A guarantor is an individual who agrees to be liable for the debt of another person (principal borrower) if that principal borrower defaults on their debt obligations. There could be one guarantor or several guarantors for the same debt. In a corporate context, it is common for lenders to require directors and/or related entities to guarantee the debts of the company that has insufficient assets/does not have a lot of trading history.
If the principal borrower complies with their debt obligations, the guarantors would not be required to make any payments towards the debt. However, if the principal borrower defaults, the lender could require one or all of the guarantors to pay in place of the principal borrower. The lender is under no obligation to pursue all guarantors at once, and often they would pursue the guarantor that has most assets and/or who the lender finds easiest to pursue.
If the lender recovers payment (or majority of it) only from one of the guarantors, that guarantor can compel other co-guarantors to contribute. The Court of Appeal in Milloy v Dobson [2016] NZCA 25 held that the normal rule as to the right to contribution in equity is that co-guarantors will share the debt equally.
Relief before and after payment
A guarantor’s right to contribution from co-guarantors may arise before or after the guarantor has fulfilled the guarantee.
However, in instances where the guarantor has not fulfilled the guarantee yet, for the right to contribution to arise, the guarantor’s liability must have become unconditional.
For instance, where the lender has obtained judgment against the guarantor (but no payment has been made yet), the guarantor may bring an action against the co-guarantors to compel them to contribute to the common liability.
At this point, there is little authority to demonstrate the exact extent of the guarantor’s ability to seek contribution prior to the payment being made by them and further developments in this area are expected.
In relation to instances where contribution is sought after payment, a guarantor’s right to contribution from any co-guarantors does not arise until the guarantor has paid more than their total proportion or share of the common liability.
Payment of guaranteed debt and amount recoverable
The payment by a guarantor must be made by the guarantor or on the guarantor’s behalf. The guarantor should pay to the person legally entitled to receive it or else the guarantor may not be relieved from liability and may not claim contribution.
The amount recoverable from each co-guarantor is regulated by the number of solvent guarantors and the proportion of the amount each is liable for. The share of the liability which would otherwise have fallen on an insolvent guarantor must be shared by all solvent co-guarantors.
No right to contribution
It has been found that there could be no right of contribution from co-guarantors in the following circumstances:
If co-guarantors are bound by different instruments for separate portions of the debt or it has been expressly agreed that each guarantor was to be individually liable only for a given portion of the debt.
Where a person became a co-guarantor at the request of another person, and it can be inferred from the circumstances that only the other person was to be liable for the guaranteed debt.
If the co-guarantor is not liable to the lender because the guarantee in question has been avoided or liability did not attach.
If the person seeking to enforce it was guilty of misrepresentation.
Enforcing right to contribution
A guarantor may bring an action in the High Court or the District Court (depends on amount in question) to enforce their right to contribution from the co-guarantors.
The rights and liabilities of all solvent co-guarantors are interlinked. Therefore, a guarantor must ensure that all solvent co-guarantors are joined in the action. If a co-guarantor is deceased, an action may be brought against the estate.
A co-guarantor who has a claim against another co-guarantor may rely on that claim as a defence to a money claim. The right of set-off may be excluded or modified by the agreement where there is an express agreement for contribution and all parties are solvent.
Co-guarantors cannot bring a counterclaim against a lender for breach of warranty without the principal borrower. This is because it is the principal borrower’s claim. Likewise, if a co-guarantor is discharged by the lender, other co-guarantors will also be discharged due to the joint nature of the liability.
Guarantor’s right to securities
A guarantor who pays more than their proportionate share has a statutory right to have all the rights and securities held by the lender transferred to them once the lender receives full payment.
Conclusion
A guarantor may bring proceedings to enforce their right to contribution from the co-guarantors and determine what a just apportionment should be. The amount recoverable from each co-guarantor is determined by the number of solvent guarantors. This is because the share of the liability which would have fallen on an insolvent guarantor must be shared by all solvent co-guarantors. All solvent coguarantors should be joined in the action as the rights and liabilities of all solvent coguarantors are interlinked.
Once the Court proceeding has been heard, and judgment has been given, the Court would consider an award of costs. Generally, the successful party in the proceeding would seek a reimbursement of costs, such as the legal fees paid to their lawyers and disbursements (e.g. Court filing fees, expert witness costs etc), from the unsuccessful party.
The determination of costs is at the discretion of the Court. The Judge may:
Order the unsuccessful party to pay the costs of the successful party (usual position).
Order that costs lie where they fall, in other words, that no party is ordered to pay the costs of the other (less common).
Rarely, the Court could order the successful party to pay the unsuccessful party.
If there is an award of costs from one party to another, the costs are generally ordered on a scale basis (i.e. determined in accordance with Court’s rates and time allocations and does not represent the actual amount incurred by the party). However, in special cases, the Court may award indemnity costs (i.e. the awarded costs represent the actual amount incurred by the party).
All references to Rules below are references to District Court and High Court Rules (same rule numbers apply for both Courts).
General principles
Under r 14.2(1), the following general principles apply to the determination of costs:
The unsuccessful party should pay costs to the successful party.
Costs should reflect the complexity and significance of the proceeding.
Costs should be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required.
An appropriate daily recovery rate should normally be two thirds of the daily rate considered reasonable.
Costs should not relate to the actual time spent or rates charged.
Costs should not exceed the actual costs incurred.
Costs should be predictable and expeditious.
Under r 14.2(1)(a), the unsuccessful party is generally liable to pay money to the successful party.
Complexity and significance under r 14.2(1)(b) are assessed objectively, based on what the case really involves and how significant it really is. Actual time spent and costs incurred are irrelevant. Depending on the complexity and significance determined under r 14.3, a category (ranging from category 1 – 3) is allocated.
The aim of r 14.2(1)(c) – (d) is to provide for a daily recovery rate which is designed to represent twothirds of a rate considered reasonable for the proceeding. Appropriate daily recovery rates are imposed by r 14.4 and depend on the category determined under the previous step.
In accordance with r 14.5, the daily recovery rate is then applied against the allocated time for a particular step. In determining a reasonable time for a particular step, the proceeding should be allocated to a band (ranging from band A to C).
Rule 14.2(f) limits costs to those actually incurred (although, it is rare that the scale costs would exceed the actual costs), which gives effect to the principle that no party should profit from the conduct of litigation. Rule 14.2(f) comes into play only after the Court has determined category, daily recovery rate and applied it against allocated time in accordance with the band.
Rule 14.2(g) states that the determination of costs should be predictable and expeditious. Predictability enables parties to assess the likely cost of litigation from the outset. The costs rules are designed to be “self-calculating”, removing from Judges the burden of having to determine costs in every case.
The scale of costs is a legislative direction as to a reasonable contribution in an ordinary case. If compliance with that direction will not achieve the purpose of an award of costs, the Court is entitled to award less or more (Morton v Douglas Homes Ltd (No 2) [1984] 2 NZLR 620 (HC)).
Reduced costs
Under r 14.7, the Court may order reduced costs, or refuse costs all together, where:
The time required is substantially less than band A.
The amount at stake in the proceeding was exceptionally low.
The issues in the proceeding were of little significance.
Although the party claiming costs has succeeded overall, that party has failed on an issue or a cause of action which significantly increased the costs to the other party.
The proceeding concerned a matter of public interest, and the party opposing costs acted reasonably in the conduct of the proceeding.
The costs claimant has unnecessarily contributed to the time or expense of the matter.
Sufficient other reason exists.
Reduction is often done by applying a set reduction percentage (e.g. 30% reduction) to the scale cost amount determined in accordance with the steps outlined above. The reduction could apply to all or limited steps in the proceeding.
Increased costs
Under r 14.6, the Court may order increased costs where:
Actual and reasonable time substantially exceeds band C.
The other party has contributed unnecessarily to time or expense of the proceeding.
The proceeding was of general importance to persons other than just the parties.
Some other reason exists that justifies the Court making an order for increased costs.
The party claiming increased costs carries the onus of persuading the Court that their award is justified.
Increased costs may be ordered where there is a failure by the paying party to act reasonably (e.g. see Bradbury v Westpac Banking Corp [2009] 3 NZLR 400, (2009) 19 PRNZ 385 (CA)). The Court should consider the extent to which the failure to act reasonably contributed to the time or expense of the proceeding. Any percentage uplift from scale can only be justified to that extent.
The Court of Appeal provided guidance on the correct approach to an award of increased costs in Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) as follows:
Step 1: categorise the proceeding under r 14.3.
Step 2: work out a reasonable time for each step in the proceeding under r 14.5.
Step 3: as part of the step 2 exercise a party can, under r 14.6(3)(a), apply for extra time for a particular step.
Step 4: the applicant for costs should step back and look at the costs award it could be entitled to at this point. If it considers it can argue for additional costs under r 14.6(3)(b) it should do so, but any increase above 50 per cent on the costs produced by steps 1 and 2 is unlikely, given that the daily recovery rate is two-thirds of the daily rate considered reasonable for the particular proceeding.
Increased costs have in the past been awarded where the party opposing costs pursued an entire claim that lacked merit, failed to admit the facts, failed to accept an offer of settlement, or proceeded with an inappropriate statutory demand.
Indemnity costs
The Court may order the payment of the actual costs incurred, instead of costs on a scale basis, where:
A party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding.
A party has breached any order or direction of the Court or undertaking given.
Costs are payable by a fund.
The costs claimant is a non-party and has acted reasonably.
A contract or deed provides for indemnity costs.
Some other reason exists which justifies an award of indemnity costs.
The party claiming indemnity costs carries the onus of persuading the Court that their award is justified.
Indemnity costs are awarded where a party has behaved either badly or very unreasonably.
To justify indemnity costs, misconduct must be flagrant. But, where indemnity costs are sought in a “hopeless case” situation, it is not necessary that there be flagrant misconduct (Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2014] NZCA 348, (2014) 22 PRNZ 322).
