6. Entering into the contract

Updates and background for this project (Digest)

• Introduction
• Pre-contractual disclosure
• Independent legal and financial advice
• Signing the documents
  

6.1 This chapter explores two issues central to regulating conditions preceding the signing of a guarantee and to the rights of prospective guarantors. It also discusses an ancillary issue pertaining to the circumstances in which the guarantee is signed. These issues are concerned with giving the guarantor a measure of protection from the risks of guaranteeing a loan and enabling him or her to make an informed decision about a proposed transaction. While all guarantees carry the risk that the borrower will default, leaving the guarantor liable for the debt, the regulatory measures proposed in this chapter are aimed at assisting a guarantor to fully appreciate, and guard against, these risks, and the risks of the particular transaction, while not stifling commercial activity.

6.2 The first issue addressed in this chapter relates to the information and advice a lender ought to provide to the prospective guarantor about the loan to the borrower. Paragraphs 6.3-6.13 examine current obligations and practice and consider whether the law should be modified to increase the level of disclosure and strengthen warnings to the guarantor. The second relates to whether a guarantor should obtain independent legal and/or financial advice, and the consequences (if any) of the absence of such advice. The third relates to the ideal conditions for settlement of the guarantee transaction, namely the place where execution of the documents should take place and in the presence of whom.

PRE-CONTRACTUAL DISCLOSURE

Current requirements

Common law

6.3 Generally, at common law, the lender is not required to disclose information to the prospective guarantor about the principal loan, except where the transaction has what the case law describes as “unusual features”.¹ The main rationale provided for this rule relates to potential breaches of the duty of confidentiality owed by the lender to the borrower (who, unlike the guarantor, is the lender’s customer).² The notion of “unusual facts” can leave a lender in a situation where it has to balance between deciding whether to disclose what may be an “unusual fact” to the prospective guarantor as against maintaining its duty of confidentiality to its customer, the borrower,³ and in a situation where a difficult judgment may have to be made as to whether a fact is “unusual” or not.

6.4 A number of government reports⁴ and research studies⁵ have observed that the common law approach is ill-founded from both the lender’s and guarantor’s perspectives on two separate counts. First, there is no basis for common law assumptions about a prospective guarantor’s independence, nor about their ability to inform themselves of the borrower’s financial position. Secondly, there is no guidance provided as to what facts are sufficiently “unusual” so as to require their disclosure. In day-to-day commercial discourse, how does a lender know when it has come across an “unusual fact” that is unknown to the guarantor, or that places a legal obligation on it to notify the potential guarantor?

Consumer Credit Code

6.5 The Consumer Credit (New South Wales) Code (“Consumer Credit Code”) sets out, in s 51, the disclosure required before a guarantee is signed in respect of a consumer credit contract (credit for personal, domestic or household purposes). Section 51 provides as follows:

(1) Before a guarantee is signed by the guarantor, the credit provider must give to the prospective guarantor—

(a) a copy of the contract document of the credit contract or proposed credit contract; and

(b) a document in the form prescribed by the regulations explaining the rights and obligations of a guarantor.⁶


(2) A guarantee is not enforceable unless subsection (1)(a) is complied with.

6.6 The regulation made under s 50 of the Consumer Credit Code provides that a guarantee must contain a warning in the terms of Form 4 of the Schedule.⁸ Form 4 warns that the guarantor may be personally liable for the debt, and that this could jeopardise the guarantor’s assets, including his or her home. It also advises the guarantor that it may be possible to withdraw from the guarantee or limit the liability, and of the guarantor’s rights in relation to an extension of credit. It recommends that the guarantor get independent legal and financial advice and make his or her own inquiries about the debtor’s financial position and credit risk.

6.7 Failure to provide a copy of the credit contract⁹ or include the Form 4 warning renders the guarantee unenforceable.¹⁰

Code of Banking Practice

6.8 The Code of Banking Practice (“Banking Code”) requires the bank to provide to a prospective guarantor “prominent notice” that the guarantor:¹¹

• should seek independent legal and financial advice on the effect of the guarantee;
• can refuse to enter into the guarantee;
• has a right to limit liability under the guarantee; and
• can request information about the transaction or facility to be guaranteed.

• any notice of demand made by the bank on the debtor, or any dishonour on any facility the debtor has (or has had) with the bank, in the previous twelve months (or, from 1 June 2005, in the previous twenty-four months); and
• any excess or overdrawing on any facility the debtor has (or has had) with the bank in the previous six months, and a list of any such excesses or overdrawings.¹²

• any related credit contract, together with a list and description of any related security contract (and a copy of that security contract if requested by the guarantor);
• the final letter of offer;¹⁶
• any related credit report from a credit reporting agency;
• any current credit-related insurance contract in the bank’s possession;
• the latest statement of account relating to the credit facility,¹⁷ and financial accounts or statement of financial position from the previous two years; and
• any unsatisfied notice of demand made in relation to the credit facility in the previous two years.

Other financial institutions

6.12 The Credit Union Code requires that a prospective guarantor be provided with a written warning about the possibility of the prospective guarantor becoming liable instead of, or as well as, the borrower ¹⁹ and with a copy²⁰ of the primary loan contract.²¹

6.13 Although finance companies commonly use guarantees, they do not have an industry code of practice. They are not subject to disclosure provisions similar to those contained in the codes of practice referred to above.²² The Expert Group on Family Financial Vulnerability recommended that finance companies develop a code of conduct containing provisions relating to, among other things, the disclosure of information,²³ but to date this has not occurred.

Privacy

6.14 Section 18N of the Privacy Act 1988 (Cth) (“Privacy Act”) regulates disclosure by credit providers of personal information. Section 18N(1) provides that a credit provider must not disclose a report that is in or has been in its possession or control, or personal information derived from the report, for any purpose unless it is a purpose contained in one of the sub-sections that follows. Intentional contravention of that prohibition is an offence attracting a substantial fine.²⁴

6.15 The two sub-sections relevant to this discussion are as follows. Section 18N(1)(bh) allows disclosure to a prospective guarantor for the purpose of considering whether to enter into the guarantee, providing the borrower consents to the disclosure. Section 18N(1)(g) allows disclosure if it is required or authorized by or under law.²⁵

6.16 The Privacy Amendment (Private Sector) Act 2000 (Cth) inserted the National Privacy Principles, contained in Schedule 3, into the Privacy Act. Clause 2.1, in so far as it is relevant, prevents an “organisation”²⁶ from disclosing personal information for a purpose (“secondary purpose”) other than the primary purpose for which the information was collected unless:

(a) both the following apply:

(i) the secondary purpose is related to the primary purpose of collection and, if the personal information is sensitive information, directly related to the primary purpose of collection; and

(ii) the individual would reasonably expect the organisation to use or disclose the information for the secondary purpose; or


(b) the individual has consented to the use or disclosure.

The Consumer Credit Code and the Privacy Act

6.17 The Commission is canvassing, as an option for reform, extending the operation of s 51 of the Consumer Credit Code or other statute-required disclosure to a guarantor. It is therefore necessary to consider a possible obstacle presented by the Privacy Act. This issue has emerged in relation to s 51(1)(a) of the Consumer Credit Code and provides a parallel example for analysis. The possibility has been raised that s51(1)(a) is inconsistent with s 18N(1) of the Privacy Act within the meaning of s 109 of the Constitution so as to make the Consumer Credit Code provision inoperable.

6.18 As set out above, s 18N(1) of the Privacy Act provides generally that a credit provider that is in possession of a report must not disclose it to another person. The term, “credit provider”, within the meaning of the Privacy Act, is defined in s 11B of that Act.²⁷ It is sufficient for present purposes to say that at least some “credit providers” within the meaning of the Code will also be “credit providers” within the meaning of the Privacy Act.

6.19 The term, “report”, within the meaning of s 18N of the Privacy Act, is defined generally in s 18N(9) as including a record, or information, that has any bearing on an individual’s credit-worthiness, credit standing, credit history or credit capacity. It appears that the copy of the contract document of a credit contract or proposed credit contract required by s 51(1)(a) of the Consumer Credit Code to be given by the credit provider to the prospective guarantor falls within the definition of the term “report” for the purposes of s 18N of the Privacy Act, if for no other reason than because it is information that has a bearing on the actual or proposed borrower’s credit history.

6.20 Thus, the command in s 51(1)(a) of the Consumer Credit Code, in so far as it applies to a person who is a “credit provider” within the meaning both of the Consumer Credit Code and of the Privacy Act, appears to collide directly with the general prohibition in s 18N(1) of the Privacy Act. If it does, the former provision would prima facie be inoperative by reason of inconsistency with the latter provision.

6.21 However, the issue is not as simple as this, because of the exceptions to the general prohibition in s 18N(1) of the Privacy Act, set out above. As noted above, s 18N(1)(g) allows disclosure of the “report” to the person to whom it is disclosed for the purpose for which it is disclosed if this “is required or authorised by or under law”. If the term “law” includes a State statute such as the Consumer Credit Code, then the direct collision between the command in s 51(1)(a) of the Consumer Credit Code and the general prohibition in s 18N(1) of the Privacy Act becomes irrelevant; and the prima facie inoperability of s 51(1)(a) of the Consumer Credit Code, where the credit provider within the meaning of the Consumer Credit Code is also a credit provider within the meaning of the Privacy Act, disappears.

6.22 The Commission is of the view that there is no good reason, as a matter of ordinary language, why a State statute does not have the character of “law”, or that the Commonwealth Parliament, when using the term “law” in s 18N(1)(g) of the Privacy Act, intended to exclude from that term State statutes.

6.23 A similar issue arose in Northern Territory v GPAO.²⁸ There, s 112AD of the Family Law Act 1975 (Cth) provided for sanctions for contraventions of certain orders made under that Act, subpoenas to produce documents being included within such orders. However, such sanctions were not available if (relevantly) a person served with the subpoena to produce documents had had a “reasonable excuse” for not complying with it. Three members of the majority in that case held that an immunity from production of documents contained in a Northern Territory statute amounted to such “reasonable excuse” within the meaning of the Family Law Act 1975 (Cth).²⁹

6.24 Further support for the conclusion that the term “law” within the meaning of s 18N(1)(g), includes State statutes is to be found in s 3 of the Privacy Act and the note to that section.³⁰ Section 3 provides, and the note states, as follows:

It is the intention of the Parliament that this Act is not to affect the operation of a law of a State or of a Territory that makes provision with respect to the collection, holding, use, correction, disclosure or transfer of personal information (including such a law relating to credit reporting or the use of information held in connection with credit reporting) and is capable of operating concurrently with this Act.

Note: Such a law can have effect for the purposes of the provisions of the National Privacy Principles that regulate the handling of personal information by organisations by reference to the effect of other laws.

6.26 Given the Commonwealth Parliament’s express intention as disclosed by s 3 of the Privacy Act that a State law that makes provision with respect to the collection, holding, use, correction, disclosure or transfer of personal information (including such a law relating to credit reporting or the use of information held in connection with credit reporting) should, if capable of operating concurrently with the Privacy Act, do so, that intention can best be given effect by construing the reference in s 18N(1)(g) to “law” as including, rather than excluding, State statutes.

6.27 Further support, if needed, for the effect suggested for the present form of s 3 of the Privacy Act on the construction of the term “law” in s 18N(1)(g) can be found in the second reading speech for the Bill which, without amendment of either the proposed amendment to s 3 or the proposed note, became the Privacy Amendment (Private Sector) Act. The Attorney-General said:

By introducing this bill, the Commonwealth intends to establish a single comprehensive national scheme for the protection of personal information by the private sector. However, state and territory laws will continue to operate to the extent that they are not directly inconsistent with the terms of the bill.

The national privacy principles recognise the operation of state and territory legislation and the common law. For example, while the principles provide for a right of access to personal information held about an individual, they also contemplate a situation in which that access may be denied if this denial is required or authorised by law.

While there may be some situations of direct inconsistency, I expect that, in the majority of cases, existing state and territory laws will continue unaffected by this bill. The existing law will simply be supplemented by the standards contained in the national privacy principles.³³

6.29 The Commission concludes that State legislation that requires disclosure by credit providers of personal information to certain persons for certain purposes, in addition to those set out in the sub-sections to s 18N of the Privacy Act, would not be constitutionally invalid.

Submissions

6.30 Issues Paper 17 asked a series of questions relating to the nature and extent, and necessity, of pre-contractual disclosure.³⁵ The following paragraphs outline the feedback that the Commission received.

6.31 The majority of submissions were of the view that, in order for the guarantor to make an informed choice about whether to enter into a guarantee, and to assist in obtaining independent financial advice, lenders ought to make full disclosure of information in their possession relevant to the financial position of the borrower.³⁶ It was thought that, at the least, this information should include current income and expenditure, assets and liabilities, and, where applicable, profit and loss statements and balance sheets.³⁷ It was also generally thought that the lender should provide the guarantor with copies of the loan application and the proposed loan contract. Other submissions thought that the guarantor should also be provided with the risk assessment and/or credit rating of the borrower,³⁸ and that the purpose for the loan³⁹ and reason why a guarantee is sought should be disclosed.⁴⁰ The NSW Department of Fair Trading submitted that the lender should generally provide the guarantor with the information on which it has based its decision to lend the money and to request a guarantee.⁴¹

6.32 The NSW Department of Fair Trading also pointed out that the situation where a lender requests a guarantee over an existing loan particularly warrants disclosure to the guarantor of all information in the lender’s possession, as the request suggests that the risk of the borrower defaulting is increasing.⁴²

6.33 The majority of submissions were also of the view that the limited common law duty to disclose only “unusual” facts should be modified.⁴³ The Financial Counsellors’ Association of NSW Inc and NSW Young Lawyers added that the term “unusual” is ambiguous and open to interpretation, leading to inconsistency in disclosure practices and uncertainty about what should be disclosed.⁴⁴

6.34 The Commonwealth Bank of Australia (“CBA”) pointed out that a lender has a duty of confidentiality to the borrower and, without the borrower’s consent, the lender cannot disclose information about its customer to any other party, including a guarantor.⁴⁵ Accordingly, it is the CBA’s practice to seek to obtain the borrower’s consent before it discloses any information to a borrower. It noted, however, that many borrowers would object to disclosure to prospective guarantors of the borrower’s full financial details. Providing the CBA obtains the borrower’s consent, then its practice is to provide the guarantor with a copy of the loan offer. The CBA always recommends to the prospective guarantor that he or she obtain independent legal and financial advice.

6.35 If a requirement were introduced to provide to the guarantor all information about the circumstances of the borrower (including why a guarantee has been sought), the CBA submitted that, even if this were limited to information in the lender’s possession, this would still be administratively difficult. Further, the CBA argued that, if a prospective guarantor was dissuaded from providing the guarantee due to incorrect advice about the reason it was required, this could result in legal action against the lender. This, the CBA argued, would make lenders more “circumspect in advising why a guarantee has been sought” and may lead to more stringent lending criteria for complex transactions.

6.36 The Australian Finance Conference (“AFC”) submitted that lenders should (and do) provide the prospective guarantor with sufficient information to enable the guarantor or his or her legal adviser, to understand the transaction and the guarantor’s obligations under it. Such documents would usually include the guarantee, and the primary transaction document (and where relevant, a letter of offer). Often, in practice, the guarantee forms part of the finance agreement.⁴⁶

6.37 The St George Bank (“St George”) submitted that the requirements under the Consumer Credit Code should be extended to small business, but with a strengthening of the warnings contained in Forms 4 and 5A that the guarantor should investigate the borrower’s financial position. Providing the lender has obtained the borrower’s consent, St George does not oppose a “passive obligation” to provide the proposed guarantor, at his or her request, with a copy of the borrower’s application form.⁴⁷ St George submitted that “any greater obligation on a lender’s behalf would place too high a duty in relation to a non-customer”. St George emphasised that it sees its primary concern as the confidentiality it owes to its customer.

6.38 St George also submitted that if it were required to disclose all information about the borrower’s circumstances then this would result in increased administrative costs, which would have to be passed on to the borrower; and a greater potential for the guarantee to be avoided if the lender failed to disclose all required information. This, St George submitted, would in turn result in decreased loan approvals and would encourage the guarantor to place too much reliance on the information provided by the lender rather than relying on his or her own assessment of the borrower’s credit-worthiness.⁴⁸

6.39 St George suggested that, rather than providing a specific reason in each case as to why the guarantee has been sought, a warning in a prescribed form could appear on the guarantee document to the effect that “your guarantee is required to support this loan because the debtor has insufficient security”.⁴⁹

Conclusion

6.40 The Commission is persuaded by the feedback from a majority of submissions that lenders ought to make full disclosure of information in their possession relevant to the financial position of the borrower. It is hard to see how a guarantor can otherwise make an informed choice about whether or not to enter into a guarantee. In addition, effective and relevant independent financial advice, if such is to be obtained, has to be based on proper disclosure. Numerous commentators have argued that legal advice on the effect of a guarantee is of very little assistance in the absence of financial information on the borrower’s position and financial advice on the implications of the transaction.

6.41 As is stressed throughout this Report, guarantors can be vulnerable to incurring significant financial loss and should be afforded the fullest opportunity to assess the risk of the proposed transaction. Even if the prospective guarantor is not dissuaded from giving the guarantee, to assume a known risk voluntarily and being well informed is empowering. The guarantor may be more likely to monitor the progress of the repayment of the loan and more able to take precautionary or pre-emptive steps if default is impending.

6.42 It is unsatisfactory for the extent of disclosure – or any disclosure at all – to be left to the discretion of the individual lender and upon whether consent from the borrower is forthcoming. It is also unsatisfactory to rely on the limited common law duty to disclose only “unusual” facts. As the submissions pointed out, the common law duty leaves lenders in a position of uncertainty about what is “unusual” and should therefore be disclosed. The majority of submissions were of the view that the common law should be modified. Lenders would benefit from legislative clarification of what is to be disclosed.

6.43 The Commission is not persuaded that the administrative inconvenience and cost of disclosure outweigh the fairness of enlightening the prospective guarantor as to the financial circumstances of the borrower and the transaction. It is also difficult to envisage legal action against the lender for wrong advice about why the guarantee was required, a concern expressed by the CBA. First, it is advice that would not, in most situations, be complex or ambiguous and, if due care is taken, could easily be conveyed accurately. Secondly, it could well be difficult for the borrower to prove that the guarantor was dissuaded from entering into the guarantee by this advice. Thirdly, the financial information about the borrower would be more revealing and essential to evaluating the risks of the guarantee than the lender’s reason for requiring it. A financial advisor, advising a prospective guarantor about the proposed transaction, would focus on financial records and documents, which speak for themselves. At any rate, if, as the CBA argued, the possibility of legal liability for wrong advice leads to more stringent lending criteria for complex transactions, this is not, in the Commission’s view, reason to draw back from requiring fuller disclosure.

6.44 A number of submissions drew attention to privacy considerations and lenders’ duty of confidentiality owed to borrowers. It is the practice of most lenders to obtain the borrower’s consent to disclosing information to prospective guarantors. However, it was submitted that borrowers would most likely object to full disclosure of their financial circumstances.

6.45 The Commission contemplated a legislative requirement that lenders obtain borrowers’ consent to disclosure of financial information to a prospective guarantee. However, on reflection, this requirement could place too much strain on the borrower/guarantor relationship and, in any case, in view of the Commission’s conclusion as to the operation of the provisions of the Privacy Act, is not necessary. As analysed above, a requirement in a statute of New South Wales that lenders disclose prescribed information to guarantors would have force by reason of s 18N(1)(g) of the Privacy Act, which allows disclosure if it is required or authorized by or under law.

6.46 The Commission is impressed by the requirements for disclosure of the Banking Code and has concluded that these requirements, with some modification, would place guarantors in the best position to evaluate the risks of guaranteeing the loan and take on these risks with full knowledge of the facts. The disclosure requirements should apply regardless of the type of loan or the relationship between the borrower and the guarantor (except where the guarantor is a sole director guarantor).⁵⁰

6.47 Accordingly, the Commission is of the view that legislation should adopt the disclosure requirements of the Banking Code to apply to all guarantees within the scope of this reference, together with a further requirement that the lender make available to the prospective guarantor the financial information concerning the borrower’s circumstances that the lender treats as being relevant to the borrower’s risk. At the least, the prospective guarantor should be provided with the loan application. If the loan application does not set out the assets and liabilities, income and expenditure (or the equivalent corporate documents) of the borrower, the documents provided with the loan application that contains this information should also be provided to the prospective guarantor. The Commission agrees with the approach of the Consumer Credit Code that the consequences of a failure to comply should render the guarantee unenforceable.

RECOMMENDATION 6.1

The Model Law should provide that a lender must make available to the prospective guarantor the financial information concerning the borrower’s circumstances that the lender treats as relevant to the borrower’s risk. The prospective guarantor should be provided with copies of:
• any related credit contract, together with a list and description of any related security contract (and a copy of that security contract if requested by the prospective guarantor);
• any related credit report from a credit reporting agency;
• any current credit-related insurance contract concerning the borrower in the lender’s possession;
• the latest statement of account relating to the credit facility, and financial accounts or statement of financial position of the borrower from the previous two years;
• any unsatisfied notice of demand made in relation to the credit facility in the previous two years;
• the final letter of offer; and
• the loan application.
If the loan application does not set out the assets and liabilities, income and expenditure (or the equivalent corporate documents) of the borrower, the documents provided with the loan application that contain this information should also be provided to the prospective guarantor.

The Model Law should provide that the lender must notify the prospective guarantor of:
• any notice of demand made by the lender on the borrower, or any dishonour on any facility the borrower has (or has had) with the lender, in the previous 2 years; and
• any excess or overdrawing on any facility the borrower has (or has had) with the lender in the previous six months. The lender must provide a list of any such excesses or overdrawings.
The lender must tell the prospective guarantor if the loan will not be made if the guarantee is not provided.

The Model Law should provide that failure to comply with the requirements set out in Recommendations 6.1 and 6.2 renders the guarantee unenforceable.

6.48 Mahalingham has identified two distinct functions that independent advice serves in loan transactions, although she observes that its precise role is not well understood:

For lenders it plays a protective role, shielding them from the effects of the misconduct of a third party or countering allegations of unfair conduct. For the family security provider, it is thought that independent advice will eliminate underlying unfairness by ensuring that the family security provider has made an informed, independent and voluntary decision in providing security.⁵¹

• to inform the guarantor of the obligations and consequences of signing a guarantee;
• to allow an opportunity for the guarantor to make an informed decision about entering into the guarantee;
• to avoid the possibility of a claim of bias associated with the financial institution giving the advice, by having a disinterested party provide advice;
• to avoid the possibility of a claim that the financial institution acted in a way that misled the guarantor about the true nature of the contract;
• to avoid the guarantor entering into an unjust contract; and
• in the event the guarantor challenges the fairness of a guarantee, as one indicator of an attempt to achieve procedural fairness.

Current requirements

6.51 In determining whether a contract or a provision of a contract is unjust pursuant to the Contracts Review Act 1980 (NSW), the court is to have regard to whether or not, and when, independent legal or other expert advice was obtained by the party seeking relief under the Act. Recommending independent legal advice is a factor that may relieve a lender of responsibility for unfairness pursuant to the High Court decision in Garcia v National Australia Bank.⁵³ It is commonly thought that many lenders now insist that guarantors obtain independent legal advice.⁵⁴

Consumer Credit Code

6.52 The Consumer Credit Code does not require that the guarantor actually have received independent legal or financial advice. As described above, Form 4 alerts the guarantor in the following words: “You should obtain independent legal advice”; “You should also consider obtaining independent financial advice”; and “You should make your own inquiries about the credit worthiness, financial position and honesty of the debtor”. However, absence of independent legal or other expert advice is a factor which the court may take into account in a decision under s 70 of the Consumer Credit Code as to whether to re-open an unjust transaction.⁵⁵

6.53 In addition, s 51 of the Consumer Credit Code requires the lender to give to the prospective guarantor a Form 5A document, which contains 25 questions and answers explaining guarantees generally and the guarantor’s rights and obligations, as well as giving advice, such as what the guarantor can do in the event of a default by the borrower.⁵⁶

Code of Banking Practice

6.54 The Banking Code provides that the bank will give a prospective guarantor “prominent notice” that he or she should seek independent legal and financial advice on the effect of the guarantee.⁵⁷ Compliance with this requirement would not protect a bank against liability for unconscionable conduct or under the principles in Garcia v National Australia Bank⁵⁸ if the guarantor did not actually obtain independent advice.

6.55 The Banking Code allows the guarantor a one-day cooling off period after being provided with the requisite financial information and before signing the guarantee.⁵⁹ However, the cooling off period is not given where the guarantor has obtained independent legal advice after having received the information.⁶⁰

Rule 45 of the Professional Conduct and Practice Rules

6.56 Rule 45 of the Professional Conduct and Practice Rules (“Rule 45”) gives guidelines for the content of the advice to be given by solicitors to third party guarantors.⁶¹ Rule 45 makes it clear that solicitors must advise the client they are not qualified to provide financial (as distinct from legal) advice and that if the guarantor has any questions about financial aspects of the transaction they should seek further advice from an accountant or financial counsellor.⁶²

6.57 Rule 45 also includes clear guidelines about conflict. It provides that the solicitor who advises a borrower or guarantor must not also act for the lender and that, in cases where there is potential conflict between parties to the transaction (that is, the borrower and guarantor), the solicitor cannot provide advice to more than one of those parties without the written consent of each party.⁶³

Submissions

6.58 In Issues Paper 17, the Commission asked a number of questions concerning independent legal and financial advice:

• In what circumstances should prospective guarantors be required to seek independent legal advice?
• Should lenders be required to ensure that this has occurred before being able to finalise a guarantee and, if so, what form should that advice take?
• What issues must the guarantor be advised about?
• Should additional requirements be imposed where the relationship between guarantor and borrower is a close personal relationship?
• Should proof that a person has received independent legal advice ever be a precondition of a guarantee’s enforceability?

6.60 A number of submissions supported a requirement to obtain independent legal and financial advice,⁶⁴ the latter particularly where the loan is for a business purpose and the guarantor is not involved in the business.⁶⁵

6.61 Other submissions suggested that the lender should be required to give general advice together with a recommendation that the prospective guarantor seek independent advice.⁶⁶ Other submissions suggested that, even if independent advice is required to be obtained, the lender should also have a responsibility to give the guarantor advice about the nature of the guarantee and the circumstances surrounding it.⁶⁷ This view was held by the Women’s Legal Resources Centre for the reason that independent legal advice does not necessarily ensure that the guarantor has made a rational financial or commercial decision about the guarantee and does not necessarily prevent him or her from entering a high-risk guarantee.⁶⁸ It submitted that “one of the features of relationship debt is the perceived lack of choice about whether to sign”. It was generally thought that advice, whether independent or from the lender, should be given in the absence of the borrower.⁶⁹

6.62 Some submissions suggested that guarantors should be required to seek independent advice in the following circumstances:

• where guarantors are old, poorly educated, have a poor understanding of English or are in a close relationship with the borrower (for example, marital or parental);⁷⁰
• where the security for the loan is to be the matrimonial home or family home, and particularly when the guarantor has dependants;⁷¹ and
• where the potential liability of any guarantor exceeds a certain amount⁷² (one submission thought this amount should be $100,000.⁷³ )

6.64 The CBA and the NSW Department of Fair Trading submitted that there should not be a blanket requirement that independent advice be obtained. Circumstances where independent advice should not, or may not, be necessary include:

• where the loan being guaranteed was for a small amount and the guarantors had an intimate knowledge of the borrower’s financial affairs (for example, parents guaranteeing a loan for their child to purchase his or her first car);⁷⁵
• where a guarantor is a director of the borrower company and is involved in the day to day running of the company;⁷⁶ and
• where the guarantor has business experience.⁷⁷

6.66 One of the submissions against requiring independent legal advice to be obtained argued that it may not be practical; would add substantially to the costs of a transaction; may only reinforce the view that it was just a formality; and in any case, would not solve many of the problems associated with “relationship debt”.⁸¹

6.67 While the Legal Aid Commission believed that independent financial advice could be of even more assistance than independent legal advice in many cases, it also warned that it may be costly to obtain. It also expressed concern that “obtaining independent financial advice may become, as independent legal advice arguably has, a means of shifting liability for any injustice to financial advisors rather than providing the guarantor with useful information”.⁸²

6.68 The AFC suggested that nothing more than the directions in the Consumer Credit Code were necessary so far as independent advice went. It specifically did not support a direct legislative requirement for independent legal advice, neither did it support prescribing the type of advice to be given to a guarantor (on the basis that this will vary with the circumstances of each transaction).⁸³

Additional requirements for close personal relationships

6.69 One submission supported imposing additional requirements when there is a close relationship between the borrower and guarantor to “ensure that the guarantor’s will is voluntary and not been subjected to any ‘undue influence’”.⁸⁴

6.70 St George suggested that additional requirements do not need to be imposed since most of their guarantees involve close personal relationships and “it is a matter for the solicitor advising the guarantor to ensure that the guarantor understands the effect of what he/she is signing”.⁸⁵

6.71 Young Lawyers pointed out that there would be difficulties associated with identifying whether there is a “close personal relationship” between the guarantor and borrower.⁸⁶ The NSW Department of Fair Trading observed that requiring a lender to inquire into any relationship between a borrower and guarantor would be “onerous and clumsy”.⁸⁷ A number of submissions expressed the view that, in any case, independent advice is not necessarily going to offset emotional pressures.⁸⁸ No matter what additional requirements or precautions are taken, it is likely that the guarantor would nevertheless give the guarantee.⁸⁹

People from non-English speaking backgrounds

6.72 Some submissions considered that lenders should insist that guarantors from non-English speaking backgrounds be required to seek independent legal and financial advice,⁹⁰ and that this should be provided through interpreters where necessary.⁹¹ The Women’s Legal Resources Centre suggested making a certificate of independent financial advice a prerequisite for the enforceability of a guarantee for guarantors from non-English speaking backgrounds and Aboriginal guarantors.⁹² Other submissions considered that the right approach would depend on the individual guarantor, given that some people from non-English speaking backgrounds could read and understand English very well and could be astute business people.⁹³ The suggested alternative was to make special provision for people with “little understanding of English” rather than “of non-English speaking background”.

6.73 The Legal Aid Commission suggested that lenders who provide an explanation in English to a person with little understanding of English should be considered not to have given the advice at all.⁹⁴

6.74 Some submissions also drew attention to the problems posed by the borrower and/or a family member acting as translator for the guarantor and suggested that the possibility of this happening should be excluded.⁹⁵

6.75 Other submissions made practical suggestions including:

• that any prescribed forms could be translated and be made available for downloading from a New South Wales Government website;⁹⁶
• that guarantee documents should come with a multi-lingual leaflet advising the prospective guarantor of a NSW Department of Fair Trading telephone advice hotline;⁹⁷ and
• that a list of bilingual specialists (solicitors, accountants and financial counsellors) should be established to provide advice when required.⁹⁸

6.76 Many submissions supported a cooling off period after the guarantee had been signed, chiefly to allow guarantors the opportunity to give proper consideration to their position and to seek advice.⁹⁹ One of these drew attention to the particular needs of women and people from non-English speaking backgrounds.¹⁰⁰ Submissions proposed periods ranging from 5 to 14 or 21 days as a period that would allow enough time for guarantors to seek independent advice.¹⁰¹ One submission proposed a cooling off period of 30 days to obtain advice, stating that “anything less would cause stress in obtaining appointments and availability of specialists”.¹⁰²

6.77 Several submissions, mainly from financial institutions, while not supporting provision of a cooling off period after signing a guarantee, supported giving a guarantor sufficient time and opportunity to consider the guarantee documents prior to execution.¹⁰³ Other submissions supported either allowing a period of time after the necessary information had been received and before the guarantee could be signed, ranging from 24 hours to 14 days, or otherwise a post-contractual cooling-off period.¹⁰⁴

6.78 One submission considered that allowing a guarantor to withdraw at any time before the provision of credit to the borrower (as provided by s 53 of the Consumer Credit Code) amounted to adequate protection.¹⁰⁵

Empirical background

6.79 The empirical study conducted by the Commission and the Faculty of Law at the University of Sydney (“Lovric and Millbank”) found that the vast majority of guarantors who responded to their survey, and a high proportion of those in their review of the litigated cases, did not receive any legal advice prior to entering the transaction, with those from non-English speaking backgrounds being particularly unlikely to receive independent legal advice.¹⁰⁶ Only 20% of guarantors reported that anyone – including the lender – suggested that they obtain independent legal advice.

6.80 Lovric and Millbank also identified grave inadequacies in the legal advice in the limited number of transactions where it took place.¹⁰⁷ Most guarantors were of the view that it had not greatly assisted them, with only one respondent saying that the advice clarified their thoughts on the document. Guarantors reported that the meeting where advice was given was a brisk formality, the advice perfunctory,¹⁰⁸ closely followed by signing.¹⁰⁹

6.81 Inadequacies in advice to prospective guarantors may be attributable, to some extent, to solicitors’ perceptions of what their role should be, particularly if the lender has arranged for the advice to be given, or if the solicitor is acting for another party in the transaction.¹¹⁰ When the lawyer is retained by a party other than the guarantor,¹¹¹ there may be confusion about what exactly the lawyer’s duty is and to whom it is owed, and a potential for conflict of interest.¹¹²

6.82 Most solicitors surveyed perceived their role as involving explanation of the documents, and giving advice on the legal risks of the transaction and the nature and extent of the liability.¹¹³ About a quarter of the solicitors described their role as ensuring that the guarantor understood the nature of the transaction or what they were doing. A few explicitly described their role as involving the protection of the guarantor’s interests. Only a few described their role as actively discouraging the client to proceed with the transaction. None of the solicitors explicitly described their role as including ensuring that the client was not subject to any undue influence or duress. Disturbingly, two solicitors perceived their role as protecting the financial institution, and a further six solicitors described their role as formal or mechanistic.¹¹⁴

6.83 Lovric and Millbank also identified problems with the independence of the advice from the borrower and the lender. In two instances, guarantors reported advice from lawyers that was openly partisan to the borrower. In one, only the “positive” aspects of the loan were explained, while in another, the lawyer pressured the guarantors to sign during the interview by telling them that if they did not sign quickly the loan would be reduced and the project would falter. In both of these instances, and in one additional case, the lawyer was also acting for the borrower.¹¹⁵

6.84 The independence and utility of the advice may also be affected if it is provided in the presence of other parties to the transaction.¹¹⁶ Lovric and Millbank noted that, although there has been some adverse judicial comment about the propriety of the borrower being present while the guarantors received legal advice,¹¹⁷ the practice has not been subject to significant scrutiny to date.¹¹⁸ Fehlberg found that, while solicitors considered that it was not “good practice” to see guarantors in the presence of borrowers because of the opportunity for pressure or influence to be brought to bear, in practice they did little to prevent it. This was because guarantors and borrowers often “presented as a package”, and because it was usually borrowers who organised the appointment and paid for the advice.¹¹⁹

6.85 Lovric and Millbank found a concern among the surveyed solicitors that the process of sending guarantors to get independent advice from lawyers in effect meant lenders were passing on their obligations to explain the transaction to solicitors, and exposing them to being sued by guarantors, or the subject of cross-claims by lenders if the guarantee goes wrong.¹²⁰ One solicitor said that they “should not be made ‘co-guarantors’ by being exposed to proceedings in this way”.¹²¹

6.86 In fact, as a result of concern about increased claims against solicitors for negligent advce to guarantors,¹²² Rule 45 was amended in 2000 to require the guarantor, rather than the solicitor as previously, to sign a statutory declaration that the solicitor had provided him or her with independent advice. However, Lovric and Millbank’s review of LawCover claims suggested that this concern was misconceived.¹²³ Their review of litigated cases confirmed that solicitors are rarely held liable for any loss suffered by guarantors.¹²⁴

6.87 Many respondents to the survey gave positive feedback about Rule 45, including that the new procedure: simplified matters; provided clearer documentation; had probably lifted the quality and consistency of advice; and, for some, eased their disquiet about their own liability.¹²⁵

6.88 There were criticisms of Rule 45, related to documentation requirements and the increased cost or time involved in compliance, for which solicitors received little reward, and which increased the cost of the guarantee transaction.¹²⁶ Some solicitors expressed the view that the requirements of the Rule (despite its protections for lawyers), together with the decision in Garcia v National Australia Bank,¹²⁷ has led to clients avoiding advice on guarantees prior to entering the transaction.¹²⁸

6.89 Lovric and Millbank also investigated who it is that benefits from independent legal advice and whether it is, in fact, guarantors who obtain a benefit. They concluded that it is questionable whether the provision of legal advice actually deters vulnerable guarantors from proceeding with the transaction.¹²⁹

6.90 The majority of solicitors responding to the survey had advised a client not to sign a contract in the last 10 years and almost half had done so on two to five occasions.¹³⁰ However, the solicitors also reported that, despite providing strong advice about the risks of the transaction, most guarantors proceeded with the transaction.¹³¹ Only one solicitor reported the view that a client listens to the legal advice and then makes a commercial decision. One barrister commented that, while independent advice may act as a deterrent to signing, by the time the advice is given, the guarantor probably already feels morally committed to the borrower to execute the guarantee. Lovric and Millbank commented that other survey data also indicated that:

much of the negotiating about the loan, and the exigencies surrounding the pressing need for finance have already proceeded to such a point that the only thing required, and that is inevitable, is the guarantor’s signature.¹³²

feelings of connection and obligation arising out of personal or family relationships govern the decision of the guarantor to proceed with the transaction rather than any objective advice about the dangers of the transaction.¹³³

6.93 Lovric and Millbank suggested that it is lenders who benefit from the provision of independent legal advice because they are protected from a guarantor’s claim that he or she did not understand the transaction, or was at a special disadvantage. They state that their research indicates that the guarantor receives little protection; and that independent legal advice as it is currently given (if it is given at all) is insufficient to assist the guarantor to make an informed decision, particularly where the guarantor is signing out of a feeling of obligation, pressure or trust.¹³⁵ However, they concluded that their research indicates that there can still be a useful role for both independent legal and financial advice, but that the issue requires “further attention and deeper analysis”.

Conclusion

6.94 Guarantee transactions are frequently very complex commercial arrangements, often involving voluminous and impenetrable legal documents. Documentation is often signed in rushed or informal circumstances, perhaps with minimal explanation, often in the presence of the borrower and in the absence of any legal or financial advice. Such circumstances are far from conducive to measured, informed and autonomous decision-making. This is exacerbated when guarantors lack basic information about the borrower’s financial position.

6.95 Prospective guarantors who are poorly-educated or do not have a good command of English or who are in a close personal relationship with the borrower are particularly vulnerable to entering into transactions from a position of ignorance and/or emotional pressure or obligation.

6.96 A valid and compelling response is to insist that prospective guarantors receive independent legal and financial advice, as a means of safeguarding them against the risks of guarantee transactions.

6.97 However, while there are undoubtedly benefits in obtaining independent advice, especially in the particular circumstances suggested in submissions,¹³⁶ the Commission has concluded that this should not be a mandatory requirement for a number of reasons.

6.98 Foremost of these, provided a prospective guarantor is strongly and clearly warned that it is advisable to obtain independent advice, the Commission is troubled by forcing an adult to do so. This ought to be a matter of (informed) free choice.

6.99 Other reasons for the Commission’s conclusion centre on:

• the substantial costs of consulting legal and financial professionals, and the extra burden of this, presumably borne by the borrower;
• concern that a blanket requirement to obtain legal or financial advice may be heavy-handed, as there would be many guarantors who would understand the nature of the transaction and its implications; this view is reinforced if inclusion of a Consumer Credit Code Form 5A document is made a general requirement;
• concern that the process may become a mere (expensive) formality;¹³⁷ and
• reservations about the degree of usefulness of independent legal advice.

6.100 This last basis arises out of the findings in the Lovric and Millbank study. As noted above, Lovric and Millbank found that most of the guarantors surveyed felt that independent legal advice had not greatly assisted them; that the meeting where advice was given was often a brisk formality and the advice perfunctory, closely followed by signing. The authors concluded that independent legal advice, as it is currently given, is insufficient to assist the guarantor to make an informed decision, particularly where the guarantor is signing out of a feeling of obligation, pressure or trust. They questioned whether the provision of legal advice actually deters vulnerable guarantors from proceeding with the transaction. They further concluded that it is lenders who benefit from the provision of independent legal advice because, once given, it can be relied upon in answer to a guarantor’s claim that he or she did not understand the transaction, or was at a special disadvantage.

6.101 Other recommendations the Commission makes in this chapter, and in Chapters 7, 9 and 11, lessen the imperative of obtaining independent legal advice in all circumstances and bolster the recommendation to advise rather than compel the guarantor to seek advice. First, the Commission makes recommendations in Chapter 7 to improve the legibility and accessibility of documentation. Secondly, this chapter and Chapter 9 make recommendations for pre- and post-contractual cooling off periods. Thirdly, the Commission recommends applying, with modifications, s 51 of the Consumer Credit Code to guarantees generally. That is, guarantee documentation should contain warnings built on Form 4 and the lender should give to the prospective guarantor a document in the form of Form 5A. This document would explain guarantees generally and the guarantor’s rights and obligations, as well as giving general advice, such as what the guarantor can do in the event of a default by the borrower. Fourthly, Chapter 11 recommends that the Model Law should empower a court to reopen unjust transactions and that, in determining whether a transaction is unjust, the court may have regard to whether or not independent legal or other expert advice was obtained by the guarantor.¹³⁸

Independent financial advice

6.102 As explained above, the Commission is also reluctant to compel parties to a guarantee transaction to incur the costs of obtaining financial advice, particularly when it may not always be necessary and may become a mere formality. Furthermore, the financial information provided to the guarantor pursuant to the Commission’s recommendation for disclosure may, in many cases, be sufficient for the prospective guarantor to appreciate the borrower’s financial position, and the attendant financial risks of giving a guarantee.

6.103 An alternative approach, as was advocated by a number of submissions,¹³⁹ is to require the lender to advise the prospective guarantor about the circumstances surrounding the proposed guarantee and loan transaction. In one sense, lenders are well placed to advise on the financial consequences of the transaction, as they are the only party to have the relevant information on hand. However, there is clearly also an inherent conflict of interest in lenders providing advice on a transaction that financially benefits them. On balance, the Commission is not prepared to recommend a compulsory obligation for lenders to give advice. This should be a matter left to the discretion of the individual lender, although left open to be taken into account in the event of the guarantor seeking relief if called upon to meet the borrower’s debt.

Cooling off period

6.104 Almost all submissions supported either a cooling off period after the guarantee had been signed or a minimum time period after provision of information before a guarantee could be signed. Several submissions, mainly from financial institutions, while not supporting a post-contractual cooling off period, supported giving a guarantor sufficient time and opportunity to consider the guarantee documents prior to execution.

6.105 Chapter 9 considers a post-contractual cooling off period and recommends that a guarantor should be allowed to withdraw from a guarantee within one clear business day from the time of signing. The Commission has concluded that time prior to signing the guarantee should also be allowed, if the proposed safeguards of full financial disclosure to the prospective guarantor, and urging obtaining independent legal and financial advice, are to be effective. The prospective guarantor must be given a real opportunity to consider the information and seek advice before committing to a guarantee.

6.106 However, this pre-contractual period has to be commercially realistic. The borrower is frequently under time pressure to move on a business transaction, or an opportunity may be lost or the borrower otherwise disadvantaged, sometimes seriously. The Commission considers that a proper balance between the borrower’s and the guarantor’s interests is achieved by allowing one clear business day between the lender’s compliance with the disclosure requirements and the earliest time at which the guarantee can be signed.

Consequences

6.107 The Commission is of the view that a failure to include the warnings recommended below or to provide the guarantor with a document in the form of Form 5A, should render the guarantee unenforceable.

RECOMMENDATION 6.4

The Model Law should provide that the contract of guarantee should contain a warning in the terms of Form 4 of the Consumer Credit Regulation, with the modifications set out below. The warning should appear directly above the place where the guarantee is to be signed, be printed in bold and in a larger font than the rest of the document, and in all other respects comply with s 20 of the Consumer Credit Regulation:

The words “You should obtain independent legal advice” and “You should also consider obtaining independent financial advice” currently appearing in Form 4 should be replaced by “You are strongly advised to obtain independent legal and financial advice, in the absence of the borrower”.

The Model Law should provide that the lender must give to the prospective guarantor an information statement in the form of Form 5A of the Consumer Credit Regulation.

The Model Law should provide that a guarantee should not be signed before the expiry of one business day following the provision of the information and documentation referred to in Recommendation 6.1.

The Model Law should provide that a guarantee is not enforceable unless the requirements set out in Recommendations 6.4, 6.5 and 6.6 have been complied with.

6.108 Relevant to protecting a prospective guarantor against entering into an imprudent transaction are the practicalities of the place where and in the presence of whom the documentation is signed. Whether documentation is signed in the home of the guarantor or borrower, or in other informal surroundings, or in the office of the lender or an independent party, and whether the borrower is present, can affect the prospective guarantor’s final decision to commit.

Empirical background

6.109 Lovric and Millbank found that it is fairly common for mortgage and guarantee documents to be signed in relatively informal surroundings such as the family home.¹⁴⁰ Lovric and Millbank pointed out that signing documents at home is not ideal in protecting the guarantor’s position. The informality of the surroundings is inconsistent with the serious and complex nature of the obligations about to be assumed by the guarantor, and the pressures of home life, such as the demands of children, make it difficult for the prospective guarantor to give his or her full attention to the transaction. It may also mean that the presence of the borrower is more likely.¹⁴¹

6.110 There is clearly a risk of overt or covert pressure on the prospective guarantor if the borrower is present when he or she is to sign the documentation. In their survey of guarantors, Lovric and Millbank found that the borrower was present in 47% of cases when the guarantee documents were signed and in 23% of cases both the borrower and the lender were present.¹⁴² Similarly, their review of litigated cases revealed that in 14% of the cases reviewed the borrower was present with the guarantor at the time of signing and in 60% of cases, the borrower and others (such as the lender, or other guarantor) were present.¹⁴³

Conclusion

6.111 Issues Paper 17 noted that the Expert Group on Family Financial Vulnerability proposed that legislation should require a financier to take all reasonable steps to advise a potential guarantor directly to sign a guarantee in the absence of the borrower.¹⁴⁴

6.112 Issues Paper 17 also noted that it seems clear from judicial decisions that it is not considered appropriate for lenders to leave it to the borrower to have the documentation executed by a related prospective guarantor at their home.¹⁴⁵ However, following a number of cases where guarantees were set aside after lenders left it to the borrower/husband to arrange for the guarantor/wife’s signature, this practice is said to have become rarer.¹⁴⁶

6.113 While the Commission believes that it is important for guarantors to be aware of the issues relating to the execution of a guarantee, it is not inclined to recommend that legislation regulate the place where and the manner in which execution of the guarantee and any supporting security should take place. The Commission’s recommendations to give the guarantor time to consider the documentation before signing¹⁴⁷ and to include a warning to seek independent advice¹⁴⁸ offer some protection against entering into a guarantee under pressure. It would be helpful and appropriate, however, for the Form 4 warning to advise the guarantor to sign the guarantee and any supporting security in the absence of the borrower.

RECOMMENDATION 6.8

The Model Law should provide that the warning in the form of Form 4 of the Consumer Credit (New South Wales) Regulation should include the following words:

“You are advised to sign the guarantee and any supporting security in the absence of the borrower.”

1. See Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 455 and 457 (Gibbs CJ). Unusual features include not only the loan itself, but also the circumstances surrounding it: see J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 127.

2. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 457 (Gibbs J).

3. This was pointed out by the Martin Committee: Australia, House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation (AGPS, Canberra, 1991) at 417-418.

4. See for example, Australia, House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation (AGPS, Canberra, 1991) at 417-419; Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 39-40.

5. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) and S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995).

6. Section 21 of the Consumer Credit (New South Wales) Regulations provides that the document must be in the form of Form 5A set out in the Schedule. This contains 25 questions and answers explaining guarantees generally and the guarantor’s rights and obligations, as well as giving advice, such as what the guarantor can do in the event of a default by the borrower.

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

8. Consumer Credit (New South Wales) Regulations s 20.

9. Consumer Credit (New South Wales) Code s 51(2). By contrast, failure to provide an information statement, while constituting an offence, does not render the guarantee unenforceable: Consumer Credit (New South Wales) Code s 51(2) and s 57. See also A J Duggan and E V Lanyon, Consumer Credit Law (Butterworths, Sydney, 1999) at para 6.3.23-6.3.24.

10. Consumer Credit (New South Wales) Code s 50(4).

11. Code of Banking Practice (2004) cl 28.4(a).

12. Code of Banking Practice (2004) cl 28.4(b). The latter part of the requirement came into effect on 1 February 2005.

13. Code of Banking Practice (2004) cl 28.4(c).

14. Code of Banking Practice (2004) cl 28.4(e).

15. Code of Banking Practice (2004) cl 28.4(d).

16. Together with details of any conditions in an earlier version of that letter of offer that were satisfied before the final letter of offer was issued: Code of Banking Practice (2004) cl 28.4(d)(ii).

17. Together with any other statement of account for a period during which a notice of demand was made by the bank, or a dishonour occurred: Code of Banking Practice (2004) cl 28.4(d)(vi).

18. Code of Banking Practice (2004) cl 28.8.

19. Credit Union Code of Practice (2004) s 17.4(i).

20. Credit Union Code of Practice (2004) s 17.4(ii).

21. The Building Society had a code with similar provisions but it ceased to operate in 2003.

22. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends at 43.

23. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996), Recommendation 9 at 50.

24. Privacy Act 1988 (Cth) s 18N(2).

25. Section 18N(1)(ba) allows disclosure if the information or report is disclosed to a guarantor and for any purpose related to the enforcement or proposed enforcement of the guarantee.

26. “Organisation” is defined as an individual, a body corporate, a partnership, any other unincorporated association or a trust that is not a small business operator, a registered political party, an agency, a State or Territory authority or a prescribed instrumentality of a State or Territory: Privacy Act 1988 (Cth) s 6C.

27. Read together with Determination No 1 of 2003 made under Privacy Act 1988 (Cth) s 11B(1)(b)(v)(B).

28. Northern Territory v GPAO (1999) 196 CLR 553.

29. Northern Territory v GPAO (1999) 196 CLR 553 at 589 (Gleeson CJ and Gummow J), 650 (Hayne J). The matter was not adverted to by the other members of the majority.

30. Section 4 and items 1 and 2 of Schedule 1 to the Privacy Amendment (Private Sector) Act 2000 (Cth) both amended s 3 of the Privacy Act 1988 (Cth) so that it took its present form and added the note to the section as so amended.

31. See The Queen v Credit Tribunal; Ex parte General Motors Acceptance Corporation (1977) 137 CLR 545.

32. See The Queen v Credit Tribunal; Ex parte General Motors Acceptance Corporation (1977) 137 CLR 545 at 563-564 (Mason J).

33. Australia, Parliamentary Debates (Hansard) House of Representatives, 12 April 2000, the Hon D Williams, Attorney-General, Second Reading Speech at 15751-15752.

34. See Privacy Act 1988 (Cth) Sch 3.

35. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) Questions 14-20 at 102-103, Question 23 at 104, and Question 32 at 106.

36. NSW Legal Aid Commission, Submission at 12; NSW Young Lawyers Submission at 3; Women Lawyers Association of NSW, Submission at 3; Ryde-Eastwood Financial Counselling Service, Submission at 4; Women’s Legal Resources Centre, Submission at 5; Financial Counsellors’ Association of NSW Inc, Submission at 2; The NSW Department of Fair Trading, Submission at 3-4; Country Women’s Association of NSW, Submission at 2.

37. The Ryde-Eastwood Financial Counselling Service submitted that information should also include: projected analysis of business plan (if any); amount that the credit provider would lend without the guarantee and how they arrived at this calculation; what security, if any, is already held; and whether the borrower has alternative sources of credit available, not requiring a guarantee: Ryde-Eastwood Financial Counselling Service, Submission at 4.

38. Ryde-Eastwood Financial Counselling Service, Submission at 4; Women’s Legal Resources Centre, Submission at 5; Financial Counsellors’ Association of NSW Inc, Submission at 2.

39. NSW Legal Aid Commission, Submission at 12.

40. Women Lawyers Association of NSW, Submission at 3; Women’s Legal Resources Centre, Submission at 5; Financial Counsellors’ Association of NSW Inc, Submission at 2; NSW Young Lawyers Submission at 3; The NSW Department of Fair Trading, Submission at 4; NSW Legal Aid Commission, Submission at 13.

41. The NSW Department of Fair Trading, Submission at 4.

42. The NSW Department of Fair Trading, Submission at 4.

43. Ryde-Eastwood Financial Counselling Service, Submission at 4; Women Lawyers Association of NSW, Submission at 3; Women’s Legal Resources Centre, Submission at 6; Financial Counsellors’ Association of NSW Inc, Submission at 3; NSW Legal Aid Commission, Submission at 13; NSW Young Lawyers, Submission at 3; NSW Department of Fair Trading Submission at 3.

44. Financial Counsellors’ Association of NSW Inc, Submission at 3; NSW Young Lawyers, Submission at 3.

45. Commonwealth Bank of Australia, Submission at 7. The issue of obtaining the borrower’s consent was also raised by The Financial Counsellors’ Association of NSW Inc, Submission at 2; the Women Lawyers Association of NSW, Submission at 3; and NSW Young Lawyers, Submission at 3.

46. Australian Finance Conference, Submission at 13.

47. St George Bank, Submission at 2.

48. St George Bank, Submission at 2.

49. St George Bank, Submission at 3.

50. See Recommendation 5.5.

51. S Mahalingham, “Deep and meaningful: Dealing with emotionally transmitted debt” (1999) 3 Consumer Rights Journal 1.

52. See also C Chew, “Another Look at the Giving of Independent Advice to Sureties: Some Uncertainties and Evolving Concerns” (2006) 1 Bond Law Review 45.

53. Garcia v National Australia Bank (1998) 194 CLR 395.

54. See, for example, A J Duggan, “Till debt do us part: A note on National Australia Bank Ltd v Garcia” (1997) 19 Sydney Law Review 220 at 227.

55. Consumer Credit (New South Wales) Code s 70(2)(h).

56. See Consumer Credit (New South Wales) Regulations s 21.

57. Code of Banking Practice (2004) cl 28.4(a)(i).

58. Garcia v National Australia Bank (1998) 194 CLR 395.

59. Code of Banking Practice (2004) cl 28.5.

60. Nor is it given where the guarantor is a “commercial asset financing guarantor” or “sole director guarantor”: Code of Banking Practice (2004) cl 28.15. Further, a “director guarantor” (being a director of a company which is to be the borrower, but not a sole director: see Part F Application and definition) can notify the bank that he or she does not wish to have the benefit of the cooling off period: Code of Banking Practice (2004) cl 28.16(e).

61. Law Society of New South Wales, Professional Conduct and Practice Rules (2001) r 45. See also the discussion in NSWLRC IP 17 at para 3.41.

62. Law Society of New South Wales, Professional Conduct and Practice Rules (2001) r 45.6.4.1, 45.6.4.2.

63. Law Society of New South Wales, Professional Conduct and Practice Rules (2001) r 45.4, 45.9.

64. Country Women’s Association of NSW, Submission at 2; Financial Counsellors’ Association of NSW, Submission at 3; Ryde-Eastwood Financial Counselling Service, Submission at 5.

65. Financial Counsellors’ Association of NSW, Submission at 3; Ryde-Eastwood Financial Counselling Service, Submission at 5.

66. NSW Young Lawyers, Submission at 4; NSW Legal Aid Commission, Submission at 14; Women’s Legal Resources Centre, Submission at 6-7; NSW Legal Aid Commission, Submission at 14.

67. NSW Legal Aid Commission, Submission at 14; Women’s Legal Resources Centre, Submission at 7.

68. Women’s Legal Resources Centre, Submission at 7.

69. NSW Young Lawyers, Submission at 4; NSW Legal Aid Commission, Submission at 14; Women Lawyers Association of NSW, Submission at 4.

70. St George Bank, Submission at 3; Commonwealth Bank, Submission at 9.

71. Women Lawyers Association of NSW, Submission at 4; NSW Legal Aid Commission, Submission at 14 (in relation to independent financial advice); Women’s Legal Resources Centre, Submission at 7; Commonwealth Bank, Submission at 9. See also St George Bank, Submission at 3.

72. NSW Legal Aid Commission, Submission at 14 (in relation to independent financial advice).

73. J L Goldring, Submission at para 5.

74. Women Lawyers Association of NSW, Submission at 4.

75. Commonwealth Bank, Submission at 9.

76. Commonwealth Bank, Submission at 9.

77. NSW Department of Fair Trading, Submission at 4; St George Bank, Submission at 3.

78. St George Bank, Submission at 3. The requirement is waived in certain circumstances, such as if the guarantor is a practising legal practitioner or if legal advice was given to the guarantor within the last 12 months. On those occasions, the guarantor must sign a certificate of waiver and the waiver must be approved by Group Credit or a nominated commercial lender.

79. St George Bank, Submission at 3.

80. St George Bank, Submission at 3.

81. NSW Young Lawyers, Submission at 3-4.

82. NSW Legal Aid Commission, Submission at 14-15.

83. Australian Finance Conference, Submission at 14.

84. Financial Counsellors’ Association of NSW, Submission at 3.

85. St George Bank, Submission at 3.

86. NSW Young Lawyers, Submission at 3.

87. NSW Department of Fair Trading, Submission at 5.

88. NSW Young Lawyers, Submission at 3-4; Women’s Legal Resources Centre, Submission at 6-7.

89. NSW Young Lawyers, Submission at 4.

90. St George Bank, Submission at 4; Women’s Legal Resources Centre, Submission at 9.

91. Country Women’s Association of NSW, Submission at 2; Women’s Legal Resources Centre, Submission at 9. Including Aboriginal people without a command of English. Although NSW Young Lawyers and the Women Lawyers Association did not think that, generally, requirements should differ for NESB guarantors, they submitted that, if the lender considers that the level of comprehension on the part of the guarantor is compromised, he or she should be required to have the guarantee explained through an interpreter, not a family member of the guarantor: NSW Young Lawyers, Submission at 7; Women Lawyers Association of NSW, Submission at 7.

92. Women’s Legal Resources Centre, Submission at 9.

93. Commonwealth Bank, Submission at 11; Australian Finance Conference, Submission at 18; Women Lawyers Association of NSW, Submission at 7.

94. NSW Legal Aid Commission, Submission at 16.

95. NSW Legal Aid Commission, Submission at 16; Women Lawyers Association of NSW, Submission at 7; Financial Counsellors’ Association of NSW, Submission at 4; Ryde-Eastwood Financial Counselling Service, Submission at 6.

96. NSW Legal Aid Commission, Submission at 16-17.

97. Financial Counsellors’ Association of NSW, Submission at 3.

98. Ryde-Eastwood Financial Counselling Service, Submission at 6.

99. NSW Legal Aid Commission, Submission at 17; Women Lawyers Association of NSW, Submission at 7; Women’s Legal Resources Centre, Submission at 9; Country Women’s Association of NSW, Submission at 2; Financial Counsellors’ Association of NSW, Submission at 4, 4; Ryde-Eastwood Financial Counselling Service, Submission at 6.

100. Financial Counsellors’ Association of NSW, Submission at 3.

101. Women’s Legal Resources Centre, Submission at 9; Financial Counsellors’ Association of NSW, Submission at 4.

102. Ryde-Eastwood Financial Counselling Service, Submission at 6.

103. St George Bank, Submission at 4; NSW Legal Aid Commission, Submission at 17; Commonwealth Bank, Submission at 11.

104. University of Western Sydney, Centre for Elder Law, Submission at 23; Financial Counsellors’ Association of NSW, Submission at 3.

105. NSW Young Lawyers, Submission at 7.

106. 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 and University of Sydney, Research Report 11, 2003) at para 5.51-5.53. Only 14% of respondents to the study’s guarantor survey obtained legal advice before signing a guarantee.

107. The researchers adopted the following definition of adequate independent legal advice: “truly independent informed advice which not only explains the transaction and its implications but also evaluates the risks involved and advises whether the surety should enter into the transaction.”: M Sneddon, “Unfair conduct in taking guarantees and the role of independent advice” (1990) 13 University of New South Wales Law Journal 302 at 345.

108. One guarantor noted that the meeting took less than fifteen minutes. Another reported that the documents were only partly explained: Lovric and Millbank at para 5.57. These findings are consistent with English research that found that, because solicitors restricted themselves to a brief explanation of the effects of the document, and did not canvass the risks of the transaction, guarantors did not feel adequately advised: B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 171.

109. Of the 10 guarantors in the survey who did receive advice, and could recall how soon afterwards they signed the contract, five reported that they signed the same day, while another two signed within two days: Lovric and Millbank at para 5.55.

110. Lovric and Millbank (at para 5.67) reviewed a number of litigated cases where the solicitor who advised the guarantor was organised by either the borrower or the lender: See Micarone v Perpetual Trustees Ltd (1999) 75 SASR 1; Pasternacki v Correy [2001] ANZ ConvR 240; Sapuppo v Ribchenkov [2002] ANZ ConvR 164; Burrawong Investments v Lindsay [2002] QSC 082; Tong v Esanda Finance (NSW, Supreme Court, No 20449/94, Grove J, 17 April 1996, unreported,); Esanda Finance v Tong (1997) 41 NSWLR 482; Janesland Holdings Pty Ltd v Simon [2000] ANZ ConvR 112. Fehlberg found that it was usually the borrower who organized the legal advice, often retaining a solicitor known to him but not to the guarantor. Even when the solicitor was not actually acting for the borrower, this gave guarantors the impression that the lawyer in question was not acting for them, but was there instead to represent the interests of the borrower or lender: B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 175-176.

111. Of the 11 guarantors surveyed by Lovric and Millbank who had received legal advice, three reported that they were advised by solicitors acting for the borrower, and one by a solicitor acting for the lender: Lovric and Millbank at para 5.68.

112. However, note that in Lang v Licciardello [1999] NSWSC 93 at para 25, Adams J expressed the view “there is no doubt that the most desirable position is that … a mortgagor should be given independent legal advice … . It seems to me that the supposition that a mortgagee’s solicitor is in conflict with the interests of that client if he or she gives advice to the mortgagor on the legal effect of the mortgage is a significantly inaccurate over-simplification of the position”.

113. J Lovric and J Millbank, Darling, Please Sign This Form: A Report on the Practice of Third Party Guarantees in New South Wales at para 5.58. Fehlberg argues that the term “independent legal advice” as it is understood in legal regulation of guarantees is a misnomer. She states that “basic explanation” is a more accurate description of what takes place in practice: B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 227-8.

114. Lovric and Millbank at para 5.60.

115. Lovric and Millbank at para 5.56.

116. The majority of solicitors Lovric and Millbank surveyed reported that on the last occasion they gave advice, only the guarantor was present: Solicitor Survey, Question 13(b): 88% reported that no one else was present; 6% of respondents indicated that the borrower was present when they gave the advice. However, the researchers concluded that this might not be an accurate representation. While they did not specifically ask guarantors whether anyone else was present when they received legal advice, of the 11 guarantors who had received advice, it was clear in four cases that the borrower had been present. Moreover, of all guarantors, both advised and unadvised, 47% reported that they signed in the presence of the borrower, and a further 23% in the presence of both the lender and the borrower: Lovric and Millbank at para 5.70.

117. Micarone v Perpetual Trustees Ltd (1999) 75 SASR 1 at para 702.

118. J Lovric and J Millbank, Darling, please sign this form: a report on the practice of third party guarantees in New South Wales at para 5.71.

119. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 224.

120. J Lovric and J Millbank, Darling, please sign this form: a report on the practice of third party guarantees in New South Wales at para 5.75. Forty eight per cent of respondents reported that they had concerns about their professional liability in giving advice to a third party guarantor.

121. See Lovric and Millbank at para 5.64.

122. See Law Society of New South Wales, Caveat 207, 30 December 1999.

123. See Lovric and Millbank at para 5.73.

124. See Lovric and Millbank at para 5.74.

125. Lovric and Millbank at para 5.77. See, for example, Respondent 82 who said: “A great help. It makes it clear we are simply ‘explaining’ legal issues”.

126. Lovric and Millbank at para 5.78.

127. Garcia v National Australia Bank (1998) 194 CLR 395.

128. J Lovric and J Millbank, Darling, please sign this form: a report on the practice of third party guarantees in New South Wales at para 5.78.

129. Lovric and Millbank at para 5.80. They also note that this reflects Felhlberg’s finding that very few of her respondents would have been deterred from the transaction even by thorough and impartial legal advice: B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 172.

130. Seventy-three percent of solicitors who responded said that they had advised a client not to sign a contract in the last 10 years; 43% said they gave such advice on two to five occasions: Lovric and Millbank at para 5.81 note 104.

131. Of those solicitors who advised against signing, 89% reported that the client went ahead despite the warning. According to some solicitors, by the time some guarantors come for compulsory advice, they have already made up their mind: Lovric and Millbank at para 5.81 note 105.

132. Lovric and Millbank at para 5.81.

133. Lovric and Millbank at para 5.82.

134. Lovric and Millbank at para 5.83; Solicitor Survey, Respondent 78.

135. Lovric and Millbank at para 5.84-5.85.

136. See para 6.62.

137. There are parallels here with the requirement under s 66S of the Conveyancing Act 1919 (NSW) that, if the statutory cooling-off period for a contract for the sale of residential property is to be shortened, a purchaser must give to the vendor a certificate under s 66W that states that a solicitor or barrister has explained to the purchaser the effect of the contract, the nature of the certificate and the effect of giving the certificate to the vendor. Obtaining this certificate is often a mere formality, and the advice can in some instances be given over the phone.

138. See Recommendation 11.6(j).

139. See para 6.61 above. As noted there, these submissions also suggested the lender could advise the guarantor about the nature of guarantee transactions generally.

140. J Lovric and J Millbank, Darling, please sign this form: a report on the practice of third party guarantees in New South Wales at para 5.31.

141. Lovric and Millbank at para 5.32-5.34.

142. Lovric and Millbank at para 5.36.

143. Lovric and Millbank at para 5.37.

144. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends, Recommendation 2.

145. NSWLRC IP 17 at para 3.31. See also A J Duggan, A Financier’s Guide to the Law of Guarantee in Australia (4th edition, Australian Finance Conference and Australian Equipment Lessors Association, Sydney, 1998) at 41. The courts consider it a point in favour of a lender that it required attendance at its premises to sign the guarantee: see, for example, Australian and New Zealand Banking Group Ltd v Dunosa Pty Ltd [1995] ANZConvR 86 at 88.

146. NSWLRC IP 17 at para 3.32.

147. Recommendation 6.6. See also para 6.105-6.106.

148. Recommendation 6.4. See also para 6.101.