Failure of compliance with the Banking Code of Practice makes banks susceptible to a claim for damages

In National Australia Bank Limited v Timothy Craig Rice and Albert Rose [2015] VSC 10, the judge dismissed National Australia Bank’s (“NAB”) claim for $3,878,744.05 plus costs and interest, brought pursuant to five guarantees executed by Mr Rose. It was found that NAB breached contractual warranties by failing to comply with the Banking Code of Practice (“Banking Code”), rendering the five guarantees signed by Mr Rose unenforceable.  NAB made an application for leave to appeal the decision, such appeal being dismissed by the Court of Appeal on 21 July 2016.

On the application for appeal, it was said by Warren CJ and McLeish JA that the key questions for determination in this application for appeal were:

1. whether the trial judge was correct to conclude that NAB failed to give ‘a prominent notice’ of the matters set out in clause 28.4(a)(i)–(iv) of the Banking Code, and thereby breached the guarantees; and
2. whether his Honour was correct to conclude that NAB’s breaches caused Mr Rose to enter into the guarantees.[1]

Background

In 2007, Messrs Rose and Rice entered a joint venture agreement to acquire investment properties in the Gold Coast. The acquisitions were funded by a combination of funds contributed by Mr Rose and borrowings from NAB. The joint venture had acquired eight properties in 2007, for which Mr Rose contributed $4.8 million with over $8 million being funded by borrowings from NAB.

For each acquisition, Mr Rice arranged for Mr Rose to sign all loan documents on behalf of the borrowing entity and also to execute a guarantee in respect of each acquisition. The documents were all signed in the presence of John D’Angelo, a senior business banking manager at NAB. Mr D’Angelo provided a partial oral summary of some the documents and took Mr Rose to the pages where his signature was required.  Mr Rice was experienced in managing real estate on the Gold Coast, but Mr Rose had not previously invested in real estate for commercial gain, and had limited experience in general business affairs. It was unbeknown to Mr Rose that he was to ‘personally guarantee’ the entirety of each of the loans. 

Mr Rose executed the guarantees, which included a warranty by NAB, advising that it would comply with the provisions of the Banking Code. The relevant provision was clause 28.4(a) (currently clause 31.4(a)), which required NAB to give Mr Rose a ‘prominent notice’ of various rights in limiting his liability and various other matters, including a statement that he was assuming financial risk and that he should obtain independent legal advise prior to executing the guarantee. Warning of the matters set out in clause 28.4(a) appeared on the cover page of each guarantee signed by Mr. Rose, as well as similar statements included on the signature pages in other parts of the documentation executed by Mr Rose. Further, of relevance, is clause 28.5 of the Banking Code (currently clause 31.5), which provides that NAB would not be able to take a guarantee from Mr Rose without leaving this notice and other documentation and allowing him until the next day to consider the information. 

In 2010, the purchasing companies defaulted on the loans and the properties were repossessed and sold. NAB proceeded by issuing demands against Mr Rose, seeking payment for the outstanding balance of the loans. In 2012, NAB commenced proceedings and Mr Rose filed a defence, alleging that the guarantees were unenforceable due to unconscionable conduct arising from him being mistaken as to the terms of the guarantees and also from NAB failing to take certain steps at the time of the execution. [2]

Decision of the Trial Judge in 2015

It was concluded by the trial judge that Mr Rose had not established that NAB acted unconscionably, absent any breach of the Banking Code.[3] Further, it was held that clauses 28.4 and 28.5 of the Banking Code were not conditions of the guarantees, as contended by Mr Rose, but to be considered as warranties.[4] As such, any breach by NAB would not entitle Mr Rose to terminate the guarantees, but instead providing the basis for a claim of damages.[5]

It followed that because NAB breached the warranty in clause 28.4(a)(i), his Honour made the following findings of fact:

1. Mr D’Angelo did not state, at any time in relation to the guarantees, that Mr Rose should get independent legal and financial advice[6] (as opposed to asking whether he ‘would like’ to seek legal advice or if he was ‘happy to sign’)[7];
2. Mr D’Angelo did not bring Mr Rose’s attention to the notice as to independent legal and financial advice on the cover page of the guarantees;[8]
3. Mr D’Angelo was fully aware of the fact that Mr Rose never read the documents before signing;[9]
4. that the documents were not in Mr Rose’s possession at any time before execution, other than as part of the execution process.[10]

Further, for the warranties in clause 28.4(a)(ii) and (iv), his Honour found that Mr D’Angelo did not make Mr Rose aware of the fact that he could refuse to sign each guarantee, or that he had a right to limit his liability under each guarantee.  As such, his Honour concluded that NAB had breached the warranties contained in clauses 28.4(a)(i), (ii) and (iv) of the Banking Code.[11]

Decision of the Court of Appeal

It was NAB’s view, and reason for seeking leave to appeal, that the trial judge paid insufficient regard to the written notices on the documents that were signed by Mr Rose and, instead, focused on what Mr D’Angelo said or did not say to Mr Rose at the time of execution.

It was the view of the Court of Appeal that NAB did not have an obligation under clause 28.4(a) of the Banking Code to orally recite or explain the required matters to Mr Rose. It was held that instead, the obligation was to give him notice of these matters. It followed that the majority affirmed the trial judge’s conclusion, that is, that NAB failed to give the ‘prominent notice’ which 28.4(a) required. The majority found that statements, which were said to be made by Mr D’Angelo at each meeting, would have been insufficient to provide the required prominent notice. It was irrelevant whether Mr Rose read or saw the notice, what was of importance was whether the notice stood out and would have been likely to be seen. As such, Mr Rose was entitled to damages as concluded by the trial judge.

As such, both decisions highlight the dangers of bank representatives not taking enough caution with respect to complying with the Banking Code.