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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
WS NO 1165 OF 2009
MADANG COCOA GROWERS EXPORT CO LIMITED
Plaintiff
V
NATIONAL DEVELOPMENT BANK LIMITED
Defendant
Madang: Cannings J
2010: 21, 25 May,
2011: 3 June
CONTRACTS – loan agreement and mortgage – bank/customer relationship – whether bank entitled to repossess vehicles secured by fixed and floating charge – whether bank committed breach of contract – whether customer entitled to damages.
The plaintiff entered into a loan agreement with the defendant bank under which the bank advanced the plaintiff K300,000.00. The loan was secured by amongst other things a fixed and floating charge (a mortgage) over all the plaintiff's assets and undertakings, including two of its motor vehicles. The plaintiff failed on several occasions to meet its monthly repayment obligations and the bank took possession of the vehicles, sold them and credited the proceeds of sale to the plaintiff's loan account, the result being that the bank owed money to the plaintiff. The plaintiff commenced proceedings against the bank seeking damages for breach of the loan agreement by the bank, on the grounds that at the time of repossession it was not in default, that the bank acted unfairly and contrary to the plaintiff's equity of redemption.
Held:
(1) At the relevant time the plaintiff was not in material default and the bank acted contrary to its duty of fairness in the conduct of the loan account (a duty imposed on it under the Fairness of Transactions Act 1993, which is an implied term of the loan agreement) and contrary to the plaintiff's equity of redemption.
(2) A cause of action was therefore established in breach of contract and the plaintiff was entitled to damages, which will be assessed in a separate trial.
Cases cited
The following cases are cited in the judgment:
Bank of PNG v Derick Sakatea Niso (2004) N2664
Bank of South Pacific Ltd v The Public Curator (2003) N2320
Golobadana No 35 Ltd v Bank of South Pacific Ltd (2002) N2309
Negiso Investments Ltd v PNGBC (2003) N2439
PNGBC v Pala Aruai (2002) N2234
Rage Augerea v Bank South Pacific Ltd (2007) SC869
Stephen Asivo v Bank of South Pacific Ltd (2009) N3754
STATEMENT OF CLAIM
This was a trial on liability.
Counsel
S Asivo, for the plaintiff, with leave of the Court
3 June, 2011
1. CANNINGS J: The plaintiff, Madang Cocoa Growers Export Co Ltd, entered into a loan agreement with the defendant, National Development Bank Ltd, under which the bank advanced the plaintiff K300,000.00. The loan was secured by amongst other things a fixed and floating charge (a mortgage) over all the plaintiff's assets and undertakings, including two of its motor vehicles. The plaintiff failed on several occasions to meet its monthly repayment obligations and the bank repossessed the vehicles, sold them and credited the proceeds of sale to the plaintiff's loan account, the result being that the bank owed money to the plaintiff. The plaintiff has commenced proceedings against the bank seeking damages of K1.7 million for breach of the loan agreement by the bank, on the grounds that at the time of repossession it was not in default, that the bank acted unfairly and contrary to its (the plaintiff's) equity of redemption.
2. The bank filed a defence but did not attend the trial despite adequate notice being given to it. The case has proceeded without the benefit of any evidence or submissions from it. The plaintiff was represented by its executive director, Stephen Asivo, who appeared with the leave of the court. One of the difficulties faced by the court in dealing with this case is that the loan agreement is not in evidence. Nevertheless, there are many other documents that have been adduced by the plaintiff and, from these, the train of events leading to the bank taking possession of the vehicles has been able to be pieced together. There were actually two occasions on which the bank confiscated the vehicles. After the first, the plaintiff made a catch-up payment and the bank returned them. However, there was no respite offered after the bank took possession of the vehicles the second time. The bank sold them soon afterwards; and it is that conduct that the plaintiff is particularly aggrieved by and which, it argues, amounted to a breach of contract by the bank.
3. The issues are these:
1 WHAT ARE THE FACTS? WHAT ARE THE CIRCUMSTANCES IN WHICH THE BANK TOOK POSSESSION OF THE VEHICLES AND SOLD THEM?
4. The story begins in February 2007, when the plaintiff applied for the loan, and ends in September 2008, when the vehicles were sold.
2007
5. On 28 February the plaintiff applied for a loan of K300,000.00 to fund the purchase of two Toyota Landcruiser motor vehicles and to strengthen working capital for its cocoa trading activities. The loan was approved in early March on these terms:
Principal : K300,000.00
Interest : 12% per annum
Period of loan : Seven years
Monthly repayments : K5,296.00
6. Security for the loan was provided in the form of:
7. The loan was drawn down as follows:
20 March : K3,939.25
20 March : K50,000.00
5 April : K96,431.50
5 April : K5,342.02
24 April : K96,431.50
24 April : K5,432.02
8. The plaintiff made the following repayments in 2007:
25 April : K5,300.00
25 May : K5,300.00
15 August : K15,900.00
31 December: K5,300.00
9. On 31 December the bank issued a letter of demand, requiring payment of the entire balance of the loan, which then was K300,830.55, within seven days, and notifying that if the plaintiff defaulted it intended to exercise its rights, powers and remedies, including the power of sale, conferred on it by the securities it held over the loan. Interestingly, the bank statement for the loan account states that the balance of the loan at 31 December 2007 was K295,530.55. It is not clear why this discrepancy of K5,500.00 existed.
2008
10. On 13 January the plaintiff's executive director, Mr Asivo, wrote to the bank requesting that the term deposit of K50,000.00 be cashed and the proceeds applied to the loan. The bank did not accede to the request and instead on 28 January took possession of the two vehicles, at which time the debit balance of the loan account was approximately K295,530.55 (that being the last end-of-month balance as at 31 December 2007).
11. On 4 February the plaintiff made a cash repayment of K26,700.00, which reduced the loan balance to K268,830.55; and in response, on 8 February, the bank returned the vehicles to the plaintiff.
12. On 10 March the bank called in the bulk of the two term deposits and applied K190,780.97 to the loan account, the result of which was that the balance of the loan was reduced to K78,049.58. It is not clear why the sum of the two term deposits (K50,000.00 + K150,000.00 = K200,000.00) was not called in or how the remaining K9,219.03 was applied. Another curious aspect of this transaction is that the sum of K190,780.97 appears on the bank statement with the narrative "Loan Repayment", which is the same narrative used for monthly repayments. It is reasonably to be expected that a different narrative would be used for this transaction, to show that it is the proceeds of realisation of a security held.
13. In June the plaintiff, with the knowledge and concurrence of the bank, entered into a 13-month lease for one of the vehicles with Mountain Engineering Ltd. The gross value of the contract was K206,100.00.
14. The next letter of demand was issued on 28 August. Before then, the plaintiff made the following further loan repayments:
30 May : K4,107.00
2 July : K277.00
15 July : K1,385.00
22 August : K500.00
25 August : K500.00
26 August : K1,500.00
15. The 28 August letter of demand required full payment within seven days of the balance of the loan, of K87,348.08, and notifying that, if the plaintiff defaulted, it intended to exercise its rights, powers and remedies, including the power of sale, conferred on it by the remaining securities it held over the loan (which then were the mortgage and the directors' guarantees). I note that the amount shown on the letter of demand (K87,348.08) is again different to the amount appearing on the loan statement (K86,579.54) for the relevant date (28 August 2008).
16. After the letter of demand was issued the plaintiff made further repayments:
2 September: K500.00
8 September: K500.00
11 September: K500.00
30 September: K8,476.00
17. There is no evidence that the bank issued any letters of acknowledgment of receipt of these deposits, while at the same time reserving its position on a "without prejudice" basis; which I would have thought would be standard banking practice to deal with the situation that had developed with this loan.
18. On 12 September the bank again (a similar thing having happened in January 2008) took possession of the two vehicles, this time with the assistance of Madang police.
19. Within the following week the plaintiff made requests in writing to the bank for an extension of time, and Mr Asivo flew to the bank's head office in Port Moresby and met with senior officers of the bank in an attempt to negotiate a reversal in the bank's position. He offered to pay K10,000.00 cash to the bank, but the offer was refused, the bank insisting that the full amount of the balance of the loan must be paid.
20. The bank quickly – within a matter of days, without a public tender – sold the two vehicles for the total sum of K86,524.00 to a single buyer (another National Development Bank customer). On 30 September 2008 it applied the proceeds of sale to the loan account, the effect of which was that the account had a credit balance of K7,851.32.
2 DID THE BANK ACT UNFAIRLY? WAS THE PLAINTIFF DEPRIVED OF ITS EQUITY OF REDEMPTION?
21. In determining these issues I will apply some fundamental principles of banking and property law in Papua New Guinea. Banks have a general duty to be fair to their customers, at least to those in a relatively weak economic position. A bank must not impose charges and interest rates, on default, that amount to a serious penalty through which the bank tries to unjustly and unreasonably enrich itself. This is an enforceable duty, which has been developed by the courts under the Fairness of Transactions Act 1993, and must now be regarded, in my view, as an implied term of any loan agreement (Rage Augerea v Bank South Pacific Ltd (2007) SC869, Negiso Investments Ltd v PNGBC (2003) N2439, Stephen Asivo v Bank of South Pacific Ltd (2009) N3754).
22. To enforce this duty the courts will interpret a loan agreement and mortgage so as to give effect to the mortgagor's equity of redemption, ie 'the equitable right of the mortgagor to redeem the mortgaged property after the legal right to redeem has been lost by default in repayment of the mortgage money at the due date' (as defined in Osborn's Concise Law Dictionary, 7th edition, Sweet & Maxwell © 1983). This principle, which has its genesis in the principles and rules that formed immediately before Independence Day the principles and rules of equity in England that have been adopted as part of the underlying law of Papua New Guinea, has been applied and enforced by Kandakasi J in a string of National Court decisions including PNGBC v Pala Aruai (2002) N2234, Golobadana No 35 Ltd v Bank of South Pacific Ltd (2002) N2309, Bank of South Pacific Ltd v The Public Curator (2003) N2320 and Bank of PNG v Derick Sakatea Niso (2004) N2664. The appropriateness and legal correctness of the principle was endorsed by the Supreme Court in Rage Augerea's case.
23. So, did the bank act fairly? No doubt it would have argued, if it had appeared at the trial, that it did, as the plaintiff appeared to be in serious default of the loan agreement as a result of its erratic repayments. The plaintiff was given a 'second chance' to get the loan account in order when the vehicles were returned to it in January 2008 but still it failed to make regular repayments. The bank had exercised its rights by calling in the two term deposits; but still the balance of the loan was substantial and the prospects of the plaintiff being able to meet its obligations were not great.
24. Against those arguments lie some telling facts. The bank took possession of the vehicles only 17 months (April 2007 to September 2008) into a scheduled 84-month loan. The balance of the loan on 30 September 2008, immediately before the credit of K86,097.69 from the sale of the two vehicles was posted to the account, was only K77,621.69. The loan was substantially ahead of where it should have been, in the plaintiff's favour.
25. Despite what the loan agreement might have stated (again, I point out, it was not in evidence) and despite what the mortgage stated (on this subject I will say more in a moment), this could not reasonably be regarded as a material default, justifying a bank taking such a drastic step as confiscating, and selling in a short space of time, without a tender (the purpose of which is to get a fair price) the two vehicles that it had helped its customer purchase. These vehicles were amongst the customer's core assets and the bank must have known they were needed for the customer to continue to trade. In fact the bank knew that the vehicles were leased to another party, and were earning income for the plaintiff. The conduct of the bank can only be regarded in these circumstances as harsh and oppressive, unconscionable and unfair. The question must be asked whether this bank had any proper understanding of customer care and asset management. No regard was paid at all to the plaintiff's equity of redemption; thus the plaintiff was deprived, by the pre-emptive action of the bank, of its equity of redemption.
3 HAS THE PLAINTIFF ESTABLISHED A CAUSE OF ACTION IN BREACH OF CONTRACT?
26. Yes. As I indicated earlier the duty of fairness in the conduct of a bank's business with its customer must be regarded, at least in cases such as the present where the customer in a relatively weak economic position vis-à-vis the bank, as an implied term of any loan agreement. In particular the bank is bound to respect and give effect to the customer's (the mortgagor's) equity of redemption. When this duty is breached, a breach of contract is committed and a cause of action is established, entitling the innocent party to damages.
27. The elements of such a cause of action have been proven to exist in this case. The bank is guilty of a breach of contract and the innocent party, the plaintiff, is entitled to damages.
REMARKS
28. Before pronouncing the orders of the court I need to acknowledge the risk in a case such as this, where one side does not turn up to present its case, that the court will make a decision based on a lopsided view of the facts. The court will only get one side of the story. Here it has been the plaintiff's side. Perhaps there is another side. I hope so. I shudder to think that what I have described in this case might be representative of the way that the National Development Bank, or any bank in PNG, treats its customers.
29. The National Development Bank has been established pursuant to statute (the National Development Bank Act 2007). Its prime function is under Section 5(a) "to mobilise savings and provide credit and other banking and financial services to the people of Papua New Guinea". On its letterhead, at least on the one appearing in evidence in these proceedings, the one used to convey the letters of demand to the plaintiff, are stated the proud words:
Haus Moni Bilong Yumi
30. The Bank's middle name is "Development". It is the People's bank. The Bank needs to take this to heart in the way that it deals with its customers. It needs to do much better than how it behaved in this case.
31. I trust that the National Development Bank will consider carefully what I have said about its duty of fairness and think about how it might conduct its affairs in future so that the sort of mistakes that occurred here are not repeated. Banks, and the individuals that control and manage them, and their staff too, perhaps need reminding that their customers, even the corporate ones, are human beings. Without customers, a bank has no business.
32. Customers need to be treated and respected as such. They need to be communicated with clearly. Customers should be informed in straightforward language of their rights and obligations. Not much of that happened here. Though the loan agreement was not in evidence, the fixed and floating charge was – all 31 pages of it. It appears to set out in painstaking detail the rights and obligations of the parties though I must confess I could not bring myself to read it through from beginning to end for fear of its effect on my soundness of mind. It is, with respect to its drafters and to the bank which chose to foist it on its customer and despite its ostensible grammatical correctness, a piece of turgid, incomprehensible gobbledegook. Take clause F21, appearing on page 21, for example. Headed 'Officers of the Bank Appointed as Attorney', it states:
All acts and things which under or by virtue of this security or any of the covenants and agreements herein contained or implied ought to be done by the Mortgagor or which the Bank is hereby or by virtue hereof or by statute authorized or empowered to do may be done by any attorney of the Mortgagor hereinafter appointed either in the name of the Bank or of the Mortgagor or of such attorney and the Mortgagor hereby irrevocably appoints every authorized officer of the Bank and the assigns of the Bank severally the attorney of the Mortgagor for the purposes aforesaid with full licence power and authority at any time or times hereafter at the cost and charges of the Mortgagor to take all such steps and proceedings and to do and execute all such acts deeds and things for securing or perfecting if necessary or as to the Bank or the said attorney shall seem expedient the charge herein contained and to execute in favour of the Bank or its assigns all such legal mortgages conveyances transfers assignments and other assurances as aforesaid of all or any part of the mortgaged premises and also for the purpose of assuring all or any part of the mortgaged premises direct to any purchaser thereof from the Bank or for otherwise giving the Bank the full benefit of this security to execute in favour of every such purchaser all such conveyances transfers assignments and/or other assurances as to the Bank or the said attorney shall seem expedient And also in the name and on behalf of the Mortgagor to take and/or defend all or any such legal proceedings as aforesaid And also to sign or endorse any such cheque promissory note bill of exchange or other commercial or other document as aforesaid And to transfer and assign any life fire or marine insurance policy or shares or any certificate or scrip relating to shares and to compound and satisfy all claims hereunder And to demand sue for recover receive and give sufficient receipts and discharges for all moneys to which the Mortgagor is or may become entitled in respect of the mortgaged premises or any part thereof or which shall come into the hands of the said attorney which receipts and discharges shall exonerate the person paying such moneys to the said attorney from all liability to see to the application thereof or from being answerable for the loss or misapplication thereof And also to prove in insolvencies bankruptcies liquidations by arrangements compromises compositions with creditors or windings up and to attend meetings of creditors therein and to vote thereat and to receive dividends and compromise claims in relation to or arising out of the mortgaged premises or any part thereof and to attend and vote at meetings of shareholders in respect of all or any shares or stock forming part of the mortgaged premises And for all or any of the purposes last aforesaid to appoint proxies And also to sign seal execute and deliver any compromises deeds of assignment or composition releases or other documents that may be considered necessary by the said attorney And also to exercise and put in force all and every or any of the powers rights and remedies of the Mortgagor under any agreement or security for the time being forming part of the mortgaged premises And for all or any of the purposes aforesaid from time to time to appoint any substitute or substitutes and such substitute or substitutes at pleasure to remove.
33. How any reasonable bank in Papua New Guinea, or indeed in any country in which English is the language of commerce, could regard that as a meaningful and proper way in which to set out the terms of an agreement with its customer, is beyond me. It is an abuse of one of our official languages.
ORDER
(1) The defendant is liable in breach of contract to the plaintiff, which has established that it is entitled to damages.
(2) The parties shall appear before the Court within one month to notify the Court their position on whether the question of damages should be referred to a mediator for mediation under the ADR Rules.
(3) The costs of the proceedings to date shall be paid by the defendant to the plaintiff on a party-party basis, to be taxed if not agreed.
(4) Time for entry of the order is abridged to the date of settlement by the Registrar which shall take place forthwith.
Orders accordingly.
____________________________
Lawyers for the plaintiff: Nil
Legal Division, NDB: Lawyers for the defendant
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