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Some wives are more special than others – Charges, Mortgages, Indemnities

It is common for the family home and other significant assets to
be registered solely in the name of a wife in circumstances where
her husband operates a business or is otherwise at risk of claims
made by third party creditors (the opposite is also true, but that
is not the subject of this topic for the reasons discussed

Lenders often require, as a pre-condition to an advance being
made, that a wife personally guarantees the debts of her husband
and/or his related entities and grants a mortgage over her property
as security.

A wife may sign guarantee/mortgage documents without any real
understanding of the legal relationship to which they give effect,
and without proper appreciation that her property is being put at
risk. A wife’s liability to the lender in these situations has
been described as ‘sexually transmitted debt’.

The special wives’ equity (“SWE“)
may operate to protect married women in such circumstances. Where
the equity applies, a guarantee/mortgage may be set aside and
become unenforceable. In such cases, the prospects of a lender
recovering its debt may be significantly diminished.

The decision which established the SWE was made more than 80
years ago, at a time when gender disparities were more pervasive
and non-heterosexual relationships were scarcely approved. The
wisdom of the decision, and its usefulness in the 21st
century, has been the subject of considerable judicial and academic
critique – not least because of its failure to reflect modern
social values and recognise areas of inequality outside of the
traditional husband/wife relationship.

The High Court of Australia has expressly left open the question
of whether the special equity ought to extend beyond just
wives1. However, in a 2000 decision, the New South Wales
Supreme Court was unwilling to extend the equity to a woman in a de
facto relationship2.

For better or worse, the SWE continues to apply only in favour
of women in matrimonial relationships.

Lenders should be aware of the equitable principles underpinning
the SWE, and the steps that may be taken to avoid its operation, to
ensure that security for loans are properly capable of being

Wives who have been charged with repayment of their
husband’s debts should be familiar with the SWE and the
considerable relief it may provide.

What is the Special Wives’ Equity?

In Yerkey v Jones3, the High Court of
Australia held that:

1. it is unconscionable for a third party to be able to enforce
a wife’s guarantee for her husband’s obligations in
circumstances where:

(a) the guarantee is procured by the application of actual undue
influence by the husband (the ‘first limb from Yerkey’);

(b) the wife does not understand the nature and effect of the
guarantee that has been provided (the ‘second limb from
Yerkey’); and

2. in either case, a wife should have a prima facie right to
have the guarantee set aside.

Justice Dixon stated that the proposition forming the basis for
the second limb in Yerkey is that:

“[I]f a married woman’s consent to become a surety
for her husband’s debt is procured by the husband and without
understanding its effect in essential respects she executes an
instrument of suretyship which the creditor accepts without dealing
directly with her personally, she has a prima-facie right to have
it set aside.”4

The 1998 decision in Garcia v National Australia Bank Ltd
expanded on
the decision in Yerkey and outlined the following
circumstances which would, together, result in the enforcement of a
guarantee being unconscionable against a wife:

1. the wife did not understand the purport and effect of the
transaction (the “No Understanding

2. the wife was a volunteer to the transaction (in that the wife
did not personally gain from the transaction) (the
Volunteer Requirement“);

3. the creditor did not itself take reasonable steps to explain
the transaction to the wife (or ensure that an independent third
party did so) (the “Reasonable Steps

Once it is established that the lender is aware of the spousal
relationship, the creditor is taken to have understood that the
wife may repose trust and confidence in her husband and, therefore,
the husband may not have explained the effect of the transaction to
the wife.

The No Understanding Requirement

It is common practice for lenders to require a guarantor to sign
a written acknowledgement that the guarantor has read the terms of
the loan and guarantee and has understood their obligations prior
to signing.

However, unless there is evidence that a wife in fact understood
the nature and effect of becoming a surety, such acknowledgements
are unlikely to be effective to avoid the operation of the SWE.
This is unsurprising, since a wife who does not read or understand
a guarantee prior to signing is unlikely to read or understand such
an acknowledgement.

Circumstances which may satisfy a court that a wife had an
adequate understanding of the transaction may include:

1. where a wife has a sufficient degree of business acumen or
work experience such that she is likely to have an understanding of
the nature of a personal guarantee;

2. where a wife obtains legal advice with respect to the
guarantee, or has previously obtained advice in connection with
guarantees in the past; and/or

3. where a wife makes statements which are consistent with her
having understood the nature of the guarantee at the time of
signing (for example during recorded telephone conversations with
bank representatives).

In the above circumstances, the SWE is unlikely to apply.

The Volunteer Requirement

The onus is on the party seeking to rely on a guarantee to show
that a wife benefited from the relevant transaction the subject of
guarantee, and therefore that the Volunteer Requirement is not

For the SWE to apply, the surety must act without recompense,
except to the advantage of her husband.7 However, it is
clear that a wife may still be regarded as a volunteer despite
obtaining incidental benefits.

For a wife to excluded from the SWE, the underlying transaction
must be of real benefit to her. It is not sufficient that a wife
receives legal consideration, in terms of the law of contract (an
acknowledgement in the terms of the guarantee that the loan was
given at the request of the wife will not suffice).

Being listed as a nominated beneficiary of a
discretionary/family trust which receives the loan is unlikely to
be sufficient to exclude a wife as a volunteer (provided that the
wife does not exercise discretion over the trust). This is the case
even where the wife has a history of financially benefiting from
the business of the trust over a prolonged period by receiving
discretionary distributions of profit.

In Commonwealth Bank of Australia v Khouri,8
it was held that because the benefits received by the wife through
a family trust were not as of right, but as a result of the
exercise of a discretion by the husband, the wife was a volunteer
to the transaction.

In Garcia, it was held that even though the wife was a director
of and shareholder of the debtor company, the fact that her husband
was in complete control of the company and that the wife was not
directly involved in the company meant that, in effect, she
received no benefit from guaranteeing the relevant company’s
debt. This was despite the fact that, from time to time, some
benefit flowed to the wife’s family from the relevant

However, where a wife expects to receive a direct profit from
the transaction, she will no longer be in the position of a

Circumstances relevant to determining whether the Volunteer
Requirement is satisfied may include, for example:

1. the degree of control exercised by the wife in respect of the
business of the borrower and the distribution of its profits;

2. whether the wife has sources of income, independent from the
borrowing entity.

The Reasonable Steps Requirement

The safest way for a lender to avoid the operation of the SWE is
to require evidence that the guarantor receives independent legal
advice prior to entering into the transaction.

Whilst the above is strongly recommended, the provision of
independent legal advice is not strictly required.

In Garcia, Justice Kirby suggested that “unless there
are special exceptional circumstances or the risks are large, a
credit provider will have taken such reasonable steps . if it warns
the surety (at a meeting not attended by the principal debtor) of
the amount of the surety’s potential liability, of the risks
involved to the surety’s own interests and advises the surety
to take independent legal advice”.9

At minimum, a lender should:

1. ensure that a wife is provided with, and has read, copies of
all relevant transaction documents (which should be provided to her
directly, rather than through her husband);

2. meet with the wife, in the absence of her husband, and warn
her of the legal and financial risks of providing a personal

3. explain the material terms of the transaction and the
guarantee, including:

(a) the extent of the debt being guaranteed;

(b) that the wife could become personally liable for the debt,
that her property could be sold and/or she could be made bankrupt
if payment is not made;

4. explain to the wife that she has no obligation to provide the
guarantee, and could seek to limit her liability under the
guarantee; and

5. recommend to the wife that she obtain her own independent
legal advice prior to signing the guarantee.

A proper record of the lender taking the above steps be kept.
This might take the form of an audio recording of any
conversations, or by requiring that a written acknowledgement be
signed by a wife (in the presence of an independent person and in
the absence of her husband).


It remains to be seen whether the courts will seek to modify,
limit or extinguish the application and scope of the SWE to more
accurately reflect contemporary social and cultural values.

It is also unclear whether the equity principles underpinning
the SWE will be extended to other relationships which fall short of

In the meantime, lenders should be careful to take appropriate
steps to avoid operation of the SWE and its potentially significant
consequences. Women who are charged with repayment of debts
relating to their husband’s affairs should seek legal advice to
determine whether they are entitled to relief under the SWE.


1 Garcia v National Australia Bank Ltd (1998)
194 CLR 395 at 404.

2 State Bank of NSW v Hibbert [2000] NSWSC

3 (1939) 63 CLR 649.

4 Ibid at 683.

5 (1998) 194 CLR 395 at 409.

6 Schultz v Bank of Queensland [2014] QSC 305
at [32].

7 Yerkey v Jones (1939) 63 CLR 649,

8 [1998] VSC 128.

9 Garcia v National Australia Bank Ltd 194 CLR
395 at 431.

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