Stubbings v Jams 2 Pty Ltd (2022) HCA 6 – Implications for Guarantees and Unconscionable Conduct
What is a guarantee?
The term ‘guarantee’ attracts a level of ambiguity. It is not always clear what the legal implications of a guarantee are beyond the notion that it involves making an assurance, generally in the circumstance of financial services being obtained.
A guarantee usually involves at least three parties: the lender, the borrower, and the guarantor. It is a tool used by the lender to ensure they are able to recover a debt in the event of the borrower’s non-compliance with repayments. It may be used in conjunction with other methods, such as the payment of a bond or deposit. A lender will typically require a guarantor where there is uncertainty around the borrower’s capacity to repay funds, or it is a trust or company structure.
It is a requirement under s56 of the Property Law Act 1974 (Qld) that a guarantee is in writing, and must be signed by the guarantor, or another authorised party. It is important to note that a guarantee outside of these requirements will not be enforceable under the Act. This distinguishes guarantees from other areas of contract law, where verbal or informal agreements are still enforceable.
Due to the written element of a guarantee, there are limited avenues for guarantors to claim they should not be bound by the promise to absorb the borrower’s liability. However, there are still legal challenges that can be made regarding the validity of a guarantor agreement. The recent High Court ruling in Stubbings v Jams 2 Pty Ltd (2022) created an important precedent for one of these avenues: the claim of unconscionable conduct.
What is unconscionable conduct?
Unconscionable conduct is prohibited from use by financial services, as set out in s12CB of the Australian Securities and Investments Commission Act 2001(Cth).
The principles of unconscionable conduct have applications in other areas of law, however the focus in Stubbings v Jams 2 Pty Ltd is on its use in the obtaining of a guarantor agreement. The High Court applied the elements of unconscionability as established in Commercial Bank of Australia v Amadio (1983). To summarise these elements, one party to the agreement must be proven to have had a disadvantage compared to the other, there has to have been knowledge of this disadvantage by the latter, and this disadvantage must then have been exploited in an unconscionable manner.
This case concerned asset based lending, and it was found unanimously by the court that unconscionable conduct had occurred on the part of the lender, Jams 2 Pty Ltd. What makes this decision notable is that asset based lending in its form was not found to be unconscionable, however certain practices inherent to this form can amount to unconscionable conduct. The loan that this case examined was granted based on the assets of the guarantor, and the lender demonstrated a wilful avoidance to further examine other factors that may have indicated the ability of the guarantor to fulfil their financial obligations under the agreement.
This opens up an interesting paradox within the law of guarantees. Essentially, despite the fact asset based lending was found not to be unconscionable in its nature, the actual practice of basing a loan solely on the assets of the borrower or guarantor can evidently satisfy the elements of what amounts to unconscionable conduct. Therefore, in practice, lenders following an asset based assessment method of loan eligibility must take care to consider other relevant factors that may indicate the ability of an individual to comply with payments.
It is not to say that all circumstances of asset based lending will be found to amount to unconscionable conduct. As with any area of law, the specific facts of each individual case must be considered when determining whether a form of breach or infringement has occurred.
It must be determined that there was an existence of some form of special disadvantage, which in this case was the inability of the guarantor to appropriately gauge the level of risk associated with the agreement he entered into.
Justice Gordon also highlighted the relevance of the lender having suspicion of the guarantor’s limited capacity for payment. The elements of unconscionable conduct cannot be proven unless the existence of a disadvantage is established, and this will depend on the facts relevant to different cases.
What are the key takeaways?
It is important to know where you stand before entering into any kind of agreement, as well as the avenues available should you feel your rights under it have been infringed upon. There are other legal challenges outside of unconscionable conduct that can render a guarantor agreement invalid, including duress and misrepresentation. Furthermore, If you are offering financial services pursuant to the Australian Securities and Investment Commission Act 2001 (Cth), it is essential you understand the standard of conduct expected in offering such services.
Should you find yourself uncertain of your rights and obligations under a guarantor agreement, our experienced team at Affinity Lawyers are here to inform and advise you in this matter. Please do not hesitate to contact us to arrange a consultation.
