Commercial Law Case Study: Assessing Guarantor and Co-borrower Debt

This assignment presents two commercial law case studies concerning loan agreements and liability. The first scenario examines whether Jack's parents are liable as guarantors for his business loan, focusing on the enforceability of the guarantee agreement and potential unconscionable conduct by the bank, referencing key cases like Commercial Bank of Australia Ltd v Amadio. The second scenario analyzes whether Jack's wife, Isabella, is liable for the debt as a co-signer, considering her limited English proficiency and whether she acted as a true co-borrower or essentially a guarantor, drawing parallels with Garcia v National Australia Bank Ltd. The analysis concludes that the parents are likely liable due to no evident unconscionable conduct, while Isabella is not, due to her special disability and the bank's potential unconscionable conduct. Desklib offers a range of solved assignments and study tools to help students understand complex legal concepts.

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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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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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understand the contractual obligations. Clearly, the bank is not at fault in the given scenario
and hence Jak’s parents would have to make the payment of $ 43,000 to the bank.
Conclusion
It is evident from the above discussion that there is no special disability that the guarantors
suffer from. Also, the conduct of the bank does not constitute unconscionable conduct as no
information about their son’s financial situation was hidden. The parents voluntarily decided
to provide the guarantee considering their faith in their son. As a result, they did not make
attempts to read the agreement or to understand their obligations. Hence, the bank is legally
entitled to recover outstanding liabilities of $ 43,000 from Jak’s parents.
Question 2
Issue
The issue is to ascertain if Jak’s wife Isabella would be liable for clearing the outstanding
debt of $ 43,000 if she had co-signed the loan agreement along with her husband.
Relevant Rule
Banks and other lenders in the past have faced significant legal challenges with regards to
enforcing the guarantee agreement considering that these are regularly challenged in the court
of law resulting in delays in enforcement. This has paved way to an alternative practice
whereby the guarantors are represented as co-borrowers for the loan. Typically, if the co-
borrower is not a direct beneficiary of the loan amount and this is known to the lending
institution, then the co-borrower is essentially a guarantor (Paterson, Robertson and Duke.
2015). However, if the co-borrower is not a guarantor but a direct beneficiary, then in such
cases, the co-borrower would be liable for the debt. As a result, if the borrower defaults on
payment of loan, then the same would need to be paid by the co-borrower. Even if one of the
co-borrowers is bankrupt, then also the bank can recover outstanding debt from the other co-
borrower provided they are not separated (Pendleton and Vickery, 2016).
A relevant case law in this regards is Garcia v National Australia Bank Ltd [1998] HCA 48.
This case highlights the circumstances when the lender cannot enforce a particular transaction
against wife. The client (Jean Garcia) along with her husband (Fabio Garcia) enacted
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mortgage with regards to a jointly owned house in 1979. Over the next several years, the
client signed a host of guarantees for assumption of loan amount which was solely used by
her husband in his company. The couple separated in 1988 while the company of her husband
went bankrupt in 1989. It was held that the bank’s conduct was unconscionable and therefore
the various guarantees provided by the wife were considered to be non-enforceable (Taylor
and Taylor, 2015). With regards to reaching the verdict, the trial judge and also the High
Court upheld the approach taken in Yerkey v Jones (1939) 63 CLR 649. In this case, the
memorandum of mortgage was held as void considering that the plaintiff did not understand
the contract and also was not the direct beneficiary of the contract (Edlin, 2015).
Additionally, in case the co-borrower is essentially the guarantor, then the guarantee
agreement would be considered as non-enforceable in the presence of unconscionable
conduct. This is in line with the verdict of Commercial Bank of Australia Ltd v Amadio
[1983] HCA 14. A key aspect highlighted in this case was the concept of special disability
whereby the personal scenario of the guarantors acts as an impediment in understanding the
implications of the enacted agreement thereby putting them in a vulnerable position
(Davenport and Parker, 2014). With regards to the Amadio case, the vulnerability of the
Amadio couple arose on account of the coupled having migrated to Australia from Italy only
when they were old limiting their understanding of English language. Also, their
understanding of business and related transactions was also very poor owing to their lack of
experience. This placed the bank in a dominant position which was exploited by not
disclosing the financial situation of their son at the time of execution of the guarantee
agreement (Carter, 2016).
Application
Based on the given facts, in the given scenario, Jak’s parents are not acting as guarantors.
Instead his wife i.e. Isabella has decided to co-sign the loan agreement. Isabella has arrived in
Australia only five months ago and speaks broken English only besides working as an artist.
The first step in the given case is to determine whether Isabella is acting as the co-borrower
or as a guarantor. It is evident that the loan taken would be used only by Jak in order to set up
his business. Also, the only reason to add Isabella as the co-borrower is to ensure that the
bank would go ahead and prove Jak with the loan. This is apparent from the fact that the bank
was not interested in providing him loan without any guarantee. As a result, the presence of
Isabella in the loan agreement is essentially providing the guarantee.
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Further, the given facts indicate that Isabella has a special disability. This is because she has
arrived only five months before in Australia and therefore does not have sound understanding
of English. Also, she is an artist and therefore she would have limited understanding of legal
documents related to business. Hence, in the given background, it is highly likely that
Isabella did not understand the ;legal documentation and associated liabilities before acting as
the co-borrower. As highlighted in the Amadio case, the conduct of the bank in this case
would also be termed as unconscionable. As a result, Isabella would not be held liable for the
outstanding amount of $ 43,000 once there is default by Jak.
Conclusion
It is apparent from the above discussion that Isabella is not acting as the co-borrower but
rather the guarantor so that the bank would extend loan to Jak which would be solely used by
him for business purposes. Further, Isabella on account of her French background and artist
profession suffers from special disability similar to the Amadio case. As a result, it would be
unconscionable for the bank to rely on assurance given by Isabelle. Hence, there would not
be any liability on Isabella to repay the outstanding amount of $ 43,000.
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References
Andrews, N. (2014) Contract Law.3rd ed. Cambridge: Cambridge University Press, pp. 67-
68
Carter, J. (2016) Contract Act in Australia. 3rd ed.Sydney: LexisNexis Publications, pp.134-
136
Davenport, S. and Parker, D. (2014) Business and Law in Australia.2nd
ed..Sydney:LexisNexis Publications, pp. 108-110
Edlin, D. (2015) Common law theory, 4th ed. Cambridge: University Press Cambridge, pp.
145-146
Gibson, A. and Fraser, D. (2014) Business Law. 8th ed. Sydney: Pearson Publications, pp.
175-178
Latimer, P. (2015) Australian business law. 24th ed. Sydney: CCH Australia Ltd, pp. 118-
119
Lindgren, K.E. (2014) Vermeesch and Lindgren's Business Law of Australia.12th ed.Sydney:
LexisNexis Publications, pp. 151-153
Paterson, J. Robertson, A. and Duke, A. (2015) Principles of Contract Law. 5th ed. Sydney:
Thomson Reuters, pp. 165-166
Pendleton, W. and Vickery, N. (2016) Australian business law: principles and applications,
5th ed. Sydney :Pearson Publications, pp. 117-119
Taylor, R. and Taylor, D. (2015) Contract Law. 5th ed. London: Oxford University Press, pp.
178-180
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