Credit Corporation (PNG) Limited v David Nelson (2011) N4368

• Jurisdiction: Papua New Guinea
• Judge: Kandakasi, J.
• Judgment Date: 24 August 2011
• Court: National Court
• Docket Number: WS No. 583 OF 2006
• Judgement Number: N4368

Full Title: WS No. 583 OF 2006; Credit Corporation (PNG) Limited v David Nelson (2011) N4368

National Court: Kandakasi, J.

Judgment Delivered: 24 August 2011

N4368

PAPUA NEW GUINEA

[IN THE NATIONAL COURT OF JUSTICE]

WS No. 583 OF 2006

BETWEEN

CREDIT CORPORATION (PNG) LIMITED

Plaintiff

AND:

DAVID NELSON

Defendant

Waigani: Kandakasi, J.

2010: 17th June

2011: 24th August

FINANCIERS AND CLIENTS – Duty of financiers – Financiers have duty to be transparent, fair and open with their clients – Duty to ensure terms of the contract are fair and reasonable - When negotiating and entering into an agreement with a client financiers under a duty to ensure clients get independent legal advice as to its fairness and legalities.

CHATTEL MORTGAGES – Nature of – Mortgages are mortgages only – Mortgagor has right of redemption until contract of sale signed with a third party – Right of redemption cannot be clogged or fettered – Higher interests rates and charges without justification could amount to unjust enrichment and a clog or fetter on mortgagor’s right of redemption –Provisions allowing for higher interest rates and charges amount to a clog or fetter on mortgagors right of redemption and are unenforceable – Inequality in bargain power leading to a mortgage may render mortgage unenforceable.

Cases Cited:

Papua New Guinean Cases:

Rage Augerea v. Bank South Pacific Ltd (2007) SC 869

Steven Naki v. AGC (Pacific) Ltd, (2005) N2782

Peter Kondowa v. Reuben Elozah (2002) N2406

Fly River Provincial Government v. Pioneer Health Services Ltd (2003) SC 705

Golobadana No 35 Ltd v. Bank of South Pacific Limited (formerly Papua New Guinea Banking Corporation) (2002) N2309

Negiso Investments Limited v. PNGBC Limited (2006) N3104

Dr. Florian Gubon Trading as Gubon Lawyers v. Pacific Mobile Communication Limited (2003) N2439

Overseas Cases Cited:

Crickmore v. Freestone [1870] 40 L.J. Ch. 137

Counsel:

I. Mambei, for the Plaintiff

G. Elai, for the Defendant

24th August, 2011

1. KANDAKASI J: This is a chattel mortgagee’s action to take possession of a motor vehicle, being the subject of a mortgage for the purposes of recovering a balance of monies lent to the mortgagor, Mr. David Nelson following the latter’s default in repaying parts of the monies lent.

Issue of Determination

2. An issue has arisen as to whether the rate of interest on the loan and default penalty interests charged by the Company is reasonable and is therefore not an unreasonable impediment to Mr. Nelson’s right as a mortgagor to redeem his property. According to the plaintiff, Credit Corporation (PNG) Limited’s (the Company) pleadings and from the evidence in the Court file, it is clear that interest on the loan was fixed at 28% while an interest rate of 33% was fixed for any default on the repayment. The issue presented is grounded on the decision of the Supreme Court in Rage Augerea v. Bank South Pacific Ltd.

(2007) SC 869.

1 The Court suggested and the parties agreed to go into written submissions which the Court would consider and come to a decision when ready. This constitutes the Court’s decision on the issue.

3. In short, the precise issues for the Court to determine are:

(a) Whether the interest of 28% charged by the Company on the loan and the 33% for the default penalty is reasonable; and

(b) Whether the default interest rates imposed by the Company is a clog or fetter on the Defendant’s right to redeem his vehicle?

Relevant Facts

4. The relevant facts are not in dispute. On 25th November 2002, the Company and Mr. Nelson entered into a commercial loan and chattel lease agreement. Under that agreement, the Company lent Mr. Nelson K37,750 to purchase a motor vehicle, an Hyundai Sonata Sedan. Mr. Nelson agreed to repay the loan with interest at 28% by monthly installments of K3,560.03 per month for 12 months. That was secured with a chattel mortgage over the vehicle in favour of the Company.

5. It was a term of the agreement that if Mr. Nelson defaulted in his repayment obligations, the whole of the balance of the principle amount of the loan, any stamp duty owing and interest shall become immediately payable on demand. A penalty interest rate of 33% on the total amount owing would be imposed and charged until full repayment.

6. All went well with Mr. Nelson making the agreed installment payments, until 12th November 2003 when he fell into areas in the sum of K4, 299.81. By the time Mr. Nelson fell into arrears, he had repaid a total of K43, 579.78 from the initial loaned amount of K37, 750. Despite these repayments, the Company took out Court proceedings, OS 498 of 2005 - Credit Corporation (PNG) Ltd v. David Nelson. Pending the Company withdrawing those proceedings to proceed by pleadings and a resolution of the proceedings thus proceeded with, the Company successfully secured orders for a seizure of the vehicle the subject of the mortgage and had it locked up for a considerable period.

The Relevant Law

7. There is no issue and I accept that, the parties relationship was one governed by contract law. They had a written agreement (mortgage) which the Company claims Mr. Nelson is in breach of. That is on account of a failure to pay K4, 299.81. Given that, the Company says it is entitled to enforce the mortgage.

8. In support of its claim, the company relies on the decisions of the National Court in Steven Naki v. AGC (Pacific) Ltd,

(2005) N2782.

2 and Peter Kondowa v Reuben Elozah.

(2002) N2406.

3 These cases are authority for the proposition that, where it is evident that, the parties entered into a written agreement which consists of a chattel mortgage, it is a legally binding and enforceable contract. Hence, the parties are thus bound by the terms of the contract. That is however, conditional on the existence of the essential elements of a contract such as an intention to create a legally binding contract which is supported by a passing of valuable consideration between the parties. Where such an agreement is breached, the Court would readily assess and award damages to the innocent party.

9. I accept that the foregoing is the general position at law. There is however cases in which, the law refuses to recognize and enforce a contract. A good example of that is for instances, a contract entered into in breach of or without meeting important, relevant and applying statutory requirements such as ss. 59 and 61 of the Public Finances (Management) Act 1995. The Supreme Court decision in Fly River Provincial Government v. Pioneer Health Services Ltd

(2003) SC 705.

4 makes that position clear.

10. Specifically, on the enforcement of mortgage contracts, by mortgagees for alleged defaults by mortgagors, is the decision of the Supreme Court in the Augerea case. Given its direct relevance, I drew the parties’ attention to that decision and asked them to make submissions on its effect on this case, particularly when the Company here is amongst other things, seeking to enforce a contract that has an interest rate of 28% and a default interest rate of 33%.

11. The Augerea Case, was a case in which the Bank South Pacific (BSP) as a mortgagee, exercised its powers based on an alleged default in a repayment of monies lent to the Augereas by the then Papua New Guinea Banking Corporation which BSP took over. BSP alleged that the default came about despite alleged numerous default notices. It proceeded to issue proceedings in the National Court and managed to get the Court to sign summary judgment in the sum of K128,380.99 from an initial loan of K25,000.00. On appeal from that judgment, the Augerea’s established to the satisfaction of the Supreme Court that, there was only one default notice; BSP did not keep proper records of the loan account; failed to have the loan regularly reduced by the full amounts of each repayment and BSP failed to demonstrate that the amount of interests and charges charged and added on to bring to the total of K128,380.99 allegedly owing was reasonable and fair. Further, the Augerea’s demonstrated to the satisfaction of the Supreme Court that, they took serious steps toward repaying the total owing on the loan so as to redeem their property but BSP ignored them and proceeded to exercise its mortgagee powers. Accordingly, the Supreme Court upheld the appeal. In so doing, the Court made a number of important points.

12. The first point the Court made was in respect of the bank’s duty to maintain proper records. In respect of that, the Court said:

“In our view, all banks have a duty to maintain and keep accurate records and accounts of their customers and keep the customers regularly and accurately informed of all activity and the status of their accounts on a monthly basis. This is necessary for the sake of transparency, avoiding surprises and to avoid mistakes or any anomalies of the kind identified in this case from being carried over and instead have them detected earlier on and rectified. This is the least a bank can do given that, they alone have control over their charges and fees and the calculation of...