Banks with unwelcome customers will take heart from the recent decision of the Court of Appeal on the debanking of Gloriavale and its related entities. 

The decision encouraged a literal interpretation of bank terms and conditions which allowed a bank to exit a customer “for any reason”, and dismissed arguments that inconsistent terms or obligations could be implied into the bank-customer relationship. In short, this decision, although only decided in the context of an interim injunction, will make it easier for banks to exit customers.

Background 

Gloriavale is a large, relatively isolated, fundamentalist Christian community located on the West Coast of the South Island. It had a long (at least 40 year) banking relationship with Bank of New Zealand (BNZ), which involved 16 entities of various types and some 83 separate accounts. The bank balances were healthy and (due to religious reasons) did not attract interest. There had been no defaults or contraventions of known bank terms. They were, on their face, good and profitable customers. 

However, Employment Court proceedings in 2022 exposed that members of the Gloriavale community, including senior members, had engaged in, among other things, labour exploitation of children aged 6 to 14 for the community’s commercial benefit. In light of the Employment Court’s findings, BNZ determined that Gloriavale had breached BNZ’s internal (and unpublished) human rights policy and terminated all its banking services to them. 

Under BNZ’s general terms and conditions, BNZ could end its relationship with any customer “for any reason” on 14 days’ notice. BNZ gave a longer period of notice, which was also extended. However, Gloriavale was not consulted about the decision. Transition to a new bank proved impossible for Gloriavale. 

Gloriavale commenced proceedings against BNZ asserting breach of contract, breach of fiduciary duty, and estoppel. They were successful in the High Court on two occasions in obtaining and sustaining an interim injunction, which required BNZ to continue providing banking services pending a final determination at trial. BNZ appealed to the Court of Appeal.

Court of Appeal decision

In a 57-page decision issued this week, written by His Honour Justice Goddard, the Court of Appeal allowed BNZ’s appeal. It lifted the injunction, on an undertaking to allow a further three months for Gloriavale to attempt an orderly transition of its business elsewhere. 

The Court considered the matter afresh and applied the orthodox injunction test: 

1. Is there a serious question to be tried in respect of the claims brought? 
2. Where does the balance of convenience lie? 
3. Would granting an injunction be in the overall interests of justice?

Perhaps unsurprisingly, the Court of Appeal found that there were no serious questions to be tried in respect of the breach of fiduciary duty and estoppel claims (there having never been any representations by BNZ, through conduct or otherwise, that it would never close the accounts). However, the Court of Appeal’s approach to the breach of contract claim was different to that in the High Court. 

No implied obligation on termination

The Court recognised that, while there was a “substantial body of overseas authority to the effect that a discretionary contractual power conferred on one party may be subject to implied limits broadly analogous to the limits that apply to the exercise of public powers”, there were differences of approach; the law was developing and remained unsettled. The “most promising” approach, in the Court’s view, was that a power to terminate must be exercised for the purpose for which that power was conferred under the contract. In this case, the Court said, the purpose of the relevant termination provision was to enable BNZ to bring the relationship to an end if it wishes to do so “for any reason”. As such, the clause had to be read as preserving, rather than limiting, BNZ’s freedom at common law to terminate unilaterally in BNZ’s own interests.

The Court accepted that it was arguable that the termination right was constrained by an implied obligation not to act dishonestly, in bad faith, capriciously, or arbitrarily. However, it noted that such allegations were either not advanced and/or not seriously arguable. 

As to a possible implied obligation to act reasonably, the Court went on to say: 

“It is not in our view seriously arguable as a matter of law that a term should be implied into this contract that would require BNZ to act reasonably in making a termination decision, or that would impose process obligations before BNZ decided to terminate a customer’s account under clause 8.2. Such a term would be inconsistent with the express terms of the contract, in particular clause 8.2, and with the general scheme of the contract.”

This conclusion was important, as it undercut Gloriavale’s main complaint namely that BNZ had made a significant and impactful decision without following fair process. There was, Gloriavale argued, no warning by BNZ, the policy relied on was neither disclosed nor known to Gloriavale, there was no opportunity to correct errors in the information relied on by BNZ, there was no opportunity for Gloriavale to provide reassurance against future conduct, and there was no reassessment of BNZ’s decision in light of information subsequently obtained.

Comment

The Court of Appeal’s approach is a departure from a relatively strong line of overseas authorities which say that, when it comes to the unilateral exercise of a power under a contract, a so-called “default rule” applies. That is one where, in addition to not acting in bad faith (maliciously), capriciously, or arbitrarily, the need to act reasonably is also said to apply. 

The principal issue overseas has rather been whether a broader concept of reasonableness (extending beyond a rationality test, to address fair process) also applies. 

In this instance, the Court favoured the view that neither approach should apply, in favour of a stricter approach of simply allowing a banking relationship to be terminated on its terms by a bank, subject only to an appropriate notice period and/or any statutory restrictions (which did not exist here).

This aspect of the ruling is therefore the most interesting one. It reflects an apparent rejection of a more liberal approach that has been creeping into the law of commercial obligations, particularly in situations where essential consumer services are in play. 

Balance of convenience/overall justice

The Court of Appeal did, however, address what the position would have been if a reasonableness obligation (be it wide or narrow) did apply. The Court found that, even then, it would not have sustained the injunction. Its reasons were as follows:

1. If the injunction continued, BNZ would be required to provide ongoing services to Gloriavale against its will, in circumstances where BNZ believed it had acted in good faith and consistently with its internal policies.
2. Gloriavale could continue its attempt to find another banking services provider. If Gloriavale could not, then that fact alone supported BNZ's position. There was, the Court said, “considerable force” in BNZ’s submission that the reluctance of other banks to provide services to Gloriavale only confirmed that BNZ’s decision to debank Gloriavale was not an unreasonable one.

These points were also fatal to Gloriavale’s arguments regarding the balance of convenience and overall justice. 

The Court further noted that there had been no updating evidence as to Gloriavale’s attempts to find a new provider, the Court merely having been informed that they had had no success.

What next?

It is to be expected that Gloriavale will seek leave to appeal to the Supreme Court. There may, in our view, be some interest by our highest court to at least explore and test the Court of Appeal’s suggestion that the obligation to act reasonably (however that might be framed) does not apply to unilateral powers of termination. This is particularly so, given the dire practical consequences for any person (whether a consumer or a commercial entity) of being unbanked or debanked.

This development is highly topical, given the Reserve Bank’s current focus on promoting financial inclusion. It last year released its Financial Inclusion policy, and this week released a thematic review into how deposit takers support financial inclusion. 

In the meantime, banks in New Zealand will be encouraged by the outcome and the support this decision offers for terminating banking services in what they perceive as appropriate cases.

Get in touch

If you would like to discuss any of the points above, get in touch with one of our experts.

Special thanks to Sam McLean for his assistance in writing this article.