The Achilles heel of farm debt mediation

Quite. Not merely has the playing field not been levelled, but the banks are accustomed to employing their advantage to maximum effect. This tropist tendency, like moths to the light, has been perennially legitimised in court litigation. Representative of the “law of the jungle” mentality entrenched in judicial culture is the claim of Chief Justice Gleeson in Australian Competition & Consumer Commission v Berbatis (High Court of Australia 18, 2003):

A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests. Parties to commercial negotiations frequently use their bargaining power to "extract" concessions from other parties. That is the stuff of ordinary commercial dealing.

I have examined bank malpractice against small business customers for the last decade, in collaboration with an ex-bank staffer who has examined the phenomenon for more than 20 years. The evidence indicates that the major Australian banks, in their dealings with small business and family farmer customers, regularly eschew professionalism, honesty and integrity. Banks perennially exert leverage over their captive customers, “the stuff of ordinary commercial dealings”, by unconscionable or fraudulent means.

Apart from the judiciary secure in its wisdom, this is also a reality that the farm debt mediation fraternity is reluctant to confront. Predominantly well-intentioned, and often much experienced, there is a persistent tendency to view mediation per se in a favourable light. This optimism pops up in relevant articles in the Australian Dispute Resolution Journal (ADRJ). The author of the 1999 review report acknowledged the dilemma while passing the buck:

The recurrent problem of power imbalance is confirmed by this research. … The practical issue, however, is whether anything can be done about it. The imbalance which exists between farmer and lender is a structural one arising out of the very relationship created by a loan and the giving of security. It is unlikely the FDM Act can remedy this sort of structural imbalance, but perhaps something can be done to ensure that the procedure becomes even more sensitive to power imbalance issues.

The author correctly highlights that mediation is a weak reed against the structural imbalance. Unfortunately, the Act as it stands does little to offset it. Section 11 (1B), inserted after a 1996 review that gave the Act permanence, notes that a creditor’s refusal to “agree to reduce or forgive any debt” does not demonstrate a lack of good faith. More, there is nothing in the Act that requires the creditor to act in good faith at all.

Section 11 (3) was inserted into the Act after a 2000 review which empowered the RAA, when finding that the creditor had not acted in good faith, to prohibit the creditor from demanding further mediation and enforcing the debt for 12 months. But this section was repealed in 2004 after the National Competition Council deemed the amendment anti-competitive!

This asymmetric tolerance of creditor discretion merely reproduces a reigning legal culture that a lender has absolute authority over the lending process and the subsequent debt.

It is apparently still possible for a farmer to complain of the creditor not having attended a mediation in good faith, and for the RAA to so rule, requiring a re-start of negotiations. But this option is not in the law, is not transparent in the regulations, and may not be known to farmers engaged in mediation.

In a 1995 article in the ADRJ, John Ginnane, then banker and mediator, claimed that the point of mediation is for “farmers to accept that they are the owners of the loan and therefore responsible for its repayment”. Similarly, a RAA staffer has claimed (to me) that bank lenders are “entitled to what they’re entitled to”.

Well what are banks entitled to? The Mediation Act and process takes default as a given (debtor failure) and the debt as an objective fact. But the passage to default may not be uncomplicated. My view is that the case referred to above has been a product of an engineered default by the bank. Can the mediator put the road to default on the table? Moreover, the debt is discretionary, enhanced by accumulated interest typically engorged by the bank setting post-default penalty interest rates at usurious levels (levels not specified in the mortgage documents), as well as by other discretionary charges.

The farm debt mediation system is populated by well-meaning decent people. But banks are not decent. Admittedly, the mediation system is marginal to a broader regulatory failure that continues to tolerate intolerant and often predatory practices from lenders. But the mediation structure possesses dimensions that ought to be confronting the elephant in the room.

Farmers can’t control the climate. Banks can’t be trusted. And the family farmer now has few friends with any leverage anywhere in the farmer lobby and political sphere. The family farmer is seen as yesterday’s model. You wouldn’t be a farmer for quids.