5. Scope of the model law

Updates and background for this project (Digest)

• Guarantees supporting credit contracts
• Not-for-profit lenders
• Guarantees relating to business loans
• Artificial persons
• Company directors as guarantors
• Related contracts
• Contracting out

GUARANTEES SUPPORTING CREDIT CONTRACTS

5.2 Guarantees may be used to support a variety of obligations other than the payment of a debt. For example, in construction contracts, performance bonds guarantee the performance of the contractor to the proprietor, or the performance of a sub-contractor to the main contractor.¹ The terms of reference of this inquiry are limited to guarantees of small business and other loans.² Guarantees that support the performance of a specified act, such as a service, are not the subject of this inquiry. The Commission, therefore, starts from the premise that the Model Law will apply only to credit contracts as defined in the Consumer Credit (New South Wales) Code (“Consumer Credit Code”). At the same time, we recognise that the exact scope of the Model Law requires further investigation.³

5.3 The Consumer Credit Code defines a credit contract as “a contract under which credit is or may be provided, being the provision of credit to which this Code applies”.⁴ For the purposes of the Consumer Credit Code, “credit” is provided if under a contract:

(a) payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred; or

(b) one person (the debtor) incurs a deferred debt to another (the credit provider).⁵

RECOMMENDATION 5.1

The Model Law should apply to guarantees that relate to a “credit contract”, defined as a contract under which credit is or may be provided. “Credit” is provided if under a contract: (a) payment of a debt owed by one person (the borrower) to another (the lender) is deferred; or (b) one person (the borrower) incurs a deferred debt to another (the lender).

5.5 The Consumer Credit Code applies only to a guarantee if the credit contract it supports is provided by a person or company which, as a general rule, is in the business of providing credit, and which provides the credit in the course of such business in consideration of a charge.⁶ The Model Law should adopt this requirement, since its provisions should not apply to transactions where the lender does not provide credit as a business for profit, such as, when he or she provides it as a favour for a friend or family member.

5.6 Hungier v Grace⁷ provides an illustration, in the context of other legislation, of when a lender is not in the business of providing credit. Hungier made a number of loans to a friend, Grace, over a six-year period. In every case, the loan was made at the request of Grace and acceded to by Hungier if he had the funds at hand. Hungier made the loans with an eye to profit, which was expressed as a rate of interest that varied in practice with the length of time Grace took to repay the loan. The issue was whether Hungier could prove four of these loans in Grace’s bankruptcy, the answer depending on whether Hungier was carrying on the business of money-lending within the meaning of the Money Lenders Act 1958 (Vic). The High Court held that Hungier was not in the business of money-lending and so could prove the debts in Grace’s bankruptcy. Although the court accepted that a lender could be in the business of money-lending with only one borrower, the loans in question were “disconnected” in the sense that they lacked the system and regularity required of loans that would be made in the course of carrying on the business of a money lender. This was because:

[T]he word ‘business’ imports the notion of system, repetition and continuity ... The line of demarcation cannot be defined with closeness or indicated by any specific formula. Each case must depend on its own peculiar features. It is ever a question of degree.⁸

RECOMMENDATION 5.2

The Model Law should apply to guarantees relating to the provision of credit if:
• a charge is made or may be made for providing the credit; and
• the lender provides the credit in the course of a business of providing credit or as part of or incidentally to any other business of the lender.

5.8 The Consumer Credit Code applies only to guarantees that relate to consumer credit contracts, that is, where credit is “provided or intended to be provided wholly or predominantly for personal, domestic or household purposes”.¹⁰ The empirical study conducted by the Commission and the University of Sydney (“Lovric and Millbank”) has shown that an overwhelming majority of third party guarantees are undertaken to support business borrowing: 94% of the litigated cases surveyed related to a business loan; 98% of solicitors and 70% of barristers participating in the study reported that the last guarantee matter they handled had involved a business loan; and half of the guarantors in the study said they guaranteed small business loans.¹¹ Of the guarantors who supported a business loan, many of them (approximately 38%) reported that the purpose of the loan was to expand an existing business. Other purposes identified in the study included: to set up a new business (25%), to get the business through a difficult time (19%), and to refinance an existing loan (8%).¹²

5.9 Chapter 4 pointed out that this empirical evidence argues that the protection given to guarantors of consumer loans should be extended to small business guarantors.¹³ Many submissions supported this view and advocated abandoning the distinction between guarantees supporting consumer loans and those supporting small business loans.¹⁴ Thus:

• The Women’s Legal Resources Centre argued that power imbalance issues are just as relevant in many small business loans as they are in consumer loans.¹⁵
• The NSW Legal Aid Commission asserted that guarantors of small business loans are not necessarily more sophisticated than guarantors of consumer loans. It also said that, in some cases, consumer guarantors are in a better position to understand the nature and extent of the loan and their obligations than business guarantors. For example, a personal guarantor of a consumer loan is more likely to be with the borrower when the loan is entered into than the guarantor of a business loan, who is likely to have only arms-length dealings with regards to the primary transaction.¹⁶
• The Ryde-Eastwood Financial Counselling Service wrote that the ability to make things or provide a service does not mean that business people necessarily have any more financial understanding than consumers in general.¹⁷

Small businesses and consumer law

5.11 At one time, consumer protection laws tended to exclude small business. The difficulty with protecting small business was not with the theory of such protection, but with formulating definitions that satisfactorily drew a distinction between small business and large commercial businesses.¹⁹ As far back as 1962, for example, the United Kingdom Committee on Consumer Protection wrote:

[W]e would have no objection to (the small business person) sharing the benefit of any alteration in the law with the private consumer. It seems to us, however, that the distinction between him and the generality of commercial purchasers lies on the size of the transaction and we doubt if a definition can be made to depend on this factor.²⁰

5.13 The definition of consumer was amended as early as 1977 to refer to a person who acquires:

(a) particular goods for a price not exceeding the prescribed amount of $40,000, or — if the price exceeded $40,000 — goods of a kind ordinarily acquired for personal, domestic or household use or consumption, or goods consisting of a commercial road vehicle, and the goods must not be acquired for the purpose of re-supply for using them up or transforming them in trade or commerce, in the course of a process of production or manufacture or of repairing or treating other goods or fixtures on land; and/or

(b) particular services for a price not exceeding the prescribed amount of $40,000, or — if the price exceeded $40,000 — services of a kind ordinarily acquired for personal, domestic or household use or consumption.²¹

In our view one important function of the consumer protection provisions of the Act is to redress, between supplier and customer, inequalities in the technical expertise required to recognise, and negotiate, a fair bargain.

[T]he Committee does not agree with proposals that the definition of consumer be necessarily limited either to transactions where the goods or services involved are for ‘personal, domestic or household use’ or to transactions for ‘non-commercial purposes’. The Committee would also reject the distinction between corporate and non-corporate purchasers, on the grounds that it is illogical and promotes form over substance...²²

This government is strengthening the Trade Practices Act 1974 to better protect the legal rights of small businesses, to ensure that small business can confidently deal with large firms in the knowledge that the rules under which they are operating are fair, and that there will be proper redress available when those rules are broken. …

The government has accepted the principle that small business people are entitled to a legal protection against unconscionable conduct which is comparable to that accorded to consumers.²⁴

Defining “small business”

5.17 In 2001, the Commonwealth Parliament passed the Financial Services Reform Act 2001 (Cth) (“Financial Services Act”), which amended the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and other related legislation. The Financial Services Act introduced a new regulatory framework governing the licensing, conduct and disclosure obligations of providers of financial products and services. Its provisions are designed to benefit consumers of financial products by: (a) enhancing their capacity to understand and compare different financial products and evaluate financial advice; and (b) giving them access to complaint handling mechanisms for resolving disputes with financial service providers.²⁵

5.18 The Financial Services Act added provisions to the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth), both of which state:

small business means a business employing less than:

(a) if the business is or includes the manufacture of goods — 100 people; or

(b) otherwise — 20 people.²⁶

5.20 Other regulatory definitions of small business use different criteria, such as turnover value or gross assets value. For example, the Privacy Act 1988 (Cth) defines a small business by reference to whether its annual turnover for the previous financial year is $3,000,000 or less.³⁰

5.21 The Australian Bureau of Statistics (ABS) has undertaken a study to determine the optimum definition of small business. It recommended the following definition:

Small business consists of those businesses which are not subsidiaries of another company and are neither public companies, unincorporated cooperatives or incorporated associations and employ less than 20 Full Time Equivalent (FTE) persons.³¹

• they are independently owned and operated;
• they are closely controlled by owners/managers who also contribute most, if not all, of the operating capital; and
• the principal decision-making functions rest with the owner/managers.

5.24 The ABS also concluded that the optimum quantitative test of small business is employment of fewer than 20 full-time employees. It found that this test, when used with the qualitative test described above, covers 95% of all small businesses in Australia. It did not favour a financial test, such as the turnover value of a business, because this needs to be adjusted over time to account for inflation. Further, the ABS asserted that the “less than 20 full-time employees” test is “readily understandable and easily visualised” by most people.³³

5.25 The ABS examined whether its proposed definition can be applied across all industries or whether the employment cut-off point should be raised for some industries. It found that the less than 20 full-time employees test is satisfactory across all industries, including those in manufacturing.³⁴ The special rule for manufacturing businesses found in the Financial Services Act and the Banking Code is therefore not justified.

5.26 A report commissioned by the Small Business Coalition³⁵ recommended a definition of small business that is similar to the ABS definition:

A business which is independently owned and operated, with close control over operations and decisions held by the owners. Business equity is not publicly traded and business financing is personally guaranteed by the owners. The business will have less than twenty employees. ³⁶

RECOMMENDATION 5.3

The Model Law should apply to every guarantee that secures credit provided, or intended to be provided, wholly or predominantly for personal, domestic or household purposes, or for the purpose of a trade or business carried on by a small business.

“Small business” means a business that employs fewer than 20 full time (or equivalent) people and that is not a publicly listed company, unincorporated cooperative or incorporated association, or a subsidiary of another company.

5.28 The recommendations in this Report do not cover guarantees relating to credit provided neither for personal, domestic or household purposes nor for small business purposes.³⁷

5.29 The terms of reference specifically require the Commission to review the law relating to small business lending.³⁸ The case law and the literature on guarantees is mainly concerned with domestic and small business credit. The Lovric and Millbank study has also identified guarantors of small business credit as the group that requires special legal protection. No evidence has been presented to the Commission that guarantees relating to “big business” credit are susceptible to unfair conduct. Special protection is therefore not justified and we make no recommendations on guarantees that support “big business” credit.

ARTIFICIAL PERSONS

5.30 For the Consumer Credit Code to apply to a guarantee, both the debtor and guarantor must, as a general rule, be natural persons.³⁹ However, many small businesses use a variety of legal structures. For example, in 2004, of the 754,484 businesses operating in Australia that were employing fewer than 20 people, more than 50% operated under a corporate structure, 18% as trusts, and 16% as partnerships. Only about 14% operated their businesses as sole proprietors.⁴⁰ Requiring the borrower and guarantor to be natural persons would defeat the purpose of extending legal protection to guarantees relating to small business. This restriction should, therefore, not be included in the Model Law.

RECOMMENDATION 5.4

The Model Law should apply to guarantees whether or not the borrower and guarantor are natural persons.

5.31 Where the guarantor of a loan to a company is a director, or even an officer, of that company, it is arguable that at least some of the provisions of any regulatory regime should be relaxed. The argument applies to obligations to disclose information or provide documents because the guarantor is, or may already be, in possession of them and may have had time to consider them, so that their disclosure or production is, or at least may be, unnecessary.

5.32 Submissions variously put this argument. Based on its belief that “the overwhelming majority of guarantees are from persons who are directors of a corporate borrower”, the Australian Finance Conference submitted that to require financial institutions to provide all information about the circumstances of the borrower (including why a guarantee has been sought) to such guarantors is “unwarranted and excessive”, of dubious benefit to the majority of guarantors and administratively onerous. The Australian Finance Conference submitted that provision of a basic level of information should only be supplemented with additional information where necessary, assessed on a case-by-case basis.⁴¹ More widely, the NSW Legal Aid Commission argued for relevant exclusion from the regulatory regime of guarantors who have a “direct beneficial interest in the transaction”. It gave the example of a managing director of a company who guarantees a loan to that company.⁴² In contrast, St George Bank supported the exclusion of the regulatory regime only where a sole director of a company is guaranteeing a loan to that company.⁴³

5.33 The Banking Code excludes or modifies the operation of some of its provisions relating to pre-contractual disclosure and the cooling off period. In doing so, it draws a distinction between sole director guarantors⁴⁴ and director guarantors.⁴⁵ In the case of a sole director guarantor, this leads to the automatic exclusion of the lender’s obligations to provide information or documents that the director must have, and to the absence of a cooling off period. In the case of a director guarantor, where the director may or may not be in possession of the relevant documents, the Banking Code requires the lender to inform the guarantor of the right to receive the documents and gives the guarantor the option of waiving the cooling-off period.

5.34 The Commission agrees with the approach of the Banking Code in the case of a sole director guarantor, who must be in possession of the specified information or documents and have had time to consider them. However, the Commission does not support the exclusion of the regulatory regime where the guarantor is merely one of a number of directors of a company nor where the guarantor has a “direct beneficial interest in the transaction”. Such guarantors are still vulnerable to unfair conduct, which, in the Commission’s view, is not necessarily overcome by informing them of the right to receive information or documents or giving them the option of waiving a cooling off period.

5.35 For example, it is arguable that a wife receives a benefit from a guarantee if she is a shareholder or a director of a company seeking a loan, or even if that company merely provides income to her and her family. She may, however, not have any involvement in the business. When her husband asks her to provide security for a financial facility to the company, it is insufficient to tell her that she has the right to receive certain information or documents or that she can waive a cooling off period, the more so if this is done in the presence of her husband. In short, there is no substitute for ensuring that she has the information or documents to enable her to make an informed decision about the transaction.⁴⁶ The Lovric and Millbank study shows that this example is not an isolated one. Of the guarantors of business loans surveyed in that study, only 16% were active directors; 20% were silent directors, 37% had no role in the business and 9% had no formal role.⁴⁷ Moreover, an English study into family businesses also found that a large proportion of women who provided third party guarantees were directors, secretaries or shareholders of the family business, but identified themselves as having no day-to-day involvement in the business.⁴⁸

5.36 Except in the case of sole guarantor directors, the Commission cannot think of an exception to the regime proscribed by the Model Law that could be formulated with sufficient precision – for example, one limited to “active” guarantor directors – to avoid injustice to those vulnerable guarantors identified in the empirical research.

Recommendation 5.5

Recommendations 6.1, 6.2, 6.3, 6.6, 6.8, 9.1 and 9.2 do not apply to a sole director guarantor.

Indemnity

5.37 Guarantees are closely related to indemnities. Both are comprehended in the term “surety”. The essence of the distinction between them is that a guarantee is a collateral obligation while an indemnity is a principal obligation. A guarantor’s promise to answer for the “debt, default or miscarriage” of another involves an obligation that is secondary or ancillary to the obligation of that other, who is primarily liable to the person to whom the guarantee is given. A promisor under an indemnity agrees, in terms that create a primary liability in the promisor, to keep the other party to the contract harmless against loss as a result of that party’s entry into a transaction with a third party.⁴⁹

5.38 Two important consequences follow from this distinction. First, a guarantor is generally discharged from liability if the principal contract is void or unenforceable:⁵⁰ the liability of a guarantor is co-extensive with that of the principal debtor, so that if the principal debtor is not liable, neither is the guarantor.⁵¹ In contrast, an indemnifier generally remains liable even if the associated transaction in question is unenforceable or void.⁵² Secondly, a guarantee is generally discharged by certain conduct of the lender, such as giving an extension of time to the borrower, or making substantial variations to the principal contract that are not beneficial to the guarantor.⁵³ An indemnity is not, however, necessarily discharged by giving time to the lender, or by other variations of the contract between the lender and borrower.⁵⁴

5.39 It is not always easy to determine whether a contract is one of guarantee or indemnity. The issue is one of construction of the contract in any case. For example, an agreement is likely to be construed as an indemnity if the contract operates to render the promisor liable in circumstances in which the principal debtor is not in default.⁵⁵ However, if the agreement contains a provision preserving the liability of the guarantor in the event of the lender giving time to the borrower to perform the principal obligation, the contract is likely to be one of guarantee since, if the contract were one of indemnity, there would be no such provision, an indemnifier generally not being discharged by such conduct of the lender.⁵⁶

5.40 Where an agreement, on its true construction, is a contract of guarantee, or a composite contract including a guarantee,⁵⁷ the provisions of the Model Law will, of course, be attracted. A distinct issue is whether or not the proposed provisions of the Model Law should also apply to contracts of indemnity on the basis that an indemnifier is, like a guarantor, vulnerable to unfair conduct on the part of the lender and/or borrower. It may even be argued that an indemnifier is in a worse position than a guarantor since his or her liability is primary.

5.41 There is increasing recognition in credit law and practice that indemnifiers, like guarantors, should be protected from unfair conduct. The Banking Code includes indemnities in its provisions on guarantees.⁵⁸ That means its requirements on disclosure of information, the cooling off period, notice that a guarantor should seek legal and financial advice on the effects of the guarantee, among others, would need to be observed by banks when obtaining an indemnity as a security for a loan or other financial accommodation.

5.42 The Consumer Credit Code defines a guarantee to include an indemnity.⁵⁹ Hence, the regulatory requirements in the Consumer Credit Code relating to guarantees apply to indemnities given in relation to credit contracts made for consumer purposes. Under the general law, liability under a contract of guarantee generally depends on the validity of the principal contract between the lender and borrower.⁶⁰ A guarantee may, however, contain clauses that preserve the liability of a guarantor in the event of circumstances resulting in the borrower not being liable to the lender, such as where the principal contract turns out to be void or unenforceable, or where the lender releases the borrower from liability. However, clauses designed to preserve the liability of the guarantor in such circumstances are, subject to exceptions, void in accordance with s 55(1) (which incorporates the principle of co-extensiveness).⁶¹ As liability under an indemnity is not affected by any such events, there is not a corresponding need for the inclusion of such clauses in indemnities. However, the consequence of defining guarantee to include indemnity under the Consumer Credit Code is to entrench the co-extensiveness principle for indemnities as well as for guarantees, and thus remove the incentive for lenders to seek indemnities rather than guarantees for transactions within the Code.

5.43 The construction of a contract as one of guarantee or one of indemnity is often so fine that a difference in their respective regulation cannot be justified. The Commission is therefore of the view that the regulatory regime proposed in the Model Law should generally extend to indemnities. The Banking Code and the Consumer Credit Code extend their respective regimes to indemnities without exception. In our view, this goes too far under the Consumer Credit Code in so far as s 55(1) of the Code operates to change the very nature of liability under a contract of indemnity and hence to eviscerate such contracts. In the Commission’s view, parties should be free to enter into contracts of indemnity provided there is compliance with the general protective regime of the Model Law. We therefore recommend that the provisions of the Model Law dealing with co-extensiveness (Recommendation 8.2) and with the requirement that, as a general rule, the lender must bring enforcement action against both the borrower and the guarantor (Recommendation 10.4) should not apply to contracts of indemnity.

RECOMMENDATION 5.6

Except in relation to the matters covered by Recommendations 8.2 and 10.4, the Model Law should apply to contracts of indemnity.

5.44 A form of agreement closely related to a third party guarantee is a third party mortgage. Third party mortgages are the means by which a third party guarantees the debts of a borrower without strictly entering into a personal undertaking to pay the secured money (ie, a contract of guarantee). Third party mortgages are, in substance, guarantees even if not strictly so in form or name. Accordingly, the courts treat third party mortgages as if they were third party guarantees.⁶² Such mortgages will, therefore, be subject to the Model Law.

5.45 The issue is whether or not any special regulation is necessary.

5.46 The Banking Code and the Consumer Credit Code contain provisions regulating third party mortgages.

5.47 The Banking Code requires banks, when accepting a third party mortgage, to give the mortgagor a copy of the loan and guarantee contracts and obtain the mortgagor’s written consent:

A third party mortgage will be unenforceable in relation to a future credit contract or future Guarantee unless we have:

(a) given the mortgagor a copy of the contract document of the future credit contract or future Guarantee; and

(b) subsequently obtained the mortgagor’s written acceptance of the extension of the third party mortgage.⁶³

5.49 The Commission can think of no reason why the Banking Code subjects third party mortgages to a different regulatory regime to that applicable to contracts of guarantee.

5.50 In contrast to the provisions of the Banking Code, s 44 of the Consumer Credit Code provides:

(1) A credit provider must not enter into a mortgage to secure obligations under a credit contract unless each mortgagor is a debtor under the contract or a guarantor under a related guarantee.

(2) A credit provider must not enter into a mortgage to secure obligations under a guarantee unless each mortgagor is a guarantor under the guarantee or a debtor under the related credit contract.

(3) A mortgage which does not comply with this section is unenforceable.

5.52 The Commission considers it unnecessary to establish any special regulatory regime for third party mortgages. Since the courts treat third party mortgages as third party guarantees,⁶⁵ they will be subject to the Model Law. All the safeguards included in the Model Law that are intended to ensure that guarantors are treated with fairness – such as those on disclosure of information, warning for guarantors to seek independent legal and financial advice, cooling off periods before and after the execution of the guarantee, requirements on variations of obligations, etc – will apply to third party mortgages.

CONTRACTING OUT

5.53 Settling the appropriate scope of the Model Law would be futile if a party could simply contract out of its provisions. A number of statutes contain provisions regulating contractual terms that seek to circumvent, avoid or modify their effect or key provisions in them.⁶⁶ Section 169 of the Consumer Credit Code is an example. It provides:

(1) A provision of a contract or other instrument by which a person seeks to avoid or modify the effect of this Code is void.

(2) A provision of a contract or other instrument by which a person seeks to have the debtor or guarantor indemnify the credit provider for any loss or liability arising under this Code is void.

(3) A credit provider that is a party to any such contract or other instrument is guilty of an offence.

Maximum penalty – 100 penalty units.

(4) Subsection (2) does not affect the operation of section 55(2).

5.55 With appropriate alteration of detail, the Commission is of the view that the Model Law should contain a section similar to s 169 of the Consumer Credit Code to enable that Law to achieve its policy objectives, in particular that of protecting third party guarantors from unfairness.⁶⁹ In one respect, however, we consider that s 169 does not go far enough in its application to the law of guarantees. The section makes no provision for what is to happen if the guarantor has paid money or transferred property under the guarantee or indemnity – for example, where the guarantor has made a payment under the guarantee unaware that some provisions in the guarantee are void by reason of s 169(1) or s 169(2). The Consumer Credit Code no doubt assumes that established principles at common law would achieve a satisfactory outcome in such a situation.

5.56 The Commission does not, however, consider that the common law is the best means of providing for payments that have been made by a guarantor under a guarantee that contains the clauses identified in s 169(1) or s 169(2). The common law, reflecting the detailed and peculiar circumstances of each case, is extraordinarily complex, making its simple statement difficult. Its application depends, among other matters, on whether or not the impugned provisions of the contract are against public policy; on the extent to which those provisions are “severable”; on whether or not the guarantor was innocent or in equal guilt with the lender; and, if the latter, on the extent to which the legislation was passed for the benefit of guarantors as a class; and, more generally, on the extent to which an action in restitution (however framed) lies at the instance of the guarantor to prevent the lender being unjustly enriched at the expense of the guarantor.⁷⁰

5.57 In our view, the detail of the common law is not necessary in this context. The Model Law should simply contain a statement that a guarantor should be able to recover any money paid or property transferred by him or her under a contract that contains a clause that seeks to avoid or modify the effect of the Model Law, or a clause that seeks to indemnify the lender for any loss or liability arising under the Law. Given that the Model Law will apply to guarantors who seek guarantees in the course of providing credit for profit as part of their business,⁷¹ the provision will not be productive of injustice but will enhance the deterrent value of the section and avoid costly litigation.

5.58 This provision will, of course, be subject to general law doctrines; for example, that payments made as part of a voluntary compromise of a disputed claim are irrecoverable,⁷² even if that principle is of limited application in the present context.⁷³

Recommendation 5.7

The Model Law should render void contractual terms that seek to exclude or modify its effect. The Law should be expressed in terms similar to s 169 of the Consumer Credit Code and should include a provision for the recovery by the guarantor of any money paid or property transferred under a contract containing such provisions.

1. See J O’Donovan and J Phillips, The Modern Contract of Guarantee (Sweet and Maxwell, London, 2003) ch 13. In Canada, this class of guarantors would be classified as compensated sureties because they undertake surety contracts for profit. Courts generally view them less benignly than accommodation sureties or those given without any expectation of personal gain: Citadel General Assurance Co. v Johns-Manville Canada Inc (1983) 147 DLR (3d) 593. See also P Devonshire, “The Liability of Original Mortgagors and Sureties Upon Default by a Mortgagor by Assumption” (2006) 39 University of British Columbia Law Review 185 at 197.

2. The terms of reference are set out at page xi.

3. See para 4.62.

4. Consumer Credit (New South Wales) Code s 5.

5. Consumer Credit (New South Wales) Code s 4(1).

6. Consumer Credit (New South Wales) Code s 6(1)(c) and (d).

7. (1972) 127 CLR 210.

8. Edgelow v MacElwee [1918] 1 KB 205 at 206 (McCardie J), cited with approval in Hungier v Grace (1972) 127 CLR 210 at 216-217 (Barwick CJ).

9. Consumer Credit (New South Wales) Code s 6(1)(d).

10. Consumer Credit (New South Wales) Code s 5, s 6(1)(b).

11. J Lovric and J Millbank, Darling, please sign this form: a report on the practice of third party guarantees in New South Wales (NSW Law Reform Commission, Research Report 11, 2003) at para 2.14-2.22.

12. Lovric and Millbank at para 2.21.

13. See para 4.23-4.26.

14. St George Bank, Submission at 1; NSW Legal Aid Commission, Submission at 3-4; Women’s Legal Resources Centre, Submission at 3; NSW Young Lawyers, Submission at 1; Financial Counsellors’ Association of NSW, Submission at 1-2; Ryde-Eastwood Financial Counselling Service, Submission at 3.

15. Women’s Legal Resources Centre, Submission at 3.

16. NSW Legal Aid Commission, Submission at 3-4.

17. Ryde-Eastwood Financial Counselling Service, Submission at 3.

18. Commonwealth Bank, Submission at 4; Australian Finance Conference, Submission at 5, 8.

19. K Tokely, Consumer Law in New Zealand (Butterwoths, Wellington, 2000) at para 1.1.

20. The Final Report of the Committee on Consumer Protection (London, HMSO 1962, Cmnd 1781) at para 47.

21. Trade Practices Act 1974 (Cth) s 4B.

22. Australia, Trade Practices Review Committee, Report to Minister of Business and Consumer Affairs (AGPS, Canberra, 1976) at 64.

23. Trade Practices Act 1974 (Cth) s 51AC. The transactional limit was originally $1 million but was increased to $3 million in 2001: Trade Practices Amendment Act (No. 1) 2001 (Cth). Section 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) now contains similar provisions in relation to financial market products and services.

24. Commonwealth of Australia, Parliamentary Debates (Hansard) House of Representatives, 30 September 1997, the Hon P Reith, Minister for Workplace Relations and Small Business, Second Reading Speech at 8799. See also Parliament of the Commonwealth of Australia, Finding a balance: towards fair trading in Australia: A Report by the House of Representatives Standing Committee on Industry, Science and Technology (Australian Government Publishing Service, Canberra, 1997).

25. See Commonwealth of Australia, Parliamentary Debates (Hansard) House of Representatives, the Hon J Hockey, Minister for Financial Services and Regulation, Second Reading Speech at 26521.

26. Corporations Act 2001 (Cth) s 761G(12); Australian Securities and Investments Commission Act 2001 (Cth) s 12BC(2).

27. See R Viney, Review of the Code of Banking Practice: Final Report (RTV Consulting Pty Ltd, October 2001).

28. See R Viney, Review of the Code of Banking Practice: Final Report (RTV Consulting Pty Ltd, October 2001) at 5, 26-27, Final Recommendation 6; Australian Bankers’ Association, Annexure to the Submission to the Issues Paper dated February 2001 for The Review of Code of Banking Practice at 5.

29. Code of Banking Practice (2004) cl 40.

30. Privacy Act 1988 (Cth) s 6D(1). For other examples, see Income Tax Assessment Act 1997 (Cth) s 960-335 (average turnover for an income year is less than $1,000,000); First Corporate Law Simplification Act 1995 (Cth) Sch 3 (gross assets of less than $5,000,000 at the end of the year).

31. Australian Bureau of Statistics, Small Business in Australia 1999 (ABS Catologue No. 1321.0, 2000) at 149.

32. Australian Bureau of Statistics, Small Business in Australia 1999 (ABS Catologue No. 1321.0, 2000) at 137-142.

33. Australian Bureau of Statistics, Small Business Unit, Defining Businesses by Size (Discussion Paper, unpublished, 1999) at 16; Australian Bureau of Statistics, Small Business in Australia 1999 (ABS Catologue No. 1321.0, 2000) at 142-147.

34. Australian Bureau of Statistics, Small Business in Australia 1999 (ABS Catologue No. 1321.0, 2000) at 147-149.

35. The Small Business Coalition is a grouping of 27 industry associations in Australia with an interest in small business issues.

36. S Holmes and B Gibson, Definition of Small Business (Final Report, 2001).

37. Businesses that are larger than small businesses may be subdivided into different categories. For example, the Australian Bureau of Statistics defines “medium business” as one that is not small business but employs fewer than 200 people, while “large business” consists of a business that employs more than 200 people: Australian Bureau of Statistics, Small Business in Australia 1999 (ABS Catologue No. 1321.0, 2000) at 149.

38. The terms of reference are set out at p xi.

39. Consumer Credit (New South Wales) Code s 6(1), 9(1)(b).

40. Australian Bureau of Statistics, Australian Bureau of Statistic Business Register: Counts of Businesses – Summary Tables (2004) at 17. For statistics on small businesses, which in 2004 numbered 1,269,000 across Australia, see Australian Bureau of Statistics, Characteristics of Small Businesses, Australia (Reissue, 2004).

41. Australian Finance Conference, Submission at 13.

42. NSW Legal Aid Commission, Submission at 8-9.

43. St George Bank, Submission at 1.

44. Code of Banking Practice (2004) cl 28.15.

45. Code of Banking Practice (2004) cl 28.16.

46. See Lovric and Millbank at 2.7-2.12.

47. Lovric and Millbank at para 2.15-2.18. A further 18% was classified as “other”.

48. B Fehlberg, “Women in Family Companies” (1997) 15 Companies and Securities Law Journal 348 at 360.

49. See Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254 (Mason CJ), and authorities there cited.

50. For example, Corser v Commonwealth General Assurance Co Ltd [1963] NSWR 225 (principal contract void due to uncertainty); Temperance Loan Fund Ltd v Rose [1932] 2 K B 522 (principal contract unenforceable).

51. See para 8.40-8.53.

52. For example, Yeoman Credit Ltd v Latter [1961] 1 WLR 828.

53. Consider Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549. And see Hancock v Williams (1942) 42 SR (NSW) 252 at 255 (Jordan CJ).

54. See G Andrews and R Millett, Law of Guarantees (4th ed, Sweet & Maxwell Ltd, London, 2005) at 11, 296.

55. Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] NSWR 154.

56. Western Credit Ltd v Alberry [1964] 2 All ER 938 at 940 (Davies LJ).

57. Consider Citicorp Pty Ltd v Hendry (1985) 4 NSWLR 1 (guarantee contract containing separable additional liability under indemnity clause which did not, however, preserve the liability of the guarantor since sums payable under the principal contract were irrecoverable because they were in the nature of a penalty).

58. Code of Banking Practice (2004) cl 28.1.

59. Consumer Credit (New South Wales) Code Sch 1 cl 1(1).

60. See para 8.40.

61. See para 8.43-8.53.

62. For example, Re Conley [1938] 2 All ER 127; Jowitt v Callaghan (1938) 38 SR (NSW) 512 at 517 (Jordan CJ); AGC (Advances) Ltd v West (1984) 5 NSWLR 590 at 602-603. A third party mortgage must be distinguished from the situation where the mortgagor undertakes primary liability under the mortgage: see Sorrell v National Australia Bank [1998] WASCA 69.

63. Code of Banking Practice (2004) cl 28.12.

64. Code of Banking Practice (2004) cl 40.

65. See para 5.44.

66. See, for example, s 68 of the Trade Practices Act 1974 (Cth) which declares void contractual provisions excluding certain rights or liabilities conferred or created by the Act.

67. An indemnity for any liability under the Code is not generally void as against public policy: Consumer Credit (New South Wales) Code s 169A(1) and (2). However, s 169A(3) of the Consumer Credit (New South Wales) Code makes s 169A subject to s 169(2). Section 169A of the Code, introduced in 1998 to ensure the enforceability of indemnities in the context of securitisation programs involving a number of parties, applies to indemnities given by persons other than the debtor or guarantor, and so is outside the scope of the Model Law. See generally D McGill and L Wilmott, Annotated Consumer Credit Code (LBC Information Services, Sydney, 1999) at 998-1008.

68. Recommendation 8.2 incorporates s 55(2) into the Model Law.

69. See para 4.2-4.12.

70. For detailed consideration of the general law, see especially J W Carter and D J Harland, Contract Law in Australia (4th edition, Butterworths, Chatswood NSW, 2002) ch 17; K Mason and J W Carter, Restitution Law in Australia (Butterworths, Sydney, 1995) ch 26; G H Treitel, The Law of Contract (11th ed, Sweet & Maxwell, London, 2003) at 480-512; Lord Goff and G Jones, The Law of Restitution (6th ed, Sweet & Maxwell, London, 2002) ch 24. See also A Vrisakis and J W Carter, “Restitution of Payments Made Under Contracts Prohibited by Statute” (2000) 15 Journal of Contract Law 1.

71. See Recommendation 5.2.

72. See Mason and Carter Restitution Law in Australia (Butterworths, Sydney, 1995) at para 1328; Goff and Jones The Law of Restitution (6th ed, Sweet & Maxwell, London, 2002) at para 1-070-1.071.

73. Consider David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 383-384 (Mason CJ, Deane, Toohey, Gaudron and McHugh J), 399-400 (Brennan J).