In Commonwealth Bank of Australia v Wood1 the Supreme Court of Victoria has confirmed that not all breaches of the Code of Banking Practice (Code) will be fatal for lenders. Importantly, in the Wood decision the court rejected as an exercise of hindsight the often run argument a guarantor would not have entered into the guarantee if they had received all necessary documents.
After the decision in Doggett v Commonwealth Bank of Australia2 most lenders would be aware the Code can be incorporated into guarantees with potentially significant consequences. The Doggett decision found errors and omissions in a lender’s credit assessment could breach the Code and open the door for a guarantor to argue that their liability under a guarantee was extinguished.
The Wood decision perhaps gives lenders some consolation that not every breach will potentially void their security. However, there are still some important lessons for lenders to take from the Wood decision.
- Not all breaches of the Code will be fatal if the guarantor cannot prove a link between the breaches and their liability or show they would have acted differently but for the breaches
- evidence of a bank officer’s usual practice of providing documents to a guarantor will not be accepted over positive evidence from a guarantor that they did not receive the documents
- lenders need to ensure not only that all required documents and notices are given to borrowers and guarantors but that the process is properly documented.
In summary, the background was:
- Dr Wood was an orthopaedic surgeon who also had interests in property development projects with his brothers. Dr Wood had previously given numerous personal guarantees, on many occasions without obtaining independent advice
- funds for an ‘Eco Resort’ project were initially advanced by Westpac to the joint venture. Dr Wood signed a guarantee in favour of Westpac
- the Westpac facility was in default and was hastily refinanced by BankWest. BankWest made one advance of approximately $3 million with a loan term of one year
- Dr Wood’s defence focused on BankWest’s process in putting the loan and securities in place and argued that BankWest’s failure to comply with the Code meant that Dr Wood was not liable
- bankWest’s initial letter of offer was rejected by Dr Wood and his partners as it required all guarantors (including Dr Wood) be jointly and severally liable for the entire debt. BankWest agreed to reduce each guarantor’s liabilities to 25% of the total debt and issued amended documents
- Dr Wood gave evidence that he did not review the second letter of offer in any detail. He said he believed he was only guaranteeing 1/12th of the debt that one of his brothers would be a co-guarantor (despite the loan documents clearly indicating that neither was correct)
- numerous BankWest internal documents (such as credit submissions and security schedules) noted Dr Wood as a guarantor, but failed to mention one brother. Importantly, those documents were internal BankWest documents that were never communicated to Dr Wood
- at the time of execution of the guarantee, Dr Wood also signed a statutory declaration confirming he had received independent financial and legal advice (despite not obtaining that advice)
- the guarantee was given to Dr Wood for execution by the manager of the joint venture project rather than a BankWest officer. Dr Wood gave uncontested evidence that he did not receive a copy of the guarantee or BankWest’s general conditions. In response, BankWest officers could only give evidence that it was their practice to provide a “guarantor pack” to potential guarantors
- BankWest gave Dr Wood an execution version of the letter of offer, but no separate copy of the letter of offer. BankWest also overlooked giving Dr Wood financial statements for the borrower as required by the Code
- the loan was not repaid and at the time of judgment Dr Wood was the sole remaining borrower or guarantor that was not bankrupt or in liquidation.
Alleged breaches of the Code
Ultimately, the court found that BankWest had breached the Code by:
- failing to give Dr Wood a separate copy of the letter of offer in addition to the execution version and financial statements as required by clause 28(4) of the Code
- giving Dr Wood’s guarantee to somebody acting for the debtor (the joint venture manager) for execution by Dr Wood in breach of clause 28.6 of the Code.
Dr Wood also alleged that BankWest had not given him the prominent notice required by clause 28.4 of the Code that he, amongst other things, could refuse to enter into the guarantee and should seek independent legal and financial advice. The court rejected that argument as the documents clearly contained the required notice.
Importantly, even if BankWest had not given Dr Wood the prominent notice required by clause 28.4 of the Code, his Honour went on to say that it was likely any breach would have been of little consequence because Dr Wood knew the matters set out in the notice and a person of Dr Wood’s education and background must have known he could have requested information about the loan or underlying transaction.
The court also rejected an argument that BankWest engaged in unconscionable conduct as, amongst other things, Dr Wood suffered no special disadvantage and simply chose not to review the documents he signed. In doing so, the court also commented that a breach of an industry code may be relevant, but does not necessarily lead to a conclusion that a person acted unconscionably.
Consequences of the breaches
Dr Wood argued that BankWest had breached essential terms of the guarantee and that he was entitled to terminate the guarantee. However, the court rejected that argument and found the relevant clauses were warranties that did not entitle Dr Wood to terminate the guarantee.
The court found Dr Wood could only assess whether he would have signed the guarantee with the benefit of hindsight. In that context, the court found no link between the breaches of the Code and Dr Wood’s liabilities. In particular:
- even if Dr Wood was directly told the limit of his liability, there was no evidence that he would not have proceeded regardless
- as Dr Wood did not review the documents, there was no evidence that he would have discovered the terms of the guarantee to be other than what he said he thought they were.
The Wood decision is positive for lenders as it confirms that not every breach of the Code will entitle a guarantor to escape liability. This is particularly so where the guarantor is financially experienced and chooses not to read the documents.
Both the Wood and Doggett decisions emphasise that a guarantor must show some link between the breach of the Code and their alleged loss. However, it is clearly better for a lender not to expose themselves to potential allegations that they have breached the Code.
The Wood decision also emphasises that courts will accept evidence from a borrower that they did not receive documents such as general conditions over evidence of a bank officer’s general practice of giving those documents. As memories tend to fade, lenders need to consider what processes they have in place to ensure all necessary steps to comply with the Code are taken and to properly document that process.