Stephen Asivo v Bank of South Pacific Ltd

• Jurisdiction: Papua New Guinea
• Judge: Cannings J
• Judgment Date: 02 October 2009
• Citation: (2009) N3754
• Court: National Court
• Year: 2009
• Judgement Number: N3754

Full : OS NO 290 of 2009; Stephen Asivo v Bank of South Pacific Limited (2009) N3754

National Court: Cannings J

Judgment Delivered: 2 October 2009

N3754

PAPUA NEW GUINEA

[IN THE NATIONAL COURT OF JUSTICE]

OS NO 290 OF 2009

STEPHEN ASIVO

Plaintiff

V

BANK OF SOUTH PACIFIC LIMITED

Defendant

Madang: Cannings J

2009: 24 July, 29 September,

2 October

JUDGMENT

CONTRACTS – loan agreement and mortgage – bank/customer relationship – whether bank entitled to refuse to provide further funding after discovery of alleged bad debt of customer – whether bank committed breach of contract – whether customer entitled to specific performance of loan agreement – whether customer entitled to damages.

The plaintiff entered into a loan agreement with a bank (the defendant) under which the bank agreed to lend the plaintiff K58,700.00 for purchase of a house and land, repayable over 16 years. A mortgage was executed over the property. The bank provided K30,000.00 to the plaintiff but refused to provide any more as it discovered that the plaintiff had a pre-existing bad debt with the bank which he had not disclosed in his loan application. The bank then demanded immediate repayment of the money it had provided to the plaintiff, plus interest, failing which it would exercise its powers of mortgagee. The plaintiff then commenced proceedings against the bank in the National Court seeking specific performance of the loan agreement and damages.

Held:

(1) There was no term of the loan agreement that permitted the bank to withhold any advance to the plaintiff on the ground of non-disclosure by the borrower of a previous bad debt with the bank.

(2) In particular, non-disclosure of a previous bad debt was not an ‘event of default’ prescribed by the loan agreement, which would have entitled the bank to cancel the loan facility.

(3) In any event, the plaintiff had disclosed in his loan application the previous loan with the bank that rendered him in the eyes of the bank a bad debtor and he could not reasonably be said to have misled the bank or be guilty of any breach of a duty of disclosure.

(4) It is incumbent on a bank to make all relevant credit reference checks on an applicant before entering into a loan agreement with the customer. In the absence of an express term of the agreement that caters for such information coming to light after execution of the agreement, the bank is estopped from relying on non-disclosure by a customer as a basis for not completing its obligations under the agreement.

(5) The bank was guilty of a breach of contract and it followed that the remedy of specific performance should be granted in favour of the plaintiff and that the plaintiff should be awarded damages of K20,000.00 plus interest.

Cases cited:

Papua New Guinea Cases

Cheong Supermarket Pty Ltd v Pery Muro [1987] PNGLR 24

Negiso Investments Ltd v PNGBC (2003) N2439

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

Overseas Cases

Livingston v Raywards Coal Co [1880] 5 App Cases 25

TRIAL

This was the trial of an originating summons in which the plaintiff was seeking specific performance of a contract and damages.

Counsel

S Asivo, the plaintiff, in person

M Koimo, for the defendant

2 October, 2009

1. CANNINGS J: This case is about a breakdown in the relationship between a bank and two of its customers. The customers are the plaintiff, Steven Asivo, and his wife, Theresa Asivo. The bank is the defendant, the Bank of South Pacific Ltd.

2. The plaintiff has brought the bank to court as he claims that it has breached a loan agreement he and his wife entered into with the bank. The purpose of the agreement was to allow them to purchase land in the Newtown area of Madang town, Section 124, Allotment 35, on which there was an existing house, and to renovate the house. The bank agreed to provide a facility of K58,700.00, repayable over 16 years. In return a mortgage by Mr and Mrs Asivo was executed over the land in favour of the bank as security for the loan.

3. Mr Asivo says the bank has breached the agreement by not providing the full facility promised. This has left him in a difficult situation, he says, as he and his wife had already committed the funds that they were expecting to receive under the loan. He asks the court to grant the remedy of specific performance against the bank: a decree that the bank has to abide by the loan agreement and provide the balance of the facility. He also seeks damages and an order preventing the bank from evicting him and his wife from the land. He says all remedies should be granted as the bank is guilty of a breach of contract.

4. The issues are twofold:

1 Has the bank committed a breach of contract?

2 If yes, what remedies should be granted to the plaintiff?

1 HAS THE BANK COMMITTED A BREACH OF CONTRACT?

The events

5. To determine this question it is necessary to examine the train of events since the loan agreement was executed in August 2006. The first drawdown on the facility occurred on 10 October 2006 when the bank provided K30,000.00. The money was disbursed via a number of bank cheques, including one in favour of the vendor of the property for K25,417.50. Things were going according to plan at that stage.

6. However, shortly afterwards the bank discovered what it regarded as a previous bad debt Mr Asivo had with the bank, which he had not disclosed in his loan application. The bank, on 28 November 2006, wrote to Mr and Mrs Asivo demanding full and immediate payment of their indebtedness to the bank, which then stood at K34,437.57, failing which it would take such steps it considered necessary to recover the amount due, including exercising its powers as mortgagee over the land and house.

7. Mr Asivo was annoyed about this. He visited the bank’s Madang branch on several occasions to try to have the problem sorted out but was told that he had been branded an ‘undesirable customer’ due to his pre-existing bad debt. He wrote a number of letters to the bank’s asset management division in Port Moresby arguing that he understood that his previous loan arrears had been settled and that he had disclosed the loan when the housing loan application was made. The bank, however, did not change its position. It refused to allow Mr and Mrs Asivo to draw down the balance of the facility on the loan agreement.

8. In February 2007 the bank wrote to Mr Asivo advising that he owed K92,975.65 on his previous loan and that he needed to arrange regular payments by the end of that month, failing which the bank would have no option but proceed with further recovery action. In December 2007 the bank served Mr and Mrs Asivo with a notice under the mortgage, demanding payment of K32,038.86 within 14 days, failing which the bank would be at liberty to sell the property. In November 2008 the bank served them with a notice to vacate the property within seven days failing which action would be taken to enforce eviction. Such action was eventually stayed by order of the National Court.

The bank’s position

9. There was no breach of contract by the bank, the bank’s counsel, Mr Koimo, submitted. On the contrary it was Mr Asivo who was at fault, in two respects.

10. First, he failed to disclose his pre-existing bad debt when he and his wife submitted their loan application in May 2006. Mr Asivo took out a loan in 2001 to purchase a Mitsubishi truck. He failed to keep up with his repayments and the truck had to be repossessed and sold. In addition the bank redeemed an IBD but there was still money owing on the loan. Mr Asivo therefore misled the bank when submitting the loan application.

11. Secondly, it was argued that Mr and Mrs Asivo had a poor and inconsistent repayment history on the housing loan.

12. Each of those events, Mr Koimo submitted, was an ‘event of default’ for the purposes of clause 11(b), (e) and (f) of the loan agreement, which states:

Each of the following events is an Event of Default at the option of the Bank. A determination by the Bank in its absolute discretion that any one or more of the following events has occurred will be final and binding on the Borrower. The Borrower must promptly inform the Bank in writing upon the happening of any of the events described in this clause:

(b) any indebtedness or obligation of the Borrower to any person including the Bank is not paid, met or satisfied when due or becomes due and payable before its specified maturity or any creditor of the Borrower becomes entitled to declare any indebtedness of the Borrower due or the Borrower defaults under any charge or security in favour of any person. …

(e) the Borrower is unable to pay his or her debts as they fall due or is unable to certify that he or she is able to pay their debts as they fall due, commences negotiations with any one or more of their creditors with a view to the general readjustment or rescheduling of their indebtedness, or enters or proposes to enter into any arrangement or composition with their...