Supreme Court New South Wales Medium Neutral Citation: National Australia Bank Limited v Kim Francis Hunter & Anor (No 3) [2013] NSWSC 1642 Hearing dates: 30 April, 1 and 9 May, 13 June and 12 July 2013 Decision date: 11 November 2013 Jurisdiction: Common Law Before: Slattery J Decision: Guarantees enforceable. Catchwords: CONTRACT - banking - bank seeks to enforce an all moneys mortgage securing a personal guarantee executed by the defendants in relation to a business loan -mortgage executed in 1992 - the first defendant claims that she was not aware at the time of executing the personal guarantee that her liability was secured by the mortgage - whether the bank officer informed the first defendant that the guarantee was secured by the mortgage - first defendant argues that the guarantees are void or voidable because of the bank's non-compliance with cl. 28.4 and 28.5 of the Code of Banking Practice - alternatively the first defendant seeks damages for breach of the Code in the amount equal to her liability to the bank - the bank admits breach of cl. 28.5 - the bank say it provided the first defendant with a list of any "related security contracts" pursuant to cl. 28.4 - nature of the obligations under the Code - effect of non-compliance with the Code - whether the first defendant would have proceeded with the guarantee if she knew it was secured by the mortgage. Cases Cited: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Brighton v Australia and New Zealand Banking Group Limited [2011] NSWCA 152 Commonwealth Bank of Australia v Starrs [2012] SASC 222 Cordon Investment Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 Financings Ltd v Stimson [1962] 3 All ER 386 Flowers v National Australia Bank [2011] NSWSC 698 Gilbert McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) SR (NSW) 122 Hancock v Williams (1942) SR (NSW) 252 ING Bank (Aust) v Leagrove Pty Ltd [2011] QCA 131 International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 L'Estrange v F. Graucoo Ltd [1934[ 2 KB 394 Middleton Nominees v Westpac Banking Corporation [2008] FCA 371 Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 SAM Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320 Smith v South Wales Switchgear Ltd (1978) 1 All ER 18 Category: Principal judgment Parties: Plaintiff/Respondent:- National Australia Bank Limited First Defendant/Applicant:- Kim Francis Hunter Second Defendant/Applicant:- Kim Lee Hunter Representation: Counsel: Plaintiff/Respondent: B. Koch First & Second Defendants/Applicants: P.J. Cutler Solicitors: Plaintiff/Respondent: Turks Legal First & Second Defendants/Applicants: Hunter Flood Lawyers File Number(s): 2011/356806 Publication restriction: No Judgment 1This is the Court's third judgment in these proceedings. It decides the issues litigated at the final hearing held on 30 April, 1 May, 9 May, 13 June and 12 July 2013. 2Events, matters and things are referred to in this judgment in the same way as they are in the Court's previous two judgments. Those judgments explain in detail the relationships between various parties and relevant procedural history. There is no need to explain those matters again except in outline. 3In the Court's first judgment on 18 February 2013, the Court declined to set aside a consent judgment that had been entered against the first defendant, Mr Hunter: National Australia Bank Limited v Kim Francis Hunter & Anor [2013] NSWSC 71 ("first judgment"). The second judgment gave to Mrs Hunter limited leave to amend her Cross-claim, after argument about that procedural issue on 13 June 2013 ("second judment"): National Australia Bank Limited v Kim Francis Hunter & Anor (No 2) [2013] NSWSC 763. Overiew of the Bank's claim and Mrs Hunter's Cross Claim 4By its Statement of Claim the Bank seeks possession of the Property, situated in Balgowlah, over which it holds an all monies mortgage registered in 1992 ("the 1992 Mortgage"). The Bank also seeks judgment against Mrs Hunter in the sum of $819,494.97. 5The Bank claims it is entitled to enforce the 1992 Mortgage against the Property because of Mr and Mrs Hunter's default under two personal guarantees they gave the Bank in 2009. The Bank claims that those guarantees secure business loans the Bank made to the Hunters and to Indulgence Hunter Pty Limited ("the Company"), the corporate trustee of their family trust, The Hunter Investment Trust ("the Trust"). When they gave these guarantees, Mr Hunter was a sole director of the Company and held one of its two shares, and Mrs Hunter held the other share; matters of which the Bank was well aware. 6The money judgment the Bank seeks against Mrs Hunter also includes amounts outstanding under a personal loan the Bank advanced to her and Mr Hunter in 2005, together with the business loans made to the Company in 2009. Mr and Mrs Hunter filed Defences to the Bank's claims in the same terms, save that Mrs Hunter admits, and Mr Hunter denies, the loan advance made to the Company. 7Mrs Hunter challenges in her Cross-claim the validity of the two 2009 guarantees. But the Bank responds that even if it cannot rely on these two guarantees, it is nevertheless entitled to possession of the Property, because both Mr and Mrs Hunter have defaulted under their 2005 personal loan from the Bank. 8Mrs Hunter concedes she is liable to the Bank on an unsecured basis for the outstanding balance of the 2005 personal loan. But she contends that the Bank's alleged non-compliance with its obligations under the Code of Banking Practice ("the Code") in relation to the two guarantees means that she has no liability to the Bank through them and that the Bank has no right to possession under the 1992 Mortgage. 9Mrs Hunter's Cross-claim seeks: a declaration that the guarantees she executed are void ab initio or, in the alternative, voidable at her election; and, in the alternative damages in an amount equal to any sum that she is found to be liable to pay to the Bank. 10Mr Hunter is a bankrupt. His Trustee has not appeared in the proceedings. After my first judgment the Federal Circuit Court made declarations that Mr Hunter holds all his beneficial interest in the Property on bare trust for Mrs Hunter. 11An outline of the relevant facts starts with the 1992 Mortgage and deals with the 2005 personal loan and the 2009 company loan. The 1992 Mortgage 12The defendants purchased the Property in 1992. It was their matrimonial home until their separation in 2009. It remains Mrs Hunter's residence. The Hunters financed the purchase of the Property in part through the 1992 Mortgage, which was registered on 21 July 1992 and has not been discharged since. 13The 1992 Mortgage included a reasonably typical "all monies" clause. The relevant part of the definition of the "the money hereby secured" in the mortgage memorandum for the 1992 Mortgage follows: "the money hereby secured" means all money and amounts at the date of the Mortgage or at any time hereafter falling within one or more of the following descriptions: (b)moneys owing or remaining unpaid to the Bank in any manner or on any account whatsoever by the Mortgagor whether alone or jointly with any other person and whether as principal or surety;" 14The Bank relies on the 1992 Mortgage as security for subsequent loan advances provided to the Hunters and to the Company. The Hunters do not challenge the validity of this mortgage. 15Subsequently the Bank granted the three loans the subject of these proceedings: the personal loan to the Hunters in 2005, and the business loans to the Company as trustee of the Trust in 2009. The Hunters executed two guarantees in relation to the Company loans. The 2005 Personal Loan 16On 8 March 2005 the Hunters and representatives of the Bank executed a FlexiPlus Mortgage Facility Agreement ("the Personal Loan") with a facility limit of $150,000, which was secured by the 1992 Mortgage. 17The 2005 personal loan remained in place until the 2009 Business Loans to the Company went into default. 2008 Facilities and Guarantees 18In May 2008 the Bank and the Company executed a Business Letter of Offer under which the Bank provided the Company with three different facilities with respective facility limits of: $62,250, $150,000 and $695,000 ("the 2008 facilities"). These 2008 facilities were secured by: a fixed and floating change over the Company's assets, the 1992 Mortgage, another mortgage over a property then owned by the Hunters in West Street, North Sydney ("the West Street Mortgage") and guarantees, with a limit of $908,000, provided by each of the defendants. 19The May 2008 facilities were superseded. Although the Bank does not rely on the 2008 facilities in these proceedings, they provide background to the 2009 facilities that replaced them. 20Unlike the two 2009 guarantees in issue in the proceedings, Mrs Hunter did not execute her May 2008 guarantee in front of a Bank officer. She executed it before a solicitor, a Mr Warwick Cottee, who witnessed Mrs Hunter's signature. Mr Cottee also signed a certificate, included in the text of the 2008 guarantee, attesting that he had: "explained the effect of this guarantee and indemnity to the guarantor who appeared to be aware of and to understand the nature and effect of obligations of the guarantor under this guarantee and indemnity, and execute it in my presence" 21In May 2008 Mr Cottee also witnessed Mrs Hunter's signature on a separate certificate titled "Declaration by Guarantor". In that certificate Mrs Hunter declared that she had obtained independent legal advice in relation to her 2008 guarantee and that she was fully aware of its legal effect. Mr Cottee did not give evidence in these proceedings. The March 2009 Business Loans 22In March 2009 the Bank entered into two loan agreements, an overdraft facility and an interest only facility, with the Company as a trustee for the Trust. These were described as a "NAB Business Overdraft" and a "NAB Business Options Interest Only Loan". Under those two agreements the Bank advanced the Company respectively $144,750 and $695,000 (referred to together in these reasons as "the 2009 Business Loans"). 23On 26 March 2009 the Bank and the Company entered into the "NAB Business Overdraft" with a facility limit of $144,750. On 27 March 2009 the Bank and the Company entered into the "NAB Business Options Interest Only Loan" with a facility limit of $695,000. 24The securities provided for each of the 2009 Business Loans were the same in form as the securities for the 2008 facilities: a fixed and floating charge over the Company's assets, the 1992 Mortgage, the West Street Mortgage and a guarantee from each of the Hunters executed on 3 April 2009 ("the First Guarantee"). The limit of the Hunters' guarantees was raised up to $1,305,000. Mrs Hunter's guarantee, and the circumstances in which it was executed, are described in more detail below. 25But by late 2009 the Hunters began to reduce their exposure to the Bank. The Hunters contracted to sell the West Street property in October 2009. Upon completion of this sale the West Street Mortgage would no longer be available to support the 2009 Business Loans. To accommodate this change, on 23 October 2009, the Bank and the Company executed a "Business Letter of Advice" which reduced the limits of the Business Loans respectively to: $145,000 for the overdraft and $540,000 for the interest only facility, and discharged the West Street Mortgage from the proceeds of the sale of that property. 26On 26 October 2009, after the Business Loans limits were reduced, the Hunters each executed a new guarantee, covering the Company's obligations to the Bank ("the Second Guarantee"). The limit of the Second Guarantee was reduced to $850,000. 27The circumstances of Mrs Hunter's execution of the First and Second Guarantees are in dispute and are described in more detail below. The First Guarantee 28Mrs Hunter executed the First Guarantee on 3 April 2009 with one of the Bank's employees, Mr Stephen Archer. The central contest between Mrs Hunter and Mr Archer was whether Mr Archer informed Mrs Hunter at this meeting that the 1992 Mortgage was one of the securities that the Bank would be relying upon to support the Hunters' guarantees of the 2009 Business Loans then being taken out. Mr Archer says that by following his usual practice he did identify the 1992 Mortgage as one of the relevant securities to Mr and Mrs Hunter. 29Mrs Hunter denies that Mr Archer drew the 1992 Mortgage to her attention on 3 April 2009. She says that had the Bank's reliance on this security been brought to her attention she would not have proceeded with the transaction any further. But for the admitted application of the Code to this transaction, this dispute may not matter much. Whether or not Mr Archer drew the all monies provisions of the registered 1992 Mortgage to Mrs Hunter's attention they would still bind Mrs Hunter. But here the Bank's alleged non-compliance with the Code in relation to the 1992 Mortgage is said to displace the position at general law. 30On this issue I prefer Mr Archer's account as this section explains. The relevant terms of the First Guarantee are set out later in these reasons. 31Mr Archer took over as the Bank's relationship manager with the Company and the Hunters. He arranged through Mr Hunter, in late March or early April in 2009 for Mr and Mrs Hunter to meet him at the Bank's Dee Why Business Banking Centre to execute various facilities, including the overdraft facility, the interest only facility, a bank guarantee, a Master Asset Finance Agreement and guarantees by each of Mr and Mrs Hunter of the Company's debts up to and limited by the sum of $1,305,000. And those documents were executed at the 3 April meeting. 32Mr Archer says that it was the Bank's usual practice prior to execution for bank officers such as himself when witnessing the execution of guarantee documents to take the proposed guarantor through various parts of the guarantee proposed to be executed: details of the guarantee and indemnity, what the guarantor undertakes to pay, the acknowledgement of the documents received, an explanation of the guarantee and indemnity, and the guarantee advice certificate. I accept that Mr Archer did do this on 3 April. 33I also accept that in conformity with his and the Bank's usual practice, he asked Mrs Hunter as the proposed guarantor, whether she knew what she was signing, whether she understood the document and whether she had any questions about it. If the guarantor answered affirmatively, his normal practice was to have the guarantor sign the document. In any event Mrs Hunter does not contest, as a solicitor that she well understood the general legal effect of a guarantee. 34But first Mr Archer had to make an important choice: whether independent legal advice from a solicitor would need to be organised before signing, or whether the guarantees could be signed before him as a bank officer. Mr Archer recalled on 3 April, as was the fact, that Mr and Mrs Hunter had obtained independent legal advice from Mr Cottee within the two years prior to April 2009. The Hunters had previously provided information about Mr Cottee's advice to the Bank. So, Mr Archer formed the view that it was not necessary for Mr and Mrs Hunter to provide a further certificate of independent legal advice for the 3 April 2009 guarantees. 35Mr Archer says that he provided copies of the facility agreements and security documents that were executed at the 3 April 2009 meeting to each of Mr and Mrs Hunter. I accept that Mr Archer did this, even though he admitted of these events "I don't recall precisely". He was adhering to what I accept was his normal practice. Mrs Hunter says she was not given any documents at the meeting. Apart from my preference for Mr Archer's account of this meeting, her evidence is inherently improbable. Mrs Hunter is a solicitor. She would have expected to receive copies of the documents she was executing at a meeting such as this. She tended under cross-examination to play down her commercial legal experience. Her legal expertise was undoubtedly in the area of migration law. But even so, she struck the Court as quite an astute legal professional who would have cautious and prudent reactions in most commercial situations: were she not given copies of documents she would have wondered why she had not been given them and would have asked for them. 36And Mrs Hunter acknowledged receiving documents at the 3 April meeting. Mrs Hunter's First Guarantee contains a section titled "Acknowledgments of Documents Received" in the form of a table. This table listed various transaction-related documents in its first column. In the next column headed "Code of Banking Practice (Code) Regulated Directors & Not code Regulated" the column heading also instruct to "Tick additional required doc's". And the third column heading "Code Regulated Non-Directors", computer generated "ticks" appeared next to the listed documents. This table and a clause below it have the guarantor acknowledge that by signing the guarantee the guarantor acknowledges that he or she has received the documents listed in the table. The documents listed in the table, ticked as having been provided, included at least a copy of the loan offer documents to the Company, a copy of the first guarantee, and a guarantor information report. My assessment of Mr Archer was that he was not someone who would have a guarantor sign an acknowledgement like this unless it was correct. It is likely in my view to have been shown to and understood by Mrs Hunter, who knew it corresponded with the true situation: that she had received these documents from Mr Archer. 37With the First Guarantee Mrs Hunter also signed a document entitled "Guarantee Advice Certificate". That certificate contains two alternative sections, "Solicitor Advice" and "Banker Advice or Advice Waiver". Mrs Hunter and Mr Archer both signed the "Banker Advice" section which certified, among other matters, that Mr Archer had explained to Mrs Hunter the nature and effect of the First Guarantee and that Mrs Hunter had read the text of the guarantee agreement. I accept that Mr Archer had her sign this document once he had decided that Mr Cottee's advice was sufficiently recent that another certificate of independent advice from a solicitor was not then needed. 38Two of the documents given to Mr Hunter and Mrs Hunter on 3 April were the Bank's letters of offer for the facility to be provided to the Company dated respectively 27 March for the $144,750 overdraft and 29 March for the $695,000 interest only facility. Both of these letters of offer contained on their fourth page a list of the securities the NAB relied on, warning that "unless the NAB specifies in writing to the contrary, the securities listed below, together with any additional securities provided by you...secure all new facilities detailed within this agreement". In both letters the First Guarantee by each of Mr and Mrs Hunter is listed as limited to $1,305,000 and "supported by" the 1992 Mortgage and the West Street Mortgage. 39I accept that as these two letters of offer to the Company were only given to Mrs Hunter on the day of her meeting with Mr Archer, 3 April, that the first time she would have been in a position to peruse them at her own pace and in her own time was when she took them home. It would be difficult not to notice this list of securities on even a casual reading of the letters. I find that Mrs Hunter was given these letters. If she read them afterwards they did not apparently cause her any concern. 40This is consistent with what happened at the meeting. I accept Mr Archer's evidence that he did say to Mr and Mrs Hunter at their 3 April meeting that the First Guarantee was limited to $1,305,000 and that the guarantee was supported by the 1992 Mortgage. In saying this Mr Archer followed the terms of these two letters quite closely and made clear to Mrs Hunter that the Property was supporting the First Guarantee through the 1992 Mortgage. 41I also infer from Mrs Hunter's own evidence that she was aware that the 1992 Mortgage over the Property secured the Company's borrowings from the Bank. In cross-examination she said of some of the warnings in the First Guarantee: "Well, I knew it was a personal guarantee. Your assets are basically on the line". The questioner pursued this answer further, asking "Including Balgowlah", to which Mrs Hunter answered "Because it was my house but not via a mortgage". By this she seemed to be suggesting that she knew she may have to sell the Property eventually to meet all her unsecured liabilities. 42But in my view she was aware that that the Property was actually mortgaged to secure those liabilities. So much is clear from Annexure "A" to the 14 March 2011 "Financial Agreement made under s 90C of the Family Law Act 1975" between Mr and Mrs Hunter. There the parties describe a patisserie operated by the Company as "secured over" the Property. This document signed by Mrs Hunter on the page where this reference appears two years after the First Guarantee, must have seemed very alarming to her if she genuinely did not know that the Company's borrowings were supported by securities over the Property. And the parties to this March 2011 agreement were undertaking an important financial engagement - their mutual property settlement - based on the correctness of this information; they agreed in clause 2 "with the estimated values as set out in Annexure A". 43There was no allegation of unconscionability in this case against the Bank. Given her background as a solicitor Mrs Hunter could not realistically advance a case of special disadvantage. Her case was simple: that had she known that the 1992 Mortgage was an "all monies" mortgage she would not have provided any of the guarantees. But it is on this issue that, in my view, she fails. 44Perhaps the strength of Mrs Hunter's case was that in a marriage, which was obviously unravelling by 2009 it seems strange that she would have guaranteed her husband's business operations which would continue after their contemplated separation. She did say forcefully that although she was aware she was signing a guarantee she was unaware that the 1992 Mortgage could be used against her. In her favour is the fact that the mortgage was 17 years old at the time that she signed the Second Guarantee, and would not naturally have been at the top of her mind. 45But against these factors is Mr Archer's evidence, which I accept. He was a highly credible witness. Mr Archer gave evidence by video link from the United Kingdom. Even applying the additional caution that is necessary where a witness is giving evidence in this way, he came across as a very reliable witness, whose evidence I accept, and not one who would, as Mrs Hunter says, merely show her where to sign and did not explain anything in detail. 46And Mrs Hunter had been independently advised by a solicitor, Mr Cottee, in 2008 about the effect of the guarantees which she then signed, which were also supported by the 1992 Mortgage over the Property. This is likely to have been another recent reminder to her that the 1992 Mortgage could secure any obligations that she was currently taking on. 47It follows from these findings that Mrs Hunter was aware when committing herself to the First Guarantee that it was supported by the 1992 Mortgage. In my view, even if she had been given on 2 April, the documents she was actually given on 3 April, as the Code required (and which the Bank acknowledged had not occurred), she would still have signed them on 3 April. 48What were the terms of the First Guarantee Mrs Hunter had signed? Its cover sheet contained various warnings preceded by the words "Please Read", warning that Mrs Hunter does not allege in these proceedings were not compliant with the Code. After setting out the details of the parties and the limits of the guarantee being given, it records the "Acknowledgment of Documents Received" described earlier in these reasons and signed by Mrs Hunter. 49Then the First Guarantee contains an "Explanation of your Guarantee and Indemnity". Clause 9 of that guarantee explanation provided as follows: "9. Your securities apply to the Guarantee Unless expressly excluded, any mortgage, charge or other security granted by you to NAB can be relied on by NAB to cover your liability under the Guarantee (see clause 12 of the Guarantee)." 50Clause 9 of this mortgage explanation, given to Mrs Hunter, was certainly a warning that "unless expressly excluded", as the West Street Mortgage later was being excluded when the Second Guarantee was taken, that all the other existing securities could still be relied upon against her. 51Then within the text of the First Guarantee, under the heading "Part A - About this Guarantee" and the sub-heading "Reason for it", clauses 1.3 and 1.4 provide: "1.3 By signing this Guarantee you ask NAB to give or continue giving the facilities to the customer, and you give this Guarantee in return for NAB agreeing to do so. 1.4 You agree to such facilities being varied, extended, or replaced or to new or additional facilities being granted even though you may not be asked to consent to them or even have knowledge of them but your liability under this Guarantee will not exceed the Guarantee Limit (see 6 below)." 52In this same section Part A - About this Guarantee, clause 3(a) and (c) provide: "3. You acknowledge that: (a) all the terms and conditions of this Guarantee are set out in this document; (b) in deciding to enter into this Guarantee the only statements by NAB which you took into account and relied on are those contained in this document; (c) no other statement, document, or promise can affect the operation of this Guarantee; and (d) no provision of this Guarantee can by (sic) varied or waived by NAB except by written notice from NAB;" 53Clause 5 of the First Guarantee says the Code applies to the guarantee. This provision is set out in full later in these reasons. 54Clause 6.2 in Part B of the First Guarantee relevantly provides: "6.2 You guarantee that the customer will pay NAB all the amounts which the customer owes NAB at any time. If the customer does not pay an amount when due, you agree to pay that amount to NAB when NAB demands it. NAB may demand from you separately different amounts which the customer fails to pay." 55Clauses 10.1 to 10.3 in Part B provides: "Indemnity 10.1 You indemnify NAB against and you must pay NAB for any loss it suffers, up to the amount of the Guarantee Limit, because the customer is ever incapacitated or you do not comply with a term of this Guarantee. 10.2 This indemnity applies whether or not either you or NAB knew or ought to have known about any fact or circumstance which gives rise to a claim under it. 10.3 This indemnity is an additional obligation of yours which NAB may enforce against you as a principal debtor separately from your obligations under 6." 56Under the heading "Part C - Securities", the First Guarantee provides in clause 12.1(a) as follows: "12. To cover your liability under this Guarantee NAB can:- (a) resort to the Securities;" 57In "Part D - Your Liability", the First Guarantee provides in clause 14.2: "14.2 Your obligations under this Guarantee are not affected by anything that might otherwise affect them under the law relating to sureties, including:" 58Clause 14.2 then sets out a detailed list of circumstances that might otherwise lead to discharge of the guarantee at general law. 59Also in Part D, clause 16.1 provides: "16.1 You waive any rights which you have as surety at any time which may be inconsistent with the provisions of this Guarantee or which would restrict NAB's rights or remedies under it." 60And clause 19.1 provides: "19.1 You must make payments to NAB without any set-off or counterclaim and without any deduction or withholding for taxes." The Second Guarantee 61Mrs Hunter executed the Second Guarantee on 26 October 2009 with one of the Bank's employees, Mr Matthew Dewstow, who also gave evidence. 62The "Acknowledgments of Documents Received" and "Guarantee Advice Certificate" sections in the Second Guarantee were relevantly identical in form to the structure described above in relation to the First Guarantee. Mr Dewstow and Mrs Hunter again signed the "Banker Advice or Advice Waiver" section of the certificate for the Second Guarantee, as she and Mr Archer had done for the First Guarantee. 63Like Mr Archer, Mr Dewstow was a credible witness. I accept that with respect to the Second Guarantee Mr Dewstow took Mr and Mrs Hunter through the same parts of the guarantee as Mr Archer had with the First Guarantee. I also accept that Mr Dewstow took Mrs Hunter through a "Business Letter of Advice" dated 23 October 2009 that the Bank had addressed to the Company to explain the terms of the October 2009 variation to the Company's existing facility. This letter refers to the release of the West Street property from the securities that supported the existing facilities. But this time the letter does not list all the other existing securities. 64The fact that the West Street property was being released immediately prompts the question: what securities remain supporting the facility? Whilst Mr Dewstow probably did not mention the Property or the 1992 Mortgage, because they were not mentioned in the 23 October letter, I nevertheless accept that Mrs Hunter remained aware that the Property was continuing to secure the Guarantees supporting the Company's borrowings, because of her 3 April meeting with Mr Archer, only about seven months before. 65And I accept that Mr Dewstow allowed Mrs Hunter to take away with her copies of the documents she had signed on 26 October: the 23 October Business Letter of Advice, the Second Guarantee, a letter of instruction for loan draw down, and a Guarantee Advice Certificate for Mrs Hunter. 66Contrary to Mrs Hunter's case I conclude that she was aware of the 1992 Mortgage at the time she signed both the First and Second Guarantees and that that knowledge was no impediment to her proceeding to sign them. 67And as with the position on 3 April, Mrs Hunter does not allege any unconscionable conduct against the Bank on this second 26 October occasion with Mr Dewstow, or that she was a person suffering a special disadvantage in relation to the Bank. So, the general advice to her about guarantees on this occasion and on 3 April was not the focus of this litigation. Demands and Defaults - November 2010 to November 2011 68The Hunters concede that both the 2005 Personal Loan and the 2009 Business Loans have fallen into default and have been validly terminated. They did not dispute that the default and demand notices had all been validly issued pursuant to the First and Second Guarantees, if the guarantees were on foot and otherwise enforceable. So only a limited summary of the relevant cancellation/default events is necessary. 69The Bank first called up the 2009 overdraft facility. The "NAB Business Overdraft" facility allowed the Bank to cancel the facility limit at any time. The Bank did so in November 2010 by sending a cancellation notice to the Company and demanding payment of all then outstanding moneys on the overdraft. The Company did not pay in response. In December 2010 the Bank served on the Company a default and demand notice. The Company did not comply with this notice. 70On 17 January 2011 following the Company's failure to repay the overdraft facility the Bank turned to the guarantors. It served on the Hunters a notice of demand under the First Guarantee, requiring the payment of all moneys outstanding under that loan. The Hunters did not make any payments in response. 71The Bank then brought bankruptcy proceedings against Mr Hunter. In March 2011 the Federal Circuit Court of Australia made a sequestration order against Mr Hunter's estate. The Trustee was appointed to his bankrupt estate. 72After Mr Hunter's bankruptcy the Bank took formal steps in relation to the 2005 Personal Loan. Under the 2005 Personal Loan the Bank could cancel the available facilities at any time, whether or not the defendants were in breach, by posting a written notice of cancellation to the borrowers. Once the facility was cancelled, the Hunters were required immediately to repay any funds outstanding under the Personal Loan. 73On 6 May 2011 the Bank sent a notice of cancellation to the Hunters demanding the payment of the money outstanding under the Personal Loan. This was no doubt an ineffective demand against Mr Hunter who was by then already bankrupt. Mrs Hunter did not pay and Mr Hunter could not pay. On 16 May 2011 the Bank served a default notice on them. On 23 June 2011 the Bank again served the Hunters with a demand notice. No payments were made. 74The Company went into liquidation in June 2011. 75Then the Bank turned to the 2009 interest only facility. The "NAB Business Options Interest Only Loan" included as an event of default that the customer, here the Company, or any of the guarantors, becomes bankrupt or goes into liquidation. After the Company's liquidation, the Bank served on the Company on 7 September 2011 a demand for the payment of all moneys outstanding under that loan. The Company did not pay. 76On 7 September 2011 the Bank also served on the Hunters a notice of demand under the Second Guarantee, requesting them to pay all the moneys then outstanding under the interest only facility. The Hunters did not make any payments in response to this demand. 77In November 2011 the Bank commenced these proceedings. The Code of Banking Practice and the First and Second Guarantees 78The Bank accepted that the Code imposed obligations on it and that the Code formed part of its contract with Mrs Hunter and the First and Second Guarantees. 79The Bank's defence admits that it adopted the "Modified Code of Banking Practice 2004" on 31 May 2004. The text of this version of the Code was in evidence and the parties accepted that was the version that applied to their relationship. 80The Code is made to apply to the First and Second Guarantees by clause 5 of each of Guarantee which provides as follows: "5. Code of Banking Practice (a) NAB has adopted the Code of Banking Practice and if you are an individual and the customer is another individual or a small business customer (as defined by the Code) relevant provisions of the Code apply to this Guarantee." 81The Bank accepts that this clause means that the Code imposes legal obligations on the Bank and forms part of its contract with Mrs Hunter: cf Brighton v Australia and New Zealand Banking Group Limited [2011] NSWCA 152 at [33], [45] - [46] and SAM Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320 at [72]. The Code itself provides for its application in particular banking situations, including that of guarantors. Code, clause 39.1(a)(ii) provides that "on and after the commencement date: (a) we will be bound by this Code in respect of... (ii) any Guarantee (as described in clause 28) we obtain from you, except as provided for below;". None of the exceptions in clause 39 apply. 82Clauses 1.1 and 1.3 of the Code make general statements about what the Code is and what obligations it imposes on the Bank. Clause 1.1 provides: "1 Introduction 1.1 This Code is a voluntary code of conduct which sets standards of good banking practice for us to follow when dealing with persons who are, or who may become, our individual and small business customers and their guarantors". 83And under Code, clause 3.2 the Bank stated it would comply with the Code as follows: "3.2 If this Code imposes an obligation on us, in addition to obligations applying under a relevant law, we will also comply with this Code except where doing so would lead to a breach of a law (for example, a privacy law)." 84Code, clause 28 deals with guarantees and what a number of different kinds of guarantors may expect from the Bank. The Code for example imposes different disclosure requirements for non-directors, for directors (clause 28.16) and sole directors (clause 28.15). Code, clause 28.4 and 28.5 impose particular requirements on the Bank to make disclosure to non-directors. Code clauses 28.16 and 28.15 reduce these obligations with respect to directors and sole directors. 85Mrs Hunter was a shareholder but not a director of the Company. Accordingly, so clauses 28.4 and 28.5 apply to her. Clause 28.4 explains the content of what the information the non-director guarantor will be given in the guarantee transaction: "28.4 We will do the following things before we take a Guarantee from you: (a) we will give you a prominent notice that: (i) you should seek independent legal and financial advice on the effect of the Guarantee; (ii) you can refuse to enter into the Guarantee; (iii) there are financial risks involved; (iv) you have a right to limit your liability in accordance with this Code and as allowed by law; and (v) you can request information about the transaction or facility to be guaranteed ("Facility") (including any facility with us to be refinanced by the Facility); (b) from 1 June 2004 we will tell you: (i) about any notice of demand made by us on the debtor, and any dishonour on any facility the debtor has (or has had) with us, which has occurred within 12 months before we tell you this, and from 1 June 2005 within 2 years before we tell you this; (ii) if there has been an excess or overdrawing of $100 or more on any facility the debtor has (or has had) with us which has occurred within 6 months before we tell you this, and from 1 February 2005 we will give you a list showing the extent of each of those excesses or overdrawings; (c) we will tell you if any existing facility we have given the debtor will be cancelled, or if the Facility will not be provided, if the Guarantee is not provided; (d) we will provide you with a copy of: (i) any related credit contract together with a list of any related security contracts which will include a description of the type of each related security contract and of the property subject to, or proposed to be subject to, the security contract to the extent to which that property is ascertainable and we will also give you a copy of any related security contract that you request; (ii) the final letter of offer provided to the debtor by us together with details of any conditions in an earlier version of that letter of offer that were satisfied before the final letter of offer was issued; (iii) any related credit report from a credit reporting agency; (iv) any current credit-related insurance contract in our possession; (v) any financial accounts or statement of financial position given to us by the debtor for the purposes of the Facility within 2 years prior to the day we provide you with this information; (vi) the latest statement of account relating to the Facility (and any other statement of account for a period during which a notice of demand was made by us, or a dishonour occurred, in relation to which we are required to give you information under clause 28.4(b)(i)); and (vii) any unsatisfied notice of demand made by us on the debtor in relation to the Facility where the notice was given within 2 years prior to the day we provide you with this information; and (e) we will give you other information we have about the Facility (including any facility with us to be refinanced by the Facility) that you reasonably request but we do not have to give you our own internal opinions.". 86By Clause 28.5 the Code requires the Bank to provide the customer with a day to absorb the information the Bank has give to the proposed guarantor about the guarantee transaction: "28.5 We will not ask you to sign a Guarantee, or accept it, unless we have: (a) provided you with the information described in clause 28.4 to the extent that that information is required by this Code to be given to you; and (b) allowed you until the next day to consider that information. We do not have to allow you the period referred to in clause 28.5(b) if you have obtained independent legal advice after having received the information required by clause 28.4." Did the Bank Breach the Code? 87Mrs Hunter framed her case by alleging two breaches of the Code against the Bank: first, a failure to provide her as a non-director guarantor, "with a list of any related security contracts" including a description with a security contract type and the property subject to the security: Code, clause 28.4(d)(i); and, a failure to comply with Code, 28.5 in that she was not given "until the next day to consider" the information described in clause 28.4 which was required to be given to her. Her particular complaint on the breach of clause 28.5, is the failure to provide to her the material required under clause 28.4(d). The Bank admits the breach of Code, clause 28.5. But it disputes the breach of clause 28.4. For the reasons which follow, in my view the Bank did not breach clause 28.4 for the First or Second Guarantees. 88The relevant obligation in clause 28.4 is to provide "a list of any security contracts". There is little doubt that Mr Archer did not on 3 April provide Mrs Hunter with a document headed "List of Related Security Contracts" setting out all the securities. But in my view Code, clause 28.4(d)(i) does not require a separate list to be provided. What it requires is the provision to the proposed guarantor of "a copy of any related credit contract together with a list of related security contracts". The two can be incorporated in the one document and they were in this case. As the Court's earlier findings make clear, on 3 April Mr Archer provided to Mr and Mrs Hunter the letter of 27 March 2009 to the Company for the overdraft facility and the letter of 26 March 2009 for the interest only facility, both of which on page four listed the fixed and floating charge over the company, the $1,305,000 guarantee an indemnity by Mr and Mrs Hunter, the registered mortgage over the Property and the registered West Street mortgage under the heading "Securities" and introduced by the following words: "Unless NAB specifies in writing to the contrary, the securities listed below, together with any additional securities provided by you or a security provider after the date of this Letter of Offer, secure all new facilities detailed within this Agreement and are in addition to any securities which are listed in the Details as specific to an individual facility. The taking of any new securities detailed below does not prejudice or waive NAB's right to rely upon, and enforce, earlier securities." 89In my view the provision of these two letters with the list of securities on page 4 was sufficient compliance with Code, clause 28.4(d). 90Before the October 2009 Second Guarantee, the Bank's 23 October Business Letter of Advice merely offered a reduction in the existing facility limits, to $145,000 for the overdraft, and $540,000 for the interest only loan, and a corresponding reduction in the guarantee limit in the First Guarantee, from $1,305,000 down to $850,000, all in consequence of the sale of the West Street property. The 23 October letter does not re-list all the securities fully listed in the 26 and 27 March letters. But under the heading "The increased reliance on security or release" the Bank's 23 October letter does record that the West Street Mortgage "will no longer support the facilities provided to you by NAB". 91In my view on the giving of the Second Guarantee the Bank did not provide "a list of any related security contracts". And if the Code were a stand alone document it would be breached by the terms of the 23 October letter and Mr Dewstow's explanation. The list that had been included in the 26 and 27 March letters was not repeated in the 23 October letter of advice relating to the reduction in the facility. Indeed the Code, clause 28.4 is not crafted readily to accommodate what is to happen when fresh guarantee is taken upon a variation in the guarantor's favour, as occurred here with the Second Guarantee. The Bank decided in this case that highlighting the security the Bank was releasing was the way to comply with clause 28.4(d). But what that means for the existence and enforceability of the Second Guarantee is a matter to be decided by analysis of the parties' communications at the time. 92The Code is not a stand alone document. Clause 5 of the First and Second Guarantees; a not uncommon feature of commercial drafting practice: Smith v South Wales Switchgear Ltd (1978) 1 WLR 165; (1978) 1 All ER 18. Once the Code is incorporated by reference in this way it must be read with the two Guarantees and they should be construed together, and in the light of the parties' prior known dealings. 93Leaving aside any arguments that might arise from the other standard clauses in the First and Second Guarantees, the 23 October letter, through which Mrs Hunter was taken on 26 October, refers back to 3 April, to "the facilities provided to you by NAB". Even if she had forgotten the 1992 Mortgage, which in my view she had not, the 23 October variation was referring her back to this prior dealing, and its own list of securities. This was sufficient compliance with the Code on 26 October. 94Such an argument would be unlikely to be available when a guarantee to which the Code applies is first taken. It may well be that leaving a security out of a list of securities in those circumstances may lead to the conclusion that on the proper construction of the agreement that particular security is not being relied upon to support the guarantee. But that is not this case, which highlights the need to construe the Code as part of the contract to which it is applied by agreement. 95In my view Mrs Hunter remained aware in October 2009, despite her protestations to the contrary, that the 1992 Mortgage over the Property remained as security for her obligations under the guarantee. It was not suggested that any non-conformity with the Code on the Second Guarantee would effect the validity or the continuing enforceability of the First Guarantee. 96Finally, the Bank rightly conceded that if the Court accepted Mr Archer's and Mr Dewstow's evidence about giving the documents to Mrs Hunter at their respective meetings that the Bank did not comply with Code, clause 28.5. The Court accepts their evidence that they gave the required Code, clause 28.4 documents to Mr and Mrs Hunter at their meetings. The Bank did not allow Mr Hunter "until the next day to consider" the clause 28.4 information given to her. 97But Mrs Hunter was well aware that the documents Mr Archer and Mr Dewstow had given her, had not been given to her the previous day. And she was in a position, then and there as a solicitor, to ask for another day to consider them. She proceeded nevertheless, without taking advantage of this opportunity, and in my view should be taken to have waived her right to this cooling off period: cf Financings Ltd v Stimson [1962] 3 All ER 386. Again, the position may well be different in other circumstances and for a person not as well legally qualified as Mrs Hunter. 98Case law on the Code. The Code does not prescribe any remedy for non-compliance. A few cases have considered the Code. In ING Bank (Aust) v Leagrove Pty Ltd [2011] QCA 131 with guarantees that were not compliant with the Code, Code compliance (including with clause 28.4) was found not to be a condition precedent to their operation, such that ING's application for summary judgment against the guarantors was granted on appeal. And in Middleton Nominees v Westpac Banking Corporation [2008] FCA 371 an argument that the Code acts as a condition precedent to the acceptance and enforcement of a guarantee failed on the facts. The Code has been described as "an open offer to anyone that if that person becomes a customer of the defendant and the defendant will deal with that person in accordance with the Code of practice": Flowers v National Australia Bank [2011] NSWSC 698. And in Commonwealth Bank of Australia v Starrs [2012] SASC 222 Peek J commented on the operation of the Code aptly describing it as a series of "do's and don'ts" and pointed out the breaches the Code would be likely to be considerable relevance in unconscionability cases. Mrs Hunter's Case on Non-Compliance with the Code - Conditional Offer 99Mrs Hunter puts three arguments concerning the Bank's alleged non-compliance with the Code: (1) the Code creates a conditional offer which was not accepted; (2) the Code is a contractual term which was breached sounding in damages or leading to the unenforceability of the Guarantees; and (3) the Code prevents the Guarantees being enforced against Mrs Hunter, because of Mr Hunter's guarantee. The first of those matters requires analysis of the parties' communications. 100Mrs Hunter argues that she made a conditional offer to the Bank and that the Bank's guarantee documents were a counter offer in different terms, which was never accepted by Mrs Hunter because of the failure of correspondence between the Bank's counter offer and Mrs Hunter's position. She submits that guarantee was never created, notwithstanding the ceremony of signing that Mrs Hunter went through with Mr Archer and Mr Dewstow. Mrs Hunter supports this argument by taking the Court to Gilbert McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) SR (NSW) 122 ("McCaul"). The Full Court of the Supreme Court of New South Wales in McCaul was considering a 5 year lease, with a clause granting a tenant an option to renew for a further term, subject to the tenant: giving three months written notice, and paying the rent punctually. The tenant gave notice purporting to exercise the option to renew, but no renewal was granted. The tenant unsuccessfully sued for specific performance. In McCaul the Full Court found that the option clause in the lease was no more than an offer to make a contract but that offer was subject to a condition that rent be paid punctually. So, purported acceptance of the offer in the lease by the tenant, but without performance of the condition to pay rent did not constitute acceptance of the offer. Properly analysed it was a counter offer. 101Mrs Hunter says that her position is similar to that of the landlord in McCaul: she has offered to enter a guarantee upon the terms of the Code but the Bank has purported to accept her offer on terms inconsistent with the Code. Mrs Hunter says that the correct analysis is that the Bank has made a counter offer to her on terms different from the Code which she has not accepted. Her argument rests on the opening words to Code, clause 28.4 "we will do the following things before we take a guarantee from you" and clause 28.5 "we will not ask you sign a guarantee, or accept it unless we have" provided the information that clause 28.5 requires to be provided. 102Unlike in McCaul both the Bank and Mrs Hunter have executed the First Guarantee and the Second Guarantee. They both accept they signed an agreement, to the terms of which they are assumed to be willing to be bound: L'Estrange v F. Graucob Ltd [1934[ 2 KB 394. Rather the task for the Court is to construe what the parties agreed both on 3 April and 26 October 2009. Mason J's well known statement in Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552 is apposite here: "Generally speaking the Court will tend to follow that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens". 103Here Code, clause 28.5 may be seen as a condition precedent to performance, by the Bank of its obligations to make advances to the Company. But in my view Mrs Hunter has waived that condition precedent in her favour. 104The Bank also submits that Code, clause 28.5(b) should be construed in accordance with well established principles underlying the construction of written contracts; that "a contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction": Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at [22], International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151 at [53] and Cordon Investment Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52]. 105Clause 28.5(b) appears in part D of the Code entitled "Principles of Conduct", which are not described as "conditions" or "condition precedent" to the contract. Nor in my view should clause 28.5(b) be so construed. Clause 28.4 has been dealt with separately and has been satisfied. Two groups of provisions that Mrs Hunter signed, clause 1.3 and clause 3(a) and (c), and clauses 14.2, 16.1 and 19, all emphasise the unqualified and immediate obligations Mrs Hunter was taking on by signing these guarantees, and are not readily consistent with a construction that clause 28.5 is a condition to precedent to enforcement of the guarantees as the next section shows. Code Non-Compliance - Breach of Contractual Term 106Alternatively Mrs Hunter says that the Code is an express term of the First and Second Guarantees and a condition precedent to their enforcement. Because the condition precedent has not been fulfilled, she submits that the guarantees are unenforceable. Alternatively, Mrs Hunter says that the Code is an express term of the guarantees which is being breached and as a result of which she has suffered loss and damage equivalent to her liability on the guarantees. 107Whether a breach of Code, clause 28.4(d) and 28.5(b) would make the guarantees unenforceable as against Mrs Hunter, must be determined in accordance with Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561: "If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety's obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach". 108The Bank argues that the breach Mrs Hunter alleges of accepting guarantees signed by Mrs Hunter without allowing her a day to consider that information should never qualify Mrs Hunter to say that she would not have entered into the contract had she not been so assured. I accept the Bank's contention that it goes without saying that when Mrs Hunter signed the guarantee she was aware she had not been allowed under clause 28.5 until the next day to consider the relevant information. 109The Bank also points to clauses 14.2 and 16.1 of the Guarantees, which are relevantly set out above, which expressly negative the consequences that might flow from a breach of clause 28.5(b) of the Code. I agree that they are inconsistent with a construction of the Guarantees that they are unenforceable if clause 28.5 is not complied with. As indicated, I regard clause 28.4 as having been complied with. 110But perhaps more fundamentally, Mrs Hunter's case of breach of contract must fail on the facts because she cannot prove any damage. Her breach of contract case depends upon her establishing that she would not have proceeded with either the First or the Second Guarantee had Mr Archer or Mr Dewstow notified her of the 1992 Mortgage. But the Court has found that she would have proceeded anyway on both occasions. She has not suffered any loss even if there were a breach of contract. Code Non-Compliance - Mr Hunter's Guarantee 111Mrs Hunter argues that if her guarantees are void or unenforceable against her, then the Bank cannot rely on Mr Hunter's guarantee to obtain possession of the Property. She submits if it were otherwise then the purpose of the Code would be defeated, because the Bank would enforce the 1992 Mortgage on the basis of his guarantee, despite the voidness of her guarantee. 112But this issue now does not arise. The Court has not found Mrs Hunter's First and Second Guarantees to be void or unenforceable. In any event the argument does not stand well against an express term in the Guarantees that the Bank may deploy against Mr Hunter (clause 14.2(a)) that if the obligations of his co-guarantor changed, then Mr Hunter would still remain liable to the Bank: see Hancock v Williams (1942) SR (NSW) 252. Conclusions and Orders 113In the result Mrs Hunter has not been able to set aside either the First or Second Guarantees and they are enforceable against her. Judgment for possession of the Property may be entered against both Mr and Mrs Hunter. Further calculations may be needed in respect of the money judgment. I will list the proceedings for mention for this purpose and to hand up short minutes of order at 9.30am on 4 December 2013. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 December 2013