Liability of Guarantor in Commercial Law

COMMERCIAL LAW
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COMMERCIAL LAW
Question 1
Issue
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.
Relevant Rule
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
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COMMERCIAL LAW
Amadio couple assumed that their liability under the contract was limited to $ 50,000
(Latimer, 2015).
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).
Application
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
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