Can a lender do anything to protect itself from allegations of unconscionable conduct?
Too often commercial lenders have to contend with allegations made by defaulting borrowers that they are guilty of unconscionable conduct. An easy phrase to include in a letter or a pleading; but what does it really mean? And is there anything a lender can do to protect itself from these allegations?
The Amadio example
Perhaps the most famous statement of unconscionable conduct is that of Mason J in Commercial Bank of Australia Ltd v Amadio (1983), where his Honour stated that the underlying general principle of unconscionable dealing:
“may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created”
In short, the lender must (or ought to) know that the borrower has a special disadvantage that it takes advantage of.
Examples of circumstances that Mason J found could constitute a “special disadvantage” include:
- infirmity of body or mind,
- illiteracy or lack of education or lack of assistance of explanation where assistance of explanation is necessary.
In the Amadio case, Mr and Mrs Amadio were elderly migrants with limited English skills. Their son asked them to mortgage their property in favour of the bank. The bank manager went to Mr and Mrs Amadio’s home to have them sign the mortgage. Mr and Mrs Amadio did not read the document and the bank manager did not explain the mortgage because he was under the belief that the son had explained the transaction to them. Importantly, Mrs and Mrs Amadio were under a false belief as to the liability they were securing.
In conclusion, the majority of the High Court held that the mortgage should be set aside unconditionally. The reason was because Mr and Mrs Amadio were under a ‘special disability’ when executing the mortgage and that such special disability was evident to the bank.
The Garcia example
The High Court has also found, in Garcia v National Bank of Australasia Ltd (1998), a lender’s conduct to be unconscionable even though there were no facts alleged to support a conclusion that the guarantor wife was under a ‘special disability’ as per Amadio.
Garcia considered a financial transaction involving a husband and wife and the NAB. The husband had amassed a significant amount of debt to the bank arising from multiple business ventures. Subsequently, the husband and wife separated and divorced. The majority of the High Court identified that in order to classify conduct as unconscionable, the circumstances would have to be that the:
- guarantor (wife) did not understand the effect of the transaction;
- transaction was voluntary (in the sense that the wife obtained no benefit from the contract);
- lender appreciates that the husband may not have fully explained the effect of the transaction to the wife; and
- lender did not itself take steps to explain the transaction to the wife.
What can a lender do to protect itself from allegations of unconscionable conduct?
In almost all circumstances, the key to a lender being able to resist allegations of unconscionable conduct is to ensure that all parties, whether borrower, guarantor or mortgagor (“transaction parties”), understand the exact nature and effect of the proposed transaction. Also, this includes the consequences should the borrower default on the loan.
Whilst there are a variety of ways to achieve this, we strongly recommend lenders insist all transaction parties obtain independent legal advice before signing any of the transaction and security documents. Further, the lender should retain a certificate of independent legal advice on the loan file as evidence that the transaction parties received legal advice from a solicitor independent of the lender. Whilst not strictly necessary, we also believe it prudent in certain circumstances for the lender to require the guarantor / mortgagor who is a volunteer (often a wife or parent of the party driving the transaction) to be advised by a different solicitor to the solicitor advising the borrower (often the husband or son).
For more details on unconscionable conduct visit the Australian Competition and Consumer Commission website.
This publication is provided for your information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.