A guarantee is a binding promise of one person (the guarantor), to be answerable for the debt or obligation of another (the debtor), if the debtor defaults.
In this article, we consider the circumstances where a guarantee may be unenforceable.
Formal requirements of guarantees
Generally, a guarantor must receive consideration (that is, some benefit) in exchange for the giving the guarantee.
Typically, the consideration is the provisions of credit to the debtor at the request of the guarantor. In this case, it is important that the guarantee be entered into before credit is provided – otherwise, a guarantor might argue that it received nothing in exchange for giving the guarantee (because the credit has already been provided) and the guarantee may not be binding.
In addition to the above:
- in states where the Statute of Frauds continues to apply (including Western Australia), guarantees must be in writing; and
- if the obligations of two or more guarantors are joint and several, the guarantee may not be binding unless each guarantor named in the document has signed it.
Enforcement of guarantees
Even if a guarantee meets these formal requirements, it may not be enforceable.
Misleading or deceptive conduct
A guarantee may be set aside on the grounds that the guarantor signed the guarantee as a result of the creditor’s, or the debtor’s, misleading or deceptive conduct.
Non-Disclosure
Creditors have a limited general duty of disclosure to a guarantor. Guarantees have been set aside where the creditor has failed to disclose to the guarantor anything unusual about the guarantee.
Duress or Undue Influence
If a guarantee is obtained by duress or undue influence on the part of the creditor or debtor such that, in providing the guarantee, the guarantor was not acting of their own free will, the guarantee may not be enforceable.
Married Women
If a creditor relies on a debtor to obtain a signed guarantee from the debtor’s, and the husband has exercised undue influence over his wife, the guarantee may be set aside by the wife, unless she received competent and independent legal advice about the guarantee before signing it.
Unconscionable dealing
Where a guarantor was under a special disability or disadvantage in dealing with a creditor (for example, because the guarantor was intoxicated, elderly, lacked mental capacity, or was illiterate), and the creditor knew of the disability and took advantage of it to obtain the guarantee, a Court will likely set aside the guarantee.
Non est factum
Similarly, if the guarantor did not understand the nature of the guarantee because they are, for example, blind, illiterate or lacked mental capacity, and they were misled into signing it, not knowing that the document they were signing was a guarantee, a Court may set aside the guarantee on the basis of non est factum (latin for “not my deed”).
Illegality
A guarantee may be unenforceable because it is illegal, for example, where:
- the making of the guarantee is prohibited by statute; and
- the effect of the guarantee is contrary to public policy or infringes public policy.
Conclusion
If you are seeking to obtain a guarantee or if you have been asked to provide (or have provided) a guarantee, we recommend that you seek legal advice.
If you or someone you know wants more information or needs help or advice, please contact us.