Alan L Tyree

Section 52 and the Duty of Secrecy Revisited

Introduction

At the time of writing the first semester examinations at the University of Sydney are close at hand. The reader might find it amusing to observe the mind of the examiner in action. We begin with what the student should know.

Every student knows that a contract of guarantee is not a contract uberrimae fidei. Every student knows that a bank is under an obligation of confidentiality with respect to the affairs of its customer. Every student knows that a corporation must not engage in conduct which is misleading or deceptive.

Every teacher knows, and some students know, that ‘knowing’ these things and being able to apply them to a particular problem are not the same.1 When we mix into the brew the new Code of Banking Practice, the scene is set for some lovely examination problems. As with all good examination problems, we should start with a real case.

The case

The facts of Crisp v Australia & New Zealand Banking Group2may be stated shortly: in 1987 C’s daughter purchased a take away food business with the assistance of a $18,000 advance from the defendant bank. Business prospered. In 1990 she wished to acquire a second location. Mrs C assisted. The Mother and Daughter team incorporated, the two of them becoming directors of the company. By mid-1990 the overdraft was increased to $100,000. The daughter borrowed another $100,000 to assist in the purchase of a house.

A new manager of the branch was then appointed. He became concerned about the lack of security for the overdrafts. Various temporary arrangements were made, some of them including taking short term securities from C. By the time of the hearing in June 1993, the bank was owed the amount of $148,716.14 together with interest dating from 28 August 1992.

Matters came to a head when the bank manager, B, decided that it would be necessary to take a mortgage over the C family home. Although the evidence was conflicting, the Northrop J found that B had dishonoured cheques on the morning of 17 January. On the same morning he rang Mrs C advising that he would dishonour cheques if security was not forthcoming.3 In ignorance of the dishonour, Mr C gave the mortgage later that day. The cheques were subsequently met.

Mr C sought a declaration that the mortgage was null and void by virtue of the misleading conduct of the manager. Northrup J observed that silence itself could be conduct which was misleading or deceptive for the purposes of s52(1).4 He further held that failure to advise Mr C was such conduct. On the evidence, Mr C would never have given the mortgage had he known that the cheques had already been dishonoured, and Northrup J exercised the discretion of the court granted by s87(1) of the Act in making the declaration sought.

It is interesting to compare the reasoning with that in Kabwand Pty. Ltd. & Ors. v. National Australia Bank Ltd.5 There the court held that silence could be ‘misleading conduct’ where there was some reasonable expectation that information would be forthcoming. However, there could be no reasonable expectation since the plaintiff knew that the banker was under a duty of confidentiality.

Different scenarios

The report does not disclose if the bank argued that the manager would have breached his duty of secrecy by disclosing the dishonours to Mr C. This duty of confidentiality was established by the Tournier case.6

The conflict between the duty of secrecy and the duty imposed by s52 has been discussed before in this Journal.7 Our examination question now takes the following twist:

“(b) Instead of the above, suppose that the bank manager tells Mr C about the dishonoured cheques. Mr C flies into a rage, refuses to give the guarantees. He leaves his wife and children and goes bush, hunting kangaroos and avoiding civilisation. As a result the businesses collapse. Ms C and Mrs C seek damages for breach of the contractual duty of confidentiality. Advise.”

The issue is, of course, whether the bank may fall within one of the four Tournier exceptions. There is clearly no public duty to disclose. Although the ‘compulsion by law’ exception might tempt the student at first, that exception has been confined to cases where there is, in fact, a compulsion so that, for example, a subpoena which is not backed by a court order is insufficient reason for a bank to disclose information about a customer’s account.8

The student is left to consider two possibilities: (I) that the bank may disclose because it is necessary to do so to protect its own interests or, (ii) that by requesting Mr C to act as surety the customer has given the bank implied authority to disclose relevant information.

It is hard to see how the student could argue that it is in the interests of the bank to disclose the company accounts. The leading case is Sunderland v Barclays Bank9where a wife was refused an overdraft because the manager knew that she was losing large sums gambling. She complained to her husband. He encouraged her to telephone the bank to demand an explanation. She did so and during the course of the conversation handed the telephone to her husband, whereupon the manager explained that many of the cheques drawn on the wife’s account were in favour of bookmakers. The Court held that the disclosure was justified both by an implied authorisation and by disclosure in the bank’s interest since they wished to retain the goodwill of Dr Sunderland. The first reason is understandable, the second incomprehensible.

Is there an implied authority in part (b) of our examination question? Surprisingly, the answer is far from clear. Both Chorley10 and Milnes Holden11 doubt whether there is any such implied authority. Paget12 and Weaver and Craigie argue that there is. It has been held that there is a duty to disclose ‘unusual features’ of an account,13 but the scope of the principle is far from clear.

Code of practice

Suppose we continue with our examination question. As the student knows, the new Code of Banking Practice provides the following:

“17.3 Before accepting a guarantee a Bank shall inform a prospective guarantor that the documents specified in section 17.4(ii) and 17.6 will be provided to the prospective guarantor if the borrower consents. If the borrower does not consent, the Bank shall so inform the prospective guarantor and shall not accept the guarantee without the agreement of the prospective guarantor to proceed with the guarantee in the absence of such consent.”

The documents referred to are a copy or summary of the contract which evidences the obligation being guaranteed and, after the guarantee is entered into, a copy of any formal demand made on the borrower and, on request by the guarantor, a copy of the latest relevant statement of account provided to the borrower.

Now, on with the examination:

“(c) Instead of the above, assume that the circumstances are such as would come within the terms of the Code of Banking Practice. The bank manager, with the consent of Mrs C provides Mr C with the information referred to in s17.3 but still does not tell him about the dishonoured cheques. Advise.”

On the one hand, the Code is to be read subject to any Commonwealth, State or Territory legislation,14 so perhaps the outcome is the same. On the other hand, the Bank has now done everything that it agreed to do under the Code of Banking Practice, so that Mr C can hardly argue that he was misled by the Bank failing to do more.

We can only hope that Mr C would not lose the protection of s52 by virtue of a Code of Practice which is intended to be a consumer protection package. We should note that in the Crisp case C would have fallen within the terms of the Code of Banking Practice. However, he does not fall within the terms of reference of the Banking Ombudsman because the amount disputed exceeded $100,000. The result was that the matter fell to be decided in the Federal Court in a hearing that lasted seven days. Mr C was at the time of the hearing a retired school teacher.

Alan L Tyree
Landerer Professor of Information Technology and Law
University of Sydney


1
In “ed talk”, the student has not yet acquired the knowledge at the Applications level of the Bloom Taxonomy: see Bloom B S, 1956 "Taxonomy of Educational Objectives: the classification of educational goals, Susan Fauer Company.
2
(1994) ATPR 41-294.
3
There was conflicting evidence as to whether Mrs C knew of the dishonour. Northrup J held that she did not.
4
Northrup J cited Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) ATPR 40-850 for the proposition.
5
[1989] ATPR 40-950, F. C. A. (Full Court).
6
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461.
7
See XXX:
8
Haughton v Haughton [1965] 1 OR 481; see generally Ellinger, Modern Banking Law, Oxford, 1987.
9
(1938) 5 LDAB 163.
10
Chorley, Law of Banking, 6th ed, London, 1974, p23
11
See Milnes Holden, XXX, p72
12
Paget argues that there is implied authority to disclose when questioned by the intending guarantor: Paget’s law of Banking, 10th ed, London, 1989.
13
Hamilton v Watson (1845) 12 Cl & Fin 109; (1845) 8 ER 1339, HL.
14
Code of Banking Practice, s1.2.