Disclaimers Won’t Exclude Liability For Breached Undertakings

• ANZ had made promises to Bushline;
• It failed to live up to those promises; and
• It was not fair and reasonable for ANZ to escape liability due to the operation of disclaimer and exclusion of liability clauses in the contract between it and Bushline.

In coming to this conclusion, the Court clarified the operation of ss 4 & 5 Contractual Remedies Act 1979 (CRA), now ss 50 & 51 Contracts and Consumer Law Act 2017 (CCLA).

• ANZ was unable to rely on its disclaimer clauses within the swap terms and conditions to defeat promises to its customers, where it had breached its undertakings and misrepresented its products and services within the meaning of s 6(1) CRA.¹
• It is not fair and reasonable (within the meaning of s 4 CRA) for the disclaimer clauses to exclude ANZ’s liability in circumstances where it failed to meet its obligations.
• The question of damages is to be remitted back to the High Court to be considered in the context of the appeal judgment.

The Coomeys were farmers.  They ran their farming operations through a trust structure known as the Bushline Trusts.

ANZ started offering interest rate swap products to its customers in mid-2005 at a time when interest rates were rising.  In October 2005, Bushline entered into its first swap agreement with ANZ.  Bushline entered two additional swaps prior to 2008.

Prior to entry into the swaps, ANZ instructed Bushline’s solicitor, Mr England, to provide it with a solicitor’s certificate certifying that he had explained the nature and effect of the swaps documents, including the terms and conditions (which were 22 closely typed pages of legalese), to the Coomeys.  Mr England provided his certificate to the Bank in early January 2006.

The agreements included various disclaimers including that neither party had relied on advice (written or oral) from the other, and that the parties understood the risks involved.

In February 2008, the Coomeys entered into an unconditional agreement to purchase a run-off block for $7.25m (Waverley Farm).  At this stage, Bushline’s debt to the Bank was about $12m.

ANZ agreed to provide Bushline with credit of $19.47m, including the $7.25m, to purchase Waverley Farm.  There were discussions about the margin.  Bushline’s case was that the Bank promised to fix the margin at 0.70pts over the BKBM floating rate for five years.

In April 2008, ANZ proposed that all Bushline’s existing and new debt be structured as one loan of $19.47m, hedged by Bushline’s existing three swaps (Refinance Loan).  Those swaps were restructured into one, two and three years.

The details of the Refinance Loan were finalised in a loan agreement dated 21 April 2008.  The loan was for $19.47m, to be advanced in one single amount on 1 May 2008.  It had a term of one year (expiring 1 May 2009).  The interest rate was the BKBM floating rate, plus the margin of 0.70% pa.

As can be seen, there was a mismatch between the one year term of the Refinance Loan and the one, two and three years of the swaps.

ANZ increased the margin on the Refinancing Loan when the global financial crisis (GFC) hit.  Bushline was unable to take advantage of the fall in interest rates following the GFC because it was tied into the swaps.  Although the Coomeys raised with ANZ the possibility of breaking the swaps in 2008, ANZ did not advise them what it would cost to do this.

Bushline commenced proceedings against ANZ in the High Court for negligence, inducement, breach of contract and oppressive action.  ANZ sought contribution from Mr England as a joint tortfeasor.

Edwards J held that ANZ had misrepresented that swaps were like a fixed rate loan.  It also breached its promise to monitor and manage the swaps for Bushline on an ongoing basis.  Nevertheless, in Her Honour’s view ANZ was entitled to rely on the disclaimer clauses in the swaps terms and conditions.  A key consideration was the legal advice Bushline had received from Mr England.  The Judge also found ANZ had not promised to hold Bushline’s margins at 0.70% for five years over all its funding.  Bushline’s claims against ANZ were dismissed.  The Judge awarded increased costs in ANZ’s favour as Bushline had unreasonably declined two settlement offers.  As Bushline’s claims against ANZ were dismissed, it was unnecessary to determine ANZ’s third party claim against Mr England.

Bushline appealed.  The grounds of the appeal included:

1. Edwards J was wrong to find ANZ had not agreed to fix the margin on its borrowings at 0.70% for five years;
2. ANZ failed to meet its continuing obligation to provide advice and support to customers with swaps. It provided flawed advice in the circumstances at the time; and
3. It was not fair and reasonable for ANZ to escape liability due to the operation of the disclaimer and exclusion clauses.

The issue of costs was separately appealed.

The appeal was allowed.  The Court of Appeal held that ANZ breached s 6 CRA² because the fixed cost representation (FCR) which ANZ made was a materially false statement of fact, and it failed to comply with the Margin and Monitoring Undertakings (MMU) it gave.  In particular, the Bank breached the:

• Margin Undertaking when it increased the margin on Bushline’s loans by substituting a rate other than BKBM plus the margin of 0.70% on that part of the Refinancing Loan that continued to be hedged by the swaps over the subsequent five-year period.
• Monitoring Undertaking from 2008 onwards by failing to respond to the Coomeys’ inquiries regarding break costs and, further, by failing to communicate to the Coomeys its developing view as to the likelihood of significant, indeed historic, reductions in official cash rates that the Reserve Bank was signalling and the possible significance of those reductions for Bushline.

The Court held it was not fair and reasonable under s 4 CRA for the disclaimer clauses to have the effect ANZ asserted with respect to the FCR and MMU.

The effect of accepting ANZ’s argument was that it was effectively saying to the Coomeys (unfairly and unreasonably):

Notwithstanding what we have promised we would do and what we represented to be true, you have no claim against us even though we did not do what we said we would and what we represented to you was false.

The Court was critical of the fact that ANZ itself, particularly amongst the staff dealing with its rural customers, generally lacked understanding as to the implications of the swaps on customer loans.

Further, it acknowledged the relevance of legal advice to the s 4 assessment.  However, the fact of Mr England’s advice did not assist ANZ.  In particular, the Court considered the advice was of a mechanical and formal nature.  It was given only once, in 2005, at a time when the Coomeys – who could not be said to be sophisticated bank customers – only had a limited understanding of the mechanics and risks of the swap transactions into which they were entering.  What they were led to believe, based on ANZ’s representations, was that the swaps were an alternative and financially advantageous way of obtaining fixed debt funding.

As proceedings were commenced in May 2014, Bushline’s claims (which were enforceable terms of the contract) after May 2008 were within time.

To the extent that ANZ misrepresented the nature and effect of swaps, when combined with floating rate loans, the relevant cause of action accrued at its earliest in 2005, again in April 2008 and, until corrected, each subsequent time Bushline entered into a swap to exchange a floating rate obligation for a fixed rate one. Bushline continued to do so on several occasions after May 2008. The claims for breaches of the FCR were therefore not out of time.

ANZ breached the Margin Undertaking by increasing margins on the Refinancing Loan while the Refinancing Swaps remained in effect and by requiring Bushline to re-pay and re-borrow the Financing Loan as the Refinancing Swaps expired. It did so for the first time in December 2008, when it first increased the BKBM margin to 0.85 per cent. Bushline’s claims for those breaches were, therefore, within time.

ANZ breached the Monitoring Undertaking as regards the possibility of breaking the swaps probably as early as August 2008, but certainly in October 2008. Bushline’s claims for the breaches were, again, therefore within time.

The High Court must now determine the question of damages, which could be significant.

The Court of Appeal did not support the High Court’s view that ANZ was entitled to rely on its disclaimer clauses because independent legal advice had been provided where ANZ was found to have misrepresented its financial products.  The Court seems to have reasoned that the just result is that the Bank should compensate the Coomeys for any losses suffered as a result of the Bank’s misrepresentations and breached undertakings.  The Coomeys were unsophisticated, yet they were offered complex swaps arrangements.  The offers made by ANZ to compensate the Coomeys previously were noted as being admissions of its wrongdoing.  However, they were substantially less than the loss sought by the Coomeys.  It would be unreasonable to allow any party to rely on its disclaimers and exclude its liability in circumstances where the ANZ staff themselves did not fully understand the implications of its swaps on customer loans.

1. We refer to the CRA but the same analysis applies to the Contracts and Commercial Law Act 2017, which replaced and repealed the CRA.
2. Section 35 CCLA