Alan L Tyree

Section 52 and the Banker's Duty of Confidentiality

A banker has a duty to keep confidential certain affairs of the customer. The duty is contractual, and it is subject to several exceptions. One of those exceptions is that the duty is subject to the duty of the banker to comply with 'the law of the land'.1

In Australia, a very important 'law of the land' is s. 52 of the Trade Practices Act 1974 ,which imposes an obligation to refrain from misleading or deceptive conduct. Section 52 has cut a swath through the general law of contract, so it is not surprising to find that it creates problems with the banker's duty of confidentiality.

The duty of secrecy

The existence and scope of the duty of confidentiality were defined in Tournier's case.2 The duty extends beyond information obtained from the details of the customer's account; it includes any information that is obtained from the banking relations of the bank and its customer.3 The duty is not absolute, but only Bankes L.J. attempted any classification of the circumstances where the banker should disclose otherwise privileged information. He listed four such circumstances:

These qualifications are not as clear cut as they may first appear. The resulting ambiguity may leave the banker in the insidious position of having to choose between the contractual duty of confidentiality and an uncertain legal or moral duty that requires disclosure of the customer's affairs.5

Relevance of s 52

Section 52 becomes relevant here because, under certain conditions, silence itself may be construed as misleading conduct. In Kimberly NZI Finance Ltd. v. Torero Pty Ltd.,6 French J., although declining to give a general rule, thought that silence could not be misleading conduct unless the circumstances gave rise to some reasonable expectation that if a relevant fact exists it would be disclosed.

This 'reasonable expectation of disclosure' test is an adaptation of a test in common use in American law.7 It is a reasonable test in many circumstances, but it is of limited usefulness in determining when the banker should disclose information about the customer's affairs.

Kabwand

Kabwand Pty. Ltd. & Ors. v. National Australia Bank Ltd.8 illustrates the limitations of the test. The banker acted as banker for both the vendor and the purchaser of a business. The bank manager told the purchaser that the business had 'an excellent cash flow situation'. The business was unprofitable, and the bank manager knew that it was so.

The case is unsatisfactory because of deficiencies in the pleadings, deficiencies which could not be amended. The court found that the 'cash flow' statement was not an assertion that the business was profitable. While it might have been misleading as a 'half truth', this was not pleaded.

More interestingly, did s. 52 impose an obligation on the banker to disclose? The Full Court answered in the negative. There could not be a 'reasonable expectation' of disclosure since the banker was under a contractual duty of secrecy.

This reasoning is not very satisfactory. In the first place, it is circular. There is no duty of secrecy if disclosure is under compulsion of law. There is compulsion if there is a 'reasonable expectation'. But, according to Kabwand, there is no 'reasonable expectation' because there is a duty of secrecy.

Comparison with guarantees

The reasoning is also similar to that in the 'guarantee' cases, and has been doubted by several influential banking law texts.9 In Cooper's case,10 the bank failed to disclose that the principal debtor's husband was an undischarged bankrupt and that the husband had used the account improperly in the recent past. The court upheld the bank's argument that there was no duty to disclose because of the contractual duty of confidentiality.

On the other hand, the bank is under a duty to disclose information to a potential guarantor when 'there is anything that might not naturally be expected to take place between the parties who are concerned in the transaction ...'.11 This establishes a test that is very close to the 'reasonable expectation' test discussed above.

The rule in Hamilton v. Watson has proved to be very unsatisfactory in the guarantee cases. There have even been cases where the banker suspected that the customer was defrauding the guarantor, yet non-disclosure did not invalidate the guarantee.12 From a policy viewpoint, it is hard to imagine circumstances that more clearly demand disclosure.

The rule in Hamilton v. Watson is not only unsatisfactory for the potential guarantor. The banker who has information prejudicial to the potential guarantor is in a very difficult position. A failure to disclose the information might invalidate the guarantee, while disclosure exposes the banker to the risk of an action by the customer for breach of the duty of confidentiality.

Origins and proper scope for 'reasonable expectation' test

The 'reasonable expectation' test arose in advertising cases. If the consumer would have a reasonable expectation of acquiring, say, new oil, then there is an obligation to disclose that the product is 're-refined' oil, even though there is no substantial difference in the products.13 In such a case, there is no penalty for disclosing too much. There is no duty to anyone to keep the information secret.

When there is a conflicting duty, the 'reasonable expectation' test is unlikely to be satisfactory. The problem, of course, is to balance the interests of the parties. The formulation of the Hamilton v. Watson test gives priority to the duty of confidentiality, but envisages circumstances in which the duty of disclosure must prevail.

By contrast, the effect of the Kabwand rule is to elevate the duty of secrecy a position of absolute dominance. It seems unlikely that this is the effect that the court intended, and it is unfortunate that such a broad policy decision hides behind a few lines of the judgment.

Because of the deficiency in the pleadings, the Kabwand rule is, strictly speaking, obiter. We can only hope that the rule will be re-examined. The complex relationship between s. 52 and the duty of confidentiality requires a more thoughtful analysis.

Alan L Tyree
Landerer Professor of Information Technology and Law
Faculty of Law
University of Sydney

1 per Lord Diplock, Parry-Jones v. Law Society [1969] 1 Ch. 1, 9.

2 Tournier v. National Provincial & Union Bank of England [1924] 1 K. B. 461.

3 Tournier v. National Provincial & Union Bank of England [1924] 1 K. B. 461, 485, per Lord Atkin.

4 Tournier v. National Provincial & Union Bank of England [1924] 1 K. B. 461, 473, per Bankes L. J..

5 See Tyree, A. L., Banking Law in Australia, Butterworths, 1990, pp. 90-104 for an analysis of the duty of secrecy.

6 Kimberly NZI Finance Ltd v. Torero Pty Ltd [1989] ATPR (DIGEST) 46-054.

7 See Taperell, G. Q., Vermeesch, R. B., and Harland, D. J., Trade Practices and Consumer Protection, 3rd Edition, Butterworths, 1983.

8 [1989] ATPR 40-950, F. C. A. (Full Court).

9 See, for example, Paget's Law of Banking, 9th ed., p. 502.

10 Cooper v. National Provincial Bank Ltd. [1945] 2 All E. R. 641.

11 Hamilton v. Watson (1845) 12 Cl. & Fin. 109; (1845) 8 E.R. 1339.

12 See, for example, National Provincial Bank of England Ltd v. Glanusk [1913] 3 K. B. 335.

13 See, for example, Royal Oil Corp v. F. T. C. F. 2d 741 (1959; Mohawk Refining Corp. v. F. T. C. 579 F. 2d 818 (1959). See Taperell, Vermeesch and Harland, supra, n. 7, at paragraph [1426] for further discussion.