This chapter outlines the law that regulates third party guarantees. That law is largely common law, that is, judge-made law developed by the courts in cases where guarantors have argued that the guarantee they have signed is unjust. The chapter also outlines the various statutory laws that apply, and gives examples from some of the cases of how the common law and the statute law works in practice.

Who are the three parties? (para 2.2-2.9) A lender, creditor or credit provider is someone who lends money. This can be a bank, finance company, credit union or building society, but it need not be an institution that is in the business of providing credit: it can also be any individual who lends money. A borrower or debtor is the person to whom a loan is made. A third party guarantor is a person who promises to pay the loan if the borrower cannot (or will not) repay it, but who is generally not otherwise involved. They are a “third party” because they are not a party to the actual loan contract which is between the borrower and the lender (credit provider). Sometimes, the guarantor will provide some kind of mortgage over their property as further security for the loan.

Grounds for setting aside (or varying) contracts of guarantee (para 2.10-2.38) At common law, there are a number of different defences that can be raised when a lender tries to enforce a guarantee that the guarantor considers unjust. While there is some degree of overlap between them, each of these has different technical criteria that govern when they can be used and what remedies are available (for example, setting aside the contract or limiting the amount owed). These categories include unconscionability (or unconscionable conduct), mistake, misrepresentation, undue influence and duress.

A “special rule” for wives? (para 2.39-2.51) Another ground for setting aside guarantees applies only to cases where wives guarantee the debts of their husbands. This category was established by the High Court of Australia in 1936 in a case called Yerkey v Jones.

It came to be considered obsolete by a number of courts and commentators (including the New South Wales Court of Appeal). However, in 1998, the High Court applied it in a case involving a wife (Garcia v National Australia Bank), and left open the possibility that the rule might be extended to a broader category of cases that involve a relationship of trust and confidence between the borrower and the guarantor.

Statutory law (para 2.52-2.107) There are a number of statutes (acts) that can be used by people seeking to have a guarantee set aside or varied. Some of these provide alternatives to the common law; some extend the law; while others fill gaps in the existing common law. Each statute is limited in some way. For example, there are various time limits in each of the acts, and they generally distinguish between business loans and consumer loans.

The Contracts Review Act 1980 (NSW) gives courts power to set aside or vary contracts that are found to be unjust on one or more of the grounds specified in the Act. It excludes contracts entered into “in the course of or for the purpose of a trade, business or profession” other than a “farming undertaking”. Even so, it has occasionally been used successfully in cases involving a personal guarantee of a business loan.

The Fair Trading Act 1987 (NSW) and the Trade Practices Act 1974 (Cth) both prohibit certain kinds of unconscionable conduct and misleading and deceptive conduct. These generally do not apply to business transactions. A new section of the Trade Practices Act 1974 (Cth) which was added in July 1998 extends some of its provisions to transactions involving “business consumers” and “small business suppliers” where the amount at issue is $1,000,000 or less.

The Consumer Credit (New South Wales) Code is the full name of the national uniform credit legislation that applies in New South Wales. The “Consumer Credit Code” (sometimes called the “uniform Consumer Credit Code”) has been adopted by all the Australian States and Territories. The Code contains a set of general provisions about unjust contracts similar to those in the Contracts Review Act 1980 (NSW) and the trade practices legislation. Importantly, it also includes a number of specific requirements that must be met if a guarantee is to be enforced. However, the Code only applies to consumer credit and therefore does not apply to guarantees that secure business loans.

An alternative approach? (para 2.108-2.113) Challenging individual guarantees through the courts, often many years after they have been entered into, may not necessarily be the best means of achieving justice. Not only is the process of taking matters to court costly and time consuming, but only the parties to that particular case are bound by the result. Therefore even where the guarantor “wins”, this may not affect day-to-day practices. An alternative approach to the problem of unfair guarantees is “abstract control”, that is, preventing lenders from entering into guarantees that have unfair terms. The focus is on ensuring the contract is fair from the outset. Chapter 2 includes examples of abstract control, such as the European Community Directive on Unfair Terms in Consumer Contracts (EC Directive 93/13) which applies in England and s 10 of the Contracts Review Act 1980 (NSW) which has not been used much in this State.

WHAT IS A THIRD PARTY GUARANTEE?

The parties to a transaction

2.2 A third party guarantee involves a situation where a person borrows money from a lender but, in order to secure repayment the lender also enters into an agreement with a third party (a guarantor) who guarantees to repay the debt in case the borrower fails to do so.

2.3 A lender (or “creditor” or “credit provider”) is someone to whom a debt is owed. A lender could be virtually anybody. Most commonly the lender will be a bank or other financial institution, but it could also be a different type of lender such as a solicitor, accountant, or even a wealthy (or not so wealthy) individual. The lender could be owed the debt for any number of reasons, including the fact that the lender had advanced money to the borrower or another person, or had provided goods or services.

2.4 A borrower (or “debtor”) is simply someone who owes money to a lender. A borrower could be an individual, or could be a trading concern, such as a sole trader, partnership or limited liability company (with one or more directors).

2.5 A guarantor is someone who agrees to be responsible for paying the amount owing in place of a borrower where the borrower, for whatever reason, is unwilling or unable to pay the lender. A third party guarantor can be any entity that is not the borrower or lender and may even include an individual who is a director of a debtor company or a member of a debtor partnership. The guarantor may have to pay everything the original borrower owed (plus the costs of recovery) or may only be liable to pay up to a certain amount, for example, a fixed sum of money. The type of agreement the guarantor has entered into with the lender will determine the extent of the guarantor’s liability.

2.6 A guarantee from a third party needs to be distinguished from a joint debt. However, joint borrowers may be treated as guarantor and borrower if one of the joint borrowers receives no benefit under the credit contract.¹

2.7 A form of agreement closely related to a third party guarantee is a third party mortgage. Third party mortgages are the means by which a third party guarantees the debts of a borrower without strictly entering a contract of guarantee. Third party mortgages are, in substance, guarantees even if not strictly so in form or name. Accordingly, third party mortgages are treated by the courts as if they were third party guarantees.²

2.8 A guarantee also needs to be distinguished from an indemnity. With a guarantee, there are three parties involved so that the borrower remains primarily liable for the debt and the guarantor only becomes liable to the lender if and when the borrower defaults. By contrast, a contract of indemnity creates an independent obligation to the lender, and therefore an indemnity is characterised as a “primary” rather than “secondary” liability.³

2.9 The courts have adopted two approaches in construing contracts of guarantee. The first approach is to construe the guarantee, in cases of ambiguity, in favour of the guarantor. The second has been to construe the guarantee as any other business document, that is, “the guarantee should be given a reasonable, business meaning and should not be construed so as to render the guarantee ineffective or illusory.”⁴ In recent years, the High Court has tended to favour the first approach.⁵

Setting aside /varying guarantees

2.10 There are many options available for someone seeking to have a guarantee set aside or varied. Often, when a guarantee is the subject of legal proceedings, the guarantor will seek to have the guarantee set aside by pleading a number of these options in his or her defence. In the first part of this chapter we deal with the common law grounds available, while the second part deals with the relevant statutory provisions, some of which reflect what the common law already provides.

THE COMMON LAW

Unconscionable conduct

2.11 Courts have traditionally set aside, in whole or in part, contracts held to be unconscionable. Unconscionable conduct applies in situations where the guarantor is under a special disadvantage or disability in relation to the other parties to the transaction so that there is “an absence of any reasonable degree of equality between them”.⁶ Certain relationships are considered more likely to give rise to unconscientious dealing. One of the classic statements is that of Justice Fullagar of the High Court:

The circumstances adversely affecting a party ... are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.⁷

• the form and content of the contract;
• the characteristics and relative positions of all parties to the transaction; and
• the circumstances surrounding the formation of and entry into the contract.⁸

2.13 Despite the existence of a disability that might indicate unconscionability, a contract can be saved if the party seeking to enforce the guarantee shows that the contract was in fact “fair, just and reasonable”.¹¹ For a contract to be set aside, some detriment to the guarantor, or an absence of benefit, must usually be shown. In more recent times the notion of benefit has been construed strictly.¹² It is not sufficient to assume that a guarantor stands to benefit merely because of a close relationship with the borrower. The cases involving husbands and wives perhaps raise this issue most clearly. It is sometimes assumed that a benefit to one member of a married couple (in this context, usually a benefit to the husband by way of his business) will automatically flow through to the benefit of the wife. But the incidence of cases in which litigation occurs after the parties have separated or divorced, combined with research questioning those assumptions about intra-familial transfers, shows that the issue of “benefit” is more complex and warrants close consideration.¹³

2.14 The contract may also be enforced, even where prima facie it might appear to be unconscionable, if it is shown that adequate advice was provided to the guarantor by the borrower or some other independent person. There are many issues to be considered concerning the adequacy of advice. The issues of what type of advice will have this effect, and the policy implications that follow, are dealt with further in Chapter 3.

2.15 Remedies available to the court include setting aside the contract completely or rescinding the contract in whole or in part, for example, where the guarantor clearly agreed to guarantee up to a certain limit but no further. Because relief for unconscionable dealing is an equitable remedy, the court can also look to the conduct of the guarantor and decline relief in some cases where it might otherwise be warranted.

2.16 The leading case on unconscionability in relation to guarantees is Commercial Bank of Australia Ltd v Amadio.¹⁴ The case involved an elderly Italian couple, Mr and Mrs Amadio, who signed guarantees in relation to debts incurred by their son. They were not familiar with written English and had no relevant business experience. Their son lied to them about the viability of his business and the bank was also found to have contributed to the deception by selectively dishonouring cheques. The son also misled them about the extent of the guarantee, saying it was limited to $50,000 and to a period of six months (whereas the guarantee was unlimited in both amount and time). Neither Mr nor Mrs Amadio received independent advice before signing the guarantee. The bank brought the guarantee documents to the parents’ home for execution. The son defaulted and the bank sought to enforce the guarantee, which was set aside unconditionally.

Other common law issues

2.17 This section deals with other relevant common law issues, namely mistake, misrepresentation and undue influence. These can all be said to be a species of unconscionable conduct.¹⁵ The distinctions can sometimes be fine and the legal categories are not necessarily mutually exclusive. For example, Justice Mason has summarised unconscionable conduct as being where:

the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position,¹⁶

the will of the innocent party is not independent and voluntary because it is overborne.¹⁷

2.18 A contract may be set aside when the guarantor is (unilaterally) mistaken as to the facts surrounding the guarantee. That is, the guarantor is “mistaken as to the nature and extent” of the contract, for example, by believing that the contract was for funds to be advanced by a bank rather than guaranteeing funds already owed.¹⁸

2.19 For this remedy to be available the guarantor must show that the party benefiting from the guarantor’s mistake knew of it and must also show that it would be unconscionable for that party to retain the benefit in the circumstances.¹⁹ The benefiting party’s knowledge may be actual or constructive, that is, they must either know in fact, or the circumstances must be such that they would be presumed to know of the other party’s mistake.

2.20 Because setting aside a contract for unilateral mistake is an equitable remedy, there are restrictions on its exercise.²⁰

2.21 Closely related to mistake is the plea of non est factum (literally “it is not his/her deed”) which, if successful, renders a contract void. It was traditionally available for those unable to read (because of blindness or illiteracy) who signed documents on the basis of wrong advice by others and then came to be extended to those who are unable “through no fault of their own” to understand the effect of a contract they have been asked to sign. It is, in modern times, very limited in application.²¹ The High Court has held that to be successful in a plea of non est factum a person must show:

• that he or she signed the document believing that “it was radically different from what it was in fact”; and
• that the failure to understand was not the result of carelessness (for example, not bothering to read the document).²²

Misrepresentation

2.22 There are many types of misrepresentation. Misrepresentation for the purposes of this Paper is a false statement of a material fact which successfully induces entry into a contract.²³ This section deals with misrepresentation at common law. A statutory remedy for misrepresentation is also available under the misleading and deceptive conduct provisions of the Trade Practices Act 1974 (Cth) and Fair Trading Act 1987 (NSW) which are discussed later in this chapter.

2.23 There are many types of misrepresentation that do not amount to representations of fact, for example, promises, some statements of opinion or law, and assurances.²⁴ So, for example, an assurance that a guarantee will not be enforced would not be treated as a representation of fact. Non-disclosure²⁵ also does not usually amount to a representation of fact unless there are exceptional circumstances²⁶ or the contract is one of utmost good faith²⁷ – like an insurance contract. Contracts of guarantee do not generally fit into this category.²⁸

2.24 Where a contract has been entered into on the basis of a false understanding because of a misrepresentation of a material fact, the person misled can choose to avoid the contract. This is the case with innocent, fraudulent or negligent misstatements. However, an innocent misrepresentation, that is, where the person making the representation believed the statement was accurate, usually allows for rescission only where the contract has not already been carried out.²⁹ It also allows for a defence to a claim for damages or specific performance of the contract. By contrast, fraudulent and negligent misrepresentations permit the person misled to seek not only to rescind the contract but also to recover damages that have arisen as a result of the misrepresentation.

2.25 A misrepresentation at the pre-contractual stage may also amount to the formation of a contract of guarantee that is “unjust in the circumstances” under the Contracts Review Act 1980 (NSW).³⁰

Undue influence

2.26 The equitable doctrine of undue influence is mainly concerned with the quality of the consent of a guarantor who enters a contract of guarantee.³¹ Relief is available where the guarantor, because of actual influence on his or her mind, does not bring an independent or voluntary will to the decision to enter the contract of guarantee. Normally there is a pre-existing relationship between the borrower and guarantor involving trust, confidence or some form of power imbalance.³² In these circumstances the guarantor’s will is treated as not being voluntary because it has been overborne.³³

2.27 For relief to be granted it must be shown that the borrower or lender exploited the guarantor’s disadvantage. It is this unconscientious behaviour that equity protects against.

2.28 Because guarantee situations usually involve the borrower (rather than the lender) exercising undue influence over the guarantor, some form of responsibility for the borrower’s behaviour must be fixed on the lender before the agreement between the lender and the guarantor can be overturned. Undue influence between a borrower and a guarantor will usually be fixed on a lender in two circumstances:³⁴

• where the obtaining of the guarantee has been entrusted to the borrower in such a way that the borrower is treated as the agent of the lender;³⁵ and
• where the lender becomes aware of facts that suggest the possibility of undue influence.³⁶

2.29 Establishing undue influence. The courts establish undue influence in two ways, by finding actual or presumed undue influence:³⁸

• With actual undue influence, the nature and extent of the undue influence must be proved by evidence.
• With presumed undue influence, a presumption of undue influence, rebuttable by evidence, arises from a particular relationship between the parties.

• Where the pre-existing relationship is one of a class traditionally held to give rise to a presumption of undue influence, for example, where the parties are: parent and child,⁴⁰ guardian and ward, trustee and beneficiary, solicitor and client, physician and patient, and in a relationship of religious influence.⁴¹ All of these may be, and often are, rebutted by evidence.
• Where the facts of the relationship, even if not within one of the traditional categories, give rise to a relationship susceptible to undue influence.⁴² There is a fine line between this category and the class of actual undue influence.

2.32 Remedies. The result of a successful plea of undue influence is that the contract of guarantee may be set aside in equity. The principal remedy granted by the court is rescission of the contract with consequential orders aimed at restitution in favour of all parties.⁴⁵

2.33 A situation which a court held constituted actual undue influence can be seen in Bank of Credit and Commerce International SA v Aboody.⁴⁶ Mrs Aboody was taken by the bank to a solicitor to receive independent legal advice concerning a guarantee she was about to sign in relation to her husband’s business. While the solicitor was giving the advice her husband “burst into the room uninvited and in a high state of excitement”. The husband was rude and overbearing and a shouting match developed between him and the solicitor. Mrs Aboody became quite distressed. The solicitor made no further attempt to advise Mrs Aboody and she signed the documentation.

2.34 There are some similarities in application between actual undue influence and duress which is discussed under the next heading. It has been suggested that maintaining these as separate categories is no longer justified.⁴⁷

2.35 It has also been suggested that because of the development of the doctrine of unconscionability, “undue influence has assumed a secondary role in litigation involving applications seeking to set aside guarantees”:

Indeed, ... it is difficult to envisage any case where a case of unconscionability will fail and a claim of undue influence succeed.⁴⁸

2.36 A guarantee may be set aside if the guarantor, in entering the agreement, has been subject to duress. Duress involves illegitimate pressure being exerted on a person with the result that the person is induced to enter into the agreement.⁴⁹ In the past the pressure was usually limited to threats involving physical force against the victim or another person or property. In more recent times economic duress has been accepted by courts as amounting to duress,⁵⁰ but there is a fine line between this and acceptable commercial practice. According to the New South Wales Court of Appeal:

Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress. ... Once the evidence establishes that the pressure exerted on the victim was illegitimate, the onus lies on the person applying the pressure to show that it made no contribution to the victim entering into the agreement.⁵¹

whereas ‘duress’ signifies a procuring of contractual assent by an illegitimate threat, ‘undue influence’ signifies an influence which may fall short of that ‘compulsion’, ‘coercion’, ‘extortion’, ‘exaction’ or ‘force’ inherent in a threat, but which is deemed ‘undue’ nonetheless.⁵²

A special rule for wives?

Australia

2.39 The rule in Yerkey v Jones⁵⁵ is a particular equitable doctrine which applies where a married woman, regardless of other characteristics, guarantees her husband’s loan. The decision in Yerkey v Jones was handed down in 1939. Its authority came to be doubted in recent years, but it was reaffirmed in 1998 by the High Court in Garcia v National Australia Bank.⁵⁶

2.40 There are two limbs to the rule:

• The first allows a wife to have a guarantee set aside if her consent was obtained by undue influence, unless she has received independent advice.⁵⁷
• The second gives a wife the prima facie right to have a guarantee set aside if she failed to understand the effect of the guarantee or its significance, unless the lender took steps to inform her of these matters.⁵⁸

2.42 The transaction must also be voluntary, that is, the wife must show that she obtained no benefit from the undertaking which is the subject of the guarantee.⁶⁰ As noted above, this can give rise to some difficulty where it is assumed that benefits to one party to a marriage automatically flow to the other.⁶¹

2.43 The rule has been criticised on numerous grounds⁶² including that it is discriminatory in that it applies only to married women in relation to their husbands regardless of vulnerability⁶³ and on the more general economic grounds that it may render matrimonial assets “economically sterile”.⁶⁴

2.44 The rule in Yerkey v Jones was disapproved by the House of Lords in 1994⁶⁵ and also by New South Wales courts,⁶⁶ including the Court of Appeal which had held that the special position of wives had been overtaken by the general doctrine of unconscionable conduct.⁶⁷

2.45 While the rule in Yerkey v Jones is limited to wives at present, the High Court in Garcia left open the possibility that it may be extended to other relationships involving “trust and confidence”.⁶⁸

2.46 The fact situation in Garcia v National Australia Bank illustrates the operation of the rule. In 1979 Mrs Garcia entered a mortgage with her husband to secure a $5,000 loan in relation to his business. The mortgage secured all moneys they might owe including moneys secured by future guarantees. Mrs Garcia later entered several guarantees relating to loans made to the business. She was a director and shareholder of the company but the court found that she was not directly involved in its operations over which her husband had “complete control”.⁶⁹ The couple separated in 1988 and divorced in 1989. An order was made for the winding up of the company in 1989. Following the divorce Mrs Garcia sought to have the guarantees set aside. The bank then sought to enforce one of the guarantees (entered in November 1987) and the mortgage demanding a sum of $327,189.69. When signing the November 1987 guarantee the bank took no steps to inform Mrs Garcia of the nature of the transaction she was entering. She claimed that she did not understand the transaction, in particular that the guarantee was secured by the mortgage over the family home. She argued that she entered the guarantee relying on representations by her husband that it would be safe to do so. A claim of actual undue influence on the part of the husband and another based on the Contracts Review Act 1980 (NSW) both failed at first instance.⁷⁰ However, a claim based on Yerkey v Jones succeeded at first instance, was overturned by the Court of Appeal and then was ultimately upheld by the High Court.

England

2.47 In England the House of Lords has rejected the “special equity” doctrine for wives who stand as guarantors, claiming that it was not necessary for the proper protection of a wife’s financial interest. In Barclays Bank plc v O’Brien⁷¹ the House of Lords initially considered situations where a wife is induced to be guarantor of her husband’s debt by undue influence or misrepresentation on the part of the husband. The House of Lords held that a guarantor who is subject to, say, undue influence or misrepresentation has an equity allowing her to set aside the transaction as against the borrower. This equity can also be enforced against the lender in either of the following circumstances:

• where the borrower is found to have acted as an agent of the lender in getting the guarantor’s consent; or
• where the lender is found to have had actual or constructive notice of the facts giving rise to the equity.

• the financial advantage to the wife is not, at first, apparent; and
• when there is a substantial risk that in such transactions the husband will have committed a legal or equitable wrong (for example, undue influence or misrepresentation) which would allow his wife to have the transaction set aside.⁷²

2.50 These requirements were also held to apply in the case of cohabiting couples. A lender would then be fixed with notice if that lender is aware that a guarantor simply cohabits with the borrower. It was also considered that a lender would similarly be put on enquiry when it becomes aware that a guarantor reposes trust and confidence in a borrower in relation to their financial affairs, without the need for them to live together. Again, a lender can, in most cases, avoid being fixed with notice by following the procedures outlined above.⁷⁴

2.51 However, Barclays Bank plc v O’Brien⁷⁵ has been applied by the English Court of Appeal in such a way as to reduce the opportunities for relief under its doctrines. The Court of Appeal considered a number of cases relating to the effect of legal advice on wives who act as guarantors⁷⁶ which, it said, established a number of propositions. These propositions were to the effect that a lender will not usually be put on enquiry so long as it urges the wife to obtain independent legal advice and that the lender will usually not be required to satisfy itself that the advice is actually independent or, indeed, that it was given at all. One of the reasons given for this approach was that the practice of requiring such guarantees was so widespread and the “efficient funding” of small businesses was so dependent on the validity of the process that the parties “must be entitled to proceed in accordance with a settled practice which is effective to secure the validity of the transaction while at the same time affording the wife the protection of proper legal advice”.⁷⁷

STATUTORY PROVISIONS

2.52 Various statutory provisions may be relied upon by those seeking to have a guarantee set aside or modified. Some provide alternatives to the common law remedies, some extend the law, while others fill gaps in the existing common law. Each provision is limited in some way. For example, there are various time limits placed on the seeking of relief,⁷⁸ and most statutes distinguish between business loans and consumer loans.

Contracts Review Act 1980 (NSW)

2.53 The Contracts Review Act 1980 (NSW) allows a court to grant relief in relation to a contract or part of a contract that is “unjust in the circumstances ... at the time it was made”.⁷⁹ The term “unjust” is not restricted and its definition includes “unconscionable, harsh or oppressive”.⁸⁰ However, there are some restrictions. The most notable is that relief is not generally available to corporations⁸¹ or in respect of contracts entered into “in the course of or for the purpose of a trade, business or profession” other than a “farming undertaking”.⁸² This restriction to consumer transactions was included as a result of concerns raised by legal and business interests about the certainty of commercial transactions.⁸³ Even though the Act is restricted chiefly to consumer transactions, it has been held in some cases to apply to personal guarantees of businesses.⁸⁴

2.54 When a court finds a contract or a provision in a contract to be unjust the court may do a number of things to avoid the unjust consequences, including:

• refuse to enforce any or all of the provisions of the contract;
• declare the contract void in whole or in part; and
• vary, in whole or in part, any provision of the contract.⁸⁵

• whether there was “material inequality in bargaining power between the parties”;⁸⁸
• the “relative economic circumstances, educational background and literacy of the parties”;⁸⁹
• whether “independent legal or other expert advice was obtained by the party seeking relief”;⁹⁰ and
• whether “any undue influence, unfair pressure or unfair tactics” were used on the party seeking relief.⁹¹

Trade practices legislation

2.57 The Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) both prohibit certain kinds of unconscionable conduct and misleading and deceptive conduct. The limitations on their provisions are dealt with below. Both statutes expand upon the common law, particularly with respect to remedies. The remedies available are discussed at the end of this section.

Unconscionable conduct

2.58 Unconscionable conduct is dealt with by Part 4A of the Trade Practices Act 1974 (Cth) and s 43 of the Fair Trading Act 1987 (NSW).

2.59 Commonwealth provisions. The provisions of the Trade Practices Act 1974 (Cth)⁹⁶ apply in New South Wales to the extent permitted by the Constitution. They are dealt with here first because some provisions were the model for the Fair Trading Act 1987 (NSW) though others have since gone further than the New South Wales Act.

2.60 Section 51AB. Section 51AB prohibits corporations, in trade and commerce, from engaging in “conduct that is, in all the circumstances, unconscionable” in relation to “the supply or possible supply of goods or services to a person”. This applies to guarantees because they are given “in connection with” the supply of goods and services, namely the provision of credit to a borrower.⁹⁷ Since s 51AB is limited to goods and services “of a kind ordinarily acquired for personal, domestic or household use or consumption”⁹⁸ it may only protect guarantors who guarantee loans for “personal, domestic or household use or consumption”⁹⁹ and would not extend to situations involving business loans. This is seen by some as inconsistent with the original intention of the section, which was to cover situations involving individuals guaranteeing business loans.¹⁰⁰

2.61 Section 51AB(2) provides a list of matters the court may consider in determining if there has been unconscionable conduct, including the relative strengths of the parties to the transaction, the understanding of the party seeking relief and general commercial practice in relation to similar transactions.

2.62 Remedies for unconscionable conduct in breach of this section are injunctions and other orders under s 80 and 87 of the Trade Practices Act 1974 (Cth).

2.63 Section 51AC. Section 51AC of the Trade Practices Act 1974 (Cth), which commenced in July 1998, makes similar provision to s 51AB in relation to “business consumers” and “small business suppliers”. That is, it applies in relation to both the supply and acquisition or possible supply and acquisition of goods or services:

• by a person to a corporation (other than a listed public company); or
• by a corporation to a person or corporation (other than a listed public company)

2.64 Matters the court may consider in determining if there has been unconscionable conduct are also listed. These are similar to s 51AB(2) except that some additional matters are included, relating chiefly to questions of commercial conduct and practice.

2.65 These provisions are thought to expand considerably the concept of unconscionability.¹⁰⁴ Similar provision is made with respect to transactions between suppliers and business consumers.¹⁰⁵

2.66 Remedies for conduct in breach of this section are available under s 80, 82 and 87 of the Trade Practices Act 1974 (Cth).

2.67 There has been some judicial consideration of s 51AC since it commenced,¹⁰⁶ but to date there has been no consideration in the context of third party guarantees.

2.68 Section 51AA. Section 51AA of the Trade Practices Act 1974 (Cth)¹⁰⁷ prohibits a corporation, in trade or commerce, from engaging in unconscionable conduct within the meaning of the common law. However, s 51AA does not apply to unconscionable conduct that is prohibited by s 51AB or 51AC of the Trade Practices Act 1974 (Cth).

2.69 The provision applies where other Trade Practices Act unconscionability provisions are excluded, and makes available the remedies under s 80 and 87 of the Trade Practices Act 1974 (Cth)¹⁰⁸ if it can be established that a corporation in trade and commerce engaged in unconscionable conduct at common law. In this respect it also provides a basis for intervention by the Australian Competition and Consumer Commission in cases not coming within s 51AB and 51AC.

2.70 While it appears to take the content of unconscionable conduct no further than the existing law, some have suggested that it may provide a “separate and more extensive liability”.¹⁰⁹

2.71 New South Wales provisions. Section 43 of the Fair Trading Act 1987 (NSW) is in similar terms to s 51AB of the Trade Practices Act 1974 (Cth). However, it is not limited to suppliers who are corporations. Like the Commonwealth Act it applies only to “goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption”.¹¹⁰

2.72 Remedies for conduct in breach of this section are injunctions and other orders under s 65 and s 72 of the Fair Trading Act 1987 (NSW), but not damages under s 68 of the Fair Trading Act 1987 (NSW).

2.73 The same limitations with respect to guarantees as apply to s 51AB of the Trade Practices Act 1974 (Cth) must apply to the New South Wales provisions (and without the benefit of s 51AC).

Misleading or deceptive conduct

2.74 Misleading or deceptive conduct is covered by s 52 of the Trade Practices Act 1974 (Cth)¹¹¹ and s 42 of the Fair Trading Act 1987 (NSW). Section 52(1) of the Trade Practices Act 1974 (Cth) states:

A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.¹¹²

2.76 These provisions cover both deceptive conduct (a party to the transaction intending to deceive) and misleading conduct (a party to the transaction objectively misleading another, without necessarily intending to do so).¹¹³ As fraud is not a necessary element, the misrepresentation need only be innocent in order for the provisions to apply.

2.77 Common examples of misrepresentations by lenders include:

(1) attempts to reassure the guarantor by saying that the document is only a formality;

(2) mis-statements about the debtor’s financial situation;

(3) false statements about aspects of the guarantee, in particular the limits of the guarantor’s liability.¹¹⁴

2.78 Where a guarantor seeks to set aside the guarantee, it must be shown that the representations induced the guarantor to enter the guarantee.¹¹⁶

2.79 In some cases it will be the borrower who makes the representation to the guarantor, so to overturn the guarantee as against the lender the guarantor not only has to prove that the representations were misleading and deceptive, but also that the borrower was acting for the lender in making the representations to the guarantor.

2.80 Remedies available include damages¹¹⁷ and others, such as rescission, variation, restitution¹¹⁸ and partial enforcement of a guarantee are also available.

2.81 An illustration of misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) can be found in National Australia Bank Ltd v Nobile.¹¹⁹ Mr and Mrs Nobile guaranteed the debts of their daughter and son-in-law’s building company. At the time of entering the guarantee there were signs that the company might be in serious financial trouble, yet the Nobiles, who had no involvement or personal interest in the company, were assured by the branch manager of the bank that the business was “going well”. In fact this was not the case since the bank’s regional lending manager had only recently adversely commented upon the branch manager’s decision to increase the company’s overdraft. It was held that the Nobiles signed in reliance upon the branch manager’s misrepresentation. Within less than twelve months the company was wound up, and the daughter and son-in-law became bankrupt a short time after. In these circumstances the court made an order, the effect of which was that the guarantee entered into by the Nobiles was void from the beginning.¹²⁰

Remedies available

2.82 Injunctions. The Court may grant injunctions¹²¹ against those involved in unconscionable conduct and misleading and deceptive conduct.¹²² Any person may apply for an injunction, not only those directly affected by conduct in breach of the Act. The injunction may be “in such terms as the Court determines to be appropriate”.¹²³

2.83 An injunction could, for example, restrain a lender from seeking to enforce or retain the benefit of a mortgage used to secure a loan.¹²⁴

2.84 Action for damages. The Commonwealth and State Acts allow a person who suffers loss or damage as a result of some breaches of the Acts to recover from the person in breach “the amount of the loss or damage”.¹²⁵ Those entitled to recover include persons suffering loss or damage as a result of misleading and deceptive conduct¹²⁶ or unconscionable conduct in relation only to business consumers and small business suppliers.¹²⁷ Damages are not available under the Commonwealth provisions in relation to unconscionable conduct affecting consumers who are not business consumers or small business suppliers.¹²⁸ They are also not available at all in respect of unconscionable conduct under the New South Wales Fair Trading Act 1987 (NSW) provisions. The fact that damages are not available in relation to most instances of unconscionable conduct under the Acts is considered anomalous, especially in light of the possibility of a court ordering compensation for unconscionable conduct in its discretion under the “Other Orders” provisions of the Acts.¹²⁹

2.85 Other orders. The Court may also make “such orders as it thinks appropriate” to compensate a person who suffers loss or damage by a person engaging in misleading and deceptive conduct and unconscionable conduct.¹³⁰

2.86 Orders the Court may make include:

• declaring part or all of a contract void from the beginning;¹³¹
• varying the contract;¹³²
• refusing to enforce any or all of the provisions of the contract;¹³³
• directing the refund of money or the return of property;¹³⁴ and
• directing the payment of the amount of the loss or damage suffered.¹³⁵

2.87 An example of the operation of the trade practices provisions can be seen in the Federal Court case of Gregg v Tasmanian Trustees Ltd¹³⁷ which involved a joint mortgage entered by Mr and Mrs Gregg guaranteeing the liability to Tasmanian Trustees Ltd of a company of which Mr Gregg was a director. Mrs Gregg was a secondary teacher who was suffering from multiple sclerosis. The Greggs’ home had been modified because of her increasing physical disability. The house had become free of debt in June 1993 owing chiefly to the contribution of Mrs Gregg to the mortgage payments.

2.88 In May 1993 Mr Gregg became a director of the company, a small computer firm. The company restructured its loans with Tasmanian Trustees and secured its debt of $261,000 by mortgages over the properties of the three company directors. The total of $261,000 represented 60% of the value of the properties. Mr Gregg and another director came to believe that their liability was limited to 60% of the valuation of their properties ($82,000 in the case of Mr Gregg). In fact each mortgage made each director independently liable for the whole of the $261,000.

2.89 Mrs Gregg was told by Mr Gregg that the mortgage secured only $82,000 and that the other directors had secured a similar amount. Mrs Gregg entered the mortgage on the basis of information she had received solely from her husband both in relation to the terms of the mortgage and the need for it (ie the viability of the business). The very complex documentation for the loan was signed by Mrs Gregg in a car outside the office of the company’s solicitor in the presence of the solicitor (who was also found to be an agent of Tasmanian Trustees) and Mr Gregg, and no explanation was made of its effect.

2.90 The Greggs’ divorce proceedings commenced in June 1994 and Mr Gregg became bankrupt in July 1995.

2.91 In the first half of 1995, unknown to the Greggs, two directors discharged the mortgages over their homes, by paying 60% of the 1993 valuations of their properties, and the remaining debt was reduced accordingly. This left the Greggs’ house and some land of another director to secure the remaining loan. In May 1996 Tasmanian Trustees demanded repayment of the remaining principal sum ($113,100) plus interest ($15,303).

2.92 The Court found that the representations made to Mrs Gregg by her husband were misleading and deceptive under s 52 of the Trade Practices Act 1974 (Cth) but that Mr Gregg had not acted as an agent for Tasmanian Trustees in making these representations. However, it was found that Tasmanian Trustees had objectively engaged in misleading and deceptive conduct through the company’s solicitor who had prepared the mortgage documentation, had been present in the car when Mr Gregg made some of the representations about the mortgage and had failed to point out that the documentation was in fact different to what had been agreed.

2.93 The conduct of Tasmanian Trustees was also found to have been unconscionable in that Mrs Gregg met the requirement of special disadvantage, Tasmanian Trustees knew or ought to have known of the circumstances and Mrs Gregg’s position had been prejudiced. Tasmanian Trustees’ conduct was therefore in breach of s 51AA of the Trade Practices Act 1974 (Cth).

2.94 The Court’s orders included a partial setting aside of the mortgage in so far as it imposed obligations on Mrs Gregg under s 87(2)(b) of the Trade Practices Act 1974 (Cth). Further, under s 87(1A) the Court limited Mr Gregg’s liability to $82,000 and reduced the amount secured by the mortgage proportionately to his interest in the property owned with Mrs Gregg. The Court also granted an injunction under s 80 of the Trade Practices Act 1974 (Cth) restraining Tasmanian Trustees from engaging in conduct which sought “to enforce or retain the benefit of the mortgage” other than in relation to Mr Gregg’s interest.

Consumer Credit (New South Wales) Code

2.95 Consumer Credit (New South Wales) Code is the title adopted for the Consumer Credit Code as it applies in New South Wales. Consumer Credit Code¹³⁸ is a generic description of the national uniform credit legislation which was first passed by Queensland¹³⁹ in 1994 and has either been adopted by the other States,¹⁴⁰ or been the subject of similar consistent legislation.¹⁴¹

2.96 The Code and its regulations (the Consumer Credit (New South Wales) Regulations¹⁴² ) apply to guarantors who are individuals or strata corporations¹⁴³ and where the guarantee supports a consumer credit contract.¹⁴⁴ A consumer credit contract is a contract entered by an individual or strata corporation that is “wholly or predominantly for personal, domestic or household purposes”.¹⁴⁵ Therefore, the Code will not apply where the loan is entered into by a corporation or is for predominantly business purposes.

2.97 The Code does two things of particular relevance to third party guarantees. First, it provides a set of general remedial provisions in relation to unjust contracts similar to those contained in the Contracts Review Act 1980 (NSW) and trade practices legislation. Secondly, it includes more specific requirements that must be met for a guarantee to be enforced.

Unjust contracts

2.98 The Consumer Credit (New South Wales) Code includes provision for the re-opening of unjust transactions. A court¹⁴⁶ may, on application by any party to the transaction, decide that a guarantee was “at the time it was entered into or changed ... unjust”.¹⁴⁷ As with the Contracts Review Act 1980 (NSW) “unjust” includes “unconscionable, harsh or oppressive”.¹⁴⁸ Under these provisions, a guarantor can apply to have a transaction re-opened on the grounds that the credit contract or mortgage are unjust as well as the guarantee.

2.99 In deciding whether a term in a contract is unjust, the Court or Tribunal may have regard to “the public interest and to all the circumstances of the case” and also to a list of considerations expressed in similar terms to those in the Contracts Review Act 1980 (NSW)¹⁴⁹ including “any other relevant factor”.¹⁵⁰ The interpretation of the relevant parts of the Contracts Review Act 1980 (NSW) will, therefore, be of interest.

2.100 Two provisions not found in the Contracts Review Act 1980 (NSW), are:

(l) whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship.

(n) the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases.

• relieve a guarantor from paying more than the court considers reasonable; and
• vary or set aside in part or in full any agreement made.¹⁵¹

Specific requirements

2.103 The Code also includes more specific requirements that must be met before a guarantee can be enforced. For example, a guarantee cannot be enforced if:

• it is not in writing and signed by the guarantor;¹⁵²
• the lender has not given the guarantor a copy of the credit contract;¹⁵³ and
• it fails to comply with any regulations with respect to the form of the guarantee made under s 50(2) of the Code.¹⁵⁴

2.104 There are also restrictions on the total amount for which a guarantor can be liable so that a guarantee is void to the extent that the amount for which the guarantor is liable exceeds the total liabilities of the borrower under the principal contract (plus the “reasonable expenses of enforcing the guarantee”).¹⁵⁷ The Code also contains detailed provisions about the form and content of information that must be provided to guarantors when entering contracts of guarantee. These provisions are discussed in the next chapter.

Farm Debt Mediation Act 1994 (NSW)

2.105 The Farm Debt Mediation Act 1994 (NSW) applies in situations where a lender is owed money by a farmer under a “farm mortgage”¹⁵⁸ and the lender seeks to enforce the debt against a farmer either as a borrower or guarantor. When the farmer is a guarantor, the guarantee must be secured by farm property for the Act to apply.

2.106 When the lender seeks to enforce the guarantee against the farmer guarantor, the Act has the effect of delaying the enforcement by requiring that 21 days’ notice be given to the guarantor.¹⁵⁹ During the notice period the farmer guarantor may request mediation concerning the farm debt¹⁶⁰ and enforcement cannot continue until the Rural Assistance Authority has issued a certificate that it is satisfied that certain processes have been carried out.¹⁶¹

2.107 The Farm Debt Mediation Act 1994 (NSW) is simply a means of delaying enforcement against farmers, either as borrowers or guarantors, in the hope that a better solution can be found through mediation. A contract of guarantee could not be overturned under the Act unless the lender and the guarantor agreed. The Act does not affect any rights to have the contract of guarantee reviewed under other relevant legislation such as the Contracts Review Act 1980 (NSW), the Consumer Credit (New South Wales) Code or “any other Act or law that deals with the granting of relief in respect of harsh, oppressive, unconscionable or unjust contracts or on the grounds of hardship”.¹⁶²

OTHER APPROACHES

Abstract control

European Community directive on unfair terms in contracts

2.108 Using the legal doctrines outlined above to overturn contracts of guarantee often many years after they have been entered may not necessarily be the best means of achieving justice in most cases. Not only is the process of taking matters to court costly, but the result is that only the parties to the litigation are bound by the result. An alternative approach to the problem of unfair contracts of guarantee may be by means of “abstract control”,¹⁶³ that is, some way of preventing lenders from entering contracts using terms that are unfair to guarantors. The focus is chiefly on the substantive terms of agreements.

2.109 An example of abstract control is the implementation of the European Directive on Unfair Terms in Consumer Contracts (EC Directive 93/13) in the United Kingdom. This is currently achieved by the Unfair Terms in Consumer Contracts Regulations 1999 (UK).¹⁶⁴ The Regulations, which are limited to consumer transactions, essentially do two things:

• First, they provide that a term found to be “unfair” is not binding. A term will be considered unfair if “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”.¹⁶⁵ An “illustrative and non-exhaustive list of terms which may be regarded as unfair” is provided and includes, for example, a term having the effect of “irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract”.¹⁶⁶
• Secondly, they allow the Director General of Fair Trading or other prescribed organisation to apply for an injunction to prevent the use of a particular unfair term, any similar term, or a term having similar effect.¹⁶⁷

Provisions in Australia

2.110 Another example of abstract control is s 10 of the Contracts Review Act 1980 (NSW) which allows the Attorney General (or Minister for Fair Trading) to apply for a court order restricting the terms on which a person may enter into a contract of a specified class if the person “has embarked, or is likely to embark, on a course of conduct leading to the formation of unjust contracts”. There have been few reported instances of the use of s 10¹⁶⁹ and none appears to have been in relation to contracts of guarantee.

2.111 The Consumer Credit (New South Wales) Code also provides that, when a guarantee or notice is not easily legible, does not conform to requirements regarding print and type or is not clearly expressed, a court may, on application by the Director-General of the Department of Fair Trading, prevent the lender using a provision “in the same or similar terms in future ... guarantees or notices”.¹⁷⁰

2.112 It is also possible that a similar result may be achieved by a broad power to grant injunctions to prevent conduct in breach of provisions under the trade practices legislation relating to unconscionable conduct and misleading and deceptive conduct.¹⁷¹ The provisions, however, remain untested in this regard.

2.113 In addition to “all accounts” clauses, it has been suggested that one of the types of provision that could be examined with a view to preventing its further use is a “conclusive evidence” clause. The example provided here featured in a recent case before the Victorian Court of Appeal:

For the purposes of this Guarantee a certificate stating all or any of the following:

(i) the amount of the moneys hereby secured or any part thereof;

(ii) that such an amount falls within a particular paragraph or sub-paragraph of the definition of the moneys hereby secured;

(iii) that such an amount is owing or payable to the Bank by the guarantor or any other person whose indebtedness to the Bank is intended to be hereby secured;

(iv) that the Bank is entitled to payment thereof on demand,

given to the guarantor by or on behalf of the Bank is conclusive evidence of the truth of its contents and binding on the guarantor.¹⁷²

1. Permanent Trustee Co of NSW Ltd v Hinks (1934) 34 SR(NSW) 130.

2. See, for example, AGC (Advances) Ltd v West (1984) 5 NSWLR 590 at 602-603. See also generally Jowitt v Callaghan (1938) 38 SR (NSW) 512 at 516 (Jordan CJ); and J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 18-20.

3. See Citicorp Australia Ltd v Hendry (1984) 4 NSWLR 1 at 14-20 (Clarke J); and J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 25-31.

4. J O’Donovan and J Phillips, The Modern Contract of Guarantee (LBC Information Services, Sydney, 1996) at 217.

5. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561; and Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 256.

6. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474 (Deane J).

7. Blomley v Ryan (1956) 99 CLR 362 at 405. See also Kitto J at 415; and Familiar Pty Ltd v Samarkos (1994) 115 FLR 443 at 457-458.

8. For a more detailed summary of factors, see J Phillips, “Grounds for Avoiding Guarantees” in J Phillips, B Horrigan and B Collier, Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 4. See also J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1513; and N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (7th Australian edition, Butterworths, Sydney, 1997) at para 15.8.

9. See Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474 (Deane J).

10. This position can be compared with that under the Contracts Review Act 1980 (NSW) which permits a court to intervene where the disability was not known to the other party.

11. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474.

12. See Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 43; and Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 475.

13. See Australian Banking Industry Ombudsman Ltd, Report on Relationship Debt (Bulletin No 22, 1999); B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997); M Trebilcock and S Elliott, “The Scope and Limits of Legal Paternalism: Altruism and Coercion in Family Financial Arrangements” (Unpublished paper, revised 23 February 1999); Australian Banking Industry Ombudsman Ltd, Report on Relationship Debt (Bulletin No 22, 1999); S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995); S Singh, For Love Not Money: The Stories of Women in Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995); S Singh, Marriage Money: The Social Shaping of Money and Marriage in Banking (Allen & Unwin, Sydney, 1997); and more broadly, J Pahl, Money and Marriage (St Martin’s Press, New York, 1989); J Pahl, Invisible Money: Family Finances in the Electronic Economy (The Policy Press, Bristol, 1999); and M Edwards, Financial Arrangements Within Families (National Women’s Advisory Council, Canberra, 1981).

14. (1983) 151 CLR 447.

15. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461 (Mason J).

16. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461 (Mason J).

17. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461 (Mason J).

18. See Royal Bank of Canada v Oram (1978) 1 WWR 564.

19. See Taylor v Johnson (1983) 151 CLR 422 at 432 (Mason ACJ, Murphy and Deane JJ); and J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1264.

20. See J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1255; D Wright, “Rectification” in P Parkinson (ed), The Principles of Equity (LBC Information Services, Sydney, 1996) at para 2712; and R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992) at para 2615.

21. See Petelin v Cullen (1975) 132 CLR 355; and J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1267-1275.

22. Petelin v Cullen (1975) 132 CLR 355 at 359-360.

23. J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1002; and N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (7th Australian edition, Butterworths, Sydney, 1997) at 378-381.

24. See J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1008-1009; and N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (7th Australian edition, Butterworths, Sydney, 1997) at para 11.9-11.16.

25. Treated as a separate category by A J Duggan, A Financier’s Guide to the Law of Guarantee in Australia (4th edition, Australian Finance Conference and Australian Equipment Lessors Association, 1998) at para 5.4.

26. See para 3.17 and 3.18. On matters requiring and not requiring disclosure see also J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) 22-29; and N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (7th Australian edition, Butterworths, Sydney, 1997) at para 11.18.

27. Uberrimae fidei.

28. See Westpac v Robinson (1993) 30 NSWLR 668 at 690 (Clarke JA).

29. Although there are some difficulties if there has been part performance. Partial rescission is now also possible: Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102.

30. Section 7. See below at para 2.53-2.56.

31. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474 (Deane J).

32. See, for example, Johnson v Buttress (1936) 56 CLR 113 at 135.

33. See Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461 (Mason J). See also Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 26. This should be distinguished from situations where guarantors simply lack information.

34. J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1405; A J Duggan, “Undue Influence” in P Parkinson (ed), The Principles of Equity (LBC Information Services, Sydney, 1996) at para 1120; and R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992) at para 1530.

35. See also Alderton v Prudential Assurance Company Ltd (1993) 41 FCR 435 at para 40-50 and the cases cited there.

36. See, for example, Bank of New South Wales Ltd v Rogers (1941) 65 CLR 42.

37. Yerkey v Jones (1939) 63 CLR 649 at 684. See also Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 25.

38. See Allcard v Skinner (1887) 36 ChD 145 at 171. See also J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1404.

39. J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1406; and N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (7th Australian edition, Butterworths, Sydney, 1997) at para 14.3.

40. But there is no automatic presumption of influence on the part of an adult child: see George v Paul George Pty Ltd (NSW SC, No 2575/1993, Santow J, 29 February 1996, unreported).

41. See Johnson v Buttress (1936) 56 CLR 113 at 119 (Latham CJ) and at 134 (Dixon J); and also Jenyns v Public Curator (1953) 90 CLR 113 at 133.

42. See the statement in Johnson v Buttress (1936) 56 CLR 113 at 119 (Latham CJ).

43. See, for example, Yerkey v Jones (1939) 63 CLR 649 at 675 (Dixon J).

44. Affirming the rule in Yerkey v Jones.

45. See J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1402; N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (7th Australian edition, Butterworths, Sydney, 1997) at para 14.13; and A J Duggan, “Undue Influence” in P Parkinson (ed), The Principles of Equity (LBC Information Services, Sydney, 1996) at para 1128.

46. [1990] 1 QB 923. However, in this case the guarantee was not set aside for other reasons.

47. J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 11.

48. J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 8.

49. See Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 45-46 (McHugh JA).

50. See Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 at 301-302; and J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1311-1313.

51. Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 46.

52. J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1301. But see Farmers’ Co-operative Executors & Trustees Ltd v Perks (1989) 52 SASR 399 at 405.

53. Also Fair Trading Act 1987 (NSW) s 55 which applies to persons instead of corporations.

54. Although the issue of the definition of “supply”, “services” and “consumer” was raised in interlocutory proceedings in relation to the NSW equivalent, s 55 of the Fair Trading Act 1987 (NSW): Campbell v Metway Leasing Ltd (1998) 20 ATPR 41-630 at 40,915-40,917 and 40,923.

55. (1939) 63 CLR 649.

56. (1998) 194 CLR 395.

57. See Yerkey v Jones (1939) 63 CLR 649 at 684 (Dixon J).

58. See Yerkey v Jones (1939) 63 CLR 649 at 683 (Dixon J).

59. Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 31.

60. Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 43.

61. This appears to have been the basis upon which the High Court refused special leave to appeal from the decision of the NSW Court of Appeal in Akins v National Australia Bank Ltd (1994) 34 NSWLR 155: Akins v National Australia Bank Ltd (High Court of Australia, No S131/1994, Application for special leave to appeal, transcript of proceedings, 12 May 1995, unreported).

62. See J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 15-16.

63. But see Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 19-20.

64. See Barclays Bank plc v O’Brien [1994] 1 AC 180 at 188. See also Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 66 (Kirby J) and para 108 (Callinan J).

65. Barclays Bank plc v O’Brien [1994] 1 AC 180.

66. See the cases discussed in National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577 at 593-598; European Asian of Australia Limited v Kurland (1985) 8 NSWLR 192; Warburton v Whiteley (1989) NSW Conv R 55-453; Akins v National Australia Bank Ltd (1994) 34 NSWLR 155; and Teachers Health Investments Pty Ltd v Wynne (1994) 6 BPR 97480.

67. National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577 at 597 (Sheller JA); and Teachers Health Investments Pty Ltd v Wynne (1996) ASC 56-356.

68. Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 22 (Gaudron, McHugh, Gummow and Hayne JJ) and at para 109 (Callinan J).

69. This factual finding illustrates how difficult it is to make determinations about whether a woman in this situation “benefits” from a transaction or not, since on the face of it, she was a participant not only in the marriage but also in the business. Compare S Singh, For Love Not Money: The Stories of Women in Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995).

70. Garcia v National Australia Bank Ltd (1993) 5 BPR 11,996.

71. [1994] 1 AC 180.

72. [1994] 1 AC 180 at 195.

73. [1994] 1 AC 180 at 196.

74. The approach in Barclays Bank plc v O’Brien [1994] 1 AC 180 was favoured, with some qualifications, by Kirby J in his separate judgment in Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at para 73.

75. [1994] 1 AC 180.

76. The leading authorities were cited in Royal Bank of Scotland plc v Etridge (No 2) [1998] 4 All ER 705 at 720: Bank of Baroda v Shah [1988] 3 All ER 24; Massey v Midland Bank plc [1995] 1 All ER 929; Banco Exterior Internacional v Mann [1995] 2 FCR 631; Midland Bank plc v Serter [1995] 3 FCR 711; Bank Melli Iran v Samadi-Rad [1995] 3 FCR 735; Halifax Mortgage Services Ltd v Stepsky [1997] 1 WLR 221; Barclays Bank plc v Thomson [1997] 4 All ER 816; and National Westminster Bank plc v Beaton (1997) 30 HLR 99.

77. Royal Bank of Scotland plc v Etridge (No 2) [1998] 4 All ER 705 at 720.

78. See, for example, Contracts Review Act 1980 (NSW) s 16; Trade Practices Act 1974 (Cth) s 82 and 87; and Consumer Credit (New South Wales) Code s 73(1).

79. Contracts Review Act 1980 (NSW) s 7.

80. Contracts Review Act 1980 (NSW) s 4(1).

81. Contracts Review Act 1980 (NSW) s 6(1).

82. Contracts Review Act 1980 (NSW) s 6(2).

83. New South Wales, Parliamentary Debates (Hansard) Legislative Assembly, 19 March 1980, the Hon S Einfeld, Minister for Consumer Affairs at 5532. See also J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1518; J Goldring, J L Pratt and D E J Ryan, “The Contracts Review Act (NSW)” (1981) 4(2) University of New South Wales Law Journal 1 at 3; and A L Terry, “Unconscionable Contracts in New South Wales: The Contracts Review Act 1980” (1982) 10 Australian Business Law Review 311 at 312 and 319-324.

84. At least where a person guarantees debts of a corporate entity: Australian Bank Ltd v Stokes (1985) 3 NSWLR 174. See also Ring Tread Systems Australasia Pty Ltd v Tubb (NSW CA, 40830/1996, 30 October 1998, unreported) at 7-8 (Mason P).

85. Contracts Review Act 1980 (NSW) s 7(1).

86. Contracts Review Act 1980 (NSW) s 9(1).

87. Contracts Review Act 1980 (NSW) s 9(2).

88. Contracts Review Act 1980 (NSW) s 9(2)(a).

89. Contracts Review Act 1980 (NSW) s 9(2)(f).

90. Contracts Review Act 1980 (NSW) s 9(2)(h).

91. Contracts Review Act 1980 (NSW) s 9(2)(j).

92. (1997) 41 NSWLR 482.

93. Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 at 484.

94. See Contracts Review Act 1980 (NSW) s 9(2)(d).

95. This was different to the relief granted at first instance which was to relieve the Tongs of all liability under the mortgage.

96. See also Australian Securities and Investments Commission Act 1989 (Cth) s 12CB which deals with conduct in relation to financial services. “Financial services” does not appear to include contracts of guarantee: See Australian Securities and Investments Commission Act 1989 (Cth) s 12BA(1). Section 51AB of the Trade Practices Act 1974 (Cth) was renumbered in 1992 having been originally s 52A: see K E Lindgren, “The Fair Trading and Consumer Protection Provisions” The Trade Practices Act – Its Impact in the First 25 Years (University of Sydney, Faculty of Law, Continuing Legal Education, 1999) at 11-12.

97. J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 32-33.

98. Trade Practices Act 1974 (Cth) s 51AB(5).

99. Both the Federal Court and Supreme Court have held that regard must be had to the purpose of the transaction as well as its nature: Begbie v State Bank of New South Wales Ltd [1994] ATPR 41-288 at para 55; and State Bank of New South Wales Ltd v Sullivan [1999] NSWSC 596 at para 239-248.

100. For example, situations like that in Amadio: see M Sneddon, “Banking and Finance: Guarantees and the Trade Practices Act, Section 51AB” (1994) 22 Australian Business Law Review 368 at 369.

101. Trade Practices Act 1974 (Cth) s 51AC(7) and (8).

102. Trade Practices Act 1974 (Cth) s 51AC(9) and (10).

103. However, because the price of the loan is taken to include the “capital value of the loan” (Trade Practices Act 1974 (Cth) s 51AC(11)(e)) it has been suggested that the capital value must be added to interest and other charges: A J Duggan, A Financier’s Guide to the Law of Guarantee in Australia (4th edition, Australian Finance Conference and Australian Equipment Lessors Association, 1998) at 36. This would mean that many loans between $500,000 and $1,000,000 will be excluded once interest and other charges have been added.

104. J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 33.

105. Trade Practices Act 1974 (Cth) s 51AC(3).

106. The first action brought by the Australian Competition and Consumer Commission in relation to an aspect of s 51AC was concluded in August 1999: Australian Competition and Consumer Commission v Leelee Pty Ltd (Federal Court of Australia, No S7/1999, Mansfield J, 20 August 1999, unreported). See also Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd [1999] FCA 1842.

107. See also Australian Securities and Investments Commission Act 1989 (Cth) s 12CA which deals with conduct in relation to financial services. “Financial services” does not appear to include contracts of guarantee: See Australian Securities and Investments Commission Act 1989 (Cth) s 12BA(1).

108. That is, injunctions under s 80 and other orders the court considers appropriate, including compensation, under s 87.

109. J Phillips, “Grounds for Avoiding Guarantees” in Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 32. See also W Pengilley, “Unconscionability: Are the Litigation Floodgates Opening in Relation to Commercial Transactions?” (1997) 13 Australia and New Zealand Trade Practices Law Bulletin 11.

110. Fair Trading Act 1987 (NSW) s 43(5).

111. Section 52 does not relate to the “supply, or possible supply, of services that are financial services”: Trade Practices Act 1974 (Cth) s 51AF.

112. Fair Trading Act 1987 (NSW) s 42(1) is in almost identical terms, except that it extends to individuals as well as corporations.

113. See, for example, Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 467.

114. A J Duggan, A Financier’s Guide to the Law of Guarantee in Australia (4th edition, Australian Finance Conference and Australian Equipment Lessors Association, 1998) at 23. See also J Phillips, B Horrigan and B Collier, Guarantees and Solicitors’ Certificates: Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology, Centre for Commercial and Property Law, 1999) at 29.

115. See Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 and 40-41 (Gummow J).

116. The representations need not have induced the guarantor for the purposes of the Australian Competition and Consumer Commission applying for an injunction under Trade Practices Act 1974 (Cth) s 80.

117. Trade Practices Act 1974 (Cth) s 82; Fair Trading Act 1987 (NSW) s 68.

118. Trade Practices Act 1974 (Cth) s 87; Fair Trading Act 1987 (NSW) s 50.

119. (1988) 100 ALR 227.

120. In accordance with Trade Practices Act 1974 (Cth) s 87(2)(a).

121. Under the Trade Practices Act 1974 (Cth) s 80; and Fair Trading Act 1987 (NSW) s 65.

122. Under Trade Practices Act 1974 (Cth) Pt 4A and s 52; and Fair Trading Act 1987 (NSW) s 42 and 43.

123. Trade Practices Act 1974 (Cth) s 80(1); and Fair Trading Act 1987 (NSW) s 65(1).

124. See, for example, Gregg v Tasmanian Trustees Ltd (1997) 73 FCR 91 at 127-128.

125. Trade Practices Act 1974 (Cth) s 82; and Fair Trading Act 1987 (NSW) s 68.

126. Trade Practices Act 1974 (Cth) s 52; and Fair Trading Act 1987 (NSW) s 42.

127. Trade Practices Act 1974 (Cth) s 51AC.

128. Under Trade Practices Act 1974 (Cth) s 51AA and s 51AB.

129. Trade Practices Act 1974 (Cth) s 87(2)(d); and Fair Trading Act 1987 (NSW) s 72(5)(e). See Australian Law Reform Commission, Compliance with the Trade Practices Act 1974 (Report 68, 1994) at para 7.28.

130. Under Trade Practices Act 1974 (Cth) s 87; and Fair Trading Act 1987 (NSW) s 72.

131. Trade Practices Act 1974 (Cth) s 87(2)(a).

132. Trade Practices Act 1974 (Cth) s 87(2)(b).

133. Trade Practices Act 1974 (Cth) s 87(2)(ba).

134. Trade Practices Act 1974 (Cth) s 87(2)(c).

135. Trade Practices Act 1974 (Cth) s 87(2)(d).

136. Under s 80 of the Trade Practices Act 1974 (Cth): Trade Practices Act 1974 (Cth) s 87(1) and s 87(1A). Under the NSW provisions the Director-General of the Department of Fair Trading stands in the place of the Australian Competition and Consumer Commission.

137. (1997) 73 FCR 91.

138. See, generally, A J Duggan and E V Lanyon, Consumer Credit Law (Butterworths, Sydney, 1999).

139. Consumer Credit (Queensland) Act 1994 (Qld).

140. Consumer Credit Act 1995 (ACT); Consumer Credit (Northern Territory) Act 1995 (NT); Consumer Credit (South Australia) Act 1995 (SA); Consumer Credit (Victoria) Act 1995 (Vic); and Consumer Credit (Tasmania) Act 1996 (Tas). Tasmania requires a proclamation approved by both houses of Parliament for amendments to the Queensland Code to take effect in Tasmania: Consumer Credit (Tasmania) Act 1996 (Tas) s 5.

141. Consumer Credit (Western Australia) Act 1996 (WA).

142. Applying the regulations enacted under Part 4 of the Consumer Credit (Queensland) Act 1994 (Qld).

143. Consumer Credit (New South Wales) Code s 9(1)(b).

144. Consumer Credit (New South Wales) Code s 9(1)(a).

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

146. In New South Wales this includes the Fair Trading Tribunal: Consumer Credit (New South Wales) Act 1995 (NSW) s 8(1). See also Fair Trading Tribunal Act 1998 (NSW) Sch 5 cl 6.

147. Consumer Credit (New South Wales) Code s 70(1).

148. Consumer Credit (New South Wales) Code s 70(7).

149. Contracts Review Act 1980 (NSW) s 9(2).

150. Consumer Credit (New South Wales) Code s 70(2)(o).

151. Consumer Credit (New South Wales) Code s 71.

152. Consumer Credit (New South Wales) Code s 50(1).

153. Consumer Credit (New South Wales) Code s 51(1)(a).

154. Consumer Credit (New South Wales) Code s 50(3). The Consumer Credit (New South Wales) Regulations (NSW) s 20 requires that a guarantee document include a warning the form of which is specified in Form 4 of the Regulations.

155. Consumer Credit (New South Wales) Code s 54(2).

156. Consumer Credit (New South Wales) Code s 43(2).

157. Consumer Credit (New South Wales) Code s 55(1).

158. Defined in s 4(1) of the Farm Debt Mediation Act 1994 (NSW).

159. Farm Debt Mediation Act 1994 (NSW) s 8(1).

160. Farm Debt Mediation Act 1994 (NSW) s 9(1).

161. Farm Debt Mediation Act 1994 (NSW) s 11(1).

162. Farm Debt Mediation Act 1994 (NSW) s 7(1).

163. J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1529.

164. The 1999 Regulations replace the Unfair Terms in Consumer Contracts Regulations 1994 (UK).

165. Unfair Terms in Consumer Contracts Regulations 1999 (UK) reg 5(1).

166. Unfair Terms in Consumer Contracts Regulations 1999 (UK) Sch 2 cl 1(i).

167. Unfair Terms in Consumer Contracts Regulations 1999 (UK) reg 12.

168. In addition to requirements under the Consumer Credit Act 1974 (UK): United Kingdom, Office of Fair Trading, Non-Status Lending: Guidelines for Lenders and Brokers (OFT 192, revised November 1997) at 4.

169. See, for example, Minister for Consumer Affairs v W W Vallack Real Estate Pty Ltd (1986) ASC 55-478.

170. Consumer Credit (New South Wales) Code s 162(2). See A J Duggan and E V Lanyon, Consumer Credit Law (Butterworths, Sydney, 1999) at para 14.2.1-14.2.3.

171. Under Trade Practices Act 1974 (Cth) s 80 and Fair Trading Act 1987 (NSW) s 65. See J W Carter and D J Harland, Contract Law in Australia (3rd edition, Butterworths, Sydney, 1996) at para 1530.