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.

Background

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Despite criticism that the rule is sexist and outdated, the High Court of Australia revisited and endorsed it in Garcia v National Australia Bank Ltd (1998) 194 CLR 395.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:

  1. The wife did not understand the purport and effect of the transaction.  
  2. The transaction was voluntary (in the sense that the wife obtained no gain from the contract the performance of which was guaranteed).  
  3. 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 [2011] 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:  

  1. the lender had knowledge that the guarantor was in a relationship of trust and confidence with the principal debtor;  
  2. the guarantor was a volunteer (such that the guarantor did not materially benefit from the transaction); and  
  3. 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.