By Anthony Lo Surdo SC -
Snapshot
- Controversy has raged in the banking industry as to whether the Code of Banking Practice, a voluntary code of conduct to which most banks adhere, has any legal and, in particular, contractual force between a bank and a customer.
- It has been the subject of at least two Victorian Court of Appeal decisions, the most recent of which has confirmed that the Code does have contractual effect.
- The decision has obvious ramifications for the manner in which banks will be required to deal with guarantors and other persons to whom provisions of the Code of Banking Practice may apply.
On 21 July 2016, the Victorian Court of Appeal delivered judgment in National Australia Bank Ltd v Rose [2016] VSCA 169. Although the National Australia Bank (the ‘Bank’) submitted in opening at trial that the Code of Banking Practice (the ‘Code’) was of no legal effect, in closing submissions it accepted for the purposes of the proceedings that the Code had the status of contractual terms in each of the guarantees in question.
Accordingly, the application of the Code was not in issue in the Court of Appeal where the primary issue was whether the Bank had, in fact, complied with the terms of the Code.
Background facts
In 2007, Mr Rose entered a joint venture arrangement with a Mr Timothy Rice (the first defendant at trial), to acquire investment properties on the Gold Coast via companies which they jointly controlled. The acquisitions were funded by a combination of funds contributed by Mr Rose (in the sum of $4.8 million) and financing from NAB (amounting to over $8 million) which was arranged by Mr Rice.
On 18 June 2007, John D’Angelo (a bank manager) attended Mr Rose’s home with loan documentation to be signed, and provided him with an oral summary of some of those documents. Mr Rose signed the documents on behalf of the relevant subsidiary company as the borrowing entity, and executed a guarantee in respect of each loan, numbering five in total. Unbeknownst to him however, having neither read the documents nor having sought legal or financial advice, each of the documents stipulated that he was to personally guarantee the entirety of each of the loans to the purchasing companies.
Each of the guarantees executed by Mr Rose also included a warranty by the Bank that it would comply with the relevant provisions of the Code, including clause 28.4(a) (now clause 31.4(a)) which relevantly provided:
‘We will do the following things before we take a Guarantee from you:
- we will give you a prominent notice (emphasis added) that:
– you should seek independent legal and financial advice on the effect of the Guarantee;
– you can refuse to enter into the Guarantee;
– there are financial risks involved;
– you have a right to limit your liability in accordance with this Code and as allowed by law;
– you can request information about the transaction or facility to be guaranteed (“Facility”) (including any facility with us to be refinanced by the Facility)…’
Clause 28.5 (now clause 31.5) provided that the Bank ‘will not ask you to sign a guarantee, or accept it, unless the bank has provided the proposed guarantor with the information described in clause 28.4 to the extent that the Code requires that information to be given and allowed the proposed guarantor until the next day to consider that information.’
Warnings of the matters set out in clause 28.4 appeared on the cover page of each of the guarantees signed by Mr Rose as well as in other parts of the documentation.
Following defaults on the loans in 2010, the properties were repossessed and sold. The Bank then issued demands against the guarantors seeking the outstanding balance of the loans. By way of counter-claim, Mr Rose sought damages for a purported breach of the Code by the Bank consisting of an alleged failure to provide a prominent notice in accordance with the requirements clause 28.4.
