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The term negotiability and its adjectival form negotiable are capable of more than one legal
meaning. In one sense, it means transferability. In another sense it means possessing the hallmarks of
negotiability, one of which is transferability. It is in this second sense that we will be referring to
negotiability in this segment of the lectures. So what is negotiability in the second sense? Before we
examine the concept of negotiability, it is useful to recapitulate how personal property is transferred
under the general law. You may have learnt in your earlier studies that a chose in action (intangible
personal property), such as a debt, must be assigned or transferred in accordance with certain legal
procedures. The basic requirements are that the transferors entire ownership rights must be
transferred permanently, the transfer must be in writing, and notice must be given to the debtor.
Different procedures apply to a chose in possession (tangible personal property), such as a chattel.
The transfer of a chose in possession may either be in formal writing, or by transfer of possession of
the property with clear intention to transfer ownership. The above forms of transfer are subject to
defects in titles and personal equities (explained further below).

Under the general law, the owner must consent to the transfer of property. The nemo dat quod non
habet (no one gives who possesses not) principle was developed to protect the rights of property
owners. Failure to give consent can take a number of forms. For example, the property may have been
stolen from the owner, or the transaction may not have been authorised by the owner. Where consent
has not been given, the property is said to be subject to a defect of title in the hands of the transferor.
In other words, the transferee has no clean title to, or ownership of the property. If the transferee tries
to transfer title to the property to a third party, the subsequent transferee will take subject to the same
defect in title. In other words, the transferee gets no title. This is of course subject to limited
exceptions, such as when the owner is precluded from claiming that consent was not given. The
transfer of property may also be subject to personal equities. In other words, if the original debtor has
a right of set-off against the transferor that right can be raised against the transferee. The principle of
negotiability was developed to overcome some of the problems encountered when transferring
personal property.

Negotiability originated in the customs of the merchants of medieval times. The common currency at
that time consisted of gold and silver coins. Payment by these means was not only inconvenient but
also hazardous. Merchants therefore resorted to their own devices to settle their debts. One of the
devices they developed as a substitute for currency was the negotiable instrument. From their
viewpoint, such a device should serve the same purpose as currency. They therefore agreed among
themselves that a document that embodied a legal right to payment must be capable of being freely
transferable by delivery alone, or in certain circumstances by delivery plus indorsement of the payee.
In addition, a transferee must be able to enforce payment free from any defences that may have been
available against prior parties.

The rules developed by the merchants were significant departures from the normal laws of property
and contract in force in most countries at that time. They were soon recognised and accepted by the
trading community throughout Europe and eventually formed part of a uniform system of law known
as lex mercatoria or the law merchant. The law merchant was initially administered in special courts
such as the courts of pie powder or courts of market. In due course, the law merchant was received
into the individual legal systems in Europe. Its reception into English law took place in stages, but by
the end of the eighteenth century the reception was complete. As the Australian legal system is based
on English law, the law merchant is also part of Australian law.

Negotiability may be conferred by statute (as in the case of promissory notes) or recognised by the
courts (as in the case of bills of exchange and cheques). Although the law only recognises certain
types of instruments1 as possessing the quality of negotiability, the categories of negotiable
instruments are not closed. The law will continue to accord the status of a negotiable instrument to
any document which by mercantile custom is regarded as such (see Bank of Baroda v Punjab
National Bank [1944] AC 176 at 183: But the law merchant is not a closed book, nor is it fixed or
stereotyped ... Hence evidence is admitted of custom and usage which, when judicially ascertained
and established become incorporated in the common law.). For example, in the United States,
travellers cheques have been held by the court to be a negotiable instrument (see Emerson v
American Express Co (1952) 90 Atlantic Reports (2nd Series) 236).

In Australia, some certificates of deposit, bearer debentures and receipts for Treasury Notes are
regarded by custom and usage as negotiable instruments, but not postal and money orders, share
certificates, letters of credit and documents of title to goods, such as bills of lading. According to
commercial practice, it is not possible for title to goods to pass free of equities. So while documents of
title to goods are transferable, they are not negotiable. The Bill of Exchange Act only regulates three
types of negotiable instruments: bills of exchange, promissory notes and cheques (only those drawn
before 1 July 1987 unlikely to be any around as cheques issued before that date would be stale
now). Cheques issued after 1 July 1987 are governed by the Cheques Act 1986.

There is no statutory definition of a negotiable instrument and we have to resort to case law. In
Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR
457 at 474), the High Court stated that a negotiable instrument has three essential attributes:
The first feature is that the rights embodied in the negotiable instrument are transferable by
one of two of the following methods. In the case of a bearer instrument (such as a bearer
cheque) the rights are transferred by mere delivery from the holder to a subsequent transferee.
In the case of an instrument payable to the order of a specific person, the rights are transferred
by indorsement and delivery of the endorsed instrument to the intended transferee.
(Indorsement signifies the writing on the back of the instrument the name of the person who
is the transferor.) Contracts other than negotiable instruments may also be assigned, but they
usually involve cumbersome procedures.

The second feature is that the person who is entitled to the negotiable instrument, called the
holder, may sue in his or her own name without the need to join the immediate preceding
transferor as co-plaintiff in the action on the instrument. This is an important exception to the
doctrine of privity of contract. Under the doctrine of privity of contract only parties to a
contract have rights and obligations arising from the contract. In other types of contract (with
some exceptions such as assignment), physical possession of a document evidencing its terms
does not in itself confer a right of action.

The third feature is that the holder of a negotiable instrument, which is in a proper form, who
takes for value and without any notice of defects in the transferees title, may take free from
any defects in title and personal equities. In other words, it is possible to pass a better title to
the transferee than that held by the transferor. The holder in due course is able to trump
previous holders of the legal estate, but will not be protected against defects in title or
personal equities in the immediate transaction. Neither is the holder in due course protected
from a forged or unauthorised indorsement, which were part of the chain by which title was

The effect of these features is that a negotiable instrument constitutes a specific item of property and
the true owner has the right to bring an action for conversion of the instrument. In addition it confers
on the holder a right to enforce the undertaking made by a party to it. It is clear from the above

The term instrument is defined in the CCH Macquarie Dictionary of Law as a formal document embodying
some legal right or obligation.

discussion of the attributes of a negotiable instrument that negotiability enhances the value of the
holders title to the instrument. But sometimes, it can also lead to injustice, as it is possible even for a
thief to give good title to a third party. That is why determining whether an instrument is a negotiable
instrument or not is important when it falls into the wrong hands.



The bill of exchange is the first category of negotiable instruments that would be covered. Before
examining the law governing bills of exchange, it might be useful to outline the role played by them
in modern commerce. Traders regularly use bills of exchange as a method of payment, not just in the
past but even today. Let us take the example of a wholesaler who buys $40,000 worth of goods on
credit from a manufacturer and then sells the bulk of the goods on credit to a retailer for the same
price. Suppose the transaction takes place on 30 April 2002 and all three parties agree among
themselves that payment for the goods should take place on 31 July 2002. The wholesaler could
collect payment from the retailer on 31 July and then use the funds to pay the manufacturer on the
same day. Alternatively, the wholesaler could draw a bill of exchange on the retailer, who by
accepting it, agrees to pay the manufacturer on 31 July. The advantage of the latter method of
payment is that the manufacturer may either wait until 31 July to receive payment, or discount the bill
and receive the money immediately.

This is how a simple trade bill of exchange (based on the above facts) would look::

Accepted 30 April 2002

Authorised Signatory
For Retailer Pty Ltd
Date 30/04/02

To: Retailer Pty Ltd

On 31 July 2002
Pay: Manufacturer Pty Ltd
The sum of: Forty thousand dollars ($40,000)

Authorised Signatory
For Wholesaler Pty Ltd

NB: In the above diagram, the Manufacturer is the Payee, the Retailer the drawee- cum-acceptor,
and the Wholesaler, the drawer.

Bills of exchange are usually used in international trade. Suppose X in Australia has agreed to sell
goods to Y in England before receiving payment. X will ship the goods and send Y the bill of lading,
which Y can use to take delivery of the goods when they arrive in England. To get some assurance of
payment, X will draw a bill on Y (i.e. draw a bill addressed to Y) for the price of the goods payable
either immediately (sight bill) or at the end of some agreed period (usance bill). X will send both
documents through its bank to Y. The bank will be advised not to release the bill of lading until the
bill has been paid or accepted (i.e. agree to be bound by the terms of the bill). If X authorises its bank
to release the bill of lading to Y against Ys acceptance and if Y accepts the bill, X can sell the
accepted bill (we call this discounting the bill) and receive payment before the maturity of the bill.
So both parties benefit from the use of the bill. There are also a number of advantages (which we will
discuss later) which X will enjoy if a bill is used.

Bills of exchange not only facilitate payment, they are also a source of credit because of the
availability of discounting facilities. In fact, drawing bills for indorsement or acceptance by banks is
an important source of finance for companies today. Where bills are used in connection with trade,
they are called trade bills, but where they are used solely for providing financial accommodation, they
are called commercial bills or accommodation bills. Commercial bills may be sub-divided into bank
bills and finance bills. Bank bills are bills backed by trading banks, whereas finance bills are those
backed buy non-trading banks. When a bank has accepted a bill, the holder of the bill has a valuable
asset. It can be sold in the money market for an amount less than its face value (hence the sale of a bill
is known as discounting). Because bills have relatively short maturity dates, ranging from 30 days
to 120 days, they must be replaced or rolled over when they mature, if finance beyond these periods
is required.

Bills are an important source of short-term finance in Australia. For an illustration of how bills are
used to raise finance in Australia, see KD Morris & Sons Ltd (In Liq) v Bank of Queensland Ltd
(1980) 146 CLR 165 and Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176
CLR 640. Commercial bills are either drawn by the customer on the financier and accepted by the
financier, or issued by the financier and accepted by another financier. These bills are then bought and
sold by a series of dealers who regularly trade in bills (just like any other commodity). The financiers
generate a profit for themselves by trying to predict movements in the discount rates for bills that they
have acquired but payable in the future. In the 1980s bills were popular because outstanding liabilities
from acceptance or indorsement did not have to be reflected on balance sheets of financiers. Despite
changes to prudential guidelines for banks in 1989, bills continue to be popular because of the active
secondary market for bank-accepted and bank-indorsed bills. The total of bank bills outstanding in
July 2003 was slightly below $54 billion.


The law governing bills of exchange in Australia is contained primarily in the Bills of Exchange Act
1909 (Cth) (BEA). This piece of legislation is based on the English Bills of Exchange Act 1882
(UK), which was drafted by Sir MacKenzie Chalmers. The English Act itself was a codification of
centuries of common law and merchant practice relating to negotiable instruments. As a testimony to
Chalmers excellent draftsmanship, the English Act has been adopted by virtually all common law
countries and has remained relatively unchanged since it was first passed. Currently the BEA is
unable to accommodate dematerialised bills of exchange and promissory notes, making them less
competitive than other financing instruments. The Federal Government undertook a review of the
BEA with the view to modernising it, but there have been no new developments.

It is important to note that the BEA does not constitute an exhaustive code for the following reasons:
s 5(2) states that the rules of the common law, including the law merchant, continue to apply
to the extent they are not inconsistent with the provisions of the BEA;
s 5(1) provides that the bankruptcy rules operate in regard to bills of exchange
notwithstanding any provisions of the BEA;
some provisions of the BEA, such as ss 27(1) and 32(1), are meaningless unless read against
the background of state law on the subject;
case law continues to play an important role in the interpretation of the provisions of the


We will begin by examining the legal definition of a bill of exchange because in Australia the BEA
governs only bills of exchange and promissory notes. [The BEA still contains a section on cheques,
but it does not apply to instruments governed by the Cheques Act. According to Professor Tyree, it

could still apply to instruments that fail to satisfy the definition of a cheque in s 10 of the Cheques
Act.] Although there are other negotiable instruments such as Treasury Notes, these instruments are
not governed by the BEA.

Under s 8(1) of the BEA:

A bill of exchange is an unconditional order in writing, addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on demand,
or at a fixed or determinable future time, a sum certain in money to or to the order of a
specified person, or to bearer.

Section 8(2) states that any instrument which does not comply with these conditions, or which orders
an act to be done that is in addition to the payment is not a bill of exchange. In other words, an
instrument which does not fulfil the requirements laid down in s 8(1), or which is not an unconditional
order to pay, would not qualify as a bill of exchange.

The main elements of a bill are examined in detail below:

(a) Order: The demand to pay must be imperative. In most bills, the order would be phrased as
follows: Pay to X the sum of Y million dollars. Certain phrases have been held by the courts to be
not sufficiently imperative. For example, in Little v Slackford (1828) 173 ER 1120, the court held that
the following words did not constitute an order, but was a request to pay: Mr Little, please to let the
bearer have [seven pounds] ... and you will oblige me. Similarly in Hamilton v Spottiswoode (1849)
154 ER 1182, the court held that the words, [w]e hereby authorise you to pay on our account, were
no more than an authority to pay. These are old authorities and must be treated with some caution.

(b) Unconditional: An order of payment, which depends on the fulfilment of a condition before it can
be enforced, would not be an unconditional order and therefore not a bill of exchange (see also s 8(2)
of the BEA). For example, an order for payment, which is conditional upon the payee signing a form
of receipt annexed to the instrument, is not a bill of exchange (see Bavins Jnr and Sims v London and
South Western Bank [1900] 1 QB 270). See also s 8(3) regarding payment out a particular fund and
when it constitutes an unconditional payment

(c) In Writing: Section 4 has expanded on the meaning of in writing by stating that it includes print.
The Electronic Transactions Act, which was recently passed to legally recognise electronic
communication, does not however apply to bills of exchange and cheques. But this may change when
the BEA is amended to keep pace with electronic commerce. Currently, there is no requirement that a
bill be written on paper and it would appear that it could be written on anything, for eg, paper, bark,
cloth, and even on the side of a cow (as depicted in one cartoon).

(d) Signed by the Person Giving It: The person who signs a bill is referred to as the drawer of the bill.
The drawer performs a dual function: Firstly, the drawer instructs the drawee to honour the bill.
Secondly, the drawer undertakes that on due presentment of the bill to the drawee, it will be duly
accepted (where acceptance is needed) and paid. To be liable on the bill, the drawer must sign on it
with the intention to be bound as such - see s 28(1). Section 97(1) states that it is not necessary that
only the drawer should sign on the bill. It is sufficient if another person places his or her signature on
the bill by his or her authority. In Muirhead and Anor v Commonwealth Bank of Australia (1996) 139
ALR 561, the Queensland Court of Appeal held that the signature on a document is not to be taken as
precluding the signature of an agent. However, if a signature is forged then this element of s 8(1) is
not satisfied. The signature of a firm name by a partner will bind all partners, but if the partner signs
in his or her own name, then only that partner will be liable. In Geo Thompson (Aust) Pty Ltd v
Vittadello [1978] VR 199, a married couple carried on business in partnership under the name
Artitalia. When a bill drawn on Artitalia was signed by the wife in her own name, the court held that
the wife and not the husband were responsible for the acceptance.

(e) Addressed by One Person to Another: Where the drawer and the drawee (the person on whom the
bill is drawn on) of a bill are the same person, the holder (see s 4 for definition) of the bill may treat
the instrument at his or her option either as bill of exchange or promissory note - see s 10(2). The
drawee must be named, or otherwise indicated with reasonable certainty and it may be addressed to
two drawees (see s 11). While a bill may be addressed to two or more drawees, it may not be
addressed to two drawees in the alternative or to a series of successive drawees.

(f) Payment of a Sum Certain in Money: The parties with liability on the bill must be able to know
from the time they become parties, how much they would be liable for and when they would become
liable. Usually the sum payable will be expressed as a single amount in words and figures. Even if the
sum payable is an amount plus interest or bank charges, this particular element is still satisfied - see s
14(1). On the other hand, if the sum payable is expressed as the sale proceeds of my car, the sum
payable lacks certainty. Where more than one sum is expressed to be payable on a bill, then the lesser
sum is taken as the sum payable - see s 14(2). This situation may arise when the words and figures on
the bill differ due to, say, a typographical error.

Problems may arise when the period of interest is expressed to run beyond the maturity of the bill. For
eg., in Rosenhain v Commonwealth Bank of Australia (1922) 31 CLR 46, the document contained the
60 days after sight [i.e., presentment] pay to the order of Caravel Co Inc [amount] value
received, with interest at the rate of 8 per cent pa until arrival of payment in London to cover.
The Australian High Court held that the arrival of funds in London was a pure contingency - it might
or might not happen. As such up to the date of arrival of funds the sum payable was not a sum certain
and the document was therefore not a bill of exchange.

(g) Payable to, or to the Order of a Specified Person or Bearer: This requirement involves a number
of other statutory provisions. Section 13 (3) states that a bill is payable to bearer if it is expressed to be
so payable, or one in which the last indorsement is in blank. For eg., a bill with words such as pay
bearer or pay X or bearer would be a bearer bill. Similarly a bill with the words pay X with an
indorsement in blank would be a bearer bill. Where the payee is a fictitious or non-existing person, the
bill may be treated as a bearer bill - see s 12(3). Determining when a payee is fictitious within the
meaning of that section is not easy - see Bank of England v Vagliano Bros [1891] AC 107, where the
court held that it does not mean that the payee does not exist, but that the bill was never intended for
the payee.

An order bill is defined in s 13(4) as one, which is expressed as payable to order or to a specified
person without words prohibiting its transfer. For eg., a bill with the words pay X or order or pay
X is an order bill. A bill made out to cash or order is not a bill since it does not order payment to a
person or order or to bearer see Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1
QB 794. Contrast this decision with Chamberlain v Young [1893] 2 QB 206, where the instrument
was in the form pay to order [i.e., the name of the payee was left blank], the court held that bill
was expressed payable to the drawers order. Note that a bill may be expressed payable to, or to the
order of joint payees, or to one of several payees in the alternative (eg, pay X or Y or order). A bill
may also be made payable to the holder of an office.

(h) Payable on Demand, or a Fixed or Determinable Future Date: When a bill is payable on demand,
the holder of the bill is entitled to present it at anytime for payment. Under s 15, a bill is payable on
demand if:
it is expressed to be payable on demand;
expressed payable at sight;
expressed payable on presentation;
no time for payment expressed; or
where a bill is accepted or indorsed when it is overdue.

Most bills however are not payable on demand but payable at a fixed future date. Instead of a fixed
future date, some bills are payable at a determinable future date. Under s 16, a bill is payable at a
determinable future time if it is expressed to be payable at a fixed period after date or sight (sight
here refers to presentment of the bill to the drawee for acceptance), or, on or at a fixed period after the
occurrence of a specified event which is certain to happen. The latter case is best illustrated with an
example. If a bill is to be paid 30 days after the death of Mr X, such a bill is payable at a fixed period
after a specified event. The death of a named individual is an event certain to happen, even though it
is not certain when it would happen. If a bill is payable at a date after sight, the bill must be presented
to the drawee for acceptance to fix the maturity of the instrument. In Korea Exchange Bank v
Debenhams (Central Buying) Ltd [1979] 1 Lloyds Rep 548, the UK CA held that a document
expressed payable at a fixed time after acceptance was not a bill as the time for payment was based on
a contingency, in that the drawee may fail to accept the bill.

Earlier we mentioned that bills are either trade or commercial bills. Bills may also be divided into
inland or foreign bills. An inland bill is defined in s 9(1) as one, which is, on the face of it purports to
be, both drawn and payable in Australasia (Australia, New Zealand, Fiji), or which is, or appears to be
drawn within Australasia upon some resident therein. Any other bill is a foreign bill. There is also one
other type of bill mentioned in the BEA, namely, an accommodation bill. Under s 33(1), an
accommodation bill is a bill to which either drawer, acceptor or indorser has become a party without
receiving any value. The purpose of accommodation is usually to finance one or more of the parties to
a bill. Accommodation bills form the bulk of bills traded on the Australian money market.


A bill may be likened to a living thing, which during the course of its life undergoes a number of
different stages. The typical life cycle of a bill comprises the following stages:
Not all bills go through the same life cycle, as some may skip one particular stage. For example, some
bills are presented for payment without being accepted first. The BEA governs each stage of a bills
life and you need to be familiar with the relevant provisions. Each stage of a bills life is examined in
detail below:

1. Drawing
Earlier we learnt that a bill must be drawn in accordance with the requirements laid down in s 8(1) of
the Bills of Exchange Act (BEA). A bill is not invalid by reason of the fact that it is not dated; it does
not specify the value given or that any value has been given; or it does not specify the place where it
is drawn or the place where it is payable - see s 8(4). However it is desirable that such details be
inserted to avoid uncertainty and inconvenience. A bill may be drawn in such a way as to render it not
transferable by negotiation. Section 13(1) states that where a bill contains words prohibiting transfer,
or indicating an intention that it should not be transferable, it is valid as between the parties but is not
transferable. For example, if Pay X only appears on the bill, then it cannot be transferred by

2. Issue
Until a bill of exchange has been properly issued, the various parties (drawers, acceptors, and
indorsers) are not liable on it - see s 26(1). Section 4 defines issue to mean first delivery of a bill
complete in form to a person who takes it as holder. The same section defines delivery to mean
transfer of possession (actual or constructive) from one person to another. What this means is that the
bill must be first put into circulation before it is enforceable. An example of how a bill is issued is

when the drawer delivers it to the payee in exchange for goods. Once a bill is in the hands of a party
other than the drawer, acceptor or indorser, it is presumed until the contrary is proved that the bill was
validly and unconditionally delivered - see s 26(3). In the case of an acceptance, notification of
acceptance would also render the acceptance complete and irrevocable see s 26(1).

3. Acceptance
Requisite for acceptance:
Under s 22, acceptance means that the drawee has assented to the order of the drawer. The acceptance
is invalid unless it complies with the requirements set out in s 22(2). The acceptance must be written
on the bill and signed by the drawee. In practice, most bills are accepted in this manner. However, the
mere signature of the drawee without additional words is still considered sufficient acceptance. The
acceptance must not express that the drawee will perform his or her promise by any means other than
the payment of money.

Requirement for presentment:

A bill has to be presented to a drawee for him or her to indicate acceptance to pay the sum due under
the bill. (Refer to s 46, which contains specific rules relating to presentment.) Until a drawee has
accepted the bill, the bill does not bind the drawee. After the drawee has accepted the bill, the drawee
becomes the acceptor of the bill. Section 44 states when a bill must be presented for acceptance:
where a bill is payable after sight (eg., 30 days after sight)
where a bill stipulates that it is to be presented for acceptance
where a bill is expressed to be payable elsewhere than at the residence or place of
business of the drawee.
Although in all other cases, there is no requirement for presentment for acceptance, it is still useful to
do so before the due date. The object of presentment is to secure the liability of the acceptor and to
obtain immediate recourse against antecedent parties in case of non-acceptance.

Types of acceptance:
Under the BEA, an acceptance may be general or qualified - s 24. A general acceptance means
acceptance without any qualification, i.e., a clear and unambiguous acceptance. On the other hand, a
qualified acceptance is an acceptance subject to some condition. The BEA provides five examples of
qualified acceptance:
payment conditional upon the happening of a particular event;
partial acceptance of the bill;
payment only at a specified place;
payment within a specified time frame;
acceptance by less than all the drawees.

The drawees refusal to accept a bill may involve a breach of contract with the drawer. When a bill is
duly presented for acceptance but is not accepted within the customary time (usually 24 hours), the
person presenting it must treat the bill as dishonoured by non-acceptance - see s 47. Failure to do so
will deprive the presenter of the right of recourse against the drawer and indorsers. However, no right
of action will arise until the holder has given notice of dishonour and protested, where necessary.
Notice may be given in any form in writing or by personal communication to the drawer and any
indorser. Failure to give notice will discharge the drawer and indorsers except against a holder in due
course who became a holder after the failure to give notice. Protest is basically evidence of dishonour
provided by a public notary and is only required for foreign bills.

4. Negotiation
After a bill has been accepted, the holder (usually the payee) of the bill has a number of options. The
holder may hold the bill until maturity and then present it to the acceptor for payment. Alternatively,
the holder may negotiate the bill prior to maturity, i.e., transfer the bill to another party in return for a
sum of money. The method of negotiation depends on the type of bill involved. For a bill payable to

bearer, negotiation is by delivery, and for a bill payable to order negotiation is by indorsement and
delivery. Under s 36(1), when a holder transfers an order bill without indorsing it, the transferee
receives such title as held by the transferor. Although the transferee acquires the right to have the bill
indorsed, until it is indorsed the holder is not a holder in due course and takes the bill subject to

For an indorsement to be valid it must comply with certain conditions - see s 37. At the very least the
indorser (the one who indorses the bill) must sign the bill, usually on the back of it. Such an
indorsement is regarded as an indorsement in blank and the bill becomes a bearer bill - s 39. Apart
from a blank indorsement, there are a number of other recognised types of indorsement:
Special indorsement - Indicates a specific person to whom or to whose order the bill is to be
paid to see s 39. For example, pay John Bloggs or order is a special indorsement and would
require Johns signature before it may be transferred.
Restrictive indorsement - Prohibits further negotiation of the bill, or which expresses that it is
a mere authority to deal with the bill as thereby directed - s 40. For example, pay John
Bloggs only or pay X out of the account of Y is a restrictive indorsement. All subsequent
transferees will have notice of the restriction and thus will not be able to assume the status of
the holder in due course.
Conditional indorsement - Imposes a condition such as pay John Bloggs when he delivers his
Finance Law assignment. The payer of the bill may disregard the condition and payment to
the indorsee (the one to whom the bill is indorsed to) is valid whether or not the condition is
fulfilled see s 38.

5. Payment:
Generally, the holder of a bill is required to present it for payment before the obligation to pay arises.
Failure to do so relieves the drawer and indorsers from liability - s 50(1). However, the acceptor
remains liable on the bill - s 57(1). Presentment must be in accordance with the legal rules set out in s
50(2). For example, where the bill is not payable on demand, then it must be presented on the due
date. Where it is payable on demand, the bill must be presented for payment within a reasonable time
after its issue to make the drawer and indorser liable. What is reasonable depends on the nature of
the bill, the usage of the trade, and the facts of the case.

When a bill of exchange is duly presented for payment, there are two possible outcomes:
(1) The bill is paid - In most cases the party primarily liable on it (namely the acceptor) pays the bill.
The bill is discharged if payment is made in due course. When a bill is discharged there are no longer
any legal rights of action on the bill. The phrase payment in due course is defined in s 64(1) of the
Bills of Exchange Act 1909 (BEA). The definition may be broken down into a number of elements:
paid by or on behalf of the drawee/acceptor;
payment is made to the holder;
at or after the maturity of the bill;
in good faith; and
without notice of any defect in the holders title.

According to Burton, a person who pays in due course receives the same protection as a holder in due
course, but in reverse. The payer is protected from any defects in title of the person presenting it and
the true owner can only pursue the rogue. On the other hand, if the bill is paid by the drawer or
indorser (and not the drawee or acceptor), the bill is not discharged - s 64(2). If the drawer makes
payment, the drawer is entitled to enforce payment against the acceptor. And if the indorser pays the
bill, the indorser may proceed up the chain against the prior indorsers, the acceptor and the drawer.

(2) The bill not paid - In some cases, the party obligated to pay (usually the acceptor) may refuse to
pay, in which case the bill is dishonoured by non-payment - s 52(1). An immediate right of recourse
against the drawer and indorser accrues to the lawful holder - s 52(2). In other words, the holder may
sue the drawer and anyone else who signed on the bill for the amount of the bill. The holder must give

notice of dishonour to the drawer and each indorser - s 53, and where necessary, protest the bill.
Protest is only needed for foreign bills. Any drawer or indorser of a bill to whom notice (or protest) is
not given is discharged from liability.

Other forms of discharge, apart from payment, are merger, waiver or renunciation, cancellation, and
alteration. Of the four alternative methods of discharge, the alteration is the most significant. Under s
69, where a bill or acceptance is materially altered without the assent of all parties liable on it, the bill
is avoided. The altered bill is however valid against the party who made, authorised or assented to the
alteration and subsequent indorsers. The following alterations are material: alteration to the date, the
sum payable, the time of payment, place of payment, and where the bill has been accepted generally,
the addition of a place of payment. Where the alteration is not apparent and the bill is in the hands of a
holder in due course, the holder may enforce it according to its general tenor. In Automobile Finance
Co of Australia Ltd v Law (1933) 49 CLR 1 at 10, the High Court explained what apparent alteration
meant: it should be apparent upon inspection of the bill that its text has undergone some change.


In this lecture we will look at the rights and liabilities of various parties when a bill of exchange is
dishonoured either by non-payment (or non-acceptance which is more rare). We will start with the
rights of parties:

Rights of Parties:
The first question that will arise when a bill is dishonoured is who should have the right to sue on the
bill. Generally, when a bill is dishonoured the lawful holder may sue the various parties liable on the
bill in his or her own name - s 43(1)(a). The rights that a party may have against parties liable on the
bill depend on the status of that party. If the party is a holder or holder for value, the rights will be
more limited than if the person is a holder in due course. For example, a mere holder takes a bill
subject to defects in title.

Before examining the rights of the holder in due course in detail, it is necessary at the outset to
differentiate between a 'holder', a holder for value' and a holder in due course'. The holder of a bill
is defined in s 4 as the payee or indorsee of a bill who is in possession of it, or the bearer. For
example, a person in lawful possession of bill made out to bearer is a holder. Similarly, if an order bill
is made out to John Smith, if John Smith is in possession of it, he is the holder. But what if John
Smith indorses the bill to Joe Bloggs and Jane Doe is in possession of it? Is she the holder? She is not
as she is not the indorsee. Similarly, if an indorsement is forged, the holder is not the holder within the
meaning of s 4. Finally, the holder of a bill need not be the one to have given value. As such, a person
who receives a bill as a gift is also a holder.

A distinction is drawn between a mere holder and a holder for value. Where the holder has given
value for the bill or has a lien on it, the holder is deemed to be a holder for value - ss 32(2) and
32(3). For the definition of value you should refer to ss 4 and 32(1). Value means valuable
consideration i.e., any consideration sufficient to support a simple contract may constitute value. A
person who purchases a bill from a payee would be an example of a holder for value. Even if the
holder has not given value, as long as value has been given by one of the antecedent parties, the
holder is a holder for value. For example, if A transferred a bill to B for value and B also transferred
the bill to C for value, but C gave the bill as a gift to D, D cannot sue C but can sue A and B. Not
every holder for value is a holder in due course. For example, a holder who has not given value for an
irregularly indorsed bill is not a holder in due course.

To be a holder in due course there must be an absence of notice of defects of title in remote
transactions. Every holder of a bill is prima facie (on the face of it) deemed to be a holder in due
course - s 35(2). The holder in due course enjoys the highest level of privilege accorded to a holder,

since he or she holds the bill free from any defect of title of prior parties, as well as from mere
personal defences available to prior parties among themselves - ss 43(1)(b). For example, in Guaranty
Trust Co of New York v Hannay & Co [1918] 2 KB 623, the court held that a bill of exchange could
be enforced against the acceptor even though the bill was accepted under the mistaken belief that an
attached bill of lading (a document used in shipping to transfer title in goods) was genuine.

The holder in due course will be able to enforce payment against all parties liable on the bill. Apart
from these advantages, there are a number of provisions in the BEA which assist the holder in due
course to prove his or her case - see for e.g., ss 26(2), 59(b), 60(1)(b), 60(2)(b). It should be pointed
out that a holder in due course is a status in respect of rights against remote parties. It does not apply
when exercising rights against an immediate prior party. As an application of this principle, the payee
of a bill can never be a holder in due course. This proposition received judicial recognition in Jones
Ltd v Waring and Gillow Ltd [1926] AC 670. However, a payee can become a holder in due course if
the bill is subsequently negotiated to the payee as was the case in Jade International Steel Stahl and
Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] All ER 104.

The necessary ingredients to constitute a person a holder in due course are set out in s 34(1):

First, the party must be a holder of the bill who has taken the bill. The definition of a holder is
found in s 4. Taken is interpreted to mean that the bill has been negotiated to him or her. That
is why the payee of a bill cannot be a holder since bill was never negotiated (i.e. transfer by
delivery or indorsement and delivery in exchange for value) to him or her.
Second, the bill must be complete and regular on the face of it. For example, there must be
nothing on the bill to arouse suspicion, such as an irregular indorsement. In Arab Bank Ltd v Ross
[1952] 2 QB 216, a bill was drawn in favour of F & FN Company but was indorsed F & FN.
The court held that the indorsement was irregular.
Third, the bill must not be overdue. Under ss 41(2) and (5), a party cannot be a holder in due
course if the party takes the bill after the bills maturity date or if there is notice of dishonour.
Fourth, the bill must be taken in good faith. Section 96 states that a thing is deemed to be done
in good faith if it is done honestly, regardless of whether it is done negligently.
Fifth, the bill must be taken for value. For value means valuable consideration see s 4. Under
s 32(1)(b), consideration includes past consideration.
Sixth, the bill must be taken without notice that it has been previously dishonoured, or without
notice of any defect in title of the person who negotiated it see s 34(2).

Liability of Parties:
The second question that will arise when a bill is dishonoured is which party should be liable on the
bill. Section 28(1) attaches liability to anyone who signs on a bill. That party may either be the
drawer, acceptor or indorser - ss 59, 60, 61. Both sections 60(2) and 61 refer to the liability of an
indorser. But s 61 is different from s 60(2) in that the former refers to a person who indorses a bill as a
stranger. An example of a stranger is a person who backs a bill to strengthen its creditworthiness.
Such a person incurs liabilities of an indorser to a holder in due course and not to other holders (see H
Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159). Another example of a stranger is a person who
signs the back of a cheque when lodging it for collection on behalf of the payee or indorsee. Even
though such a person has no title to the cheque, he or she is liable to a holder in due course.

Where a person signs a bill in a trade or assumed name, he or she is liable as if he or she had signed
on the bill see s 28(2). For example, if X signs a bill in Ys name, then X is liable as though X
signed in his or her own name. According to Professor Goode, rights flow backwards and liabilities
forward under the BEA. What this means is that claims on a bill can only be brought against prior
parties, while liabilities are owed to subsequent parties. Suppose we have a bill drawn by B on A and
indorsed for value to C, which in turn indorsed it for value to D. D, if a holder in due course can sue
C, B and A. Similarly, if C is compelled to pay D, C can sue B and A. The party primarily liable on

the bill is the acceptor, except where the bill is an accommodation bill (here the acceptor acts as a
surety for the party accommodated).

Problems arise when the signature on a bill is forged or unauthorised. According to Burton, this is one
area of the law of negotiable instrument, which follows the general rule of property ownership, and no
special concession is made even to the holder in due course. As a general rule, a forged or
unauthorised signature is wholly inoperative - s 29. The only qualification to this rule apart from
ratification of the unauthorised signature is when the party whose signature is abused is estopped from
claiming that the signature has been forged or unauthorised (see Greenwood v Martins Bank [1933]
AC 51).

The legal consequences flowing from a forged signature depends on whose signature was forged. If
the drawers signature was forged, then the document is not a bill of exchange, as it does not satisfy
the form requirement laid down in s 8(1). However the acceptor and indorsers are still obliged to
honour the bill if the holder is a holder in due course. This is because under s 59(b) the acceptor
cannot deny to the holder in due course the genuineness of the drawers signature, while under s
60(2)(b) the indorser cannot deny to a holder in due course the genuineness of the drawers signature
or the signature of all previous indorsers. If the drawees signature is forged the document is still a bill
of exchange even though the drawee is not liable on it - s 58. Similarly, if the indorsers signature is
forged, the document is still a bill of exchange, but the indorser is not liable.

Where the indorsement on an order bill is forged or unauthorised, it is ineffective to transfer the bill
by negotiation. The forgery or lack of authority breaks the chain of title and the person taking the bill
is not a holder as defined in the BEA and has no rights against the parties in the chain prior to the
forged or unauthorised signature. The true owner of the instrument may sue in conversion (see below
for discussion of conversion) to recover the instrument as a tangible property. If the acceptor pays the
person taking the bill after the forged or unauthorised signature, the payment is not in due course and
the bill is not discharged. It is also important to mention here that if a person loses his or her right to
sue on a bill, the person still have rights at common law. For example, if the goods are not paid, the
seller may sue for breach of contract. It is also possible, depending on the facts of the case, to sue the
transferor for misrepresentation.

Sometimes a bill is transferred by delivery without indorsement. This would happen when the bill is a
bearer bill. The holder of a bearer bill (not order bill) who transfers it by delivery is called a transferor
by delivery see s 63(1). Such a person is not liable on the bill (s 63(2)) because he or she did not
sign the bill. (Earlier we learnt that a signature is essential for liability under s 28(1).) However, a
transferor by delivery warrants to the purchaser of the bill that he or she has title to the bill, the bill is
what it is, and that he or she is not aware of any defect that makes the bill valueless. If any of these
warranties turn out not to be true, the transferor by delivery would be liable to the transferee for
damages for breach of warranty. For example, if the bill turns out to be worthless, the transferee may
sue for the amount paid for the bill.


Now we will look at what happens when a bill is stolen or converted. The rules that apply are
different from those that apply when a bill is dishonoured. When a bill is stolen, the true owner of the
bill may try to recover the bill or the money paid. The expression true owner is not defined in the
BEA or the Cheques Act. But essentially any person who can maintain an action in conversion is the
true owner. There are basically two actions available to the true owner of a bill (applies also to other
negotiable instruments) against a person who makes payment, receives payment, retains or deals with
the bill contrary to the true owners rights. The two actions are an action in conversion and an action
for money had and received. Often both actions are taken together.

The essence of conversion is dealing with a chattel in a manner repugnant to the immediate right of
possession of the person who has the property or special property in the chattel: Penfolds Wines v
Elliott (1946) 74 CLR 204 at 229. Conversion is a tort of strict liability and any inconsistent dealings,
however innocent, would amount to conversion. So for example, if a financial institution pays a stolen
bill it can be sued in conversion, even if it is not aware the bill was stolen. For the purpose of
conversion, the bill is treated as a chattel as per Lloyds Bank Ltd v Chartered Bank of India, Australia
and China [1929] 1 KB 40, at 55-56 and the true owner may recover the face value of the bill. To sue
in conversion, the plaintiff must be in actual possession of the goods or have an immediate right of
possession (see Bute (Marquess) v Barclays Bank [1955] 1 QB 202. A person in actual possession of
goods may not be the owner of the goods. Even if a person does not have actual possession of goods,
he or she may nonetheless have an immediate right to possession of those goods.

In Australian Guarantee Corporations Ltd v Commissioners of the State Bank of Victoria [1989] VR
617, the court held that the drawer of a cheque who gave it to a broker to be handed over to the payee
remained entitled to immediate possession of the cheque until it was delivered to the payee. In
Midland Bank Ltd v Reckitt [1933] AC 1, a solicitor who had a power of attorney to sign cheques on
behalf of his client fraudulently issued cheques in his name and banked them with the defendant.
When the client sued the defendant for conversion, the defendant argued that the client was not
entitled to bring the action as the cheques were in the solicitors name. On appeal to the House of
Lords, it was held that the true owner is the person entitled to the property in or possession of the
instrument and not the person to whom it is made payable.

It is customary for the person bringing an action in conversion to make an alternative claim for money
had and received. However, the successful plaintiff is only entitled to one set of damages. The claim
for money had and received is a restitutionary claim based on the principle of unjust enrichment:
Westdeutsche Landesbank Girozentrale v Islington BC [1996] 2 All ER 961. Unjust enrichment has
three elements:
The defendant received a benefit;
The benefit was obtained at the expense of the plaintiff; and
The retention of benefit would be unjust.
Satisfaction of all three elements, assuming there is no defence applicable or available, is necessary
for a claim in restitution to succeed.There are circumstances where it is advantageous to claim under
money had and received, such as when the instrument is not a bill of exchange (i.e. does not comply
with definition) and nominal damages is likely to be awarded if the plaintiff succeeds in an action in


Like bills of exchange, promissory notes are negotiable instruments. However, they differ in one
major respect - promissory notes involve only two parties (the maker and the payee), while bills of
exchange involve three parties (the drawer, the drawee/acceptor and the payee). Since a promissory
note is signed by the maker and not accepted by, or drawn on a drawee, it does not fall within the
definition of a bill of exchange. Section 10(2) of the Bills of Exchange Act 1909 (Cth) (BEA) provide
that where the drawer and drawee of a bill of exchange are the same person, or the drawee is a
fictitious person or lacks legal capacity, the holder may treat it as a note.

Promissory notes are used mainly for raising finance in the debt markets. A modern version of the
promissory note is the commercial paper. Many large Australian private sector corporations and
public authorities have issued promissory notes to finance their credit requirements. In July 2003, for
example, money market dealers held commercial paper and promissory notes to the value of $523

million. Market participants sometimes refer to promissory notes as one-name paper as their value
lies in the strength of the maker (unlike bills of exchange which are dependent on the strength of the
acceptor and to a lesser extent, the drawer).

Sometimes promissory notes are issued to secure the payment of instalments due under lending
agreements and other commercial transactions. Apart from the fact that these notes can be discounted
by the payee in the money market, the notes also provide an effective means for instituting action to
recover the amounts due. This is because an action on a note can be instituted by summary procedure
and only limited defences based on the underlying transaction can be raised against the holder of the
note. For example, a claim for damages for failure to supply goods of acceptable quality cannot form
the basis of a defence to an action on a note made for the price of the goods supplied. What this means
is that the promisor must pay first and claim damages later.

There are a number of reasons why promissory notes (notes) are used widely in Australia:

First, notes are attractive to well-established companies since they enjoy better credit ratings.
They also have little difficulty obtaining underwriting facilities. The cost of raising finance
through notes generally depends on the credit standing of the maker. The stronger the standing,
the lower the interest paid.

Secondly, using notes is less expensive than bills as there is no need for intermediaries such as
financial institutions to accept or indorse the notes. Financial institutions are only involved as part
of a syndicate underwriting the issue of the notes.

Thirdly, notes may be transacted without incurring secondary/contingent liability and are
therefore more attractive to money market dealers. Most notes are issued in bearer form.

Fourthly, notes (with very few exceptions) are exempted from stamp duty.

Fifthly, notes are negotiable instruments and therefore easily transferable. Other debt securities
are not negotiable instruments and transferees of these instruments take subject to prior equities.

Lastly, notes may be issued as floating rate or fixed rate instruments and could be backed by

The BEA governs promissory notes even though they are not bills of exchange - see s 95. Most of the
BEA provisions (with the necessary modifications) apply to promissory notes. But because there is no
acceptor for promissory notes and also because notes are not used for trade, the provisions in the BEA
relating to presentment for acceptance, acceptance, and bills in set, have no applicability to
promissory notes.

The maker of a note, as the party primarily liable on the note, corresponds with the acceptor of a bill.
The first indorser of a note, as the party with secondary liability on the note, corresponds with the
drawer of an accepted bill payable to the drawers order. You need to bear these two points in mind
when applying the provisions of the BEA to promissory notes - see s 95(2). So for example when
suing the first indorser of a note you will rely on s 60(1) instead of s 60(2). But subsequent indorsers
will be sued under s 60(2).

A promissory note is defined in s 89 (1) of the BEA as:

[A]n unconditional promise in writing made by one person to another, signed by the maker, engaging
to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order
of a specified person, or to bearer.

If you examine the above definition carefully, you will notice that in many respects it resembles the
definition of a bill.

It is possible to breakdown the definition of a promissory note into the following elements:



by one person to another

signed by the maker

engaging to pay on demand at a fixed or future determinable time

a sum certain in money

to or to the order of a specified person, or to bearer.

The requirement that a promissory note be in the form of a promise to pay distinguishes it from a
bill of exchange and other commercial paper such as an I.O.U. A bill of exchange is an unconditional
order and an I.O.U. is an acknowledgement of a debt to be paid in the future. On the other hand, a
promissory note is an undertaking to pay on demand, or at a fixed or determinable future time. In
Akbar Khan v Attar Singh [1936] 2 All ER 545, the issue was whether the following document, which
was stamped as a receipt, was a deposit receipt or promissory note:

This receipt is hereby executed by [D] for Rs 43,900 received from [a firm] for and on
behalf of [P]. This amount is to be payable after 2 years. Interest at rate of Rs 5-4-0 per cent
per year to be charged

The court held that the document was a receipt and not a promissory note because it did not contain an
undertaking to pay and an implied promise to pay is not sufficient.

Opinion appears to be divided on whether an agreement to pay on or before a specified date falls
outside the definition of a promissory note. In Gore v Octahim Wise Ltd [1995] 2 Qd R 242, the
plaintiff executed two documents entitled Promissory Notes, one payable on 31 December 1988 and
the other 31 December 1989. Both documents contained an unconditional promise to pay the principal
sum with interest on the maturity date. But they allowed the promisor to repay the principal sum in
whole or in part at any time without premium or penalty. The notes were presented on the specified
maturity dates and dishonoured. The court held that the contingency as to time of payment introduced
such uncertainty as to make illusory their negotiability. As such the documents were not promissory
notes within the meaning of s 89(1). On the other hand, in ASIC v Emu Brewery Mezzanine Ltd (2004)
52 ACSR 168, Simmonds J held that the possibility of prior part payment did not destroy the status of
notes as promissory notes. This decision was upheld on appeal by the Supreme Court of WA (see
Emu Brewery Mezzanine Ltd (In Liq) v ASIC [2006] WASCA 105).

Section 89(3) provides that a note is not invalid by reason only that it also contains a pledge of
collateral security with authority to sell or dispose of the note. In other words, this sub-section allows
a promissory note to have incorporated into it a pledge of collateral security with authority to sell or
dispose of the security. Unless, transfer of the note is accompanied by physical transfer of the
property it may not be possible to have a traditional pledge. Everett and McCracken have suggested
that the expression pledge refers to a charge rather than the traditional possessory security. One way
of securing the notes is to get a bank to issue a letter of credit and get a third party to hold in trust for
the holders of the notes.

Under s 91, a promissory note may be made by any number of makers who may be liable on it jointly
and/ or severally. Generally if a note states I promise to pay but is signed by two persons, it is
deemed to be a joint and several note. This is to be contrasted with a note, which states: We promise
to pay. It has been suggested by some commentators that liability of the makers of such a note is joint

Section 90 states that a promissory note is inchoate and incomplete until it has been delivered to the
payee or bearer. This is because it is an empty promise until completed by delivery. Similarly, a note
payable to the makers order is not a note within the meaning of the BEA until the maker has indorsed
it. Before that the maker has done nothing but promise to pay herself. But when the note had been
indorsed, the benefit of the promise to pay is negotiated to a third party. How a note is negotiated
depends on whether it is made payable to order or bearer - see ss 36 and 37.

Where a note payable on demand has been indorsed it must be presented for payment within a
reasonable time of the indorsement. Otherwise, the indorser is discharged - s 92(1). What is
reasonable depends on the usage of the trade, nature of the instrument and the facts of the case - s
92(2). Section 92(3) provides that a note payable on demand, which is negotiated, is not deemed to be
overdue, for the purpose of affecting it with defects of title of which the holder has no notice, by
reason that it appears that a reasonable time for presenting the note for payment has elapsed since its
issue. The reason is that the law recognises that on demand promissory notes are frequently given by
way of security and withheld from presentment for long periods of time. This was dealt with in Scott
(SA) Pty Ltd v Dawson [1962] NSWR 1166. However, the legal position is different for bills of

Under s 93(1) it is not necessary, save for one exception, to present the note to make the maker liable
in it. The exception is when the note requires presentment for payment at a particular place. Normally
a particular place should be a specified address. In Eimco Corp v Tutt Bryant [1970] 2 NSWR 249,
the note was payable at Salt Lake City. The court held that Salt Lake City was not a particular place
as it was too general and therefore presentment for payment was not necessary. But, under s 93(2),
presentment of the note is necessary to make the indorser of a note payable (same as for bill of
exchange). Section 94 provides that the maker of a note engages that he or she will pay it according
to its tenor and is precluded from denying to a holder in due course the existence of the payee and his
or her then capacity to indorse.



It is not uncommon for people buy goods and services on credit. They do so for various
reasons, but a common one is the lack of funds. Credit is given in a number of ways. Suppose
X wants to buy a car for $5,000, credit may take the form of a loan from a bank.
Alternatively, the car dealer may allow X to pay for the car in regular instalments under a hire
purchase arrangement. By doing so, the car dealer is acting as the credit provider. A third
approach is for X, to pay for the car by credit card. When payment is by credit card, Xs card
issuer is acting as the credit provider. Regardless of how credit is provided, X has to repay
the credit advanced with interest and charges before the end of the agreed period.

Credit may be advanced solely on the basis of Xs promise to repay, or it may be advanced
on a secured basis. If X is a consumer, the credit contract and related contracts (such as the
mortgage contract, if there is one) will be regulated by consumer credit law. In this segment
of the unit we will focus on the key provisions of the National Credit Code, as it is the most
important piece of legislation governing consumer credit in Australia. It is relevant to all of
us, as it is conceivable that sometime within our lifetime we will be borrowing money for our
personal use. The money that we borrow could take the form of a housing loan, acquisition of
goods on hire purchase, or paying the minimum balances of our credit card accounts. If we
carry on business and extend credit to consumers, the provisions of the Code may also apply
to us. In other words, you do not need to be employed in banking or finance to be affected by
the Code.


Traditionally, consumer credit in Australia was regulated according to the form of the credit.
There were 11 forms of consumer credit and each was subject to its own set of laws. This
made the law on consumer credit undesirably complicated for consumers and credit
providers. Following publication of the Molomby Committee Report in 1972, South Australia,
Victoria, New South Wales, Western Australia and the Australian Capital Territory passed
legislation to modernise and standardise their credit laws. But these goals were not achieved
as the laws passed by the states and territories (collectively referred to as the Credit Acts)
were generally complex, inflexible and prescriptive. To make matters worse, their coverage
was limited and the penalties for non-compliance severe.

In May 1993, the governments of all the Australian states and territories agreed to adopt
uniform credit laws. Under the Uniform Credit Laws Agreement of 1993, they agreed to the
introduction of a uniform credit law to take effect on 1 November 1996. Queensland would
enact legislation which other states would follow, or at least maintain consistency with. All
states and territories except Western Australia (WA) applied the Queensland Code as local
law. Instead of adopting application of laws legislation, WA adopted the alternative
consistent legislation option by enacting the Consumer Credit (Western Australia) Act 1996
(Act), which was a slightly modified version of the Code introduced in Queensland. The
legislative scheme was referred to as the Uniform Consumer Credit Code (UCCC).

From 09 July 2003, as a result of amendments to the Consumer Credit (Western Australia)
Act 1996, the Queensland Code applied as the law in Western Australia. Despite adopting the
Queensland Code, Western Australia retained some differences. Subsequent amendments to
the Queensland Code would only apply as law in Western Australia following publication of
an Order in the Gazette by the Governor. The Order cannot be made unless each House of
Parliament first approved a draft of the Order. The Productivity Commission in its 2008
Report recommended that responsibility for regulation of consumer credit be transferred to
the Commonwealth. In July 2008, the Council of Australian Governments agreed that the
Commonwealth would assume responsibility for all consumer credit products.

The key plank in the new legislative regime for consumer credit is the National Consumer
Credit Protection Act 2009 (Cth) which commenced operation on 1 April 2010. It introduced
a number of important changes to the regulation of consumer credit. The National Credit
Code which replicates the Uniform Consumer Credit Code is contained as a schedule to the
National Consumer Credit Protection Act (NCCPA). The changes were introduced in stages:
the first between 1 July 2010 and 1 October 2011, and second, between 1 July 2011 and 1
July 2012. Further changes were made with the enactment of the Consumer Credit
Legislation Amendment (Enhancements) Act 2012 (Cth).

Although we will be focusing on the provisions of the National Credit Code, it is also
important to be familiar with some of the key changes introduced by the NCCPA:

Shift of consumer credit regulation from state-based law to national law with the NCC
replacing the UCCC.
Transfer of responsibility for administration of the NCCPA to the Australian
Securities and Investments Commission (ASIC). ASICs role is not confined to
ensuring compliance with the Code but extends to regulating who should engage in
credit activities through its registration/licensing regime. It also has very broad and
extensive powers and can avail itself of a wide range of remedies.
All persons (subject to a number of exemptions, such as employees of a licensee and
car dealers) who engage in credit activities, must initially be registered with ASIC and
subsequently hold an Australian Credit Licence.
Credit assistance providers (e.g. finance brokers), credit providers and lessors are
subject to general conduct requirements including responsible lending obligations:
o They must, for example, provide a credit guide to a consumer as soon as soon
as it becomes apparent that they will be providing credit assistance to, or
entering into a credit contract/lease with the consumer.
o They must also not provide credit assistance to enter into, or enter into a credit
contract/lease with the consumer that is unsuitable for the consumer. This
obligation requires credit assistance providers, credit providers and lessors to
make unsuitability assessments of their potential clients. A credit contract
/lease is unsuitable if it does not meet the consumers requirements/objectives,
or the consumer will be unable to comply with the financial obligations or can
only do so with substantial hardship (if the consumer has to sell his or her
principal place residence to meet the financial obligations then it is presumed
that the consumer can only meet the obligations with substantial hardship).
Mandatory membership of an ASIC approved external dispute resolution scheme for
all credit providers and providers of credit-related services and advice.
The extension of consumer credit regulation to loans provided in relation to
investment properties.

The banning of unsolicited credit limit increases invitations by credit providers
without the express consent of the consumer.
The banning of exit fees on home loans for contracts entered after 1 July 2011.
Prohibitions on short term credit contracts and additional protection for pay day


The Code essentially lays down rules that regulate the credit provider's conduct throughout
the life of the loan and allows competitive forces to provide price restraint. Significant
redress mechanisms are available to borrowers in the event the credit providers fail to comply
with the Code. Before discussing the provisions of the Code in detail, it would be useful to
briefly describe the Codes main features:

The Code regulates all consumer credit transactions regardless of the form of the
transaction. It regulates the following types of consumer contracts: continuing credit
contracts (e.g. overdrafts and credit cards); hire purchase agreements; consumer
leases; personal loans; housing loans).
The Code differentiates between consumer credit and commercial credit by looking at
the purpose of the loan. It applies where credit is provided wholly or predominantly
for personal, domestic or household purposes. But unlike its predecessor (i.e., the
UCCC), the Code applies to credit for the purchase, renovation, or improvement of
residential property for investment purposes. However, it does not apply to credit
provided predominantly for a business or non-residential investment purpose.
The Code does not have either an upper monetary limit or a minimum interest
threshold, but Regulations made under the Act may prescribe a maximum annual
percentage rate. It is not limited to credit provided by financial institutions and applies
to credit provided in the course of a credit business or some other business.
The Code also regulates transactions associated with credit contracts (such as
contracts for sale of goods or services, contracts of specified kinds of insurance, and
mortgages and guarantees given to secure repayment under a credit contract) and
consumer leases.
Although the concept of consumer credit is the key to deciding whether a
transaction is regulated under the Code, yet surprisingly the Code does not define the
meaning of consumer credit. Instead it defines those conditions that must be
satisfied before a credit contract is regulated by the Code.
Benefits to consumers include pre-contractual disclosures, assistance for reasonable
cause (like illness or unemployment), notice of intended legal action, access to court
or tribunal for determination whether contract unjust, and imposing liability on linked
credit providers for vendors breach of contract and misrepresentations.




JULY 2010.)

Before invoking the provisions of the Code, you need to first make a determination whether
the Code applies to the particular transaction. If the Code does not apply, you will have to fall
back on the general law and any applicable legislation for that particular transaction.

You should start by analysing the definition of credit contract found in the Code. Section 4
of the Code provides that a credit contract is a contract under which credit is, or may be
provided, and the Code applies to the provision of credit. Things that you need to satisfy
yourself are that there is a contract; credit is provided under the contract; and the credit is
regulated by the Code.

Section 3(1) states that credit is provided if under the contract payment of a debt owed is
deferred, or a deferred debt is incurred. Both types of debts must be absolute debts and not
contingent debts to qualify as credit. (Absolute debts are debts where the consideration from
the other party has been executed. In the case of a contingent debt, the sum of money
becomes payable only upon the occurrence of certain circumstances.)

The Code only applies to the provision of credit if all of the criteria set out in s 5(1) have
been satisfied:

1. The debtor is a natural person ordinarily resident in this jurisdiction, or a strata

corporation formed in this jurisdiction when the contract was entered into.2 The
objective of including strata corporations is to ensure that owners of villa units and
flats are not denied the protection of the Code.

2. The credit provided, or intended to be provided, is wholly or predominantly (a) for

personal, domestic or household purposes; or (b) to purchase, renovate, or improve
residential property for investment purposes; or (c) to refinance credit provided
wholly or predominantly to purchase, renovate or improve residential property for
investment purposes.3

3. There appears to be two tests used to determine the purpose for which credit is
provided. First, there is the objective test which looks at what a reasonable person
standing in the shoes of the credit provider would have understood the predominant
purpose for which the credit was provided. This was the approach adopted in Rafiqui
and Thomas v Wacal Investments Pty Ltd4, a case which involved the purchase of land
by a couple to have a place to live and to continue an interest in growing vegetables
for family consumption. The court decided the usage that the land was to be put to
was sufficient to satisfy the predominant purpose test. This is the preferred approach.
The second test looks at the substance of the transaction. In other words, it looks at
the way the credit was ultimately used. This was the approach used in Likenholt Pty

See Shah v Barnet London Borough Council [1983] All ER 226 at 235, per Lord Scarman: ordinary
residence refers to a mans abode in a particular place or country which he has voluntarily adopted and for
settled purpose as part of the regular order of his life for the time being, whether of long or short duration. His
Lordship went on to add that a man cannot rely on his unlawful residence as constituting ordinary residence .
See s 13(1) of the Code: There is a general presumption that the Code applies to credit contracts, guarantees,
and mortgages in any proceedings where the party claims that the Code applies.
(1998) ASC 155-024.

Ltd v Quirk (2000) ASC 155-040. There a loan taken by a borrower to replace his
liability under a personal guarantee of a loan to a company of which he was a director
was held not to constitute credit for personal purposes. The problem with this
approach is that until the funds are actually used, it would not be possible to be certain
about the purpose of the credit.

a. If, before entering into the contract, the debtor signs a business purpose
declaration that the credit is wholly or predominantly for a purpose that is not a
Code purpose, it is presumed not to be provided for personal, domestic or
household purposes, unless the contrary is established (s 13(2)). However, such a
declaration is ineffective if the credit provider knew or had reason to believe, or
ought to have known or have reason to believe, at the time the declaration was
made, that the credit was in fact to be applied wholly or predominantly for a Code
purpose. (See Queensland v Shark [2002] QSC 171 where a loan shark forced his
customers to sign business purpose declarations.) This is to protect a debtor from
being tricked into signing a declaration. If a declaration is signed, it must be in the
form laid down by regulation (i.e., in prescribed form).

b. Under circumstances where the credit is used for more than one purpose, s 5(4)(a)
states that if more than half the credit is used for a Code purpose, or if the purpose
for which the credit is to be used most is a Code purpose, then the credit comes
under the Code (see Permanent Custodians Ltd v Upston [2007] NSWSC 223).

c. Section 13(1) places the onus of proof on the credit provider to prove that a credit
contract is not covered by the Code, if the other party claims that the Code

4. A charge is or may be made for providing the credit. Charge covers not just interest
but also charges imposed in connection with the provision of credit such as
establishment fees, account-keeping fees, and any other administration fee. If no
charge is imposed for providing the credit, the credit will not be regulated by the

5. The credit provider provides the credit in the course of a business of providing credit
(e.g., a bank), or as part of or incidental to any other business of the credit provider
(e.g., a retailer providing credit for its customers). Business is not defined in the
Code and the existing authorities suggest that the meaning depends upon it context.5
While system and regularity are important, they are not themselves definitive.6 In the
course of business suggests that a private loan to a friend or family member would
not fall within this criterion.

Section 191 of the Code provides that any attempt to contract out of the Code is void and an
offence carrying a penalty of 100 penalty units. For example, it is not possible for the credit
provider to include a provision in the contract stating that the civil penalty provisions will not
apply to any contravention. Similarly, a debtor may not indemnify a credit provider for any
fines imposed non-compliance with the Code.

Federal Commissioners of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 378-379.
Hungier v Grace (1972) 46 ALJR 492 at 494.

Even if ss 3-5 have been satisfied, the credit contract may still be excluded from the
application of the Code if it falls within one of the classes of excluded contracts. Section 6 of
the Code excludes the following categories of credit contracts from regulation:

Short-term contracts (any credit that must be repaid within 62 days from the time it is
provided and fees/charges do not exceed 5% of the credit and interest charges do not
exceed an annual percentage rate of 24%).7
Credit without prior arrangements (e.g. unauthorised overdrafts or savings accounts
that fall into debit). If a creditor charges interest for an overdue account, it is not a
charge, and creditor need not register as credit provider.
Credit under a continuing credit contract for which only an account charge is payable
(s. 6(5) states that an account charge is a periodic or fixed charge that does not vary
with the amount of credit provided under a continuing credit contract).
Joint debit and credit facilities (e.g., a cheque account with an overdraft facility).
Margin loans as defined in s 761EA (1) of the Corporations Act 2001 (Cth).
Bill facilities, insurance premiums by instalments, credit provided by pawnbrokers,
credit provided by the trustee of an estate, employee loans, and credit excluded by

As mentioned earlier, the Code does not just apply to credit contracts but also to several other
categories of contracts. Below is a brief description of each category of contract, other than
credit contracts, regulated by the Code:

Mortgages given by natural persons or strata corporations that secure obligations

under a credit contract or related guarantee - s 7(1). Mortgage is given a broad
definition in s 204 and includes interests that would not normally be regarded as
constituting mortgages or security. The property subject to the mortgage may be
business or investment property.
Guarantees given by natural persons or strata corporations which guarantee
obligations under a credit contract - s 8(1). Guarantee is defined in s 204 to include
indemnities, except those arising from contracts of insurance. The differences
between an indemnity and a guarantee have been discussed earlier.
Consumer hire purchase - described in s 9(1) as a contract for the hire of goods where
the hirer has a right or obligation to purchase the goods. It is governed by the Code
because the law recognises that a hire purchase transaction is nothing more than a
consumer financing transaction. Under the Code the legal nature of a consumer hire
purchase contract is transformed into a sale of e goods by instalments secured by a
mortgage over the goods. The owner becomes the credit provider/mortgagee, the hirer
becomes the debtor/mortgagor, and the amounts payable under the contract become
the instalment payments.
Consumer lease - described in s 169 as contracts for the hire of goods where the hirer
does not have the right or obligation to purchase the goods. Equipment subject to a
higher than normal rate of obsolescence are usually leased.

With effect from 1 March 2013, there are special rules governing short term and small amount contracts. For
example, loans of $2,000 or less have their own fee limits. Short term loans of $2,000 and less repayable in 15
days or less are banned, except if the credit provider is an ADI.


At the formation stage of the contract, the credit provider must provide the debtor with
certain documents. Under s 16, the credit provider must not enter into a credit contract unless
the credit provider has given the debtor (a) a pre-contractual statement containing the matters
required by s 17, and (b) an information statement of the debtors statutory rights and
obligations. Both statements must be given before the contract is entered into, or before the
debtor makes an offer to enter into the contract, whichever comes first. The pre-contractual
statement sets out financial details of the proposed transaction and is meant to enable the
debtor to make an informed decision regarding credit. It must contain the information
required by s 17. The financial information specified by regulations must be set out in the
prescribed form of a financial table. As this information must also be included in the credit
contract, the credit provider can simply provide a copy of the credit contract to the debtor.
The information statement contains information about the debtors statutory rights and
obligations. Both statements must be in the form prescribed by regulations.


Section 14 requires a credit contract to be in writing and signed by the debtor and credit
provider. The credit contract may be in the form of a written contract document signed by
both parties, but typically, the contract will arise from a written offer by the credit provider
that is accepted by the debtor signing the contract document. Alternatively, the credit contract
may take the form of a written contract document signed by the credit provider constituting
the offer and accepted by debtor or an authorised person by conduct (i.e. adopted by debtor or
authorised person). For example, the debtor may accept the offer of credit by drawing down
the credit to incur a liability, or telephoning the credit provider to convey acceptance, or
taking delivery of the goods in the case of a hire purchase). Where the contract document is
made up of more than one document, it is sufficient if one document is signed and the other
documents are referred to in the signed document.

Section 17 lists the information that must be disclosed in the credit contract. The information
required includes the credit providers name, the amount of credit (including details of to
whom it is made to), the annual percentage rate, the method of interest calculation, the total
amount of interest charges payable, the amount of the repayment, credit fees and charges, the
default rate of interest, enforcement expenses and the insurance financed by the credit
contract. Information deemed critical for informed decision making is called a key
requirement (see s 111) and failure to provide the information attracts a civil penalty.

In Australian Finance Direct Ltd v Director of Consumer Affairs (2007) 241, seminar
participants could borrow the registration fees from a credit provider. However, the credit
contract failed to mention that the credit provider was entitled, with the agreement of the
seminar organiser, to hold back a proportion of the amount borrowed as a kind of security.
The High Court held that the holdback of funds should have been disclosed in the credit
contract and as a result the previous equivalent8 of s 17 (3) (a key requirement) was breached.

Previous equivalent refers to the equivalent provision in the Uniform Consumer Credit Code or UCC. Due to
the renumbering of the NCC sections, it is not possible to refer to the section cited in the case.

Another case involving breach of the previous equivalent of s 17 was GE Capital Finance
Australia v Various Debtors (2000) ASC 155-036. There the credit provider offered
customers of certain retail stores a continuing credit facility. Upon approval of a customers
application for credit, the credit provider would make a written offer to the customer in the
form of a pre-printed booklet containing terms of the proposed contract. A copy of this
booklet was to be given to the customer before acceptance of the offered line of credit but in
some 11,900 instances the retailer failed to do so. As the credit provider had breached the
previous equivalents of ss 17(3), 17(4), 17(5) and 17(8) a civil penalty (now just called
penalty) was imposed on the credit provider.

The credit contract must comply with the intelligibility and language requirements set out in s
184. Factors which are to be taken into account when determining whether these
requirements have been met includes legibility, the way the contract is set out, and clarity of
expression. To the extent that the contract is printed or typed, it must conform to the
regulations relating to print or type. For example, the print or type must not be less than 10
point font size. If a term does not meet the language requirements, the court will prevent the
credit provider from using it in future.

The credit provider must provide the debtor with a copy of the contract document. Under s
20 if the contract document is to be signed by the debtor and returned to the credit provider,
the credit provider must provide the debtor a copy to keep. If the contract takes another form,
the credit provider must give the debtor a copy of the contract in the form it was made. In all
cases, a copy must be given no later than 14 days after it was made, provided a copy of the
document was not given earlier.

Section 193 makes it clear that any contravention of the Code does not invalidate the
contract. It also preserves the common law, equitable and statutory rights and remedies.
Contraventions of the Code would attract various criminal and civil consequences. Under
22, any contravention of the requirements of Division 1 of Part 2 of the Code is an offence
and the maximum penalty is 100 penalty points (1 penalty point amounts to $110, but is
subject to change).

In addition to criminal consequences, there may also be civil consequences. If a credit

provider breaches a key requirement (refer to s 111 for the list of key requirements there
are different ones for continuing credit contracts) in relation to a credit contract, the credit
provider may be subject to a penalty (previously known as a civil penalty). The payment is
called a penalty because it is punitive and not compensatory in nature. But unlike most
penalties, it may be paid to an individual (set-off against any amounts due or to become due
to the credit provider).

The key requirements include the amount of credit, the annual percentage charge, the method
of calculation of interest, total amount of interest charges payable under the contract. They
generally refer to matters for disclosure at the time the contract is formed. The purpose of
imposing penalties is to encourage compliance and enforcement through self-regulation. The
amount of penalty varies with who made the application to the court. Imposition of penalties
is not automatic, but at the discretion of the court.

The court may order payment of a penalty if an application is made by the debtor, guarantor,
credit provider, or ASIC (ss 112, 113). Proceedings must be brought within a period of six
years from the date of contravention of a key requirement (s 123). Where an application is

made by debtor or guarantor, the maximum penalty is an amount not exceeding the interest
charges payable under the contract from the date it was made (s 114(1)). In the case of
contravention of a key requirement relating to a statement of account of a continuing credit
contract, the maximum penalty is all interest payable under the contract for the period to
which the statement relates. A larger amount may be payable if the court is satisfied the
debtor has suffered a loss (s 114(2)). The amount of penalty is payable to the debtor or
guarantor and may be set off against any amount that is due to the credit provider (s 115).

One of the limitations placed on the debtor or guarantor is that no application for a penalty
can be made if the contravention of the key requirement is or has been the subject of an
application by a credit provider or ASIC (government agency) anywhere in Australia (s
112(2)). But the court may still, on an application by the debtor or guarantor, order the credit
provider to compensate the debtor or guarantor for actual loss suffered as a result of
contravention of the key requirement (s 112(3), s 118).

The credit provider on discovering that it has contravened a key requirement may apply for a
penalty in order to place a limit on its liability and prevent individual borrowers from
applying for individual penalties (this was what happened in GE Capital Finance Australia v
Various Debtors). This is because in the case of a financial institution or bank, many
thousands of contracts may be affected by the same error. If the credit provider or ASIC
makes an application for a penalty order, the maximum penalty that may be imposed for all
contraventions of that key requirement in Australia is $500,000 (s 116). The credit provider
must pay the penalty to ASIC (s 117).

On an application being made, the court must declare whether or not there has been a
contravention and if the court is of the opinion that there has been one, the court may make
an order requiring the credit provider to pay the penalty (ss 113(1), 113(2)). If the breach is a
systemic breach involving contracts in various jurisdictions, the penalty is apportioned
between the jurisdictions according to the number of contracts.

The decision to impose a penalty on a credit provider is discretionary in nature. When

deciding whether to impose a penalty, the court is to have regard to the prudential standing of
the credit provider (s 113(3)), if asked by the credit provider, and other factors such as the
credit providers conduct, whether the contravention was deliberate, the loss suffered by the
debtor, the credit providers compliance system, and whether the contravention was
preventable (s 113(4)). The list of factors in s 113(4) is not exhaustive.

The following cases illustrate the matters to be taken into account when deciding whether to
impose a penalty:

In Macquarie Credit Union Ltd v The Director-General of Fair Trading (1998) ASC
155-014 (first case concerning the Uniform Consumer Credit Code), the applicant, a
credit union, applied to the NSW Commercial Tribunal for a declaration whether,
inter alia, its failure to include in the credit contract that the debtor had to reimburse
the bank fees charged for dishonoured cheques and fees paid to third parties was a
contravention of the key requirements. (The failure to include the information was
due to a software problem.) The Tribunal held that the credit union had contravened
the key requirements but in the exercise of its discretion did not make an order
requiring the payment of a penalty as it recognised that some errors would occur in
the early phase of implementation of a complex regulatory scheme.

In Suncorp-Metway Ltd v Director-General, Dept. of Equity and Fair Trading9, the
credit provider breached the previous equivalent of s 17(6) when it failed to include in
its statement the total amount of interest payable. However, no penalty was imposed
because the court took into account the following factors: the credit provider had tried
to implement a system to ensure compliance, the breaches were inadvertent, the
debtors did not suffer any losses as a result of the breach, the credit provider had acted
promptly to correct the breaches after becoming aware of them, and the credit
provider had incurred costs of more than $100,000 in respect of the case.

In Polish Community Credit Union Ltd 10 a small community based credit union with
some 1,200 members, breached key requirements of the Code. It did not change its
standard loan and guarantee form until August 1998, well beyond the November 1996
implementation date. A penalty of $5 per contract was imposed for the 447 contracts
after taking into account the prudential standing of the credit union. The credit union
was making a loss and had assets of around $153,000 and a larger penalty may have
an adverse impact on the viability of the credit provider. Although the penalty was
small it was designed to serve as a reminder to other credit providers of their
obligations under the Code.

In State of Queensland v Ward11, Ward, a loan shark at Surfers Paradise lent money
to desperate borrowers including drug addicts through a company called Shark.
Shark breached various disclosure requirements, imposed exorbitant interest rates
(156 % - 360 %) and enforced the contracts through harassment and physical assault.
Wards business was closed down and he was prevented from providing further
consumer credit. The Consumer Agency also fined Shark $270,000 (which was later
reduced to $40,000) and ordered it to pay legal costs. In imposing the fine, the Court
took into account the unjust conduct of the credit provider.

If the credit provider breaches any Code provision, the affected person or ASIC can apply to
the Court to make restitution or pay compensation to the affected person. In State of
Queensland v Ward, Ambrose J stated for the purposes of s 124, restitution connotes giving
up or restoring something improperly or unlawfully taken or retained and does not include
compensation. So, for example, if the form or disclosure requirements are breached, the
affected person can also seek relief under s 124, regardless of whether a civil remedy is also
available under another provision.


Under s 7(1), any mortgage given by an individual or strata corporation, which secures
obligations under a credit contract or guarantee that is governed by the Code, is also regulated
by the Code. For example, if X approaches a finance company for a loan to buy a car for
personal use. The credit contract may provide that X grant the finance company a mortgage
over the car as security. Not only the credit contract, but also the mortgage must comply with

(2000) ASC 155-027.
(2000) ASC 155-036.
(2002) ASC 155-055.

the provisions of the Code. The Code bans certain types of mortgages. In addition, it provides
relief if the mortgage is unjust within the meaning of s 76 of the Code.

Although the mortgage taken by a credit provider may be over goods or land or both, the
provisions of the Code are mainly concerned with goods. According to s 7(2), a regulated
mortgage can also secure obligations under non-Code contracts, but the Code provisions will
extend to the mortgage only to the extent that it secures obligations under a credit contract or
related guarantee. The expression mortgage has an expanded meaning under the Code and
refers to most types of security interests (see s 204). It covers not just mortgages in the strict
sense of the word, but also other security interests such as equitable charges, pledges, liens,

Under s 42, a mortgage must be in the form of a written document and signed by the
mortgagor. There is also a requirement for easy legibility and clear expression under s 184
and a mortgage may be reopened for this reason (for e.g., see 76(2)(g).) It is sufficient
compliance of the requirement for writing if the mortgage forms part of the credit contract
signed by the mortgagor. If the mortgage fails to comply with s 42 it is unenforceable, but if
the credit contract complies with the Code and contains an obligation that the debtor provides
security, the credit provider may be able to compel the debtor to sign an enforceable
mortgage. Where the mortgage is not part of the credit contract, the credit provider is
required (under s 43) to give the mortgagor a copy to keep within 14 days after it is made,
provided a copy was not given earlier.

Section 44 requires that the property, which is subject to the mortgage, be described or
identified. Where the mortgage does not describe or identify the property, it is void (i.e. have
no legal effect). A mortgage that charges all the property of the mortgagor is also void, but
this does not prevent the mortgage from charging specifically identified property which when
taken together comprise all of the mortgagors property. The objective behind these
provisions is to ensure that the mortgage always specifies the property that it covers.

Under s 45, mortgages over future property are generally void but subject to exceptions such
as where the future property is described or identified, or the property to be acquired will be
obtained wholly or partly with credit provided under the credit contract secured by the
mortgage. Any mortgage which secures goods supplied from time to time under a continuing
credit contract is void, unless the goods are specifically identified (s 46). All accounts
mortgages (mortgages which secure all amounts the mortgagor owes on any account, whether
currently or in the future or contingently) are allowed under s 47 provided certain
requirements are met the credit provider must provide a copy of the contract/guarantee and
get the mortgagors acceptance to extend the mortgage to cover that obligation.

Third party mortgages are prohibited (subject to exceptions) under 48. The restriction against
third party mortgages means that a mortgagor must be a debtor under a credit contract or a
guarantor under a related guarantee. Under s 49, a mortgage is also void if it exceeds the sum
of the amount of liabilities of the debtor under the credit contract and reasonable expenses for
enforcing the mortgage. Section 50 prohibits certain types of mortgages and securities. For
example, a credit contract obligation cannot be secured by a cheque or bill of exchange or
promissory note indorsed or signed by the debtor or guarantor. A mortgage cannot be created
over essential household property subject to exceptions, e.g., when the mortgagee is a linked
credit provider of the person who supplied the goods to the mortgagor.

A mortgagor must not assign or dispose of property subject to a mortgage without either the
credit providers consent or the authority of the court under s 51. The credit provider is not to
unreasonably withhold consent or attach unreasonable conditions to the consent. If the credit
provider fails within a reasonable time to reply to a request for consent, or it is unreasonably
withheld, the court may give approval subject to conditions. As a condition for grant of
consent, the credit provider may request that breaches of the credit contract be remedied;
require either the mortgagor or assignee to enter into an agreement to be personally liable to
pay the amounts due /become due under the mortgage; or require the debtor or assignee to
pay reasonable costs incurred by the credit provider for stamp duty in respect of the disposal
or assignment and legal fees. Section 53 provides that it is an offence for the credit provider
to enter into a mortgage that contravenes a requirement in Div 1 of Part 3 (i.e. the part of the
Code containing various provisions relating to mortgages).


Section 8 provides that the Code applies to a guarantee (which includes an indemnity by
virtue of the extended definition found in s 204), which is given by a natural person or strata
corporation to the extent it guarantees obligations under a regulated credit contract. The
provisions of the Banking Code of Conduct may also apply. As a guarantee is a contract, it is
subject to the general principles of contract law. For example, a guarantee can be set aside if
procured by force or fraud, or the guarantors consent was not genuine. But the guarantee
may be drawn in such a way that the guarantor is still liable even if any one of the above

Section 55 states that a guarantee must be in writing and signed by the guarantor. It is
sufficient compliance if the guarantee is contained in a mortgage signed by the guarantor.
The failure to meet these requirements would render the guarantee unenforceable. In addition
a guarantee must be easily legible, clearly expressed and conform to minimum print size
requirements (s 184). Otherwise, the guarantee may be reopened on the grounds that it is
unjust for failing the test of intelligibility under s 76(2)(g).

Under s 56, the credit provider must give to the prospective guarantor a copy of the credit
contract and an information statement explaining the rights and obligations of the guarantor
before the guarantee is signed. Failure to comply with this provision would render the
guarantee unenforceable. In addition, s 57 provides that the credit provider must give the
guarantor a copy of the guarantee and related credit contract within 14 days after the
guarantee is signed, provided a copy of either document was not given earlier.

A guarantor can withdraw from a guarantee before credit is given by giving written notice to
the credit provider (s 58). The guarantor can also withdraw if the credit contract made differs
in a material respect from the proposed credit contract given to the guarantor before the
guarantee was made. A guarantee may provide that the guarantor guarantees not just the
debtors obligations under a particular credit contract but also obligations under future
contracts (s 59). But for the guarantee to be enforceable in relation to the future contract, the
credit provider must give the guarantor a copy of the future contract and get the guarantors
written acceptance of the extension of guarantee.

There are various other provisions that give protection to guarantors. For example, a
guarantee is void to the extent that it secures an amount that exceeds the liability of the debtor

and reasonable enforcement expenses (s 60). If the credit contract provides for increases in
limit, the increase in liability is not enforceable unless the credit provider gives the guarantor
written notice and the guarantor gives consent.

Non-compliance with the provisions in Division 2 of Part 3 (i.e. the part of the Code
containing various provisions relating to guarantees) is an offence under s 62.


Contracts for the sale of goods and the supply of services are often financed by credit
contracts. Sometimes finance is arranged by the supplier. For example, when a customer
negotiates the purchase of a motor vehicle, the customer may ask for credit and the supplier
(dealer) is likely to get the customer to sign an offer to enter into a loan contract addressed to
a finance company. In a typical consumer finance transaction, the consumer will enter into
two separate contracts: one with the supplier known as the sale contract, and the other with
the credit provider known as the credit contract. The credit provider will pay the supplier with
the amount financed.

The Sale of Goods Act will imply into the contract of sale conditions relating to title,
merchantability and quality and fitness for purpose. (If it is a consumer contract, the
Australian Consumer Law provisions will also apply.)

At common law both the sale and the credit contract are kept separate from each other.
Under the doctrine of privity of contract, only parties to a contract may gain rights under the
contract. So if the goods supplied are defective, the supplier is liable to the consumer.
Similarly, if a supplier misrepresents the terms of the credit contract, the supplier is liable to
the consumer. The credit provider has no liability in each case, even if the credit provider has
a commercial arrangement with the supplier. This state of affairs was unsatisfactory as the
consumer had no remedy if the supplier ceased business or became insolvent. Part 7 of the
Code has changed the common law position by making the credit provider jointly and
severally liable, under certain circumstances, for any loss or damage suffered by the buyer if
the supplier is in some way connected to the credit provider by some commercial

Let us now examine more closely the requirements that must be met for Part 7 to apply. First,
the credit contract must be a regulated credit contract, i.e. subject to the Code. (Under s 126,
Part 7 of the Code would only apply to a sale contract financed or proposed to be financed,
wholly or partly by the provision of credit to which the Code applies.) In other words, it must
satisfy ss 3-6 of the Code. The second requirement is that the contract financed is a sale
contract. (Section 125 defines a sale contract as a contract for either the sale of goods or the
supply of services. See also s 204 for the definitions of contract, goods and services.)
The third requirement is that the credit provider is a linked credit provider. In other words,
the credit provider must be in some kind of commercial arrangement with the supplier (See s
127(1) below on the various types of commercial arrangement that satisfy this requirement.)

Under s 127 (1) a linked credit provider is:

A credit provider with whom the supplier of goods and services has a contract,
arrangement or understanding whereby the credit provider finances the suppliers

business, or the goods and services provided by the supplier (e.g., credit provider
agrees to provide finance to the suppliers customer, or supplier supplies goods to
credit provider and the debtor leases those goods from the credit provider) ; or
A credit provider with whom the supplier has an arrangement whereby prospective
purchasers who require credit are regularly referred to the credit provider by the
supplier; or
A credit provider with whom the supplier has an arrangement whereby the supplier
makes available forms of contract, application forms or offers of credit to purchasers
(e.g., supplier has a stand next to the cash register containing credit application forms)
; or
A credit provider with whom the supplier has a contract, arrangement or
understanding whereby purchasers sign contracts or credit applications at the premises
of the supplier.

For example, if X wishes to buy a car and requires credit and the dealer gets X to complete an
application for credit form belonging to ABC Finance Company, then ABC Finance
Company is a linked credit provider. Arrangement or understanding has a wide meaning
and indicates some meeting of minds which creates a shared expectation that the parties will
act in a particular manner (see V & L, para 24.142). It is something less than a binding

The Code deems the linked supplier to be the credit providers agent in respect of a credit
contract. As a result, the credit provider is liable for any misrepresentations made by the
supplier. Under s 129(1), the linked credit provider and the supplier are jointly and severally
responsible to a debtor who suffers loss or damage as a result of a misrepresentation, breach
of contract, or failure of consideration in relation to the sale contract.

Section 130 limits the liability of the credit provider by providing that:
Legal proceedings are to be brought against both supplier and credit provider jointly;
The liability of the credit provider is not more than the sum financed, the amount of
interests/damages, and the amount of costs awarded by the court/tribunal;
Any judgement given against linked credit provider and supplier must be first
enforced against the supplier and only to the extent unsatisfied against the credit
provider. It is not possible to enforce judgment against linked credit provider unless a
written demand for satisfaction of the judgement is made and the demand has
remained unsatisfied for not less than 30 days.

Under s 131, the linked credit provider can claim any amounts paid under s 130 including
costs reasonably incurred defending the action from the supplier, unless there is an agreement
that states otherwise.

In any proceedings brought against the credit provider under s 129(1), the credit provider can
rely on the following defences found in s 129(2):
The credit provider can establish that the credit was provided as a result of an
approach by the debtor that was not induced by the supplier. No definition of induce
is found in the Code, but case law (see, e.g, Ryan v Trigiboff [1976] 1 NSWLR 588)
would suggest that it means persuade, influence or pressure. For e.g., it is possible to
make out a case that the supplier had induced the credit if the suppliers advertisement
for goods states that finance is available from a particular finance company, but not if
it states that financing is available without mentioning a particular finance company.

The credit provider can establish that after due inquiry but before becoming a linked
credit provider under a tied loan contract12, the credit provider was satisfied that the
suppliers reputation with respect to the suppliers financial standing and business
reputation was good. In addition, after becoming the linked credit provider, but before
the credit contract was entered into, the credit provider had no reason to suspect that
the supplier would misrepresent matters relating to the sale contract, would breach the
sale contract, would fail to provide consideration, or would be unable to meet the
suppliers liabilities as they fall due. (This defence is also known as the due diligence

The credit provider can establish in the case of a sale contract financed by a
continuing credit contract13 that, having regard to the nature and volume of business
carried on by the linked credit provider and other matters relevant to the particular
case, the credit provider (before becoming aware of the sale contract or proposals to
make the contract, whichever is first) had no cause to suspect a person may have a s
129(1) claim against the supplier. (This defence is also known as the credit card bulk
volume defence.)

Under s 128, the linked credit provider is liable for any representations, warranties or
statements made by the supplier or any person acting on behalf of the supplier to the debtor in
relation to a tied loan contract or tied continuing contract. What this means is that the debtor
will have the same rights against the credit provider as if the credit provider had made the
warranties, representations or statements about the credit contract. However, the credit
provider is entitled to seek indemnity from the person who made the representations,
warranties or statements. It has been suggested that s 128 is the legislative response to cases
such as Custom Credit Corporation Ltd v Lynch [1993] 2 VR 468 where the debtor was
unable to obtain relief for a misrepresentation made by the supplier. In that case, the debtor
purchased goods from a supplier who arranged finance from a third party credit provider. The
supplier misrepresented that the taking of consumer credit insurance was compulsory when it
was not and the debtor argued that this should lead to the re-opening of the credit contract.
However, the court held that since the supplier was not an agent of the credit provider, the
misrepresentation could not be attributed to the credit provider.


The Code also governs insurance contracts connected with credit contracts. Basically, if a
consumer has granted a mortgage over property, the credit provider can require the debtor or
guarantor to take out insurance, or to pay the cost of insurance taken out or arranged by the
credit provider or supplier (s 143(1)). The insurance can take the form of compulsory third
party personal injury insurance, mortgage indemnity insurance, insurance over mortgaged
property or insurance approved by regulations.

The term tied loan contract is defined under s 127(3) as a credit contract where the credit provider knows or
ought to know that the debtor entered into the contract wholly or partly for the payment of goods and service.
This definition is therefore broad enough to cover all types of credit contracts.
See s 127(2) and s 204 for the definition of tied continuing credit contract- a credit contract where there are
multiple advances and the amount of available credit is decreased with each advance - for e.g., a credit card

A credit provider who wrongly represents or requires that a debtor or guarantor take out
insurance, commits an offence and can be required to refund the whole of the premium( ss
143(1),(4)). Where the credit provider or supplier can lawfully insist on insurance, the debtor
or guarantor has a choice of insurers and is only required to take out insurance on reasonable
terms (s 143(2), (4)). Otherwise, the credit provider also commits an offence and can be
required to refund the premium to the debtor or guarantor.

Section 144 prevents the credit provider from financing premiums over mortgaged property
for more than a year except in the case of extended warranty insurance. There is a limit on the
amount of commission paid by the insurer to the credit provider for consumer credit
insurance not more than 20% of the value of the premium, excluding government charges
(see s 145). Section 204 defines consumer credit insurance as insurance that insures the
debtors capacity to make repayments under the credit contract.


Changes to obligations under credit contracts, mortgages and guarantees fall into three
categories: changes made unilaterally by the credit provider, changes made by mutual
agreement, and changes made by the court. The expression change when used here means
variation to an existing contract which continues as altered after the variation is made. It does
not refer to discharging the contract and replacing it with a new one (novation). The
distinction is important because if the changes amount to a novation, then the rules relating to
formation of contract (such as the provision of disclosure documents) under the Code will

Unilateral changes:

Section 63(3) of the Code makes it clear that the right to make unilateral (involving one-side)
changes is found in the contract and not the Code. In other words, if the contract does not
make any provision for unilateral changes, the Code will not be of any assistance. For
unilateral changes to a credit contract, mortgage or guarantee, the credit provider must
comply with the notice requirements laid down in the Code see ss 64-69. All notices
required under the Code must be given in writing (this includes electronic communication),
which may be sent by post, email, facsimile or delivered personally s 195. For example,
with changes to the method of calculating interest rates, the credit provider must give at least
20 days notice (s 64(4)), and changes to the annual percentage rate or reference rate must be
notified not later than the day on which the change takes effect either by advertisement or
written notice (s 64(1),(2)). Some unilateral changes need not be notified, for example, a
change which reduces the debtors indebtedness.

Mutually agreed changes:

Section 71 deals with mutually agreed (involving both sides) changes to the credit contract,
guarantee or mortgage. An example of such a change is when the credit provider agrees to the
debtors application for an increase in the amount of credit. Under s 71(1), it is necessary for
the credit provider to give written notice of the change not later than 30 days after the date of
the agreement setting out particulars of the change and any information required by the

regulations. But s 71(1) does not apply to a change, which defers or otherwise reduces the
obligations of the debtor for a period not exceeding 90 days, or to an agreement to increase
the amount of the credit under a credit contract (s 71(2)).

Hardship changes:

It is not uncommon for unforeseen events like illness or job loss to prevent a person from
making repayments on his or her loan. Sections 72-75 deal with changes to a credit contract
on grounds of hardship. Where a debtor cannot meet his or her obligations under a credit
contract, regardless of the limit, the debtor may give the credit provider a notice of hardship
either orally or in writing. (the debtor does not need to wait for default to seek help). Within
21 days of receipt of the hardship notice, the credit provider may give the debtor a notice
requiring the debtor to give the credit provider within 21 days of the date of the notice
information relevant to deciding whether the debtor is or will be able to meet the obligations
or how to change the contract if the debtor is or will be unable to meet those obligations. The
debtor must comply with the requirement.

There are no criteria provided in the Code for deciding whether to change the credit contract.
But the note to s 72(3) state that the credit provider need not agree to change the credit
contract, especially if the credit provider does not believe there is a reasonable cause (such as
illness or unemployment) for the debtor not to be able to meet his or her obligations, or
reasonable believes that the debtor would not be able to meet his or her obligations under the
contract even if changed. A breach of s 72 will attract the maximum penalty of 2000 penalty

The credit provider must give the debtor notice of its decision in the prescribed form within
21 days of receiving the information required. If the credit provider has not agreed to change
the credit contract the credit provider must give the debtor the reasons for not changing the
credit contract and other prescribed information. But if the credit provider has agreed to
change the credit contract, the credit provider must give the debtor and any guarantor a
written notice in the prescribed form setting out particulars of the change in terms of the
contract (s 73). Breach of this requirement will attract a maximum penalty of 50 points.

If the creditor provider refuses to change the contract, the debtor is entitled under s 74 to
apply to the court for a change of the terms of the contract. The court may, after allowing the
relevant parties (i.e. the applicant, credit provider and guarantor, if any) a reasonable
opportunity to be heard, make such orders to change the terms of the contract as it thinks fit,
or refuse to make the change. Pending the outcome of the application, the court may order a
stay of enforcement proceedings (i.e. any court action to recover debt or take possession of
property under a mortgage) if appropriate in the circumstances.

Some of the grounds on which the court agreed to change the credit contract included the

In Permanent Custodians Ltd v Upston [2007] NSWSC 223, the court held that other
reasonable cause could include financial hardship due to business failure in an
owner-operated business.
In McNally v ANZ Banking Group Ltd (2001) ASC 155-047, a short term of
imprisonment was held to be a reasonable ground for a hardship change.

In Garner v Capital Finance Australia Ltd [2003] VC 1171, the court changed the
contract due to a combination of factors including illness, unemployment, family
responsibilities and the applicants financial commitments to his three sons and in
keeping the family home.

Unjust transactions:

The Code also contains provisions to deal with contracts, guarantees and mortgages that are
unjust. Under s 76, a court may (on the application of a debtor, mortgagor, or guarantor)
reopen a transaction if it is satisfied that the credit contract, mortgage or guarantee (or its
terms) which the transaction gave rise to, was unjust in the circumstances that it was entered
into or changed. Unjust according to s 204 includes unconscionable, harsh or oppressive.
The Code has adopted the definition of unjust in the Contracts Review Act 1980 (NSW).
Therefore, case law on the Contracts Review Act definition of unjust is more relevant than
case law on the Credit Act definition. The word includes in s 76 suggests that the definition
of unjust is not exhaustive. There are no monetary limits on transactions which may be re-
opened under s 76. The court will first make a determination whether the credit contract,
mortgage or guarantee is unjust. Only after it has done this, will it consider whether the
transaction that gave rise to the credit contract, mortgage or guarantee should be re-opened.

A contract is not unjust simply because of a failure to comply with the Code (McKenzie v
Smith: Lehman v Smith (1988) ASC 155-025). In West v AGC (Advances) Ltd (1986) 5
NSWLR 610 at 621, McHugh JA explained when a contract may be unjust under the
Contracts Review Act 1980 (NSW):

... thus a contract may be unjust ... because its terms, consequences or effects
are unjust. This is substantive injustice. Or a contract may be unjust because of
the unfairness of the methods used to make it. This is procedural injustice.

When making a determination whether a particular contract or contractual change is unjust, s

76(2) states that the court is to have regard to the public interest and to all the circumstances
of the case. (There is no definition of public interest in the Code. Presumably, public interest
represents the underlying purpose of the Code.) Section 76(2)(a)-(o) lists a number of factors
that the court may consider in determining whether a contract is unjust. The fact that one of
the criteria listed is present does not automatically make the credit contract, mortgage or
guarantee automatically unjust.

Thus, in Mah v Esanda Ltd [2004] NSWCTTT 448, the tribunal held that inequality in
bargaining power was, in itself, insufficient to lead to a finding that the loan was unjust.
Some evidence must be provided to show that the credit provider abused or in some way took
advantage of the debtors position. The fact that the applicant was 19 years of age and
received no legal advice did not render the transaction unjust where the terms of the resulting
credit contract were not unjust.

Of the matters set out in s 76(2), para (l) is of particular importance. If the credit provider
knew or could have reasonably ascertained by reasonable inquiry of the debtor, at the time
the contract was entered into or changed, that the debtor could not pay in accordance with the
terms or not without substantial hardship, the court may reopen the transaction. This
provision is directed at lenders who consciously lend without making proper inquiries into
the debtors ability to pay. The introduction of responsible lending obligations on credit

providers by the National Consumer Credit Protection Act may reduce the potential for this
ground to be raised.

Under para (o) of s 76(2), the court can also take into account the terms of comparable
transactions involving other credit providers and if the injustice is alleged to result from
excessive interest charges, the annual percentage rate or rates payable in comparable cases.
According to Asia Pacific International Pty Ltd v Dalrymple [2000] 2 Qd R 229, a case
involving an unregulated credit contract, excessive interest alone is not sufficient to re-open a
credit contract, some form of unconscionable conduct is also necessary. In that case D
borrowed obtained a one-month loan for business purposes and was charged an interest rate
of 20%, compounded on a monthly basis. D defaulted and P brought an action to recover the
principal sum and interest. The court held that although there was nothing unlawful about
charging a high interest rate, P had taken advantage of Ds special vulnerability.

Below are some more recent cases which involve unjust transactions:

In McNally v Australia and New Zealand Banking Group (2001) ASC 155-047, Mr &
Mrs P had difficulty servicing their home loan. The reasons were the imprisonment of
Mr P, the birth of their baby and the stress associated with trying to keep up with the
loan repayments. The bank agreed to reschedule their loan but the couple were still
unable to honour the new arrangement. As result the bank issued a default notice
requiring the debt to be repaid in full with enforcement expenses of about $10,000.
The NSW Fair Trading Tribunal ordered the bank to extend the loan contract and
declared the enforcement expenses unjust under the previous equivalent of s 76(2).

In Maisano v Car and Home Finance Pty Ltd (2006) ASC 155-078, the applicant,
who was a pensioner born in Italy with little understanding of spoken English entered
into a loan contract with the credit provider as co-borrower with her son. Her car was
used as security for the loan. She did not personally benefit from the loan. When her
son defaulted, the credit provider sought to repossess the car. The applicant argued
that she would not have signed the loan documentation had she known that she was to
become a borrower and her car used as security. The Victorian Civil and
Administrative Tribunal held that the loan contract and mortgage were unjust and the
transaction should be reopened. The credit providers application to repossess the car
was dismissed.

Unfair and dishonest conduct:

Section 180A of the National Consumer Credit Protection Act 2009 (Cth) (NOT THE
CODE) allows consumers (includes all natural persons) to seek a remedy for unfairness or
dishonesty by providers of credit services (includes credit providers). Before making any
orders, the court must be satisfied that the defendant provided a credit service to the plaintiff,
the defendant engaged in conduct connected with provision of that service; the conduct was
unfair or dishonest, and the consumer entered into the credit contract, consumer lease,
guarantee or mortgage that he or she would not have entered or would have entered but not
on those terms, or the consumer became liable to pay fees or costs to the defendant or a third
party. The word conduct when used here means to do an act or omit to perform an act (such

as failing to disclose information). Section 180A also sets out the matters which the court
may have regard to when deciding whether conduct is unfair or dishonest and they include
factors such as the consumer was at a disadvantage in dealing with the defendant or the
consumer belonged to a class of persons who were more likely than others to be at a special


Under s 82, a debtor or guarantor may pay out a credit contract at any time. In other words,
the credit provider cannot prevent the debtor or guarantor from terminating early a credit
contract. The credit provider may, if the contract provides, impose a charge for early
termination, presumably to compensate for the loss of income, pending alternative use of the
released funds. Under s 83, the credit provider must, at the written request of the debtor or
guarantor, provide a payout figure (and a breakdown) at the date specified by the debtor or
guarantor. This section does not apply to a continuing credit contract. It is an offence not to
provide such a statement and s 84 empowers the court to determine the payout figure, if the
credit provider does not do so.

The Code provides an avenue for the debtor or mortgagor to initiate the termination of a
credit contract and mortgage of goods. The procedures set out in s 85 (some of which are
reproduced below) must be complied with when mortgaged goods or goods subject to a sale
by instalments are surrendered:

The debtor or mortgagor may either give written notice of an intention to return the
goods to the credit provider (if the goods are in debtors possession), or require the
credit provider in writing to sell the goods (if the goods are in the credit providers
The goods may be returned to the credit provider at the credit providers place of
business during ordinary business hours within 7 days of the date of the notice, or
within such other agreed period.
The credit provider must, within 14 days after the debtor or mortgagor returns the
goods or requests the goods to be sold, give a written notice of the estimated value of
the goods and any other prescribed information.
The debtor or mortgagor may within 21 days after the notice nominate in writing a
purchaser who is prepared to purchase the goods at the estimated value/ greater.
If the goods are not to be returned, the credit provider must sell the goods as soon as
reasonably practicable to the nominated buyer, and if there is no buyer at the best
price reasonably obtainable.

A question that normally occupies the mind of a borrower is what would happen when a sale
contract is rescinded or discharged and there is a tied loan contract or tied continuing
contract. Under common law, even if the buyer of goods had the right to terminate the sale
contract, the buyer did not have the automatic right to terminate any related credit contract.
The position is different under the Code. Under s 135, the debtor is entitled to terminate the
tied loan credit contract if the sale contract is terminated. For example, in Agussol v
Australian Finance Direct Limited (2004) ASC 155-066, when the contract for the supply of
educational seminars and materials was rescinded for misrepresentation, the consumer was
held entitled to terminate the credit contract. (If, however, the credit contract is a tied

continuing credit contract, the debtor is entitled to be credited with the amount of credit in
relation to the sale contract and accrued interest charges attributable to that amount.)

If the tied loan contract is terminated under s 135, the debtor may recover from the credit
provider any interest or other amounts paid to the credit provider pursuant to the credit
contract. The credit provider is entitled to recover from the debtor any amount of credit not
paid to the supplier. In addition, the credit provider can recover from the supplier any loss
suffered by the credit provider as a result of the termination. Any related guarantee or
mortgage is also terminated to the extent of the obligation secured. The supplier who knows
that a sale contract has been terminated must give the credit provider notice of that
termination. Otherwise, the supplier will be guilty of an offence. Section 135 also governs
the rights and obligations of the credit provider, debtor, guarantor and mortgagor.


Under common law, when a debtor defaults the credit provider is at liberty to exercise
whatever contractual rights and remedies it may have. The contract is usually drafted in
favour of the credit provider and this could prove unfair to the consumer who is likely to be
in a weaker bargaining position. The Code has intervened by restricting the way in which the
credit provider may exercise its rights and remedies. These restrictions are generally found in
Part 5, Division 2 of the Code.

Under ss 88 (1) and (2), a credit provider must not begin enforcement proceedings (defined in
s 204) against a debtor or mortgagor), unless 3 conditions are satisfied:
The debtor/mortgagor is in default (default not defined but would presumably refer
to any breach of the contract);
A default notice, that complies with s 88(3), has been issued to the
debtor/guarantor/mortgagor giving at least 30 days from the date of the notice to
remedy the default; and
The default has not been remedied within the period specified in the default notice.

If the debtor has given a hardship notice (and certain criteria have been met), the credit
provider cannot, under s 89A, begin enforcement proceedings until it has given the debtor a
notice stating that it has not agreed to the change and 14 days has passed from the day notice
was given.

Breach of ss 88 (1) or (2) is an offence and the aggrieved party may claim compensation
under s 124. The credit provider need not give a default notice, nor wait for the period in the
notice to elapse before commencing enforcement proceedings under certain circumstances.
For example, if the credit provider had a reasonable belief that the contract was induced by
fraud or the credit provider had made a reasonable attempt to locate the debtor/mortgagor but
to no avail, then no default notice is required. Section 89 states that if the default is remedied
within the specified period, the contract is reinstated and the acceleration clause (see s 92 for
definition) is not operational.

Under s 90, the credit provider must not enforce judgement against the guarantor unless:
The judgement debt has remained unsatisfied for 30 days after the credit provider has
made a written demand for payment;

The court has relieved the credit provider from the obligation to obtain judgement
against the debtor;
Despite reasonable attempts, the debtor could not be located; or
The debtor is insolvent.

The Code preserves the traditional right of the secured creditor to repossess the security if
there is default. Unauthorised repossession can expose the credit provider to legal action for
conversion/damages and possibly a fine. Before the credit provider can repossess goods, the
notice requirements under s 88 and s 89A must have been complied with.

Section 91 provides further restrictions on the credit providers right to take possession of
mortgaged property. The credit provider must not, without court consent, take possession of
mortgaged goods if the amount owing is less than 25% of the amount advanced, or $10,000,
whichever is less. However, the restrictions do not apply to a continuing credit contract or if
the credit provider has reasonable grounds to believe that the mortgagor intends to remove or
dispose of the goods.

Section 94 allows a debtor/mortgagor/guarantor who has been served with a default notice or
demand for payment to negotiate with the credit provider for the postponement of
enforcement proceedings. (Compare s 94 with s 72.) Where the parties are unable to reach an
agreement, the debtor/guarantor/mortgagor may, under s 96, apply to the court for a
postponement. Postponement of enforcement proceedings does not apply to repossession as it
is confined to the period of default notice. Since goods can only be repossessed when the
debtor has defaulted it follows that the default notice must have expired.

Prior consent of the debtor or court is required before the credit provider can enter residential
premises to repossess goods (s 99).The court may, on the application by a credit provider,
authorise the credit provider to enter residential premises for the purpose of taking possession
of mortgaged goods (s 100). Section 101 enables the credit provider to obtain a court order
directing the debtor deliver up the goods at a specified time and place.

Section 102 sets out the obligations of the credit provider who has repossessed mortgaged
The credit provider must within 14 days after taking possession of mortgaged goods
give written notice to the mortgagor. The notice must contain matters such as the
estimated value of the goods, a statement of the mortgagors rights and obligations
and the enforcement expenses.
The credit provider must not sell the goods taken under the mortgage within 21 days
after the date of the notice, unless authorised by the court.
In addition, the goods must be returned to the mortgagor if the amount in arrears and
reasonable enforcement expenses are settled within the 21 days period, or if the credit
contract is paid out.

Under s 104(1), if no payment is made within 21 days after the notice is given, the credit
provider must sell the goods as soon as reasonably practicable either to a nominated
purchaser (see s 103 for the procedures to be followed), or if there is no nominated purchaser,
for the best price reasonably obtainable. In Henry v AGC Ltd [1985] WAR 137 the credit
provider took possession of a backhoe that was the subject of a hire-purchase agreement.
After various unsuccessful attempts to sell the machine to a third party, the credit provider
sold it back to the dealer for $10,500. The dealer spent an additional $4,500 to recondition the

machine and later re-sold it for $30,500. Based on the evidence, the court held that the credit
provider had not discharged his obligation to obtain the best price reasonably obtainable. To
ascertain the goods actual value, the court relied on the credit providers estimate of $20,000
given in the statutory notice and not the dealers resale price.

However, it would appear that a credit provider is not legally obliged to wait for the best
price to sell. After the goods have been sold, the credit provider must give the mortgagor a
notice containing information such as the gross amount realised, enforcement expenses, and
any further action that may be taken. Under s 106, the court may on the application of a
mortgagor order that the credit provider pay compensation to the mortgagor if the court is
satisfied that s 104(1) has been breached.


A lease is an arrangement under which a person hires goods for an agreed period of time. For
example, if X wants the use of a car for year, but does not wish to buy it, X can lease the car.
Leasing is a form of financing and therefore consumer leases are regulated by the Code. But
unlike credit contracts, consumer leases are regulated under a separate section of the Code,
namely Part 11. In other words, the provisions in other parts of the Code will only apply
when stated in Part 11. The main reason for this is that a lease does not fall within the
definition of credit contract found in the Code. In the past, the regulation of consumer
leases was less stringent than the regulation of credit contracts. But this has since changed
and the regulation of leases is now aligned to the regulation of credit contracts. This is to
reduce the incentive for some credit providers to opt for consumer leases due to the lower
regulatory requirements. The lease changes apply to contracts entered into on 1 March 2013
or later.

A consumer lease is defined in s 169 as a contract for the hire of goods by a natural person
or strata corporation under which that person or corporation does not have a right or
obligation to purchase the goods. The definition points to three requirements that have to be
met for the transaction to be a consumer lease. First, it must involve the hire of goods (see
definition of goods in s 204). Second, the lessee must be a natural person or strata
corporation. Third, the transaction must not give the lessee the right or obligation to purchase
the goods. A hire purchase agreement is similar to a lease except that the hirer has the right or
obligation to purchase the goods.

Section 170 sets out the additional requirements (equivalent to those in s 5 applicable to
credit contracts) that must be satisfied before Part 11 of the Code would govern a consumer
The goods are hired wholly or predominantly for personal, domestic or household
A charge is made for hiring the goods and the charge together with the amount
payable exceeds the cash price; and
The lessor hires the goods in the course of a business of hiring, or incidental to
any other business carried out in the jurisdiction.
For leases, the purpose for which the leased goods are used is crucial to any determination
whether the Code applies. However, for credit contracts, both the purpose for which credit
was provided, and the purpose for which credit was intended to be provided are important.

Under s 171, certain leases are excluded from the application of Part 11, even if they satisfy
the criteria set out in s 170. These leases have been categorised into:
Short-term (4 months or less) or indefinite leases (for example, a lease for an
unspecified period)
Employment-related consumer leases (for example, as part of a remuneration
package for an employee, the employee is entitled to lease certain goods from the
Any other leases specified by regulations.

Part 11 contains various disclosure and procedural rules covering variations to contracts,
entry to property to take possession of goods and other miscellaneous matters. They are fairly
similar to those that apply to credit contracts. Below are some of the more important rules:

Section 173 states that a consumer lease must be in written form; signed by both
parties; may be made up of multiple documents and may be in a form prescribed by
A consumer lease must contain the information required in s 174 such as a description
of the goods, amount of any deposit or stamp duty payable by the lessee, amount of
each rental payment and total number of rental payments and a statement of the
conditions on which the lessee may terminate the lease.
A lessor will be prevented from making unilateral changes to the consumer lease
unless the lessee agrees to in writing (s 174A).
A copy of the consumer lease and a statement in the prescribed form explaining the
lessees rights and obligations must be given to the lessee within 14 days of entry into
the lease (s 175).
A lessor must provide the lessee periodic statements of accounts in the prescribed
form (ss 175C and 175D).
A lessor must now provide an end of lease statement to the lessee at least 90 days
before the end of the term and it must contain the information prescribed by
regulation (s 175C).
A consumer lease may be changed on the grounds of hardship or on the basis the
transaction is unjust (ss177B, 177F-177K). The provisions are consistent with those
for credit contracts.
A lessee has a right to terminate a lease both before and after the goods have been
provided (s 178A). In addition, the lessor is required to provide a statement of account
to the lessee upon termination of the lease (s 179A).
The following enforcement matters applicable to credit contracts/mortgages have now
been extended to consumer leases:
o Definition of enforcement proceedings
o Postponement of enforcement proceedings
o Enforcement procedures for goods hired
o Recovery of enforcement expenses from the lessee (ss 179D, 179F, 179G,
179H, 179M, 179N, 179R).
A linked lessor is liable for the suppliers representations, warranties and statements
in relation to the tied consumer lease, but is entitled to be indemnified by the maker of
the representation, warranty or statement (ss 179S, 179U).
Part 12 of the Code and s 204(2) applies to leases with the necessary changes. Section
124 also applies to leases