Faingata'a v Westpac Bank of Tonga [2010] TOSC 8; CV 281 of 2009 (24 June 2010)

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

NO. CV. 281 of 2009

BETWEEN:

RINGO FAINGATA’A
Plaintiff

AND:

WESTPAC BANK OF TONGA
Defendant

BEFORE THE HON. CHIEF JUSTICE FORD

Counsel: Mr O. Pouono for the plaintiff
Mr H Waalkens QC and Mr R Stephenson for the defendant.

Dates of submissions: 14 May and 8 June 2010.
Date of Judgment: 24 June 2010.

RULING

The application

[1] The defendant has applied, pursuant to Order 8 Rule 8 of the Supreme Court Rules 2007, for an order striking out the statement of claim on the grounds that it discloses no reasonable cause of action, that it is frivolous and that it is unclear. In the alternative, the defendant seeks an order for security for costs.

[2] The application raises issues as to whether a bank has a duty of care to a director, shareholder or employee of a customer company and whether it has a similar duty of care to a director who gives a guarantee to the bank on behalf of the company. The plaintiff claims that a legal duty of care is owed in both situations.

The background

[3] The plaintiff was a director, shareholder and manager of a company called Mobile Technology Services Ltd ("the company"). He claims to have been "the main person who conducted the business of the company in terms of marketing and management when the business first started" but sometime later a Mr Peni Taufa became the majority shareholder and also a director. No dates are specified in the statement of claim for these events but the defendant confirmed in an affidavit that the company was a customer for some two years between late 2006 and late 2008. The company is said to have specialised in supplying and maintaining computer parts and hardware.

[4] On 2 July 2008 the defendant, who for ease of reference I will refer to as "the bank", sent an offer letter to Mr Taufa, as Managing Director of the company, confirming that it had approved an overdraft facility loan in the amount of $980,000. The purpose of the loan was described as "working capital and purchase equipments (sic) for hiring". The term of the loan was said to be "ongoing" and repayment was "on demand". The overdraft facility was to be made available "at the discretion of and during the pleasure of the bank and shall be repayable on demand unless otherwise indicated in existing agreed documentation." The offer was open for acceptance until 15 July 2008 "or such other later date as the bank may agree."

[5] The offer letter confirmed that the following securities had been agreed to:

• Loan Agreement over workshop to be constructed. Mortgage will be later arranged after land deed is available.
  
• Equitable mortgage on all company's assets EMA
  
• Debt and interest guarantee by shareholders Peni Kalekava Taufa and Ringo Faingata'a.
  

[6] The offer letter was signed and accepted by Mr Taufa and the plaintiff on behalf of the company or about 28 July 2008 (the date in the copy before the court is unclear -- it could be either 27 or 28 July 2008). The account transaction list shows that as at 28 July the company's overdraft stood at $115,275.05. On 28 July a further $637,500.00 of the loan was drawn down which left the company with a total overdraft of $752,775 .05.

[7] A formal loan agreement with the bank was signed on 14 August 2008, as was the guarantee given by the plaintiff and Mr Taufa. Both these documents appear to have been in the bank's standard format.

[8] The next development, according to the documentation before the court, came on 19 September 2008 when the plaintiff wrote to the General Manager of the bank on company letterhead. The letter read:

"Re: Mobile Technology Services Ltd (MTS) Cheque Account 20005111119

We write regarding the above account. Recently we requested an overdraft of $990,000 from your bank to finance purchasing of heavy equipments (sic) for hire. Our Managing Director, Mr Peni Taufa, is in New Zealand to assist with purchasing the equipments. There were some slight variations in the prices of the equipments initially planned to be purchased. United Development Ltd who was the supplier hence require an additional $100,000 for payment of the excess and also the freight from New Zealand. However our cheque for $100,000 paid to United Development on 10 September 2008 was returned and not honoured by your bank although we believe that there should be sufficient funds available in our account. Accordingly the equipment were (sic) unable to be shipped from New Zealand and resulted in MTS incurring additional costs because of the delay in the shipment. There were also some other cheques bounced back by your bank although there were sufficient funds in the account. We are very dissatisfied with returning (sic) of these cheques because it affected the operation of the business and fees were also charged to our account. In fact, there will be substantial costs that will be paid by MTS to United Development Ltd as a result of this delay in the shipment of the heavy equipments already ordered.

This letter is to request your bank to honour the cheques total to $155,000 that were returned recently and also reverse all bank fees relating to these returned cheques. If you do not honour these cheques we have no option but to cancel the whole deal and close the operation of the MTS and seek assistance from other banks.

We are deeply frustrated with your service.

Ringo Faingata'a

General Manager"

[9] On 13 October 2008 the bank made formal demand of the plaintiff in the sum of $819,419 .78. The letter of demand is not very clearly expressed. Although it is addressed to the plaintiff, it is debatable whether it is, in fact, a demand to the company or a demand to the plaintiff under the guarantee. No issue arises, however, regarding the interpretation of that document. The amount said to be due to the bank under the mortgage as at that date was $819,419 .78.

[10] On 20 October 2008 the plaintiff wrote a further letter to the bank:

"We refer your letter dated 13 October 2008 demanding the money owes (sic) by the Mobile Technology & Services Ltd (MTS) to your bank.

I would like to draw your attention to my letter dated 19 September 2008 which details what action MTS would take as a result of your bank bouncing our cheques causing us additional costs when we were in the process of buying the heavy equipments from New Zealand. I advised you then that your service was poor and affected our relationship with my supplier.

We have agreed with my partner in New Zealand to close down the business and we are in the process of doing that. We are deeply frustrated with your service and is (sic) the main reason for taking this action.

Ringo Faingata'a

General Manager"

The claim

[11] The writ was issued on 9 December 2009. The following paragraphs are probably the most relevant pleadings in the statement of claim:

"6. This is a claim under torts (sic) of negligence alleging that the bank was negligence (sic) in handling and monitoring the loan that as a result of such negligence, the plaintiff suffers economic loss.

6 d. The purpose of the advance was made known to the bank in which a warehouse was to be constructed and also for purchasing of heavy duty equipment for the operation of the company.

7. After the plaintiff signed the loan agreement, the bank also submits (sic) the plaintiff to sign a letter of guarantee without specifying or explaining to the plaintiff the obligations stated in the Letter of Guarantee. As a result, the plaintiff bound himself to be at the mercy of the bank.

8. The bank released about $891,000 of the advance to the company without any knowledge of the plaintiff. The remaining balance remain (sic) payable to the company but at the option of the bank.

9. A few weeks later from the releasing of the advance, the bank demands that the company pay up in the lump sum the money already advanced.

10. The bank should have expected that the company has not built the warehouse and also the purchasing of the equipment. As result of an earlier demand, the company would surely suffer so as the plaintiff.

11. The plaintiff has no choice but to close down the operation of the company.

12. In closing down the Company, the plaintiff lost his source of income and also revenue for the family. He was on a scale (sic) of $40,000 per anum from the company. Closing down of the operation of the company means that he was out of a job.

. . . .

15. The plaintiff suffers because the bank was negligence (sic) in its handling of the advance towards the company.

Particulars

a. The bank has a duty of care as a banker towards the plaintiff.

b. The bank breaches (sic) its duty of care as follows:

(1) The bank made the demand for the repayment of the advance without considering the fact that advance was for a purpose known to the bank;

(2) That purpose was not yet achieved;

(3) Such demand cannot be met by the plaintiff and there was no choice left open to the plaintiff but to close down the operation of the company;

(4) The plaintiff was not advised about the Letter of Guarantee and also the guarantee was not filled out by the bank; and

(5) The plaintiff was not properly advised by the bank as its customer.

c. The plaintiff suffers damage because of the defendant's negligence."

[12] In his prayer for relief, the plaintiff seeks general damages in the sum of $980,000 and specific (sic) damages in the sum of $100,000.

Submissions on the strike out application

[13] In his helpful submissions supported by relevant authorities, counsel for the defendant has concentrated primarily on the issue of whether the statement of claim discloses a reasonable cause of action. The principal submission made under this head is that if a company suffers a loss resulting from a breach of duty owing to it by the defendant, then only the company has a cause of action in respect of that breach of duty. There is no derivative cause of action that flows on to directors, shareholders or employees. A director or shareholder of the company would only be entitled to pursue a claim for damages if he was able to establish a breach of a separate recognised legal duty owed to him personally that had resulted in personal loss. Counsel for the defendant submits that the pleadings in the present case do not disclose the existence of any independent duty of care owed by the bank to the plaintiff and, therefore, the claim cannot succeed.

[14] In relation to any alleged separate cause of action arising out of the plaintiff's signing of the guarantee, counsel for the defendant notes that the plaintiff asserts in his affidavit in opposition that the bank owed him a duty of care "in essence a fiduciary duty to me as a client". In response, the defendant denies that the bank can become subject to a fiduciary duty except in "rare circumstances" where it acts in an advisory capacity and that was not the situation in the present case. The defendant further alleges that any "such claim would still offend the principle of a derivative action analogous to a double recovery of losses alleged to have been suffered by the company."

[15] In support of his principal contention that on the documentary evidence before the court only the company and not the plaintiff could have a cause of action against the bank, counsel for the defendant sought to rely on the decision of the House of Lords in Johnson v Gore Wood & Co [2001] 1 All ER 481, which also involved a strike out application. Counsel placed particular reliance on the following propositions from the speech of Lord Bingham (p.503):

"These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company . . . (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. . . . (3) Where a company suffers loss caused by breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other."

[16] In response, counsel for the plaintiff points out that the bank has already obtained judgment in default against the company in another civil case but he stresses that the plaintiff is not seeking to recover the company's loss. He submits that although the company "provides the context in which the claim has been filed, the plaintiff is only seeking to recover a loss that was caused by a direct breach of a breach of duty owed to him by the defendant. This is the notion of proximity. How such duty exists and breached (sic) can only be determined in open court."

[17] The only authority counsel for the plaintiff sites in support of his submission is the seminal case on negligence, Donoghue v Stevenson [1932] UKHL 100; [1932] All ER 1. The only attempt made by counsel in his submissions to identify the alleged breach of duty owed by the bank is expressed as follows:

"13. The plaintiff was an employee and evidence will only shows (sic) that the defendant was negligence in releasing and an early demand for the repayment of the loan. As of 28 May 2010, upon discovery of the Account Authority Document of Mobile Technology Ltd, where the advanced (sic) was released unto by the defendant, it could not be found at this stage. This is peculiar to a financial institution that has been conducted commercial transaction on international level and worldwide. Without the Account Authority Document of Mobile Technology Ltd, certainly on a balance of probability, someone was negligence and certainly it was not the plaintiff.

14. Certainly, the unavailability or the loss of the Account Authority Document also leans (sic) to the ground that the plaintiff has identified as breach of fiduciary duty. The extend of such duty can only be determined by evidence."

Discussion

[18] The principle upon which an application to strike out a claim may be entertained by the court is clear and was stated unequivocally by the Court of Appeal in Jagroop v Sokai and KOT [2001] Tonga LR 234, 236: "No party should have his claim denied without a hearing in the ordinary way, except where the claim is so hopeless that it cannot possibly succeed."

[19] Adopting the words of Lord Bingham in Johnson v Gore Wood & Co (supra), p.501, the crucial decision which a court must make on a strike-out application is whether on the facts pleaded the plaintiff's alleged claim is sustainable in principle. That decision can be resolved only by close scrutiny of the pleadings.

[20] I appreciate that English is counsel for the plaintiff's second language but even making all the allowances I can on that count, and acknowledging that at the strike out stage any reasonable doubt must be resolved in favour of the plaintiff, I do have considerable difficulty understanding precisely the nature of the duty of care the plaintiff alleges he was owed by the bank and the precise nature of the alleged breach. The documentation shows clearly that the plaintiff was not a customer of the banks. It was the company that was the customer and it was the company that entered into the loan contract with the bank.

[21] In Johnson v Gore Wood & Co (supra),p.528, Lord Millet said:

" A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this represents a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue."

[22] In an affidavit in opposition to the strike out application, the plaintiff deposes that the bank was negligent towards him as "a director, shareholder and an employee" of the company. He claims that the bank owed him a duty of care which he described as, "in essence a fiduciary duty" as "a client". He says that the bank "breached such duty". But the fiduciary duty allegation is not pleaded in the statement of claim. Nor is it pleaded that the plaintiff was "a client", whatever that term means.

[23] In that same affidavit, the plaintiff goes on to state:

"5. That Mobile Technology made an advance from the defendant. It was granted by the bank and when it came to the draw down of the loan, I was not aware or even know that it was drawn. I realise that the bank must have allowed the loan to be drawn by another shareholder who was also a director of the company in my absence.

. . . .

7. That during the time in which the drawdown was made, I was out of the jurisdiction. I went with my family on my wife's vacation leave to Australia about the same time as to when the actual drawdown of the loan was made.

8. That I came to know about the drawdown when I received the demand letter from the bank. The demand made by the bank put Mobile Ltd out of business. At that time, the company was not in a financial position to repay back the loan."

[24] In a subsequent affidavit, the plaintiff withdrew the final sentence from paragraph 5 above which commences with the words "I realise . . "

[25] Although no evidence can be heard on a strike out application such as this, I have deliberately referred to the plaintiff's affidavits as well as to his statement of claim for the reason that if the affidavit disclosed a sound basis for the allegation that he had a cause of action against the bank then I would be disposed to grant leave to the plaintiff to allow him to file an amended statement of claim incorporating appropriate additional pleadings. Being as generous as I can in this exercise, it would seem that what the plaintiff is alleging is that the bank owed a duty of care to him as a director, shareholder and an employee of the company and it breached that duty in two essential respects. First, by allowing the overdraft facility to be drawn down on 28 July 2008 without the plaintiff's knowledge at a time when the plaintiff was in Australia and, secondly, in making demand of the company on 13 October 2008 for repayment of the overdraft when the bank was aware that the purpose of the funds was to construct a warehouse and to purchase heavy duty equipment and those purposes had not been and could not have been accomplished within that time period.

[26] As a preliminary observation, I note that the plaintiff does not state when he left for Australia but it would appear that, in fact, he was in Tonga when the loan facility was drawn down on 28 July 2008 because he signed the offer letter which was dated that same day or the day before. He was also present when the loan documents and guarantee were signed on 14 August 2008. The other point is that under clause 4.1 of the loan agreement the bank had the sole discretion as to when the loan monies could be paid out to the company and the bank had the right at any time to refuse to make any disbursement of any amount of the loan which had not then been dispersed. There is simply no evidence before the court, in other words, to indicate that the loan could not be drawn down unless the plaintiff was present in Tonga at the time. There is also nothing in the loan documentation before the court to indicate that the purpose of the overdraft facility was for "a warehouse (which) was to be constructed and also for purchasing of heavy duty equipment for the operation of the company" as alleged in the statement of claim. The stated purpose of the loan in the loan documentation was for "working capital and purchase equipments (sic) for hiring".

[27] In addition to these factual matters, however, it seems to me that all the issues the plaintiff complains about are contractual issues between the company and the bank. If the bank had breached any one or more of the contractual terms and conditions relating to the loan advance, as is now being suggested by the plaintiff, then that would have been a defence the company could have pleaded in answer to any claim against it by the bank. The company never sought to make any such allegations, however. Counsel for the plaintiff acknowledges in his submissions that the bank has successfully obtained judgement in default against the company.

[28] In summary, it seems to me that the plaintiff has, in colloquial terms, not even got off the ground in establishing on his pleadings that he has in principle a sustainable cause of action in his own right against the bank arising out of the drawdown of the overdraft facility or the bank's subsequent demand under its mortgage.

[29] The other alleged cause of action relates to the guarantee. In his statement of claim, the plaintiff alleges that the bank had an obligation to specify or explain to him his obligations under the guarantee. In his affidavit he alleges that: "the bank was under an obligation to inform me of the outcome of the loan so as its drawdown. However I was not informed." No authority is cited in support of the submission.

[30] Charlesworth & Percy on Negligence (11th edition), 8-80 states:

"In the normal course of events a bank does not owe a duty of care, whether in tort or contract, to proffer any explanation or to advise the taking of independent advice to a customer who comes to its premises in order to sign securities . . . On the other hand when a bank chooses to give preliminary advice to a customer about the nature and effect of a proposed mortgage in the bank's favour, it is under a duty not to misstate the effect of the mortgage."

[31] The quotation from Charlesworth relates to customers of a bank. As noted above, the plaintiff in the present case was not a customer of the bank.

[32] The question whether a bank has a duty of care to intended guarantors to explain the guarantee, warn the guarantor or recommend to the guarantor that he obtain separate advise, has been considered in several New Zealand cases. In Shivas v Bank of New Zealand [1989] NZHC 862; [1990] 2 NZLR 327, Tipping J. expressed the view that where there is a contractual relationship, as between a bank and a guarantor, the law should not be anxious to search for a countervailing liability in tort.

[33] In Shivas the plaintiffs alleged that the bank had been negligent and in breach of its duty of care in failing to advise them correctly on the full extent of their liability under the guarantee and to ensure that they had access to independent legal advice before signing. After considering the authorities, Tipping J. held:

"The guarantor who is concerned at the circumstances in which he has given a bank guarantee will be able to complain should any of the following circumstances be present -- deceit by the bank, misrepresentation, negligence if advice or information is sought and given or volunteered by the bank in a careless manner, breach of a fiduciary duty in terms of Hamilton v Watson [1845] EngR 568; (1845) 12 Cl & Fin 109,119, unconscionable bargain, mistake and undue influence. . . . If the guarantor cannot succeed on one or other of the recognised causes of action in my view the pendulum would be swinging too far if one were to permit an action for the tort of negligence on the premise not of advice negligently given but on the basis of a failure to explain, warn or recommend separate advice."

[34] The allegations made in the pleadings fail to establish any of the scenarios referred to by Tipping J. in the above passage. The bald assertion made by the plaintiff in his affidavit that the bank owed a fiduciary duty to him is not sufficient to establish a cause of action. Chitty on Contracts 29th edition, 34 -- 251 states: "Usually the relationship of banker and customer is not of a fiduciary nature." In the present case the plaintiff was not a customer of the bank and no circumstances are alleged which would establish an exception to the general rule as stated in Chitty.

Conclusion

[35] I have not been persuaded that the plaintiff has been able to establish a sustainable cause of action in principle against the bank. Reverting to the terminology used by the Court of Appeal in Jagroop, in my view, the plaintiff's claim is so hopeless that it cannot possibly succeed. The proceedings are, accordingly, struck out.

[36] Costs normally follow the event which means that the defendant is entitled to costs against the plaintiff. It is clear from his affidavit, however, that the plaintiff is in a parlous financial situation. There is no civil legal aid scheme operating in Tonga. The court is aware, that counsel for the plaintiff and his law partner frequently provide pro bono services in criminal and civil cases. The court commends them in that work and does not wish to discourage their efforts. As this case shows, however, counsel may need to be more circumspect in pursuing complex civil actions. Against that background, the defendant may be prepared to waive its claim for costs. If it wishes to pursue the matter, however, submissions should be filed within 21 days.

DATED: 24 JUNE 2010

CHIEF JUSTICE