Pija Grannies Limited and Rex W Embahe v Rural Development Bank Limited (2011) SC1327

• Jurisdiction: Papua New Guinea
• Court: Supreme Court
• Judge: Kandakasi J, Cannings J, Kawi J
• Judgment Date: 02 September 2011
• Citation: (2011) SC1327
• Judgment Number: SC1327
• Year: 2011
• Docket Number: SCA 149 OF 2010

Full Title: SCA 149 OF 2010; Pija Grannies Limited and Rex W Embahe v Rural Development Bank Limited (2011) SC1327

Supreme Court: Kandakasi J, Cannings J, Kawi J

Judgment Delivered: 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...