In Commonwealth Bank of Australia v Wood [2016] VSC 264 the Supreme court of Victoria rejected a claim by a guarantor that a breach of the Code of Banking Practice by the Bank’s predecessor Bankwest was a defence to the enforcement of the guarantee. On the facts, Justice Elliott concluded that the guarantor had not established any causal link between his liabilities under the Guarantee and Bankwest’s breaches of the Code of Banking Practice.

The Bank sued for about $2.5m owing under the guarantee for a failed property development. The borrower’s project manager (Coomes) was present when the guarantee was signed.

The guarantor’s defence was based on Clause 28.6 of the Code of Banking Practice :

28.6 We will:

(a) not give the Guarantee to the debtor, or to someone acting on behalf of the debtor, to arrange the signing (except a legal practitioner or financial adviser who is working for you); and

(b) ensure that you sign the Guarantee in the absence of the debtor where we attend the signing of the Guarantee.

Justice Elliott observed:

“Although the Banking Code does not contain a provision which, of itself, provides a remedy for any contravention, that does not prevent the court granting a remedy. Ordinarily, when the provisions of the Banking Code are incorporated into a guarantee, they have contractual force. In this case, the Banking Code was relevantly incorporated without any material qualification.

Wood submitted that each of the clauses of the Banking Code relied upon were conditions (or essential terms), the breach of which would give Wood the right to terminate the Guarantee. Further, Wood submitted that, by breaching the Banking Code, Bankwest evinced an intention not to be bound by the terms of the Guarantee and repudiated the Guarantee. As part of the allegations in Wood’s amended defence and counterclaim, Wood purported to accept the alleged repudiation and to terminate the Guarantee.

The Commonwealth Bank submitted that the relevant clauses were no more than warranties (or non-essential terms), so that Wood could only ever have a claim for damages if the Banking Code had been breached. Further, the Commonwealth Bank submitted that if there had been a breach of the Banking Code, such a breach or breaches did not amount to repudiatory conduct which would entitle Wood to terminate the Guarantee.

The characterisation of clauses 28.4 to 28.6 of the Banking Code will depend upon the facts of each individual case, including the express terms of the Guarantee into which the Banking Code is incorporated….

in this case the provisions in those clauses can only properly be characterised as warranties. …

There is no issue that a contract was entered into. It is not a question of the court permitting such an event to occur, but rather what consequences flow from the breaches of some of the provisions of the Banking Code.

… As to Bankwest’s breach of clause 28.6 of the Banking Code, there is again no evidence that Wood would have done anything differently had someone other than Coomes provided the documents to him for execution. In light of Wood’s circumstances, including the fact that he stood to gain financially from the transaction, Coomes’ presence, as someone acting on behalf of Mato, would have been highly unlikely to have had any effect on Wood’s conduct in relation to the execution….

In summary, considering the above matters individually and collectively, I am not satisfied that Wood’s evidence, given after the proposed development of the Property had failed, as to what he would have done in December 2007 accurately reflects the course he would have adopted had the Banking Code not been breached. …

As to the allegation that Bankwest’s conduct in breaching the Banking Code amounted to a repudiation of the Guarantee, the breaches were only breaches of warranties; but, even if the terms in question could be characterised as intermediate terms, the conduct in question could not be said to have deprived Wood of the substantial benefit of the transaction, or a substantial part of it.”

The Judge also rejected the guarantor’s allegations of unconscionable conduct by Bankwest.