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Borrowing Dulls the Edge of Friendships

Case Note: Richardson v Wagner [2021] QDC 24

In the immortal words of William Shakespeare’s ‘Hamlet’: “Neither a borrower nor a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of Husbandry”[1]. Put simply – loans and relationships often do not mix well. This principle was clearly on display in a recent decision of The Queensland District Court – Justice Barlow forced to make a difficult decision on whether a lender or guarantor, both seemingly blameless in the situation, should bear the detriment of incurring the defaulted debt of a now bankrupt defendant.

Background

The plaintiff, Mr Richardson, over the course of a number of short loans since 2014, had loaned various sums of money to JDP Applications Pty Ltd (JDPA – the first defendant) – a company owned and solely directed by childhood friend and second defendant, Jason Wagner. Between 5th July and 4th November 2016, Mr Richardson lent JDPA money totalling $100,000 at 5% interest per month.

On 9 November 2016, this principal amount of $100,000 was increased by an additional $50,000 to $150,000, and the deadline on the original $100,000 extended by 3-4 months – on the provision that the third defendant, Lesleigh Wagner (Jason’s mother), guaranteed the entire loan. Mrs Wagner signed the guarantee, and Mr Richardson transferred the remaining $50,000.

JDPA later went into liquidation and Mr. Wagner went bankrupt. Mr Richardson thus sought to enforce the guarantee for $150,000 plus interest against Mrs Wagner.

The Issues

The primary issue Justice Barlow had to determine was whether to enforce the guarantee against Mrs Wagner, or allow Mr Richardson to suffer the loss.

A secondary issue derived from whether JDPA’s prior repayments to Mr Richardson were to be apportioned to the principle or the interest. Since the loans calculated interest as a percentage of the principle, reductions in the principle would decrease the interest payable at a faster rate.

A ‘Guarantee’?

Despite the existence of a document which resembled a guarantee, the defendant firstly argued that she should not be bound by the document as it either was not, could not be inferred to be, or was too uncertain in its terms to be, a guarantee[2]. She argued the document was instead only an “acknowledgement of debt or consideration that had already passed”[3], and not the defendant’s contract of promise[4].

Justice Barlow, however, found the document was clear in defining the terms of the loan: an intentional joint offer by the named signatories (Mr and Mrs Wagner) to guarantee JDPA’s entire loan in exchange for Mr Richardson increasing the loan to $150,000 and providing the 3-4 month extension. An explicit clause indicated that the loan would be guaranteed by the signatories. Justice Barlow indicated that upon the signature and delivery of the document to Mr Richardson, both Mr and Mrs Wagner had clearly intended to offer personal guarantees of the debt’s repayment[5], and that the document “cannot sensibly be construed any other way”[6]. To suggest differently would be to adopt a “Humpty Dumpty” method of giving words meanings they do not have, and Justice Barlow refused to partake in it[7]. The argument was rejected.

No Consideration?

The defendant further argued that despite its potential guarantee status the document was contractually unenforceable as no fresh consideration was exchanged[8]. This argument was also rejected.

Justice Barlow stated that despite Mr Richardson not receiving any direct personal benefit from the guarantee, Mr Richardson provided consideration by lending money to his own detriment on the promise of the guarantee[9]. His transfer of the final $50,000[10], and 3-4 month extension[11], was deemed ample fresh consideration.

Upon considering the case’s circumstances, Justice Barlow found valuable consideration had also passed from Mrs Wagner. The evidence showed that Mrs Wagner was aware of the what the guarantee document was, understood its significance as being legally binding on her, and sent it away with Mr Wagner – in effect asking Mr Richardson to lend money and in exchange offering to guarantee the debt[12].

A Limited Guarantee?

The third argument outlined that the guarantee was only for the additional $50,000 – not the full $150,000 plus interest[13]. However, Justice Barlow indicated that the guarantee clearly stipulated that it was for the entirety of the $150,000 loan at 5% per month – not simply the $50,000 additionally invested[14].

A similar defence argument suggested that the guarantee was only valid for the 3-4 month extension period, and during this period JDPA did not default nor did Mr Richardson call on JDPA or the guarantors to pay the outstanding debt[15]. Justice Barlow however outlined Mr Richardson could call upon Mr and Mrs Wagner as guarantors at any time after a default by JDPA, and the guarantee did not limit this time. He stated that if a debtor is required to pay money at a certain time, “it would be a nonsense to hold that the guarantor, if not called upon to fulfil those obligations within the very same time, would be free of the guarantee”[16]. This is because the guarantor is only liable after the debtor’s default, and default might only occur at the end of the period the contract specifies[17].

Unconscionability

The defence argued unconscionability across two grounds.

The defence, relying on Commercial Bank of Australian Ltd v Amadio[18],  firstly insisted it would be unconscionable to allow Mr Richardson to enforce the guarantee. They argued at the time of contracting Mrs Wagner had a ‘special disadvantage’ by nature of her age, a close relationship with “full trust and faith” in her son (Mr Wagner) in matters relating to JDPA’s business[19], and the nature of the loan’s unusually high interest rate. They continued that Mr Richardson would be taking unfair advantage of her if he did not actively make enquiries about her ability to repay the loan[20].

Justice Barlow; however, concluded that Mr Richardson lacked the “predatory state of mind” required for equitable intervention and denial of the guarantee’s benefits[21]. He outlined there was nothing that would have awakened him to the likelihood of any such disadvantage, and further reinforced that “constructive notice has no part to play in the doctrine of unconscionability”[22]. He added that even if such disadvantage existed, nothing suggested Mr Richardson was wilfully blind by not inquiring about it[23].

Secondly, the defence argued that Mr Richardson, on applying Amadio[24], had duties to disclose JDPA’s financial positions regarding the previous loans accumulating $100,000 to Mrs Wagner before she signed the guarantee. They reasoned that Mr Richardson had information of JDPA’s financial circumstances that showed it as different from what Mrs Wagner would ‘naturally expect’[25], and hence he should have disclosed this information. In considering this argument, Justice Barlow distinguished the case from Amadio[26], indicating a lender’s disclosure obligations are only confined to circumstances where there are some unexpected facts or unusual featuresin the case[27]. Since the prior loans between Mr Richardson and JDPA contained no extraordinary elements (despite the unusually high interest rate that Mrs Wagner was already aware of), Mr Richardson had no disclosure obligations.

Principal or Interest?

Justice Barlow held each repayment made prior to 9 November 2016 (when it was agreed that a further $50,000 would be added) was payment only of interest. He utilised Clayton’s Case[28]  – the general presumption applied by the High Court being that “payments made in reduction of a debt are intended to be applied consecutively in discharge of the items making up the debt”[29]. Whilst accepting that any deviation to this rule required explicit communication between the parties[30], His Honour found that Mr Wagner had explicitly assigned the payments to interest (the bank statements showed that the repayments were labelled as “interest”), had exchanged text messages that indicated the repayments were for interest, and had impliedly authorised Mr Richardson to decide himself where to apply the payments (Mr Richardson applied them to interest).

The Judgement

Justice Barlow found Mrs Wagner as liable to Mr Richardson as guarantor of the debt – awarding Mr Richardson $195,609.17.

Lessons regarding loans for future business

There are some valuable lessons to be learnt from the Wagners’ case:

  1. Seek legal advice when drafting the terms of your contract agreement as ambiguity as to the terms can lead to lengthy and costly litigation;
  2. It is important to make appropriate inquiries into the financial position of any personal guarantor as their guarantee certainly loses value should they become bankrupt;
  3. Be clear and direct in assigning the aspect of the loan you wish for the repayments to go towards (i.e. principal or interest);
  4. Be wary of signing a personal guarantee. While you may certainly trust that you will not be relied upon to enforce the debt; should you understand that what you are signing is legally binding then the court is likely to enforce the guarantee.

This article was written by Luke Borgert & Jackson Litzow (student placement).

 

Footnotes

[1] W Shakespeare, Hamlet, Act 1, scene III. Polonius speaking to Laertes.

[2] Richardson v Wagner [2021] QDC 24 (‘Richardson v Wagner’), [15a].

[3] Ibid [21].

[4] Ibid [20].

[5] Ibid [22].

[6] Ibid [15b].

[7] Ibid [27].

[8] Ibid [33].

[9] Ibid [34].

[10] Ibid [31].

[11] Ibid [15c].

[12] Ibid [37].

[13] Ibid [15d], 50.

[14] Ibid [41]-[42].

[15] (1893) 151 CLR 447.

[16] Richardson v Wagner (n 2) [49].

[17] Ibid [15e].

[18] Ibid [52]; Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392, [161].

[19] Richardson v Wagner (n 2) [53].

[20] Ibid [54].

[21] (1983) 151 CLR 447 (‘Amadio’).

[22] Ibid 457; Richardson v Wagner (n 2) [44].

[23] Amadio (n 24).

[24] Behan v Obelon Pty Ltd [1984] 2 NSWLR 637, 638E.

[25] Devaynes v Noble (1816) 1 Mer 571, 35 ER 781 (‘Clayton’s Case’).

[26] Sibbles v Highfern Pty Ltd (1987) 164 CLR 214, 222.

[27] Richardson v Wagner (n 2) [77].

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