A mere breach of the Code of Banking Practice should not of itself necessarily result in an adverse finding against a bank.
The Williams v Commonwealth Bank of Australia1 case demonstrates that even where there is a breach of the Code of Banking Practice, the banking industry's customer charter on good banking service, a court will not necessarily set aside a mortgage or guarantee where it is clear on the facts that even if the Code had been complied with, it would have made no difference to the customer's decision to enter into the documents.
An elderly grazier sought an order setting aside a guarantee and mortgage over his property, given in favour of the Commonwealth Bank of Australia (the Bank) for the purpose of supporting bank facilities provided to his youngest son for the purchase of a stock and station agency. Interestingly, despite the order sought by the father, there was no default by the son under his arrangements with the Bank, and nor was there any demand or claim by the Bank for possession of the father's property. Rather, the underlying reason for the litigation involved complex family dynamics, as the presence of the mortgage prevented the father from undertaking any estate planning for the benefit of his three other children.
The Bank's facility consisted of an overdraft facility for $1.5 million and a 15-year loan for $250,000. Prior to signing the mortgage and guarantee documents in 2007, the father and his son met with the Bank, where officers of the Bank read and explained to the father all the material terms of the documents and the extent of the son's principal liability and of the father's security. The Bank officers advised the father that he should obtain independent legal advice before signing, and that he need not sign the documents there and then but could take them away for further consideration.2
The father did not follow this advice. Rather, he proceeded to sign the documents in the presence of the Bank officers and his son. The father had a great deal of confidence in his son, which on the evidence in court appeared to be well founded, as there was no hint of any financial difficulty in the conduct of the son's business.3 The father had, however, sought independent legal advice one week earlier, where his solicitor explained that if his son could not repay the loan, the Bank could sell his property. The father understood this. In response to a question by the solicitor on whether the father should already have transferred a parcel of his land to his eldest son, the father simply replied that if anything should happen to him, his children "would work it out between them".4
In 2009, the father consented to increasing his maximum liability under the guarantee to $2,061,417. It was around this time that the father first exhibited signs of concern at his level of indebtedness and the practical effect his actions might have on the entitlements of his three other children to his estate.5 However, it was another three years before the father took action, and sought to set aside the mortgage and guarantee based on breaches of the Code of Banking Practice and unconscionability pursuant to the Contracts Review Act 1980 (NSW).
Code of Banking Practice
The Bank accepted that its Code of Banking Practice formed part of its contract with the father, and that cll 28.4(d)(v) and 28.6(b) were breached — that is:
- the Bank did not, before taking a guarantee from the father, provide him with copies of his son's financial accounts or statements of the financial position of the son for the purposes of the facility (cl 28.4(d)(v)); and
- the Bank did not ensure that the father signed the guarantee in the absence of his son (cl 28.6).
However, despite these breaches, the court found that even if these requirements had been complied with, the outcome would not have differed. No loss was caused by those breaches. The father made it clear that he had no desire to examine his son's financial position, and was determined to help him set up his business. Further, although the father signed the guarantee in the presence of his son, there was no coercion on the part of the son, who adopted a "take-it-or-leave-it" approach.6
Unconscionability and the Contracts Review Act
Nor did the court find that the father had established any case based on unconscionability under the Contracts Review Act.
Although the father was elderly (81 years of age), as noted by the court, age is not, by itself, a disabling condition, unless it is also accompanied by some other factor.7 He suffered no other incapacity or infirmity at the time of the guarantee in 2007 or its extension in 2009.8
The father was not deprived of any real or informed choice to enter into the mortgage or guarantee, and there was no undue influence or pressure by his son or material fault on the part of the Bank. The Bank officer's responsibilities did not extend to investigating the effect of the transaction on the father's personal, moral or financial obligations, including any estate planning he was expected to undertake [at 35].9
Significantly, the court noted the distinction between understanding the nature and legal effect of the mortgage and guarantee, and giving attention to the long-term domestic and personal consequences of the transaction.10 While the father understood the former, he failed to do the latter.
Notwithstanding the result of this decision, clearly it is important for banks to have proactive monitoring and supervision of their procedures to ensure full compliance with the Code of Banking Practice. That being said, this is a welcome decision of the Supreme Court of New South Wales. The case reinforces the principles that lie behind the Code of Banking Practice and makes it clear that a mere breach should not of itself necessarily result in an adverse finding against a bank.
This article was first published in the Australian Banking & Finance Law Bulletin, Vol 29 No 3, September 2013.
1 Williams v Commonwealth Bank of Australia  NSWSC 335.
2 Above, n 1, at .
3 Above, n 1, at .
4 Above, n 1, at .
5 Above, n 1, at .
6 Above, n 1, at .
7 Citing (at ) Baira v RHG Mortgage Corp Ltd (2012) 297 ALR 416;  NSWCA 387 at ; Davey v Challenger Managed Investments Ltd  NSWCA 172 at .
8 Above, n 7, at .
9 Above, n 7, at .
10 Above, n 7, at .
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.