Pija Grannies Ltd v Rural Development Bank Ltd [2011] PGSC 64; SC1327 (2 September 2011)

SC1327

PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA 149 OF 2010

PIJA GRANNIES LIMITED
First Appellant

REX W EMBAHE
Second Appellant

V

RURAL DEVELOPMENT BANK LIMITED
Respondent

Waigani: Kandakasi J, Cannings J, Kawi J
2011: 1, 2 September

BANKS AND CUSTOMERS – negligence – contract – importance of terms of agreement – whether bank has a duty to prevent customer becoming over-committed in loan repayments.

The appellants entered into a loan agreement with the respondent bank, which, the appellants claimed, the respondent breached by advancing the whole of the amount of the loan rather than in tranches. As a result, the appellants claimed that they became over-committed and lost the opportunity to earn profit. The appellants sued the respondent for breach of contract and negligence in the National Court but lost. They appealed to the Supreme Court.

Held:

(1) Banks have a duty under the law of negligence to act reasonably and with much care. Further, banks have a duty to act fairly and in accordance with the terms of agreements with their customers.

(2) Here, there was no express agreement that the bank had to allow for drawdown strictly in accordance with the term of the agreement. The funds were applied at the discretion of the appellants. Extrinsic evidence of an oral agreement could not override or qualify the terms of the written loan agreement.

(3) The appeal was without merit and was dismissed.

Cases cited

The following cases are cited in the judgment:

Curtain Brothers (Queensland) Pty Ltd and Kinhill Kramer Pty Ltd v The State [1993] PNGLR 285
David Nelson v Credit Corporation (PNG) Ltd (2011) N4368
Misima Mines Ltd v Collector of Customs (2007) N3206
Odata Ltd v Ambusa Copra Oil Mill Ltd (2001) N2106
Otto Benal Magiten v Rural Development Bank Ltd, WS NO 938 of 1999, 2006, (unreported)
Rage Augerea & Maureen Augerea v Bank South Pacific Ltd (2007) SC869

Counsel

G Salika, for the appellants
T Cooper, for the respondent

2nd September, 2011

1. BY THE COURT: The appellants are appealing against a decision of the National Court which dismissed their claim for damages on account of negligence arising out of a loan agreement with the respondent bank.

THE APPELLANTS' CLAIMS

2. The appellants claim that it was a term of the loan agreement it had with the bank that the bank would allow for a drawdown of a loan of K350,000.00 in the following way:

(a) New Development K120,200.00
(b) Purchase of 24 Blocks of land K125,000.00
(c) Capital Equipment K 92,000.00
(d) Maintenance of Existing Area K 12,800.00

3. The bank advanced the whole of the agreed loan amount to the appellants who made use of the proceeds of the loan entirely at their own discretion under the management of the second appellant. However, the appellants say, the bank was contractually obliged to advance the monies in the order set out above. But they claim that the bank in breach of the contract allowed for over-commitments with the allocation for the purchase of the blocks of land exceeded by K45,517.50. This the appellants claim was forced on them by an oral agreement the bank had with individual block-holders increasing the original prices. All this, the appellants claim, placed them in a position where they were only able to purchase eight blocks of land out of the intended 24. They claim that they missed out on the opportunity to buy the remaining 16 blocks and the economic use they could have made out of it. In the consequence, they claim that, they have suffered serious loss which exceeds K13 million.

GENERAL PRINCIPLES

4. Allowing ourselves to be guided by the decision of the Supreme Court in Rage Augerea & Maureen Augerea v Bank South Pacific Limited (2007) SC869 and many decisions that have followed that decision and other decisions like the one in Otto Benal Magiten v Rural Development Bank Ltd (WS No 938 of 1999, 2006 (unreported) and David Nelson v Credit Corporation (PNG) Ltd (2011) N4368, we are firmly of the view that banks owe a duty of care to their customers to act reasonably and with much care. Contrary to the learned trial Judge's view on this point in this matter, we are of the firm view that, in addition to the banks' general duty of care, where the banks have an agreement, they have a duty to act fairly and in accordance with the terms of the agreement. That is in addition to ensuring at the first place that the terms of the agreement are fair and reasonable and are capable of standing up against any challenge under the Fairness of Transaction Act or a similar challenge going into the fairness and reasonableness of the terms of the agreement.

5. Having said that, however, we are also of the firm view that, parties who claim a breach of the duty of care owed to them by the banks have a duty to properly and clearly articulate their claims and demonstrate the basis for their allegations in due compliance of the rules relating to pleadings. They should exercise care to ensure that there is a proper factual and legal foundation for their claims in order to succeed against the banks. A mere claim of negligence or a breach of contract will not suffice.

THIS CASE

6. Turning then to the allegations in this case, we have carefully given consideration to the parties' submissions and matters placed before the learned trial Judge and full reasons for decision by the learned trial Judge. We are of the firm view that the learned trial Judge was correct in arriving at his decision that the bank was not negligent for the reasons his Honour gave.

7. We observe and make a few points. Firstly that, there was no express agreement between the parties that the bank had to allow for draw-downs strictly in accordance with the terms and in the order in which the loan amounts were to be applied. As was found by the learned trial Judge, the loan agreement at clause 5 said in the last sentence:

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

8. The appellants agreed to this provision in the agreement. It gave the bank the power at the highest not to continue with any of the periodical advances against the agreed loan amounts. This provision vests a power in the bank to discontinue further advances. That in our view is not an absolute discretion but a discretion that must be exercised within the terms of the agreement on proper considerations and bases.

9. This leads us to the second point, there is no contest between the parties that the full agreed amount of the loan was paid over to the appellants and they applied the proceeds entirely at their discretion for their own benefit. This means they were in a position to properly control and appropriately apply the funds and hence control their over-expenditure. It therefore seems rather odd that the appellants would go to court and claim negligence on the part of the bank for not stopping them from applying the loan proceeds in the way they themselves chose to apply them.

10. Thirdly the appellants make much of an issue over an oral agreement the bank had with the individual holders of the 24 blocks of land they were to buy. The appellants claim is that the oral agreement increased the prices of the land and placed them in need of an additional K45,517.50. The learned trial Judge found that the oral agreement preceded the loan agreement and was subsequently superseded by the loan agreement.

11. The appellants do not point out how the learned trial Judge fell in error here or elsewhere in his judgment and in particular his reasons for judgment. In particular, they have failed to establish to the satisfaction of this Court what duty the bank owed them in respect of the prior oral agreement with the block-holders and how that was breached. The appellants' submissions at paragraphs 9 to 24 address this issue. Unfortunately, they do not say when the oral agreement was entered into, what sort of duties the bank owed them and when those duties had to be discharged and were breached.

12. We also consider that the appellants' argument that the loan agreement should be read subject to the contents of an internal memorandum of the bank is without merit. This is so in view of the fact that there is no evidence of the internal memorandum being part of the terms of the loan agreement. We also note that this argument offends the law in relation to calling of extrinsic evidence as enunciated in many decisions of the Supreme Court and the National Court, led by the decision in Curtain Brothers (Queensland) Pty Ltd and Kinhill Kramer Pty Ltd v The State [1993] PNGLR 285, and the many decisions such as Odata Ltd v Ambusa Copra Oil Mill Ltd (2001) N2106 and Misima Mines Ltd v The Collector of Customs (2007) N3206 which have adopted and applied them.

CONCLUSION

13. We find the appeal is without merit. Accordingly, we make the following orders:

(1) The appeal is dismissed.

(2) The appellants shall pay the respondent's costs, which costs shall be agreed if not taxed.

__________________________________________________________________
Young & Williams Lawyers: Lawyers for the Appellants
Rageau Manua & Kikira Lawyers: Lawyers for the Respondent