Dr Evan Jones concludes his investigation into newly-appointed High Court Justice Susan Kiefel's past role in failing to deliver justice to victims of bank malpractice.
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 Garcia 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 Amadio (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.
Dr Evan Jones talks about bank bastardry on ABC Lateline (25/4/16)
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 preside over the banking sector. Predation remains the name of the game and the bench plays parlour 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 also 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 institutonalising 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 Paul 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.
“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? Chief Justice 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 Timms 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.
Paul 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.
Dr Evan Jones is a retired political economist. He has been writing on bank malpractice against small business and the family farmer for over a decade.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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