Gloriavale v BNZ: Why BNZ can't close accounts over child labour...yet

When you have a contract that gives you the discretion to stop providing services “for any reason”, surely that means you can use "any reason" to stop providing services?

While this seems clear on the face of it, BNZ recently found that closing Gloriavale’s bank accounts was not so simple. Meanwhile, Westpac followed a different decision-making process when de-banking a customer controlled by a Russian oligarch linked to Vladimir Putin, and Westpac ultimately had a better outcome.

So what does a party need to consider when using a contractual discretion?

In 2022, the Employment Court found that children as young as six had been employed by Gloriavle Christian Community (Gloriavale). The highly publicised decision of the court found Gloriavale in breach of employment law by employing children, failing to pay minimum wage, and more. In 2022, Bank of New Zealand (BNZ) decided the Employment Court decision breached of their Human Rights Policy. BNZ’s standard terms and conditions allowed BNZ to close any accounts for “any reason”. Therefore BNZ issued a notice to close all bank accounts held by Gloriavale. Gloriavale approached other banks seeking a new bank to move their accounts to but was turned down. On 6 July 2022, BNZ ceased its 40-year business relationship with Gloriavale.

Gloriavale applied to the High Court for an interim injunction to temporarily prevent BNZ from closing their accounts. Gloriavale argued the closure would mean they were unable to make payments for food, rates, medical care, and clothing for their members and they had no other banking option immediately available to them.

Gloriavale blog

At law, when a party exercises a contractual discretion “for any reason” they must still act in good faith and make a reasonable decision. The court found BNZ had not done this as they did not take all relevant factors into account in its decision making. In particular, BNZ had not considered that other banks would not necessarily accept Gloriavale as a banking customer – meaning Gloriavale could be left without access to banking. Subsequently, the Court granted the interim injunction preventing BNZ from closing Gloriavale’s accounts until a final decision is made at the full hearing.

In contrast, in 2022 Westpac New Zealand Limited (Westpac) found their customer Targa Capital Limited (Targa) was controlled by Russian oligarch Alexander Abramov who had been subject to financial sanctions by Australia in 2022 due to his close ties with Russia’s president. New Zealand had also imposed travel sanctions on Mr. Abramov and his family. Similarly to the Gloriavale case, Westpac notified Targa it was terminating their business relationship and Targa sought an interim injunction to prevent Westpac from closing their accounts.

The terms of the contract between the parties stated that while Westpac was able to terminate an account, they could only do so on reasonable grounds and by applying a reasonable and consistent approach. The facts of this case were such that Westpac could have faced serious regulatory issues had they continued to act for a customer who they could not guarantee was not being controlled by a sanctioned individual. As such, Westpac believed on reasonable grounds they needed to terminate their business relationship with Targa to preserve their legitimate commercial interests. The Court consequently rejected Targa’s application for an interim injunction.

Unlike the UK and Canada, New Zealand law does not have parameters in place to protect “financial inclusion”, in particular the right to access banking services. As such, banks are generally entitled to cancel contractual relationships with customers who are in breach of their obligations. However the two cases above highlight differences in how banks exercised their discretion to terminate and therefore the lawfulness of that termination.

Interestingly, BNZ’s standard Terms and Conditions which formed its contract with Gloriavale sought to give BNZ greater freedom by allowing them to close any accounts for any reason and not requiring them to act reasonably. This somewhat backfired as BNZ made a decision looking at one factor rather than all the relevant factors and the bigger picture. While at first glance Westpac’s terms seem more restrictive, Westpac benefited from the requirement to be reasonable being written into their terms and conditions, as the ‘default rule’ was at the forefront of their decision-making.

The full decision of the case between Gloriavale and BNZ will be important for the future development of the law. Generally commercial parties want to maintain the freedom to contract so that they can enter into any agreement they want, so long as it is not illegal, and give effect to that agreement without interference from the courts. However in recent years there has been a push to ensure consumers and small businesses are protected when entering into agreements. For example, through the prohibition on unfair contract terms in some small business agreements (see more here) and in consumer contracts (see more here). Banks, insurers, and similar service providers will certainly want to know they have control over who their customers are and will be watching this case unfold.

Lessons from these cases

  • Review your agreements and business processes to check whether they are fit for purpose. Ensuring your Terms and Conditions, Terms of Service, and other agreements are prepared by a competent lawyer gives you greater certainty that you can rely on the contract.
  • When making decisions, look beyond just what the contract says you can do and think about a “reasonable person” in the same situation as you would do.
  • Include a requirement in decision-making processes to act reasonably and take all relevant factors into account.
  • If you are concerned a decision could be contentious, seek legal advice before making the decision.

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