BUS101: Business Law - Legal Issues - Vincenzo Amadio - Assessment Answer

Business Law Assignment

Assignment Task

The case concerns a guarantee given by Mr and Mrs Amadio over a loan by the bank to their son, Vincenzo.

• A guarantee is just a contract between a lender (usually a financial institution) and a person called the guarantor.
• The contract is formed by the guarantor’s making an offer to the lender that if the lender grants a loan to a third party (the borrower), and the borrower fails to repay the loan, the lender can then call on the guarantor to make the repayment.
• If the lender accepts the offer the contract of guarantee is made.
• The consideration for the contract is the actual making of the loan; this is considered something of value to the guarantor who wants to assist the borrower.
• In practice it is common for a parent to assist an adult son or daughter, who would not otherwise be able to obtain a loan, by being a guarantor; the parent values being able to assist the son or daughter and this constitutes consideration because consideration can be “value” in any form.
• To support the guarantee contract (ie, ensure the guarantor can pay up, if called upon), a mortgage over some property owned by the guarantor is often given by the guarantor to the lender.

3 The full details of what happened in the case are set out in the judgements delivered bythe separate judges and you will not be able to answer the questions without closely reading them, but by way of short summary only:

• Mr and Mrs Amadio were immigrants to Australia of Italian birth, had a relatively poor command of English and limited business experience.
• They were induced by their son Vincenzo to be guarantors of loans by the bank to Vincenzo, whom they believed to be successful in business.
• In fact, Vincenzo's business was in a severe financial difficulties.
• The bank knew this, but allowed Vincenzo to explain to his parents the nature of the guarantee and mortgage documents they were signing.
• Vincenzo failed to repay the loans and the bank called on Mr and Mrs Amadio under the guarantee.
• Mr and Mrs Amadio challenged the enforceability of the guarantee contract.
• At the first hearing the bank was successful in defending the claims brought against it by Mr and Mrs Amadio.
• An appeal court reversed that decision and gave judgement for Mr and Mrs Amadio.
• The bank appealed against that decision to the High Court of Australia where the case was heard by four judges. It is the decision of that court that you read (although contained within it is a summary of what the earlier courts decided).

4 You will see that of the four judges who heard the case in the High Court, three decided in favour of Mr and Mrs Amadio and one decided in favour of the bank. Therefore, Mr and Mrs Amadio were successful by a majority decision.

5 However, as between the three judges who decided in favour of Mr and Mrs Amadio, they did not all decide the case on the same legal grounds. It is your understanding of the different approaches taken by the judges that this exercise is intended to test.

6 Students should discuss as a group what answer the group will give, in its own words, to the questions below. If it appears to the tutor marking the group report that just one or two students have written all the answers some oral testing of group members may be used to determine whether all group members contributed to and understand the answers being submitted.

The questions you have to answer

1 State three causes of action (ie, legal issues) which Mr and Mrs Amadio raised in challenging the mortgage guarantee they had signed?

2 In reversing the decision of the trial judge, what three conclusions did the appeal court come to after its examination of the facts?

Answer the following from the judgment of Justice Gibbs

3 Is a bank always required to inform an intending guarantor about the state of the account of the customer which is to be guaranteed? If not, in what circumstances would a bank be required to inform a potential guarantor about this?

4 What were two facts in this case which persuaded Justice Gibbs that the bank should have made such a disclosure?

5 What was the ratio for Justice Gibbs’s decision of the case in favour of Mr and Mrs Amadio (i.e., what was the legal issue or issues (not just facts) this judge identified to decide the case)?

Answer the following from the judgment of Justice Mason (who decided the case on different grounds):

6 What was the ratio for his decision?

7 How was it different from the ratio adopted by Justice Gibbs?

8 Justice Mason identified three ways in which the bank on the one hand and Mr and Mrs Amadio on the other hand were positions of “gross inequality of bargaining power.” What were three of those ways?

Justice Mason and Justice Deane both explained the legal difference between unconscionable conduct (unconscionability) and undue influence.

9 In your own words, what is the difference which the two judges explained between these two legal issues?

Answer the following from the judgment of Justice Deane

10 What was the ratio for Justice Deane's decision in favour of Mr and Mrs Amadio?

Answer the following from the judgment of Justice Dawson (who was the dissenting judge)

11 What was the general test (ie, the proper circumstance) in which a bank would be liable to a guarantor who has been induced to give a guarantee as a result of some misrepresentation about the guarantee?

Solution 1

Mr. and Mrs. Amadio raised some issues in challenging the guarantor case against them by the bank. The issues raised included the following:

• The bank presented an unconscionable bargain
• The loan was purchased by undue influence
• The loan was issued under a misrepresentation of the facts

Based on this information Mr. and Mrs. Amadio raised concerns that the bank did not have any jurisdiction to demand that they pay for the loans that their son had borrowed from the bank.

Solution 2

The appeal court reversed the decision arrived at by the trial court. The trial court ruled that the parents of Vincenzo Amadio should pay the defaulted loan amount to the bank under the guarantor’s act. The appeal court concluded the following factors:

• The bank was under an obligation to reveal the true status of accounts belonging to Vincenzo Amadio. This status should be revealed to his parents who were listed as guarantors of the loan.
• The bank was fully liable for their son’s misrepresentations of information.
• The transaction was an unconscionable one that will be relieved using the available equity

Solution 3

As a lender, the bank is fully obligated to reveal the true state of accounts belonging to a customer. This information will be revealed to the persons who will position themselves as guarantors of the borrowed sum of money. This information is required to enable the guarantor to make an informed decision (Honigsberg, Katz & Sadka, 2014). This will prevent the guarantor from suing the bank indicating that they were not aware of the state of the customer’s account. The bank is not entitled to assume that the guarantor is aware of the situation. They should consider the fact that the customer might have omitted some information to the guarantor.

Solution 4

Justice Gibbs arrived at his decision based on some factors that were evident in the case proceedings.

• Justice Gibbs made his decision based on the fact that the bank is required to disclose any information about any relation between the bank and the customer that may seem to be unusual (Australian Contract Law 2013). In this case, Vincenzo Amadio operated an unusual account because he did not have the funds to operate it.
• Justice Gibbs also concluded that misrepresentation was made by the customer and not the bank. Vincenzo Amadio had the responsibility of information his parents about the account status for them to make an informed decision about being the guarantor for the borrowed loan.

Solution 5

Justice Gibbs ruled the case in favor of Mr. and Mrs. Amadio based on the facts of the case that took place. The bank has a duty of informing the guarantor concerning the account status of the customer. However, this is if there is unusual activity on the account status. Failure of the bank to disclose this information to the guarantor amounted to a misrepresentation of a material part of the whole transaction between the bank and the customer.

Solution 6

Justice Mason made his decision based on the fact that the bank engaged in unconscionable conduct when entering into the contract (Rahman, 2008). The innocent party, in this case, is Mr. and Mrs. Amadio. However, the innocent party is responsible for the disadvantages that have been taking place between the contracts. Also, it is almost impossible to definitively describe the situations where relief will be provided to the innocent parties based on unconscionable conduct having taken place. The manner in which all the parties entered into the contract were not novel. Therefore, Justice Mason believes that the innocent party is entitled to the mortgage guarantee.

Solution 7

The ration provided by Justice-Mason is different from that one provided by Justice Gibbs based on the approach that was taken by both judges. Justice Gibbs was of the opinion that the bank was required to provide all necessary information to the guarantor for them to make an informed decision. On the other hand, Justice Mason argued that ignorance cannot be treated as a defense. The grantor trust the words of their son when he asked them to be guarantors in the guarantee. Vincenzo Amadio offered misrepresented information to his parents by omitting some vital information about his account status.

Solution 8

Justice Mason was of the opinion that both the bank and the customer engaged in gross misconduct while developing the loan contract. The ways through which this happened include the following:

• Mr. and Mrs. Amadio were ignorant enough not to seek information about the contract they were getting themselves into.
• The respondents had increased reliance and confidence in their son such that he managed to convince them to set themselves as guarantors, so that the bank can increase the overdraft limit on the business account (Morabito, 2009).
• The bank omitted information about the account status of the business account, despite the fact that there were unusual dealings with the account.

Solution 9

Both Justice Mason and Justice Gibbs explained the differences between the unconscionable conduct and undue influence.

• Unconscionable conduct refers to a situation in a doctrine of contract law in Australia that is used to describe terms that are highly unfair or are sided towards one direction. This is often in favor of the party that has the highest bargaining power.
• Undue influence was used to refer to a situation where a person is induced to act or behave in a certain manner, other than what is expected of them.

Solution 10

Justice Deane was of the opinion that the defendants were entitled to relief from the guarantee. The bank engaged in unconscionable conduct while awarding the account overdraft to the business account. During the time of developing the guarantee contract, Mr. and Mrs. Amadio were under relevant disability when dealing with the bank. They had not received due information from Vincenzo Amadio who was their son requesting them to be a guarantor for the bank loan. The defendants were not fluent in the English language (Freilich & Webb, 2010). This brought communication barriers between them and the bank. The bank should have made conducted a background check to determine that the business has in fact been unable to meet most of its financial obligations.

Solution 11

A bank would be liable to claim payment from a guarantor who had received misrepresented information if the bank had taken up the obligation of informing the guarantor about the account status of the customer. However, they are only required to disclose this information if they detect some unusual activity. The guarantors should seek all the necessary information from the bank regarding the guarantee contract. When this is done, the bank would have been liable to claim defaulted funds from the guarantor.