List of recommendations

Updates and background for this project (Digest)

New South Wales should initiate discussions with other Australian jurisdictions to develop and enact a uniform law (the “Model Law”) relating to contracts guaranteeing another’s debt. The Model Law should implement the recommendations in this Report.

Sectors of the finance industry that use guarantees should adopt codes of practice that are consistent with applicable recommendations in this Report.

The Model Law should not derogate from rights and remedies that exist apart from the Model Law.

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

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

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

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

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

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

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

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

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.

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.

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.”

The Model Law should adopt the provisions of s 50 of the Consumer Credit Code requiring a guarantee to be in writing.

The Model Law should adopt the requirements in s 162 of the Consumer Credit Code and s 39 and 39A of the Consumer Credit Regulations relating to the legibility and language of guarantees and notices.

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.

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).

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.

The Model Law should provide that a guarantor should be allowed to withdraw from a guarantee within one clear business day from the execution of such contract.

The Model Law should contain requirements (similar to those found in s 52 of the Consumer Credit Code) that a lender must, not later than 14 days after a guarantee is signed and given to the lender, give the guarantor: (a) a copy of the guarantee signed by the guarantor; and (b) a copy of the credit contract.

The Model Law should contain requirements (similar to those found in s 163 of the Consumer Credit Code) that the lender give the guarantor, at the written request of the latter, during the life of the contract, a copy of the credit contract or guarantee.

The Model Law should provide that guarantors should have a right to obtain information from lenders during the life of the guarantee, in terms similar to s 34 of the Consumer Credit Code. Further, the Model Law should contain a provision (similar to s 35 of the Consumer Credit Code) that, if a lender fails to give a statement within the time required, the court may, on application by the guarantor, order the lender to provide the statement or itself determine the amounts in relation to which the statement was sought.

The Model Law should contain provisions governing increases in liabilities similar to those in s 56 of the Consumer Credit Code, subject to some clarifications. First, the lender must give the guarantor, in addition to a copy of the proposed revised contract, a written notice explaining in plain language all the material facts concerning the proposed changes in the loan transaction to which the guarantee relates. Secondly, the lender must comply with these requirements before the changes have been settled with the borrower. Finally, failure by the lender to comply with these requirements should result in the guarantor not being liable for the increased amount although remaining liable for the amount originally guaranteed.

The Model Law should adopt s 65 of the Consumer Credit Code concerning the notice requirement in relation to changes by agreement to the credit contract or guarantee. It should, however, state that in every case the written notice must explain in plain language all the material facts concerning the changes.

The Model Law should contain provisions regulating unilateral changes by the lender to the terms of the guarantee, similar to those found in s 63 of the Consumer Credit Code. It should, however, clarify that the written notice should explain in plain language all the material facts concerning the proposed changes.

The Model Law should give guarantors within its ambit the right to pay out the guaranteed loan as a means of discharging the guarantee, in terms similar to s 75-77 of the Consumer Credit Code.

The Model Law should provide that lenders be required to notify guarantors regarding the borrowers’ default. The notice, which should be accompanied by a copy of the default notice given to the borrower, should explain in plain language the effects on the guarantee of the borrower’s default. It should be given simultaneously with the service of the default notice on the borrower. The Model Law should provide that the notice is a pre-condition to the commencement of legal proceedings to enforce the guarantee.

The Model Law should adopt s 81 of the Consumer Credit Code concerning the consequences of the exercise by a guarantor of his or her right to remedy the borrower’s default.

The Model Law should require a lender to proceed against the borrower before enforcing the guarantee. Such requirement should be in terms similar to the provisions contained in s 138 of the Credit Act 1984 (NSW).

The Model Law should regulate enforcement expenses, in terms similar to s 99 of the Consumer Credit Code. However, it should clarify that lenders may recover only enforcement expenses that have been reasonably incurred and in amounts that are reasonable under the circumstances.

Where the Court considers that a guarantee or a provision of a guarantee is, in the circumstances, unjust, the court should be able to reopen it.

“Unjust” should include “unconscionable, harsh or oppressive”.

The Model Law should provide that, in determining whether a guarantee or a provision of a guarantee is unjust, the court is to have regard to the guarantee at the time when it was entered into or changed.

The Model Law should provide that, in determining whether a guarantee or a provision of a guarantee is unjust, the court is not to have regard to any injustice arising from circumstances that were not reasonably foreseeable when the guarantee was entered into or changed.

The Model Law should provide that, in determining whether a guarantee or a provision of a guarantee is unjust, the court may have regard to any arrangements consisting of an inter-related combination or series of contracts involving the guarantor where the guarantee being considered is a part of those arrangements.

In determining whether a guarantee or a provision of a guarantee is unjust, the court is to have regard to the public interest and to all the circumstances of the case.

In determining whether a guarantee or a provision of a guarantee is unjust in the circumstances relating to it at the time it was entered into or changed, the court should have regard to the public interest and to all the circumstances of the case, including such of the following as it considers relevant:

(a) the consequences of compliance, or noncompliance, with all or any of the provisions of the guarantee;

(b) the relative bargaining power of the parties;

(c) whether or not, prior to, or at the time the guarantee was entered into or changed, its provisions were the subject of negotiation;

(d) whether or not it was reasonably practicable for the guarantor to negotiate for the alteration of, or to reject, any of the provisions of the guarantee or the change, including the extent to which the lender was willing to negotiate the relevant terms and conditions;

(e) whether or not any of the provisions of the guarantee or change impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of the lender;

(f) whether or not the guarantor, or a person who represented the guarantor, was reasonably able to protect the interests of the guarantor because of his or her age or physical or mental condition; (A person is taken to have represented a guarantor if the person represented the guarantor, or assisted the guarantor to a significant degree, in the negotiation process prior to, or at, the time the guarantee was entered into or changed.)

(g) the relative economic circumstances, educational background and literacy of the parties to the guarantee, and of any person who represented any of the parties to the guarantee;

(h) the form of the guarantee and the intelligibility of the language in which it is expressed;

(i) whether or not, and under what circumstances, the guarantor was given the opportunity to seek legal or other expert advice;

(j) whether or not, and if so when, the guarantor obtained independent legal or other expert advice;

(k) the extent to which any person accurately explained the provisions of the guarantee or change, and their legal and practical effect, to the guarantor and whether or not the guarantor understood those provisions and their effect;

(l) whether the lender or any other person exerted or used unfair pressure, undue influence or unfair tactics on the guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;

(m) whether the lender took measures to ensure that the guarantor understood the nature and implications of the guarantee and, if so, the adequacy of those measures;

(n) whether at the time the guarantee was entered into or changed, the lender knew, or could have ascertained by reasonable inquiry of the borrower at the time, that the borrower could not pay in accordance with the terms of the guaranteed loan or could only do so with substantial hardship;

(o) whether the terms of the guarantee or the conduct of the lender are justified in the light of the risks undertaken by the lender;

(p) the terms of other comparable guarantees involving other lenders and, if the injustice is alleged to result from excessive interest rates or other charges, the annual percentage rate or rates or other charges for which guarantors might become liable in comparable cases;

(q) the requirements of (i) any applicable industry code, or (ii) any other industry code with which the guarantor reasonably believed the lender would comply;

(r) whether, in entering the guarantee, the parties complied with the provisions of the Model Law or any other relevant statute;

(r) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party; and

(s) any other relevant factor.

The Model Law should provide that, in reopening a guarantee, and in order to avoid as far as practicable an unjust consequence or result, the court may do any one or more of the following, despite any settlement of accounts or any agreement purporting to close previous dealings and create a new obligation—

(a) reopen an account already taken between the parties;

(b) refuse to enforce any or all of the provisions of the guarantee;

(c) set aside any provision of the guarantee in whole or in part,

(d) vary any provision of the guarantee in whole or in part;

(e) relieve a guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;

(f) in relation to a land instrument given by the guarantor, make an order for or with respect to requiring the execution of an instrument that:


(i) varies, or has the effect of varying, the provisions of the land instrument, or

(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument.

The Model Law should provide that the court may also make such orders as may be just in the circumstances for or with respect to any consequential or related matter, including any of the following:

(a) the making of any disposition of property,

(b) the payment of money (whether or not by way of compensation) to a party to the guarantee,

(c) the compensation of a person who is not a party to the guarantee and whose interest might otherwise be prejudiced by a decision or order under the Model Law,

(d) the sale or other realisation of property,

(e) the disposal of the proceeds of sale or other realisation of property,

(f) the creation of a charge on property in favour of any person,

(g) the enforcement of a charge so created,

(h) the appointment and regulation of the proceedings of a receiver of property,

(i) the rescission or variation of any order of the court under this clause, and

(j) the submission of any aspect of the matter in dispute to mediation,


and such other orders or relief in connection with the proceedings as may be just in the circumstances.

The Model Law should provide that, in deciding whether to grant relief, the court may have regard to the conduct of the parties to the proceedings in relation to the guarantee since it was entered into.

The Model Law should contain provisions similar to s 86-89 of the Consumer Credit Code, which provide for the postponement of court proceedings to allow the parties to negotiate a settlement. It should, however, additionally provide that the right to negotiate a postponement of proceedings only applies to credit contracts in respect of which the maximum amount of credit that is or may be provided is $500,000 or less, or such other amount as may be prescribed by the regulations.

The Model Law should grant jurisdiction to the Consumer, Trader and Tenancy Tribunal to resolve matters arising out of its provisions. Its jurisdiction should, however, be limited to cases where the amount claimed does not exceed $500,000 or any other figure prescribed by the regulations.