A sophisticated guarantor takes a walk courtesy of the Banking Code of Practice.
Was it really the intent of the Banking Code of Practice that a sophisticated and successful businessman worth approximately $23 million could avoid liability under guarantees he freely signed because the documents did not contain a sufficiently “prominent” notice telling him, amongst other things, that he could obtain independent legal advice and also because he was not allowed a day to consider the documents?
It sounds unlikely but that is what happened in National Australia Bank v Rose  VSCA 169.
This was not a case of a family member guaranteeing another family member’s debts. The guarantor (Rose) was involved in Queensland property investment with a friend (Rice). Through a jointly owned company they purchased properties worth $13.7 million using debt of over $9 million.
Rose gave Rice permission to negotiate with the bank. Rose knew he was signing guarantees when the bank officer came to his house with a large bundle of documents for a “signing” meeting. During this meeting, which lasted for approximately 15 to 30 minutes, Rose chatted with the bank officer and signed the documents at the “sign here” stickers. The guarantees contained notices setting out the various warnings required under the Code.
The property investment deal later went belly up and the bank sued Rose for approximately $3.8 million on three guarantees.
The majority of the Court of Appeal upheld the trial judge’s finding that the bank had breached the Code because the notice on the guarantees was not prominent enough and Rose should have been given until the next day to consider the documents and obtain independent legal advice.
Faced with the bank’s claim, at trial Rose had – rather conveniently – given evidence that if he had obtained advice and learnt of his true exposure he would have refused to enter into the guarantees. This meant that Rose was entitled to bring a damages claim against the bank for breach of the Code – the damages amounted to the bank’s claim and relieved him of all liability.
Ferguson JA wrote a somewhat stinging (and compelling) dissent which even annexed the bank’s “prominent” notice to her reasons. Ferguson JA found that the bank gave a sufficiently prominent notice to Rose, who was a sophisticated and wealthy businessman with net assets of $23 million. Her Honour’s dissent lists the relevant circumstances surrounding the signing of the guarantees. Importantly, Her Honour considered that the issue of whether the notice was sufficiently prominent has to be viewed in context – the business experience of Rose was therefore highly relevant as he knew the nature of the documents he had to sign. Her Honour also noted that if the notice complied with the Code it was irrelevant whether the notice was actually seen or read by Rose.
Critically, and contrary to the majority, Ferguson JA held that any breach of the Code did not cause any loss because it was highly probable that if Rose had been given more time to consider the documents he would not have bothered to read them and would have gone ahead with signing the documents.
For banks the key point to take away from this decision is process. Guarantees and documents should be provided to the person signing before having a short signing meeting. With email it is now a simple matter to send the documents to the guarantor in advance with all of the warnings required by the Code, including the opportunity to read the documents and to seek legal advice.
The other point to note is that there is a clear risk to banks if they cut corners for more sophisticated customers and do not strictly follow the Code’s provisions and processes for guarantors – you never know which deals will not work!