Case Note: National Australia Bank v Rose [2016] VSCA 169

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The recent Victorian Supreme Court of Appeal case of National Australia Bank Ltd v Rose [2016] VSCA 169 deals with the notice that needs to be given to any prospective guarantor under the Code of Banking Practice (Code) about their potential liability if a borrower defaults on the principal loan and the consequences of failing to give proper notice.

The Facts

In 2007, Mr Rose and Mr Rice, entered into a joint venture arrangement for the purchase of investment properties on the Gold Coast. Mr Rose provided his share towards the venture upfront and Mr Rice took out various loans with National Australia Bank (NAB) to finance his share. Mr Rose purportedly guaranteed the complete sum of each and every loan.

However, at the time of signing the guarantees, Mr Rose’s evidence was that he was not aware that he was a personal guarantor for the complete amount of the loans. This was for two reasons:

  1. Mr Rose had based his understanding of his liability under the guarantees on the information provided to him by Mr Rice.
  2. Mr Rose was not provided with any substantial further information when he met with the bank manager to sign the guarantees. The bank manager provided Mr Rose with only a brief verbal summary of the legal effect of the guarantees and inserted tabs in the guarantees where Mr Rose was required to sign. Mr Rose did not read the guarantees.

Particular importance was placed on the following facts in relation to the meeting:

  1. its brevity;
  2. the contested fact as to whether the bank manager highlighted to Mr Rose the cover page of each guarantee, which contained a warning;
  3. the explanation provided to Mr Rose as to the obligations of a guarantor if the borrower defaulted;
  4. the bank manager could see that Mr Rose did not read the guarantees; and
  5. evidence that had Mr Rose been told to seek legal advice he would have done so.

Ultimately, the borrower defaulted on the loans and NAB commenced a recovery proceeding against Mr Rose, to recover the outstanding balance of the loans after the secured properties had been sold. Mr Rose counterclaimed for damages pursuant to clause 5 of the guarantees, which stated that the Code formed part of them.

The Issue

The case centred on whether NAB gave Mr Rose “prominent notice” of matters required by clause 28.4(a) of the Code. The purpose of providing “prominent notice” is to give a “prospective guarantor a minimum threshold opportunity to gain an understanding about the risks that may be involved in signing a guarantee”. NAB argued that “prominent notice” had been given to Mr Rose through:

  1. the written warning on the cover page of each guarantee; and
  2. the conversation between Mr Rose and the bank manager at the meeting where Mr Rose signed the guarantees.

Mr Rose argued that NAB had failed to give him “prominent notice”, as required by Clause 28.4(a) of the Code due to it failing to:

  1. leave the guarantees with him overnight; and
  2. inform him that he should seek independent legal advice.

Mr Rose argued that had he been informed that he should seek independent legal advice he would have done so and through doing so he would of became aware of the true extent of his potential liability to NAB as guarantor.

The Outcome

The Court upheld Mr Rose’s counterclaim for damages which was equal to the amount outstanding to NAB as guarantor, being the sum of $3,878,744.05 plus interest and costs. The Court concluded that it could not be said that NAB had given Mr Rose “prominent notice” of the relevant matters in the sense that it was likely to come to his attention in the context in which it was presented to him and therefore it had breached its contractual warranty to him. Further, the oral explanations given to Mr Rose by the bank manager were found to be insufficient.

Key Takeaways

  1. A lender should fully inform a potential guarantor of all obligations placed upon them before entering into a guarantee.
  2. If a party is imposing a guarantee on a third party the proposed guarantor should seek the necessary financial and legal advice in order to understand the obligations to be placed upon them. They should be given time to consider the proposed guarantee and obtain this advice should they wish.
  3. The Code incorporated into an agreement, was considered to be legally binding.
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