Outline of this Report

Updates and background for this project (Digest)

Chapter 1 (Introduction) discusses the legal nature of the contract of guarantee, the purposes it serves and its incidence. It also explores why contracts of guarantee are so problematic for the law.

Chapter 2 (Guarantees in New South Wales Law and Practice) surveys the current law and practice relating to contracts of guarantee. It considers the ways in which guarantees are regulated generally at common law, by statute and by industry codes of practice. It also considers more particular statutory regulatory schemes.

Chapter 3 (Guarantees in Historical and Comparative Perspective) canvasses approaches that various legal systems have taken to address the problems presented by guarantees. These approaches range from placing a ban on women entering guarantees and placing particular assets beyond the reach of creditors who seek to enforce a guarantee, to more holistic attempts at ensuring equality of bargaining power or fair dealing on the part of lenders.

Chapter 4 (Reforming the Law) identifies the policy objectives underlying contracts of guarantee as protecting guarantors from unfairness and providing commercial certainty for lenders. It then examines the extent to which the current law fails to achieve these objectives. It notes various suggested reform options that are considered incompatible with the achievement of the identified objectives. Finally, it specifies the most effective means of achieving reform, recommending that New South Wales initiate discussions with other Australian jurisdictions to develop a uniform law relating to guarantees. The proposed uniform law is referred to as the “Model Law”.

Chapter 5 (Scope of the Model Law) identifies the types of guarantees to which the Model Law should apply. Accepting that the Commission’s terms of reference restrict our recommendations to guarantees in support of “credit contracts”, the Chapter discusses whether the Model Law should apply where the credit provider is not in the business of providing credit; where guarantees are given in support of a loan for the purposes of small businesses; where either the borrower or the guarantor are not natural persons; and where company directors guarantee a loan to the company. This chapter also addresses the extent to which the Model Law should apply to indemnities and third party mortgages. Finally the chapter considers the extent to which parties should be able to contract out of the Model Law.

Chapter 6 (Entering into the Contract) considers issues that arise prior to and at the signing of a guarantee, in particular:

• the types of information that lenders should be required to disclose to assist a prospective guarantor in making an informed decision about the transaction;
• the merits of requiring a “cooling off” period between the time when the lender discloses the required information to a prospective guarantor and the signing of the guarantee;
• the desirability of requiring lenders to advise every prospective guarantor to obtain independent legal and financial advice; and
• whether the borrower should be absent when the guarantor signs the guarantee, as a measure to prevent undue pressure or influence.

Chapter 8 (Terms of the Contract) examines three topics that relate to the terms of guarantees: “all moneys clauses”, which extend a guarantor’s liability to secure future credit for the borrower; clauses that modify the operation of the “co-extensiveness” principle, which makes the liability of a guarantor co-extensive with that of the borrower; and conclusive evidence clauses.

Chapter 9 (Aspects of the Life of the Contract) deals with the following issues that arise subsequent to the execution of a guarantee:

• whether guarantors should have a right to a post-contract “cooling off” period, that is, a specific time frame within which they should be allowed to withdraw unilaterally from the contract;
• the types of information a guarantor should be entitled to receive from the credit provider during the life of the contract; and
• the rights and obligations of the parties when there are changes to the contract of guarantee or to the principal contract to which the guarantee relates.

• whether guarantors should be allowed to pay out the guaranteed loan early as a means of discharging the guarantee;
• whether credit providers should be obliged to notify guarantors of default by the borrower, and in particular, whether this should be a prerequisite to the commencement of legal proceedings to enforce the guarantee;
• whether credit providers should be required to exhaust their remedies against borrowers prior to the enforcement of guarantees; and
• the extent to which credit providers should be allowed to recover from guarantors the costs incurred in enforcing the guarantee.

Chapter 12 (Alternative Dispute Resolution) surveys means of resolving disputes other than through court proceedings, in particular: by postponement of court proceedings to facilitate settlement; through proceedings before the Consumer, Trader and Tenancy Tribunal of NSW; by mediation; and through industry-based dispute resolution schemes.