Finance Company Advice Assignment Sample

• Subject Name : Law

Contract Law, Contract Administration and Management

Unconscionable Conduct

In general, unconscionable conduct is defined as conduct that is so harsh that it violates good faith. As per the Australian Consumer Law, when dealing with other companies or their clients, companies shall not indulge in unconscionable conduct. There is no specific legal definition for unconscionable conduct and it is a term that courts have developed on a case-to - case basis over the years. Where it is overly harsh or oppressive, actions can be unconscionable. To be called unconscionable, the action must be more than just unfair; when judged against the laws of society, it must be against conscience (Rajapakse, 2014).

The company's actions will be made unconscionable if it is extremely harsh or aggressive, and is above tough business negotiation. For instance, Australian courts have considered dealings or transactions to be 'unconscionable' if they are deceptive, contain substantial deception or contain unreasonable and irrational actions..

Grounds on Which the Court Will Consider Unconscionable Conduct

When deciding if the conduct in respect to the sale or delivery of products and services to a consumer or the delivery or purchase of goods or services to or from a company is unconscionable, the judge will weigh a variety of considerations (ACCC, n.d.):

They include:

1. The comparative negotiating leverage of the parties
2. Where certain conditions are imposed on the weaker party that were not legally essential to protect the valid interests of the stronger party;
3. If the weaker party can remember the documents used;
4. The usage by the stronger group of undue influence, coercion, or unjust strategies;
5. The specifications of industry codes relevant;
6. The desire of the stronger side to enter into negotiations; 
7. The degree to which the parties behaved in good conscience.
8. It is not an exhaustive list and it should be understood that the court can also take any other factor it considers relevant (ACCC, n.d.).

How can the finance company stop unconscionable conduct?

The below realistic tips will help the organizations to stop engaging in unconscionable conduct:

1. While discussing the conditions of a deal or arrangement, do not take advantage of the other party.
2. While enforcing the rights under an agreement, ensure fair dealing. 
3. Know the clients' attributes and weaknesses. For instance, when working with clients from a non-English - speaking context, use simple English
4. Ensure that the agreements are comprehensive, easy to comprehend, not too long, and doesn't include strict, unjust, or restrictive clauses.
5. Ensure the essential or uncommon terms or conditions of an arrangement are explicitly revealed.
6. Make sure the consumers know the requirements of the arrangement relating to the contract and allow them the ability to better accept the offer. The finance company should decide to include a description of the main terms if the contract is lengthy.
7. Offer clients the chance to get counsel on the agreement before signing it.
8. Be open to settling concerns if things go wrong.
9. Do not praise and reward employees engaged with unreasonable, pressure-based transactions (ACCC, n.d.).

Relevant Case Laws on Unconscionable Conduct and Undue Influence

In Australian Competition and Consumer Commission v ABG Pages Pty Ltd[1], the Federal Court ordered ABG which was an online business directory service to pay a $300,000 penalty for violating the ACL. In regards to its online advertisement services, ABG confessed to intervening in systematic unconscionable behavior, undue abuse, and making inaccurate and misleading statements (ACCC, 2018).

According to section 20 of the Australian Consumer Law, an individual should not, from one period to another, indulge in unconscionable conduct, within the context of unwritten law, in commerce or trade.

The equity of special wives has long been something of a problem in contract law, frequently discussed these days about its significance in society. The rule on special wives' equity emerges in the sense of a very relevant contract law case of Garcia v National Australia Bank Ltd[2] (Wooler, 2018).

There has long been uncertainty about the position of the judgment of the High Court of Australia in Yerkey v Jones[3]. The decision to offer unique equity security to wives who pledged their husbands' loans was considered for several years, prohibiting the creditor from recovering under the guarantee if the man had secured her permission, but the wife did not realize the consequence of the guarantee. Several rulings later held that Yerkey v Jones[4] was no more great law in the New South Wales Court of Appeal. Nonetheless, the High Court of Australia in recent times affirmed the theory of Garcia v National Australia Bank Ltd[5]in contravention of this.

Such an issue poses the interpretation of the values in Yerkey v Jones[6]. Garcia v National Australia Bank Ltd[7] is the basis of the facts of the issue and in that case, the High Court ruled that the protections offered by her cannot be enforced on the grounds of special equity available in benefit of a wife set out in Yerkey v Jones[8].

In the case of Garcia v National Australia Bank Ltd[9], the court affirmed the theory articulated by the judge in Yerkey v Jones[10], as follows: "If the permission of a married woman to give security for the debt of her spouse is obtained by the husband and, without knowing its consequence in critical ways, she implements a guaranteed contract approved by the creditor without explicitly communicating with her individually, she has a prima facie privilege to get it set aside."

In addressing the wife's equity principle, in the case of Yerkey v Jones[11], the court found the following requisites:

1. She shall be a volunteer (that is, not getting benefit from the loan);
2. She should not know the document's effect;
3. The husband has exercised undue influence;
4. The bank shall be aware that she is the wife of the borrower;
5. The lender or any external third party may not have clarified to the wife the transaction (Abernethy and Salman, 2016).

'In deciding that the wife didn't have a misunderstanding, the primary judge suggested that it was important to consider and understand all the following components:

1. If she was able to restrict her liabilities under the guarantee;
2. That, under the guarantee, her responsibility was for interest and expenses, and also the amount of the loan;
3. That she would be rendered bankrupt if she did not pay the sum payable under the guarantee; and
4. The size of the mortgage on a single property was not restricted (Abernethy and Salman, 2016).

One current Australian case, ACCC v Lux Distributors[12], stated that unconscionability should be assessed towards conscience by comparison to the social values at issue (Wooler, 2018).

The subject of undue influence has become a subject that for many years has disturbed the courts. Even then, much of the issues were put to rest after the House of Lords ruling in Royal Bank of Scotland plc v Etridge[13]. The Lords determined that where it could be shown that (1) the claimant has put faith and confidence in the other side regarding its financial dealings and (2) there is a questionable transaction, the judge can conclude that, during the lack of a reasonable justification, the payment can only be achieved by undue influence. According to Jayne Hewett v. First Plus Financial Group Plc[14], if a wife offers protection for the loans of her husband it demands clarification, and the lender is questioned (Mian, 2013). The finance company should take precautions to make sure that the wife's approval to the payment is duly sought and therefore should suggest that independent legal counsel be sought from the spouse. The finance company may not depend on its apparent approval if a wife's approval has already been gained through improper influence, because it has reasonable cause to assume that she knows the purpose and consequence of the payment. If a counsel has been advised to inform the wife and has issued a written notice that they have advised her of the purpose and impact of the deal, this is a valid explanation (Stothard, 2010).

Transactions gained through undue influence are not enforceable and all profits obtained according to it must be repaid. In the sense of relations containing high degrees of faith and trust, undue influence regulates transactions that are made (Chen-Wishart, 2006).

From the above discussion following advice is given to the Finance company which are as stated below:

 The legal issues faced by the company is that in view of the judgment of Garcia v National Australia Bank Ltd[15] what precautions have to be taken to safeguard the interest of the finance company whereby securing the loan given to a start-up company is guaranteed by immovable property creating mortgage which is owned either by the spouse of the promoter or his old parents. There is a consistent approach of the court to apply the principle of undue influence in case the spouse takes a stand that she was asked to sign the documents in favor of the financial company as she was under the influence of her husband when such a plea is being accepted by the court at the later stage when the husband is unable to pay debts and the company initiates proceedings for recovery of the debts selling the mortgaged property for realizing the debts (Pascoe, 1997). It is also a point for consideration that for safeguarding the personal property at the time of seeking the loan the wife may be ready and willing to give her consent but subsequently when recovery proceedings commenced, she may change her stand in connivance with her husband to save the property.

Advice to the Finance Company

In view of such a legal position, the financial company needs to be more cautious and it is advisable to take the following measures to ensure that it should not face adverse situations while recovering the loan financed to the start-up company which does not have their sufficient assets to secure the loan.

1. Either wife or old parents who are giving their consent for mortgaging the joint property the financial company may check and ensure that the wife or the old parents as the case may be must-have significant holding in the start-up company so that they are equal partners in the business and will likely to enjoy the profits out of the dividend given by the company. Mainly holding a few shares will not serve the purpose as it can be established that they are equally promoters of the company. This will help the finance company to come out from the rule of undue influence and not come in the way of recovering the outstanding debts /dues of the company.
2. While giving a loan and creating a mortgage it would be appropriate for the finance company to explain to the spouse or the old parents about the consequences of non-payment of money borrowed by the start-up company and the discussion can be audio or video recorded to put strong evidence despite giving a complete explanation as to the consequences of non-payment of loan to the spouse or the old parents who agreed to stand as security. In the case of Garcia v National Australia Bank Ltd (1998) 194 CLR 395, it is not shown by the finance company that any such precautions were taken by them while financing and executing the deed of mortgage of a property which is standing in the joint name of the spouse. This precaution will help to put the finance company on much strong footing while leading the evidence as to the free consent of the spouse or the parent has given while executing the mortgage deed to secure the secured loan.
3. The finance company may also think of taking an undertaking or declaration from the spouse or the old parents who are standing as a security to the fact that they have chosen to give security knowing fully the consequences in case of non-payment of loan by the company. The declaration can also carry a clause that they will not take any such stand of undue influence in case of non-payment of loan by the start-up company and the recovery proceeding commenced by the finance company. The reference of Garcia v National Australia Bank Ltd (1998) 194 CLR 395 may also be given in the undertaking and the other judgment applying the rule of undue influence which they will not rely upon/take a defense in the court nor take any such defense in case of recovery proceeding initiated by the finance company. In the undertaking, the copies of judgment may be enclosed and the declaration may be made by the spouse or the old parents that they have gone through all these judgments and know fully that the defense of undue influence taken by the spouse in such cases will not be taken by her or them later on when such a situation is faced by the company.
4. A clause in the undertaking may be added stating that in case of any matrimonial dispute or separation between the husband and wife, the wife will not press for the partition of this mortgaged property till the loan is repaid will help the finance company to deal with such cases.
5. At the end of the undertaking it should be written that the contents of the undertaking are read over-explained to the declarant and it is understood by her or him and be signed by her lawyer so that it can be established that the contents of the undertaking were signed by the spouse or the parents after understanding the consequences from her or his lawyers rather signed believing the executive of the finance company.
6. In order to take care of the ethical issues the finance company may set up a standard operating procedure (SOP) for their executive and avoid the general practice, whereby the promoter approaches the finance company, finalize the deal and do paper formalities obtaining the signature of his spouse or parents, but the spouse or parents never accompany him during the negotiation of loan and this creates a room of doubt as to the undue influence and the court may not be hesitant in applying this rule. To overcome such a problem it should be ensured through SOP that whenever any such start-up is approaching for a loan then apart from the promoter, his wife or his parents as the case may be who are signing mortgage deed should be present in all negotiations, finalization of the deal and the discussion between the company's executive and the borrower so that the entire procedure is fully exposed to his spouse or parents rather they remain in the dark while signing the papers. This could be a very innovative idea to safeguard the interest of the finance company. The executives of a finance company in the excitement of completing the targets or giving better performance try to opt for shortcuts which may give a bad name to the company on ethical parameters as well as putting hurdles while recovering the loan. It is also advisable that the finance company may come out with a code of conduct which will include all the above points and standard practices followed by the company while giving the loan and taking guarantees and such code of conduct should be part of the agreement between the finance company and the borrower. This will help in establishing the company which operates under a specific written down code of conduct.

Conclusion on Finance Company Advice

In light of the above, it can be concluded that if the finance company adopts the following suggested measures then its business will be secured and the future complications related to the lending business won’t arise.

Bibliography for Finance Company Advice

Legislation

Common-Law- Contract Law

Australian Consumer Law s(20).

Cases

Garcia v National Australia Bank Ltd (1998) 194 CLR 395 Wooler, G. (2018)

Yerkey v Jones (1939) 63 CLR 649

ACCC v Lux Distributors [2013] FCAFC 90, 41

Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44

Jayne Hewett v. First Plus Financial Group Plc [2010] EWCA Civ 312

Books

Wooler, G. 2018. Unconscionable conduct in commercial transactions: global perspectives and applications. United Kingdom: Cambridge Scholars Publishing.

Articles

Chen-Wishart, M. 2006. Undue influence: vindicating relationships of influence. Current Legal Problems, 59(1), pp.231- 266.

Mian, N. 2013. A comparative study of a restitutionary remedy for an undue influence between the English law and the Islamic legal principles. IOSR Journal Of Humanities And Social Science. 12(5). pp. 37-42.

Pascoe, J. 1997. Wives, Business Debts and Guarantees. Bond Law Review, 9(1), pp. 1-25.

Rajapakse, P.J. 2014. Unconscionable or unfair dealing in asset-based lending in Australia. Competition & Consumer Law Journal, 22(1), pp. 151-177.

Media Reports

ACCC. 2018. ABG Pages admits misleading and unconscionable conduct. [Online]. Available at: https://www.accc.gov.au/media-release/abg-pages-admits-misleading-and-unconscionable-conduct

 [Accessed on October 27, 2020]

Website

Abernathy, D., and Salman, J. 2016. Australia: Queensland Court of Appeal denies wife relief from guarantee. [Online]. Available at: https://www.mondaq.com/australia/charges-mortgages-indemnities/456964/queensland-court-of-appeal-denies-wife-relief-from-guarantee

ACCC. n.d. Unconscionable conduct. [Online]. Available at: https://www.accc.gov.au/business/anti-competitive-behaviour/unconscionable-

Stothard, C. 2010. UK: Undue influence - the concealment of affair amounts to undue influence. [Online]. Available at: https://www.mondaq.com/uk/securities/98106/undue-influence--the-concealment-of-affair-amounts-to-undue-influence

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