Chapter 14 - The commercial provisions in the Judicature Act 1908

 

Sections 84 to 86: Sureties

Sections 84 to 86 of the Judicature Act 1908 state the law applying to a surety (a guarantor) who pays a debt or satisfies a duty on behalf of a debtor. Section 84 allows a guarantor who pays or satisfies a debt or duty to have assigned to him or her any judgment or security held by the creditor in respect of the debt or duty. This is regardless of whether the judgment or security is deemed at law to be satisfied by the payment of the debt or performance of the duty.

Section 85(1) gives this guarantor the right to stand in the place of the creditor (known as “subrogation”) for all the rights possessed by the creditor in respect of the debt or duty.390 This allows the guarantor to obtain indemnification (that is, compensation or reimbursement) for the amount paid and loss sustained in satisfying the debt or duty. Under section 85(2), the payment, satisfaction or performance cannot be filed in court in an action or proceeding by the guarantor.

Section 86 provides that a guarantor who is a co-surety, co-contractor or co-debtor cannot use sections 84 and 85 to recover more than a just proportion of the debt paid.

Sections 84 to 86 accord statutory recognition to existing equitable principles.391 It seems that the law is the same in the United Kingdom, but that jurisdiction has no statutory equivalent of these provisions. In equity the basis of the guarantor’s right to a creditor’s security on payment of the guaranteed debt arises from the obligation imposed on the principal debtor to indemnify the guarantor.392

Interpretation of the sureties provisions by the courts and the common law rules about the position of guarantors have led to the development of further principles in this area of law. The leading cases on section 84 are Official Assignee v Tizard393 and De Pelichet McLeod & Co Ltd v Lysnar.394 From these cases it is clear that section 84 is for the benefit of a person who pays the whole of a debt or performs the whole of a duty rather than just part, but that the section is not an exclusive code.

Section 85 means that at any time after the debt is due, a guarantor may pay off the creditor and then, on giving a proper indemnity for costs, may sue the principal debtor in the creditor’s name.395 A guarantor is also entitled to the same priority on a bankruptcy or liquidation of the principal debtor as the creditor would have enjoyed.396 A further implication of section 85 is that a guarantor can recover from the principal debtor the costs of defending an action brought by the creditor, if the defence was undertaken with the debtor’s authority.397

A guarantor’s right to contribution398 from any co-guarantors after paying the debt only arises after the guarantor has paid more than his or her total proportion or share of the common liability.399 A guarantor who has made payment of more than his or her proportionate share of common liability has a statutory right to an assignment of all the rights and securities held by the creditor for the purpose of obtaining contribution, but only once the creditor has received full payment of the debts.400

Issues with surety provisions

The case law indicates that the scope of sections 84 to 86 is quite narrow and that in many cases the statute does not apply. For instance, the statutory requirement that in order for a guarantor to be able to stand in the place of the creditor, the guarantor must have paid the full debt, limits the application of the provisions. In both Official Assignee v Tizard401 and De Pelichet McLeod & Co Ltd v Lysnar,402 the amount paid was not the full debt. However, the rules of equity applied to produce the same result that would have been reached if the Act did apply.

There is no indication that sections 84 to 86 are intended to be a code. Much of the law on this subject is provided by cases. Where the statute does not apply, but the common law does (such as where there is only part payment of a debt), there is a difference in the rights obtained by the guarantor. Under the statute, the guarantor gains rights identical to those the creditor has against the debtor, while under the rule of equity the rights can be wider.403 Another difference is the equitable right to subrogation only applies when the guarantee has been undertaken at the principal debtor’s actual or constructive request. This is not the case with the statutory right.404

There appears to be some confusion regarding the court in which an action can be brought. One New Zealand commentary states that a guarantor who wishes to enforce the right to an indemnity from the debtor may bring an action for indemnification in the High Court or District Court (if the amount of the claim is within the District Court’s jurisdiction).405 However, in the Family Court case of WBA v LMA it was held that the Judicature Act 1908 provisions did not apply because the Act only applied to the superior courts.406

Case law indicates that parties can contract out of the guarantor’s right to subrogation and the Judicature Act 1908 does not prevent this.407 In these cases, sections 84 to 86 do not apply.408 Parties are also free to exclude or modify rights to contribution by express agreement.409 Given the ability to exclude the rights provided for in the statute, it is questionable whether there is much value in having the statutory provisions. Further, it appears that the rules of equity apply more broadly than the statutory provisions, and provide similar rights. In many cases, the rules of equity are relied upon because circumstances do not fit within the scope of the Judicature Act 1908. Having said that, retaining statutory provisions for sureties would continue to provide a degree of clarity about the law and would ensure that the position in law is not altered. Subject to the views of submitters, we are inclined to retain the surety provisions, but they would not fit well into a new Courts Bill. The question then arises as to the most appropriate home for them, and we discuss this further at the end of this chapter.

If retained, the language in the provisions requires updating (for instance, reference to a “specialty” may now be obsolete) and it should be made clear whether they can be relied on in the District Court.

Q41

Do you agree that sections 84 to 86 of the Judicature Act, which relate to sureties, should be retained?

Laws of New Zealand Guarantees and Indemnities (online ed) at [131].

Morrison Short Term Investments v Coakle HC Auckland CIV-2009-404-6528, 19 February 2010 at [13].

Laws of New Zealand Guarantees and Indemnities (online ed) at [132], citing Yonge v Reynell (1852) 9 Hare 809, 68 ER 744.

Official Assignee v Tizard HC Dunedin CP44/92, 19 August 1993.

De Pelichet McLeod & Co Ltd v Lysnar [1928] GLR 204.

Laws of New Zealand Guarantees and Indemnities (online ed) at [125]; Swire v Redman (1876) 1 QBD at [541].

Laws of New Zealand Guarantees and Indemnities (online ed) at [151]; Insolvency Act 2006, s 272 states this explicitly in the context of bankruptcy.

Laws of New Zealand Guarantees and Indemnities (online ed) at [153]; Crampton v Walker (1860) 3 E & E 321, 121 ER 463.

That is, the right of a person who has paid an entire debt to recoup a proportionate share of the payment from another person who is equally responsible for the payment of that debt or liability.

Laws of New Zealand Guarantees and Indemnities (online ed) at [161]; Plant v Calderwood [1969] NZLR 752 (SC); Davies v Humphreys (1840) 6 M & W 153, 151 ER 361.

De Pelichet McLeod & Co Ltd v Lysnar [1928] GLR 204; Duncan Fox & Company v North and South Wales Bank (1880) 6 Apps Cas 1, [1874-80] All ER Rep Ext 1406.

Official Assignee v Tizard HC Dunedin CP44/92, 19 August 1993.

De Pelichet McLeod & Co Ltd v Lysnar [1928] GLR 204.

For instance, in Badeley v Consolidated Bank (1886) 34 Ch D 536, it was held (at 556) that the fact that a creditor who has obtained judgment against one partner of a firm cannot sue another partner of the same firm does not take away the rights of a guarantor for one partner against another partner. (The rule barring a creditor from suing a second partner has now been abrogated by s 94 of the Judicature Act 1908.)

Laws of New Zealand Guarantees and Indemnities (online ed) at [140]; Alexander v Vane (1836) 1 M & W 511, 150 ER 537.

Laws of New Zealand Guarantees and Indemnities (online ed) at [155].

WBA v LMA FC Chch FAM-2008-009-002782, 27 October 2009.

Re Fernandes, ex parte Hope (1844) 3 Mont D & De 720.

Richmond Ltd v PPCS Ltd (2003) 9 NZCLC 263,115.

Spanbild v Urquhart HC Auckland CIV 2008-404-004784, 4 December 2009, which refers to James O’Donovan and John Phillips Modern Contract of Guarantee (Sweet & Maxwell, London, 2003) and Trotter v Franklin [1991] 2 NZLR 92 (HC).