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Insurance Newsletter - July 2015 © Carter Newell 2015
Insurance Newsletter July
2015
Independence and unconscionability - Lessons
for lenders and solicitors in advising third party
guarantors
Introduction
The New South Wales Supreme Court has set aside a
personal guarantee given by an elderly third party guarantor,
on that basis that to do otherwise would be unconscionable
where the transaction was not adequately explained to the
guarantor by a ‘competent, independent and disinterested
stranger’.
Importantly, in applying the High Court’s principles as set out
in Garcia v National Australia Bank Limited1
the New South
Wales Supreme Court firstly reinforced the obligations on
a solicitor purporting to advise a third party guarantor (and
a lender which seeks to rely on such advice having been
given), and secondly made clear that solicitors’ professional
conduct rules do not displace obligations imposed by the
general law.
The facts
A lending institution called Alceon Group Pty Ltd (Alceon)
agreed to lend $23 million to property development entity
Quadwest Developments Pty Ltd (Quadwest), which was
in desperate need of funds to pay significant creditors and
ensure completion of a large residential strata title project
in Perth.
The dire state of Quadwest’s finances introduced a high
level of risk to the loan, which Alceon sought to mitigate
by requiring security including personal deeds of guarantee
and mortgages from third parties.
At the centre of Quadwest’s organisational structure was
businessman Christopher Rose, the son of elderly parents
Peter (Mr Peter Rose) and Betty Rose (Mrs Rose).
Mark Brookes, Partner
Nola Pearce, Special Counsel
Tom Pepper, Graduate Lawyer
Executive summary
The decision in Alceon Group Pty Ltd v Rose [2015] NSWSC 868 is of relevance to lenders and solicitors advising third
party guarantors, insofar as it addresses the need for independence in the provision of the advice and for lenders to
turn their minds to the adequacy of that advice.
The case also has an overriding relevance for all solicitors, as it addresses the need to proceed carefully in situations
where the general law may impose obligations over and above those contained in professional conduct rules.

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Quadwest was wholly owned by another Christopher
Rose company, and Christopher Rose was a director and
secretary of Quadwest. Mr Peter Rose was a director of
Quadwest from December 2005 to September 2008, and
from October 2008 up to and including 2011 when the
Alceon loan was negotiated. Mr Peter Rose had worked
as a builder and was involved in the construction side of
the project. Mrs Rose had no involvement in Quadwest’s
activities.
As a condition of the $23 million loan to Quadwest,
Alceon required from Mr and Mrs Rose personal deeds of
guarantee and indemnity for $2 million and a mortgage over
the family home at Clontarf, New South Wales. It was not
in dispute that those documents were executed by Mr and
Mrs Rose, and the loan was advanced.
Quadwest defaulted on the loan and Alceon sought to
enforce the personal guarantees of Mr and Mrs Rose,
and its rights under the mortgage over the family home.
Both Mr and Mrs Rose resisted the orders sought by
Alceon on a number of grounds. This newsletter focuses
on the contention of Mrs Rose that the transaction was
not adequately explained to her and that to enforce the
transaction against her would be unconscionable.
The law
The High Court in Garcia identified certain circumstances
in which a guarantee such as that signed by Mrs Rose
would not be enforced on the basis that to do so would be
unconscionable.
Those circumstances were described by the majority in
Garcia as being where ‘the lender took no steps itself to
explain … the purport and effect [of the transaction] to her
or did not reasonably believe that its purport and effect had
been explained to her by a competent, independent and
disinterested stranger’.2
Where that failure has occurred, according to the majority
in Garcia, the following circumstances make the transaction
unconscionable:
1. The surety did not in fact understand the purport and
effect of the transaction;
2. The transaction was voluntary (in the sense that
the surety obtained no benefit from the contract the
performance of which was guaranteed);
3. The lender is to be taken to have understood that, as a
wife,3
the surety may repose trust and confidence in her
husband in matters of business and therefore the lender
is also taken to have understood that the husband may
not fully and accurately explain the purport and effect of
the transaction to his wife; and yet
4. The lender did not itself take steps to explain the
transaction to the wife or find out that a stranger had
explained it to her.4
The circumstances surrounding
Mrs Rose’s guarantee
A solicitor by the name of Thomas Lennox (solicitor) had
advised Quadwest on the prospective loan from Alceon,
and was actively involved in the negotiations between the
solicitor’s client Quadwest, and a Mr Cronin of Alceon.
The solicitor was assisted in the matter by another lawyer,
Patricia Tsang.
The solicitor sent an email to Christopher Rose attaching
various documents including an Acknowledgment by
Guarantors, a Declaration (as to receipt of independent
legal advice) and a Consent to LegalAdvice (from a partisan
solicitor). More about these documents is said below.
In communicating Alceon’s requirement for advice to be
given to Mrs Rose, Mr Cronin wrote to the solicitor that:
‘[Alceon’s] legal advice and obligation as lender is
that [Mr & Mrs Rose] have to be advised of the risks
associated with their guarantee in this circumstance – we
understand that this advice need only be independent of
Alceon and [its solicitors], so Lennox or Tsang would
suffice. We believe that this advice need only be brief
but is a requirement – sorry, I know this is logistically
difficult but needs to be done.’
The solicitor then had a telephone conversation with
Christopher Rose, Mr Peter Rose and Mrs Rose in which he
informed them to the effect that if Quadwest did not comply
with its obligations, Alceon could demand the personally
guaranteed amount of $2 million, and if the loan was still
not satisfied, could exercise its rights under the mortgage,
including selling the family home.5
Was the solicitor’s advice
adequate?
Before considering Alceon’s state of knowledge about
the solicitor’s advice to Mrs Rose (in order to assess the
defences raised by Mrs Rose), the court considered the
adequacy of the advice in fact provided to her. Although her
Honour made clear that the solicitor was not a party to the
proceedings and had not had an opportunity to be heard
in relation to any findings of fact against him, her Honour’s
assessment of what she found to be the solicitor’s advice
remains a useful guide for practitioners.
As to the solicitor’s telephone call to the three members of
the Rose family about the effect of the mortgage, the court
found the call to be no more than ‘a formality to meet the
bare requirements of Alceon’.
Further, the solicitor himself advanced no case that he
had made any attempt to explain to Mrs Rose the effect
of either the Declaration (which stated that Mrs Rose
had received independent legal advice regarding the
transaction and freely signed the mortgage, guarantee and
other documents) or the Consent to Legal Advice (which
purported to constitute a consent by Mrs Rose to receiving
advice from a solicitor who was advising other parties to
the transaction and so (in the court’s summation of the
effect of the document) was ‘hampered in giving Mrs Rose
independent or even complete legal advice’).6
Moreover, the court noted that the solicitor was well aware
that the Declaration was ‘simply false’7
in that he knew he
had not provided Mrs Rose with the advice that, by signing
the Declaration, she stated she had been given.
The Court considered that Alceon’s suggestion that the
advice to Mrs Rose ‘need only be brief’ was ‘not necessarily
correct’.8
Rather, what was required was advice that Mrs
Rose could comprehend, and the solicitor was obliged to
take steps to ensure that she understood it.

3. Insurance Newsletter - July 2015 © Carter Newell 2015
Ultimately, the court held that the solicitor’s advice was
‘wholly inadequate’. It held that he failed to act as an
independent solicitor, that he made no attempt to explain
clearly to Mrs Rose the purport or effect of the Guarantee
or the Mortgage she was asked to sign and no attempt at
all to explain the Declaration. The explanation of the effect
of a mortgage was ‘cursory, superficial, perfunctory and
incomplete, at best’.9
Was enforcement of the
transaction unconscionable?
The court considered each of the four indicia of
unconscionability identified in Garcia (and noted above), as
follows.
Did Mrs Rose understand the effect of
the transaction?
Over the 58 years of their marriage, Mrs Rose had deferred
to her husband in respect of financial matters. As she had
done previously, Mrs Rose signed the Alceon documents
when requested to do so by Mr Peter Rose, without being
bothered (in her words) to know what they were.
Apart from the solicitor’s explanation in the phone call to the
three Rose family members, there was, as noted above, no
attempt to explain to Mrs Rose the other documents which
required her signature. Although no bad faith was found on
the part of either Mr Peter Rose or Christopher Rose, the
court held that neither one had explained to Mrs Rose the
nature and effect of those documents.
As Mrs Rose had signed mortgages over her home on a
number of previous occasions, the court considered that
she understood the effect of a mortgage and generally that
the property could be taken if there was a default on the
loan for which the mortgage was security. However, whilst
Mrs Rose was found to have a theoretical grasp on these
matters, she was found to not have any appreciation of
the magnitude of the risk of default given Quadwest’s dire
financial position, and the consequently high risk of Alceon
exercising its rights under the mortgage.
As a result, Mrs Rose was held not to have understood the
transaction into which she was entering.
Was the transaction voluntary?
Mrs Rose stood to gain no personal material benefit from
the transaction, and was therefore a ‘volunteer’.
Was the lender taken to understand
that Mrs Rose would trust and rely on
her husband in relation to entry into the
transaction?
Her Honour found that not only could Alceon be taken to
understand that Mrs Rose reposed trust and confidence in
her husband, but it did in fact have that understanding given
Alceon’s attempt to protect itself by having advice given to
Mrs Rose.
Did the lender believe the transaction
was adequately explained by a
‘competent, independent and
disinterested stranger’?
It was clear that Alceon believed the solicitor was
competent; the real issue was whether Alceon could have
considered at the relevant time that he was independent
and disinterested. The court found that Alceon was well
aware – at the time of the transactions – that he was neither.
Thecourtheldthatatthattime,Alceonknewofthe‘financially
severe’ terms of its offer of finance, knew of Quadwest’s
‘dire financial position’ and therefore must have known ‘the
very high degree of risk associated with [the] arrangement’,
but nevertheless encouraged Christopher Rose to procure
the solicitor – whom it knew was Quadwest’s solicitor – to
provide advice to Mrs Rose.
In doing so, the court considered that Alceon ‘entirely
undermined the protection it had sought to provide for itself’.
Did compliance with the Solicitors’
Rules justify the solicitor’s
conduct?
Alceon sought to advance an argument that, as the solicitor
had observed the Solicitors’ Rules,10
his advice should
be considered adequate, and consequently Alceon had
discharged its obligation. Although not identified in the
judgment, it is understood anecdotally that Alceon sought to
rely on the solicitor having adopted the model ‘Declaration’
of receipt of independent legal advice referred to in rule
45.7 and appearing in Schedule 2 to the Solicitors’ Rules.
Unsurprisingly the court rejected this contention (even
without the necessity of examining the particular
requirements of rule 45)11
holding that professional conduct
rules ‘cannot, and do not, permit avoidance of the principles
of law stated by the High Court’,12
and if any inconsistencies
arise, it is the rules that must give way.
Moreover, her Honour noted that it is not within the
contemplation of the Solicitors’ Rules that a solicitor would
‘facilitate presentation to a proposed finance provider of a
document containing patently false statements’ such as the
statement that Mrs Rose had been given legal advice about
the solicitor’s conflict of interest in the matter.13
Conclusion
Alceon was found not to have reasonably believed that
Mrs Rose received ‘competent, independent and objective’
advice as to the purport and effect of the transaction into
which she was entering. The Garcia test being satisfied,
the court declared it to be unconscionable to enforce the
transaction against Mrs Rose.

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© Carter Newell Lawyers 2015
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1
Garcia v National Australia Bank Ltd (1999) 194 CLR 395.
2
Ibid, per Gaudron, McHugh, Gummow and Hayne JJ [31].
3
It is worth noting that these principles are not confined to matrimonial
relationships, and may include de facto and same sex relationships, according
to judicial comment in Garcia (see for example, at [22] and [33]). The underlying
factor is the trust and confidence reposed by one party to the relationship in the
other, where the trust and confidence is, or ought to be, apparent to the proposed
lender.
4
Garcia v National Australia Bank Ltd (1999) 194 CLR 395 [31].
5
Interestingly, the solicitor was believed in his account of the conversation, which
Mrs Rose said she did not recall, despite the fact that he had made no file note of
the conversation and gave his evidence from memory more than three years after
the event. In part, this was explained by her Honour’s view that the advice as the
solicitor now described it ‘was deficient to such an extent that it is unlikely that his
evidence was fabricated. Fabricated evidence would be expected to have gone
further in protecting him against allegations of breach of duty’ ([68]).
6
Alceon Group Pty Ltd v Rose [2015] NSWSC 868 [75].
7
Ibid [85].
8
Ibid [82].
9
Ibid [74].
10
The Law Society of New South Wales Professional Conduct and Practice Rules
promulgated pursuant to the Legal Profession Act 1987 (NSW).
11
Which notably include, at the least, a requirement that the interests of the
recipient of the solicitor’s advice must not conflict with those of any other client of
the solicitor (rule 45.4.2).
12
Ibid [87].
13
Ibid [88].
Nola Pearce
Special Counsel
P: (07) 3000 8427
E: npearce@carternewell.com
Authors
Tom Pepper
Graduate Lawyer
P: (07) 3000 8360
E: tpepper@carternewell.com
Mark Brookes
Partner
P: (07) 3000 8301
E: mbrookes@carternewell.com
Analysis
This case serves as a warning to lenders and also to solicitors advising third party guarantors, and to all solicitors in
relation to professional standards generally.
A lender should be aware that when obtaining personal guarantees and mortgages from third parties (particularly
volunteers), it must turn its own mind to whether the third party has received and understood (or reasonably appears
to have received and understood) independent advice as to the purport and effect of the transaction. In this case,
the lender advanced a high risk loan and sought to protect its position by obtaining the third party guarantee, but by
virtue of its own constructive and actual knowledge of the solicitor’s lack of independence at the time the ‘advice’ was
purportedly given to the third party volunteer, was not able to enforce the guarantee.
Solicitors advising third party guarantors should be scrupulous in ensuring that they provide independent advice to the
guarantor as to each of the documents to be signed and the effect of the transaction. The solicitor should also take
steps to test and, insofar as possible, ensure the third party has understood that advice.
All solicitors should also take heed of the need to observe the highest standards of professional conduct. The court’s
observation that the Solicitors’ Rules in New South Wales cannot and do not override common law principles aligns
with the explicit requirements of the Australian Solicitors Conduct Rules (ASCR) (now in force in Queensland, South
Australia and the Australian Capital Territory) – see for example rule 2.1 (the purpose of the ASCR being to assist
solicitors to ‘act ethically and in accordance with the principles of professional conduct established by the common
law and these Rules’) and rule 4.1.5 (‘a solicitor must also comply with these Rules and the law’) (emphasis added
in each case). Where a solicitor perceives any inconsistency between professional conduct rules and the general law,
the prudent course is to observe the higher standard of the two.