(a) The social context
Mr and Mrs C are a Greek couple who cannot read or write English and can speak very little of the language. They were approached by their nephew to pro-vide a guarantee for an overdraft facility for a clothing business in which he had a half share. Mr C was led to believe by his nephew and his nephew’s partner that the business was extremely profitable.
Before the overdraft facility was approved, Mr C returned to Greece for his mother’s funeral. The nephew’s partner arranged for Mr C to execute a power of attorney so that Mrs C could sign documents on his behalf. Whilst Mr C was overseas, the application for the overdraft facility was rejected. At the financier’s suggestion, an application was made for a loan in the name of Mr and Mrs C.
The nephew and his partner arranged for Mrs C to execute documents which made her and her husband the borrowers. Mrs C, trusting her nephew and not being able to read the documents, signed them believing she was signing a guar-antee limited to $30,000.
Some months after Mr C had returned, Mr and Mrs C received an account state-ment. They gave the statement to their son to read only to discover they had been tricked by their nephew into personally borrowing $40,000. The security for the loan was a mortgage over their home.
As the nephew and his partner did not make any of the payments under the overdraft facility, the financier served Mr and Mrs C with a demand for $55,000.
A settlement was negotiated where Mr and Mrs C were released from liability and the mortgage over their home discharged in exchange for a payment of
$9,000.42
The fact that a scenario so similar to Amadio could be cited in a community legal service’s report 10 years after the High Court’s judgment indicates that the finance industry has failed to deal effectively with the problems arising from this routine financial transaction. The question remains as to whether this is just a lag between judicial pronouncement and everyday practice, or whether the equitable doctrines of unconscionability and undue influence have failed to get to grips with the inherent nature of contracts of guarantee.
In a submission to the 1991 Martin Inquiry into the Australian banking industry on behalf of the Australian Federation of Consumer Organisations, the Australian Consumer Association and the Australian Financial Counselling and Credit Reform Association, Greg Kirk argued:43
[Since Amadio], there has been ... no evidence that bank practices have been changed to ensure that the propensity for unfair guarantees is reduced.
Whatever the concern in head office, in the branches guarantee contracts are still not being explained, intending guarantors are not being advised of the risks, nor given information on the principal’s financial position, and in many cases are given bland assurances that it will all be okay ... Few bank managers have
__________________________________________________________________________________________________________________________________________
42 Consumer Credit Legal Service (Vic), Annual Report 1994–95.
43 Commonwealth of Australia. House of Representatives Standing Committee on Finance and Public Administration, Inquiry into the Australian Banking Industry: Submissions S1625–26.
accepted that it is their responsibility to ensure that guarantors enter the rela-tionship fully informed of the risks and burdens they are taking on. There is a vast difference between what the High Court would find acceptable and what goes on in practice when documents are put for people to sign. There are large numbers of guarantees which if put to the test before a court would be held to be unenforceable. But of those guarantors who are called upon to pay, only a small proportion will have the access to advice and resources necessary to con-test their liability.
Similarly, from 1990 – 94 the Australian Banking Industry Ombudsman received 675 written complaints relating to guarantees.44
The final report of the Inquiry also identified a risk of unfairness inherent in the nature of guarantees, in particular:
● guarantees are required only when there are grounds for doubt about the principal’s capacity to pay;
● guarantors do not have access to details of the borrower’s financial situation or other aspects of the transaction;
● guarantors are often under emotional pressure to enter the contract;
● guarantees are not well understood in the community; and
● guarantors are not taking on an immediate liability and so are less likely to scrutinise the details of the transaction.45
We can further situate these developments in current social trends:
● There has been a steady increase in the owner-occupation of houses, in par-ticular an increase in joint ownership, over the past 40 years.46 Some immigrant groups have a higher rate of home ownership than the Australian born.47This trend increases the likelihood that the family home will be used to secure business credit and that both spouses will be required to sign documents.
● A growth in the size of the small business sector has occurred since the mid-1970s, due to economic restructuring. In Australia the number of small businesses increased by 15% from 1983–87. Many minority ethnic groups are overrepresented in small business activity compared with the Australian born over the postwar period.48
__________________________________________________________________________________________________________________________________________
44 Australian Law Reform Commission, Equality Before the Law: Women’s Equality, Report No 69, Pt 2, 1994, p 245, Canberra: AGPS.
45 Commonwealth of Australia. House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change: Banking and Deregulation, 1991, p 414, Canberra: AGPS.
46 Watson, S, Accommodating Inequality, 1988, Sydney: Allen & Unwin.
47 Junankar, PN, Pope, D, Kapuschinski, C, Ma, G, Mudd, W, Recent Immigrants and Housing, 1993, Canberra: AGPS.
48 Collins, J, Gibson, K, Alcorso, C, Castles, S, Tait, D, A Shop Full of Dreams: Ethnic Small Business in Australia, 1995, Sydney: Pluto.
● The deregulation of the financial sector has increased the availability of credit and the range of transactions, increasing the likelihood that vulnera-ble family members might enter a transaction that they do not fully understand.49
● Economic restructuring has resulted in increasing levels of unemployment and low income jobs, especially amongst migrant groups.50The insecurities of employment make it difficult for many to control their financial futures, leading to more possession actions.
Amadiolays out the three elements of the modern equitable jurisdiction to set aside contracts procured by unconscientious dealing:
● a weaker party must be under a special disadvantage in relation to a stronger party;
● the stronger party must have knowledge of that special disadvantage; and
● it was unfair of the stronger party to procure the transaction in the circum-stances.
Given an introduction to the social context of third party guarantees, students can begin to consider whether the doctrine in this form offers a suitable frame-work for addressing the ‘risks of unfairness’ inherent in contracts of guarantee.
Further, they can go on to consider how courts construct the notion of ‘special disadvantage’.
(b) Unconscionability and the construction of special disadvantage (i) The construction of special disadvantage: the invisibility of gender Dianne Otto, in an article entitled ‘A Barren Future? Equity’s Conscience and Women’s Inequality’ says the following:51
The High Court has made reference to a wide range of relevant disadvantages.
Some, such as drunkenness and lack of explanation or independent advice at the time of the transaction, are specific to the individual concerned or temporary in their effect. Others, such as poverty, age, sex, lack of education and unfamiliarity with the English language, speak to disadvantages that may be characterised as structural, as arising from institutionalised arrangements of social power. This suggests a potential for ‘special disadvantage’ to encompass inequality in broad social terms. A more restrictive application is however connoted by Mason J’s insistence that the word ‘special’ qualifies the meaning of disadvantage so as to
__________________________________________________________________________________________________________________________________________
49 Report of the Expert Group on Family Financial Vulnerability, Good Relations, High Risks:
Financial Transactions Between Families and Friends(1996) 11.
50 Ackland, R and Williams, L,Immigrants and the Australian Labour Market: The Experience of Three Recessions, 1992, Canberra: AGPS; Collins, J, ‘The Changing Political Economy of Australian Racism’ in Vasta, E and Castles, S (eds), The Teeth Are Smiling: The Persistence of Racism in Multicultural Australia, 1996, pp 73, 78–81, 89, Sydney: Allen & Unwin.
51 Otto, D, ‘A Barren Future? Equity’s Conscience and Women’s Inequality’ (1992) 18 Melbourne University Law Review808, 814 –16.
‘disavow any suggestion that the principles apply whenever there is some differ-ence in the bargaining power of the parties’ ... The solitary mention of ‘sex’ by Fullagar J in 1956, in his long list of possible relevant disadvantages in Blomley v Ryan, remains just that. No other judge has since referred approvingly to the pos-sibility that ‘sex’ may be a special disadvantage for the purposes of the doctrine ...
It was Mr Amadio’s involvement with the transaction that constituted the ‘facts’
upon which the decision was made. This has the effects of dismissing the rele-vance of Mrs Amadio’s experience and silencing the issues of gender which were involved ... [T]he disadvantage suffered by Mrs Amadio was not only that which she shared with her husband in terms of age and lack of English language skills.
Another aspect of her special disadvantage arose from her position as a wife.
This secondary social position resulted in her exclusion from participation in the negotiation of the agreement, and seriously affected her ability to act in her own self-interest.
Specifically, in European Asian of Australia v Kurland,52Rogers J held ‘that in the year 1985 it seems anachronistic to be told that being a female and a wife is, by itself, a sufficient qualification to enrol in the class of persons suffering a special disadvantage ... That being a female spouse should place a person shoulder to shoulder with the sick, the ignorant and the impaired is not to be tolerated’.
This is a position that seems to wish gendered differences away. In contrast, the Australian Law Reform Commission surveyed reported Australian cases from 1985–93 and identified 18 cases where women had assumed liability for the debts of others, but none in which husbands had guaranteed the debts of their wives:53
In these cases the women were in relationships in which they were dependent on or controlled by men. While it was impossible to draw any direct conclusions from these cases there were some common features.
These factors: women’s role as carer; interrupted work patterns; dependency and/or control; and the lack of business experience and education are usually interrelated. A woman may see her role as primary caregiver to the children of the relationship; she therefore interrupts her work pattern to care for those chil-dren; this reinforces her dependency upon her partner; and precludes her from actively participating in business matters (because she does not see her role as active business participant and because she is largely occupied with domestic duties).
__________________________________________________________________________________________________________________________________________
52 (1985) 8 NSWLR 192, 200.
53 Australian Law Reform Commission, above n 44, 243.
(ii) The construction of special disadvantage: migrants
Many of the key factors that characterise situations where financial problems involving guarantees arise are accentuated in the context of migrant communi-ties:54
● incomprehensible documentation;
● language difficulties;
● cultural and generational attitudes and expectations, increasing the pres-sure to guarantee a loan for a family member, and to accept that family member’s assessment of the situation;
● lack of familiarity with complex financial transactions.
Yet post-Amadio, we want to suggest that the fact of ‘migrantness’ functions in two ways. It is used as a factor in assessing or constructing ‘special disadvan-tage’, but it is also seen as a potential problem for the credit industry and so as something to be policed by the courts. That is, courts are anxious to limit the invocation of ‘migrantness’ as being somehow equivalent to special disadvan-tage. In fact, migrantness is turned around, and becomes a sign of commercial savvy or even cunning. The migrant is then viewed with suspicion, seeking special treatment to avoid credit obligations, and the signs of migrantness – such as the use of an interpreter in court – become used against the person seeking relief.
CURRICULUM SUGGESTION
We indicated at the beginning of this section that Amadio may have had lit-tle systemic impact in terms of migrants’ financial vulnerability in situations involving contracts of guarantee. It can also be instructive to look at deci-sions after Amadio to see how the courts have responded to the issue of migrantness which has erupted into mainstream jurisprudence thanks to Amadio. Here is a suggested activity:
Having read Amadio, it is valuable to look at later cases that can reveal some of the prob-lems migrants might face in negotiating the court system. Read the following two extracts from first instance judgments. What is the judge in each saying about the testimony of Mr Galluzzo and Mrs Shenouda respectively?
__________________________________________________________________________________________________________________________________________
54 Expert Group on Family Financial Vulnerability, above n 49, p 10; Kirk, G, above n 43, 38–39.
Sinclair v Galluzzo and another(Supreme Court of NSW, 9 November 1994).
At page 14:
Mr Galluzzo spoke English in an unsophisticated but quite passable manner. He answered questions in English, which I initially required him to do, and these questions and answers are to be found at 64, 65, 66, 67 and 68 of the transcript.
Thereafter an interpreter was used, but he sometimes answered immediately in English, ie before the question was interpreted. I formed the impression as to some questions that he did not understand the question in Italian any better than he did in English. He struck me, and I so find, as a forceful and shrewd personal-ity who would have an understanding of his own interests.
At page 26:
In reaching this conclusion, I point out that lack of sophistication, poor education and poor skills in understanding written English are not of themselves necessar-ily disabling factors. Such individuals very often are shrewd judges of their own interests, and I find that in particular Mr Galluzzo was such a person.
National Australia Bank Ltd v Shenouda and another(Supreme Court of NSW, 13 December 1995).
At page 19:
With respect to the evidence of Mrs Shenouda, I found her evidence to border on the bizarre. She was most anxious to get across the fact that she was ill and she was completely compliant with whatever it was that her husband wished her to do. She relied entirely on the interpreter during the course of the proceedings.
Although she showed by her alertness that she was aware of what was being put in English, and indeed in part of the transcript answered in English without the aid of an interpreter.
Make some notes to answer the following questions:
What attitude are the judges taking regarding English language proficiency as a marker of
‘special disadvantage’?
In resisting a simple equation between migrantness and special disadvantage, are the judges constructing an alternative stereotype of ‘the migrant’?
What are the practical consequences of the judges’ attitudes for the supposed protection offered to migrants by the principles in Amadio?
(iii) Gender, ethnicity and the intersection of disadvantage
Having noted how both gender and migrantness can increase financial vulner-ability, the historical and structural intersection of these factors can produce specific disadvantage for many migrant women. Barbara Misztal has sum-marised a few of the things we know about the structural position of migrant women:55
● most migrant women enter Australia as dependants of male principal applicants;
● women hardly ever arrived sponsored by an employer;
__________________________________________________________________________________________________________________________________________
55 Misztal, B, ‘Migrant Women in Australia’ (1991) 12 (2)Journal of Intercultural Studies 15, 16–17.
● they settle in the host country to improve the economic well-being of their families and work for cash rather than career;
● the importance of economic success of the migrants’ family for its members cannot be overestimated; economic prosperity is valued not only as evi-dence of the family’s achievements but also as a factor allowing the family to extend economic support to members in a home country or to bring them to a new country; and
● they often work within their own ethnic community, often for poor wages, mobilised through kinship networks; for example, the ethnic small business is a field where ‘a clear-cut opposition between the work/family, public/private ... dualities does not exist’.56
It is clear from this summary that the position of many migrant women is struc-turally distinct from that of many migrant men. What is apparent is that patterns of economic and emotional control and dependence that are central to issues of financial vulnerability are reinforced by the social relations of migra-tion. Yet as Otto pointed out, courts are reluctant to make anything of this distinction in applying the doctrine of unconscientious dealing, even where they find such a distinction on the facts. For example, consider the following reason-ing from Marzouk v Westpac Bankreason-ing Corporation.57Here Dr Marzouk, a migrant from Egypt, was described by Meagher J as:
... by no stretch of the imagination ... a disadvantaged person. He is a former United Nations officer, he has a PhD from London University, he has studied under Sir Roy Allen, he has worked for the National Bank of Egypt, he has worked in various foreign countries, he has written books, and he is a lecturer in Economics at Macquarie University ... The trial judge found him to be astute and intelligent (at 2).
In contrast, the trial judge had found that:
Mrs Marzouk, on anyone’s view, is quite naive in relation to business matters.
That is not intended as a criticism of her. She had never operated her own bank account, or borrowed any money on her own account. Everything was done jointly with her husband. It was he who decided all matter of finance. She never questioned his decision ... Mrs Marzouk executed the documents in question here because she was told by her husband and by her son that she should do so;
she trusted them to have ensured that it was the right thing for her to do. She said that she gave no thought at all to what she was signing; she would have signed any document put in front of her if her husband was with her (at 7).
Yet this restricted autonomy of Mrs Marzouk is not seen as granting her grounds for relief independent of her husband. Instead, the court merely uses
__________________________________________________________________________________________________________________________________________
56 Alcorso, C, ‘“And I’d Like To Thank My Wife ...”: Gender Dynamics and the Ethnic “Family Business”’ (1993) 17 Australian Feminist Studies93, 98.
57 Supreme Court of NSW, Court of Appeal, 14 October 1992.
her deference to her husband to discredit the value of her evidence as indepen-dent testimony:
In the light of this naivety of Mrs Marzouk, and of her deference in all such mat-ters to her husband’s wishes, I do not place much weight upon her evidence that Saeed had told them that their liability under the guarantee could be no more than $20,000. The prospect is remote that she would have had a clear under-standing of what Saeed was saying (at 7).
LEARNING ACTIVITY
At this stage, it is useful for students to begin to unpack the policy issues underlying the application of unconscionability doctrine and to explicitly consider possible policy reforms in this area. Here is a possible exercise:
Now that we have examined the principles of Amadioand the social contexts in which they operate, we can consider what policy issues are important in this area of the law.
In your reading so far, can you discern any underlying policy issues that seem to be guid-ing the courts in their decisions?
In some cases, judges have been quite explicit in enunciating what they see as the policy concerns. For example, Lord Browne-Wilkinson in Barclays Bank plc v O’Brien58 (an English case involving undue influence, but centred, like the Australian cases, on the ques-tion of the liability of third party guarantors) cauques-tioned that: ‘It is ... essential that a law designed to protect the vulnerable does not render the matrimonial home unacceptable as security to financial institutions.’ That is, he thought the main policy issue that governs consideration of guarantor liability was whether it was in the ‘public interest’ that, say, the wife should be protected if that protection leads to creditors being unwilling to accept the matrimonial home as security and thereby reduce the flow of loan capital to business enterprise.
__________________________________________________________________________________________________________________________________________
58 [1993] 4 All ER 417, 422.