- The Victorian Court of Appeal found an obligation to assess borrower repayment capacity in the Banking Code of Australia was incorporated into a guarantor agreement.
- Where a lender agrees to incorporate the Banking Code in lending instruments, not only borrowers but guarantors may escape liability if that duty is breached.
- Lenders may wish to consider not incorporating the Code, or potentially limiting the incorporation in guarantees to particular terms – though the extent to which this may be done is not entirely clear.
The Victorian Court of Appeal’s decision in December last year in Doggett v Commonwealth Bank of Australia  VSCA 351 illustrates the importance of lenders taking care to assess borrower repayment ability when the Code of Banking Practice is incorporated into a loan and guarantee arrangement.
In a surprising decision, the Court held that a guarantee had incorporated a particular obligation under the Code of Banking Practice to the effect that the lender must exercise care and skill in forming an opinion about a borrower’s ability to repay – even though the borrower was not a party to the guarantee. The bank’s failure to assess the borrower’s capacity could therefore be a breach of an obligation by the bank to the guarantor, thereby potentially letting the guarantor off the hook.