Legal Liability Of Guarantors And Co-Borrowers: A Case Analysis

1. Jak’s parents do not have $43,000 readily available to repay the loan and they fear losing their family home. They seek your advice.

2. How would your advice be different if, instead of Jak convincing his parents to act as guarantors, he had asked his wife Isabelle to co-sign a loan agreement? Isabelle has arrived to Australia 5 months ago from France. She speaks broken English and works as an artist.

Determining the Enforceability of Guarantee Agreements

The key issue is to determine if Jack’s parents would be held liable for the pending loan on the basis of the position of guarantor assumed by them. In order to determine the same,. It needs to be determined if the guarantee agreement that the bank has enacted with the parents would be legally enforceable or not.

A key question which arises with regards to guarantor agreement is the form of action which is expected from the guarantor. A view in this regards is expressed in Degman Pq Ltd v Wright [I983] NSWLR 348 case where it was highlighted that the obligation of guarantor is not to settle the debts owed to creditor but rather to ensure that the principal debtor meets the outstanding debt obligations (Andrews, 2014). However, this view was rejected by Mason CJ in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11 case. He opined that in the present scenario, the guarantor usually has no significant influence on the principal debtor so as to force him to make the repayment. As a result, the key remedy that the unsettled creditors seek from the guarantor is payment of damages for breach of contract (Lindgren, 2014).

One of the key circumstances in which the guarantee agreement is not held enforceable is where unconscionable conduct is involved on the part of the bank. This is apparent from the Commercial Bank of Australia Ltd v Amadio [1983] HCA 14. In this case, the Amadio couple acted as guarantor for the debt assumed by their son. The documents executed in this regards created a mortgage over a building owned by the Amadio couple. The son defaulted on the loans and the bank took steps for the enforcement of guarantee. However, the matter reached court since the Amadio couple advocated that bank’s conduct was unconscionable (Carter, 2016).

The High Court of Australia highlighted that it was unconscionable for the bank to rely on the guarantee provided by the Amadio couple. This is because the couple had limited knowledge of English as they had migrated from Italy in their old age. The couple also did not receive any independent advice and no such recommendation was tendered by the bank. Also, at the time of entering into the agreement, the couple were not aware of the son’s financial situation. Further, the bank did not highlight that the guarantee had no limit whereas the Amadio couple assumed that their liability under the contract was limited to $ 50,000 (Latimer, 2015).

Role of Guarantor in Repaying the Debt

With regards to this case, Mason CJ highlighted the following (Gibson and Fraser, 2014).

"Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will also be granted when such advantage is taken of an innocent party who though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interests (at 462)”

Another relevant case in this regards is Paratei Pty Ltd v ING Bank Australia Limited; Sparks v Battaglia [2015] NSWSC 1368. In this case also, the guarantee providers were aged and had special disability with regards to limited knowledge of English. However, the court highlighted that the guarantee agreement was enforceable as the guarantors  had provided multiple guarantees over the years and were aware of the financial status of the principal debtor which was a company in this case. As a result, it would be incorrect to conclude that when the guarantors have some special disability, then by itself, the guarantee agreement would be void on grounds of unconscionable conduct (Davenport and Parker, 2014).

As per the given facts, it is evident that Jak intends to start his accounting practice for which he needs a loan of $ 25,000. Considering that he possesses no assets, hence a guarantor was required for him to avail this loan. He asks him elderly parents brought up in Australia to provide guarantee. He assured them that the loan assumed would be only $ 25,000 and would be repaid in a period of 6 months. However, the actual guarantee agreement enacted with the bank is for an indefinite amount and indefinite time period. Jak defaults on the loan obligations and hence the bank wants to recover outstanding sum of $ 43,000 from his parents.

In the given case, there does not seem to be unconscionable conduct on the part of the bank considering that the parents despite being old were well verse in English and thereby could have read the guarantee agreement before signing. Also, they could have also asked relevant questions about their obligations under the agreement to the bank representative. However, Jak’s parents decided to place faith in their son and hence did not bother to read or understand the contractual obligations. Clearly, the bank is not at fault in the given scenario and hence Jak’s parents would have to make the payment of $ 43,000 to the bank.

Unconscionable Conduct in Guarantee Agreements

Conclusion

It is evident from the above discussion that there is no special disability that the guarantors suffer from. Also, the conduct of the bank does not constitute unconscionable conduct as no information about their son’s financial situation was hidden. The parents voluntarily decided to provide the guarantee considering their faith in their son. As a result, they did not make attempts to read the agreement or to understand their obligations. Hence, the bank is legally entitled to recover outstanding liabilities of $ 43,000 from Jak’s parents.

The issue is to ascertain if Jak’s wife Isabella would be liable for clearing the outstanding debt of $ 43,000 if she had co-signed the loan agreement along with her husband.

Banks and other lenders in the past have faced significant legal challenges with regards to enforcing the guarantee agreement considering that these are regularly challenged in the court of law resulting in delays in enforcement. This has paved way to an alternative practice whereby the guarantors are represented as co-borrowers for the loan. Typically, if the co-borrower is not a direct beneficiary of the loan amount and this is known to the lending institution, then the co-borrower is essentially a guarantor (Paterson, Robertson and Duke. 2015). However, if the co-borrower is not a guarantor but a direct beneficiary, then in such cases, the co-borrower would be liable for the debt. As a result, if the borrower defaults on payment of loan, then the same would need to be paid by the co-borrower. Even if one of the co-borrowers is bankrupt, then also the bank can recover outstanding debt from the other co-borrower provided they are not separated (Pendleton and Vickery, 2016).

A relevant case law in this regards is Garcia v National Australia Bank Ltd [1998] HCA 48. This case highlights the circumstances when the lender cannot enforce a particular transaction against wife. The client (Jean Garcia) along with her husband (Fabio Garcia) enacted mortgage with regards to a jointly owned house in 1979.  Over the next several years, the client signed a host of guarantees for assumption of loan amount which was solely used by her husband in his company. The couple separated in 1988 while the company of her husband went bankrupt in 1989. It was held that the bank’s conduct was unconscionable and therefore the various guarantees provided by the wife were considered to be non-enforceable (Taylor and Taylor, 2015). With regards to reaching the verdict, the trial judge and also the High Court upheld the approach taken in Yerkey v Jones (1939) 63 CLR 649. In this case, the memorandum of mortgage was held as void considering that the plaintiff did not understand the contract and also was not the direct beneficiary of the contract (Edlin, 2015).

Co-Borrowing Agreements as an Alternative Practice

Additionally, in case the co-borrower is essentially the guarantor, then the guarantee agreement would be considered as non-enforceable in the presence of unconscionable conduct. This is in line with the verdict of Commercial Bank of Australia Ltd v Amadio [1983] HCA 14. A key aspect highlighted in this case was the concept of special disability whereby the personal scenario of the guarantors acts as an impediment in understanding the implications of the enacted agreement thereby putting them in a vulnerable position (Davenport and Parker, 2014). With regards to the Amadio case, the vulnerability of the Amadio couple arose on account of the coupled having migrated to Australia from Italy only when they were old limiting their understanding of English language. Also, their understanding of business and related transactions was also very poor owing to their lack of experience. This placed the bank in a dominant position which was exploited by not disclosing the financial situation of their son at the time of execution of the guarantee agreement (Carter, 2016).

Based on the given facts, in the given scenario, Jak’s parents are not acting as guarantors. Instead his wife i.e. Isabella has decided to co-sign the loan agreement. Isabella has arrived in Australia only five months ago and speaks broken English only besides working as an artist. The first step in the given case is to determine whether Isabella is acting as the co-borrower or as a guarantor. It is evident that the loan taken would be used only by Jak in order to set up his business. Also, the only reason to add Isabella as the co-borrower is to ensure that the bank would go ahead and prove Jak with the loan. This is apparent from the fact that the bank was not interested in providing him loan without any guarantee. As a result, the presence of Isabella in the loan agreement is essentially providing the guarantee.

Further, the given facts indicate that Isabella has a special disability. This is because she has arrived only five months before in Australia and therefore does not have sound understanding of English. Also, she is an artist and therefore she would have limited understanding of legal documents related to business. Hence, in the given background, it is highly likely that Isabella did not understand the ;legal documentation and associated liabilities before acting as the co-borrower. As highlighted in the Amadio case, the conduct of the bank in this case would also be termed as unconscionable. As a result, Isabella would not be held liable for the outstanding amount of $ 43,000 once there is default by Jak.

Conclusion

It is apparent from the above discussion that Isabella is not acting as the co-borrower but rather the guarantor so that the bank would extend loan to Jak which would be solely used by him for business purposes. Further, Isabella on account of her French background and artist profession suffers from special disability similar to the Amadio case. As a result, it would be unconscionable for the bank to rely on assurance given by Isabelle. Hence, there would not be any liability on Isabella to repay the outstanding amount of $ 43,000.

References

Andrews, N. (2014) Contract Law.3rd ed. Cambridge: Cambridge University Press, pp. 67-68

Carter, J. (2016) Contract Act in Australia. 3rd ed.Sydney: LexisNexis Publications, pp.134-136

Davenport, S. and Parker, D. (2014) Business and Law in Australia.2nd ed..Sydney:LexisNexis Publications, pp. 108-110

Edlin, D. (2015) Common law theory, 4th ed. Cambridge: University Press Cambridge, pp. 145-146

Gibson, A. and Fraser, D. (2014) Business Law. 8th ed. Sydney: Pearson Publications, pp. 175-178

Latimer, P. (2015) Australian business law. 24th ed. Sydney: CCH Australia Ltd, pp. 118-119

Lindgren, K.E. (2014) Vermeesch and Lindgren's Business Law of Australia.12th ed.Sydney: LexisNexis Publications, pp. 151-153

Paterson, J. Robertson, A. and Duke, A. (2015) Principles of Contract Law. 5th ed. Sydney: Thomson Reuters, pp. 165-166

Pendleton, W. and Vickery, N. (2016) Australian business law:  principles and applications, 5th ed. Sydney :Pearson Publications, pp. 117-119

Taylor, R. and Taylor, D. (2015) Contract Law. 5th ed. London: Oxford University Press, pp. 178-180