In Part 1 of this article we summarised the Court’s findings about the conduct of the lender as mortgagee in possession, which absolved the guarantor from all liability under the relevant guarantee.
The decision of the Supreme Court of Victoria in Webster Investments Pty Ltd v Gary James Anderson & Ors  VSC 620 also considered a further guarantee sought to be enforced by the lender, which the purported guarantor claimed had been executed in error. After considering the facts, the Court found that the guarantee was executed by mistake and the lender had taken a ‘cavalier approach’ to a significant liability which it sought to impose on the purported guarantor without regard to the contemporaneous documents. This aspect of the decision cautions lenders and their solicitors to be extremely careful in preparing loan and security documents.
Some important lessons to take away from this decision include:
- lenders should ensure they maintain records to show when security documents have been executed
- a lender should not rely on the borrower to arrange for the correct execution of security documents
- the lender’s letter of offer should accord with securities taken and, if any additional securities are sought, the lender should issue an amended letter of offer to reflect those additional securities
- documents (in this case both the guarantee and the certificate) need to be clear and unambiguous
- when enforcing securities or guarantees, a lender (and its solicitors) should be satisfied there is a proper basis for doing so and not seek to take advantage of a mistake.
The guarantee in question was part of a suite of documents prepared by the lender in late December 2005, which included documents relating to two loan transactions, only one of which was being guaranteed by the purported guarantor. Although separate facilities and borrowers, there was a commonality of some parties and a hotel complex in Ballarat secured both loans.
In its claim that the guarantee was given by the purported guarantor, the lender relied on a mortgage, which named the purported guarantor (among others) in a schedule as a guarantor of the loan, and a solicitor’s certificate of independent legal advice (the ‘certificate‘). Both of these documents were signed by the purported guarantor.
The purported guarantor maintained that the mortgage was signed under the mistaken belief he was signing a document that related to the other transaction. Importantly, the purported guarantor contended that:
- he had no interest or involvement in the borrower or the investment for which the loan was advanced and he therefore did not benefit in any way from the loan said to have been guaranteed
- the lender’s letter of offer to the borrower set out all securities that were to be provided in respect of the loan, but it did not name the purported guarantor as a guarantor
- the minutes of the lender’s board meeting held on the same day as the letter of offer was issued, set out the securities that were to be provided, which did not refer to any guarantee being provided by the purported guarantor
- the lender sent to its solicitors a letter confirming instructions to prepare the relevant security documents and those instructions did not include any reference to a guarantee being taken from the purported guarantor
- the lender’s acceptance of the letter of offer did not refer to the purported guarantor and it was not signed by the purported guarantor
- except for the mortgage (which incorporated Memorandum of Common Provisions AA689, that contain, among other things, guarantee provisions), the lender did not produce a separate guarantee and indemnity signed by the purported guarantor.
Significantly, the lender accepted that the minutes of meeting were an accurate reflection of what its board had agreed to be the terms of the loan. Additionally:
- the lender offered no clear explanation as to why the purported guarantor was not identified in the letter of offer and the related documents
- there was no documentary trail or other evidence of the lender having made any contact with the purported guarantor prior to the signing of the mortgage regarding the alleged guarantee.
The Court held that the certificate was also signed by mistake and, in any event, the certificate did not create obligations under the mortgage. The Court also accepted that if a solicitor’s certificate had been obtained for the other transaction, this would have enlivened the purported guarantor to the fact that he was being asked to guarantee both loans.
The Court concluded that the parties were clearly not in agreement and, therefore, no contract to guarantee came into existence. The mortgage was prepared without regard to the letter of offer and at a time when two transactions were being discussed. The Court stated that it was plain the lender had significant financial interest at risk, and the claim under the guarantee was ‘mere wishful thinking and possibly desperate thinking’. It therefore found it unconscionable for the lender to seek to rely on the alleged guarantee in the circumstances.