While Chapter 2 was concerned with the law that applies when there is a dispute about a guarantee, this chapter focusses on some of the day-to-day practice issues that affect the use of guarantees. First, however, it looks at the social context in which guarantees are used.

The social context: “relationship debt” (para 3.2-3.7) Unlike most commercial decisions, the decision to be a guarantor is often not made out of financial self-interest, but for other non-commercial reasons. Many guarantors get no financial benefit at all from the loan. Recently there has been considerable attention given to “relationship debt” and to the social and economic context in which this occurs. In a 1999 report, the Australian Banking Industry Ombudsman described “relationship debt” as “a shorthand expression for the assumption by one person of responsibility for a debt owed by another person to whom they are related in some way”.

There is a clear contrast between the emotional underpinnings of many transactions secured by third parties and the imperatives of commercial stability and certainty. Lenders are engaging in a commercial profit-based enterprise and they need to be able to operate within a defined legal and commercial framework. Yet the legal and commercial framework – the common law, statutory law and the voluntary industry codes of practice – reveals a lack of clarity and certainty in relation to guarantees. (para 3.8)

Advice and information issues (para 3.16-3.47) There is only a limited legal obligation on lenders to disclose information to guarantors before they sign guarantees. It is now relatively common for people to be urged to obtain “independent legal advice”, although there is no formal legal requirement that they do so. Less commonly, it is sometimes suggested that people also obtain independent financial advice. The New South Wales rules about the provision of legal advice changed early in 2000 following concerns by the Law Society that lenders have tended to use independent legal advice as a means of shifting responsibility from themselves to solicitors.

The “fine print” (para 3.48-3.52) There are also a number of practical issues that surround the signing of a guarantee, such as who is present when the guarantee is being signed, the location where it is signed, and the readability of the documents. Guarantees are sometimes hard to read and can be written in very complex language. There are only limited situations (mostly to do with consumer credit lending) where the law requires that they be in clear, simple English. This may cause particular difficulty for people whose first language is not English.

“All moneys” clauses (para 3.53-3.57) Sometimes called “all accounts” clauses, these have the potential to create an open-ended liability for a guarantor who is, in effect, agreeing to secure any future loans that the borrower may enter into. There is nothing to prevent the use of such clauses at common law, although the courts sometimes limit their operation in disputed cases.

Ongoing information (para 3.60-3.69) At common law, there is no general obligation on a lender to supply a guarantor with ongoing information about the status of a loan, such as whether the repayments are being regularly made by the borrower. In these circumstances, guarantors have no way of knowing how vulnerable they are, unless they are being kept informed by the person whose loan they have guaranteed.

Enforcement (para 3.70-3.74) A lender need not inform the guarantor that the borrower has defaulted under the principal loan before commencing proceedings to enforce the guarantee. And, a lender does not have to sue the borrower first, unless the contract expressly says so. Some informal dispute resolution processes have been established by the industry groups as part of their codes of practice, for example, the scheme administered by the Australian Banking Industry Ombudsman.

BACKGROUND TO ENTERING A GUARANTEE

3.2 As noted in Chapter 1, there has been increasing attention paid to the phenomenon of lenders securing loans by obtaining guarantees from third parties who may not otherwise be involved in, or receive any benefit from, the loan transactions. These third party guarantors are often spouses, close family members or friends. Unlike most commercial decisions, the decision to be a guarantor is often not made out of financial self interest, but instead may be made for other, non-commercial reasons. Where a guarantee is called upon, there can be serious consequences such as the loss of the guarantor’s home. Guarantors who are not directly involved in the transaction for which they provide security often have much to lose and little, if anything, to gain from their action. Why would a third party undertake so onerous an obligation as a guarantee? To answer this question requires some attention to the social and economic context in which this practice continues to operate.

The role of relationships

3.3 Several studies and published reports have illustrated that a close emotional relationship (usually, but not necessarily, a familial relationship) between a guarantor and borrower is pivotal to why people enter third party guarantees.¹ The nature of the relationship, rather than an appreciation of the responsibility for the debt, is often the reason for the guarantor accepting liability.²

3.4 For many guarantors, often women³ (particularly wives) or parents, the sole or most significant “benefit” gained from entering a guarantee may be an emotional one – the maintenance of harmonious relations with the borrower.⁴ If the husband, partner or son cannot or will not repay the debt, the debt is often “transmitted” to the guarantor, notwithstanding in many cases separation, divorce, bankruptcy (or a combination of these).⁵ Various terms have been used to describe such results, most commonly “sexually transmitted debt”, “emotionally transmitted debt”⁶ and, more recently, “relationship debt”.⁷ In a recent report by the Australian Banking Industry Ombudsman Limited (“ABIO”), relationship debt was described as “a shorthand expression for the assumption by one person of responsibility for a debt owed by another person to whom they are related in some way”.⁸

3.5 An in-depth research study of “surety wives” undertaken at the Centre for Socio-Legal Studies, University of Oxford (the “Fehlberg study”), for which guarantors, borrowers, lenders and lawyers were interviewed, observed that the typical scenario in the case law is that of a wife who:

under some emotional pressure or misunderstanding caused by her husband, signs a charge over the family home in order to provide financial assistance to a business, usually conducted by her husband, but often providing the family’s income.⁹

3.7 A research study by the Consumer Advocacy and Financial Counselling Association of Victoria (the “Singh study”)¹⁵ was concerned with how women inform themselves in the family business. This study observed that in Australia in the mid-1990s nearly half a million women ran small businesses with their husbands and that women were nearly always partners or directors in the family business.¹⁶ Some central observations emerging from this study and other recent studies are:

• Approximately four out of ten women in a family business (41.3%) believe that a woman can be informed but may not have the power to make decisions in the family business.¹⁷ The husband’s often greater knowledge and skill in the business, as well as the wife’s fear of placing the marriage or the relationship at risk,¹⁸ is an important barrier in preventing the wife converting information into the power to decide.¹⁹ Another factor is the division of labour in the home, especially when the wife assumes child-rearing and home-making responsibilities, with the husband becoming the more regular income earner.²⁰
• Women have greater decision-making power in relation to the household budget. They do not manage the money in the family business to the same extent.²¹
• Earning the money gives a family member “ownership” of that money, despite the marriage.²² Consequently, women who consider “they own the money seek more comprehensive information about the family business than the women who feel that the business is their husband’s, and that he has first claim to the money he ‘earns’”.²³
• The issue of whether a guarantee is binding or not is often precipitated by difficult family circumstances, either on separation or divorce and consequential property settlement, or on the failure of the business. The reported cases show these circumstances often occur around the same time.²⁴ Particular difficulties can be caused by the interaction of guarantee and debt problems with proceedings in the Family Court of Australia arising out of the breakdown of a relationship. As the Fehlberg study found:
  
  Divorced and separated wives were especially disadvantaged when the on-going contractual obligation involved in providing a security outlasted the intimate relationship between debtor and surety. Terminating liability to the lender was far less negotiable than terminating the surety’s relationship with the debtor.²⁵
This is a matter to which the ABIO drew attention in its recent report on relationship debt.²⁶

3.8 A large gap can exist between the emotional underpinnings of many loans secured by third parties and the imperatives of commercial stability and certainty. Lenders are generally engaged in a commercial profit-based enterprise and need to be able to operate within a defined legal and commercial framework. Therefore, lenders need to ensure that they advance money on terms that are sufficient to ensure that the loan is repaid. Those terms may include ensuring that the loan is secured and, if the borrower has no security available, the lender may seek some form of security from a third party. Lenders operating in the sphere of commercial practice and commercial risk may either be unaware of the relationship between the borrower and the guarantor or may not consider the “private” aspects of that relationship relevant to the transaction. Yet, as noted above, a significant proportion of these loan arrangements secured by third parties take place within familial relationships quite distinct from the archetypal arms-length contractual arrangement. This is where the issue requires a fine balance between what the Australian Law Reform Commission in its report Equality Before the Law described as the “competing claims for justice: on the one hand, the protection of the commercial interests of lenders and their shareholders against, on the other hand, the injustice that would be suffered by the woman”.²⁷ It is clear that all those involved – borrowers, lenders and guarantors – would benefit from more certainty in both the law and practice surrounding the provision of third party guarantees.

SOURCES OF LAW AND PRACTICE

Consumer Credit Code

3.9 As Chapter 2 explained, the Consumer Credit (New South Wales) Code (the “Credit Code”) and its Regulations²⁸ (the “Credit Code Regulations”) provide a range of legislative protections for guarantors in consumer credit situations. The Credit Code does not apply to the common situation of guarantees involving small business debts, including personal guarantees of loans to, for example, a family company, where husband and wife are the secretary/directors.²⁹

3.10 As noted in Chapter 1, the regulatory framework has, with minor exceptions,³⁰ maintained the distinction between “consumer” transactions on the one hand, and those involving business (including small business). However, a number of reviews by law reform and related bodies have drawn attention to the limited protection provided both by legislation and industry codes of practice to guarantors of small business loans.³¹

Industry practice

3.11 In November 1993 the Australian Bankers Association released its Code of Banking Practice.³² The Code is not law, but rather a self-regulatory voluntary code promoting “good banking practice”³³ for the Association’s member banks. While aspects of the Code detail processes to be followed in relation to guarantees, the Code is generally concerned with the Bank/Customer relationship.³⁴ Unlike the borrower, the guarantor may not be a customer of the bank.³⁵

3.12 The Code of Banking Practice was followed in 1994 by the adoption of similar codes of industry practice for building societies and credit unions (the three codes are collectively referred to as “the codes of practice”).³⁶ These are also voluntary codes and are binding on a member building society or credit union once it has agreed to be bound in the same way as banks under their code of practice.³⁷ Finance companies have yet to adopt such a code of practice.

3.13 Where there is a conflict between the Credit Code and the codes of practice, the Credit Code (being legislation) prevails.³⁸

3.14 However, like the Credit Code, the codes of practice are generally limited to consumer situations. The codes of practice apply to guarantees signed by individuals (not companies) who secure the liabilities of a borrower.³⁹ The borrower cannot be a (public) corporation,⁴⁰ or a corporation where the guarantor is a director or secretary,⁴¹ or a trustee of a trust (including a discretionary trust) where the guarantor is a beneficiary.⁴² Nor will the codes apply where the borrower is a partner,⁴³ co-owner, agent, consultant or associate of the guarantor at this time.⁴⁴

3.15 Thus, the provisions in the codes of practice covering guarantors do not generally apply to the very common situation of a family business, where the wife is both guarantor and secretary/director of the borrowing family company, or is both guarantor and a beneficiary of the discretionary family trust for which a loan is made.⁴⁵

PROCESS OF ENTERING A GUARANTEE

Provision of information about the principal loan

3.16 Prior to signing a guarantee, what information and advice must a lender provide to the prospective guarantor about the principal loan with the borrower?

Common law

3.17 Generally, at common law, the lender is not required to disclose information to the prospective guarantor about the principal loan, except where the transaction has what the case law describes as “unusual features”.⁴⁶ The main rationale provided for this rule is a potential breach of the duty of confidentiality owed by the lender to the borrower (who, unlike the guarantor, is the lender’s customer).⁴⁷ The notion of “unusual facts” can, as the Martin Committee pointed out, leave a lender in a situation where it has to balance between deciding whether to disclose what may be an “unusual fact” to the prospective guarantor as against maintaining its duty of confidentiality to its customer, the borrower.⁴⁸

3.18 A number of government reports⁴⁹ and research studies⁵⁰ have observed that the common law approach is ill founded from both the lender’s and guarantor’s perspectives on two separate counts. First, there is no basis for common law assumptions about a prospective guarantor’s independence, nor about their ability to inform themselves of the borrower’s financial position. Secondly, there is no guidance provided as to what facts are sufficiently “unusual” so as to require their disclosure. In day-to-day commercial discourse, how does a lender know when it has come across an “unusual fact” which consequently places a legal obligation on it to notify the potential guarantor?

3.19 The following outlines the current legislative requirements as to the information which a lender must make known about the borrower to a prospective guarantor before he or she signs the guarantee. Of course, these requirements apply only to consumer contracts and do not apply to guarantees of small business loans. The voluntary codes of practice are also referred to where relevant and are similarly limited to consumer contracts.

Consumer Credit Code

3.20 Section 51 of the Credit Code requires a lender (called a “credit provider”⁵¹ ) to give a prospective guarantor (of a consumer loan) a copy of the credit contract⁵² or proposed contract and a prescribed information statement⁵³ explaining the rights and obligations of a guarantor. Failure to provide a copy of the credit contract renders the guarantee unenforceable.⁵⁴

3.21 There is also a requirement for a boxed warning notice to appear immediately above the place on the guarantee where the guarantor is to sign.⁵⁵ The boxed warning notice includes a statement that before the guarantor signs the guarantee he or she should obtain independent legal advice and consider obtaining independent financial advice.⁵⁶ Failure to include the boxed warning notice renders the guarantee unenforceable.⁵⁷ Within 14 days of signing the guarantee, a copy of the credit contract⁵⁸ must be provided to the guarantor by the lender (if a copy of the credit contract has not been previously given to the guarantor).⁵⁹

3.22 These provisions (as for the Credit Code generally) apply only to consumer credit contracts.

Industry codes of practice

3.23 The codes of practice require a bank, building society or credit union that has adopted the relevant code to provide a prospective guarantor with a written warning about the liabilities of a guarantor.⁶⁰ However, they do not require the boxed warning notice and a copy of the prescribed information statement.

3.24 The codes of practice also require a copy or summary⁶¹ of the primary loan contract to be provided to the prospective guarantor. The Credit Union and Building Society Codes do not require the borrower’s consent to the handing over of the principal loan contract to the prospective guarantor.⁶² However, the Code of Banking Practice provides that a copy or summary of the principal loan contract may only be provided to the prospective guarantor with the consent of the borrower.⁶³ In practice, this may mean that some guarantors, especially people guaranteeing business loans who are subject to familial or relationship pressure, sign guarantees without ever having seen the principal loan contract.

3.25 Although finance companies commonly use guarantees, they do not have an industry code of practice. They are not subject to disclosure provisions similar to those contained in the codes of practice discussed above.⁶⁴ The Expert Group on Family Financial Vulnerability recommended that finance companies develop a code of conduct containing provisions relating to, among other things, the disclosure of information,⁶⁵ but to date this has not occurred.

Types of information to be provided

3.26 There have been a number of proposals concerning the type of information that should be provided to guarantors by a lender. The Expert Group on Family Financial Vulnerability recommended that, rather than a prescriptive list of matters that must be disclosed or provided, the needs of the particular guarantor should determine what information should be provided in any given situation. This is because the circumstances in which guarantees are provided vary enormously.⁶⁶ The types of information that might be provided include relevant information held by the financier, such as the loan application or offer, and Credit Reference Association of Australia reports. In the case of personal loans, it would include information such as the borrower’s statements of assets and liabilities, and income and expenditure while for business loans, corporate balance sheets, profit and loss statements and cash flow projections might be relevant.⁶⁷ In its report on Multiculturalism, the Australian Law Reform Commission suggested that the lender should be obliged to give the guarantor the financial information on which it has based its assessment of the risk of default by the borrower.⁶⁸

3.27 However, existing legislation does not extend as far as these recommendations in regard to the information to be provided to the prospective guarantor by the lender about the credit contract.

Unjust circumstances surrounding the signing

of a guarantee

3.28 There are a number of grounds, both common law and statutory, upon which guarantees that have been entered into in unjust circumstances may be set aside.⁶⁹ These unfair circumstances can arise from a wide variety of situations around the signing of the guarantee, including, who is present when the guarantee is signed by the guarantor, inequality of bargaining power prior to the guarantee being signed, and the location where the guarantee is signed.

3.29 Chapter 2 provides details of many of these unfair circumstances as elucidated by the common law. It also provides details of the Contracts Review Act 1980 (NSW), the Consumer Credit (New South Wales) Code, the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW). All four statutes provide non-exhaustive lists of the matters to be taken into account in determining whether the situation is unfair or unconscionable.⁷⁰ Generally speaking, these include the following considerations:

• inequality of bargaining power;⁷¹
• difficult or harsh terms;⁷²
• intelligibility of the contractual documents;⁷³
• unfair tactics or pressure exerted by another person;⁷⁴
• comparable conduct in similar contracts or transactions;⁷⁵
• standard form contracts, or whether the parties negotiated the provisions of the contract⁷⁶ or were willing to do so;⁷⁷
• acting in good faith;⁷⁸
• ability of guarantor to protect his or her own interests;⁷⁹
• relative financial circumstances, educational background, literacy;⁸⁰
• whether or not independent legal advice or other expert advice was obtained;⁸¹
• accurate explanation of the legal and practical effect of the contract;⁸²
• whether the provisions of the transaction are understood;⁸³
• terms of comparable transactions, including rates of interest or charges.⁸⁴

3.30 Two of the matters that appear in these statutory lists are considered in further detail. These are the circumstances surrounding the signing of the guarantee (and in particular, the location where the guarantee is signed) and the effect of independent pre-contractual advice (legal and/or financial) on the nature and effect of the guarantee.

The place where a guarantee is signed

3.31 Although the legislation does not specify where a guarantee is to be signed, it seems clear from judicial decisions that it is not considered appropriate for lenders to leave it to the borrower to have the documentation executed by a related prospective guarantor at their home.⁸⁵

3.32 Following a number of cases where guarantees were set aside after lenders left it to the borrower/husband to arrange for the guarantor/wife’s signature, this practice is said to have become rarer. Instead, the wife is more likely to attend the lender’s office to sign the guarantee. The lender would then explain the legal documents to her in general terms and most likely recommend that she seek independent legal advice.⁸⁶ The guarantee could then be signed at the solicitor’s office or alternatively, at the lender’s office after the solicitor’s advice has been received. The Expert Group on Family Financial Vulnerability proposed that legislation should require a financier to take all reasonable steps to advise a potential guarantor directly to sign a guarantee in the absence of the borrower.⁸⁷

3.33 In Beneficial Finance Corporation Ltd v Comer⁸⁸ Justice Rogers, in considering an application under the Contracts Review Act 1980 (NSW) to set aside a guarantee signed by Mrs Comer for a loan relating to her husband’s business, noted that the mortgage documents were signed in the office of the finance company’s solicitor. Her evidence was that she had not understood the nature of the documents she was signing, there had been no discussions between the finance company and herself, and no consideration was given to her financial circumstances. Her sole involvement was as guarantor because the two properties involved were held in the joint names of her and her husband. Justice Rogers commented:

Mrs Comer says that whatever [the solicitor] may have said, or may not have said, she was completely distracted from paying any attention to what was being said by the activities of her son … who at that stage was … about two and a half years old. Like any little boy of that age he was doing things which required the attention of his mother to ensure that he did not damage or spoil any of the articles of furniture or documents in [the] office.⁸⁹

3.34 In recent years, it has become more common for lending institutions to recommend that people who agree to provide third party guarantees should obtain independent legal advice before doing so. While such advice is not legally required, at common law the fact that independent legal advice has been obtained can be used by lenders to defend themselves against allegations of unconscionable conduct.⁹⁰ Independent legal advice can also assist in countering claims that the guarantee was affected by undue influence.⁹¹ Consequently, banks and other lenders often advise potential third party guarantors to confirm that such advice has been sought and provided.

3.35 The Credit Code requires that a boxed warning notice appear on the page of the guarantee immediately above where the guarantor is to sign, urging the guarantor to obtain independent legal advice and also to consider obtaining independent financial advice.⁹² Under the Credit Code and the Contracts Review Act 1980 (NSW), in deciding whether a guarantee is unjust, one of the statutory factors to which the court is directed is whether independent legal advice was received by the person seeking relief from the guarantee.⁹³ If the guarantor has received independent legal advice, it is less likely that he or she will be able to rely successfully upon some statutory defences. However, the Credit Code does not apply to guarantees over small business debts. The Contracts Review Act 1980 (NSW) excludes corporate guarantors, but probably covers a guarantee by a private individual of a company’s debts.⁹⁴

3.36 The codes of practice all require that a lender recommend that a prospective guarantor obtain independent legal advice.⁹⁵ None of the codes of practice specifically refers to independent financial advice, by contrast with the boxed warning required by the Credit Code. It is much less common for financial advice to be recommended or obtained before a guarantee is signed.

3.37 In summary, there is no direct requirement or necessary pre-condition under legislation for independent legal advice (or financial advice) to be obtained before a guarantee can be validly executed. Furthermore, those statutory provisions that require prospective guarantors to be advised to seek independent legal (or financial) advice are, in most cases,⁹⁶ limited to consumer loans and do not extend, for example, to small business loans.

3.38 Although it is obviously a good idea for a prospective guarantor to obtain independent financial and legal advice as to the merits of entering a particular guarantee, in practice, as the case law demonstrates, this has not (at least until recently) tended to be the case, especially in intra-family business lending.

3.39 In its 1992 report on Multiculturalism, the Australian Law Reform Commission observed that many people enter into contracts of guarantee they do not understand while “under family or social pressure and without enough information to make an informed decision.”⁹⁷ It recommended that lenders should be required to inform guarantors as to the reasons why a guarantee is required.⁹⁸ Other reviews and reports have recommended that lenders should be required to advise potential guarantors about the legal nature of guarantees, about the financial risks involved in a guarantee, and that the prospective guarantor should be advised to seek independent advice about these matters.⁹⁹ Other practices that that have been suggested include requiring private meetings between appropriately trained lenders and the prospective guarantors (ie, in the absence of the borrower),¹⁰⁰ providing that prospective guarantors be given a separate copy of the security documentation at least one week before they sign, and requiring that prospective guarantors receive not only independent legal advice, but also independent financial advice.¹⁰¹

3.40 The Fehlberg study found that a number of the respondents to the study thought that the solicitor’s role was to witness the documents, rather than provide advice:

The term ‘independent legal advice’ thus proved a misnomer in the case of the surety sample. Sureties at most received a basic explanation of their legal obligations in an atmosphere which left them feeling intimidated and uncomfortable about reading the complicated legal documentation presented for signature, or asking questions. … The minority of sureties who took matters into their own hands and sought truly independent advice received the only advice that the solicitor could responsibly provide given the solicitor’s lack of information about the business or lack of skills in financial analysis: ‘Don’t sign’.¹⁰²

3.41 A solicitor may be asked to provide a guarantor with a certificate confirming that independent legal advice has been provided.¹⁰³ In New South Wales, when a solicitor has been asked to provide such a certificate to a guarantor, whether or not the Credit Code applies, Rule 45 of the Solicitors’ Practice Rules governs the issuing of such a certificate, and until recently, set out detailed provisions governing the form that such certificates were required to take.¹⁰⁴ These certificates have been the subject of considerable controversy and as a result, the Law Society Council has revised Rule 45 with effect from January 2000. As the Law Society pointed out:

Since 1980, the Law Society has been made aware of an increase in the number of solicitors who have provided independent certificates of explanation of loan documents being joined in proceedings arising out of default on the part of borrowers, mortgagors or guarantors, making them virtual ‘parties of last resort’. In 1998-99 claims on LawCover relating to the provision of such certificates rose to 15 per cent of total claims made during the year.¹⁰⁵

The critical decision of the High Court in Garcia v National Australia Bank Limited ... is that a creditor should either take steps to explain the transaction to the surety or “know” that the surety has received “competent independent and disinterested” advice from a third party to protect its right to enforce the transaction.¹⁰⁸

3.43 A number of matters upon which a solicitor is required to advise a proposed signatory are set out in Rule 45. These include:

• the legal consequences of a guarantor’s failure to remedy a borrower’s default;¹⁰⁹
• whether the guarantor’s liability is limited to a specific amount or not;¹¹⁰ and
• any additional obligations, rights and remedies of the guarantor if the Consumer Credit Code applies.¹¹¹

3.44 A guarantor is required to sign a statutory declaration (Schedule 2) to the effect that he or she has signed the relevant documents after receiving independent legal advice. In addition, under Schedule 4 Part 2, a proposed guarantor must also declare that the advice covered a number of matters set out there. These include that in the event of any failure by the borrower to comply with the terms of the loan, the lender can sue the guarantor personally. Furthermore the lender can take possession of any property secured and, if that property is sold but the proceeds are insufficient to cover the debt, the guarantor can be sued for the deficit. The guarantor must also certify that he or she understands a number of other matters, including that the lender can pursue its remedies against the guarantor even if it has not done so against the borrower, and that the guarantor understands that the solicitor does not profess any qualification to give financial advice.

3.45 While the general tenor of the rule is that a solicitor should not act for more than one party in such cases, there is a recognition of the difficulties this can cause, particularly in rural and regional areas.¹¹³ Schedule 5 provides for the written consent of a borrower/guarantor to a solicitor advising more than one party where the borrower/guarantor acknowledge that the solicitor has explained the circumstances and the potential conflict of interest and the person being advised has agreed.¹¹⁴

The value of independent legal advice

3.46 As noted in the introduction to this chapter, a common impetus for people signing guarantees can be the existence of a relationship of some kind of emotional interdependence rather than an arms-length business decision. This is particularly the case where people provide guarantees to other family members. Given this background, doubt has been cast on the effectiveness of independent legal advice in protecting guarantors. For example, it has been suggested that independent advice in these circumstances might amount to no more than a “futile endeavour”¹¹⁵ and may be of benefit only to lenders in terms of the certainty it provides to them in transactions with guarantors.¹¹⁶ However, some solicitors believe that independent legal advice may serve an important function for prospective guarantors in tenuous relationships.¹¹⁷

3.47 In summary, independent legal advice is primarily an educative process to enhance a guarantor’s freedom to make informed decisions in relation to whether to provide a guarantee, and to educate the guarantor about the nature, obligations and consequences of signing a guarantee. This would appear especially valuable for potential guarantors of loans to “redeem” a failing family business. The process of consulting a solicitor and being required to attest to a clear understanding of the consequences of the transaction can also serve as a “speed bump” in slowing down the rush to get a guarantee signed. This then gives the parties an opportunity for reflection. However, the case law and research studies demonstrate that independent legal advice does not necessarily prevent people from entering high-risk guarantees, often for emotional reasons, particularly family pressure.

THE GUARANTEE DOCUMENT

Legibility and plain English

3.48 Contract documents securing loans, such as guarantees and mortgages, are sometimes hard to read and can be written in complex language with “fine print”. This has been the subject of comment in a number of judgments. For example, Justice Sully in Commonwealth Bank of Australia v Gough¹¹⁸ commented on the contract signed by Mrs Gough as follows:

I am satisfied that the mortgage is cumbersome in form and unintelligible to any person who is not a trained lawyer. Indeed, I would not be surprised to find many a trained lawyer unable to come to grips easily with the convoluted language of portions of the mortgage documents.¹¹⁹

The mortgage she executed is expressed in characteristically complex, convoluted, and legalistic language. By way of example, the first clause or covenant runs to over six hundred words and is entirely bereft of any form of punctuation. … The mortgage contains 41 covenants which extend over 5 pages of cramped printing. The introductory words which are to be found on page 1 of the mortgage, are in these terms: “In consideration of all or any loans advances credits or banking accommodation whether made created or given on the signing hereof or that may hereafter be made created or given in its discretion by the Bank to for or on account of the Mortgagor and/or to for or on account of Stenace Pty Ltd ... (hereinafter referred to as ‘the Customer’) or at the request of either the Mortgagor or the Customer by any means whatsoever and/or for forbearance on the part of the Bank to immediately demand and sue for payment of any moneys now owing by the Mortgagor and/or the Customer to the Bank and/or for other valuable consideration moving from the Bank to the Mortgagor and/or the Customer (as the Mortgagor doth hereby admit) and for the consideration aforesaid the Mortgagor hereby covenants and agrees with the Bank in manner hereafter appearing:” Then follows the 41 covenants.

... Had the Bank set out to create a document which was intended to achieve a high degree of confusion in the mind of the ordinary but intelligent lay reader, and to be largely incomprehensible to most members of the public, it has achieved that objective.¹²⁰

3.50 Not only are the provisions in contracts of guarantee sometimes difficult to understand, but they may cause considerable difficulty for non-English speaking people as many technical legal terms may have no counterpart in other languages and will therefore be very difficult to translate.¹²¹

3.51 The Credit Code requires that terms in a guarantee must be easily legible with a print or typeface of at least 10 points¹²² and that the guarantee must be clearly expressed.¹²³ If the terms are not expressed as the Credit Code requires, a Court may prevent the lender from using terms that are the same or similar to the offending provision in future.¹²⁴

3.52 More generally, various statutes allow a Court when determining whether a guarantee is unjust or unconscionable, to take into account factors including the objective intelligibility of the language in which the document is expressed¹²⁵ or the ability of a person to understand the document.¹²⁶

“All moneys” clauses

3.53 A common term in a contract of guarantee is an “all moneys” or “all accounts” clause. These clauses extend a guarantor’s liability to secure future credit contracts between the lender and the borrower. These clauses are considered contentious because they create an open-ended liability for the guarantor.

3.54 The common law does not prevent the use of such clauses in guarantees or mortgages, although courts will limit their operation in some cases. For example, in Australian and New Zealand Banking Group Ltd v Volmensky¹²⁷ the Bank, relying on an all moneys clause, claimed from Mrs Volmensky $272,500 plus interest accruing at $566 per day in relation to debts incurred for her husband’s business. However, it was found that the mortgage was intended to serve a specific purpose, namely, the original loan of a total of $60,000 and that “nothing else was in contemplation.” The judge confined the operation of the mortgage to the $60,000 originally envisaged.

3.55 The Credit Code permits guarantees to extend to future credit contracts providing certain procedures are complied with. In particular, a lender must give the guarantor a copy of the future credit contract and obtain the written acceptance of the guarantor to any extension of the guarantee.¹²⁸

3.56 In regard to the industry codes of practice, the Code of Banking Practice proscribes “all moneys” provisions (at least to the extent that it applies);¹²⁹ while the Building Society¹³⁰ and Credit Union¹³¹ Codes permit certain extensions of guarantees to future credit contracts if specific procedures are followed.

3.57 In 1991 the Martin Committee Enquiry recommended that the use of unlimited guarantees no longer be permitted.¹³²

LATER OPERATION OF A GUARANTEE

3.58 While much emphasis has been given to the provision of pre-contractual information to potential guarantors, including in the case law, there is less discussion of the rights and ongoing information needs of guarantors once a guarantee has been signed.

3.59 Two examples of situations where a guarantor’s obligations might significantly change are:

• the guarantee may enable the borrower to access monetary advances beyond the original sum drawn. The guarantor may be unaware that the original debt has increased thereby increasing his/her possible debt obligation; and
• the guarantor’s risk may be increased if the borrower’s initial security decreases in value – that is, the borrower may sell his/her home for a lesser value than originally agreed.¹³³

Ongoing advice and information

3.60 At common law there appears to be no general obligation on the lender to supply the guarantor with ongoing information about the loan to the borrower; for example, whether loan repayments are being regularly made.¹³⁴

Consumer Credit Code

3.61 The Credit Code requires a lender to provide, at the request of a guarantor within specified time limits,¹³⁵ in writing or orally,¹³⁶ a statement of the current balance of the borrower’s account, amounts credited or debited, any amounts currently overdue, or any amounts currently payable.¹³⁷ The Credit Code also requires a lender to provide, at the written request of a borrower, mortgagor or guarantor within specified time limits,¹³⁸ a copy of the credit contract, mortgage or guarantee, or any credit-related insurance contract in the lender’s possession, or any notice previously given to the borrower, mortgagor or guarantor under the Code.¹³⁹

Industry practice

3.62 The Code of Banking Practice and Building Society Code state that, subject to the borrower’s consent, a bank or building society (respectively) must send to the guarantor a copy of any formal demand that is sent to the borrower; and on the guarantor’s request, a copy of the latest relevant statements of account provided to the borrower (if any).¹⁴⁰

3.63 The Credit Union Code contains similar requirements but does not specify that it requires the borrower’s consent.¹⁴¹

Unilateral variations to the loan

3.64 At common law, any variation to the principal loan that could be detrimental to the guarantor will discharge the guarantee.¹⁴² However this equitable rule can be overcome if the guarantor consents to the proposed variation,¹⁴³ or if the guarantee explicitly provides that the principal loan can be varied from time to time.¹⁴⁴

Consumer Credit Code

3.65 The Credit Code allows a guarantor, once he or she has signed the guarantee, to withdraw from it (with written notice) at any time before credit is first provided,¹⁴⁵ or after credit has been provided¹⁴⁶ if the credit contract differs in some material respect from the proposed credit contract given to the guarantor before the guarantee was signed.¹⁴⁷

3.66 When a lender varies an agreement with a borrower so as to increase the liabilities of the guarantor,¹⁴⁸ the lender must notify the guarantor in writing and the guarantor will only be liable for the increased liabilities if he or she agrees to the variation in writing.¹⁴⁹

3.67 When the variation is a refinancing, the Credit Code requires the guarantor to enter a new guarantee, unless the original guarantee provides for an extension to any future credit contract (that is, an “all moneys” clause). The guarantor is then only bound if he or she has been given a copy of the future credit contract and has accepted it in writing.¹⁵⁰

Discharging the guarantor from a guarantee

3.68 At common law¹⁵¹ and under the legislation, if the credit contract and guarantee are valid and binding, a guarantor can be discharged from his or her obligations under the guarantee by paying out the total amount of the guaranteed debt plus the costs of recovery.¹⁵² The industry codes of practice have a similar approach.¹⁵³

Consumer Credit Code

3.69 The Credit Code also provides that at the written request of a guarantor, the lender must, within seven days of the request, provide a written statement of the amount required to pay out a credit contract¹⁵⁴ at the date specified and indicate how it is calculated.¹⁵⁵

Enforcement through the courts

3.70 At common law, the lender does not need to inform the guarantor of the borrower’s default under the principal loan before commencing proceedings to enforce the guarantee, unless the contract of guarantee provides otherwise.¹⁵⁶ Furthermore, at common law, the lender does not need to proceed against the borrower first,¹⁵⁷ or make a demand on the guarantor before enforcing the guarantee, unless the contract of guarantee states otherwise.¹⁵⁸

Consumer Credit Code

3.71 Under the Credit Code the lender does not have to provide notice of the borrower’s default to the guarantor before initiating proceedings to enforce the guarantee. However, the lender can only enforce a judgment against a guarantor under the guarantee if:

• a judgment debt against the borrower has remained unsatisfied for 30 days after the lender has made a written demand for payment of the debt;
• the Court has relieved the lender from obtaining a judgment for the debt against the borrower, because recovery is unlikely;
• the lender has tried but cannot locate the borrower; or
• the borrower is insolvent.¹⁵⁹

3.72 Under the codes of practice (and subject to the borrower’s consent in the case of banks and building societies, but not in the case of credit unions) the lender must send to the guarantor a copy of any formal demand that is sent to the borrower.¹⁶⁰

Alternative dispute resolution

3.73 The industry codes of practice provide for internal and external dispute resolution processes for members and their customers.¹⁶¹ Internally, the dispute resolution processes must be accessible and free, and details of the procedure and time frame must be provided with the lender giving reasons for any outcome. All three codes of practice provide for an external and impartial process to hear and deal with any dispute that remains unresolved after the internal process.

3.74 The largest and longest established of these is the Australian Banking Industry Ombudsman (ABIO). The ABIO is an independent mediation, conciliation and investigative body for customer complaints against banks, including small business customers. It was established in 1990, to provide banking customers with a free, external and independent process for resolving disputes. The Ombudsman scheme was extended in mid 1998 to cover complaints about guarantees given over certain loans to small companies.¹⁶²

1. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997); S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995); Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994); and Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996).

2. G McDonald “Women and Credit in the Australian Banking Industry” paper presented at the Women and Credit Conference (Melbourne, 6 March 1991).

3. Most are women: Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 243-244.

4. See for some discussions 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) and B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997). For discussion of “benefit” see para 2.13.

5. Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 240; and B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 10.

6. Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 240 – drawing upon Paula Baron’s coining of that term: see P Baron “The Free Exercise of Her Will: Women and Emotionally Transmitted Debt” (1995) 13 Law in Context 23.

7. Australian Banking Industry Ombudsman Ltd, Report on Relationship Debt (Bulletin No 22, 1999).

8. Australian Banking Industry Ombudsman Ltd, Report on Relationship Debt (Bulletin No 22, 1999) at 2.

9. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 2.

10. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 267.

11. For the added complexities of ethnicity and the experiences of recent immigrants and some Aboriginal communities, see Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at 247.

12. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 9-10 and 271.

13. Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 239; Garcia v National Australia Bank Ltd (1998) 194 CLR 395; Barclays Bank plc v O’Brien [1994] 1 AC 180 at 188 (Lord Browne-Wilkinson).

14. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 9-10. Barclays Bank plc v O’Brien [1994] 1 AC 180 at 188 (Lord Browne-Wilkinson). Equity in owner-occupied housing accounts for more than 50 per cent of total women’s wealth in Australia and New Zealand – notably more than for men: Yann Campbell Hoare Wheeler, Women’s Economic Status: “Equal Worth” – Final Report: Output 4 (Job No 32056, for the Australian Commonwealth/State and New Zealand Standing Committee of Advisers for the Status of Women, 1999) at ch 1; Executive Summary at 27.

15. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995).

16. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 3-4. Note, however, that the Corporations Law (Cth) no longer requires proprietary companies to have two directors which may make some difference to companies established after 1995: see Corporations Law (Cth) s 221(2).

17. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 71.

18. This also raises issues of the need for “trust” in a marriage conflicting with the demands of business information, and cultural assumptions about the appropriate way to behave within relationships: S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 7; B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 283.

19. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 6. See also B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 10. Professors Michael Trebilcock and Steven Elliott show how this fear of endangering the marriage has a significant economic basis, as it is well established that following divorce, women’s standard of living declines, while men’s increases: 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). For Australian data on this phenomenon, see P McDonald (ed), Settling Up: Property and Income Distribution on Divorce in Australia (Prentice Hall/AIFS, 1986); and K Funder, M Harrison and R Weston, Settling Down: Pathways of Parents after Divorce (AIFS, 1993). Trebilcock and Elliott refer to Teachers Health Investments Pty Ltd v Wynne (1996) ASC 56-356 (NSWCA) as an example of a case involving an explicit threat of this nature.

20. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 9. See also Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 244. Work undertaken by the Australian Bureau of Statistics and others shows that women still overwhelmingly carry the burden of work in the home, no matter what their workforce participation status: see Australian Bureau of Statistics, How Australians Use Their Time 1997 (ABS Cat No 4153.0, 1998).

21. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 62; B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 79, 146-147 concurs. As the Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 240 observed, the woman “… may be a silent partner or silent director in a family business or a family company while having no effective control over the business and being excluded from participating in it.”: See also S Singh, Marriage Money: The Social Shaping of Money in Marriage and Banking (Allen & Unwin, Sydney, 1997).

22. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 7.

23. S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) at 7.

24. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 10. Examples from the well known cases include Garcia v National Australia Bank Ltd (1998) 194 CLR 395; Akins v National Australia Bank (1994) 34 NSWLR 155.

25. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 270-271.

26. Australian Banking Industry Ombudsman Ltd, Report on Relationship Debt (Bulletin No 22, 1999) at 16-17.

27. Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 244.

28. Consumer Credit (New South Wales) Regulations.

29. See also Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 252.

30. Trade Practices Act 1974 (Cth) s 51AC and Banking Industry Ombudsman Ltd, Terms of Reference (effective from 6 July 1998), para 19A. See J Pascoe “The Effect of the Federal Government’s Small Business Package on Guarantees of Business Debts” (1998) 12(3) Commercial Law Quarterly 17.

31. For example, Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at 253-254; Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 252-254 and Recommendation 13.2; Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 35-36.

32. This was in response to the Martin Committee Enquiry. The code may be viewed at the Australian Bankers’ Association website: «www.bankers.asn.au/3_level/bankcode.htm». The Code is currently under review. For a recent discussion see M Funston, “Wanted: A Code We Can Bank On” (1999) 4(1) Consumer Rights Journal 5.

33. Code of Banking Practice, Preamble.

34. “Customer” and other relevant terms are defined in Code of Banking Practice s 1.1.

35. The Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 253 cautions on the limited contractual force of the Code: “As a guarantor may not be a ‘customer’ and may not be receiving a ‘banking service’ from the bank, the principles relating to guarantees in s 17 of the Code may not be binding between the guarantor and the bank.” The Commission consequently recommended (Recommendation 13.1): “Section 1.3 of the Code of Banking Practice should be amended to ensure that (a) s 17 of the Code will be binding between a guarantor and a bank from the date on which the bank publicly announces that it adopts the Code (b) the dispute resolution principles set out in s 20 of the Code will also be binding between the bank and the guarantor as if the guarantor were a ‘Customer’ for the purposes of that section.”

36. The Building Society Code of Practice (released in October 1994) and the Credit Union Code of Practice (released in July 1994).

37. Building Society Code of Practice s 1.3; and Credit Union Code of Practice s 1.3.

38. Code of Banking Practice s 1.2; Building Society Code of Practice s 1.2; and Credit Union Code of Practice s 1.2 each state: “This Code is to be read subject to any Commonwealth, State or Territory legislation.”

39. Code of Banking Practice s 17.1; Building Society Code of Practice s 16.1; and Credit Union Code of Practice s 17.1.

40. As defined in s 9 of the Corporations Law (Cth): Code of Banking Practice s 17.1; Building Society Code of Practice s 16.1; and Credit Union Code of Practice s 17.1. Code of Banking Practice s 17.1(i) and Credit Union Code of Practice s 17.1(i) refer to a “public corporation or any of its Related Entities”, whereas Building Society Code of Practice s 16.1(i) refers to “a corporation or any of its Related Bodies Corporate”.

41. Code of Banking Practice s 17.1(ii); Building Society Code of Practice s 16.1(ii); and Credit Union Code of Practice s 17.1(ii).

42. Code of Banking Practice s 17.1(iii); Building Society Code of Practice s 16.1(iii); and Credit Union Code of Practice s 17.1(iii).

43. At least in the case of the Code of Banking Practice s 17.1(iv) and the Building Society Code of Practice s 16.1(iv). The Credit Union Code of Practice, however, does not refer to “partner” in this context: Credit Union Code of Practice s 17.1(iv).

44. Code of Banking Practice s 17.1(iv); Building Society Code of Practice s 16.1(iv); Credit Union Code of Practice s 17.1(iv).

45. This is the situation in a number of the cases: see for example, the facts of Garcia v National Australia Bank Ltd (1998) 194 CLR 395. See also Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 254 and Recommendation 13.2; S Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995) Recommendation 9.

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

47. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 457. The provisions of the three industry codes of practice reflect this view.

48. Australia, House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation (AGPS, Canberra, 1991) at 417-418.

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

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

51. “Credit provider” means a person that provides credit, and includes a prospective credit provider: Consumer Credit (New South Wales) Code Sch 1 Principal Definitions.

52. Consumer Credit (New South Wales) Code s 5.

53. The prescribed information statement is a statement set out in Form 5A of the Consumer Credit (New South Wales) Regulations explaining the guarantor’s rights and obligations. It can be on a separate document or part of the guarantee document: see Consumer Credit (New South Wales) Code s 51(1)(b) and Consumer Credit (New South Wales) Regulations s 21.

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

55. See Consumer Credit (New South Wales) Code s 50(3); and Consumer Credit (New South Wales) Regulations s 20 and Form 4.

56. See Consumer Credit (New South Wales) Regulations Form 4.

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

58. As well as a copy of the guarantee signed by the guarantor.

59. Consumer Credit (New South Wales) Code s 52.

60. Code of Banking Practice s 17.4(i); Credit Union Code of Practice s 17.4(i); and Building Society Code of Practice s 16.4(i) which further states that this written warning can be in the form of an information statement about guarantees as prescribed by the Consumer Credit (New South Wales) Regulations.

61. Note that although the Code of Banking Practice s 17.4(ii) and Building Society Code of Practice s 16.4(ii) refer to either a “copy or summary” of the primary loan contract which the guarantee is to cover the Credit Union Code of Practice s 17.4(ii) only refers to a “copy” of the credit contract.

62. Building Society Code of Practice s 16.4(ii); and Credit Union Code of Practice s 17.4(ii). See also Consumer Credit (New South Wales) Code s 51(1)(a).

63. Code of Banking Practice s 17.3 and 17.4(ii).

64. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 43.

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

66. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 44.

67. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 42-43. The information to be provided would exclude any internal assessments prepared by the financier.

68. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at 247 and 251-252.

69. See further, Chapter 2.

70. Contracts Review Act 1980 (NSW) s 9; Consumer Credit (New South Wales) Code s 70(2); Trade Practices Act 1974 (Cth) s 51AB(2), 51AC(3), 51AC(4); and Fair Trading Act 1987 (NSW) s 43(2).

71. Contracts Review Act 1980 (NSW) s 9(2)(a); Consumer Credit (New South Wales) Code s 70(2)(b); Trade Practices Act 1974 (Cth) s 51AB(2)(a), 51AC(3)(a), 51AC(4)(a); and Fair Trading Act 1987 (NSW) s 43(2)(a).

72. Contracts Review Act 1980 (NSW) s 9(2)(d); Consumer Credit (New South Wales) Code s 70(2)(e); Trade Practices Act 1974 (Cth) s 51AB(2)(b), 51AC(3)(b) and 51AC(4)(b); and Fair Trading Act 1987 (NSW) s 43(2)(b).

73. Contracts Review Act 1980 (NSW) s 9(2)(g); Consumer Credit (New South Wales) Code s 70(2)(g); Trade Practices Act 1974 (Cth) s 51AB(2)(c), 51AC(3)(c), 51AC(4)(c); and Fair Trading Act 1987 (NSW) s 43(2)(c).

74. Contracts Review Act 1980 (NSW) s 9(2)(j); Consumer Credit (New South Wales) Code s 70(2)(j); Trade Practices Act 1974 (Cth) s 51AB(2)(d), 51AC(3)(d), 51AC(4)(d); and Fair Trading Act 1987 (NSW) s 43(2)(d).

75. Contracts Review Act 1980 (NSW) s 9(2)(k); and Trade Practices Act 1974 (Cth) s 51AC(3)(f), 51AC(4)(f).

76. Contracts Review Act 1980 (NSW) s 9(2)(b), (c); and Consumer Credit (New South Wales) Code s 70(2)(c), (d).

77. Trade Practices Act 1974 (Cth) s 51AC(3)(j) and 51AC(4)(j).

78. Trade Practices Act 1974 (Cth) s 51AC(3)(k) and 51AC(4)(k).

79. Contracts Review Act 1980 (NSW) s 9(2)(e); and Consumer Credit (New South Wales) Code s 70(2)(f). Although no specific provisions exist in trade practices legislation, this may be subsumed under the concept of relative strength of bargaining power: Trade Practices Act 1974 (Cth) s 51AB(2)(a), 51AC(3)(a), 51AC(4)(a); and Fair Trading Act 1987 (NSW) s 43(2)(a).

80. Contracts Review Act 1980 (NSW) s 9(2)(f). Although no specific provisions exist in trade practices legislation, this may be subsumed under the concept of relative strength of bargaining power: Trade Practices Act 1974 (Cth) s 51AB(2)(a), 51AC(3)(a), 51AC(4)(a); and Fair Trading Act 1987 (NSW) s 43(2)(a).

81. Contracts Review Act 1980 (NSW) s 9(2)(h); and Consumer Credit (New South Wales) Code s 70(2)(h), but there is no direct requirement for the provision of independent legal or other expert advice. Although no specific provisions exist in trade practices legislation, this may be subsumed under the concept of generally understanding the documents: Trade Practices Act 1974 (Cth) s 51AB(2)(c), 51AC(3)(c), 51AC(4)(c); and Fair Trading Act 1987 (NSW) s 43(2)(c).

82. Contracts Review Act 1980 (NSW) s 9(2)(i); and Consumer Credit (New South Wales) Code s 70(2)(i). Although no specific provisions exist in trade practices legislation, this may be subsumed under the concept of generally understanding the documents: Trade Practices Act 1974 (Cth) s 51AB(2)(c), 51AC(3)(c), 51AC(4)(c); and Fair Trading Act 1987 (NSW) s 43(2)(c).

83. Contracts Review Act 1980 (NSW) s 9(2)(i); and Consumer Credit (New South Wales) Code s 70(2)(i), (k). Although no specific provisions exist in trade practices legislation, this may be subsumed under the concept of generally understanding the documents: Trade Practices Act 1974 (Cth) s 51AB(2)(c), 51AC(3)(c), 51AC(4)(c); and Fair Trading Act 1987 (NSW) s 43(2)(c).

84. Consumer Credit (New South Wales) Code s 70(2)(n); Trade Practices Act 1974 (Cth) s 51AB(2)(e), 51AC(3)(e), 51AC(4)(e); and Fair Trading Act 1987 (NSW) s 43(2)(e).

85. As Duggan cautions lenders in 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 41. The courts consider it a point in favour of a lender that it required attendance at its premises to sign the guarantee: see, for example, Australian and New Zealand Banking Group Ltd v Dunosa Pty Ltd [1995] ANZConvR 86 at 88.

86. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 14-15.

87. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) Recommendation 2.

88. (1991) ASC 56-042.

89. Beneficial Finance Corporation Ltd v Comer (1991) ASC 56-042 at 56,684-56,685. It was held that the guarantee was unjust and its effect was read down.

90. M Sneddon, “Unfair Conduct in Taking Guarantees and the Role of Independent Advice” (1990) 13 University of New South Wales Law Journal 302 at 319.

91. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 174 and 192.

92. Consumer Credit (New South Wales) Code s 50; and Consumer Credit (New South Wales) Regulations s 20 and Form 4.

93. Consumer Credit (New South Wales) Code s 70(2)(h); and Contracts Review Act 1980 (NSW) s 9(2)(h).

94. See para 2.53 and J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 185.

95. Code of Banking Practice s 17.5; Building Society Code of Practice s 16.5, Credit Union Code of Practice s 17.5.

96. Excepting the Contracts Review Act 1980 (NSW).

97. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at 246.

98. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at 251.

99. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) Recommendation 2. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 276 proposed that borrowers also agree, as a condition of the loan, to the lender giving the guarantor the commercial information about the borrower and the business collected by the lender to assess the borrower’s creditworthiness.

100. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 276; and Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 258-259 (Recommendation 13.5).

101. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 276; and Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) Recommendation 13.4.

102. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 268.

103. See J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 192-195.

104. Law Society of New South Wales, Revised Professional Conduct and Practice Rules (1995, amended November 1997).

105. Law Society of New South Wales, Caveat (No 207, 30 December 1999) at 1-2. LawCover is the professional indemnity insurance provider for NSW solicitors.

106. See generally, the covering memorandum in Caveat (No 207, 30 December 1999). As a result of some actions against solicitors in South Australia, the South Australian Supreme Court has noted that the South Australian Law Society has advised its members not to provide certificates of legal advice: see Micarone v Perpetual Trustees (South Australia, Supreme Court, Judgment No S6438, Duggan J, 19 November 1997, unreported) at 80.

107. Law Society of New South Wales, Caveat (No 207, 30 December 1999) at 1.

108. Law Society of New South Wales, Caveat (No 207, 30 December 1999) at 1.

109. Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended January 2000) Rule 45.6.3.2.

110. Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended January 2000) Rule 45.6.3.5.

111. Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended January 2000) Rule 45.6.3.6.

112. Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended January 2000) Rule 45.6.4.

113. See, for example, R Staniland, “Explanation of Loan Documents” (letter to the editor) (1998) 36(2) Law Society Journal 6.

114. The revised rule spells out the requirement of “independence” by providing that a solicitor advising a guarantor must not act for the lender; must not advise a proposed signatory in the presence of any other signatory, or in “any circumstances where the interests of any signatory or proposed signatory … conflict with those of any other …” except in accordance with a set of principles spelt out in Rule 45.4.4. These principles are drawn from the decision of the Privy Council (on appeal from the New Zealand Court of Appeal) in Clark Boyce v Mouat [1994] 1 AC 428 at 437.

115. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 192.

116. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 21.

117. B Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, Oxford, 1997) at 278.

118. (1993) ASC 56-247.

119. (1993) ASC 56-247 at 58,521. Sully J upheld the guarantee. Mrs Gough’s appeal to the Court of Appeal was dismissed by majority: Gough v Commonwealth Bank of Australia (1994) ASC 56-270.

120. Australian and New Zealand Banking Group Ltd v Volmensky (NSW, Supreme Court, No 15542/1992, Spender AJ, 14 December 1994, unreported) at 6, reported in part in (1995) ANZ Conv R 202 at 207.

121. For an example, see Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482.

122. Consumer Credit (New South Wales) Regulations s 39.

123. Consumer Credit (New South Wales) Code s 162(1).

124. Consumer Credit (New South Wales) Code s 162(2).

125. Contracts Review Act 1980 (NSW) s 9(2)(g); and Consumer Credit (New South Wales) Code s 70(2)(g).

126. Contracts Review Act 1980 (NSW) s 9(2)(i); Fair Trading Act 1987 (NSW) s 43(2)(c); Trade Practices Act 1974 (Cth) s 51AB(2)(c), 51AC(3)(c) and 51AC(4)(c); and Consumer Credit (New South Wales) Code s 70(2)(i).

127. Australian and New Zealand Banking Group Ltd v Volmensky (NSW, Supreme Court, No 15542/1992, Spender AJ, 14 December 1994, unreported).

128. Consumer Credit (New South Wales) Code s 54(2). Similar requirements apply to all accounts mortgages: Consumer Credit (New South Wales) Code s 43(2). See also s 56 in relation to conditions to be met before a guarantor is liable for further credit advances under a variation to an existing credit contract.

129. Code of Banking Practice s 17.2.

130. Building Society Code of Practice s 16.3.

131. Credit Union Code of Practice s 17.3.

132. Australia, House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation (AGPS, Canberra, 1991) Recommendation 89 at 417.

133. Australia, Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 38.

134. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 126 footnote 41. Variations to the principal loan, unanticipated in the original guarantee, would require the guarantor’s consent to be bound by them: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 559 and 560; Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 at 380 and 403.

135. Consumer Credit (New South Wales) Code s 34(2). If the information is not provided within the required time limits, the Court may, on the application of the guarantor, order the lender to provide the statement: Consumer Credit (New South Wales) Code s 35.

136. Consumer Credit (New South Wales) Code s 34(3).

137. Consumer Credit (New South Wales) Code s 34(1).

138. Consumer Credit (New South Wales) Code s 163(2).

139. Consumer Credit (New South Wales) Code s 163(1) and (3).

140. Code of Banking Practice s 17.6; and Building Society Code of Practice s 16.6.

141. Credit Union Code of Practice s 17.6.

142. See generally on this strict equitable rule: J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 339-340 and 357-358.

143. See J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 353.

144. See J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 350.

145. Consumer Credit (New South Wales) Code s 53(1)(a). This is irrespective of whether the credit contract differs in some material respect from the proposed credit contract previously given to the guarantor. There is no equivalent entitlement to withdraw at common law.

146. Consumer Credit (New South Wales) Code s 53(1)(b)

147. Consumer Credit (New South Wales) Code s 53(1)(b) and s 51(1)(a). Note that information provided to the guarantor which is not included in the proposed credit contract (for example, oral representations made to the guarantor before the guarantee was signed) would not appear to be caught by s 53(1)(b). It has also been suggested that s 53 implies that, if the guarantor does not withdraw from the guarantee, the guarantee is valid: A J Duggan and E V Lanyon, Consumer Credit Law (Butterworths, Sydney, 1999) at para 6.3.45.

148. Such as by the lender and borrower agreeing to increase the borrower’s credit limit on a continuing credit contract: Consumer Credit (New South Wales) Code s 62(3).

149. Consumer Credit (New South Wales) Code s 56(1). This statutory requirement to notify and obtain consent does not include specified changes such as: automatic increases in the amount of repayments as specified under the credit contract, interest rate changes, or changes in credit fees and charges: Consumer Credit (New South Wales) Code s 56(2), 58(2)(a) and (b), and 61.

150. Consumer Credit (New South Wales) Code s 54. See further on “all moneys” clauses at para 3.53-3.57.

151. See J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 426.

152. Consumer Credit (New South Wales) Code s 75.

153. See Code of Banking Practice s 17.7; Building Society Code of Practice s 16.7; and Credit Union Code of Practice s 17.7.

154. Excepting a continuing credit contract: Consumer Credit (New South Wales) Code s 76(1).

155. Consumer Credit (New South Wales) Code s 76. If the lender does not provide a pay out figure, the Court may do so on the application of the guarantor: Consumer Credit (New South Wales) Code s 77.

156. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 483.

157. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 537-538.

158. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 487.

159. Consumer Credit (New South Wales) Code s 82. “Unlike s 80 which restricts enforcement proceedings against debtors and mortgagors by restricting a credit provider’s right to initiate proceedings, this provision [s 82] does not restrict the commencement of proceedings, but instead restricts the enforcement of judgments against guarantors”: D McGill and L Willmott, Annotated Consumer Credit Code (LBC Information Services, Sydney, 1999) at 590. Thus the lender could commence proceedings and obtain judgment against the guarantor at the same time as, or even before, it takes action against the borrower.

160. Code of Banking Practice s 17.6(i); Building Society Code of Practice s 16.6(i); and Credit Union Code of Practice s 17.6(ii).

161. Code of Banking Practice s 20, Building Society Code of Practice s 20, Credit Union Code of Practice s 20.