Moka v Nationwide Microbank Ltd [2024] PGNC 425; N11089 (7 March 2024)

N11089

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO. 1485 OF 2016

JACK MOKA
Plaintiff

-V-

NATIONWIDE MICROBANK LIMITED
Defendant

Waigani: Kariko, J
2019: 7^th March
2024: 7^th March

BANKING – loan agreement – whether fair – alleged unconscionable conduct –Fairness of Transactions Act pleaded – procedure under the Act

The plaintiff sought to have a loan agreement he entered into with the defendant declared unenforceable for being unconscionable under the Fairness of Transactions Act 1993, pleading the defendant breached s 5 of the Act.

Held:

1. For jurisdiction under the Fairness of Transactions Act 1993 to be invoked, there must be an application under s 5 for the Court to have a transaction reviewed for not being fair in accordance with s 4.
   
2. None of the provisions of the Fairness of Transactions Act 1993 create a distinct cause of action or actionable wrong which may be enforced by the Court.
   
3. The procedures for a review under the Fairness of Transactions Act 1993 were not followed.
   
4. A breach of the bank’s implied duty to be fair and the equitable doctrine of unconscionable conduct were not pleaded and therefore could not be considered.
   
5. The essential elements of the doctrine of unconscionable conduct were not proven on the evidence.
   

Cases Cited:

Papua New Guinean Cases
Aviso v Bank of South Pacific Ltd (2016) N6518
James Geama, Koim Kopun v OTML Shares In Success Ltd (2011) N4269
Panamaseier Resources Pacific Company Ltd v Richard Sikani (2015) N6166
Papua Club Inc v Nasaum Holdings Ltd (2004) N2603
Papua New Guinea National Stevedores Pty Ltd v Bank of South Pacific Ltd (2001) N2069

Overseas Cases
Bromley v Ryan [1956] HCA 81; (1956) 99 CLR 362
Commercial Bank of Australia Limited v Amadio [1983] HCA; [1983] HCA 14; (1983) 151 CLR 447
Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621

Counsel:
Ms K Nugi, for the Plaintiff
Mr S Gor, for the Defendant

7^th March 2024

1. KARIKO, J: These proceedings concern the plaintiff’s residential rental property located at Section 370 Allotment 54, Morata, N.C.D. (the Property) which was mortgaged to the defendant bank as security for a loan it advanced to the plaintiff for renovations to be made to the Property.
   
2. The suit was filed by the plaintiff after the defendant sought to enforce its rights as mortgagee of the Property following default in repayment of the loan in accordance with the terms of the relevant loan agreement executed by the parties on 9 December 2013 (the Agreement).
   
3. The plaintiff claims the Agreement was unconscionable pursuant to the Fairness of Transactions Act 1995 (the FTA) and that it be declared void, and any steps taken by the defendant as mortgagee to sell the Property be declared unlawful.
   
4. The defendant denies the plaintiff’s claims and in its cross-claim countered that the plaintiff is liable to pay the arrears on the repayment of the loan.
   

THE LOAN

5. The details of the loan terms are largely not controversial.
   
6. Pursuant to the Agreement, the defendant offered a loan of K150,000 to the plaintiff to assist him renovate the Property which he rented out.
   
7. It is not disputed that the main terms of the Agreement as contained in the document were:
   
   • The principal amount of the loan was K150,000.
   • The loan was to be repaid over 5 years.
   • Interest on the loan was charged at a flat rate of 2%.
   • The principal plus interest over 5 years amounted to K300,000.
   • The loan was to be repaid by monthly instalments of K5,000 starting 10 January 2014.
   • Repayment was guaranteed by the guarantors.
   • A K1 per day penalty was payable for late payments.
   • The plaintiff’s savings and the mortgage could be used to recover outstanding payments.
   • The defendant reserved the right to take legal action to recover arrears plus costs from the plaintiff and his guarantors.
     
8. Further to the Agreement:
   
   • the defendant retained K30,000 of the principal in a “recovery account” to meet arrears in case of default in the loan repayments.
   • A further K5,000 of the principal was deducted for bank fees.
     

THE PLAINTIFF’S CLAIMS

9. In his statement of claim, the plaintiff alleges that:
   
   • (at [8]): the circumstance relating to the signing of the Agreement constituted unconscionable conduct by the defendant and constituted breach of the FTA,
   • (at [13]): the defendant used its position of power to unfairly treat the plaintiff,
   • (at [14]): the defendant thereby breached s 5 of the FTA.
     
10. The particulars of the alleged unconscionable conduct against the defendant are:
    
    • That the defendant failed to properly explain the terms and conditions of the Agreement.
    • That the plaintiff was unable to properly read the Agreement due to his poor eyesight.
    • That when the plaintiff mentioned he might not be able to pay the required K5,000 each month, he was advised he could pay the amount he could and settle arrears when he was able to.
    • That the plaintiff was attended to at the counter in the presence of other customers and he thereby felt uncomfortable to query the terms of the Agreement.
    • That the defendant did not arrange for insurance over the Property.
    • That there was no inspection or valuation of the Property at any time.
    • Notwithstanding that the Property was to be mortgaged in its favour, the defendant improperly retained K30,000 of the loan amount as security.
    • The plaintiff was not allowed reasonable grace period before commencement of the loan repayment.
      
11. The plaintiff asserts that by virtue of all these factors, the defendant breached s 5 of the FTA.
    
12. As his principal relief, the plaintiff seeks an order that the Agreement breached s 5 of the FTA and is therefore unenforceable. Several consequential orders are also sought including declarations that any exercise of the defendant’s rights as mortgagee over the Property including the right to sell is unlawful.
    

PLAINTIFF’S EVIDENCE

13. Affidavits of witnesses were tendered into evidence and their deponents were allowed to be examined by counsel and the court.
    
14. The plaintiff presented five affidavits – four he deposed to and the fifth by Peter Gola, one of his two guarantors for the loan.
    
15. The plaintiff’s own evidence repeated the assertions in his pleadings listed in [6] above regarding the claim of unconscionable conduct.
    
16. He explained in his oral testimony he did not raise his concerns with the defendant’s officers dealing with him regarding his difficulties in reading the Agreement and understanding it, the uncomfortableness of signing at the counter with other persons around, the failure of the defendant’s officers to explain the terms of the Agreement, the failures of the defendant’s officers to have the Property valued or insured, the impropriety of the retention amount and the mortgage over the Property, and the inadequacy of the grace period, because he was very keen to get the loan monies.
    
17. The plaintiff suggested that the retention of the K30,000 did not permit him to complete the renovations, resulting in loss of tenants and therefore rental income and that negatively impacted on his ability to make loan repayments according to the Agreement.
    
18. Peter Gola confirmed that he was asked by the plaintiff to be a guarantor in his application for a loan from the defendant and witnessed the signing of the Agreement. He added that the defendant’s representative did not explain to him his obligations as a guarantor under the Agreement.
    

DEFENDANT’S EVIDENCE

19. The evidence from the defendant effectively refuted the alleged particulars of unconscionable conduct. It responded through its witnesses that:
    
    • The plaintiff understood the terms of the loan agreement or did not raise any issues at the time of the signing of the Agreement.
    • It did not make commercial sense that the bank officers would suggest to a borrower to repay a loan by any amount he pleased.
    • Insurance for the Property was a matter for the plaintiff at his cost.
    • The plaintiff had provided a valuation report, and any further valuation would have also been a matter for the plaintiff at his cost.
    • The K30,000 in a retention account was common banking practice, applied as an alternative to requiring the plaintiff to pay the amount as his equity contribution for the loan,
    • The plaintiff was given a month grace period before commencing repayment of the loan commenced.
      
20. Regarding the application for restructure of the loan, the defendant requested for information from the plaintiff, importantly receipts of costs incurred in the renovations, in order to properly consider the application but the plaintiff failed to produce them.
    

SUBMISSIONS

21. The plaintiff urged the court to find that it had properly proven that the facts pleaded as amounting to unconscionable conduct by the defendant in the execution of the Agreement, and grant the relief sought.
    
22. The defendant not only argued the plaintiff’s onus of proof was not discharged, but that the plaintiff’s reliance on the FTA was misconceived such that the court’s jurisdiction was not properly invoked. Accordingly, it submitted that the plaintiff’s claim be dismissed and the counter relief against the plaintiff, granted.
    

CONSIDERATION

23. I first determine whether jurisdiction has been properly invoked.
    
24. As the plaintiff’s claim is based on the FTA, it is appropriate to refer briefly to provisions of the legislation considered relevant to deciding this case:
    
    • s 1: the Act essentially provides for procedures to have transactions reviewed by the court to ensure that they have been entered into fairly.
    • s 3: the word “Court” is defined to include the National Court while “transaction” includes contract of a commercial nature.
    • s 4: for purposes of the Act, the concept of fairness relates to the principle just and equitable distribution of parties’ respective rights and obligations relevant to their positions and considering appropriate business principles and practices.
    • s 5(1): the court may, upon application by a party, review a transaction if the Court is satisfied the transaction was “not genuinely mutual” or “manifestly unfair to a party”.
    • s 5(2): situations where the transaction may not be genuinely mutual or manifestly unfair include:
      • if the applicant “did not understand the transaction and no genuine effort was made to explain its terms to him prior to entering into the transaction"; s 5(2(a).
      • if the other party “was in such a predominant position, (whether economically, socially, personally or otherwise), that an ordinary person with the background of the applicant was not likely to exercise a true freedom of choice in relation to the transaction."; s 5(2)(b)
      • if the other party did not disclose information affecting the fairness of the transaction; s 5(2)(c)
      • if he misunderstood the likely consequences of the transaction and the consequences are so adverse to the party’s rights that he could not reasonably be held responsible for them; s 5(d).
    • s 7: in all proceedings under the Act, the Court shall first attempt to reach an amicable settlement and if a settlement is reached, a mediated order shall issue.
    • s 8: if the attempt at mediated settlement fails, the Court shall proceed to review the transaction under s 5.
    • s 11: proceedings under the Act may only be brought within 3 years of the applicant becoming aware of the matters he claims were unfair.
      
25. First, I am satisfied the proceedings were filed within the time limit stipulated in s 11.
    
26. For jurisdiction under the FTA to be invoked, there must be an application under s 5 for the Court to have a transaction reviewed for not being fair in accordance with s.4; James Geama, Koim Kopun v OTML Shares In Success Ltd (2011) N4269.
    
27. The plaintiff has not properly pleaded such application in the present case. Instead, the plaintiff filed an action alleging breach of s 5. The plaintiff appears to think that s 5 imposes a statutory duty which if breached by a person renders that person liable for an unlawful act. That is, the plaintiff has pleaded breach of s 5 by the defendant as his cause of action.
    
28. However, s 5 merely gives discretionary power for the court to review a transaction upon application by a party to the transaction. The court may exercise the power of review only if sections 7 and 8, which require the parties to attempt mediation of their dispute, have been complied with. This means that in accordance with the FTA, the Court can only review a disputed transaction after mediation has been attempted to settle the dispute but has failed; James Geama v OTML Shares In Success Ltd (supra), Panamaseier Resources Pacific Company Ltd v Richard Sikani (2015) N6166.
    
29. In Aviso v Bank of South Pacific Ltd (2016) N6518, Cannings J stressed at [21] that none of the provisions of the FTA create a distinct cause of action or actionable wrong which may be enforced by the Court. I endorse the proposition.
    
30. His Honour further explained:
    

[21] ... The Act operates in two main ways. One way is by creating a procedure by which a party to a transaction can make application to the National Court to review the transaction. This is done under Section 5(1) ...

[23] The other way the Act operates is by evincing the legislative policy ...

[24] That legislative policy can be drawn upon by the courts in the interpretation of contracts and other legal documents. The Supreme Court held in Rage Augerea v Bank of South Pacific Ltd (2007) SC869 and Pija Grannies Ltd v Rural Development Bank Ltd (2011) SC1327 that an implied term of many standard banking transactions is that the bank has a duty to be fair to its customer...

31. In these proceedings, the plaintiff seemingly chose the first approach. However, as he did not follow the provisions of the FTA, the court has no jurisdiction to deal with a matter under the Act. Furthermore, the plaintiff did not plead or argue that the defendant breached the bank’s duty of fairness as an implied term of the Agreement. This case is on all fours with Aviso v Bank of South Pacific Ltd (supra) except that in that case, s 4 of the FTA was relied upon as a cause of action.
    
32. It was contended on behalf of the plaintiff that the proceedings are also based on the common law (correctly, the equitable) principle of unconscionable conduct. I reject the submission for the obvious reason that the pleadings do not raise this as the cause of action.
    
33. In any case, it is my view that the doctrine has not been established, and for these reasons.
    
34. In Papua New Guinea National Stevedores Pty Ltd v Bank of South Pacific Ltd (2001) N2069, Kapi DCJ observed:
    

The equitable doctrine of unconscionable conduct is most usually called in aid to set aside a contract or other transaction. The principles are set out by Deane J in Commercial Bank of Australia Limited v Amadio [1983] HCA; [1983] HCA 14; (1983) 151 CLR 447:

"Jurisdiction of Court’s iniquity to relieve against unconscionable dealing ... this long establishes extending generally to circumstances in which (i) a party to a transaction was under his special disability in dealing with the other party with a consequence that there was an absence any reasonable decree of quality between them and (ii) that disability was sufficiently evidence to the stronger party to make it prima facie unfair or unconscientious that he procure, or accept, the weaker parties assent to the impugned transaction in the circumstances in which he procured or accepted it. The circumstances are shown to be registered, the onus is cast upon the stronger party to show that the transaction was fair, just and reasonable."

35. The essential elements of the doctrine identified in the statement of Deane J are:
    
    • (1) The plaintiff is under a special disability,
    • (2) The defendant had knowledge of the plaintiff’s disability.
    • (3) The defendant exploited that disability unconscientiously to obtain the plaintiff’s consent to the transaction.
      
36. Deane J also observed in Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621 at 638 that the doctrine does not serve to protect a plaintiff from consequences of his own mistakes but prevents his victimization.
    
37. Of the matters pleaded as amounting to unconscionable conduct, I consider these factors could possibly be considered as special disabilities:
    
    • That the defendant failed to explain the terms and conditions of the Agreement to the plaintiff who did not understand the terms.
    • That the plaintiff was unable to read much of the Agreement due to the font size.
    • That he was unable to ask questions because the signing took place at the counter with other customers nearby.
      
38. Special disability may include “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary”; Bromley v Ryan [1956] HCA 81; (1956) 99 CLR 362. The presence of one or more of the characteristics does not automatically amount to a special disadvantage unless the ability of the innocent party to make a judgement as to his own best interests is greatly affected: Commercial Bank of Australia Limited v Amadio (supra). For a transaction to be considered unconscionable, the plaintiff must demonstrate that he was suffering from a special disability; Papua Club Inc v Nasaum Holdings Ltd (2004) N2603.
    
39. The plaintiff appears to be a formally educated person who has a good command of English. Reference is made to the letters he wrote to the defendant and his statements in his various affidavits, and indeed he admits he is literate in reading English. He also testified he was involved in a previous loan with another bank for the purchase of a PMV bus. Clearly, he was familiar in dealing with banks on business loans.
    
40. It is significant that not only did the plaintiff fail to advise the bank officer that he could not fully read the Agreement and therefore did not understand the terms, but these concerns were not raised with the defendant in the first three letters the plaintiff wrote to the bank when he encountered financial difficulties and sought refinancing of the loan. It is also noteworthy that the medical report he produced regarding his eyesight was compiled followed a medical examination on 27 February 2018, a little over 4 years after the signing of the Agreement. Based on the evidence, I am not satisfied on the balance of probabilities that he suffered a special disability.
    
41. As to the element of knowledge, the defendant must have known or ought to have known of the plaintiff’s disability; Commercial Bank of Australia Limited v Amadio (supra). In this case, the defendant did not know or could not have known that the plaintiff had problems in reading and understanding the Agreement.
    
42. The last element of unconscientious exploitation requires the stronger party to exploit the weakness it knows to exist in the other party to get that party to agree to the transaction. For example, in Commercial Bank of Australia Limited v Amadio (supra), the bank officer exploited the fact that the Amadios were elderly immigrant couple with limited literacy in English and persuaded them to sign legal documents without explaining the terms of the documents nor suggesting they first seek legal advice. Given my finding in the preceding paragraph, that case plainly contrasts with the present case.
    
43. It is therefore my opinion that the elements of the doctrine of unconscionable conduct have not been properly proven.
    
44. In the result, the plaintiff’s claim is dismissed, and I find for the defendant cross-claim as it is uncontested and confirmed by the evidence that the plaintiff owes monies to defendant pursuant to the Agreement.
    
45. I propose to enter judgement for the outstanding amount to be assessed as it has increased in accordance with the Agreement since the cross-claim was filed.
    
46. As added remarks, I would caution the defendant that any steps to exercise its rights as mortgagee must follow the relevant requirements of the Land Registration Act 1981 and that it acknowledges the plaintiff’s equitable right of redemption.
    

ORDER

(1) The plaintiff’s claim is dismissed.
(2) Judgment is entered against the plaintiff in the defendant’s cross-claim with damages to be assessed.
(3) Directions will issue for the hearing on damages.
(4) Time for entry of this order is abridged to the date of settlement by the Registrar which shall take place forthwith.

PANG Legal Services: Lawyers for the Plaintiff
Fiocco & Nutley Lawyers: Lawyers for the Defendant