Gahuku Traders Ltd v Yondu Coffee Producers Ltd [2018] PGNC 280; N7396 (25 May 2018)

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AND:
MICHAEL GOTAHA (in his capacity as Managing Director to the First Plaintiff)
Second Plaintiff

AND:
ALEX KAVIE (in his capacity as Managing Director to the First Defendant)
Second Defendant

CONTRACT LAW – Agreement for loan – oral agreement between the lender and borrower – whether there was agreement for the borrower to repay the loan at compound interest rate of 20% per annum payable on monthly basis – whether the term of repayment based on 20% per annum payable monthly is unfair in the circumstances.

Acting Public Prosecutor v Uname Aumore [1980] PNGLR 510
Belden Norman Namah v Peter O’Neill (2015) SC 1617
Dr. Florian Gubon trading as Gubon Lawyers v Pacific Mobile Communications Ltd (2006) N3104
Jay Mongo Pty Ltd v Steamships Trading Co. Ltd [1995] PNGLR 129
Kora Gene v. Motor Vehicles Insurance (PNG) Trust [1995] PNGLR 344
Ludger Mond v Jeffrey Nape (2003) N2318
Negiso Investments Limited v. PNGBC Limited (2003) N2439
Putput Logging Pty Ltd v Philip Ambolis [1992] PNGLR 159
Rage Augerea v Bank South Pacific Ltd (2007) SC 869
Re Application by Dr. Philip Kereme (2017) SC 1600
Spirit Haus Ltd v Robert Marshall (2004) N2630
Waghi Security Service Pty Ltd v John Tenlon & Anor [1994] PNGLR 138
Wamena Trading v Civil Aviation Authority (2006) N3058

1. YAGI J: This is a judgment on a claim by the plaintiffs against the defendants for interests deriving from a loan pursuant to an oral agreement.

2. The plaintiffs claim that pursuant to agreement the first defendant was advanced certain amounts of money in 2006. The terms of the agreement required the first defendant to repay the loan moneys at the rate of 20 percent (20%) interest per annum. The interest is to be calculated and paid on monthly basis.

3. I note at the outset it is trite principle in law that in civil proceedings the plaintiff bears the onus of proving his claim on the balance of probabilities which is consistent with the entrenched principle in law that he who alleges has the responsibility to prove it on the required standard of proof.

4. Pursuant to directional orders issued in the course of the proceedings the parties have filed statement of agreed and disputed facts and issues for trial as well as their respective affidavits which they intend to rely upon at trial.

5. The statement of agreed and disputed facts and issues was filed on 05 March 2018. I consider it important and necessary to adopt the statements to assist in my deliberation of the issues in dispute. I set them out below -

(1) Mr. Alex Kavie and Mr. Alex Kehana approached Mr. Michael Gotaha for financial assistance as Yondu Coffee Producers Limited was encountering financial problems and was in liquidation;

(2) Mr. Gotaha agreed to help them out and an agreement was reached by the parties;

(3) The agreement reached was between Mr. Gotaha and Mr. Alex Kavie and Mr. Alex Kehana;

(5) The money was loaned for Yondu Coffee Producers Limited to pay off its creditors;

(6) For the most part of 2013 up until July 2014, the Plaintiffs have not been paid any monies the First Defendants still owes.

(3) To date Yondu Coffee Producers Limited has paid K1,042,250.00 to Gahuku Traders Limited;

(4) As at the date this proceeding was filed, the First Defendant still owe the First Plaintiff an amount of K4,050,524.61 in accumulated interest

The main issue for determination is whether the interest rate is as claimed by the Plaintiffs in the Statement of Claim (20 percent per annum calculated monthly) and hence, as at the date of this proceeding, the amount still owed by the First Defendant to the First Plaintiff is K4,050,524.61.”

6. The Plaintiffs filed on 27 January 2018 an affidavit in the name of Michael Gotaha purportedly sworn on the same date. This affidavit is document number 26 in the Court file. At trial the plaintiffs sought to tender the affidavit through the witness Mr. Michael Gotoha. However, the defence objected to it being tendered into evidence on the basis that Mr. Gotaha did not sign the affidavit. Counsel for the plaintiffs conceded that the witness Mr. Gotaha gave clear evidence that the affidavit was signed by his son on his behalf. Accordingly, the Court refused to admit the affidavit into evidence on the basis that he was not the deponent and the contents tantamount to hearsay evidence.

7. The only evidence adduced by the plaintiffs is the sworn oral testimony of Mr. Michael Gotaha. He is the only witness for the plaintiffs.

8. As for the defendants two affidavits were filed. However, at trial only one witness was called and his affidavit was tendered into evidence without objection. That affidavit is sworn on 28 February 2018 and filed on 01 March 2018. The other affidavit was not relied upon in the trial. The affidavit relied upon was that of the witness Mr. Alex Kehana, the only witness for the defence.

9. After the trial counsel asked for time to prepare written submissions. Accordingly, the submission on the evidence was adjourned and heard on 07 May 2018. This is now the decision of the Court in respect to the claim in the proceedings.

10. The relevant facts in respect to the dispute are as follows. The first defendant is a company based in Goroka and is involved principally in coffee buying, processing and exporting business. At the material time the company was placed under liquidation pursuant to a court order due to its inability to settle debts owed to a number of its creditors. In July 2005 the company, through its managing director, Mr. Alex Kavie (the second defendant), approached Mr. Gotaha, the Managing Director of Gahuku Traders Limited (the first plaintiff ) and requested for financial assistance to discharge its creditors and trade out from liquidation.

11. The request was considered and accepted by Mr. Gotaha. An agreement was reached, reduced into writing and executed whereby a sum of K150,000.00 was advanced to Yondu Coffee on terms and conditions. One of the fundamental terms of the agreement was that interest is charged at the rate of 20% per annum to be calculated and paid monthly.

12. The principal loan and the interest due under the agreement had been fully repaid sometime in 2006.

13. Then in October 2006, and again at the request of the defendants, the plaintiffs made further financial advances to Yondu Coffee. A total amount of K1,017,560.25 was advanced as a loan to Yondu Coffee. This amount is not disputed. In this second financial transaction the parties had not reduced the terms of the agreement into writing as was done in the first loan transaction in July 2005. This is where the parties are at loggerhead on the issues for determination.

14. Yondu Coffee did not commence repaying the loan until April 2009 and despite demands by the plaintiffs the full repayment has not be made. The sticky point of contention has been clearly identified by the parties in the issues for trial.

Whether the interest rate is as claimed by the Plaintiffs in the Statement of Claim (20 percent per annum calculated monthly)

16. The plaintiffs say that the interest rate is based on the initial agreement first entered into in July 2005. The defendants disagree and say that although the rate of 20% per annum was agreed upon, that rate was not intended to be calculated and paid on monthly basis, rather, it was to be a one-off payment on the principal loan (K1,017,560.25).

17. The background to this dispute maybe summarized in this context. Yondu Coffee was facing serious financial crisis in relation to its business operations including servicing its creditors. It was facing imminent winding up of its operations under the liquidation process. Its creditors were hot on their trail chasing their money and no doubt the court ordered liquidator was charging exorbitant fees as well. Under these circumstances the defendants were in dire need to secure financial accommodation and time was an important factor or consideration. They were desperate to salvage and save their business operations. They were looking for a ‘Good Samaritan’, to use the biblical context, to bail them out of their predicament. For obvious reasons no financial institution including the banks would be interested in lending money to the defendants given their disastrous financial circumstances. It would be a suicidal decision for the financial institutions, and, for that matter, any right thinking business minded person or body.

18. Both Mr. Gotaha and Mr. Alex Kavie had previously been working together and now both involved in their respective businesses undertakings. Mr. Gotaha, through his business, had been providing financial assistance to various business houses and individuals.

19. In or about July 2005 the defendants approached Mr. Gotaha for financial assistance. An agreement was reached where Mr. Gotaha and his business, Gahuku Traders Ltd, loaned an amount of K150,000.00 to the defendants. Amongst the terms of the loan was that the defendants were to repay the principal loan with compound interest at 20% per annum, which interest is to be calculated and paid monthly. That agreement was reduced into writing and executed with the common seal of the respective companies. This agreement is not disputed by all parties.

20. This written agreement was one of the documents annexed to the affidavit of Mr. Gotaha, which was rejected by the Court. At the end of the trial, counsels agree to the Court receiving it as part of the evidence since the document is not in dispute. It was accordingly marked as Exhibit “C1”.

21. In the course of writing this judgment it came to the attention of the Court that there is a clear line of judicial precedents which affirms the law in s. 19(1) of the Stamp Duties Act Chapter 117. Section 19(1) states -

unless it is duly stamped in accordance with the law in force at the time when—

22. The cases which strictly applied this provision of the law include cases such as Putput Logging Pty Ltd v Philip Ambolis [1992] PNGLR 159, Waghi Security Service Pty Ltd v John Tenlon & Anor [1994] PNGLR 138, Jay Mongo Pty Ltd v Steamships Trading Co. Ltd [1995] PNGLR 129, Spirit Haus Ltd v Robert Marshall (2004) N2630 and Wamena Trading v Civil Aviation Authority (2006) N3058.

23. This Court being a court of law has the primary duty to uphold and give effect to the law as it finds it. see Wamena Trading (supra) and Acting Public Prosecutor v Uname Aumore [1980] PNGLR 510.

24. The document is an agreement for valuable consideration and is liable to duty under the Stamp Duties Act. Duty has not been paid and it has not been stamped as from the date of its execution to date and hence will also attract appropriate rate of penalty under the Act. In the circumstances this particular document will be disregarded completely. Having said that it does not mean that oral evidence given by a witness pertaining to the content cannot be considered together with all other evidence in the trial. See Wamena Trading (supra).

25. Returning to the issue under consideration here, given the prevailing circumstances, it is not surprising then that the defendants readily agreed to the terms of the first loan of K150,000.00 in July 2005. One of the fundamental terms to which Mr. Gotaha agreed to lend assistance was that repayment must be at the rate of 20% per annum payable on monthly basis. Clearly, this particular term is most unfavorable to the defendants. The defendants accepted the terms and paid off the first loan including the interests on unfavorable terms. The defendants are not complaining about the unfavorable terms under the first loan agreement.

26. The second loan was agreed to and paid by the plaintiffs to the defendants about 16 months later. This was after the first loan was fully repaid. At that point the circumstances faced by Yondu Coffee had not changed. The pressure was still on Yondu Coffee to trade out of its liquidity. Many more creditors including the ANZ Bank demanded to be paid off their outstanding money. The desperate state of affairs continued for Yondu Coffee. Being fully aware of the pre-exiting conditions and terms by which Mr. Gotaha and his business operated in terms of loans because of the prior dealing, Messrs Kavie and Kehana visited Mr. Gotaha at his private residence during his religious day, the Sabbath, when he is under a duty according to his Christian faith to honour the day as a holy resting day. The defendants did not visit Mr. Gotaha at his office during normal business hours. That visit is a clear signal of desperation.

27. Following the visit, the parties attended a scheduled meeting later that day at the defendants’ premises. At that meeting and following discussions, it was resolved that all creditors on the liquidator’s books be paid off and that Gahuku Traders become the sole creditor outside of the court sanctioned liquidation process. On that basis Mr. Gotaha agreed to lend further financial assistance to the defendants. The total amount loaned was K1,017,560.25, out of which the following creditors were to be paid -

Monpi Coffee Export - K127,823.12
Stevens Lawyers - K 25,000.00
ANZ Bank - K614,737.13
K767,560.25

28. A further amount of K250,000.00 was advanced to Yondu Coffee to keep its business operations afloat, thus, the loan totaling K1,017,560.25 was facilitated.

29. Mr. Gotaha gave evidence that the loan was given to Yondu Coffee on the same terms as the first loan, that is, the interest rate was 20% per annum payable monthly. He described it as compound interest rate. On the other hand, Mr. Kehana on behalf of the defendants, in his evidence denied that this was so and says that the agreed rate of interest was 20% on the principal amount of K1,017,560.25, being the simple interest rate, and that equates to K89,689.75.

30. Mr. Gotaha is a graduate accountant and a professional in that field of expertise. He has been involved in business activities for a number of years and is an experienced businessman in his own right. He has been running his own business through Gahuku Traders and lending money to business houses and clients in need of financial assistance. Being the lender he sets his own lending terms and conditions. Clients either accept or reject his lending terms. That is the norm and practice in modern business or commercial transactions. The borrower does not fix the terms. The borrower either accepts or rejects the terms. It is very seldom or rare that the lender is open to negotiation on interest rate. Mr. Gotaha appears to be a shrewd businessman given the terms of the first loan. He obviously was quite aware of the predicaments facing the defendants but at the same time has a business to run. The defendants, as I said earlier, were in a vulnerable situation. It was a case of take it or leave it and face the consequences. If the defendants were to insist on the rate they claim, the most probable result would be that Mr. Gotaha would be unwilling to seal the deal and walk away. There is no evidence given by Mr. Kehana that suggest that there was change in circumstances brought to the fore during the discussions that Mr. Gotaha was asked to change the fundamental lending terms. In any event Yondu Coffee was not in a position to insist or negotiate in amending the fundamental lending terms. This reminds me of the old adage “beggars cannot be choosers”. Yondu Coffee has to dance to the tune or music played by Mr. Gotaha. That was the hard reality faced by the defendants at that time.

31. Counsel for the defendants submits that it would not be a fair transaction on the part of Yondu Coffee if the parties agreed for Yondu Coffee to pay compound interest at 20% monthly for such a substantial amount of money loaned. Counsel referred to s. 1 of the Fairness of Transaction Act 1993 and argued the purpose of the Act is to ensure there is fairness in transaction between contracting parties. In that regard, counsel argues the parties in this case were not commercially and economically on equal footing. It is submitted the plaintiffs had the finance and the defendants were cash strapped and in liquidation and therefore the agreement for the defendants to pay 20% compound interest is unfair pursuant to the provisions of the Act. It is also submitted the presence of Mr. Gotaha at the defendants premises exerted pressure and intimidated the defendants into submitting to the demands made by Mr. Gotaha.

32. Counsel for the plaintiffs did not respond to the issue of fairness under the Fairness of Transaction Act. However, it was submitted the agreement entered into by the parties was a commercial transaction where all parties were fully aware and the defendants were cognizance of the intention of the plaintiffs to profit out of the transaction. As regards to the claim that Mr. Gotaha exerted pressure and intimidated the defendants, it was submitted Mr. Gotaha’s presence was reasonable in the circumstances where Yondu Coffee was under liquidation and therefore Mr. Gotaha’s presence was for reasonable cause in the light of his substantial investment in terms of the loan to Yondu Coffee to bail it out from its dire liquidity problem.

33. The issue of fairness in transaction has not been raised by the defendants in the pleadings and clearly is not one of the issues agreed to by the parties to be tried and determined in this proceeding. It is raised only during submissions. In that respect, it appears the plaintiffs may not have anticipated and prepared to respond. It appears to be a surprise issue and in that regard it is raised unfairly. Nevertheless, since it is raised I will consider it in the course of this judgment when I deal with the second issue as I believe the issue can be more appropriately dealt with there.

34. However, having considered the evidence on the first issue I am satisfied in all the circumstances on the balance of probabilities that the loan of K1,017,560.25 was advanced to Yondu Coffee at the compound interest rate of 20% per annum payable monthly.

Whether the amount still owed by the First Defendant to the First Plaintiff is K4,050,524.61

35. The defendants dispute the amount claimed by the plaintiffs at K4,050,524.61 because they disagree with the rate of interest payable. They dispute that interest was payable at compound rate and insist that it should be calculated at simple rate. The Court has already found that the applicable rate agreed to is the compound rate of 20% per annum payable monthly.

36. The evidence is that the loan was advanced in October 2006. The defendants started repaying the loan in June 2011 and repayments continued as per the schedule set out in affidavit of Mr. Kehana. The plaintiffs claim that as at October 2012 the outstanding loan stood at K2,927,791.06. It would appear that plaintiffs have made substantial discount in the claim because if the compound interest is calculated for the period October 2006 to May 2011 alone, the period in which no repayments was made at all, a period of 4 years 8 months, the actual outstanding loan amount, no doubt would have far exceeded the amount of K2,927,791.06 based on the compound interest rate of 20% per annum calculated monthly.

37. Mr. Kehana said in evidence that the figure of K2,927,791.06 was not based on the defendants records but was a figure that was calculated by lawyers acting for the plaintiffs. He said the defendants rejected this figure because they disputed the rate of interest applied in calculating the outstanding amount.

38. Given the substantial discount which I alluded to earlier I think in all probability the outstanding amount is a fair and reasonable estimate. The plaintiffs claim that amount was outstanding as at October 2012. However, the plaintiffs have not provided clear and cogent evidence as to the exact amount outstanding since October 2012. They have not produced an accounting records whatsoever despite the evidence of Mr. Gotaha that they have records. In his evidence Mr. Gotaha continues to refer to his affidavit which was rejected by the Court. Therefore there is no concrete evidence adduced by the plaintiffs. The plaintiffs carry the onus of proving the exact amount, however, as I said the evidence is seriously lacking. The plaintiffs cannot rely on the figures pleaded in the statement of claim because the figures are mere averments subject to proof by appropriate evidence. The law as to pleadings is settled. Pleadings drive the evidence. They are not evidence: Re Application by Dr. Philip Kereme (2017) SC 1600, Belden Norman Namah v Peter O’Neil (2015) SC 1617 and Ludger Mond v Jeffrey Nape (2003) N2318. In the circumstances, I consider it fair and reasonable to strike a balance between the two extreme figures, that is, K1,017,560.25 asserted by the defendants and K2,927,791.06 asserted by the plaintiffs. This will be K2,000,000.00 as a compromise figure, given the lack of concrete evidence. Therefore calculation based on that amount taking into account the amounts repaid based on the repayment schedule in Mr. Kehana’s affidavit, the calculation should appear as follows:

Item	Year	Month	Days per Month	Outstanding Amount in Kina	Interest compounded monthly @ 20%	Total Interest	Balance In Kina
	2012	October		2,000,000
Repayment		November		25,000
Repayment		December		20,000
Repayment	2013	January		20,000	32,250	32,250	1,967,250
Default Interest		February	28		32,788	65,038	2,000.038
		March	31		33,334	98,371	2,033,371
		April	30		33,890	132,261	2,067,261
		May	31		34,454	166,715	2,101,715
		June	30		35,029	201,744	2,136,744
		July	31		35,612	237,356	2,172,356
		August	31		36,206	273,562	2,208,562
		September	30		36,809	310,372	2,245,372
		October	31		37,423	347,794	2,282,794
		November	30		38,047	385,841	2,320,841
		December	31		38,681	424,522	2,359,522
	2014	January	31		39,325	463,847	2,398,847
		February	28		39,981	503,828	2,438,828
		March	31		40,647	544,475	2,479,475
		April	30		41,325	585,800	2,520,800
		May	31		42,013	627,813	2,562,813
		June	30		42,714	670,526	2,605,526

39. Generally one of the fundamental terms in a standard loan agreement is the period by which the borrower is required to repay the loan with interest within a fixed period. This is necessary so that the parties are able to calculate the interest that is payable on the loan and where there is default by the borrower the applicable rate of penalty interest, etc. In this case, there is no evidence of an agreed fixed term or period by which the loan is to be repaid by Yondu Coffee. This is very peculiar and most uncharacteristic of a commercial loan transaction. A notable effect of such omission in the fundamental term is that the borrower ends up being heavily penalized in terms of paying incredibly huge amount of money on interest component alone. The present case is a classical example. I think this where the issue of unfairness and unconscionable conduct becomes relevant.

40. The issue of fairness in transactions entered into between parties in the present case, as I mentioned earlier, has not been raised in the pleadings but in submissions by the defendants. As the issue is founded on statute that issue cannot be ignored by the Court because the Court is duty bound to apply the law.

41. It is therefore appropriate at this juncture to return to the issue of fairness in transaction between the parties. The Fairness of Transaction Act was enacted in 1993 replacing the old pre-independence colonial legislations in Transactions with Native Act 1958 and the Transactions with Natives Act 1963. The colonial legislations predominantly deal with unfairness in transactions with “natives” indigenous of Papua New Guinea based on race, education, literacy, knowledge, experience, etc. These are the main factors where it was deemed that the natives were at great disadvantage because the circumstances at that time were that a great majority of the native population were illiterate, uneducated and inexperienced in engaging in modern commercial transactions. There was imbalance in the economic and commercial power between natives and large foreign business entities including the financial and banking institution and in that regard the apparent inequality in the social justice and socio-economic order within the society generally. It became obvious to the legislators of the time that the imbalance had the adverse effect of suppressing and undermining the rights of “natives” in participating meaningfully in a free and open market economy in the interest generally for the development and prosperity of the country. The use of economic and commercial power was considered an unfair tool or advantage and hence the introduction of the legislations. Of course, as PNG developed into a modern society and her citizens increasingly became educated, literate, experienced and skilled in their own spheres and right, the need to modernize the law became necessary. The court reports indicate the level and complexity in issues pertaining to fairness in transactions in different disputes between giant corporations to ordinary grassroots man in the community.

42. In that context it is worthy to note at the outset the preamble of the current Fairness of Transaction Act 1993. It 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 person, 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.”

43. Section 1 of the Act provides for its purposes. It is stipulated in the following words -

(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 free 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 and review 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.”

44. It seems quite obvious from s. 1 that the law seeks to regulate and bring about some acceptable standards of behavior or conduct when parties are entering into transactions irrespective of the nature, magnitude and complexity. It seeks to ensure there is some level or degree of fairness in transactions between parties. Under s. 3 of the Act, the word “transaction” is given a broad meaning. It means and includes “any contract, promise, agreement, dealing or undertaking of a economic or commercial nature whether supported by consideration or not entered into between parties” and includes transactions which are governed by customary law.

45. In Rage Augerea v Bank South Pacific Ltd (2007) SC 869, Mr. Augerea successfully appealed against summary judgment obtained by the Bank against him in the National Court for a substantial sum of money. The Bank claimed that the money comprised of outstanding principal loan and accrued interest owed by Mr. Augerea under a loan agreement. The Supreme Court found that the amount of money claimed by the Bank was improper, unreasonable and unfairly charged particularly the interest component of the loan which appeared to have inflated the total amount claimed by the Bank. The Supreme Court in the course of its deliberations made the following statement at paragraph 25 -

“25. Fairness and equality in all negotiations leading to any agreement has now become a concern of Parliament and it has enacted the Fairness of Transactions Act 1993. That Act has been considered with some detail in one case and was considered and applied in another case. The first case to do that was in the case of Negiso Investments Limited v. PNGBC Limited and the second was in the case of Dr. Florian Gubon Trading as Gubon Lawyers v. Pacific Mobile Communication Linited. 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. Appling those principles the Courts have already struck down agreements that were considered unfair because of inequality in the bargaining powers of the parties.”

46. With respect to the three cases which was referred to by the Supreme Court, in the case of Negiso Investments Limited v. PNGBC Limited (2003) N2439 the borrower obtained a loan of K600,000.00 from the Bank and in return the Bank obtained registered mortgage over two of the borrower’s properties as securities for the loan account. The borrower defaulted and therefore the Bank exercised its power of sale as a mortgagee and sold the two properties. The borrower sued the Bank seeking declaratory orders that the Bank, amongst others, acted unfairly in disposing of the borrower’s property. The Court found, amongst others, that the Bank acted unfairly with respect to the delay in selling the properties and charging the borrower higher interest rate during the period when the properties where in the process of being sold. In the end the Court, after having regard to the provisions of ss. 4 and 5 of the Fairness of Transaction Act, resorted to its power under s. 7 of the Act and ordered the parties to have the dispute mediated.

47. In Dr. Florian Gubon trading as Gubon Lawyers v Pacific Mobile Communications Ltd (2006) N3104, a lawyer sued his former client for fee which he claimed was owing to him for consultancy services. The lawyer claimed that he provided services to his client in brokering a substantial international financial facility for his client to undertake a project in the country. The client applied to dismiss the claim for breaches of the Lawyers Act and failure to disclose a reasonable cause of action. The Court found, amongst others, that certain provisions of the Lawyers Act were breached. Furthermore, s. 66 of the Lawyers Act which deals with questions of fairness and reasonableness of lawyers fees import similar considerations as in s. 4(1) of the Fairness of Transaction Act 1993.

48. As regards the case Kora Gene v. Motor Vehicles Insurance (PNG) Trust [1995] PNGLR 344, the Motor Vehicle Insurance (PNG) Trust executed a deed of release with a claimant whereby the claimant released the Trust from all liabilities in consideration of a payment of K600.00 in respect to a claim for solatium for the death of his child in a motor vehicle accident. The claimant subsequently issued proceedings claiming damages for the death of his daughter. The Trust raised the argument that the claimant is barred from making any further claim for damages by virtue of the deed of release. The Court dismissed that argument holding that the release should not be a bar to his claim based on the principle of unfairness. The Court struck down the deed of release having found it was a situation where the claimant who is an illiterate villager entering into a deed of release with a large and sophisticated company and therefore by virtue of the disparity of education and understanding the claimant was at a great disadvantage, and hence imbalance in power. The Court further said that it was unconscionable for the Trust to have entered into the deed with an illiterate villager without taking appropriate precautions to ensure the claimant understands his legal rights.

49. Having regard to the sentiments expressed and the principles surrounding the question of fairness and equality between two parties in a transaction it seems obvious that the key consideration under the law is whether one party has taken unfair advantage by reason of economic power or other advantage to the detriment of the disadvantaged party. Kandakasi J expressed it in this way in Dr. Florian Gubon (supra) -

“26. 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.”

50. In this case, it is my view that, although the plaintiffs had the advantage in terms of economic power, it cannot be said that the defendants were at disadvantage position by reason of them facing liquidation. That is an unfortunate circumstance and, in my view, not a disadvantage position. As I said the defendants were fully aware of the economic power imbalance. They experienced it in the first transaction. They did not question or challenge it. I do not think the circumstances in which the parties transacted the agreement could amount to unconscionable conduct on the part of the plaintiffs. Here the parties were conscious of their own circumstances. The meeting which led to the second loan facility was initiated by the defendants. The defendants were certainly not put under any pressure by the plaintiffs. There was no intimidation involved in that meeting. There is no evidence of either instance. The evidence of Mr. Kehana of claims of pressure and intimidation as submitted by counsel did not occur at that important meeting which sealed the agreement between the parties. Those allegations, which are denied by Mr. Gotaha, relate to events that happened much later in time after the agreement was concluded in October 2006. Messrs. Kavie and Kehana are company executives and have been in business for some time and no doubt they are aware of the nature and extent of the transaction they were entering into on behalf of Yondu Coffee. They have previous experience and skills in substantial loan negotiations with the banks and other financial institutions. So both were not in any disadvantage position in terms of knowledge, experience and skill. The only downside is that they were in desperate need of money and they need it quickly because any delay could spell disaster and eventual demise of Yondu Coffee. The object and intention of the law ensure fair play and equality at the time when parties enter into binding and enforceable transactions or agreements. However, there may be instances where the duty to act fairly and equitably operates throughout the entire relationship such as the mortgagor and mortgagee relationship as in the case Rage Augerea v Bank South Pacific Ltd (supra).

51. Nonetheless, the loan in the present case appears to be an open handed transaction on the basis that it is not for a fixed term and so in that regard seems to be unfair for the reasons I alluded to earlier. Furthermore, the plaintiffs appear to allow the defendants a free run for 4 years 8 months since 2006 without taking any action thereby allowing the interest component to exacerbate the situation. In a relationship between the lender and borrower the lender is obliged to forewarn and give notice of the default to the borrower so that the borrower is able to take steps to remedy the default. In this case there is no evidence before the Court as to any notice or warning given by the plaintiffs.

52. By way of a general concluding remark I wish to express this view. It is quite obvious that the defendants have been heavily penalized with regards of the interest. The rate is clearly beyond the commercially acceptable rate applied by many commercial banks and licensed financial institutions. The banks and financial institutions operate not only under certain commercial standards, practice and guidelines but more important within the law. One of the laws is the Stamp Duties Act which I have discussed earlier. When they lend money to borrowers loan agreements including security instruments are executed and duty is accordingly paid and stamped on those documents. The duty that is collected by the Internal Revenue Commission is paid into the consolidated revenue and eventually is used by the government to provide services to the public such as the courts system. When a party to that loan agreement wishes to enforce a right, obligation or entitlement that party is at liberty to seek justice before the Courts. In my view is not fair, just and proper for a party who do not abide by the law in paying taxes by way of duty to come to Court and obtain free justice. This would be tantamount to unjust enrichment. Where a party enters into large loan transactions and fail to comply with the tax laws of the land in terms of paying duly assessed taxes they stand the risk of having any judgment in their favour subject to scrutiny by the Tax Office. Of course when that does eventuate tax will be assessed on the value of the monetary consideration under the agreement and any penalty thereto. I will stop here and leave the issue for the appropriate authority to consider the tax implications relating to this judgment.

53. The end result is that there will be judgment for the plaintiffs in the sum of K2, 605526.00 with cost on a party-party basis. No interest is claimed and therefore no interest is awarded in this judgment.

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Punao & Co Lawyers: Lawyers for the Plaintiffs
Buri Ovia & Associates: Lawyers for the Defendants

National Court of Papua New Guinea

Gahuku Traders Ltd v Yondu Coffee Producers Ltd [2018] PGNC 280; N7396 (25 May 2018)