First Principles of Business Law

4. Unconscionable dealing

4.3. Guarantees given by a spouse

Read the facts and the question and then choose the best answer.

A, who is married to B, says to C Bank: "I need a loan to tide my business over. The only security I can offer is a house owned by my wife. She has had advice on this from her own lawyer and is prepared to execute a mortgage in your favour."

C Bank replies: "OK, we'll accept a mortgage over your wife's house as security for your loan."

It is true that B has had advice on this matter from her own lawyer. If B executes a mortgage in these circumstances, and later regrets it, could she have it set aside on grounds of general law unconscionable dealing?

(a) Yes. A spouse is always at a disadvantage in circumstances like these, when asked to undertake a transaction that entails a liability with no benefit. The bank would be aware of this and should not accept the guarantee.

(b) No. A spouse is likely to be at a disadvantage in circumstances like these, when asked to undertake a transaction that entails a liability with no benefit. But since B has had independent advice it is not unconscionable for the bank to accept the guarantee.