The following applies to all guarantees, whether or not they are regulated by the NCC. The provisions of the Banking Guidelines setting out proper practice in an industry or occupation. For example, the franchising code of practice sets out rules for businesses operating under a franchise. Codes can be voluntary or statutory (required by legislation). regarding guarantees may also apply. For more information about the codes of conduct for the A debt that does not have to be paid until some future time. Being allowed to pay later, in the future, for something you are getting now. services industry, see Chapter 5.10: Unauthorised transactions and ePayments Code.
What is a guarantee?
A A binding promise made as reassurance that another person will carry out their legal obligations (e.g. paying a debt). The person making the promise is called a guarantor. If the person being guaranteed fails to pay, the guarantor becomes responsible for the debt. is a binding agreement that involves three parties: the credit provider (lender); the A person who owes a debt. (borrower); and the guarantor. Guarantees are sometimes required by credit providers before they agree to lend money if they suspect the debtor may not be able to make all repayments.
A ‘guarantor’ promises the credit provider to repay the loan if the debtor refuses or fails to repay the loan. Agreeing to become a guarantor may cause financial hardship. It involves more than helping out a friend or relative who needs money or wants to buy goods on credit, because if the debtor stops making repayments the guarantor has to pay.
Rights of a guarantor
A guarantee involves a promise by the guarantor that they A document that sets out what a person wants to happen to their money and other property after they die. pay the Money that is owed by one person or business to another. owing to the credit provider if the debtor fails to pay it.
Unless the guarantee document is a A formal legal document that is used for specific purposes, such as trusts, some types of ownership of land, and agreements where no money is going to be paid. Deeds must clearly state that they are a deed, and they usually include the words ‘signed, sealed and delivered’. They are also called ‘contracts under seal’, although attaching a seal with wax is no longer necessary., the guarantee must be given before or at the time the credit provider lends to the debtor. If the guarantee is given after the credit provider lends to the debtor, the guarantee may not have been given in exchange for the loan; this makes the guarantee unenforceable.
Also, if the credit provider used any force, An intentionally dishonest act, or lack of action, done to deceive someone and bring some advantage over those who have been deceived., illegality, Forcing someone to do something they do not want to do. An agreement signed under duress will be invalid., Taking unfair or improper advantage of the weakness of another person. The influence is to make them agree to do or not to do something they would not do of their own free will., or allowed the guarantor to be mistaken about their rights and liabilities under the guarantee, the guarantee may be avoided. A guarantee may also be avoided if the credit provider was aware of another A person or organisation directly involved in a court case. Parties include the plaintiff or applicant, the defendant, and any third party added to the action, but not independent witnesses. using fraud, illegality, duress, undue influence or mistake against a potential guarantor.
What if the guarantor pays?
The guarantor is entitled to recover any money paid from the debtor, if possible. Also, the guarantor is entitled to any securities held by the credit provider. In Lavin v Toppi  HCA 4 at 52, it was held that a co-guarantor to a bank loan (Lavin) – who subsequently entered into a deed of A document signed by parties ending a court action. The party who began the action agrees to drop it, often in exchange for a payment by the other party. Also called terms of settlement. with the bank that contained a promise by the bank not to To take legal action in a civil case. Lavin – had to make an equitable contribution to her co-guarantor who paid a disproportionate amount of the guaranteed debt to the bank.
Other circumstances where a person may escape liability under a guarantee
A guarantor may be freed from their obligations if:
- the guarantee is altered by the credit provider (e.g. the name of one co-guarantor is struck out);
- the credit provider changes;
- the guarantor is called on to pay but the credit provider cannot hand over securities it has taken;
- the credit provider fails to protect the guarantor (e.g. fails to insure when there is an obligation to do so); or
- the credit provider alters the guaranteed An agreement that the law will enforce. (e.g. by giving the debtor more time to pay than the original contract provides for), as long as this alteration is by a binding contract.
However, the terms of the guarantee may make the guarantor liable even if one of the matters listed above has occurred.
The National Credit Code and guarantees
Formalities of guarantees
The NCC creates additional requirements for guarantees that are entered into in relation to a A contract relating to the giving of credit. regulated by the NCC. A guarantee must be in writing and signed by the guarantor, although it will be enough if the guarantee is contained in a A restriction attached to ownership of property to secure the repayment of money borrowed. The mortgage stops the owner of the property selling it until they have paid off the debt. signed by the guarantor (s 55 NCC). The guarantee must contain a form 8 warning (s 55(3); reg 81 National Under the Australian Consumer Law, a person who buys goods or services for less than $40 000 or for personal or home use. Credit Protection Regulations 2010 (Cth) (‘NCCP Regulations’). The guarantee will not be enforceable unless these requirements are complied with (s 55(3) NCC).
A copy of the credit contract must be given to the guarantor before they sign (s 56(1)(a)). The guarantee is not enforceable unless this is done (s 56(2)).
The credit provider must also give the prospective guarantor a copy of a document entitled ‘Form 9 information statement: Things you should know about guarantees’, which explains the rights and obligations of the guarantor (s 56(1)(b); reg 82 NCCP Regulations).
The credit provider must, within 14 days after the guarantee is signed, give the guarantor a copy of the guarantee signed by the guarantor and any related credit contract or proposed credit contract (if a copy of the related contract has not previously been given to the guarantor) (s 57).
Can a guarantee be cancelled?
A guarantor can withdraw from a guarantee by giving written notice to the credit provider:
- at any time before credit is first provided under the credit contract; or
- after credit is first provided under the credit contract, if the contract is materially different from the proposed credit contract given to the guarantor before they signed the guarantee (s 58 NCC).
A guarantee can also be cancelled by a An independent body that hears legal claims brought by parties and decides between them. Serious cases are heard by a judge and jury, or just a judge. Less-serious cases are heard by a magistrate. under section 76 of the NCC if it is found to be unjust (see ‘Unjust contracts’, below).
In the cases of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 and Garcia v National Australia Bank Ltd (1998) 194 CLR 395, the High Court held that it would be unconscionable to allow the respective banks in those cases to To make people obey a law or the terms of an agreement, using police powers or court orders. the guarantees against the guarantors due to defective sign-up processes.
A guarantee may provide that the guarantor guarantees not only the debtor’s obligations under a particular credit contract but also obligations under future credit contracts (s 59(1) NCC). The guarantee will only be enforceable in relation to future credit contracts if the credit provider has given the guarantor a copy of the contract document of that future credit contract and subsequently obtained from the guarantor a written acceptance of the extension of the guarantee (s 59(2)).
Increasing a guarantor’s liabilities
A guarantor’s obligations under a guarantee can be significantly increased in a variety of ways (s 61 NCC). For instance, the credit contract subject to the guarantee may allow the debtor and credit provider to agree to vary the contract by providing further amounts of credit under that contract to the debtor.
However, increased Legal responsibility, enforced by civil or criminal courts. has no effect unless:
- the credit provider gives the guarantor a written notice setting out how the terms of the credit contract can be changed to allow an increase in the guarantor’s liabilities; and
- the credit provider obtains from the guarantor an acceptance of the extension of the guarantee to that increased liability (s 61(2)).
Certain exceptions to these requirements are set out in section 61(2) of the NCC.
ANZ v Manasseh  WASCA41
In ANZ v Manasseh  WASCA 41, the court had to decide if a second letter of The first step in agreeing to make a legally binding agreement. An offer must be accepted before there can be a legally enforceable contract. For example, a person can offer to sell their car for $5000 and a buyer can accept the offer and pay that purchase price. to a borrower (to increase the borrower’s loan facility limit) was a new or replacement arrangement, or a variation of the original loan agreement entered into by the borrower. The guarantor had given a guarantee to the bank in respect of the borrower’s original loan. The terms of the guarantee provided that the guarantor would not be liable for any new or replacement arrangements unless he consented to them. The guarantor refused to To agree to something being done, to approve an action or arrangement. See also informed consent. to guarantee payment of the second loan offer. The bank allowed the borrower to draw funds under the second offer without obtaining the guarantor’s consent. The question arose if the guarantor was liable to pay the bank the borrower’s increased debt under the second loan offer.
The Court of The review of the decision of a lower court by a higher court. If an appeal is successful, the higher court can change the lower court’s decision. decided that the second loan offer was a new agreement, which caused the The end of something. Contracts terminate when the parties have done what they agreed. A contract can also be terminated without being completed, for example if one party breaks the contract, or it is impossible to carry out. and replacement of the original loan agreement. This meant that the guarantor was not liable to pay the borrower’s debt. Lenders must obtain the existing guarantor’s consent or enter into new guarantees when a borrower’s facility agreement is replaced.
Guarantor goes bankrupt
If a guarantor gave a guarantee (including a clause giving a legal mortgage) to a credit provider to secure a debtor’s debt, and the guarantor bankrupts after the credit provider called on the guarantee to be honoured, the When a debtor who cannot pay their debts has their money and property taken over and managed by a trustee who uses it to pay back creditors. The debtor is then called a bankrupt. makes no difference to the enforceability of the guarantee (see GE Commercial Corporation (Aust) Pty Ltd v Nichols as Trustee of Bankrupt All the property a person has, including real property and personal property. It is often used to describe property belonging to someone who has died, or the property of a bankrupt. of Lymn  NSWSC 562 (13 April 2012)).
A guarantee will be Having no legal effect. A void agreement has something wrong with it, so it cannot be a legally binding contract. For example, a verbal agreement to buy land would be void, because the law says those contracts have to be in writing. to the extent that it:
- secures an amount that exceeds the debtor’s liabilities under the credit contract and the reasonable expenses to enforce the guarantee (s 60(1) NCC); or
- limits the guarantor’s rights to A promise to pay compensation to cover losses or expenses that may arise in the future if some stated event occurs. For example, if a business partnership ends and one partner continues to run the business, they generally agree to indemnify the others against any claims against the business in the future. Insurance contracts also indemnify the insured against stated risks. from the debtor (s 60(5)).
A The person or organisation to whom a debtor owes a debt. cannot begin enforcement proceedings against a debtor unless the debtor is in Failure to do something that is legally required. For example, a person who fails to make a payment on their car is in default on the loan; if they continue to be in default the creditor may issue a default summons to take the debtor to court. , a default notice has been served on the debtor and the guarantor, and the default is not remedied within 30 days (s 88(1) NCC) (see also ‘Enforcement of credit contracts’, below). A creditor can only enforce a judgment against a guarantor if it has a judgment against the debtor that has been unsatisfied for 30 days after a written demand, or if other exceptional circumstances apply, such as that the creditor has been unable to locate the debtor or the debtor is Being unable to pay your debts in full when they are due. (s 90 NCC).
Banking Code of Practice 2020 and guarantees
The most recent version of the Banking Code of Practice (‘Banking Code’), which has applied since 20 March 2020, contains additional protections for people who are, or may become, guarantors. The protections apply to customers of banks who are members of the Australian Banking Association (ABA); however, in determing disputes against non-member financial firms, the Australian Financial Complaints Authority (AFCA) may consider the Banking Code to be good industry practice.
Some of the protections in the Banking Code that apply to guarantees signed after 1 July 2019 include:
- the bank will not accept a guarantee until the third day after the prospective guarantor has been given the notices and documents required by sections 96–99 of the Banking Code (cl 107) unless certain exceptions apply – such as, that the prospective guarantor obtained independent legal advice (cl 108);
- the bank will give the guarantee documents directly to the guarantor not the borrower (subject to exceptions) (cl 109);
- if the bank attends the signing of the guarantee, it will ensure the guarantor signs it in the absence of the borrower (subject to exceptions) (clause 110).
NAB v Rose  VSCA 169
In National Australia Bank Ltd v Rose  VSCA 169, the Victorian Court of Appeal confirmed that NAB had breached the previous version of the Banking Code by failing to verbally inform a guarantor, Mr Rose, of certain written warnings in the documents (including that the guarantor should seek independent legal advice before signing), in the course of taking five guarantees from him in connection with the purchase of investment properties. The court held that the Banking Code was a term of the guarantee, and so the Banking Code breach constituted a breach of the banker–client contract. The court concluded that NAB’s breaches of the Banking Code caused loss to Mr Rose in the amount of the guarantees. This had the effect that Mr Rose was entitled to set-off A court order for money to be paid to someone to compensate them for a loss suffered as a result of a civil wrong or breach of contract. For example, a person who caused a serious permanent injury to another person can be ordered by the court to pay damages that compensate the injured person for their loss of income from being unable to work. See also aggravated damages; compensatory damages; general damages; liquidated damages; nominal damages; special damages. (i.e. that his liability under the guarantees should be reduced by the amount of his loss).
Doggett v CBA  VSCA 351
In Doggett v Commonwealth Bank of Australia  VSCA 351, the Victorian Court of Appeal confirmed that the equivalent of the current clause 49 in the 2004 version of the Banking Code was a term of guarantees given by two guarantors, and accordingly required the bank to exercise the care and skill of a diligent and prudent banker in assessing whether a borrower would be able to afford and repay a loan. In this case, however, the guarantors were not entitled to a remedy because they had released the bank under a compromise agreement.
CBA v Wood  VSC 264
In Commonwealth Bank of Australia v Wood  VSC 264, the guarantor Claimed but not proved. For example, the police can allege in court that a car was stolen, but they then have to prove it with evidence. If you say a person did something illegal you are making an allegation. Unless you can back it up, you will not be able to win a court case about it. that the CBA breached the Banking Code by giving the guarantee to the debtor, or someone acting on behalf of the debtor, to arrange the signing. The guarantor also argued that the bank failed to ensure that he signed the guarantee when the debtor was not there, and that the breaches gave him the right to terminate the guarantee. The court found that the guarantor had failed to prove that his loss, which was the amount of his liability under the guarantee, was caused by the breach of the Banking Code. So even through the court found that the relevant provisions of the Banking Code were incorporated as contractual terms of the guarantee, and that they were breached, the guarantor was not entitled to a remedy.
(See ‘Banking Code of Practice’ in Chapter 5.10: Unauthorised transactions and ePayments Code.)