• Approach and methodology
• Survey development, design and distribution
• Acknowledgements and confidentiality

A.1 The purpose of this research project was to examine the incidents of third party guarantee transactions, with particular reference to guarantees relating to business loans. The overall aim was to get a picture of the impact of third party guarantees on guarantors, as well as information from key stakeholders involved in guarantee transactions including lenders, lawyers and financial advisors and consumer advocates.

A.2 The project directed particular attention to the experience of guarantors in situations of particular vulnerability, such as guarantors who are women in relationships with borrowers, elderly relatives, guarantors from a non-English speaking background, or a combination of the above.¹ This is because it appeared that a high proportion of the reported cases involve guarantors who are drawn from these groups and thus we identify them as “high risk”.

A.3 The scope of the research was informed by a review of background material and consultations with key stakeholders, organisations and consumer advocates. Background materials used to inform our research included:

• Case law: reported and unreported;
• Research papers;²
• Industry reports and annual reports (including government policy documents relating to consumer and business credit and debt);
• Academic and professional literature on issues arising in the law on guarantees and the law of unconscionability more generally;
• secondary information on industry practice; and
• New South Wales Law Reform Commission’s Issues Paper 17: Guaranteeing Someone Else’s Debts.

A.4 This research is breaking new ground as there is little available data in this area, for instance basic statistics such as how often third party guarantees are taken, what the criteria is for their use and what proportion of business loans are supported by guarantees from friends or relatives. Most of the available analysis of third party guarantees focuses almost exclusively on the outcomes of litigation. While an analysis of the case law is an element of our approach, we also wanted to examine the process of taking third party guarantees at the other end of the process, that is, at the early stages of the transaction.

A.5 Given the absence of any defined sampling frame, this research was exploratory in nature. One of the aims of this research was to investigate the circumstances in which guarantors considered to be in situations of financial vulnerability, such as women in relationships with borrowers, elderly relatives, guarantors from a non-English speaking background, or a combination of the above, enter into guarantee or guarantee-like transactions.

A.6 The project collected data from a number of sources using a multi-method, multi-data approach, also known as triangulation.³ This diversity allowed the researchers to compare and contrast data from different perspectives. This approach has the benefit of addressing issues of validity and one-sided accounts. The sample included guarantors, legal practitioners (solicitors, barristers and judges) and lenders. The project also undertook a comparative review of litigated cases in the area of third party guarantees. Most data was obtained from survey instruments. However, material from other stakeholders with interest or expertise in the area of third party guarantees was obtained by semi-structured interviews or consultations. The diversity of methodologies permitted the inclusion of both qualitative and quantitative information in this research.

A.7 Given the exploratory and sometimes sensitive nature of the research, we considered it essential to be flexible to include other sources of information. The emphasis on the qualitative approach, and triangulation in sourcing the data, allowed us to obtain a useful snapshot of the complexities operating during the course of the life of guarantee transactions.

A.8 A mixture of qualitative and quantitative data collection approaches were used, including:

• Consultations with lawyers, financial counsellors and consumer advocates with direct expertise in third party guarantee matters;
• Consultations with representatives from peak organisations whose constituents may have experience with third party guarantee or related financial issues;
• Surveys of:

– guarantors about their experiences with third party guarantees;

– lenders about the criteria for taking third party guarantees, and policies and procedures which cover the use and enforcement of guarantees;

– solicitors and barristers about their experiences advising and dealing with clients (guarantors, borrowers or lenders) with third party guarantees;

– judges about their experiences with the litigation of third party guarantee cases;

• Case studies from consumer advocacy organisations such as community legal centres, financial counselling services, the Australian Banking Industry Ombudsman and the Legal Aid Commission of NSW;
• Analysis of statistical data from financial organisations and peak bodies;
• Comparative analysis of decisions made by courts; and
• Observations of the conduct of cases in courts and tribunals and analysis of cases currently being pursued through the courts (including examination of a sample of files involving disputed guarantees at the New South Wales Supreme Court).

A.10 This research was undertaken through both questionnaire and direct interviews. The approach to the surveys is outlined in detail below.

SURVEY DEVELOPMENT, DESIGN AND DISTRIBUTION

A.11 Consultations were undertaken with academics and representatives from a wide range of organisations who have experience dealing with third party guarantees. The consultants, some of whom formed an informal “Reference Group” included representatives from financial counselling services,⁴ solicitors and barristers in private practice, community legal centres,⁵ the Legal Aid Commission of New South Wales and government consumer protection policy officers⁶ as well as representatives from the finance industry sector.⁷ These consultations helped to crystallise the issues for further research and assisted us to identify the best means to obtain further information from parties involved in such transactions. Most consultations were conducted in the early stages of the project, as their purpose was not only to elicit perceptions and opinions on issues of relevance to the study, but also to inform the design and development of the research strategies to be pursued.

A.12 Much of the data collected for this research was by way of survey. There were five separate survey documents (for guarantors, lenders, solicitors, barristers and judges). Surveys were either self-completed, or conducted over the telephone as a semi-structured interview.

A.13 The development and design of each survey is discussed in further detail below.

Guarantor Survey

A.14 Urbis Keys Young, a consultancy firm, was engaged to assist in the design of the survey instrument. A draft of the survey instrument incorporated comments and feedback from the Reference Group. As the first survey instrument developed for this project, the guarantor survey informed the development of subsequent surveys.

A.15 In its final form the guarantor survey consisted of four parts:

• Part 1 asked for background information on the guarantor;
• Part 2 sought information about the transaction that caused them problems;
• Part 3 sought information about what happened once they found out there was a problem with the loan, and provided opportunity to make any other comments;
• Part 4 asked for responses from guarantors of business loans.

A.17 The method of selecting interviewees commenced with a call for volunteers, with some initial assistance from consumer advocacy and financial counselling organisations.⁸ This subsequently fostered a “snow-ball” process, with initial volunteers and organisations suggesting other prospective respondents. A large media campaign targeted regional and rural areas, as well as emphasis on the ethnic media.

A.18 A copy of the survey is reproduced at Appendix D.

A note on our approach to the guarantor survey

A.19 This project sought to investigate the instances and prevalence of people becoming liable for other people’s debts. While there was anecdotal evidence that the situation affected more women than men, the researchers did not approach the task of finding respondents with partiality or presumptions. The researchers were mindful, in this respect, that the validity of our inquiry depends on the recognition of a plurality of interests within the community.⁹ We sought to be surprised by our data rather than having pre-existing assumptions confirmed.

Distribution of surveys

A.20 The guarantor survey was widely publicised throughout the community sector via consultations, conferences and mail-out from late 2001 through to 2002. Leaflets and surveys were posted directly to community legal centres and financial counselling services in New South Wales, many of whom publicised the survey through their networks, newsletters and other publications. A media campaign targeted metropolitan, suburban, regional and rural newspapers, magazines and radio stations. Radio interviews with the project worker greatly assisted in generating interest in the surveys.¹⁰ We also publicised the project via consumer advocacy networks and electronic bulletin boards.¹¹

A.21 One previous study focusing on women and the family business identified an under-representation of people from non-English speaking background in their research.¹² To ensure that views of people from non-English speaking backgrounds were reflected in our research, we publicised the guarantor surveys in non-English language newspapers, and in adult migrant education and resources centre agencies. Editorials and advertisements were placed on SBS radio in three languages other than English (Vietnamese, Spanish and Arabic).¹³ Telephone interpreters were used for interviewing guarantors who had difficulty communicating in English.

A.22 The survey was also publicised by stories published in regional and rural newspapers and magazines throughout late 2001 and early 2002, as well as stories and interviews on regional and rural radio.

Response

A.23 We actively sought to interview guarantors who had “good experiences”, as well as those who had experienced problems with the loan they guaranteed. Some respondents were found through contacts within the financial counselling services and community legal centre sector whose clients were by definition, those who had problems. Not surprisingly, most of the stories we heard were the “bad news” stories. While these responses cannot be taken to represent comprehensively the gravity or prevalence of problems with third party guarantees, the survey provides invaluable insight into the range of problems experienced by guarantors.

A.24 Eighty six per cent of our respondents were from New South Wales. Of those who were not, 4 respondents were from the ACT, 5 from Victoria and 1 each from Queensland, Western Australia and South Australia. Of the NSW respondents, a significant proportion from regional NSW. While 49% of respondents were from metropolitan NSW, 30% live in regional NSW reflecting a significant range of coverage.

A.25 We were aware that a low level of literacy was a problem for a significant number of guarantors: this was often a reason that they unwittingly became a guarantor or co-borrower in the first place. To overcome this as a barrier to filling in the survey, we encouraged people to telephone us so we could take them through the survey. We also made telephone interpreting services available at no cost to the respondents.

A.26 Consistent with research into other relationships which involve some kind of family conflict or breakdown, and confirmed by many advocates in our initial consultations, it is difficult for people to speak out about problems with a difficult personal (and in particular, familial) element. While our data reflects only a limited sample, it is very likely that there are large numbers of people who are unwilling or unable to talk about these kinds of problems. Many of those who did participate in our survey were at pains to stress they wished to remain anonymous. Many respondents were ashamed at the situation they now found themselves in, or were embarrassed and didn’t want to cause undue harm to anyone else in their family. Some had never spoken to anyone at all about their situation, and had just taken on the responsibility for paying someone else’s debt quietly, but with extreme hardship. Many said that they only spoke up because they felt it important that other people don’t get into the same situation they found themselves in. Nonetheless, there was a high level of co-operation during interviews from those who contacted us to participate in the survey.

A.27 Given the barriers to participation, we consider that the response to the guarantor survey was very good. In the end, the research project processed 87 surveys from guarantors. In addition, we received numerous informal submissions through telephone inquiries and letters. There were also several in-depth interviews before the survey document was finalised; these were treated as qualitative interviews. These interviews are not included in the statistical data. Where these informal submissions are used, they are referred to as interviews or confidential submissions.

A.28 Over half of the guarantors who participated in our survey had entered the transaction between the years 1993 and 2002 (51 of 87 respondents). Therefore a reasonable proportion of the data collected by the project reflects the way transactions are conducted since significant changes to law and practice as a result of the Australian Banker’s Association Code of Practice 1993, the Contracts Review Act 1980 (NSW) and the decisions in Garcia (1998) and Amadio (1983).

Solicitor Survey

Development

A.29 The questionnaire for solicitors was developed by project staff who had worked with the consultants from Urbis Keys Young Pty Ltd during development of the guarantor survey.

A.30 The draft solicitor survey was piloted by a number of solicitors with experience in the area of third party guarantees. Valuable comments were incorporated into the final version of the survey. The survey of solicitors sought information about pre-contractual advice and post transaction disputes.

A.31 In its final form the solicitor survey consisted of four parts:

• Part 1 asked for background information on the solicitor and their practice;
• Part 2 sought information about legal advice given to guarantors (in the last 10 years) prior to the guarantor signing a contract to secure a loan. Many questions in this part focused on the last time such advice was given;
• Part 3 sought information about the enforcement of guarantees and guarantee-like situations (in the last 10 years). Many questions focused on the last time such advice was given. These questions were addressed to solicitors who had acted for both guarantors and lenders.
• Part 4 asked for responses to general questions and provided an opportunity for solicitors to make additional comments.

A.32 An article seeking input from solicitors was published in the Law Society Journal in May 2002.¹⁴ The solicitor survey was mailed to community legal centres in New South Wales, relevant law firms listed in Legal Profiles ¹⁵ and to accredited specialists listed in the NSW Law Society’s Directory of New South Wales Accredited Specialists in relevant areas of law.¹⁶

A.33 In addition, surveys were sent to solicitors who had represented parties in recent third party guarantee litigation. Solicitors were contacted by phone or email 2-3 weeks after the survey was sent to them to encourage completion if they had not already done so. In September 2002 the project team stopped actively seeking further responses to the Solicitor Survey.

Response

A.34 The research project received and processed responses from 89 solicitors. The data provides a useful picture of the current practices in relation to legal advice to guarantors and perceptions of solicitors about their role in providing legal advice to third party guarantors.

A.35 Respondents consisted of solicitors who had acted for guarantors, borrowers and lenders. There was a roughly equal number of responses from solicitors for guarantors and lenders. Responses were often coloured by what “side” of the transaction the solicitor’s client was from. The involvement of solicitors who acted for lenders helped to make the study more representative, as the bulk of lenders, by their own choice, did not participate.

Barrister Survey

Development

A.36 The research team decided to undertake a survey of barristers to better understand the conduct of litigation of third party guarantee matters. Barristers have specialised knowledge about the conduct of litigation, whereas solicitors are usually more heavily involved at the earlier stages of disputes. The barrister survey was developed in a similar fashion to the solicitor survey.

A.37 In its final form the barrister survey consisted of three parts:

• Part 1 asked for background information on the barrister and their practice;
• Part 2 sought information about barristers acting in a matter involving a guarantee or guarantee-like transaction (in the last 10 years). Many questions in this part focused on the last time the barrister acted for such a person. These questions were addressed to barristers who had acted for both guarantors and lenders.
• Part 3 asked for responses to general questions and provided an opportunity for barristers to make additional comments.

A.38 The barrister survey was sent to all practitioners who listed contracts, banking and equity as areas of practice on the NSW Bar Association website. Barristers listed as counsel in recent litigation in the area of interest were also sent a copy of the survey. In addition, several clerks from chambers in Sydney and other regional chambers were contacted and asked to bring the survey to barristers’ attention. Follow up was by way of phone call or email to the barristers’ clerks 2-3 weeks after the surveys were first sent. The survey was also advertised in the Bar Brief. ¹⁷

Response

A.39 A total of 47 surveys from barristers were processed. This consisted of barristers who had acted for guarantors, borrowers and lenders.

Judge Survey

Development

A.40 After identifying areas of further interest from responses to the solicitor and barrister surveys the research team formulated a brief survey for completion by judges. In particular, we were interested in the settlement prospects and rates of litigation in third party guarantee matters. The survey was piloted on 3 judges, whose valuable comments were incorporated into the final survey instrument.

Distribution and follow up

A.41 The judge survey was sent to all judges of the Supreme Court of NSW, District Court of NSW, and Federal Court of Australia.

Response

A.42 A total of 46 surveys from judges were processed. A number of judges responded that they had little or no experience adjudicating matters relating to third party guarantees, but very detailed comments were received from those who did have experience.

Lender Survey

Development

A.43 The Reference Group assisted with development of an instrument to survey lenders about their experiences with third party guarantees and guarantee-like transactions. It was hoped that the participation of the finance sector in this research would help us to identify both lenders’ current practices in seeking guarantees, and how they believe the law might regulate this area while protecting their legal and business interests. This information was sought by means of a survey of credit providers, to be supplemented, where appropriate, with interviews conducted with in-house legal counsel in a number of key financial institutions.

A.44 The final survey comprised questions seeking statistical information on the incidence and prevalence of third party guarantees, information on guidelines as they relate to third party guarantees, and information on enforcement of third party guarantees.

Distribution, follow up and response rate

A.45 Survey documents were sent to 112 lenders including banks, building societies, credit unions and finance companies.¹⁸ Assistance was sought from lenders’ peak bodies, including the Australian Bankers’ Association (“ABA”), the Australian Finance Conference (“AFC”) and Credit Union Services Corporation Limited (“CUSCAL”) requesting that they encourage their members to participate in the research. The ABA did not respond to our survey, however the AFC and CUSCAL did give valuable assistance.

A.46 Lenders were sent follow up correspondence after one month, and major lenders were telephoned several times over the months that followed.

A.47 The response from the finance industry was, largely, very disappointing. Only two major banks, 2 smaller bank lenders and 3 finance companies responded to the survey and provided the project with information of varying substance.¹⁹

A.48 To analyse lender practice, the project made use of data from submissions the Law Reform Commission received in response to Issues Paper 17: Guaranteeing Someone Else’s Debts.

Case Law Review

A.49 It was hypothesised that an analysis and comparison of decisions of higher and lower courts and tribunals would reveal significant variations in their understandings or applications of the law in this area. However, at an early stage in the project it was apparent that lower courts and tribunals either do not hear many third party guarantee cases, or have insufficient resources to track the matters. The Consumer Trader & Tenancy Tribunal (“the CTTT”) and its predecessors have a limited jurisdiction to hear third party guarantee matters.²⁰ While there are some decisions coming from the District Court, it has no process for identifying when third party guarantee cases are heard. Our consultations and research confirmed that the vast majority of third party guarantee matters that proceed to litigation in New South Wales are heard in the Supreme Court. However, some third party guarantee matters appear in the Federal Court as part of a bankruptcy matter, or under the unconscionability provisions of the Trade Practices Act 1974 (Cth).

A.50 To enable a comparative analysis of the courts’ decisions, the research team undertook a review of reported and unreported cases involving third party guarantees decided since the High Court’s decision in Garcia in 1998. The research team developed a digest of 52 recent cases from 1998 to October 2002, summarising the facts of each case, the claims or defences and the court’s decision and other key pieces of information. A set of 30 key issues were identified for inquiry, mostly mirroring the issues raised in the guarantor and lawyer surveys.²¹ The cases analysed for the case law review are indicated with an asterixis in the case index in Appendix C. A number of significant decisions were handed down in late 2002 and early 2003. These are not part of the case law review, but are discussed in detail in the report.

ACKNOWLEDGEMENTS AND CONFIDENTIALITY

A.51 An important issue in the conduct of this research project was the issue of confidentiality. We wished to encourage respondents to speak freely about their experiences and attitudes. All survey respondents were informed of the confidential nature of the research and assured that no identifying information would be included in our published findings. The research team adhered to relevant protocols relating to confidentiality as required by the University of Sydney Human Ethics Committee. Survey respondents and interview participants took part voluntarily after being approached by members of the project team, or being contacted and invited to participate by their financial or legal advisers.

A.52 We are extremely grateful to those who took the time to respond to the surveys. In particular, the researchers are indebted to consumer advocate groups for encouraging their clients to respond, and to the guarantors themselves for their willingness to contribute their stories.

1. See Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 10.

2. In particular, the Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996); Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997); Radmila Jukic, Till Debt Do Us Part (Consumer Credit Legal Service, 1994); For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, 1995).

3. Robert Burgess, “Multiple Strategies in Field Research” in Robert Burgess (ed), Field Research: A Sourcebook and Field Manual (Routledge, 1991) at 163.

4. In particular, the Financial Counselling Service of NSW.

5. In particular, the Consumer Credit Legal Centre NSW and the Women’s Legal Resource Centre.

6. In particular, the NSW Department for Women and the NSW Department of Fair Trading.

7. In particular, assistance was obtained from the Australian Finance Conference and the Credit Union Services Corporation Limited (CUSCAL).

8. Including Community Legal Centres, the Legal Aid Commission of NSW, Financial Counselling Service of NSW.

9. John Barnes, Who Should Know What? Social Science, Privacy and Ethics (Penguin, 1979).

10. The research was publicised by radio interviews on local ABC radio stations, the Alan Jones Show on Radio 2UE and SBS Radio.

11. Such as the Australian Consumers’ Association and the National Association of Community Legal Centres; we also sent information to the NSW Farmers’ Association, the Country Women’s Association and various electronic bulletin board services including the Rural Women’s Network.

12. Supriya Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, 1995) at 20.

13. We chose these languages after we consulted credit and debt caseworkers to find the three community groups whose constituents were, in their opinion, most likely to have problems with third party guarantees.

14. Kirsten Anker, “Getting to the bottom of third party guarantees” (2002) 40 Law Society Journal 34.

15. Surveys were sent to law firms practicing in the areas of Retail Banking & Consumer Credit, Corporate Advisory, Competition Law and Consumer Protection, Debt Recovery, Project & Structured Finance. See Legal Profiles 2001-2002 edition, at http://www.legalprofiles.com.au.

16. This included specialists in Advocacy (commercial law and common law); Business law (business disputes, business structures, commercial real estate, corporations law, insolvency, business/companies sale and purchase); Commercial litigation (corporations law, insolvency law, banking law) and Property law (Mortgages and securities law).

17. A newsletter of the NSW Bar Association. See (2002) 94 (June) Bar Brief at 20.

18. The confidential nature of the research means the project can not publish the names of the lenders.

19. We also had letters from 2 building societies and 2 minor banks stating that they either do not keep the kind of information we were seeking or do not provide loans which require guarantees.

20. Claims at the CTTT are limited to matters under the Consumer Credit Code. As such there is no jurisdiction to hear matters involving commercial loans; nor is there jurisdiction to hear Contracts Review Act 1980 (NSW) claims.

21. It was not always possible to identify each of the issues from the judgments. Wherever possible, court files were examined to get the information not referred to in a judgment. Nonetheless, the review of litigated cases represented a significant analysis of the current common law.