6.10 ‘Surety wives’

In Yerkey v Jones,^[1] Mr Jones purchased a property and obtained a loan to do so. He got his wife to give a guarantee to the creditors in the form of a mortgage over land she owned. Upon Mr Jones defaulting, the creditors sought to exercise the guarantee. Justice Dixon stated that:

[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.^[2]

This principle is obviously extraordinarily far-reaching. The husband in this case does not need to be guilty of any wrong towards the wife. However, where it is the case that the wife understood the effect, in essential respects, of the instrument of suretyship, it would be necessary for her to have acted under the husband’s undue influence in order to have a contract set aside.

The modern Australian approach to “surety wives” was made clear in Garcia v National Australia Bank Limited.^[3]  In that case, the appellant and her husband entered into several guarantees, secured by their matrimonial home, for the husband’s company. Throughout the marriage, the husband had repeatedly told the appellant that she had no business sense, while he was an expert. The guarantee in dispute was, according to the appellant, entered into at a time when she was concerned for the future of the marriage, and took less than a minute to execute. While the husband had explained that the transaction involved no danger, the wife was given no independent advice or explanation of the transaction by the bank or any third-party. The Court found that, while the appellant was aware that she was signing a guarantee, she did not understand the nature of the guarantee in question. Having noted that the Yerkey v Jones test did not depend on the wife being under the husband’s undue influence, or on the husband acting as agent for the creditor, the Court concluded that:

Rather, it 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.^[4]

There are some important limitations to this far-reaching principle. First, where the wife benefits directly from the transaction, she cannot be seen as a “volunteer”, and can thus not rely on the Yerkey v Jones principle. In Garcia v National Australia Bank Limited, the trial judge, with whom the majority of the High Court agreed, held that the appellant was not directly involved in her husband’s company, despite that she was both a director and a shareholder of the company. This was due to the fact that the company was in the husband’s complete control, and even though it was clear that benefits flowed from the company to the family from time to time, it was concluded that:

Taken as a whole, those findings demonstrate that the appellant in fact obtained no real benefit from her entering the transaction; she was a volunteer. The fact that she was a director of the company is nothing to the point if, as the trial judge’s findings show, she had no financial interest in the fortunes of the company.^[5]

However, in the more recent case of Chandran v Narayan,^[6] the Court noted that: “whilst each case must be dealt with on its own facts, where the wife has a more active interest in the conduct and fortunes of the husband’s business she is not considered to be a volunteer for the purpose of the rule”. In that case, the surety wife argued that her involvement in her husband’s business was limited to acting as a dispatcher and a payroll clerk. However, based on the facts before him, Young CJ concluded that her role was greater than that, and that:

[S]he was not merely a person who was standing by, ignorant of all the affairs of the business, who was convinced by her husband that she had to become more deeply involved. She at the very least accepted that it was necessary for the good of the family that she put her interest in the family properties on the line as security for the debts.^[7]

Second, the creditor may quite easily protect itself by dealing directly with the wife, or otherwise making sure that she had received competent, independent and disinterested advice:

If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing, cannot, I think, in itself give her an equity to set it aside[.]^[8]

In deciding Garcia v National Australia Bank Limited, the majority of the Court left open the question of the exact scope of this rule: “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”.^[9] Justice Kirby, on the other hand, noted that:

The stereotype underlying Yerkey may hold true for some, perhaps even a significant number of, wives. But this Court should, where possible, refuse to “classify unnecessarily and overbroadly by gender when more accurate and impartial” principles can be stated … When an opportunity is presented legitimately to refashion an equitable principle so that it is not expressed, irrelevantly, in discriminatory terms, this Court should accept that opportunity.^[10]

It is reasonable to read this as an indication that the High Court may be willing to extend the “surety wife” rules to other relationships, such as same-sex marriages and de facto relationships. Indeed, while there is no authority yet to support this assertion, in today’s society, the “surety wife” rules can reasonably be viewed as gender neutral. Therefore, the principle may be invoked by a husband entering into a contract as a guarantor for his wife’s loan.