Key points

• A financier is not acting unconscionably in holding a broker to the standards imposed by their contract or arising from the broader legislative framework, nor is rigorous investigation (to determine if those standards have been violated) necessarily unconscionable.
• A misleading or deceptive conduct claim is only as good as the evidence called to prove it. It is not enough to point to what might be misleading or deceptive and ask the courts to infer from there.
• The obligation of procedural fairness in professional memberships does not extend to brokering accreditations.

Alert content

A recent case of the Federal Court of Australia (Markovic J), Hudson v National Australia Bank [2022] FCA 1222 (Hudson’s Case), reviews the duties and diligence owed between financiers and their brokers, both in how those relationships are maintained and how (and when) they should be terminated. Issues relating to procedural fairness are examined in the context of termination of brokers for misconduct as well as allegations of misleading and deceptive conduct arising out of the communication of that termination to other financiers.

The broader context at play was the national consumer protection regimes created by the National Consumer Credit Protection Act 2009 (Cth) (National Credit Act) and Australian Consumer Law as scheduled to the Competition and Consumer Act 2010 (Cth) (the ACL). The claim was brought by Kerry Hudson, director of Leaseworks Australia Pty Ltd (the Brokers), against National Australia Bank Limited (NAB) and its wholly-owned subsidiary Finance & Systems Technology Ltd (FAST).

Facts

Since 2007, the Brokers brokered insurance, asset, and mortgage financing arrangements between consumers and various financiers, including NAB, using FAST’s mortgage bulking facilities pursuant to an originator agreement (the Sub-Originator Agreement).

In early 2014, the Brokers purchased customer files (a trail book) from another broker who had been permanently banned from engaging in credit activities and was previously convicted of fraud. Those files were subsequently uploaded to FAST’s origination facility. The source of the files, and their use by the Brokers, was discovered by FAST, who suspended and later terminated the Sub-Originator Agreement with the Brokers. FAST notified other financiers about the suspension and termination. It did this as the Brokers no longer had access to FAST’s mortgage bulking facilities by which FAST made applications to those other financiers.

Claims advanced

The Brokers commenced proceedings alleging that, in terminating the Sub-Originator Agreement as it did, FAST, as an aggregator and NAB, as a financier had:

1. engaged in misleading or deceptive conduct within the meaning of section 18 of the ACL;
2. engaged in unconscionable conduct within the meaning of section 21 of the ACL;
3. denied the Brokers natural justice and procedural fairness when making the decision to terminate;
4. breached a clause imposing good faith obligations on the parties to the Sub-Originator Agreement; and
5. breached the confidentiality clause of the Sub-Originator Agreement.

Decision

Justice Markovic dismissed the Applicants’ claims in their entirety.

Misleading or deceptive conduct

The Brokers alleged that the statements made by FAST to other financiers that the Brokers had been suspended was misleading or deceptive in circumstances where the Brokers had not been suspended, and further had been given permission to use the trail book files.

There were four fatal errors with the Brokers’ claim of misleading or deceptive conduct, though it appears that any one of them established on its own would have been sufficient to defeat the claim.

1. The Brokers were unable to establish “with any precision” the representations which they alleged were misleading or deceptive. The evidence relied on was the recollection of the author of an email sent to Westpac, regarding the Brokers’ purchase of the trail book, based on a call that author had received from a staff member of FAST (the Westpac Email). The Applicants did not establish which of the alleged matters canvassed in the email were said to be misleading or deceptive. Her Honour stated that the onus lay with the Brokers to precisely identify the representations said to be misleading or deceptive. Her Honour further rejected an invitation to draw an inference about the statements based on the FAST staff member not being called to give evidence – on the basis that his evidence would not have assisted as the Applicants’ failed to identify which of his alleged statements were misleading or deceptive.
2. The statements in the Westpac Email were not misleading or deceptive. The email described what NAB had actually done to investigate the use of the trail book by the Brokers, and the findings that NAB had made based on that investigation.
3. The Brokers did not establish reliance. The Brokers failed to call evidence from other financiers who terminated Ms Hudson’s accreditations on the basis of the Brokers’ conduct.
4. Her Honour also considered in obiter the question of causation. Her Honour stated that the Brokers also failed to establish causation because they did not proffer a counterfactual – i.e. what would have happened if Respondents had not conducted an investigation, if the statements in the Westpac email had not been made, if other financiers had not also terminated her accreditations. There was no evidence of alleged loss.

The takeaway is that such claims need to be identified with precision, and all elements must be clearly established by the party seeking relief.

Unconscionable conduct

The Brokers alleged that FAST and NAB acted unconscionably in forming “false conclusions” about the Brokers, without a proper hearing, and consequently suspending and then terminating them.

Her Honour considered the relationships that NAB and FAST had with the Brokers separately –such interests and relationships were different and, to the extent unconscionability may arise, it must be considered in the context of each relationship.

In terms of NAB, Her Honour found that NAB’s relationship with Ms Hudson arose commercially in the context of the National Credit Act. The Act does not permit behaviour other than in accordance with its standards, and in that context the actions taken by NAB against Ms Hudson (in conducting an investigation and review of her accreditation) were not unconscionable.

The relationship that FAST had with the Brokers arose via the Sub-Originator’s Agreement, and so the question was whether it had acted unconscionably in choosing to suspend and ultimately terminate that agreement as well as to contact other financiers about the Brokers’ conduct. Her Honour similarly found that FAST had not engaged in an unconscionable conduct, noting that FAST had a contractual right to terminate the Sub-Originator Agreement without cause and that some of the key alleged events (said by the Brokers to demonstrate unconscionability) had not been proven.

Her Honour’s comments are illuminative on unconscionable conduct between members of the industry – here financiers and brokers. This was a commercial arrangement that was well-detailed, documented, and regimented both in contract and by operation of law (most relevantly the National Credit Act). In that arrangement was a process for the breakdown of relationships, their investigation, and the suspension or termination of any agreement, accreditation, or access to brokering platforms like that operated by FAST. Taking advantage of those processes is not itself unconscionable – engaging in rigorous investigation or robust questioning is not inherently unconscionable, particularly when a legislative regime that does not allow deviation from a standard. This can be contrasted to customer-financier type relationships, where the balance of power and expectation of adherence to a standard is not equally shared by both parties. This is why Hudson’s Case provides another dynamic to the discourse on unconscionability under the Australian Consumer Law.

Denial of natural justice or procedural fairness

By this claim, the Brokers sought to avail themselves of the recognised obligation of natural justice, seen in memberships of professional bodies or certain trades, in their relationships with FAST and NAB. Specifically, the Brokers argued that this obligation applied to the decision-making process to disaccredit them.

Her Honour rejected the claim and found that no such duty, as between brokers and accreditors, exists. Her Honour found that the Brokers were not “members of a club, an unincorporated association or voluntary organisation”, nor were they subject to any set of rules governing such membership. Their position cannot be likened to that of any sports player, whose position depends on membership of (and adherence to the rules of) a governing body for their sport. Rather, the Brokers’ relationship with NAB and FAST was one of contract. Accreditation is not the same as membership.

Breach of Sub-Originator’s Agreement

The Brokers alleged that NAB and FAST had failed to comply with a duty of utmost good faith, as well as a confidentiality obligation, imposed on the parties by the Sub-Originators’ Agreement.

First, clause 7.1.1 obligated Leaseworks and FAST to “show the utmost good faith and attention to their mutual business activities and use their best endeavours to promote, develop and extend the mutual business interests of both parties”. Her Honour rejected that the clause extended to apply to clauses in the Sub-Originator’s Agreement permitting its termination at convenience, but even if it did apply, it did not amount to a breach because the parties had good reason to terminate (i.e. concerns about the Applicants’ use of the trail book).

Second, the Brokers alleged that certain communications between FAST and other financiers breached the confidentiality obligation contained in the Sub-Originator’s Agreement. Her Honour rejected that claim, finding that the Brokers had not been able to establish that certain communications took place, but moreover that the clause ensured the confidentiality of information “relating to the mutual business interests of both parties which is obtained by both parties”, which did not include the suspension and termination of activities.

Lessons learnt

Consumer and credit legislation is frequently, and often authoritatively, litigated between financiers and the consumers sought to be protected by it. Hudson’s Case provides a further layer to those regulatory regimes, by looking at how those protections are maintained when sought to be relied on as between the financiers and brokers themselves. Issues relating to notification and provision of clean letters of separation are matters often raised and agitated – Hudson’s case provides some direction for the industry as to how these issues will be considered by the Courts.

Hudson’s Case also serves as an emphasis on the need for a clear, well-rounded, and multifaceted case in misleading or deceptive conduct - what something might look like is not necessarily what it is, and without evidence to establish there is little for a court to do with a claim.

Way forward

The parties have until 11 November 2022 to seek leave to appeal the decision to the Full Court of the Federal Court of Australia. It remains to be seen whether any party will seek leave to appeal.

Further information

Louise Massey (Partner), Brooke Spain (Managing Associate), and Danielle Gilby (Solicitor) are currently acting in Hudson’s Case. Please contact us if you wish to receive developments about the matter or any other matters.