Petals Finance v Tau [2008] PGDC 163; DC5014 (21 July 2008)

DC5014
PAPUPA NEW GUINEA

[IN THE DISTRICT COURT OF JUSTICE]

Grade V Civil Jurisdiction

DC NO 737 OF 2008

PETALS FINANCE

Complainant
-V-

MARETA TAU

Defendant

PORT MORESBY: PUPAKA, PM

2008: 21^ST JULY

Money lending services – Claim for principal and interest – Issue of how much owed – Interest rate – Interest compounded and rolled over every fortnight – Issue of whether parties were at arms length – Default penalty so called – Amount claimed over originally intended sum – Court to find the original intent – Application of Judicial Proceedings (Interest on Debts & Damages) Act.

Money lending services – Roll over and or compounding interest charges – Default in payment resulting in unintended and unfair outcomes – Presumption that parties are not at arms length – Principles of unjust enrichment and loan sharking discussed

Mr. Westly for the Complainant
No appearance by the Defendant

21^st July 2008
PUPAKA: The complainant’s claim as set out in a Complaint and Default Summons upon Complaint dated 9^th May 2008 is that on 16^th of July 2005 it loaned the defendant K300.00 to be repaid with interest. It now says the defendant defaulted in making payments. Therefore it sues to recover the principal loan as well as all the accrued interests and charges.

Though the proceeding seems to have been dully served it is undefended. The defendant never appeared in court to defend in this proceeding at any time. Therefore the complainant was directed to file affidavit evidence for an expedited ex parte hearing. Consequently the complainant filed two affidavits. One is dated 30^th April 2008 and it was filed by an Albert Koniel. The other, dated 18^th July 2008, was sworn and filed by Bernard Tulemanil. The two affidavits contain similar evidence regarding the outstanding loan. Albert Koniel’s affidavit contains several documentary annexures, including the Loan Application, copy of the defendant’s Pay Slip, Permanent Variation Advice (PVA), and a personal information (profile) form.

The Complainant’s Case

The complainant’s case is that the defendant applied for and borrowed K300.00, to be repaid with 45% interests, which meant the total money repayable by the end of the loan period was exactly K435.00. By an agreed repayment schedule the defendant was to pay K62.14 a fortnight for seven (7) fortnights. It is left unsaid but of course, if he could afford to do so, the defendant could pay the K435.00 at any time within the specified period. The time schedule would have been just a suggested repayment plan, set or affixed only for the complainant’s ease and convenience.

Finding on the evidence

First of all I find that the defendant agreed to pay about K435.00. If she kept her side of the bargain she would have paid, through salary deductions, a total of K434.98. No more and no less. That was the crux of the deal between these parties. For ease and convenience it was agreed that the defendant spread the payments over seven (7) installments of K62.14. Nevertheless if the defendant elected to pay the whole lot (K434.98) by the first payday, I doubt the complainant would have complained, as it would have got all it was entitled to, and also much earlier than it expected too.

Whether by design or on purpose is not clear but the complainant does not disclose just how much exactly the defendant paid by way of fortnightly payments of K62.14. All Albert Koniel says is that “the defendant kept up to date with her first couple of payments and has defaulted since”. A quick perusal of the record of payment and interest computation attached to witness Bernard Tulemanil’s affidavit reveals that the defendant made six (6) installments of K62.14, on various dates beginning 17^th August 2005 and ending 26^th of October 2005. It appears the repayments started straight after the loan was approved and continued without a break and then stopped completely. It seems that a total of K372.84 may have been paid by the defendant to the complainant through direct salary deductions.

By the time the last of the six (6) payments was made on 26^th October 2005, only one final installment of K62.14 was outstanding. Presuming that the defendant made no other payments after the sixth and final installment, she still owed K62.14 when she ceased direct fortnightly deductions.

The complainant’s records of continuing and or accumulating rollover of interests seem to be as tabulated by witness Bernard Tulemanil. I must admit it makes no lawful or logical sense to me. However I take this to be a record of the way the last and remaining K62.14 multiplied and grew to K4350.02. I can say outright that the complainant will get K4350.02 only in its dreams, for it cannot get it in real life. No lawful tribunal can sanction this sort of nonsense claim. It is unlawful and unjustified. Indeed to sanction a claim like this would be to sanction unjust enrichment. To my mind this claim is not a lawful claim. At the most it is a dishonest claim, even if it is based upon a misconception of the principles of compounding interests.

Of the documents annexed to Albert Koniel’s affidavit, Annexure “A” is the Loan Application form. It shows that the defendant applied for a K300.00 loan. Under the section “ACKNOWLEDGEMENT OF BORROWER /EMPLOYEE the loaning entity is alternatively referred to as Petals Finance or BS Consultants. Therefore there is confusion as to who the parties to the agreement are. Did the defendant contracted with Petals Finance or with BS Consultant? It is not clear who BS Consultant is or why it is being referred to in the contract document. Therefore it is uncertain as to which entity the defendant actually contracted with.

Ergo, were it not for other issues, I would promptly dismiss this claim here and now. However there are certain issues raised by the added claims, relating to penalty fees and default charges, which I must discuss as well in the circumstances, even if it is only for the record.

Penalty Charges

As I have said in other similar claims in this jurisdiction, the complainant was not entitled to charge default fees. These sorts of charges, seemingly unjustified due to the complete lack of discloser of what loses complainants like Petals Finance may suffer as a result of defaults, cannot be enforced, regardless of whether not the charge or fee is contested. Parties like this complainant are obligated to say what damages or losses they will suffer or did suffer due to the default in periodic payments. Without evidence of direct and quantified loss no default fees or charges can be levied.

The complainant claims it is owed K4350.02. It considers that amount to be its ‘principal’ and interests together with the aggregate default fees. Considering that the maximum contract amount was only K434.98 even under default conditions, it is difficult to appreciate just why more than ten (10) times that is now being claimed.

The exact math or mechanics of how a loan of K300.00, even if lent at 100% interests, can possibly be turned into K4350. 02 is simply unclear.

Absurdity of compounding interests & snowballing rollovers

I also wish to repeat something that I have already said in other similar claims in relation to the so-called ‘market money’ cases in this jurisdiction: Even despite existence of clear contracts, unjustified interests charges and fortnightly rollovers are wrong and cannot be enforced at law.

As to how exactly a principal loan and accrued interest can be rolled over any number of times and compounded to achieve a snowballed figure is unclear, but it is certain that if the snowballing effect continues long enough it is possible for the final figure to be anything, perhaps millions!

I have no desire to educate myself on the mechanics of the process as it does not really matter. I consider the practice is unfair and one that is forbidden by accepted equitable principles. In my view, claims based on the practice (continuous rollover on a periodic basis creating a snowballing effect) or agreements to facilitate that sort of practice, are unenforceable. To sanction or allow someone to gain by this practice, even if there is a contract wherein the defendant agreed to be bound by the snowballing or compounding interest, is to judicially endorse unjust enrichment. Equity prohibits the undesirable and pernicious practice of unjust enrichment.

Unjust enrichment may occur where a party benefits or stands to so benefit 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 that 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 claims 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 are more than what is reasonable.

In the case of Tom Rangip –v- Roland Yeung & Or, which was a Kimbe District Court case, Chief Magistrate Manuhu (as he then was), in relation to a suit wherein the defendants unjustifiably claimed monies they really were not entitled to or had earned in any sense at all, said much the same thing.

In the instant case the contract between the complainant and the defendant, at least to the extent that it catered for and created a contingency agreement, was defective and unconscionable.
Situations or arrangements or deals like the current one are questionable activities. It borders on a fringe activity sometimes referred to as ‘loan sharking’. The courts should not and must not allow parties to profit needlessly; especially not without rendering adequate considerations on their part and must not in any way permit profiteering over and above the limits of foresight and logic or reason.

It matters little, and is of no significance really, that the defendant agreed to the exorbitant contractual terms. In equity there is a trite proposition 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 otherwise compelled to contract out of extreme need or lack of choice or under some sort of compulsion of one kind or other.

In this instance the defendant could have needed the money badly. She agreed to not only pay hefty interests in a short time but she also, presumably, agreed to be penalized if she defaulted in the seven (7) specific payments. That was tough but it just goes to show the lopsided bargaining positions of the parties at the time of contract. However this is where equity steps in. The presumption in equity alluded to above dictates that no contract, entered into between an apparently weaker and an objectively stronger party, with the odds stacked up against the weaker party, is enforceable. Such a contract is presumed to be unconscionable.

There is one other thing adequately borne out by the evidence that I need to state at this juncture. One of the annexure in witness Albert Koniel’s affidavit is a copy of the defendant’s pay slip. Obviously it is the copy pay slip submitted by the defendant when she applied for the loan. It shows that at the time the complainant loaned her K300.00 the defendant was servicing other similar loans. She was also paying off loans from other schemes like this complainant’s. At the time the defendant was making the following repayments: K56.79 to Finance Corporation; K20.00 to Handy Finance; K52.00 to Paukale Pty Ltd; K50.00 to TS & Loan Society; and K20.00 to Vini Finance. She took home K170.70 after deductions. Then of course, on top of all these, the defendant was going to pay the complainant K62.14.

The defendant’s personal facts sheet, made available to the complainant for purposes of the loan application, showed she was 42 years old at the time and she had five (5) children.

Presuming that the defendant is the sole source of her family’s income and her take home net of K170.70 (actually K108.56 after the complainant took its dues) is enough for her and her children, even if just to live on, not to mention other vital expenses for the time being, she must tell the world how she manages to do that. A lot of same sized families cannot survive on money like this in the city.

The point I make is that one does not have to be divinely inspired to work out the fact that the defendant was not a viable candidate for loans. The complainant nevertheless went ahead and gave her a loan. In the circumstances I think this complainant was overly reckless. It took a huge risk on the defendant. In fact it gambled. It should consider itself lucky it got its principal plus most of the interests before the repayments stopped.

More importantly though, this also goes to show the extent to which some fringe operators stoop down to to pry upon the weak and desperate with such shameless abandon. Thankfully though there are laws in the land and the principals of equity do dictate that entities like this complainant are prevented from enforcing unconscionable contracts.

Conclusion

For all the foregoing I consider the parties really intended, at the relevant times when their minds and thinking converged such as to found consensus ad idem, that the defendant would pay the complainant a maximum of K434.98 without default or a bit more where there was loss incurring default. Of course there has been default but the complainant has simply failed to show actual losses suffered as a result of that default. In my view the complainant cannot rely on the default per se to assert default fees – over and above the contracted principal plus interests – without proof of real losses as a result of the default. Without proof of quantifiable loses as a result of default, any charges become unlawful and therefore unenforceable.

In any event the defendant may owe the complainant only K62.14 plus 8% at the most. However I do not intend to rule that she does owe the complainant, Petals Finance. She may yet owe that to BS Consultants instead. BS Consultants is of course not a party to these proceedings. In the end I can only dismiss this claim and I will. I make no orders on costs as these proceedings have not been defended.

________________________________________________________
Westly for the Complainant