Garcia v. National Australia Bank

Lord Browne-Wilkinson’s “bright line” approach in Barclays Bank Plc v. O’Brien,1 of prescribing the steps a bank must take in order to avoid being fixed with constructive notice of undue influence or other equitable wrongdoing, has yielded some decidedly chiaroscuro law. For English and Scottish courts the task of applying, distinguishing and refining these prescriptions is ongoing.2 In other jurisdictions the logically anterior question has been whether the O’Brien guidelines should be adopted, in their original or modified form, as the basis for setting aside guarantees procured by wrongdoing. The answer in Commonwealth countries has been mixed. The New Zealand Court of Appeal has adopted the O’Brien model of equitable intervention, albeit with some fine tuning as to the precise steps a bank must take if it is to avoid liability.3 The Supreme Court of Canada has paid Lord Browne-Wilkinson the unexpected compliment of applying the guidelines he laid down to answer a very different question, namely whether a bank has sufficient knowledge of a debtor’s breach of fiduciary duty so as to render it liable as constructive trustee for having received property in breach of that duty.4 In marked contrast, the High Court of Australia in Garcia v. National Australia Bank Ltd 5 has rejected the application of the O’Brien guidelines, at any rate where a wife has agreed to act as surety for her husband’s indebtedness, and perhaps for other family relationships as well. In so doing the High Court has rehabilitated the concept of the wife’s “special equity” to have a guarantee set aside which had previously been given its quietus, as far