Trish Cassimatis & David McCrostie | March 2012 | Commerical disputes & insolvency
A recent Court of Appeal decision in Guijar v Australian and New Zealand Banking Group Ltd examines whether oral discussions bankers had with their customer amounted to a binding verbal contract.
Who does this impact? Lenders and in particular relationship bankers who have direct interaction with customers
What action should be taken?
TurkAlert
Have we talked ourselves into a loan contract?
Relationship managers should be mindful of their verbal communications with their customers when discussing conditions of loans offers. They should be clear insofar as distinguishing what is an offer and what they are binding the Bank to.
Background Mr Guijar was an investor in real estate. He owned 2 shops in Pitt Street, a unit in Stanley Street Newtown, property in Spain, land in Victoria and a home unit in which he lived. In July 2002 Mr Guijar contracted to purchase a unit (then under construction) in Ultimo for $485,000. In August 2003 Mr Guijar obtained financing from ANZ in the amount of $320,000 to assist with the purchase of a property in Newtown. In March 2004, ANZ made a loan offer relating to the loan already advanced over the Newtown property and the proposed loan concerning the Ultimo unit. It offered a loan of $485,000, secured by first mortgages over both the Ultimo and Newtown properties and a formal letter of charge over term deposit funds of $51,000.The term of the loan was a maximum of 6 months. Settlement of the bridging loan occurred on 5 March 2004 however Mr Guijar did not pay out the loan on its maturity date being 5 September 2004.
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Have we talked ourselves into a loan contract?
Between the settlement of the loan and the maturity date of the loan Mr Guijar had: >> received €75,000 from the sale of a property in Spain and paid it to ANZ. ANZ placed $51,000 into a term deposit >> exchanged contracts with a purchaser for one of the Pitt Street shops but the purchaser could not complete >> exchanged contracts with a purchaser for the other Pitt Street shop but problems arose regarding whether certain work was needed to be carried out at the shop and who would fund it. >> not found a buyer for the Stanley Street Newtown property >> committed himself to buy another property in Parramatta Road, Petersham for $472,000 plus GST and settlement was due on 11 October 2004. ANZ agreed to extend the facilities to 31 March 2005. The security continued to be first mortgages over the Newtown and Ultimo properties and a formal letter of charge over the term deposit funds. Ultimately the loan was not paid out by 31 March 2005 and the file was transferred to ANZ’s solicitors for service of formal notices under s 57(2)(b) of the Real Property Act. Eventually, Mr Guijar discharged his debts to ANZ by refinancing.
Commencement of proceedings Mr Guijar commenced Local Court proceedings against ANZ for damages in the amount of $33,500 that he alleged he sustained as a result of ANZ breaching oral contracts between him and two ANZ bankers.
The first oral contract – February 2004 Mr Guijar said that the Bank (via its Bank staff) verbally agreed that it would lend Mr Guijar $485,000 to complete the purchase of the Ultimo property and that when €75,000 was made available to ANZ following the sale of Mr Guijar’s Spanish property those funds could be applied by him in reduction of the sum of $485,000.
The second oral contract – April 2005 Mr Guijar said that the Bank (via its bank staff) verbally agreed the net proceeds of sale of the Pitt St shop ($404,184.33) plus the term deposit would be paid to ANZ in reduction of the principal sum of $485,000 and ANZ would refinance the remaining part of the principal sum of $26,000.
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Trish Cassimatis & David McCrostie | March 2012
Judgement at first instance In relation to the first verbal contract, the Magistrate of the Local Court made a finding that notwithstanding what Mr Guijar thought was an understanding with the relevant ANZ bankers, it did not amount to an agreement. The conversations he had with the bankers as regards to the application of the term deposit funds only amounted to him making an offer to ANZ as to what should happen with such funds. In relation to the second verbal contract, the Magistrate considered whether ANZ made a false and misleading representation that induced Mr Guijar to enter into the bridging loan agreement and whether there was an original agreement at all. The Magistrate answered these questions unfavourably to Mr Guijar and dismissed the proceedings. On appeal from the Local Court to the Supreme Court, the primary judge agreed with the learned Magistrate that the first conversation between Mr Guijar and the bankers did not result in a binding verbal contract in February 2004. However, in respect of the second verbal contract, the primary judge viewed the Magistrate’s reasons inadequate as regards to why Mr Guijar’s conversations with bank staff did not amount to agreement.
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Have we talked ourselves into a loan contract?
On this basis, the matter was remitted to the Local Court to be determined according to law. ANZ sought leave to appeal this aspect of the primary judge’s decision.
Court of Appeal
the lesson for the bank in this case is to ensure that key senior staff are mindful of what they say to customers, particularly pressure situations, such as when aggregated facilities are rapidly being refinanced, paid out and renegotiated all at one time.
Leaving aside the issue of the bases upon which one may appeal from the Local Court to the Supreme Court – which for a large part of the judgment, relevantly for lenders, the Court of Appeal upheld the primary judge’s support for the original Magistrate’s finding that the first conversation did not result in an agreement between Mr Guijar and the bank. In relation to the second oral contract, Campbell JA found that even if the original Magistrate’s reasons for judgment did not cover all of the elements necessary to prove the existence of an agreement or otherwise (being the requisite error of law required to trigger a basis for appeal) the unchallenged evidence was that the particular banker with whom Mr Guijar spoke, did not have authority in April 2005 to bind ANZ to an oral contract, and accordingly, remitting the matter to the Local Court for retrial was not warranted.
Implication for lenders Notwithstanding the ultimate determining factor was the banker’s level of authorisation to enter into deals, careful language and accurate and comprehensive file notes of oral conversations will assist the Court in reconstructing the events and determining what was said by whom. In obiter comment, Justice Campbell observed that what was said by the banker did not amount to an offer capable of acceptance to bind the bank and, therefore no agreement was reached. Had the banker been found to have used other words, there is every chance that an agreement, binding on the bank, might have been formed. Although vindicated in the end (after lengthy and, no doubt, expensive litigation),
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Trish Cassimatis & David McCrostie | March 2012
For more information, please contact: Trish Cassimatis Lawyer T: 02 8257 5783 M: 0427 905 799 trish.cassimatis@turkslegal.com.au
David McCrostie Partner T: 02 8257 5711 M: 0419 682 661 david.mccrostie@turkslegal.com.au
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