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Chief Justice Kiefel and the Banks

High Court Justice Susan Kiefel High Court Justice Susan Kiefel

Susan Kiefel has recently been elevated as Chief Justice of the High Court of Australia. She was sworn in as Chief Justice on 30 January. Kiefel was appointed to the Queensland Supreme Court in 1993, and to the Federal Court of Australia in 1994. She has been a High Court Justice since September 2007. Writes Dr. Evan Jones

Much praise has been heaped on her appointment as the most senior officer in the country’s judiciary. The Sydney Morning Herald devoted an editorial and an op-ed piece to the occasion.

Her being historically the first female Chief Justice is undoubtedly a milestone. And her Wikipedia entry highlights that she is a self-made person par excellence. But there has to be more than this to make her elevation truly meritorious.

My interest is in banking litigation, and Ms Kiefel is not a stranger to banking litigation. A ready inference from available judgments is that Kiefel has not been a particularly good friend to bank customers before the courts, people who I have rationally come to call bank victims.

At the time when Kiefel was being considered for appointment to the High Court during the Howard Government years, the  media reported  She is considered a conservative ‘black letter’ lawyer in the mould of Justice Heydon”. That label might provide a clue to the following.

Nobile v NAB

My first sighting of Kiefel is when she appears in May 1987 as junior counsel for the NAB against the Plaintiffs Nobile & Martelli, guarantors for their married children’s business. The bank officer engages in misleading representation and fabricates diary notes whose misrepresentation is self-evident, and Jackson J strikes out the guarantees. It is a lay down misere for the guarantors. The NAB, having already acquired a ‘take no prisoners’ mentality, stupidly saw fit to appeal. Three judges affirmed the Trial hearing judgment in March 1988.

One would have thought that Kiefel would have her eyes opened in Nobile to the dirty practices that banks are capable of. Not so, it appears.

Ferneyhough v Westpac

Kiefel appears as senior counsel for Westpac in Ferneyhough during 1991. Ferneyhough was the fourth Queensland foreign currency loan victim of Westpac (after Chiarabaglio, 1989, Potts, 1990, and Thannhauser, 1991) to have a judgment go in their favour. There was also a judgment for Spice (1989) in New South Wales. There had never been anything like this balance tipped towards the bank customer in bank litigation. The background to this affair was the fact that foreign currency loans had been aggressively ‘sold’ (and misrepresented) by those successively in charge of the portfolio in Queensland, Neville Imhoff and Albert Look. Of the total number of foreign currency loan borrowers nationally, a disproportionate number emanated from Westpac customers in Queensland.

Kiefel would be well aware of the details behind these victories, not least Ferneyhough.

Presiding over Ferneyhough, Lee J notes:

“With the removal of foreign exchange restrictions a natural barrier to the use of the facility was removed and perhaps the use of such loans expanded ahead of Westpac's capacity to put in place sufficiently skilled personnel and settled instructions as to prudent practices to be followed by Westpac to advance its interests and to safeguard the interests of unsophisticated customers drawn into such transactions in response to the competition for an expanded market being undertaken by Westpac.

Abandonment of previous rules restricting such loans to large corporate borrowers with knowledge of the facility and access to natural hedges and relaxation of a requirement that all such borrowings be hedged raised the level of the obligation on Westpac to provide an explanation of the facility and of the need for and method of management of the risk adequate in all the circumstances for the customer concerned.”

Kiefel would have to have had a watching brief on all ongoing foreign currency loan litigation, especially in Queensland. Soon after Ferneyhough comes Westpac’s successful appeal against Potts victory in the lower court under MacKenzie J (10.12.90), delivered by de Jersey & Dowsett JJ (16.4.92). This latter would have to be one of the most scandalous judgments in Australian judicial history. It’s my understanding that there were no more victories for Westpac foreign currency loan victims in any court in Australia.

The foreign currency loan saga was being displayed in the mainstream media on an almost daily basis. Moreover, the coverage reached fever pitch when the so-called ‘Westpac Letters’ were exposed in early 1991. The label refers to two letters written by Westpac’s lawyers Allen Allen & Hemsley to Westpac senior executive Warwick Kent on 26 November and 11 December 1987. They highlight that Westpac’s subsidiary Partnership Pacific had promised its foreign currency loan customers professional and cautionary management of such loans whereas PPL staff had fraudulently deceived and cheated their clients through a mixture of total incompetence and dishonesty.

Thus Kiefel would be well aware of the behaviour that banks can get up to against customers. This is all happening precisely as a backdrop when she is acting for Westpac against Ferneyhough. For Kiefel to be ignoring the history of foreign currency loan litigation and the guilty banks’ consistent attempt to deny responsibility for their intemperate venturing into this minefield would involve significant professional negligence on her part.

But Kiefel would also be aware that such miscreant banks had friends in Parliament (vide the whitewash Martin banking inquiry in 1991) and friends at court.

Kiefel herself was appointed to the Queensland Supreme Court in 1993, and then to the Federal Court of Australia in October 1994. Thus she comes to preside immediately over her own foreign currency loan case, in the form of Donkin v Australian Guarantee Corporation (2 November and 9 December 1994).

Donkin v AGC

AGC started life as a hire purchase company but was bought up by the Bank of New South Wales (forerunner of Westpac) during the post-war years (as were its competitors by other banks), becoming wholly owned by Westpac in 1988. By the late 1980s, under the impulsion of comprehensive financial deregulation, AGC’s lending practices (as with its parent company) had lost all prudence, moving beyond its staff’s competence.

Kiefel comes to the Donkin litigation late. Beaumont J, August 1991, claims that the loan officer had a duty to advise on this complex product but concluded that no damages were due to the borrower. Donkin’s appeal, August 1994, was dismissed. A judgment on 24 December 1991 (note the date, the judgment curiously unavailable), gives possession of Donkin’s properties (hotels, nightclub) to the bank. Donkin, facing bankruptcy, gains potential respite, in August 1994, with a judgment that Donkin’s counter-claim might have merit.

Enter Kiefel, 12 November 1994. Readers of judgments seeking readily understandable reasoning will not find them in a Kiefel court. In general, Kiefel denies Donkin’s claims of sale of properties under value (deemed inconceivable?) and of receiver liability for mismanagement. Kiefel also denies Donkin’s belated claim that the bank-employed accountant (taken as ‘expert’) had strategically miscalculated the likely return to Donkin if the foreign currency loan had been appropriately managed. This denial leads to the supposed non-basis for Donkin’s damages claim.

Donkin then appeals for Kiefel to disqualify herself from presiding over his case, on the grounds that Kiefel has acted for Westpac in Ferneyhough. Donkin is not helped by the exaggerations of the Foreign Currency Borrowers’ Association in this regard. In her judgment of 9 December, Kiefel takes umbrage. Kiefel even foreshadows “the possibility of an order for costs against Mr Donkin’s legal representatives”.

Kiefel notes:

            “It is said that there is an apprehension that I might not bring an impartial mind to bear and which is said to arise from my having acted as senior counsel for Westpac Banking Corporation, a company having a connection with the respondent …”

A ‘company having a connection’? Hello? AGC had been majority owned by Westpac for decades and wholly owned since 1988. AGC would have been offering foreign currency loans precisely because under license from its parent. Beaumont J rightly claims that AGC personnel should have had automatic access to Westpac personnel expertise regarding foreign currency loans (although he wrongly assumed that parent company personnel themselves possessed such ‘expertise’).

In the hearing of 17 November 1994 (from which the 9 December judgment derives), the transcript records:

            “There is another matter, and it is a matter which I invariably bring to the attention of people in Westpac matters, and that is Westpac is in fact my banker”.

That acknowledgment has not been referenced in the judgment itself. Also missing from the hearing is the fact that Kiefel’s longtime close friend, Helen Lynch, enjoyed a longtime career at Westpac, serving as a Director until 2006 and subsequently as Chair of several Westpac boards. The friendship is acknowledged in Kiefel’s swearing in ceremony to the High Court in 2007. (I know of one person who received a foreign currency loan by courtesy of Lynch, so she also would be familiar with the intricacies of this troubled portfolio.)

Kiefel notes in the 9 December judgment:

            “It was then submitted to me … that any such hypothetical perception was one which might amount in law to a reasonable apprehension that I might not be able to bring an impartial mind to bear …”

Quite. But Kiefel has already pulled up the drawbridge:

            “Insofar as there is said to be a need for disqualification where a judge hearing the matter has formerly acted as counsel for one party, or a corporation associated with that party, it clearly has no basis, for the reasons given by the New South Wales Court of Appeal in S & M Motor Repairs Pty Ltd v Caltex Oil (1988) at 364-5.”

As a non-legal outsider (which has its advantages in such matters), it does seem unsatisfactory that a judge should call on precedent (another judge’s excuse) to hide from what, to the layperson, appears to be a straightforward matter of morality. The potential for conflict of interest is transparent.

It so happens that the case that Kiefel cites does not support her stance. Kiefel refers specifically to Bryson J’s reasons for not standing down. But the long discourse by Kirby J, dissenting against his two peers, in S & M Motor Repairs v Caltex refers to the absolute necessity that no hint of possible bias should he attributable to court proceedings.

Kirby J’s disquisition meanders initially through the Bible, Plato, Socrates and Thomas Aquinas, so one is forced to ask — who is writing this stuff? It turns out to be one Michael Kirby, then President of the NSW Appeal Court, later on the High Court, and eventually something of a judicial celebrity.

Kirby highlights the evolving standard — “whether a reasonable man with no inside knowledge might well think it might be biased”. Kirby here is referring, not to attitudes within the legal fraternity, but “ordinary reasonable citizens on the Emu Plains omnibus”. Kirby here confects the Aussie vernacular equivalent of ‘the man on the Clapham omnibus’. Quite.

Kirby orders that the judgment of the said judge be set aside. He concludes that “it is inherent in my finding that the appellants did not have a trial according to law.”

Kiefel remained on the bench in Donkin v AGC, but she should have found a more amenable precedent to stay put.

One also notes that Donkin, still trying to overturn his bankruptcy, appears before Chesterman J in 2003. It so happens that Chesterman, in a previous life, had been briefed by AGC.

Chesterman had also appeared for Westpac in Thannhauser, Potts, Porter/Drambo (1996) and Cockerill — a veritable member of the family! What chance detachment? The throws of the dice, it appears, have gone heavily against Donkin.

A considerable literature has been generated by the legal profession itself regarding issues of ‘disclosure’ of interests by judges and the elicitation of self-justifications for judges not disqualifying themselves. Self-disqualification remains rare and judicial conflict of interest in bank litigation is rampant (they all have banking relationships, details undisclosed). But examination of that literature must be left for another occasion.

Kiefel proceeds to infer that the logical implication of Donkin’s call for her disqualification is that there is:

            “… an inference open, where the bases put forward are so clearly untenable, is that the applicant and the [Foreign Currency Borrowers] Association itself seeks some measure of control over which Judge might determine foreign currency cases.”

That was not the intention of Donkin’s legal representative, nor of the FCBA. It is a provocative gambit by any judge who should be playing with a straight bat. But, once raised, the issue of judge selection is not entirely irrelevant. In this same hearing (17 November), the transcript records Kiefel as saying:

            “I think judge shopping is becoming a real problem.”

What? ‘Judge shopping’? Quite. Far from the bank victims themselves seeking to engage in ‘judge shopping’, a matter of which they have zero influence, the odd close court-watcher has inferred that this beast does rear its ugly head on occasion. The bank litigant, of course, not the bank victim, comes out with the judgment.

Exhibit A for those who claim that judge-shopping is a fact of life is the appeal of Westpac against Potts, decided 16 April 1992 before de Jersey and his Brisbane Grammar contemporary Dowsett (with Macrossan CJ taking a back seat). The judgment for the bank, reversing a series of foreign currency loan judgments against Westpac for the victims, is curiously not available publicly. That is a good thing for the reputation of the courts, as it is a legal embarrassment.

Lisciandro v Official Trustee in Bankruptcy

We move on to Lisciandro v Official Trustee in Bankruptcy, Amadio, Kiefel presiding.

The semi-literate Lisciandro was asked by his ‘friend’, the failed businessman Mr Radford to serve as a ‘director’ in his new company which began to act as a service agent distributing parts supplied by a company called Alminco. Alminco demanded of Radford’s company a guarantee regarding short term credit extended in trading, which Lisciandro signed after misrepresentation of its significance by Radford.

Here is the hapless Lisciandro made bankrupt for being a trusting soul. Kiefel determined that as Alminco personnel knew nothing of Lisciandro’s (non-existent) role or circumstances then it could not be held responsible for Liscandro’s fate.

Kiefel determined that Amadio did not apply here. Amadio v Commercial Bank of Australia, determined by the High Court in 1983, was decided in favour of the parent guarantors. The bank knew the son’s business to be failing. The parents’ English, especially written, was far from ideal. The parental guarantee was declared void. Amadio has served as a significant precedent for the court system’s voiding of guarantees in multiple cases of uncomprehending guarantors. Case dismissed.

Kiefel’s determination was probably ‘rational’ in terms of the law, but justice was not served to Lisciandro. What Alminco gained from Lisciandro’s bankruptcy is not clear. Why Lisciandro hadn’t sued Radford is not known. Lisciandro’s ongoing bankruptcy served no purpose, but the law, as interpreted, dictates that it should be so.

The Lisciandro judgment serves as precedent for later determinations in comparable cases where mischievous or corrupt intermediaries sever a direct link between the victim and the beneficiary (typically a bank lender) of the victim’s demise.

Kranz v National Australia Bank

Lisciandro is not a bank case, but the Kiefel determination was leveraged as precedent in Kranz v National Australia Bank (2003). The Kranz judgment available on the web (Austlii) is that of an appeal court, confirming a (non-available) Trial judgment.

Kranz is another classic guarantor victim, brought in by a dodgy brother-in-law who was speculating in mining stocks. The hazardous nature of the loan was transparent to NAB personnel; they knew that the would-be borrower was desperate. They imposed strict terms on the loan and they asked for further security. Bank personnel admitted in the Trial hearing that they had a duty to advise the guarantors of the implications, but the judges at both Trial and Appeal opined that the bank had no such duty (as below). One Appeal judge also opined that this case would have been won for the plaintiff (Kranz) in the UK, but not in Australia.

The Appeal judgment has the hallmarks of a judgment in which the "reasoning" (which is lacking) and the precedents have been developed to support a pre-determined judgment. In this affair, Kiefel in Lisciandro came in handy.

Kranz’ barrister, in supplication to the High Court, highlights not merely the lack of justice but the judicial "reasoning" that ensures a denial of Equitable principles.

… the inquiry is split [and] the applicant is denied the cumulative force of a consideration of all of the circumstances in determining what is a unitary inquiry after all. … all of the facts are relevant consonant with the approach of equity in dealing with the application of very broad and flexible rules rather than the process of law of reasoning by analogy and by categories. …
[There was] a special disadvantage constituted by the relationship of trust. … The Bank knew that my client Mr Kranz was family, that he was a brother-in-law. They knew it was a non-commercial relationship. …

The odd thing about this case is that it is a case where the Bank officers themselves took the view that the nature of the transaction, its unusual and speculative nature, and in particular the requirement of a holding period, made it necessary that the applicant be provided with a proper explanation. In other words, they took the view that they would be acting unconscionably if they had not provided it, and they said, of course, that they did, but the trial judge found against them and found that they had not. So it is odd to say they are wrong about this.

Obviously we accept that it is an objective test and it is not for the Bank officers to state the law but in a situation where the Bank knew better itself what it really knew, for them to say they thought it was unconscionable not to have provided Mr Kranz, the applicant, with an explanation, odd indeed that the court would say, ‘No, in fact, you didn’t need to at all. You’re being unduly scrupulous’.

The High Court, under the hard man Gleeson CJ, dismissed the appeal. As the Dickens’ character opines in Oliver Twist:

‘the law is a ass!’

One can’t hold Kiefel responsible for the outcome in Kranz but the trend is against the rights of the hapless guarantor. Kiefel has conscientiously contributed to that trend. The hard won success of Amadio and its successors is in danger of being consigned to the margins.

Kiefel has waxed philosophical about the grounds on which the judiciary has seen fit to void guarantees for bank loans, of which more below.

Cockerill v Westpac

Another judgment by Kiefel against another foreign currency loan borrower is relevant. The case is Westpac v Cockerill, FCA Queensland, February 1998. Kiefel led, with the other two judges assenting.

Cockerill and the Dingles took out a foreign currency loan in Swiss francs in 1984. The plummeting of the Australian dollar against the franc in 1985 led readily to disaster. Atypically, the borrowers established a compromise settlement with Westpac in 1988, whereby the loan was paid out at a reduced rate, but they still ended up in bankruptcy. Later they sued Westpac claiming that the terms of the settlement had been made under duress (they would later be foreclosed and sold up). A Trial court judgment in December 1996 gave them leave to pursue Westpac.

Westpac (on a roll since the 1992 Potts Judgment) in turn appealed. The reasoning by Kiefel is of consummate sophistry, finding flawed pleading by the applicants. Legalistic logic-chopping regarding various legal categories of ‘duress’ replace the substance of the settlement and its background. Kiefel claims, inter alia, that:

“…neither the threats of appointment and sale nor the demand for release were themselves wrongful nor could they have operated as coercive. The critical matter was the applicants' lack of choice.”

Make sense of that. Legal eagles will no doubt have an idea, but linguistically disenfranchised bank victims speak the King’s English (at best). The borrowers signed the settlement agreements under duress, regardless of which category of law the latter slippery concept fell. It is common practice by banks to impose the most draconian of conditions upon a bank customer already reduced to helplessness by the bank’s behaviour.

Kiefel finds the Trial judge in error and sets his determination aside, deciding for the bank. In such convoluted processes of reasoning, the only thing that seems to make sense is the outcome.

At one stage, Kiefel claims:

“It is not, however, that inequality of bargaining position, or the reason for its creation, which is the essence of the action — it is the pressure brought to bear and its wrongfulness …”

The applicants were not pleading inequality of bargaining position, though that of course was present (as with all lender-borrower contracts). So this sentence is gratuitous; indeed it doesn’t fit with what comes before and after.

Interesting then that the phrase is appropriated in the ‘reasoning’ of White J for the bank in NAB v Freeman, QCA, November 2001. Lyn Freeman, Queensland farmer, owned a property suffering from drought but he was December 2003 by the NAB and his property sold under value.

The Kiefel claim that inequality of bargaining power was of no import in Cockerill is here leveraged in Freeman as substantive precedent, even though the phrase was gratuitous in Cockerill.

Relevant also that Paul de Jersey, then Queensland Supreme Court Chief Justice, reproduces the Kiefel claim from Cockerill in a June 2002 talk ‘Update on Case Law Developments’ (Supreme Court of Queensland Library). As elsewhere, de Jersey is concerned to delimit relief from claims under ‘economic duress’ and absence of choice.

Kiefel, again, is not responsible for the subsequent use of her obiter dicta. But the incident is relevant for the ‘weight’ that judges bring to their judgments and to the law in general. The accretion of precedent is presumed to give a measure of objectivity to the law. Here it is clear that it does no such thing. It’s more ‘pick a phrase, any phrase’ to justify one’s intent.

The definitive and brutal judicial statement of why inequality of bargaining power in commercial transactions is not merely condoned by the law but its use and abuse ordained comes from the pen of Gleeson CJ of the High Court in December 2003, April 2003. That judgment, alas, was still to come for Kiefel in 1998 and White in 2001 (although Kiefel was to readily pick it up in 2003, below). Meanwhile, any port in a storm.

ACCC v Oceana Commercial

The 1990s saw the development and entrenchment of a widespread scam perpetrated on Queensland’s Gold Coast and Brisbane whereby marketing fronts pushed and sold investment units at inflated prices to ‘mum and dad investor’ non-residents. Most of the banks, first and second tier, were involved as suppliers of mortgage credit.

In 2001, the Brisbane Courier-Mail (then in investigative mode before it became a total rag) started an exposé of the scam, especially the role of Westpac as funder. One banking insider told the Courier Mail (15 March 2003) that the profits “were too great to ignore”. The insider continues:

"The banks were well aware of the practice and greatly rewarded the managers who wrote lots of new loans … In Westpac, I know of one branch lending manager who … was feted as a great business writer and was paid huge bonuses for his work."

In November 2001, The ACCC mounted a case for a Cairns-based couple called Gleeson, joining the CBA as financier in the action.

Complaints to various authorities and the ACCC action led to Westpac secretly attempting to pay off its borrowers, albeit with trivial amounts. One such borrower, 63-year old widow Kay Elder blew the whistle on her ‘confidential’ payoff. She paid $180,000 for the unit in 1998 with a loan from Westpac but was forced to sell for $110,000 in 2000 upon her retirement.

In December 2003,  Kiefel decided against the marketeers, but determined that the CBA had no case to answer. The judgment comprises over 50,000 words but the non-suit for the bank is contained in pars. 312-342.     

The Gleesons paid $165,000 for the investment unit. The CBA had a valuation from a valuer that put the market value at $100,000.

Granted the ACCC ran its case badly. But, for Kiefel, it is more logic chopping. The bank effectively is a mere money lender, having nothing to do with the scam, with no responsibility for disclosure. Kiefel even asks, desperately, ‘what if the bank’s valuation had been wrong?’ Kiefel declaims:

“… I would have thought it necessary for the Commission to have proved that [the valuer’s opinion] were in fact true.”

Not at all. A gap of $65,000? The bank heard from the valuer the full background of the scam that was responsible for this significant valuation gap.

As the Courier-Mail put it (15 March 2003):

“When the property marketeering machine was at full throttle, everyone with an integral part in the clever conspiracy — the banks, developers, solicitors, selling agents and financial advisers — did spectacularly well.”

Read ‘an integral part’. Precisely. Note the insider quotation regarding Westpac above. There could be no marketing scam whatsoever without a willing lender. Just as there could be no financial investment ‘advisory’ scams, à la Storm Financial and Commonwealth Financial Planning, without integrally involved lenders.

The Courier-Mail (26 January 2002):

“But of all the grubby parties, the bank is the most important. Without the funds provided by the banks, there can be no deals. The banks have been lying down with the dogs in this dirty business for years. But somehow, the banks avoided catching the fleas.”

Quite. The Courier-Mail again (15 March 2003):

“When the legal argument is stripped away, one fundamental issue for Kiefel to determine turns on whether banks should disclose everything relevant to a customer.

When Australians go to a bank for a loan or a product, they are compelled to disclose a wealth of information. Salary, assets and their value, credit worthiness and dependants are all relevant.

Common sense suggests it must follow that banks also should disclose relevant facts. It is difficult to imagine anything more relevant to a property purchase than the actual market value of the property. There is little point to consumer protection if the banks can, by their silence, profiteer while leading customers into a loan for a property the bank knows is a rip-off.”

There is common sense and there is the law. Kiefel, as with the bulk of her profession, does not seek to understand the character of the lender-borrower relationship and its embodiment in contract. Of which more below. This in spite of the fact that litigation involving bank and related financial providers is the judiciary’s bread and butter.

The aforementioned Kay Elder was forced to take on the significant residual mortgage debt against her own home, after sale of the unit bought under misrepresentation. Some retirement package. How convenient for Westpac, which continued to profit from its conscious involvement in the scam after accounting for the trivial ‘compensation’ offered to victims.

In defense of her exoneration of the bank, Kiefel cites Hill J in Golby v CBA (1996), in turn drawing on an Anthony Mason 1984 determination in the High Court:

“Absent therefore some special feature, such as the giving of advice …, there is no reason to erect a fiduciary relationship between banker and customer when that relationship is essentially one founded in contract.”

This line embodies a judicial axiom. But it conflates a practice and a norm. And the conflation is deeply submerged in the folklore of the law of contract — as explicitly flagged here. Yet the common law itself embodies a prejudice as to the nature of commercial relationships. Which is why the separate judicial culture of Equity was constructed and evolved. But Equity has been denigrated and quarantined as the irritating moralising relative.

As I noted in a ACCC v Berbatis to the Bank Reform Now Rally in Canberra, 21 November 2016:    

“[The bank-borrower relationship] is probably the most asymmetric of all commercial relationships, because the bank has absolute power of life and death once you sign the contract, given the scale of the debt. The common law says that the bank and the small business borrower are equal under the law, which is absurd. …

[Conventional loan] facilities effectively are not fit for purpose. In effect not merely do we know about the low doc loans, the forged signatures, etc, but every loan made to a small business, or family farmer in effect has a predatory character because of the overwhelming imbalance of power written into that contract.”

Kiefel also cites the High Court’s Gleeson CJ in ACCC v Berbatis (2003), just recently available. Gleeson declaims that asymmetry of power is relevant insofar as the more powerful party has not merely a right but an obligation to pursue its self-interest as far as that power allows. The judgment is a godsend for those who seek to legitimise oppression and exploitation in commerce.

The agenda is encapsulated in Weerasooria’s Banking Law and the Financial System in Australia, pre-eminent banking law textbook (6th edn., 2006, p.488):

“The following principles govern the situation where a customer borrows from a bank:

* A loan from a bank to a customer in a commercial context is a transaction in which the bank is entitled to seek and obtain the best terms it can.

* A bank is entitled to have regard solely to its own commercial interest. …”

Wickrema Weerasooria was a sometime Monash University academic, whose then research centre was thoughtfully funded by the NAB. He is the author of a ‘definitive’ article, ‘Banks owe no fiduciary or “special duty” to customers: a reaffirmation’, in a 2000 issue of the Australian Banking and Finance Law Bulletin.

In short, the combination of the substantive character of the bank-borrower relation and judicial convention produces from the judiciary a directive to the banking sector that predation is to be not merely tolerated but legitimised. The judiciary gives the banks a license for unconscionability and fraud.

Kiefel’s exoneration of the financier in ACCC v Oceana Commercial has also been used as precedent in legacy (2014). Great Southern, with Timbercorp, was a ‘managed investment scheme’ scam, with the usual case of thousands of victims. A just and fitting outcome!

Kiefel reflects on the bigger picture

Kiefel has occasionally waxed philosophical, notably about guarantees. Two articles are prominent: ‘Avoidance of Guarantees on Equitable Grounds’ (reproduced in Queensland Law Society Journal, August 1989); and ‘Guarantees by Family Members and Spouses: Garcia and a German Perspective’ (Australian Law Journal, October 2000).

The 2000 article is densely academic, musing on the comparative treatment of family member guarantees in the Australian and German courts with different legal traditions. Kiefel appears to find questionable the High Court of Australia’s determination for the wife guarantor in legacy v NAB (1998). She surmises that, given key elements of the case, it would not have succeeded in the German court system.

However, the 1989 talk is prescient as to Kiefel’s tendencies. The implicit implication is that judicial precedent regarding the occasional voiding of guarantees has become too complex, expanding the circumstances for which guarantees can be voided. Kiefel appears to find troubling the trend in determinations overturning bank lender rights to call up their guarantees. The hallowed ‘freedom of contract’ is being nibbled away by the seeping intrusion of Equitable principles that should stay neatly cloistered.

Kiefel dissents from the majority in the High Court determination for the parental guarantor in Commercial Bank of Australia v legacy (1983) — an iconic turning point regarding unconscionability in the domain of guarantees.

There are other clanging elements in this talk. Kiefel opens with a hypothetical guarantor situation which is presumed as representative, but is entirely unrepresentative. The typical guarantor is not a regular guarantee maker, they do not possess the requisite capacity and information, and the bank is not typically off on the side of the establishment of a guarantee.

Kiefel also misrepresents Nobile. She ignores, though as junior counsel she was there on the spot, that the NAB lost Nobile because the bank officer incompetently reconstructed diary records to hide the bank’s duplicitous role in obtaining the parental guarantees.

In both Amadio and Garcia the bank was not directly responsible for misleading the guarantor. In Amadio it was the son (for his failing business); in Garcia it was the oppressive husband (for his failing business). Kiefel implies then that the bank is generally an innocent bystander — a comparable situation to Kiefel’s determination in ACCC v Oceana Commercial.

Cui bono? In Amadio, the bank knew that the son’s business was failing — it was bouncing the business’ cheques. In Garcia, the bank declined to ensure that the wife understood the nature of the transaction, and she had not the faintest idea.

The High Court in Garcia joined the bank’s neglect to the familial elements, representative of family guarantees in general, in which the involvement is strictly non-commercial. The guarantor has no beneficial interest in the use of the loan that the guarantee secures, and the action is dictated by non-rational emotional considerations. These representative familial elements enhance the bank’s responsibility in the transaction.

The judiciary and bank practices and culture

It appears that no-one on the bench has cared to delve into the oppressive character of the thrust for additional security through demands for guarantees from related or third parties. Judges perennially care not a jot about the basics behind the fine detail over which they sharpen their pencils. Ditto the regulatory authorities that provide over the banking sector. Predation remains the name of the game, and the bench plays parlor games with the entrails of the victims.

Fundamentally, why does a bank seek guarantees from non-business involved family members in the first place? Is the loan from a financial institution a viable proposition on its own terms or is it not?

The bank seeks guarantees in order to transfer the risk of loss on the financial relationship to the borrower family and related parties. The guarantee is another means by which the bank avoids having to commit resources to enhance the prospect that the businesses on which it lends funds are viable. The guarantee is another means by which the bank ceases to play the banker and plays the money-lender instead (and without awareness by the borrower of the changed hats). The guarantee contributes to an environment in which the bank doesn’t care whether the businesses on which it lends funds are viable or not.

But, ah, says the judiciary. The customer borrowed the money — that’s all that is relevant.

The intrinsic non-rational non-commercial character of family member guarantees gives to the transaction an inherently predatory character. In particular, the mortgage that Mrs Garcia secured by the guarantee, details of which she was oblivious, had an ‘all moneys’ clause. Nothing spells predation more than an ‘all moneys’ clause.

Kiefel makes a great deal about banks getting off the culpability hook by instutionalising the instructions that ‘independent advice’ must be sought by the potential guarantor. Of course, independent advice is important, but ultimately not trustworthy. Most professionals to which small business/farmer borrowers would turn to are themselves ignorant of bank practices. The only honest independent advice should be that a guarantee per se would be a danger to be avoided.

The fundamental issue remains the bank demand for family member guarantees, a claim rooted in non-commercial considerations and dramatic asymmetry of power. It is the demand for the guarantee itself, not the absence of independent advice, that is the source of later problems that end up in litigation.

In the context of courts occasionally providing relief from ‘hard bargains’ (that is, transparently oppressive origins and conditions of the guarantee), Kiefel (1989) expresses concern:

“Further, if some burden of ‘objective consideration’ is to be placed on banks and creditors, there must be some limit imposed on it. The allocation of risk in commercial contracts would otherwise become too one-sided, a situation the courts are attempting to remedy.”

This statement exposes Kiefel’s limited understanding of bank lending practices and her bias. In small business/farmer and retail mortgage lending, the allocation of risk is already one-sided — to the detriment of the borrower. The residential home of the unincorporated business borrower is the first to be taken as security (with always calamitous consequences following foreclosure). Hence also the demand for family member guarantees.

Imagine the uproar if banks demanded of corporate senior executives security over their homes and guarantees from family members! Yet loans to the corporate sector, generally without security, are the greatest source of risk of bad debts. Two weights, two measures.

Then Queensland Chief Justice de Jersey, in his 2002 talk, shares Kiefel’s fears:

“It is important to the maintenance of a sound economy that lenders not be daunted or frustrated by courts which are overly protective of borrowers. The generally free circulation of capital is critical to economic vibrancy. Policy considerations strongly contribute to where the courts draw the line for intervention in these cases: protect the vulnerable, certainly, but be careful in the definition of vulnerability.”

What would de Jersey know about the underpinnings of ‘economic vibrancy’? Not a jot.

And again:

“There is real danger with concepts by nature diffuse — as with unconscionability, that they also become unpredictable; a degree of uncertainty may render commercial life exciting: too much, leave it intolerable. The law should be sufficiently predictable to allow the confident resolution of problems, if not in the client’s rooms, then at least in the solicitor’s office. It should ideally not be necessary to resort to the court. The challenge for the courts is to avoid plunging these sorts of concepts into an abyss of subjective fairness where nothing is predictable.”

In passing, the prospect of a ‘confident resolution of problems’ before litigation is resorted to is risible. Does de Jersey include in this domain the oppressive hoax that is bank-controlled mediation? de Jersey attempts to divert attention from the substantive issue of unconscionability by creating a fantasy land that nobody involved in the arena, except the perennial victors, believes in.

Two other issues raised reinforce one’s inference that the judiciary do not care to understand bank practices. First, the perennial use of the term ‘bargain’ in judicial and legal commentary is entirely inappropriate with respect to the bank-customer relationship. The concept of bargain and bargaining may be appropriate for the exchange of a hundredweight of potatoes or a thousand tonnes of coal, but not so in the sphere of banking.

There is no ‘bargaining’ preceding a credit contract — the terms are dictated by the lender. The credit contract is an entirely different ‘kettle of fish’, not least because it is ongoing (entrenching an asymmetric relationship of dominance and dependence) rather than one-off. The language only servers to further perpetuate obfuscation of the credit contract by and within the judiciary and legal profession.

Second, there is the matter of the bank-customer relationship and that with other parties, especially other customers. In relation to Amadio, Kiefel (1989) claims:

“The bank is not, because of its duty to its customer, able to disclose all of the information relating to the account.”

What? One can only infer that Kiefel intends that the bank, because of its ‘intimate’ relationship with the son as borrower, is constrained not to inform the son’s parents that the son’s business is dead in the water.

Yet we have seen that Kiefel determined in Oceana Commercial that the bank had no duty to inform the prospective customers, the Gleesons, in financing a spiv-marketed unit that the bank’s own valuation disclosed a massive disparity between market value and purchase price. No duty to the customer there.

Similarly, in legacy v CBA (2004), the bank was held to have no duty to inform the Timms’, would-be purchasers of a business, that the business, already on the bank’s books, was on the ropes. Surprise, surprise — in Timms, Barrett J cites Golby (as above) and … Kiefel in Oceana Commercial as precedents! What a lark.

The imperial unit of duplicity regarding a bank’s ‘duty to its customer’ is in Kabwand v NAB (G65 of 1986, judgment FCA Queensland, 29 September 1988; not available publicly). The Toowoomba bank manager had on his books a failing strawberry farm, owned by a friend, and on which debt had been allowed to accumulate, implicating the manager himself. The manager fraudulently misrepresented the productivity and value of the farm to unsuspecting purchasers, Ned and Joy Somerset, to get the bad debt off the bank’s books and to save his friend — ultimately (after ready default) destroying the lives of the Somersets as a previously successful farming couple. Part of the argument in court, in which the bank defended the indefensible actions of its personnel, was that the bank manager had a duty to its customer (the original owner) of non-disclosure of salient facts to the seduced purchasers.

The bank manager had laboriously reconstructed Customer Interview Records for the relevant period. Reluctant discovery by the bank under court pressure of the CIR copies (‘duplicate running sheets’) highlight that in the top copy of the CIR for 31 July 1984, the manager had deleted the words: “Should this contract come to fruition it will certainly solve Mr [X]’s problems and ours along with it.” Here the duty to this particular customer clearly went beyond the call of duty! As for the Somersets …

The bank’s duty, it appears, is only to itself.

Kiefel, the judiciary and bank litigation

In sum, so much for black letter law! The statements of Kiefel and de Jersey are witness to a conscious strategic commitment of members of the judiciary to the maintenance of the banking sector’s leverage over its customers. The innate bias of contract law provides the basis for this mentality, but the self-consciousness of the players here displayed highlights that the bias of the courts against bank victims is not simply a matter of successful professional acculturation.

de Jersey himself has applied his vision in court with a heavy hand, leaving a legacy of influential judgments favouring the bank over the borrower — a significant contribution that could not have failed to influence the trend of bank litigation across all jurisdictions in Queensland .

The myth of precedent notwithstanding, a judge has absolute discretion to determine the outcome of a case, regardless of the evidence before him or her. Precedents can be selected judiciously to bolster the desired outcome. A judge can readily determine that the earth is flat.

The only inhibition to judicial discretion is in the possible scrutiny of a trio of peers in the Appeal Court (and, rarely, the judicial nobility on the High Court, utterly unpredictable). Yet if the trial judge’s peers have been socialised into the same culture, it is not improbable that they too will agree that the earth is flat.

Repeat after me: a bank has no fiduciary duty to its customer. This is Moses and the Prophets!

The textbooks state it bluntly. Much of the legal profession is on the bank drip. Friendly relations between legal personnel reinforce the interaction between bar and bench, further cemented when individuals move from standing at the first to sitting on the second. There are no whistleblowers on the parlous state of this cosiness and the pro-bank centre of gravity of bank litigation judgments that defy common sense.

There has been a recent groundswell of support for a Royal Commission into the banking sector, including from within Parliament itself. The push is being fiercely resisted and at present is going nowhere.

I have always thought that any Royal Commission into banking will not delve into the whole character of the problem if it does not confront the related complicity of the legal profession and the judiciary in legitimising bank malpractice.

All those resisting a Royal Commission know what’s at stake — that the door, once opened, cannot be readily slammed shut.

The judiciary is integrally enmeshed in the problem, and it goes all the way to the top.

This article first appeared in Independent Australia, 8-10 February 2017.
Last modified onThursday, 02 March 2017 10:34

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