Court finds Code of Banking Practice requires notice for guarantees to be ‘markedly noticeable'

The impact of the Code of Banking Practice was front and centre in a judgment delivered by the Victorian Court of Appeal in National Australia Bank v Rose [2016] VSCA 169. 

It was accepted for the purposes of the proceeding that the terms of the Banking Code had the status of contractual terms of the relevant guarantees.

Loan documents and eight bank guarantees were all signed in the presence of a senior business banking manager at the bank. Following the default on the loans in 2010, the bank commenced proceedings claiming the outstanding balance of the loans and suing under five of the guarantees.

It was alleged, as a counter-claim, that the bank had failed to comply with the Banking Code which required the bank to give the proposed guarantor prominent notice of certain matters before accepting any guarantees, and giving the proposed guarantor until the next day to consider the guarantee information.

The majority (Warren CJ and McLeish JA) held that whether “a notice is prominent is inherently a question of degree and one which must be answered in a context.”  While written notice could ordinarily suffice and there was no general obligation on the bank under the Banking Code to provide oral notice or explanation of the matters required, the majority reasoned that a “reasonable businessperson would expect a prominent notice to be more markedly noticeable” than might otherwise be sufficient.

The majority found prominent notice had not been given having regard to the circumstances in which the guarantees were signed, including:

• the short length of the meeting (15-30 minutes);
• the senior banker’s conduct in directing the guarantor through, and summarising, the extensive number of documents;
• the guarantor was not provided with the guarantee documents for the purposes of overnight review before being asked to execute them; and
• the senior banker was aware that the guarantor had not read the guarantee documents or the written warnings before signing them.

The majority decision provides guidance on compliance with the Banking Code, suggesting that, in seeking to discharge their obligations in giving prominent notice, banks should not seek to rely solely on written warnings in their guarantee documents. Adequate measures, both written and verbal, should be taken to notify the proposed guarantor of the risks involved in entering into the guarantee agreement. This may include leaving the guarantee documents with proposed guarantors overnight so as to ensure that written warnings are read. 

This article is part of a series highlighting a six judgments in the retail banking sector delivered by Australian courts last year covering a range of issues arising in banks’ engagement with their clients, contractual arrangements and the application of standard terms and conditions. The cases provide a number of cautions for banks seeking to navigate through various traps. Click here to view the full list.