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Protecting women who provide security for a husband's, partner's or child's debts. the value and limits of an economic perspective

Published online by Cambridge University Press:  02 January 2018

Megan Richardson
Megan Richardson*
Affiliation:
University of Melbourne
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Extract

In recent cases English, Australian, and New Zealand courts have been called on to deal with apparently similar fact situations of a woman entering into a mortgage, guarantee or joint loan contract with respect to a husband’s, partner’s or child's business debts, placing her home at risk. Yet the results and reasoning in the cases appear to be markedly different. The question is whether the apparent differences can be resolved to yield a coherent policy approach. It will be argued, drawing on an economic-feminist perspective that the cases can be resolved in terms of the courts’ preparedness to acknowledge only limited categories of behaviour and circumstances, when measured against the paradigm of the ‘rational economic man’, as displacing the assumption that contracting increases welfare.

Type
Research Article
Information
Legal Studies , Volume 16 , Issue 3 , November 1996 , pp. 368 - 386
Copyright
Copyright © Society of Legal Scholars 1996

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References

1. Barclays Bank Plc v O'Brien [1994] 1 AC 180.

2. See for instance, Fehlberg ‘The Husband, the Bank, the Wife and her Signature’, (1994) 57 Modern Law Review 467; Berg ‘Wives Guarantees - Constructive Knowledge and Undue Influence’ [1994] Lloyds Maritime and Commercial Law Quarterly 34; Lehane, ‘Undue Influence, Misrepresentation and Third Parties’ (1994) 110 Law Quarterly Review 167; Battersby, ‘Equitable Fraud Committed by Third Parties’ (1995) 15 Legal Studies 35; Oldham ‘“Neither a Borrower nor a Lender Be’ -the Life of O'Brien' (1995) 7 Child and Family Law Quarterly 104; Mee ‘Undue Influence, Misrepresentation and the Doctrine of Notice’ (1995) 54 Cambridge Law Journal 536.”

3. Barclays Bank Plc v O'Brien [1993] QB 109 per Scott LJ at 117.

4. Ibid at 142.

5. Barclays Bank plc v O'Brien above n 1 at 195 rejecting the Australian High Court authority of Yerkey v Jones (1939) 63 CLR 649 which held that a special equity arises in relation to a third party creditor if the contract is the result of ‘improper or unfair dealing’ on the part of the husband: Ibid at 683–484 per Dixon J.

6. Ibid at 189–191,196 (including in the reference to ‘husband's’ debts, the debts of a company in which he has a direct financial interest: Ibid at 199).

7. Ibid at 189–190.

8. See Ibid at 195: ‘The doctrine of notice lies at the heart of equity’.

9. Ibid at 195–196.

10. Ibid at 196–197.

11. Ibid at 197.

12. Ibid at 198 citing by way of example Avon Finance Co Ltd v Bridger [1985] 2 All ER 281 (a case in which a son persuaded his elderly parents by way of a misrepresentation to stand surety for his debts).

13. CIBC Mortgages Plc v Pitt [1994] 1 AC 200.

14. Ibid at 205.

15. Ibid at 207–208.

16. Ibid at 209, overruling the Court of Appeal in Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 holding that manifest disadvantage must be proved for actual undue influence (although leaving open whether manifest disadvantage must be shown in other cases, as held in National Westminster Bank Plc v Morgan [1985] AC 686).

17. Ibid at 210–211.

18. Ibid citing the Court of Appeal judgment of Gibson LJ.

19. Ibid at 188.

20. Ibid.

21. The aim being to' hold the balance fairly between the vulnerability of the woman and the' practical problems of financial institutions asked to accept a… surety obligation': Ibid at 197.

22. See also Goode Durrant v Biddulph [1994] 2 FLR 551 where the fact that a joint loan contract ostensibly for the purposes of the family business was ‘manifestly disadvantageous’ to the wife (taking into account her minimal interest in the company for which the loan facility was obtained, the substantial security she was offering by way of her share in the matrimonial home, and the husband's dominant role as the instigator in seeking and obtaining the loan from the bank), was treated as a basis for applying the O'Brien standards.

23. Above n 1 at 190–191.

24. Massey v Midland Bank plc [1995] 1 All ER 929.

25. Ibid at 935 per Steyn LJ.

26. Ibid at 933.

27. Ibid at 934.

28. Ibid at 934–935.

29. Banco Exterior Internacional v Mann [1995] 1 All ER 936.

30. Ibid at 946 per Morritt LJ.

31. Ibid at 940.

32. Ibid at 943–944 with reference to the Bank of Baroda v Shah [1988] 3 All ER 24 holding that there is no obligation of a creditor to ensure that the surety received entirely independent advice, for it was entitled to assume (in the absence of clear indications to the contrary)' that the solicitor who did advise was honest and competent'.

33. Ibid at 944. Note that Hobhouse J dissented on this issue, commenting that the bank's approach in this case (in requiring her solicitor to provide the advice) ‘left open precisely the position that materialised’: Ibid at 948.

34. Ibid at 944 per Morritt LJ.

35. Note the apparently conflicting result in TSB Bunk plc v Camfield [1995] 1 All ER 951 where the fact that a creditor had required independent advice but it was not given was treated as fixing the creditor with notice of the undue influence, notwithstanding that ‘It has not been suggested that the plaintiff was, at the material time, aware of the failure of the solicitors to fulfil their duties’: ibid at 954. The Court of Appeal referred to Massey, which postdated the trial court's finding of constructive notice, but said ‘However the point has not been taken in this court and I say no more about it’: ibid.

36. Ibid at 934 (emphasis added).

37. For a general discussion of the Australian and New Zealand law see, for instance, Chen Wishart Unconscionable Bargains (Butterworths, 1989); Richardson ‘Contract Law and Distributive Justice Revisited’ (1990) 10 Legal Studies 258; and Law Commission, Unfair Contracts (Preliminary Paper No 11, 1990); Duggan ‘Trade Practices Act 1974 (Cth), Section 52A and the Law of Unjust Contracts’ (1991) 13 Sydney Law Review 138; Otto ‘Equity's Conscience and Women's Inequality’ (1992) 18 Melbourne University Law Review 808; Sneddon, ‘Unfair Conduct in Taking Guarantees and the Role of Independent Advice’ (1992) University of New South Law Journal 302; and Richardson ‘The Utilitarian-Economic Model of Contractual Obligation: Unconscionability at the Frontier’ (1995) 20 Melbourne University Law Review 481.

38. Akins v National Australia Bank (1994) 34 NSWLR 155.

39. Ibid at 171 per Clarke JA treating the earlier Australian High Court authority of Yerkey v Jones above n 5 as superseded. See also National Australia Bank v Garcia (1996) ASC 56-354 and Teachers Health Pty Ltd v Wynne (1996) ASC 56–356.

40. See Commercial Bank of Australia v Amadio (1983) 151 CLR 447.

41. Commercial Bank of Australia v Amadio per Deane J at 474; Blomley v Ryan (1956) 99 CLR 362 per Fullagar J at 405.

42. Akins v National Australia Bank above n 38 per Clarke JA at 171–172.

43. Ibid at 173.

44. Ibid (rejecting the argument that the presence of children at the interview had distracted Mrs Akins).

45. Ibid at 171. See similarly the recent case of National Australia Bank v Garcia above n39.

46. Gough v Commonwealth Bank of Australia (1994) ASC 56–270.

47. Ibid at 58,855 per Mahoney JA.

48. Ibid at 58,854.

49. Ibid at 58,849. Kirby P dissented on the basis that Mrs Gough's evidence that she went along with the decisions made by her husband and signed blank tax forms provided by the accountant indicating her status as a company employee, should be accepted -and that there was sufficient evidence available to the bank to indicate that the business was essentially her husband's and that because she lived with him ‘she was necessarily susceptible to his requests’: ibid at 58,841.

50. Contractors Bonding Ltd v Snee [1992] 2 NZLR 157.

51. Ibid at 166 per Richardson J.

52. Ibid at 174.

53. See similarly the Court of Appeal in Tilialo v Contractors Bonding Ltd (1994) CA 50/3, unreported, where the fact that the company's solicitor may have provided false assurances as to the effectiveness of a guarantee signed by the ex-wife of a husband who was managing director and part owner of the company for which the loan was obtained was held not to affect the finance company. The court also distinguished O'Brien on the basis that the transaction was on its face for the purposes of a company in which the appellant was a fifty percent shareholder and a director and moreover ‘to all appearances she was an independent woman engaged in a business with her former husband for a considerable time after the marriage had ended’.

54. Cf the New South Wales Supreme Court decision of Santow J in Burke v State Bank of New South Wales (1994) 37 NSWLR 53 following O'Brien with little reference to the Court of Appeal decision in Akins (handed down only two months earlier).

55. Contractors Bonding Ltd v Snee above n 50 at 168 per Richardson J, although with particular reference to Yerkey v Jones which was subsequently superseded by Barclays Bank plc v O'Brien: see above n 5.

56. Ibid at 174.

57. Contractors Bonding Ltd v Snee above, n 50 at 166.

58. Ibid.

59. Mrs Akins' mistake may have been that she mounted her own defence in the case in a competent and articulate manner: see above n 38 at 157–159. It may also be noted that, although Mrs Akins might have had a potential argument as to physical abuse by her husband, this was not raised by her in her claim as to unconscionability vis-a-vis the bank.

60. See Barclays Bank PIC v O'Brien above n 3 and accompanying text.

61. Above n 50 at 166. See also, on this issue, the recent case of Teachers Health Pty Ltd v Wynne above, n 39.

62. Ibid.

63. See above n 23 and accompanying text.

64. Barclays Bank plc v O'Brien above n 1 at above n 20.

65. Kronman and Posner The Economics of Contract Law (1979) 2; Trebilcock The Limits of Freedom of Contract (Harvard University Press, 1993) p 16.

66. See Richardson ‘The Utilitarian-Economic Model of Contractual Obligation: Unconscionability at the Frontier’ above n 37.

67. Ibid at 490–491.

68. See, for instance, Trebilcock above n 65 at 151.

69. See Trebilcock above n 64 at 163.

70. See, for instance, Posner Economic Analysis of Law (4th edn Little Brown & Co, 1992) p 116; Epstein ‘Unconscionability: A Critical Reappraisal’ (1975) 18 Journal of Law and Economics 293.

71. Trebilcock above n 65 at 118,152 and see also Trebilcock ‘An Economic Approach to the Doctrine of Unconscionability’, Reiter and Swan (eds), Studies in Contract Law (Butterworths, 1980) p 379.

72. Trebilcockabove n 65 at 118 and see also Eisenberg ‘The Bargain Principle and Its Limits’ (1982) 95 Harvard Law Review 741.

73. See generally Richardson ‘The Utilitarian-Economic Model of Contractual Obligation: Unconscionability at the Frontier’ above n 37 at 494.

74. See Trebilcock above n 71 at 408.

75. Held Feminist Morality: Transforming Culture, Society and Politics (University of Chicago Press, 1993) pp 194–195 and see also Hadfield ‘The Dilemma of Choice: A Feminist Perspective on The Limits of Freedom of Contract’, (1995) 33 Osgoode Hall Law Journal 337 at 338.

76. See West ‘Submission, Choice and Ethics: A Rejoinder to Judge Posner’ (1986) 99 Harvard Law Review 1451 at 1455; Hadfield above n 75.

77. Posner above n 70 at 4.

78. See, for instance, Easterbrook and Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991) p 11.

79. Mill ‘On Liberty’ (1859), in Gray (ed), On Liberty and Other Essays (Oxford University Press, 1991) p 114.

80. Cf Trebilcock above n 65 at 162, arguing that Mill's views on slavery are inconsistent with his liberal perspective, leading to ‘slippery slope’ arguments against his liberty principle. But the argument Mill makes is not that a person should be prohibited from entering into a slavery contract but that the slave should not subsequently be held to the slavery: ibid at 114.

81. See Mill ‘The Subjection of Women’ in Gray (ed), On Liberty and Other Essays above n 79, pp 506–507.

82. See similarly for a feminist position, West in ‘Taking Preferences Seriously’ (1990) 64 Tulane Law Review 659,675 but cf Trebilcock above n 65 at 160 arguing that to assess such preferences is inherently ‘patronising and authoritarian’. However this argument does not respond to the point that a woman's preferences may themselves be viewed as not free because of the particular family or social context in which they are exercised. The question then is which paternalism is worse, that of an interested party (for instance, a husband, partner or child) or that of a disinterested third party (the court).

83. See Mill above n 81 at 507: ‘laws and institutions require to be adapted, not to good men, but to bad’.

84. See similarly, for a feminist perspective on the role of the courts (and legislature) in promoting a better society, West above n 76 at 1455–1456.

85. See Trebilcock above n 65 at n 68 (although himself limiting the category of ‘cognitive incapacity’ to minors and mental incompetents and treating endogenous and ‘bad’ preferences as beyond the scope of economic analysis).

86. See, for instance, Held above n 75 at 280 and West n 74 at 675–676, arguing for a reduced scope for the binding force of contracts with respect to women, and further Radin ‘Market Inalienability’ (1987) 100 Harvard Law Review 1849.

87. The New South Wales Court of Appeal's response to Mrs Akin and Mrs Gough may be seen by a feminist as an example of a preference for the (male) bank officer's version of the story over the woman's story. See also, with respect to the earlier cases of Aboody supra note 16 (whose legal rulings are now superseded by Pitt) and Amadio above n 40, Otto above n 37 at 816 and 822.

88. As has been suggested by some feminists regarding the abandonment by Australian courts of the Yerkey v Jones‘special equity’ in favour of wife-sureties: see, for instance, Fehlberg ‘Surety Wives and Australian Law: Akins v National Australia Bank’ (1996) 11 in Banking and Finance Law Review 423 (although see below nn 94–96 for other recommendations).

89. Familiar examples are Lloyds Bank v Bundy [1975] QB 326 (a father guaranteeing his son's business debts); Avon Finance Co Ltd v Bridger (referred to in O'Brien at above n 12); Commercial Bank of Australia Ltd v Amadio above n 40 (parents guaranteeing their son's business debts).

90. For instance, two surveys carried out in England and Australia, respectively, involved sample interview groups of less than 50 (in the first case predominantly those who had suffered problems in relation to surety contracts in the pre-O'Brien period): see Fehlberg Securities and Guarantees: Another Perspective on Money and Marriage (unpublished D Phil thesis, Wolfson College, Oxford, 1995); Singh For Love Not Money: Women, Information and the Family Business (Consumer Advocacy and Financial Counselling Association of Victoria, 1995). The second study also contained results of a questionnaire based survey of 160 women engaged in a family business which indicated that seven out of ten women were ‘completely’ satisfied, and two out of ten were ‘somewhat’ satisfied with the information they had (even though one in three women did not ‘actively and persistently’ seek or receive detailed information when signing documents which have legal and/or financial implications). Although very useful in indicating the risks of surety contracts and attitudes of women, the surveys do not purport to provide comprehensive evidence as to the costs versus benefits of surety and joint loan contracts as a general practice.

91. As indicated by English and Australian Banking Codes: see Good Banking - Code of Banking Practice (2nd edn, 1994), paragraph 14; Australian Bankers' Association, Code of Banking Practice (1994), paragraph 17; New Zealand Bankers' Association Draft Code of Banking Practice (Discussion Document, October 1995, paragraph 9.4).

92. In Australia, where solicitor liability has became a recognised risk following Amadio above n 40, the Victorian Solicitors Liability Committee, Learning from Amadio (1995), specifies standards for legal advice given to prospective sureties: see Richardson,' The Utilitarian-Economic Model of Contractual Obligation: Unconscionability at the Frontier' above n 37 at 499 and further Sneddon ‘Lenders and Independent Solicitors’ Certificates for Guarantors and Borrowers: Risk Minimisation or Loss Sharing' (1996) 24 Australian Business Law Review 5.

93. Note that the Fehlberg survey which included 22 surety spouses (20 women and 2 men) indicated that although the large majority of those surveyed suffered problems in relation to their contracts, often feeling inadequately advised, informed and free in undertaking their commitments, most (13/22) would still prefer to maintain their flexibility to enter into surety arrangements in preference to legislative constraints: Fehlberg above n 90 at 382.

94. See Fehlberg above n 88 at 436–437 with respect to surety contracts (although, query in the light of the discussion in this article whether the standards should extend more broadly to joint loan contracts with an equivalent purpose).

95. Cf the recommendations of the Australian Law Reform Commission with respect to guarantee contracts: see ALRC, Equality Before the Law: Women's Equality (1994) Report No 69, Recommendation 13.4 and 13.5 (suggesting that the bank should monitor by way of a separate interview in which the terms and significance of the guarantee are again explained and the bank satisfies itself ‘on reasonable grounds’ that the guarantor understands and freely consents - although query whether the duplication of functions would be efficient). Fehlberg endorses the recommendations: above n 90 at 384.

96. See Fehlberg above n 90 at 385 (again only with respect to surety contracts), leaving it open as to whether the programme should be funded through banks or from some other source. On the basis that costs of lending should be internalised to those who stand to benefit, the economic answer would be that banks and other institutional creditors should provide the programme.