Commercial Litigation & Insolvency News Alert: Prominence - a rose by any other name: National Australia Bank fails to recover under a guarantee
In an important decision of National Australia Bank v Rice the Victorian Court of Appeal has confirmed the initial finding of the trial judge, that despite warnings as prescribed by the Code of Banking Practice being present in the guarantee documents, the context of the execution of the guarantees was such that the warnings were not sufficiently “prominent”. The lack of prominence being in breach of the Code of Banking Practice allowed a guarantor to set off funds sought from the bank for such breach and therefore escape any recovery.
Mr Rose and Mr Rice entered into a joint venture whereby the parties acquired investment properties on the Gold Coast. Various investment vehicles were incorporated over the years and Mr Rice had significant experience in property investment. Mr Rose had little experience but significant funds to invest. He was always advised that he would be taking a 50% stake in each of the properties although Rice’s contribution was nothing more than his expertise. Funds were borrowed for any balance from the National Australia Bank. A significant amount of property was bought over approximately 12 months totalling a value over $23 million. A default arose and NAB issued demands seeking to recover under the guarantees a shortfall in the sum of almost $4 million from Rice and Rose.
After much amendment including during the course of the trial, Rose’s position was that because he was not given sufficient opportunity to read the documents, the notices could not be said to have been given prominence. Equally, should he have known of even the most basic particulars of what was actually being sought by guarantee, he would have sought legal advice. This was not advised as being recommended as is required under the Code. Rose argued that should he have been advised of these issues he would have sought legal advice, obtaining whatever further information might have been available (in this case, details of Rice’s liability and financial circumstances) and not signed a guarantee.
The bank was hampered by the bank officer who was unable to recall specific details of the execution and the circumstances surrounding it. He could only rely upon recollection of his usual practice. No contemporaneous notes existed supporting the carrying out of his usual practice in this particular instance. It seemed clear his usual practice, even if accepted as having been carried out, meant that the context in which the guarantee was signed was well short of what had been required under the Code of Banking Practice. There was no opportunity for Rose, the client, to read the document in any detail. The documents were complicated and lengthy, and it was clear that Rose had not read the warning. The Court did not accept that any of the oral advice given by the bank officer was consistent with all the warnings required.
Rose believed that the documentation presented to him was only for the purposes of booking monies against the various entities that had been incorporated. He had only ever been told by Rice that the extent of his liability was the sums he contributed in cash.
While NAB argued initially that the Code had no contractual effect, it was accepted on appeal that the status of the Code terms were in fact contractual, a breach of which would support a claim for damages. In this instance, damages were the value of the funds sought under the guarantee. If the Code had been complied with, Rose argued (and the Court agreed) he would never have signed the guarantee. The Court and the Court of Appeal rejected arguments by NAB concerning causation of Mr Rose’s damage as it was concluded by all Judges that should Rose have appreciated the warning, he would have obtained legal advice.
Central to the Court’s determination was their consideration of whether the warning notices were prominent. All Judges were of the view that prominence had to be viewed in context of the surrounding circumstances which may differ from case to case depending upon the level of sophistication of the customer. In this case the customer was surprisingly inexperienced for 'a man of means' where there was complex documentation with no opportunity to read and with little assistance from any bank officer. It was clear in that context that the warnings were not “prominent” and so breached the Code.
What does this mean?
The circumstances and context of execution of guarantees continue to pose considerable difficulties for banks where there is not sufficient care taken by bank officers in the execution of process. This case underlines what is now, an almost universal need for an independent solicitor’s certificate.
The causation issues in matters such as these may not be as easy to prove as in this case, as Rose’s understanding of the transaction was completely at odds with the true circumstances.
Tony Mylne, Partner