N5672
PAPUA NEW GUINEA
IN THE NATIONAL COURT OF JUSTICE

WS 331 OF 2013

BETWEEN:

KINA FINANCE LIMITED
Plaintiff

AND:

MATHILDA KURIA AND MOGIA KURIA
Defendants

Waigani: Hartshorn J.
2013: December 2nd,
2014: March 17th

Trial

Cases cited: 
Papua New Guinea Cases

Rabtrad Niugini Pty Ltd v. ABCO Pty Ltd [1990] PNGLR 155 
Congregation of the Brothers of Sacred Hart Inc. v. Director of Child Welfare [1992] PNGLR 40 

Overseas Cases

Ampurius Nu Homes Holdings Ltd v. Telford Homes (Creekside) Ltd [2012] EWHC 1820 
AP-Fonden v. Bank of New York Mellon SA/NV & Ors [2013] EWHC 3127 

Hong Kong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474 
JP Morgan Chase Bank & Ors v. Springwell Navigation Corporation [2008] EWHC 1186 
Levison v. Patent Steam Carpet Cleaning [1977] 3 All ER 498
Pierce v. Canada Trustee Mortgage Company (2005) 254 D.L.R. 79

Counsel:

Mr. D Bidar, for the Plaintiff
Mr. F Unage, for the Defendants

17th March, 2014

1. HARTSHORN J. The plaintiff Kina Finance Ltd (KFL) sues the defendants Mathilda and Mogia Kuria for breaching a loan agreement it has with them. The Kurias cross claim against KFL for its breach of the agreement and for negligence.

2. In October 2007, KFL agreed to lend to the Kurias the sum of K 328,000. This sum was to enable the Kurias to purchase a property and to pay an existing loan to the Bank South Pacific Ltd (BSP) of K 68,000. The Kurias provided security for the loan over the property being purchased and over two other properties, and agreed to repay the loan together with interest by monthly repayments in 10 years.

3. KFL contends that the Kurias did not make the monthly repayments as agreed and have defaulted under the loan agreement by failing to comply with several written notices of demand and default that required payment of the amount owing. The Kurias contend that KFL breached the loan agreement by not paying the outstanding loan to BSP. Further, employees of KFL breached the duty of care that KFL owed to the Kurias by negligently managing the loan account.

4. The Kurias contend that the loan agreement was for one loan and it was to be used simultaneously to purchase the property at Goroka and to pay the K68,000 debt to BSP. By KFL not paying the BSP debt, it has not fully performed its obligations to the Kurias under the loan agreement, they allege, and KFL has fundamentally breached the loan agreement. Consequently the Kurias contend that they are not liable under the loan agreement; rather they are entitled to damages.

5. KFL contends that the reason the BSP debt was not paid was because there were insufficient funds remaining of the agreed loan sum of K 328,000 after loan funds were used to purchase the property at Goroka, and that despite repeated requests of the Kurias to make up the shortfall, they did not, and so the BSP debt was not paid.

6. From a perusal of the Kurias submissions, the Kurias in essence, if I understand correctly, submit that there is a valid loan agreement but that KFL has fundamentally breached the agreement by not paying the BSP debt. As a result of this breach by KFL, the Kurias submit that they are not in breach of their obligations under the loan agreement. Given this, the first issue for consideration is whether KFL fundamentally breached the loan agreement by not paying the BSP debt. It is necessary to outline what occurred.

7. The loan was made to the Kurias for K 328,000 only, to assist with the purchase of the Goroka property and to pay the BSP debt. KFL paid K265,225.56 of the loan to the Kurias for them to use to complete the purchase of the Goroka property. This left K62,774.44 remaining of the loan. The amount required to pay the BSP loan was K65,000 as at the 31st July 2008 as advised by BSP. So there were insufficient loan funds remaining to pay off the BSP loan.

8. KFL contends that the Kurias agreed to the amount paid at settlement of the purchase of the Goroka property as is evidenced by their signatures on the settlement statement. Further, KFL contends that the Kurias admitted that there was a shortfall of K 2,225.56 that delayed the payment of the BSP loan. This shortfall arose because of the increased purchase price of the Goroka property and the payment of stamp duty. 

9. KFL contends that the Kurias were aware of the shortfall and that it had to be made up before the BSP loan could be paid. The Kurias did not make up the shortfall and did not contact KFL in regard to it.

10. The Kurias contend that they were not notified of this shortfall and were not aware of it. Further, it is submitted that on their calculations there was only a shortfall of K 690.81. As this shortfall was minor, the Kurias contend that KFL should have paid it and then added that amount to the total loan owed by the Kurias to KFL.

11. As to whether there was a breach of the loan by KFL; the loan was for K328,000 only (clause 1.3 of the loan). There was no agreement for, and therefore no obligation for KFL to lend more than K 328,000 to the Kurias. As there were insufficient loan funds remaining to pay off the BSP debt, KFL was under no obligation to pay the BSP debt until the Kurias made up the shortfall. As to the Kurias not knowing or not being informed that there was a shortfall, I am satisfied that the Kurias knew that there was a shortfall as they have both signed the settlement statement for their purchase of the Goroka property for more than they had originally anticipated the settlement amount would be. The submissions of counsel for the Kurias confirmed that they were aware of a shortfall notwithstanding that they disagree on the amount of the shortfall. Further, the defendant Mr. Mogia Kuria, a former bank employee, would have known of the shortfall by virtue of his experience.

12. Given the above I am not satisfied that KFL did breach the loan agreement with the Kurias by not paying the BSP debt. KFL was prevented from paying the BSP debt from the loan funds because the Kurias did not meet the shortfall. It can be argued that KFL suffered as a consequence of frustration by the breach of the Kurias. This is so as KFL was frustrated from paying the BSP debt with the remaining loan funds because of the breach or failure by the Kurias to make up the shortfall required to pay the BSP debt: Chitty on Contracts 23rd ed para 1366.

13. If however, KFL did breach the loan agreement by not paying the BSP debt, was it a fundamental breach?

14. KFL refers to a fundamental breach as being, "a breach going to the root of the contract"; Levison v. Patent Steam Carpet Cleaning [1977] 3 All ER 498; Rabtrad Niugini Pty Ltd v. ABCO Pty Ltd [1990] PNGLR 155, and the Kurias rely upon the following passage from Cheshire and Fifoot Aus 3rd ed 1974; "if a person contracts to deliver or do one thing and he delivers or does another, he has failed to perform his contractual duty."

15. I make reference to the test stated by Diplock LJ in Hong Kong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474 and which was recently cited with approval in the English High Court decision of Ampurius Nu Homes Holdings Ltd v. Telford Homes (Creekside) Ltd [2012] EWHC 1820 (Ch):

"Does the occurrence of the event deprive the party who has further undertakings to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?"

16. In this instance, KFL agreed to loan K 328,000. Part of those loan funds were used to purchase the Goroka property. The remaining loan funds were insufficient to pay the BSP debt and so the BSP debt was not paid by KFL. In this scenario of considering the non-payment of the BSP debt as a breach by KFL, can that breach be considered as going to the root of the loan contract and causing the Kurias to be deprived of substantially their whole benefit under the loan contract or of KFL doing something other than for what it was contracted such that the breach may be regarded by the Kurias as allowing them to treat their liability under the loan agreement as at an end?

17. This can be answered with reference to the Supreme Court case of Congregation of the Brothers of Sacred Hart Inc. v. Director of Child Welfare [1992] PNGLR 40 in which the Court (Woods, Hinchliffe and Doherty JJ) said:

"This raises a question that has dogged the courts for many years. As Lord Justice Diplock of the Court of Appeal said in Hong Kong Fir Shipping Co Ltd v Kawasaki K.K.Ltd [1962] 1 All ER 474 at 485:

"The problem: in what event will a party to a contract be relieved of his undertaking to do what he has agreed to do but has not yet done? has exercised English courts for centuries."

He later goes on to say that:

"Such a question cannot be simply answered by treating all contract undertakings as falling into one of two categories: 'conditions' the breach of which gives rise to an event which relieves a party not in default of further performance of his obligations, and 'warranties' the breach of which does not give rise to such an event."

His Honour suggests that there are many contractual obligations of a more complex character which cannot be categorised as being "conditions" or "warranties". He then says at page 497:

"Of such undertakings, all that can be predicated is that some breaches will, and others will not, give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend on the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a 'condition' or a 'warranty'."

Whilst the Court of Appeal in that case was looking at a charter party contract which could be far removed from a contract for the care and accommodation of juveniles, we feel that the principles as stated by Lord Justice Diplock could be applied here. His Honour concluded with the principle: 

"What the learned judge had to do in the present case, as in any other case where one party to a contract relies on a breach by the other party as giving him a right to elect to rescind the contract, was to look at the events which had occurred as a result of the breach at the time at which the charterers purported to rescind the charter party, and to decide whether the occurrence of those events deprived the charterers of substantially the whole benefit which it was the intention of the parties as expressed in the charter party that the charterers should obtain from the further performance of their own contractual undertakings."

18. Applying the principle to this case, has the breach by KFL to pay off the BSP debt substantially deprived the Kurias of the whole benefit of the loan agreement? I am satisfied that it has not. The Kurias have benefited from their borrowing of over 80% of the loan funds which were used for their purchase of the Goroka property. In this scenario of considering the non-payment of the BSP debt as a breach by KFL, the breach was not a fundamental breach.

19. In any event, as I have previously mentioned, in my view KFL did not breach the loan agreement by not paying the BSP debt. Consequently, the argument of the Kurias that they are not liable to meet their obligations under the agreement because of a fundamental breach by KFL, fails.

20. In the cross claim it is pleaded amongst others that "In the course of employment and in this premises, its employee of the Plaintiff owes a duty to exercise reasonable skills, care and diligence in ensuring that the loan is managed well", in certain circumstances that are set out.

21. There is no pleading as to how or on what basis or when this duty was created or specifically what the nature of the duty is. The relationship between KFL and the Kurias is contractual, the terms of which are set out in the loan agreement. There are no terms or provisions in the loan agreement for KFL to provide the Kurias with specific information or advice. The relationship between a financial institution lender and a customer borrower is a commercial relationship of creditor and debtor and does not give rise to any fiduciary obligation or relationship or duty of care unless there are specific provisions to that effect in the agreement: Pierce v. Canada Trustee Mortgage Company (2005) 254 D.L.R. 79 at 85; JP Morgan Chase Bank & Ors v. Springwell Navigation Corporation [2008] EWHC 1186 (Comm) at para 574 and AP-Fonden v. Bank of New York Mellon SA/NV & Ors [2013] EWHC 3127 (Comm) para 173. These are Canadian and English authorities which are persuasive in this jurisdiction.

22. I am not satisfied that the Kurias have made out that KFL owed a duty to them or if they did, specifically what was the duty. If any duty was owed and it was breached by KFL, I am not satisfied that it caused loss to the Kurias. The Kurias were aware by virtue of them both signing the settlement statement for the purchase of the Goroka property that the amount required to settle would result in there being insufficient loan funds remaining to pay off the BSP debt, and as they had agreed to borrow K 328,000 only, it was their responsibility to make up the shortfall. Further, they were aware by virtue of the settlement of the purchase that the loan funds for the purchase were drawn down. That Mr. Kuria is a former bank employee, and that both Kurias have been involved in property transactions before, to my mind is indicative of them being aware or that they should have been aware of what was occurring. It cannot be said that they were novices or had no knowledge in this regard.

23. After considering the defence and the cross claim of the Kurias I am not satisfied for the above reasons that either the defence or the cross-claim have merit.

24. I have considered the claim of KFL and the evidence relied upon and am satisfied that it has made out its claim against the Kurias. Consequently KFL is entitled to the relief that it seeks. Judgment is entered for the plaintiff on the statement of claim and judgment is entered for the cross-defendant on the cross-claim. I will hear counsel as to final orders.

_____________________________________________________________
 O'Briens: Lawyers for the Plaintiff 
 Muroa & Associates Lawyers: Lawyers for the Defendant