Academic journal article University of Western Sydney Law Review

The Application of the Defence of Non Est Factum: An Exploration of Its Limits and Boundaries

Academic journal article University of Western Sydney Law Review

The Application of the Defence of Non Est Factum: An Exploration of Its Limits and Boundaries

Article excerpt

CONTENTS

I   INTRODUCTION
II  THE NATURE OF THE DOCTRINE OF NON EST FACTUM
III NON EST FACTUM 1N THE CONTEXT OF GUARANTEES--A CRITICAL
    ANALYSIS
IV  APPLICATION OF NON EST FACTUM IN GUARANTEE CASES:
    RESTRICTIONS AND LIMITATIONS
V   THE PLEA OF NON EST FACTUM IN GUARANTEE CASES: DIMINISHED
    AND CIRCUMSCRIBED
VI  CONCLUSION

I INTRODUCTION

Non est factum is a defence which may be available to someone who has been misled into signing a document which is fundamentally different from what he or she intended to execute or sign. Accordingly, where the defence is established, the signing party may be able to escape the effect of the signature by arguing that the agreement was void for mistake. (1) This article is concerned with evaluating the limits and breadth of the defence as it is applied to contracts of guarantees, which are perhaps the most common form of security used in the business world today.

It is usually thought that the guarantor or surety knows that the guarantee secures the repayment of the borrower's loan and that dissatisfaction with the borrower's financial position is probably the reason for the creditor's stipulation that a contract of guarantee be entered into. The use of guarantees can be one of a number of ways of dealing with the sub-prime mortgage crisis, which has created a credit crunch that has a devastating effect on banks and financial markets and has pushed the major economies into a recession. (2) The fact that the Australian Government (like those of other developed countries) has decided to guarantee bank customers' deposits (as part of a stimulus package) to raise public confidence in the financial system following the world economic downturn means that it can no longer afford to rely on the usual claim that the banks are always secure, well regulated and capitalised. In this way, the Government has battled to prop up the banks, committing billions of dollars in the process. Yet action on the current scale has never been tried before and nobody knows when it will have an effect-let alone how much difference it will make. (3)

In a specific situation, where one party has signed a contract of guarantee, believing it to be something different from what it actually is, that party may be able, as alluded to earlier, to rely on the doctrine of non est factum to have the document set aside for mistake. Without such a defence, the mistaken party may be liable under a document appearing to be valid and binding. The rationale for the defence of non est factum is that in truth, the document has not been executed at all.

The article also questions the significance of the plea as a doctrine and its application. It is important to know, for example, that the extensive disclosure by the creditor as required by the Banking Code of Practice and the Consumer Credit Code may have the indirect effect of reducing the application of non est as a defence at law, since guarantors will now have less opportunity for claiming that they were under a misapprehension as to the terms of the guarantee. It is possible, under some circumstances, that a mistaken party who is unable to obtain relief by reason of non est factum may be able to set aside the guarantee for other reasons such as a breach of the creditor's duty of disclosure, misrepresentation, or unconscionable conduct which are wider in scope and are more likely to give a remedy. (4)

II THE NATURE OF THE DOCTRINE OF NON EST FACTUM

The modern boundaries of the doctrine of non est factum can be found in Saunders v Anglia Building Socie (5) where the House of Lords restated the principles governing the availability of the defence. Stated in general terms, the criteria for a successful plea are the following:

* The person relying on the defence usually must belong to a class of persons who, through no fault of their own, are unable to have any understanding of the purport of a particular document, because of blindness, illiteracy or some other disability. …

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