can prove for only $10 million, because its entitlement against Oceanfast as guarantor of Oceanfast Marine's performance of its obligations under the contract can not rise higher than its entitlement against Oceanfast Marine. Lumley can prove for $5 million under Oceanfast's indemnity, quite apart from Moule v Garrett. The potential for the rule against double proofs is greater, because Lumley has under the indemnity a ground for proof not linked with the extent of Oceanfast Marine's liability to Adsteam, but again there is no question of double proofs.

The Result

176 In my opinion the answer given by the trial judge to the separate question was incorrect. The appeal should be allowed. The order dismissing the proceeding should be set aside. The answer to the separate question should be set aside, and it should be answered that the plaintiff is and the fifth, sixth and seventh defendants are not entitled to prove in the administrations of the first and second defendants for the amount referred to in the plaintiff's proofs of debt identified in paragraph 15 of the Statement of Claim. Consequential declarations and/or orders will be required to dispose of the proceedings, and the proceedings should be remitted to the Equity Division for such further hearing or the making of declarations and orders as may be appropriate. The respondents should pay the appellant's costs of the appeal and of the trial, and have a certificate under the Suitor's Fund Act if qualified.

********

LAST UPDATED: 06/02/2002