I have been asked to be third party guarantor on loan documents and the bank wants me to obtain Independent Legal Advice, why is this required?

So I’m a Third Party Guarantor…

Where a bank will only lend money to a borrower if a third party provides a guarantee, the banks will not advance the loan unless that third-party guarantor obtains independent legal advice.

This is commonly the case where the borrower is a corporate entity related to the guarantor. For example, the borrower is a company and the guarantor is the director of the borrower. Another common circumstance is where the guarantor is a co-owner of real estate owned also by the borrower. It’s less common these days for parents to go guarantors to children.

This practice serves the bank’s interests by strengthening the enforceability of the deed of guarantee. In the last several decades, prominent court cases, most notably Amadio v Commercial Bank of Australia (1983) 151 CLR 447, demonstrated the impact of misrepresentation and unconscionable conduct on the enforceability of guarantor obligations.

That case involved an elderly Italian couple who had provided a bank guarantee for their son. They had limited business experience and grasp of written English. The bank manager for Commercial Bank of Australia visited the couple’s residence to secure the guarantors signatures on the mortgage document without offering any explanation about the document.

Three’s a Crowd – Scupture by Antonio Canova – The Three Graces, between 1813 and 1816

Later, Commercial Bank issued a demand under the guarantee and upon failure to meet that demand, served notice that it would exercise power of sale under the mortgage documents.

The majority of the High Court concluded that the bank’s actions constituted unconscionable conduct, rendering the guarantee unenforceable. This conclusion was based on the finding that the parents were in a position of ‘special disadvantage’ in their dealings with the bank, and that the bank had taken advantage of this vulnerability.

Therefore, it’s understandable why the practice of requiring independent legal advice has become so commonplace, even though the days of bank managers visiting peoples homes are long gone! As a matter of interest in 1982 Commercial Bank of Australia merged with Bank of NSW to become Westpac Banking Corporation.

As a consequence of banks requiring certain assurances about independant legal advice, the various law societies have sought to impose obligations to ensure that solicitors don’t become overly exposed for the benefit of the banks. A NSW solicitor must comply with rules in relation to how that independant legal advice can be provided and prescribed forms are provided for how that advice can be documented.

If you have been asked to obtain independant legal advice on guarantee documents please contact us to discuss.