Darling, Please Sign This Form: A Report on the Practice of Third Party Guarantees in New South Wales

NSW Law Reform Commission
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2003, pp. 1 - 182
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Research Background This research examined 'third party guarantees', where another person - often a wife or family member - is asked to provide security for the debt of the borrower. Borrowers are frequently involved in running small businesses. The guarantor often receives no direct benefit from the loan and agrees to undertake it due to a relationship of emotional independence; moreover they may be given only incomplete information about the debt and the risks involved. 'Relationship debt' through this kind of contract involves a high risk of unfair dealing, and has generated considerable litigation. Research Contribution This research explored the experiences of the people who agree to guarantee the loans of others. Why do they sign on, how do they get into trouble in those transactions and what might have assisted them in avoiding such difficulties? Prior to this research the main source of information was judgments of cases that are litigated when things "go wrong". Yet litigated cases represent a very small percentage of disputed matters, the vast majority of which settle prior litigation. Reported cases also do not give any sense of transactions that are not disputed. Therefore, drawing information only from litigated cases was misleading policy-makers. This study explored the experiences and views of lenders, borrowers, guarantors, litigants and judges to provide a solid basis for legal reform. Research Significance This project was the first comprehensive Australian empirical research into the law and practices governing third party guarantees. It was funded through an ARC SPIRT (now linkage) grant and undertaken in partnership with the NSW Law Reform Commission. The findings were published as a research report and informed the Commission's final report and recommendations.
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