“The melancholy truth is that Mrs Correy mortgaged her home for a substantial sum to help a son … Such is a mother’s love.”1
3.1 Although it has been noted that, “Trusting wives and elderly parents from non-English speaking backgrounds are familiar characters in Australian contract law”2 , there is very little information about those who guarantee loans for others beyond the law reports. While research has identified that some guarantors, in particular those who have a close personal relationship with the primary borrower, and those from non-English speaking backgrounds appear to be at particular risk, most research has based its findings on anecdote or upon reported case law rather than upon empirical research.3
3.2 A major aim of this research was to investigate more fully the experiences of, and problems faced by, third party guarantors who do not appear in the litigated cases. We wanted to find out who the guarantors in the community are, how old they are, what their backgrounds are, what their relationships with borrowers are, why they sign guarantees, what kind of information they have, and what kind of information they need. We wanted to ascertain whether widespread assumptions about the make-up of guarantors – that they are largely women, predominantly the wives of men operating small businesses, and that a large proportion of guarantors are also from non-English speaking backgrounds – could be confirmed.
3.3 What we found was that the majority of guarantors are indeed women, that they mostly guarantee loans for borrowers who they are in a close personal relationship with, and many of them are elderly. A large proportion of guarantors are also from non-English speaking backgrounds. Details of the data collected are summarised below.
3.4 Some of these categories reflect those that have been considered by courts in Australia as relevant to a legal claim of unconscionability. To be entitled to claim relief from a transaction for unconscionability the claimant must show that they were under a “special disadvantage” which the other party was, or ought to have been, aware of and took advantage of. Factors such as old age, lack of formal education and inability to speak or read English have all been considered as “special disadvantages”.4
3.5 It should be noted that these categories are not self contained, and many guarantors would be placed in more than one: for instance if they were older women who were from a non-English speaking background. Likewise when the reasons why guarantors agreed to the transaction are explored later in this chapter, it should be recalled that there is a considerable overlap between categories, as respondents gave more than one reason for their actions. The headings in this chapter are therefore only a guideline, and are not intended to suggest that the many issues outlined below can be readily separated out.
GUARANTOR CHARACTERISTICS
Gender
3.6 The survey of guarantors revealed almost two-thirds of those who guaranteed loans were women.5 This was very closely mirrored in the review of litigated cases which revealed that 65% of guarantors were female, while 15% were male (in the remaining 19% of cases, the guarantors were groupings of family members, predominantly husbands and wives as co-guarantors or co-borrowers). One financial counsellor advised that in his experience guarantees affect women three times more often than men.6
3.7 The gender breakdown of our guarantor respondents reflects similar findings in research conducted in Victoria in 1997. The study found that:
“… women are more willing than men to guarantee loans …. While women comprise roughly two-thirds of the sample, they represent more than three-quarters (77.8%) of those who have guaranteed loans. More than one-fifth (20.6%) of the 188 persons surveyed say they would guarantee a loan for their spouse. Women say it more often than men. More than one-fifth (21.4%) of the persons studied … say they would do so for their child. This includes nearly the same proportion of men and women.”7
3.8 In Fehlberg’s UK study only 2 of the 22 guarantors were male. The higher proportion of men in our study arises due to our inclusion of all guarantors, rather then just spouse and partner guarantors which Fehlberg’s study was limited to. Our study was comparable to Fehlberg’s in that a very small number of men guaranteed a female partner’s debts. Male guarantors appeared in our study largely as parents of the primary borrower, while women were most likely to appear as the partner of the borrower. The marked gender disparity in the relationship of guarantor and borrower is discussed further in the section on relationships.
Age
3.9 The respondents to the guarantor survey were generally from higher age brackets, with 65% of respondents over the age of 50.
figure 3.1: age of respondents
The highest proportion were 60 years or over (37%); followed by 28% aged between 50 and 59; 21% between 40 and 49 years; 8% between 30 and 39 years and 6% under 30 years old.
3.10 This is consistent with the statistics on the relationship between the borrower and guarantor from our review of litigated cases, which pointed to a high proportion of parents guaranteeing loans for their own children (29%); and a further small percentage of parents guaranteeing loans for sons-in-law.8
3.11 These statistics indicate that older people are disproportionately represented in problematic third party guarantee transactions.9 Men appear particularly likely to be guarantors later in life: only 8 male guarantors were under the age of 50, while 21 were over. However, it should be noted that in every age range women outnumbered men, and so men over 50 were still far less heavily affected than women over 50.10
3.12 There is significant potential for pressure to be brought to bear on elderly parents, especially by someone they trust. The Aged Rights Advocacy Service has documented a high and rising incidence of financial abuse of elders – defined as “the illegal, improper use and/or mismanagement of a person’s money, property or resources”. In 2001 the service noted that 43% of their clients reported financial abuse.11 Commentators have noted that older people are particularly liable to be asked to guarantee adult children’s debts because they are likely to be in possession of valuable security: an unencumbered residential home.12 It is also possible that older people may also be less likely to pursue legal action after problematic guarantees are enforced.13
Country of birth and language background
3.13 The Australian Law Reform Commission has noted that credit contracts cause particular problems for people of non-English speaking backgrounds, and especially recently arrived migrants, as communication difficulties lead to information imbalance.14
3.14 A considerable proportion of respondents to the guarantor survey were overseas-born or did not speak English as their first language. Around 40% of our guarantor survey respondents were born outside Australia – this is around double the level of overseas-born residents in the general Australian population.15 Of those born outside Australia, 85% were from non-English speaking countries – a figure more than double that in the population as a whole.16
3.15 Twenty per cent of respondents to the guarantor survey spoke a language other than English as their first language. Of those who indicated that English was their second language, the majority indicated that their level of spoken English was weak or fair,17 while half reported their understanding of written English was weak.18
3.16 The barrister survey data reveals that over one-fifth of their clients were from a non-English speaking background.19 Most judges reported that many trials had a third party guarantor from a non-English speaking background.20
3.17 This very high over-representation of people from non-English speaking backgrounds is reflected in litigated cases. In our review of litigated cases we found that 42% of cases involved guarantors from a non-English speaking background. These figures indicate that there may be significant issues for many guarantors with language and their ability to understand written and spoken information about the guarantee transaction. Yet our review of litigated case found that very few guarantors from non-English speaking backgrounds successfully had a guarantee set aside on this basis.21 This issue is discussed further in Chapter 7: Litigation.
3.18 The above statistics differ markedly from the solicitor survey. Solicitors reported that the last time they gave advice in relation to a guarantor prior to signing the guarantee, only 5% of such clients were from a non-English speaking background. This suggests that guarantors from non-English speaking backgrounds are not receiving advice prior to signing guarantees: a time where advice as to liability under a guarantee contract is critical.
3.19 Clearly, people from non-English speaking backgrounds appear to be disproportionately affected by problematic third party guarantees. The issue of culture and ethnicity in third party guarantee transactions is discussed in further detail below.
Literacy
3.20 Most guarantor survey respondents stated their ability to speak English was good or very good,22 while 3% rated their ability as weak and 10% as fair. This degree of confidence declined somewhat with written English. While a similar proportion described their ability as good or very good,23 11% reported their ability as weak and 5% as fair.24
3.21 Levels of confidence with the English language generally contrasted with the respondents’ degree of comprehension of specifically legal documentation. Twenty-seven per cent of the respondents reported that they could not read, or understand the documents that they signed.
Level of education
3.22 A guarantor’s level of education is often referred to in the context of litigation, where in assessing claims of unconscionability the background of the guarantor is discussed.25
3.23 A quarter of our guarantor respondents had not completed high school education. While 12% reported that their highest level of education was primary school, a further 13% had undertaken only some secondary school.
3.24 Most guarantors had some secondary education and a technical or university qualification: 29% had completed high school, a further 20% had a technical or trade qualification and 26% had completed a university degree. When educational level was recorded by gender, we found that men were somewhat more likely than women to have been educated post-secondary school.26 This level of higher education is roughly in accord with that found by Fehlberg in her UK study.27
Financial position of the guarantors
3.25 The research team examined the financial position of the guarantors at the time they entered into the transaction to ascertain whether the guarantors had the capacity to undertake responsibility for the loan should they be called upon to do so.
3.26 Survey data revealed that guarantors were generally not in a strong financial position when they agreed to undertake the guarantee. Respondents were asked to describe their own financial situation at the time of signing the guarantee. While 60% said it was fairly strong or very strong;28 it is significant that 40% described it as fairly weak or very weak.29 This finding is reinforced by the fact that 49% of respondents reported that at the time they gave the guarantee they did not believe they had the capacity to pay the loan if called on.
Relationships
“Family situations are more difficult because you want to help them out and you trust them.”30
“It would be a sad state of affairs if courts interfered as of course with gifts and beneficial transactions effected in favour of children in circumstances where it could truly be said that they were entered into “in consideration of the natural love and affection” that parents have for their offspring. Every day of the week, indeed far more frequently, parents make gifts to children though they might be disadvantageous to themselves.”31
3.27 Many studies have reported 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.32 This research did not explicitly seek guarantors who had signed guarantees in the context of close personal relationships. However, the results did reveal that the vast majority of guarantees or joint loans were signed by close family relatives: mostly female spouses, followed by parents of borrowers.
3.28 The survey of guarantors revealed that 83% of guarantors were in a close personal relationship with the borrower. Of these, 39% of loans were guaranteed by a partner or spouse of the primary borrower; 26% had signed as a guarantor for a loan for their adult child, and 18% had signed for another relative.33
3.29 The review of litigated cases revealed similar results: 43% of the guarantors were the spouse or partner of the primary borrower. Thirty five per cent were parents guaranteeing loans for their children and 12% were other relatives.34
3.30 The survey of solicitors revealed that the last time they gave advice in relation to a guarantee over three quarters of the guarantors and borrowers were in a close personal relationship.35 The barrister survey statistics also revealed over half of guarantors were in close personal relationships with the borrower.36 Judges confirmed this trend when they stated that the vast majority of litigated guarantor cases they see before the courts involve wives guaranteeing debts for their husbands and parents guaranteeing loans for their children.
figure 3.2: relationships between guarantor and borrower
3.31 When we examined in more detail the relationships of those who responded to our guarantors survey, we found a distinctly gendered pattern. Men were most likely to appear as guarantors for the debts of their children (9), followed by a sibling or some other relative (5), business associate (4) or friend (2).37 Only 2 men were the guarantors of a spouse or partner’s debt. This was starkly contrasted with female guarantors, the great majority of whom were the spouse or partner of the borrower (32 of 52 discernible relationships).38
3.32 Responses from lenders were less consistent. We asked lenders what proportion of guarantees are provided by family or people in close personal relationships with the primary borrower. One bank said it does not keep those statistics, another bank estimated that 80% of its guarantees of small business are given by directors of the borrower “in husband and wife combinations” and another 15% are given by wives in favour of businesses run by their husband. This bank said 5% of the guarantees that it takes are given by parents in favour of their children. The majority of smaller lenders said that guarantees from family members are only taken if they are involved in the business. The Australian Finance Conference submitted that, contrary to our findings, its members reported that guarantees are usually provided by a person who has a connection with the borrower but that it was rare to take a guarantee from any close family member unless it can be established that that person is closely associated with the benefits from that business.39
WHY DID THEY SIGN?
3.33 Third party guarantors are not directly involved in the transaction for which they provide security and often have much to lose and little, if anything, to gain from entering the transaction. An important task of the research project was to try to ascertain why someone would undertake so onerous an obligation. The survey results indicate the reasons why people sign on as guarantors are complex, especially in situations where the transaction involves family members.
3.34 By contrast, when third party guarantee matters come before the courts litigants are forced to rely on known legal categories such as duress or unconscionability when seeking relief. The courts often struggle when considering these complex interpersonal relationships which challenge the framework of traditional legal categories.41
3.35 Courts often look to the actual moment of execution as crucial to determining whether the transaction was informed with some kind of invalidating factor such as duress, unconscionability or misrepresentation.42 Our research indicates that the point of signing is often not as significant as the circumstances surrounding the relationship and the pressures on a guarantor to sign well before the execution. To get a more complete picture of the reasons why people sign it is necessary to look at what is going on behind the scenes prior to entering the guarantee. That is, what forces are operating – commercial, social and emotional – to make someone enter a guarantee. We also tried to ascertain what was going on at a more immediate and prosaic level and consider, therefore, questions such as who was with the guarantor when they signed and where they signed.
3.36 The stories gathered in the course of interviewing guarantors paint a complex picture of the reasons why a guarantee is signed. While many guarantors had some insight into the risky nature of the transaction or had misgivings, they still went ahead with it.43 This is consistent with Belinda Fehlberg’s findings in her UK study.44 Our guarantor survey data revealed that many guarantors value their relationship over and above any concerns they may have about a transaction. Forty-one per cent reported that they agreed to the guarantee because they did not want to risk or damage their relationship with the borrower by failing to act as a guarantor. A significant proportion of guarantors reported that they did not understand what they were doing at the time of the transaction.45
3.37 Clearly, many of these reasons cannot be easily translated into discrete and identifiable legal claims or categories. These factors are explored below.
Economic dependence
3.38 Some women who provide guarantees for the business enterprise of their husband are likely to be influenced in their decision making by their economic dependence on their spouse, particularly where they primarily perform unpaid work and the spouse performs more or better-paid work.47 Belinda Fehlberg argues that economic dependence in heterosexual couples, particularly when women are primarily involved in child-care, means that “men are both likely to have greater control over domestic financial arrangements, and to feel more entitled to mobilize the available resources for their personal use.”48 Fehlberg found in her UK study that non-income earning wives with children had the least power over family finances.49
3.39 While we did not specifically ask guarantors about whether they were economically dependent upon the borrower, or about whether the borrower controlled family finances, it was clear from several responses, discussed below, that this was the case. Almost one-third of the respondents to the guarantor survey reported that they signed because the borrower made the financial decisions in their relationship and that they just did as they were told with respect to these transactions. A further 17% reported that they were partners and it seemed right to share – of these the great majority were women.50
3.40 In 14% of the litigated cases we reviewed the guarantor claimed financial or emotional dependence on the borrower as a factor influencing their decision to sign the documents. According to the wife in one of these cases:
“I felt totally dependent on [my husband] financially and emotionally. If I had been asked … to sign the Guarantees by him, I would have done so without questioning his judgement because my health, my marriage and my children were vulnerable if any conflict were to arise between us.”51
In another litigated case a woman explained that she did not ask any questions about the documents because she was too embarrassed to ask questions in front of her husband, who was threatening to leave her and was present when she signed them.52
3.41 The factors explored below reflect the categories that we asked guarantors to respond to as reasons why they entered into the transaction. While focusing upon these specific responses we do not mean to suggest that structural inequalities are not present.53 Indeed, they inform many of the comments made by guarantors. Structural gender inequalities include a greater likelihood of women’s economic dependence upon a male partner who is the primary borrower, engendered typically by prime responsibility for child care and consequent broken workforce participation. Other structural inequalities arising from economic imbalance and dependence many also be present in other relationships, for instance the large number of elderly guarantors who were supporting the borrowing of adult children. Although elderly guarantors are comparatively asset rich – often it is an unencumbered home that is the security for the loan – they are liable to be income poor. In such situations, adult children may be an important source of income support or future security.
Trust
3.42 An overwhelming majority of respondents said one of the reasons they signed the guarantee was because they trusted the borrower.56 The issue of trust featured even more prominently where the guarantor was in a familial relationship with the borrower. Such trust may be qualified – some respondents indicated that they signed because they trusted the other person, but added their own comments such as “to an extent”, “but pressured.” Notably many guarantors reported that they wouldn’t think of openly questioning the request to act as guarantor because this would indicate a lack of trust.57
3.43 The data from our surveys and review of the litigated cases confirms the proposition that women place a high value on trust in their relationship: many believe that their relationship with the debtor obliges them to help him obtain credit.
Optimism
“You always hope that it will be alright…that it will be for the best.”58
3.44 Caseworkers, financial counsellors, lawyers, judges and policy workers generally agreed that people signing as guarantors (leaving aside those who are clearly misled, duped or the like) are generally optimistic: they think that, as guarantor, they will never be called on to repay the loan.
3.45 One barrister made the following observations:
“The real problem is that no-one signing a guarantee really believes they will be obliged to pay. Human nature is the problem, not banks or other lenders.”59
One lawyer commented:
“People will give guarantees unwisely because they have dreams and aspirations and can only achieve those by borrowing. Most guarantees are given by spouses and company directors/shareholders who share the dreams.”60
3.46 The decision to enter into a guarantee to secure a family member’s loan is often informed by factors other than sound commercial ones, and undertaken without any assessment of risk. Optimism in the other person’s ability to repay the debt is often informed by the desire to help another family member get ahead, a high degree of personal trust in the borrower or a desire to affirm a developing relationship.61 Belinda Fehlberg noted in her UK study that when the loan was to support a new business, there was a high degree of optimism both from the borrower and their guarantor spouse, most of whom described themselves as, “happy to support the debtor because they believed in his or her abilities and therefore believed that the business would be successful.”62
3.47 In our survey of guarantors the respondents were not asked specifically whether they were optimistic about the transaction. However, 44% said they didn’t think signing involved any serious risk and the same portion responded that they thought the transaction was for the family’s financial benefit.
3.48 Optimism may reflect ignorance about the extent of liability for a debt. One financial counselling service reported “[our] service finds that most people, whether highly educated or not, are not aware that they are liable to repay the full loan, they believe that they are liable for 50%, or some other portion.”63
3.49 The Australian Banking Industry Ombudsman (“the ABIO”) states that:
“The experience of the ABIO is that a common response to a guarantee being called up is one of shock on the part of debtors and guarantors. It is rare to find a case where a guarantee has been signed with any expectation that it will be called upon or with any financial planning being done to prepare for this occurring ... [t]his may be influenced in particular cases by statements by the debtor or the lender or both that ‘your house is not at risk’. It may result from a natural unwillingness on the part of the guarantor to believe that the worst will happen.”64
This was confirmed in our research. Eighty-two per cent of respondents to our guarantor survey reported that when they found out there was a problem with the debt, it came as a big shock for them.
Lack of choice
3.50 Whether the guarantor actually had a choice about whether they signed is not a straightforward issue. While there may ostensibly be a choice about whether someone signs a guarantee, the choice may be often more notional than real.
3.51 Over one-third of respondents said they did not feel that they had a choice about whether they signed the documents.67 Of those who reported this as a reason they signed, the great majority were women.68 This is consistent with the findings of Belinda Fehlberg’s UK study, which found that “Sureties consistently said that at the time of signing, they felt they had no choice about whether or not to sign”.69
3.52 The absence of choice must be broken down to better understand what people meant when they say they didn’t feel they had a choice. Sometimes it meant that they were under pressure or duress to sign, such as facing threats of physical violence. Sometimes it referred to an overbearing sense of obligation, such that the guarantors feared that a relationship would be irreparably damaged if they refused.
3.53 Fehlberg noted that for five of her guarantors, “the idea that they had a choice had never entered their minds. It was just assumed by themselves, and by all around them, that they would sign. In the context of their relationship with the debtor, signing was an automatic reaction.”70 Likewise, our review of the litigated cases found that it was not uncommon for women sign guarantees for their husbands, in particular, for no other reason than that they were asked to sign. In these cases there was clearly no consideration of the merits or benefits of the transaction. Such unquestioning acquiescence tends to indicate that any choice, or any discussion about the matter, may be more apparent than real for those women – they did as they were told. For example, in Commonwealth Bank of Australia v Stavrianos, Mrs Stavrianos gave evidence of how she would be asked to sign documents by her husband:
“He was asking me to sign it, not whether I would. “Darling, please sign this form” would be the way he would put it.”71 (emphasis added)
3.54 In some instances, there was really no other option but to sign if the guarantor wished to remain in their relationship with the borrower. One barrister commented in our survey:
“for the sake of domestic harmony there is usually irresistible pressure on the guaranteeing spouse to sign.”72
Fehlberg notes that this can entail a combination of both economic and emotional pressure which means that for the guarantor the question of choice became “largely irrelevant”.73
3.55 Dependency, vulnerability and absence of real choice do not always fall into the neat legal category of “undue influence”;74 nor does it necessarily fall within the parameters of unconscionability. Several respondents felt that they were under an emotional or moral obligation to help family or repay assistance from other family members. Below are some of the comments made by guarantors:
“the company directors stated that I had a moral obligation to assist them during a cash flow period as I had a safe government job and I would be putting eight people out of work in a high unemployment area [if I didn’t sign the guarantee].”75
3.56 The guarantor survey found that many parents who assisted their children with loans did so out of a sense of moral obligation.
“It was for my daughter and I would do anything for my children.”76
“a family situation – wanted to help son…family situations more difficult because you want to help them and you trust them.”77
“due to family relationship – he was my son.”78
“we are family. It is the right thing to do for your family.”79
The issue of choice was also connected to pressure and threats of violence. Vulnerability to pressure was implicit in many of the responses from guarantors in our surveys.
Pressure
“I was too scared not to sign – he’d leave or kill me.”80
3.57 Fehlberg’s UK study found that pressure ranged from actual physical violence to more subtle forms of emotional pressure.81 Our observations were consistent with these findings; many guarantors reported they signed because of a range of pressure of various kinds.
3.58 Guarantors reported a large amount of emotional pressure.
3.59 Solicitors also commented that family pressure is one of the main reasons why guarantors sign, despite being advised against doing it. Such emotional pressure is also reflected in the reported cases.84
3.60 Guarantors also reported pressure that amounted to harassment or direct threat:
3.61 Of 16 guarantor respondents who reported that they were “too scared not to sign”, 14 were women. Among other comments offered by guarantors to explain why they signed, several women but only one man reported threats, harassment or pressure to sign.
3.62 Our review of the litigated cases confirmed the proposition that courts are often reluctant to consider the relevance and importance of a background of violence (particularly violence that is “domestic”) in cases that aren’t directly about “violence” – that is, outside the sphere of criminal law.87 How evidence of violence in a relationship is treated by the courts is dealt with in further detail in Chapter 7: Litigation.
Culture and Ethnicity
3.63 Cultural factors concerning the way people perceive their role and responsibilities within their community and family are significant. The Expert Working Group on Family Financial Responsibility identified cultural attitudes as further complicating transactions involving family members.88 Cultural obligations and responsibilities mean that a guarantor may feel obliged to provide assistance to family members and other members of their community with no consideration of the commercial viability of the transaction.
CULTURAL FACTORS
Mr V is a 74 year old pensioner, with a University education in Vietnam. In 1995 he mortgaged his home to assist his son-in-law develop a shopping centre.
In 1998 the bank commenced proceedings for possession of his home after the son-in-law didn’t make his repayments. Mr V said he signed the guarantee because his son-in-law had sponsored him to Australia many years ago.
Because of this he felt “indebted to him and felt obliged to help him.” Mr V said he felt “an emotional obligation to repay this ‘debt’” of sponsorship to his son-in-law. In the end son-in-law left his daughter and is now a successful businessman, and Mr V lost his home. Mr V says, however, that if someone else was in his shoes he would do the same “because of the family situation and especially the sponsoring”.89
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3.64 The Australian Law Reform Commission’s Report, Multiculturalism and the Law notes that migrants and refugees often arrive in Australia with special needs which makes them more reliant on credit than other members of the community.90 They may have no savings and few possessions. The report further states that the downgrading of government sponsored post-arrival accommodation and bond requirements for certain categories of migrants have made the need for credit even more immediate. Migrants are likely to require credit in order to establish themselves after arrival in Australia and many set up a small business in order to gain an income. Lack of credit history or savings means that recent migrants are more likely to require a guarantor or co-borrower in order to obtain credit.91 The pressure on family members to provide a guarantee for a relative or community member is overwhelming in some cultural contexts.
3.65 One participant of non English speaking background in the guarantor survey, and his wife, agreed to provide security over their home to guarantee a loan for the benefit of some friends because they wanted to help out the friends who were new immigrants.92 In another case, an Iranian man who had received temporary financial assistance from another Iranian man when his marriage broke down later felt a moral obligation to provide him a guarantee.93
3.66 The ALRC noted that its consultations indicated that people with bargaining disadvantages (including language problems) are particularly vulnerable to unfair practices including inadequate or misleading information about terms and conditions. These factors were borne out in our research.
3.67 Additionally, there appears to be considerable cultural confusion about what exactly a guarantee is, as such transactions are not universal. Third party guarantee liability is sometimes a completely foreign notion to people from different ethnic backgrounds. For example, in Tong v Esanda Finance, it was apparent there was no concept of the meaning of “mortgage” in Vietnamese, let alone third party mortgage liability.94 One judge surveyed in this research noted:
“… I have come to doubt that people from different legal cultures even suspect that they could become liable for a loan in which they have no direct interest and from which they have derived no benefit. The idea that a moneylender can secure two debtors for the price of one is quite foreign! The particular case which I recall involved a request from a companion who had shared with the person he persuaded to act as guarantor the horrors of refugee camps and I am sure that the guarantor believed that he was presenting his title deeds to show that he was not a man of straw and as such could credibly recommend the borrower to the moneylender. The matter was complicated by a perfunctory signature before an ‘independent’ solicitor who did little beyond ensuring that signatures were affixed to the ‘right’ places. The solicitor was joined by cross claim … I believe that the whole notion, inherited from English law, may be little understood by a significant proportion of Australians from non English backgrounds and I would commend investigation.”95
Misunderstandings and misinformation
Mrs A, a sole parent with 8 children, with limited English, was approached by her brother-in-law to be a guarantor for loan of $10,000 to purchase stock for his business. The brother-in-law defaulted and the lender pursued Mrs A, attending her home and threatening to evict her and her children unless she made payments. Upon obtaining legal advice, Mrs A discovered for the first time that:
1. She was in fact a co-borrower and not a guarantor
2. the loan was for $30,000, and not $10,000
3. the debt was secured over her home.96
3.68 Previous reports on third party guarantees and family relationships highlight the potential dangers for guarantors that arise out of misunderstanding the documents or the transaction.97 Our research confirms that many guarantors sign without an understanding of the nature of the transaction. Guarantors experience both factual and legal misunderstandings about the transaction as a result of misrepresentations, failure to read or understand the documents, lack of competent legal and financial advice, lack of business experience and different cultural expectations.
3.69 The litigated cases and results of our surveys point to an alarming level of guarantor misunderstanding about many elements of the transaction. In many cases there appeared to be a fundamental misunderstanding about the way a mortgage operates. In our consultations consumer advocates expressed the view that there is low level of understanding about basic concepts such as liability (joint, several or secondary) in the general community and that some people do not understand what a guarantee is at all.98 It appears there is also a general misunderstanding about the obligations for contribution of co-guarantors.
3.70 The research found that there was not a simple line that could be drawn between understanding and misunderstanding the transaction; rather there was a wide range of misunderstandings, assumptions, deceptions and half-mistakes that formed a continuum of error. Such errors cover a range of issues including: the period of liability; the amount for which they could be liable; what their role in the transaction actually was (that is, were they are guarantor or a borrower) and whether the loan was secured over property.99
3.71 The reasons for the many varieties of misunderstanding are complex: it could be that deceit or fraud are involved, or a guarantor’s lack of knowledge is not remedied, or that other social or cultural factors impinged on the ability of the guarantor to make an informed decision about signing.
3.72 The range of confusion or misunderstanding is evidenced in the cases and survey responses:
“I thought I was a character reference only for my son; thought I was a guarantor for my daughter and I had no idea it was a co-loan.”100
“I thought that because the business was in both names just thought signature required: didn’t know severally liable … I wouldn’t have signed if I knew my liability under the partnership.”101
“Actually I thought I was a co-borrower and not a guarantor. I asked several times for a copy of the contract to see whose name appeared on same. I was not sent one.”102
“I didn’t understand any of it, no legal or business mind. All legal stuff that I didn’t understand.”103
3.73 Many guarantors were under the mistaken apprehension that they were only signing a guarantee for a limited period of time.104 Others thought that signing was a mere formality and did not understand that this meant they were putting their homes at risk. Some thought they were merely signing a personal overdraft.105 In our review of litigated cases we also found that guarantors commonly claimed they were misled by the borrower about the transaction.106
3.74 Lack of information about liability, or a misunderstanding about the nature of the transaction must be distinguished from cases where the signature was procured in fraudulent circumstances such as forgery.107
Would the guarantor have signed regardless?
3.75 Legal responses to the problem of third party guarantee transactions have tended to focus upon the provision of information, usually in the form of legal advice prior to signing. Recommendations have also on occasion focused upon the provision of financial advice or information about the borrower’s financial position.
3.76 While we did not explicitly ask guarantors whether they would have signed regardless of information, warnings or advice, the following are some of the comments made by guarantors which indicate that for some the execution of the guarantee was, in effect, a forgone conclusion:
“being [guarantor] for my daughter, I was not worried one iota as I was helping her.”108
“… sick at the time, didn’t want to worry about things so I just signed.”109
“It was for my daughter and I would do anything for my children.”110
3.77 It appears that, for some guarantors at least, they would enter the transaction no matter what they knew about it in advance. In numerous Australian decisions judges have held that, although the guarantor was deceived or misinformed, if they would have signed under any circumstances, then relief should be refused because the misconduct was not the cause of the guarantor’s decision to enter into the transaction.111 Other cases have similarly held that the absence or inadequacy of legal advice would not permit relief if the guarantor would have consented to the transaction regardless.112 Such an approach has been doubted in decisions in the UK concerning situations where the guarantor was, in addition to such failures, misled.113
3.78 However, many respondents to our guarantor survey suggested that more information would have made a difference to their choice: had they been properly or better informed, they may not have proceeded with the transaction. The following are some of the comments from guarantors:
“I should have had independent legal advice. I should have had time to discuss the issue with financial/relationship counsellors.”114
“More information should be given to people like me … the lender should make it a rule that someone like me has to go to the bank and be fully aware of their legal rights and what could happen to them.”115
“… should explain things more, especially if husband and wife … should have been sat down, should have explained liability clearly.”116
3.79 The issue of what the guarantor knew when they signed and what advice or assistance they received is explored further in Chapter 5: The Guarantee Transaction.
CONCLUSIONS
3.80 Most third party guarantors are in close personal relationships with the borrower. Many are women who are the spouse of the borrower, a large number are also the parents of the borrower. People from non-English speaking backgrounds are dramatically over-represented compared to the general population and appear to be under-advised prior to entering into the transaction compared with other guarantors.
3.81 The reasons why people enter such risky transactions are not clear cut and cover a range of often intermingled factors including: relationships of trust, feeling a lack of choice, pressure, misunderstanding or optimism. Many such factors are clearly heightened in situations in which the guarantor is economically dependent upon the borrower.
3.82 Both the demographic information gathered by this research, and the reasons given by guarantors as to why they signed suggest that third party guarantee transactions are being regularly undertaken in situations of power imbalance. These factors suggest that many guarantors could not be regarded as making a free choice to enter into the transaction.
3.83 The following chapter outlines the credit environment in Australia and examines the regulation of lenders’ conduct in taking guarantees. In Chapter 5 we then examine in some detail guarantors’ experiences of giving guarantees.
FOOTNOTES
1. Pasternacki v Correy [2001] ANZ ConvR 240; [2000] NSWCA 333 at para 34.
2. Sue Mahalingham, “Deep and meaningful: Dealing with Emotionally Transmitted Debt” (1999) 3(6) Consumer Rights Journal.
3. See, for example, the report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions within Families and Between Friends (Report, 1996); Australian Law Reform Commission, Equality Before the Law: Women’s Equality (Report 69, Part 2, 1994).
4. For further detail see New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000).
5. 64.6% of respondent guarantors were women.
6. Richard Brading, Wesley Mission, Consultation 6 July 2001.
7. Supriya Singh, Marriage Money: The Social Shaping of Money in Marriage and Banking (Allen and Unwin, Sydney, 1997) at 50.
8. Notably there were no borrowers who were daughters-in-law.
9. According to data from the Australian Bureau of Statistics (“ABS”), 12.4% of the Australian population in 2001 was aged 65 years or older: Australian Bureau of Statistics, Australian Social Trends 2002, Cat. No. 4192.0 (ABS, Canberra, 2002) at 2. See Fiona Burns, “Undue Influence and the Elderly” (2002) 26 Melbourne University Law Review 499 for a recent comprehensive review of literature and cases involving undue influence and elderly people.
10. 39% of the guarantors were women of fifty or over, while 24% were men of that age.
11. Aged Rights Advocacy Service, “Abuse Prevention Program, Annual Summary July 2001 to June 2002”, http://www.sa.agedrights.asn.au/ (accessed 3 June 2003).
12. Juliet Lucy Cummins, “Relationship Debt and the Aged: Welfare and Commerce in the Law of Guarantees” (2002) 27 Alternative Law Journal 63.
13. See Rosslyn Monro, “Elder Abuse and Legal Remedies: Practical Realities” (2002) 81 Reform 42 at 44.
14. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992).
15. Guarantor Survey, Question 1. The 2001 Census reports 22% of Australia’s population was born overseas: see Census 2001 Cat. No. 2015.0 (ABS, 2002).
16. As at June 2000, of Australia’s overseas born residents, 39% were from the main English-speaking countries such as the United Kingdom or New Zealand: see Australian Bureau of Statistics, Australian Historical Population Statistics, Cat. No. 3105.0.65.001, AusStats Time Series Spreadsheets 2001 (ABS, 2001), 6. Migration.
17. Of 18 respondents in this category, three reported their understanding of spoken English as weak while eight said it was fair. Three stated that it was good and four very good.
18. Of 18 respondents in this category, eight reported that their understanding of written English was weak, two reported it was fair, four good and four very good.
19. 21% of barristers reported that the guarantor in the last guarantee matter that they acted on was from a non-English speaking background.
20. 47% reported that between 11-40% of trials they had sat on involved a guarantor from a non-English speaking background; 7% said the number was between 60-89%.
21. Only seven out of the 52 cases analysed in the Case Law Review were successful on these grounds, despite 42% of guarantors being from a non-English speaking background.
22. 21% and 66% respectively.
23. 18% and 67% respectively.
24. 9% and 5%.
25. See, for example, National Australia Bank v Petit-Breuilh [1999] VSC 368; [2000] ANZ ConvR 520.
26. 55% of male guarantors, compared to 41% of female guarantors.
27. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 104-105.
28. 48% and 12% respectively.
29. 23% and 17% respectively.
30. Guarantor Survey, Respondent 4.
31. Mitchell v 700 Young Street Pty Ltd [2003] VSCA 42 per Ormiston JA at para 2.
32. See, for example, Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997); Supriya Singh, For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria Inc, 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).
33. A further 7% signed for a friend; 8% signed for a business associate and the remaining 2% signed either for a business entity or their own company.
34. Four per cent guaranteed loans for friends; 4% signed for a business associate and the remaining 1% signed either for a business entity or their own company.
35. 54% spouses or de facto partners; 20% parents/children; 5% some other relative.
36. 30% were spouse or partner; 23% were parents of the borrower, and 2% were related to the borrower in some other way.
37. A further 2 men indicated “someone else” and 4 noted “some or all of the above”.
38. A further 9 women were the parent of the borrower, 7 were a sibling or other relative, 4 were friends, 2 were business associates, 2 were “someone else” and 4 indicated “some or all of the above”.
39. Australian Finance Conference Submission.
40. Cross-examination of Mrs Stavrianos from Commonwealth Bank of Australia v Stavrianos (Unreported, NSW Supreme Court, No 12224/94, Graham AJ, 17 October 1997) at 57.
41. See Janine Pascoe, “Wives, lenders and guarantees – new law in the UK and lessons for Australia” (2002) 17 Australian Banking and Finance Law Bulletin 117 at 124.
42. For further information see New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000).
43. 42% respondents agreed with the statements that they “it was a silly thing to do but they did it anyway”, while 54% agreed that they were nervous or worried about the arrangement from the start. Respondents could indicate more than one response.
44. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 165.
45. 33% of respondents said it was not true that they understood what they were doing at time, while 60% said it was true that they understood what they were doing. 8% were not sure or could not remember.
46. Sialepis v Westpac Banking Corporation [2001] NSWSC 101 at para 127.
47. Australian Law Reform Commission, Equality Before the Law; Women’s Equality (Report 69 Part 2, 1994) Chapter 10.
48. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 85.
49. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) Chapter 4.
50. Three men and 12 women noted that this was a reason they signed.
51. Brueckner v The Satellite Group (Ultimo) Pty Ltd [2002] NSWSC 378 at para 158.
52. Commonwealth Bank of Australia v Horkings [2000] VSCA 244 at para 16.
53. For a discussion of structural inequality and gender in guarantee transactions see eg: Paula Barron, “The Exercise of Her Free Will: Women and Emotionally Transmitted Debt” (1995) 13 Law in Context 23; Miranda Kaye, “Equity’s Treatment of Sexually Transmitted Debt” (1997) 5 Feminist Legal Studies 35; Kristie Dunn, “Yakking Giants: Equality Discourse in the High Court” (2000) 24 Melbourne University Law Review 427; Nicola Howell, ‘Sexually Transmitted Debt: A Feminist Analysis of Laws Regulating Guarantors and Co-Borrowers” (1995) 4 Australian Feminist Law Journal 93.
54. Guarantor Survey, Respondent 14.
55. Guarantor Survey, Respondent 6.
56. 76% said they signed because they trusted the borrower.
57. In its submission to New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000), the Country Women’s Association of NSW noted that “all too often the guarantee is between family members and asking for this information may be seen as distrusting or doubting the family member. This can be a very emotive issue and one sometimes hears a party state ‘Well, I didn’t like to ask him for that information in case he thought I didn’t trust him’”: Country Women’s Association of NSW, Submission at 2.
58. Guarantor Survey, Respondent 14.
59. Barrister Survey, Respondent 27.
60. Solicitor Survey, Respondent 77.
61. See Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial Transactions Within Families and Between Friends (Report, 1996) at 10.
62. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 131. See also 185-188.
63. Kate Keating, Telephone Consultation 5 July 2000.
64. Colin Neave, Australian Banking Industry Ombudsman, AFC Conference Paper, February 2000 at 13-15; see also Australian Banking Industry Ombudsman, Report on Relationship Debt Bulletin No 22, September 1999.
65. Reisch v Commonwealth Bank of Australia [1998] ANZ ConvR 628.
66. Sayer v Turk [2001] NSWSC 750, Transcript, Tuesday 21 August 2001.
67. 34% said they didn’t think they had a choice when they signed.
68. Five men and 24 women said that they didn’t think they had any choice when they signed.
69. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 181.
70. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 181.
71. Commonwealth Bank of Australia v Stavrianos (Unreported, NSW Supreme Court, No 12224/94, Graham AJ, 17 October 1997).
72. Barrister Survey, Respondent 41.
73. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 181.
74. See Janine Pascoe, “Wives, Lenders and Guarantees – New Law in the UK and Lessons for Australia” (2002) 17 Australian Banking and Finance Law Bulletin 117 at 124.
75. Guarantor Survey, Respondent 54.
76. Guarantor Survey, Respondent 3.
77. Guarantor Survey, Respondent 4.
78. Guarantor Survey, Respondent 5.
79. Guarantor Survey, Respondent 13.
80. Guarantor Interview, Respondent 1A.
81. See Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 267.
82. Guarantor Survey, Respondent 12.
83. Guarantor Survey, Respondent 21.
84. See eg Pasternacki v Correy [2001] ANZ ConvR 240; [2000] NSWCA 333.
85. Guarantor Interview, Respondent 1A.
86. Guarantor Survey, Respondent 11.
87. Reg Graycar, “Telling Tales: Legal stories about violence against women” (1996) 7 Australian Feminist Law Journal 79. See eg Sialepis v Westpac Banking Corporation [2001] NSWSC 101; Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413.
88. Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions within families and between friends (Report, 1996) at 10.
89. Guarantor Survey, Respondent 72.
90. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992).
91. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at para 11.3.
92. Guarantor Survey, Respondent 51.
93. Australia and New Zealand Banking Group Ltd v Alirezai [2002] QSC 175.
94. Tong v Esanda Finance (Unreported, NSW Supreme Court, No 20449/94, Grove J, 17 April 1996).
95. Judge Survey, Question 25, Respondent 17.
96. Case Study, Legal Aid Commission, In Whose Interest? <http://www.lawlink.nsw. gov.au/lac/lac.nsf/pages/avcoapp>.
97. Australian Law Reform Commission, Multiculturalism and the Law (Report 57, 1992) at para 11.4. See also the Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions Within Families and Between Friends (Report, 1996) at 10.
98. Jenny Lawton, Narelle Brown, Kate Keating, Consultations, July 2000.
99. See eg Ribchenkov v Suncorp-Metway Ltd (2000) 175 ALR 650.
100. Guarantor Survey, Respondent 71.
101. Guarantor Survey, Respondent 41.
102. Guarantor Survey, Respondent 34.
103. Guarantor Survey, Respondent 58.
104. See eg Guarantor Survey, Respondent 3. See also, Janesland v Simon [1999] ACTSC 35; Sialepis v Westpac Banking Corporation [2001] NSWSC 101.
105. See, for example, Commonwealth Bank of Australia v Khouri [1998] VSC 128.
106. See eg Micarone v Perpetual Trustee (1999) 75 SASR 1; Fraser v Power (2001) Aust Contract R 90-127; National Australia Bank v Starbronze Pty Ltd [2001] ANZ ConvR 247; Lang v Licciardello [1999] NSWSC 93; Westpac Banking Corporation v Bagshaw [2000] NSWSC 650; State Bank of New South Wales v Hibbert (2000) Aust Contract R 90-119; State Bank of New South Wales v Sullivan [1999] NSWSC 596; Farrow Mortgage Services Pty Ltd (In Liq) v Torpey (1998) NSW ConvR 55-857.
107. For example, St George Bank v Trimarchi [2003] SCNSW 151, where the guarantors’ son forged his parents’ signatures on the loan application and provided false information to the bank about their assets and liabilities. Sialepis v Westpac Banking Corporation [2001] NSWSC 101 and Commonwealth Bank of Australia v Khouri [1998] VSC 128 which concerned allegations of the husbands forging the signatures of their wives.
108. Guarantor Survey, Respondent 68.
109. Guarantor Survey, Respondent 7.
110. Guarantor Survey, Respondent 3.
111. See eg: Commonwealth Bank of Australia v Stavrianos (Unreported, NSW Supreme Court, No 12224/94, Graham AJ, 17 October 1997); National Australia Bank v Mitolo [2002] SASC 102.
112. See, for example, Farrow Mortgage Services Pty Ltd (In Liq) v Torpey [1998] NSWSC 114; Sapuppo v Ribchenkov [2001] FCA 1428.
113. See UCB Corporate Services Ltd v Williams [2002] All ER 28. See also Mark Pawlowski, “A post-Etridge World” (2002) Property Law Journal 5.
114. Guarantor Survey, Respondent 55.
115. Guarantor Survey, Respondent 33.
116. Guarantor Survey, Respondent 41.
