Liability of Jak's Parents for Repaying Loan

0
Commercial Law

1
Answer 1
Issue
The issue is whether Jak’s parents are liable to repay $43,000 loan to the bank or not?
Rule
A contract creates a legally binding relationship between two or more parties who are bind
by its terms and failure to comply with these terms gives the right to parties to enforce the
terms on another party. However, a contract which is formed based on unconscionable
conduct is not enforceable, and its parties can set aside the contract to eliminate their legal
responsibilities. Unconscionable conduct is referred to a doctrine of contract law which is
used in order to describe terms that are extremely unjust or favour only one party who has
the superior bargaining power.1 This doctrine was first established in Australia in the
judgement of Blomley v Ryan2 in which the court provided that intoxication might preclude
the capacity of a party to contract. In this regards, another relevant judgement was given in
the case of Commercial Bank of Australia Ltd v Amadio.3 In this case, a bank guarantee was
given by elderly parents for their son to the bank. They signed the documents when the
bank manager attended their home who did not give any explanation regarding the content
of these documents. The son told his parents that the guarantee is for around $50,000 and
it would be given for six months.4
However, in reality, the overdraft limit went from $189,000 to over $270,000, and the
company was liquidated. The bank demanded the money from the parents who argued that
they were not aware of these terms of the guarantee. Amadio’s had a limited grasp of
written English, and they did not have a good command of the language. The court provided
that Amadio’s were at a special disadvantage because their English skills were poor and the
bank did not provide any explanation to them regarding the guarantee.5 The son also did
not allow them to get independent advice from someone else. The court provided that the
1 Jeannie Marie Paterson and Gerard Brody, ‘“Safety net” consumer protection: using prohibitions on unfair
and unconscionable conduct to respond to predatory business models’, (2015) 38 (3) Journal of Consumer
Policy 331-355.
2 [1956] HCA 81
3 [1983] HCA 14
4 John Doyle, ‘Risk watch: Things to consider when advising guarantors’, (2013) 35 (6) Law Society of South
Australia 33.

2
terms of the contract are not enforceable based on the doctrine of unconscionable conduct.
Another relevant judgement in this regards was given in the case of Yerkey v Jones6 in which
the court provided that if the wife has given a guarantee based on misrepresentation or
without knowledge regarding the facts of the contract, then it can be set aside. 7 Although
many people criticise this rule for being sexist and out-dated; however, it was applied by the
court in the recent judgement of Agripay Pty Ltd v Byrne8 by provided that unconscionable
conduct and human weaknesses are not limited to heterosexual marriage relationship and
they can apply to all vulnerable parties that are in a personal relationships.
A contract can also be set aside based on misrepresentation which is referred to a false
statement of fact in order to induce another party to enter a contract. The false statements
which are made by parties during the negotiation of a contract are considered as
misrepresentations based on which a contract becomes voidable which can be set aside by
the representee (the person who signed the contract while relying on the
misrepresentation).9 Specific criteria must be satisfied by parties in order to establish the
doctrine of misrepresentation. In Bisset v Wilkinson10 case, the court provided that there
must be false statement of fact or law regarding than an estimation or opinion regarding
future events. This statement must be made by a party who is in the position to know the
true facts. The objective of the false statement is to induce the representee to form a legal
relationship with the party.
Application
In the given scenario, Jak told his parents that he wants a guarantee for a loan of $25,000
which will be repaid within a period of six months. However, the agreement which they
signed was for an infinite credit limit that was given for an unlimited period. The bank
manager who visited Jak’s parents did not explain to them the terms of the agreement.
Now, the bank is demanding $43,000 from Jak’s parents, and they might have to sell their
5 Sharon Thompson, ‘Thorne v Kennedy: Why Australia's decision on prenups is important for English law’,
(2018) 48 Family Law 415-419.
6 (1939) 63 CLR 649
7 Yannis Nicholas Vrodos, ‘Revisiting the Wives Special Equity: An Exploration of the Volunteer Requirement’,
(2015) 40 UW Austl. L. Rev. 244.
8 [2011] QCA 85
9 Ewan McKendrick and Qiao Liu, Contract Law: Australian Edition (Macmillan International Higher Education,
2015).
10 [1927] AC 177