Commercial Law

This document discusses the liability of guarantors in loan agreements in commercial law. It explores the factors of misrepresentation, undue influence, and unconscionable conduct through case studies and their application in real-life scenarios. The document provides insights into the legal principles and their implications.

Commercial Law
Running head: Commercial Law 0
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Commercial Law 1
Contents
Issue.................................................................................................................................................2
Rules................................................................................................................................................2
Application......................................................................................................................................5
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Issue
(a) The issue of the case is to check the liability of Jak’s parents. Whether they are liable to pay
debts borrowed by their son?
(b) What is the liability of Jak’s wife Isabelle? Whether she is liable to pay debt being a co-
signer of loan agreement?
Rules
For the development of a contract, certain factors are required to be there. Acceptance is one of
them. Here this is necessary to state that only existence of consent is not enough, but in addition
to this, the same must be free consent. Many of the cases have happened there in which offeror
took consent of offeree by influencing him/her fraudulently or by stating a false fact and court
decided that there was no contract in the absence of free consent. Before moving ahead on this
discussion, the meanings of various terms are required to be detailed:-
 Misrepresentation: - Misrepresentation termed as fraudulent or incomplete
statement/presentation of a material fact by one party to another. The purpose of such a
statement is to induce another party to enter into the contract. If a contract is influenced
by misrepresentation then the innocent party would have the right to rescind the contract.
It was held in the case of Smith v Hughes (1871) LR 6 QB 597, that silence cannot be
treated as misrepresentation. Nevertheless, it was decided in the case of HIH Casualty
and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, that in the cases
where representator has a fiduciary position or the contract is of good faith then the
silence of one party can understand as misrepresentation.

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 Undue Influence: - This is another factor that is there to influence free consent of a party
of the transaction. As the name implies, undue influence is a situation where a
confidential relationship exists between parties that influence consent of a party for the
benefit of influencing party. Whenever a contract found to be a result of undue influence,
the innocent party can rescind the contract. Here this is to mention that some
relationships are there which are assumed to have fiduciary nature and such relationship
includes the relationship of doctor-patient, parent-child, solicitor-client, trustee-
beneficiary and religious advisor, and disciple (E-lawresources.co.uk, 2019).
 Unconscionable conduct: - This is conduct, which goes beyond good conscience.
Australian consumer law requires businesses to not to involve in such conducts while
dealing with customers and other businesses (Accc.gov.au, 2019). In the context of
contract law, unconscionable conduct can be understood as a situation where there is a
strong and weaker party in a contract. Such superior party uses his/her higher position to
seek the acceptance of weaker party for the development of a contract. This is necessary
to state that to do unconscionable conduct, one party must have bargaining power and
must have more knowledge on a particular matter than another party. Further, the same is
required to take unfair advantage of another party’s situation. Similar to
misrepresentation and undue influence, the innocent party has the right to rescind the
contract if his/her consent is influenced by unconscionable conduct of another party.
After above-mentioned discussion, it is clear that in a contract, consent of all the parties must
reflect free will to enter into a contract. Many cases have happened there where one party took
consent of other party using unfair means and courts have given different decisions in such cases.
One of the lead cases in this direction is Yerkey v Jones (1939) 63 CLR 649. One of the parties of

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the case Mrs. Jones alleged that her consent to a mortgage agreement has taken fraudulently as
many of the non-disclosures and misrepresentation were there. She stated that she was thinking
the contract to be a property liability contract but in actual it was a personal liability contract and
she entered into the same because of the influence of her husband (Jade.io, 2019). In the decision
of this case, it was given that the consent of the wife was not influenced by undue influence.
Only the existence of a relationship of husband and wife is not enough to take a suppose of
undue influence. In the name of this case, certain rules have been developed which are known as
Yerkey v Jones. The first rule is that the wife entered into a contract without understanding the
same. Further, the wife entered into a contract without dealing with other parties. The rule of this
case does not apply in cases where the wife takes benefit out of contract
(Lawcasesummaries.com, 2019).
According to the fact of the case of Garcia v National Australia Bank Ltd HCA 48, (1998)
194 CLR 395, the appellant signed a mortgage and in addition to this also signed a number of
personal guarantee agreements for her husband. The total amount of loan was of $270 000
(Classic.austlii.edu.au, 2019). The business of appellant’s husband failed and his marriage with
the appellant also came to an end. At the time of signing the contract, her husband made her
believe that there is no danger in signing those contracts and his business will go well. Appellant
(Mrs. Garcia) understood what a guarantee is but she was not aware of the fact that up to what
extent the guarantee executed out of signing the contract will go. Mrs. Garcia initiated action
against her husband.Few of the honors of the high court observed that bank, in this case, was
aware of the fact that Mrs. Gracia is the wife of creditor and yet taken no steps to explain the risk
associated with the signing of guarantee contract to her. At last, the majority of justice agreed
with the decision of the trial judge and established the presence of undue influence

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(Australiancontractlaw.com, 2019). In the reasoning of the decision, it has been granted that
misuse of mutual trust is against the principle of equity.
The last case, which is required to discuss hereby, is Commercial Bank of Australia v Amadio
(1983) 151 CLR 447; [1983] HCA 14. In this case, respondents Mr. and Mrs. Amadio signed a
guaranteed deed in favour of their son. Their son told them that the loan is of $50 000 and the
same would be repaid in the next 6 months (Gibson and Fraser, 2013). Parents believed on this
statement made by their son and executed a guarantee agreement. This guarantee was associated
with the overdraft limit for the business of their son. Later on, it has been disclosed that the bank
granted the overdraft limit from $189,000 to over $270,000, whereas the parents had believed
that the overdraft limit is just $50 000 (Debelle, 2011). When the business of son became unable
to repay the overdrafts limit sanctioned by the bank, the bank held his parents liable to repay the
same. In the decision given of the case, the majority of the judges decided that bank was aware
with the true financial condition of the creditor’s business and hence it was the responsibility of
the bank to disclose the same to his parents but the bank did not perform this action. Further,
creditor made an express misrepresentation. Further, the factor of unconscionable conduct was
also there on the part of the bank as the same took unfair advantage of special disability of
respondents.
Application
(a) In the given case, a person named Jak was successfully working as an accountant and then
decided to start his own accounting practice. He was facing the issue of lack of capital. He was
required to take a loan and could not do this without the help of guarantors. He thought to have

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the help of his elderly parents. His parents grew up in Australia. Jak informed his parents that he
is falling short of $25000 and the same will be repaid to the bank by his business in the coming 6
months. His parents had believe to their son and trusting on the statement made by him, they
have signed the contract of guarantee for the loan taken by their son from the bank. Later on, the
business of Jak failed and he became unable to repay the debts taken from the bank. When banks
asked his parents to repay the loan taken from the same under guarantee agreements, it has been
disclosed that the loan taken by Jak was for $50000 and not $25000. In addition to this, the term
of debt was also 4 years and not 6 months. The bank approached the parents of Jack for the
balance of the unpaid amount, which was $43000. Applying the provisions of Amadio case, a
factor of misrepresentation was there. Bank, as well as Jak, made the misrepresentation to Jak’s
parents. Jak made express misrepresentation by stating the false statement to his parents. Further,
the bank was aware of the fact that Jak’s parents are giving a guarantee of trusting on their child.
In addition to this, the contract signed by Jak’s parents was a trustworthy contract and applying
the provisions of the case of HIH Casualty and General Insurance Ltd v Chase Manhattan Bank
it was a liability to disclose all the possible consequences of guarantee to Jak’s parents. Bank
remained silent on the matter and therefore it will be termed as misrepresentation. Here in the
case, it is mentioned that Jak’s parents grew up in Australia and hence it is assumed that they had
knowledge of the language. As the fiduciary relationship was there in between Jak and his
parents, the factor of undue influence was also there. Jak was in a position to influence the

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consent of his parents. According to the facts and decision of the case of Commercial Bank of
Australia v Amadio, bank hereby is also liable for unconscionable conduct as the same get
benefit out of the contract. Bank manager visited Jak’s parents, the same might have idea about
the fact of misrepresent6ation made by Jak yet the same did not inform his parents about the true
situation and took unfair advantages of special disability of Jak’s parents as they were elderly,
had no knowledge of the limit of guarantee and had trust on their son.
(b) In this scenario, Jak asked his wife Isabelle to co-sign the loan agreement. Isabelle is not
from Australia and therefore speaks broken English. It is her special disability. As decided in the
case of Yerkey v Jones, only the existence of the husband-wife relationship is not enough to
assume the existence of undue influence. Applying the rule decided in this case Isabelle entered
the contract without understanding the same. Further, Isabelle did not deal with other parties and
hence she cannot rely on undue influence based on Yerkey v Jones, rule. The facts and decision
of the case of Garcia v National Australia Bank Ltd, are also necessary to mention. This case is
similar to the given case. Isabelle relied on the assurance given by her husband who had good
knowledge of accounting business. In this manner, undue influence gets established in this case
applying the provisions of Garcia v National Australia Bank Ltd. Further express
misrepresentation is there on the part of Jak. As Isabelle was new to Australia, it was the liability
of the bank to inform her about her liability. Nevertheless, the bank did not do so and took unfair
advantage of her special disability as the same get benefited out of this contract. This termed as

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unconscionable conduct. It means the bank was liable for unconscionable conduct and Jak was
liable for undue influence and misrepresentation.
Conclusion
In a conclusive way, this is to state that in both of the cases, signing parties signed the contract
will not be liable for the repayment of debt. In the first case, Jak’s parent will have no liability to
repay the balanced debt as their acceptance was influenced by misrepresentation of Jak and bank
and unconscionable conduct of bank. In the second case, misrepresentation and undue influence
of Jak and unconscionable conduct of bank influenced consent of Isabelle.

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References
Accc.gov.au. (2019) Unconscionable conduct. [online] Available from:
https://www.accc.gov.au/business/anti-competitive-behaviour/unconscionable-conduct
[Accessed on 27/03/19]
Australiancontractlaw.com. (2019) Garcia v National Australia Bank. [online] Available from:
https://www.australiancontractlaw.com/cases/garcia.html [Accessed on 27/03/19]
Classic.austlii.edu.au. (2019) Case Notes. [online] Available from:
http://classic.austlii.edu.au/au/journals/NewcLawRw/1998/15.pdf [Accessed on 27/03/19]
Commercial Bank of Australia v Amadio (1983) 151 CLR 447; [1983] HCA 14
Debelle, P., (2011) Red Silk: The Life of Elliott Johnston, QC. Australia: Wakefield Press.
E-lawresources.co.uk. (2019) Undue influence. [online] Available from: http://www.e-
lawresources.co.uk/Undue-Influence.php [Accessed on 27/03/19]
Garcia v National Australia Bank Ltd HCA 48, (1998) 194 CLR 395
Gibson, A., and Fraser, D. (2013) Business Law 2014. Austrlia: Pearson Higher Education .
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6
Jade.io. (2019) Yerkey v Jones [1939] HCA 3; 63 CLR 649. [online] Available from:
https://jade.io/article/64113 [Accessed on 27/03/19]

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Lawcasesummaries.com. (2019) Yerkey v Jones (1939) 63 CLR 649. [online] Available from:
https://lawcasesummaries.com/knowledge-base/yerkey-v-jones-1939-63-clr-649/ [Accessed on
27/03/19]
Smith v Hughes (1871) LR 6 QB 597
Yerkey v Jones (1939) 63 CLR 649