Bond Law Review

Volume 19 | Issue 1 Article 3

2007

Rethinking the Special Equity Rule for Wives: Post

Garcia, Quo Vadis, Where to From Here?
Charles Chew
charles@[Link]

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Rethinking the Special Equity Rule for Wives: Post Garcia, Quo Vadis,
Where to From Here?
Abstract
The operation of the special equity principle can be seen where a wife does not understand the nature and
effect of the guarantee she is induced to sign by the husband whereupon the transaction may be set aside. It
should be remembered that women often become involved in these guarantees because of the existence of a
personal relationship rather than because of any real appreciation of the legal relationship created. Credit
providers such as banks involve women in this kind of ‘sexually transmitted debt’, ‘emotional debt’ or
‘relationship debt’ as a means of countering debtor default or to compensate for inadequate or non‐existent
debtor assessment procedures, rather than to make it more difficult for men to access credit. This article looks
at the how the High Court’s decision in Garcia v National Australia Bank has followed the special equity
principle and raises questions concerning its status. It also looks at the application of the principle in Garcia in
the modern context and the limitations and the future of that application.

Keywords
special equity, consumer credit

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 RETHINKING THE SPECIAL EQUITY RULE FOR WIVES: POST
GARCIA, QUO VADIS, WHERE TO FROM HERE?

CHARLES Y C CHEW *

Abstract

The operation of the special equity principle can be seen where a wife does not
understand the nature and effect of the guarantee she is induced to sign by the
husband whereupon the transaction may be set aside. It should be remembered
that women often become involved in these guarantees because of the existence
of a personal relationship rather than because of any real appreciation of the
legal relationship created. Credit providers such as banks involve women in
this kind of ‘sexually transmitted debt’, ‘emotional debt’ or ‘relationship debt’
as a means of countering debtor default or to compensate for inadequate or
non‐existent debtor assessment procedures, rather than to make it more
difficult for men to access credit. This article looks at the how the High Court’s
decision in Garcia v National Australia Bank has followed the special equity
principle and raises questions concerning its status. It also looks at the
application of the principle in Garcia in the modern context and the
limitations and the future of that application.
Introduction: Special equity rule‐the search for a principle
Consumer groups have complained about consumer credit practices causing women
who have become guarantors or sureties for their spouses to eventually lose their
homes and their financial security. One of their more urgent concerns has been the
practice of credit providers requiring women to take some legal responsibility for
credit provided to their male spouses or partners and from which the women
involved receive no benefit.1

* MA (Syd), B Leg S (Hons) (Macq), Dip Ed (New England), PhD, Grad Dip Leg Pract (UTS),
Senior Lecturer in Law, Faculty of Law, University of Wollongong.
1 Trade Practices Commission, Guarantors: Problems and Perspectives (Discussion Paper, 1992)
at 14.
 (2007) 19.1 BOND LAW REVIEW

Although for the present, the case law in respect of the special equity rule has been
restricted to wives 2 there have been suggestions that the principle could be extended
to a wider range of relationships of trust and confidence such as those involving
husbands as well as wives; de facto relationships and same‐sex arrangements;
parents and grandparents in respect of their financial transactions with children or
grandchildren; members of extended families, such as aunts and uncles; and close
friends.3
The special equity rule originally evolved as a result of the courts’ interpretation of
the early English cases decided in respect of guarantees given by wives to secure the
debts of their husbands. The courts did not apply the doctrines of undue influence or
unconscionable conduct because they were somewhat vague in their deliberations
and gave the impression that they were deciding the cases on the basis of a special
principle which only applied to the guarantees wives gave.4
The existence of this special equity as an independent principle which applies to
wives who became guarantors was clearly acknowledged in Australia in the
landmark decision of Yerkey v Jones.5 This case involved Mr and Mrs Yerkey, the
plaintiffs who sued upon a covenant to pay principal and interest contained in a
mortgage of land owned by Mrs Jones. Mr Jones intended to purchase a property
from the plaintiffs for the purpose of poultry farming. A condition of the debt was
that Mr Jones should procure from his wife a second mortgage over her property to
secure £1,000 of the £3,300 final payment. The solicitor of the creditors prepared the
mortgage and Mr Jones persuaded his wife to sign. Under the mortgage which was a
“guaranteed mortgage”, Mrs Jones was made personally liable to pay the £1,000. Mr
Jones failed in his poultry business having occupied the farm for about a year
without paying any interest and abandoning it altogether.
Mrs Jones sought equitable relief, claiming that she did not understand the nature of
the transaction although the solicitor explained it to her in some detail. Mrs Jones did
not receive any independent legal advice. In the Supreme Court of South Australia,
Napier J held that on grounds of undue influence, misrepresentation and unilateral
mistake, Mrs Jones was entitled to equitable relief against the personal covenant in
the mortgage.

2 As is evident in, for example, Yerkey v Jones (1939) 63 CLR 649 and Garcia v National
Australia Bank (1988) 155 ALR 614.
3 Expert Group on Family Financial Vulnerability, Good Relations, High Risks: Financial
Transactions Within Families and Between Friends (Report, 1996), 10.
4 See Turnbull & Co v Duval [1902] A C 429 and Chaplin & Co Limited v Brammall [1908] 1K B
233.
5 (1939) 63 CLR 649.

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In the High Court it was held that a wife like Mrs Jones stands in a special position,
where she acts as a guarantor for her husband in that if she signs a written guarantee,
she has a prima facie right to have it set aside if her consent was obtained by her
husband and she did not understand its effect.6 There Dixon J’s judgment had come
to represent the authoritative statement of how equity will provide relief for a wife
who has agreed to be surety for her husband’s debt. His Honour examined a number
of authorities on the position of wives as guarantors for their husbands such as Shears
& Sons Ltd v Jones,7 Turnbull & Co v Duval8 and Chaplin & Co Ltd v Brammall9 and
allowed the appeal explaining the position in this oft quoted passage:

If 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 with her personally, she has a prima facie right to have it set
aside. 10

Such an equitable principle was originally developed as a way of ameliorating the

harshness of the common law, which prevented a woman from dealing with a
property in her own name.11 The position of married women under common law has
been explained by Blackstone in the following way:

By marriage the husband and wife are one person in law. The very being or
legal existence of the woman is by the common law suspended during the
marriage, or, at least it is incorporated and consolidated into that of the
husband, under whose wing, protection and cover she performs everything. 12

6 Above n 5 at 683. It is an essential element of the principle in Yerkey that the wife obtains no
tangible benefit from the transaction.
7 (1922) 128 LT 218.
8 [1902] AC 429.
9 [1908] 1 KB 233.
10 Above n 5, 683. See also Warburton v Whitley (1989) NSW Conv R 55‐453; Bawn v Trade
Credits Ltd (1986) NSW Conv R 55‐290; Broadlands International Finance Ltd v Sly (1987) ANZ
Conv R 329; Bank of Victoria Ltd v Mueller [1925] VLR 642, 648.
11 Lee Aitkin, ‘Equity, Third‐Party Guarantees and Wife as Guarantors: Recent English
Developments’ (1992) 3 Journal of Banking and Finance 260, 264.
12 Quoted in G Williams “Equitable Principles for the Protection of Vulnerable Guarantors: Is
the Principle in Yerkey v Jones Still Needed?” (1994) 8 Journal of Contract Law 60, 69. See
Aitkin, above n 11, 264.

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A Critical Analysis of The Yerkey Principle in the Context of Garcia v

National Australia Bank
The Yerkey principle of special equity which provides wives with more liberal
protection than the doctrine of undue influence was reluctantly applied in some
cases13 and distinguished in others.14 Recent appellate courts in Australia 15 and in
England16 have rejected this principle. However, the recent surprising High Court
decision in Garcia v National Australia Bank Ltd 17 has once again reignited the debate
on the judicial basis of the rule in Yerkey v Jones by reviving it from the brink of
judicial irrelevance. The High Court preferred not to adopt the views expressed by
the House of Lords in Barclays Bank v O’Brien18 by re‐affirming the correctness of the
Yerkey principle and addressing the strong criticisms against it. In so doing, the court
provided an authoritative statement on the hitherto controversial status of Yerkey v
Jones.19 The High Court in Garcia found it unnecessary to consider O’Brien in detail,
and merely made the observation that in that case the House of Lords discounted

13 Warburton v Whiteley (1989) 5 BPR 97‐338; NSWLR Conv R 55‐453; Peters v Commonwealth
Bank (1993) NSW Conv R 55‐629; Garcia v National Australia Bank Ltd (1993) ANZ Conv R
603; ANZ Bank v McGee [1994] ASC 56‐278.
14 European Asian of Australia Ltd v Lazich [1987] ASC 55‐564; European Asian of Australia Ltd v
Kurland (1985) 8 NSWLR 192; Commonwealth Bank v Cohen [1988] ASC 55‐681; Akins v
National Australia Bank Ltd [1994] 34 NSWLR 155; Commonwealth Bank v McGlynn (1995)
ANZ Conv R 81; ANZ Bank Ltd v Dunosa Pty Ltd (1995) ANZ Conv R 86.
15 National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577; Akins v National Australia Bank
Ltd [1994] 34 NSWLR 155. In Gregg v Tasmania Trustees (1997) 73 FCR 91 there was an action
by a (school teacher ) wife to set aside a mortgage of the matrimonial home which she had
given jointly with her husband (who later became a bankrupt) to a creditor, the Tasmanian
Trustees for a loan to a company, Tasram, in which the husband had an interest. Here
Merkel J ( at 113‐114) gave a summary of social development in Australia stressing that
fundamental changes in the role of women in the Australian workforce in recent years
have negatived the necessity for any legal equities in favour of wives. On this basis he
pointed out that Yerkey v Jones was no longer good law and that the equitable presumption
in favour of a vulnerable wife as enunciated by Dixon J in Yerkey v Jones in 1939 has now
been subsumed and or superseded by general principles relating to unconscionability as
laid down by the High Court in Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
16 Barclays Bank plc v O’Brien [1994] 1 AC 180; CIBC Mortgages p/c v Pitt [1994] 1 AC 200.
17 (1998) 155 ALR 614.
18 [1994] 1 AC 180.
19 J O’Donovan, “The Retreat from Yerkey v Jones: From Status Back to Contract” (1996) 26
University of Western Australia Law Review 309.

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what it understood was the special equity theory as stated by Dixon J in Yerkey v
Jones.20
In Garcia the High Court expressed the view that Yerkey v Jones continues to state the
law in Australia. In its analysis, the court did not see any requirement for any
presumption of undue influence nor did it see any necessity to characterise the
husband as the agent of the lender (as the House of Lords did in O’Brien). The
essence of the principle lies in the relationship of trust and confidence that exists
between the guarantor and the borrower, and the creditor’s knowledge of this
relationship.
The facts of Garcia are relatively uncomplicated. The appellant Mrs Garcia, a qualified
physiotherapist, in 1979 gave a mortgage with her husband to secure a loan in
relation to his business. The mortgage secured all moneys they might owe including
moneys secured by future guarantees. Mrs Garcia between 1985 and 1987 executed a
number of guarantees given by both her and Mr Garcia in support of the latter’s
businesses, which included a business of buying and selling gold through a
company. She became shareholder and director of this company, although she was in
reality not directly involved in its operations over which her husband had control.
After her divorce in 1988, she sought a declaration that the mortgage and guarantees
were not binding on her and should be set aside. The respondent bank demanded
payment of $327,189 under one of the guarantees (‘the November 1987 guarantee’)
and claimed possession of the home, her husband’s interest having been transferred
to her in the divorce settlement. Mrs Garcia claimed that she did not understand the
transaction, being under the mistaken belief that the guarantee was of limited
overdraft accommodation to be applied only in the purchase of gold, and did not
understand that her obligations under the guarantee were secured by the mortgage
over her family home. The husband’s business unfortunately proved to be a failure
and the bank proceeded to sell the home for the debt owed. Mrs Garcia contended
that she gave the guarantee in reliance of representations by her husband that it
would be safe to do so. At first instance, her claim of actual undue influence on the
part of the husband and another based on the Contracts Review Act 1980 (NSW) both
failed.21 Her claim based on Yerkey v Jones, on the other hand, succeeded, was
overturned by the Court of Appeal, but was eventually upheld by the High Court.

20 Garcia v National Australia Bank (1998) 155 ALR 614 at [15] per Gaudron, McHugh,
Gummow and Hayne JJ.
21 Garcia v National Australia Bank Ltd, above n 13.

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Majority Judgment
The majority of the High Court in Garcia was able to resurrect the Yerkey doctrine by
including as a ‘special disability’ the disadvantage suffered by a wife who acted as
guarantor in a transaction from which she had received no benefit and without
adequate explanation as to its nature and effect. The High Court defied the latest
judicial predictions and trend towards favouring the adoption of the doctrine of
unconscionability as enunciated in Commercial Bank of Australia v Amadio22 and
indirectly criticised the lower courts’ reluctance to accept the validity of the special
equity rule23 as evidenced by the majority of the justices cautioning that ‘it is for this
court alone to determine whether one of its previous decisions is to be departed from
or overruled’.24 The court contended that the ‘special equity’ rule for wives and the
doctrine of unconscionability and notice have been crucial to the evolution of the
modern law of guarantees. At the same time, in some situations, the development in
these areas has also been affected by a number of statutory provisions.25
The High Court then expressed the view that Amadio was not intended to mark out
the boundaries of the field of unconscionability.26 The majority referred to what was
said in Amadio that ‘it is impossible to describe definitely all the situations in which
relief will be granted on the ground of unconscionable conduct’.27 Unlike Yerkey, the
unconscionable conduct depicted in Amadio concerned actual misconduct which
brought about the entry of the surety into the transaction.28 The court was able to
identify the crucial difference between the doctrine of Yerkey /Garcia and that of
Amadio. The Amadio principle was used as a ground for setting aside a transaction for
unconscionability in situations where the weaker party was under a special
disability, and the disability was evident to the stronger party to make it unfair or
unconscientious that he or she procure or accept, the weaker party’s assent to the

22 (1983) 151 CLR 447.

23 See, for example, European Asia of Australia Ltd v Kurland (1985) 8 NSWLR 192; Akins v
National Australia Bank Ltd (1994) 34 NSWLR 155; National Australia Bank Ltd v Garcia (1996)
39 NSWLR 577; Teachers Health Investments Pty Ltd Wynne (1994) NSW Conv R 55‐718;
Gregg v Tasmanian Trustees Ltd (1997) 73 FCR 91; Miles v Shell Company of Australia (1998)
156 ALR 133.
24 Above n 17, at 619 per Gaudron, McHugh, Gummow and Hayne JJ.
25 See, for example, ss 51AA, 51 AC, 52.
26 Above n 17, 622.
27 Ibid 622.
28 Above n 17, 622.

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impugned transaction.29 If these criteria are met, the burden shifts to the stronger
party to show that the transaction was fair, just and reasonable.30
The idea of a ‘special disability’ (when considering unconscionability) as mentioned
is a pivotal one in Amadio where it must be sufficiently evident to the lender. In
reality, there are a great number of cases in which practical problems encountered by
guarantor wives have rendered them unable to demonstrate they are under a “special
disability” that is sufficiently evident to the lender.31 This means that the only option
left for the court is to grant relief to the guarantor wife under the Yerkey v Jones
principle, as is happening in Garcia.32
In Amadio, despite the fact that the bank did not leave the acquisition of the execution
of the mortgage transaction to the son, it nonetheless had notice of the circumstances
that the Amadios may have been acting under their son’s influence and it did not
succeed in making certain that they received independent advice. On the other hand,
it should be noted that in Garcia, the guarantor wife’s status as a professional, a
director of the company, as well as her interest in the family business would not
qualify her from relying on Amadio. Yet the circumstances may raise in the mind of
the lender a suspicion or doubt as to the ability of the guarantor wife to secure the
debt and her knowledge of financial matters to enter into the transaction. It is
possible to look at this suspicion or doubt as being related to the concept of
constructive notice.
Despite the questionable validity of the ‘special equity’ rule, the High Court has
given its endorsement in Garcia which means that it will remain as good law in
Australia for sometime to come. It is submitted that although a number of aspects of
the judgment have been welcome, especially the concept that a wife’s particular
vulnerability may be extended to other relationships of ‘trust and confidence’ such as
‘long term and publicly declared relationships short of marriage between members of

29 Above n 17, 622.

30 Bromley v Ryan (1956) 99 CLR 362, 428‐9.
31 For example, Teachers Health v Wynne (1994) NSW Con R 55‐718; Akins v National Australia
Bank (1994] 34 NSWLR 155.
32 See Warburton v Whitely (1989) 5 BPR 97‐338; (1989) NSW Conv R 55‐453. See also G
Williams, ‘Equitable Principles for the Protection of Vulnerable Guarantors: Is the Principle
in Yerkey v Jones Still Needed?’ (1993) 8 Journal of Contract law at 68‐83; B Collier,
‘Confusion Now Hath Made This Masterpiece’ (1997) 25 Australian Business Law Review
190, 190‐202.

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the same or opposite sex’,33 Garcia has not adequately resolved many uncertainties
which dominate this contentious area of the law.34
The main judgment was given by the majority, namely, Gaudron, McHugh,
Gummow and Hayne JJ (with Callinan J delivering a separate judgment) who
believed that the rule in Yerkey v Jones remains good law but did not go into a
detailed analysis of conflicting authorities.35 Their Honours nevertheless held instead
that the reasons given in the judgment of Dixon J were ‘not significantly different’
from the reasons of the other members of the court.36 The decision was to be seen as
particular applications of accepted equitable principles which have as much
application today as they did then.37 The majority then concluded that the authority
of Yerkey v Jones should be considered as of continuing legal utility because of the
‘significant number of women in relationships...marked by disparities of economic
and other power between the parties’38 They argued that Dixon J conveniently
examined two sets of circumstances in which it could be said that the guarantor was
a volunteer, albeit a ‘mistaken volunteer’ who obtained no financial benefit from the
transaction and who entered into an improvident bargain.39
The first circumstance is where there is actual influence by the husband over the
wife. In this case, Dixon J said that it will not be sufficient to merely explain the effect
of the guarantee to the guarantor. Their Honours quoting Dixon J in Yerkey v Jones
explained that ‘nothing but independent advice or relief from the ascendancy of the
husband over her judgment and will would suffice’.40 The second circumstance is
where there is no undue influence, but where “if the creditor takes adequate steps to

33 Garcia, above n 17, [22] per Gaudron, McHugh, Gummow and Hayne JJ and [109] per
Callinan J.
34 Robyn Baxendale, ‘Garcia v National Bank Limited ‐ Ensuring Equity in Surety
Transactions: A Legal Debt‐End?’ (1999) 21 Sydney Law Review 313 at 313. It should be
pointed out that the thorny question of what relationships may be given protection in third
party guarantees has been clarified. There is ‘no rational cut‐off point’ as to the kinds of
relationships which may be susceptible to undue influence in guarantee contracts. In the
absence of banks evaluating the extent to which a debtor may have influence over a
guarantor ‘the only practical way forward is to regard banks as “put on inquiry” in every
case where the relationship between the surety and the debtor is non‐commercial’. See
Royal Bank of Scotland p/c v Etridge (No 2) [2002] 2 AC 773, para 87 per Lord Birkenhead.
35 Above n 17, at 618‐619 where the majority gave only a superficial consideration to the
judgment of Sheller J in Garcia v National Australia Bank (1996) 39 NSWLR 77, 598.
36 Above n 17, 619.
37 Ibid 619.
38 Ibid.
39 Ibid 621‐2.
40 Ibid 621.

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inform [the wife] 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 give her an equity to set the
instrument aside’.41 In this situation, the High Court reasserts the proposition that to
avoid the impeachment of a transaction of this nature, the creditor must take
adequate steps to inform the wife, and the creditor must have reasonable ground to
suppose that she has an adequate comprehension of the obligation she is undertaking
and an understanding of the effect of the transaction.42
The majority contended that the changes in Australian society and the role of women
since Dixon J’s judgment should be viewed as ‘particular applications of accepted
equitable principles which have as much application today as they did then’.43 The
justices did not assess Yerkey on the basis of the alleged inferior economic, social and
domestic position of women generally; instead, they observed that:

So far as Yerkey v Jones proceeded on the basis of the early decision of Cussen J
in The Bank of Victoria v Mueller,44 it is based on trust and confidence in the
ordinary sense of those words, between marriage partners. 45

The majority argued that it would be unconscionable for a creditor to enforce a

guarantee against a surety‐wife who was a volunteer, if it can be shown that she did
not understand the object and effect of the transaction and the creditor took no steps
to explain the transaction and did not reasonably believe that a competent,
independent and disinterested stranger had done the same. Thus what made it
unconscionable to enforce was a combination of circumstances, where:

in fact the surety did not understand the purport and effect of the transaction;
the transaction was voluntary (in the sense that the surety obtained no gain
from the contract the performance of which was guaranteed); 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…46

The majority did consider the possibility of extending the rule in the future to
husbands acting as sureties and to relationships which are ‘long term and publicly

41 Ibid 622.
42 Ibid 621‐2, quoting Yerkey v Jones (1939) 63 CLR 649 at 684.
43 Ibid 619.
44 [1925] VLR 642.
45 Above n 17, [21].
46 Ibid 623.

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declared relationships short of marriage between members of the same or opposite

sex’.47 The court stopped short of elaborating, pointing out that such issues were not
the focus of the present case and that ‘the resolution of questions arising in the
context of other relationships may well require consideration of other issues’.48 So,
although no clear guidance is given, the possible extension of the rule in the future
may signal a departure from the Yerkey principle in the sense that courts hereafter
can look to cohabitation and emotional dependency rather than concentrate on the
marital status of the parties.

Minority Judgments
Kirby J contended that Dixon J’s analysis in Yerkey v Jones was a ‘judicial statement
worthy of the greatest respect but not commanding obedience as a matter of binding
precedent’.49 His Honour delivered a strong dissent by saying that a principle which
placed a wife in an ‘advantageous position that she would not have enjoyed had she
not been married to the principal debtor’,50 entrenched discriminatory stereotypes ‐ a
position that he held earlier as anachronistic when he was a member of the New
South Wales Court of Appeal in Warburton v Whitley 51 The rationale of his Honour’s
judgment is that if the legal basis of the Yerkey rule is challenged, it cannot be justified
in terms of social policy and legal principle.
Kirby J made the observation that recent changes pertaining to the status of married
women, and domestic relationships, require courts to refrain from classifying
unnecessarily by gender, when more accurate and impartial principles could be
discerned.52 His Honour believed that qualities such as trust and confidence,
vulnerability and dependence were not necessarily unique to marriage, but could be
regarded as much wider ‘relationship’ issues.53 His Honour did admit that there may

47 Ibid 620.
48 Ibid.
49 Ibid 633.
50 Ibid 634.
51 Ibid 635‐6. See J Pascoe, ‘Wives, Business Debts and Guarantees’ (1997) 9 Bond Law Review
58‐81.
52 Ibid 631‐33.
53 Kirby J’s reformulation has been described as ‘a generally well‐reasoned judgment’. His
Honour’s approach effectively removed the gender‐based ‘special equity’ theory and
replaced it with a formulation that is expressed in non‐discriminatory terms. It
encompassed all other categories of relationship that are ‘emotional dependence’ based. It
has the advantage of recognising that a substantial proportion of business decisions are
made by husbands, and at the same time, circumventing the legal foundation of equitable
presumption of ‘invalidating tendency’. See W Weerasoria and D Turner, ‘High Court Re‐

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be situations in which the Yerkey principle can give assistance to married women who
might come within the ambit of the unconscionability rules of Amadio. These cases
would, however, be better served by formulating a non‐ discriminating rule which is
gender ‐ neutral.54 With this in mind, and drawing on the reasoning of the House of
Lords in Barclays Bank v OʹBrien,55 Kirby J decided to restate the law in a ‘principled
and certain form’. To do this His Honour favoured a reformulation of the principle as
expressed by Lord Browne‐Wilkinson in OʹBrien.56
Under the reformulated OʹBrien principle of Kirby J, the creditor will be fixed with
constructive notice if it knows facts sufficient to put it on inquiry as to the possibility
of wrongdoing by the debtor.57 When constructive notice is properly understood as a
principle which is wide and flexible, there is no reason why it should not give rise to
liability.58 What is crucial is to recognise and identify the circumstances in which the
creditor will be taken to have notice of the guarantor’s equity to render the
transaction unenforceable. Kirby J saw his modified O’Brien principle as having a
wider application in that it is relevant to all other cases where there is a relationship
of emotional dependence between the debtor and the person conferring the
advantage. It may apply to the situation where the husband guarantees his wife’s

affirms and Re‐embraces Yerkey v Jones and Disapproves of House of Lords Decision in
Barclays Bank v O’Brien’ (1998) 14 (3) Banking Law Bulletin 33, 34.
54 See Murray Brown, ‘The Garcia Code’ (2003) 14 Journal of Banking and Finance Law and
Practice 17, 21.
55 [1994] 1 AC 180.
56 Above n 17, 642‐643. At 641 Kirby J restated the OʹBrien principle thus: (1) where a person
guarantees the debts of another and the creditor knows that there is a relationship
involving an emotional dependence on the part of the guarantor towards the debtor, the
surety obligation will be enforceable unless the guarantee was procured by the undue
influence, misrepresentation or other legal wrong of the debtor; (2) where there has been
undue influence, misrepresentation or other legal wrong by the principal debtor, unless the
credit provider has taken reasonable steps to satisfy itself that the guarantor had entered
into the contract freely, the credit provider will not be able to enforce the surety obligation
because it will be fixed with notice of the guarantor’s right to set aside the transaction.
57 In Bank of New South Wales v Rogers (1941) 65 CLR 42, for example, where the debtor was
the guarantor’s uncle with whom she was in a dependency relationship, the court said that
the credit provider knew enough about this relationship to put it on inquiry as to the
circumstances in which the guarantee was given.
58 D Fox, ‘Constructive Notice and Knowing Receipt: An Economic Analysis’, (1998) 57 (2)
Cambridge Law Journal 391. See also Manchester Inc v Bishopsgate Investment Trust (No 3)
[1995] 3 All ER 747, 769.

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debts, or where the creditor is, or ought reasonably to be aware that the surety
reposes trust and confidence in the debtor in relation to his financial affairs.59
Callinan J in a separate and minority judgment did not, unlike Kirby J, favour
extending the special equity principle beyond marred couples. Although conceding
that sexual and matrimonial relationships in recent times have undergone changes,
his Honour expressed the view that to state a principle to encompass all cases would
not be a feasible idea. He pointed out that:

…given the diversity of human relationships…I would not with respect adopt
the principle…that any exceptional rules formerly applicable to guarantees by
wives of husbands’ obligations should be extended to co‐habitees in cases in
which the creditor is aware of an emotional relationship between all co‐
habitees. 60

His Honour believed in any case that this was an area for legislative rather than
judicial intervention. He expressed his approval of Yerkey thus:

For myself I would take the view that the principles stated by Dixon J have
now stood and been accepted for so long as the law in Australia, and that
during that time they have served the ends of justice so well, they should be
taken as the law unless and until this court has held or should now hold to the
contrary.61

Where to From Here?

The recent trend of case law before the appeal of Garcia to the High Court is
unmistakable. There is not going to be any special entitlement to protection in equity
according to the principle in Yerkey. A wife is to be treated like any other
disadvantaged person and can get protection from equity if the transaction is
‘unconscionable’ as the term is explained in Amadio. At the same time, it appears that
in the event that equity does not provide relief, it will not be available under the
equitable remedies as embodied in, for example, the Contracts Review Act 1980
(NSW).
The recent cases demonstrate that in the absence of any general duty to advise the
guarantor, the creditor’s position will be protected except in those situations where
the guarantor gets no benefit from the transaction. O’Brien, which belongs to this
category of cases raises, in addition, serious policy questions concerning whether
women, particularly wives should constitute a special class of guarantors for whom

59 Above n 17, 642‐643.

60 Above 17, [109]. In light of the majority’s reasoning, it is possible that Callinan J’s
comments may not survive future judicial extension of the principle to other relationships.
61 Ibid [107].

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the transaction is more easily avoided than for others; or whether the test of
unconscientious conduct as established in Amadio should be used in all situations of
potential unconscionability leading to and justifying avoidance. O’Brien was not
decided on the concept of the ignorant wife, but did recognise the fact that in most
marriages it is still the husband who has the business experience and the wife who
tends to be in the position of following his advice and not having a truly independent
mind in making judgments concerning financial matters. The wife is nevertheless
given tender treatment. One aspect of this treatment can be seen in the fact that
OʹBrien fixes a creditor with constructive notice of the wife’s equity when the
transaction is on the face of it not made to the wife’s financial benefit and carries a
risk of the husband committing a legal or equitable wrong resulting in the guarantee
being set aside.
O’Brien can be seen as a viable synthesis of existing principles and is consonant with
some recent Australian authority. In European Asian Pty Ltd v Kurland,62 for example,
it was forcefully stated that any special principle for wives which is based on Yerkey
and which is seen to represent a woman’s ‘inferior position’ is anachronistic and not
applicable in contemporary Australian society.63 The burden seems to fall on the
creditor to show that informed consent has been obtained by the provision of
independent advice. In Beneficial Finance Corp v Karavas,64 Kirby P, for example,
explained that for a transaction to be considered just (in this case within the terms of
the Contracts Review Act (1980) (NSW)) a duty may have to be imposed on the lender
to ensure independent legal advice is obtained although this may involve delay and
cost.
When all is said and done, it can be concluded, however, that although one may be
sympathetic with the approach in O’Brien, it is simply not up the courts in Australia
to espouse it in open disregard to the approach taken by the High Court in Yerkey v
Jones. To do so would be to ascribe too much importance to O’Brien which after all is
a House of Lords decision having only persuasive authority in Australia.
It is submitted that the value judgments and assumptions which are implied in the
High Court’s decision in Garcia are not universally shared, and are therefore subject
to criticisms. Despite the affirmation in Garcia of the Yerkey rule with its uncertainties,
it is likely that courts will apply other general law and statutory regimes. Yet the
decision in Garcia is instructive in many ways. It allows the High Court to give its
endorsement of the time honoured proposition that guarantors who are vulnerable

62 (1985) 8 NSWLR 192, 200.

63 See also Commonwealth Bank v Cohen (1988) ASC 58 at 146; European Asian Pty Ltd v Lazich
(1987) ASC 55‐564.
64 (1991) 21 NSWLR 256.

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and who are not just guarantor wives, often enter into contracts of guarantee only on
the basis of a personal relationship and with no understanding of the legal
implications involved. When seen in conjunction with the apparent inconsistency of
the majority of the court in their widening of the application of the Yerkey principle
with its historical basis, it may be possible to conclude that despite their
endorsement, the demise of the principle is imminent. Although the limitations of the
special equity rule are obvious enough, it has the effect of providing a legal
mechanism to accommodate the wide number of specific pressures which arise
where a domestic relationship takes on a commercial flavour.65 In this sense, it can be
said that the strength of Yerkey as applied in Garcia is that it is sufficiently flexible to
accommodate a blurring of commercial and personal relationships by reducing a
guarantor’s burden of proving actual undue influence or unconscionable dealing.66
It is almost certain that in Garcia, the majority expressed the view that there is a
presumption of undue influence arising from, but not confined to the relationship of
marriage, leading to the risk that the guarantor may receive unsatisfactory
explanation and the transaction be set aside for unconscionability. The judgments
apply the concept of undue influence in requiring a relationship of trust and
confidence, but bring the contract of guarantee into the ambit of an unconscionable
transaction, by examining the quality of the assent of the party who has the stronger
bargaining power. The presumptions of undue influence and unconscionability may
be rebutted by the availability of independent advice, useful and helpful explanation,
or evidence of the fact that the guarantor does not benefit from the transaction.
It will be interesting to see if or how far the courts in future will accept the High
Court’s invitation to broaden the scope of Yerkey and Garcia to include other types of
relationships.67 The judgment of Kirby J will no doubt generate interest in that it
enquired why the High Court in Garcia should endorse a principle designed to apply
specifically to one class of sureties, namely wives. His Honour’s line of reasoning has
delineated a broader principle which is not confined to one group whose members
have attributed to them particular needs and vulnerabilities which are certainly not
confined to that group.68 As to whether the fears of Kirby J that women may use the
‘special equity’ to avoid their lawful obligations are realised remains to be seen.

65 Joellen Riley, ‘Should the Lender Know if Directors Are Sleeping Together?’ (1999)
Commercial Law Quarterly 23; B Fehlberg, ‘Women in Family Companies’ (1997) 15 Sydney
Law Review 345, 356‐8.
66 O’Donovan, above n 19, 309.
67 Above n 17, 638 per Kirby J.
68 Ibid.

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The potential scope of the Garcia defence

Sufficient time has passed to allow us draw some conclusions about the approach of
other courts to the High Court majority’s suggestion of a possible extension of the
special equity to an expanded class of vulnerable guarantors. The crucial question of
course is whether, as discussed above, the principle applies only where the wife is
guarantor for the husband’s debts or whether it has a wider application. The recent
court decisions on this point have tested these boundaries. They have on the whole
demonstrated that the scope of the Garcia defence has been mixed so that there has
been no uniform approach in its application.
The test that has attracted most attention, however, is still the one limiting the
defence application to cases where the guarantor and the debtor are in a legal
husband/ wife relationship or in a similar one.69 That is to say, the decisions which
have been most consistent is where the principle so far has only ever been applied in
favour of a guarantor‐wife.70 However, other tests have also been proposed, for
example, that the principle applies where ‘the lender knew or ought to have known
that the surety was emotionally dependent on the debtor’71 or ‘where the lender was
aware that the surety and debtor were in a relationship of trust and confidence’.72
In Watt v State Bank of New South Wales,73 the appellants Mr and Mrs Watt agreed to
assist to be guarantors of the loan of their daughter and son‐in–law and sought to
rely on the Garcia defence, pointing out that they had not understood that the papers
which they had signed contained guarantees and mortgages in favour of the
respondent. Higgins CJ and Crispin P contended that the Garcia principle was based
on the need to protect married women from the consequences of transactions entered
into at the request of their husbands and turned upon ‘special considerations of trust
and confidence that arise from a marital relationship’.74 Their Honours argued that
although it was possible that the same considerations might apply in relationships
similar to marriage, there was nothing to suggest that the principle could be
extended to parents who had guaranteed the debts of their children. Whilst they
accepted that parents often entered into improvident transactions at their children’s
request, they said that the parent‐child relationship is very different from that
between husband and wife. Thus it can be argued that although the appellants as

69 See, for example, ANZ Bank Group v Alirezai [2002] ANZ Conv R 597.
70 See Equitiloan Securities v Mulrine [2000] ACTSC 48, [7] and State Bank of New South Wales v
Layoun [2001] ANZ Conv R 487.
71 Equitiloan Securities v Mulrine, above n 70, [7].
72 State Bank of New South Wales v Layoun, above n 70.
73 [2003] ACTCA 7.
74 Above n 73, 20.

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guarantors were entitled to ‘every sympathy’75 and are to lose their home and
possibly their life savings, the Garcia principle was not available to them. Their
Honours were of the opinion that the Garcia defence applies only to marriage and
possibly similar relationships, as it is only in these relationships that the trust and
confidence between the parties might be sufficient for one to act in ‘unquestioning
reliance’ on a request by the other to become guarantor and as a result receive from
the debtor no sufficient explanation of the transaction’s purport and effect.76 Their
Honours explained their justification for this conclusion in the following terms:

The real vulnerability of parents usually stems not from a failure to

comprehend the nature of the transactions in which they have been asked to
participate or from insufficient information concerning their implications. It
stems from their love of their children. Their desire to help and protect them,
to advance their interests, to maintain a close relationship, to avoid causing
disappointment, hurt or distress, to maintain the relationship may all make it
difficult to say no. The principles in Yerkey v Jones and Garcia offer no
protection for people lured into improvident transactions by feelings of this
kind. 77

Armstrong v Commonwealth of Australia 78 was decided in a similar way to Watt. In

Armstrong, although the wife was a 25 per cent shareholder in the company which
received the loan, Bryson J refused to extend the special equity principle of Garcia to
de facto wives.
In some decisions an attempt has been made to limit what might be thought to be the
potential scope of the Garcia defence. In State Bank of New South Wales v Hibbert,79 for
example, Bryson J adopted a conservative approach to the possible extension of
Garcia to other committed relationships based on emotional ties by not granting relief
to defacto partners who jointly provided a mortgage and guarantee in favour of the
plaintiff bank by saying that:

the extension of the principles acted on in Garcia from wives to all married
persons, or to all women, or to all persons who are living in defacto
relationships…does not appear to me a development which the law can
realistically be expected to take.80

75 Above n 73, 34.

76 Above n 73, 21.
77 Above n 73, 21.
78 [1999] NSWSC 588.
79 [2000] NSWSC 628.
80 Above n 79, para 60.

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In National Australia Bank v Starbronze,81 the court decided not to grant relief to a
surety who entered into a guarantee following misrepresentations as to its effect by
the borrower. This was because the relationship between the surety and the
borrower, that of brothers‐in‐law was not sufficiently intimate to attract the operation
of the Garcia principle. Coldrey J justified the decision of the court by commenting
that ‘the fact that a person may have trust and confidence in another cannot without
the added dimension of intimacy, attract this aspect of the doctrine of
unconscionability’.82
To a similar effect is Equitiloan Securities Ltd v Mulrine83 where the court had to decide
whether the Garcia defence should be applied where the creditor was aware that the
guarantor was emotionally dependent on the debtor. On this basis, Master Conolly
turned down relief for the surety as there was nothing in his relationship with the
debtor to take it beyond a long‐term friendship.84
Yet, in Liu v Adamson85 the court showed a softening of attitude in Groom v Hibbert.
The facts involve a de facto husband and wife who both signed a costs agreement
with a solicitor for legal costs incurred in connection with the husband’s restaurant
and nightclub business. Under the costs agreement they also provided a guarantee
and a mortgage over their jointly owned home. The wife brought proceedings to set
aside the costs agreement and the mortgage under the special wives’ equity. Master
Macready in giving recognition to changes to the community’s acceptance of de facto
relationships said:

The matter before me involves a simple long‐standing de facto relationship

between a man and a woman…and the role each plays would fit many
marriages. It has endured seventeen years and the parties to it have five
children. In these circumstances it seems to me that the principle in Yerkey v
Jones should be extended to cover the situation presently before me.86

The approach taken by the Australian Capital Territory Court of Appeal in Watt can
be contrasted with that taken by the Victorian Court of Appeal in Kranz v National
Australia Bank,87 which rejected the argument that the Garcia defence could only be
invoked where the surety is married to the debtor or is involved with the latter in a

81 [2000] VSC 325.

82 Above n 81, 84.
83 [2000] ACTSC 48.
84 Above n 83, para 7.
85 [2003] NSWSC 74 (21 February 2004); BC 200300579.
86 Above n 85, para 23.
87 [2003] VSCA 92 (25 July 2003).

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similar long–term relationship.88 According to the facts, Lefkovic asked his brother‐
in‐law Kranz, the plaintiff, to provide further security for a loan from the bank. The
object of the loan was to acquire a private placement of shares to be held by a shelf
company which was set up by Lefkovic. Kranz executed a guarantee for the debts of
the company in favour of the bank. Lefkovic defaulted on the loan and the bank
decided to enforce the guarantee. The appellant Kranz who did not read the
documentation, and did not have it explained to him by any one except Lefkovic
(who misrepresented the facts), sought to set aside the guarantee, relying on the
Garcia defence and arguing that the respondent either knew or should have known
that the relationship of trust and confidence existed between himself and Lefkovic.
The Victorian Court of Appeal in Kranz adopted a more liberal view of the possibility
of extending the Garcia principle to other relationships. Charles JA disagreed with the
necessity of restricting the Garcia defence to only ‘the most intimate of family
relationships’. His Honour believed that this would ‘confine the application of the
principles applied in Garcia within limits that cannot be justified’. This softening of
the approach of the court at the appellate level will probably in time lead to an
opening of the door a little wider in future cases.
What then are we to make of these apparently conflicting authorities? It looks as if
the Garcia principle must be applied at least where the lender is aware that a female
surety and a male debtor are in a sexual and emotional relationship analogous to
marriage ‐ that is, where the lender is aware that the surety and the debtor are
cohabiting. On this basis, there is no reason to treat these relationships as but pale
shadows of marriage.89
Credit providers after the High Court’s decision in Garcia should be more cautious
and should not depart from their usual practices and procedures when dealing with
a guarantor wife. This is so regardless of whether the woman is a director of the
husband’s company or just a participant or employee of his business. In the case of
vulnerable guarantors of business debts who technically fall outside the ambit of the
Yerkey principle, they may now have recourse to the new legislative remedy under s
51AC of the Trade Practices Act 1974 (Cth).
Mrs Garcia could be regarded as being very fortunate in coming within the principle,
and being given the benefit of any doubt by the High Court justices in respect of her
status as a volunteer. This is despite her qualifications and professional experience, as
well as the controversial evidence as to the precise details of her shareholding in her

88 See also ANZ Banking Group Ltd v Alirezai [2004] QCA 6 (6 February 2004); BC 200400178
which is to a similar effect.
89 Garcia v National Australia Bank, above n 17.

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husband’s companies. She was also a company director, with a history of

investments, running her own business and yet was able to convince the court that
she did not understand the nature of the obligation into which she entered. A
consequence of the Garcia case is that there is now an onus on banks to make certain
that their documentation is clear, their explanations thorough and comprehensible
and there is a need to remove the traditional concepts that there is no obligation to
disclose risks to guarantors especially where these are wives dealing with their
husbands’ debts.
It should be noted that the special equity for wives doctrine in Garcia remains unique
to Australia, having been specifically rejected in England90 New Zealand91 and never
been completely adopted in Canada.92 In O’Brien, the House of Lords expressed the
view that there was no need for a special wives equity because adequate protection
could be afforded under ordinary principles.93 As Lord Browne‐Wilkinson observed,
the Yerkey principle was based on uncertain foundations and failed to reflect the
current requirements of contemporary society.94 Under the O’Brien approach, a
woman will not be able to set aside a transaction purely on the grounds that she did
not understand it and was relying on ordinary principles of undue influence. The
exception here would be in cases where undue influence is proven and the creditor
knew of the marriage relationship. Ultimately, the creditor will not be able to enforce
the contract of guarantee unless it can prove that it was reasonably satisfied that the
wife understood the transaction and entered into it at her own free will.95
Confronted with perpetuating the relevance of the Yerkey doctrine in light of English
developments, the High Court in Garcia came up against a range of competing legal
and policy considerations. One of these was the discrepancy between the perception
of modern gender roles and the reality of domestic relationships. At the same time,

90 Barclays Bank p/c v OʹBrien, above n 16.

91 See Wilkinson v ASB Bank (1998) 6 NZBLC 102,427, where the Court of Appeal adopted a
modified OʹBrien approach.
92 In Canada there is no consistent approach. In British Columbia the Yerkey principle has
been followed. This is evident in E &R Distributors v Atlas Drywall Ltd (1980) 118 DLR (3d)
339 which was nevertheless qualified in North West Life Assurance Co of Canada v Shannon
Heights Developments Ltd (1987) 12 BCLR (2d) 346,349. The other Canadian provinces
disapproved of Yerkey. See, for example, Bank of Montreal v Featherstone (1989) 58 DLR (4th)
567 (Ont CA); Royal Bank of Canada v Poisson (1977) 103 DLR (3d) 735. On the whole, it can
be said that Canada seems poised to follow the approach taken in O’Brien considering that
its defining guidelines were applied in the different context of a “knowing receipt”
constructive trust in Gold v Rosenberg (1997) 152 DLR (4th) 385 (SCC).
93 As was proposed in CIBC Mortgages P/c v Pitt [1994]1 AC 200.
94 Barclays Bank v OʹBrien, above n 16, 194‐5.
95 Above n 16, 194‐5.

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although contemporary society in this country accepts equality between the sexes
and supports the concept of mutual respect between marriage partners,96 it should be
stressed that a large number of women remain subservient to their husbands, and
would not normally question their spouses’ business affairs. And the overturning of
the security devices may have the effect of reducing the flow of private capital to
businesses because of institutional cautiousness that would come about.97 A final
issue of concern is that the over‐reliance on Yerkey may embolden husbands to find a
way out of their obligations by allowing them to challenge the very explanations they
themselves gave their wives of the need to execute guarantee transactions.98
It is also true to say that despite their many limitations, personal guarantees are
extremely useful transactions since they are the main source of funding for the family
and other forms of small business. Such guarantees must be protected and the
common theme running through cases such as Garcia is the need to increase
awareness of the nature and effect of these guarantees. A number of protective
measures for the guarantors of relationship debts may be considered: relevant
statutory provisions; industry codes of practice; making the debtor’s loan application
and creditor’s offer available to the guarantor and the setting up of mechanisms for
the review or termination of the guarantor’s liability etc.

Conclusion
It can be said that Garcia ensures the survival of the special equity rule for wives in
Yerkey v Jones.99 This states that if a wife is a volunteer to a guarantee contract, and
does not understand its effects in essential respects, she may be in a position to set it
aside, even if there is no unfair dealing involved, and even if the creditor did not
make efforts to explain the transaction or to recommend the guarantor seek
independent advice. Yet since Garcia was handed down solicitors and barristers did
not think the decision had such a large impact on the law.100 There has been some
uncertainty concerning the scope of the application of the Garcia defence. Certainly,

96 See, for example, the Sex Discrimination Act (Cth) ss 5‐6, 7 D (1); and The Equal Opportunity
Act 1995 (Vic) ss 6‐9.
97 See Barclays Bank vO’Brien, above n 16, 188. See a criticism of this view in Anna Lawson,
‘OʹBrien and its Legacy: Principle, Equity and Certainty?’ (1995) 54 (2) Cambridge Law
Journal 280.
98 See Kirby J in Garcia v National Australia Bank , above n 17, 644 ; see also S M Cretney, ‘The
Little Woman and the Big Bad Bank’, (1992) 108 Law Quarterly Review 534.
99 Yerkey v Jones above n 5.
100 J Lovric, J Millibank, Darling, Please Sign this Form: A Report on the Practice of Third Party
Guarantees in New South Wales, NSW Law Reform Commission, Research Report 11, 2003,
xix.

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the decisions have demonstrated that the scope of the application of the defence has
been mixed. Some cases have applied the principle to de facto spouses, for example,
although the ones where the application has shown a consistent pattern are those
which involve guarantor wives. There has also been confusion as to whether the
principle extended to elderly parents while the claims of in‐laws and close friends
have all been denied in the cases reviewed. There is also great variation in terms of
the courts’ interpretation and application of the requirement that the claimant be a
volunteer to the transaction in order to be granted relief.101
It can be said that whilst the High Court has been unwilling the extend the wives’
equity principles beyond the narrow confines of the legal husband/wife relationship,
it seems that the boundaries of Garcia are continually being tested, and it is not
surprising that an increasing number of cases involving non marital situations are
coming before the courts from time to time.

101 Above n 105.

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