Background: the Court of Appeal’s decision that banks can rely on clear contractual powers to terminate banking arrangements
Last year we published an update following the Court of Appeal’s decision in Bank of New Zealand v The Christian Church Community Trust. The case concerned the Bank’s decision to terminate banking services to entities associated with the Gloriavale community, following an Environment Court decision including adverse findings such as that members of its community were employees from the age of six. The Bank considered that judgment in light of its human rights policy and decided to terminate the provision of banking services.
The Bank relied on a clause in its terms and conditions which allowed it to terminate services “for any reason”. The relevant legal issue was what restrictions, if any, there were on its ability to rely on that clause. Gloriavale argued that the power was subject to an implied restriction that it must be exercised in good faith, and not arbitrarily, capriciously or unreasonably (the “default rule”), or arguably that New Zealand law should incorporate a broader contextual duty to exercise such powers reasonably or, to take into account all relevant considerations and to disregard irrelevant considerations (the “expanded default rule”).
The Court of Appeal held that there was no relevant restriction on the Bank’s ability to terminate its banking services. It held that any “default rule” or “expanded default rule” was excluded by the clear terms and conditions (and, in any event, the Court considered the “most promising” approach to any implication was based on a “proper purposes” approach). The Bank was entitled to rely on its clear contractual terms.
The case provided a measure of certainty for lenders seeking to de-bank customers, and to other commercial parties seeking to rely on sufficiently clearly drafted contractual terms.
The decision left open the broader question of when, if ever, the default rule or the expanded default rule might apply to private parties in New Zealand. It held that the interim injunction application was not the right setting in which to resolve that question. The issue remains unresolved.
The political issue
The Gloriavale case was the most recent in a series of recent disputes and controversies concerning when banks can refuse banking services to customers.
The issue has hit the headlines again this year, in light of moves from banks in Australia and New Zealand to move away from lending to customers in the fossil fuel industries. The moves variously have been defended based on both credit risk and emission-reduction considerations.
NZ First says that the so-called “anti-woke” Bill will prevent the perpetuation of a “woke ideology in the banking sector”, which was being promoted by “unelected, globalist, climate radicals”. The Explanatory Note explains that the intention of the Bill is to “remove moralising from banking”. The other Government parties are considering their position on the Bill.
The Bill
The Bill would prohibit any financial institution from refusing to provide services to a customer or potential customer, or to treat them less favourably, because of:
- any of the prohibited grounds of discrimination under section 21 of the Human Rights Act 1993;
- any direct or indirect environmental, social, or governance consideration;
- any climate-related reporting standard issued by the External Reporting Board; or
- the industry within which the customer operates.
A breach of the prohibition would be an offence and would expose the financial institution to a sentence of a fine of up to NZ$50,000 or three months’ imprisonment (for an individual) or a fine of up to NZ$500,000 (for a corporate entity).
The Bill contains an exception for decisions made for a “valid and verifiable commercial reason”, or as otherwise required or permitted by an enactment.
Comment
The Bill would cut through the question of what limits are implied into banks’ terms and conditions, by overriding the relevant contractual terms altogether. The intention appears to be to outright prohibit banks from making decisions about who can receive services, and on what terms, based on environmental, social, or governance reasons. Decisions made for commercial reasons will be subject to a new “valid and verifiable” standard.
As drafted, it is far from clear how the Bill might operate in practice.
- The Bill appears to envisage “environmental, social, or governance considerations” and “commercial reasons” as being likely to be distinct and exclusive categories. However, that may often not be the case. Financial institutions may often find that ESG concerns are relevant to decisions taken in the overall commercial interests of the bank, including reputationally.
- The requirement that the commercial assessments be “valid and verifiable” appears to introduce a new, objective element to the assessment of how banks can exercise their contractual powers. If enforced in this way, it would represent a significant incursion into both the contract between financial institutions and their customers (including large commercial customers), and into financial institutions’ freedom to assess their own commercial interests.
The Gloriavale decision was welcomed by many for the certainty it brought for financial institutions seeking to rely on their contractual powers. The Bill seeks to change the law in this area. Whether it would do so in a way that removes or increases commercial certainty will depend on the final form of the Bill, and on how its competing considerations are developed during the legislative process if the Bill moves forward.
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] Financial Markets (Conduct of Institutions) Amendment (Duty to Provide Financial Services) Amendment Bill.