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In the given case of Garcia v National Australia Bank Limited, the broad facts of the case are that Jean Garcia and Fabio Garcia had mortgaged their ancestral and jointly owned home in favour of Commercial Banking Company in exchange for a loan taken by the husband for his business. Jean was a physiotherapist and had signed a number of guarantees for the same loan. There were two major reasons due to which Garcia had signed the bank guarantees, the first being that her husband claimed repeatedly that she was a fool and he had expert knowledge of the commercial market and secondly, she was trying to save a failing marriage. Soon after the incident, the couple got divorced and Garcia demanded that she should be freed of the guarantees that she had signed. The trial court considered all the facts and evidence of the case held that Jean was not legally bound by the guarantees that had been signed by her. The case proceeded to the High Court and the decision of the Trial Court was upheld by the High Court of Australia.
The incidents that are relevant for the case started in the year 1979 when Fabio Garcia (husband of Jean Garcia) mortgaged the jointly owned ancestral home to the National Australia Bank Limited. This mortgage was done to secure a loan amounting to $5,000/- that was taken solely by Fabio Garcia to be used for expenses of his business named ‘Citizens Gold Bullion Exchange Private Limited’, and the amount involved was later used to secure a joint personal loan by the couple. This particular company was engaged in transactions of gold. Jean was not aware of the stability of the company owned by her husband and it was made to believe that they were not taking a risk by mortgaging the jointly owned ancestral home. The ancestral home in question was built on land which had been purchased by Jean Garcia after taking financial assistance from her father. Over the span of the next eight years Jean was made to sign 4 guarantees by her husband, out of which three were related to the loan taken by him for his business. Jean signed the guarantees due to the principle discussed in spousal role and because she was repeatedly told that she did not have any knowledge of the commercial market whereas her husband was an expert. Subsequently, after a period of 2 years the couple had to get divorced due to personal issues and the company owned by the husband was wound up by the Court. Jean Garcia moved to the court to get the guarantees signed by her declared null and void as they were entered into under the extreme pressure and undue influence of her husband and the nature of the guarantees was misrepresented by the husband and the transaction which was entered into was different from what Jean Garcia was made to believe. Soon after, the concerned bank claimed repayments of the guarantee and the mortgage amount that was owed by the company owed by the husband of the appellant. This essay shall critically analyse the case and the principals involved and utilised in the decision of the case in issue and also the principles set by the precedent cases which were applied in the current case, and try to reach a conclusion whether the decision that was reached by the judges of the High court did justice to the parties or not.
The court relied on a previous case with similar facts of Yerkey v Jones. However, the case had been overruled by the judgement of Commonwealth Commercial Bank of Australia vs Amadio. The principles that have been used in this case are the ones of: unconscionable conduct, undue influence and special equity other than the provisions already codified in the Contracts Review Act, 1988. The principle of unconscionable conduct has been established in Australia by way of case laws and decisions, it does not have a legal codified definition and can be understood only by going through the previous decisions on the topic. The term ‘unconscionable conduct’ may be understood to mean the conduct of a party which is not only understood to be unfair but it must also hurt the consciousness of the society as measured against the accepted norms of behaviour by the society (Gooley & Radan, 2006). The courts in Australia have attributed the meaning to transactions where serious misconduct is involved in the transaction and the transaction is unfair or unreasonable on the face of it. This kind of transaction is usually entered into when one side is predominantly weaker than the other and the stronger party has taken advantage of a particular disability of the weaker party or the knowledge of a fact that the weaker party is not conversant with a particular field. The stronger party may have used undue influence or unfair levels of pressure to make the weaker party agree to the transaction, and did not act in good faith. Provisions with respect to the concept of Unconscionable contract has been added over time to Part 2-2 of Australian Consumer Law, 2010. The provisions discuss the concepts related to the doctrine and then move on to discussing the remedies that are available to the parties who have been affected by the doctrine (McKendrick & Liu, 2015). It has been established that any individual other than that of a corporation can claim to have the doctrine applied on any particular situation. Section 22 of the Act lists out factors that a court considers to decide if a particular situation falls within the ambit of the application of the doctrine or not.
Undue Influence is said to be exercised by a party when a transaction is entered into between two parties with unequal strength. Not all transactions entered between two parties of differing strengths may be considered to be entered into under the application of undue influence. However, when it is proved that undue influence has been applied by one of the parties, the weaker party may render the contract void. Section 18 of the Australian Consumer Law 2010, along with provisions enumerated in the Australian Competition and Consumer Act, 2010 provide that misrepresentation of false representation of facts need to induce an individual to enter into any contractual relations, may render the contract voidable at the request of the party who has entered into the contract based on such misrepresentation made.
The transaction and contract between Jean and Fabio Garcia may have been influenced by undue advantage exerted by the husband. While the case of jean Garcia was still being considered, the Court laid down four circumstances which if fulfilled, would prove unconscionable suretyship. These four conditions were:
It was indeed found that the surety wife had entered into the transaction as it had been misrepresented to her by her husband. Mrs Jean Garcia was made to believe that she was authorizing an agreement which enabled her spouse to deal in larger quantities of gold than what was currently allowed. She was also made to believe that there was no risk involved in the guarantee transaction as the money involved was backed by the gold of the company. The husband repeatedly pointed out and inadvertently forced Mrs Jean Garcia to believe that she was not conversant with commercial transactions while her husband was an expert.
The principle of ‘special equity’ deals with the issue of wives that guarantee the debts incurred by their husbands even though they do not understand the nature of the transaction or the guarantee. This issue has been faced by the Courts in Australia for some time now and there seems to be no perfect solution to it. Approximately a time gap of fifteen years has passed since the ‘Rule of Special Equity’ was used by the High Court of Australia. The principle was first laid down in the case of Yerkey v Jones, where the judges laid down three basic rules which had to be fulfilled if the principle was to be applied. This principle was originally developed and established for the safety of wives who to stand as security for the husband’s debts voluntarily. The case laid down three criteria that had to be fulfilled for the principal to be applied:
Once all the above mentioned requirements have been fulfilled, two situations may be applied on the case: The first being- where the consent of the surety to the transaction was taken by the application of undue influence, and the second situation being- where the surety is not capable enough to understand the nature of the transaction on the effect of the transaction that is being entered into. In the first situation, the transaction may be validated if independent advice has been sought by the surety and had an opportunity to refrain from entering into the transaction. The second situation could have been invalidated if the creditor had intervened between the transactions of the surety and the debtor and had explained the nature of the transaction to the surety.
With regard to the provisions of wives’ special equity, four basic requirements have been laid down in the Yerkey v Jones case:
Previous to the case of Garcia v National Australia Bank Limited, in the case of Barclays Bank Plc v O’Brien, the House of Lords rejected the application of the principle as the creditor banks were suffering losses due to no fault of theirs. However, the concept of the Doctrine of special equity has been accepted by various jurisdictions other than that of Australia. In the case of Royal Bank of Scotland v Etridge (No. 2)., the Court held that the restriction that was imposed on the principle to make it applicable only on cases in which the parties were married or had a sexual relationship, could be considered as arbitrary in nature. The principle should be made applicable on all the cases where the relationship shared by the debtor and the surety was ‘non-commercial’ and within the knowledge of the creditor (Harper, 2001).
The case in question has been filed and discussed after the case of Barclays Bank Plc v O’Brien,where it was held that the banks have to take extra precautions to protect themselves in cases where married women are involved. The question thus arises that why did the National Australia Bank not ensure that the procedures and guidelines enumerated under the Barclays Bank Plc v O’Brien was not followed. Under these provisions, the Bank had to provide Jean with independent advice which made sure that the nature of the transaction was understood by her. It was later revealed that the National Australia Bank and several others had been following several unethical practices in which the profits and interests of the banks were out in the forefront before the interests of the customers. This act of the banks was not only unethical but also illegal. In the Royal Commission hearings, it was revealed that the employees of the National Australia Bank Limited often invested the savings in the accounts of their customers in high- risk investments and the failure of such investments caused loss of life-long savings of the customers.
Even though Jean was a physiotherapist herself, and could be counted well within the ambit of professional and business women, she was successful in proving to the Trail Court, during the period of the trial, that, she had indeed not understood the nature of the guarantees which she had signed. This put the burden of proof on the banks, who should have provided her with independent advice on the transaction. Since the banks had failed to fulfil their duties, the surety and to be let go off and the guarantee contract had to be cancelled. The decision of the Trial Court was upheld by the higher courts of Australia.
If the contract between the debtor and the surety, i.e., Jean Garcia and Fabio Garcia is looked into, it is understood that the basic principles of a valid contract have not been fulfilled and even if the concept of special equity was not considered the contract would have been voidable on the request of the wife. The contract in issue was already playing it by the issues of undue influence, misrepresentation, unconscionable conduct as well as it attracted the doctrine of special equity. All the factors of undue influence misrepresentation and unconscionable conduct may be applied on any transaction, the doctrine of special equity held at most importance for married women. In a society, a married woman would usually deal with aspects of running the household and other duties by herself and depend on her husband for commercial and financial matters. With the implementation and establishment of this doctrine, the court wanted to showcase that husbands could not take advantage of this trust and confidence placed on them by their wives and convert it into financial benefit for themselves. The issue of banks suffering unnecessary losses as discussed in the case of Barclays Bank v O'Brien could be solved if the banks, as creditors, made sure that the surety wife was well aware of the nature of the transaction that was being entered into. This initiative taken by the banks on their part code validate the whole agreement and make the surety liable to pay for all the guarantees that had been signed.
Gooley, J. and Radan, P., 2006. Principles of Australian contract law. LexisNexis.
McKendrick, E. and Liu, Q., 2015. Contract Law: Australian Edition. Macmillan International Higher Education.
Barclays Bank v O Brien  1 AC 180
Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
Garcia v National Australia Bank Ltd (1998) (1998) 194 CLR 395
Royal Bank of Scotland v Etridge (No. 2)  UKHL 44
Yerkey v Jones (1939) 63 CLR 649
Bogan, S., 1998. Garcia v National Australia Bank Ltd: Resurrecting the Corpus of Yerkey v Jones. University of New South Wales Law Journal, The, 21(3), p.845.
Hepburn, S., 1997. The Yerkey Principle and Relationships of Trust and Confidence: Garcia v. National Australia Bank. Deakin L. Rev., 4, p.99.
Harper, A.J., 2001. Sexually transmitted debt: credibility, culpability and the burden of responsibility/Ainsley J. Harper (Doctoral dissertation).
Contracts Review Act, 1988
Australian Consumer Law, 2010 (Section 18 and 22)
ABC News: https://www.abc.net.au/news/2019-02-04/banking-scandals-were-decades-in-the-making/10771612
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