A recent Court of Appeal decision provides a firm
reminder to the banking industry that the obligations in the
Code of Banking Practice impose strict legal obligations
that lenders must adhere to in dealings with
In National Australia Bank Ltd v John Albert Rose
 VSCA 169, the Victorian Court of Appeal dismissed an appeal
by the National Australia Bank (NAB), ruling that the bank had
breached the Code in the course of taking guarantees from its
customer, Mr Rose.
Original Court decision
In the court decision that was appealed by NAB, Mr Rose
successfully avoided liability under five separate guarantees for
some $6 million as a result of NAB's failure to give a
'prominent notice' under clause 28.4 (now clause 31.4(a))
of the Code.
Clause 31.4(a) provides that, before a bank takes a guarantee,
it must give the potential guarantor a prominent notice outlining
they should seek independent legal and financial advice on the
effect of the guarantee;
they can refuse to enter into the guarantee;
there are financial risks involved;
they have a right to limit their liability in accordance with
the Code and as allowed by law; and
they can request information about the transaction or facility
to be guaranteed, including any facility that is being
In Rose, the guarantee documents were only given to the
guarantor for the first time at a meeting with NAB's bank
manager when the documents were signed. At this meeting the bank
manager did not properly explain the effect or financial risks of
any of the guarantees, never told Mr Rose to obtain independent
legal advice and did not inform him that he could refuse to sign
the guarantees (or at least limit his level of liability).
It was accepted by the Court that, if Mr Rose had been made
aware of his guarantee obligations and potential liability, he
would have never have signed the documents.
For more information on the facts of the case and the original
court decision, see
The Court of Appeal upheld the original court decision. Both
parties had a poor recollection and limited documentation regarding
the meeting in which Mr Rose signed the guarantees. As a result,
the Court focused on the matrix of circumstances that surrounded
the meeting that suggested that a prominent notice had not been
given. These circumstances included:
the short time in which the meeting took place (15-30
the volume of material that needed to be perused and considered
in that short time;
the guarantee was only one document in each set of multiple
documents and the written warning as to the nature and effect of
the guarantee was only a small part of those documents;
the summary of the guarantees given by the bank manager was
the documents were not given to Mr Rose to consider before the
meeting or provided for overnight review before signing; and
the bank manager was aware that Mr Rose had not had a chance to
read the documents before he signed them.
As a consequence, the Court of Appeal decided that NAB failed to
give a sufficiently prominent notice to Mr Rose before he signed
Further, it was held that, although no direct link could be
drawn between the breach of the Code and the loss incurred by Mr
Rose, NAB's breach did lead to his misunderstanding of the
effect of the guarantees.
Critically, if Mr Rose had been made aware of his guarantee
obligations and potential liability, he would not have signed the
documents. As a consequence the guarantees were unenforceable.
The Code imposes strict legal obligations that banks must
There is a danger in bank representatives witnessing the
execution of guarantees and having loose procedures regarding the
explanations and warnings to be given to a proposed guarantor to
comply with the Code.
Banks should review their standard practices to make sure that
each requirement imposed by the Code is carefully followed.
However a bank's internal documents, such as a record of
interview or checklist, may be of little assistance to the bank if
there are gaps or errors in the document or if they are
inconsistent with what actually occurred.
Winner – EOWA Employer of Choice for Women Citation 2009,
2010, 2011 and 2012
Winner – ALB Gold Employer of Choice 2011 and 2012
Finalist – ALB Australasian Law Awards 2008, 2010, 2011 and
2012 (Best Brisbane Firm)
Winner – BRW Client Choice Awards 2009 and 2010 - Best
Australian Law Firm (revenue less than $50m)
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The 2016 Budget saw many highly anticipated changes announced to Australia's superannuation rules.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).