The New South Wales Court of Appeal has recently delivered an important judgment confirming that unconscionability will not be found lightly when allegations of unconscionable conduct are made against banks.
Mastronardo & Anor v Commonwealth Bank of Australia Ltd & Ors  NSWCA 136 explores the liability of banks for unconscionable conduct under the predecessor of what is now section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The section provides:
“12CB Unconscionable conduct in connection with financial services
- A person must not, in trade or commerce, in connection with:
- the supply or possible supply of financial services to another person (other than a listed public company); or
- the acquisition or possible acquisition of financial services from another person (other than a listed public company).
- Engage in conduct that is, in all the circumstances, unconscionable.”
Section 12CC then sets out several matters to which the court may have regard in determining whether a contravention has occurred, including the relative strengths of the bargaining positions, whether a party has been required to comply with conditions which were not reasonable necessary, whether undue pressure was exerted, whether a party failed to disclose any intended conduct, and the extent to which a party was willing to negotiate the terms and conditions for lending.
Section 12GF provides that a person who has suffered loss or damage by contravening conduct may recover the amount of the loss or damage.
The decision in Mastronardo provides an illustrative analysis of the circumstances in which the application of pressure by banks to refinance loans will constitute “unconscionable” conduct.
Briefly, the key facts were:
- Mr and Mrs Mastronardo provided guarantees to the bank in 2006 in respect of a facility which the Bank provided to Remo Corporation Pty Ltd (Remo), a property development company controlled by Mr Mastronardo and his father;
- The guarantees were secured by a mortgage over Mr and Mrs Mastronardo’s home; the bank also took mortgages over other properties owned by Remo and other guarantors;
- Mr and Mrs Mastronardo took out a loan in their own names in 2007 to purchase a property adjoining their home and the adjoining properties became securities for the facility in their own names and for their guarantees in respect of the Remo facility;
- There were several variations of the Remo facility which resulted in further loans being advanced and in repayment dates being extended; the variations also introduced a term (the release term) to the effect that the Bank would release the adjoining home properties as security for the Remo facility upon the LVR being reduced to 70%;
- In March 2010, the Bank became concerned that Remo was in a precarious financial position; and
- At a meeting on 31 May 2010, the Bank advised Remo that it required all its facilities to be refinanced, notwithstanding the fact that a substantial part of the Remo facility was not then due, and that it did not consider itself bound by the release term.
Mr and Mrs Mastronardo commenced proceedings alleging that the Bank had repudiated the release term, that its conduct was unconscionable under the ASIC Act and that they had thereby suffered loss.
Hammerschlag J, the judge at first instance, found that Remo was not in breach of its facility at the time of the 31 May 2010 meeting, that the Bank had no entitlement to require an entire refinancing and that it “conveyed the message [at the meeting] that [it] did not consider itself obliged to adhere to the release provision”. His Honour held that this constituted a breach of contract, but regarded it as no more than “a common or garden breach of contract”, lacking “the high level of moral obloquy” required for conduct to be “unconscionable” for the purposes of the ASIC Act. In so doing, he adopted the test applied by Gageler J in Paciocco v Australia and New Zealand Banking Group (2016) 258 CLR 525. His Honour also held that Mr and Mrs Mastronardo had not established that they would have been able to make the payment necessary to keep the LVR below 70% if the adjoining home properties were to be released as security for the Remo facility and that no loss flowed from the bank’s breach.
The Mastronardos appealed, challenging the finding that the bank’s conduct was not “unconscionable” for the purposes of the ASIC Act.
By the time the appeal was heard, the Court of Appeal had already distanced itself from the “high level of moral obliquy” test in another case, Ipstar Australia Pty Ltd v APS Satellite Pty Ltd  NSWCA 15, which was concerned with the meaning of “unconscionable” in a comparable provision in the Australian Consumer Law. Leeming JA noted in Ipstar that he did not find it of assistance to ask whether the conduct involved a “high level of moral obliquy” and that he did not consider that the expression assisted in the task of giving legal meaning to “unconscionable”. Bathurst CJ said that it seemed to him to be unhelpful “to seek to redefine the statutory concept of unconscionability” and that a determination of whether conduct was unconscionable involved “a consideration of all the circumstances to conclude whether or not the conduct in question falls below the acceptable norms, standards or values such as to warrant it being determined to be unconscionable”.
The parties in Mastronardo agreed, for the purposes of the appeal, that the approach to be adopted was that taken in Ipstar. White JA, with whom Bathurst CJ and Macfarlan JA agreed, noted the observation of Bathurst CJ in Ipstar that “a party is generally entitled to exercise its bargaining power to protect its legitimate commercial interests by driving an advantageous bargain”. White JA also noted that, as Allsop CJ had said in Paciocco, “a determination as to whether a party’s conduct falls foul of a general standard expressed in terms of what is unconscionable requires a close examination of the facts”.
After a careful analysis of the facts, White JA concluded that the bank did not commit an anticipatory breach of contract by insisting that Remo and Mr and Mrs Mastronardo refinance all their facilities, even though a substantial part of the Remo facility was not then due, and that there was nothing unconscionable in the bank’s conduct. In reaching that conclusion, his Honour noted that there was not a realistic possibility that Remo and Mr and Mrs Mastronardo would be in a position to make the payment necessary to take advantage of the release term. Addressing the considerations listed in section 12CC, his Honour also found that:
- Remo and Mr and Mrs Mastronardo did not lack bargaining strength as evidenced by the extensions which they had been able to negotiate during the life of the facilities;
- They were not required to comply with conditions that were not reasonably necessary;
- The bank did not fail to disclose its intended conduct;
- The bank evidenced its willingness to negotiate the terms and conditions for lending; and
- The bank did not fail to act in good faith.
Finally, his Honour also concluded that Remo and Mr and Mrs Mastronardo did not demonstrate that they had acted in good faith towards the bank.
The decision confirms that unconscionability will not be found lightly and that the courts are willing to review the history of the banking relationship carefully and to apply a common sense approach when allegations of unconscionable conduct are made.
This article was written by Greg Lewis, Partner.
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