Doggett v Commonwealth Bank [2015] VSCA 351

A bank wrongly approved a loan to a borrower to purchase the management rights of a development, owing to a mistake made by the bank. The bank failed to identify that the borrower’s cash flow would be unable to service the loan by a significant margin. The borrower complained to the bank and accepted a new proposal from the bank, which waived certain fees, in return for giving up all rights to sue the bank. The borrower eventually defaulted and the bank appointed receivers and sued for the balance owing. The borrower argued that the bank breached the Code of Banking Practice in approving the loan and that the bank’s new proposal to resolve the borrower’s complaints was procured by duress.

The trial judge found that the bank had breached its requirement to exercise care and skill of a diligent prudent banker in assessing the borrower’s ability to repay its loan from the resources available to it and the borrower should be placed in the position as if the loan had not been approved. However the successful claim was ultimately defeated by the borrower signing away his rights to sue the bank.

The Court of Appeal agreed that the Code of Banking Practice was incorporated into the guarantee and loan and was breached. The court said:

The conclusion that the Bank’s mistake caused the [borrowers’] loss may seem odd given that the borrowers themselves knew of the true position, not only in relation to the management costs, but in relation to the deposits and the other liabilities as well. It may seem odd that the Bank should be held to have caused a loss to the borrowers by approving their application by reason of a mistake as to a matter upon which the borrowers themselves knew the truth. But that is a consequence of the agreed incorporation of the Code into the contractual arrangements and of the legal requirement in the event of breach of cl 25.1 that the borrowers be put in the position they would have been in had cl 25.1 not been breached.

The majority of the court also found that had the breach not occurred, the bank would have refused the loan application and these damages should be set-off against the bank’s claim under the guarantee and extinguish the bank’s claim.

However the Court of Appeal agreed with the trial judge that the compromise letter settled the borrower’s claims. The court found that the bank’s breach of the Code was within the area of dispute between the parties at the time the letter was signed because the borrower’s claims were of inappropriate facilities and so compromised this claim. The Court found that while the borrowers were under considerable commercial pressure, they knew that if they agreed to the proposal they would be giving up rights to sue. The court found that the bank did not threaten to do anything if the proposal was not accepted other than to defend proceedings and possibly proceed with the enforcement of its security. The court held that its conduct was not unconscionable and does not become so merely because it can subsequently be demonstrated that a claim for breach of the Banking Code would have succeeded.

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