What happened?

The Court of Appeal’s recent judgment in Bank of New Zealand v The Christian Church Community Trust & Ors [2024] NZCA 645 (BNZ v Gloriavale) clarifies and aligns the legal framework governing the termination of banking relationships in New Zealand, which is commonly referred to as “debanking” [1]. The judgment overturns the High Court’s interim injunction, which had prevented BNZ from debanking the Gloriavale entities [2].

Helpfully for the banking community, the decision confirms that banks can rely on express contractual rights to terminate customer agreements and highlights the high bar for courts to imply terms into those agreements. Given BNZ’s express right to terminate in this case, the Court found that it did not need to decide whether the common law’s “default rule” or “expanded default rule” for implied terms apply in New Zealand. 

While this case primarily focused on interlocutory issues, the judgment provides valuable guidance for banks navigating debanking decisions. In particular, it emphasises the importance of clear, enforceable termination provisions and reaffirms judicial deference to express contractual terms. For those struggling to open or maintain bank accounts, the Court confirms that these access issues are policy questions best resolved by legislative or regulatory action.

This alert considers the judgment’s key points and significance. It also offers practical guidance for banks navigating debanking decisions.

Who needs to read this alert and why?

This alert should interest banks, financial institutions, corporate counsel, advocacy groups, and regulators seeking clarity on the legal limits of debanking under standard contracts. It should also interest legal professionals and academics analysing contract law, fiduciary duties, and the balance of power in banking relationships.

Context

BNZ had provided banking services to the Gloriavale entities for several decades. In July 2022, it decided to terminate the relationship under clause 8.2 of its standard terms and conditions (Ts&Cs), which allowed termination “for any reason” with 14 days’ notice. BNZ’s decision was guided by its internal human rights policy and prompted by the Courage v Attorney-General judgment [3], which found that children as young as six were employed at Gloriavale. 

BNZ initially provided Gloriavale with three months' notice of its intention to terminate, which was extended once at Gloriavale’s request. After BNZ declined a second extension, Gloriavale sought and obtained an urgent without-notice injunction from the High Court, later followed by an on-notice interim injunction. BNZ appealed the High Court’s injunction decision to the Court of Appeal.

The Decision

The Court of Appeal (Court) ruled in BNZ’s favour that there were no serious questions to be tried in respect of Gloriavale’s three claims: breach of contract, breach of fiduciary duty, and estoppel. As such, the Court ordered the lifting of the High Court’s injunction, on the condition that BNZ would provide Gloriavale an additional three months’ notice to facilitate an orderly transition of its business to another bank.

Claim 1: Breach of contract

Clause 8.2 of the Ts&Cs

The Court determined that clause 8.2 of the Ts&Cs allows BNZ to terminate the banking relationship "for any reason", without being restricted by the examples of reasons listed in the clause, or any requirement that the bank’s reason for terminating be of a specific nature. 

Applying standard contractual interpretation principles, the Court concluded that BNZ's only obligation was to provide 14 days’ notice, which it did. The Court found no basis to imply a substantive or procedural reasonableness requirement in BNZ’s decision, affirming that clause 8.2 preserves BNZ’s right to terminate the relationship unilaterally in its own interests.

“Default rule” and “expanded default rule”

The Court acknowledged that overseas authorities suggest a "default rule" may apply at common law, which requires that unilateral contractual powers or discretions be exercised honestly, in good faith, and not arbitrarily or capriciously, unless the relevant contract explicitly excludes this rule. Additionally, the Court acknowledged the emergence of an "expanded default rule" [4] in the United Kingdom, which requires that such powers and discretions be exercised having considered all relevant factors and disregarded all irrelevant matters.

The Court found that this interlocutory appeal was not the right setting to decide whether New Zealand should adopt the "default rule" or the “expanded default rule”. Rather, its preferred approach was that implied terms should ensure powers and discretions are exercised for "proper purposes", based on the contract's express terms and intentions. 

The Court concluded that even if the “default rule” applied in New Zealand, it could not be implied in the context of clause 8.2, which allows termination "for any reason". BNZ had not acted irrationally, unreasonably, or capriciously and had complied with the clause’s express 14-day notice requirement. Similarly, the Court found that the “expanded default rule” could not be implied in clause 8.2, as imposing the rule’s procedural requirements would contradict the clause’s clear process requirement, which simply required BNZ to provide 14 days' notice. The Court emphasised that implying terms requires a standard of "strict necessity", meaning a term cannot be implied if it contradicts an express term of the contract. 

A note of caution?

In obiter, Goddard J observed that if process obligations had been found in clause 8.2, then a serious question to be tried would exist due to deficiencies in BNZ’s debanking process. This underscores the importance of following a careful process when navigating debanking decisions. We offer practical guidance on procedural matters below. 

Claim 2: Breach of fiduciary duty

The judgment swiftly dismissed Gloriavale’s claim that BNZ’s decision breached a fiduciary duty, reaffirming that the relationship between a bank and its customer is contractual, not fiduciary. It notes that Gloriavale failed to provide any authority supporting this claim and did not demonstrate any aspect of their relationship with BNZ that would prevent BNZ from making termination decisions in its own interests.

Claim 3: Estoppel

The Court held that Gloriavale's estoppel claim added nothing to their breach of contract claim. The judgment recorded that if BNZ's Ts&Cs limited the circumstances in which it could close or suspend an account, BNZ must comply with those limits. However, without such limits, Gloriavale has no basis for estoppel to prevent BNZ from exercising its contractual right to close an account in its own interests.

Debanking is an issue for Parliament and regulators

The Court held that the risk of the Gloriavale entities being unable to open accounts with other New Zealand banks was insufficient to uphold the injunction and force BNZ to maintain their relationship.

In obiter comments, the Goddard J suggests that such broader public interest issues are for Parliament to address, not BNZ's responsibility. It opines on whether BNZ had a public interest obligation to provide minimal banking facilities to customers without alternatives, but this line of argument was not resolved. It also notes that while some jurisdictions impose such obligations by statute, New Zealand does not, and the Court did not find it arguable under common law. 

The issue of debanking was raised in the Commerce Commission’s Final Competition Report on Personal Banking Services [5]. Last week, in response, the Minister of Finance, Hon. Nicola Willis, published a revised Financial Policy Remit [6] for the Reserve Bank of New Zealand, together with a new letter of expectations. In the latter, the Minister states that “[she] expect[s] the Reserve Bank to work with wider government to support the banking industry to take actionable steps toward making basic bank accounts more widely available, ensuring that every New Zealand has access to essential banking services without unnecessary impediments” [7]. These expectations do not, of course, go so far as to enshrine a right to a bank account.

Practical guidance for banks navigating debanking decisions

In light of the judgment and current public debate, we offer the following practical guidance for banks navigating debanking decisions:

• follow any internal policy designed to guide decision-making. This could be a generic account closure policy, or a risk-specific one focused on anti-money laundering, sanctions or foreign tax policy risks, etc; 
• review applicable terms and conditions to understand the bank’s termination rights and any restrictions on contractual discretion, noting that not all termination rights are unfettered. Those with an express or apparent obligation to act “reasonably” should consult debanking jurisprudence;
• review customer due diligence and transaction history to understand the nature and extent of risks posed;
• follow a fair process, led by an independent bank representative who consults, demonstrates available flexibility and escalates decisions as needed, while documenting each step. These steps will assist if the bank is found to have an obligation to act “reasonably” from a procedural perspective. A good process also mitigates against customer complaints;
• determine if reasonable grounds for debanking exist, noting that regulatory, contractual and capital market risks, and commercial interests, have proven defensible in recent New Zealand cases;
• explore if lesser measures, like service withdrawal, heightened monitoring, enhanced due diligence, a trespass notice, or an expectation letter, can mitigate the risks identified;
• consider the tension between risk mitigation and financial inclusion, noting relevant public debate and other banks' responses; and
• quantify litigation and public relations risks and ensure they are accepted and managed at the appropriate level internally before debanking.

Questions?

If you have any questions about debanking or this decision, please contact one of our experts.

Footnotes:

1. The judgment aligns with prior New Zealand case law - such as Targa Capital Limited v Westpac New Zealand Limited [2023] NZHC 230 - in which bank customer petitions for injunctions were declined.
2. Christian Church Community Trust v Bank of New Zealand [2022] NZHC 3271 (First injunction decision). Christian Church Community Trust v Bank of New Zealand [2023] NZHC 2523, [2023] 3 NZLR 190 (Second injunction decision).
3. Courage v Attorney-General [2022] NZEmpC 77, (2022) 18 NZELR 746.
4. The “expanded default rule” is primary derived from Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661.
5. Commerce Commission New Zealand Te Komihana Tauhokohoko, Final Competition Report on Personal Banking Services dated 20 August 2024, available here.
6. https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/about/financial-policy-remit/financial-policy-remit-december-2024.pdf.
7. https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/letters-of-expectation/letter-of-expectations-competition-dec-2024.pdf.