Women are better educated, participate in the workforce, and have greater financial independence than ever before. In some cases, the husband has signed a guarantee. Yet cases of the “unduly influenced wife” or “ill-informed wife” signing a guarantee are the subject of regular legal disputes.

Garcia v National Australia Bank Ltd

The principles from Garcia v National Australia Bank Ltd 194 CLR 395 (1998) continue to have application in the court system. The High Court back in 1998 foresaw that the principles from Yerkey v Jones (1939) 63 CLR 649 would apply to all manner of relationships and not just to wives. As foreseen, married and unmarried women and men frequently sign guarantees in a variety of circumstances. When those guarantees are enforced by a lender, a number of legal principles are engaged.

In Garcia the High Court majority set out the key principles applicable in such cases:

First, the Garcia principles only apply to guarantee or suretyship agreements. Not settlement or other agreements: see Narain v Euroasia at [31] and [45] per Nettle JA (as he then was).

Second, there are two kinds of case where the equitable principles of unconscionability apply (Garcia at p 408-409 by reference to the 1938 case of Yerkey v Jones 63 CLR 649):

‘Undue influence’: The first category is cases where there is actual undue influence by a husband over a wife. For example, where there is an imbalance of power and the wife, lacking in economic or other power is overborne by her husband and goes guarantor/surety without a free mind and will (see Euroasia per Robson J p 258). In these circumstances, a creditor who has left it to the husband to obtain the wife’s consent without independent advice is at risk that the transaction will be voidable (Yerkey at 684); and
‘Failure to explain’: The second category where enforcement of a guarantee is unconscionable is where there has been a failure to adequately and accurately explain the suretyship transaction and its purport and effect. This category is less concerned with undue influence than with a lack of proper information. For example, where the husband seeks to have the wife sign a surety for his immediate economic benefit but not hers.

In the first category of case, it would be unconscionable to enforce the surety where a free will was not brought to its execution.

In the second category of case, it would be unconscionable to enforce the surety if:

Purport and effect: The surety did not understand the purport and effect of the transaction, even if she was a willing party. This requires knowledge at least of the fact of liability, the general extent of liability and the possible consequences of default. However, it is insufficient that the person misunderstood or failed to appreciate the degreeof risk associated with the transaction, or the improvidence or lack of wisdom of the uses to which the moneys would be put. The person’s misapprehension must be of a matter material to the liability of the creditor: State Bank of NSW Ltd v Chia (at [169]).
Volunteer: The transaction was voluntary, ie the surety gained no benefit from the contract (see section below re ‘What is a volunteer?’)
Trust and confidence: The lender is taken to have understood that as a wife, the surety 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, and yet;
Explanation: if the lender took no steps to explain its purport and effect or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger.

The second category does not depend upon any presumption of undue influence by the husband over the wife. Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction.

Garcia defence

The above four tests (from the so-called ‘failure to explain/lack of information’ or second category of case) are frequently referred to as the elements of a ‘Garcia defence’. The burden of proof rests on the wife (or party in that position) to make out the defence.

Facts in Garcia

In Garcia, the enforcement of the guarantee was unconscionable. The matter fell into the ‘failure to explain’ category. The wife did not understand the purport or effect of the transaction. She had given a guarantee of liabilities incurred and to be incurred by her husband’s company. Even though she was a co-director of the company, it was in the complete control of her husband.

She knew it was a guarantee but thought it was a guarantee of limited overdraft. Nor did she understand the guarantee was secured by the mortgage given over her home. The bank had not explained the transaction to her. She had not received independent advice about the guarantee. The wife obtained no real benefit; she was a volunteer.

Other guarantee cases

Garcia remains good law and is frequently cited in litigation. Recent Victorian cases include:

In Narain v Euroasia (Pacific) Pty Ltd [2009] VSCA 290 following a consent judgment made by Master Evans, orders made by Master Daly (as she then was, setting aside the consent judgment), a hearing de novo before Robson J (who set aside Master Daly’s order and restored the original consent judgment), and an appeal of the consent judgment decision to Hollingworth J (dismissed), the Hollingworth J decision was appealed to the Court of Appeal.

On the final appeal the determinative factor was that the appellant (the wife) could not succeed in a Garcia defence because she was not a volunteer: she gained a benefit from the contract she had guaranteed.

The appeal was dismissed, with a finding that signing a deed of settlement would not avail a party to a Yerkey defence without being a volunteer (at [50]). Robson J and Nettle JA’s judgments are particularly worth reading.

In Bank of Western Australia v Abdul [2012] VSC 222 per Croft J, the wife was found not to be a volunteer because loans to fund renovations to a family property were held to provide her with a ‘real benefit’ (at [213]-[214]). She was also found to have “well understood the nature and effect of the security instruments she was asked to execute”. Her Garcia defence failed.

In Capital One v Soda Kids Capital One Securities Pty Ltd v Soda Kids Holdings Pty Ltd and Ors [2014] VSC 168 per Ginnane J, the husband (not the wife) did not understand the “purport and effect” of the relevant guarantees and mortgage owing to his poor English literacy skills and failure to understand business matters.

He failed to establish that he was a volunteer, and thus obtain the benefit of the unconscionability doctrine, because he owned trademarks for products his wife sold in her business, and received direct benefits from his investments. He placed trust and confidence in his wife in the conduct of the Soda Kids business. Because he failed to establish he was a volunteer, the husband would not have established a Garcia defence, had the matter been necessary to decide (at [210]-[234]).

In Zenith 500 Pty Ltd v Stavrakis and Alexopoulos [2016] VCC 1146 per Judge Anderson, the wife’s Garcia defence failed because the Court considered that she understood the ‘purport and effect’ of the transaction. She demanded explanations from her husband. They argued for days about the transaction. She received independent advice. She prevaricated in her evidence about whether she personally benefited and thus failed to establish that she was a volunteer (see [78] – [81]).

In Twenty Ninth Macorp Nominees Pty Ltd v George & Anor [2017] VSC 136 per Almond J, the wife did not meet the requirements to establish a Garcia defence because she failed to establish an insufficient understanding of the essential aspects of the documents she signed. That was the basis on which her liability in this case fell to be determined (at [179]-[182]). She did not resist the volunteer point on the basis that the husband and wife “…were both knowing co-borrowers for the purpose of the investment and it is reasonable to infer that the both stood to gain from it” (at [170]).

In Taranto v Lopes & Lopes [2017] VCC 1613 per Judge Woodward, the wife did not make out the requirements for a Garcia defence because she was tertiary educated, had a history of her own banking, and was capable of understanding the purport and effect of the guarantee had she enquired or had it explained to her. There was enough doubt about whether she received a benefit that she could not establish she was a volunteer.

What is a volunteer?

In each of the above cases, the Garcia defence failed for a variety of reasons. No party who sought to do so succeeded in establishing they were a volunteer.

In the Garcia case, Mrs Garcia was a professional woman. She was both a director and a shareholder of the relevant company, but neither of these was an obstacle to the finding that she was a volunteer.

What is meant by the term ‘volunteer’? In Yerkey v Jones a volunteer was considered to be:

“a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee”

(cited with approval in Garcia at [31]).

In Soda Kids, Ginnane J narrowed ‘financial benefit’ somewhat to ‘direct and immediate benefit’:

“A person who receives a direct and immediate benefit from giving securities is not a volunteer within the meaning of the Garcia principle.” (at [227])

Regarding ‘direct and immediate gain’, in Abdul Croft J held at [59]:

In terms of direct and immediate gain, it should be observed that the authorities indicate that “incidental benefit which accrues generally to the family of which the wife is a member is not sufficient benefit to render a transaction which does not otherwise contain a ‘real benefit’, non-voluntary”.[80] Additionally, “[T]he question of whether a guarantor is a volunteer is not, necessarily, determined conclusively by the examination of legal rights and interests”.[81]

Perhaps the best summary of the subtleties of ‘volunteer’ is by Einstein J in State Bank of New South Wales Ltd v Chia [2000] NSWSC 552 at [169(2)]:

Incidental benefit which accrues generally to the family of which the wife is a member is not sufficient benefit to render a transaction which does not otherwise contain a `real benefit,' non-voluntary: Armstrong v Commonwealth Bank of Australia (unreported, 17 June 1999, New South Wales Supreme Court, per Hamilton J), Cranfield Pty Ltd v Commonwealth Bank of Australia (unreported, 20 November 1998, Supreme Court of Victoria, per Mandie J).

Where the wife expects to reap direct profit from the transaction, the transaction cannot be said to be voluntary: State Bank of New South Wales v Vecchio (Unreported, 10 November 1998, New South Wales Supreme Court, per Kirby J).

Neither can it be said to be voluntary where the monies secured by the guarantee are used to purchase an asset in which the wife is equally interested with her husband: Commonwealth Bank of Australia v Khouri (Unreported, 4 November 1998, Supreme Court of Victoria, per Harper J).

However, where the interest of the wife is a shareholding in the company through which her husband conducted his business and in which she has no real involvement, then a guarantee given by the wife over that company's debts will be voluntary: Commonwealth Bank of Australia v Khouri (supra).

But where the wife has an active and substantial interest in the conduct of, and the fortunes of, the business run by her husband, she will not be a volunteer in relation to any guarantee over the debts of that business: Radin v Commonwealth Bank of Australia (Unreported, 23 October 1998, Federal Court of Australia, per Lindgren J).

Where the transaction is not ex facie for the benefit for the wife, then the onus will lie on the party seeking to enforce the security to show that the wife was not, relevantly, a volunteer: Warbutron v Whiteley (1989) NSW ConvR 55-453 at 58, 288 per McHugh JA.

Regarding cash flow used for interest payments, Croft J held in Abdul at [61]:

…evidence that cash flows from the businesses were used to make interest payments on the family home which the defendants owned jointly is, in my view, irrelevant in this context as being no more than an “incidental benefit that accrues generally to the family”.[90]

Regarding shareholdings, in Euroasia, Robson J put it as a ‘real benefit’ test. He held at [128] that a wife being a shareholder (in her husband’s company) is not inconsistent with being a volunteer because the ultimate question is whether or not she obtained any real benefit from entering into the transaction at (see also Garcia at p 412).