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\u2019s parent or spouse).<\/p>\n
Typically too, the loan may be made to support the business activities of the borrower.<\/p>\n
There are many dangers in agreeing to guarantee someone\u2019s financial obligations.<\/p>\n
You should always obtain competent legal advice regarding a guarantee before agreeing to it or signing anything.<\/p>\n
Quinn & Scattini Lawyers are experienced in providing that advice.<\/p>\n
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.<\/p>\n
\u201cUndue influence\u201d 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.<\/p>\n
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).<\/p>\n
\u201cUnconscionable conduct\u201d also involves an inequality of power, but usually entails the dominant party taking advantage of a \u201cspecial disability\u201d (e.g. old age, language difficulties, illiteracy, lack of education), such that the resulting transaction is harsh and oppressive to the weaker party.<\/p>\n
In a matter which was resolved in our clients\u2019 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.<\/p>\n
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\u2019 knowledge, it was used to sign documents causing our clients to guarantee the loan.\u00a0 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 \u201cthe guarantor.\u201d<\/p>\n
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 \u201cguarantor,\u201d they ratified the execution of the guarantee under the Power of Attorney.<\/p>\n
So what happened?<\/p>\n
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.<\/p>\n
In another guarantee matter recently resolved in our client\u2019s favour, our client, a housewife with no business experience, sought our urgent assistance. She had signed a guarantee for her son\u2019s business loan facilities which had been defaulted upon. She had exhausted attempts for relief through the Financial Services Ombudsman.<\/p>\n
Correspondence from the bank\u2019s 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.\u00a0 Our client agreed with our proposal. The grounds of claim against the bank primarily included misleading and deceptive conduct, unconscionable conduct, and undue influence.<\/p>\n
One unusual feature was our argument that our client\u2019s son effectively acted as the bank\u2019s agent for the purpose of obtaining her signature on the guarantee and therefore the bank was responsible for the misrepresentations made by him.<\/p>\n
So what happened?<\/p>\n
The Bank filed a defence denying the allegations contained in our client\u2019s statement of claim. But it also immediately stopped any further action to recover our client\u2019s home. We then quickly settled the whole dispute including the defaulted loan, and discontinued the proceedings against the bank.<\/p>\n
It was a win for our client.<\/p>\n
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\u2019 procedures were quite loose and had not been as scrutinised and tested in court to the extent that they are today.<\/p>\n
Another is that, although the legal documents involved may have been prepared by lawyers, the staff who handled the transaction lacked legal sophistication.<\/p>\n
This is a complex area of law.<\/p>\n
If you need advice regarding a guarantee or you are being pursued for a guaranteed debt, call Quinn & Scattini Lawyers.<\/p>\n
We are ready to step in to assist you.<\/p>\n
Get the best representation. Contact Quinn & Scattini Lawyers on\u00a01800 999 529<\/a>, email\u00a0mail@rmold.newwebsite.live<\/a>, or submit an enquiry below.<\/p>\n