ANZ v Paul Stephen Fuller [2004] NSWSC 305

The borrowers, a partnership formed by a father and son (“the business”), maintained a business bank account with the bank. During the operation of the bank account, discussions were made between the bank and the business for an overdraft facility to be set up.

As security for the overdraft facility, it was agreed that the bank obtained a guarantee from the father and his wife, and a similar guarantee from the son and his wife. The guarantees were then secured by a mortgage of each of the couples’ family homes (“the transactions”). These transactions were entered into when the couples executed a mortgage document and a guarantee document at a branch office of the bank.

Subsequently, the financial position of the business worsened, it failed to repay its indebtedness under the overdraft facility. The bank commenced proceedings to recover the debt by enforcing their security. In this case, the wives claimed relief from their liabilities under the guarantees on the basis that it would be unconscionable for the bank to enforce the securities against them.

In the High Court case of Garcia v National Australia Bank (1998) Aust Contract R 90-096, it was held that the bank is taken to understand that as a wife, the surety may put trust and confidence in her husband in relation to matters of business and therefore may not obtain a full and accurate explanation of the purport and effect of the transaction from her husband.

As such, it is unconscionable for the bank to seek enforcement of the guarantee in circumstances where:

1. the wife did not understand the purport and effect of the transaction;

2. the wife is a volunteer in that she did not receive a real benefit from the transaction; and 

3. the bank did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her

As noted by Master Malpass at paragraph 112,

An understanding of the “purpose and effect” (or the “general nature and effect”) of the transaction has been said to include at least an understanding of the fact of liability, the general extent of the liability and the possible consequences of default ([State Bank of New South Wales v] Chia [[2000] 50 NSWLR 587] at p600).

Further at paragraph 108, Master Malpass discerns that

The wife will not be a volunteer where she receives a real benefit from the transaction.  Incidental benefit which accrues generally to the family of which the wife is a member is not a sufficient benefit (Chia at p601).

The case for the mother

In this case, Master Malpass accepted that neither of the wives received any real benefit from the transactions. Neither were partners of the business nor played any role in the business. He also accepted that both wives were unaware that the guarantees were unlimited in nature and to be secured by a mortgage of their family homes.

However, Master Malpass found that on the occasion when the father and the mother attended the branch office to execute the security documents, a bank officer had explained the purpose and effect of transaction to the mother. In these circumstances, Master Malpass held that it was not unconscionable for the bank to enforce the guarantee against the mother pursuant to the principle in the Garcia case.

The case for the daughter-in-law

As for the liability of the daughter-in-law, on the occasion that the son and the daughter in law attended the branch office to execute the security documents, the bank arranged for a solicitor to explain the effect of the guarantee to the couple. However, because the solicitor was not given a copy of the mortgage document, his advice did not fully explain the consequences of default under the guarantee. Accordingly, Master Malpass held that it would be unconscionable for the bank to enforce the mortgage.

In the result, the daughter-in-law was entitled to relief which restricts her liability under the guarantee to an unsecured sum of $30,000.

Contract Review Act 1980

Although the Contracts Review Act 1980 was raised in the pleadings of the wives, little was said as to its potential application.  As such, in the views of Master Malpass, no entitlement under the Contracts Review Act was demonstrated.

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