Court finds no unconscionable conduct and rejects ‘aggregation’ of knowledge

In Commonwealth Bank of Australia v Kojic [2016] FCAFC 186,  Marija Kojic and Dragutin Kojic entered into a joint venture with Southern Construction Services Pty Ltd (SCS) for the purchase of property in South Australia. 

The Kojics agreed to contributed 50% of the purchase price in consideration for a 50% interest in the property. However, the deal was never formally recorded.

The Kojics and SCS and other companies under the control of Mr Blanusa (Blanusa Interests) banked with CBA.  The Kojics’ payment was made by  bank cheque from their CBA account. The Kojic payment took the form of an unsecured loan since the Kojics took no steps to take security for the payment.  Mr Blanusa funded his share by an advance from the bank, for which the bank registered a first ranking mortgage over the subject property. This mortgage also secured other monies that the bank advanced to the Blanusa Interests.  The Blanusa Interests defaulted in their repayment to the CBA, which took possession of the property under the mortgage and sold it. Evidence was presented at trial that the bank was aware of the Kojics’ interest in the property. 

The Kojics brought proceedings against the bank to recover their payment in equity and through the Trade Practices Act 1974  (Cth), as it was then in force. The Kojics alleged that the CBA had engaged in unconscionable conduct and was in breach of its fiduciary duties.

At first instance, Mansfield J held that notwithstanding the fact that the Kojics were sophisticated investors, and that the bank employees’ conduct was in no way blameworthy, the bank had acted unconscionably in the transaction by knowingly improving its position as a secured creditor to the Blanusa Interests at the expense of the Kojics. 

However, on appeal this decision was reversed. Allsop CJ, Besanko and Edelman JJ held that as the bank was not acting in an advisory role for the Kojics, it did not owed them a fiduciary duty.  The bank’s knowledge that the Kojics were experienced property developers, and their lack of awareness of the Kojic’s misunderstanding of the extent of the ‘Blanusa Interests’ also meant that the factual basis was not present to meet the standard for unconscionable conduct.

The Court was required to consider whether the knowledge of several employees could be aggregated in determining the knowledge of an institution where there is a duty and opportunity for the employees to communicate the information to each other. The Court held that the knowledge of a number of persons without fraudulent intent could not be aggregated to create a notional person with dishonest intent. Therefore, the knowledge of the relevant two employees could not be aggregated in the circumstances of this case.

A key take away from this case is that the responsibility of financial institutions to make inquiries of their clients as to the nature of a deal will depend on the role they take in relation to their clients - for example, whether it is an advisory or purely transactional role. It is also an important reminder to financial institutions that in certain situations, the knowledge of employees can be aggregated in determining culpability of the institution. 

This article is part of a series highlighting a six judgments in the retail banking sector delivered by Australian courts last year covering a range of issues arising in banks’ engagement with their clients, contractual arrangements and the application of standard terms and conditions. The cases provide a number of cautions for banks seeking to navigate through various traps. Click here to view the full list.