NAB v Savage [2013] NSWSC 1718

The wife guaranteed a loan used by the husband to buy shares. The loans went into default and the bank sought possession. The wife argued that they should be set aside on the basis of the wife’s equity principle. In relation to the guarantee, the bank was told by the husband that the wife had received independent legal advice and a document was signed by her to this effect, but this document was not witnessed by the bank officer or a lawyer.

Further, the court found that the wife had been given no explanation of this loan or the guarantee by her solicitor or the bank and that it was unreasonable for the bank to accept the husband’s word without checking with the solicitor or the wife.

The law is that if a lender fails to explain to a wife who acts as guarantor on her husband’s loan, the nature and effect of the transaction or fails to take reasonable steps to ensure a third party has done so and the wife obtains no direct benefit from the transaction, equity may set is aside as unconscionable.

The wife’s equity principle requires proof of four matters:

  1. The wife did not understand the purport and effect of the transaction;
  2. The transaction was voluntary, in that there was no direct or immediate gain for the wife from the transaction;
  3. The lender knew that she was the wife and could be expected to repose trust in her husband in financial matters;
  4. The lender did not itself take steps to explain the transaction to the wife, or find out that a stranger had explained it. It is not sufficient to entrust this to the husband. The court found that there was no further requirement to prove that had the wife understood the transaction, she would not have signed it. This was explicitly rejected by the court saying:

    The Yerkey v Jones equity is concerned with the conscience of the lender, not the reasonableness of the surety, or what the surety would have done had the lender not behaved unconscionably….Whether she would have entered into the transaction in any event is, in my view, immaterial to the equity.

The court believed the wife that she signed all the documents without reading them even though she was capable of doing so and that she did not know that the documents concerned loans and that the loans were secured by mortgages over the home.

The court set aside guarantee since the wife was a volunteer and the bank took no steps to explain the guarantee to her or have a third party do so.

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