Court of Appeal overturns Gloriavale de-banking injunction: “default rule” and “expanded default rule” still at large

10 December 2024

The Court of Appeal has handed down a welcome decision for the banking community by overturning the High Court’s interim injunction which prevented BNZ from terminating Gloriavale as a customer.1 That High Court decision received criticism for being inconsistent with the express terms of the termination provision, which allowed termination for “any reason”, and for being out of step with a similar High Court decision in Targa Capital v Westpac2 in which a debanking injunction was declined.   

Background

The key background facts were:

  • BNZ has banked the Gloriavale entities for many years.
  • In July 2022, BNZ gave notice to the Gloriavale entities of its intention to terminate the provision of banking services. BNZ considered this decision was appropriate in light of its internal human rights policy in response to the Courage v Attorney-General3 decision, in which children as young as six years old were found to have been employees at Gloriavale.
  • Clause 8.2 of BNZ’s standard terms and conditions gave BNZ the right to terminate banking services “for any reason” upon giving 14 days’ notice.
  • BNZ initially gave three months’ notice that it would cease providing banking services. The notice period was extended once at Gloriavale’s request. BNZ declined to provide a second extension and Gloriavale sought and obtained from the High Court an urgent without notice injunction, and then an on notice interim injunction.
  • BNZ appealed the injunction decision to the Court of Appeal.
The Court of Appeal’s Decision

The Court of Appeal considered there was no serious argument for an implied restriction on BNZ’s power to close accounts under clause 8.2 of its standard terms. Even if such terms were implied, the Court found no serious issue to be tried, as BNZ’s decision was neither irrational nor outside the bounds of how a reasonable bank would act.

As was the case in Woolley v Fonterra,4 the Court of Appeal was again presented with the question of whether the “default rule” or “expanded default rule” apply in New Zealand contract law and, again, it did not need to decide the point.

The Court acknowledged that overseas authorities suggest a “default rule” may apply at common law in relation to the exercise of unilateral contractual powers or discretions, with the effect that it is implied that the power or discretion must be exercised honestly and in good faith, and not arbitrarily, capriciously or unreasonably. It is a “default” rule because, where applicable, it applies by default unless the contract excludes it.

The Court also acknowledged that overseas authorities also refer to an “expanded default rule”, attributed to the Braganza5 case in the UK (determined in an employment context), which imply restrictions akin to those applied in judicial review, so that the party must exercise the power or discretion considering all relevant matters and disregarding all irrelevant matters.

The Court of Appeal was careful to note that this appeal of an interlocutory decision was not the appropriate forum for determining whether the default rule or expanded default rule apply in New Zealand, and instead stated its view that “the most promising approach” was that any such implied term be that the relevant power or discretion be exercised for “proper purposes”, where the limits derive from the express terms and intention of the contract, rather than applying the “default rule” or “expanded default rule”. 

Interpretation of clause 8.2

The Court of Appeal applied orthodox contractual interpretation principles to determine that clause 8.2 did what it said on the tin: BNZ could terminate the banking relationship for any reason. The only limitation in the clause was the requirement for BNZ to give 14 days’ notice of its intention to terminate, which it did. The Court noted that it was difficult to see how a term could be implied in relation to reasonableness of BNZ’s decision where BNZ is entitled to exercise the power to close accounts for any reason, in its own interests.

Default rule, even if implied as a matter of NZ law, was not infringed

The Court of Appeal decided that, even assuming the default rule applied in New Zealand, it could not be implied in the specific context of clause 8.2 given the clear power to terminate “for any reason”.  The Court further determined that, even if the default rule applied in New Zealand and could apply in the context of clause 8.2 specifically, BNZ had not acted irrationally, unreasonably or capriciously, and so even if its power to terminate was so fettered it had not infringed the rule.

Expanded default rule, even if implied as a matter of New Zealand law, was not infringed

The Court of Appeal decided that, even assuming the expanded default rule applied in New Zealand, it could not be implied in the specific context of clause 8.2 because the only process requirement in clause 8.2 was to give 14 days’ notice, which BNZ had complied with. The Court added that had the expanded default rule been engaged there would have been a “weak” argument that BNZ’s process did not comply with the rule.

In refusing to imply any restrictions on BNZ’s ability to terminate under clause 8.2, the Court of Appeal laid down a reminder that the test for implication, as recently set out by the Supreme Court in Bathurst Resources v L&M Coal Holdings,6 is a standard of “strict necessity” which is a high hurdle to overcome. In particular, a term cannot be implied as a matter of fact if it would contradict an express term of the contract.

Finally, the Court of Appeal considered that, even if clause 8.2 implied a term in the nature of the default rule or the expanded default rule, the overall justice of the case nonetheless favoured declining to continue the injunction.

Takeaways

The Court of Appeal’s judgment is good news for parties seeking to rely on clearly drafted contractual provisions and a reminder of the high bar before the courts will imply terms. While noting that this appeal of an interlocutory decision was not the appropriate forum for determining the issue, the Court of Appeal suggested its preference for the “proper purposes” approach to either the “default rule” or “expanded default rule”. 

If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.

[1] Bank of New Zealand v The Christian Church Community Trust and Others [2024] NZCA 645.[2] Targa Capital Limited v Westpac New Zealand Limited [2023] NZHC 230.[3] Courage v Attorney-General [2022] NZEmpC 77, (2022) 18 NZELR 746.[4] Woolley v Fonterra Co-Operative Group Limited [2023] NZCA 266. See Bell Gully article for more details here: https://www.bellgully.com/insights/questions-remain-regarding-the-new-zealand-courts-approach-to-assessing-contractual-discretions/[5] Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661.[6] Bathurst Resources Limited v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696.


Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.