Australia: A bikie made me do it: cheque fraud, bank policy and the Contracts Review Act

Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24

A recent NSW Court of Appeal decision considered whether a defendant should be given the opportunity to defend a bank's claim to recover money owning from a dishonoured cheque, on the basis that the policy which allowed the cheque to be paid before it cleared, generated an inherent and obvious risk of fraud.

The facts

Teachers Mutual Bank Ltd (TMB) had a "no clearance timeframe" policy for cheques. The policy allowed TMB to pay cheques presented for payment by its school teacher members without taking steps to ensure the account contained clear funds. In April 2009, Mr Dunwoodie (Mr D) presented a cheque to TMB which was paid under the no clearance timeframe policy but which was later dishonoured. The dishonoured cheque led to TMB obtaining default judgment against Mr D in the amount of approximately $66,000.

Three years later, Mr D applied to the NSW District Court to set aside the default judgment. He asserted that he had been forced by members of a bikie gang to act against his will to draw the cheque, present it and withdraw the money from the TMB. Mr D had to demonstrate to the Court that he had a bona fide ground of defence. As the Court's power to set aside the regularly obtained default judgment is discretionary, Mr D also had to convince the Court that he had an adequate explanation for the failure to defend and an explanation for his delay in making an application to set aside the judgment.

The District Court dismissed Mr D's application and the question before the Court of Appeal focused on whether Mr D had a bona fide ground of defence.

Grounds of defence

1. Duress and fraud

Mr D's first argument was that that the withdrawal from the TMB account was undertaken under duress or fraud and that he should be permitted to defend the claim on that basis. The Court of Appeal dismissed that argument because there was simply no suggestion that TMB was in any way a participant in, or cognisant of, either the fraud or the duress to which Mr D claimed occurred. The Court's reasoning is unsurprising – it would be breaking new ground to hold a third party bank liable for the unlawful actions or misconduct of others in circumstances where no notice of that conduct existed.

2. Contracts Review Act

The next potential ground of defence considered by the Court of Appeal lay under the Contracts Review Act 1980 (NSW) (CRA). The CRA gives the Court a broad discretion to give relief in circumstances where it finds "a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made...".¹ Section 9 of the CRA provides that when determining whether a contract is unjust "the Court shall have regard to the public interest and to all the circumstances of the case..."

Mr D relied on the decision of the New South Wales Court of Appeal in the Tonto Home Loans case,² and, in particular, a passage from that case to the effect that it is appropriate, and in the public interest, for the Court to administer the provisions of the CRA to protect people who may be taken advantage of because of a lender's indifference or disregard for obvious risk and lax operation of appropriate safeguards. Mr D sought to defend TMB's claim on the basis that the cheque clearance policy "generated an inherent and obvious risk of fraud" and exposed [TMB's] ""members to predation by third parties", a risk which was manifest, and that the debit transaction was only possible because of that policy and, accordingly that the contract was unjust."³

The decision

The dissenting judge, McColl JA, dismissed the proposed CRA defence as having no prospects. Her Honour observed that there was no arguable defence that TMB's cheque clearance policy generated an obvious risk of fraud or exposed TMB's members to predation by third parties".⁴ However, this was not a view shared by the other members of the Court (Basten JA and Ward JA).

Basten JA observed that "[b]y paying cash in such circumstances, the Bank was, in effect, providing credit." And that "[s]uch lending may arguably be an irresponsible practice from the perspective of the customer."⁵

His Honour considered that the policy could be exploited and noting there was a "rich case law" under the CRA, concluded that the imprecision of the statutory standards of the CRA was a reason for there being an arguable defence under the CRA.

The Court of Appeal made orders to remit the matter to the District Court to hear and determine the application to set aside default judgment on the basis that there was an arguable case for relief under the CRA.

Comment

The facts presented to the Court of Appeal suggested Mr D may have been a victim of extortion. They also show he presented a valueless cheque to a bank. It follows that the bank, TMB, was a secondary victim to extortion, and a primary victim of fraud.

In these circumstances, it would be an irrational outcome (and arguably contrary to the public interest) if liability for debts incurred to a bank could be avoided because a bank's policy was capable of being manipulated by acts the law deems to be criminal. Although the decision of the Court of Appeal is not determinative of such matters, it does highlight the ability to use the CRA as a shield to what otherwise should be straightforward debt claims. That possibility serves as a timely reminder for banks to review their non-loan account policies and procedures to ensure they are appropriate.

Footnotes

¹Section 7(1) of the Contracts Review Act 1980 (NSW).
²Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389.
³Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 at [26].
⁴Ibid at [68].
⁵Ibid at [75].

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