Motoi v Nationwide Microbank Ltd [2016] PGNC 26; N6177 (5 February 2016)

N6177

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO 117 OF 2014

ANIM AGAI MOTOI
Plaintiff

V

NATIONWIDE MICROBANK LIMITED
First Defendant

PAUL LAHO
Second Defendant

Madang: Cannings J
2015:22 June
2016:5 February

CONTRACTS – Loan agreement between customer and licensed financial institution – Whether first defendant entitled to repossess vehicle secured by bill of sale – First defendant's duty of fairness – whether first defendant committed breach of contract – Whether customer entitled to damages.

The plaintiff entered into a loan agreement with the first defendant under which it advanced the plaintiff K90,295.01 to purchase a bus to use as a public motor vehicle (PMV) and to arrange comprehensive motor vehicle insurance on the bus. The loan was secured by a bill of sale over the bus and by a letter of set-off against K47, 000.00 held by the plaintiff in a savings account with the first defendant. Ten weeks after the plaintiff took possession of the bus it was involved in an accident, rendering it unroadworthy. The plaintiff then failed on several occasions to meet his monthly repayment obligations and the first defendant took possession of the bus, told the plaintiff that he would have to settle the balance of his loan account within seven days, failing which the bus would be sold. The plaintiff did not comply with the first defendant's request and the bus was sold. The plaintiff commenced proceedings against the first defendant seeking damages for breach of the loan agreement by the first defendant, on the grounds that at the time of repossession he was not in material default and that the first defendant acted unfairly and contrary to his equity of redemption.

Held:

(1) At the time of repossession of the bus, the plaintiff was not in significant default and the first defendant acted contrary to its duty of fairness in the conduct of the loan account (a duty imposed on it under the Fairness of Transactions Act 1993, which is an implied term of the loan agreement) and contrary to the plaintiff's equity of redemption.

(2) A cause of action was established in breach of contract and the plaintiff was entitled to damages.

Cases cited

The following cases are cited in the judgment:

Bank of PNG v Derick Sakatea Niso (2004) N2664
Bank of South Pacific Ltd v The Public Curator (2003) N2320
Credit Corporation (PNG) Ltd v David Nelson (2011) N4368
Golobadana No 35 Ltd v Bank of South Pacific Ltd (2002) N2309
Madang Cocoa Growers Export Co Ltd v National Development Bank Ltd (2012) N4682
Negiso Investments Ltd v PNGBC (2003) N2439
PNGBC v Pala Aruai (2002) N2234
Rage Augerea v Bank South Pacific Ltd (2007) SC869
Stephen Asivo v Bank of South Pacific Ltd (2009) N3754
Steven Naki v AGC (Pacific) Ltd (2005) N2782

STATEMENT OF CLAIM

This was a trial on liability for breach of contract

Counsel

A A Motoi, the Plaintiff, in person
Y Wadau, for the Defendant

5th February, 2016

1. CANNINGS J: The plaintiff, Anim Agai Motoi, commenced proceedings against the defendants, Nationwide Microbank Ltd and its Madang branch manager, Paul Laho, seeking damages for breach of contract. A trial on liability has been conducted.

2. The contract in question is a loan agreement under which the first defendant (a licensed financial institution) advanced the plaintiff K90,295.01 to purchase a 15-seater bus to use as a public motor vehicle (PMV) and arrange comprehensive motor vehicle insurance on the bus. The loan was secured by a bill of sale (a type of mortgage) over the bus and by a letter of set-off against K47,000.00 held by the plaintiff in a savings account with the first defendant. Ten weeks after the plaintiff took possession of the bus it was involved in an accident, rendering it unroadworthy. The plaintiff then failed to meet his repayment obligations and the first defendant took possession of the bus, told the plaintiff that he would have to settle the loan account, within seven days, failing which the bus would be sold. The plaintiff did not comply with the first defendant's request and the bus was sold.

3. The plaintiff argues that the defendants breached the loan agreement by unfairly repossessing and selling the bus, contrary to his equity of redemption.

ISSUES

1. What are the facts? What are the circumstances in which the first defendant took possession of the bus and sold it?
   
2. Did the first defendant act unfairly? Was the plaintiff deprived of his equity of redemption?
   

100. Has the plaintiff established a cause of action in breach of contract?
     

1. WHAT ARE THE FACTS?
   

4. On 29 May 2012 the parties entered into the loan agreement. The amount of the loan was K90, 295.01, repayable in monthly instalments, including interest, of K3, 738.89 over 36 months. The purpose of the loan was to purchase a new Toyota Hiace 15-seater bus for the value of K78, 000.00 and to arrange comprehensive motor vehicle insurance on the bus, for K12, 925.01. The loan was secured by a bill of sale over the bus, a letter of set-off regarding the plaintiff's savings of K47,000.00 held with the first defendant and a guarantee (the guarantor was a party to the loan agreement).

5. On 2 July 2012 the plaintiff took possession of the bus, which was registered in his name. He operated it as a licensed PMV between Madang town and the Transgogol area of Madang District. On 17 September 2012 the bus was involved in an accident, rendering it unroadworthy (though it could be driven, with some difficulty). On 18 September 2012 the plaintiff went to the first defendant's Madang branch. He informed the first defendant of the accident and sought assistance in lodging an insurance claim. He was told that that was his responsibility. He obtained two repair quotes, one for K23,783.75, the other for K20,494.46.

6. The evidence is not entirely clear as to what happened in the period between 18 September 2012 and 7 January 2013, when the first defendant formally notified the plaintiff that his loan account was in arrears. This is because the plaintiff's evidence does not clearly indicate what attempts, if any, he made to make a claim on his insurance policy, which was with MMI Pacific Insurance Ltd, and the defendants produced no evidence at all for the trial. I find, by inference, that, for some unknown reason, the plaintiff made no claim on his insurance policy, the bus remained unroadworthy and, as a result of the bus being the plaintiff's primary income-earning asset, the plaintiff had difficulty meeting his monthly repayment obligations.

7. On 12 October 2012 the first defendant took the bus into its possession, evidently as a way of encouraging the plaintiff to regularise his loan repayments. The bus was released to the plaintiff, upon his making a repayment, on 9 November 2012.

8. The same thing happened again in the period from 29 December 2012 to 4 January 2013: the first defendant took possession of the bus, then released it when the plaintiff made a repayment.

9. On 7 January 2013 the first defendant's then Madang branch manager, Mr Poka, wrote to the plaintiff. He acknowledged the plaintiff's payment of K3, 000.00 received on 4 January 2013 but pointed out that his loan account was still K1,364.02 in arrears. Mr Poka continued:

As a first warning, we kindly remind you to clear these arrears within 14 days from the date of this letter. And please take note that another repayment of K3,726.67 falls due on the 23rd of this month, thus total amount equates to K5,093.57 due. [sic]

Failure to comply by the due date will result in the first defendant taking appropriate recovery action to recoup the amount due and payable.

Please treat this as a matter of priority and don't let your family suffer as a result of your negligence.

10. On 13 February 2013 the first defendant again took possession of the bus and then returned it, after a loan repayment, on 8 March 2013.

11. On 25 February and 6 March 2013 a friend of the plaintiff, Panu Wagum, wrote letters to the first defendant, on the plaintiff's behalf, urging a restructuring of the loan or a grace period so that the plaintiff could arrange to have the bus repaired and back on the road, earning income. There was no response to these letters.

12. On 1 April 2013 the first defendant took possession of the bus for the fourth time. On 16 April 2013, the first defendant's new Madang branch manager, Paul Laho (the second defendant), wrote to the plaintiff in the following terms:

This letter serves to inform you that your 15-seater Toyota Hiace bus which was repossessed by the bank on the 1st April 2013 will be up for sale.

You are given 7 days of notice from the date of delivery of the letter to settle your loan outstanding amount of K111,628.00. If you not settle your outstanding loan within seven days of notice given, the bank will take action by selling your motor vehicle to pay off your outstanding loan.

13. As to what happened after the date of that letter, 16 April 2013, the evidence is again unsatisfactory. However I find by inference, that:

• the plaintiff did not comply with the first defendant's request;
• the first defendant sold the bus and applied the proceeds of sale to the loan account;
• the first defendant foreclosed on the plaintiff's savings account, to the full extent of the set-off of K47,000.00, and applied that sum to the loan account; and
• no further action has been taken by the first defendant to recover any amount still owing on the loan.
  

2 DID THE FIRST DEFENDANT ACT UNFAIRLY? WAS THE PLAINTIFF DEPRIVED OF ITS EQUITY OF REDEMPTION?

14. In determining these issues I will apply some fundamental principles of banking and property law in Papua New Guinea. Banks and other licensed financial institutions have a duty to be fair to their customers, at least to those in a relatively weak economic position. A licensed financial institution must not impose charges and interest rates, on default, that amount to a serious penalty on a borrower or by which the lender tries to unjustly and unreasonably enrich itself. This is an enforceable duty, which has been developed by the courts under the Fairness of Transactions Act 1993, and must now be regarded as an implied term of any loan agreement (Rage Augerea v First defendant South Pacific Ltd (2007) SC869).

15. To enforce this duty the courts will interpret a loan agreement and mortgage so as to give effect to the mortgagor's (the borrower's) equity of redemption, ie 'the equitable right of the mortgagor to redeem the mortgaged property after the legal right to redeem has been lost by default in repayment of the mortgage money at the due date' (as defined in Osborn's Concise Law Dictionary, 7th edition, Sweet & Maxwell © 1983). This principle, which has its genesis in the principles and rules that formed immediately before Independence Day the principles and rules of equity in England that have been adopted as part of the underlying law of Papua New Guinea, was endorsed by the Supreme Court in Rage Augerea's case.

16. The overriding duty of fairness owed by a licensed financial institution to a customer in an inferior economic position has been applied and enforced in a string of National Court decisions including PNGBC v Pala Aruai (2002) N2234, Golobadana No 35 Ltd v Bank of South Pacific Ltd (2002) N2309, Bank of South Pacific Ltd v The Public Curator (2003) N2320, Negiso Investments Ltd v PNGBC (2003) N2439, Bank of PNG v Derick Sakatea Niso (2004) N2664, Stephen Asivo v Bank of South Pacific Ltd (2009) N3754, Credit Corporation (PNG) Ltd v David Nelson (2011) N4368 and Madang Cocoa Growers Export Co Ltd v National Development Bank Ltd (2012) N4682.

17. So, did the first defendant act fairly? Mr Wadau, for the defendants, submitted that it did, as the plaintiff was in default of his monthly repayments. The action taken by the first defendant was squarely in line with the terms of the loan agreement. The plaintiff's repayments were erratic and he was given a reprieve by the first defendant on several occasions. It was the plaintiff's responsibility to make a claim on his insurance policy. For whatever reason he failed to do that, and that led to his problems, which are of his own making.

18. Those are valid submissions and it is disconcerting that there is no evidence regarding the plaintiff's attempts, if any, to make an insurance claim. The plaintiff cannot be said to be blameless in the fiasco that has occurred. I nevertheless conclude that the first defendant has breached its duty of fairness, for the following reasons:

1. Clearly the plaintiff had little business acumen, so when he informed the first defendant, the day after the bus was damaged, of what had happened and asked for assistance in lodging an insurance claim, the first defendant should have offered some assistance, at least to point him in the right direction, so that a claim could be made promptly. It is surprising that the first defendant was unwilling to assist as it would appear to have been in its interest, as well as the plaintiff's interest, to have a claim lodged promptly. It would have enabled the first defendant to protect the value of its credit risk asset (the loan) and be seen to be giving effect to its duty of fairness to its customer.
   
2. The first defendant should have negotiated some restructuring of the loan account, to give the plaintiff time to get the bus back on the road and earning an income.
   

100. The first defendant's conduct in seizing the bus on multiple occasions as a tactic to encourage the plaintiff to make repayments was heavy-handed and bullying.
     

4. By 7 January 2013, seven months after the loan agreement was signed, the plaintiff was K1,364.02 in arrears, but this was not a significant default in the context of a loan of 36 months duration with a total value of K134,600.00.
   
5. The first defendant's letter of 16 April 2013, giving the plaintiff just seven days to settle his "loan outstanding amount of K111,628.00", was a further instance of bullying by the first defendant as it was imposing an unreasonable demand, which it knew the plaintiff had no hope of complying with.
   
6. The first defendant made no attempt, before repossessing and selling the bus, to call up any of the plaintiff's savings of K47,000.00 or to call upon the guarantor to make any repayment of the loan.
   
7. The first defendant made no attempt to provide assistance to its customer so that the most drastic form of debt recovery – seizing the plaintiff's income-earning asset – could be avoided.
   
8. The first defendant let a preventable scenario unravel, to the detriment of its customer, despite being in a strong position to act otherwise.
   
9. No regard was given to the plaintiff's equity of redemption; thus the plaintiff was deprived, by the pre-emptive action of the first defendant, of his equity of redemption.
   

19. I find that the first defendant acted unfairly (and unprofessionally) and therefore breached the loan agreement.

3 HAS THE PLAINTIFF ESTABLISHED A CAUSE OF ACTION IN BREACH OF CONTRACT?

20. Yes. The first defendant breached the loan agreement, by breaching the implied term of the agreement requiring that it act fairly towards the plaintiff. The elements of a cause of action in breach of contract have been proven against the first defendant: there was a contract, the defendant breached it and the plaintiff suffered damage (Steven Naki v AGC (Pacific) Ltd (2005) N2782). The plaintiff is entitled to damages, which are payable by the first defendant. The second defendant was not a party to the loan agreement. No cause of action is established against him and the proceedings against him must be dismissed.

ORDER

(1) The first defendant is liable in breach of contract to the plaintiff, who has established that he is entitled to damages, to be assessed at a separate trial.

(2) The proceedings in relation to the second defendant are dismissed.

(3) The costs of the proceedings to date shall be paid by the first defendant to the plaintiff on a party-party basis, to be taxed if not agreed.

Judgment accordingly.

__________________________________________________________________
Young Wadau Lawyers: Lawyers for the Defendant