The High Court of Australia recently found Westpac liable for defamation for dishonouring 30 cheques when there were sufficient funds to cover them.
However, the Court divided 3-2 over whether the defence of qualified privilege applied, with the majority holding that it did not.
This Brief Counsel analyses the Australian decision and its potential impact on New Zealand law.
Aktas v Westpac Banking Corporation Ltd  HCA 25 (4 August 2010) concerned the sole shareholder of a real estate agency business ("Homewise") under a franchising agreement with Century 21 Australia Pty Ltd. Among other services, the plaintiff's business collected rental payments from clients' properties. Rent was paid into the business's trust account, held at the bank, and clients were subsequently paid their rental income out of this account. After a disagreement with the franchisor, Homewise had had a default judgment entered against it, and a garnishee order was made attaching to all debts due to Homewise from the bank.
Once it was notified of the garnishee order, the bank changed the status of Homewise's accounts with it, including the trust account, to prevent any money being paid out of them. In doing that to the trust account, it unknowingly breached section 36(2) of the Property, Stock and Business Agents Act 1941 (NSW), which protects trust accounts from garnishee orders. As a consequence, 30 cheques drawn against that account were marked "Refer to Drawer" and returned to the payees, even though there were sufficient funds in the trust account to pay them and the cheques should have been honoured.
At trial the jury held that the bank, by notifying the payees of why the cheques had not been honoured, had published defamatory imputations in respect of the plaintiff and Homewise. That finding was not challenged on appeal. But the trial judge and the Court of Appeal held that the defamatory statements were covered by the defence of qualified privilege and it was this decision that was, by a bare majority, overturned by the High Court.
In the High Court, all the Judges accepted that, for the defence of qualified privilege to apply, there must be evidence that both the giver and the receiver of the communication in question had a special and reciprocal interest in the subject matter, such that it was desirable as a matter of public policy that the communication should be protected, even though it was defamatory. However, the Judges' opinions divided on whether that test was met in this case.
The majority judgment
The majority view was that the defence of qualified privilege did not apply because the allegedly privileged occasion arose only because of the bank's mistaken view that it was required to freeze the trust account. There was no need for any communication between the bank and the payee if the cheque was to be honoured. On that basis, there was no reciprocity of interest, because the payee could have no interest in receiving a communication of refusal to pay a cheque when, in fact, there were sufficient funds to meet the cheque.
The majority placed some reliance on an English decision, Davidson v Barclays Bank Ltd  1 All ER 316. In that case, the bank dishonoured a cheque drawn by the plaintiff after the bank's failure to comply with a stop order placed by the plaintiff on an earlier cheque meant that his account had insufficient funds to meet the second cheque. In that case, it was held that a bank could not create an occasion of privilege by making a mistake that called for communication on their part, and a defamation action brought by the plaintiff accordingly succeeded.
Beyond this, however, the majority saw the central argument as being whether there was a public interest in protecting this communication. Ultimately, it concluded that "to hold banks responsible to their customers not only in contract, but also for damage to reputation, is conducive to maintaining a high degree of accuracy in the decisions that banks must make about paying cheques."
In the minority, Heydon and Kiefel JJ offered separate but complementary reasons why qualified privilege should attach to such communications.
Essentially, Heydon J held that the occasion of this communication was privileged, and the bank's mistake about the effect of the garnishee order on the trust account did not change that. His Honour focused on discussion in an Irish decision, Pyke v The Hibernian Bank Ltd  IR 195, in which Black J pointed out that recognised occasions of privilege included matters such as reporting suspected misconduct of public officials or charging a person with a crime, even though it may turn out that the truth was that there was no misconduct or crime. Even though the relevant communications were brought into existence only because of an honest mistake, they remain privileged occasions nonetheless.
In effect, Heydon J pointed out at that the very point of having a defence of qualified privilege was to protect mistaken communications made in good faith in circumstances where there was a sufficient public interest in allowing mistaken communications to be made. Here, all parties had a relevant interest in the communication; the bank had an interest in communicating its reason for refusal (beyond its own statutory self interest), and the payees had an interest in knowing that the cheque had "bounced" so that they could try to seek payment some other way and make sure that their own accounts would not be affected as a consequence. Denying the defence of qualified privilege where there had been a mistake would effectively mean that the defence could never operate.
Heydon J also resisted the idea that the laws of defamation should effectively be used to incentivise banks to be vigilant in their procedures for dishonouring cheques. The need for the bank to honour its contract with its customer was sufficient to incentivise that vigilance.
Kiefel J took a different view of the issue of public policy, seeing it as being grounded on the necessity of freedom of communication between commercial parties in the ordinary course of business. Furthermore, Kiefel J drew on comments by Black J in Pyke to demonstrate that the English decision of Davidson appears to create an undesirable exception to the general principle that the defence of qualified privilege should not be denied simply because the only reason the communication was made on that occasion was because of a mistake. That exception is not supported by the case law and should not occur here.
The New Zealand position is unclear
It does not appear that any New Zealand decision has discussed whether the defence of qualified privilege (which also exists in New Zealand law) applies in circumstances where a bank has mistakenly dishonoured a cheque.
There is one decision (that of Eichelbaum J in Hill v National Bank of New Zealand  1 NZLR 736) in which it was held that a cheque stamped "Refer to Drawer" was capable of being defamatory. The defence of justification (now known as truth) succeeded in respect of some of the cheques dishonoured in that case, where it was true that there were insufficient funds to meet them, but failed in cases where the accounts in question did have sufficient funds. However, the defence of qualified privilege was neither pleaded nor discussed.
It is unclear which way a New Zealand court would go on the defence of qualified privilege. Arguably, the minority position in Aktas should be preferred; if the bank's refusal to honour the cheque is wrongful, the plaintiff already has a remedy by suing for breach of contract. It is difficult to see what else a defamation action would achieve, and the majority's approach in holding that the defence of qualified privilege does not apply where the communication is induced by a mistake effectively renders the defence useless.
Our thanks to Michael Dobson, Law Clerk, and Nicholas Wood, Senior Solicitor, for writing this Brief Counsel.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.