Kipil Lending Services v Lulu [2008] PGDC 155; DC5006 (30 April 2008)

DC5006
PAPUPA NEW GUINEA

[IN THE DISTRICT COURT OF JUSTICE]

Grade V Civil Jurisdiction

DC NO 53 OF 2008

KIPIL LENDING SERVICES

Complainant
-v-

BETTY LULU

1^st Defendant

JACK TARI

2^nd Defendant

PORT MORESBY: PUPAKA, PM

2008: 30^TH APRIL

Civil proceeding – Money lending services – Claim for principal and interest – No payment done – Issue of how much owed – Interest rate – Interest compounded and rolled over every fortnight – Parties not at arms length – Default penalty so called – Amount claimed way over originally intended sum – Court to ensure that original intent is maintained – Application of Judicial Proceedings (Interest on Debts & Damages) Act.

Money lending services – concept of rolling over and compounding interest charges – Default in payment resulting in unintended and unfair results – Parties not at arms length – Principles of unjust enrichment and loan sharking referred to and discussed.

The Complainant by its Manager – M. Andane
No appearance of the Defendants

30^th April 2008

PUPAKA: The complainant’s case by its Summons & Summons upon Complaint of 14^th February 2008 is that it loaned the defendants K1000.00 at an interest rate of 50% on 5^th October 2007.
It is now said the defendants have defaulted in payments and they owe the complainant K6, 449.80 as a result. As I alluded to in the complainant’s similar claim in its case against Peter Etai, [DC No. 54 of 32008], I cannot begin to workout or understand the exact math or mechanics of how a principal sum of K1000.00, loaned at 50% interest, can be turned into K6, 449.80 by 14^th February 2008 (which is in just 4 months from 5^th October 2007, the date of the loan), but it is said a additional 20% is levied for default in the first installment, which was due in two weeks.

In the continued absence of the defendants the complainant was directed to file affidavit evidence for a speedy ex parte hearing, which it has done, both in this matter and its similar case against Peter Etai (supra). Therefore today was for an ex parte hearing of this and the other matter. The defendants herein failed to turn up in court as usual. Consequently the complainant requested the Court to consider its affidavit evidence and grant judgment. As a result the Court considered its evidence that way and the following is the Court’s considered judgment in this matter.

Evidence

The complainant filed two affidavits: One dated 27^th February 2008 and another dated 18^th April 2008. The first of these, dated 27^th February 2008, was sworn by one Mrs. Cathy Tuluya of the complainant, who attested that she is actually the complainant of the proceedings, which is strange because the formal complainant is still Kipil Lending Services. Anyway she says she loaned the defendants K1000.00 with the intent that the latter would pay back the loan within the fortnight with 50% interests. She says there was default in payments. She says (by application of a process the logic of which incidentally escapes me) the defendants ended up owing K6, 449.80. She does say there was an additional 20% charge that is factored in for default.

The complainant’s affidavit dated 18^th April 2008 seems to be more substantive than the first one. Nevertheless that affidavit is a defective one. The deponent of this affidavit is anonymous because he or she is unnamed and unidentified, which renders this affidavit defective. I cannot consider the contents of this affidavit in any way, shape or form.

Evidence is not clear on how much the defendants were to have paid each fortnight. I take it, given the manner of pleading, that this was a one-off loan to be paid back with 50% interests within a fortnight. I think it is adventurism on the part of the Court to guess that there was an extended timeline for payment and that payments could be made by installments. The pleadings simply make no reference to that situation or scenario.

Having dealt with the complainant’s other case fixed for today – against Peter Etai – it does seem it is engaged in ‘money lending’ activities. It seems to have a structured approach to rates and deductions and other matters. Therefore if similar arrangements applied as in the case of Peter Etai, the complainant really should have disclosed evidence of installment amounts and completion dates. The Court has no right to guess at what those may have been. Nevertheless, on the whole, I am satisfied that the defendants borrowed K1000.000, money which they have not repaid. They agreed to pay an interest capitalization of 50% on that loan. I accept that by the end of the loan repayment schedule, if any, the defendants were to have paid K1500.00. Had the defendants kept up on the date of the repayment, the most they would have paid was K1500.00. This was consciously agreed to by the parties as it seems to have been their intention. To that extend, theirs was an otherwise acceptable, reasonable and lawful agreement.

However I doubt the defendants originally agreed to pay the thousands of extra kina on top of the borrowed K1000.00, even if they were to run into arrears. The defendants may have accepted that they maybe liable to pay an extra 20% as a penalty fee perhaps, but no more than that.

I shall further expound on this, given the rather generalized pleadings and the sketchy evidence of this claim to over 600% interest capitalization on the original loan – within a matter of just four (4) months.

How much does the defendant owe?

All going well, i.e., under normal circumstance, the complainant would have been satisfied with K1500.00, which is the amount the defendant’s contracted to pay. However, allowing for imposition of the extra ‘penalty fee’ of 20%, which amounts to K200.00, the total due, after default in payment had occurred, would be a maximum of K1700.00.

This cannot include court costs. Costs of mounting a successful court proceeding and interests pursuant to the Judicial Proceedings (Interest on Debts and Damages) Act 1962 are calculations that may be added if and only after a favorable order is obtained. Therefore the most the complainant is entitled to, by way of judgment, prior to assessment of after order costs and interests, is a maximum of K1700.00.

Absurdity of compound interests & snowballing rollovers

How interests on interests together with the principal sum can be rolled over and compounded any number of times to get this ‘snowballing’ figure is, as I already said above, quite unclear to me. However it does seem to me that if the snowballing effect is allowed to continue the final figure could turn out to be anything, in fact infinite!

Be that as it may, I do not intend to educate myself on the mechanics of the process as I feel that it really does not matter in the end. I consider the practice to be unfair and one that is forbidden by accepted equitable principles. In my view, claims based on the practice of continuous rollover, on a fortnightly basis, to create a snowballing effect and or agreements to facilitate that sort of practice, are untenable and unenforceable.

To allow someone to gain by this practice, whether or not there is a binding contract whereby the defendant agreed to be bound by any snowballing or compounding interest is to judicially sanction and endorse an abjectly pernicious practice of unjust enrichment. The Principles of Equity prohibit that sort of practice, including claims for unjust enrichment.

Unjust enrichment occurs when a party benefits or stands to benefit unduly under unmeritorious circumstances. For instance in the case of Simon Norum –v- Daniel Ikio & Ors (N1593), the National Court held that a contract, seemingly valid on the face of it, but one which was really a contingency agreement, was wrong. In this particular case Justice Lenalia considered it to be wrong for lawyers to contract with clients to charge the latter fees based on a percentage of any claim recovered. His honor said it was wrong for lawyers to adhere to an unjustified assumption that the Lawyers Act give them the right to enter into contingency agreements so as to charge fees by percentages that were more than what is reasonable.

In the instant case before me the contract between this complainant and its defaulting clients (the two defendants), at least to the extent that it catered for and created a contingency agreement, was defective and unconscionable. Situations of this sort must be categorized as the wanton activities of unscrupulous moneylenders that it actually is. It borders on fringe activities sometimes referred to as ‘loan sharking’.

It really is of no consequence that the defendants agreed to the exorbitant contractual terms. It is a trite proposition at equity that parties are presumed not to have negotiated at arms length if one party is the much weaker one for having no leverage and or bargaining power but was compelled to contract out of a lack of choice or extreme need or compulsion of some sort.

In this instance the defendants may have needed the money badly. They agreed to not only pay a 50% interest in under a short term but also, presumably, agreed to pay thousands of kina if they defaulted in payments. The default period is glaringly significantly in that it is just over four (4) months. All that for a consideration loan of K1000.00. It is incredible but that just goes to show the lopsided bargaining positions of the parties. How can anyone say the defendants got a fair deal, in a contract wherein they agreed to pay over 600% on a two-week term loan of K1000.00?

However this is where the Principles of Equity kicks in. It is situations such as this that the presumption in equity alluded to above play a pivotal role. Equity dictates that no contract, entered into between a weaker and a stronger party, with all odds obviously stacked up against the weaker party, is enforceable on the bases that such a contract is unconscionable.

Conclusion

For all the foregoing I consider the parties really intended, at the relevant time when their minds and thinking converged, that the defendants had to pay the complainant K1500.00 without default or a maximum of K1700.00 where there was default. There has been default here of course. Therefore the defendants are liable to the complainant in the sum of K1700.00. To conclude any other way would entail unjust results.

Ergo I order the defendant, Betty Lulu and Jack Tari, each and severally and jointly, pay the complainant, Kipil Lending Services, the sum of K1700.00. There shall be interests paid on that at the statutory rate of 8% from the date of Summons to the date of payment. The complainant shall have its nominal costs of this proceeding.

______________________________________________________
The Complainant by its Manager
No appearance by the Defendants