This week’s TGIF considers the most recent decision in a line of cases which hold that the provisions of the Code of Banking Practice may be incorporated into loan agreements, as well as guarantees given by individuals.
The plaintiff bank lent money to the manager of a joint venture formed to develop an “eco resort” on the Murray River. The defendant, a director and shareholder of one of the joint venture parties, provided a $2.4 million guarantee.
The loan fell into default and the bank commenced proceedings in the Supreme Court of Victoria to enforce the guarantee.
THE CODE OF BANKING PRACTICE – INCORPORATION AND BREACH
The defendant sought to avoid enforcement of the guarantee. The defendant’s primary argument was that the bank had breached the Code of Banking Practice (Code) in the process of obtaining the guarantee.
The guarantee stated that the “relevant provisions” of the Code applied. In line with recent decisions in National Australia Bank v Rice and Commonwealth Bank of Australia v Doggett (the subject of a recent TGIF article), the bank did not dispute that the Code was incorporated into the contract of guarantee by reference and that its provisions had contractual effect.
The parties acknowledged “relevant provisions” included cl 28 of the Code, which applies to guarantees given by individuals to secure loans to other individuals or small businesses (the Code was revised in 2013 and the former cl 28 has shifted to cl 31).
The Court held the bank had breached the Code by:
- failing to provide disclosure of documents to the defendant, including related credit and security contracts, the final letter of offer and the principal debtor’s financial statements (cl 28.4(d));
- failing to allow the defendant one day to consider the disclosed documents as a result (cl 28.5(b)); and
- providing the guarantee to the principal debtor to arrange the defendant’s signature (cl 28.6).
EFFECT OF THE BREACHES
The defendant submitted that the above-mentioned clauses of the Code were conditions of the guarantee and that he was lawfully entitled to terminate the guarantee as a result of the bank’s breaches.
The bank submitted that the clauses of the Code were simply contractual warranties and that the defendant was therefore only entitled to sue for damages in the event of breach (i.e. the defendant had no right of termination).
The Court upheld the following general principles:
- Ordinarily, when the provisions of the Code are incorporated into a guarantee, they have contractual force.
- The characterisation of clauses 28.4 to 28.6 of the Code as warranties, intermediate terms or conditions will depend on the facts of each case.
- While guarantees must be interpreted strictly, the guarantor must establish the breached provision is a condition before a right to terminate arises.
On the present facts, the Court classified the clauses as warranties because of the guarantee’s express terms. Significantly, the guarantee contained a clause which provided that the defendant would not be released from liability in circumstances where the defendant’s obligations became unenforceable. Citing the earlier New South Wales Court of Appeal decision in Brighton v Australia and New Zealand Banking Group Ltd, the Court considered that this clause negated any conclusion that the relevant provisions of the Code were conditions.
As the relevant provisions of the Code in this particular case only amounted to warranties, the defendant was only entitled to sue the bank for damages.
The Court did not make any award of damages in the defendant’s favour because he could not establish any loss flowing from the bank’s breach. The Court concluded the guarantor would have proceeded to sign the guarantee even if the bank had complied with the Code.
Judgment was entered for the bank for $2.6 million.
The decision confirms the importance of compliance with the Code. Non-compliance with the Code may provide a basis for a borrower or guarantor to challenge enforcement action.