This appeal raises the question whether one co-guarantor of a debt owed by a debtor to a creditor can recover a contribution from another co-guarantor where the first co-guarantor has paid the creditor part of that debt in securing the release of the guarantee without any formal demand being made on either co-guarantor by the creditor although service of a written demand is provided for under the guarantee.

That question arises in the following circumstances. The debtor, Test Electronics Ltd. ("Test"), was incorporated in 1989 and carried on business as an assembler of printed circuit boards. The Plaintiff, Michael Stimpson, and the Defendant, John Smith, were throughout directors and shareholders of Test. Test's bank initially was National Westminster Bank ("the Bank"), which granted Test a facility. On 18 October 1990 Mr. Stimpson and Mr. Smith entered into the guarantee in question. By it they jointly and severally guaranteed payment to the Bank on demand of (a) all liabilities of Test to the Bank up to a maximum of £25,000 and (b) interest. By cl. 13 of the guarantee a demand had to be in writing signed by an officer or agent of the Bank and could be served by hand or post.

Test did not prosper. In the 13-month accounting period ended 30 April 1991 it incurred a loss of over £100,000 and worse was to follow. Relations between Mr. Stimpson and Mr. Smith became strained. In March 1991 Mr. Smith was excluded from Test, though he retained his shares and remained a director. Thereafter he knew nothing of what was going on in Test. In December 1991 Test's overdraft limit with the Bank was £100,000. The Bank for some two months previously had been returning Test's cheques when the limit was exceeded and it told Mr. Stimpson and Test that it required a reduction to £80,000 in the overdraft facility. The Bank had threatened that it would put in a Receiver. Mr. Stimpson negotiated with the Bank an oral agreement, the terms of which appear from correspondence between him and the Bank, that some shares of his deposited with the Bank should be sold by the Bank, that £20,000 would be transferred to Test's current account in permanent reduction of Test's overdraft borrowing, that Test's overdraft would be reduced to £80,000 and that the guarantee given by him and Mr. Smith would be released. All this was done with a view to a transfer of Test's account to the Bank of Scotland. On 2 January 1992 the guarantee was cancelled, as the Bank confirmed by letter dated 20 January 1992 to Mr. Stimpson. Both co-guarantors were thereby released from liability under the guarantee. Test's account with the Bank was closed in March 1992 and a new account opened with the Bank of Scotland which re-financed Test. Thus the remaining overdraft was extinguished by fresh borrowings from that bank.

About March 1992 Mr. Stimpson wrote a letter to Mr. Smith. In it Mr. Stimpson said that he himself had paid off the guarantee in the sum of £20,000 but that Test had insufficient money to repay him, that while Test continued to trade, he would not look to Mr. Smith for £10,000 but that should Test go into liquidation he would seek reimbursement from Mr. Smith of £10,000 plus interest. Although that letter was sent, it was never received by Mr. Smith. On 27 July 1994 Test was compulsorily wound up, heavily insolvent. There has been no distribution to creditors and Test was dissolved in 1996.

On 30 May 1995 Mr. Stimpson, by his solicitors, claimed a contribution from Mr. Smith. But no payment was made and proceedings against Mr. Smith were commenced in the Brighton County Court on 9 April 1995 for a contribution of £10,000 and interest. Mr. Stimpson averred in his Particulars of Claim an oral agreement between him and the Bank that in consideration of the Bank releasing him and Mr. Smith from liability under the guarantee, he would discharge £20,000 of Test's overdraft from his own monies. Mr. Smith by his Defence claimed that without a demand made to Test and the co-guarantors by the Bank for payment, he was not liable under the guarantee and that as he was not a party to the oral agreement he was not bound by the terms of the release. By a counterclaim Mr. Smith claimed a contribution from Mr. Stimpson in respect of another guarantee liability.

The case was heard by Mr. Recorder Hall. In his judgment delivered on 29 January 1998 he found that in 1991 both Mr. Stimpson and Mr. Smith were well aware that Test was in a delicate trading position and that at any time during this period it could have gone under and been wound up by the Bank. He also found that there was at all times a legal liability both on Mr. Stimpson and Mr. Smith to the Bank under the terms of the guarantee. He further found that had Mr. Stimpson not arranged for his shares to be sold and £20,000 to be transferred to Test's account, it was likely that the Bank would have taken steps against Test and the co-guarantors; the payment to the Bank was in response to a requirement made of Mr. Stimpson by the Bank and so it was not made on a voluntary basis. He also said that the Bank could have demanded payment from both or either of the co-guarantors at any time. Turning to what he regarded as the difficult issue in the case, viz. whether liability to make a contribution could have arisen when the Bank had made no formal written demand, he held that, while under the guarantee a written demand was required to be made by the Bank to the guarantors for liability to arise, in equity Mr. Stimpson was entitled to recover a contribution from Mr. Smith "having regard to the fairness and justice of this case as between the parties". He upheld Mr. Smith's Counterclaim, allowing a partial set-off against Mr. Stimpson's claim.

Mr. Smith now appeals. Mr. Caun for him submits that no liability had arisen under the guarantee and the payment was made not under legal compulsion but by voluntary agreement between Mr. Stimpson and the Bank. Without such liability, he says, there can be no liability on a co-guarantor to contribute. He says that a demand was a prerequisite for legal liability under the guarantee to arise and that demand under the guarantee had to be in writing signed by an officer or agent of the Bank; that did not happen here. Further he challenges the findings made by the Recorder as to Test's financial position.

Mr. Stimpson by a Respondent's Notice contends that the Recorder was wrong to hold that the guarantee required the service of a written demand. Mr. Darton for Mr. Stimpson submits that on the true construction of the guarantee the co-guarantors were made liable as if they were the principal debtor. That, he says, means that no demand was necessary for liability to arise under the guarantee. He further submits that the Recorder was correct for the reasons given in his judgment to hold that Mr. Stimpson was entitled to receive a contribution from Mr. Smith.

I start with the factual position in 1991 in view of Mr. Caun's challenge to the findings of the Recorder. Mr. Caun points to the facts that no bank account statements of Test were in evidence, that there is no documentary evidence of the Bank threatening action or requiring payment, that Mr. Stimpson accepted in oral evidence that the account fluctuated with money being paid in as well as drawn out, that the Bank of Scotland was prepared to provide additional finance to Test, that Mr. Stimpson accepted that there were grounds for optimism at the time, and that Test continued to trade for another two years. Mr. Caun said that the Recorder's findings were therefore not supportable. I have no hesitation in rejecting that submission. The absence of bank statements of Test, which has never been a party to the litigation, is, we were told, attributable to the fact that Mr. Stimpson had no documents of Test : they had been handed to the Official Receiver when Test was wound up. There was clear evidence not only from Mr. Stimpson but also from Mr. Smith as to the precarious state of Test's finances. As Mr. Smith accepted in cross-examination, at the time he left Test, the accounts of Test would have shown that any capital in Test had been lost. He was owed salary by Test, but at a meeting with Mr. Stimpson and others on 11 July 1991, he was told that Test was not in a position to pay him anything and that there was no point in winding it up. The Recorder was entitled to find on the evidence of Mr. Stimpson, who dealt with the Bank for Test, that the Bank was saying to him and Test that it was not happy with the trading account, that unless the account was put in order, the Bank would appoint a Receiver and that the overdraft had to be reduced. The fact that the Bank of Scotland was prepared to lend Test further monies on additional security (Mr. Stimpson charged his home to it) in no way detracts from the fact that in December 1991 Test could not repay its debt to the Bank which required the overdraft to be reduced. That debt, though fluctuating, was ascertained or ascertainable simply by looking at the actual amount of the overdraft. It seems plain to me that Test had been required by the Bank in December 1991 to make immediate payment of at least part of its debt, by the demand for a reduction in the overdraft, and that the Bank had the immediate right to serve a demand on the co-guarantors or either of them to meet their liabilities under the guarantee at the time Mr. Stimpson negotiated the release of the guarantee and the payment by him of £20,000.

I turn to the question whether the service of a demand in writing duly signed was a precondition of liability under the guarantee and of the right to contribution of a co-guarantor who makes payment. I shall consider this question first on the basis found by the Recorder that the guarantee required that such a demand be served.

Let me start by setting out certain uncontroversial principles applicable in this area of the law:

(1) Where more than one person guarantee to the creditor the payment of the same debt, an equity arises such that if one of them pays more than his due proportion of the debt, he is entitled to a contribution from his co-guarantor or co-guarantors.

(2) It is immaterial whether the co-guarantors are bound jointly or severally or jointly and severally or by the same instrument or by separate instruments or in the same sum or different sums or at the same time or different times or whether the co-guarantor making payment knows of the existence of the other co-guarantor or co-guarantors, as the right of contribution is not dependent upon agreement, express or implied.

(3) Normally an action for contribution cannot be brought until payment has been made by a co-guarantor of more than his share of the common liability.

(4) In particular circumstances an action for contribution will lie even before payment is made; thus when judgment has been entered by the creditor against one guarantor, who has paid nothing in respect of the judgment, he can maintain an action in equity against his co-guarantor and obtain an order requiring payment of the co-guarantor's due share to the creditor (if a party to the action) or (if the creditor is not a party) an order that the co-guarantor indemnify the judgment debtor, on payment of his own share, against further liability (Wolmershausen v. Gullick [1893] 2 Ch. 514).

These principles are all subject to any contractual terms which may limit or extend the entitlement of an interested person. No such term is to be found in the guarantee.

Is the service of a demand in writing in accordance with the guarantee a precondition of liability under the guarantee? It would be surprising if an evidentiary or procedural requirement of service of a written demand in the guarantee was a precondition. Under cl.5 of the guarantee, the Bank had the right to set off the liability of the co-guarantor to it against any credit balance in any account of the co-guarantors (or either of them: cl.10) with the Bank as well before as after demand under the guarantee. If a set-off could be operated without a demand, why should it have been intended that in other circumstances a demand was a condition of liability? Further, provisions in a guarantee that there should be a demand made by the creditor on the guarantor are clearly for the benefit of the guarantor alone (see, for example, Thomas v. Notts. Inc. Football Club [1972] 1 All E.R. 1176 at p.1182f per Goff J.). As such they can be waived by the guarantor, who is not bound to wait for a demand before paying. Mr. Caun submitted that the position was different where there were co-guarantors under the guarantee, and he pointed out that Mr. Smith knew nothing of what was going on. But Mr. Stimpson and Mr. Smith guaranteed Test's liabilities jointly and severally. It is not in dispute that the Bank had the right to go against either of the co-guarantors without even notifying the other. In these circumstances it seems to me impossible to say that one co-guarantor alone does not have the right to waive the procedural or evidentiary requirement of service of a written demand, which was included in the guarantee for his benefit.

The Recorder found assistance in the authorities relating to the equitable right of a guarantor to an indemnity from the debtor. It is clearly established that a guarantor of an accrued debt can call upon the debtor to pay off the amount due even though payment has not been demanded of the guarantor, and that it is immaterial that under the guarantee the guarantor is only liable to the creditor on demand made to the guarantor (see the Thomas case, in which the earlier authorities were reviewed). The principle applied by Goff J. was that the guarantor is entitled to remove the cloud which is hanging over him (see [1972] All E.R. at p.1182e). Mr. Caun submitted that the Thomas case and others in that line of authority were distinguishable because they were cases where the guarantor was seeking relief against the debtor. He submitted that the principle thereby applied was inapt as between co-guarantors. He further submitted that it was critical to those cases that the liability was accrued or ascertained or ascertainable, whereas in the present case, he said, at the time of Mr. Stimpson's payment Test's account was continuing to be operated and the overdraft was fluctuating.

Mr. Darton relied before us not only on the Thomas line of authority but also on the decision of the Queensland Supreme Court in Moulton v. Roberts [1977] Qd. R.135. In that case the plaintiffs and the defendant were co-guarantors of the debt of a company, and by the guarantee had agreed to make payment on demand and there was an evidentiary provision for a demand. The plaintiffs paid off the debt, although the creditor had made no formal demand on the co-guarantors. Williams J. held that each of the co-guarantors was in jeopardy despite the absence of any demand by the creditor, and, after referring to the Thomas case as a case of a guarantor requiring a debtor to pay off the amount due, said (at p.138):

"It seems to me that the principles are equally apposite where it is a case of one surety requiring contribution as a result of either having paid off the debt or being prepared to pay it off to the advantage of his co-guarantors."

Williams J. then stated that the creditor had been paid off by the plaintiffs with the knowledge, approval and encouragement of the defendant. Next, he referred to a passage in Lindley on Partnership 5th ed. (1988) p.374 which had been cited approvingly by Wright J. in the Wolmershausen case. In that passage it was said that as soon as the creditor had acquired a right to immediate payment from the guarantor, the guarantor was entitled to call upon the debtor to pay the amount of the debt guaranteed. Williams J. (at p.140) said that he was of the view that that principle as between the debtor and guarantor was apposite as between co-guarantors, a fortiori when the payment of the debt was with the consent and co-operation of the defendant co-guarantor. Mr. Caun sought to distinguish Moulton v. Roberts on the basis that the defendant had agreed to the discharge of the debt. But it is clear from the reasoning of Williams J. that that was simply an additional factor referred to after he had expressed the relevant statements of principle. That case provides persuasive authority to support Mr. Darton's submissions.

The only textbook which deals with the specific point is Andrews & Millett : Law of Guarantees 2nd ed. (1994). At p.360 the editors say this:

"It is submitted that strictly speaking there is no restriction upon the time at which a surety can apply for relief against his co-sureties, provided that the account between the principal [sc.debtor] and creditor is closed and there is an immediate liability due and payable under the guarantee such that the amount of the contribution can be properly ascertained. It is immaterial that the creditor has not yet demanded payment, or even that the creditor is obliged under the terms of the guarantee to make a demand before the surety is liable. It is enough that the creditor could enforce the guarantee, either forthwith or after making a demand, for more than the surety's rateable share. This is certainly the case with quia timet relief against the principal [sc. debtor] for an indemnity, and there is no reason why the same should not apply against the co-surety for contribution. This is entirely consistent with Wright J.'s approach in Wolmershausen v. Gullick".

The suggestion in the first sentence that the account between the debtor and creditor must be closed is a reference to the actual facts of the Thomas case and is part of the authors' discussion of when the right to contribution arises before payment by the guarantor. Where, as here, the guarantor has made a payment of £20,000 in circumstances where the debt immediately owed by Test greatly exceeded the £25,000 limit of the guarantee and the guarantee was extinguished, there is no problem in ascertaining the amount of the contribution and no reason why the right of contribution should not arise on the payment notwithstanding the absence of any demand. Of course, payment of the guaranteed debt without the prior consent of the co-guarantor or a court order imposing liability on the co-guarantor to pay a contribution does not shut out the co-guarantor from arguing that the payment was officious or voluntary and that no contribution should be required. The paying co-guarantor in those circumstances takes the risk, as Mr. Darton conceded, that it might be established that no contribution is due.

In the present case, in my judgment, on the findings of fact by the Recorder it is impossible to accept that the payment made by Mr. Stimpson was officious or voluntary. I agree with the Recorder that the argument to that effect on behalf of Mr. Smith does not reflect the reality of the commercial position which faced Test and the co-guarantors. In fact Mr. Stimpson did well for Mr. Smith and himself in securing the extinction of their joint and several liability under the guarantee up to a maximum of £25,000 by the payment of only £20,000, given that Test was not in a financial position to indemnify the co-guarantors against their liability.

It follows that in my opinion the Recorder was right to uphold Mr. Stimpson's claim to contribution. That conclusion renders it unnecessary to decide the question raised by the Respondent's Notice and I say nothing on it.

I would dismiss this appeal.

The cancellation of the guarantee dated 18th October 1990 was as beneficial to the defendant as it was to the plaintiff. Liability of £25,000 was reduced to £20,000. At the time of cancellation no written demand had been served by the National Westminster Bank (the bank) in accordance with the express provisions of the guarantee.

According to Mr Caun's argument the absence of a written demand meant that the payment made by the plaintiff was not made under the guarantee, and that to hold the defendant liable to make contribution in the absence of such a written demand involved an inappropriate extension of principle. In short the plaintiff's claim for contribution was misconceived. A surety may not unilaterally impose on a co-surety an arrangement with which the co-surety might not agree, or which might be to his disadvantage. In such circumstances, however apparently advantageous to him, the defendant was not bound to accept the arrangement which should properly be regarded as a voluntary payment by the plaintiff.

Mr Caun relied on the principle which he said was of general application, expressed by Brett MR in Leigh v. Dickeson (1885) 15 QB 60.

"... It has always been clear that purely voluntary payment cannot be paid back. Voluntary payments may be divided into two classes. Sometimes money has been expended for the benefit of another person under such circumstances that an option is allowed to him to adopt or decline the benefit: in this case. if he exercises his option to adopt the benefit, he will be liable to repay money expended; but if he declines the benefit he will not be liable. But sometimes the money is expended for the benefit of another person under such circumstances. that he cannot help accepting the benefit, in fact he is bound to accept it: in this case he has no opportunity of exercising any option, and he will be under no liability.''

The Master of the Rolls was considering whether a tenant in common had any right of contribution against a co-tenant for the cost of repairs to a house. The tenant paid for the cost of repairs without allowing his co-tenant any 'liberty' to decide whether or not to agree to the repairs. Even if her refusal to agree was unreasonable, as she had not been in any position to object to the repairs, the co-owner was not obliged either in law or in equity to make any contribution.

The present case however is concerned not with the rights of tenants in common among themselves but with the nature of the legal relationship between co-sureties. The right of contribution between them "is bottomed and fixed on general principles of justice, and does not spring from contract; though contract may qualify it''. (Dering v. Earl of Winchelsea (1787) 1 Cox Eq. 318). The principles are well understood and for present purposes sufficiently summarised in the current edition of Snell on Equity (29th Edition) at pages 475/6.

"The doctrine of contribution applies whether the parties are bound in the same instrument or different instruments, provided they are both sureties for the same principal and for the same debt. It is immaterial that they are ignorant of the mutual relation of suretyship, nor does it matter whether they are bound under the same sum or in different sums, except that each is surety for an equal amount or must contribute equally ... and the surety must pay his full share to a co-surety who has paid the whole debt even if there is a counter claim which the debtor might set against the creditor.''

In the context of the right to contribution between sureties, Wright J in Wolmershausen v. Gullick [1893] 2 Ch 514, at 527 observed that

'... In equity it was very reasonably held, that even in the absence of any special agreement, a person who was entitled to contribution or indemnity from another could enforce his right before he had sustained actual loss, provided loss was imminent; and this principle will now prevail in all divisions of the High Court. Therefore a person who is entitled to be thus indemnified against loss is not obliged to wait until he has suffered, and perhaps been ruined, before having recourse to judicial aid.'

This principle has not been doubted. It is analogous to the right of a surety to pursue his right of indemnity against a debtor notwithstanding the absence of a demand from the creditor on the basis that he should be entitled to be relieved from having "such a cloud hanging over him".

Applying what he described as this ''ancient principle'', and analysing all the relevant authorities, Goff J, as he then was, in Thomas v. Notts Incorporated Football Club Limited [1972] 1 All ER 1176, said, at 1182,

'The principle is that the surety is entitled to remove the cloud which is hanging over him. It would be strange indeed, as it seems to me, if he can do that when no demand is required, notwithstanding there is no present likelihood of any attempts to recover against him, and yet when his liability arises as between himself and the creditor only on demand, he cannot seek to remove the cloud until it has started to rain, especially as the provision in the contract of suretyship that the creditor must make a demand on the surety is clearly a provision for the benefit of the surety'.

In Moulton v. Roberts [1977] Qd. 135, Williams J applied both Thomas and Wolmershausen when rejecting an argument very similar to that deployed by Mr Caun. It was submitted that the general law of guarantees as well as the express terms of the guarantee then under consideration showed "the necessity for a demand by the bank ... before any monies became payable and further before any one of the guarantors could, by repaying the principal debt to the bank, obtain any right of contribution from the others." An order for contribution was nevertheless made. Williams J held that despite the absence of a demand in accordance with an "evidentiary provision" in the contract, each of the parties to the guarantee was in "jeopardy", and concluded that the principles set out in Thomas were

"equally apposite where it is a case of one surety requiring contribution as a result of either having paid off the debt or being prepared to pay it off to the advantage of his co-sureties...''

He also applied the observation in Wolmershausen on the basis that the principle "as between the principal debtor and surety is apposite as between co-sureties".

In my judgment, whether the factual situation facing a surety is properly described as an "imminent" threat of loss, or he is in immediate "jeopardy" under the guarantee, once the stage has been reached where a demand in accordance with the formal terms of the guarantee can realistically be anticipated in the absence of a negotiated settlement, the surety who reaches an arrangement with the creditor which is not disadvantageous to his co-surety is not thereafter deprived of his entitlement to contribution. Unless there were a separate contractual arrangement between the sureties themselves to this effect, it would be unjust and contrary to the basic principles that govern the mutual obligations of co-sureties if contribution were not to follow.

Returning to Mr Caun's submission, if he were right, a surety could never waive procedural requirements included in the contract of guarantee without losing the normal entitlement to contribution from his co-surety, even where the new arrangements so achieved were to their mutual advantage. Therefore by waiving, or not insisting, that the bank should comply with the formal requirements for a written demand in this case, the plaintiff simultaneously deprived himself of his claim to contribution when he and the defendant were guaranteeing the company's liabilities jointly and severally.

Given the circumstances of the present case that result would be odd, and unjust. The stark reality was that the company whose debts were guaranteed by the plaintiff and the defendant was indebted to the bank in an amount well in excess of their guarantee, which was capped at £25,000. The company's affairs were in disarray. If the bank had sent a written demand for payment to either the plaintiff or the defendant his liability to the bank would have been established, together with his right to contribution. Instead the demand was made orally. Payment was required. The plaintiff was not seeking officiously to alter the arrangements under the guarantee, but rather to mitigate the position by negotiating a more favourable arrangement for himself and his co-surety without reducing their rights against the company whose debts they had guaranteed. Finally, the fact that the bank had not made a written demand in accordance with clause 13 did not make the payment by the plaintiff ''voluntary'' in the sense explained by Brett MR in Leigh v. Dickeson. Rather, he was honouring obligations to the bank which the defendant shared with him.

For these reasons, as well as those given by Peter Gibson LJ, with whose judgment I agree, this appeal should be dismissed.

I agree that this appeal should be dismissed for the reasons given in both judgments. As we are extending the law in this important field, or at least unearthing and applying old principles to a new factual situation, I will summarise my reasons for doing so.

The point at issue is a short one. Does a surety have a right to contribution from a co-surety where the creditor has not made a formal demand for payment under the guarantee?

In order to answer this question I think it is important to distinguish between the legal rights of the creditor and surety which arise under the contract of guarantee and the equitable rights which exist between sureties in the absence of any contract between them. Where the guarantee requires a formal demand to be made upon the surety this is not a condition precedent to his liability under the contract. It simply marks the time from which that liability can be enforced. It is a provision in the contract for the surety's benefit which he may waive. If he does so and pays an ascertained liability of the debtor which he has guaranteed, I can see no reason in logic or law why his waiver should affect his separate right to contribution from his co-surety. This right should be enforceable upon payment or its equivalent by the surety unless the payment was officious or voluntary. The co-surety's liability to the surety is not dependent upon any formal demand being made on him or even knowledge of the existence of the surety. Our law recognises that a surety may enforce his equitable right to indemnity against the debtor even though a demand has not been made on him by the creditor (Thomas v. Notts. Inc. Football Club [1972] 1 All E R 1176) ). I can see no reason why the same should not apply to a surety's right to contribution from a co-surety.