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Kuso v Bank South Pacific Ltd [2009] PGNC 236; N3961 (15 September 2009)

N3961

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS No. 1444 OF 2003

BETWEEN:

KEN KUSO
First Plaintiff

AND:

LUKIM ARTS LTD
Second Plaintiff

AND:

BANK SOUTH PACIFIC LTD
Defendant

Waigani: Gavara-Nanu, J
2009: 12 & 13 February & 15 September

CONTRACT - Commercial Loan - Plaintiff applying for a loan to start a business - Plaintiff applying for a loan from European Investment Bank Global Loan Facility - Plaintiff using Bank of Papua New Guinea Form 100 to apply for loan - Plaintiff lodging application for loan with Papua New Guinea Banking Corporation (PNGBC) - PNGBC offering plaintiff a standard PNGBC Commercial loan with terms and condictions - Plaintiff accepting PNGBC''S Commercial loan. Plaintiff complying with terms and conditions of the loan offered - Plaintiff bound by the contract - Principles of a binding contract discussed.

Cases cited:

Papua New Guinea Cases
Abi Moses Kupis -v- MVIL (2005) N2784
Finch -v- Sea Freight Pty Ltd [1976] PNGLR 440
George Page Pty Ltd -v- Malipu Bus Balakan [1982] PNGLR 140
Haiveta -v- Wingti (No.1) [1994] PNGLR 160
McDonald -v- Papuan Constructions Ltd [1964] PNGLR 124
Rainbow Holdings Pty Ltd -v- Central Province Forest Industries Pty Ltd [1983] PNGLR 34
Richard Manui -v- ANZ Banking Group (PNG) Ltd (2008) N3406
SCR No. 4 of 1980 - Re Petition of M. T. Somare (No.2) [1982] PNGLR 65
Shell Papua New Guinea Ltd -v- Specko Investment Ltd (2000) SC767
Tonolei Development Corporation Ltd -v- Lucas Waka, Minister for Forests (1983) N4046

Overseas cases:
Hornal -v- Neuberger Products Ltd [1957] 1 QB 247

Counsels:
N. Kubak, for the plaintiffs
N. Henry, for the defendant

15 September, 2009

1. GAVARA-NANU J: In about 1997, the first plaintiff (''the plaintiff'') decided to start a small business comprising a guest house and an artifact shop, in Lorengau town of Manus Province. The plaintiff decided to obtain a loan to finance the business. He did some research into ways of obtaining a loan and in his research, he came across a circular from the then Papua New Guinea Banking Corporation (""PNGBC"") No. 0787, dated 24 July, 1997, which was signed by a Mr. M.E Hallinan, then Executive Manager of the Lending Division of PNGBC. From the circular, the plaintiff learnt that there was a loan facility available with the bank, the circular was known as European Investment Bank or (EIB) Global Loan Facility. This loan was made available through the Bank of Papua New Guinea (""Bank of PNG"") PNGBC was one of the participating Commercial Banks.

2. The Bank of PNG was the agent of EIB when it made the facility available to the participating commercial banks in PNG including the then PNGBC. The loan facility was available to nationally owned small to medium size businesses.

3. The above circular was addressed and circulated to all PNGBC Managers of the Lending Departments, Loans Central Branches and Customer Service Branches by Mr. Hallinan. The circular informed those managers that Bank of PNG had expressed concern that PNGBC branches throughout PNG had since 1981 informed their customers that the facility was not available.

4. The circular advised and reminded the managers that the loan facility was still available.

5. On or about 13 August, 1997, the plaintiff spoke by phone to Mr Hera Hetahu, then Senior Manager, Monitory Policy and Analysis Division of Bank of PNG about the loan facility. Mr. Hetahu later forwarded an Application Form to the plaintiff to apply for a loan. The Application Form was known and titled as ""BPNG Form 100"".

6. The Application Form for a loan was faxed to the plaintiff with standard terms and conditions, which were spelt out in a standard accompanying letter titled ""to whom it may concern"".

7. The letter which was signed by Mr. Hetahu, among other things advised that there were two forms of loan applications, one was for loans from K80,000.00 to K150,000.00 and the other was for loans from K150,000.00 and over.

8. A phone number with Bank of PNG was given in that letter for applicants having any questions to direct their queries to.

9. At this juncture it is convenient to comment on certain aspects of the terms and conditions of the EIB loan facility. One is, it was a requirement for a borrower or the applicant for a loan under the facility to provide 10% equity on the total amount required. The EIB would then provide 20% equity on the amount of loan and the participating financial institution would provide 20% of the amount of loan to the borrower. The other 50% would be from EIB and for its 20% equity in the loan, the EIB would be a shareholder in the approved project for which EIB loan facility was approved. However, if the borrower wanted, he or she could provide the 20% equity required for EIB in which case, the borrower would provide 40% equity. In such a case, because EIB would not provide the 50% equity on the loan, it cannot become a shareholder in the project.

10. There are other terms and conditions which the plaintiff had to satisfy, all these were stated in detail in the terms and conditions which were in the letter of offer sent to the applicant by Mr. Hetahu.

11. The plaintiff subsequently filled the Bank of PNG Form 100 to apply for a K500,000.00 loan. He said he travelled to Port Moresby and lodged his application with PNGBC Port Moresby Branch in about September, 1997. It is noted that application for K500,000.00 was to be fully financed by PNGBC. The plaintiff said when in Port Moresby, he saw a Senior PNGBC Loans Officer by the name of Tevi Elu. His loan was not approved until January, 1998, but the loan approved was a standard PNGBC commercial loan for K320,000.00. In his affidavit, the plaintiff says the funds were not released to him until September, 1998.

12. The plaintiff was advised of the approval of his loan in a letter dated 21 January, 1998. This letter is annexed as Annexure ''F'' to the plaintiff''s affidavit, sworn on 13 October, 2006. The letter had PNGBC letter head. The K320,000.00 was a fully drawn loan for a period of 6 years and it was to be repaid at the rate of K5,000.00 per month. In the letter of approval, PNGBC advised the plaintiff of the terms and conditions upon which the loan was approved. It is noted that the letter of approval was sent from PNGBC''s Lae Branch and was signed by a T.G. Elu, who was the Manager Lending Services, Lae, Eastern Region. In the last paragraph of the letter, the plaintiff was advised to contact the writer, (Mr Elu) on a phone number which was provided in the letter and talk to him (Mr. Elu), if he wanted clarification on the terms and conditions of the loan.

13. At the bottom of the letter, the plaintiff acknowledged and accepted the bank''s offer subsequently by signing the letter and enclosed an establishment cheque of K4,800.00 for the loan.

14. It is noted that as part of the security for the loan, the plaintiff mortgaged his property at Sect. 26 Allotment 51, Lorengau, Manus Province. He also entered into a Bill of Sale with PNGBC on 12 October, 2000, over his Kijan Toyota, Reg. No. LAI 475, as an additional security for the loan. The plaintiff subsequently obtained two additional fully drawn loans of K23,929.00 on 1 March, 1999, and K87,485.00 on 23 March, 2009, thus taking his total loan facility to K440,000.00. These two loans were obtained at PNGBC, Madang Branch.

15. Under the terms and conditions of the loan, the plaintiff had two months grace period before he was to start repaying the first loan.

16. In these proceedings, the plaintiff is claiming a declaration that the loan he applied for to finance his business is an EIB loan and not a standard PNGBC commercial loan. He is also claiming damages for loss of business, mental, psychological and physical stress, humiliation and loss of status in the community. He also seeks reimbursement of funds deducted from his Account with interests by the defendant in loan repayments.

17. The defendant has also filed a cross-claim claiming K1,041,875.40 in outstanding loan repayments with interests. The defendant also seeks a declaration that the plaintiff deliver to its possession the property described as Section 26 Allotment 5, Lorengau, Manus Province, with improvements thereon and an order granting leave to issue a Writ of Possession pursuant to O 13 r 3 of the National Court Rules and in the event that the plaintiff failed to give possession of the above property, the police be empowered to evict the plaintiff from the said property.

18. Mr. Ruga Tauedea an employee of BSP has conceded that Bank of PNG Form 100 is not the standard Application Form used by borrowers who apply for loans from BSP. This is not surprising because the bank of PNG Form 100 is or was by its name, supposed to be a Form used by persons borrowing money or getting loan assistance under the Bank of PNG programmes for investment of K150,000.00 and over.

19. The plaintiff claims that the defendant was fully aware that he had wanted to apply for a loan under EIB loan facility and not a commercial loan from the defendant, yet the defendant approved a commercial loan under its terms. The plaintiff claims the defendant was negligent in not advising him that his loan application was being processed as a commercial loan from the defendant and not a EIB loan. The defendant is therefore accused of failing to apply fair banking practices.

20. There is no dispute that PNGBC was a participating financial institution for EIB loans facility that was administratered by the Bank of PNG.

21. The plaintiff has not explained the exact nature of his discussions with Mr. Tevi Elu who according to the plaintiff was a Senior Loans Officer with PNGBC when he lodged his loan application at the Port Moresby branch of PNGBC in September, 1997. There is no evidence that the plaintiff was interviewed by Mr. Elu when he lodged his loan application which is a normal thing to do when a borrower applies for a loan.

22. One notable aspect of the plaintiff''s loan application is that it is undated. The other is, although the plaintiff''s application for a loan was lodged in Port Moresby, the approval letter for K320,000.00, which was dated 21 January, 1998, was issued at the Lae Branch of PNGBC and was signed by Mr. T. G. Elu who as noted earlier was the Manager Lending Services, Lae, Eastern Region. Mr. T. G. Elu who signed that letter appears to be the same Mr. Tevi Elu with whom the plaintiff lodged his application at the Port Moresby Branch of PNGBC. This may explain how and why the letter of approval for the loan was issued at the Lae Brach of PNGBC.

23. It is noted from the letter that Mr. Elu was responsible for the lending services of the PNGBC in the Eastern Region.

24. It is also noted that after his loan for K320,000.00 was approved in January, 1998, the plaintiff executed a PNGBC Application for Financial Accommodation for the said amount on 7 July, 1998, at Lorengau, Manus. In this regard, it is noted that Mr. Tauedea has told the Court that, a Financial Accommodation can be executed after a loan has been approved. It is clear that, that is what happened with the K320,000.00 loan.

26. It is also noted that on 2 March, 1999, the plaintiff executed the second Application for Financial Accommodation for K23,929.00 which was headed ""an increase in facility of K23,929 over the original loan of K320,000.00"".

27. Then on 16 June, 1999, the plaintiff executed the third Application for Financial Accommodation for K87,483 which was headed ""an increase in facility"". This application indicates the fully drawn loan limit of K440,000.000.

28. Looking at the Applications for Financial Accommodation for the respective amounts of K320,000.00, K23,929 and K87,485, although these documents appear to have been executed at Lorengau, Manus, they were processed at the Madang Branch of PNGBC.

29. Returning now to the principal issue of whether the defendant was negligent in not advising the plaintiff that the loan the plaintiff was applying for was not an EIB loan but a standard commercial loan from the defendant, the plaintiff has to prove what it is asserting. This is a fundamental rule of evidence: See, Finch v. Sea Freight Pty Ltd [1976] PNGLR 440; George Page Pty Ltd v. Malipu Bus Balakau [1982] PNGLR 140; SCR No. 4 of 1980 - Re Petiton of M T Somare (No.2) [1982] PNGLR 65 and Richard Manui v. ANZ Banking Group (PNG) Ltd (2008) N3406.

30. As I alluded to earlier, the loan application was not a PNGBC standard loan application because the application was in a Bank of PNG Form 100. In his application the plaintiff asked for 3 years grace period and the amount requested was K500,000.00.

31. As noted, only K320,000.00 was approved first. Mr. Tauedea told the Court that this reduction in the amount approved may have been as a result of plaintiff making another representation to PNGBC. The Court is left to speculate on the reason for the reduction in the amount of loan.

32. One other notable feature about plaintiff''s loan application is that there is no evidence of when it was lodged at the Port Moresby Branch of PNGBC. There is also no indication that it was received by PNGBC, for instance a Bank stamp or some form of official endorsement by the bank on the application to show that the application was received and processed by PNGBC.

33. Thus, even if the initial K320,000.00 loan was approved pursuant to plaintiff''s application through Bank of PNG Form 100, no reason was given why only K320,000.00 was approved from the amount requested of K500,000.00.

34. The threshold question still remains, namely, whether the apparent failure by the defendant to advise the plaintiff that the approved loan was not an EIB loan but a standard PNGBC commercial loan, renders the defendant liable to the plaintiff.

35. I have come to a firm view that, although the application itself for a loan was prima facie irregular, the fact is that an amount of K320,000.00 PNGBC commercial loan was approved and given to the plaintiff by the defendant. There was an offer made for this amount by the defendant to the plaintiff in the letter dated 21 January, 1998, and the plaintiff accepted that offer. The terms of the offer were very clear and unambiguous.

36. The plaintiff was given an opportunity in the letter to discuss the offer with Mr Elu, if he needed clarification on any of the terms and conditions of the loan. The plaintiff responded to the offer by acknowledging and accepting the offer with its terms and conditions by signing the letter at the bottom to indicate his acceptance of the offer. The acceptance of the offer was accompanied by a cheque for an establishment fee of K4,800.00 which was made payable to the defendant. This was done in accordance with 2nd paragraph of the letter, which reads: ""The loan approval will be funded after all the security and other documentation has been completed"". The second sentence of the paragraph is bolded, obviously to indicate its significance. The sentence reads: ""In this regard, we request you to signify your acknowledgement and acceptance of the above terms and conditions by signing and returning a copy of this letter"". The last sentence of the paragraph reads: ""Once returned with your cheque for the establishment fee, we will arrange funding for loan"".

37. The letter is in clear and specific terms that the loan was funded by PNGBC and that it was not an EIB loan.

38. The terms and conditions of the loan were quite clearly different to the terms of a loan under EIB, which are contained in the Bank PNG circular prepared by Mr. Hera Hetabhu.

39. Furthermore, the plaintiff subsequently executed a mortgage over his property in Lorengau, Manus Province, and executed a Bill of Sale over his Toyota Kijang both as securities for the loan. These were knowingly done by the plaintiff. This shows clearly that the plaintiff was aware that his loan was a PNGBC commercial loan. He also obtained two additional loans in March and June, 1999. These loans were to increase his original loan of K320,000.00. The two additional loans were obtained under the same terms and conditions as the original loan.

40. The letter by the defendant dated 21 January, 1998, to the plaintiff for the loan of K320,000.00 with stated terms and conditions which the plaintiff accepted, in my view constituted a binding contract between the plaintiff and the defendant. The plaintiff by accepting the offer and conveying that acceptance to the defendant concluded the contract between the plaintiff and the defendant. See, Rainbow Holdings Pty Ltd -v- Central Province Forest Industries Pty Ltd [1983] PNGLR 34. The offer made by the defendant in its letter of 21 January, 1998, was unambiguous and its acceptance leaves no room for doubt that there was a binding contract. See, Shell Papua New Guinea Ltd -v- Specko Investment Ltd (2000) S767. The acceptance of the officer by the defendant was followed by the loan being drawn by the plaintiff. Again, this leaves no room for doubt that the contract was concluded and binding. See, also McDonald -v- Papua Constructions Ltd [1964] PNGLR 125 and Tonolei Development Corporation Ltd -v- Lucas Waka, Minister for Forests (1983) N4046.

41. I find that elements of a binding contract exist in the loan agreement, including consideration. It is also my view that the plaintiff by accepting the offer from the defendant had by his conduct abandoned any right to dispute or challenge the terms of the loan agreement.

42. I find that the circumstances in which all three loans were approved for the plaintiff by the defendant, then the plaintiff allowing his property at Lorengau to be mortgaged to the defendant and the Bill of Sale he entered into with the defendant over his vehicle as securities for the loans clearly show that the plaintiff willingly entered into a commercial loan agreement with the defendant.

43. This in my view relieved the defendant from any obligation to advise the plaintiff that the loan was a PNGBC commercial loan. The plaintiff disputes this, but his conduct in my mind leaves no room for doubt that he willingly accepted a commercial loan from the defendant and his conduct clearly shows that he fully understood and appreciated that he was getting a commercial loan from the defendant.

44. The plaintiff''s conduct also raises a number of unanswered questions. For instance, the application for the original loan was lodged at the Port Moresby Branch of PNGBC in September, 1997, why was the loan not approved until three months later on 21 January, 1998? And how is it that the letter of approval was issued from Lae Branch of PNGBC, when the application for loan was lodged in Port Moresby? Was this because Mr. Tevi Elu with whom the plaintiff lodged his application in Port Moresby had transferred out of Port Moresby and was based in Lae when the loan was approved, assuming Mr. T G Elu who signed the approval letter for the loan is the same person with whom the plaintiff lodged his application in Port Moresby? And, did the plaintiff have two files for his loan, one at the Port Moresby Branch of PNGBC and the other at Lae Branch of the PNGBC? Or was his file transferred from Port Moresby to the Lae Branch of PNGBC? Furthermore, why is it that Applications for Financial Accommodation for the loans were purportedly processed at the Madang Branch of PNGBC and if they were issued and processed at the Madang Branch of PNGBC, how and why did the plaintiff execute those three documents in Lorengau? All these questions leave huge gaps in the plaintiff''s case. Such questions also raise serious doubts whether plaintiff''s claims are genuine. These unanswered questions render the plaintiffs claims, hence the proceedings frivolous and an abuse of process.

45. The plaintiff has also contended that he was supposed to have been given a grace period of 3 years or 36 months under the EIP loan facility but he was given only 2 months by the defendant, but that grace period is not a term of the EIB loan facility. It was a period the plaintiff had requested in his BPNG Form 100 application. The argument is therefore baseless. On this point, the fact remains that the plaintiff had willingly accepted the terms and conditions of the loan facility offered to him by the defendant, thus, he cannot now turn around and complain about the loan.

46. The defendant as I alluded to earlier has cross-claimed against the plaintiff for certain relief including a claim for K1,041,873.40 in outstanding loan repayments with interests. This amount made up of the principal amount totaling K431,414.00 which is made up of K320,00.00, K23,992.00 and K87,485.00 calculated at 12.404% per annum over six years together with additional penalty fee or interest calculated daily on any outstanding loan balance or arrears at 5.095% per annum. These rates are part of the terms and conditions of the loan which the plaintiff accepted.

47. Pursuant to paragraph 4 of the cross-claim, the amount claimed accrued from October, 1998.

48. The loan for K320,000.00 is not in dispute. There is also evidence that the defendant approved the loan for this amount. In regard to the other two loans for K23,992.00 and K87,485.00, there is no evidence that the plaintiff had applied for loans for these amounts, nor is there direct evidence that the defendant had approved these loans. However, there are Applications for Financial Accommodation for these two loans. Mr. Tauedea told the Court that Applications for Financial Accommodation for K320,000.00, was made after the loan was approved by the defendant which he said was normal. Mr. Tauedea said, the two additional loans were given to the plaintiff as part of his total loan package. Notably also, the Applications for Financial Accommodations for the two loans were given on top of the Application for the original loan of K320,000.00. The Applications for Financial Accommodation for these two loans were executed by the plaintiff just as he did for the Application for Financial Accommodation for K320,000.00 after the loan was approved.

49. According to the bank statements adduced by the defendant, by 1 November, 2000, the outstanding balance for the loan Account was K477,644.13.

50. From the foregoing, I am satisfied on the balance of probability that the two loans were approved and given to the plaintiff by the defendant. The plaintiff has also not challenged or denied the evidence adduced by the defendant regarding these two loans. In my opinion, there is convincing, real and substantial evidence provided by the defendant to support these claims. See, Haiveta -v- Wingti (No1) [1994] PNGLR 160, see also, Honal -v- Neugerger Product Ltd [1957] 1 QB 247 and Abi Moses Rupies -v- MVIL (2005) N2784.

51. In the result, I find that the plaintiff is indebted to the defendant in the sum of K1,041.873.40 which is an amount that accrued from the principal amount of K477,644.13 with interest for the period stated above. I therefore award this amount to the defendant. The other relief sought as I said are consequential upon this principal relief. Thus having found infavour of the defendant on the principal relief, I also grant the other relief sought which are in the cross-claim, including costs and incidental to these proceedings.

52. Orders accordingly.
_____________________________________________
Nobert Kubak & Co Lawyers: Lawyer for Plaintiff
BSP Legal Services Division: Lawyer for Defendants