Lenders
are now well aware of the decision of the High Court in Garcia
v National Australia Bank (1998) where a wife guaranteed the
debts of her husband's company.
The trial judge found that at the time Mrs Garcia signed a
guarantee in November 1987 that she understood she was executing
a guarantee and that she believed it was a guarantee of the
debtor company's overdraft. He also found, however, that she
did not understand that the guarantee was secured by the all
moneys mortgage which she had signed in 1979 and that she signed
the guarantee thinking that it was quite safe to do so or was "risk
proof".
Mrs Garcia was held not to be bound by the guarantees she
had given. This was despite the fact that she was an educated
woman who was a physiotherapist, was a director of the debtor
company and was recorded as being a shareholder. The trial
judge was not satisfied, on the whole of the evidence, that
the companies were "anything more than Mr Garcia's creation
and that he was in complete control of them" and he accepted
Mrs Garcia's evidence that she was not directly involved in
the debtor company (or the other companies associated with
her husband).
The majority of the High Court recognised that there was a
need to protect married women from consequences of entering
improvident transactions based on a request by their husband
and in reliance on the special relationship of trust and confidence
that arose from a marital relationship. The rationale is not
based on the subservience or inferior economic position of
women, nor is it based on a wife's vulnerability to exploitation
because of her emotional involvement. Rather it is based on
trust and confidence between marriage partners where one spouse
may well leave many business judgments to the other spouse
with little consultation or explanation.
To avoid a guarantee on the basis of principles set out in
Garcia, it must be shown:
(a) in fact the surety did not understand the purport and
effect of the transaction; (b) the transaction was voluntary (in the sense that the surety
obtained no gain from the contract the performance of which
was guaranteed);
(c) the lender is to be 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
(d) the lender did not itself take steps to explain the transaction
to the wife or find out that a stranger had explained it to
her.
The High Court did hint at the possibility that these principles
may be extended beyond husband/wife relationships. The boundaries
of Garcia are being tested continually in the Courts and although
to still restricted to wives, attitudes seem to be softening.
There have been some remarks made obiter in recent cases that
relief under Garcia principles should extend to de facto relationships,
and even to ex wives, but cases brought by siblings have been
firmly rejected. Similarly, Courts have been unwilling to accept
that the principles that might be applied to a husband and
wife extend to parents who guarantee a debt of their child.
Lenders should continue to ensure that in all cases where
a person is asked to give a guarantee and has a special relationship
of trust and/or emotional dependence with the debtor or with
the director of the debtor company, that that person receives
independent legal and financial advice on the transaction,
and such advice is documented.
|
