Foreign Currency Loan Fiasco in 1980s: Dwyer v Commonwealth Bank of Australia - 5 |
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School of Economics and Political Science In the early 1980s, in the first flush of financial deregulation, three of Australia’s four major banks embarked on a strategy of marketing loans denominated in foreign currencies to small businesses and farmers. Devaluation of the Australian currency, especially against the Swiss franc, saw an escalation of principal owed in Australian dollars by such borrowers. The resulting crisis produced a wave of litigation against the banks. Some of the court judgments favoured the borrowers, albeit these judgments were in a minority. Legal precedent, judicial culture and the superior resources of the banks proved formidable obstacles to borrower success in the court system, not least against the Commonwealth Bank of Australia. This paper examines the judicial experience of one litigation in particular – that of Dwyer & Anor v. Commonwealth Bank of Australia. The thrust of Dwyer, although not identical, is representative of the experience of foreign currency loan borrowers in the Australian courts. |
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9 The Appeal Judgment On 30 June 1995 Justice Sheller, Justices Clarke and Handley concurring, delivered a judgment dismissing the appeal (Dwyer v Commonwealth Bank of Australia, 1995b). Relevant text comprises 6 ½ pages. The Record Sheet summary reads thus:
On close examination, the Appeal judgment is more guarded in tone than the Staff judgment, but its quality is little better. Partly the common elements are because Sheller repeats some of the inaccuracies of the Staff judgment and perpetuates its parameters. No questions of law are at stake. The issue remains the credibility of Dwyer and, to a lesser extent, his solicitor Baird. Sheller refers to instances of documentation to which Dwyer and/or Baird would have been exposed. Says Sheller (p.14): ‘There was ample evidence from officers of Westpac and other finance consultants of advice given to Mr Dwyer about the ramifications of a foreign currency facility and the risk of exchange rate fluctuations. … [A 1982 Westpac] document referred to the volatility of exchange rates and interest rates’. But such references imply that the meaning of the text is transparent. The Appeal judges to a man exposed themselves during the hearing as novices on currencies. We have also seen how Sackar drew a particular, partisan and dubious interpretation from the Bamfield report.
Formally, the matter of the recovery of paid withholding
tax remains open. • what the bank wrote or said • whether what was written or said was incorrect or misleading, or written or said negligently • to what extent, if any, the bank was under a duty to provide more information or give more advice If in any of these steps the bank was in breach of its duty
• to what extent and in what way, if any at all, the
customer relied upon what was written or said or would have relied upon
the further information or advice • whether loss resulted. Sheller agreed with the plaintiffs that his Honour ‘short circuited the process by dealing with reliance without determining what representations were made’ (p.11). But Sheller proceeds to perform his own short circuit – ‘On its face his Honour’s approach appears to be unsatisfactory but, on analysis, I think the findings he made justify his conclusion’. On his way to this evaluation Sheller claims curiously that ‘[Staff] proceeded on an assumption that the CBA was under a duty “as alleged” that is that CBA should have given more information or advice than it did’ (p.10). On the contrary, the idea of fiduciary duty made no entrance in the trial hearing. The transcript of the trial judgment reads (1991b: 5): ‘… if one assumes a duty upon the defendant Bank, as alleged, I cannot be satisfied that Mr. Dwyer would have relied upon or accepted such information or advice as the Bank would have tendered …’. Staff is speaking hypothetically; he did not assume a duty upon the defendant Bank. Sheller likes Staff’s conclusions but doesn’t like his reasoning. Sheller finds another route to the attractive conclusions, this time circuitous, although without having to retrace Staff’s steps. Sheller claims that the appellants, through Dubler, came before him arguing that the Bank had a duty to ‘demolish the theory attributed to Mr Looke’ (p.13), or alternatively ‘to give general warnings which would have been “necessarily inconsistent with and would hence debunk the Looke theory”’ (p.14) Kevin Looke was Dwyer’s accountant until 1982, and Looke became aware that some brokers were touting the availability of foreign currency loans. He disseminated this information, but his involvement appeared to be that of generating sufficient interest from business people to join a consortium by which a substantial block foreign currency loan would be obtained; obtaining a bank guarantee for the block loan was also a necessary step. Looke did not attract much interest in this proposition. Looke’s relationship with Dwyer (and hence his capacity for continuing influence and advice) following this early dead-end was a subject of dispute among the parties. Looke died in 1984 so he was not available to constrain the use and abuse of his name in the Dwyer hearings. The so-called ‘Looke theory’ is the presumption that a foreign currency loan might involve losses and gains from currency fluctuations, but over time these fluctuations would not be great in amplitude and would tend to balance out. In short, the implication of the ‘Looke theory’ is that a foreign currency loan would be a viable proposition.
It is this optimistic scenario, with Looke’s name on it,
that the trial judge Staff claimed was held by Dwyer, such that no amount
of warnings as to parlous risk would have dislodged Dwyer from his ‘blind
faith’. Said Sheller: ‘This makes their argument on appeal quite artificial’. So the appeal was doomed. But the ‘far cry’ is a concoction. There is a common thread. Dwyer had become aware of foreign currency loans from Looke. He had subsequently inquired about and applied for such a loan on several occasions. Did he understand at any point what he was getting himself into? In his inquiries with Baird he was met with various presentations which appear to be generally of a formulaic nature. The Bank thought that this was more than enough in quantity and quality. The Trial judge agreed. So did the Appeal judges. The crucial Savell/Rogers CBA meeting was, to Dwyer and Baird, little different from meetings with other potential lenders/brokers, if anything probably less informative on the key issue of risk. The Appeal judges added additional subtleties to Staff’s conclusions. First, Sheller confronts the divergence of memory between the two sides of what was said at the Savell/Rogers meeting (indeed, he opens with this issue). Savell is alleged by Dwyer to have claimed that the floating of the Australian dollar and the fact that foreign currency loans are mediated through the US dollar both contribute to a stable regime for a foreign currency loan. Savell denies having made either claim. The colour of Sheller’s articulation is such that he cannot conceive that a bank officer’s memory might be flawed. It doesn’t matter that ‘Mr Savell had no recollection of meeting Messrs Baird and Dwyer’ (p.12). It is sufficient, concurring with Staff’s reasoning, that Dwyer’s account was not corroborated, including by Baird’s notes. Second. Sheller hedges his bets and transcends the difficulty of establishing veracity by reasoning that it doesn’t matter. ‘It is not self evident that if [Savell’s] statements were made they were wrong’ (p.11). Third, reliance is everything. The importance of reliance provides an additional layer for why what was said was not of primary concern. Dwyer was held to come to the meeting only to hear about the difference between two forms of foreign currency loans. In this Sheller concurs with the Trial judge. Sheller goes further in claiming that, insofar as Dwyer shifted from the initial simulated loan to a direct foreign currency loan in early 1985, that extra step and the deliberations behind it vitiated any notion that the Savell/Rogers meeting was decisive in determining Dwyer’s long term path of action. 10 The Missing Background
The Dwyer court cases were run almost completely without
context. The economic backdrop entered only through the murky character of
graphs displaying relative currency ratios. Remarkably, legal precedent
played the most minimal of roles in the Dwyer hearings. Foreign currency
cases figure in the submissions of the parties both before and following
the Trial hearing. The plaintiffs forwarded Potts v Westpac (1990) and
Mehta v Commonwealth Bank By contrast, the Bank forwarded David Securities (1989) as precedent for the onerous test to argue for ‘duty of care’ (Dwyer v Commonwealth Bank, 1991d). On the matter of disclosure of exchange risk, the Bank also forwarded David Securities v Commonwealth Bank (1989) (and the failed Appeal initiated by the borrowers, not referenced here), Ralik v Commonwealth Bank (1990) and the Mehta Appeal, successful for the bank following an adverse Trial judgment (Mehta v Commonwealth Bank, 1991). In the posthearing submission (Dwyer v Commonwealth Bank, 1991e), the Bank again forwarded Ralik (1990) and the Mehta Appeal judgment (1991), amongst others, to claim brutally in the Dwyer case, ‘There is no duty’. None of this mattered, save for brief cameos. Most surprising of all is the absence of Quade. [The Quade judgement states “the bank was told by their own treasury department not 'if' or ‘maybe’ the Australian dollar would devalue but it will devalue substantially.” This information was known to the bank prior to the bank selling this loan to its trusting customers. It was withheld from the borrowers that were sold a foreign currency loan by CBA so that they could not make an informed decision.] Quade appealed on the grounds of nondiscovery, a problem for all early litigants. The Appeal judgment overturning the Trial judgment that favoured the CBA is, to this author’s knowledge, the only foreign currency case proceeding through the courts that was lost by the Commonwealth Bank. Non-discovery itself was a telling factor. According to Burchett J (Quade v Commonwealth Bank of Australia, in ALR, 1991: 577/8):
It was found that the Bank assumed the responsibility to advise, that there was reliance, and that the advice was inadequate. This judgment was in February 1991, three months before the Dwyer case began in May. Quade had been consigned to oblivion in three months. Bank documents were available in the Dwyer case (thanks to Quade?). They made only a cameo appearance in the Court hearings (given their contents, this absence hardly does credit to the Dwyer counsel). Bank documents (especially the ‘G’ documents) and other material will be the subject of a paper complementary to this one. 11 Conclusion
The prospect of the Dwyers winning in their court actions
was close to zero. One begins with the structural asymmetries in court
actions. The banks command massive resources. They can purchase the cream
of legal talent, and John Sackar’s powerful performance in Dwyer indicated
that he is clearly in that category. Behind counsel, it is clear that
there was an army of staff devoted to gathering material to demolish the
Dwyer case. Of course, there was more at stake than this single case.
There was the necessity to sustain the momentum of victories in foreign
currency litigation and to stem the damning 12 References Bamfield & Company (1985), ‘Report’ [on the relative merits of Direct Foreign Currency Borrowing and Simulated Foreign Currency Borrowing]. 29 January. 3pp. Plaintiffs’ Bundle of Documents, pp.353-355. Baird, David (1991), ‘Dwyer –v– Commonwealth Bank of Australia: Supplementary Statement of David John Baird’, 23 May. 7pp. [Campbell] Committee of Inquiry into the Australian Financial System (1981), Australian financial system: final report. September. Commonwealth Bank of Australia (1991), ‘Overview of Foreign Currency Lending’ [Supplementary Submission #3a], in Martin Inquiry [Standing Committee on Finance and Public Administration], Australian banking industry, Submissions, Volume Ten, 2430-2490. Dodd, Max (1998), Affidavit for Gregory Ronald Roach v Commonwealth Bank of Australia, 10 March, 11pp. Dwyer & Anor v Commonwealth Bank of Australia (1991a) Supreme Court of New South Wales No.50463/90 Transcript of Hearings 27 May – 12 Sept. Dwyer & Anor v Commonwealth Bank of Australia (1991b) Supreme Court of New South Wales No.50463/90 Judgment Staff AJ 18 October 1991. Dwyer v Commonwealth Bank of Australia (1991c) Plaintiff’s Topics for Submissions. 28 May. 5pp. Dwyer v Commonwealth Bank of Australia (1991d) Defendant’s Topics for Submissions. 27 May. 15pp. Dwyer v Commonwealth Bank (1991e) [Defendant’s] Outline of Submission. no date (July?). 4pp. Dwyer & Anor v Commonwealth Bank of Australia (1995a) Supreme Court of New South Wales Court of Appeal No.40663/91 Transcript of Hearings 27 April – 28 April.
Dwyer & Anor v Commonwealth Bank of Australia (1995b)
Supreme Court of New South Wales Court of Appeal No.40663/91 Judgment
Sheller, Clarke, Handley JJ 30 June 1991. Gerathy, J. (1991), ‘Statement of J Gerathy’ [filed for the Defendant]. 21 June. 3pp. International Division [CBA] (1984), ‘Swiss Franc Forecast – 1984/85’ [G34A], 22 June. Long, E. (1984), ‘Comments’ [G46], 7 August.
McLennan, J. R. (1990), Submission #36, in Martin Inquiry
[Standing
Kingston, Geoffrey (1997), “The Foreign Currency Loans
Affair: a
Martin Committee [Parliament of the Commonwealth of
Australia,
Roe, David, Treatt & Watts [Solicitors] (1982), letter to
Westpac, 25
Rogers, [Justice] Andrew (1990), “Developments in Foreign
Currency
Rogers, J. C. (1984), ‘Application for Advance’,
Memorandum, 23
Savell, W. L. P. (1991), ‘Statement of W L P Savell’ [filed
for the
Taylor, L. E. [Chief Solicitor & General Counsel] (1995),
to Mr G R Valentine, Tom (1997), “The Foreign Currency Loans Affair: Some Comments”, Australian Economic Papers, December, 362-368.
Weerasooria, W. S. (2000), Banking Law and the Financial
System, 5th Wyatt, R. J. [Acting Chief State Manager NSW] (1984), ‘Comments [re Dwyer loan security]’, 23 July. Other Court Cases Chiarabaglio v Westpac (1990) Federal Court of Australia Queensland No. G 159 of 1987 Judgment Foster J 21 July 1989. David Securities [Rahme] v Commonwealth Bank of Australia (1989) Federal Court of Australia NSW No. G 234 of 1988 FED No.208 Judgment Hill J 11 May 1989. Mehta v Commonwealth Bank of Australia (1990) Supreme Court New South Wales 50023 of 1989 Judgment Rogers J 27 June 1990. Mehta v Commonwealth Bank of Australia (1991) Court of Appeal New South Wales 40407 of 1990 Judgment Samuels, Meagher, Waddell JJ 28 March 1991, Ralik v Commonwealth Bank of Australia (1990) Supreme Court New South Wales 050261 of 1989 Judgment Cole J 14 August 1990. Potts v Westpac (1990) Supreme Court Queensland 657 of 1988. Judgment MacKenzie J 10 December 1990 Quade v Commonwealth Bank of Australia (1991) Federal Court of Australia NSW No. G 734 of 1989 FED No.24. Full Court Judgment Neaves, Burchett, Einfeld JJ 14 February. [reproduced in Australian Law Reports (1991), v.99, 567-600; Stephen Gageler, Reporter.]
Spice v Westpac (1990) Federal Court of Australia No. G 49
of 1987 Thannhauser v Westpac (1991) Federal Court of Australia Queensland No. Q G29 of 1989 FED 98 Judgment Pincus J 19 March 1991.
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