Despite criticism, a special equity established in the 1930s is still available which entitles a wife (if the circumstances permit) to relief from enforcement of a guarantee she has given as security for her husband’s debts. The rule is likely to now extend to persons who give a guarantee for another’s debt where those persons are in a relationship of trust and confidence, regardless of gender.
It is not uncommon for a lender to seek further. Often, the lender may look to the family home for that security. Where that family home is owned by the husband and wife jointly, the wife may sign a guarantee and mortgage documents to secure the husband’s obligations or the obligations of his business.
Circumstances may exist where the wife was put under pressure; relied on a misrepresentation; or did not properly understand the implications of the transaction she was being asked to execute. Later, she may be entitled to relief from the consequences of the guarantee in accordance with the principles of special equity emanating from the decision of Yerkey v Jones (1939) 63 CLR 649.
Later interpretation of the rule
Despite criticism that the rule is sexist and outdated, the High Court of Australia revisited and endorsed it in Garcia v National Australia Bank Ltd (1998) 194 CLR 395. The majority of the High Court in that case formulated the elements that make it unconscionable to enforce a guarantee against a wife who is a guarantor:
- The wife did not understand the purport and effect of the transaction.
- The transaction was voluntary (in the sense that the wife obtained no gain from the contract the performance of which was guaranteed).
- The lender did not take steps to explain the transaction to the wife or to find out that a stranger had explained it to her.
The lender is taken to have understood that a wife may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife.
The creditor only needs to know at the time of taking the guarantee that the guarantor was married to the debtor.
On 3 May 2011, the Qld Court of Appeal upheld a decision of the Qld Supreme Court to set aside a guarantee given by a doctor for her husband’s debt in Agripay Pty Ltd v Byrne  QCA 85.
The Court followed the principles from Yerkey v Jones and Garcia. It was added that “Human weaknesses and unconscionable conduct are not limited to heterosexual marriage relationships. These legal principles should apply equally to all vulnerable parties in personal relationships”.
The guarantor in Agripay was well educated but had blind faith in her husband with respect to business and financial affairs. She admitted that she knew what the nature of a guarantee was, however the lender did not explain (or have explained) to her the purport and effect of the transaction she was guaranteeing. Those circumstances, along with the finding that she did not personally benefit from the transaction, resulted in the guarantee being set aside on the grounds that it was an unconscionable transaction.
Extension of the principle
It is worth noting that, in Garcia, the Court did consider (without deciding) that the principle may extend to “long term and publicly declared relationships short of marriage between members of the same or of the opposite sex” or to a husband acting as surety for a wife.
It seems from the comments of the Court of Appeal in the Agripay decision that the rule can be extended. It seems that a case can at least be argued in favour of having the guarantee set aside where:
- the lender had knowledge that the guarantor was in a relationship of trust and confidence with the principal debtor;
- the guarantor was a volunteer (such that the guarantor did not materially benefit from the transaction); and
- the guarantor did not fully understand the nature and effect of the transaction and it was not properly explained to the guarantor by the lender.
Other defences available to guarantors
Although most modern lenders are prudent in ensuring that measures are taken to ensure that all appropriate steps are taken to ensure a guarantee they take will be enforceable if called upon, circumstances often arise where a guarantor may be entitled to some relief from the transaction.
Some common defences are based on circumstances where:
- the creditor has breached its duty to disclose unusual features of the principal transaction to the guarantor;
- the creditor has made an actionable misrepresentation;
- the creditor has engaged in misleading or deceptive conduct; and
- the creditor engaged in unconscionable conduct.
Mrs Garcia (physiotherapist) and her husband executed mortgage in favour of bank for purposes of securing guarantees under husband’s business. Husband assured Garcia there was no ‘danger’ in the transaction and no explanation of transaction was given by bank. Court found Garcia understood nature of guarantee but not the extent of this particular guarantee.
Parties divorced and Garcia sought declaration guarantees void as a result of undue influence.
Mrs Garcia understood what a guarantee was, but not that this guarantee was secured by a previously signed ‘all moneys mortgage’”. Undue Influence was established.
Court of appeal
Overturned decision of the Trial Judge.
Gaudron, McHugh, Gummow and Hayne JJ
Their Honours observed that there was no positive finding of actual undue influence despite fact husband had pressured wife and she signed because he repeatedly told her she was a fool and he an expert, and to try to save their marriage.
Their Honours further observed that
[para 20; pages 403-404 CLR] Australian society, and particularly the role of women in that society, has changed in the last six decades is undoubted. But some things are unchanged. There is still a significant number of women in Australia in relationships which are, … marked by disparities of economic and other power between the [p 404] parties.
They noted that Yerkey v Jones was
[para 21; page 404 CLR] ... based on trust and confidence, in the ordinary sense of those words, between marriage partners. The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse. In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect and incomplete, if not simply wrong. ...
[Relief where there is no actual undue influence] depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction's purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable. … [para 23]
On that basis
[para 40; page 411] … the only question of notice that arises is whether the creditor knew at the time of the taking of the guarantee that the surety was then married to the creditor. …
The Bank was aware that Mrs Garcia was married to the creditor and, because they took no step to explain the transaction to her and knew of no independent advice to her about it, Garcia was entitled to succeed.
Justice Kirby agreed that the appeal should be allowed, despite noting concerns about whether equity ought to provide relief in a case such as this - in particular:
[at para 53; page 415] The wife was not deluded nor coerced by the husband into signing the guarantee. Nor was her will overborne in a technical sense. … If the financial transactions [involving the business] had proved profitable, and if the personal relationships of the husband and wife had improved, it scarcely seems likely that the wife would have disclaimed the economic benefits as vigorously as she has now sought to escape the economic burdens.
[In addition it was] specifically found that she would have appeared to the Bank as 'an intelligent articulate lady with a professional position calling at the bank, appear[ing] to be voluntarily signing a guarantee in respect of an account of which she was a director of the company concerned, and there was nothing to give the bank even suspicion". The wife knew what a guarantee was. She knew that the document she was executing was a guarantee. If the transaction at the Bank took only a minute, this was, at least in part, because the wife asked no questions. She sought no information or advice. She gave the appearance of knowing what she was doing. She had previously set up her own professional business as a physiotherapist. ... [footnotes omitted]
While Justice Kirby considered the presumption of undue influence applied here, he did not consider it should be confined to 'married woman' but should instead identify a broader principle (para 66). In relation to this case, his Honour concluded:
[para 81] 'The Bank knew, or could readily have discovered, that Mrs Garcia reposed trust and confidence in her husband in relation to her financial affairs. Mrs Garcia was thus in a position of potential vulnerability to demands that she should act as a surety, even if the Bank had no reasonable means of knowing the details of the particular stresses of her personal relationship. Breakdown of personal relationships is sufficiently common in Australia to have alerted a credit provider, such as the Bank, to the potentiality of this surety's vulnerability. This is particularly so where (as here) a domestic home in which the borrower lived was put at risk by the surety arrangements. The Bank could readily, without unduly intrusive questions, have discovered the nature of the parties' relationship. It was already aware that they were cohabitees. ... Sufficient that basic questioning disclosed a transaction on its face of little or no specific advantage to the proposed surety and that such party stood at high risk in relation to the roof over her head.
[para 82] Misrepresentation by Mr Garcia to his wife being established, together with constructive notice of the potential vulnerability of the wife, the Bank is unable to enforce the surety obligation against her because it is fixed with constructive notice of her right to set aside the transaction having regard to its failure to take reasonable steps to satisfy itself that she entered the obligation freely and with knowledge of the relevant facts. It is here that the principal weakness in the Bank's case is obvious. As the primary judge found, in this case the Bank's ordinary procedures were not followed. Mrs Garcia was given no advice or explanation of the documents which she was signing. Still less was she told to seek independent advice or that such evidence would be a pre-condition to the Bank's acceptance of her guarantee. The fact that she was a director of the company and that she presented as an "intelligent articulate lady" in a professional position is certainly relevant. But it is not ultimately determinative. To the knowledge of the Bank, the home in which she lived was being placed in jeopardy. The Bank failed to insist that she was made fully aware of that risk. In such circumstances, there being no exceptional reasons to hold otherwise, the Bank was unable to enforce the surety obligation. Although the case is not clear cut and some of the evidence supported the Bank's arguments, I have concluded that the primary judge was right to hold as he did. Banks and other credit providers can protect themselves from this result. Most already do so.
[para 83] The result to which I have come flows not from the fact that Mrs Garcia was a married woman in need of special protection, as such, from the law of equity. It flows from a broader doctrine by which equity protects the vulnerable parties in a relationship and ensures that in proper cases they have full information and, where necessary, independent advice before they volunteer to put at risk the major asset of their relationship for the primary advantage of those to whose pressure they may be specially vulnerable.
Agreed with the findings of the trial judges and the orders of the majority in this case.
More detail forthcoming