In the lending business, personal guarantees are common practice. However, any financial transaction can pose substantial risks for guarantors, lenders and lawyers.
Below, we outline a recent important Supreme Court of New South Wales decision in which a guarantor was successful in having a guarantee set aside, despite having received legal advice prior to executing the guarantee.
ClarkeKann’s new Litigation & Insolvency Partner, Chris Kintis, represented the successful guarantor in the Supreme Court and together with Sophie Clark, provides an insight into the case.
At the age of 81, Mrs Rose executed a personal guarantee that was secured by a mortgage over her family home. At the time she provided the guarantee, Mrs Rose had not been in the workforce for over 40 years and substantially relied on her husband to take care of the family’s financial affairs.
The borrower was a company associated with the husband and son of Mrs Rose. Prior to executing the guarantee, certain legal advice was provided to Mrs Rose, at the request of the lender, by way of a brief telephone discussion. The advice was provided by the borrower’s solicitor.
Subsequently, the borrower defaulted and the lender sought to enforce Mrs Rose’s personal guarantee and the mortgage over her home. Mrs Rose sought to have the guarantee and mortgage set aside.
The Court held that Mrs Rose’s case was to be determined by the application of the High Court’s decision in Garcia v National Australia Bank Ltd  HCA 48 and the application of the Contracts Review Act 1980 (NSW).
In Garcia, the High Court stated that if a lender either:
then that guarantee cannot be enforced because it would be unconscionable to do so.
When determining whether a lender reasonably believes that the purport and effect of the transaction has been explained, certain circumstances need to be considered, including whether:
The key to the success of Mrs Rose’s defences were the circumstances in which the documents were signed.
Although the Court was satisfied that Mrs Rose was not entirely ignorant of the documents she signed and, in theory, she had an understanding of the transaction, the Court found that:
In this case, it was the lender who actively encouraged the borrower’s solicitor to advise Mrs Rose, whilst it was fully aware that the solicitor:
In doing so, the lender entirely undermined the protection it had sought to provide for itself. As the high risk of default was evident at the time Mrs Rose signed the documents (to everyone except Mrs Rose), the Supreme Court held it would be unconscionable to enforce the guarantee and mortgage.
The lender sought to justify its actions by relying on the fact that it had complied with the NSW Law Society Rules. However, the Supreme Court held that the rules do not permit avoidance of the principles of law stated by the High Court, specifically the obligation that Mrs Rose be given “competent, independent and objective” advice.
Inevitably, refinancing in any commercial situation can involve significant pressures and urgency.
ClarkeKann appreciates the complexities of financial transactions and can assist either lenders or borrowers protect themselves whether they are already in a difficult situation, or whether they want to avoid one.
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