Court rules that Code of Banking Practice has contractual force

The Supreme Court of Victoria has ruled that the Code of Banking Practice has contractual force, in a case in which National Australia Bank failed in a A$6.2 million claim against five loan guarantees.

Justice James Elliott found that in taking the guarantees NAB's loan officer did not advise the customer to seek independent legal advice and financial advice before signing, nor give him the opportunity to consider the documentation and sign it the following day.

This was a failure to comply with clause 28.5 of the Code of Banking Practice.

Elliott found that if the guarantor had received legal advice he would have been informed of the true extent of his potential liability and would not have signed any guarantees.
 
Throughout the case, NAB v Timothy Craig Rice and John Albert Rose, NAB argued that the Banking Code was not "promissory or contractual" and that it was intended that the Code impose no contractual obligation but merely provide a desirable code of practice. The bank also argued that it could not be the basis of a claim for loss.

The court found that the relevant provisions of the Code relied upon in the proceeding applied with contractual force.

Timothy Rice, a Gold Coast property manager, and John Rose, a wealthy businessman, were friends who decided to form a property investment joint venture in 2007. They would buy and sell luxury dwellings on the Gold Coast.

At the time they formed the joint venture Rose had assets worth $26 million and no debt, and Rice had assets worth $4.3 million and debt of $3.5 million.

Between June 2007 and April 2008 they acquired seven investment properties, all of which were financed to some extent by NAB loans. Rose executed eight guarantees.

Rose claimed that he was not aware that the effect of the guarantees was to make him jointly and severally liable for all the borrowers' liabilities. He claimed that he was advised by his business partner that he would be liable for only a portion of each loan.

The court accepted this. Elliott said: "It was contrary to the understanding Rose had, based on what Rice had told him. Nothing D'Angelo [the bank officer] said to Rose suggested that Rose's understanding was incorrect."

Rose argued that NAB's non-compliance with the Code of Banking Practice amounted to "material non-disclosure".

An interesting sub-plot in the case was that in December 2007 Rice approached NAB for a separate loan of $11 million. Security was a property he had purchased for $17 million. Rice could not service the debt and of the $11 million sought $1 million was for "interest capitalisation pending resale". Funding was approved.