This week’s TGIF considers the Supreme Court of Queensland decision of Schultz v Bank of Queensland Ltd [2015] QCA 208 dismissing a wife’s appeal that sought to rely on the wife’s equity principle (from Yerkey v Jones[1]) to claim relief from a legal obligation to pay under a guarantee given in favour of a bank.

BACKGROUND

On 11 April 2007 a wife personally guaranteed a $773,000 loan in favour of the trustee of a family trust (Relevant Guarantee), which was predominantly controlled by her then husband.  The wife was a beneficiary of that trust.  The guarantee was secured by mortgages over two properties owned by the wife.

Ultimately, there was a default on repayments and the bank sued the wife who argued the wife’s equity principle in defence and alternatively claimed unconscionability.

THE WIFE’S EQUITY PRINCIPLE

In considering the wife’s equity principle, the court considered the following requirements espoused in the case of Yerkey v Jones:

  1. The wife must be a volunteer (ie not benefit from the loan);
  2. The wife must not understand the effect of the document;
  3. The husband must exercise undue influence; 
  4. The creditor must know that she is a wife;
  5. The creditor or some independent third party must have failed to explain the transaction to the wife.

Consistent with the findings of Martin J in Groves  v Groves, Boddice J considered that the applicant must show there was a material misunderstanding as to the nature and effect of the transaction. 

In concluding that the wife did not have a material misunderstanding, the primary Judge indicated that all of the following elements must be understood, and were understood:

  1. whether she could limit her liability under the guarantee;
  2. that her liability was for interest and costs, as well as the loan amount, under the guarantee;
  3. that she might be made bankrupt if the amount payable under the guarantee was not paid; and
  4. that the mortgage over a particular property was not limited in amount.

On appeal, Boddice J considered that the primary Judge gave adequate reasons for his finding that the wife’s equity could not be successfully asserted, because the wife knew the amount of the loan, gave no evidence that she did not understand that she was additionally liable for interest and costs, and knew that the secured properties may be sold.

Additionally, his Honour agreed with the majority in Garcia v National Australia Bank Ltd [2] that a creditor may avoid a surety’s claim not to have understood the purport and effect of the transaction if the creditor itself explains the transaction sufficiently.  In applying this reasoning, Boddice J considered that the level of explanation needed is dependant on the following factors:

  1. the nature of the transaction;
  2. the degree of risk associated with the transaction;
  3. the sophistication of the vulnerable party; and
  4. the nature of the relationship that the party enjoys with the spouse.

UNCONSCIONABILITY

Pursuant to section 12CA of the Australian Securities and Investments Commission Act 2001 (Cth), and the equitable principles espoused in Commonwealth Bank of Australia Ltd v Amadio[3], unconscionability was dependent upon the establishment of a “special disadvantage” that:

  1. adversely affected the wife’s “ability to make a judgment as to [her] own best interest”; and
  2. was sufficiently evident to the creditor, who took unfair advantage of that ‘special disadvantage’ by entering the transaction.

The wife argued that she was not informed that the family trust had defaulted on a previous loan (which she had also personally guaranteed), at the time of providing the Relevant Guarantee.

The Court upheld the primary Judge’s finding that this did not place the wife at a special disadvantage within the meaning of the equitable principle.

COMMENT

Whilst the guarantor wife failed in this case, it illustrates that the principles in Yerkey v Jones are still good law in Australia.  The Court took the view that if a surety can show a material misunderstanding regarding the transaction, the onus will then fall on the lender to demonstrate there was adequate explanation provided.  As such, it is strongly advisable that when engaging in any transaction where the guarantor is or might be a ‘wife’, the lender take particular care.