Garcia v NAB
Garcia v National Australia Bank Ltd
High Court of Australia
[1998] HCA 48; 6 CCL 81; 194 CLR 395; 155 ALR 614; 72 ALJR 1243 (6 August 1998)
Case details
Court
High Court of Australia
Citations
[1998] HCA 48
6 CCL 81
194 CLR 395
155 ALR 614
72 ALJR 1243
Judges
Gaudron J
McHugh J
Gummow J
Kirby J
Hayne J
Callinan J
Appeal from
Court of Appeal (NSW)
National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577
Judges
Mahoney P
Meagher JA
Sheller JA
Appeal from
Supreme Court of NSW
Garcia v National Australia Bank Ltd (1993) 5 BPR 11,996
Judge
Young J
Issues
Undue Influence
Full case
AustLII ➤
Overview
A woman (Garcia) and her husband executed mortgage in favour of bank to secure guarantees under husband's business. This followed assurances from the husband that there was 'no danger' in the transaction.
No explanation of the transaction was given by the bank.
Court held that the guarantee was void as a result of undue influence.
Facts
Mrs Garcia (physiotherapist) and her husband executed mortgage in favour of bank for purposes of securing guarantees under husband’s business (Mrs Garcia had signed four guarantees, including a guarantee in November 1987 in respect of which the NAB subsequently demanded payment).
Mr Garcia had assured Mrs Garcia that there was no ‘danger’ in the guarantee transaction; no explanation of transaction was given by bank and documents were signed at the bank in less than a minute. The Trial Judge found Garcia understood nature of guarantee but not the extent of this particular guarantee.
The parties later divorced and Garcia sought declaration guarantees void as a result of undue influence.
Trial Judge (Justice Young)
Mrs Garcia understood what a guarantee was, but not that this guarantee was secured by a previously signed ‘all moneys mortgage’”. Undue Influence was established. There was no finding of actual undue influence by Mr Garcia; instead, the decision was based on the principles from Yerkey v Jones.:
[I]f a married woman's consent to become a surety for her husband's debt is procured by the husband and without understanding its effect in essential respects she executes an instrument of suretyship which the creditor accepts without dealing directly with her personally, she has a prima-facie right to have it set aside. …
(per DIxon J in Yerkey v Jones (1940) 63 CLR 649)
Here Mr Garcia pressured his wife to sign the document which, Young J found, she did because Mr Garcia ‘consistently pointed out what a fool she was in commercial matters whereas he was an expert, and because she was trying to save her marriage’.
An alternative case based on Amadio principles (unconscionable conduct) was not made out. This was because even if the husband’s conduct was unconscionable, the bank was not aware of any special disability (Mrs Garcia was an articulate professional woman).
An alternative case based on the Contracts Review Act 1980 (NSW) also failed.
Court of Appeal
Allowed an appeal by NAB. Did not consider they were bound to follow Yerkey v Jones.
High Court
Justices Gaudron, McHugh, Gummow and Hayne
Their Honours observed that there was no positive finding of actual undue influence despite fact husband had pressured wife and she signed because he repeatedly told her she was a fool and he an expert, and to try to save their marriage.
Their Honours further observed that
[para 20] Australian society, and particularly the role of women in that society, has changed in the last six decades is undoubted. But some things are unchanged. There is still a significant number of women in Australia in relationships which are, … marked by disparities of economic and other power between the [p 404] parties.
They noted that Yerkey v Jones was:
[para 21] ... based on trust and confidence, in the ordinary sense of those words, between marriage partners. The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse. In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect and incomplete, if not simply That that is so is not always attributable to intended deception, to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation because of emotional involvement. It is, at its core, often a reflection of no more or less than the trust and confidence each has in the other.
Their Honours considered that the Yerkey principles may find application in relationships beyond those described in Yerkey:
[para 22] It may be that the principles applied in Yerkey v Jones will find application to other relationships more common now than was the case in 1939 - to long term and publicly declared relationships short of marriage between members of the same or of opposite sex - but that is not a question that falls for decision in this case. It may be that those principles will find application where the husband acts as surety for the wife but again that is not a problem that falls for decision here. This case concerns a husband and wife and it is to that relationship that the present decision relates, just as it is concerned only with the circumstance of the wife acting as surety for her husband. …
[para 23] In his reasons for decision in Yerkey v Jones, Dixon J dealt with at least two kinds of circumstances: the first in which there is actual undue influence by a husband over a wife and the second, that dealt with in Mueller, in which there is no undue influence but there is a failure to explain adequately and accurately the suretyship transaction which the husband seeks to have the wife enter for the immediate economic benefit not of the wife but of the husband, or the circumstances in which her liability may arise. The former kind of case is one concerning what today is seen as an imbalance of power. In point of legal principle, however, it is actual undue influence in that the wife, lacking economic or other power, is overborne by her husband and goes surety for her husband's debts when she does not bring a free mind and will to that decision. The latter case is not so much concerned with imbalances of power as with lack of proper information about the purport and effect of the transaction. The present appeal concerns circumstances of the latter kind rather than the former. [footnotes omitted]
…
[para 33] [Relief where there is no actual undue influence] depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction's purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable. …
On that basis
[para 40; page 411] … the only question of notice that arises is whether the creditor knew at the time of the taking of the guarantee that the surety was then married to the creditor. …
The Bank was aware that Mrs Garcia was married to the creditor and, because they took no step to explain the transaction to her and knew of no independent advice to her about it, Garcia was entitled to succeed.
Justice Kirby
Justice Kirby agreed that the appeal should be allowed, despite noting concerns about whether equity ought to provide relief in a case such as this - in particular:
[at para 53; page 415] The wife was not deluded nor coerced by the husband into signing the guarantee. Nor was her will overborne in a technical sense. … If the financial transactions [involving the business] had proved profitable, and if the personal relationships of the husband and wife had improved, it scarcely seems likely that the wife would have disclaimed the economic benefits as vigorously as she has now sought to escape the economic burdens.
[In addition it was] specifically found that she would have appeared to the Bank as 'an intelligent articulate lady with a professional position calling at the bank, appear[ing] to be voluntarily signing a guarantee in respect of an account of which she was a director of the company concerned, and there was nothing to give the bank even suspicion". The wife knew what a guarantee was. She knew that the document she was executing was a guarantee. If the transaction at the Bank took only a minute, this was, at least in part, because the wife asked no questions. She sought no information or advice. She gave the appearance of knowing what she was doing. She had previously set up her own professional business as a physiotherapist. ... [footnotes omitted]
While Justice Kirby considered the presumption of undue influence applied here, he did not consider it should be confined to 'married woman' but should instead identify a broader principle (para 66). In relation to this case, his Honour concluded:
[para 81] 'The Bank knew, or could readily have discovered, that Mrs Garcia reposed trust and confidence in her husband in relation to her financial affairs. Mrs Garcia was thus in a position of potential vulnerability to demands that she should act as a surety, even if the Bank had no reasonable means of knowing the details of the particular stresses of her personal relationship. Breakdown of personal relationships is sufficiently common in Australia to have alerted a credit provider, such as the Bank, to the potentiality of this surety's vulnerability. This is particularly so where (as here) a domestic home in which the borrower lived was put at risk by the surety arrangements. The Bank could readily, without unduly intrusive questions, have discovered the nature of the parties' relationship. It was already aware that they were cohabitees. ... Sufficient that basic questioning disclosed a transaction on its face of little or no specific advantage to the proposed surety and that such party stood at high risk in relation to the roof over her head.
[para 82] Misrepresentation by Mr Garcia to his wife being established, together with constructive notice of the potential vulnerability of the wife, the Bank is unable to enforce the surety obligation against her because it is fixed with constructive notice of her right to set aside the transaction having regard to its failure to take reasonable steps to satisfy itself that she entered the obligation freely and with knowledge of the relevant facts. It is here that the principal weakness in the Bank's case is obvious. As the primary judge found, in this case the Bank's ordinary procedures were not followed. Mrs Garcia was given no advice or explanation of the documents which she was signing. Still less was she told to seek independent advice or that such evidence would be a pre-condition to the Bank's acceptance of her guarantee. The fact that she was a director of the company and that she presented as an "intelligent articulate lady" in a professional position is certainly relevant. But it is not ultimately determinative. To the knowledge of the Bank, the home in which she lived was being placed in jeopardy. The Bank failed to insist that she was made fully aware of that risk. In such circumstances, there being no exceptional reasons to hold otherwise, the Bank was unable to enforce the surety obligation. Although the case is not clear cut and some of the evidence supported the Bank's arguments, I have concluded that the primary judge was right to hold as he did. Banks and other credit providers can protect themselves from this result. Most already do so.
[para 83] The result to which I have come flows not from the fact that Mrs Garcia was a married woman in need of special protection, as such, from the law of equity. It flows from a broader doctrine by which equity protects the vulnerable parties in a relationship and ensures that in proper cases they have full information and, where necessary, independent advice before they volunteer to put at risk the major asset of their relationship for the primary advantage of those to whose pressure they may be specially vulnerable.
Justice Callinan
Agreed with the findings of the trial judges and the orders of the majority.