One of the most contentious areas of finance law is that of guarantees. This typically involves the guarantee by one person of a loan made by a financial institution to another person who is often in a family relationship with the guarantor (for example, the borrower’s parent or spouse).

Typically too, the loan may be made to support the business activities of the borrower.

There are many dangers in agreeing to guarantee someone’s financial obligations.

You should always obtain competent legal advice regarding a guarantee before agreeing to it or signing anything.

Quinn & Scattini Lawyers are experienced in providing that advice.

Having A Guarantee Set Aside

There may be several grounds upon which a guarantee can be set aside, but, for brevity, this article mentions only two of these: undue influence and unconscionable conduct.

“Undue influence” occurs where there is an inequality of power between the person procuring the guarantee (the dominant party) and the person giving the guarantee (the weaker party), and the dominant party applies unfair and undue pressure in such a way as to deprive the weaker party of their free will and independent judgement.

In some circumstances, undue influence may be presumed by law where the dominant party holds a position of trust or confidence over the weaker party (such as a solicitor and client, or a doctor and patient).

“Unconscionable conduct” also involves an inequality of power, but usually entails the dominant party taking advantage of a “special disability” (e.g. old age, language difficulties, illiteracy, lack of education), such that the resulting transaction is harsh and oppressive to the weaker party.

Case Example: Allegation That A Guarantee Was Signed Under A Power Of Attorney

In a matter which was resolved in our clients’ favour, a major bank had sued our clients to enforce a guarantee that had been signed for them without their knowledge under a Power of Attorney. Our clients had contributed cash towards the deposit for the purchase of a property in return for a share of it.

Without first obtaining legal advice, they provided a Power of Attorney to another investor which authorised him to sign paperwork regarding their contribution and shareholding while they were briefly overseas. The scope of the Power of Attorney had made no mention of entering into a guarantee, but, without our clients’ knowledge, it was used to sign documents causing our clients to guarantee the loan.  The investors defaulted on the loan. Our clients then discovered to their horror that the bank was suing them for $225,000 in reliance on a guarantee of which they had no knowledge. Then, while attempting to negotiate the sale of the property without our assistance, our clients inadvertently referred to themselves in correspondence as “the guarantor.”

The bank sued our clients, asserting that signing the guarantee was within the scope of the Power of Attorney for signing loan documents, and alternatively, that by our clients identifying themselves to third parties as being the “guarantor,” they ratified the execution of the guarantee under the Power of Attorney.

So what happened?

We prepared a defence arguing that the guarantee was not within the scope of the Power of Attorney and that it was unconscionable in all the circumstances for the bank to rely on the guarantee. The bank pursued the claim in the District Court for almost three years until we secured the discontinuance of the case in May 2015.

When Attack Is The Best Defence

In another guarantee matter recently resolved in our client’s favour, our client, a housewife with no business experience, sought our urgent assistance. She had signed a guarantee for her son’s business loan facilities which had been defaulted upon. She had exhausted attempts for relief through the Financial Services Ombudsman.

Correspondence from the bank’s lawyers made it clear that no further delay would be tolerated. The bank had served her with a Notice of Exercise of Power of Sale and she had two days left to vacate her family home or be served with a District Court application for possession of her home. Given her particular circumstances, we recommended a strategy of suing the bank in the Supreme Court, and filing and serving the claim on the bank within the two days in order to gazump its application to the District Court.  Our client agreed with our proposal. The grounds of claim against the bank primarily included misleading and deceptive conduct, unconscionable conduct, and undue influence.

One unusual feature was our argument that our client’s son effectively acted as the bank’s agent for the purpose of obtaining her signature on the guarantee and therefore the bank was responsible for the misrepresentations made by him.

So what happened?

The Bank filed a defence denying the allegations contained in our client’s statement of claim. But it also immediately stopped any further action to recover our client’s home. We then quickly settled the whole dispute including the defaulted loan, and discontinued the proceedings against the bank.

It was a win for our client.

How We Can Help

This area of law quite often brings the bank unstuck when seeking to enforce the guarantee. There can be several reasons for this. One is that the guarantees were often entered into many years ago, at a time when the banks’ procedures were quite loose and had not been as scrutinised and tested in court to the extent that they are today.

Another is that, although the legal documents involved may have been prepared by lawyers, the staff who handled the transaction lacked legal sophistication.

This is a complex area of law.

If you need advice regarding a guarantee or you are being pursued for a guaranteed debt, call Quinn & Scattini Lawyers.

We are ready to step in to assist you.

Contact Us

Get the best representation. Contact Quinn & Scattini Lawyers on 1800 999 529, email mail@rmold.newwebsite.live, or submit an enquiry below.

We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba) or by telephone or video-conference.

This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.