The Code of Banking Practice in the Courts
Alan L Tyree

The Code of Banking Practice was established as a result of discussions initiated by the report of the Martin Committee, A Pocket Full of Change, in 1991. In June 1992, the Federal Treasurer announced the formation of a task force composed of representatives from the Treasury, the Reserve Bank, the Trade Practices Commission and the Attorney General's department. The task force was to prepare a Code of Banking Practice. An initial draft was circulated in November 1992.

At the same time, the Australian Bankers Association was at work on their own draft, and, not surprisingly, this was the one adopted by the banks. The adoption of the Code was welcomed by the government of the day. Consumer groups were not so welcoming, believing that the process had been hijacked by the ABA.

The full adoption of the Code was delayed until the passage of the Uniform Consumer Credit Code which came into effect on 1 November 1996.

In May 2000 the ABA appointed an independent consultant, Richard Viney, to review the operation of the Code. His report identified a number of weaknesses and led to the drafting of a much improved version released in August 2003. Adoption was slow, in part due to problems with the provision of clause 28 relating to guarantees. That clause was amended in May 2004 and the Revised Code was widely adopted.

The Code was again reviewed in 2007 by Jan McClelland, an independent consultant. As a result of that review and extensive consultation, the Code was again revised and published in 2013. This version of the Code commenced on 1 February 2014.

The 1993 Code developed by the ABA contained a clause requiring the inclusion by reference of the relevant provisions of the Code into the Terms and Conditions of banking services. A similar clause has remained in each version of the Code.

Section 12.3 of the 2013 Code provides:

Any written terms and conditions will include a statement to the effect that the relevant provisions of this Code apply to the banking service but need not set out those provisions.

The bold terms in the clause are those defined in the Code.

This clause is obviously intended to incorporate the Code into the Terms and Conditions of the relevant service. In other words, the Code is included in the contract by reference.

This is certainly the interpretation given to the Code by legal counsel to the Financial Ombudsman Service (FOS). Commenting on the 2003 Code, counsel noted that adopting banks are contractually bound by the promises made and are potentially liable for damages for any breach.¹ The Ombudsman also noted that the Code had been drafted by the banks' representative body so that attempts to read down or unduly limit the meaning and effect of clauses would be inconsistent with the decision to adopt the code.² As will be seen below, this admonition has not been generally respected by the courts.

The Terms of Reference of the Financial Ombudsman Service require the Ombudsman to consider the Code in any dispute.

Courts have not always been friendly to treating the Code as binding contractual terms. Terms of the Code have been held to be too vague or subject to interpretation which renders them redundant or ineffectual.

The low point in acceptance was probably the NSW Court of Appeal in Sam Management Services (Australia) Pty Ltd v Bank of Western Australia Ltd [2009] NSWCA 320. The case involved an agreement between the bank and a small business customer to consolidate seven existing loan facilities. The agreement incorporated the Code of Banking Practice.

The customer alleged that the bank had breached cl 2.2 of the Code which required the bank to 'act fairly and reasonably … in a consistent and ethical manner.'

Hodgson JA considered that, on the facts, the bank had not breached its obligation. Hodgson JA clearly considered cl 2.2 to be an enforceable undertaking since he considred, at para 56 alternative facts that might have been a breach of the obligation.

Young JA agreed with Hodgson JA that the bank had not breached the Code, but wished to add come comments about the incorporation of the Code into the contract:

74 The clause [2.2 of the Code] in a legal document is so fraught with ambiguity. Its exact meaning was not canvassed before us so that it would be unwise to attempt to be definitive in its construction. Assuming it must be given some meaning in a commercial document, it probably does not operate to beyond requiring the bank to act in good faith towards the customer.

75 However, the principal purpose of these remarks is to suggest to bankers that the cross reference in legal documents to their promotional material is likely to lead to complications in litigation.

This interpretation of cl 2.2, while purporting to give it "some meaning", essentially deprives it of any effect. It is precisely the "reading down" referred to by legal counsel for the Ombudsman.

Commonwealth Bank of Australia v Starrs [2012] SASC 222 was an action for the enforcement of guarantees. Each guarantee contained the statement that "The relevant provisions of the Code of Banking Practice apply to this guarantee". Clause 28 of the 2003 Code was pleaded as a defence, and it was argued that the clause was a "relevant provision" by virtue of cl 28.1:

Guarantees

28.1 This clause 28 applies to every guarantee and indemnity obtained from you (where you are an individual at the time the guarantee and indemnity is taken) for the purpose of securing any financial accommodation or facility provided by us to another individual or a small business (called a “Guarantee”), except as provided in clauses 28.15 and 28.16

Peek J concluded that the Code did not apply since a company could not be an "individual". However, he went on to make some observations about the operation of the Code. After expressing the view that a breach of the provisions of the Code, or even a number of provisions, could not have the effect of invalidating the guarantee, he went on to say [footnotes omitted]:

In my view, the Code is largely a collection of “dos and don’ts” of bankers’ conduct, the origin of most of the provisions being traceable to various factual situations considered in decisions of the courts in areas including those of unconscionability generally and particular doctrines such as those in Yerkey v Jones, Garcia and Commercial Bank of Australia v Amadio (Amadio).

Under this view, the Code has no direct effect, and breaches of the Code are only relevant if they relate to an existing cause of action. If that is correct, then there is no to incorporate the terms of the Code into the contract since they have no direct contractual effect. Indeed, there is little reason for the existence of the Code since the banker will generally refer to in-house manuals for a list of "dos and don'ts".

Peek J also commented on some submissions by the bank which were not necessary since he had found that the Code did not apply. The essence of the submissions were:

• the only breach of the Code was that the bank violated cl 28.6(a) by giving the guarantee directly to the debtor to arrange signing by the guarantor;
• the purpose of cl 28.6(a) is to prevent a vulnerable guarantor from being improperly influenced;
• there is nothing to suggest that the guarantor is vulnerable;
• therefore the breach should be overlooked.

In accordance with his views of the Code, Peek J noted that “There is force in those submissions…”. If, however, the Code is incorporated into the contract, then surely the correct approach would be to find that there was a breach, but that the breach caused no damage.

Victor Seeto v Bank of Western Australia Limited [2010] NSWSC 922 was an application to remove receivers appointed under a loan and mortgage agreement. The agreements contained a clause incorporating the "relevant provisions" of the Code. The agreements also contained the following clause:

If:

…

(b) a provision of the Agreement would otherwise contravene a requirement of the Code of Banking Practice or impose an obligation or liability which is prohibited by the Code of Banking Practice,

the Agreement is to be read as if that provision were varied to the extent necessary to comply with the Code of Banking Practice or, if necessary, omitted.”

This incorporating clause does much more than simply import the terms of the Code into the contract. It purports to give them paramount status. It is not uncommon for terms incorporated by reference to be inconsistent with the express terms of a contract, and the standard rules of construction give the express terms priority: see Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35; Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631; Korea Exchange Bank v Standard Chartered Bank [2006] 1 SLR 565.

The plaintiffs argued that the Bank had breached cl 2.2 of the 2003 Code. Nicholson J observed that it was not necessary in the case for him to determine as a matter of construction the underlying intention of cl 2.2, and acknowledged that the issue was not fully argued. However, he thought it appropriate to express his "preliminary view" about it.

That view was that the obligation to act fairly and reasonably, consistently and ethically imposed by cl 2.2 is qualified by cl 2.3:

In meeting our key commitments to you, we will have regard to our prudential obligations.

According to Nicholson J (at para 38, "The effect of this provision, in my opinion, is to preserve the bank's entitlement to act with careful regard to its own interests under the relevant contract(s)." The clauses are directed to the manner of exercise of a contractual right or power, not to qualify or vary the right or power.

Implicit in this interpretation is the unacknowledged assumption that the "interests" of the bank will always be in line with its "prudential obligations". While many would hope that the assumption is correct, it seems very unlikely in the real commercial world.

It wasn't the case in National Australia Bank Limited v Smith [2014] NSWSC 1605, another case where guarantors claimed that the bank had acted improperly. The issues were complex, the guarantors claiming under the Australian Securities and Investment Commission Act 2001 (Cth), the Contracts Review Act 1980 (NSW) the Fair Trading Act 1987 (NSW), the Real Property Act 1900 (NSW) and the Code of Banking Practice.

The guarantors relied, in part, on cl 25(1) of the Code which was incorporated by reference into the guarantees:

Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.

Interestingly, the guarantors also claimed in negligence, arguing that clauses 2.1 and 25.1 set a standard for the duty of care owed them by the bank. The bank, relying on Sam Management Services (Australia) Pty Ltd v Bank of Western Australia Ltd [2009] NSWCA 320, argued that the Code was not enforceable. However, Slattery J found explicitly (at para 314) that cl 25.1 of the Code is sufficiently certain to be enforceable.

Why is the obligation to act with "the care and skill of a diligent and prudent banker" (as required by cl 25.1) more certain than the "ambiguity" of the obligation to act "fairly and reasonably … in a consistent and ethical manner…" (as required by cl 2.2)?

The answer might lie in the evidence before the court. In Smith, there was evidence presented by expert witnesses to the effect that the bank had not acted with the care and skill of a prudent banker. Interestingly, there was also expert evidence given as to accepted banking practice. Slattery J noted, at para 193, that cl 25.1 sets an objective contractual standard of prudent conduct, and that "accepted practice" may fall short of prudent practice.