Guarantees – not always a guaranteed outcome
19 Jul 2010
It is not uncommon for a lender to rely upon a guarantee from a husband and wife as an important element in assessing whether or not to give finance.
In a recent decision of Agripay Pty Limited v The Estate of Murray Andrew Byrne & Anor, the Queensland Supreme Court had to consider whether a wife was liable as guarantor to a lender for the debts of her husband and highlighted the steps that a lender should take to ensure that a guarantee it obtains is enforceable.
By way of background, in this case:
- Mr Murray (the deceased) borrowed money from Agripay for some agricultural investments. His wife, Dr Byrne (the second defendant) had guaranteed the repayment of the money to Agripay.
- Mr Murray apparently did not run his financial affairs in close consultation with his wife. A theme of her evidence was that she was only peripherally involved in Mr Murray’s business affairs.
- Dr Byrne became aware in 2005 that Mr Murray was talking to an investment adviser (Cooke) about possibly investing in agricultural managed investment schemes.
- An important meeting occurred where Mr Murray and Cooke spoke extensively. Dr Byrne was called over to sign documentation. The reason given was to facilitate Mr Murray’s taking up investment opportunities in order to deal with his tax liability.
- Cooke told Dr Byrne, before she signed the documentation, that she should obtain legal advice, but at the same time he said that if she did not sign then and there, Mr Murray would lose the opportunity to seize his tax advantage.
- She therefore signed as guarantor under a ‘financial application’.
- Dr Byrne did not read the finance application. Had she done so, she would have realised that the statement of assets and liabilities was substantially incorrect. She signed the finance application without any proper understanding of her actual or potential liability. She did not know the amount being advanced, or the term of the loan. She mistakenly thought the term of the loan was seven years, when it was ten. When, subsequently to her signing, Cooke showed her a spreadsheet setting out matters of detail, her evidence was that she could not understand it. She did not know the consequences should Mr Murray default, which were peculiarly significant.
- Dr Byrne’s evidence was that she:
- Signed, without seeking independent advice as recommended, even though she was upset and felt that she was being ‘ambushed’.
- Had faith in Mr Murray, in short, maybe blind faith despite his sometimes indifferent personal treatment of her.
- Mr Murray died and his estate was sequestrated in bankruptcy.
- The money was not repaid and the court entered judgment against the deceased estate in favour of Agripay. Agripay sought to enforce Dr Byrne’s guarantee and pursued her for the monies owed.
Dr Byrne resisted Agripay’s claim under the guarantee on the basis the guarantee was unconscionable.
The courts have long held that a guarantee can be set aside if it was unconscionable for a lender to rely upon it. Some circumstances where that can occur are set out in the decision of Garcia v National Australia Bank Ltd (1) where the high court held that a lender would be unable:
‘... to enforce it [the guarantee] against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that:
- 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; and yet
- 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.’
In this case, his Honour the Chief Justice De Jersey considered the elements of understanding, voluntariness, that the lender understood the marriage relationship and the lender’s explanation of transaction.
His Honour found that:
- Dr Byrne knew little of the ‘purport and effect’ of this particular transaction;
- there was no ‘real benefit’ from the principal transaction and no 'direct or immediate gain’;
- Mrs Byrne should be regarded as a volunteer in this suretyship (guarantee);
- Agripay knew of the marriage relationship as they had sufficient ‘notice’ within the meaning of the authorities;
- Agripay did not adequately explain the transaction, or take steps to ensure that an explanation was given;
- the requirements to warrant setting aside the guarantee, established by Garcia, were met in this case; and
- the guarantee was set aside and Agripay able to enforce the judgment.
Agripay further highlights the need for lenders to be wary and take care when lending money that the guarantors must fully understand the transaction and the purport and effect of their liability and what happens upon default. Failure to do so can result in a guarantee being set aside.
(1) Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 408