How important is independent legal advice when a guarantee is provided?
Importance of lenders requiring borrowers and guarantors to obtain independent legal advice once again confirmed by the courts in National Australia Bank Limited v Wehbeh & Anor  VSC 431.
In 2008, NAB (Bank) registered a mortgage over Mr and Mrs Wehbeh’s Greenvale property. This was to secure the repayment of a home loan. And also to secure the performance of Mr and Mrs Wehbeh’s obligations as guarantors under a guarantee provided to the Bank for a business loan that was made to a company, 888 Investments Pty Ltd (Company). Mr Wehbeh and a business partner were the only directors and shareholders of the company.
In mid-2010, Mr and Mrs Wehbeh separated. Shortly thereafter, repayments towards the home loan stopped. The repayments on the business loan also ended. Because of the loan defaults, the Bank served the parties with default notices. However, the borrowers continued to be in default of their obligations under the loan transactions. The Bank commenced proceedings against Mr and Mrs Wehbeh, as mortgagors, to recover possession of the Greenvale property and judgment for the debt owed under their guarantees.
In 2012, the Bank obtained summary judgment against Mr Wehbeh. However, Mrs Wehbeh defended the claims made against her.
The Court found that the Bank had established its right to possession of the Greenvale property. As well as its entitlement to judgment on the debt outstanding in relation to the guarantee of the business loan.
Therefore the main issues that the Court had to consider were the two defences raised by Mrs Wehbeh:
- unconscientious dealing in relation to the home loan and,
- undue influence in relation to the guarantee provided for the business loan.
Unconscientious dealing defence in relation to home loan
In relation to the home loan, the Court had to determine whether Mrs Wehbeh was under some form of special disability or a situation of disadvantage which the Bank had unconscientiously taken advantage of. Previously the courts have granted relief against an unconscionable dealing in circumstances where the consideration from the stronger party (such as the Bank) does not flow to the party under the disability, but rather to a third party.
In this instance, the Court found that consideration did flow from the Bank directly to Mrs Wehbeh. She used the home loan in question to discharge a pre-existing mortgage over the Greenvale property held by another financier, Perpetual.
The Court noted that Mr and Mrs Wehbeh had re-financed their home loan a number of times with various banks. Further, it appeared that Mrs Wehbeh understood the nature and effect of those past transactions. There was no substance to Mrs Wehbeh’s assertions that she was under some form of special disability or disadvantage. Such as lacking experience in the type of home loan she entered with the Bank. Or that her will was overborne by her husband causing her to enter the home loan.
Undue influence defence in relation to guarantee of business loan
In relation to her guarantee of the business loan, Mrs Wehbeh argued that the Bank should have known that she reposed trust and confidence in her husband when she entered the transaction. She also stated she did not receive benefit from the transaction. And that she did not properly understand the nature of the transaction.
Garcia decision influential
In determining whether it was unconscionable to enforce the guarantee provided by Mrs Wehbeh, the Court took into account the Garcia decision. The Court considered whether the:
- surety (guarantor) understood the purport and effect of the transaction;
- transaction was voluntary (in the sense that the surety obtained no benefit from the contract the performance of which was guaranteed);
- lender is taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction; and
- lender took its own steps to explain the transaction to the wife or to find out whether someone else had explained the transaction to her.
Whilst Mrs Wehbeh alleged that she did not understand the effect of the transaction, that she was a volunteer to the transaction, and that the Bank knew she was married to Mr Wehbeh and would repose trust and confidence in him, the Court noted that she did not allege that the Bank had failed to ascertain whether an independent person had explained the transaction to her.
In this case, the Bank had received and relied upon a certificate provided by Mrs Wehbeh’s solicitor, Mr Raso. Therefore it is clear that she had been adequately advised as to the nature and effect of her obligations as guarantor.
The Court therefore found that Mrs Wehbeh did receive independent legal advice before she signed the document. Furthermore, the Court held that it is the knowledge of NAB that characterises whether its behaviour is unconscientious and in this instance, NAB understood it to be that Mrs Wehbeh received independent legal advice regarding the guarantee.
The Court was not satisfied that Mrs Wehbeh had established all the necessary elements required under the defences she raised. In conclusion, given the above findings, the Court held that the bank was entitled to possession of the Greenvale property and to judgment for the debt she owed under the guarantee.
This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.