In the decision of Westpac Banking Corporation v Diagne [2014] NSWSC 822, the Supreme Court of NSW considered and rejected a number of defences and claims commonly pleaded by mortgagors. These included the Yerkey v Jones defence, and claims against the bank of misleading and deceptive conduct and negligence.

When faced with orders for possession of their property, it is not uncommon for mortgagors to raise a number of defences in an attempt to delay or prevent orders being made so as to allow a bank to sell their property. The usual suspects include the Yerkey v Jones defence, claims of misrepresentation against the bank and, more recently following the global financial crisis, claims that the bank was negligent in lending money. Those defences and claims were all raised by Mr and Mrs Diagne against Westpac in an attempt to avoid the bank obtaining possession of their property. This TGIF considers the Diagnes’ claim that the bank was negligent in loaning it money.

Background

The Diagnes owned and operated restaurants known as Afrilanka and Kilimanjaro. The Diagnes’ dealings with Westpac were not unusual. They had entered into a home loan with Westpac for the purchase of their home which was secured by a registered first mortgage over the property.

The bank later increased the limit on that loan and provided further commercial facilities to the Diagnes to allow them to purchase a commercial property from which they intended to run another restaurant known as Lat-Dior African Eatery. Commercial facilities were also provided to support the opening and running of the new restaurant.

The commercial facilities were secured by a mortgage over the new restaurant property and guarantees were provided for the facilities either by the Diagnes.

What went wrong?

The bank gave evidence that the Diagnes had underestimated the set-up costs of the new restaurant and that the Diagnes sought on a number of occasions to obtain further funding to open the restaurant. Eventually the bank refused to provide further funding and the Diagnes’ facilities began to fall into arrears. Westpac sought to exercise its rights as mortgagee of the Diagnes’ properties.

The Diagnes’ claim that the bank was negligent

A claim in negligence requires a party to establish that a duty of care was owed. The Diagnes argued that the Bank had a duty to:

  1. prudently investigate their income, assets and liabilities and their proposed business plan in order to determine serviceability; and
  2. take reasonable remedial action when the loans fell into arrears, including investigating the causes of the arrears, work with the Diagnes to remedy the problems identified, monitor their ability to service the facilities and appropriately set and alter limits on overdraft facilities.

It was alleged that Westpac breached those duties causing the Diagnes to suffer loss. The Diagnes relied on an expert report prepared by a retired banker who stated that the commercial loans to purchase the property for the new restaurant would not have been made by a responsible banker. He also stated that the bank’s delay in taking appropriate steps to recover the amounts it loaned were well wide of acceptable banking standards.

The Court rejected the Diagnes’ negligence claims in toto. It rejected the claim that the bank owed the duties alleged by the Diagnes. In doing so, the Court relied upon the decision of Tai Hing[1] which provides that banker and customer obligations cannot extend beyond what is agreed in the banker-customer contract. That is, their obligations lie in contract rather than tort.

The Court also found that the Diagnes failed to establish that a breach of any such duties was responsible for their losses. On the facts, the Diagnes had decided to purchase the additional property and open a new restaurant before they had approached the bank for funding to do so. The fact the bank gave them the funding to realise that decision, does not make the bank responsible for it.

Finally, the Court also accepted expert evidence led by Westpac that it had acted prudently.

Comment

This decision confirms that, despite the current post global financial climate and the consequential focus on bank lending practices, the Courts are not willing to import a duty of care on banks to investigate the financial circumstances of its loan customers.