This week’s TGIF considers the latest in a string of significant decisions on the Code of Banking Practice. The case sends a clear message to bankers: fail to comply with the Code at your peril!
The Code requires a bank to give a guarantor ‘prominent notice’ of certain matters, including that a guarantor should seek independent legal and financial advice and that there are financial risks involved in executing a guarantee. It also recommends that once a bank has given that information, a guarantor is allowed until the next day to consider it.
WHAT DOES IT MEAN?
In National Australia Bank v Rose  VSCA 169, the Court of Appeal was required to examine what ‘prominent notice’ notice means to an experienced businessman.
The bank’s guarantees had, on their cover page and signing page, detailed written warnings about the information that it was required to disclose. Importantly, however, the guarantor only reviewed the documents for 15 to 30 minutes prior to execution, and the relevant banker could not prove that he gave the warnings orally.
The majority judgment (2:1) found the warning did not constitute a prominent notice in the context in which the document was executed.
The majority held that the purpose of the prominent notice requirement would be defeated if it could be satisfied by merely providing written warning in circumstances where the bank knew that the guarantor did not have the opportunity to read it or that it was likely that it would not be read. In reaching this conclusion, the majority found it significant that the banker:
- knew the guarantor had not read the documents;
- provided a verbal summary of the documents which competed for the guarantor’s attention; and
- arrived at the guarantor’s house (on each occasion) under the premise the documents were to be executed.
The majority decision means it is best practice for bankers to leave documents with guarantors overnight or ensure the written warning is read by the guarantor.
This decision also reinforces the importance of bankers keeping records of conversations that take place when documents are being executed.
A DIFFERENT VIEW
As noted above, one judge held that the notice was sufficient. Justice of Appeal Ferguson acknowledged the limited time the guarantor spent with the documents but also that he was a “successful and wealthy businessman” and that the bold and capitalised warnings on the front and signing pages could not be more prominent in the documents themselves. Her Honour held that even if the front page of the document was not before the guarantor, the information on the signing page stood out, and would be expected to be seen by an experience businessman. On that basis, her Honour found that the bank did comply with the Code requirements. This approach is consistent with the approach adopted by Elliott J in Commonwealth Bank of Australia v Wood  VSC 264 (which was discussed in our TGIF on 8 July 2016).
While Ferguson JA’s decision appears to make more commercial sense, the decision of the majority will stand unless it is appealed to the High Court. This means that best practice for bankers is to leave documents with guarantors overnight or ensure the written warning is read by the guarantor.
The message from recent cases is clear - fail to comply with the Code at your peril!