Third party guarantees entered into with inadequate understanding or informed consent : a critical analysis

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NO FULL TEXT AVAILABLE. Access is restricted indefinitely. ----- There has been growing concern about the consequences of the widespread use of third party guarantees to secure loans given by a credit provider or lender (such as a bank, finance company, credit union or building society). Third party guarantees are given when a credit provider will not lend money, or will not extend a loan, unless the loan is secured by a guarantee provided by a person other than the borrower. This third person, the third party guarantor (so called, being in legal terms, a third party to the principal debtor-creditor relationship), may not be involved in, or benefit from the loan transaction itself, and undertakes to pay the loan if the borrower cannot repay it. The loan transaction is not an arm’s length transaction (as compared to other contractual transactions) on account of the close relationship between the borrower and the guarantor who gives the guarantee because of ties of family or friendship, involving, for example, family members, spouses or close friends. Third party guarantors do not derive any tangible benefits from the loan transactions and many fall victim to failed loans they have guaranteed. It is not uncommon for the guarantees to be enforced against these parties, often with traumatic and unjust consequences such as the guarantors losing their assets, including their homes and in some cases ending up as bankrupts. This thesis is concerned with the crucial problem of guarantees being signed in situations where the guarantors have little information or are misinformed about important aspects of the transaction. It is seldom, for example, that guarantors have any information about the borrower’s loan or the financial soundness of the business they are supporting and so are unable to assess the risk they are taking. Such information is indispensable if guarantors are to give a fully informed consent to participate in the transaction. Pressure, influence and coercion from the lender may also affect consent in that the guarantor may not then be able to act in a fully independent and voluntary manner. The study looks at the various legal and equitable doctrines as well as the legislative provisions which may allow the courts to grant guarantors relief against lenders and assess their effectiveness in situations of inadequate understanding or consent. It also aims to critically examine the existing law as well as to suggest reforms and protective procedures to assist the guarantor or surety. There will be arguments in this study as to whether the suggested reforms and protective procedures should be backed by legislation or an enforceable code of practice applicable across the finance industry. These proposals for change would benefit intending sureties by giving them some measure of protection from claims resulting from, for example, inadequate disclosure, misleading or deceptive conduct, misrepresentation, duress, undue influence and unconscionability which have the effect of causing the sureties to give guarantees without sufficient understanding or informed consent.
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