The Achilles heel of farm debt mediation

The scene is rural New South Wales in 1994. Bathurst State MP Mick Clough (“Country Labor”) was confronted with a rising number of distressed farmers who had been foreclosed by their banks. Farmers had long faced an adverse environment - in the 1980s, falling commodity prices combined with draconian financing costs (in conjunction with the omnipresent advice to get big, requiring added debt, or get out); in the early 1990s, recession complemented by drought. As fellow Labor MP Richard Amery noted later in Parliament, “[One farmer] said that he returned to his farm after a weekend away to find that the front gate had been locked. Such stories raised heartwrenching issues.” Indeed they did. Farmer suicides were on the rise.

Labor being then in Opposition, Amery, as Shadow Minister for Fair Trading, initiated farm debt mediation as a private member’s Bill. Drawing on the experience of mediation in American farm States, and with qualified support and amendments from Independents and the minor Parties in the Legislative Council, the Farm Debt Mediation Act was enacted in November. Curiously, the Bill was opposed by the National Party in the Coalition Government, the latter taking instructions from the bank lobby.

Amery became Agriculture Minister in the Carr Labor Government elected in 1995 and oversaw successive reviews and amendments to the Act. New South Wales remains the only State in which farm debt mediation is mandatory.

Reportage and opinion generally emphasises the positive aspects of the Act’s operation, with a strong current of optimism. The Act’s objective is stated as the “efficient and equitable resolution of farm debt disputes”. The 2008-09 Annual Report of the NSW Rural Assistance Authority notes that 1,106 lender-farmer cases have gone to mediation, with the parties having “reached an agreement in 89 per cent of those cases”. Agreement is perennially graced with the adjectives “satisfactory” or “successful”.

Labor MP Gerard Martin, Clough’s successor in the Bathurst electorate, claimed in the debate on the Act’s Amendment Bill in September 2002: “It has levelled the playing field from being heavily in favour of the banks to giving farmers and people on the land some semblance of a fair go.”

Certainly the system has given indebted farmers “some semblance of a fair go”. More succinctly, as Martin noted in the same speech, “The baying dogs cannot race in to the carcass, if I can put it that way”.

A 1999 report on the Act, reviewing three and a half years’ operations, confirmed positive outcomes for some stressed borrowers - a write off of part of the farm debt, rescheduling or refinancing of the debt by the lender, time allowed to refinance through another lender, etc. These accomplishments are significant for the farmer under duress.

But the Act and the system have decidedly not “levelled the playing field”. The playing out of a recent mediation is instructive. Effectively the mediation manager of the bank (a significant agribusiness lender) dictated the terms of the so-called agreement, the farmers feeling that they had no choice other than to sign it. Said mediation manager ignored reasonable concerns expressed by the farmers and lost his temper in response to a question that exposed the bank’s discriminatory treatment of the borrowers. Oppressive and unnecessary demands for information from the borrower remain in the agreement. The bank’s agents’ sole concession was the desultory shaving of prevailing rates of interest from penalty rates arbitrarily set at debilitating levels.

The bank forces the farmers to travel and to pay for a mediation the outcome of which has been contrived on bank terms, but its local managers decline to visit the farm and investigate the prospects of utilising unprecedented rainfall.

This is a travesty of the formal desiderata of the system. But the elaborate apparatus of mandatory mediation, under the aegis of the Rural Assistance Authority (RAA), entrenches bank heavy-handedness with a cachet of legitimacy.

During the same debate as that including Gerard Martin, as above, Ian Armstrong, the then National Party MP for Lachlan, inadvertently highlighted the fly in the ointment.

One of the essential factors that is often overlooked in these types of transactions is that a trust must be established between the borrower and the lender. We can pass as much legislation as we like in this place, but unless there is trust - involving professionalism, confidence, honesty and integrity - between borrowers and lenders, the legislation will not work.

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.