Pija Grannies Ltd v Rural Development Bank Ltd [2010] PGNC 235; N5829 (4 October 2010)

N5829

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS 465 OF 2005

BETWEEN:

PIJA GRANNIES LIMITED
First Plaintiff

AND:

REX W. EMBAHE
Second Plaintiff

AND:

RURAL DEVELOPMENT BANK LIMITED
Defendant

Waigani: Hartshorn, J.
2010: March 9th, 10th
: October 4th

Trial

Cases cited:
Papua New Guinea cases

ANZ Banking Group (PNG) Ltd v. Kila Wari (1990) N801
Westpac Bank (PNG) Ltd v. Henderson and Henderson [1990] PNGLR 112
Papua New Guinea Institute of Medical Research v. PNGBC (1999) N1934
Bank of Hawaii (PNG) Ltd v. PNGBC and 2 Ors (2001) N2095
Rage Augerea v. The Bank of South Pacific Ltd (2007) SC869
Kennedy Amun v. Bank of South Pacific Ltd (2008) unreported WS 1316/05 Waigani delivered 21stJuly 2008

Overseas Cases

Jarvis v. Moy, Davies, Smith, Vandervell & Co (1936) 1 KB 399
Selangor United Rubber Estates Limited v. Craddock (No. 3) (1968) 1 WLR 1555
Cuckmere Brick Co. Ltd v. Mutual Finance Ltd [1971] 1 Ch 949

Counsel:

Mr. G. J. Sheppard and Ms. G. Salika, for the plaintiffs
Mr. T. Cooper, for the defendant

4th October, 2010

1. HARTSHORN, J: The plaintiffs entered into a Loan Agreement with the defendant the Rural Development Bank Limited (RDB) pursuant to which RDB would advance K350,000 to the plaintiffs. The second plaintiff Mr. Rex Embahe, was the guarantor under the Loan Agreement. The advance was to assist the first plaintiff Pija Grannies Limited, to purchase and develop 24 oil palm blocks. Pija Grannies defaulted on its loan repayments.

2. The plaintiffs claim that RDB did not adhere to the agreed loan structure and thereby breached the Loan Agreement. Further, the plaintiffs claim that RDB was negligent in its management of the loan funds by not acting in good faith and in the best interests of the plaintiffs. The plaintiffs seek damages for breach of contract and negligence.

3. RDB denies that it breached the Loan Agreement and that it was negligent in its management.

Issues

4. The agreed issues for determination are:

a) whether RDB breached the terms of the Loan Agreement,

b) whether RDB was negligent in the management of the plaintiffs' loan funds,

c) if it is found that RDB was in breach of the Loan Agreement and was negligent in the management of the plaintiffs' loan funds, to what damages are the plaintiffs entitled?

Loan Agreement

5. The plaintiffs submit that the terms of the Loan Agreement are contained in the application for finance that was prepared by RDB and executed by Pija Grannies and Mr. Embahe. This is conceded by RDB.

6. The plaintiffs claim that RDB breached clause 3 a) of the Loan Agreement when it failed to secure K125,000 from the advance for the purchase of 24 blocks and when it failed to complete the purchase of the remaining 16 blocks.

7. Clause 3 a) of the Loan Agreement is as follows:

"3. a) AMOUNTS SOUGHT AND PURPOSES:

A large Agricultural Term Loan of K350,000.00 has been approved to assist the Applicant Company in setting up/expanding large Oil Palm Venture;

The cost structure and sources of funding are:-

New Development Cost = K 222,200.00

Block Purchase (25 blocks) = K 125,000.00

Capital Equipment = K 92,000.00

Maintenance of existing area = K 31,205.00

Operating Cost (Admin, Overheads, etc) K 50,260.00

Total Project Cost = K 554,087.00 - (100%)

Less: Equity = K 204,087.00 - (37%)

RDB Loan = K 350,000.00 - (63%)"

8. RDB submits that under the terms of the Loan Agreement it has the discretion whether to advance funds to the plaintiffs. In this regard it is noted that the last sentence of clause 5 of the Loan Agreement is as follows:

"Provided however that the Bank reserves the right to discontinue at any time and from time to time the making of periodical advances under the loan without ascribing any reason thereof."

Clause 1 (d) also provides amongst others, for the Bank to decline to make available any further portion of a loan to be advanced progressively, in certain circumstances.

9. In the facts agreed by the parties, it is agreed amongst others, that RDB raised cheques totalling K246,605.00 for the purchase of a Toyota Land Cruiser and a dump truck, and for fertilisers, chemicals and tools to assist the plaintiffs in meeting the initial operational costs of Pija Grannies. The remaining balance of the K350,000.00 advance, being K103,395.00, was withheld by RDB for the purchase of the 24 oil palm blocks. Upon settlement on 19th April 2000, RDB paid K24,000 being the full purchase price for 8 blocks and K74,481.50 as part payment of the purchase price for the remaining 16 blocks. RDB then, in total, advanced K345,086.50 under the Loan Agreement.

10. From a perusal of the Loan Agreement and specifically clause 3, it is not specified that the loan by RDB has to be advanced only for the specific categories listed in clause 3a) and to a certain amount for each category. The total project cost is K 554,087.00 which is to consist of 37% equity and 63% RDB loan. The Loan Agreement is silent as to what portion of each listed category is to consist of equity and loan. To my mind the categories listed and the amounts for each category are a guide only. It is not a term of the Loan Agreement that the sum of K125,000 listed in the category of "Block Purchase (25 blocks)" has to consist all of RDB loan.

11. I am not satisfied that it was a term of the Loan Agreement that RDB had to secure K125,000 of the advance for the purchase of the 24 blocks. Consequently, I am not satisfied that RDB breached clause 3 a) of the Loan Agreement when it advanced K98,481.50 in respect of the 24 blocks. Given this finding on the interpretation of the Loan Agreement it is not necessary to consider the other submissions of counsel on this issue.

Whether RDB was negligent

12. It is submitted that RDB owed a duty of care to the plaintiffs and that it was negligent in carrying out that duty.

13. The plaintiffs submit that the lender and borrower relationship with RDB was based on trust. They cited the cases of Cuckmere Brick Co. Ltd v. Mutual Finance Ltd [1971] 1 Ch 949, ANZ Banking Group (PNG) Ltd v. Kila Wari (1990) N801 and Westpac Bank (PNG) Ltd v. Henderson and Henderson [1990] PNGLR 112 for the proposition that this relationship of trust obliged RDB to act in good faith and in the best interests of the plaintiffs and its conduct of the Loan Agreement.

14. In written submissions on behalf of the plaintiffs, it is submitted that RDB did not and failed to act in good faith and in the best interests of the plaintiffs when it:

a) over drew on the various funds of the advance and caused a shortfall in the purchase price of the 24 blocks,

b) exceeded the purchase price of K125,000 under the Loan Agreement when it made a verbal agreement with the 24 bock holders regarding the purchase price for each of the 24 blocks,

c) failed to restructure and or refinance the loan to accommodate or reflect the purchase price of each block according to its verbal agreement with the block holders.

15. As to the cases of Cuckmere Brick Co. Ltd v. Mutual Finance Ltd (supra), ANZ Banking Group (PNG) Ltd v. Kila Wari (supra) and Westpac Bank (PNG) Ltd v. Henderson and Henderson (supra) cited by the plaintiffs in regard to the duty of care that should be exercised; these cases are concerned with the duties of a mortgagee to a mortgagor when the mortgagee by itself or a receiver, having taken possession of the mortgagor's property, exercises the power of sale. As such, I did not find these cases of particular assistance.

16. The Supreme Court case of Rage Augerea v. The Bank of South Pacific Ltd (2007) SC869 was also cited. This decision was a successful appeal against the entry of summary judgment in favour of a bank. In the decision the Supreme Court made observations as to a bank's duty to maintain accurate records and to inform customers accurately on a monthly basis on the status of their accounts. Further, the headnote of the decision refers to a bank being under a duty to ensure that client's obtain legal advice when negotiating and entering into an agreement with the bank. These observations in my respectful view, appear to be obiter dicta.

17. As to the other cases cited, Bank of Hawaii (PNG) Ltd v. PNGBC and 2 Ors (2001) N2095 was in essence a dispute between two banks concerning a fraudulently drawn cheque and the case of Papua New Guinea Institute of Medical Research v. PNGBC (1999) N1934 concerned unauthorised withdrawals occasioned by forged signatures. Again, I did not find these cases particularly helpful.

18. The relationship between a banker and customer is contractual. In Kennedy Amun v. Bank of South Pacific Ltd (2008) unreported WS 1316/05 Waigani delivered 21st July 2008, Davani J. reproduced the following passage from "Paget's Law of Banking eighth edition 1972 at p. 69:

"The relationship of a banker to customer is one of contract, though for long this way of looking at the matter seemed not to have attracted much attention in the courts. It follows, as in all cases, that a banker must not be negligent in performing his contract, whatever it may be; what will amount to negligence must clearly depend on the facts of the particular case..... The relationship consists of a general contract which is basic to all transactions, together with special contracts (such as the contract of borrowing and lending) which arise only as they are brought into being by the express acts or implied intentions of the parties. The General Contract is a simple, indivisible contract (see Atkin LJ in Joachimson v. Swiss Bank Corporation [1921] 3KB 110 at 127) though with many facts; it arises the moment the parties agree to enter into contractual relations with each other and continues until brought to an end by consent or perhaps by revocation by either party; it is a contract which is underwritten and undefined by the parties - in other words it is implied."

19. In Jarvis v. Moy, Davies, Smith, Vandervell & Co (1936) 1 KB 399, Greer LJ at p 405 stated that a breach of a duty of care was founded in contract where the breach arose from obligations imposed by the contract, but was founded in tort where the breach arose from obligations which were independent of the contract. Jarvis (supra) was cited in Selangor United Rubber Estates Limited v. Craddock (No. 3) (1968) 1 WLR 1555 as authority for the proposition that the relationship between banker and client is contractual. These cases are persuasive in this jurisdiction.

20. The three instances referred to above where it is submitted that RDB did not and failed to act in good faith and in the interests of the plaintiffs, in my view are all concerned with obligations that the plaintiffs submit that RDB has under the Loan Agreement. As to the first, that RDB over drew on the various funds of the advance and caused a shortfall in the purchase price of the 24 blocks, I have already found that the Loan Agreement does not specify that the sum of K350,000 has to be advanced only for the specific categories listed and to a certain amount for each category. It is not the case then, that RDB has overdrawn and caused a shortfall as alleged.

21. As to RDB exceeding the purchase price of K125,000 when it is alleged, that RDB made a verbal agreement with the 24 block holders regarding the purchase price for each of the 24 blocks; the evidence of the alleged verbal agreement is contained in the affidavit of a Caspar Auntari. He deposes amongst others, that in or about 1999 he agreed with the owners of the 24 blocks that they would transfer title of their blocks to RDB.

22. The Loan Agreement, which it is agreed was executed in or about January 2000, after the alleged verbal agreement, provides amongst others, that security is to be given by Pija Grannies to RDB by registered first mortgages over the titles to the blocks. Any alleged verbal agreement concerning RDB purchasing the blocks was superseded by the Loan Agreement. As Pija Grannies under the Loan Agreement, was to purchase the blocks and not RDB, it was Pija Grannies responsibility to agree the terms of such purchase with the owners of the blocks.

23. Consequently, if RDB owed a duty of care to the plaintiffs that was founded either in contract or in tort, the allegations as to RDB not acting in good faith and in the best interests of the plaintiffs by its actions or otherwise as a consequence of the alleged verbal agreement, in my view, necessarily fail as the alleged verbal agreement if it existed, was in any event, superseded by the Loan Agreement.

24. Given the above, I am not satisfied that RDB was negligent in the management of the plaintiffs' loan funds as alleged.

Orders

25. The formal Orders of the Court are:

a) the plaintiffs' claims are dismissed,

b) judgment is entered for the defendant against the plaintiffs,

c) the costs of and incidental to the proceeding are to be paid by the plaintiffs to the defendant.
__________________________________________________________

Young & Williams Lawyers: Lawyers for the Plaintiffs
Rageau Manua Kikira: Lawyers for the Defendant