On 21 July 2016, the Victorian Court of Appeal confirmed that a guarantee and indemnity provided by an individual was invalid on the basis that NAB had not complied with relevant provisions in the Code of Banking Practice (COBP).
Banks must provide all individuals, irrespective of their professional acumen or prior relationship with the Bank, with certain notices prior to entering into a guarantee and indemnity1.
Explicit notice must be given of the following issues and the Bank must draw attention to them in a manner that is prominent (such as a written warning statement on the front cover and above the execution block of a guarantee and indemnity):
- the individual can refuse to enter into the guarantee and indemnity
- there are financial risks involved in providing a guarantee and indemnity
- the individual has a right to limit the liability under the guarantee and indemnity and the current liability under the proposed guarantee and indemnity
- the individual can obtain information about the transaction or facility it is guaranteeing, and
- the guarantor may obtain independent legal and financial advice in respect to the guarantee and indemnity.
The Bank must allow the guarantor an appropriate amount of time (currently not less than 24 hours2) to read and consider the finance documents and obtain independent legal and financial advice if necessary.
Where the guarantor does not wish to obtain independent legal and financial advice, the Bank should consider obtaining a waiver of independent legal and financial advice to demonstrate that the individual has opted not to seek this advice.
In 2007, Mr Rose and his business partner entered into a joint venture arrangement and established a company which was funded, in part, by a capital injection by Mr Rose and a series of loans provided by NAB, which totalled over $8 million. Mr Rose had agreed to provide NAB with a guarantee and indemnity in respect to his share of the loans. However, unbeknownst to Mr Rose, his joint venture partner had arranged with NAB for Mr Rose to pledge a guarantee and indemnity for the total loan amount with NAB.
On 18 June 2007, Mr Rose met with a senior business banking manager at NAB, who had spent 15 to 30 minutes discussing the relevant financing documents, including the guarantee and indemnity, and flagged where Mr Rose's signature was required. Mr Rose did not read the documents and was not informed by the banking manager that the guarantee and indemnity was for the total amount of the loan. Mr Rose claimed that he was never provided prominent notice (as required by clause 31.4(a) of the COBP), nor did the banking manager advise that Mr Rose that he would become liable for the total amount of the loan in the event of default by the borrower.
In 2010, the borrower defaulted on the loan and NAB sought to enforce the guarantee and indemnity provided by Mr Rose and his joint venture partner. Mr Rose brought a counterclaim for breach of the COBP.
The Court of Appeal determined that NAB had failed to give Mr Rose prominent notice in respect to the guarantee and indemnity, as required under clause 28.4(a) of the COBP (now clause 31.4(a) of the COBP). In reaching its decision, the court considered the circumstances in which the guarantees were signed such as:
- the length of the meeting
- the length and number of the documents involved
- the fact that the bank manager guided the movement through the documents and gave incomplete summaries of those documents to Mr Rose
- the bank manager's knowledge that Mr Rose was not reading the documents, and
- the fact that NAB did not leave the documents with Mr Rose for his review. Although Mr Rose could have read the various documents if he wished, NAB dealt with him on the basis that he had no need to do so.
It was held that NAB breached its obligations under the COBP by not giving Mr Rose notice which could be considered ‘prominent’ - that is, the notice provide by NAB did not suitably highlight the pertinent issues that arose upon Mr Rose providing the guarantee and indemnity, such as Mr Rose's total liability under the guarantee and that there were certain financial risks involved with providing the guarantee.
On 27 July 2016, the High Court of Australia handed down it's judgment in Paciocco & Anor v Australia and New Zealand Banking Group Limited. This case determined that certain fees charged by Australia and New Zealand Banking Group Limited (ANZ) on the accounts held by Paciocco and others (the Appellants), were enforceable and were not a penalty.
Banks must be aware that the penalty doctrine will apply to the fees it charges in respect of its products. Any fees must reflect a reasonable estimate of the costs incurred by the bank in connection with the relevant triggering event or they will risk being rendered a penalty, be unenforceable and become repayable to the customer.
In 2009, the Appellants held consumer and business accounts with ANZ, including consumer credit card accounts and various consumer and business deposit accounts. Over a period of time, these accounts were charged dishonour fees, non-payment fees, late payment fees and over-limit fees. For example, in respect to the consumer credit card, if the minimum monthly repayment was not paid by the due date, a late payment fee of $35 was charged (subsequently reduced to $20 after December 2009).
History of proceedings
In the primary hearing in the Federal Court, the Appellants contended that the fees charged by ANZ should be construed as a penalty on the basis that they were excessive in comparison to the damage or loss that ANZ had incurred or could conceivably prove as a result of a late payment or non-payment of amounts owing. This claim was supported by evidence from an expert engaged by the Appellants which set out calculations for the amount required to restore ANZ to the position it would have been had the Appellants made the payments as required.
The expert engaged for ANZ took a broader approach and accounted for costs such as provision costs for bad or doubtful debts, regulatory capital costs, and operational costs associated with collecting amounts owed by customers, referred to as collection costs. This resulted in a much higher estimate of the potential loss sustained by ANZ.
The Federal Court accepted the evidence from the expert for the Appellant, finding that that the fees charged by ANZ amounted to a penalty as they were extravagant and unconscionable. The Federal Court held that ANZ's expert erred by including certain costs, such as regulatory capital costs, as these costs would not ordinarily be recovered by ANZ in an action for damages against the Appellant.
On appeal to the Full Federal Court, ANZ was successful in having its expert's determination of loss accepted by the Full Federal Court. It was held that taking into account the different categories of costs, such as provision costs, regulatory capital costs, and collection costs was legitimate and representative of the loss incurred by ANZ, thus the various fees did not amount to a penalty.
The Appellants sought to appeal to the High Court.
High Court's decision
The High Court upheld the judgment of the Full Federal Court, finding that ANZ was entitled to seek recompense for all categories of costs as they were legitimate costs that ANZ was entitled to recover. The fact that the fee charged by ANZ was disproportionate to the amount that was not paid or was late in payment by the Appellant does not in itself amount to a penalty.