Posted by Justin Sprogis | Banking & Finance, Business Law, Commercial Law, Compliance, Legal Developments 

A recent decision of the Victorian Supreme Court (NAB v Rose) that found that a voluntary code of conduct could, in the right (or wrong) circumstances, have binding effect as if it was a contractual arrangement has caused understandable confusion for many companies and individuals that have signed up to voluntary codes of conduct.

The confusion is understandable – these codes have, until now, been regarded more as guidelines for business practices, rather than strict obligations on those that sign up to them. The question we are sure you are asking yourselves now is: what does this mean for me and my business, if we are a signatory to an industry-wide voluntary code of conduct?

The short answer is that you are generally safe to continue to treat codes of conduct as non-binding guidelines, as you always have, so long as you are acting in the spirit of that code and let your customers know if you might need to depart from the code as part of the work you’re doing with that customer.

However, if you do breach the code and that causes your customer loss, you might have an issue, based on the facts of the Victorian Supreme Court Case.

The Victorian Supreme Court case that found that a voluntary code of conduct was legally binding had some unique facts to it, which in summary were:

• NAB made a series of loans to a real estate investor, which were guaranteed by the investor as well as by a friend of the investor. NAB never spoke to the friend of the investor until it came time to sign the documents.

• NAB was a signatory to the Banking Code, a supposedly voluntary code of conduct that almost all Australian banks are also a signatory to.

• The investor couldn’t repay the loan, so NAB called on the guarantees from the investor and his friend.

• The friend argued that NAB had breached the Banking Code by not properly telling him what he was guaranteeing, nor giving him the chance to get independent legal and financial advice. If NAB followed the Code, the friend argued, NAB would have done these things. Therefore, the friend’s argument was that his guarantees couldn’t be enforced by NAB.

• NAB’s argument in response was that the Banking Code imposed no contractual obligations on NAB, but merely provided ‘a desirable code of practice’. Therefore, NAB concluded, the guarantees from the friend were enforceable.

The Court disagreed with NAB. It found that the Banking Code put an obligation on NAB to explain the friend’s obligations under the guarantees, and to give the friend the chance to get legal and financial advice, or back out of the deal entirely.

One of the key findings was that the failure by NAB to comply with the Banking Code was directly linked to the loss suffered by the friend as a result of NAB calling on the guarantees granted by the friend.

So what should you take from all of this? Of course, the safest option is to continue to comply with your voluntary codes as you always have been. If you come across a particular transaction or deal where you might have to do something that is either a breach of, or inconsistent with, the voluntary code, make sure you let your customer know and get them to say it is approved.

While there may yet be more court cases that reject the finding of the Victorian Supreme Court, for now you should keep in mind that if you sign up to a voluntary code of conduct, and you breach that code in your business, and doing so causes direct loss to your customer, there is the possibility that you could be liable for this loss.

Please contact our team of experts to discuss the implications of this decision for you and your business. We are always happy to help and work with you to make sure that you never have to deal with the situation that NAB found itself in.

This publication is © Nexus Lawyers Pty Ltd and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.