2. www.carternewell.com
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.