Introduction
In a recent judgment, the New Zealand Court of Appeal (“the Court”) has signaled a possible change of approach in relation to the exercise of contractual discretions.[1]
Previously, the Court had proceeded on the assumption that the “default rule”, that a contractual discretion must not be exercised arbitrarily, capriciously, or unreasonably, applied in New Zealand.[2] However, it has now said that it considers that the “proper purpose” approach, proposed by Professor Paul Davies and Lord Sales in a recent journal article, is the “most promising” approach in this area.[3]
In addition to being of obvious significance in New Zealand, the decision is also of potential significance in England and Wales, where, while it is usually considered that the law is governed by “the default rule” or “the expanded default rule” (from the Braganza decision), the authorities do not always speak with one voice.
BNZ v Gloriavale: Background facts
Gloriavale is an isolated Christian community located on the West Coast of New Zealand’s South Island.[4] Prior to the events of this case, it had enjoyed a longstanding customer relationship with the Bank of New Zealand (“BNZ”).[5]
The contractual relationship between Gloriavale and BNZ was governed by BNZ’s standard terms and conditions (“Terms and Conditions”).[6] Clause 8.2 of the Terms and Conditions stated that BNZ could close Gloriavale’s accounts “for any reason”. The clause also gave some examples of situations in which BNZ could close Gloriavale’s account. However, it recorded that those examples did not limit the reasons why BNZ might close or suspend an account.
In May 2022 the Employment Court in New Zealand delivered a judgment in a case called Courage v Attorney-General, which involved several Gloriavale entities. The judgment was very critical of those entities. It held that children at Gloriavale aged between six and fourteen had been coerced, including through violence and denial of food, to perform physical work for the benefit of the Gloriavale community.[7]
BNZ became aware of this judgment and decided to terminate its banking relationship with Gloriavale, on the basis that it was in breach of its internal human rights policy.[8] It made that decision unilaterally, without involving Gloriavale.[9]
In doing this, BNZ decided to keep Gloriavale’s accounts open for three months to give it time to try and find another banking provider, or to make alternative arrangements if it was unable to do so.[10] BNZ subsequently agreed to extend this period for a further 6 weeks, before refusing further extension requests.[11]
Gloriavale was unable to make alternative banking arrangements during this time.[12] It brought proceedings against BNZ, asserting breach of contract, breach of fiduciary duty, and estoppel. It also applied for an interim order to prevent BNZ from closing its accounts until the conclusion of those proceedings.[13] The High Court of New Zealand granted the injunction.[14] BNZ was granted leave to appeal that decision to the Court.[15]
BNZ v Gloriavale: The decision
The Court found that there was no serious issue to be tried in relation to the breach of fiduciary duty and estoppel claims. This was unsurprising. It has long been accepted that the typical relationship between a bank and a customer is contractual, rather than fiduciary, in nature.[16] Gloriavale could not identify any statement, or conduct, on the part of BNZ, which would support the assumption that BNZ would continue to provide Gloriavale with banking services which might have founded a fiduciary claim.[17]
The Court’s reasoning in relation to the breach of contract claim is much more interesting. This claim required the Court to consider whether there were any limitations on BNZ’s ability to terminate its banking relationship with Gloriavale under clause 8.2 of the Terms and Conditions. This prompted The Court to consider the status of contractual discretions under New Zealand law.
In doing so, the Court stated that:[18]
“There is a substantial body of overseas authority [including English authority] to the effect that a discretionary contractual power conferred on one party may be subject to implied limits broadly analogous to the limits that apply to the exercise of public powers. These authorities do not speak with one voice: the law is developing and remains unsettled. This Court has not to date had to determine which (if any) of these lines of authority should be followed in New Zealand.”
The Court went on to consider the “default rule” from the English decision of Abu Dhabi National Tanker Co v Product Star Shipping Co Ltd (No 2), where Leggatt LJ held that a contractual discretion must not be exercised “arbitrarily, capriciously, or unreasonably.”[19]
It also considered the “expanded default rule” from the decision of the United Kingdom Supreme Court in Braganza v BP Shipping Ltd.[20] In doing so, the Court noted that this case is sometimes citied as authority for the proposition that exercises of discretionary decision-making functions under contracts are subject to the same constraints as exercises of public power conferred on a public authority by a statute. In particular, it noted that the case is cited as authority for the proposition that the relevant contractual decision-maker must take into account relevant matters and must not take into account irrelevant matters.[21]
However, the Court considered that the “most promising” approach to ascertaining the limits of contractual power or discretion is the one suggested in a recent journal article by Professor Paul Davies and Lord Sales, in which they suggest that “[A]ny restrictions need to be found through the normal techniques of interpretation and implication, and that these usually have the effect that contractual powers must be exercised for a proper purpose.”[22]
In expressing its preference for this approach, the Court expressed agreement with the authors’ claims that approaches underpinned by public law concepts are inappropriate as:
- Public powers are conferred for the public good and a public authority cannot pursue its own self-interest when exercising such powers, whereas a party exercising a contractual discretion typically can have regard to its own self-interest.[23]
- The contractual context lacks the longstanding constitutional principles and values against which the rationality of an exercise of discretion can be assessed and instead the parties themselves generate the values that are to apply to an exercise of discretion as something inherent in the contract itself.[24]
The Court, therefore, preferred the authors’ formulation of the jurisdiction as being one based on normal techniques of contractual interpretation, which seeks to distinguish between contractual discretions which have been “conferred for use for particular purposes”[25] and those which are intended to “preserve the freedom of one party to act unilaterally in their own interests”.[26]
However, despite the obvious significance of these points, they were ultimately obiter, as the Court recognised that an interlocutory appeal was not the appropriate setting in which to determine New Zealand’s approach to the exercise of contractual discretions.[27]
The Court held that, regardless of which approach was adopted, there was not a serious issue to be tried. It held that a term could not be implied in relation to the reasonableness of BNZ’s decision, or the process through which it was made, in circumstances where it had held that BNZ was entitled to exercise the power to close accounts for any reason and in its own interests.[28] It also held that BNZ had not acted arbitrarily, irrationally, capriciously, or unreasonably, given that Gloriavale’s actions, as highlighted in Courage v Attorney-General, where inconsistent with BNZ’s human rights policy.[29] In making this point, it noted that a “bank may have a legitimate commercial and reputational interest in adopting, and acting on, policies in relation to matters such as social and environmental responsibility and human rights.”[30]
The Court also noted that the fact that other banks would not take Gloriavale on as a customer supported BNZ’s assertion that it had acted reasonably in closing Glorivale’s accounts.[31]
However, the Court did note that given BNZ had failed to engage with Gloriavale before terminating its accounts, it would have held that there was a serious question to be tried if it considered that it was arguable that process obligations could be imposed in relation to the exercise of the discretion.[32]
Comment
The Court’s indication that it prefers the “proper purpose” test is clearly of interest from a New Zealand law perspective, particularly given the Court had previously proceeded on the assumption that the “default rule” applied under New Zealand law.
It is also likely to be of significance in England and Wales. While a decision of the New Zealand Court of Appeal is unlikely to result in a change in English law in and of itself, it is likely to lead to greater judicial consideration of the “proper purpose” approach. This approach is of course still relatively new, being based on a 2024 journal article. While it is unclear whether this approach will ultimately be adopted, it seems that at a minimum there is likely to be a critical reconsideration of the “default rule” and the “expanded default rule”. This is especially likely given that the public law foundations to these approaches are arguably not appropriate in a private law context.
The case is also interesting as it is an example of a bank terminating its relationship with a customer for reasons which fall outside the scope of traditional banking considerations. This seems likely to become increasingly common, particularly as banks increasingly make decisions in light of ESG considerations. It will be interesting to see whether legislatures seek to protect access to banking services in response to this.
If you would like to discuss the contents of this article further, please contact Andy McGregor.
[1] Bank of New Zealand v The Christian Church Community Trust & Ors [2024] NZCA 645 (“BNZ v Gloriavale”)
[2] Woolley v Fonterra Co-operative Group Ltd [2023] NZCA 266, [2023] 3 NZLR 405 at [103] and [112]- [115].
[3] BNZ v Gloriavale at [135]
[4] At [19]
[5] At [20].
[6] At [8].
[7] At [36].
[8] At [39].
[9] At [40]-[41].
[10] At [43].
[11] [46].
[12] At [47].
[13] At [49].
[14] At [52].
[15] At [53]
[16] At [168]
[17] At [175] – [176]
[18] At [11].
[19] Abu Dhabi National Tanker Co v Product Star Shipping Co Ltd (No 2) [1993] 1 Lloyd’s Rep 397 (CA) at 404
[20] Braganza v BP Shipping Ltd [2015] UKSC 17, [[2015] 1 WLR 1661.
[21] BNZ v Gloriavale at [68].
[22] BNZ v Gloriavale at [123] and Paul S Davies and Philip Sales “Controlling contractual discretions: Wednesbury reasonableness, good faith and proper purposes” (2024) 140 LQR 106 at 106.
[23] BNZ v Gloriavale at [124]
[24] At [125]
[25] Davies and Sales, above n 22, at 115; and BNZ v Gloriavale at [127].
[26] BNZ v Gloriavale at [128].
[27] At [135].
[28] At [140].
[29] At [161] – [162].
[30] At [139]
[31] At [162]
[32] At [163].