The decision of Donnelly v Australia and New Zealand Banking Group Ltd [2014] NSWCA 145 concerned a claim made by Ms Donnelly, raised in defence to possession proceedings, that ANZ engaged in unconscionable conduct when it entered into a facility agreement with Ms Donnelly. The decision should provide comfort to banks that a mere failure of a customer to obtain legal advice and perfectly understand an agreement they entered into is not a sufficient basis to establish a claim of unconscionability.

BACKGROUND

Ms Donnelly’s facility agreement with ANZ provided for a loan in Hong Kong dollars. The facility agreement included a “clawback clause” which became operative if, due to currency fluctuations, the Australian Dollar value of the loan exceeded 85% of the value of the security provided by Ms Donnelly. If this occurred, ANZ was entitled to convert the currency of the facility into Australian Dollars.

Soon after drawdown, the AUD depreciated sharply against the HKD and ANZ exercised its right under the clawback clause. The result was that Ms Donnelly’s indebtedness was converted to approximately AU$730,000, being about AU$130,000 more than the original AUD value of the loan.

ANZ commenced proceedings against Ms Donnelly for possession of the secured property and judgment for the indebtedness.

DEFENDING POSSESSION PROCEEDINGS BY CLAIMING UNCONSCIONABILITY

Mrs Donnelly defended the possession proceedings against her, arguing that ANZ had engaged in unconscionable conduct on the following basis:

  • the facility documents were signed at the “urging and direction” of Mr Stuart, a representative of ANZ;
  • Mr Stuart failed to inform her that a deterioration in the value of the AUD against the HKD would lead to an increase in the AUD equivalent of the loan indebtedness;
  • no independent financial or legal advice was offered before signing the facility; and
  • Mr Stuart misrepresented to Mrs Donnelly that the currency of the loan could only be changed at her request or with her consent.

At first instance, the court held that ANZ had not acted unconscionably. Despite finding that Mr Stuart did suggest to Ms Donnelly that the AUD would “skyrocket” and “shoot past parity before the end of the year”, the Court found there was no evidence to support Ms Donnelly’s allegations.

The Court also determined that Ms Donnelly, being an intelligent and articulate woman, was not in a position of special disadvantage.

Ms Donnelly appealed the Court’s decision.

WHAT HAPPENED ON APPEAL?

The Court of Appeal accepted the principles of unconscionability set out in Kakavas v Crown Melbourne Ltd [2013] HCA 25. In short, the principles provide that equity will not come to the aid of someone who merely makes a bad business decision. Rather, an equitable claim of unconscionability must point to conduct of a defendant which is beyond the ordinary conduct of business.

Applying this principal, the Court of Appeal found that the fact that Ms Donnelly did not read or have a perfect understanding of the terms of the facility agreement was not a sufficient basis for a claim of unconscionability. Ms Donnelly had to show conduct on the part of ANZ that was unconscionable.

In this regard, the Court of Appeal found that ANZ had taken reasonable steps to inform Ms Donnelly of the risk of the AUD decreasing against the HKD. In making this finding, the Court relied in part on the evidence of Mr Stuart’s usual practice of explaining the effect of exchange rate movements to customers, as opposed to his actual recollection of events. The Court found that Ms Donnelly failed to demonstrate that it was contrary to incontrovertible facts or that it was glaringly improbable that Mr Stuart’s usual practice was not applied in her case.

The court also confirmed that the failure of ANZ to recommend that Ms Donnelly obtain legal advice was not unconscionable in the circumstances of the case. The Court found on the facts that it was Ms Donnelly’s choice not to seek legal advice from lawyers in her family or a solicitor acting for her on another transaction.

COMMENT

This decision confirms that where banks engage in arm’s length commercial transactions with parties that are not in a position of some special disadvantage, Courts are not willing to assist those parties in the event they become the victims of their own improvident transactions.

It was relevant in this case that Mrs Donnelly was an intelligent woman who entered into the Facility for currency gains. In such circumstances, a mere failure by the bank to invite a customer to obtain legal advice does not constitute unconscionability.

It should also provide some comfort to banks that the Court’s are willing to accept evidence of bank officer’s usual practices, in circumstances where the customer is unable to point to evidence to the contrary.