This week's TGIF considers the latest in a string of
significant decisions on the Code of Banking Practice. The case
sends a clear message to bankers: fail to comply with the Code at
The Code requires a bank to give a guarantor 'prominent
notice' of certain matters, including that a guarantor should
seek independent legal and financial advice and that there are
financial risks involved in executing a guarantee. It also
recommends that once a bank has given that information, a guarantor
is allowed until the next day to consider it.
WHAT DOES IT MEAN?
In National Australia Bank v Rose  VSCA 169, the Court of
Appeal was required to examine what 'prominent notice'
notice means to an experienced businessman.
The bank's guarantees had, on their cover page and signing
page, detailed written warnings about the information that it was
required to disclose. Importantly, however, the guarantor only
reviewed the documents for 15 to 30 minutes prior to execution, and
the relevant banker could not prove that he gave the warnings
The majority judgment (2:1) found the warning did not constitute
a prominent notice in the context in which the document was
The majority held that the purpose of the prominent notice
requirement would be defeated if it could be satisfied by merely
providing written warning in circumstances where the bank knew that
the guarantor did not have the opportunity to read it or that it
was likely that it would not be read. In reaching this conclusion,
the majority found it significant that the banker:
knew the guarantor had not read the documents;
provided a verbal summary of the documents which competed for
the guarantor's attention; and
arrived at the guarantor's house (on each occasion) under
the premise the documents were to be executed.
The majority decision means it is best practice for bankers to
leave documents with guarantors overnight or ensure the written
warning is read by the guarantor.
This decision also reinforces the importance of bankers keeping
records of conversations that take place when documents are being
A DIFFERENT VIEW
As noted above, one judge held that the notice was sufficient.
Justice of Appeal Ferguson acknowledged the limited time the
guarantor spent with the documents but also that he was a
"successful and wealthy businessman" and that the bold
and capitalised warnings on the front and signing pages could not
be more prominent in the documents themselves. Her Honour held that
even if the front page of the document was not before the
guarantor, the information on the signing page stood out, and would
be expected to be seen by an experience businessman. On that basis,
her Honour found that the bank did comply with the Code
requirements. This approach is consistent with the approach adopted
by Elliott J in Commonwealth Bank of Australia v Wood  VSC
264 (which was discussed in our
TGIF on 8 July 2016).
While Ferguson JA's decision appears to make more commercial
sense, the decision of the majority will stand unless it is
appealed to the High Court. This means that best practice for
bankers is to leave documents with guarantors overnight or ensure
the written warning is read by the guarantor.
The message from recent cases is clear - fail to comply with the
Code at your peril!
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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