Unconscionable conduct still a grey area

When Sydney barrister Ross Goodridge took out a margin loan with Macquarie Bank in 2003 to invest in shares, he signed a declaration that the money he borrowed would be used for "business or investment" purposes.

Two Sydney doctors, Anthony Oliver and Mark Irving, signed similar forms when they borrowed from the Commonwealth Bank in 1998 and 2000 respectively to invest in managed funds promoted by Storm Financial.

So did semi-retired Townsville couple Barry and Deanna Doyle when they borrowed from Macquarie Bank in 2006, also as clients of Storm.

Those declarations have all assumed significance since the five borrowers sued their banks for compensation. Each sustained losses when their investments were sold at low prices during the global financial crisis.

There are various legal remedies available to aggrieved bank customers. One is to claim under the unconscionable conduct sections of the Australian Securities and Investments Commission Act, intended to protect purchasers of financial services.

The ASIC Act has one provision for individual consumers and another for small businesses.

Does an investor fall into either category?

Last year Justice Steven Rares said Goodridge fitted the definition of a consumer, namely a person who buys financial services "of a kind ordinarily acquired for personal, domestic or household use".

This was because Goodridge gave evidence that the purpose of his investing was to provide income in his retirement, which the judge said was "put[ting] money aside for a personal use".

In January three appeal judges overturned that decision, citing Goodridge's signed declaration that "the funds would be applied wholly or predominantly for business or investment purposes".

The declaration meant "his evidence that the funds were invested for the purpose of providing for his retirement was not relevant" to whether the consumer provision on unconscionable conduct in the ASIC Act had been contravened, the appeal judges said.

The issue will crop up again in cases brought by Oliver and Irving. They are claiming compensation from the Commonwealth Bank under either the consumer provision or the small business provision.

It is also relevant to the Doyles, who are the lead applicants in a class action launched in December by ASIC on behalf of clients of Storm Financial against Bank of Queensland and Macquarie Bank.

The defendant banks argue that Goodridge's loss in the full Federal Court gets them at least partly off the hook in the Oliver, Irving and Doyle cases.

As these cases progress through the courts, it will become obvious whether people who borrow to invest have fallen between the cracks as successive laws to protect consumers from unconscionable conduct have been introduced and updated.

There will also be broader messages from judges about the types of claims that can succeed against banks.

Other post-financial crisis cases testing the legal rights of investor borrowers include class actions by people who lost money borrowed from Bendigo and Adelaide Bank in agricultural schemes marketed by Great Southern.

At least three class actions in NSW and Victoria have been forced to retract or amend such cases. Last month Justice Clifford Einstein struck out claims in the NSW Supreme Court by 300 borrowers against Bendigo Bank over Great Southern losses.

There were fresh parliamentary developments last month when the federal government introduced amendments to the law on unconscionable conduct. These involved changes to the ASIC Act and to the Competition and Consumer Act (until January called the Trade Practices Act), which governs consumer protection outside the financial services sector.

The two statutes are designed to supplement the case law that has developed in relation to unconscionable conduct.

Two cases are frequently cited. One, which went to the High Court in 1983, involved Giovanni and Cesira Amadio, a couple in their 70s who guaranteed borrowings by their son Vincenzo. They won the case on the basis that the Commercial Bank of Australia took "unfair or unconscientious advantage" of the "special disadvantage" of the Amadios, because the bank knew they did not speak English, knew they relied solely on what their son told them and knew they did not understand what they were signing.

The second, decided by the NSW Court of Appeal in 2005, said a plaintiff needed to "distinguish what is unconscionable from what is merely unfair or unjust".

That case did not relate to a bank but to a dispute between a shopping centre and a tenant. However, it has been cited in bank cases since.

The Court of Appeal said "restraint in decision-making" was appropriate in unconscionable conduct claims under the Trade Practices Act. "Unconscionability is a concept which requires a high level of moral obloquy," it said.

For borrowers, the need to prove "special disadvantage" and "high moral obloquy" can be a high hurdle.

In his second reading speech when introducing the amendments in June, the parliamentary secretary to the treasurer, David Bradbury, said the government wanted to remove "limitations" on the way courts have been interpreting the statutory - as against unwritten law - prohibitions on unconscionable conduct.

Parliament intended to expand the "ancient common-law doctrines" when applied to business and consumer relationships, Bradbury said.

The amendments will have no retrospective effect and so will not help holders of margin loans who suffered losses during the global financial crisis.

But the long deliberations that led to them show how grey the law is in this area.

Before framing the bill introduced in June, the government sought advice from a panel comprising Professor Bryan Horrigan from Monash University, Ray Steinwall from the Australian Competition Tribunal, and David Lieberman, a former commissioner of the Australian Competition and Consumer Commission.

The panel's March 2010 report said: "There remains no judicially or academically settled view on all aspects of [unconscionable conduct statutes], including the precise content and range of its individual provisions, the relationship between them and their application across a range of industry sectors and circumstances."

It was generally agreed the statute went beyond the case law, the panel said. "However, how far it goes and what that means in practice are both matters of some contention."

The report noted the High Court was "yet to hear test cases that would provide the opportunity for it to settle the full meaning and application of the statutory concept".

There was good news for the finance industry last month when the High Court refused special leave for an appeal by Goodridge.

However, there was also potentially bad news for the banks in a brief comment by Justice Bill Gummow.

Most of the discussion in the High Court on June 10 covered other aspects of Goodridge's case, to do with whether the sale of most of Macquarie Bank's margin lending business to Leveraged Equities in 2009 was validly executed.

In refusing special leave, Justice Gummow said Goodridge's appeal did not have sufficient prospects of success.

In relation to Goodridge's unconscionable conduct claim, he added: "We express no view as to the correctness of the conclusions expressed by the full court of the Federal Court as to the construction and application of section 12CB of the Australian Securities and Investments Commission Act."

This outcome means the banks are ahead - for the moment.

At a pre-trial hearing in the Oliver and Irving cases in the Federal Court last week, Justice Nye Perram said: "Justice Gummow has the luxury of expressing no view but I would have to be brave not to follow the Full Court."

One interpretation of Justice Gummow's comment is that the High Court is looking for a test case to deal with unconscionable conduct but Goodridge was not the right vehicle.

ASIC has used section 12CB sparingly since it was given responsibility for consumer rights relating to financial services in 1998. The case it is bringing on behalf of the Doyles and other Storm clients could turn out to be the one that clearly defines the rights of investor borrowers.

Suits against banks commonly include a combination of claims. Apart from unconscionable conduct, typical allegations are breach of contract, negligence or misleading conduct. The issue of whether a bank has breached its own lending policy or the industry code of conduct is also often raised.

In NSW a contract shown to be "unjust" can be set aside under the Contracts Review Act, but this remedy is only available to consumers and excludes contracts "for the purpose of a trade, business or profession".

Once again the declarations of "business or investment" purposes that banks ask their margin loan customers to sign can work in a bank's favour in court.

It is rare for judges to find a fiduciary relationship between a bank and its customer. Fiduciary duties apply where one side agrees to put the other side's interests ahead of its own.

Usually banks are held to be entitled to pursue their own legitimate financial interests in their dealings with borrowers.

In striking out some of the Great Southern class action claims in June, Justice Einstein said: "There is no conflict beyond that of earning a commercial profit able to be made out."

During the Oliver and Irving hearing last week, Justice Perram said in some types of claims against banks, "you need to identify not just that the bank acted in a way that's not good for you - banks do that - you have to identify that the bank had no reason to do so".

The same sentiment was expressed by the full Federal Court when it dismissed Goodridge's appeal.

"Absent some conduct on the part of [the bank] which could be characterised as taking improper advantage of Mr Goodridge (which there was not), there is nothing unconscionable in a margin lender enforcing its legal rights to protect itself against a fall in the value of its security," it said.