BOQ proves wife knew full effects of guarantee

Justice David Jackson, in the Supreme Court of Queensland, has dismissed a claim of "special disadvantage" by a wife who guaranteed several Bank of Queensland loans - including one for $773,000 that was backed by the family home - and payment of interest.

In the case of Schultz v Bank of Queensland, the wife (whose husband defaulted, in effect, on several business, property and investment loans) relied in her defence on a 1939 ruling, the Yerkey v Jones decision.

The "Yerkey v Jones equity" case was decided in favour of a wife who entered into a transaction as surety for the debts of her husband or her husband's company.

"To some, it might seem an anachronism in a 21st century world. But it was affirmed by the High Court as recently as 1998 in Garcia v National Australia Bank," Justice Jackson said in his ruling in the Schultz case yesterday.

There are two parts to the Yerkey v Jones decision. The first turns on whether the husband actually exercises undue influence affecting the wife's decision to become a surety.

The second aspect turns on whether "the wife does not understand the effect of the document or the nature of the transaction of suretyship."

Then, if the transaction is one in which the wife is a volunteer, and the creditor has notice that the surety is a wife (and therefore may repose trust and confidence in her husband), the lender is obliged to take steps to explain the transaction of suretyship, unless it appears that an independent third party has already done so.

If the lender fails to do so, the wife is not bound by the guarantee or indemnity.

Justice Jackson, ruling on the Schultz v BOQ case, found that the plaintiff (ie, the wife of the borrower, who needed funds for his business) was aware of the need to get independent advice, yet signed the waiver, not under duress, although she was said to have been in a rush to finish signing the set of guarantee documents.

That awareness turned out to be crucial, after her husband defaulted, in effect, on several business, property and investment loans that had been secured by his wife's share of the family home, and her investment property. Some of the finds raised via loans were paid into the couple's family trust for investment purposes.

Ultimately, the bank has been given possession of both the properties in question - the family home and the plaintiff's home unit.