Bank of Tonga v Taufaeteau [2006] TOSC 35; CV 406-2002 (5 September 2006)

IN THE SUPREME COURT OF TONGA
CIVIL JURISDICTION
NUKU’ALOFA REGISTRY

CV.406/2002

BETWEEN:

BANK OF TONGA
Plaintiff

AND:

KARL TAUFAETEAU
Defendant

BEFORE THE HON. JUSTICE FORD

Counsel: Mrs A. T. Tapueluelu for the plaintiff and Mr S. T. Tu'utafaiva for the defendant

Dates of hearing: 4 September 2006
Date of judgment: 5 September 2006

JUDGMENT

Background

[1] The background to this case is almost surreal. The litigation has its genesis in a housing loan taken out by the defendant with the plaintiff bank in the mid-1980s. The same loan transaction has already been the subject of litigation in both this court and in the Court of Appeal.

[2] The issue that has now arisen is whether the plaintiff bank is able to recover the sum of $17,391.31 plus interest which it claims was the amount still owing under the loan as at 30 September 2000 or whether, as the defendant claims, the plaintiff is precluded from recovering any money that was still owing beyond 28 June 2000 because, as the defendant puts it, that was the end of the 12 year term for repayment of his loan.

The documentation

[3] The statement of claim records that the loan was made up of two separate advances. The first advance, made on 25 August 1987, in the amount of $50,000 was for the purpose of building a new house. The second advance, made on 7 June 1988, in the sum of $15,000 was to enable completion of the dwelling house. The interest rate in both cases was 8.5%.

[4] A separate loan agreement was signed between the parties in respect of each advance. The first loan agreement dated 25 August 1998 provided that the borrower agreed to make repayments of $600 on the last day of each month until the full amount borrowed, together with interest, had been paid in full. As security, the defendant was required to provide a mortgage over his interest in the land and dwelling house in question. The mortgage was dated 8 January 1988 and was expressed to be for a term of 12 years but the repayment provision required the defendant to pay $600 each month, "until the principal sum ($50,000.00), together with interest, has been repaid in full."

[5] The second loan agreement, dated 17 June 1988, superseded the first. The conditions were effectively identical except that the monthly repayments were increased from $600 to $730 with the first such payment falling due on 30 June 1998.

[6] Although it is not referred to in the statement of claim, another relevant document in the loan transaction was a letter of offer written by the bank to the defendant dated 2 May 1988. The letter set out the terms and conditions of the second loan advance and contained two provisions of particular relevance to the present proceeding. First:

"Repayment of $730 per month as from June 1988 an increase from $600 pm covering both principal and interest will apply which will provide for a term of 12 years."

The second relevant provision read:

"A once only Establishment Fee of $250 will apply only for the increase in addition to other Bank and Statutory Charges. Full details of these charges will be available to you when you call to sign our documentation."

[7] Both loan agreements also contained a provision regarding interest which has particular significance in the context of this case. The provision reads:

"The rate of interest payable shall be 8.5% per annum or such other rate as the Bank may from time to time charge its other customers on a like account."

Previous litigation

[8] I propose simply to try and summarise the issues involved in the previous court cases. It appears that at some stage around 1990 the bank learned that the defendant had let his dwelling house to tenants and it then unilaterally increased the interest rate from its residential interest rate of 8.5% to its commercial interest rate of 13.5%. The defendant issued proceedings challenging the bank's right to make such a variation to the loan conditions. The defendant also challenged the bank's right to recover bank charges, fees and insurance premiums under the loan agreements.

[9] In a judgment dated 10 November 1995, Lewis J. rejected the defendant's (plaintiff in that particular proceeding) claim completely. In relation to the interest rate variation, the judge held that the bank was entitled to increase the interest rate to a commercial level. However, His Honour found that the bank was only entitled to charge 10%, that being the published commercial interest rate at the relevant time, not 13.5%.

[10] The defendant then appealed that decision to the Court of Appeal where he had limited success. In relation to the interest rate variation, the Court of Appeal, in a judgment dated 28 May 1996, concluded that the bank was not entitled to charge the interest rate applicable for commercial loans i.e. 10% per anum, but it was entitled to vary the interest rate to accord with the rate charged to its other residential housing loan customers. The court held that the relevant rate in this regard was 9.5% and it authorised the bank to make the necessary recalculations to the defendant's account.

[11] In relation to the defendant's claim that he did not have to pay bank fees and charges because the letter of offer dated 2 May 1988 had never been registered under the Contracts Act (Cap 26) -- (now repealed), the Court of Appeal referred to the second passage cited under paragraph [6] above and went on to say:

"It is noteworthy that the loan agreements do not specify that they recorded or purported to record, exclusively, the whole transaction between the parties and that no other document could be looked at and relied upon. The trial judge was correct, in our view, in concluding that the letter (the letter dated 2 May 1988) "forms part of the agreement between the plaintiff and the Bank" and that the bank fees and charges were deducted properly and with authority."

In the present proceeding the defendant, in paragraph 20 of his statement of defence, attempts to re-open this same issue. The doctrine of res judicata applies. This court is bound by the Court of Appeal finding on this issue and I propose to say no more on this aspect of the case.

The issues in this case

[12] Although neither loan agreement refers to any term for the loan, the plaintiff in paragraph 14 of its statement of claim pleads:

"The original term for repayment of the defendant's loan was agreed to be twelve (12) years."

When precisely that term was agreed to is not clear. The relevant wording in the letter of offer set out at paragraph [6] above is unclear. It states, in reference to the second loan advance: " . . . which will provide for a term of 12 years." This phraseology suggests that the intention was to have the second loan agreement provide for a 12 year term but it never did.

[13] In all events, the plaintiff appears to accept that the original term was agreed to be 12 years but quite clearly all that meant was that if the defendant kept up his monthly repayments of $730 then the expectation was that the loan would be repaid over a period of 12 years. The defendant's contractual obligation, however, under the two loan agreements was to continue paying the monthly repayments of $730 until the loan, together with interest, was repaid in full.

[14] Whatever the expectations may have been, it would have become obvious as soon as the authorised adjustments were made increasing the interest rate from 8.5% to 9.5% as from September 1990, that if the monthly repayments were to remain at $730 then a longer period than 12 years would be required for repaying the loan in full. The plaintiff sets out the position in paragraph 21 of the statement of claim in these terms:

"As a consequence of the increase in interest rate from 8.5% to 9.5% per anum since September 1990, the term for repayment of the defendant's loan account naturally and by implication was extended from 12 years to 13 years and 2 months to be cleared in November 2001."

[15] For the reasons mentioned above, the implied extension of the term to 13 years and 2 months seems to be something of an artificial approach. The defendant's obligation was clearly to keep making his monthly repayments of $730 for so long as it took to repay the loan in full together with interest. I repeat, that whilst the original expectation was that the loan would be paid off over a 12 year period, the reality is that there was never any fixed date expressed in the loan agreements by which the loan had to be repaid in full.

[16] The defendant's response is probably best summed up in the following two paragraphs from his statement of defence:

"13. He admits making the last payment on 28 June 2000. The defendant further says that he did not make any payments after 28 June 2000 because he had complied fully with the terms of the two loan agreements which were paid in full by then.

14. . . . The defendant further says that the term for repayment of his loans was always 12 years. The plaintiff never informed the defendant of any extension in the term and the defendants never agreed to any extension of it."

[17] In a letter dated 13 November 1997, defence counsel wrote to the plaintiff and in the final paragraph said:

"The main concern of our client is that with the interest rate, insurance premiums and other charges being debited to his account, the loan is very unlikely to be paid in full by the end of the 12 year mortgage on the land. However, (he) instructs that when he worked out with Mr Matato the amount of monthly repayment, it was agreed that the loan and interest would be fully paid in 12 years. This would support our client's contention right from the beginning that no other charges were contemplated when the Loan Agreements were entered into. So if the Bank is not going to cancel those charges our client would not care because he is not going to increase his monthly payment and after 12 years he is not going to agree to any change in the duration of the mortgage."

Conclusions

[18] The passage I have just quoted from the lawyer's letter is, of course, a direct defiance of the Court of Appeal judgment which ruled that the bank was entitled to increase the interest rate and make the other charges which the defendant had unsuccessfully challenged. What the defendant appears to conveniently overlook is that under the provisions of the second loan agreement, he undertook to continue making monthly repayments of $730 until the principal sum together with interest had been repaid in full. The loan agreement does not state that he had to continue making the monthly repayments only for a period of 12 years. The Court of Appeal judgment made it clear that "repayment in full" included the bank charges, fees and insurance premiums.

[19] The defendant's contention appears to be that the loan was for a fixed term of 12 years which expired on 28 June 2000 and if at the end of that 12 year period there was any money still owing to the bank then the bank would simply have to write it off as it were. There are many borrowers who no doubt would be delighted if lending banks were that naive. That is not how they word their loan documents, however, and it certainly does not represent the position in the present case. I see no merit whatsoever in the defendant's defence and I find it surprising that, as an accountant by profession, he can seriously advance such a fanciful proposition before this court.

[20] At the hearing, Mr Tu’utafaiva raised a new matter which had not been raised earlier either in the pleadings or with counsel for the bank. Normally, in that situation the court would not entertain the submission, particularly given the historical background to this particular case. The issue is so fundamental, however, that I suspect the bank would be able to proffer an immediate answer if given the opportunity. The matter raised by defence counsel goes to the amount actually borrowed from the bank. As I understand it, the point made by Mr Tu’utafaiva is that, of the total sum available under the approved loan of $65,000 the defendant only ever uplifted and utilized $45,000 because he was required to leave $20,000 on fixed deposit with the bank. After brief discussion with counsel, the issue was left on the basis that counsel for the bank would investigate the matter with the plaintiff. If there is substance in the allegation and the situation cannot be resolved by agreement between the parties then, rather reluctantly, I reserved leave for the issue to be referred back to the Court.

[21] The plaintiff succeeds and is entitled to judgment in the sum of $17,391.31 together with interest at 9.5% per annum from 30 September 2000 until paid. The plaintiff is also entitled to costs to be agreed or taxed.

NUKU'ALOFA: 5 September 2006

JUDGE