Code of Banking Practice: Recent Milestone win for Lenders

There has been much debate and case law about the enforceability of the Code of Banking Practice.

In the past, a strict approach has been taken against lenders who have engaged in conduct which is considered to be a breach of the Code.

However, the recent Victorian Supreme Court decision of Commonwealth Bank of Australia v Wood [2016] VSC 264 proves to be a milestone and has ruled that not all breaches of the Code will necessarily result in judgment against the lender.

Background

In this case, an Orthopedic Surgeon entered into a joint venture to acquire and develop a new property.

Westpac initially provided the loan facility for the development. However, upon default of the Westpac facility, the loan was refinanced with Bankwest. The Orthopedic Surgeon provided a personal guarantee and indemnity under the loan facility.

Under the facility, Bankwest agreed to lend $6,000,000 for the development however, only $3,000,000 was ultimately advanced.

One of the lenders in the joint venture defaulted on the Bankwest facility and the Bank sought to recover pursuant to the guarantee.  

The Orthopedic Surgeon argued that Bankwest was not entitled to recover under its mortgage for the following reasons:

  1. There were inconsistencies and mistakes in the Bank’s loan documentation; and
  2. The Bank had breached its notice and disclosure requirements under the code of banking practice.

The Orthopedic Surgeon also claimed that he was under the impression that all of his brothers would also be guarantors and that he was only willing to provide a guarantee for a twelfth of the share of the liability under the loan. Further, he said that he would have looked over the documents thoroughly because of the nature of the investment and the risk involved.

Findings

The Court held that the Bank breached its disclosure obligations under the code by not providing the Orthopedic Surgeon with a guarantor pack. However, it did not find that the Bank had breached its notice requirements under the banking code, and even if it had, it would have been of little consequence.

The Court also decided that the Bank’s breaches of the banking code were only breaches of warranties not a breach of a condition. It was held that:

“There can be no doubt that guarantees should be construed strictly. However, the guarantor must establish that the breached provision is a condition, and not a mere warranty, before it may avoid its obligations under a guarantee. If, on a true interpretation of the provision, it is not intended to operate as a condition, it is not easy to understand why the [guarantor] should be discharged by its breach”.

The Orthopaedic Surgeon failed to establish a casual link between his liabilities under the guarantee and the Bank’s breaches of the Code.

Ultimately, the Court decided that the evidence in this case showed that the Orthopedic Surgeon would have signed the documents no matter what.

The Court gave judgment for the bank for the following reasons:

  1. The Orthopedic Surgeon’s evidence was vague and inconsistent;
  2. The Orthopedic Surgeon falsely declared that he had received independent financial and legal advice;
  3. The Orthopedic Surgeon had signed loan documents in the past without obtaining any independent legal advice;
  4. The Orthopedic Surgeon ignored the warnings on the loan documents prior to signing;
  5. The Orthopedic Surgeon said he did not recall whether or not he had read the whole document.

Future of the Code

This case demonstrates that the Courts have a willingness to rule in favour of lenders, particularly where the case involves an educated guarantor and the breaches of the Code would have little to no effect on the outcome of the decision.

However, the Code is constantly under review and revision.

It will be interesting to see whether the courts will continue to adopt this relaxed approach in favour of lenders, or whether there will be a tightening of the rules that lenders need to follow under the Code.

Click here for a full copy of the judgment.

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