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Fiji Development Bank v Moto [1995] FJHC 166; Hbc0055j.95s (22 November 1995)

IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction

CIVIL ACTION NO. 0055 OF 1995

Between:

FIJI DEVELOPMENT BANK
Plaintiff

- and -

1. INOKE MOTO
2. KERESONI RARAWA
3. SISIANA MATE
Defendants

Mr. V. Kapadia for the Plaintiff
Ms. V. Narayan for the 2nd and 3rd Defendants

JUDGMENT

This is an application for summary judgement under Order 14 of the High Court Rules seeking the payment of monies allegedly owed in terms of a Deed of Guarantee given by the second and third defendants securing the indebtedness to the plaintiff bank of a company called Matowa Shipping Services Ltd., of which the defendants are directors and majority shareholders. The remaining director/shareholder Inoke Moto is also named as the first defendant in the action however in the absence of a notice to defend, default judgment was entered against him by the plaintiff bank and he is accordingly not an active party in the present application.

The facts of the case are not in serious dispute and may be briefly summarised as follows: The three named defendants are the directors and shareholders of Matowa Shipping Services Ltd. In March 1992 the company obtained a loan of $100,000 from the plaintiff bank in order to purchase a shipping vessel. The loan was secured by a debenture, bills of sale, and personal guarantees of the defendants as shareholders and directors of the company. Default was made by the company in meeting its monthly loan repayments and this was exacerbated by the loss of the vessel when it sank off Lakeba in the Lau Group on the 7th of June 1993. A marine insurance hull claim against the ship's insurers was subsequently declined in January 1994. By a Demand Notice dated 4th November 1994 the plaintiff bank sought payment from the defendant under their personal guarantees.

On the face of it this was a fairly straight forward transaction of a fairly common kind whereby on a standard form the directors of a small private company guaranteed the company's indebtedness to its bank. The defendants have each sworn an affidavit in opposition to the application which their counsel claims raises complicated questions of law and triable issues of fact.

However, before dealing in detail with the various issues raised in the defendant's affidavits it is convenient to consider the proper approach to an application for summary judgment under Order 14 the purpose of which "... is to enable a plaintiff to obtain a quick judgment where is plainly no defence to his claim." (Home and Overseas Insurance Co. v. Mentor Insurance Co. (U.K.) Ltd. (1989) 3 ALL E.R. 74.)

The correct approach to an application for summary judgment is succinctly summarised in my view in the headnote to the New Zealand Court of Appeal decision in Pemberton v. Chappell [1986] NZCA 112; (1987) 1 N.Z.L.R. 1 where it was said of the N.Z. equivalent of Order 14:

"Held: ... the High Court Rules casts onto the plaintiff the onus of convincing the Court that the defendant has no fairly arguable defence. Normally that onus will be satisfied by the plaintiff's affidavit verifying the allegations in the Statement of Claim and his oath that he believes that the defendant has no defence to the claim ... If a defence is not evident on the plaintiff's pleading and the defendant wishes to resist summary judgment, the defendant must file an affidavit raising an issue of fact or law and give reasonable particulars of the matters which he claims ought to be put in issue. Where the only arguable defence is a question of law which is clear-cut and does not require findings on disputed facts or the ascertainment of further facts, the Court may, and normally should, decide it on the application for summary judgment. But where the defence raises questions of fact on which the outcome of the cause may turn it will not often be right to enter summary judgment."

Over a century earlier in 1880 Lord Blackburn in Wallingford v. Mutual Society (1880) 5 A.C. 685 said of the nature of the affidavit required from a defendant in opposing an 'Order 14' application, at p.704:

"I think that when the affidavits are brought forward to raise (a) defence they must, if I may use the expression, condescend upon particulars. It is not enough to swear 'I say I owe the man nothing'. Doubtless, if it was true, that you owed the man nothing as you swear, that would be a good defence. But that is not enough. You must satisfy the judge that there is reasonable ground for saying so... And in like manner as to illegality, and every other defence that might be mentioned."

In this latter regard although the debt is not denied the affidavits of the defendants raises the following three (3) 'defences' which may be conveniently categorised as:

(1) The bank's failure to explain the guarantee or recommend independent legal advice;

(2) The 'Clause 13' defence; and

(3) The bank's negligence in not seizing and realising the shipping vessel.

Dealing firstly with (1) which is raised in a single paragraph common to both affidavits, which reads:

"5. THAT I admit I signed the Guarantee ... but state that the true meaning and implications of the Guarantee were never explained to me nor was I ever advised to get independent legal advice before signing the Guarantee and that I was simply told to sign the Guarantee."

I notice that the defendants do not deny having read the Guarantee themselves, nor is it denied that it was signed in the presence of a barrister and solicitor of the High Court of Fiji. Furthermore the first named defendant is a "businessman" and the last type-written paragraph to the Guarantee suggests that this was the second guarantee given by the defendants to the plaintiff bank to secure the total liability of the debtor company Matowa Shipping Services Limited.

Nor is the 'defence' raised a plea of 'non est factum', where the person signing believed that the document he signed had one character or one effect whereas in fact its character or effect was quite different. But in any event it is well established that it is only in exceptional circumstances that a party of full age and understanding will not be bound by his signature to a document, whether he reads or understands it or not.

In F.D.B. v. Navitalai Ragona [1977] FamCA 81; (1984) 30 F.L.R. 151 Kermode J. (as he then was) in rejecting a similar 'defence' said at p.153:

"There is no dispute that the defendant executed the Guarantee. His defence is not a plea of non est factum. The document is not one which is required by law to be read over and explained to the Guarantor ... The general rule is that a party of full age and understanding is normally bound by his signature to a document whether he reads or understands it or not."

The 'defence' also raises the question of what duty (if any) does a bank owe to an intending guarantor to explain the guarantee, or recommend the taking of independent legal advice? The question was not addressed in any meaningful way by learned counsel for the defendants in her written submissions but in any event I reject the existence of any such duty.

In Seaton v. Heath (1899) 1 Q.B. Romer L.J. said of the nature of a contract of guarantee at p.792:

"... ordinary contracts of guarantee are not amongst those requiring 'uberrima fides' on the part of the creditor towards the surety; and mere non-communication to the surety by the creditor of facts known to him affecting the risk to be undertaken by the surety will not vitiate the contract, unless there be fraud or misrepresentation ..."

and later at p.793:

"... in general, contracts of guarantee are between persons who occupy, or ultimately assume, the positions of creditor, debtor, and surety, and thereby the surety becomes bound to pay the debt or make good the default of the debtor. In general, the creditor does not go to the surety, or represent, or explain to the surety, the risk to be run ... The risk undertaken is generally known to the surety, and the circumstances generally point to the view that as between the creditor and surety it was contemplated that the surety should take upon himself to ascertain exactly what risk he was taking upon himself."

In this regard there is not the slightest suggestion of "fraud or misrepresentation" in the defendants affidavits nor ought it to be over-looked that the defendants in the present case are not merely intending guarantors, in addition, they were active directors and shareholders of the debtor company and therefore can be safely assumed to be fully familiar with the company's financial position and the reasons for seeking the plaintiff bank's assistance, and the nature of the securities required by the plaintiff bank for that assistance. Needless to say their earlier guarantees to the plaintiff bank speaks volumes of the defendants familiarity with the terms and nature of the particular security involved in this case.

I am also fortified in my view by the recent judgments of Hardie Boys J. in Westpac v. McCreanor (1990) 1 N.Z.L.R. 580 and of Tipping J. in Shivas v. Bank of New Zealand [1989] NZHC 862; (1990) 2 N.Z.L.R. 327 where the latter said at p.368:

"A guarantor who is concerned at the circumstances in which he has given a bank guarantee will be able to complain should any of the following circumstances be present - deceit by the bank, misrepresentation, negligence if advice or information is sought and given or volunteered by the bank in a careless manner, breach of fiduciary duty in terms of Hamilton v. Watson (1845) 69 R.R. 85, unconscionable bargain, mistake and undue influence. The present question is whether it is necessary or desirable to add to the bases upon which a guarantor may, according to the circumstances, challenge the guarantee by casting upon the bank a positive duty to explain, warn or to recommend separate advice. In my respectful view a guarantor's position is adequately covered in law already. If the guarantor cannot succeed on one or other of the recognised causes of action in my view the pendulum would be swinging too far if one were to permit an action for the tort of negligence on the premise not of advice negligently given but on the basis of a failure to explain, warn or recommend separate advice."

There is no merit at all in this ground of 'defence'.

I turn next to consider 'defence' number 2 (above) which is based on 'Clause 13' of the Deed of Guarantee. The clause expressly provides (so far as relevant for present purposes):

"13. THAT in case any Guarantor shall give to the Bank at the branch of the Bank where the account of the Debtor shall be kept written notice of desire to discontinue any further liability under this guarantee then and immediately after the said notice shall have been so given the liability under this guarantee of the person giving such notice shall cease and determine so far as respects any liability which shall be incurred by the Debtor after the receipt of such notice except so far as any future liability shall arise out of ... the Debtor's obligation to pay interest on the moneys for the payment of which the person giving such notice remains liable ..."

From the foregoing it is sufficiently clear that the defendants as guarantors are expressly empowered to determine their liability under the guarantee upon giving the requisite notice. Furthermore that the effect of such notice is merely to prevent future liability accruing under the guarantee but not to any liability that may have already accrued and any future interest accruing thereon.

In this regard both affidavits of the defendants refer to a joint letter written by them to the plaintiff bank wherein they purported to inform the plaintiff bank of their withdrawal from the company.

I say 'purported' advisedly because not only did counsel for the defendants not address this issue in any detail but in any event the relevant letter and enclosure are before the Court as annexures 'B' and 'C' to the affidavit in reply of the Assistant Manager, Legal of the plaintiff bank.

The letter written on Matowa Shipping letterhead is signed by both the second and third defendants and is dated 7 July 1992. In it the defendants specifically acknowledge being 'the main guarantor to the Company's loan at F.D.B.' Then reference is made to their dissatisfaction 'with the management of the company and the handling of its financial affairs' and finally the letter closes with the following proposal:

"We propose to the bank that if I. Moto fails to take over the company that the Company's assets and liabilities be taken over by the undersigned."

This latter 'proposal' is clearly in line with the resolutions passed at a Director's meeting attended by all 3 defendants albeit that there was an additional resolution that the defendants "... are to withdraw from Matowa Shipping Services Ltd." (whatever that may mean).

I note however that no reference is made to 'Clause 13' in the letter or the company resolution nor is the same alluded to or mentioned in the defendants affidavits or the Statement of Defence. Furthermore the 'proposal' and the 'resolutions' refer to 'the assets and liabilities of the company' which phrase would exclude the defendants personal liability under the guarantees.

Be that as it may, I have carefully scrutinised the contents of both the letter and the company's resolutions (which I observe differs materially from the defendant's copy of the resolutions - See: annexure 'B' to the defendants affidavits) and am unable to distil or infer "... (any) desire (on the part of the defendants) to discontinue any further liability (under their guarantees)" as required in terms of 'Clause 13' of the Deed of Guarantee.

On the contrary, I agree with the view expressed by the Assistant Manager Legal, of the plaintiff bank:

"... (that) it is clear (from the annexures) that the Directors of Matowa Shipping Services Ltd. had (had) differences which they were attempting to resolve by either party taking over the management of the company."

In passing I note from the defendants own admissions and the absence of any clear evidence that advances were being made to the debtor company after March 1992, that the larger portion of the advances to the debtor company (i.e. $100,000 to purchase the vessel) was made long before the defendants letter of withdrawal and therefore even if the defendant's letter qualified as a 'notice' under 'Clause 13' of the Deed of Guarantee, nevertheless, their liability would not be substantially different (if at all) from that already set out in the plaintiff bank's Demand Notice and Writ.

There is also no merit in this 'defence'.

I turn next to deal with the third and final ground of 'defence' urged by the defendants in paras. 10 to 13 of their affidavits, the effect of which is conveniently summarised by their counsel in the following passage:

"The plaintiff was aware that the First Defendant was not making its payments and yet allowed the First Defendant to retain the boat and ultimately cause it to sink."

At the hearing of the application counsel on being pressed to identify the 'duty' owed by the plaintiff bank in the above context, referred to the judgment of the English Court of Appeal in Standard Chartered Bank Ltd. v. Walker (1982) 1 W.L.R. 1410 where it was

"Held: that a receiver realising assets under a debenture owed a duty both to the borrower and to a guarantor of the debt to take reasonable care to obtain the best price that the circumstances permitted ..."

In his judgment in the case Lord Denning M.R. referred to the decision in Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. (1971) Ch. 949 which firmly established that a mortgagee in exercising his power of sale owes the mortgagor a duty to take reasonable care to obtain a proper price for the mortgaged property at the time of its sale, and said at p.1415:

"This duty is only a particular application of the general duty of care to your neighbour which was stated by Lord Atkin in Donoghue v. Stevenson (1932) A.C. 562 and applied in many cases since."

More specifically in relation to a receiver, Lord Denning referred to the decision in Gaskell v. Gosling [1897] UKLawRpAC 40; (1897) A.C. 575 and said at p.1415:

"He owes a duty to take reasonable care to obtain the best possible price which the circumstances of the case permit. He owes this duty not only to the company, of which he is the agent, to clear off as much of its indebtedness to the bank as possible, but he also owes a duty to the guarantor, because the guarantor is liable only to the same extent as the company. The more overdraft is reduced, the better for the guarantor."

and later in what might be categorised as classical negligence terminology his lordship said at p.1416:

"Clearly the guarantor's liability is dependant upon the company's. He is in a very special position. The amount of his liability depends entirely on the amount that the stock realises when sold with proper care. To my mind he is well within the test of 'proximity'. The receiver owes a duty not only to the company, but also to the guarantor to exercise a duty of care in the disposal of the assets. I say nothing about creditors."

I accept that the broad principles enunciated in the above passages could well extend to the circumstances of the present case in a very general sense but Lord Denning's disclaimer in the last sentence cited above puts the lie to the defendants submission. In my view the relationship between a receiver (who is the agent of the debtor) and a surety, and the potential impact upon a surety's liability of the actions of the receiver are so direct that had that been the case here I would have had little doubt in the matter.

The relationship in this case however, is not one between 'mortgagor and mortgagee' or 'receiver and surety' but one of creditor and sureties (as a notional debtor) where the sureties complain that the creditor owed them a duty to safeguard, repossess and realise a security which was permitted to remain in the possession and control of the debtor and which was ultimately lost through the debtor's negligence.

If I may say so the submission comes perilously close to equating a 'contract of guarantee' with a 'contract of insurance' which it clearly is not. Nor is it helpful in my view to introduce negligence analysis or terminology in an area of contractual relations where 'Equity' has, long before the development of the tort of negligence, provided relief to an aggrieved party.

In somewhat similar vein Norse L.J. in Parker-Tweedale v. Dunbar Bank P.L.C. (1990) 3 W.L.R. 767 said at p.773:

"In my respectful opinion it is both unnecessary and confusing for the duties owed by a mortgagee to the mortgagor and the surety, if there is one, to be expressed in terms of the tort of negligence. The authorities which were considered in the careful judgments of the Court in Cuckmere Brick Co. Ltd. v. Mutual Finance (1971) Ch. 949 demonstrate that the duty owed by the mortgagee to the mortgagor was recognised by equity as arising out of the particular relationship between them."

(my underlining)

and later in rejecting the extension of a similar duty to a beneficiary under a trust of whose interest the mortgagee has notice, his lordship said at p.774:

"Once it is recognised that the duty owed by the mortgagee to the mortgagor arises out of the particular relationship between them, it is readily apparent that there is no warrant for extending its scope so as to include a beneficiary or beneficiaries under a trust of which the mortgagor is the trustee."

Purchas L.J. in his judgment after noting the general trend in the law of tort against recognising a general liability in tort for pecuniary loss dissociated from physical damage, said at p.778:

"Where there is a directly contractual relationship the law will be slow to imply a duty greater than that created under the contract even if that contract is silent in a particular respect ... Even where there is no direct contractual relationship but where there is a contractual context against which the parties came into a relationship short of a contractual one, again a duty in tort enlarging the rights enjoyed by the victim of the alleged tort beyond those provided for in a contractual context generally will not be imposed: See: Pacific Associates Inc. v. Baxter (1990) 1 Q.B. 993."

In the present case not only was there a direct contractual relationship between the defendants and the plaintiff bank but the contract itself provided that "... the guarantee shall be a continuing guarantee ..." (Clause 1); and "... shall be enforceable notwithstanding that any ... security shall be still in circulation ..." (Clause 2); and further, "... shall be a principal obligation ... and shall be independent of and in no way affected by any other security ..." (Clause 5).

More particularly and directly relevant to the defendants third 'defence', Clause 7 provides:

"THAT this guarantee shall not affect or be affected by any other ... security now held or taken by the Bank or be affected by any loss by the Bank of any collateral or other security or by the Bank failing or neglecting to recover by the realisation of any collateral or other security ... or by any other laches acts or omissions or mistakes on the part of the bank or by the release discharge abandonment or transfer ... and either with or without consideration of any security ... held by the Bank from the Debtor ... and the bank shall be under no obligation to marshal in favour of the Guarantor any security whatever held by the Bank or any assets that the Bank may be entitled to receive or have a claim upon ... and the Bank may at its absolute discretion ... release, refuse to complete or to enforce ... any specialties, ... or other securities or instruments ... held by the Bank and whether satisfied by payment or not without discharging the liability of the Guarantor under this Guarantee."

Of even greater relevance is the case of China & South Sea Bank Ltd. v. Tan Soon Gin [1989] UKPC 38; (1990) 1 A.C. 536, Lord Templeman in delivering the judgment of the Privy Council upholding a summary judgment against a surety and in rejecting the surety's claims that the creditor owed him a duty to exercise the power of sale conferred by a mortgage which would have resulted in the surety's liability under the guarantee being substantially reduced or eliminated, said at p.543:

"The Court of Appeal sought to find such a duty in the tort of negligence but the tort of negligence has not yet subsumed all torts and does not supplant the principles of equity or contradict contractual promises or complement the remedy of judicial review or supplement statutory rights ... Equity intervenes to protect a surety."

Their lordships nevertheless affirmed and applied the rule laid down in Watts v. Shuttleworth (1860) 120 R.R. 559 (per Pollock C.B.)

"... that if the person guaranteed does any act injurious to the surety, or inconsistent with his rights, or if he omits to do any act which his duty enjoins him to do, and the omission proves injurious to the surety, the latter will be discharged ... the rights of a surety depend rather upon principles of equity than upon the actual contract."

In doing so the Privy Council said of the rights and duties of a creditor at p.545:

"The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgaged securities or sue he surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all ... The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full ...

The creditor is not obliged to do anything ... if disaster strikes ... the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing. The surety contracts to pay if the debtor does not pay and the surety is bound by his contract. If the surety ... is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them. No creditor could carry on the business of lending if he could become liable to a mortgagor and to a surety or either of them for a decline in value of mortgaged properly, unless the creditor was personally responsible for the decline."

A fortiori where the security is lost not through any personal act of the creditor but rather through the negligence of the debtor company of which the defendants are shareholders and directors albeit passive even reluctant ones.

In light of the above I have no hesitation in holding as a matter of law that no duty exists upon the plaintiff bank to exercise its power of sale over the shipping vessel at any particular time or at all.

This third and final ground of 'defence' is without merit and accordingly there will be judgment entered for the plaintiff bank as prayed.

(D.V. Fatiaki)
JUDGE

At Suva,
22nd November, 1995.

HBC0055J.95S