In National Australia Bank Limited v Rice [2015] VSC 10, the Supreme Court of Victoria decided that NAB could not enforce its loan guarantees against the guarantor as it had not complied with the Code of Banking Practice.
The provisions of clause 28 of the 2004 Code of Banking Practice which applied in this case are substantially the same as clause 31 of the 2013 Code.
NAB claimed $6,184,593.48, plus interest and costs pursuant to 5 guarantees. There was no dispute that the guarantor executed each of the Guarantees. Default judgment was entered against the borrower.
THe guarantor and the borrower had entered a real estate joint venture. The guarantor provided his 50% in cash but the borrower had to borrow his 50% from NAB.
Justice Elliott found that the guarantor did not know that, by signing the documents, he would potentially become jointly and severally liable for all of the borrowers’ liabilities. It was contrary to the understanding the guarantor had, based on what the borrower had told him. The NAB manager witnessed the guarantees and nothing he said to the guarantor suggested that his understanding was incorrect.
In particular the bank manager never said to the guarantor that he should seek independent legal and financial advice before signing any of the Guarantees. The written recommendation to do so in the documents was not raised by the manager.
Justice Elliott concluded:
“NAB submitted that it was not necessary to articulate the warnings orally. So much may be accepted. But to comply with the Banking 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.
Accordingly, the warranties contained in clause 28.4(a)(i), (ii) and (iv) were breached.”
The guarantor established that NAB failed to comply with the Banking Code. Such conduct amounted to a breach of a contractual warranty and NAB’s claim was dismissed.
No unconscionability by NAB was proved.
