Can a mother apply the wife’s special equity?

The case of McIvor v Westpac Banking Corporation [2012] QSC 404 a guarantor unsuccessfully attempted to widen and apply the scope of certain elements of the wife’s special equity principle in Garcia v National Australia Bank (1998) 194 CLR 395 (Garcia) in relation to the presumption of undue influence in entering into bank guarantees.

Background

Mr McIvor, a solicitor who had moved to the business of moneylending, was the plaintiff’s son (Son).

The Son entered into loan agreements as the director of various corporate entities (Entities).

The Son's mother, Mrs McIvor (Plaintiff) provided guarantees for various loans (Guarantees) and granted a mortgage over one of her properties (Mortgage) at the request of the Son to Westpac Banking Corporation (Bank), to secure the Guarantees.

The Entities subsequently defaulted on their obligations to the Bank.

On or about 7 February 2012, the Bank’s solicitors issued a letter of demand to the Plaintiff, pursuant to the Guarantees.

The Plaintiff claimed her execution of the Guarantees was procured by undue exercise by the Son of his influence over her, based on the following:

  1. The Plaintiff is the mother of the Son;

  2. The Son was a law graduate and solicitor who had extensive knowledge of commercial matters; and

  3. By reason of one and two above, she had “absolute trust and confidence” in him in such matters, and he occupied a position of influence over her.

The Plaintiff claimed that the nature of the relationship was such that the Son was able to cause her to execute any document he chose.

The Plaintiff claimed that because of the relationship, it would be unconscionable to enforce the Guarantees, on the basis that:

  1. it was a voluntary transaction against her when she did not bring free will to its execution (First Limb); and

  2. there was a failure to adequately explain the Guarantees (Second Limb).

In relation to the First Limb, the Plaintiff sought to prove the fact that there existed an antecedent relationship between her and her Son, which put the Son in a position to “exercise dominion, power or ascendency over” her.

In relation to the Second Limb, the Plaintiff cited the principles in Yerkey v Jones (1939) 63 CLR 649 (Yerkey) in that nothing but independent advice would suffice.

The Plaintiff claimed that she did not receive any advice from any of the solicitors that issued the certificates and she did not understand the purport and effect of the Guarantees.

In defence to the claims, the Bank claimed that it was reasonable to rely on:

  1. each of the solicitors’ certificates provided to it that the Plaintiff had received adequate and competent legal advice in regards to each of the Guarantees; and

  2. the written disclosures on the Guarantees to ensure the Plaintiff was adequately informed as to the risks of the Guarantees entered into.

The decision

The Court noted the substantial issues to be:

  1. Was the antecedent relationship between the Plaintiff and her Son one in which he was in a position to exercise “dominion, power or ascendency” over her?

  2. Was there undue influence exercised by the Son?

  3. Was the provision of independent advice sufficient?

  4. Was the Bank on notice of the exercise or possible exercise of undue influence?

  5. Is it unconscionable for the bank to enforce the Guarantees on the basis of Garcia?

The Court found that:

  1. The solicitors’ certificates provided were sufficient for the Bank to rely on as to the advice being sufficient and independent;

  2. The written warnings and disclaimers on the Guarantees highlighted the importance, effect and degree of the obligations of the document to the Plaintiff;

  3. Any possible presumption of undue influence was successfully rebutted by the Bank by way of one and two above; and

  4. The Bank acted prudently in relation to knowledge of any undue influence, by way of requiring independent legal advice.

On the basis of those reasons, the claim was dismissed.

Lavan Legal comment

This is yet another reminder of the importance of independent legal advice and express, clear warnings in relation to guarantees.

Lenders should always be particularly aware when of taking guarantees from volunteers who are relatives of the borrower.