In Commonwealth Bank of Australia v Kojic[1] (Kojic), the Full Court of the Federal Court considered two important issues. The first was the proper approach to the application of statutes proscribing unconscionable conduct. The Chief Justice’s reasons[2] dealt comprehensively with this aspect.
The second (and the focus of this article) was whether it was permissible to aggregate the knowledge of individual employees and officers and attribute that knowledge to the bank for the purposes of establishing that it had acted unconscionably. The court’s treatment of that issue represents a departure from the conclusions of the Western Australian Court of Appeal in Westpac Banking Corp v The Bell Group Ltd (in liq) (No 3)[3] (The Bell Group). As a consequence (it is submitted), the weight of authority now supports the proposition that it is generally not permissible to aggregate the knowledge of individual officers and employees so as to establish a corporation’s putative state of mind.
The facts in Kojic
So as to appreciate the context of the court’s consideration of the aggregation issue, it is necessary to set out the facts in some detail.
Mr and Mrs Kojic were experienced property developers. They had a long association with Mr Blanusa and had participated in numerous property developments with him. Mr Blanusa, via his company Southern Construction Services Pty Ltd (SCS), agreed to purchase land for $850,000 with a view to subdividing it. Settlement was to occur in March 2009, but SCS could not settle. SCS sought finance from the bank not only to assist with the purchase of the proposed development property, but also by way of a refinance of loans with another bank. This application for finance was managed by Mr Barnden, a relationship manager at the Commonwealth Bank of Australia (CBA). Even with the loan from the bank (which accounted for just over half of the purchase price), SCS remained unable to settle.
Mr Blanusa spoke to the Kojics about the possibility of investing in the development. He told them the bank would only fund about 50% of the purchase price. He did not (and did not thereafter) disclose to the Kojics that the proposed mortgage over the property would secure other liabilities of SCS.
On 9 November 2009, the vendors gave Mr Blanusa the ultimatum that settlement must occur by 13 November 2009. On 10 November 2009, the Kojics communicated their agreement to contribute 50% of the purchase price in exchange for a 50% interest in the property.
Mrs Kojic telephoned their long-standing relationship manager Mr Coombe, also at CBA. She explained the circumstances of the proposed purchase of a half interest in the development property. The Kojics had the funds necessary to proceed with the transaction without the need to obtain finance, and the purpose of the call was simply to arrange the funds transfer.
Mr Barnden told Mr Blanusa that, having regard to the timeframe for settlement, it was not possible for the Kojics to be registered on title, as this would have required changes to the security structure of the suite of loans to SCS. This was communicated to Mrs Kojic, who was nevertheless prepared to proceed with the transaction, apparently on the basis that CBA (via Mr Coombe) knew that the property was to be half owned by the Kojics.
Mr Barnden knew that the Kojics were long-standing CBA customers and were proposing to acquire an interest in the property. Mr Coombe and Mr Barnden knew that each other were the Kojics’ and Mr Blanusa’s respective relationship managers. They did not, however, speak to each other about the transaction.
Settlement proceeded without the Kojics being recorded on title. About 18 months later, CBA sold the property pursuant to its rights under the mortgage and the Kojics lost the money they invested.
At first instance, the trial judge considered it appropriate to aggregate the knowledge of Mr Coombe and Mr Barnden. Doing so permitted a finding that CBA knew that the Kojics’ payment was for a half interest in the property, that they did not understand that SCS’s liability under the mortgage extended beyond the funds lent to purchase the property, and as a consequence, their contribution was effectively an unsecured loan. It was concluded that, having that knowledge, it was unconscionable for CBA to accept payment from the Kojics.
On appeal, it was held that it was not permissible to aggregate the knowledge of Mr Coombe and Mr Barnden, but even if it was, CBA’s conduct was not unconscionable.
Edelman J’s analysis of the aggregation issue
While Allsop CJ and Besanko J touched upon the aggregation issue, Edelman J’s reasons dealt most comprehensively with it. His Honour surveyed the relevant authorities including in the United Kingdom and United States. Edelman J considered the starting point for any discussion of the introduction of the concept of “collective knowledge” was the relevant statute, in this case ss 51AB and 51AC of the Trade Practices Act 1974 (Cth) (TPA).[4]
Edelman J’s analysis commenced with a consideration of whether s 84 of the TPA, a provision that supplements the general rules of attribution, was an obstacle to the expansion of those rules insofar as they relate to unconscionable conduct. These (albeit tentatively expressed) views did not generate any enthusiasm from Allsop CJ[5] or Besanko J.[6] Their Honours, however, agreed with the remainder of Edelman J’s views on aggregation.
Edelman J considered the most basic difficulty with introducing a principle of aggregation into a test for statutory unconscionability was the concept that a corporation could be found to act unconscionably where none of the natural persons involved had so acted. This conceptual difficulty was articulated by Devlin J in Armstrong v Strain[7] where his Lordship stated “you cannot add an innocent state of mind to an innocent state of mind and get as a result a dishonest state of mind”.
A third obstacle identified by Edelman J was the practical difficulties associated with avoiding the imposition of liability on the basis of the aggregation of knowledge. Senior counsel for the Kojics suggested that the way the CBA might have avoided liability was to ensure that only one bank officer dealt with the transaction. The long-standing relationship between each relationship manager and their respective clients, and the fact that neither found out about the involvement of the other until the transaction was near completion, illustrated the difficulty with this approach.
Finally, and related to the third obstacle, Edelman J found that putting in place the process described above (of replacing a relationship manager when other employees became involved in a transaction) might be inconsistent with other legal norms (such as in relation to confidential information) which required information to be confined rather than disseminated.
Rejection of “one transaction” approach
In The Bell Group, the issue of aggregation was considered in the context of “knowing receipt” claims. Drummond AJA (with whom Lee AJA agreed) held that the decision of the High Court in Krakowski v Eurolynx Properties Ltd[8] (Krakowski) was “clear authority” for the proposition that the knowledge of a number of persons, individually unaware of fraud, could be aggregated to create a notional person with dishonest intent.[9] The passage in Krakowski relied on in support of that proposition is as follows:
A division of function among officers of a corporation responsible for different aspects of the one transaction does not relieve the corporation from responsibility determined by reference to the knowledge possessed by each of them. Neither [the agent or director] was called to give evidence. It is erroneous to make a finding as to the company’s intention or willingness to misrepresent the contractual arrangements with [the tenant] without reference to the knowledge of [the agent or director].[10]
Drummond AJA held[11] that it was the fact that the various officers, employees and agents acted for the bank in different aspects of the one transaction that justified aggregation of their knowledge.
The “one transaction” principle was referred to in Australian Competition and Consumer Commission v Radio Rentals Ltd,[12] in which Finn J declined to aggregate information contained in the records of various employees on the basis that they could not be said to be involved in different aspects of the one transaction.[13]
Edelman J strongly rejected (as plainly wrong) the proposition that Krakowski authorised the aggregation of knowledge in the manner contended by Drummond AJA, whether the relevant officers or employees were involved in one transaction or otherwise. His Honour’s views on the characterisation of Krakowski were shared by Allsop CJ and Besanko J.
In what circumstances is aggregation permissible?
In Edelman J’s closing remarks, his Honour considered that a finding that a corporation had acted unconscionably, notwithstanding the absence of any unconscionable conduct on the part of any individual, might be appropriate where that corporation had deliberately arranged itself so as to avoid any individual employee or officer having the relevant knowledge. However, it may be the making of such arrangements that constitutes unconscionable conduct, in which case aggregation would not arise.
The Chief Justice opined[14] that aggregation may be appropriate (assuming the statutory context permits) in circumstances where there is a duty and opportunity to communicate information as between employees or officers. Besanko J referred to the possibility of such an approach, but did not express any opinion in relation to it.
While Kojic is binding on trial judges only in respect of statutory unconscionable conduct, Edelman J’s forceful analysis extends beyond that limited context. It is submitted that, on the current state of the authorities, aggregation is likely to be arguable only in circumstances where there is a duty and opportunity to communicate as between the relevant officers or employees of a corporation.
[1] Commonwealth Bank of Australia v Kojic [2016] FCAFC 186 ; BC201611121.
[2] With which Besanko and Edelman JJ agreed.
[3] Westpac Banking Corp v The Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1 ; [2012] WASCA 157 ; BC201206001.
[4] Now contained in the Competition and Consumer Act 2010 (Cth). Equivalent provisions are contained in the Australian Securities and Investments Commission Act 2001 (Cth).
[5] Above n 1, at [64].
[6] Above n 1, at [81].
[7] Armstrong v Strain [1951] 1 TLR 856.
[8] Krakowski v Eurolynx Properties Ltd (1995) 130 ALR 1.
[9] Above n 3, at [2187].
[10] Above n 8, at 16.
[11] Above n 3, at [2183].
[12] Australian Competition and Consumer Commission v Radio Rentals Ltd (2005) 146 FCR 292 ; [2005] FCA 1133 ; BC200505943.
[13] Above n 12, at [179].
[14] Above n 1, at [66].