Asivo v Bank of South Pacific Ltd [2009] PGNC 149; N3754 (2 October 2009)

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CONTRACTS – loan agreement and mortgage – bank/customer relationship – whether bank entitled to refuse to provide further funding after discovery of alleged bad debt of customer – whether bank committed breach of contract – whether customer entitled to specific performance of loan agreement – whether customer entitled to damages.

The plaintiff entered into a loan agreement with a bank (the defendant) under which the bank agreed to lend the plaintiff K58,700.00 for purchase of a house and land, repayable over 16 years. A mortgage was executed over the property. The bank provided K30,000.00 to the plaintiff but refused to provide any more as it discovered that the plaintiff had a pre-existing bad debt with the bank which he had not disclosed in his loan application. The bank then demanded immediate repayment of the money it had provided to the plaintiff, plus interest, failing which it would exercise its powers of mortgagee. The plaintiff then commenced proceedings against the bank in the National Court seeking specific performance of the loan agreement and damages.

(1) There was no term of the loan agreement that permitted the bank to withhold any advance to the plaintiff on the ground of non-disclosure by the borrower of a previous bad debt with the bank.

(2) In particular, non-disclosure of a previous bad debt was not an ‘event of default’ prescribed by the loan agreement, which would have entitled the bank to cancel the loan facility.

(3) In any event, the plaintiff had disclosed in his loan application the previous loan with the bank that rendered him in the eyes of the bank a bad debtor and he could not reasonably be said to have misled the bank or be guilty of any breach of a duty of disclosure.

(4) It is incumbent on a bank to make all relevant credit reference checks on an applicant before entering into a loan agreement with the customer. In the absence of an express term of the agreement that caters for such information coming to light after execution of the agreement, the bank is estopped from relying on non-disclosure by a customer as a basis for not completing its obligations under the agreement.

(5) The bank was guilty of a breach of contract and it followed that the remedy of specific performance should be granted in favour of the plaintiff and that the plaintiff should be awarded damages of K20,000.00 plus interest.

Cheong Supermarket Pty Ltd v Pery Muro [1987] PNGLR 24
Negiso Investments Ltd v PNGBC (2003) N2439
Steven Naki v AGC (Pacific) Ltd (2005) N2782

This was the trial of an originating summons in which the plaintiff was seeking specific performance of a contract and damages.

1. CANNINGS J: This case is about a breakdown in the relationship between a bank and two of its customers. The customers are the plaintiff, Steven Asivo, and his wife, Theresa Asivo. The bank is the defendant, the Bank of South Pacific Ltd.

2. The plaintiff has brought the bank to court as he claims that it has breached a loan agreement he and his wife entered into with the bank. The purpose of the agreement was to allow them to purchase land in the Newtown area of Madang town, Section 124, Allotment 35, on which there was an existing house, and to renovate the house. The bank agreed to provide a facility of K58,700.00, repayable over 16 years. In return a mortgage by Mr and Mrs Asivo was executed over the land in favour of the bank as security for the loan.

3. Mr Asivo says the bank has breached the agreement by not providing the full facility promised. This has left him in a difficult situation, he says, as he and his wife had already committed the funds that they were expecting to receive under the loan. He asks the court to grant the remedy of specific performance against the bank: a decree that the bank has to abide by the loan agreement and provide the balance of the facility. He also seeks damages and an order preventing the bank from evicting him and his wife from the land. He says all remedies should be granted as the bank is guilty of a breach of contract.

5. To determine this question it is necessary to examine the train of events since the loan agreement was executed in August 2006. The first drawdown on the facility occurred on 10 October 2006 when the bank provided K30,000.00. The money was disbursed via a number of bank cheques, including one in favour of the vendor of the property for K25,417.50. Things were going according to plan at that stage.

6. However, shortly afterwards the bank discovered what it regarded as a previous bad debt Mr Asivo had with the bank, which he had not disclosed in his loan application. The bank, on 28 November 2006, wrote to Mr and Mrs Asivo demanding full and immediate payment of their indebtedness to the bank, which then stood at K34,437.57, failing which it would take such steps it considered necessary to recover the amount due, including exercising its powers as mortgagee over the land and house.

7. Mr Asivo was annoyed about this. He visited the bank’s Madang branch on several occasions to try to have the problem sorted out but was told that he had been branded an ‘undesirable customer’ due to his pre-existing bad debt. He wrote a number of letters to the bank’s asset management division in Port Moresby arguing that he understood that his previous loan arrears had been settled and that he had disclosed the loan when the housing loan application was made. The bank, however, did not change its position. It refused to allow Mr and Mrs Asivo to draw down the balance of the facility on the loan agreement.

8. In February 2007 the bank wrote to Mr Asivo advising that he owed K92,975.65 on his previous loan and that he needed to arrange regular payments by the end of that month, failing which the bank would have no option but proceed with further recovery action. In December 2007 the bank served Mr and Mrs Asivo with a notice under the mortgage, demanding payment of K32,038.86 within 14 days, failing which the bank would be at liberty to sell the property. In November 2008 the bank served them with a notice to vacate the property within seven days failing which action would be taken to enforce eviction. Such action was eventually stayed by order of the National Court.

9. There was no breach of contract by the bank, the bank’s counsel, Mr Koimo, submitted. On the contrary it was Mr Asivo who was at fault, in two respects.

10. First, he failed to disclose his pre-existing bad debt when he and his wife submitted their loan application in May 2006. Mr Asivo took out a loan in 2001 to purchase a Mitsubishi truck. He failed to keep up with his repayments and the truck had to be repossessed and sold. In addition the bank redeemed an IBD but there was still money owing on the loan. Mr Asivo therefore misled the bank when submitting the loan application.

11. Secondly, it was argued that Mr and Mrs Asivo had a poor and inconsistent repayment history on the housing loan.

12. Each of those events, Mr Koimo submitted, was an ‘event of default’ for the purposes of clause 11(b), (e) and (f) of the loan agreement, which states:

Each of the following events is an Event of Default at the option of the Bank. A determination by the Bank in its absolute discretion that any one or more of the following events has occurred will be final and binding on the Borrower. The Borrower must promptly inform the Bank in writing upon the happening of any of the events described in this clause:

(b) any indebtedness or obligation of the Borrower to any person including the Bank is not paid, met or satisfied when due or becomes due and payable before its specified maturity or any creditor of the Borrower becomes entitled to declare any indebtedness of the Borrower due or the Borrower defaults under any charge or security in favour of any person. ...

(e) the Borrower is unable to pay his or her debts as they fall due or is unable to certify that he or she is able to pay their debts as they fall due, commences negotiations with any one or more of their creditors with a view to the general readjustment or rescheduling of their indebtedness, or enters or proposes to enter into any arrangement or composition with their creditors. ...

(f) in the Bank’s opinion there is a material adverse change in the Borrower’s financial position.

13. Mr Koimo submitted that these events of default triggered the bank’s right to cancel the facility under clause 12.1 of the loan agreement which states:

At any time after an Event of Default occurs, the Bank may in the manner and at the times the Bank in its absolute discretion deems appropriate but without obligation to do so and despite any omission, neglect, delay or waiver of the right to exercise such option and without liability for loss:

(b) demand and require immediate payment of the debt and recover the debt from the Borrower;

(c) exercise any right, power or privilege conferred by law, equity or this Agreement;

(d) perform any one or more of the Borrower’s obligations under the Agreement.

14. I reject the submission that this was an event of default, entitling the bank to refuse to provide the balance of the facility, for four reasons.

15. First, I agree with Mr Asivo who says that in fact he did disclose the previous bank loan. This is borne out by the loan application, which was admitted into evidence. In the space on the pro-forma application form, headed "Credit history – Credit Reference: Previous loans, finance companies, store etc", Mr Asivo wrote:

16. This was sufficient in my view to put the bank on notice that the applicant had a previous loan the status of which needed to be checked before the loan application was approved. Mr Asivo cannot reasonably be said to have misled the bank or be guilty of any breach of a duty of disclosure.

17. It is incumbent on a bank to make thorough credit reference checks on an applicant before approving a loan application. In the absence of an express term of the agreement that caters for such information coming to light after execution of the agreement, the bank is estopped from relying on non-disclosure by a customer as a basis for not completing its obligations under the agreement. If the bank fails to carry out those checks and enters the loan agreement, it cannot later, upon finding out something adverse about its customer, turn around and repudiate the agreement. That is the antithesis of fairness as the customer would have inevitably in the meantime arranged their life or business in accordance with the terms of the loan agreement. Besides that, it would only encourage reckless lending practices on the part of banks and other lending institutions if they were allowed to refuse to provide loans or continue to allow drawdowns of loans to customers because of their own failures.

18. Secondly, having considered the evidence surrounding the truck loan, it would be most unreasonable to allow the bank to use it as the basis for avoiding the loan agreement. The evidence provided by the bank is very sketchy but apparently Mr Asivo took out the loan in about 2001. He purchased a truck, to use as a PMV, but shortly afterwards it was involved in an accident. It was unroadworthy, he couldn’t afford to repair it, it was not generating the cash flow that he was relying on to service the loan, he fell behind in his repayments, the truck was repossessed by the bank and sold, the bank foreclosed on an IBD he had with it, he heard not much more about it and as far as he knew that was the end of the matter. No recovery action appears to have been undertaken or threatened. About four years went by and Mr Asivo believed – with some justification, in my assessment – that it was a dead issue. It was only after the problem with the housing loan agreement arose in late 2006 that the bank wrote to him to tell him that he still owed K92,975.65 on the truck loan.

19. Thirdly, clause 11 relates to events of default that occur after commencement of the loan agreement, not before commencement. This is evident from the wording of the clause: "The Borrower must promptly inform the Bank in writing upon the happening of any of the events described in this clause". Clause 11 is speaking in future tense, not past tense, ie not before the commencement of the agreement. Here the event of default relied on by the bank – Mr Asivo’s alleged non-disclosure of the previous loan – occurred in the past, before the commencement of the agreement, when he submitted the loan application. Clause 11 is not relevant here. Even if I were to agree with the bank that Mr Asivo did not disclose the previous loan, clause 11 would not entitle the bank to refuse to provide the balance of the loan facility.

20. Fourthly, there is no other clause in the loan agreement that allows the bank to refuse to provide the facility that it has undertaken to provide on the ground of non-disclosure by the borrower of a previous bad debt with the bank. The bank’s case rested on clause 11. Mr Koimo did not point to any other clause or to any general principle of the law of banking that would allow a bank to be relieved of its obligation to provide a loan to a customer after entering into an agreement to do so, on the ground of non-disclosure of a previous debt by the customer.

21. I conclude that as a matter of fact Mr Asivo was not guilty of non-disclosure of his previous debt and that it would be most unreasonable to allow the bank to use it as the basis for avoiding the loan agreement. As a matter of law, I conclude that even if Mr Asivo is regarded as having failed to disclose the previous loan there is nothing in the loan agreement that permitted the bank to withhold the balance of the facility for that reason.

22. This is the second event of default relied on by the bank. The argument is that Mr and Mrs Asivo have fallen behind in their loan repayments and have rejected the bank’s offer for the repayment schedule to be amended. This is said to constitute an event of default under each of clauses 11(b), (e) and (f) of the loan agreement. I have several problems with this argument.

23. First, the evidence is vague and has been poorly presented. All that has been admitted into evidence is a printout of Mr and Mrs Asivo’s loan account for the period from 17 November 2006 (when the balance was K32,572.82 debit) to 30 June 2009 (balance K37,671.69). The court has been left to its own devices to ascertain the details of the allegedly poor and inconsistent repayment history.

24. Secondly, there are irregular items appearing in the debit column of the printout, eg:

12 Mar 2009	LEGAL COST-AIR TICKETS POM-MDG-POM	1,102.40
17 Apr 2009	TRAVEL DIEM	30.00
17 Apr 2009	LEGAL COST- BUSINESS TRAVEL	724.00
17 Apr 2009	LEGAL COST-AIR NIUGINI	1,102.40
22 Apr 2009	LEGAL COST-AIR NIUGINI	1,102.40
23 Apr 2009	LEGAL COST-LEGAL TRAVEL	1,102.40
28 May 2009	LEGAL FEES	250.00

25. The court has not been informed what these charges represent. If they are costs associated with this case (or District Court proceedings Mr and Mrs Asivo instituted – which were dismissed – to try to forestall their eviction from their house) I cannot see how they can legitimately be debited to the loan account.

26. Thirdly, I consider that an element of reasonableness must be implied into clause 11 of the loan agreement. The clause speaks of the bank being able to determine that any of the prescribed events is an event of default "at its absolute discretion". Just as under principles of administrative law those exercising a discretion have a duty to do so reasonably, a similar duty must be imposed upon a bank, especially when it is dealing with individuals such as Mr and Mrs Asivo. From November 2006 onwards – when the bank refused to provide the balance of the facility – Mr and Mrs Asivo were put in a very difficult position. They had engaged a building firm to build a rest house on their land. This cost K10,023.40. They wanted to draw down on the balance of the facility to pay the builders. Because the bank refused to allow the draw down they had to pay the builders out of funds that they had earmarked for servicing the housing loan. That – and the ongoing dispute with the bank over its refusal to provide the balance of the facility – is why they fell behind in their repayments. In these circumstances it is unreasonable for the bank to rely on the alleged poor and inconsistent repayment history as an event of default.

27. I conclude that the bank cannot rely on the alleged poor and inconsistent repayment history of Mr and Mrs Asivo as an event of default authorising withholding the balance of the facility.

28. Mr and Mrs Asivo have not been at fault in any material way since the commencement of the loan agreement. They have not been guilty of any breach of the loan agreement.

29. The answer to this question is yes. The bank agreed to provide Mr and Mrs Asivo with a facility of K58,700.00. Mr and Mrs Asivo had by virtue of clause 3.1 "the entitlement" to draw down advances against that facility subject to certain conditions precedent. All of the conditions appear to have been satisfied in this case. The only one the bank claimed was not satisfied (clause 3.1(e): there being no event of default) has, by virtue of my earlier findings, in fact and in law, been satisfied.

30. That means that Mr and Mrs Asivo had a right to draw down the balance of the facility and that the bank had a contractual obligation to provide it. The loan agreement did not expressly put a limit on the period within which the balance had to be provided but it must be implied that the balance would be provided within a reasonable period after the date of the initial drawdown, 10 October 2006.

31. Given all the circumstances of this case and the knowledge which the bank had of the purpose for which the funds were required, a reasonable period is one month after the initial drawdown: the bank was obliged to provide the balance of K28,700.00 by 10 November 2006. It failed to do so and it is that failure which I conclude constitutes a breach of contract by the bank.

32. Specific performance is an equitable remedy, which means that the court is required to look not only at the technical legal issues that the case has thrown up but also and more importantly the equity and justice of the case. Who is in the right? Who is in the wrong? Where do the interests of justice lie?

33. Clearly the bank is in the wrong. Its internal procedures broke down. It failed to do a proper reference check. Then it blamed its customers – and tried to make them pay – for its own mistakes. This is unacceptable banking practice (Steven Naki v AGC (Pacific) Ltd (2005) N2782). The bank treated Mr and Mrs Asivo in a shabby and insensitive way and used bullying tactics, culminating in their threatened eviction from the property that they had purchased with the bank’s assistance.

34. Banks have a duty to be fair to their customers, especially to those who are in a relatively weak economic position. This is a statutory duty enforceable under the Fairness of Transactions Act 1993 (Negiso Investments Ltd v PNGBC (2003) N2439).

35. I have no hesitation in granting the remedy of specific performance: the bank will be obliged to provide the balance of the facility within 30 days.

36. Mr Asivo seeks a minimum of K10,000.00, representing reimbursement of the K10,000.00 which he and his wife paid the builders who they engaged to improve their property.

37. Damages is a common law, not an equitable, remedy. A person has a right to be awarded damages if they establish a cause of action in, say, breach of contract. It is not a matter of discretion whether the person is awarded the remedy, at least not to the extent that discretion comes into play with equitable remedies. Normally a plaintiff establishes a cause of action for breach of contract by a trial commenced by writ of summons. The facts relied on by the plaintiff are pleaded in a statement of claim, the defendant pleads its response by a defence and has the opportunity to plead a counter-claim. The pleadings process can continue for months or years and if the matter is not settled a trial is held, based on the pleadings.

38. This case is different. Mr and Mrs Asivo have prosecuted their case by originating summons. There have been no pleadings, as such. They commenced the case only in July this year so the matter has been resolved fairly quickly. Would it be proper in these circumstances to consider awarding them damages? It would be unusual, certainly; but that does not mean that it would not be proper. The bank has not taken any issue about improper procedure so I think it would be proper to consider damages. It would not be unfair to the bank as the originating summons spells out that the plaintiffs are seeking damages.

39. I could set the matter down for a trial on assessment of damages but really I don’t think that is necessary. Mr Koimo has responded to the claim for damages in his submission. He argues that the claim is baseless and unfounded. I disagree.

40. The purpose of an award of damages is to put the innocent party in the same position, as far as possible, as he would have been in if the wrongdoer had not committed the wrongful act (Livingston v Raywards Coal Co [1880] 5 App Cases 25). A useful question to ask is therefore: would the damage being claimed for have happened if it were not for the wrongful act (in this case, the breach of contract)? Put another way: is there a cause-and-effect relationship between the wrongful act and the damage? Here, there is a clear cause-and-effect. The bank breached the contract and that meant that Mr and Mrs Asivo had to suddenly dip into other funds to pay the builder. There is perhaps an argument to say that if the court is ordering the bank to provide the balance of the facility, there is an element of double-counting if the bank is also required to pay damages. However, this point was not raised by the bank in its submissions, so I will award the K10,000.00 claimed.

41. On top of that Mr and Mrs Asivo must be compensated for the inconvenience, hardship, distress and anxiety that has been wrought upon them by the shabby and insensitive treatment meted out by the bank. I will award K10,000.00 on account of that.

42. The total award of damages is therefore K20,000.00. In all the circumstances this is a modest, fair and appropriate sum.

43. Mr Asivo wants the court to order that there be a revised loan agreement. I received no detailed submissions on this point but I gather that he is asking the court to order the bank to correct its records so that his loan account accurately reflects the repayments that he and his wife have made. Certainly it would be a good idea for the loan account to be thoroughly audited in light of the number of irregular debit entries appearing on the account, which I highlighted earlier.

44. The best way to accommodate these issues is by ordering the parties to attempt a settlement of a revised agreement or at least to reach an agreement on what the state of the loan account is and to come back to the court for endorsement of the agreement.

45. Mr Asivo wants the bank restrained from evicting him and his wife from the property. That order follows naturally from the other orders.

46. Mr Asivo has not sought interest in his originating summons but the normal practice is for the court to award interest when it makes an award of damages. The Judicial Proceedings (Interest on Debts and Damages) Act Chapter No 52, which is the law that allows the court to award interest, does not stipulate that interest must be expressly sought by a plaintiff. The relevant provision is Section 1, which states:

Subject to Section 2, in proceedings in a court for the recovery of a debt or damages the court may order that there be included in the sum for which judgment is given interest, at such rate as it thinks proper, on the whole or part of the debt or damages for the whole or part of the period between the date on which the cause of action arose and the date of the judgment.

47. As Bredmeyer J pointed out in Cheong Supermarket Pty Ltd v Pery Muro [1987] PNGLR 24, this section confers a four-fold discretion on the Judge: (1) whether to grant interest at all; (2) to fix the rate; (3) to grant interest on the whole or part of the debt or damages for which judgment has been given; and (4) to fix the period for which interest will run.

1. A plaintiff should in the normal course of events receive interest. There is nothing that takes this case out of the ordinary in that regard. The Court will order that interest be included in the sum for which judgment is given.

2. The rate of interest commonly used is 8%. In view of current economic conditions in the country I think 8% is the proper rate of interest.

3. Interest should be payable on the whole of the sum of damages for which judgment is given.

4. I will fix the commencement date for the appropriate period as the date on which the cause of action in breach of contract accrued, 10 November 2006. The end of the period is the date of judgment, 2 October 2009. The appropriate period is 2.9 years.

50. The general rule is that costs follow the event, ie the successful party has its costs paid for by the losing party on a party-to-party basis. The question of costs is a discretionary matter. There are no special circumstances in this case that warrant departure from the general rule.

(1) Specific performance of the loan agreement between the plaintiff and his wife and the defendant is granted to the extent that the defendant shall within 30 days after the date of entry of this order make available to the plaintiff and his wife K28,700.00, being the balance of the Facility it agreed to provide to the plaintiff under the loan agreement.

(2) The defendant shall pay to the plaintiff K20,000.00 damages plus interest of K4,640.00, being a total judgment sum of K24,640.00 within 30 days after the date of entry of this order.

(3)The plaintiff and the defendant shall attempt to reach settlement on a revised agreement or reach an agreement on what the state of the loan account is and file within 30 days after the date of entry of this order an appropriate document in the National Court Registry at Madang for endorsement by the Court; failing which the Court will recall the matter for appropriate directions and orders.

(4) It is declared that the defendant has no right to have the plaintiff evicted from the property the subject of the loan agreement, Section 124, Allotment 35, Madang; and the defendant shall not take any steps to evict the plaintiff from the property without the leave of the National Court.

(5) Costs of the proceedings shall be paid by the defendant to the plaintiff on a party-party basis, to be taxed if not agreed.

Lawyers for the plaintiff: Self-represented
Bank of South Pacific Legal Services Division: Lawyers for the defendant

National Court of Papua New Guinea

Asivo v Bank of South Pacific Ltd [2009] PGNC 149; N3754 (2 October 2009)