Terms of Reference

The New South Wales Law Reform Commission has been asked by the Attorney General to inquire into and report on the legal framework for the protection of guarantors of small business and other loans and in particular, to consider:

1. Whether the present legal framework adequately protects the interests of personal guarantors of small business and other loans;

2. Whether there is a reasonable level of satisfaction in the community with the operation and application of the existing laws protecting guarantors of small business and other loans, in particular, whether those guarantors, financiers and principal borrowers are satisfied with the present legal framework;

3. Whether there are more practical and effective strategies for the provision of personal guarantees of small business and other loans that would enhance the development of conscientious lending practices while not placing undue constraints on small business lending; and

4. Any related matters.

In addition, the Commission, in collaboration with the Faculty of Law, University of Sydney was awarded an Australian Research Council grant to undertake some empirical research into the practices surrounding the use of third party guarantees. The research entails surveys of guarantors, legal practitioners, financial counsellors, consumer advocates, and credit providers; and a comparative analysis of the case law and practices in Australia and overseas.

OVERVIEW OF THE SOCIAL AND LEGAL CONTEXT IN WHICH GUARANTEES ARE GIVEN BY FAMILY MEMBERS OR FRIENDS

Introduction

Despite the hazards of entering into third party guarantees being well highlighted in the media (often under the heading “sexually transmitted debt”), people still continue to enter such contracts. It is not uncommon when a guarantee is enforced for there to be serious consequences such as the loss of the guarantor’s home.

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.

The typical scenario is as follows. A potential borrower needs money on credit,¹ and approaches a lender, typically a bank or other financial institution, for a loan.

The lender is not satisfied that the borrower has sufficient capacity to repay the loan and will only provide the money if the loan is secured. If the borrower has no acceptable security, the lender may agree to provide the money to the borrower if it is secured against some property² or other interest the borrower owns jointly with another party (for example, a spouse of the borrower); or some property or interest owned by a third party (typically, a parent of the borrower). In order to further secure repayment of the money provided to the borrower, the lender also enters into an agreement with the third party (the guarantor) who agrees to be responsible for paying the amount owing in place of the borrower if the borrower fails to repay. Thus the “third party”, being the guarantor, is not a party to the actual loan contract, which is between the lender and the borrower.³

Guarantees, as a species of contract, are very susceptible to being entered into in unfair circumstances for three main reasons. First, the guarantor is a third party to the principal agreement – a “stranger” to the primary loan contract. For this reason, guarantors are likely to have limited information on the events leading to the borrowing and the financial details of the primary transaction they are guaranteeing. Secondly, they are often “volunteers” to the guarantee, in the sense that they receive little or no benefit from the primary transaction. Thirdly, they are frequently in a relationship of emotional interdependence with the borrower of the primary loan contract. A relationship of interdependence may mean that the guarantor will sign a guarantee without engaging in the usual inquiries that a person entering an arms-length business arrangement would. They may refrain from questioning the borrower’s capacity to service the loan; and enter the contract of guarantee for “unbusinesslike” motives, such as a confirmation of the emotional attachment, or as an optimistic affirmation of the borrower’s decision.

Broad issues to consider

Legal protection is offered to guarantors against the pressure of being asked to sign a guarantee through a mixture of case law, and legislation, both state and federal. Although not legislation, industry codes of practice also provide some limited protective guidelines.⁴

Despite this spectrum of protection, many people still enter into guarantees under what they describe later as unfair emotional pressure. Part of the Commission’s task is to ask whether further legislative protection will alleviate this apparent unfairness, or is it the case that no amount of legislation can change the situation? Does effective protection for potentially vulnerable people simply require more community education and awareness of the potential hazards of entering a third party guarantee?

The question of who should be protected against their decision to enter into contracts of guarantee depends on who society regards as particularly vulnerable to entering such contracts. The amount of case law and legislation, not to mention reports and studies⁵ on the topic of third party guarantees would suggest that it is well recognised in our society there are many vulnerable people in the community who need to be protected from entering into such contracts from which they receive little or no benefit.

Social and economic environment

The role of relationships

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.⁶ The nature of the relationship, rather than an appreciation of the responsibility for the debt, is often the reason for the guarantor accepting liability.⁷

For many guarantors, often women⁸ (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.⁹ 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).¹⁰ Various terms have been used to describe such results, most commonly “sexually transmitted debt”, “emotionally transmitted debt”¹¹ and, more recently, “relationship debt”.¹² Recent articles indicate that elderly parents and people with disabilities are also at risk.¹³

A seminal research study of “surety wives” undertaken at the Centre for Socio-Legal Studies, University of Oxford (the “Fehlberg study”), found that “due to emotional pressure (ranging from physical abuse to more subtle forms of pressure) and economic reasons, sureties viewed themselves as having no real choice about providing security”.¹⁴ A central theme emerging from that research, and from other similar studies, is that third party guarantees often sit at the intersection between the “private” sphere of the family and its internal emotional pressures, agendas and ethics (including cultural)¹⁵ and the “public” sphere of the business world of bankers, lawyers, contract law, commerce and its ethics.¹⁶ While the vulnerability to emotional pressure inherent in third party guarantees extends to a broader range of relationships than marriage, it has been recognised as having a much greater impact on women than on men.¹⁷ The problem is compounded because title to the family home is increasingly jointly held by husbands and wives and as the main significant asset, it is often used as security for a loan for a business over which the husband has the predominant control.¹⁸

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.¹⁹ This is a matter to which the Australian Banking Industry Ombudsman drew attention in its recent report on relationship debt.²⁰

The co-incidence of relationship debt and family breakdown is a concern. The conflicting priorities and overlapping considerations in family law settlements and with third party creditors are areas of particular ambiguity and complexity.²¹

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 familial nature makes guarantees as a class of contract especially vulnerable to injustice and therefore warrants special legal protection to avoid unfairness. 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”.²² 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.

Legal environment

Consumer/business distinction – limitations under legislation and codes of practice

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.²³

Relief under the Contracts Review Act 1980 (NSW) is not generally available to corporations²⁴ 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”.²⁵ This restriction to consumer transactions was included in this Act as a result of concerns raised by legal and business interests about the certainty of commercial transactions.²⁶ Even though the Act is restricted chiefly to consumer transactions, it has been held in some cases to apply to personal guarantees of businesses.²⁷

The Consumer Credit (New South Wales) Code (“Credit Code”) is the title of the national uniform credit legislation that applies in New South Wales. Consumer Credit Code²⁸ is a generic description of the national uniform credit legislation which was first passed by Queensland²⁹ in 1994 and has either been adopted by the other States,³⁰ or been the subject of similar consistent legislation.³¹ The Credit Code and its regulations (the Consumer Credit (New South Wales) Regulations³²) provide a range of legislative protections for guarantors in consumer credit situations.

The Credit Code and its regulations apply to guarantors who are individuals or strata corporations³³ and where the guarantee supports a credit contract.³⁴ A credit contract is a contract entered by an individual or strata corporation that is “wholly or predominantly for personal, domestic or household purposes”.³⁵ The Credit Code will not apply where the loan is entered into for predominantly business purposes. 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.³⁶ The provisions as they currently stand apply only to consumers, and do not protect individuals who guarantee loans relating to a business, even when the guarantors have no direct interest in the business.

The Credit 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, including varying or setting aside in part or full any contract made.³⁷ Secondly, it includes more specific requirements that must be met for a guarantee to be enforced.

Industry practice

In November 1993 the Australian Bankers Association released its Code of Banking Practice.³⁸ The code is not law, but rather a self-regulatory voluntary code promoting “good banking practice”³⁹ for the Association’s member banks.⁴⁰ Once adopted by a bank, the terms of the code become part of that bank’s contract with its customer. While aspects of the code detail processes to be followed in relation to guarantees, the code is generally concerned with the Bank/Customer relationship.⁴¹ Unlike the borrower, the guarantor may not be a customer of the bank.⁴²

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”).⁴³ 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. 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 other industry codes of practice.⁴⁴

Where there is a conflict between the Credit Code and the codes of practice, the Credit Code (being legislation) prevails.⁴⁵

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.⁴⁶ The borrower cannot be a (public) corporation,⁴⁷ or a corporation where the guarantor is a director or secretary,⁴⁸ or a trustee of a trust (including a discretionary trust) where the guarantor is a beneficiary.⁴⁹ Nor will the codes apply where the borrower is a partner,⁵⁰ co-owner, agent, consultant or associate of the guarantor at this time.⁵¹

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.⁵²

Guarantees set aside or varied

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 or varied.⁵³ These unfair circumstances can arise from a wide variety of situations around the signing of the guarantee, including, who is present when the guarantor signs the guarantee, inequality of bargaining power prior to the guarantee being signed, and the location where the guarantee is signed.

Statute

The Contracts Review Act 1980 (NSW), the Credit Code, the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) provide non-exhaustive lists of the matters to be taken into account in determining whether the situation is unfair or unconscionable.⁵⁴ 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 placed on those seeking relief under each of the acts;⁵⁵ and most statutes distinguish between business loans and consumer loans, with less protection generally offered to business loans.

Generally speaking, determining an unfair or unconscionable situation includes the following considerations:

• inequality of bargaining power;⁵⁶
• difficult or harsh terms;⁵⁷
• intelligibility of the contractual documents;⁵⁸
• unfair tactics or pressure exerted by another person;⁵⁹
• comparable conduct in similar contracts or transactions;⁶⁰
• standard form contracts, or whether the parties negotiated the provisions of the contract⁶¹ or were willing to do so;⁶²
• acting in good faith;⁶³
• ability of guarantor to protect his or her own interests;⁶⁴
• relative financial circumstances, educational background, literacy;⁶⁵
• whether or not independent legal advice or other expert advice was obtained;⁶⁶
• accurate explanation of the legal and practical effect of the contract;⁶⁷
• whether the provisions of the transaction are understood;⁶⁸
• terms of comparable transactions, including rates of interest or charges.⁶⁹

Common law

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. These categories include unconscionability (or unconscionable conduct), mistake, misrepresentation, undue influence and duress. While there is some degree of overlap between the legal categories and the distinctions can be fine,⁷² each of these has defences have 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.⁷³ This paper shall briefly look at the two most prominent – unconscionable conduct and its derivative a “special rule for wives” as recently elucidated in Garcia v National Australia Bank Ltd.⁷⁴

Unconscionable conduct

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 personal disadvantage or disability, such as age, mental or physical health, illiteracy or lack of education, in relation to the other parties to the transaction so that there is “an absence of any reasonable degree of equality between them”.⁷⁵ Special disadvantage can also arise from the creation of the contract: its characteristics and the relative positions of all parties to the transaction, and the circumstances surrounding the formation of and entry into the contract.⁷⁶

The special disadvantage must be evident to the other party and must be taken advantage of in circumstances where it is prima facie unfair to do so.⁷⁷ This usually requires proof that the lender knew of the disability or could infer it from the facts available.⁷⁸

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.⁷⁹ It is not sufficient to assume that a guarantor stands to benefit merely because of a close relationship with the borrower, such as between husband and wife. 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.⁸⁰

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.

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.

A special rule for wives?

Another ground for setting aside guarantees applies only to cases where wives guarantee the debts of their husbands. In cases such as Yerkey v Jones⁸¹ and Garcia v National Australia Bank ⁸² the courts have singled out wives as a clearly identifiable group in need of particular protection with regard to third party guarantees and have developed a “special rule” to deal with them.

The High Court of Australia established this category in 1939 in the case of Yerkey v Jones. The rule in Yerkey v Jones is a particular equitable doctrine that 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 and its authority came to be considered obsolete by a number of courts and commentators in recent years. However, the special rule for wives in Yerkey v Jones was reaffirmed in 1998 by the High Court in another case involving a wife, Garcia v National Australia Bank. The majority 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.

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.⁸³
• 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.⁸⁴

The transaction must also be voluntary, that is, the wife must show that she obtained no benefit from the undertaking that is the subject of the guarantee.⁸⁶ 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.⁸⁷

The rule has been criticised on numerous grounds⁸⁸ including that it is discriminatory in that it applies only to married women in relation to their husbands regardless of vulnerability⁸⁹ and on the more general economic grounds that it may render matrimonial assets “economically sterile”.⁹⁰

Abstract Control

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 also 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”,⁹¹ that is, preventing lenders from entering into guarantees that have unfair terms. The focus is on ensuring the contract is fair in its substantive terms from the outset. Clauses which could come under such scrutiny might include “all moneys” and “conclusive evidence” clauses.

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).⁹² 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”.⁹³ 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”.⁹⁴
• 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.⁹⁵

Provisions in Australia

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 10⁹⁷ and none appears to have been in relation to contracts of guarantee.

The Credit 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”.⁹⁸

Disclosure of information before the guarantee is signed

Lenders have a limited legal obligation to disclose information to a guarantor before signing a guarantee. Any obligation does not generally cover business loans.

Under the Credit Code, for consumer loans a lender must provide a guarantor with a copy of the principal loan contract⁹⁹ and a statement explaining the rights and obligations of a guarantor.¹⁰⁰ The guarantor is also advised to obtain independent legal and financial advice.¹⁰¹

Industry codes of practice require a written warning of the guarantor’s liabilities to be provided to the guarantor, with a copy or summary of the principal loan contract.¹⁰² However, these codes generally apply to consumer loans only.

The absence of legal protection for business loans 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.

The place where a guarantee is signed

Although legislation does not specify where a guarantee is to be signed, judicial decisions indicate that lenders should not allow the borrower to arrange for the execution of the documentation by a related guarantor at their home.¹⁰³

This practice would seem to have become rarer 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. 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.¹⁰⁴ 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.

Judicial decisions have also indicated it is inappropriate for prospective guarantors, often mothers and wives, having alternative distractions such as young children in the office when they sign the guarantee.¹⁰⁵

Independent advice

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, lenders to defend themselves against allegations of unconscionable conduct can use the fact that independent legal advice has been obtained.¹⁰⁶ Independent legal advice can also assist in countering claims that the guarantee was affected by undue influence.¹⁰⁷ Consequently, banks and other lenders often advise potential third party guarantors to confirm that such advice has been sought and provided.

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.¹⁰⁸ 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.¹⁰⁹ 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, as discussed earlier, 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.¹¹⁰

The industry codes of practice all require that a lender recommend that a prospective guarantor obtain independent legal advice.¹¹¹ 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.

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,¹¹² limited to consumer loans and do not extend, for example, to small business loans.

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.

Solicitors’ Practice Rules

As a consequence of the legislation, industry codes of practice and finance industry’s increasing practice to warn prospective guarantors to obtain independent legal advice, a solicitor may be asked to provide a prospective guarantor with a certificate confirming that such advice has been given.¹¹³ 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.¹¹⁴ For some time, there has been concern that lenders have tended to use the exhortation to seek independent legal advice as a means of shifting responsibility from themselves to solicitors¹¹⁵ and claims on Law Cover increased significantly.¹¹⁶ In response, the Law Society Council introduced a revised Rule 45 in early 2000.¹¹⁷

While the 1996 Rule 45 set out the criteria and processes to be followed by solicitors in providing certificates of independent legal advice, the effect of the 2000 Rule 45 is to do away with such certificates altogether. Instead, 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.¹¹⁸ 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.

While the general tenor of the rule is that a solicitor should not act for more than one party in such cases, there is recognition of the difficulties this can cause, particularly in rural and regional areas.¹¹⁹ 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.¹²⁰

The solicitor must make it clear to the proposed guarantor that the solicitor is offering only legal, and not financial advice (which should be sought elsewhere prior to signing the guarantee, such as the advice of an accountant or financial counsellor).¹²¹

The value of independent legal advice

Given the background of familial pressure or other emotional interdependence as the impetus for people signing guarantees, 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”¹²² and may be of benefit only to lenders in terms of the certainty it provides to them in transactions with guarantors.¹²³ However, some solicitors believe that independent legal advice may serve an important function for prospective guarantors in tenuous relationships.¹²⁴

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.

Legibility and plain English

Guarantees are sometimes hard to read and can be written in complex language with “fine print”. There are only limited situations mostly to do with consumer credit lending where the law requires such documents to be in clear, simple English. This may cause particular difficulty for those whose first language is not English, especially technical legal terms which may have no counterpart in other languages and will therefore be very difficult to translate.^125.

The Credit Code requires that terms in a guarantee must be easily legible with a print or typeface of at least 10 points¹²⁶ and that the guarantee must be clearly expressed.¹²⁷

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.¹²⁸

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 expressed¹²⁹ or the ability of a person to understand the document.¹³⁰

However, as discussed previously, the Credit Code only applies to consumer credit loans and not to business loans.

“All moneys” clauses

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.

The common law does not prevent the use of such clauses in guarantees or mortgages, although courts will limit their operation in some cases.¹³¹

The Credit Code permits guarantees to extend to future credit contracts providing certain notice and consent provisions 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, before the guarantee can be enforced in respect of the further credit.¹³²

Under the Credit Code there are also restrictions on the total amount for which a guarantor can be liable. 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 (and the reasonable expenses of enforcing the guarantee).¹³³

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);¹³⁴ while the Building Society¹³⁵ and Credit Union¹³⁶ Codes permit certain extensions of guarantees to future credit contracts if specific procedures are followed.

Again, however, business loans do not fall under the Credit Code or the industry codes of practice. It could be that the procedures for consumer loans (which require specific written consent from the guarantor before future loans or increased liabilities are procured) should apply to business loans as well.

In 1991 the Martin Committee inquiry recommended that the use of unlimited guarantees no longer be permitted.¹³⁷

Later operation of a guarantee

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.

Ongoing advice and information

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.¹³⁸ The guarantor, unless being informed by the borrower whose loan they have guaranteed, may not know how increasingly vulnerable they are. The first the guarantor may know about the risk of default by the borrower is when the lender calls upon the guarantee.

The Credit Code requires a lender to provide, at the request of a guarantor within specified time limits,¹³⁹ in writing or orally,¹⁴⁰ a statement of the current balance of the borrower’s account, amounts credited or debited, any amounts currently overdue, or any amounts currently payable.¹⁴¹ The Credit Code also requires a lender to provide, at the written request of a borrower, mortgagor or guarantor within specified time limits,¹⁴² 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.¹⁴³

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).¹⁴⁴

The Credit Union Code contains similar requirements but does not specify that it requires the borrower’s consent.¹⁴⁵

Enforcement

At common law,¹⁴⁶ a lender need not inform the guarantor that the borrower has defaulted under the principal loan before commencing proceedings to enforce the guarantee, unless the contract provides otherwise. Furthermore, at common law, the lender does not need to proceed against the borrower first,¹⁴⁷ or make a demand on the guarantor before enforcing the guarantee, unless the contract of guarantee expressly says otherwise.¹⁴⁸

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 under certain specified conditions.¹⁴⁹

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.¹⁵⁰

Alternative dispute resolution

The industry codes of practice provide for internal and external dispute resolution processes for members and their customers.¹⁵¹ 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.

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.¹⁵²

AN ISSUE TO CONSIDER

The business/consumer distinction

Although there are many issues raised by this reference,¹⁵³ the Commission’s terms of reference, mentioned above, ask it to examine, in particular, small business guarantees. Clearly the protections and regulations afforded to guarantors of business loans are more limited than the protections available where the guarantee is provided to support a loan that is essentially of a personal or domestic nature.¹⁵⁴

Thus the Commission will review the (perhaps erroneous) presumption that people entering into guarantees for businesses, and in particular “small businesses”, are more sophisticated and possess more business savvy (and thus require less protection) than consumers.

Recent statistics collected as part of a state wide survey of credit and debt financial counselling services reveal that although the relevant agencies receive far fewer complaints or queries about business debts compared to consumer debts, the median consumer debt was $12,000, while the median business debt was $65,000.¹⁵⁵

While there have been many encouraging reforms and procedural measures put into place which will assist a guarantor (notably, the disclosure requirements, plain language documentation, pre-contractual and ongoing provision of information as outlined in Credit Code and the industry codes of practice), the legislative reforms have mostly been to the benefit of “consumer guarantors”. The situation is quite different for guarantors of business debts. Guarantors of these loans who dispute their liability are forced to rely on the not always consistent reasoning of the courts for relief. Litigation is extraordinarily expensive and complex (a recent submission suggests that a guarantor can quickly tally up thousands of dollars in legal costs by the time they have finalised their defence).

It is very difficult for a guarantor to have a guarantee set aside in the courts on the basis that he or she was not fully informed of all material facts, lacked full comprehension of the nature of the transaction or was not independently advised. Instead, the guarantor will have to show that the lender or borrower used some form of misconduct in the way they procured the guarantee. This will often mean resort to the equitable doctrines of unconscionability, undue influence and duress.¹⁵⁶ Amadio unconscionability claims are notoriously difficult to run.¹⁵⁷ It seems that the courts will accept the special disability or disadvantage of the guarantor only in extreme cases; and many of the cases fall on evidentiary grounds for failing to establish actual or constructive knowledge of the alleged special disability or disadvantage.¹⁵⁸

It seems that a decisive issue in many cases is the court’s perception of the role of a guarantor in the context of a business loan. In some cases where the spouse guarantor is a passive director, or even in cases where a spouse had no idea that she was set up as an employee of the business, the court has refused to see lack of involvement or knowledge in the affairs of the company as significant.¹⁵⁹ The pivotal role of the personal relationship between the guarantor and borrower is something that the courts do not easily take into account – the background of a personal relationship is traditionally treated as of less relevance in the context of what are seen, or constructed, as commercial contractual relationships.

FOOTNOTES

1. Apart from the usual scenario of a person borrowing money from a lender, the situation can also involve a person receiving goods or services, such as a car, on credit with a third party offering the lender/creditor a guarantee that the other person, being the borrower, will pay for those goods or services.

2. Via a mortgage over their property.

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

4. In 1998, Part IVB – Industry Codes, sections 51ACA, 51AD and 51AE were inserted into the Trade Practices Act 1974 (Cth). These provisions enable prescribed industry codes of practice (either mandatory or voluntary industry codes as defined in s 51ACA), to be underpinned by the Trade Practices Act legislation and its sanctions. So far, only the Franchising Code of Conduct has been declared in the regulations (see Trade Practices (Industry Codes – Franchising) Regulations 1998).

5. In recent years, a number of organisations have undertaken a range of inquiries and research as increasing awareness of, and discussion about, this problem has emerged. These include bodies such as the Trade Practices Commission (Australia, Trade Practices Commission, Guarantors: Problems and Perspectives (Discussion Paper, 1992)), the Martin Committee (a federal parliamentary committee on banking) (Australia, House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation (AGPS, Canberra, 1991)) and a variety of community organisations such as consumer credit services and legal centres (See eg: R Jukic, Till Debt us do Part (Consumer Credit Legal Service, Melbourne, 1994); 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, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, Melbourne, 1995)) The Australian Law Reform Commission and a number of credit advice bodies and legal services focussed particular attention on what came to be widely known as “sexually transmitted debt” (Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at ch 13.) Following the report of the Access to Justice Advisory Committee, a national Expert Group on Family Financial Vulnerability was established and its report, Good Relations, High Risks: Financial Transactions Within Families and Between Friends, released in February 1996, pointed out that the range of relationships affected by these issues extends beyond spouses. There is evidence to suggest that the problem particularly affects borrowers and guarantors from non-English speaking backgrounds.

6. 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).

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

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

9. 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).

10. 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.

11. 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.

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

13. “Borrowers exploit relatives, friends, old and disabled” Sydney Morning Herald (15 January 2001) at 5.

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

15. 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.

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

17. 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).

18. 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.

19. 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.

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

21. See, for example, I Kennedy, “Harmonising Family Law and Bankruptcy” (2000) 14(2) Australian Family Lawyer 17.

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

23. 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.

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

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

26. 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.

27. 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).

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

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

30. 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.

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

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

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

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

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

36. See also Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994) at 252. A research study by the Consumer Advocacy and Financial Counselling Association of Victoria (the “Singh 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: 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).

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

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

39. Code of Banking Practice, Preamble.

40 A review of the Code of Banking Practice is being conducted by an independent consultant (Mr R Viney) and an Issues Paper was released on 5 March 2001. The review’s terms of reference, submissions and Issues Paper may be viewed on the Review’s website at http://www.reviewbankcode.com. The Credit Union Code of Practice is also being reviewed.

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

42. 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.”

43. The Building Society Code of Practice (released in October 1994) and the Credit Union Code of Practice (released in July 1994). The Australian Securities and Investments Commission (ASIC) assumed the role of monitoring these three industry codes in mid-1998.

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

45. 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.”

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

47. 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”.

48. 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).

49. 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).

50. 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).

51. 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).

52. 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. Also, many organisations that gave submissions to the Review of the Banking Code of Practice drew attention to the lack of protection for guarantors of small business loans: submissions of Australian Securities and Investments Commission, NSW Government, and Minister for Consumer Affairs, Victoria (website www.reviewbankcode.com).

53. Injunctions and damages may also be available in certain circumstances under the Trade Practices Act 1974 (Cth) ss 80 and 82; and Fair Trading Act 1987 (NSW) ss 65 and 68.

54. 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).

55. 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).

56. 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).

57. 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).

58. 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).

59. 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).

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

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

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

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

64. 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).

65. 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).

66. 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).

67. 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).

68. 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).

69. 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).

70. Which extends Trade Practices Act 1974 (Cth) remedies to unconscionable conduct that is recognised under the present common law of States and Territories.

71. A new section of the Trade Practices Act 1974 (Cth) s 51AC commenced in July 1998 extending some of the Act’s provisions to transactions involving business consumers and small business suppliers where the amount at issue is $1,000,000 or less. Since guarantees could be taken to be supplied “in connection with” the supply of services, s 51AC may apply in the case of guarantees given in relation to loans of $1,000,000 or less.

72. In fact, mistake, misrepresentation and undue influence can all be said to be a species of unconscionable conduct see: Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461 (Mason J).

73. See further, New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) Chapter 2.

74. (1998) 194 CLR 395.

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

76. 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.

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

78. 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.

79. 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.

80. 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).

81. (1939) 63 CLR 649.

82. (1998) 194 CLR 395.

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

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

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

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

87. 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).

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

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

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

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

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

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

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

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

96. 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.

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

98. 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.

99. For the guarantee to be enforceable, Consumer Credit (New South Wales) Code s 51(2).

100. Consumer Credit (New South Wales) Code s 51, and Consumer Credit (New South Wales) Regulations s 21 and Form 5A.

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

102. Code of Banking Practice s 17.4 (with the borrower’s consent); and Building Society Code of Practice s 16.4 and Credit Union Code of Practice s 17.4 (both without the borrower’s consent).

103. 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.

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

105. Beneficial Finance Corporation Ltd v Comer (1991) ASC 56-042 at 56,684-56,685 where among other things, a wife signing a guarantee for her husband’s business in the finance company’s solicitor’s office was distracted by the presence of her two and a half year old son. It was held that the guarantee was unjust and its effect was read down.

106. 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.

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

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

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

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

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

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

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

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

115. 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.

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

117. Commencing in March 2000.

118. The solicitor’s advice must cover a number of matters including: the legal consequences of a guarantor’s failure to remedy a borrower’s default, whether the guarantor’s liability is limited or not, any additional obligations, rights and remedies of the guarantor if the Consumer Credit Code applies: Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended January 2000) Rule 45.6.3.2; 45.6.3.5, and 45.6.3.6.

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

120. The revised rule spells out the requirement of “independence” at 45.4 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.

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

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

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

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

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

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

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

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

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

130. 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).

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

132. 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.

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

134. Code of Banking Practice s 17.2.

135. Building Society Code of Practice s 16.3.

136. Credit Union Code of Practice s 17.3.

137. 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.

138. 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.

139. 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.

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

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

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

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

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

145. Credit Union Code of Practice s 17.6.

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

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

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

149. 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.

150. 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).

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

152. Australian Banking Industry Ombudsman Ltd, Annual Report 1998-1999 at 7. However, the ABIO has a $150,000 monetary jurisdiction. Guarantor advocates in New South Wales observe that lenders are extremely quick to lodge possession hearings in the Supreme Court against a guarantor – this immediately places the matter outside the ABIO’s terms of reference (see para 20(g) and (h) of the Terms of Reference – once the subject matter of a complaint is being addressed in another jurisdiction).

153. For further discussion of issues raised see Chapter 4 of New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000).

154. The Australian Banking Association recently announced the adoption of a new set of principles to extend to the small business sector. The principles, however, are non-binding and falls short of the potential legal protection offered by the Code of Banking Practice: see J Pascoe, “Recent Developments in the Law Relating to Guarantees of Business Debts”, in W Weerasooria (ed), Perspectives on Banking, Finance and Credit Law (Prospect Media, 1999) at 115. The rationale seems to be that those involved in non-consumer transactions do not require protection.

155. Griffiths, M and Bunt, M (2000) Consumer Credit and Debt Issues in NSW (University of Newcastle: Ourimbah, NSW) Unpublished Paper, October 2000.

156. See J Pascoe, “Recent Developments in the Law Relating to Guarantees of Business Debts”, in W Weerasooria (ed), Perspectives on Banking, Finance and Credit Law (Prospect Media, 1999) at 109.

157. See J Pascoe, “Recent Developments in the Law Relating to Guarantees of Business Debts”, in W Weerasooria (ed), Perspectives on Banking, Finance and Credit Law (Prospect Media, 1999) at 109.

158. See J Pascoe, “Recent Developments in the Law Relating to Guarantees of Business Debts”, in W Weerasooria (ed), Perspectives on Banking, Finance and Credit Law (Prospect Media, 1999) at 109, footnote 16 and the cases there cited.