A real estate manager with no substantial assets had a friend who was rather wealthy, having made his fortune manufacturing bike helmets.
The real estate man convinced the bike helmet man to go into business with him to acquire investment properties on the Gold Coast.
They agreed to fund and own the properties on a 50/50 basis and the real estate partner borrowed his half, secured on the investment properties, whereas the bike helmet man provided cash.
The real estate man asked the naive bike helmet man to be a director of the purchasing companies without explaining why that was necessary.
The bike helmet man left everything to his real estate man– the set up of the companies, the buying and negotiating with the bank.
The bank took cross-mortgages over all the real estate purchased and took directors’ guarantees.
The bank described the investments as speculative but approved the lending on the financial strength of the bike helmet man, without ever talking to him.
At one stage, the bank made the provision of further cash injections by the bike helmet man a condition of its approval if the properties were not sold within 12 months but did not communicate this to the bike helmet man.
When the bank called up the guarantees, the bike helmet man argued the guarantees were unconscionable and that the bank had failed to comply with the Banking Code.
The court found the bank gave no detailed explanation of the documents to the bike helmet man signed and did not recommend that he obtain independent legal advice in relation to the guarantees.
The court also found that the letters of offer with respect to the guarantees did not indicate that the guarantor was jointly and severally liable for the whole of the debts.
The court accepted the bike helmet man’s evidence that in relation to three of the guarantees that he did not know that he would potentially become jointly and severally liable for all of the debts and in relation to the remaining three guarantees that he would potentially become liable beyond his half of the loans, interest and liabilities.
This was because of what he said he was told by the real estate man, together with no explanation from the bank officer to correct this misunderstanding.
The certificates signed by the bike helmet man that he read and understood the guarantee did not assist the bank because the bank officer knew that the he had not read the document explaining the nature of a guarantee.
The court was unimpressed by the bank’s paperwork and said:
I find the errors were significant and raised serious doubt about the evidence of [the bank officer] that he strictly followed banking procedures when dealing with security documentation and related matters.
The court placed little or no weight on internal bank documents which purported to record that the guarantor had stated that he understood his liability under the guarantees. The court noted that most of the certificates had serious issues with them and contained statements the bank knew to be untrue. The court held they could not provide a proper basis for denying the guarantor a defence he may otherwise have had or found an estoppel.
Unconscionability at equity
The law is that there must be a special disability known to the bank however such a disability may be found if no explanation is given where one is required.
The court found that the friend was a successful businessman who was perfectly capable of looking after his own interests, although he lacked experience with guarantees and that the bank had not failed to provide explanation where it was required because there was no evidence which showed that the bank officer knew of his misunderstandings.
Also generally a bank owes no duty of care to a guarantor unless the transaction has one or more unusual features known to the bank. The court found no duty on the bank to disclose to the bike helmet man their negative credit assessment of the real estate man.
The court found that the relevant provisions of the Banking Code were to be treated as contractual terms of each of the guarantees and the fact that no remedy was provided in the Code did not prevent one being granted.
The court found that the bank never recommended independent legal and financial advice before signing any of the guarantees, failed to state clearly that the guarantor would be potentially liable for the whole of the debt under the guarantees and gave the gurantor no opportunity to consider the information until the following day before signing the guarantees and these failures breached the Code. The court said:
Not only did [the bank] fail to specifically point out the words “Warning Please Read” at the front of each Guarantee, and fail to tell [the friend] that he should seek independent legal and financial advice, but also [the friend] was not told he could refuse to sign each Guarantee, or that he had a right to limit his liability under each Guarantee… Simply “looking” at the front page and giving the inadequate summary that the bank officer said formed part of his standard practice, and not inviting the guarantor to read any of its contents, did not give prominent notice of the required warnings.
The court found that the breaches would not give rise to a right to terminate because they were not essential terms or conditions and even if they were construed as intermediate terms, the bike helmet man obtained a real commercial interest in the moneys being advanced. In any case, the right to terminate had been waived by the express terms of the guarantee. The court found that any breach could not amount to more than a breach of warranty. However breach still permitted the guarantor to sue for his loss.
The court accepted that if the breaches had not occurred, the bike helmet man would have sought legal advice and would not have signed the guarantees once he knew he would become potentially liable for all the debts, not just the interest on the loans which was already covered by the term deposit.
In any event the court found that even if the guarantor would not have sought legal advice, the outcome did not change. The findings that the bank did not tell the guarantor that there were risks involved for him or that he could limit his liability, together with the fact that he was not properly informed of his liabilities under the Guarantees, and that if he had been so informed he would not have signed any of the guarantees, were sufficient to establish a breach of the Banking Code and a direct causal link to the loss.
The court held that the loss suffered was the amount claimed by the bank in relation to each of the guarantees. This would place him in the same position as he would have been in if the bank had complied with the Banking Code. The court refused to deduct the $1m in profit from these damages on the basis that if the bank had not breached the Banking Code, not only would the guarantor not have signed the guarantees, but the bank would not have provided the finance and the guarantor would not have lost $5m of his own funds in the joint venture.
The court said:
In these circumstances, the receipt of $1.1 million did not result in any real profit; it can only be characterised as reducing the substantial losses the guarantor has incurred. In taking a common sense approach to the question of loss, the facts demonstrate that [the guarantor] has suffered loss far beyond his exposure under the Guarantees by reason of his joint venture. This remains the position even after taking into account the $1.1 million he received. Whether such losses were too remote to have been properly claimed against NAB is a question unnecessary to consider; no claim for consequential loss was made by the guarantor. If the guarantor had made a claim for damages in relation to consequential loss, the amount of $1.1 million would have been taken into account. However, in circumstances where the guarantor simply seeks to set off the amounts payable under the Guarantees, it would be entirely wrong to reduce that amount by the moneys he received in 2008.
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