The recent case of Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer [2023] NSWSC 466, serves to highlight the difficulty in establishing unconscionable conduct on the behalf of the lender (and beneficiary of a guarantee).
Mr. Naegeli was the director of a company that advanced money to a company associated with Mr. Schaeffer.
As part of the loan agreement, Shaeffer signed a guarantee to ensure the loan would be repaid.
After Schaeffer passed away, Naegeli sought to enforce the guarantee against Shaeffer's deceased estate. However, the estate argued the guarantee was unenforceable due to unconscionable conduct on the part of Naegeli. The estate claimed that Shaeffer had been under duress when he signed the guarantee and Naegeli had taken advantage of his vulnerable position.
In support of his resistance to enforcement of the guarantee, the Estate argued that Shaeffer been going through a difficult personal and financial situation at the time he signed the guarantee. He also claimed that Naegeli had threatened to call in the loan if he did not sign the guarantee.
Stevenson J stated when considering the facts:
"What must be shown is conduct that:
'objectively answers the description of being against conscience', where the standard of conscience is informed by such matters as “certainty in commercial transactions, honesty, the absence of trickery or sharp practice, fairness when dealing with customers, the faithful performance of bargains and promises freely made”;
is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience”, the judgment being “a heavy one” and one “informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society."
However, the court found that the Estate's claims of unconscionable conduct were not supported by the evidence. The judge noted that Shaeffer had been represented by lawyers at the time he signed the guarantee and that he had not raised any concerns about its terms. The court also found that Naegeli had not taken advantage of Shaeffer's vulnerable position, and that there was no evidence of duress or intimidation.
Stevenson J summarised:
"Mr Schaeffer entered the Guarantee freely, voluntarily and unhesitatingly.
...
Here, the [Guarantee] was placed in front of Mr Schaeffer. He executed it. He spoke English. He was a businessman of some significant success. That success included in cleaning, property and art. He understood the arrangement and what he was doing. He was at no disadvantage, particularly not to the plaintiff. He thought the [G]uarantee would ultimately be unnecessary. True he had remorse about it later, anyone who has made a bad deal, even a speculative one, does. But that is not the test. There is nothing that [Mr Naegeli] did that would cause the Court to adjudge him unconscionable.”
As a result, the court ruled that the guarantee was enforceable, and the estate was ordered to pay the outstanding amount owed under the loan agreement.
This case serves as a reminder that the burden of proof for establishing unconscionable conduct is high. In order to successfully argue unconscionable conduct, it is necessary to provide concrete evidence that one party took advantage of the other's vulnerability or ignorance, and that the resulting transaction was unfair or unreasonable.