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What you need to know
- A guarantor recently sought to rely on various breaches of the Code of Banking Practice to dispute the enforceability of a guarantee and argue that it had been repudiated as a result of the bank's breaches of the Code.
- The Supreme Court of Victoria found that despite several breaches being established, the surrounding circumstances did not entitle the guarantor to avoid his liabilities under the guarantee.
- This decision demonstrates that courts are likely to consider breaches of the Code of Banking Practice in full context, including the specific contractual terms as well as the cause or causes of any loss, when determining the consequences of those breaches.
In Commonwealth Bank of Australia v Wood  VSC 264, the Supreme Court of Victoria considered various breaches of the Code of Banking Practice (the Code) which a guarantor sought to rely upon to dispute the enforceability of a guarantee given to the Commonwealth Bank of Australia (the Bank).
The Court found that despite several breaches being established, in all the circumstances of this particular case the guarantee was still enforceable.
Breaches of the Code
The guarantor's arguments focused on three clauses of the Code.
The guarantor alleged that the Bank had breached its disclosure obligations under the Code by failing to provide it with copies of: (1) any related credit contract together with a list of any related security contracts (clause 28.4(d)(i)), (2) the final letter of offer to the debtor (clause 28.4(d)(ii)) or, (3) any financial accounts or statements of financial position given to the Bank by the debtor within two years prior (clause 28.4(d)(v)).
The guarantor alleged that the Bank had breached clause 28.5(b) of the Code because it failed to give the guarantor "until the next day" to consider the information in (1) and (2) above.
The Bank had provided the guarantor with the original final letter of offer for execution (about a week before the guarantee was signed), but did not provide the guarantor with a copy of that letter.
The Court said that to the extent the Bank had breached clause 28.4 by the complete failure to provide certain information, there was no opportunity to consider such information at all. However, to the extent that the information in clause 28.4 included information that was contained in the final letter of offer and the guarantee, the guarantor did not establish that he did not have until the next day to consider that information.
The Court also noted that clause 28.5 does not oblige a bank to allow "until the next day" to consider the information if the guarantor has obtained legal advice. In this case, the guarantor had signed a declaration that he had obtained legal advice, even though he had not. Therefore, the Court found that as a matter of contract, clause 28.5 did not apply.
However, the Court went on to say that to the extent that a breach of clause 28.5 had been established, it was more likely than not that the guarantor would have signed the guarantee in any event.
The guarantor alleged that the Bank breached clause 28.6 of the Code (the requirement that a bank will not give the guarantee to the debtor or to someone acting on behalf of the debtor to arrange signing). The Court found that the person to whom the guarantee was given was acting on behalf of the debtor and accordingly the Bank had not complied with clause 28.6 of the Code.
Consequences of breaches
Conditions or mere warranties?
The guarantor argued that each of the clauses of the Code relied upon were conditions (or essential terms) of the guarantee, the breach of which would give the guarantor the right to terminate the guarantee. The guarantor also argued that by breaching the Code, the Bank had evinced an intention not to be bound by the terms of the guarantee and had repudiated the guarantee.
In response, the Bank argued that the relevant clauses were no more than warranties (or non-essential terms) of the guarantee, with the result that the guarantor could only ever have a claim for damages if the Code had been breached. The Bank also argued that if the Code had been breached, such a breach or breaches did not amount to repudiatory conduct which would entitle the guarantor to terminate the guarantee.
The Court said the guarantor would have to establish that the breached provisions were conditions, and not mere warranties, of the guarantee before he could avoid his obligations under that guarantee.
The Court said the characterisation of clauses 28.4 to 28.6 of the Code will depend upon the facts of each individual case, including the express terms of the guarantee. Significantly in this case, clause 10.1 of the guarantee provided as follows:
"Rights given to us under
(the guarantee) and your liabilities under it are not affected by
any act or omission by us or by anything else that might otherwise
affect them under law or otherwise, including:
(g) the fact that the obligations of any person who guarantees any of the debtor's obligations may not be enforceable."
The Court held that whether or not clauses 28.4 or 28.5 might possibly be construed as a condition or an essential term in other circumstances, in this case the provisions in those clauses could only properly be characterised as warranties.
What would the guarantor have done if not for the breaches?
The guarantor argued that if the breaches had not occurred, he would have fully appreciated the extent of his obligations under the guarantee and would have refrained from signing it.
The guarantor gave evidence that at all relevant times, he believed his liability would be and was limited to a twelfth of the debtor's liabilities, and that his brother would be a co-guarantor.
The Court rejected that argument, finding there was no evidence to support it. The Court made a number of noteworthy observations:
- There were financial incentives for the guarantor to execute the guarantee, whether or not his brother was a co-guarantor and whether or not his liability was limited to a twelfth of the debtor's liabilities.
- The Court was not satisfied that the guarantor would not have taken on the exposure involved by signing the guarantee, given the anticipated profits in which he was expected to be able to share. Further, the Court said even if it were satisfied that the guarantor believed at the time of execution that his liability was limited to a twelfth of the debtor's liabilities and that his brother was to be a guarantor, it was not satisfied that he would have discovered the truth of the matter had the Bank complied with the Code.
- There was no basis for finding that the guarantor would have discovered that the terms of the guarantee were other than what he believed them to be. There was also no basis for finding that the guarantor would have treated any additional documents any differently from those that were in fact provided, or that the guarantor would have done anything differently had someone else provided the documents to him for execution. In light of the fact that the guarantor stood to gain financially from the transaction, the presence of someone acting on behalf of the debtor would have been highly unlikely to have had any effect on the guarantor's conduct in relation to the execution.
It followed that the guarantor had not established any causal link between the liabilities he was subject to under the guarantee and the Bank's breach of the Code.
As to the allegation that the Bank's conduct in breaching the Code amounted to repudiation of the guarantee, the Court concluded that the breaches were only breaches of warranties, but even if the terms in question could have been characterised as essential terms, the conduct in question could not be said to have deprived the guarantor of the substantial benefit of the transaction, or a substantial part of it.
This decision demonstrates that when there is a breach of the Code, the consequences of any breach will depend on the surroundings circumstances. In determining those consequences, courts will have regard to all of the terms of the relevant contract (in this case that included clause 10.1 of the guarantee), as well as the facts of the particular case to establish whether there is any causal link between the breach of the Code and the liability of the complainant.
This article is intended to provide commentary and general information. It 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 article. Authors listed may not be admitted in all states and territories