8. Terms of the contract

Updates and background for this project (Digest)

• “All moneys” clauses
• The principle of co-extensiveness
• Conclusive evidence clauses
  

8.1 Chapter 7 explored the obstacles to fair dealing that can be created by convoluted, barely intelligible, or sometimes illegible, guarantee and mortgage documentation. This chapter deals with a completely different subject matter, but the focus continues to be on reforming documentation to prevent or lessen problems and disputes from arising. The first part of the chapter discusses the difficulties, misunderstandings and hardship that can result from the inclusion of “all moneys” clauses in contracts of guarantee.

8.2 The second part of the chapter examines the principle of co-extensiveness, which states that the liability of a guarantor is co-extensive with that of the principal debtor. In the past, creditors have circumvented the principle by including a term in the guarantee that preserves the guarantor’s liability in the event that the principal contract is void, voidable or unenforceable. Since the enactment of the Consumer Credit (New South Wales) Code (“Consumer Credit Code”), a guarantor of a consumer credit contract is protected in such circumstances. The discussion explores whether the Model Law should contain provisions similar to those of the Consumer Credit Code.

8.3 The final part of the chapter considers the use of “conclusive evidence clauses” in guarantees.

“ALL MONEYS” CLAUSES

Definition

8.4 An “all moneys” clause, also known as an “all accounts” clause or a “dragnet” clause, creates an unlimited guarantee. It extends a guarantor’s liability to secure future credit contracts between the lender and the borrower. In this way, the guarantor may become liable for future debts or advances unrelated to the initial transaction.

8.5 The following is an example of an “all moneys” clause:

The guarantor guarantees “all moneys and amounts at the date of the mortgage or any time hereafter owing or remaining unpaid to the bank in any manner or on any account whatsoever by the mortgagor”.

The common law

8.7 The common law allows the use of “all moneys” clauses in guarantees or mortgages, although courts may limit their operation in some cases. For example, in Australian and New Zealand Banking Group Ltd v Volmensky² the bank attempted to rely on an “all moneys” clause in the mortgage to claim from Mrs Volmensky repayment of further debts incurred in her husband’s business. The court refused to extend her liability on the basis that the mortgage was intended to serve a specific purpose, namely, the original loan of a total of $60,000 and that “nothing else was in contemplation.”

8.8 Documentation such as the initial loan approval and the loan agreement may be capable of being used to read down the “all moneys” clause in the security document. In a commercial context, it should be appreciated that an “all moneys” clause would only be read down where the parties’ actual intentions are inconsistent with the broad words of the clause. Where an inconsistent intention is not obvious, the clause will be interpreted in its broadest sense.³

Consumer Credit Code

8.9 Section 43 of the Consumer Credit Code regulates “all accounts mortgages”. It provides that a mortgage that initially secures credit under a credit contract, or obligations under a related guarantee, can also contain a provision securing credit provided under a future credit contract or related guarantee. However, the mortgage is unenforceable in relation to future credit or guarantees unless the credit provider has given to the mortgagor a copy of the relevant documentation and has subsequently obtained the mortgagor’s written acceptance of the extension of the mortgage.

8.10 Section 54 of the Consumer Credit Code is the equivalent section dealing with guarantees. Interestingly, it is titled “extension of guarantee” rather than “all accounts guarantees”. It provides:

54 Extension of guarantee

(1) In addition to guaranteeing obligations under a credit contract or proposed credit contract to which a guarantee initially applies, a guarantee may contain a provision that makes credit provided under another future credit contract subject to the guarantee.

(2) Any such guarantee is unenforceable in relation to such a future credit contract unless the credit provider has—


(a) given the guarantor a copy of the contract document of that future credit contract; and

(b) subsequently obtained from the guarantor a written acceptance of the extension of the guarantee or obtained acceptance in some other form provided for by the regulations.


(3) Section 50 (Form of guarantee) and section 51 (Disclosure) do not apply to an extension of a guarantee under this section.⁴

8.11 The Australian Bankers’ Association endeavours to regulate the use by banks of “all moneys” clauses through its voluntary Code of Banking Practice (“Banking Code”). The 2003 Banking Code (as amended in May 2004) provides, in cl 28.2, that a bank may only accept a guarantee if the guarantor’s liability is limited to, or in respect of a specific amount (together with other liabilities, such as interest and recovery costs) described in the guarantee.

8.12 Clause 28.4(a)(iv) provides that the bank will give guarantors a notice that they have a right to limit their liability. Clause 28.9 provides that the guarantor may, by written notice, limit the amount or nature of the liabilities guaranteed. Clauses 28.12 and 28.13 require the written consent of the guarantor for an extension to a third party mortgage or a guarantee, respectively. Clause 28.13 provides:

A Guarantee given by you will be unenforceable in relation to a future credit contract unless we have:

(a) given you a copy of the contract document of the future credit contract; and

(b) subsequently obtained your written acceptance of the extension of the Guarantee,

except to the extent the future credit contract (together with all other existing credit contracts secured by that Guarantee), is within a limit previously agreed in writing by you and we have included in the notice we give you under clause 28.4(a) a prominent statement that the Guarantee can cover a future credit contract in this way.

8.13 The Credit Union Code of Practice permits certain extensions of guarantees to future credit contracts if specific procedures are followed.⁸

Empirical background

8.14 The empirical research into guarantees conducted jointly by the Commission and the University of Sydney (“Lovric and Millbank”) found that, although lenders report that such clauses are rarely used, guarantees for unlimited amounts are in fact common:

Eighteen per cent of guarantors reported they guaranteed an unlimited or indefinite amount of money. Furthermore, 27% of guarantors reported they discovered they had given a mortgage over their home that contained an “All Moneys” clause only after problems arose with the loan. It appears that guarantors who receive legal advice may in fact be more, rather than less, likely to be entering into such transactions. Forty-six per cent of respondents in the solicitor survey said that on the last occasion they gave advice to a guarantor the security documents contained an “All Moneys” clause.⁹

Submissions to Issues Paper 17

8.16 In Issues Paper 17, the Commission sought submissions on whether there is prevalent use of “all moneys” or “all accounts” clauses in contracts of guarantee,¹¹ and whether legislation and industry codes of practice should generally prohibit such clauses in all contracts of guarantee.¹²

8.17 In the experience of the NSW Legal Aid Commission (“Legal Aid”), many standard form contracts of guarantee contain provisions for the guarantee to be either unlimited or capped at a particular level, but the incidence of unlimited guarantees may be falling.¹³ However, Legal Aid submitted that the use of “all moneys” clauses in mortgages remained “common, if not standard” and that these could be used to override the provisions in some guarantees that limit the liability of a guarantor.¹⁴

8.18 It gave the following example of potential hardship where a wife signs a contract of guarantee in relation to an overdraft account for her husband’s business:

The contract of guarantee may contain a clause limiting her liability under the guarantee to a specified sum. However, she and her husband have also given a mortgage over their home to the lender for an earlier home loan. The mortgage contains an all monies clause the effect of which is that the mortgage will secure all future lending to the husband and the wife. In these circumstances, even though the wife’s personal liability under the guarantee contract is limited, the lender will have unlimited access to her home as security for all advances made to the husband’s business.¹⁵

8.20 However, it further submitted that “it makes financial sense (particularly in the business context), to have mortgage documentation that is flexible enough to allow further loans or advances without a rewriting of the mortgage”. In its view, “all monies clauses should be regulated so that the mortgagee must obtain the written consent of the mortgagor for each further advance or potential increase in liability”. Legal Aid argued that if this consent is not obtained, the mortgage should be rendered unenforceable. It noted that this approach has already been adopted with the enactment of s 43 of the Consumer Credit Code.

8.21 The St George Bank (“St George”) reported that the inclusion of an “all moneys” clause was “standard” for the bank’s commercial guarantees, but that such a clause was not included in “retail” guarantees because of clause 17.2 of the Code of Banking Practice, as it then was.¹⁷ This clause provided:

A Bank may only accept a guarantee if the amount of the guarantor’s liability is limited to, or is in respect of, a specific amount plus other liabilities (such as interest and recovery costs) that are described in the guarantee.

8.23 The Commonwealth Bank reported that, for lending other than that under the Consumer Credit Code, its usual practice was to obtain an unlimited guarantee, while at the same time advising the guarantor of the current maximum liability at the time the guarantee is signed. If a debtor then wished to obtain further facilities or finance, the Bank would obtain an acknowledgment from the guarantor agreeing to an increase in the guarantor’s liability under the guarantee. In some cases, if requested by a guarantor, the Bank would obtain a limited guarantee up to a specific amount.¹⁸ In the Bank’s view, this has the advantage of sufficient flexibility while at the same time requiring the guarantor’s consent to be obtained to any increase in his or her liability.

8.24 In the circumstances, the Commonwealth Bank opposes a prohibition of “all moneys” clauses. It argues that any prohibition would result in increased costs and delays due to the need for new documentation and rearrangement of a borrower’s facilities. It also submitted that the taking of separate guarantees for each change of financial accommodation to a business could lead to a multiplicity of guarantees being taken, some of which might at any one time be in force while other have been superseded. In its view, the potential for confusion could well be greater than if one “all accounts” document were held with a specific acknowledgment of the total amount presently secured by it.¹⁹

8.25 The Ryde-Eastwood Financial Counselling Service submits that, based on its experience, the use of “all moneys” clauses in contracts of guarantee have lessened in recent years. It said that these clauses have usually been well hidden in lease contracts, loan contracts and mortgage documents and often not brought to the attention of the clients. It supports the prohibition of “all moneys” clauses.²⁰ The Financial Counsellors’ Association of NSW Inc also supports the prohibition of these clauses, finding them “abhorrent”.²¹

8.26 Judge Goldring submitted that, if independent legal advice is given, “all moneys” clauses would not be a problem because the guarantor would be aware of their existence and ramifications, “or might even decline to become a guarantor”. Judge Goldring suggested, however, that an exception should be made where the guarantor is in a close personal relationship with the borrower. In these cases, Judge Goldring submitted that “all moneys” clauses should be prohibited, as “[n]o amount of independent advice would overcome the dependency relationship”.²²

8.27 The NSW Young Lawyers supports the prohibition of “all moneys” clauses in the case of small business and consumer guarantees, but not for guarantees given by large businesses or corporations. It submits that, if “all moneys” clauses are to continue in relation to small businesses and consumers, the guarantor should nominate the security that such person or entity wishes to provide under the guarantee. This “would assist in drawing the nature and scope of the security being provided under the guarantee to the attention of the guarantor”, thus giving the guarantor “a greater understanding of their obligations, and the risks associated with signing the guarantee”.²³

8.28 The Women Lawyers Association of NSW also supported a prohibition of “all moneys” clauses in contracts for small business and consumer third party guarantees, and suggested that guarantors should be able to nominate the security under the contract. It reiterated that there is a danger in unlimited guarantees that guarantors will jeopardise assets they never intended to provide as security:

For example, a guarantor may receive a personal injury compensation payment or inheritance after providing the guarantee. Unscrupulous borrowers may seek to exploit a guarantor’s good fortune by deliberately defaulting on the loan.²⁴

The history of the use of these clauses and consequent court action underlines the difficulties in ensuring that guarantors understand the implications of these clauses. At the time of signing any information about these clauses is likely to be hypothetical and therefore it is difficult to get independent financial or legal advice, even if sought. Also, given the concerns about information given to guarantors and privacy legislation, it is difficult to properly inform borrowers and guarantors.

Many women seek advice from WLRC at time of family breakdown. In these situations in particular, all moneys clauses are insidious as there is often a difficulty in obtaining information about the loan and associated information so the woman is left not knowing what her potential financial obligations are.²⁶

8.31 The Australian Finance Conference (“AFC”) reported that some of its members have made a policy decision not to take “all moneys” guarantees and mortgages in the context of small business transactions. It, too, acknowledged that unlimited guarantees have the potential to increase the debt exposure of guarantors well beyond their original commitment and without the guarantor’s knowledge. Nonetheless, it does not support a prohibition of “all moneys” clauses, but supports the approach taken in s 54 of the Consumer Credit Code. It submitted that this approach varies little from the practice adopted by AFC in relation to commercial transactions. For commercial guarantees and mortgages containing “all moneys” clauses, AFC members invariably seek the written consent of the guarantor or mortgagor to any further advances, or the guarantor’s prior written acknowledgment that the proposed further advance is a transaction to which the mortgage or guarantee applies.²⁸

Conclusion

8.32 The use of “all moneys” clauses is of significant concern because of the open-ended liability created, which the guarantor may not be aware of or fully appreciate.²⁹ They are complex clauses and their construction may depend on reading a number of documents together.³⁰ The clause is often contained in the memorandum of common provisions, a separate document to the mortgage and the guarantee.³¹ The complexity surrounding “all moneys” clauses heightens the danger that a guarantor will not be aware that, at the time he or she enters a transaction, he or she is providing a guarantee for all moneys owed presently and all money loaned in the future, even many years hence.³²

8.33 Johncorp Industries v Sussman³³ provides an illustration of the complexity and potential ambit of “all moneys” clauses. In that case, a wife and husband executed a mortgage and also executed personal guarantees to secure certain debts. The mortgage contained an “all moneys” clause. One loan was advanced to the husband only and, although the “all moneys” clause in the mortgage did not cover that loan, the inter-relation of all of the documents was held to extend liability to the wife through a chain-reaction.³⁴

8.34 The protection given by the common law and by voluntary codes of practice to guarantors of “small business” loans against unlimited liability is either insufficient or inconsistent.³⁵ At common law, if no special disadvantage or disability, mistake, non est factum, misrepresentation or undue influence is found, an “all moneys” clause of itself would not render the contract unenforceable.³⁶ Nor is escape from an “all moneys” clause likely to be provided by the Australian Securities and Investments Commission Act 2001 (Cth).³⁷

8.35 The Commission appreciates the strong arguments in favour of prohibiting “all moneys” clauses. However, we have concluded that it is preferable to allow parties to adopt “all moneys” clauses subject to the safeguards provided by s 54 of the Consumer Credit Code. This approach is supported by a substantial number of submissions, as discussed above.

8.36 In the Commission’s view, the greatest danger of “all moneys” clauses has been that the guarantor has often not been aware or not understood, that he or she could be liable for further sums in addition to the amount of the loan specified in the documentation. As Ryde-Eastwood Financial Counselling Service pointed out, these clauses have often been well-hidden in lease contracts, loan contracts and mortgage documents and often not brought to the attention of the guarantor. Further, the guarantor may not have been made aware when this credit facility was drawn upon, increasing his or her liability. The Consumer Credit Code stipulates that the mortgagor or guarantor must give written consent to any increases in credit and must receive a copy of the relevant documentation. Otherwise, the mortgage or guarantee is unenforceable in relation to the extension of credit. In this way, the guarantor (or mortgagor) has the opportunity to refuse to guarantee further sums. This protection is reinforced by the Commission’s recommendation in Chapter 7 regarding the legibility of documentation,³⁸ and the recommendations in Chapter 6 regarding the inclusion of warnings and information modelled on Forms 4 and 5A of the Consumer Credit Regulation.³⁹

8.37 At the same time, permitting mortgages and guarantees to continue to contain “all moneys” clauses has the advantage of avoiding the costs, inconvenience and time delays of renegotiating further credit, rearranging a borrower’s facilities and preparing further documentation. As Legal Aid submitted, it makes commercial sense to allow this flexibility. The Commission also notes the Commonwealth Bank’s point regarding the potential for confusion if separate guarantees for each change of financial accommodation of a business result in a multiplicity of guarantees, some of which might at any one time be in force and while others have been superseded.

8.38 The Commission is, however, of the view that the adoption of s 54 of the Consumer Credit Code into the Model Law should be modified in two respects. First, the copy of the proposed future credit contract given by the lender to the guarantor should contain a notice, in plain language, explaining that the extension of credit will extend the guarantor’s liability under the guarantee. Secondly, the lender must give the guarantor information in writing on the current status of the original credit contract, in particular:

• the current balance of the debtor’s account;
• any amounts currently overdue and when each such amount became due; and
• any amount currently payable and the date it became due.⁴⁰

RECOMMENDATION 8.1

The Model Law should adopt the provisions of s 54 of the Consumer Credit Code relating to “all moneys” clauses.

The copy of the proposed future credit contract given to the guarantor pursuant to the adapted s 54 of the Consumer Credit Code, should contain a notice, in plain language, explaining that the extension of credit will extend the guarantor’s liability under the guarantee.

In addition to giving the guarantor a copy of the proposed future credit contract, the lender should provide the guarantor with information in writing on the current status of the original credit contract, including the current balance of the debtor’s account; any amounts currently overdue and when each such amount became due; and any amount currently payable and the date it became due.

8.39 This common law principle states that the liability of a guarantor is co-extensive with that of the principal debtor. That is, if the principal contract were rescinded, discharged or declared void, the contract of guarantee would be affected in the same way. The creditor stands in no better position against the guarantor than against the principal debtor, so that, if the principal debtor is not liable, neither is the guarantor.⁴¹

8.40 The principal contract may be defective due to illegality, the debtor’s lack of capacity, or the presence of vitiating factors such as fraud, undue influence or unconscionability. Alternatively, the contract may be unenforceable because it is statute-barred or does not comply with statutory formalities.

8.41 Co-extensiveness operates both as a principle and as a rule of interpretation. It operates as a principle in the circumstances outlined in paragraph 8.39 above. That is, it applies in those circumstances because the contract is void, voidable or unenforceable, without regard to the terms of the contract of guarantee. However, where its effect is to say that the guarantor’s liability is neither greater nor less “than that of the principal, in terms of amount, time for payment and the conditions under which the principal is liable”,⁴² it operates as a rule of interpretation. This ensures that the contract of guarantee is read in such a way that it imposes no greater or lesser liability on the guarantor than is imposed on the principal under the loan – provided, of course, it is capable of being interpreted in this way.

8.42 The principle of co-extensiveness is embodied in s 55 of the Consumer Credit Code as regards consumer guarantees. Section 55(1) provides as follows:

Total amount for which guarantor can be liable. A guarantee is void to the extent that it secures an amount, in relation to a credit contract to which this Code applies, that exceeds the sum of the amount of the liabilities of the debtor under the credit contract and the reasonable expenses of enforcing the guarantee, or any lesser amount agreed between the credit provider and the guarantor.⁴³

8.43 Section 55(1) does more than simply restate the common law. First, because it is drafted in absolute terms, it removes some of the uncertainties at common law.⁴⁴ For example, the common law is not always clear on the extent of the guarantor’s liability in situations where the principal contract is unenforceable, as opposed to void.⁴⁵

8.44 In Carter v White,⁴⁶ the principal obligations were unenforceable as the creditor did not sue within the statutory limitation period, but the surety was not time-barred. The court held that the surety remained liable on the guarantee. Andrews and Millett observe that where the principal contract is unenforceable because it fails to comply with a statutory requirement, the position is not so clear.⁴⁷ In Eldridge and Morris v Taylor,⁴⁸ the English Court of Appeal held that, in such circumstances, “the debt of the principal is gone” and therefore “the surety is also discharged”.⁴⁹ Lord Justice Slesser held that “if the principal debtor is not liable the surety cannot be liable either”.⁵⁰

8.45 Contrast the decision in Temperance Loan Fund Ltd v Rose,⁵¹ which dealt with similar circumstances. The same Court of Appeal, while concluding that the surety was not liable, did so only on the ground that action on the guarantee was specifically prohibited by the Money Lenders Act 1927 because it was embodied in a promissory note and there was no memorandum of writing complying with the Act. Lord Justice Greer stated that he was bound by the decision in Eldridge and Morris v Taylor and that, if the surety were held liable in the circumstances, then the statute would give a defence to the principal, who has had the money, but not to the surety, who has not.⁵²

8.46 From their analysis of these cases, Andrews and Millett concluded that:

it would be dangerous to assume that these cases are necessarily authority that the unenforceability of the principal contract renders every guarantee likewise unenforceable. Each contract and the ground of its unenforceability must be examined on a case-by-case basis.⁵³

It can fairly be said then that there has been no rigid application of the general rule recognised by the English law that the liability of a surety is co-extensive with that of the principal; modifications have been made and exceptions created by the courts … ⁵⁴

8.49 Secondly, the Consumer Credit Code overcomes the practice by creditors of including a provision in the guarantee specifically preserving the guarantor’s liability in the event that the principal contract is void, voidable or unenforceable. By virtue of s 169 of the Consumer Credit Code, parties cannot avoid or modify the effect of s 55.⁵⁶

8.50 Section 55(1) is subject to s 55(2). That subsection provides that:

[n]othing in subsection (1) prevents a credit provider from enforcing a guarantee relating to liabilities under a credit contract that is unenforceable solely because of the debtor’s death, insolvency or incapacity.

8.52 Section 55 of the Consumer Credit Code, read with s 169, operates to ensure that the amount secured under the guarantee will never exceed the amount (plus reasonable expenses of recovery) under the loan agreement. In other words, the Consumer Credit Code changes a rule of interpretation (which would otherwise be capable of being displaced) into a rule of law.⁵⁸

8.53 The Commission is of the view that s 55 plays a valuable role in removing the not-insignificant ambiguities of the common law and in protecting guarantors. We recommend that it be included in the Model Law. However, we do not otherwise intend to affect the operation of the co-extensiveness principle at common law, including its operation as a rule of interpretation.

RECOMMENDATION 8.2

The Model Law should adopt the provisions of s 55 of the Consumer Credit Code so that the guarantor’s liability cannot exceed that of the borrower (except where the borrower has died, is insolvent or incapacitated).

8.54 Standard form guarantees and mortgages often contain a provision that a certificate signed by a specific officer of the lender is conclusive evidence, as between the lender and guarantor, of the amount of the liability under the guarantee or mortgage. These are referred to as “conclusive evidence clauses”. The lender must first prove the existence and terms of the credit contract, after which a conclusive evidence clause in the guarantee provides the lender with an expeditious way of proving the borrower’s liability.⁵⁹ These clauses are particularly useful where transactions between the lender and borrower are complex, and proving each debit and credit individually would take a long time. Without a conclusive evidence clause, the lender has to prove the relevant “debt, default or miscarriage”, or the event that triggers liability under an indemnity.⁶⁰

8.55 The validity of conclusive evidence clauses has been upheld by courts on many occasions, most notably by the High Court in Dobbs v National Bank of Australasia Ltd.⁶¹ The guarantee in Dobbs contained a term that a certificate signed by the principal debtor’s bank manager should be conclusive evidence of the guarantor’s indebtedness, in the amount set out in the certificate, as at the date of the certificate. The guarantor relied on two arguments to refute liability, one of which depended on adducing evidence notwithstanding the certificate. He argued that the cheques drawn by the borrower, and honoured by the bank, were not drawn in accordance with the authorities held by the bank, that accordingly the amounts could not have been validly debited to the customer’s account, and that the customer was therefore not indebted to the bank.

8.56 The High Court, rejecting the appeal, held that conclusive evidence clauses, such as the one in question, mean what they say, that is, that a certificate of the balance due to the bank by the borrower is conclusive evidence of the amount and existence of the borrower’s debt. The court said that the object of such clauses is to provide a ready means of establishing these matters, so that a court does not have to go through the process of examining evidence of the debits that make up the indebtedness.⁶²

8.57 The High Court further held, in answer to an argument relied on by the appellant, that the clause was not void as being contrary to public policy in ousting the jurisdiction of the court. In coming to this conclusion, the court distinguished between negative restrictions on the right to invoke the jurisdiction of the court and positive provisions giving efficacy to the award of an arbitrator. It found that the clause belonged to the latter category, which are permissible provisions, and not the former, which “have always been invalid”. The court made this further observation:

Parties may contract with the intention of affecting their legal relations, but yet make the acquisition of rights under the contract dependent upon the arbitrament or discretionary judgment of an ascertained or ascertainable person.⁶³

8.59 O’Donovan and Phillips have criticised conclusive evidence clauses on the grounds that their inclusion in a guarantee has the effect of turning the guarantee into a “performance bond”. A performance bond (also known as a performance guarantee or demand guarantee) is essentially an unconditional undertaking “to pay a specified amount to a named beneficiary, usually on demand, and sometimes on presentation of certain specified documents”.⁶⁵ Andrews and Millett have described performance bonds as “more akin to a promissory note than a true guarantee”. According to these authors, a true guarantee can be distinguished from a performance bond because the former is conditioned on proof of actual breach or non-performance.

8.60 O’Donovan and Phillips argue that, solely on its terms, a guarantee would not have the character of a performance bond in the absence of a conclusive evidence clause. The problem with this consequence, they argue, relates to the fact that guarantors of performance bonds are usually banks. The bank, having taken a counter-security from the borrower, may easily exercise its right of indemnity against the borrower. On the other hand, if the guarantor is an individual, there is usually no such security and he or she may not be able to recover sums paid to the lender from an insolvent borrower, and will have no redress if the amount which he or she has paid is in excess of the amount for which the borrower is liable.⁶⁶

8.61 Moreover, in Bache & Co (London) Ltd v Banque Vernes et Commerciale De Paris, the court found the practice of inserting conclusive evidence clauses acceptable only “because the bankers or brokers who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake”.⁶⁷ Andrews and Millett question whether different considerations might apply to conclusive evidence clauses where the lender does not fall within the category of reputable banking institution or other trustworthy professional, and the guarantor’s “safeguard in terms of recouping any overpayment might prove illusory”.⁶⁸ Also referring to the court’s rationale in Bache & Co (London) Ltd v Banque Vernes et Commerciale De Paris, O’Donovan and Phillips state that “[a]ny rule of such construction which rests on such tenuous basis is questionable”.⁶⁹ They advocate legislative reform, making a certificate, statement or opinion of indebtedness prima facie (as opposed to conclusive) proof of that fact only.⁷⁰

8.62 Decisions since Dobbs v National Bank of Australasia Ltd have clarified or qualified the effect of conclusive evidence clauses in the following ways:

• Certificates intended to be supported by a conclusive evidence clause must be strictly construed because the parties are entitled to assume that such a certificate will be given fairly and in proper form.⁷¹
• A certificate must therefore be prepared by a person properly qualified or authorised by the conclusive evidence clause to do so, and following on proper investigation into the transactions.⁷²
• Estoppel may prevent a bank from relying on a certificate if it is inconsistent with the position previously asserted by the bank and relied on by the guarantor. ⁷³
• Certificates purporting to be conclusive evidence of the amount due or owing upon, or secured by, a mortgage cannot be conclusive evidence against a claim of equitable set-off that operates to absolve the mortgagor in whole or in part from liability.⁷⁴

8.64 In National Australia Bank Ltd v Sampson (No 2), where the defendant sought to rely on the Contracts Review Act, Justice Young commented that, based on the decision in Cook v Bank of New South Wales, the potential unfairness of enforcing a conclusive evidence clause against an individual was now firmly established in practice. ⁷⁶

8.65 In Westpac Banking Corporation v Sugden,⁷⁷ Justice Brownie held that, if a clause makes a certificate prima facie evidence of the liability, this could generally be supportable under the Contracts Review Act. On the other hand, his Honour found that a clause making such a certificate “conclusive evidence” of the liability is, in general terms, “a clause which goes far beyond what is reasonably necessary for the protection of the legitimate interests of a Bank”.⁷⁸ In the case before him, his Honour found that there was nothing to suggest that the certificate was anything other than completely accurate and that, therefore, there was no unjust consequence or result that ought to be remedied under the Contracts Review Act.

8.66 The Commission recognises the convenience, and savings in time and administrative costs, of admitting as conclusive evidence of indebtedness a certificate prepared by or on behalf of a lender. However, on balance, we have concluded that allowing such certificates, or statements or opinions, to be received by a court as conclusive evidence of the facts certified is undesirable. While evidence clauses should continue to be allowed in guarantees because of their expediency, certificates prepared pursuant to them should be received as prima facie evidence only of the facts contained therein.

8.67 The reason for our conclusion relates to the uncertainty in application of conclusive evidence clauses. This uncertainty arises from the fact that the various ways of addressing conclusive evidence clauses, including the possibility of addressing them under the Commission’s recommendations for “unjust guarantees”,⁷⁹ involve consideration of the circumstances of individual cases and reliance on general doctrines. The Commission prefers a general rule that makes it clear that such clauses have only prima facie effect. Accordingly, if the correctness of facts certified is challenged, the lender will bear the burden of proving that the amounts are right. In our view, this provides a proper balance between securing fairness to guarantors and commercial expedience.⁸⁰

RECOMMENDATION 8.3

The Model Law should provide that a term of a guarantee to the effect that a certificate, statement or opinion of any person is to be received as conclusive evidence of any fact contained therein should be construed to mean only that such certificate, statement or opinion is to be received as prima facie evidence of that fact.

1. This approach is used in the Standard Mortgage Provisions of a major bank: NSW Legal Aid Commission, Submission to Research Report 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 and University of Sydney, Research Report 11, 2003).

2. [1995] ANZ Conv R 202.

3. See Smith v Australia And New Zealand Banking Group Ltd (1996) NSW Conv R 55-774; Burke v State Bank of New South Wales Ltd (1995) 37 NSWLR 53 at 72 (Santow J). See also J Pascoe, “Women’s Guarantees and ‘All moneys’ Clauses” (2004) 4 Queensland University of Technology Law and Justice Journal 245 at 258-262.

4. See also Consumer Credit (New South Wales) Code s 56 in relation to conditions to be met before a guarantor is liable for further credit advances under a variation to an existing credit contract. This is examined in para 9.36-9.40, Recommendation 9.5.

5. R Viney, Review of the Code of Banking Practice: Final Report (RTV Consulting Pty Ltd, October 2001) at 61, Recommendation 52.

6. For an analysis of the differences between the Banking Code and Consumer Credit Code provisions, see J Pascoe, “Women’s Guarantees and ‘All moneys’ Clauses” (2004) 4 Queensland University of Technology Law and Justice Journal 245 at 250-254.

7. See para 2.43.

8. Credit Union Code of Practice (1994) s 17.3.

9. 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 5.18.

10. Lovric and Millbank at para 5.19.

11. NSW Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000), Question 3 at para 4.5.

12. NSWLRC IP 17, Question 34 at para 4.12.

13. NSW Legal Aid Commission, Submission at 7.

14. NSW Legal Aid Commission, Submission at 7-8.

15. NSW Legal Aid Commission, Submission at 8.

16. NSW Legal Aid Commission, Submission at 20.

17. St George Bank, Submission at 1.

18. Commonwealth Bank, Submission at 3.

19. Commonwealth Bank, Submission at 15.

20. Ryde-Eastwood Financial Counselling Service, Submission at 8.

21. Financial Counsellors’ Association of NSW Inc, Submission at 4; See also M E Drummond, Submission at 1: “I am staggered that the recommendation to scrap unlimited guarantees has been shelved;” and C O’Donnell, Submission at 2.

22. J L Goldring, Submission at 2.

23. NSW Young Lawyers, Submission at 11.

24. Women Lawyers Association of NSW, Submission at 10.

25. Women’s Legal Resources Centre, Submission at 2.

26. Women’s Legal Resources Centre, Submission at 12.

27. NSW Department of Fair Trading, Submission at 7.

28. Australian Finance Conference, Submission at 6.

29. A significant proportion of guarantors who were surveyed did not discover that they had even signed an “all moneys” guarantee until it was called upon: 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 5.18.

30. See B Collier, “‘All Debts’ Clauses in Commercial Contracts of Guarantee: Principles of Construction and Limitations on the Ambit of Clauses of this Nature” (1998) 24 Monash University Law Review 7; R Edwards, “Problems with ‘All Moneys’ Mortgages” (2002) 17 Australian Banking and Finance Law Bulletin 151.

31. See, for example, Australian and New Zealand Banking Group Ltd Banking Group v Capper [2001] NSWSC 946.

32. See Gattellaro v Westpac Banking Corporation [2001] NSWCA 76. Westpac sued Mr and Mrs Gattellaro in reliance on an unlimited guarantee given by Mr Gattellaro in 1985, the obligations under which were secured by a 1977 “all moneys” mortgage, despite the fact that even Westpac itself no longer had a copy of the 1977 document. The trial judge upheld the bank’s claims and the defendants appealed to the Court of Appeal, where their appeal was rejected. The Gattellaros appealed, unsuccessfully, to the High Court: Gattellaro v Westpac Banking Corporation [2004] HCA 6 (11 February 2004).

33. [2001] NSWSC 519.

34. The court held that the personal guarantee given by the wife secured loans made solely to the husband. As the mortgage contained a reference to money owed by the mortgagor pursuant to any guarantee, it was held that the wife was liable for subsequent loans to the husband to an unlimited amount.

35. See, generally, Chapter 2.

36. See para 2.5-2.16.

37. See para 2.29.

38. Recommendation 7.2.

39. Recommendations 6.4, 6.5.

40. This proposed requirement should be distinguished from the recommendation for a general right of guarantors to obtain information from the lender regarding the current status of an existing credit contract: see para 9.20-9.28 and Recommendation 9.4, which adopts, with modifications, s 34 of the Consumer Credit Code.

41. McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457. See also Butterworth’s, Halsbury’s Laws of Australia, (at 29 September 2006) 370-Restitution, “Chapter III Ineffective Contracts” at [370-2505].

42. G Andrews and R Millett, Law of Guarantees (4th edition, Sweet & Maxwell, London, 2005) at 6-002.

43. See also Code of Banking Practice (2004) cl 17.2 and Credit Union Code of Practice (1994) s 17.2: the relevant financial institution may only accept a guarantee if the amount of the guarantor’s liability “is limited to, or is in respect of, a specific amount plus other liabilities (such as interest and recovery costs) that are described in the guarantee”.

44. For two decisions that appear to derogate from the principle of co-extensiveness, see the decision of the English Court of Appeal in Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournarus [1978] 2 Lloyd’s Rep 502 and the House of Lords decision in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129. In these cases, the guarantor was held liable for the payment of certain accrued instalments rather than the damages that the debtor was liable to pay for breach of his obligation to pay those instalments.

45. See G Andrews and R Millett, Law of Guarantees (4th edition, Sweet & Maxwell, London, 2005) at 6-026-6-027. See also R Else Mitchell, “Liability of Surety” (1947) 63 Law Quarterly Review 355 at 358-360.

46. Carter v White (1884) 25 Ch D 666.

47. G Andrews and R Millett, Law of Guarantees at 6-027.

48. Eldridge and Morris v Taylor [1931] 2 K B 416.

49. Eldridge and Morris v Taylor [1931] 2 K B 416 at 420 (Scrutton LJ).

50. Eldridge and Morris v Taylor [1931] 2 K B 416 at 423 (Slesser LJ).

51. Temperance Loan Fund Ltd v Rose [1932] 2 K B 522.

52. Eldridge and Morris v Taylor [1932] 2 K B 522 at 531 (Greer LJ).

53. G Andrews and R Millett, Law of Guarantees at 6-027.

54. R Else Mitchell, “Liability of Surety” at 371.

55. J Steyn, “Guarantees: the Co-extensiveness Principle” (1974) 90 The Law Quarterly Review 246 at 246 and 266.

56. Section 169(1) of the Consumer Credit (New South Wales) Code provides that “a provision of a contract or other instrument by which a person seeks to avoid or modify the effect of this Code is void”.

57. See Consumer Credit Law Commentary (CCH Australia Ltd) at [39-250].

58. See further para 5.53-5.54.

59. See Bache & Co (London) Ltd v Banque Vernes et Commerciale De Paris SA [1973] 2 Lloyd’s Rep 437.

60. G Andrews and R Millett, Law of Guarantees at 7-033.

61. Dobbs v National Bank of Australia Ltd (1935) 53 CLR 643. See also Je Maintiendrai Pty Ltd v ANZ Banking Group Ltd (1985) 38 SASR 70; Bache & Co (London) Ltd v Banque Vernes et Commerciale De Paris SA [1973] 2 Lloyd’s Rep 437; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 371; Shergold v Tanner (2000) 62 ALD 584.

62. Dobbs v National Bank of Australia Ltd (1935) 53 CLR 643 at 651-654 (Rich, Dixon, Evatt, McTiernan JJ).

63. Dobbs v National Bank of Australia Ltd (1935) 53 CLR 643 at 652 (Rich, Dixon, Evatt, McTiernan JJ).

64. Bache & Co (London) Ltd v Banque Vernes et Commerciale De Paris [1973] 2 Lloyd’s Rep 437.

65. G Andrews and R Millett, Law of Guarantees at 16-001.

66. J O’Donovan & J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1999) at 262.

67. Bache & Co (London) Ltd v Banque Vernes et Commerciale De Paris [1973] 2 Lloyd’s Rep 437 at 440 (Denning LJ).

68. G Andrews and R Millett, Law of Guarantees at 7-032.

69. J O’Donovan & J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1999) at 262.

70. See, for example, Property Law Act 1974 (Qld) s 57.

71. National Australia Bank Ltd v Sampson (No 2) (NSW, Supreme Court, 4434/1991, Young J, 9 September 1991, unreported).

72. In Shomat v Rubinstein (1995) 124 FLR 284, a certificate prepared without reference to all the material relevant to the amount of liability, put together in haste, and which did not comply with the terms of the clause (for example, as to who should make the certificate) was found not to have been intended by the parties to be a conclusive determination of the quantum of their liability.

73. Cook v Bank of New South Wales (1982) ASC ¶55-223.

74. Long Leys Co Pty Ltd v Silkdale Pty Ltd (1991) [1992] NSW Conv R ¶59,476.

75. Cook v Bank of New South Wales (1982) ASC ¶55-223.

76. National Australia Bank Ltd v Sampson (No 2) (NSW, Supreme Court, 4434/1991, Young J, 9 September 1991, unreported).

77. Westpac Banking Corporation v Sugden (1988) NSW Conv R ¶55-377.

78. Westpac Banking Corporation v Sugden (1988) NSW Conv R ¶55-377 at 57,472.

79. See Chapter 11.

80. See para 4.14.