Bank, borrowers and the duty of care to make the right financial decision

Westpac Banking Corporation v Diagne [2014] NSWSC 822

Background

The first defendant, Mr Diagne and the second defendant, Mrs Diagne, were restaurant owners and operators. In 1999, Mr and Mrs Diagne as existing customers of Westpac, and sought a commercial loan facility for the purchase of a property in Enmore, where they proposed to operate a restaurant. 

In 2005, Mr and Mrs Diagne began discussing with their relationship manager, the possibility of borrowing further funds from the Bank to renovate and make alterations to the Enmore property and to lease the general equipment and other items for the further restaurant. 

In December 2006, the Diagne’s facilities fell into arrears and the Bank issued letters of demand seeking repayment of all facilities within 30 days. By early 2007, the Bank commenced legal recovery action against Mr and Mrs Diagne, however, that action was stayed given Mr and Mrs Diagne’s notification of dispute to the Financial Ombudsman Service (FOS).

A FOS determination was issued and the Bank subsequently issued further letters of demand in July 2013, and exercised its rights as mortgagee by commencing legal proceedings against Mr and Mrs Diagne in August 2013.

Mr and Mrs Diagne argued that the bank did not follow suit with its representations of support for funding and that it failed to ensure that they could obtain the funds required in order to establish and operate the restaurant at the Enmore property 1. Mr and Mrs Diagne argued they suffered a loss as a result of the Bank’s conduct.  The Bank was of the view that it had followed its prudent lending practices and it was a matter of Mr and Mrs Diagne failing to estimate their set up costs of the further restaurant. 

Issues

Mr and Mrs Diagne, in defence and by way of a cross claim, inter alia, raised the following allegations: 

  1. that the Bank made false or misleading representations in contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (“Representations”); 
  2. that Mr and Mrs Diagne relied on the representations and the representations gave rise to an estoppel; 
  3. that the contracts relating to the purchase of the Enmore property and all subsequent facilities, variations and guarantees arising from that purchase was unjust in the circumstances;
  4. that Mrs Diagne did not obtain any financial benefit from the guarantees she gave, she did not understand the purport or effect of the transaction and that the transaction was not voluntary,  that is the Yerkey v Jones2 defence; 
  5. that the Bank owed Mr and Mrs Diagne a duty to “[p]rudently investigate the income, assets and liabilities of [Mr and Mrs Diagne] and the proposed business plan of [Mr and Mrs Diagne] in order to determine serviceability” 3; 
  6. that the Bank owed a duty “[t]o take reasonable remedial action when the loans fell into arrears, including investigating the causes of the arrears, working with [ Mr and Mrs Diagne] to remedy the problems identified and continuing to monitor the ability of the borrowers and guarantors to adequately service the facilities” 4

Decision 

Despite the other defences (which notably failed), of particular focus was the negligence claim against the Bank.

Importantly, the Court did not accept that the Bank owed Mr and Mrs Diagne a duty of care (separate to the contractual arrangements) to investigate their financial circumstances in order to determine whether the loan that was made was appropriate . 

Otherwise, the Court was of the view that the negligence claim against the Bank must fail given Mr and Mrs Diagne it failed to establish that a breach of duties caused the losses.

The Bank was entitled to judgment for possession of the two properties and for the debt amount claimed, further, leave was granted to issue the writs of possession for the two properties, and the cross claims were dismissed. 

This decision is not only fact specific but specific to the forensic legal decisions made by the plaintiff.


1. Westpac Bank Corporation v Digane [2014] NSWSC 822 at 70
2. Yerkey v Jones (1939) 63 CLR 64
3. Westpac Bank Corporation v Digane [2014] NSWSC 822 at 65
4. Ibid.
5. Ibid. at 69