After the stock market crash in 1987, it was feared that deregulation had gone too far. An alternative approach was sought to ensure that bank customers received fair treatment, and the Government assigned responsibility for suitable recommendations to a committee chaired by Stephen Martin.
In its 1991 report the Martin Committee concluded that the banks should be required to establish a formal system of self-regulation based on a government approved Code of Banking Practice. It further cited the high cost of resolving disputes, in the courts, between banks and their customers, and stressed the importance of an effective, low cost, complaints resolution procedure.
The first such Code of Practice was established in 1993 but not adopted until 1996. It was substantially revised in 2003, and further modified in 2004.
It should be noted that ASIC has not approved these codes of practice developed by the financial services industry under RG 183, and it does not oversee their administration.
Here’s the official ABA line on the banking codes:
"The Code of Banking Practice establishes the banking industry’s key commitments and obligations to its individual and small business customers on standards of practice, disclosure and principles of conduct for their banking services.
The Code is a good example of industry self-regulation and of the banking industry’s response in meeting the interests of customers in a dynamic and changing retail banking services market.
The Code is not legislation but when your bank adopts the Code, it becomes a binding agreement between you and your bank. In some respects the Code provides for situations not covered by the law and in others goes further than the law in providing rights and obligations.
The ABA has established the Code Compliance Monitoring Committee (CCMC) which will monitor compliance and have the power to publicly name a bank which has been found guilty of a serious or systemic breach of the Code." [AUSTRALIAN BANKERS ASSOCIATION's website]
The Code Compliance Monitoring Committee (CCMC) monitors compliance with the Code of Banking Practice. However, it focusses more on the approach Banks take to their customers if such are in financial difficulty. It doesn’t appear to be interested in any nefarious deeds that the banks might perpetrate against their customers.
Back in December 2010, the Council of Small Business Organisations of Australia submitted a report to the Senate Inquiry into Competition within the Australian Banking Sector.
The report alleges that the Australian banks' voluntary code of self- regulation has been deliberately constructed by the banks so as to have no practical effect, thereby disadvantaging consumers and small businesses. I quote:
“There is significant evidence suggesting that the ABA and hence the banks and bankers, have acted to retain control over the compliance procedures that would require them to deal fairly and openly with all their customers, including all small businesses. There are also a number of specific incidents which would not appear to have been handled in accordance with the spirit of the code as originally recommended by the Martin Committee, or in accordance with banks’ customers and public interest in general.
This report recommends that the Senate or the Federal Government Treasurer commissions an inquiry into the issues raised herein. This government report would have specific intent of implementing legislation and procedures that would add a truly independent element to the governance and principles involving bank in dealings with all their customer
If that review find banks or bankers used the constitutions or other practices to their customers’ disadvantage, the government report might recommend corrective action.”
One part of this report caught my eye:
“The (Martin) report also sets out the significant difference between statements the bank (CEO’) and the ABA made with regard to the contractual nature of the Code. It concludes that if the code is a contract, then the overriding powers of the Association’s constitution would seem to be introduced dishonestly and for the purpose of obtaining a financial disadvantage. On the other hand is the code is not a contract, statement made by the CEOs and the ABA should be investigated as they may be untruthful and misleading.”
I find it odd that there still seems to be some lingering doubt as to whether Banking Codes are enforceable. It is a cardinal principle in any contract that you cannot mislead any party knowingly because “misrepresentation” arises. Therefore, if any bank’s customer were led to believe that these Banking Codes can be relied on in their dealings with the banks, and they can’t, the contract is breached from its inception.
The NSW Court of Appeal commented on such in Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd, back in October 2009. The Court's comments have significance given that the Code requires banks, in their terms and conditions for the provision of banking services to individual and small business customers, to undertake to comply with the relevant provisions of the Code.
In Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd, (judgement date July 2009) the New South Wales Court of Appeal commented on the operation of the Code of Banking Practice and in particular on the obligation of clause 2.2 of the Code that banks "act fairly and reasonably towards [customers] in a consistent and ethical manner".
27. I find that the Code of Banking Practice applies and that therefore there is imposed on the Bank an obligation “to act fairly and reasonably” towards SMS, having regard to SMS’s conduct and its own and having regard to the terms of the loan agreement.”
Question: If the banking code has no legal significance, why is it cited here?
It is interesting to note that Young JA in this case expressed the following view:
"This appeal has been made viable because of the inclusion in the contract between the parties of the Code of Banking Practice, a document which was probably never prepared by its drafters to form part of a legal document. It is drafted as a lay- person's document to be understood in a quick reading by a person considering dealing with the bank. It thus lacks the precision that one would expect in a term to be included in a contract dealing with megadollars…Assuming it must be given some meaning in a commercial document, it probably does not operate to [sic] beyond requiring the bank to act in good faith toward the customer. However, the principal purpose of these remarks is to suggest to bankers that the cross reference in legal documents to their promotional material is likely to lead to complications in litigation.”
I can’t agree with Young JA’s view that the Banking Code only requires the Bank to act in good faith. The Code is promoted by the banks as a supposed voluntary code of conduct, the stated objective of which is to set standards of good banking practice for banks to follow when dealing with individuals and small businesses who are, or who may become, customers of a bank, and their guarantors (clause 1.1). The obligations which are imposed by the Code on the banks (and the rights which it confers on customers, potential customers, guarantors and potential guarantors) are expressed to be in addition to obligations (and corresponding rights) applying under relevant laws (clauses 3.2 and 4).
The provisions of the Code form part of the contract between the bank and its customer (clause 10.3), so banks will be contractually bound by the Code provisions and potentially liable in damages for any breach. It is a requirement of the Code that the terms and conditions of banking services (defined as any financial service or product) must include, amongst other things, "a statement to the effect that the relevant provisions of the Code apply to the banking service", without setting out those provisions (clause 10.3). As clause 10.3 is confined to "banking services" it has no application to guarantees.
The purpose of the clause 10.3 requirement is to oblige banks to incorporate in the terms and conditions of the contracts which relate to their banking services, by reference, the relevant provisions of the Code so that non-compliance with the Code becomes a breach of the terms of the contract applying to each banking service. The loan facility with the Bank in the Sam Management case included a statement which complied with clause 10.3.
The modified 2004 Code of Banking states in relation to credit:
“2 Provision of credit
2.1 Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.”
It follows therefore that the comments made by Young JA to the effect that the Code was promotional material and probably never prepared by its drafters to form part of a legal document is suspect. It is ‘implied’ that the relevant provisions of the Code forms part of every contract made by a bank for the provision of banking services to an individual or small business customer. These codes cannot be mitigated by any process introduced thereafter that places the banks’ customers at a disadvantage.
A contract is an agreement made by both parties based on the conditions laid down at the time. If one party has been misled into believing that certain conditions apply (banking code) when they do not, as I have previously stated, “misrepresentation” arises. This in itself is in breach of any contract because one party has not declared the full facts at the time.
Much cant has been forthcoming about the various banking codes of conduct that various banks have adopted. If any customer enters into any agreement with any bank acting on a reasonable belief that the lender would comply with their code of banking, the banks are legally liable in contract law. Because they just happen to be a bank does not give them any special privileges or allow that bank to set aside their obligations and responsibilities in a contract.
The banks’ contentions that the codes are not contractual is purely propaganda. Much has been made by the banks of the fact that the banking code of practice is self-regulatory and voluntary. What seems to be overlooked is that the provisions of the code form part of the contract between the bank and its customer so banks are contractually bound by the provisions of the Code and therefore liable in damages for any breach of such. However, getting lawyers to run with this is something else again. Contract law these days seems to have become unfashionable.
Our case against the Banks are a classic example of the Banks involved; namely the CBA, the Macquarie Bank and the BOQ violating their own banking codes in relation to their Storm customers and the courts turning a blind eye to their so doing.
The issue is simple enough! These Banks for the most part extended loans that were imprudent. Furthermore, they used deception when so doing, and in some cases, were downright fraudulent in their behaviour. Take the BOQ in North Ward, Townsville for example.
Here’s what a ’60 Minutes’ report in 2010 had to say
“’BOQ docs show problems with Storm loans’
Friday, June 4, 2010 – Ellen Fanning
60 Minutes has uncovered a paper trail inside the Bank of Queensland that suggests the Bank had reason to suspect 18 months ago that it had a rogue branch in its network, writing dodgy loans to clients of the disgraced financial planning firm Storm Financial.
The program broadcast emails from Bank of Queensland executives and a key internal Bank of Queensland report, outlining significant problems with mortgages made to Storm customers by a small suburban branch based in Townsville.
The documents were exhibits in a recent Federal court case in Brisbane involving Storm Financial.
The North Ward Branch provided mortgages to about 260 Storm clients, which represented the bulk of BOQ's Storm-related lending. The loans were worth at least $110 million, according to the Bank's own internal report.
The same damning report, a credit risk review produced in draft form in January of 2009, warns "it could be construed" the loan applications for Storm clients might have been "manipulated to achieve approval" and "should this prove to be the case" these loans might have to be "set aside".
When the draft report was received by a senior executive at the bank, it was terminated and no final report was prepared.
Five months later, on 25 June, 2009, the Bank made a statement to the Australian Stock Exchange saying, "Based on the Bank's knowledge and enquiries to date: There is no evidence of improper or dishonest practices or conduct by the Bank in connection with Storm clients." In evidence to a Joint Federal Parliamentary Committee last September, Mr Liddy stated, "If there was wrongdoing in the [North Ward] branch and we had identified wrongdoing, we would take action."
Storm Financial's "one size fits all" financial advice saw clients mortgage their homes, then take out massive investment loans, so called "margin loans" and invest the total amount, plus all their available savings, in the share market. It all hinged on Storm finding banks willing to lend its clients the money.
60 Minutes has learned that on at least one occasion, the Bank of Queensland was willing to lend to Storm clients, who had been refused further finance by another bank.
64 year old Jan Campbell of Logan City, south of Brisbane, and her husband Alan had a Westpac mortgage of $280,000 and a margin loan of $1,453,000 with Colonial Geared Investments. In July 2008, Storm proposed they increase their mortgage by $88,000 but Westpac refused to lend them any more money.
60 Minutes had a former, senior independent banker review the Campbell's financial data. He concluded that at the time of their Bank of Queensland loan application, the Campbells could rely on a conservative income from their investment portfolio of about $90,000 per year. However, the interest costs on their margin loan for the previous financial year had amounted to more than $160,000, even before they paid their existing mortgage or drew down funds to cover their living expenses. On that basis, he concluded they could not afford to continue repaying the loans they had.
A similar analysis shows disabled Vietnam veteran Steve Reynolds of Townsville, could rely on a conservative income from his investments and a small pension of about $74,000 but the interest costs on his various loans totalled at least $90,000 per year.
The customers maintain they did not fill out the loan applications and that Storm Financial supplied all their financial details to the North Ward branch. The Bank of Queensland has admitted North Ward branch breached the Bank's own lending policy by failing to interview the individual borrowers. However, they say they relied on data from Storm Financial.
For these clients, the mystery has been how they got loans which they could not afford to repay.
60 Minutes showed Mr Reynolds copies of an email, sent in December 2008, to Mr Bruce Auty, Bank of Queensland's Group Executive, Group Risk, which throws some light on that matter.
The email was sent on 17 December 2008, the day the Townsville Bulletin published an article about Mr Reynolds, Storm and his Bank of Queensland loans. The email noted, "Just a heads up on the press article in today's press clippings that has finally put BOQ and Storm Financial in the ‘same sentence'. The email's author, Lindsay Johnston, the Bank's Head of Risk Assessment, referred to Mr Reynold's loan and wrote, "Basically none of the info provided and input on the applicant is accurate... I would suggest that things may unravel at a rate of knots from this point on."
Later, on January 15, 2009, Mr Auty wrote an email to several colleagues, stating, "Sooner or later we will receive some hard questions about storm, our relationship and affected customers. While from what we have seen to date our position is defensible, there remain some gaps." He went on to propose that an independent reviewer "prepare a report in relation to the processes that saw Reynolds (The Vietnam Vet mentioned by SMH [Sydney Morning Herald]) receive a loan, whether our processes were followed ... and any remedial action we may need to undertake in relation to customers."
Later he wrote to colleagues that the purpose of the review was "firstly potentially being able to selectively use outcomes for external (press) purposes and secondly, whether our process has been followed..."
On 20 January 2009, five days after Mr Auty first raised the possibility of holding an independent review, a meeting of the Executive Committee of the bank decided against going ahead with such a review, in favour of an internal credit risk review.
Prepared by Jeff O'Sullivan, senior manager, Credit Risk Review, that report identified exactly how such high risk loans had been approved in the first place.
He noted that among the sample mortgages he reviewed, the North Ward branch had, in many instances, not included Storm client's margin loans as a liability when calculating whether they could afford more debt. His report notes, "On many referred loans a standard comment ‘no other debts held other than for example credit card etc' despite knowledge of an existing margin loan."
In the Campbell's case, the report noted "income confirmation is based upon a printout of Colonial Geared Investments", which indicated that they had a margin loan of $1.453 million. The report concluded "we should have investigated amounts borrowed and included in servicing."
In the case of Mr Reynolds, the report noted that a print out of Macquarie Margin loan showed a debt of $724,000 however there was "no allowance in servicing for this debt". The report further notes that when applying for an earlier loan, in August 2006, the bank had on file a rate notice dated August 2004 which indicated a pension discount for Mr Reynolds, "so the $100K income claimed in the application is obviously not true."
In other files reviewed, the report noted over and over again that Storm had sent the North Ward an initial letter detailing margin loans but that these amounts were "not disclosed" in the Bank's computer system or the loan applications. In one case, the report noted that an initial letter from Storm had indicated a margin loan balance of $1,318,402 but that North Ward's co-owner manager "Mr [Matthew] Buchanan had stated in comments recommending approval ‘No other debts held other than credit card facility.'"
Had such margin loan amounts been included in the Bank's serviceability calculations, it's highly unlikely the loans would have been granted.
Furthermore, internal bank emails, seen by 60 Minutes, reveal that had the margin loan amounts been entered into the Bank's computer system by staff at the North Ward branch, the loans would have been referred to one of the Bank's twenty Risk Assessment managers for review. The effect of leaving the loans out of the Bank's computer system was that some loans were automatically approved, without further review by the Risk Assessment division.
In addition, the report noted that North Ward branch had accepted photocopies of disbursement authorities from clients on Storm letterhead. Best banking practice is that photocopies are not accepted because they are too hard to authenticate. The report included an example of one couple who took a $1.168 million dollar Bank of Queensland mortgage. Their disbursement authority authorised the payment of $280,919 directly to Storm in what appeared to be a commission payment. This represents 24% of the loan amount.
It was a draft copy of this report, sent to Mr Auty in late January 2009, which came to the damning conclusion that the loans might have to be "set aside." Mr O'Sullivan wrote, "it is noted from review of some of the loan files that it could be construed that income and ongoing commitments may have been manipulated to achieve approval. Should this prove to be the case, then these loans could be set aside."
The draft report was terminated. It is not known whether a copy of the draft report was ever shown to the Bank of Queensland Board, including Board member Bill Kelty, who is the chair of the Bank's Corporate Governance Committee.
Under the Bank of Queensland's franchise structure, the owner managers of the North Ward branch took a cut of the profit from the loans they wrote. Matthew Buchanan, who appears to have handled a large proportion of the Storm lending, told the Federal Court last year he estimated that in the 2008 financial year he made $350,000. A report in the Australian Financial Review indicates that his co-owner manager Declan Carnes has amassed an investment and property portfolio of $10 million. Mr Liddy has estimated that the Storm lending contributed to about 10 percent of North Ward's business between 2004 and 2008. Mr Buchanan and Mr Carnes declined to be interviewed by 60 Minutes.
Mr Liddy personally named North Ward, the best branch in the BOQ network and at the "top of the BOQ totem pole" in 2005, 2006 and 2008, despite credit risk reviews as early as 2006 revealing problems with their some of their loans. In one email, a BOQ executive Alan Butler wrote on 17 December 2008, "I have conducted a number of credit risk reviews of North Ward's business over the years and have previously questioned the integrity of the data on the files." Mr Butler noted that these credit risk reviews had been conducted in late 2006/early 2007 and another in February 2008.
In subsequent evidence to the Federal Court in October last year, as part of a hearing into the collapse of Storm, Mr Butler said that in addition to these two formal reviews of the North Ward branch, there were two or three informal reviews initiated to "clarify some rumours that were going round the bank."
Mr Butler said that, in the months following the initial 2006 credit risk review, action should have been taken by the BOQ's area manager and state manager to ensure the problem areas were fixed. But he said there was a recurrence of the same sort of problems identified in the 2008 credit risk review.
When asked whether, once such problems were identified, branch managers would usually put in place procedures to prevent them from recurring, he replied, "in some cases they would; in others not so." He said the Bank had procedures to deal with a branch manager who was a recidivist non-complier but to his knowledge no such procedures were ever initiated in relation to the North Ward branch.
Mr Butler, whose title at the bank was Head of Portfolio Management and Financial Crimes, resigned from the Bank in the same week the 2009 Credit Risk Review was terminated.
Mr Liddy refused to be interviewed by 60 Minutes on the basis that the Bank is subject to an ongoing investigation by ASIC and litigation commenced by two former clients of Storm.
The Commonwealth Bank has admitted it did the wrong thing by its Storm customers and depending on individual circumstances will offer such clients cash compensation or concessions, like reduced loan balances, and in some cases permanent tenancy arrangements.
In contrast, the Bank of Queensland has insisted customers like Mr Reynolds and the Campbells repay their loans. The Bank of Queensland has granted some customers a "repayment holiday". However, according to the customers, the interest on their loan continues to accrue during these times leaving them further in debt. While customers interviewed by 60 Minutes insist they will not be able to resume mortgage repayments when this "repayment holiday" period is over, Mr Liddy has stated publicly that in cases of genuine hardship, the Bank will not force its customers to sell their homes to repay their mortgages. It is not clear how this will be possible.
The BOQ has also stated that it is offering some customers a reduced rate of interest or an extended repayment period.
When approached for comment by the program at the Bank's headquarters in Brisbane, Mr Liddy said repeatedly, "We have been dealing with each of our customers independently and that's what we've said right along." He went on to say, "We are satisfied with the way the bank is handling [customers]." When it was pointed out that many customers were not satisfied with the Bank's approach, Mr Liddy said, "I think you'll find that some of them very much are."
Mrs Campbell is not one of Mr Liddy's satisfied customers. Last September, she gave up hope that the Bank of Queensland would do the right thing. Faced with a massive monthly mortgage repayment, she and husband Alan, sold up their family home, paid out their loan and in a tragic twist are now renting the property back from the new owners.
Mrs Campbell has returned to the job from which she retired two years ago, to begin saving anew for the couple's eventual retirement.”
So is this just another ’60 Minutes’ grab at sensationalism or is it the truth. In fact, it is understated. This particular branch of the BOQ actually altered documentation to ensure that some of these loans would be acceptable under the BOQ’s internal credit system. To prove that a leopard cannot change his spots, here’s a case involving the same BOQ Bank that occurred this year!
“Bank of Queensland forged customer signature, loan applications
Author: DARYL PASSMORES - THE Courier-Mail, 06 May 2015
The co-owner of a controversial Bank of Queensland branch in Townsville has admitted his staff falsely witnessed loan applications on a regular basis.
Declan Carnes, joint owner/manager of the North Ward franchise, told the Supreme Court that one of his employees witnessed the signature of a disabled man who was being treated in hospital hundreds of kilometres away.
Justice Jean Dalton said the action was “probably dishonest”. But Mr Carnes admitted he had never investigated the matter even though he was aware of allegations that the customer’s signature had been forged as well.
And under cross-examination, Mr Carnes said it was not unusual for staff to falsely witness customer documents.
Bank of Queensland has launched an investigation.
It is the latest controversy for the North Ward branch, which was responsible for 267 of the 319 loans made by the Bank of Queensland to customers caught up in the disastrous Storm Financial collapse.
In the latest case, BoQ sued Mervyn and Pamela Hills, both 70, for hundreds of thousands of dollars owed on a loan to buy the “Seashells” fish and chips shop just behind the North Ward branch in 2007.
Pensioner Mr Hills, who was left paraplegic after a car accident, was allowed to act as a guarantor and put up the couple’s home as security against the loan.
The Supreme Court hearing in Brisbane last month heard that branch employee Darren Wall witnessed a document in Townsville while the customer was in hospital in Brisbane.
Mr Hills gave evidence that the signature on one document was not his.
Mr Carnes said he was aware of the forgery allegation but had not questioned Mr Wall, who still works at the branch. “I don’t believe Mr Wall would have done that,’’ he said.
Cross-examined, he agreed that the bank’s practices were “not consistent with the standards of a banker exercising ordinary skill and care”.
During the trial Mr Carnes agreed it was inappropriate to require Mr Hills to give a -personal guarantee and mortgage over the house and agreed some documents were “inexplicable’’.
Head office staff responsible for loan approvals said “pertinent information” — including Mr Hills’ condition — had been withheld.
A settlement reached since the trial requires the couple to pay BoQ $369,012 plus $93,204 in interest. A counterclaim by the couple alleging unconscionable conduct was dismissed. Mr Carnes did not return calls. Mr Wall, who was not called as a witness in court, declined to comment.
An ASIC spokesman would not comment on the case.”
The last part really amuses me! ASIC has proven to me over the course of the last seven years that its thinking borders on the infantile. ASIC’s naivety when it comes to regulating and enforcing the consumer laws in this country knows no bounds. The Banks and rogue financial advisers out there that take advantage of a financial system full of holes could not have found a dozier, more addled and indecisive toothless watchdog than the ASIC. This acronym by the way should stand for ‘A System in Crisis’ rather than the ‘Australian Investments and Securities Commission’.
Can anyone explain for instance why ASIC has never reported the BOQ in North Ward to the Department of Public Prosecutions despite my many requests to them to do so! Did you know that under the Crimes Act it’s a criminal offence to falsify documentation? Apparently, the lawyers, the Judiciary and ASIC don’t because no one has given it a mention!
Further, no one has questioned why the banks took so long to effect margin loan calls on their Storm customers. The norm in banking is “5 days” but the CBA took 10 or so weeks and the Macquarie Bank 3 to 4 weeks. This was during a time when the global financial crisis was occurring and days could mean the difference between losing some of your investments and all of them.
These issues are clearly breaches of the Banks’ banking codes but they were swept under the table by the lawyers and the Judiciary. Why? Because it suits them to do so! Money is to be made where confusion reigns supreme.
In closing the following article is of particular significance:
“Failing to comply with Banking Code of Practice costs bank $6 million
15 April 2015 – Cooper Grace Ward – Lawyers
The Banking Code of Practice has contractual force. Where applicable, a bank must comply with the Code. Failure to comply can expose the bank to a claim for damages.
In National Australia Bank Limited v Rice  VSC 10, a guarantor, Mr Rose, successfully avoided liability under five guarantees, where National Australia Bank (NAB) claimed $6,184,593.48 plus interest and costs.
Mr Rice and Mr Rose entered into a joint venture arrangement for the acquisition and sale of real estate on a 50/50 basis. When a property was purchased, a new company was incorporated for the acquisition of the property and finance was obtained from NAB. Rice and Rose were directors of the company.
Before the joint venture arrangement, Rice had an existing relationship with NAB. Rose had no previous business relationship with NAB.
Rice had most of the dealings with NAB’s representative, Mr D’Angelo, regarding the obtaining of finance.
Although Rose had been successful in business, he had never invested in real estate for commercial gain and had only limited experience in general business affairs.
Rose personally contributed $4.8 million towards the purchase price of the initial properties. Rice had no funds of his own to invest.
Rose signed guarantees that made him liable for all of the obligations of the borrowers. Rose thought that, in signing the guarantees, he was only liable for ‘interest on the loans or something like that’.
The guarantees were signed by Rose when they were given to him by D’Angelo as part of the bundles of loan documentation for execution.
At no time were the guarantee documents in Rose’s possession before signing, other than as part of the execution process.
The guarantees signed by Rose contained a warning statement on the front page of the guarantee that he should seek independent legal and financial advice on the effect of the guarantee before signing the guarantee.
One of the documents signed by Rose was a certificate stating he had read and understood the guarantee documents.
The signature page for each guarantee also contained warnings, however they were not immediately adjacent to the place for the required signature.
D’Angelo was aware that Rose did not read any of the warnings or the documents before signing the guarantees.
NAB’s guarantees also contained the usual clauses found in bank documentation where Rose waived any right as a guarantor that might be inconsistent with the provisions of the guarantee, or that would restrict NAB’s rights or remedies under the guarantees.
The guarantees contained a provision that the Code applied to the guarantees.
Clause 31.4(a) (previously clause 28.4(a)) provides that before the bank takes a guarantee, the bank is required to give the proposed guarantor a prominent notice that:
• they should seek independent legal advice and financial advice on the effect of the guarantees;
• they can refuse to enter into the guarantees;
• there are financial risks involved;
• they have a right to limit their liability in accordance with the Code and as allowed by law; and
• they can request information about the transaction or facility to be guaranteed including any facility that is being refinanced.
Clause 31.5 (previously clause 28.5) provides that the bank will not ask you to sign a guarantee, or accept it, unless the bank has:
• provided the proposed guarantor with the information described in clause 31.4 to the extent that the Code requires that information to be given; and
• allowed the proposed guarantor until the next day to consider that information.
The bank is not required to allow the proposed guarantor until the next day to consider the information if the proposed guarantor has obtained independent legal advice after receiving the information required by clause 31.4.
Execution of the guarantees
The Court found that D’Angelo:
• was unclear as to the precise explanations and warnings that he had given Rose when the guarantees were signed;
• did not discuss any page of the guarantee in any detail; and
• relied on his standard practice as to what he did and what he said to Rose at the time of the execution of the guarantees.
There was a large discrepancy between what D’Angelo was purported to have said based on his standard practice and what Rose purported to recall not being told by D’Angelo.
It was not part of D’Angelo’s standard practice to refer to the warnings on any page. After the guarantees were signed, D’Angelo returned to his office and completed a record of interview or checklist as to what occurred when the guarantees were signed.
There were gaps and errors in the bank’s internal records as to what D’Angelo did and what he said to Rose at the time the guarantees were signed. As a result, the Court placed little reliance upon the bank’s contemporaneous documentation purporting to record what occurred.
The Court preferred the evidence of Rose, who:
• said that he did not have any of the guarantees properly explained to him and that he simply signed where he was told to sign by D’Angelo;
• was emphatic that D’Angelo never told him that he should obtain independent legal advice; and
• said that, if he had been told to obtain independent legal advice, he would have done so.
NAB’s contention regarding the warnings
NAB argued that it was not necessary to give the warnings orally. The Court accepted this but said that to comply with the Code, NAB was required to give Rose ‘a prominent notice’ of such matters. Simply ‘looking’ at the front page and giving the inadequate summary that D’Angelo said formed part of his standard practice, and not inviting Rose to read any of its contents, did not give prominent notice of the required warnings.
There was no attempt by D’Angelo to give Rose the opportunity to consider the information contained in the bank documentation, or to give him until the next day to sign the guarantees. On either version of what occurred, nothing that was said by Rose could amount to a waiver of the benefit of the provisions under the Code. Signing the guarantees did not amount to such a waiver.
Consequences of breaching the Code
Rose’s unequivocal evidence was that if he had been told by D’Angelo that he should obtain independent legal advice before signing any of the guarantees, he would have done so.
The Court held that such legal advice would most likely have informed Rose of the true extent of his potential liability under the guarantees. The Court accepted Rose’s evidence that if he had known that he would become potentially liable for all of the debts, he would not have signed any of the guarantees.
The Court commented that in some cases, asking a potential guarantor whether they wanted to get legal advice, as opposed to telling the potential guarantor that legal advice should be obtained, would be unlikely to have any effect on the attitude of the guarantor. However, in this case the Court said the distinction was critical. If D’Angelo had told Rose he should get legal advice, that would have rung alarm bells and Rose would have sought the suggested legal advice.
Entitlement to damages
The Court held:
• NAB’s failure to comply with the requirements of the Code constituted a breach of warranty entitling Rose to claim damages;
• the clauses in the guarantees did not prevent Rose from claiming damages;
• Rose’s damages equated to at least his liability under the guarantees; and
• if NAB had not breached the Code, Rose would not have signed any of the guarantees and he would not have had any liability to NAB.
During the course of the joint venture, Rose had received $1.1 million from the sale proceeds of a property that was financed by NAB. NAB argued that the profit should be taken into account.
The Court said that in the absence of the NAB finance, the purchases would not have proceeded and Rose would not have invested approximately $5 million of his own funds in the joint venture. In those circumstances, the receipt of the $1.1 million did not result in any real profit to Rose.
Rose suffered loss far beyond his exposure under the guarantees because of his joint venture with Rice. This remained the position even after taking into account the $1.1 million sale proceeds that Rose received.
Claims for consequential loss
The Court did not consider whether Rose’s $5 million loss of funds were too remote to be claimed against NAB.
This was because Rose did not make any claim for consequential loss. If he had made a claim for damages in relation to consequential loss, the $1.1 million he received would have to be taken into account. However, Rose had simply sought to set off the amounts payable under the guarantees, and as a result, the Court said it would be incorrect to reduce that amount by the sale proceeds that Rose received.
The decision highlights the danger of bank representatives witnessing the execution of guarantees and having loose procedures regarding the explanations and warnings to be given to a proposed guarantor to comply with the Code.
A court may not place any reliance on a bank’s internal documents such as a record of interview or checklist if there are gaps or errors in the document or if they are inconsistent with what actually occurred.”