N4901

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO. 56 of 2012

BETWEEN

BANK SOUTH PACIFIC LIMITED
Plaintiff

AND:

ROBERT TINGKE
Defendant

Waigani: Kandakasi, J.
2012: 13th August
2012: 29th October

BANKING LAW – Banker and Customer - Personal loan - Penalty doctrine – Definition of – Freedom of contract – Genuine pre-estimate of damages for breach of contract permissible but not penalty to force compliance – Need to consider substance rather than form - Default in repayment – Default interest rate at 31.4590% – Whether that interest rate is penalty?

BANKING LAW - Person loan agreement - High interest rates – Similar rates previously struck down – Parties not in equal bargaining position - Fairness of terms and conditions of – Bank has duty to ensure client understand terms and conditions of any contract through independent legal advice – Breach of duty – Effect of - Unfair and unenforceable contract - Interest rates – Need to be reasonable – High interest rates could amount to penalty and unenforceable - Application of the relevant provisions of the Fairness of Transactions Act - Terms and conditions not reflecting binding Court decisions – Effect of –Unenforceable contract.

CONTRACTS – Freedom of contract – Law will generally uphold the free agreements of the parties – Exceptions – Doctrine of penalty – Application of - Unequal bargaining positions – Terms not explained and understood by disadvantaged party – High interest rates and penalty clause – Unenforceable contract.

EQUITY - Personal bank loan – High interest rates - Terms not reflecting relevant judicial pronouncements – Unequal bargaining position – Bank not ensuring customer seeking and securing independent legal advice and understanding of the terms of the contract – Defaulting in loan repayments – Bank delay acting on default – Interest and costs continuing to run beyond amount lent and agreed interest – Effect of – Unjust enrichment – Bank not entitled to gain from own failure.

PRACTICE & PROCEDURE – Default judgment - Application for – Two parts – Technical or procedural and discretionary – Factors for consideration - Disclosure of cause of action and sufficiency of pleadings – Claim inclusive of high interest rates and costs allowed to built up against defendant - Plaintiff duty bound to act promptly - Need to expedite final disposition of cases - Delay in bringing application for default judgment and delay generally - Effect of.

PRACTICE & PROCEDURE – Motion for default judgment seeking judgment beyond amount pleaded – Need for service of – Interest of justice requires service - Good practice to avoid future wastage of time and resources. 

Cases Cited:
Papua New Guinea Cases
 
Mapmakers Pty Ltd v. Broken Hill Proprietary Company Limited (N588)
The Government of Papua New Guinea and Richard Harold Davis v. Stanley Barker [1977] PNGLR 386
Hilary Singat v. Commissioner of Police (2008) SC910
Otto Benal Magiten v. Bernadette Beggie (No 1) (2005) N2880
Heroauka No 2 Land Group Inc v Frontier Holdings Ltd (2010) N4096
John Kunkene v Michael Rangsu and The State (1999) N191
Urban Giru v. Luke Muta (2005) N2877
Kante Mininga v. The State & Others (1996) N1458
Mapmakers Pty Ltd v. Broken Hill Proprietary Company Ltd [1987] PNGLR 78
Joseph Peng v Phillip Craig Tangney (2009) SC969
Hilary Singat v. Commissioner of Police (2008) SC910
Lina Kewakali v The State (2011) SC1091
Lepanding Singut v Kelly Kinamun (2003) N2499
Pius Sankin v Papua New Guinea Electricity Commission (2002) N2257
Papua New Guinea Banking Corporation v. Jeff Tole (2002) SC694
Philip Takori v. Simon Yagari (2008) SC905
MVIT v James Pupune [1993] PNGLR 370.
MVIT v John Etape [1994] PNGLR 596
Michael Pundari v Niolam Security Ltd (2011) SC1123
Rage Augerea v. Bank South Pacific Ltd (2007) SC 869
Credit Corporation (PNG) Limited v. David Nelson (2011) N4368
Golobadana No 35 Ltd v. Bank of South Pacific Limited (formerly Papua New Guinea Banking Corporation) (2002) N2309
Post PNG Ltd v. Yama Security Services Ltd (unreported and unnumbered judgment delivered on 26th July 2001) SCA 80 of 2000.
Teio Raka Ila v Wilson Kamit (2002) N2291
The Central Bank of PNG v. Gabriel Tugiau (2009) SC1013
Negiso Investments Limited v. PNGBC Limited (2006) N3104
Dr. Florian Gubon Trading as Gubon Lawyers v. Pacific Mobile Communication Limited (2003) N2439
Kora Gene v. Motor Vehicles Insurance (PNG) Trust [1995] PNGLR 344
The Papua Club Inc v Nusaum Holdings Ltd (No 2) (2004) N2603

Overseas Cases

Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656.
Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd [1915] AC 79
AMEV-UDC Finance Ltd v Austin [1986] HCA 83; (1986) 162 CLR 170
Andrews v. Australia and New Zealand Banking Group Ltd [2012] HCA 30
Lloyds Bank Ltd v. Bundy [1974] 3 All ER 757

Counsel:

K.R. Kawat, for the Plaintiff/Applicant
No Appearance, for the Defendant/Respondent

29th October, 2012

1.	 KANDAKASI J: Facts and Background: The Bank South Pacific Limited is seeking by notice of motion for default judgment in default of notice of intention to defend and defence to recover from one of his former customers Robert Tingke a sum of K12, 665.75 out of a personal loan of K5, 500.00. The Bank granted the loan on 27th February 2008 on terms including an 18% per annum interest rate and an "Effective Rate of Interest of 31.4590 % per annum with monthly repayments of K311.08. Mr. Tingke made repayments at the agreed rate until 17th March 2009, when he fell into arrears. 

2. The Bank did nothing about the default until about 2 years later on 18th April 2011, when it issued a letter of demand requiring Mr. Tingke to repay an amount of K8, 559.79 in full or make alternative arrangements to repay the outstanding loan within 21 days or face court action. After a lapse of almost 9 months from 18th April 2011, on 31st January 2012, the Bank issued this proceeding claiming in the writ K10, 816.02. The Bank's pleading do not disclose, how much was repaid and how much was owed when Mr. Tingke defaulted save only to note a balance of K4, 264.55 in debit carried over from somewhere when the account was placed with the Banks recovery unit. 

3.	Following service of the writ on him on 05th March 2012, Mr. Tingke failed to file and serve his notice of intention to defend and his defence. The deadline for Mr.Tingke to do so expired on 19th April 2012. Though the Bank was entitled, it did not apply for default judgment soon thereafter until the passage of a further more than 2 months, after which the Bank filed its application for default judgment on 29th June 2012 and sought to move it on 10th July 2012.

Relevant Issues

4. At the hearing of the Banks application the following main issues were presented:

(a)	Is Mr. Tingke in default of filing and serving his notice of intention to defendant and or defence?

(b)	If the answer to the first question is yes, should the Court in the exercise of the discretion vested in it, sign default judgment in favour of the Bank?

(c)	If the above questions are answered in the affirmative, should the default judgment be for a specific amount or should it be default judgment with damages to be assessed? 

5. We will address each of these issues in the order presented. However, we will deal with the first two questions as one under the broad heading of whether default judgment should be entered in favour of the Bank. Then if need be, we will deal with the last question. Otherwise a determination of the first two questions, especially if they are determined against the application, there will be no need for the Court to consider that issue. Accordingly, it will simply be left out. Accordingly, we turn to a consideration of the first two questions.

Whether Default Judgment should be signed for the Bank?
- The relevant principles

6. Whether default judgment should be entered is dependent on the following factors of whether or not: 

(a)	the writ of summons with a statement of claim endorsed thereto has been duly served on the defendant; and

(b)	the time period for filing of the defendant's defence has expired; and

(c)	the defendant has not filed and served his or her defence; and

(d)	a search of the court file has been carried out at the expiry of the deadline for the filing of the defence which has revealed no defence being filed; and

(e)	the plaintiff has forewarned the defendant of the plaintiff's intention to apply for default judgment where a notice of intention to defend has been filed,. and

(f)	the defendant has not filed and served his or her defence 

7. My learned brother Justice Cannings has in a string of judgments as in Otto Benal Magiten v. Bernadette Beggie (No 1) and Heroauka No 2 Land Group Inc v Frontier Holdings Ltd acknowledged and noted these as the first formal and or technical parts of an application for default judgment. I respectfully agree with His Honour. 

8. Once the first formal and technical part is met, the next part, whether or not to enter default judgment falls within the discretion of the Court. Whether or not that discretion should be exercised in favour of a plaintiff applicant is dependent on whether or not:

(a)	the plaintiff's claim presents a clear cause of action known to law with sufficient and the necessary particulars; 

(b)	the defendants appear to have a defence on the merits; 

(c)	other defendants have not been served with the notice of motion or the proceedings;

(d)	the entry of judgment may prejudice other defendants;

(e)	default is not extensive;

(f)	plaintiffs have prosecuted the case diligently;

(g)	entry of judgment would be contrary to the national interest;

(h)	all condition precedents such as in the case of notice of intention to make a claim against the State or the Motor Vehicles Insurance Trust Limited have been met; and

(i)	whether the statement of claim raises serious allegations of fraud or deceit, which require evidence to prove it at trial before judgment;

9. To these, I add three additional factors as separate factors although they might generally fall under the ambit of disclosing a valid cause of action. First, where there are relevant and applying legislation, whether the requirements of the legislation have been met. Where for example, a plaintiff's claim is based on a contract as in this case, the Court needs to be satisfied as to whether the terms of the contract as pleaded are fair and reasonable having regard to the provisions of the Fairness of Transactions Act 1993 or any other relevant and applicable legislation. Another good example is where the claim concerns, a contract with the State for the provision of goods and services, the Court needs to be satisfied that the requirements of the Public Finances (Management) Act 1995 have been met especially the need for public tender and Ministerial approval. The second factor is, whether the kind of cause of action or matters pleaded has been the subject of specific mention and consideration by deliberate judgments of the National and Supreme Courts and the matters pleaded demonstrate sufficient accommodation of the Courts expressions or pronouncements. Third and finally, whether the proceeding is statutory time barred under the Frauds and Limitations Act or the Wrongs (Miscellaneous Provisions) Act or any other relevant and applicable legislation. 

Application of the Principles to the Present Case 
-	Formal parts

10. In the present case, the Bank issued this proceeding on 31st January 2012 to recover parts of a total personal loan advance of K5, 500 to Mr. Tingke under a personal loan agreement entered into between them on 25th February 2008. Mr. Tingke did make some repayments before he fell into arrears sometime before 17th March 2009.
 
11. Clearly, the Bank delayed recovery action and in particular the issuance of this proceeding for almost a period of 3 years before filing and serving the proceeding on Mr. Tingke on 05th March 2012. The total amount claimed in the Writ of Summons and in particular the Statement of Claim endorsed thereto includes a substantial part of costs and interests.

12. Following service of the Writ of Summons on Mr. Tingke, he had until 05th April 2012 to file and serve his Notice of Intention to Defend. But Mr. Tingke did not do that. Conditional on him filing his Notice of Intention to Defend, he had until 19th Apil 2012 to file and serve his Defence on the Bank. That he did not also do. In the circumstances, the Bank was entitled to file its motion for default judgment and move it without first forewarning Mr. Tingke of its intention to do so. For forewarnings are only required where a defendant has filed and serve his or her notice of intention to defend.

13. If the Bank was diligent it could have moved for default judgment at the end of April 2012. Instead, the Bank filed its application for default judgment on 22nd June 2012 and did not move it until 10th July 2012, which was a further 3 months later. It seems clear to me therefore that, the Bank did not take heed of what the Courts have been saying in deliberate judgments as in the Supreme Court decision in Lina Kewakali v The State (2011) SC1091. These decisions highlight the need for plaintiffs who wish to apply for default judgment to do so promptly. A failure to observe this could result in the application being denied and the proceedings being dismissed.

14. In any case, Mr. Tingke apart from not filing and serving his notice of intention to defend and his defence, did not turn up at the hearing of the application for default judgment and take issue with this point or anything else. Apart from the timing of the application for default judgment, I find that the Bank has met all of the technical and formal procedural requirements including a conduct of the court file search which revealed no notice of intention to defend and defence. These are the first part for the entry of default judgments.

Discretionary part 

15. We now need to consider the question of whether the Court should sign default judgment in the exercise of the discretion vested in it. Where ever the Court is vested with discretion, that discretion must be exercised on proper principles and in accordance with the law. As noted already in the foregoing, past decisions of the Supreme and National Courts have effectively provided some guidance on what factors the Court should take into account in order to determine whether default judgment should be signed once a case of default in filing a notice of intention to defendant or a defence is established. 

16. Checking against the factors we have outlined in paragraph 8 above, I find that, this is a case in which no statutory time limit or a condition precedent is an issue. Similarly, I find no issue of prejudice and the need for service of the application for default judgment on any other defendants arises here. There is only one defendant out of a contract between only two parties. I also find that, this case does not concern any matter of national interest although all decisions of this Court often have national application and effect. Similarly, I find that, the pleadings do not concern any claim of fraud and or deceit, which warrant a proper hearing and determination. 

17. I do find however, that whether or not, I should grant the Bank's application is dependent on a consideration and application of the other factors enumerated in paragraph 8 above. We start that process off with a consideration of whether the pleadings disclose a cause of action known to law, with the relevant, necessary and sufficient particulars. 

18. The Bank's statement of claim makes it clear that, this is a claim for breach of contract and an action seeking to enforce a contract. But when we closely examine the pleadings, some of the relevant and necessary particulars are missing. What is clear is that, the Bank is an incorporated legal entity which carries on business as a bank and Mr. Tingke was its customer, who applied for a personal loan. The Bank approved the application and advanced on 27th February 2008 a sum of K5, 500.00 under a personal loan agreement. The Bank then pleads, "Full particulars of the Agreement will be provided in [sic] trial". This offends against the clear judgment of the Supreme Court in Papua New Guinea Banking Corporation v. Jeff Tole, which the Supreme Court in Philip Takori v. Simon Yagari endorsed. These authorities say that, pleadings of the type under consideration are no pleadings at all. Rules of pleading require all parties to plead with all the necessary and relevant particulars sufficiently and succinctly. A failure to do so comes with the risk of not being allowed to adduce evidence and ultimately a denial of a relief for which no foundation has been properly laid in the pleadings. There is a long line of Supreme Court decisions on that, starting with the decision in MVIT v James Pupune and followed by the decision in MVIT v John Etape and reinforced by later decisions such as the decision of their Honours Cannings and Yagi JJ., in Michael Pundari v Niolam Security Ltd.

19. At the same time, I find that the Bank has pleaded that the advance of K5, 500 had a weekly repayment condition of K311.08 per month with an interest rate of 18% per annum for a period of 24 months. The Bank also pleads that the total interest payable would thus be K1, 980.20 and the grand total amount payable at the end of the agreed period of 2 years would be K7, 480.20. Further the Bank pleads that, in the event of a default in the repayments, interest at 31.4590% would be charged and unspecified bank fees and charges would be added and become due and payable until the full amounts owing are repaid.

20. The Bank goes on to plead that Mr. Tingke made repayments from the date of the advance until 17th March 2009 when no more repayments were made by him. More than 2 years later on 18th April 2011, the Bank issued a letter of demand. The Bank again pleads in paragraph 10 "Full particulars of the letter will be provided in [sic] trial." Despite that pleading, the Bank goes on to plead that, the letter of demand informed Mr. Tingke that he owed the Bank K8, 559.79, which attracted an interest rate of 31.4590% per annum. Then in its writ of summons, the Bank prays for judgment in a sum of K10, 816.02 with interest at 31.4590% from the date of the issue of the Writ to date of judgment. That is in addition to interest at 8% pursuant to the Judicial Proceedings (Interest on Debts and Damages) Act and costs. However, in the motion the Bank is seeking judgment in the sum of K12, 655.75, which is not pleaded.

21. From these pleadings, it is clear that the Bank is claiming more than what it bargained for. The advance under the loan agreement was K5, 500. Interest on that was to be K1, 980.20, giving a grand total of K7, 480.20 at the end of the agreed period. Through this claim the Bank is claim a total of K10, 816.02 which is to attract an interest of 31.4590% from the date of the issue of the Writ to date of judgment and a further 8% interest on the judgment. There is a difference of K3, 335.82 plus the interest components. This amount does not allow for the K311.08 paid each month for about 13 months which gives K4.044.04, before Mr. Tingke fell into arrears. If we add this amount on, the Bank is claiming more than K7, 379.89 on top of the K7, 480.20 it bargained for at the first place plus further interest and costs. Without more, it appears clear to me that, here is a case of unjust enrichment by the Bank.

22. The Supreme Court in Rage Augerea & Maureen Augerea v. Bank South Pacific Ltd,  considered in some detail, the Banks duties and responsibilities in a loan setting. In that case, the Bank 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 the same Bank here took over. The Bank alleged that, the default came about despite alleged numerous default notices, which caused it 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.

23. On appeal from the National Court judgment, the Augereas' established to the satisfaction of the Supreme Court that, there was only one default notice; the Bank did not keep proper records of the loan account; failed to have the loan regularly reduced by the full amounts of each repayment and the Bank failed to demonstrate that the amount of interests and charges charged and added onto their account to bring to the total of K128, 380.99 allegedly owing was reasonable and fair. Further, the Augereas' demonstrated to the satisfaction of the Supreme Court that, they took serious steps toward repaying the total owing on the loan so they could redeem their property but the Bank ignored them and proceeded to exercise its mortgagee powers. In the circumstances, the Supreme Court upheld the appeal. 

24. As I noted in Credit Corporation (PNG) Limited v. David Nelson, the Supreme Court in upholding the Augereas' appeal, the Court made a number of important points. The first point the Court made concerned the Bank's duty to maintain proper records. In that respect 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 interests and application of them to a customer's account. A bank's customer usually has no control over these things. Where errors or anomalies appear, banks also have a duty to provide a satisfactory explanation for them and correct them without delay and at no costs and penalty against the customer unless the customer forced the error at the first place on the bank."

25. Secondly, the Supreme Court noted the importance of a mortgagor's right to redeem his or her property. In respect of that, the Court endorsed the summation of the relevant principles of law in my decision in Golobadana No 35 Ltd v. Bank of South Pacific Limited (formerly Papua New Guinea Banking Corporation) as follows:

"(a) 'The right of a mortgagor to redeem his property is a fundamental characteristic of all mortgagees. "Redemption is of the very nature and essence of a mortgage, as mortgages are regarded in equity. It is inherent in the thing itself."… 

(b) Equity guards jealously the right of the mortgagor to redeem and whenever it is faced with the challenge "will not permit any devise or contrivance designed or calculate to prevent or impede redemption." This accord well with the age-old principle in the law of mortgages that "Once a mortgage always a mortgage:"…

(c) There are numerous authorities dealing with clogs or fetters on the equitable right of redemption. These authorities reveal a number of principles:

(i) Firstly, a mortgage cannot be made irredeemable, and equity will not permit any devise or contrivance being part of the mortgage transaction or contemporaneous with it calculated to prevent or impede redemption…. However, there is nothing preventing the mortgagor from giving to the mortgagee by a separate transaction and independent from the granting of the mortgage an option to purchase the property…. Of course, whether the grant of the option is part and partial of the mortgage transaction is to be determined as a matter of substance rather than form. As the mere separation of the documents will not of itself affect the existence of a "clog" on the equity of redemption…;

(ii) Secondly, the right to redeem cannot be rendered nugatory or illusory;

(iii) Thirdly, in the area of "collateral advantages," the authorities do allow for collateral advantages to be given by a mortgagor to a mortgagee in consideration for a loan to him or her. Such collaterals could be upheld only if they are "not either (1) unfair and unconscionable, or (2) in the nature of penalty clogging the equity of redemption or (3) inconsistent with or repugnant to the contractual and equitable right to redeem;

(iv) Finally, there are cases that could be classified as miscellaneous areas. In these areas some authorities have shown a reluctance to uphold a covenant that seeks to clog or unnecessarily fetter a mortgagor's right of redemption. These include covenants for a repayment of a greater amount than that advanced…. Similar positions have been taken in cases containing covenants requiring a payment of a higher rate of interest upon default which may be seen as a penalty…. Other cases have indicated a preparedness to strike down covenants in mortgages that seemed to impose unreasonable time periods for late redemption…. Furthermore, some authorities have indicated a preparedness to strike down covenants which seek to prevent a mortgagor from redeeming his property on the contractual date for repayment,… and as earlier noted after the contractual date for repayment. 

(d) The right in a mortgagor to redeem exists until a contract of sale has been signed between a mortgagee and a third party in the case of a mortgagee exercising his right of sale'."

26. Applying these principles to the case before it, the Supreme Court noted that the Bank had been charging an interest rate of 17.2% per annum and changed it to 25.25 % and again to 22 % from an initial agreed rate of 6%. This amongst others substantially increased the Augereas' indebtedness to the Bank from a small amount of K25, 000 to K128, 380.99, which made no allowance for the Augereas repayments. Additionally, the Court noted that the Bank was claiming well over 100% recovery on its initial loan of K25, 000. Then specifically on the interest rates, the Supreme Court observed that:

"These interests as far as we can see, were unreasonably high and were obviously intended to penalize the Augereas rather than a reasonable arrangement for a recovery of what the Bank lent and the Augereas agreed to repay with interests and charges. As has been clearly demonstrated by what happened, these unreasonable interest rates and charges that were imposed against the Augerea's and the Bank's attitude effectively prevented the Augereas as mortgagors from redeeming their property." 

27. The third point the Supreme Court made in the Augeras' case was this. Whilst there was an agreement between the Augereas and the Bank for an application of the kind of charges and interest rates the Bank charged and imposed, it found that, "the Bank's actions did amount to a serious penalty, through which the Bank was trying to unjustly and unreasonably enrich itself over and above what was reasonably due to it." The Court went on to find that, "the default provisions and the Bank's attitude as clearly unreasonable impediments, clogs or fetters on the Augereas as mortgagors' right of redemption of their property". On that basis, the Court declared that "the interest rates and charges and the kind of attitude shown by the Bank should not be permitted, allowed or enforced in a just, fair and democratic society such as ours."

28. What the Supreme Court said was a reinstatement of a position already taken by both the National and Supreme Courts. In the matter of Post PNG Ltd v. Yama Security Services Ltd the Supreme Court stated for the first time (as far as I am aware) the doctrine of penalty in these terms:

"Damages in contract are awarded to compensate a party for loss or injury not to penalize. Damages are awarded to put the injured party in the same position, as it would have been had the contract not been breached, and it is the duty of the Court to satisfy itself that a sum to be held over a party to enforce a contract. A Plaintiff claiming under a contractual provision for liquidated damages must show that the agreement represents a genuine pre estimate by the parties of the actual loss that will be occasioned if the contract terms are met. But if the provisions can be seen to be essentially a threat over a party to secure performance of the contract, the provision will be a penalty and unenforceable.

Courts have long held that because the purpose of a penalty is to ensure compliance rather than to truly compensate, agreements for sums found to be penal will not be enforced, and the party claiming damages will be properly and adequately compensated by an award of actual assessed loss. Further, if there be provision in an agreement for a sum or sums payable on breach wholly out of proportion to the breach… the Courts will hold such provision as a penalty, as unconscionable, and unenforceable. 'A Plaintiff cannot recover the sum stated in a contract if he has not in fact suffered such loss.' (Law of Contracts Cheshire & Fifoot 2nd Edn 767)."

29. The Supreme Court went on to say that a Court dealing with a contract having a penalty provision has the duty to:

" … inquire into the matter and determine whether the provision in the contract represents a genuine pre-estimate of the damages that will occur in the event of breach, as opposed to whether the sum designated is in reality a penalty to be imposed if the contract is not carried through."

30. Many subsequent decisions of both the National and Supreme Courts have adopted and applied this principle, which includes my own decision in Teio Raka Ila v Wilson Kamit and the Supreme Court in Papua New Guinea Banking Corporation v. Jeff Tole.

31. The penalty doctrine does recognize that we live in a free society and hence a free economy. As a natural flow on consequence of that, the law does recognize and allows for the freedom of contract. Hence parties to a contract may agree to anything provided they are reasonable, fair and legal. That includes their ability to provide for any remedies for any breach of the terms of their contract. The Australian High Court decision in Ringrow Pty Ltd v BP Australia Pty Ltd elaborated well on the freedom of contract in these terms:

"The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships … Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language." 

32. Thus, the exception to the general rule namely, the doctrine of penalty will not apply provided all conditions for a valid contract are met and where such a contract provides for a genuine pre-estimate of damages for any breach and is not effectively a penalty to force compliance. His Lordship, Lord Dunedine in his decision in Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd (supra) explained that, what makes a penalty is where there is an imposition of a payment of a sum of money in terrorem of the offending party, which is to say intended to frighten, scare, intimidate or force them into performance. On the other hand, what makes true liquidated damages is that which represents a genuinely agreed pre-estimate of damages and losses which may result from the breach. The decision in the Dunlop case points out a number of matters that could indicate a penalty clause as opposed to a genuine pre-estimate of damages. These are:

(1)	the sum stipulated is extravagant and unconscionable compared to the possible greatest loss that could possibly be proven following a breach;

(2)	if the breach consists only of not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (this is the corollary of the last test); and

(3)	There is a presumption that it is a penalty (but no more) when a single lump sum is made payable on the occurrence of one or more or all of several events, some of which are serious and others are not serious.

33. Other Australian High Court decisions like the decision in AMEV-UDC Finance Ltd v Austin,added to the above test one more test. These decisions emphasis that a finding for penalty may be more likely where there is inequality of bargaining power. That is to say, if a party does not have an opportunity to truly negotiate his or her contract, then he or she does not have a choice as to whether to be subject to a penalty. Mason and Wilson JJ said, with the subsequent approval of High Court decision in Ringrow (supra):

"The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often leveled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties.

34. Very recently on 6th September 2012, the Australian High Court in a unanimous decision, in the matter of Andrews & Ors v. Australia and New Zealand Banking Group Ltd, carefully went through the history and development of the doctrine of penalty, restated and reinforced these principles and said of the penalty doctrine:

"… as the term suggests, a penalty is in the nature of a punishment for non-observance of a contractual stipulation and consists, upon breach, of the imposition of an additional or different obligation. 

In general terms, a stipulation prima facie imposes a penalty on a party ("the first party") if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party… In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation… If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation." 

35. This decision hit the newspapers and other media outlets. The case concerned various bank charges and fees. In particular, the case concerned late payment, honor, dishonor and over limit fees in respect of consumer credits and commercial credit cards. The Court of first instance held that late payment fees were penalties. However, for the other fees, the court held that they were not penalties. The ANZ Bank accepted that decision and did not appeal against the decision but the appellants appealed against the second part of the primary judge's decision. The High Court made it clear that, it is to the substance of what is claimed as a penalty the Court should be looking at and not the form. Then giving due weight and consideration to all the arguments, the decision of the primary judge and the case law on the doctrine, the High Court held that honor, dishonor, overlimit and non-payment fees could amount to penalties which are unenforceable. 

 36. Now returning to the Supreme Court decision in the Augeras' case, the Supreme Court proceeding in accordance with the above position of the law, found that the parties were not in an equal bargaining position at the time of signing the initial loan agreement and the subsequent variations to the agreement. The Court noted that, there was a serious imbalance between the parties because the Bank "had its legal and experienced loan or lending team working for it and advancing its cause whilst the Augereas were mere employees with no independent legal advice". Additionally, the Court noted that, there was no evidence of the Bank "requiring and in fact ensuring that the Augereas were legally represented or did have independent legal advice on the terms of the loan and the mortgage before accepting the loan from the Bank." Even than the Court went on to note that:

 "Even if they had legal advice, that would not have made any difference because the reality of the situation was that the Augerea's were in a no win position because the banks usually set the interest rates and terms of the loan and are usually not flexible. A customer would therefore have no choice but to accept such terms. If that was not the case, the burden was on the Bank to provide evidence of a fairly negotiated loan and mortgage, but it did not provide any such evidence." 

37. Finally, the Supreme Court took into account the implications of the Fairness of Transactions Act 1993. The Court noted that, Parliament passed that legislation out of a concern around issues of fairness and equality of parties bargaining positions during negotiations leading to agreements. The Court also noted that, the Act was considered and applied in the case of Negiso Investments Limited v. PNGBC Limited and Dr. Florian Gubon Trading as Gubon Lawyers v. Pacific Mobile Communication Limited. Then on its part the Supreme Court noted that: 

"The Act allows for a review of agreements or contracts that are considered unfair. As was observed in the second case, the Act did not introduce something that was new. It merely reinstated and reaffirmed the position at common law which has already been adopted and applied by the courts in our jurisdictions as in the case of Kora Gene v. Motor Vehicles Insurance (PNG) Trust…... Applying those principles the Courts have already struck down agreements that were considered unfair because of inequality in the bargaining powers of the parties." 

38. Applying the above principles, I found in the case of Credit Corporation (PNG) Limited v. David Nelson (supra) that, interest rates at 28% with default interest rate of 33% unreasonable when contrasted with the kinds of interest rates, Banks were prepared to give to their customers on their deposits, which the Banks use to lend out and make money. Accordingly, I decided to strike them down. I then went on to hold that, whilst the Company as a financial institution was entitled to exercise its legal right, it has an obligation to demonstrate to the satisfaction of the Court that:

"(a) terms of the chattel mortgage are reasonable and fair; and

(b) were clearly understood and accepted by Mr. Nelson; and

(c) the terms were fairly negotiated and arrived at between the parties; and

(d) the parties were on equal footing at the time of the negotiations and signing of the loan agreement; and 

(e) the steps the Company took to enforce his legal rights were fair and reasonable."

39. In that case, I found that, according to the Company's own pleadings, Mr. Nelson's actual default was K4, 299.81. That was after he had made a total repayment of K43, 579.78 from an initial loan of K37, 750.00. I was of the view that, if one worked only on the basis of the principal amount lent and repaid, Mr. Nelson fully repaid the principle amount as well as an extra K5, 829.78 which could account for reasonable interests and other charges. Notwithstanding that, the Company's own pleadings showed that an amount of over K10, 000 was added to Mr. Nelson's loan account for interests, legal costs, and other bank charges and fees. This obviously caused Mr. Nelson to be in more indebtedness than he really was and despite that, the Company still took the steps it took against Mr. Nelson. I also noted that, on the basis of the proceeding, the Company proceeded to seize Mr. Nelson's vehicle, the subject of a chattel mortgage and take possession. 

40. Give these considerations, I found that the terms of the chattel mortgage were unreasonable and they were not fairly negotiated and arrived at because there was no evidence of any such negotiation and agreement, Mr. Nelson not being allowed to have independent legal advice and a clear understanding of the terms as being fair and reasonable. I further found that, the way in which the Company went about to enforce its rights were unreasonable and unfair.

41. In this case, when the Bank's application first came before me, I raised with learned counsel for the Bank, the possible application of the decision of the Supreme Court in the Augereas' case and those that followed it and the authorities it represents. I asked in particular if the Bank took note of what the Supreme Court said in the Augeras' case and made the necessary adjustments to its terms and conditions of trade and in particular interest rates, and charges relative to its loan terms. Learned Counsel for the Bank asked for and I granted him an adjournment to seek instructions and to file additional affidavit evidence addressing these aspects. 

42. This I did, taking full cognizance of the fact that, the decision in the Augeras' case was in the context of a loan that was secured by a property mortgage. On return however, learned counsel for the Bank tried to distinguish that judgment from the present one by focusing on the difference between a personal loan which is usually unsecured and a home loan or other loans which are usually secured by a property or chattel mortgage. At the same time, learned counsel for the Bank in what I considered with respect to be a knit picking exercise that zoomed in on the Supreme Court's decision in the Augeras case dealing with an interest starting at 6%, which was the subject of changes up to a final rate of 22%, whereas in this case we are dealing with a fixed interest rate at 18% and in default 31.4590%. Learned counsel for the Bank however, did not point out to any pleading or evidence that reveals what the Bank did took serious note of the Supreme Court's decision and all other relevant decisions and took the necessary steps within its business and in particular loan terms and conditions and enforcing them. 

43. The objective behind the Bank's argument was twofold as far as I could tell. The first was to show that the interest rates were justifiably high for personal loans which are unsecured by a mortgage. The second was to distinguish and provide justification for the Bank choosing not to take heed of the Supreme Court decision in the Augeras' case. 

44. I am of the view that the key principles enunciated in the Augeras' case applies to all loan situations involving banks and other financing institutions. They also apply to all other contractual settings with appropriate modification to reflect the nature of the contracts has is evidenced in the provisions of the Fairness of Transactions Act 1993. The only part of the judgment that does not appear to apply to personal loans and other contractual settings are the points made concerning a mortgagor's right of redemption. Nevertheless, even in that case, the effect in a personal loan setting is the same. If the borrower repays the full amount of what he borrowed together with a reasonable amount in interest and costs, he or she would be free from the burdens of the loan or become free from his indebtedness to the lender. Where the loan has been secured by a mortgage, the borrower should be able to also have the additional benefit of redeeming his property that was mortgaged. Hence, I remain convinced that the decision of the Supreme Court and the provisions of the Fairness of Transactions Act applies to all situations subject to appropriate variations only as to the form but not the content or substance to reflect the different kinds of financial services, banks or financing institutions provide.

Present Case

45. In the present case, on 9th August 2012, the Bank filed the affidavit of Mr. Beven Clark. That affidavit only deposes to the loan agreement between the Bank and Mr. Tingke and how the loan account would have been settled or cleared at the end of the agreed term. Hence, the affidavit merely repeats what is pleaded and does not address the question of whether the Bank as taken due notice of the Supreme Court's decision and made the necessary adjustments to its interest rates and its conduct as a bank generally. In the absence of any expressed sworn testimony or any other evidence to point to the contrary, it is clear the Bank has chosen to ignore what the Supreme Court said specifically against it in the Augereas' case and continued to conduct its business in the way it used to as at the time of the decision of the Supreme Court. This I find is contemptuous and is a clear corporate defiance against the clear authority of the Supreme Court. Yet the Bank came back to the Courts for redress without doing something meaningfully about what the Supreme Court said in relation to its relationships with its customers especially, in a loan situation. 

46. Additionally and as already noted, the Bank does not plead, specifically how much Mr. Tingke repaid as at the time of his defaulting and how much of what he paid went to interest and how much of that went to charges and how much went to a repayment of the principal. This is necessary given that the Bank pleads (regardless of the evidence outside the pleadings) that, Mr. Tingke was making his monthly repayments from February 2008 to March 2009 at the rate of K311.08. That would mean Mr. Tingke paid a total of K4, 044.04 as at the time of his falling into arrears, leaving a balance of K1,455.96, from the principle amount lent plus the agreed interest component, which is far less than what the bank is seeking to recover.

47. There is an account statement concerning Mr. Tingke's loan account that says, a sum of K4, 264.55 was carried over from an undisclosed source on 17th March 2009. This is from an affidavit by an Aki Akasigi sworn on 29th June and filed on 2nd July 2012. Again, this affidavit does not say how much was repaid and how much was still owed as at the time of the first default, whenever that was. 

48. From the pleadings and the affidavit before the Court, it is clear that Mr. Tingke's account was placed with the Bank's recovery section on 17th March 2009. Yet the first letter of demand did not go out until 18th April 2011. That was more than 2 years from 17th March 2009. In that period, the total owing increased to K8, 401.20 on account of interests, costs and charges. Then this proceeding did not get filed until a further 8 months had passed with interests and charges continuing to run against Mr. Tingke's account. 

49. There is neither any evidence nor any pleading as to how the loan agreement was negotiated and arrived at. Similarly there is neither any pleading nor is there any evidence showing how is it reasonable or fair for the Bank to seek to recover more than 100% of what it lent, without allowing for the amounts already paid. These would go into the terms and conditions on which the Bank itself and the banking sector in PNG operate. There is neither any pleading nor is there any evidence as to how the terms of the loan in particular the interest and default provisions are fair and reasonable. Such evidence or pleading should disclose for instance the kinds of interests the Banks are giving to their customers who place cash deposits with them, which the Banks in turn use to lend to their other customers or apply to their other businesses and in most cases, make huge profits. Additionally, pleadings and evidence demonstrating how reasonable the Bank is in particular and generally the banking sector's terms and conditions of trade in PNG are by comparing and contrasting the kinds of terms and conditions that are applicable locally and internationally. Such evidence would be most relevant and necessary to answer the reasonableness question. The Bank's pleadings and evidence does not address these.

50. Further, there is no evidence or pleading that the Bank did require and Mr. Tingke did get independent legal advice and understanding of the full meaning and effect of the terms of the loan and their fairness. Indeed, I note that most prudent banks make it their business to ensure that, their clients seek and secure independent legal advice so the clients could fully understand the commitments they are about to enter into and do so fully appreciating the consequences of not delivering on their obligations. 

51. The 1974 English decision in the matter of Lloyds Bank Ltd v. Bundy, is a case on point. Relevantly after a review of previous authorities on point the Court said:

"Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on 'inequality of bargaining power'. By virtue of it, the English law gives relief to one who, without independent advise, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other."

52. Recent expression of the same principle can be accessed internationally through the internet for quick searches. A quick internet search for example, under the phrase "banks required to ensure clients get independent legal advice" or similar would produce a number of results taking the searcher to a number of sites supporting this proposition. An example of this is the following statement from the Canadian Ombudsman for Banking Services and Investigations in the context of an advanced aged woman who gave a guarantee and mortgage for the benefit of another person.

"We determined that the bank should have ensured that the client was making an informed decision. Our investigation also showed that, in similar circumstances, some banks would require the client to obtain independent legal advice so that she would fully understand her commitment. Under the circumstances, we recommended that the bank release the client from any responsibility for the two loans taken out by her daughter-in-law. The bank agreed."

 53. The need for Banks or lenders to require and ensure that their borrowers seek and receive independent legal advice is now a well accepted practice internationally. Some lenders have moved specifically to requiring such legal advice to cover the following important matters:

"1. The borrower will be entering into a loan transaction; 

2. Interest will accrue and be debited to the loan; 

3. The loan and accrued interest will be repayable on the sale of the property or when the loan term ends, or a borrower is in default for any reason other than failure to pay after the loan term ends; 

4. The borrower will have ongoing obligations under the documents (such as maintaining the property, keeping it insured, allowing regular valuations); 

5. Failure to meet borrower obligations may permit the lender to (inter alia) exercise its rights under the agreement to call for repayment of the loan, take possession of the property and sell it and claim against the borrower personally for any shortfall; 

6. The borrower may have rights under consumer credit legislation and, if so, what those additional rights and remedies may be; and 

7. As to the obligations, if any, any party might have to family members or to people who might make a claim on their estate?"

54. Sean McAnnally, suggests in his article "Lender or adviser: what is it to be?" that, such prescription by Banks or lenders may not be advisable from the Bank or lenders stand point. However, that suggestion aside, it is clear that some Banks and or lenders are taking the need to require independent legal advice not merely as a formality but a serious and an integral part of their lending business and are going out their ways to ensure that the duty is dully discharged. 

55. In PNG, the Courts have adopted and applied these principles in contracts generally pursuant to Schedule 2.2 of the Constitution, to either uphold or strike done contracts. One of the earliest cases on point is the decision of Wood's J in Kora Gene v. Motor Vehicles Insurance (PNG) Trust. In that case, the plaintiff an unsophisticated illiterate person signed a deed of release, releasing the defendant of all liabilities in consideration of a payment of K600 for solatium. The defendant sought to enforce the deed of release, which the plaintiff challenged. The Court held that the deed of release was unenforceable and refused to enforce it. In so doing, the Court reasoned that:

"Whilst parties can always talk between themselves without lawyers, in the circumstances of PNG and by virtue of the disparity of education and understanding between the plaintiff and the defendant, I must find that the parties here are not on an equal footing. The plaintiff here is at a great disadvantage. I must find it is unconscionable for a plaintiff of the nature and the sophistication of the Motor Vehicle Insurance Trust to negotiate directly with an illiterate villager without taking appropriate precautions to ensure that the villager understands his legal rights."

56. The legislature in PNG found the principles on inequality of the parties from a fairness stand point sound and enacted the Fairness of Transactions Act 1993 with fairness in all transactions or contracts that are economic or commercial in nature being at the center. Section 4 (1) of that Act in relevant parts defines the concept of fairness in these terms:
 
"… the concept of fairness relates to the principle of the just and equitable distribution to and among parties to a transaction of the rights, privileges, advantages, benefits and duties, obligations and disadvantages of the transaction in proportion and relative to a party's standing in or contribution to the transaction, and according to business principles and practices appertaining to the particular transaction in question …"

57. The next provision subsection (2) of s.4 provides that in order to determine:

"… the fairness or otherwise of a transaction, the circumstances of the parties existing before, at and after the entering into of the transaction shall be taken into account."

58. Section 5 (2) provides for four circumstances in which a transaction may be deemed unfair and not genuinely mutual, unless the parties are on equal footing. The first is where the party applying for the review "did not understand the transaction and no genuine effort was made to explain its terms to him prior to entering into the transaction." The second is where "the other party to the transaction was in such a predominant position, (whether economically, socially, personally or otherwise), that an ordinary person with the background of the applicant was not likely to exercise a true freedom of choice in relation to the transaction." The third is where "the other party had or should have had at the time of entering into the transaction or immediately thereafter information affecting the fairness of the transaction which was not disclosed to the complainant." The final circumstance is where the complainant "was mistaken in or had miscalculated the likely consequences of the mistake or miscalculation to such an extent adverse to his interests that he could not reasonably be held responsible for such consequences." 

59. As I noted elsewhere as in Dr Florian Gubon v. Pacific Mobile Communications Ltd (supra), the Act expressly states that; 

" its aim is not to depart drastically from the rule of law and of the right of the parties to contract. Rather, s.1 provides amongst others that the aim of the Act is to 'ensure the overall fairness of any transaction' in cases where the parties are not on equal footing 'for reasons of economic or other advantage' and where one of the parties is 'predominant and the other is not able to exercise a free choice.' Even if the parties are on equal footing, the aim of the Act is also to ensure that the transaction is not otherwise manifestly unfair or not genuinely mutual."

60. Most of the cases on point have upheld applications to strike down contracts on grounds of unfairness. There are at the same time, some cases in which the Court has adopted and applied the same principles and upheld the parties' agreements or contract on being satisfied that the parties were on equal footing and fully understood the terms of the contract. An example of such a decision is the decision of my brother Gavara-Nanu J., in The Papua Club Inc v Nusaum Holdings Ltd (No 2), where his Honour having considered these principles declined to find for the plaintiff. In so doing, His Honour said:

"Applying these principles to the present case, I cannot see how the plaintiff was at a disadvantage, let alone at a special disadvantage. The reason being, it had received independent legal advice that its interests in the property were not protected either by the Deed or the Sub-lease after 20th December, 2005. Yet, it took no remedial actions. For instance, it knew full well that it needed to obtain restraining orders before settlement to restrain the sale of the property or to negotiate an agreement with the second defendant for its interests to be protected in the event of the property changing ownership, but it did not. The plaintiff was advised of these options but it ignored them.

The defendants were in no better or stronger position than the plaintiff in the whole transaction because they were all represented by lawyers and were given appropriate legal advice on their respective rights in the property. This was not the case of the defendants having an unfair advantage over the plaintiff. For instance, there were no undue influences or pressures which were brought to bear on the plaintiff by the defendants. The parties dealt with each other through their lawyers on an equal footing throughout the whole transaction. There is nothing which can suggest otherwise."

61. In the case at hand, I find that, loan agreement commenced with Mr. Tingke filling out a loan application form and the another document reading vaguely as a Loan Schedule being filled out and signed off. Both these documents are annexed to the affidavit of Mr. Akasigi sworn on 29th June 2012. A further copy of the Loan Schedule also appears in Mr. Clark's affidavit sworn on 06th August 2012 as annexure "B". The Loan Schedule has a provision that requires, Mr. Tingke to read the contents of the documents before signing it. It also asked him not to sign, if there was anything in the document he did not understand.

62. There is no pleading or evidence, as to Mr. Tingke's level of education and his knowledge of how the banking system works. Similarly, there is no pleading or evidence, that the terms of the loan were fully explained to Mr. Tingke. In particular, there is no pleading or evidence of what each of the terms meant, how they would come into operation, how they would be enforced and how the fees and charges will be calculated, what would be the actual fees charges and costs, which would be added on in the event of a default or breach of any of the terms of the agreement, and that Mr. Tingke had a clear understanding of each and every term of the loan and he knowing full well of his duties and obligations, he entered into the agreement and agreed to the consequences that would follow for any breach by him of the agreement. Additionally, there is no evidence of the Bank specifically requiring and ensuring that Mr. Tingke sought and secured independent legal advice before entering into the agreement.

63. In the absence of any pleading or evidence to the contrary, it is clear to me that, the Bank with its big corporate might, entered into the loan agreement with Mr. Tingke who was a simple natural person who needed the money. I can see clearly for instance that, there was a clear need for an explanation on how the two different interest rates would work. One of them was called a "Annual percentage rate" fixed at 18% and another called "Effective Rate of Interest". In his affidavit Mr. Beven Clark tries to explain the difference between the two and why they are both needed but he does not go far enough to say, that explanation was put to Mr. Tingke and Mr. Tinke fully understand and accepted them.

64. Finally, I find that, there is neither any pleading nor is there any evidence providing a justification for the interest rate of 18% and 31.4590%. In submissions, learned counsel for the Bank submits that, these rates are justified because of the unsecured nature of personal loans and is no different to what the other banks charge. Unfortunately, there is again no pleading or evidence of the kinds of interest rates offered to customers who deposit their money with the Banks and how that compares with what the banks are charging and gain from them. Also there is no pleading or evidence of the kinds of interests the other banks are charging both locally and internationally and the justification for them. In the absence of any evidence and pleading to the contrary, I find that these interest rates are too high, unreasonable and unfair. 

65. In any case, I find that the interest rate of 31.4590% is obviously intended as a penalty for any default and not a rate agreed upon as a just compensation for the Bank missing out on its bargain. Without more, the rate is well beyond the 18% interest and is more than double that rate. When all that the Bank stood to gain at the end of the loan period was a total of K7, 480.20 which is inclusive of K5, 500.00 principal and K1980.20 interest, the default interest rate of 31.4590% and allowing that to build up over a period of more than 2 years and exceed the contracted amount of K7,480.20 can hardly be a genuine pre-estimate of the Banks damages but clearly a penalty.

66. Additionally, for a corporation like the Bank with in house lawyers and other debt recovery staff, it is hard to work out what exactly are the banks damages and costs for its various recovery actions that such a high rate of interest is warranted. A prudent bank would be careful in what costs it incurs and keep records of every cost it reasonably incurs, itemize them and produce the evidence on the basis of which a genuine pre-estimate of its damages, costs and charges would be worked out. This the Bank did not do here. The practical application of the Banks interest rates, undisclosed and unjustified costs and charges here have given the Bank an advantage far beyond what the parties may have bargained for.

Conclusion 

67. Of the remaining factors on the checklist as outlined in paragraph 8 above, I first find that the plaintiff's claim presents a clear cause of action known to law which is one base on contract. However, it lacks specific pleadings with sufficient particulars going into the fairness of the contract at the negotiation, agreement, performance or giving effect to the agreement stages and enforcement following default in repayments by Mr. Tingke. 

68. Secondly, although there is no defence been filed and serviced for or by Mr. Tingke, it is obvious that, Mr. Tingke appears to have some good defence to the claim against him. He could raise the defences of say unfairness, not being on equal footing with the Bank and not being able to clearly understand the terms of the loan agreement and how they were going to work and the default provisions and actions based on that amounting to a penalty which is unenforceable. 

69. Thirdly, I find that there can be no issue on notice or service of the writ of summons on Mr. Tingke as there is an affidavit of personal service on him on 5th March 2012. The same cannot however be said of the notice of motion seeking judgment. Whilst I appreciate that in the past some plaintiffs may have been permitted to proceed with their application for default judgment where a notice of intention to defendant has not been filed, without first filing and serving the application for default judgment, I am of the view that the principles of natural justice which are well entrenched in our Constitution require that notice of the application for judgment be still drawn to the attention of a defendant who has not filed and served, a notice of intention to defend and a defence. This is necessary if not for anything else, to at least let the defendant know of what is next happening in relation to the proceedings against him or her. This would give a defendant the opportunity to raise any issue that goes into the substantive merits of the case. I consider, this to be a natural consequence and follow on from the principles of natural justice and more so, in the interest of the ensuring that the Court is able to do justice on the substantive merits of the case rather than on compliance or non compliance of the rules of the Court alone. A recent statement of those principles is in the following terms in the Supreme Court decision in Philip Takori v. Simon Yagari (supra):

"12. We are aware that, many defendants and their lawyers have been filing their defence and have taken further steps in many proceedings in violation of the clear requirements of the law. At the same time, we note that, there is a large body of case authority such as the decision of the Supreme Court in Public Officers Superannuation Fund Board v. Sailas Imanakuan…which say that, the rules are only a means to an end and not an end in themselves. In other words, the Courts should be looking at doing justice on the merits of the case and not necessarily on the compliance or non compliance of the rules. However, we are of the view that, that issue can only arise when, a party is properly applying for and does make out a case for a dispensation of the strict compliance of the rules pursuant to O 1 r 7 of the Rules." 

70. From a case management view point, giving a defendant such additional opportunity, would help avoid the extra time, money and effort that could be outlaid by the parties as well as the Court in an application for a set aside of a judgment entered in default of a defendant's notice of intention to defend or defence and its flow on consequences. It therefore makes both economic and justice sense to ensure that a defendant is served with an application for default judgment. 

71. Here the Bank did not address the issue of serving its application on Mr. Tingke. In the absence of any evidence or address on this, it is clear that Mr. Tingke was denied the opportunity be made aware of the application against him, and if he so chooses, appear and be heard before judgment. There is also peculiar aspect about the motion in this matter, which necessitates the need for service of the same on Mr. Tingke. The motion is seeking judgment in the same of K12, 665.75, whereas the writ of summons claims K10, 816.02, which is in turn not the amount of K8, 559.79 the bank claimed was owing to it in its letter of demand dated 18th April 2011. Of course the Bank would argue that the differences in these figures are the interests calculated and added on. If this is so, the Bank should have in fairness said how much in interest and costs were running each day in its letter of demand against the account, but it did not. Hence, a service of the motion on Mr. Tingke was necessary so he could have the opportunity to be heard on the ever changing figures before there could be final judgment.

72. Another reason to serve the application for default judgment on a defendant is the fact that, default judgments are not automatic. They are subject to proper application, judicial consideration and decision. It thus makes sense to serve an application for default judgment on a defaulting defendant, who could have the opportunity to be heard if such a defendant so wishes. This would enable the Court to hear from the affected parties, consider all of the relevant factors in play and then come to a final decision. A failure will only result in separate applications for set aside of default judgment and the other flow on consequences as I mentioned already not being avoidable, thereby taking up the courts time more than once.

73. Fourthly, I find that Mr. Tingke's defaulted in filing and serving his notice of intention to defend and defence on 6th April 2012 following service of the writ of summons on 5th March 2012. Up to the date of filing of the notice of motion for default judgment on 29th June 2012, Mr. Tingke was in default for only two months. This must be contrasted with the total period of time almost three years allowed to pass and more seriously allowing interests, costs and charges to accumulate against Mr. Tingke by the Bank, in a way that has not been fully disclosed and justified by the Bank, and yet it seeks judgment inclusive of the amounts thus allowed to be built up. In other words, the Bank has not exercised its rights under the loan agreement diligently and in a way that was aimed at minimizing costs and interests to both parties. Instead, by its own conduct, the Bank allowed costs and an interest to build up over and above the funds it lent and was to recover with the agreed amount of interest. That in my view the Bank did, to its own detriment and would be most unfair to allow the Bank to gain from its own failure. 

74. Fifthly, in the absence of any evidence to the contrary, I find that the whole loan transaction and its eventual default and enforcement steps taken by the Bank most unfair. The Bank and Mr. Tingke were not on equal footing. The Bank did not allow and ensured that, Mr. Tingke sought and secured independent legal advice as to the fairness of the terms of the loan and his obligations and the consequence that would follow if he breached the loan agreement. 

75. Finally, I repeat my earlier finding that, the Bank failed to take heed and then appropriately accommodate in its business the meaning, effect and application of the Supreme Court decision in the Augereas' case and the cases that have since followed it. Similarly, I find that the Bank has not observed and did not conduct its business with its customer in accordance with the requirements of the Fairness of Transactions Act 1993.

Decision on the Application

76. Having regard to all of the above, and in the exercise of the discretion vested in this Court, I decline the application for default judgment. Accordingly, I order a dismissal of the application and I order that this matter be place on the directions hearing list for further directions as to the further conduct of the proceedings in the light of this decision. The matter is thus listed for direction hearing on 20th November 2012 at 9:30 am.

77. Ordinarily costs would follow the event, that is to say the Bank should pay Mr. Tingke's costs. However, since, Mr. Tingke did not participate at all, the Court orders the Bank to bear its own costs.

_____________________________
K. R. Kawat: Employer In House Lawyer for Plaintiff 
No Appearance for the Defendant/Respondent