Concept of Special Equity and Yerkey Principle

Discuss about the Corporate Law for National Australia Bank v Garcia.

As per the facts of the case National Australia Bank v Garcia (1998) 194 CLR 395, Mrs. Garcia, the appellant and her former husband mortgaged their home and executed it in favor of National Australia Bank Ltd. The appellant signed a guarantee in favor of the Bank securing the debts of the company of her former husband. Her husband assured her that there was no risk associated with the interests she was guaranteeing and neither the bank explained her obligations as a guarantor. She was a practicing physiotherapist, hence, was assumed intelligent enough to understand her role as a guarantor.

The parties dissolved their marriage and there was a failure in the business of her husband as well. The appellant assumed that with the dissolution of marriage her obligations as a guarantor should also dissolve. When the bank demanded guarantees on the failure of the business, the appellant claimed equitable relief against the contract. The trial court ruled that the documents were signed by the appellant under undue influence caused by her former husband with the assurance that it does not involve any real risks. The Court of Appeal disagreed with the trial court and overturned the decision given in Yerkley v Jones that is a landmark precedent on equity law in Australia stating the decision does not form a part of the Australian equity law. The High Court rejected the Court of Appeal, upheld the decision in Yerkley, and held that the Court of Appeal was incorrect to set aside the decision of Yerkley.

According to the Yerkey principle of special equity provides wives with liberal protection than the doctrine of undue influence. Although recent Australian courts have rejected to apply, the principle provided in Yerkey v Jones’s case (Hannigan 2015).

According to the concept of special equity, it was incorporated within the equitable jurisdiction as a means of precautionary measures that safeguarded wives from the equitable fraud that may be caused by their husbands or any third party creditor. The equity frauds are committed against the wives who acts as a guarantor of the debts of her husband.

The concept of equitable fraud and special equity includes the concepts of unconscionable conduct and undue influence.

Undue influence- The doctrine of undue influence implies that a stronger person dominates the will of the weaker party thus, exerting influence upon the weaker party. Thus, to establish undue influence, it is important to establish its essential element, which is lack of free will. Undue influence may be actual or presumed undue influence. Actual undue influence requires the aggrieved party to establish that he or she was part of a transaction without exercising his or her free will.

Undue Influence and Equitable Fraud

Undue influence is presumed when it is established that the parties are in a antecedent relationship where it is presumed that undue influence has been exerted by one party upon the other party where benefit has been acquired at the expense of the other party. Since undue influence is a form of equitable fraud, the special equity aims at safeguarding such wrongful conduct irrespective whether it is actual or presumed undue influence.

In Yerkey’s case, the concept of special equity was explained. It was held that when a married woman gives her consent to become the surety for the debt of her husband, where the husband obtains such consent, the surety might set aside such instrument prima facie. However, it must be established that the women executed the surety document without comprehending the consequence of the responsibility and the creditor without dealing with such surety, directly accepted such suretyship.

This principle lays down two essential grounds upon which the woman may set aside the suretyship. Firstly, the wife may set aside suretyship when she consented to give guarantee due to undue influence of her husband exercised upon her. However, here, the creditor must establish that the wife has obtained independent legal advice. Secondly, when the wife consented to become guarantor as she misunderstood the purpose and consequence of her obligations as a guarantor, she is entitled to set aside her suretyship. However, the creditor must establish that she he undertook all reasonable steps to inform her about the transactions details or that he reasonably believed the wife to be aware of her obligations and transactions.

The respondent contended that in order succeed in special equity claims, it is necessary to establish circumstances like business understanding and intelligence of women. The respondent further contended that the wife was a presentable professional physiotherapist, which establishes the fact that she was competent and intelligent woman to comprehend the obligations she assumed as a guarantor for the debts of her husband’s company. Further, being a physiotherapist, it is reasonably expected and any prudent person would assume that is understood the effects of her role as a guarantor and was aware of the transactions, hence, she is not entitled to special equity rights that can be exercised to set aside her guarantees.

The appellant contended that she did not fully understand the effect of assuming the responsibilities of a guarantor and that it would cost her the matrimonial home. She further contended that her husband assured that there was no real risk associated with her being the guarantor for his debts. The appellant further contended that her husband exercised undue influence upon her pressurizing her to become the guarantor of the debts of his company. Moreover, the bank did not provide any details about the transaction and neither explained her the obligations as a guarantor. Therefore, her consent to execute the suretyship instrument was obtained without her fee will, hence, she claimed for her right to special equity in order to set aside the document.

Analysis of the Court’s Decision

According to Dobbs and Roberts (2017), the High Court observed that though the husband of the appellant did not exert actual undue influence upon her but it was apparent that he exerted emotional pressure on the appellant. It is evident from the fact when he continuously commented how foolish the appellant was in respect of commercial matters whereas he had expertise in that field. Austin and Roberts (2017) further states that adequate evidence was adduced that established that she became the guarantor of the debts only to save her marriage from being dissolved and for the sake of herself and her children’s future. The High Court did not adopt the views that was expressed in Barclays Bank v O’Brien [1994] by reaffirming the accuracy of the principle established in the case of Yerkey v Jones [1939].

The High court upheld the rule stipulated in the Yerkey’s decision that marriage relationship between partners is based on trust and confidence. It is one such relationship where often women leave the business judgments to the other spouse. Under such circumstances, any business decision must be taken after explaining the party about its purpose and consequences. Hannigan (2015) argues that Mrs. Gracia was not forced by the respondent to sign the guarantee and was competent to understand the purpose and effect of signing a guarantee as besides being a professional physiotherapist, she was also a director of her husband’s company. Hence, it was reasonable for the bank to assume that she was aware of the obligations as a guarantor.

However, the High Court held that it was possible for the Bank to find out that the appellant reclined her confidence and trust in her husband with respect to her financial affairs. Hence, she was in a vulnerable state to agree to become a surety. Further, breakdown of marriage in Australia automatically alerts credit provider like bank to become aware of the potential vulnerability of the surety, especially, when a domestic home is at stake due to the surety arrangements. 

Conclusion and Court Outcome

It was established that Bank failed to follow its normal procedures as it neither advised nor explained the documents she was signing. Further, the fact that her husband committed misrepresentation towards her and her state of vulnerability is sufficient to establish that Bank is not capable of enforcing the surety obligation against the appellant. The fact that she was a physiotherapist and the director of her husband’s company does establish the fact that she was an intelligent lady but this ground cannot be used as a determinant factor of whether she is entitled to her special equity rights to set aside her guarantees. The home in which she resided was in danger and the bank failed to ensure whether she was aware of the risk.

Therefore, under such circumstances, the court held that the decision is based on the ground that equity safeguards the vulnerable parties in an antecedent relationship and ensure that in particular cases, they are provided with all necessary information before voluntarily placing a major asset of their relationship at stake for the advantage of of those who pressurizes such vulnerable person. 

References

Austin, K. and Roberts, K., 2017. Corporate law: Is it time to revisit our class action gateways?. Governance Directions, 69(4), p.238.

Barclays Bank v O’Brien [1994] 1 AC 180

Dobbs, D. and Roberts, C., 2017. Law of remedies: damages, equity, restitution. West Academic.

Garcia v National Australia Bank (1998) 194 CLR 395; [1998] HCA 48

Hannigan, B., 2015. Company law. Oxford University Press, USA.

Yerkey v Jones [1939] HCA 3 – 63 CLR 649; (1938) SASR 201