N2439

PAPUA NEW GUINEA

[National Court of Justice]

OS 163 of 2002

BETWEEN

NEGISO INVESTMENTS LIMITED
Plaintiff

AND

PNGBC LIMITED
Defendant

Waigani	:	Sevua, J
2002		:	10th April &
2003		:	26th June

EQUITY – Mortgage – Default in loan repayment – Auction of property – Delay in executing contract of sale – Occupation by purchaser pending sale of property – Mortgagor forced out of property before conclusion of sale – Sale not concluded and property offered for tender again – Mortgagor’s loan amount continued to attract interest.

MORTGAGE – Mortgagee’s exercise of power of sale – Duty of mortgagee – Transaction and or dealing by mortgagee (bank) – Whether dealing unfair to plaintiff mortgagor.

Fairness of Transaction Act 1993

Cases cited:
Cuckmere Brick Co. Ltd v. Mutual Insurance Limited [1971] Ch. 949
McHugh v. Union Bank of Canada [1913] AC 299 adopted and applied.

Counsel:
B. Andrew for Plaintiff
I. Shepherd for Defendant

26th June 2003

SEVUA, J:	By originating summons, the plaintiff claims a declaration that the dealings of the defendant with the plaintiff in exercising its powers as mortgagee under securities taken, are not genuinely mutual and manifestly unfair to the plaintiff within the meanings of those terms as provided in Sections 4 and 5 of the Fairness of Transactions Act 1993 (the Act).

The factual circumstances of this case are particularized in the original summons, which I set out hereunder.

On 16th June 1999, the plaintiff obtained a loan in the sum of K600,000.00 from the defendant. By way of security, the defendant took registered mortgages over the plaintiff’s properties described as Section 15 Allotment 16, Lae, Morobe Province (Lae property) and Section 61 Allotment 6, Hohola, National Capital District (Port Moresby property). By February 2001 the plaintiff was in default. On or about 24th August 2001, the defendant exercising its power of sale under the mortgage, auctioned the Lae property and sold it to Motorist Discount Center Limited. Motorist Discount took possession of the property thereby dispossessing the plaintiff. The sale was not completed so the defendant advertised the property for sale again on 13th March 2002. The defendant did not inform the plaintiff that the sale of the property did not go through until 21st February 2002. In November 2001, the defendant exercising its power of sale, sold the Port Moresby property.

The plaintiff claims that by allowing Motorist Discount Centre to take possession of the Lae property when the plaintiff could have remained in possession until sale, and by not diligently pursuing completion of the sale or some other sale within a reasonable time, the defendant has acted unfairly and to the detriment of the plaintiff in the following circumstances:

(a)	the proceeds of the sale of the Lae property would have been applied to the balance of the plaintiff’s loan account with the defendant.

(b)	having been dispossessed, the plaintiff was deprived of his income from the Lae property and the opportunity to apply that income to the reduction of his loan account with the defendant.

(c)	notwithstanding that the defendant had taken possession of the Lae property, it continued to charge the plaintiff with penalty interest under the terms of the loan agreement

(d)	in November 2001, the defendant exercised its power of sale of the Port Moresby property notwithstanding its unfair dealings with the plaintiff in respect of the Lae property.

The plaintiff also claims an order that the Court make a mediated order pursuant to Section 7 of the Act, however, in the event that a mediated settlement fails under Section 7, an order between the parties as the Court thinks conforms with Section 4 of the Act having proceeded to review the dealings between the parties in accordance with Section 8 of the Act. Finally, the plaintiff claims an order for costs against the defendant.

It should be noted that the hearing date, 10th April, was for OS 118 of 2002 between the same parties, however the parties had agreed to the terms of a consent order in that proceeding, which the Court sanctioned and therefore this matter was then brought up by consent as it involved the same parties and counsel. 

At the hearing, the plaintiff sought to cross - examine the defendant’s witness, Wayne Thistlethwaite, who had sworn an affidavit in OS 113 of 2002, and the defendant had agreed to that course. The basis for that was because the plaintiff was seeking a review of the whole of the dealings of the defendant with the plaintiff in respect of the foreclosures undertaken by the defendant bank. In OS 118 of 2002, the plaintiff does not impeach the sale of the Port Moresby property as it understands that the debt must be extinquished. However, the plaintiff contends that the sale of the property must also be scrutinized. In the present proceedings, which relates to the property in Lae, the plaintiff seeks to review the manner of the exercise of the power of sale by the bank as mortgagee.

The evidence in relation to the primary facts is not in dispute except the evidence relating to the Lae property following the auction.

The defendant’s evidence is this. On 12th March 2002, Wayne Thistlewaite swore an affidavit. In that affidavit, he said since 17th March 2002, the Lae property had not yet been settled although it was "purportedly" sold for K425, 000.00 on 24th August 2001. The then purchaser, Motorist Discount had paid a 10% deposit of K42, 500.00, which had since been forfeited to the defendant because the sale was not completed. The contract between the defendant and Motorist Discount was subsequently terminated.

Mr Thistlewaite also said the property has been re-tendered and that more than K380, 000.00 had been offered and negotiations were proceeding. In respect of the sale to Motorist Discount, he said the defendant had never granted possession to the purchaser and did not give notice to the plaintiff to vacate the property.

It is the evidence of the defendant that the loan to the plaintiff was approved in June 1999, however, it was not drawn until August 1999. The first repayment fell due in September 1999 but the plaintiff did not make any payment. The state of the loan at the time of trial was close to K1.2m.

In cross examination, Mr Thistlewaite said he did not have a statement of account of the plaintiff’s loan account although he had one prepared about four weeks prior to trial. Although the plaintiff requested a statement of account, the defendant did not supply it but instead provided the loan balance. At the time the property was auctioned, the balance of the loan was approximately K1.1m, however, it had increased to K1.2m. The deposit of K42,500.00 paid by Motorist Discount had reduced the debt by that much. In addition to that, approximately K25,000.00 was taken out from the plaintiff’s Port Moresby account.

On 5th November 2001, Motorist Discount took out an advertisement in the Post Courier in respect of the Lae property indicating it had taken possession of the property. However, the defendant said it did not execute the contract until 9th December 2001. The deposit was paid on 27th August 2001 in terms of the auction. The defendant did not know that the plaintiff had vacated the property until February 2002. The defendant denied permitting Motorist Discount to take possession at the time the contract was executed except that Motorist Discount should insure the property. However, it appeared that despite that, Motorist Discount had already put its own security personnel at the property. The defendant denied telling the plaintiff to vacate the property, in fact, the defendant said, it informed the plaintiff to move back into the property when it discovered that the property had been vacated.

When asked why the defendant had from August to December 2001 failed to do anything, Mr Thistlewaite responded by saying that Ministerial approval took months and in addition the procedure had delayed the execution of the contract for nine months after the auction. He said when dealing with mortgaged properties, it takes months not weeks.

After the defendant’s evidence, counsel for the plaintiff, Mr Andrew, informed the Court that he wanted to call the principal of the plaintiff company to give evidence. Mr Shepperd for the defendant objected to this so the Court heard preliminary submissions at that stage, relating to questions of law raised by the Fairness of Transactions Act. The submissions covered the definition of "transaction" and the defendant’s exercise of its mortgagee’s power of sale.

Having heard counsels’ submissions, the Court overruled the defendant’s objection on the basis that the issues raised were issues of law and the Court was of the view that those issues would be addressed after all the evidence have been adduced. The Court then directed the plaintiff to call evidence in respect of OS 163 of 2002.

The plaintiff’s evidence came from Iffysoe Segeyaro, the proprietor of the plaintiff company. He was aware of the auction of the Lae property in August 2001.

The plaintiff operated a Night Club at the Lae property. The Night Club had been refurbished so on the night of the Friday the property was auctioned, the plaintiff had arranged a major launching of the re-opening of the Club by Nau FM. On the night of the next day, Saturday, Kuima Security moved its security personnel into the property and the security guards started harassing the patrons of the club by restricting their movements in and out of the club. Patrons were told by Kuima Security guards that the property had been purchased so they (patrons) should not cause any problems at the premises.

When this was relayed to Mr Segeyaro, he telephoned Mr Thirstlewaite sometime in the week following the commencement of Kuima Security operations and complained about the involvement of that security firm and the harassment. Mr Thirstlewaite advised the plaintiff that Kuima Security should not be at the property and that he would get assistance from The Professionals. The plaintiff said that the operation of the club was affected by the harassment of Kuima Security. Patrons telephoned the plaintiff and expressed concerns and annoyance at the kind of harassment they were being subjected to.

Following that telephone conversation with Mr Thirstlewaite, the plaintiff expected the defendant to do something about the complaint however, the defendant did nothing to resolve the problem so the plaintiff decided to close its business and vacate the property. The other reason for closing was that the property was being sold. After closing its operations and vacating the property, the plaintiff did not contact Mr Thirstlewaite again. The property was vacated about end of August 2001.

The Court has not been assisted by the defendant despite a direction that counsel file written submissions by 16th April 2002. Instead only the plaintiff filed its written submissions on 17th April 2002, and the Court is indebted to Mr Andrew, counsel for the plaintiff.

As I alluded to earlier, the facts are not in dispute except the possession of the Lae property after the auction in August 2001. However, having heard the witnesses and observed them, I prefer the evidence of Mr Segeyaro. The defendant through Mr Thirstlewaite, knew of the presence of Motorist Discount on the Lae property on the night after the launching and the re-opening of the Night Club operated by the plaintiff at the Lae property. Mr Thirstlewaite undertook to do something about the presence of Kuima Security, but failed. If the Court were to accept his evidence, the Court would also accept that it was his obligation to ensure that the plaintiff remained in the property and that Kuima Security ought to have been removed. The plaintiff complained about Kuima Security so he knew about it. He did nothing and eventually, the plaintiff was forced out of the property.

The conduct of the defendant through Mr Thirstlewaite clearly demonstrated its indifference to the progress of sale of the property in question. It must however affect the rights of the mortgagor and I accept the plaintiff’s submissions on this aspect. The evidence is not in dispute. The property was auctioned in April 2001. Motorist Discount paid the usual 10% deposit of K42, 500.00. The defendant was obliged to enter into a written contract with the purchaser immediately thereafter, however such a contract was not entered into until December 2001, eight months after the auction. I cannot accept Mr Thirstlewaite’s evidence that this was normal and that the delay was due to ministerial approval. The fact is, he gave no evidence whatsoever as to his efforts in pursuing ministerial approval. I do not accept that the delay of four (4) months in executing a contract of sale is normal. In my view, such a conduct amounted to a complete disregard for the defendant’s duty to the plaintiff as mortgagor. As Mr Andrew puts it, that is a demonstration of Mr Thirstlewaite’s indifference. I accept that submission. The indifference also relates to the fact that the defendant had never furnished to the plaintiff a statement of the loan account except the balance at one stage. Mr Thirstlewaite conceded that. The Court wonders whether there was conspiracy by the bank.

The plaintiff’s counsel has made a number of submissions in respect of the law, especially the Fairness of Transactions Act 1993. At this juncture, I should say that there is no decided case relating to this legislation and the Court has not been referred to any precedent under a similar law in other jurisdictions. However, the Court’s attention has been drawn to an article, "Fair Trading in Papua New Guinea" by Owen Cox, former Senior Lecturer, School of Business, Pacific Adventist University, reported in the January 2001 edition of the Australian Law Journal, pp 53 – 66, which also appears in the June 2001 issue of Lawtok.

The preamble to the Act states:

"Being an act relating to the effect of certain transactions, to ensure that they operate fairly without causing undue harm to, or imposing too great a burden on, any persons, and in such a way that no person suffers unduly because he is economically weaker than, or is otherwise disadvantaged in relation to, another person."

For reasons that will become apparent later in this judgment, it is significant to quote some provisions of the Act and I start by referring to Section 1 of the Act which provides the purposes of the Act.

1.	Purposes of Act

The purposes of the Act are to –

(a)	ensure the overall fairness of any transaction which –

(i)	is entered into between parties in circumstances where one party is for reasons of economic or other advantage predominant and the other is not able to exercise a full choice; or
(ii)	for one reason or another, without attaching any evil design or bad faith, appears to be manifestly unfair or not to be genuinely mutual; and

(b)	allow for the re-opening of any transaction irrespective of fault and validity, enforceability or effect of any agreement; and

(c)	ensure the fair distribution and adjustment of rights, benefits, duties, advantages and disadvantages arising out of a transaction.

Section 3 of the Act provided some definitions that are relevant to this case. "Party" in respect of a transaction means a party to the transaction and includes a person who –

(a)	derives or derived or is entitled to or was intended to derive any right or benefit from the transaction; or
(b)	suffers, or has suffered or may suffer any disadvantage or loss from the transaction; or
(c)	has undertaken or may undertake any duty as a result of the transaction.

"person" includes a company, corporation, or a group of persons whether incorporated or not.

"transaction" means any contract, promise, agreement, dealing or undertaking of an economic or commercial nature whether supported by consideration or not entered into between parties, and includes –

(a)	an informal, complete or incomplete transaction; and
(b)	a transaction governed by customary law;

but does not include -

(c)	…………………………
(d)	…………………………
(e)	…………………………
(f)	…………………………

Mr Andrew has made submissions in respect of the definition of "transaction", and in particular, the words "dealing" and "undertaking" appearing in that definition. I consider it imperative and pertinent to this case that the Court should consider these terminologies in the light of the whole contract between the parties from the advancing of the loan favourably to the plaintiff by the defendant to the auctioning the property, the subject of the advance. On that basis, it is my opinion that the Act applies to the circumstances of this case.

The plaintiff’s counsel has also made a submission on the exercise of power of sale by the mortgagee, which the Court considers to be relevant to this case and I will revert to the case law on this submission later.

In considering the applicability or otherwise of the Act to this case, the facts which are undisputed need to be reiterated. From the affidavit of Mr Thirstlewaite sworn on 12th March 2002 the Court accepts the following. The defendant bank advanced the sum of K600,000.00 to the plaintiff on 16th May 1999. The defendant’s security over that loan were two registered mortgages over properties described as Section 15, Allotment 16, Lae, Morobe Province and Section 61, Allotment 6, Hohola, National Capital District. It is my view, and I so accept the position that, the advance of the loan to the plaintiff by the defendant and the subsequent taking of the security over the plaintiff’s properties are transactions within the meaning of the definition of "transaction" in s.3 of the Act.

It was further submitted that the realization of the assets by the defendant bank as mortgagee are "dealings" within the meaning of the definition. It is contended that the word "dealing" in the definition of "transaction" ought to be given its ordinary meaning, which in the Compact Oxford Dictionary means conduct or transactions. It is further submitted that a dealing to be "entered into" by the parties in terms of the definition does not convey the legal meaning of entered into as indicating the making of a contract because under the definition of transaction, a contract or agreement or dealing need not be supported by consideration. Mr Andrew further submitted that the word dealing is inserted in the definition of transaction to broaden the scope of transactions affected and for the same reason "undertaking" is included. The plaintiff further submitted that within the meaning of the definition, the realization of the Lae property is a "dealing" under the Act. It is also a dealing connected with and inseparatable from the taking of the security, and the taking of the security clearly is a transaction within the meaning of the Act.

The plaintiff relies on Cuckmere Brick Co. Ltd v. Mutual Finance Limited [1971] Ch. 949 as the starting point of modern authorities in respect of the exercise of power by the mortgagee. There is a discussion on the exercise of power of sale as a remedy of a legal mortgage under s.101(1) of the English Law of Property Act in Pagent’s Law on Banking, 11th Edition at p.609. The English provision is quite similar to s.68 of our Land Registration Act, Ch. 191.

In dealing with the English Law of Property Act, I cite a passage from the text alluded to at p.610 which I want to adopt and apply as the law here pursuant to Constitution, Schedule 2.2 because I consider it relevant to this case.

"The mortgagee exercising his power of sale has to take a certain care. This is not a duty that is imposed by the LPA but a duty which has been imposed by the courts faced with complaints by various parties about the way sales have been conducted. It is clear that it is not a fiduciary duty and that the mortgagee is perfectly entitled to look at its own interest but at the same time a balance has to be struck between the mortgagee’s concern to recover the outstanding debt as soon as possible and the interest of the mortgagor in seeing that a full price is obtained." (my own emphasis)

The text which I have cited refers to authorities that a mortgage has certain duty of care in exercising his power of sale although this is not a fiduciary duty. There is therefore an obligation on the mortgagee to act in good faith. Cross, LJ in Cuckmere Brick Co. Ltd (supra) referred to a statement in McHugh v. Union Bank of Canada [1913] AC 299 at 311 where Lord Moulton in delivering the opinion of the Court said:

"It is well settled law that it is the duty of a mortgagee when realizing the mortgaged property by sale to behave in conducting such realization as a reasonable man would behave in the realization of his own property, so that the mortgagor may receive credit for the fair value of the property sold."

It is obvious in my opinion that the case is authority for the proposition that a mortgagee, when exercising his power of sale, owes a duty to the mortgagor to take reasonable care to obtain a proper price for the property he (mortgagee) is selling. I adopt that statement of the law and apply it in the present case. I consider that Papua New Guinea Banking Corporation as the mortgagee had a duty to the plaintiff in the sale of the Lae property. That duty includes the duty to ensure that a proper value was received for the property so that the plaintiff’s debt be reduced. I find that the defendant failed in that duty and the provisions of the Fairness and Transactions Act must therefore be applied in favour of the plaintiff although I hold that, that duty is not a fiduciary one.

On the basis of the evidence before me, I find that the defendant through Mr Thistlewaite, acted in breach of the duty I have alluded to. The plaintiff was forced out of the property because of the mortgagee’s right to foreclosure, but the sale of the property did not proceed within a reasonable time, and as it were, the contract of sale did not proceed at all. I have already rejected Mr Thirstlewaite’s evidence that the delay in ministerial approval was normal. The defendant failed to inform the plaintiff as to the progress of sale. Even before repossession of the property, the plaintiff had complained about a security firm’s harassment of patrons of the Night Club, but the defendant did nothing to resolve that. Some of those issues are not inadvertence, but a lack of good faith.

One important aspect of this duty to the mortgagor is that the balance of the loan continued to increase when the plaintiff could have been permitted to remain on the property and continue to trade so that the proceeds of its business could be applied to reduce it’s debt. The contract of sale with Motorist Discount Center did not take place until four months after its offer was accepted by the defendant. That was quite unfair to the plaintiff because it meant, the plaintiff missed out on income which would have reduced its debt.

However more so, I consider that Mr Thirstlewaite did not conduct himself as if he were selling his own property, which is consistent with his duty in accordance with the principles of law I have adopted from the English authorities cited. The defendant accepted an offer in August 2001. Then the contract collapsed and the property was offered for sale again on 13th March 2002. At the time of trial (April 2002) that offer was being negotiated.

The plaintiff has also asked the Court to consider the transaction in respect of the Port Moresby property. The evidence of Mr Thirstlewaite is that the notice to vacate the property at Hohola was signed on 23rd January 2001 and served on 24th January 2001, however the contract of sale was not entered into until 20th November 2001. Again, the plaintiff could have been allowed to remain in the property to trade so that its debt could be reduced until such time the sale of the property was approved. I consider the action of the defendant therefore to be quite unfair in these circumstances.

Having considered the evidence and the overall circumstances in which the two properties were sold, I am of the view that the defendant bank’s conduct was unfair within the meaning of the Fairness of Transactions Act 1993. Section 5 (1) of that Act grants a discretionary power to the Court to review where the Court is satisfied that the transaction was not genuinely mutual or was manifestly unfair to a party.

I am satisfied that both the sale of the Lae property and the Port Moresby property were not diligently pursued by the defendant with a fair result that the proceeds of the sale would have been credited to the plaintiff’s accounts to reduce its indebtedness. The defendant has failed to explain why it was not prudent and/or reasonable for the sale to proceed as soon as it accepted the bid on both properties. Instead, it allowed time to run which I find to be very unfair to the plaintiff. In the case of the Lae property, the contract was executed four months after Motorist Discount’s bid for the auction was accepted. In the case of the Port Moresby property, the contract was executed approximately 12 months after the plaintiff was evicted from the property.

In both transactions relating to both the Lae and Port Moresby properties, I find that the defendant bank was in a predominant position economically that its conduct in the exercise of its power under the mortgages was unfair to the plaintiff, whose principal was weak financially, and not well educated and lacking in any business acumen and indeed commercially naïve. It is the opinion of the Court that the defendant bank was in such a predominant position economically that its dealing with the plaintiff can only be concluded as unfair under the Fairness of Transactions Act. I do not find that the defendant’s exercise of power of sale under the mortgages was unlawful, however, it is my opinion that the defendant’s overall conduct under the veil of foreclosure amounted to an unfair transaction which is subject to the Court’s power of scrutiny under the Act.

Pursuant to s.1(b) of the Act, the Court has to re-open and review any transaction irrespective of fault and validity, enforceability or effect of any agreement. Because I consider that the conduct of the defendant was unfair under the Act, the Court has power to review the transactions. I find that under s.5 of the Act, the transactions, ie., exercise of the power of sale, was manifestly unfair to the plaintiff. I am satisfied that the plaintiff has shown that the defendant bank was in such a predominant position economically. This Court therefore considers that a mediated order under s.7 of the Act is necessary and this must be done in the first instance. The parties will therefore have to negotiate an amicable settlement.

In saying what I have alluded to, the Court is mindful of the effect such a decision will have on the defendant and the purchasers of the properties in question. I have been referred to Owen Cox’s paper, ‘Fair Trading in Papua New Guinea’ (supra) and I agree with the learned author that "fairness" in the context of the Act means "weighing the respective bargaining positions of the parties, something that is expressed in s.4………." of the Act. Whilst I do not think the Court’s power is really a rewriting of the contract between the parties, the Court nevertheless has the power to determine if there has been unfairness in any transaction between the parties. If the defendant says the Court is rewriting the terms of the Contract, then so be it. After all the Act grants the power of review to the Court where there has been unfairness, and the purposes of the Act are quite clear.

In my view, where one party is in such a predominant position, for example, Cox refers to a situation where a big business is dealing with small Papua New Guinean traders and there is unfairness in the transaction, the Court must be able to review the transaction and remedy the unfairness. Banks and corporate entities with huge financial and other resources are economically powerful and are at greater advantages and thus it is the opinion of this Court that, they must act fairly when dealing with people or business entities that are weaker in economic or financial powers. In the present case, I find that the parties are not on an equal footing and that the plaintiff was at a greater disadvantage.

I consider that the plaintiff in the present case is a party who is entitled to, or have the right to seek a review and the procedure is set out in s.7 of the Act. For the reasons given, I am of the view that the parties in these proceedings must explore mediation in an effort to arrive at an amicable settlement by virtue of s.7(1) of the Act. If mediation fails then the parties will have recourse to s.4 of the Act, which provides the Court with powers to make such other order which conforms with that provision.

I believe there is merit in the plaintiff’s application for a review because of the great disparity and unfairness that I have adverted to in this judgment. When one looks at the whole conduct of the defendant bank, it is not difficult to conclude that there was unfairness. The bank had exercised its power of sale which is correct in law, however, it has a duty to the plaintiff mortgagor. That duty in my view includes the duty to act fairly and quickly in finalising the sale of the repossessed properties so that the plaintiff’s indebtedness is reduced or extinguished. Apparently, that duty was not discharged in a fair manner because the plaintiff was evicted and the properties repossessed, however, the debt continued to increase, because of the inordinate delay by the defendant in finalising the contracts of sale.

For all these reasons, I order that parties explore mediation in pursuance of s.7(1) of the Act so that an amicable settlement is arrived at within 30 days of today’s date. If that fails, the plaintiff is at liberty to proceed under s.8 of the Act.

I order the defendant to pay the plaintiff’s costs of these proceedings.
________________________________________________________________________
Lawyer for Plaintiff		:	Maladinas
Lawyer for Defendant		:	Blake Dawson Waldron