5.1 Most third party guarantee transactions proceed and are discharged without incident. Unavoidably, the bulk of guarantee transactions that came to our attention in the course of this research were the “bad stories”. A comparison of guarantee transactions that were discharged without incident with those which went awry would be useful to assist understanding what is “best practice” in this area. However, the research project was not provided access to such material by lenders.
5.2 This chapter first explores some of the complexity of the guarantee documentation itself drawing upon some of the documentation publicly available through law reports of litigated cases. It then examines responses from our surveys where guarantors reported on the situations in which they agreed to provide security. This information includes factors such as: what information the guarantor had, whose idea it was for the guarantee to be executed, where and when the transaction took place, who was present and what occurred.
5.3 If there are unjust circumstances surrounding a guarantee transaction (including the circumstances surrounding the execution of the guarantee as well as the contract itself) it may be set aside on the basis of equitable and common law principles as well as statutory provisions such as the Contracts Review Act 1980 (NSW). Such circumstances include inequality of bargaining power, unfair tactics and pressure, the inability of the guarantor to protect their interests and lack of information or independent advice about the financial and legal effects of the transaction.3 We do not focus upon the application of these legal principles but instead explore the transaction from the guarantor’s point of view. We then consider the role of legal advice prior to the execution of guarantee transactions.
5.4 It is relatively common for lenders to claim that while bad practices may have existed in the past, lenders are now closely regulated and are considerably more prudent in taking guarantees following various developments in court decisions on point.4 Over half of the guarantors who participated in our survey had entered the transaction between the years 1993 and 2002. Therefore a reasonable proportion of the data collected by the project reflects the way transactions have been conducted in recent years. Many of the transactions reported to us by guarantors were clearly undertaken since (and in spite of) significant reforms such as the Australian Bankers’ Association Code of Banking Practice (1993), the introduction of the Uniform Consumer Credit Code (operative since 1996), the extension of unconscionability provisions in trade practices legislation to cover small business (1998) and the High Court decision of Garcia v National Australia Bank (1998).5
THE DOCUMENTS
Intelligibility
5.5 The New South Wales Law Reform Commission’s Issues Paper Guaranteeing Someone Else’s Debt identified problems with legibility of security documents and the use of complex legalistic language in the documents.6 While plain language documentation may be more common than it was in the past, evidence suggests that guarantors may still not read the documents and instead rely on general comments made by the lender or the borrower about the nature of the obligation they are assuming.7 It is important to note, also, that the plain language reforms to documentation, including the warnings to guarantors under the Uniform Consumer Credit Code do not apply to those who guarantee business debts.
5.6 Some lawyers still feel that the documentation remains complex. Loan and mortgage documents have increased dramatically in size. One solicitor commented:
“Over 18 years in practice, I have seen loan and mortgage documents increase dramatically in size, various forms of independent advice certificates come and go and the occasional case where a guarantor successfully escaped liability. By and large, financiers seem to respond to successful defences of guarantee cases by focusing on closing ‘loopholes’ in their loan documents or pushing more responsibility on to solicitors to provide a back-stop, through use of certificates. We now have very complicated ‘plain English’ documents often (including) ‘all moneys’ securities and Consumer Credit Code disclosures which run for many pages but which average borrowers cannot understand. At the end of the day I think lenders need to accept more responsibility for their lending practices and, if they lend to ‘high risk’ clients, they should accept the fact that they will lose out sometimes.”8
5.7 Our research confirmed that guarantee documentation remains very poorly understood by guarantors. In our review of litigated cases, we found that in 73% of the cases the guarantor had not read the security documents. Guarantors who participated in the survey were asked whether they understood or could read the documents that they signed to give security for the loan. Twenty-seven per cent of respondents to this question stated that they could not read or understand the documents they signed. Problems identified by guarantors include the use of legal jargon and small print in contract documents and the large volume of paper. Comments from guarantors also highlight the difficulty in comprehending contracts when they do not have an opportunity to take the documents away to read and consider them:
“Didn’t understand any of it, no legal or business mind. All legal stuff that I didn’t understand, just did it for my daughter and hoped for the best.”9
“Documents should be easier to read. Any large company should fully explain liabilities. Very scary to be confronted by huge documents. Simplify documents. Need to make sure people read documents, and all of them, so they understand what they have signed up for. I did not know I had given a personal guarantee.”10
“At time of signing they made me sign so many papers and kept turning the pages and saying sign here. No time to read anything.”11
5.8 A recent case heard in New South Wales illustrates this issue well. The case concerned a loan and guarantee executed in 2000 in which the documentation consisted of a 58 page memorandum of mortgage, a six page deed of guarantee/indemnity and a 25 page deed of loan. The elderly guarantors, who were the mothers of the people operating the business receiving the benefit of the loan, were confronted with a total of 89 pages of documents.12
5.9 In guarantee cases the documents may not even be intelligible to lawyers. In a 2001 case concerning “all moneys” guarantees executed some years earlier, the judge stated
“The obscurity in the terms of the mortgage relied on by the Bank was evidenced by the difficulties experienced by Counsel for the Bank in dialogue with the bench in the present case. Experienced Counsel initially had difficulty even identifying the relevant clauses, let alone their exegesis or proper explanation. How could lay people, the more so if only educated to the degree that the Karams were, be expected to understand its complex obscurities without proper legal advice?”13
5.10 In another recent case the Court commented on the illegibility of security documents relied on by the bank in the course of an application by the bank for summary judgment and possession. The documents had been executed in 1994.
“I might add that the guarantee is in tiny print, and for example, the wording of paragraphs (1) is unintelligible. The document is illegible.”14
5.11 The following is a clause of a guarantee contract the subject of litigation. In this case, one of the guarantors, Mrs Torpey, received no real independent advice on this guarantee document, which allowed the lender to pursue her without first seeking repayment or pursuing enforcement against the debtors.
“Although, as between [the debtors] of the one part and the Guarantor of the other, the Guarantor is a surety, it is agreed that, as between the Guarantor and [the creditor], the within guarantee shall constitute a principal obligation and shall not be treated as ancillary or accessory to the Mortgage or any other obligation howsoever created, and may be enforced against the Guarantor notwithstanding any laches, compounding or compromise or any forbearance, extension of time or indulgence granted to [the debtors] or any other acts or omissions whatsoever on the part of [the creditor], AND the liability of the Guarantor hereunder shall not be affected by reason of the Mortgage, or any other security or agreement held, taken or entered into by [the creditor], at any time being or becoming, in whole or in part, invalid, illegal, unenforceable, void, voidable, defective or informal by reason of any act, omission, rule of law or equity or otherwise.”15
5.12 Through the course of our consultations and surveys, the issue of providing guarantors with better documentation and information about the guarantee arose. Opinions about the benefits of more information to guarantors were mixed. The approach of protecting guarantors “by throwing more paper at them”16 was doubted by some; others thought that more plain language documentation with clear warnings would assist. Over half of respondents to our guarantor survey said that more written and spoken information would have assisted them at the time they signed up to be a guarantor.17
“All moneys” clauses
“I did not know it was an all moneys mortgage and what that meant.”18
5.13 Provisions commonly known as “All Moneys” or “All Accounts” clauses are used in mortgage and guarantee documents in order to extend the liability of a guarantor to future advances by the lender to the borrower. They are open ended and complex and their construction may depend on reading a number of documents, such as a personal guarantee and a mortgage document, together.19 The “All Moneys” clause is often a term in the memorandum of common provisions; this is a separate document to the mortgage and the guarantee also executed by a guarantor.20 Such clauses are a major concern because guarantors may not be aware at the time they enter a transaction that they are providing a guarantee for all money owed presently and all money loaned in the future.
5.14 The complexity and potential ambit of “All Moneys” clauses (or “dragnet clauses” as they are sometimes known) is illustrated by the case of Johncorp Industries v Sussman.21 In that case a wife and husband executed a mortgage and also executed personal guarantees to secure certain debts. The mortgage contained an “All Moneys” clause. One loan was advanced to the husband only, and although the “All Moneys” clause in the mortgage did not cover that loan, the inter-relation of all of the documents was held to extend liability to the wife through a chain-reaction.22
5.15 Many guarantors are often unaware that their liability for a debt is caught by an “All Moneys” clause in a mortgage they signed many years earlier. In a case currently under litigation, Westpac is suing Mr and Mrs Gattellaro in reliance on a 1985 guarantee which was in turn secured by a 1977 “All Moneys” mortgage – despite the fact that even Westpac itself no longer had a copy of the 1977 document.23
5.16 The following is an extract from the Standard Mortgage Provisions of a major bank.24 According to the Land Titles Office, this document is still current:
“Principal money
At any time all money (unless otherwise agreed in writing by [the bank]) which:
(a) I owe to [the bank] at that time for any reason;
(b) Any other person owes to [the bank] at that time because of something that [the bank] does or does not do at my express or implied request;
(c) When [the bank] makes a demand under this mortgage or the question of payment arises, it is reasonably foreseeable that I or another person will owe to [the bank] arising out of some earlier transaction: with me; or with that other person at my express or implied request, whether or not the transaction is also with anyone else;
(d) Is money that [the bank] has received for crediting to any of my accounts but that: [the bank] has to pay to someone else because of a legal requirement ; or [the bank] has in its discretion paid to someone else upon a claim being made by a liquidator, trustee in bankruptcy or other person; or
(e) [the bank] pays, whether voluntarily or not, because some payment of, or transaction or arrangement relating to, money previously paid to it is or is claimed to be void, voidable or a preference.
Money which is described in each of the above paragraphs will be principal money:
(a) whether or not the money is due for payment at that time;
(b) even if the money is owing only on a contingency;
(c) whether I or the other person owes the money alone or jointly, or jointly or severally or in common with any other person and whether as principal surety;
(d) whether the relevant transactions took place before or after
I executed this mortgage; and
(e) whether or not the relevant transactions took place in the course of [the bank’s] banking business.
For example, principal money includes money which I owe or may owe [the bank];
(a) because [the bank] issues a letter of credit, or gives a guarantee or other undertaking, for me or at my request;
(b) because [the bank] draws, issues, accepts, endorses, purchases, discounts or pays any bill of exchange or promissory note for me or at my request;
(c) under any bill of exchange or promissory note which I issue, accept or endorse (including for example one issued, accepted or endorsed by a partnership of which I am a member) and which [the bank] holds in any capacity;
(d) under any leasing arrangement; and
(e) under any arrangement that [the bank] enters into for me or at my request to manage movements in foreign currency exchange or interest rates or other costs of obtaining financial accommodation.”
5.17 In order to gain a proper understanding of the section of the mortgage document extracted above it is necessary to read it with two other separate clauses. One of those clauses defines the secured money under the mortgage as “principal money” while the other states that where there are two mortgagors the obligations in relation to the secured money applies to each of them individually and together, that any one of the mortgagors can exercise rights in relation to the secured money on behalf of all, and that when the bank deals with one mortgagor it is taken to have dealt with all of them.
5.18 Lenders report that such clauses are rarely used. Yet data collected by the project revealed a disturbing number of guarantees for unlimited amounts. Eighteen per cent of guarantors reported they guaranteed an unlimited or indefinite amount of money. Furthermore, 27% of guarantors reported they discovered they had given a mortgage over their home that contained an “All Moneys” clause only after problems arose with the loan. It appears that guarantors who receive legal advice may in fact be more, rather than less, likely to be entering into such transactions. Forty-six per cent of respondents in the solicitor survey said that on the last occasion they gave advice to a guarantor the security documents contained an “All Moneys” clause.
5.19 Our research also found that “All Moneys” clauses are very common in litigation over third party guarantees. In our review of litigated cases, we found that over half of them involved security documents that contained an “All Moneys” mortgage. Further 83 % of barristers who responded to our survey stated that on the last occasion they acted in a third party guarantee matter the loan included an “All Moneys” clause. These results indicate that the clauses are still common in security documents and that guarantors are often unaware of the existence of the provision.
5.20 “All Moneys” provisions are often justified on the basis of convenience for both the lender and the borrower.25 It is increasingly accepted, however, that such provisions present a stark likelihood of unjust transactions. The Uniform Consumer Credit Code provides some regulation of all money clauses by requiring notice to be given to the guarantor of extensions of credit.26 Under the Consumer Credit Code a mortgage may include an all money or all accounts clause but it is unenforceable unless the credit provider has provided the guarantor with a copy of the loan or guarantee contract and obtains a written acceptance from the guarantor for the extension of further credit.
5.21 The Australian Bankers Association has attempted to regulate the use of “All Moneys” and all accounts mortgages by banks since 1993. The Code of Banking Practice expressly prohibits the use of unlimited guarantees (although guarantees of company loans were not included in these provisions).27 Our research shows that such provisions have had little effect in terms of the number of such provisions reported to us. The revised Code of Banking Practice in effect since August 2003 will hopefully be somewhat more effective as it covers a far greater range of guarantee transactions, including those supporting loans to small business.28 The amended Banking Code also regulates the use of third party mortgages so that the written consent of the mortgagor is required for any extension of the mortgage.29 The Banking Code is discussed in further detail above in Chapter 4.
Information about the borrower’s loan
5.22 Guarantors who secure a business loan often have little or no knowledge of the financial situation of the business or the person borrowing the money.30 One commentator has argued that:
5.23 Data collected by the project indicates that few people ever receive adequate information from the lender. Our research shows that few people obtain a copy of the documents they sign, or a copy of the borrowers contract.32 It is as if the borrower takes the money and “disappears”.33
5.24 Third party guarantors are rarely in the position of a business partner who has an understanding of the business’ prospects and risks. Many solicitors who advised against signing a guarantee cited insufficient information on the borrower’s finances as a reason for this advice. Guarantors rarely play an active role in the business conducted by the borrower. Only 16% of the guarantors surveyed played an active role in the business.34 Of respondents who guaranteed a business loan, nearly half had little or no knowledge of the financial situation of the business at the time the loan was taken out. Likewise, 43% reported little or no knowledge of the borrower’s personal financial situation. This is consistent with Fehlberg’s findings where only four of her 22 guarantors had any knowledge of the financial affairs of the business they guaranteed.35
5.25 This information supports the assumption that many guarantors are not entering into guarantee transactions within the traditional arms-length contractual context, they are taking on financial responsibility for a transaction in which they have little understanding of the risks in circumstances where they are usually unable to pay should they be called on.
5.26 The provision of more and better information for prospective guarantors has been the focus of earlier reports and inquiries into problems experienced by third party guarantors. The Expert Group on Family Financial Responsibility recommended compulsory disclosure of information held by the lender, which a reasonable guarantor would reasonably require, in order to decide whether or not to enter into the transaction.36
5.27 Industry codes of practice require banks, building societies and credit unions to provide prospective guarantors with written information about the liabilities of a guarantor, but these are of limited effect.37 The revised Code of Banking Practice in effect since August 2003, requires banks to provide guarantors with considerably more information on the loan prior to entering into the guarantee when it is made in favour of an individual or small business.38
CIRCUMSTANCES OF THE TRANSACTION
Whose idea to be guarantor?
5.28 Third party guarantors appear unlikely to enter the transaction unless requested to do so by the borrower or the lender.
5.29 Data collected by the project confirms that many people agree to act as a guarantor at the request of the person borrowing the money.39 In some cases the guarantee was provided at the request of the lender. In only a few cases was the idea to become a guarantor their own.40
5.30 In Belinda Fehlberg’s UK study, she found that the vast majority of guarantors (18 of 22) were not involved in the planning or negotiation stages of the transaction. Fehlberg defined involvement as a guarantor having “the real opportunity while the transaction was being organized (not just immediately before the signing) to voice their views to those involved other than the debtor.”41 Our research confirmed these findings, with our respondents reporting that they were presented with documentation in a transaction in which their only role was understood to be signing. This had a clear impact on several issues discussed below, including whether the guarantor had time to consider the contract, any ability to negotiate the terms of the contract, or the opportunity to receive independent legal advice.
Where were the guarantors when they signed?
5.31 Our research indicates that it is fairly common for mortgage and guarantee documents to be signed in relatively informal surroundings such as the family home. This contrasts with Fehlberg’s study, where most guarantors signed at the lender’s premises or a solicitor’s office.42 A minority of our respondents signed in a solicitor’s office reflecting the fact that very few received legal advice (discussed below).
5.32 The problem with signing documents at home is that the informality of the surroundings is inconsistent with the serious and complex nature of the obligations about to be assumed by the guarantor and the pressures of home life, such as sick children, make it difficult for the prospective guarantor to give her full attention to the transaction. It may also mean that the presence of the borrower is more likely.
5.33 Twenty-two per cent of respondents to the guarantor survey signed the security documents at home.43 One guarantor said she signed the guarantee documents in her garage, while the witness to her signature had already signed on the document prior to her signature.44 In one instance, a guarantee was signed in hospital,45 and in another “at the greengrocer’s down the road from the bank”.46
5.34 In our review of litigated cases, 13% involved allegations that the documents were signed at the guarantor’s home.47 In several instances the guarantor, often a wife, signed the guarantee documents on the kitchen or dining table.48 In one case the guarantors’ signatures were procured by the borrower (their son-in-law) while they were on holiday in Sweden.49
Who was with the guarantor when they signed?
5.35 The Expert Group on Family Financial Vulnerability recommended that the law should require a lender to advise a prospective guarantor to execute the guarantee in the absence of the borrower.50 Judicial decisions have also indicated that it is not appropriate for a lender to entrust the execution of guarantee documents to the borrower.51
5.36 Despite the inherent risks associated with the presence of the borrower at the time the guarantor signs the documents, the data collected by the project indicates that the borrower was frequently present when the guarantor signed. Forty-seven per cent of respondents in the guarantor survey said the borrower was present when they signed the guarantee documents. Twenty-three per cent of guarantors said that both the borrower and the lender were present.
5.37 Similarly our review of litigated cases revealed that the borrower was often present at the crucial time. In 60% of cases the borrower and others (such as the lender, or other guarantor) were present, while in 14% of the cases reviewed the borrower alone was present with the guarantor at the time of signing.
Time to consider the contract?
“The broker just put reams of paper in front of me and said sign here etc, it was all done in a hurry.”52
5.38 Data collected by the project indicates that many people enter guarantor transactions in a hurry and with little or poor preparation:
“There was always urgency in my signing and (my husband) had always told me that if I didn’t sign the “deal would not go through” …
I was, I think without one exception, given only a few hours notice; no regard was given to the fact I had two young children or the fact that
I didn’t live or work in the City. I was never asked what times would be suitable or convenient for me. I was simply told when and where.”53
5.39 One guarantor who responded to our survey stated that she signed a guarantee for her husband after being taken to the bank by him without any prior notice or discussion. As she was not expecting to sign any papers she did not have her glasses with her so she was not able to read the documents. The next day she returned to the bank to ask it to “ignore” the documents she had signed. The bank officer reassured her, but took no subsequent action.54
5.40 In one case in our review of the litigated cases, the wife claimed that she received a telephone call from her husband who asked her to go to the bank to sign some documents. Prior to the telephone call the wife knew nothing about the proposal to use the family home to secure the debts of her husband’s business. She went to the bank with her 2 year old child and signed a mortgage in front of a bank officer who, she claimed, gave no explanation of the mortgage. The Court ultimately held that the mortgage should be set aside.55
5.41 Our research found strong support from guarantors for the introduction of a cooling off period to allow time to reconsider guarantee transactions before they take effect. Fifty-two per cent of respondents said that a cooling off period would have helped them.56
5.42 The following comments come from our guarantor survey:
“Cooling off period also very important. Needs to be more difficult to get into these things. Awareness is not enough. Need time to think about the consequences. Guarantors should have to sign something else acknowledging they understand documents. Signing in front of husband and credit provider very difficult. Need time to consider documents away from the other person.”57
“Would like to see a cooling off period, not so much pressure to sign on the day so they can take the car home.”58
“Need to explain the transaction especially for young kids. I was only 18 when I signed. Need a cooling off period. Wish I had never signed.”59
5.43 The strong support for a cooling off period is consistent with provisions in the Consumer Credit Code. Under the Consumer Credit Code a guarantor can withdraw from the transaction any time before the credit is provided under the credit contract.60 The limited application of the Consumer Credit Code to many third party transactions due to the distinction between consumer and business loans was discussed earlier in this chapter.
Opportunity to negotiate terms of the contract
5.44 Belinda Fehlberg notes that the guarantors in her study, like those in our study, were usually without commercial experience and were not involved in the business that they were supporting. Fehlberg argues that this combination of factors meant that guarantors were, “particularly unlikely to question the requirements of a bank, due to the authority and expertise that they perceived banks to have compared to themselves.” Further, she adds that even if guarantors had the confidence to question the terms of the transaction, “Due to their lack of business experience, they did not know the questions to ask”.61
5.45 Our research confirms guarantors have a poor understanding of the transaction and are therefore not in a position to negotiate the terms of the guarantee contract. Our consultations with financial advisors and advocates found that many borrowers are unaware they are able to negotiate contracts, and the terms thereof, and many settle on contracts which are plainly disadvantageous to them. Many guarantors and co-borrowers seem to be unaware that the primary borrower could have negotiated a different contract (albeit a loan with a higher interest rate), but one which did not require a guarantee or a joint borrower to support the loan. For some, the ease and availability of an “on the spot” deal overrides consideration of terms and financial implications of the transaction.62
5.46 In rare cases where a guarantor was informed about some or all of these matters, we found that they still had only a very limited capacity to negotiate the terms of the transaction. One guarantor’s experience illustrates the inequality in bargaining power between a prospective guarantor and a lender in such a situation:
INDEPENDENT LEGAL ADVICE
“The requirement for a guarantor to obtain “independent” legal advice has merely become a device to join legal advisers to the litigation process – failing to advise etc – I do not support the notion of independent advice – it should always be – do not sign the guarantee unless given by fully informed and participating shareholders/ directors.”64
5.47 The presence of legal advice is one factor that is listed in the Contracts Review Act 1980 (NSW) as a consideration in determining whether a contract is unfair. Recommending independent legal advice is a factor that may relieve a lender of responsibility for unfairness under the High Court decision in Garcia. It is commonly thought that many lenders now insist that guarantors obtain independent legal advice.65
5.48 The provision of such advice has received considerable attention from professional bodies regulating the legal profession. The Banking Finance and Consumer Credit Committee of the Law Council of Australia believes that a consistent national approach to the provision of legal advice is in the interests of credit providers, guarantors and lawyers,66 but as yet there is no uniform national approach to the use of solicitors’ certificates in guarantee transactions.
5.49 Our research indicates that many guarantors did not obtain independent legal advice and that when it was given it was often of very limited utility.
5.50 Mark Sneddon has defined adequate independent legal advice as:
“truly independent informed advice which not only explains the transaction and its implications but also evaluates the risks involved and advises whether the surety should enter into the transaction.”67
Using this definition, we identified grave inadequacies in the legal advice in the limited number of transactions where it took place. In particular, there were problems in the limited scope of advice as well as its independence from the borrower and the lender.
Incidence of legal advice
5.51 The vast majority of guarantors who responded to our survey, and a high proportion of those in our review of the litigated cases, did not receive any legal advice prior to entering the transaction.68
5.52 Our data suggests that in actuality many guarantors do not obtain independent legal advice prior to entering the transaction. Only 14% of the surveyed guarantors reported that they obtained independent legal advice. In only 29% of the litigated cases we reviewed had the guarantor obtained legal advice prior to signing the guarantee.
5.53 Disturbingly, only 20% of guarantors reported that anyone – including the lender – suggested that they obtain independent legal advice. A closer analysis of our survey data revealed that those from non-English speaking backgrounds were particularly unlikely to receive independent legal advice.
5.54 These findings contrast to Fehlberg’s UK study where half of the guarantors had signed the document before a solicitor. However it is noteworthy that none of Fehlberg’s respondents believed that the purpose of the appointment was to receive legal advice, and most continued to believe that the role of the solicitor was simply to witness their signature, even after they had been “advised”.69 This finding was consistent with experiences reported by guarantors in our research, that the meeting was a brisk formality, closely followed by signing.
Guarantors’ perceptions of legal advice
5.55 Of the guarantors who had received legal advice prior to signing, many were of the view that it had not greatly assisted them. Nor was there much chance for guarantors to reflect upon the advice they received; of the 10 guarantors in our survey who did receive advice and could recall how soon afterwards they signed the contract, five reported that they signed the same day, while another two signed within two days.
5.56 In two instances, our guarantors reported advice from lawyers that was openly partisan to the borrower. In one, only the “positive” aspects of the loan were explained, while in another the lawyer pressured the guarantor to sign during the interview by telling them that if they didn’t sign quickly the loan would be reduced and the project would falter. In both of these instances, and one additional case, the lawyer was also acting for the borrower.
5.57 Some guarantors indicated that the advice was perfunctory, with one guarantor noting that it took less than fifteen minutes. Another reported that the documents were only partly explained. Only one guarantor who responded to our survey reported that the advice clarified their thoughts on the document. This was consistent with Fehlberg’s finding that as solicitors restricted themselves to a brief explanation of the effects of the document, and did not offer advice in the sense of indicating whether consenting to the transaction was wise or improvident, guarantors consequently did not feel adequately advised.70
5.58 Most of the solicitors who responded to our survey perceived their role in giving advice as involving explanation of the documents, advice on the legal risks of the transaction and the nature and extent of the liability. One solicitor stated, “my job remains to explain the legal effect of the guarantee, not the wisdom of signing it.”
5.59 Fehlberg argues that the term “independent legal advice” as it is understood in legal regulation of guarantees is a misnomer. She states that “basic explanation” is a more accurate description of what takes place in practice.71
Solicitors’ perceptions of their role
5.60 About a quarter of the solicitors who responded to our survey described their role as ensuring that the guarantor understood the nature of the transaction or what they were doing. A few explicitly described their role as involving the protection of the guarantor’s interests. Only a few described their role as actively discouraging the client to proceed with the transaction. None of the solicitors explicitly described their role as ensuring the client was not subject to any undue influence or duress. Disturbingly, two solicitors perceived their role as protecting the financial institution, and a further six solicitors described their role as formal or mechanistic, for example: “My advice was a formality – a lending requirement”.
5.61 Both professional regulation and judicial decisions concerning legal advice to prospective guarantors make a distinction between legal and financial advice. Several solicitors made the point that they saw their role as providing “legal advice” only. The current professional conduct rule in NSW makes it clear that solicitors must advise the client they are not qualified to provide financial (as distinct from legal) advice and that if the guarantor has any questions about financial aspects of the transaction they should seek further advice from an accountant or financial counsellor.72
5.62 The majority judgment in Micarone v Perpetual Trustees identified three policy reasons to exclude the provision of financial or practical advice from the scope of legal advice: solicitors are not always qualified to give such advice, the solicitor may not be able to ascertain all the relevant information and solicitors will refuse to advise if the duty and risks attached are too onerous.73 The Court estimated that such advice would take “several hours, if not a day or two”, and involve considerable cost to the client, if advice was to include the financial and practical circumstances of the transaction.74
5.63 Numerous commentators have argued that legal advice on the effect of a guarantee is of very little assistance in the absence of financial information on the borrower’s position and financial advice on the implications of the transaction. Our research indicates that when solicitors advise prospective guarantors they do not generally have any information regarding the financial position of the borrower. When they do have information it is often limited.75 Despite this, most solicitors who participated in our survey reported they had sufficient information to enable them to give the guarantor useful advice.76 Interestingly, however, almost half of all the solicitors reported advising guarantors to seek further information or advice before signing the guarantee documents.77
5.64 Many of the solicitors and barristers who responded to our surveys expressed the view that the lender should take greater responsibility for the provision of information, both legal and financial, to guarantors.78 In one sense lenders are well placed to advise on the financial consequences of the transaction, as they are the only party to have the relevant information on hand. One solicitor commented:
“The lender obtains the benefit and has the resources to do so. It also has the financial details of the borrower. It should make a commercial lending decision and accept the risks. Private practitioners should not be made ‘co-guarantors’ by being exposed to proceedings this way.”79
However there is clearly also an inherent conflict of interest in lenders providing advice on a transaction that financially benefits them.
The “independence” of independent legal advice
5.65 The independence of legal advice may be affected by the solicitor’s or the guarantor’s perception of their role if their advice has been arranged by the lender, if they are acting for another party in the transaction, or if they provide advice in the presence of other parties to the transaction.
5.66 While Courts talk about the “scope of the solicitors retainer”, in a way that implies the solicitor and guarantor explicitly turn their minds to the role of the solicitor, there may be considerable confusion about what exactly the lawyer’s duty is and to whom it is owed.
5.67 In a number of the litigated cases we reviewed, the solicitor who advised the guarantor was organised by either the borrower or the lender.80 The guarantor had no control over the content of certificates or statutory declarations supplied by the lender or the solicitor which set out the matters on which the guarantor was advised. This reflected Fehlberg’s findings, that it was usually the borrower who organized the legal advice, often retaining a solicitor known to him but not to the guarantor. Even when the solicitor was not actually acting for the borrower, this gave guarantors the impression that the lawyer in question was not acting for them, but was there instead to represent the interests of the borrower or lender.81
5.68 The potential for conflict of interest is also apparent when the lawyer is retained by a party other than the guarantor.82 In an extreme example, Tong v Esanda Finance, the certificate of independent advice given by the “independent” solicitor testified an absence of professional interest in the transaction on behalf of the lenders or on behalf of the borrowers. However, in evidence the solicitor made it clear that he believed he was acting as solicitor for the borrowers rather than in the interests of the guarantors.83 A repeat of such a scenario appears alarmingly possible. Of the 11 guarantors from our survey who had received legal advice, three reported that they were advised by solicitors acting for the borrower, and one by a solicitor acting for the lender.
5.69 The current NSW Law Society Practice Rule regarding the provision of advice to guarantors includes clear guidelines about conflict. The Rule also provides that the solicitor who advises a borrower or guarantor must not also act for the lender and that in cases where there is potential conflict between parties to the transaction (that is, the borrower and guarantor) the solicitor cannot provide advice to more than one of those parties without the written consent of each party.84
5.70 The independence and utility of legal advice may also be compromised if the guarantor does not meet with the solicitor alone. In Fehlberg’s study, of the 11 guarantors who received legal advice, in seven instances the borrower was also present.85 Fehlberg found that while solicitors considered that it was not “good practice” to see guarantors in the presence of borrowers because of the opportunity for pressure or influence to be brought to bear, in practice they did little to prevent it. This was because guarantors and borrowers often “presented as a package”, and because it was usually borrowers who organised the appointment and paid for the advice.86 While the majority of solicitors we surveyed reported to us that on the last occasion they gave advice, only the guarantor was present,87 this may not be an accurate representation. While we did not specifically ask guarantors whether anyone else was present when they received legal advice, of the 11 guarantors who had received advice, it was clear in four cases that the borrower had been present. Moreover of all guarantors, both advised and unadvised, 47% reported that they signed in the presence of the borrower, and a further 23% in the presence of both the lender and the borrower.
5.71 There were also several reported cases in our pool of litigated cases where legal advice was clearly provided in the presence of the borrower.88 While there has been some adverse judicial comment about the propriety of the borrower being present while the guarantors received legal advice,89 the practice of giving legal advice in the presence of the borrower has not been subject to significant scrutiny to date. Such practice clearly impacts upon the independence and effectiveness of any advice.
Claims against solicitors
5.72 There is a concern that the provision of independent legal advice for prospective guarantors is a mechanism to shift some of the risk of a transaction away from the lender to solicitors and their professional indemnity insurance.91 Our survey of solicitors generally reflects this view. The focus of much of the material written about the role of solicitors is the protection of lenders and solicitors against claims rather than a concern for increased consumer understanding.92
5.73 In 1999 the New South Wales Law Society reported an increase in the number of solicitors joined in legal proceedings as a result of providing certificates of legal advice in loan transactions.93 Rule 45 of the Solicitors Practice Rules was subsequently amended in 2000 in a climate of great concern about claims against solicitors for negligent advice to guarantors. However our research suggests that this concern was somewhat misinformed. The Law Society asserted that LawCover claims arising out of the provision of certificates of legal advice rose to 15% of total claims during the year 1998-99. Investigation of this claim with LawCover reveals this figure to be erroneous. LawCover does not maintain separate statistics for losses relating to certificates, however they advised that the proportion of claims pursuant to certificates would form part of the claims made under other categories, such as mortgage and commercial borrowing. In 1999 the combined percentage of claims made under these categories was 1.5%.94
5.74 Our review of litigated cases indicates that solicitors are rarely held to be liable for any loss suffered by guarantors. In 77% of the cases we reviewed where the guarantor did obtain legal advice, the Court held that the advice was satisfactory. In only three of the relevant cases the Court found that the solicitor’s advice was inadequate in some respect, and in none of those cases was the solicitor found liable for the guarantor’s or lender’s loss.95
5.75 Nonetheless, just less than half of the solicitors who participated in our survey reported that they had concerns about their professional liability in giving advice to a third party guarantor.96 Many felt that the process of sending guarantors to get independent advice from lawyers in effect meant lenders were passing off their obligations to explain the transaction on to solicitors, and exposing them to being sued by guarantors, or cross-claimed against by lenders if the guarantee goes wrong. One solicitor said lawyers “should not be made ‘co-guarantors’ by being exposed to proceedings in this way”.97
The impact of Rule 45 on legal practice
5.76 Prior to amendments to the Solicitor’s Practice Rules in 2000, solicitors in NSW signed a statutory declaration that they had provided independent advice to a guarantor. The amendments to Rule 45 now provide that it is the guarantor who signs a statutory declaration that they signed the guarantee documents after they received independent legal advice. The Rule gives guidelines for the content of the advice to be given by solicitors to third party guarantors and makes it clear that the advice to be provided by the solicitor is limited to legal advice and does not extend to financial advice.98
5.77 Many solicitors who responded to our survey gave positive feedback on Rule 45 of the Solicitors Practice Rules adopted by the New South Wales Law Society. Some solicitors said that the new procedure simplified matters or provided clearer documentation. One said that Rule 45 has probably lifted the quality and consistency of advice. Some felt it eased their disquiet about their own liability.99
5.78 By contrast some solicitors were negative about the requirements of the rule, particularly the documentation. A few commented on the increased cost or time involved in complying with the rule, for which they receive little reward, and which increased the cost of the guarantee transaction. Some solicitors expressed the view that the decision in Garcia, and the requirements of Rule 45 (despite its protections for lawyers) has led to clients avoiding advice on guarantees prior to entering the transaction.
LEGAL ADVICE IN AUSTRALIA IN COMPARISON WITH THE UK: ETRIDGE
The position taken in Australia with respect to the circumstances and content of independent legal advice for third party guarantors contrasts with benchmarks proposed in the United Kingdom.
In Etridge, the content of the legal advice is set out in detail by Lord Nicholls of Birkenhead.100 A solicitor should:
- discuss with a prospective guarantor the practical consequences of the contract, the present financial situation of the guarantor and the borrower and whether there are other assets or income that might be used to satisfy the debt in the event of failure of the business
- obtain information from the lender in order to do this and if the lender fails to provide information the solicitor should cease to act
- ultimately only give confirmation to the bank of the provision of legal advice on the guarantor’s specific instructions.
The benchmarks prescribed by Lord Nicholls focus on substantive fairness to the guarantor rather than simply upon procedural steps.101
|
Who benefits from independent legal advice?
5.79 Do guarantors obtain any benefit from the provision of legal advice? Sue Mahalingham notes that:
“The precise role played by independent legal advice is not well understood. Independent advice has two distinct functions in loan transactions. For lenders it plays a protective role, shielding them from the effects of misconduct of a third party or countering allegations of unfair conduct. For the family security provider, it is thought that independent advice will eliminate underlying unfairness by ensuring that the family security provider has made an informed, independent and voluntary decision in providing security.”102
5.80 Our research suggests that it is questionable whether the provision of legal advice actually deters vulnerable guarantors from proceeding with the transaction. This reflects Felhlberg’s finding that very few of her respondents would have been deterred from the transaction even by thorough and impartial legal advice.103
5.81 Our research indicates that in the course of providing advice to prospective guarantors many solicitors consistently give a strong warning to prospective guarantors that they should not sign up to the transaction.104 However the solicitors also reported that despite providing strong advice about the risks of the transaction, most guarantors proceed with the transaction.105 According to some solicitors, by the time some guarantors come for compulsory advice, they have already made up their mind. One barrister commented that while independent advice may act as a deterrent to signing, by the time the advice is given the guarantor probably already feels morally committed to the borrower to execute the guarantee. This sentiment is corroborated by other survey data which indicates that much of the negotiating about the loan, and the exigencies surrounding the pressing need for finance have already proceeded to such a point that the only thing required, and that is inevitable, is the guarantor’s signature. Only one solicitor reported the view that the client listens to the legal advice then makes a commercial decision.
5.82 The comments from solicitors who responded to our survey also point to the ways in which feelings of connection and obligation arising out of personal or family relationships govern the decision of the guarantor to proceed with the transaction rather than any objective advice about the dangers of the transaction. Family pressure, or the family relationship between the borrower and guarantor, were nominated by a number of solicitors as the reason guarantors proceeded with the transaction. Another solicitor identified “moral obligation” while another said: “family will always guarantee family”.
5.83 One solicitor commented:
“Most if not all guarantors will proceed regardless of any advice given for emotional reasons, and regardless of any disclosure or information supplied. The only way to protect guarantors is to prohibit certain classes of guarantees.”106
5.84 Lenders benefit from the provision of independent legal advice because the certificate or statutory declaration verifying legal advice acts as a shield to deflect any later claims by the guarantor that the guarantee should not be enforced because they did not understand the transaction or were at a special disadvantage in the transaction. One respondent suggested that this is in fact the sole benefit of legal advice:
“As it stands, the requirement of independent legal advice only serves the purpose of covering and protecting the lending institutions’ interests – if consumers are losing protection as a result of unrealistic and unhelpful legal independent advice then such consumer protection is meaningless and without substance.”107
5.85 The provision of legal advice may be of little significance in terms of providing guarantor protection. While our research indicates that independent legal advice, as it is currently given (if it is given at all) is insufficient to assist the guarantor to make an informed decision where the guarantor is signing out of a feeling of obligation, pressure or trust, this does not mean that there is no role for advice. Our research indicates that there is some potential for solicitors to provide meaningful assistance. For example one solicitor reported advising a parent that she could usefully, and safely, assist her child by providing her with a small loan so that the daughter had sufficient funds for a deposit to purchase a block of land as an alternative to proceeding with a guarantee for the daughter. Independent financial advice could also assist the guarantor in that they could be informed about alternative financing arrangements which would not require a third party guarantee, for example a limited guarantee, a loan with a higher interest rate, or a loan directly to the borrower, rather than providing a guarantee.
5.86 It appears that further attention and deeper analysis needs to be directed to the provision and utility of independent legal advice.
CONCLUSION
5.87 Guarantee transactions are frequently very complex commercial arrangements, often involving voluminous and impenetrable legal documents. Such documents are often signed in rushed or informal circumstances that are far from conducive to informed decision-making. Guarantors frequently lacked basic information about the borrower’s financial position and entered into the transaction with minimal explanation, usually in the absence of any legal advice.
5.88 Our research found evidence of practices such as asset based lending, the continued use of “all moneys” clauses, and an increased use of “joint loan” documentation to disguise what were genuinely third party guarantees: all of these practices are significantly disadvantageous to guarantors and conducive to unfair dealing.
5.89 The role of legal advice in guarantee transactions, while it has received considerable attention, does not necessarily offer a solution to problems of informed consent.
5.90 As we will see from the next chapter, it is usually not until the loan goes wrong – the borrower defaults and the lender calls on the guarantor – that the reality of the risk is bought home to the guarantor.
FOOTNOTES
1. Gattellaro v Westpac Banking Corporation (High Court of Australia, No S92/2001, transcripts, 14 February 2003), per Gummow J.
2. Solicitor Survey, Respondent 26.
3. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) at 73.
4. See Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) Chapter 7.
5. Garcia v National Australia Bank (1998) 194 CLR 395.
6. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) at 85-87.
7. Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions within Families and Between Friends (Report, 1996) at 32.
8. Solicitor Survey, Respondent 71.
9. Guarantor Survey, Respondent 58.
10. Guarantor Survey, Respondent 23.
11. Guarantor Survey, Respondent 25.
12. Challenger Management Investment Ltd v Davey [2002] NSWSC 430, Exhibit A in the trial.
13. Karam v ANZ Banking Group Ltd [2001] NSWSC 709 at para 215.
14. ANZ Banking Group v Capper [2001] NSWSC 946 at 31.
15. Elkhoury v Farrow Mortgage Services Pty Limited (In Liquidation) (1993) 114 ALR 541 at 549.
16. Solicitor Survey, Respondent 80.
17. 61% stated that more written information would have helped them and 55% reported that a simple, spoken explanation of their obligations would have helped.
18. Guarantor Survey, Respondent 39.
19. See Berna Collier, “‘All Debts’ Clauses in Commercial Contracts of Guarantee: Principles of Construction and Limitations on the Ambit of Clauses of this Nature” (1998) 24 Monash University Law Review 7; Robin Edwards, “Problems with ‘All Moneys’ Mortgages” (2002) 17 Australian Banking and Finance Law Bulletin 151.
20. For example in ANZ Banking Group v Capper [2001] NSWSC 946.
21. Johncorp Industries v Sussman [2001] NSWSC 519.
22. The court held that the personal guarantee given by the wife secured loans made solely to the husband, and as the mortgage contained a reference to money owed by the mortgagor pursuant to any guarantee, so the wife was thereby liable to an unlimited amount for subsequent loans to the husband.
23. Gattellaro v Westpac Banking Corporation [2001] NSWCA 76. Special leave to appeal to the High Court was granted on 14 February 2003.
24. Legal Aid Commission, NSW, Submission.
25. Justification for “all moneys” mortgages were made by a number of submissions to New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000).
26. Consumer Credit (New South Wales) Code 1995, s 43.
27. See Code of Banking Practice (1993) cl 17.
28. See Code of Banking Practice (2003) cl 28.2.
29. See Code of Banking Practice (2003) cl 28.12.
30. See New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) 69-73 for information on the current law and regulation on the lender’s duty to provide information to the guarantor.
31. Susan Kiefel, “Avoidance of Guarantees on Equitable Grounds” (1989) 19 Queensland Law Society Journal 293 at 295.
32. 37% of respondents received a copy of their contract around the time of signing, 20% received a copy of the borrower’s contract around the time of signing.
33. Guarantor Survey, Respondent 25.
34. 20% reported they were a silent director, 9% had no formal role and 38% had no role.
35. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 142.
36. See Recommendation 1, Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions Within Families and Between Friends (Report, 1996) at 1.
37. See New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) at 71.
38. Code of Banking Practice (2003) cl 28.4.
39. Guarantor Survey, Question 12: 53% of respondents reported that it was the idea of the person borrowing the money/receiving the benefit of the loan.
40. Guarantor Survey, Question 12: 21% of respondents reported that it was the lender’s idea, 8% that it was the idea of both the guarantor and the borrower, only 4% said it was their own idea.
41. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 159.
42. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 167.
43. Thirty-eight per cent of respondents to the guarantor survey reported they signed the documents in the lender’s office.
44. Guarantor Interview, Respondent 1A.
45. Guarantor Survey, Respondent 77.
46. Guarantor Survey, Respondent 51.
47. In 33% of the cases in the case law review the documents were signed at the lender’s office; in 28% of cases the documents were signed in a solicitor’s office.
48. See Commonwealth Bank of Australia v Horkings [2000] VSCA 244; Commonwealth Bank of Australia v Khouri [1998] VSC 128; Liptak v Commonwealth Bank of Australia (1998) 196 LSJS 466; Charles v Parkinson [2000] FCA 1467; Anjoul v Westpac Banking Corporation [2000] NSWCA 355; Commonwealth Bank of Australia v Sarah Marie Holdings Pty Ltd [2002] VSC 1. See also Gough v Commonwealth Bank of Australia (1994) ASC 56-270; Westpac Banking Corporation v Bagshaw [2000] NSWSC 650 (in the latter two cases the wife’s evidence on this point was rejected in favour of evidence of the bank manager as to his usual practice).
49. State Bank New South Wales v Watt [2002] ACTSC 74. The Court held that even though this was contrary to the bank’s own procedures nothing adverse could be drawn from that circumstance.
50. See Recommendation 2, Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks – Financial Transactions Within Families and Between Friends (Report, 1996) at 1.
51. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) at 76.
52. Guarantor Survey, Respondent 20.
53. Extract from the guarantor wife’s evidence in Brueckner v The Satellite Group (Ultimo) Pty Ltd [2002] NSWSC 378 at para 176.
54. Guarantor Survey, Respondent 6: the borrower subsequently defaulted on the loan and the guarantor paid the debt.
55. Westpac Banking Corporation v Mitros [2000] VSC 465. Similarly in Robinson v Watts the wife found out that she was to sign documents giving security over her home for her husband’s business debts when in the car with her husband driving to the solicitor’s office. In this case the solicitor was the lender’s solicitor who advised the wife and provided a certificate that the wife understood the documents. In addition, the husband was present at the time: Robinson v Watts [2000] NSWSC 584. The wife was unsuccessful in defending the bank’s enforcement of the security.
56. Guarantor Survey, Question 15(c): 31% of respondents stated that a cooling off period would not have helped them.
57. Guarantor Survey, Respondent 9.
58. Guarantor Survey, Respondent 79.
59. Guarantor Survey, Respondent 10.
60. Consumer Credit Code s 53(1)(a). Section 53(1)(b) provides that the guarantor can also withdraw after credit has been provided if the credit contract is materially different from the proposed contract given to the guarantor before it is signed.
61. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 176. Emphasis in original.
62. See comments by Kate Keating, Relationship Debt and Comparison Rates: A Caseworker’s Perspective, paper delivered at Australian Finance Conference, February 2000.
63. Guarantor Survey, Respondent 67.
64. Solicitor Survey, Respondent 26.
65. See eg Anthony Duggan, “Til Debt do us Part: A Note on National Australia Bank Ltd v Garcia” (1997) 19 Sydney Law Review 220 at 227.
66. See Elizabeth Lanyon, “Aspects of Third Party Guarantees and Solicitors’ Certificates” (2001) 29 Australian Business Law Review 231 at 241. See also Mark Sneddon, “Lenders and Independent Solicitors’ Certificates for Guarantors and Borrowers: Risk Minimisation or Loss Sharing?” (1996) 24 Australian Business Law Review 5.
67. Mark Sneddon, “Unfair Conduct in Taking Guarantees and the Role of Independent Advice” (1990) 13 University of New South Wales Law Journal 302 at 345.
68. Guarantor Survey, Question 17: only 14% of respondents obtained legal advice before signing; Case Law Review, Issue 22: in 29% of the cases the guarantor had legal advice.
69. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 170-171.
70. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 171.
71. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 227-8.
72. Law Society of New South Wales, Professional Conduct and Practice Rules, Rule 45.6.4.1 and 45.6.4.2.
73. Micarone v Perpetual Trustees Ltd (1999) 75 SASR 1.
74. Micarone v Perpetual Trustees Ltd (1999) 75 SASR 1 at para 698 and 699 per Debelle and Wicks JJ.
75. Solicitor Survey, Question 16: 76% of solicitors who responded stated that the last time they gave advice to a guarantor they had no information regarding the financial position of the borrower, 24% said they did have information.
76. 95% of respondents stated that they had sufficient information to give useful advice.
77. 46% of respondents stated that the last time they gave advice to a guarantor they advised them to seek further information or advice before signing.
78. Solicitor Survey, Question 50: 58% supported the proposition. Barrister Survey, Question 29: 59% supported it.
79. Solicitor Survey, Respondent 45.
80. See Micarone v Perpetual Trustees Ltd (1999) 75 SASR 1; Pasternacki v Correy [2001] ANZ ConvR 240; Sapuppo v Ribchenkov [2002] ANZ ConvR 164; Burrawong Investments v Lindsay [2002] QSC 082; Tong v Esanda Finance (Unreported, NSW Supreme Court, No 20449/94, Grove J, 17 April 1996); Esanda Finance v Tong (1997) 41 NSWLR 482; Janesland Holdings Pty Ltd v Simon [2000] ANZ ConvR 11.
81. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 175-176.
82. However, note in Lang v Licciardello [1999] NSWSC 93, Adams J expressed the view “there is no doubt that the most desirable position is that …a mortgagor should be given independent legal advice … [but] the supposition that a mortgagee’s solicitor is in conflict with the interests of that client if he or she gives advice to the mortgagor on the legal effect of the mortgage is a significantly over-simplification of the position”: at para 25.
83. Tong v Esanda Finance (Unreported, NSW Supreme Court, No 20449/94, Grove J, 17 April 1996); Esanda Finance v Tong (1997) 41 NSWLR 482.
84. Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended 2000) Rule 45.9 and 45.4.
85. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 175.
86. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 224.
87. Solicitor Survey, Question 13(b): 88% reported that no one else was present; 6% of respondents indicated that the borrower was present when they gave the advice.
88. See eg St George Bank v Trimarchi [2003] NSWSC 151; Tong v Esanda Finance (Unreported, NSW Supreme Court, No 20449/94, Grove J, 17 April 1996); Esanda Finance v Tong (1997) 41 NSWLR 482.
89. Micarone v Perpetual Trustees Ltd (1999) 75 SASR 1 at para 702.
90. Solicitor Survey, Respondent 73.
91. See eg Jim O’Donovan, “Guarantees: Vitiating Factors and Independent Advice” (1992) 66 Law Society Journal 57 at 60.
92. John Phillips, Bryan Horrigan and Berna Collier, Guarantees and Solicitors’ Certificates Guidelines for Lawyers, Financiers and Guarantors (Queensland University of Technology Centre for Commercial and Property Law, 1999).
93. Law Society of New South Wales, Caveat 207, 30 December 1999.
94. This includes notification of circumstances and actual claims. Ron Shorter, General Manager, LawCover Claims, Email communication 21 October 2002.
95. Case Law Review, Issue 23; Sapuppo v Ribchenkov [2002] ANZ ConvR 164; Farrow Mortgage Services Pty Ltd (In Liq) v Torpey and Anor (1998) NSW ConvR 55-857; State Bank of NSW v Hibbert (2000) Aust Contract R 90-119.
96. Solicitor Survey, Question 15(b): 48% of respondents stated that they had concerns.
97. Solicitor Survey, Respondent 45.
98. See Law Society of New South Wales, Professional Conduct and Practice Rules (1995, amended 2000) Rule 45 and also the discussion in New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (Issues Paper 17, 2000) at para 3.41.
99. See, for example, Respondent 82 who said: “A great help. It makes it clear we are simply “explaining” legal issues”.
100. Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773.
101. Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 at para 65 and 67. However, the regime in relation to obligations by lenders imposed by Etridge is expressly prospective, and past transactions will continue to be governed by the procedures set out in earlier cases. For discussion see: John Phillips, “Setting aside Guarantees: Another Approach” (2002) Oxford University Commonwealth Law Journal 47; K Scott, “Evolving Equity and the Presumption of Undue Influence” (2002) 18 Journal of Contract Law 236. Some have argued that this approach passes the burden of these risky transactions on to lawyers: see Paula Giliker, “Barclays Bank v O’Brien Revisited: What a Difference Five Years Can Make” (1999) 62 Modern Law Review 609 (discussing the Court of Appeal decision).
102. Sue Mahalingham, “Deep and meaningful: Dealing with emotionally transmitted debt” (1999) 3(6) Consumer Rights Journal.
103. Belinda Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Clarendon Press, 1997) at 172.
104. Solicitors Survey, Question 21(a): 73% of solicitors who responded said that they had advised a client not to sign a contract in the last 10 years; Question 21(b): 43% said they gave such advice on 2-5 occasions.
105. Solicitors Survey, Question 22(a): of those solicitors who advised against signing 89% reported that the client went ahead despite the warning.
106. Solicitor Survey, Respondent 78.
107. Debbie Georgopoulos, Department of Fair Trading, Consultation 11 July 2000. See also Paula Barron, “The Exercise of Her Free Will: Women and Emotionally Transmitted Debt” (1995) 13 Law in Context 23 at 47.
