Legal Liability Of Jak’s Parents And Wife In Repaying The Loan For His Accounting Practice In Northern Territory

Background of Jak’s Investment in His Accounting Practice

The issue is whether Jak’s parents are liable to repay $43,000 loan to the bank or not?

A contract creates a legally binding relationship between two or more parties who are bind by its terms and failure to comply with these terms gives the right to parties to enforce the terms on another party. However, a contract which is formed based on unconscionable conduct is not enforceable, and its parties can set aside the contract to eliminate their legal responsibilities. Unconscionable conduct is referred to a doctrine of contract law which is used in order to describe terms that are extremely unjust or favour only one party who has the superior bargaining power. This doctrine was first established in Australia in the judgement of Blomley v Ryan in which the court provided that intoxication might preclude the capacity of a party to contract. In this regards, another relevant judgement was given in the case of Commercial Bank of Australia Ltd v Amadio. In this case, a bank guarantee was given by elderly parents for their son to the bank. They signed the documents when the bank manager attended their home who did not give any explanation regarding the content of these documents. The son told his parents that the guarantee is for around $50,000 and it would be given for six months.

However, in reality, the overdraft limit went from $189,000 to over $270,000, and the company was liquidated. The bank demanded the money from the parents who argued that they were not aware of these terms of the guarantee. Amadio’s had a limited grasp of written English, and they did not have a good command of the language. The court provided that Amadio’s were at a special disadvantage because their English skills were poor and the bank did not provide any explanation to them regarding the guarantee. The son also did not allow them to get independent advice from someone else. The court provided that the terms of the contract are not enforceable based on the doctrine of unconscionable conduct. Another relevant judgement in this regards was given in the case of Yerkey v Jones in which the court provided that if the wife has given a guarantee based on misrepresentation or without knowledge regarding the facts of the contract, then it can be set aside. Although many people criticise this rule for being sexist and out-dated; however, it was applied by the court in the recent judgement of Agripay Pty Ltd v Byrne by provided that unconscionable conduct and human weaknesses are not limited to heterosexual marriage relationship and they can apply to all vulnerable parties that are in a personal relationships.

The Issue of Legal Liability of Jak’s Parents in the Loan Agreement

A contract can also be set aside based on misrepresentation which is referred to a false statement of fact in order to induce another party to enter a contract. The false statements which are made by parties during the negotiation of a contract are considered as misrepresentations based on which a contract becomes voidable which can be set aside by the representee (the person who signed the contract while relying on the misrepresentation). Specific criteria must be satisfied by parties in order to establish the doctrine of misrepresentation. In Bisset v Wilkinson case, the court provided that there must be false statement of fact or law regarding than an estimation or opinion regarding future events. This statement must be made by a party who is in the position to know the true facts. The objective of the false statement is to induce the representee to form a legal relationship with the party.

In the given scenario, Jak told his parents that he wants a guarantee for a loan of $25,000 which will be repaid within a period of six months. However, the agreement which they signed was for an infinite credit limit that was given for an unlimited period. The bank manager who visited Jak’s parents did not explain to them the terms of the agreement. Now, the bank is demanding $43,000 from Jak’s parents, and they might have to sell their family home to repay this loan. It is advised that they should rely on the doctrine of unconscionable conduct to eliminate their liability in the agreement and set aside its terms. As illustrated by the case of Commercial Bank of Australia Ltd v Amadio, parties who are at a disadvantageous position in the contract can rely on unconscionable conduct to set aside their liability. Jak’s parents trusted their son, and they were not aware of the correct terms of the agreement. Jak misused their trust to bind them in a legal relationship without telling them regarding the actual terms of the contract. The bank manager also failed to explain the terms to them or allow them to get independent advice from outside.

Although Jak can argue that his parents were not weak in English like Amadio’s and they could have read the terms of the agreement before agreeing to sign the case; however, as discussed in Yerkey v Jones, Jak was at the dominating position since his parents trusted them. The parents of Jak were in a vulnerable position, and as provided by the court in Agripay Pty Ltd v Byrne case, the rule applies in all personal relationships; thus, the parents of Jak can rely on the rule given in Yerkey v Jones. Moreover, the statement made by Jak to his parents was a false statement of facts and based on the principle of misrepresentation the agreement become voidable. As discussed in Bisset v Wilkinson, Jak made a false statement to his parents in order to induce them to sign the contract even when he knew the correct facts.

Application of the Doctrine of Unconscionable Conduct in the Contract Law

Conclusion

In conclusion, it is advised to Jak’s parents that they should file a suit against Jak and the bank to set aside the terms of the agreement based on unconscionable conduct and misrepresentation.

The issue is whether Jak’s wife, Isabelle, would have liable for repaying the loan if Jak had convinced her to co-sign the loan agreement?

While signing an agreement for a loan, it is common for the wife to sign a guarantee or mortgage documents jointly with husband to secure the husband’s obligations. However, circumstances might exist where the signature of the wife is taken under pressure or through undue influence. If the wife has relied on the misrepresentation, then also the contract can be terminated. If the wife did not properly understand the implications of the transaction in which she has entered, then the contract can also be set aside. This rule was established by the court in the case of Yerkey v Jones. This rule not only protects people in a heterosexual marriage relationship; however, it focuses on protecting all vulnerable parties that are in a personal relationship. However, this rule did not apply in case the wife stands on a position to receive benefit from the contract. This rule was established by the court in the judgement of Garcia v National Australia Bank Ltd  in which the majority of High Court judges provided that the rule of Yerkey v Jones applies in Australia.

In this case, a mortgage deed was executed between Garcia and her husband in order to secure guarantees under the husband’s business. The husband told Garcia that there is ‘no danger’ in this transaction. While singing the guarantee, the bank did not explain the terms of the contract to the wife. Parties divorced, and Garcia filed a suit in the court in order to declare the guarantee as void based on undue influence. The Trial judge held that although Mrs Garcia understood the concept of guarantee; however, she did not understand that this guarantee was secured by a previously signed “all money mortgages”; thus, the court provided advice in favour of Mrs Garcia by establishing undue influence. This decision was overturned by the Court of Appeal. Lastly, the High Court re-established the decision of the Trial judge by stating that the husband pressured his wife to sign the contract and the bank took no step to explain the terms of the guarantee to her based on which the contract can be set aside.

The Relevance of the Doctrine of Misrepresentation in Setting Aside the Terms of the Agreement

In case Jak would have asked his wife to co-sign the loan agreement without telling her the actual terms of the agreement, then her wife can set aside the contractual obligations by relying on the rule established by the court in Yerkey v Jones case. Jak was in a dominating position in the relationship because Isabelle’s English skills were not good. Jak made misrepresentation regarding the facts of the case and the bank also did not explain the terms to Isabelle while taking her signature. Moreover, as discussed in Garcia v National Australia Bank Ltd, Jak relied on undue influence while taking the signature of Isabelle; thus, Isabelle has the right to terminate the agreement with the bank and set aside its terms in order to avoid her legal liability which is raised in the scenario.

On the contrary, Jak can argue that this rule is out-dated as provided by Justice Kirby by stating that the wife knew what she was getting into while signing the contract. However, Justice Kirby did not reject the application of undue influence in this case; instead, he provided that it should be applied in a broader term. The rule given in Yerkey v Jones case cannot be applied if the wife has any interest in the transaction; however, in the case of Isabelle, she did not have any interest in the guarantee given by Jak because she is an artist who is not a partner in the business of Jak. Since Isabelle was not properly understood the implications of the transactions and she did not have any interest in the agreement as well, she can set aside her liability which is raised in the co-signed loan agreement.

Conclusion

In conclusion, it can be advised to Isabelle that she can set aside the term of the co-signed loan agreement by applying the rule given in the case of Yerkey v Jones because her signature was taken by Jak without notifying her about the impact of the transaction.

A Articles/Books/Reports

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Agripay Pty Ltd v Byrne [2011] QCA 85

Bisset v Wilkinson [1927] AC 177

Blomley v Ryan [1956] HCA 81

Commercial Bank of Australia Ltd v Amadio [1983] HCA 14

Garcia v National Australia Bank Ltd [1998] HCA 48

Yerkey v Jones (1939) 63 CLR 649