A contract is not "oppressive" merely because the obligor is naïve

The High Court has decided that a lender is not acting oppressively simply because it takes a guarantee from an obligor with little understanding of the corporate affairs associated with the borrower it is guaranteeing.

In this case1, the borrower went into voluntary liquidation and the lender demanded repayment of its facility from both the borrower and the guarantors.

Following non-payment by both the borrower and the guarantors, the lender sought summary judgment.

The guarantors opposed the application, arguing (among other things) that:

• the liquidation did not constitute a default under the facility;
  
  
• the lender acted oppressively by not issuing proceedings while it was still able to recover from the borrower; and
  
  
• the guarantees were unconscionable/oppressive under the Credit Contracts Act 1981 because the guarantors did not understand the extent of their liability.

The court rejected all of the guarantors' claims, noting:

• the liquidation was an event of default under the facility;
  
  
• there was no obligation on the lender to recover from the borrower before claiming against the guarantors; and
  
  
• the guarantees were not unconscionable - the guarantors' naivety and the complexity of the documents did not render the guarantees oppressive. Referring to the decision in Etridge2, the court noted that people in business should be regarded as capable of looking after themselves and understanding the risks in giving guarantees.
  

1 S H Lock (NZ) Limited v Hyndman, Baker, Botica and Ratcliffe (High Court, Auckland CIV-3145-03, 20 February 2004, Master Sargisson)

2 Royal Bank of Scotland v Etridge [2001] 2 All ER (Comm) 1061

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