The Facts
On 15 September 2021, the District Court of New South Wales handed down a judgment in Hume Plasterboards v Best Interiors[1] which reaffirmed the ‘wives’ special equity’, otherwise known as the Yerkey v Jones[2] defence. Even though the ‘wife’ (or de facto partner) of the company’s director signed a guarantee, the successful use of the defence meant that she was not liable for the debt incurred.
The plaintiff, Hume Plasterboard Pty Ltd (Hume) is a supplier of building products. The first defendant, Best Interiors Pty Ltd (Best Interior) was a construction firm, supplying and installing plasterboard products to builders and developers. The second defendant was Mr Li, who was the owner of Best Interior. The third defendant was Mr Li’s ex-wife and current de facto partner Ms Chu. Although the couple had not officially re-married, they lived together and referred to each other as husband and wife.
From 2015, Hume supplied goods to Best Interior on credit pursuant to a credit agreement signed by both Mr Li and Ms Chu who were separately listed as guarantors. Hume alleged that even though they were supplying goods, Best Interior did not pay any invoices between October 2019 and January 2020. Consequently, Hume commenced proceedings against the business and the two guarantors in June 2020 to recover an outstanding debt of approximately $127,000. As a defence to being liable for the debt, Ms Chu pleaded ‘wives’ special equity’ otherwise known as the Yerkey v Jones defence.
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The Yerkey v Jones Defence
The Yerkey v Jones defence was first recognised by the High Court of Australia in the 1939 case of the same name and was reaffirmed by the High Court in the case of National Australia Bank v Garcia[3] (Garcia) in 1996. The basic principle created by Yerkey v Jones is that when a lender deals with a wife through the husband, it may be affected by any equity, as between the wife and husband, which might arise from his conduct.
In Garcia, utilising the Yerkey v Jones principles, it was confirmed that, if there is no undue influence on the part of the husband, a wife will not be liable under a guarantee if four elements are met:
- The guarantor did not understand the purport and effect of the transaction;
- The transaction was voluntary (in a sense that the guarantor obtained no gain from the contract that was guaranteed);
- The lender understood that the husband may not fully and accurately explain the purport and effect of the transaction to the wife; and yet
- The lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.
Decision in Hume v Best Interior[4]
After considering all the evidence, the judge found that Ms Chu succeeded in her Yerkey v Jones defence and therefore was not liable under the guarantee. Among the judge’s considerations, was the fact that Ms Chu scarcely read or spoke English, she had never spoken to Hume, she had ‘no formal interest’ in Best Interior (i.e. she was not a shareholder or held any office within the company) and had no appreciation of what a guarantee actually was. As a result, she did not understand the purport and effect of the guarantee she entered. Furthermore, Hume did not take steps to ascertain that she understood or even inquired whether a third party (independent from Mr Li) explained the transaction to her.
In determining whether Ms Chu should be considered Mr Li’s ‘wife’ for the purposes of the defence, the judge held that in the circumstances, the creditor, the borrower and the guarantor all commonly regarded Ms Chu as being married to Mr Li. This ‘common regard’, coupled with the evidence that they lived as husband and wife, was enough to constitute Ms Chu as Mr Li’s wife for the purposes of the defence.
Conclusion
While this decision draws upon valuable case law and a unique set of circumstances, practically credit providers should ensure that all guarantors are given an opportunity to seek independent legal advice to reduce potential defences being raised.
[1] Hume Plasterboards v Best Interiors Aust Pty Ltd & Ors [2021] NSWDC 484
[2] Yerkey v Jones (1939) 63 CLR 649
[3] National Australia Bank v Garcia (1996) 39 NSWLR 577
[4] Hume Plasterboards v Best Interiors Aust Pty Ltd & Ors [2021] NSWDC 484
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