Guarantee unconscionable to enforce

169X123-NSWSupremeCourtThe NSW Supreme Court has delivered a message to lenders seeking to protect themselves with Solicitors advising on third party guarantors. The decision held in Alceon Group Pty Ltd v Rose [2015] NSWSC 868 particularly calls attention to the importance of independence and adequacy when legal advice is provided. In this case, the New South Wales Supreme Court held it unconscionable to enforce a contract to a third party personal guarantor due to a lack of independent and adequate advice given.

The background into this case involves an entity named Quadwest Developments Pty Ltd (“Quadwest”) which was involved in the construction of residential apartments in Perth. The sales in the Perth project did not yield sufficient proceeds to repay its debts which resulted in Quadwest seeking to refinance with the lending institution known as Alceon Group Pty Ltd (“Alceon”). Alceon was aware of the risk of default by Quadwest, as such, they were only prepared to enter into an arrangement with Quadwest subject to the condition that Quadwest’s duties to the arrangement were backed by personal guarantees and security over real estate other than the Perth Apartments.  The personal guarantees were provided by the Director, Mr Christopher Rose (“Christopher Rose”) and his parents, Mr Peter Rose (“Peter Rose”) and Mrs Betty Rose (“Beth Rose”), which were secured by a mortgage over their residential property in New South Wales.

Eventually, Quadwest defaulted on the loan and Alceon sought to enforce the personal guarantees provided by Peter Rose and Beth Rose and its rights to the mortgage of their home. Notwithstanding the above, Peter Rose and Beth Rose resisted Alceon’s orders to enforce the personal guarantees. In this case, Beth Rose’s plea against Alceon enforcing the guarantee was successful due to the following reasons:-

  • Beth Rose was not wholly aware of what she was signing and relied on her husband, Peter Rose.
  • The requirement by Alceon that Peter Rose and Beth Rose receive legal advice was more to protect itself rather than to protect Peter Rose and Beth Rose.
  • There was a conflict of interest and the Solicitor providing the advice did not act as an independent solicitor and the advice given was wholly inadequate.
  • The Lender was aware of the inadequate advice being given and the conflict of interest the Solicitor had with the borrowing entity.
  • The Lender, Alceon, was found to not have taken enough steps to ensure that the third party guarantor was given competent, independent or objective advice to ensure she was wholly aware of the extent of the agreement.
  • Based on the decision of the High Court in Garcia v National Australia Bank Ltd[1998] HCA 48, the court held that it would be unconscionable to enforce contract against Beth Rose.

The decision in this case is a message to lenders and solicitors advising third party guarantors to be aware that it is not enough that legal advice has been obtained, but the advice should also be objective and adequate. Lenders seeking to mitigate risks and protect themselves with personal guarantors must be careful when doing so and should always confirm that the solicitor providing legal advice is independent to both parties and that sufficient steps are taken to ensure that the advice given to guarantors are understood and whole.

Reference available upon request