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Fa'aoa anor v Tonga Development Bank [2002] TongaLawRp 50; [2002] Tonga LR 317 (22 November 2002)

IN THE SUPREME COURT OF TONGA
Supreme Court, Nuku'alofa

C 652/01

Fa'aoa anor

v

Tonga Development Bank

Ford J
23, 25, 26, 30 September, 1, 2, October 2002; 22 November 2002

Misrepresentation and fraud – fraud not pleaded as defence – justice required court to recognise it

Negligence – failed to prove any negligence

Breach of contract – failed to prove any breach

On Friday 6 November 1998 the plaintiffs' house at Kanokupolu caught fire and burned to the ground. The cause of the fire was unknown. No one was home at the time. The plaintiffs' claimed that the house and contents were insured against fire with National Pacific Insurance Ltd. They alleged that the Tonga Development Bank, which held security over the property, had assumed an obligation under the loan agreement to keep the dwellinghouse and contents "fully insured". They said that the replacement costs of the house was $54,800 and the contents $14,422, making a total of $69,222. The plaintiffs claimed that the Bank failed to honour its contractual obligation in this regard and the house and contents were insured for a total of only $13,000. The amount the plaintiffs received from the insurance company, after repayment of the balance of a small loan they had, was $10,008.43. They brought an action in negligence and breach of contract and claimed damages of the sum of $59,213.57 being the difference between the net figure received and the estimated replacement costs. The defendant denied liability on both counts. The plaintiffs had two houses at Kanokupolu and the one that burned down was not the one on the plaintiffs' town allotment.

Held:

1. The onus was on the plaintiff to establish his claim on the balance of probabilities but where fraudulent misrepresentation was relied upon as a defence then the burden of proving the allegation was on the defendant. The standard of proof applicable was the civil standard of balance of probabilities but the degree of probability required to establish proof was high because of the gravity of the allegation.

2. The obligation was upon the defendant to plead fraud and it was not pleaded. The court, in having reached the firm view that fraudulent misrepresentation was established on the evidence, decided it would be unjust to have no option, because of a defect in the pleadings, but to treat the claim as a valid one which should be enforced. The court found that notion untenable.

3. The justice of the case required the court to recognise the fraud defence even though it had not been pleaded.

4. Even if the court had not recognised the fraud defence, it would still have rejected the plaintiffs' claim. The court was not satisfied to the required standard of proof that the defendant had been negligent or in breach of contract in any of the respects alleged. The court was satisfied that the plaintiffs, through the first plaintiff, consented to and were fully aware of the $13,000 valuation figure fixed for insurance purposes.

4. The plaintiffs failed in their claim.

Cases considered:

Carlisle and Cumberland Banking Co v Bragg [1911] 1 KB 489

Prasad v Morris Hedstrom (Tonga) Ltd (No 2) [1993] Tonga LR 69 (CA)

Robinson's settlement, In re Gant v Hobbs [1912] 1 Ch 717

Counsel for plaintiffs: Mr Niu
Counsel for defendant: Mrs Vaihu

Judgment

Sometime around midday on Friday 6 November 1998 the plaintiffs' house at Kanokupolu caught fire and burned to the ground. The cause of the fire is unknown. No one was home at the time.

It is the plaintiffs' case that the house and contents were insured against fire with National Pacific Insurance Ltd. The plaintiffs claim that the Tonga Development Bank, which held security over the property, had assumed an obligation under the loan agreement to keep the dwellinghouse and contents "fully insured". They allege that the replacement costs of the house is $54,800 and the contents $14,422, making a total of $69,222. They claim that the Bank failed to honour its contractual obligation in this regard and the house and contents were insured for a total of only $13,000. The amount the plaintiffs received from the insurance company, after repayment of the balance of a small loan they had, was $10,008.43. They seek in this proceeding to recover from the defendant Bank the sum of $59,213.57 being the difference between the net figure received and the estimated replacement costs. The claim is based on negligence and breach of contract. The defendant denies liability on both counts.

The background to the litigation is that in June 1996 the plaintiffs made application to the defendant Bank for a loan of $3609. Mr Fa'oa is a fisherman and the purpose of the loan was to purchase a Yamaha outboard motor along with wire to erect a fishing fence and other sundry items. The application was approved subject to the plaintiffs providing adequate security. There are several clauses in the loan agreement relating to the security requirements but, in essence, the borrowers agreed to transfer to the Bank as security for the performance of the agreement all their right, title and interest in the chattels described in the schedule.

The schedule to the agreement reads:

"To be secured by the mortgage of the registered town allotment of Katoanga Fa'oa situated at Kanokupolu. Wooden dwellinghouse of the borrowers situated at Kanokupolu together with furnitures (sic) in it. Wooden fishing boat 20 feet of the borrowers. All livestock of the borrowers including 10 brood sows and their future breeds. Together with the wire and the Yamaha outboard motor 4 horsepower to to be purchased with the loan funds."

Under clause 6 of the loan agreement dated 1 July 1996, the borrowers agreed:

"6. To keep the chattels fully insured with an insurance company acceptable to the Bank and authorises the Bank to debit any borrower's account in payment of such annual premium during the term of this agreement."

The thrust of the plaintiffs' case is that despite the wording of clause 6, it was the Bank people who handled the insurance matters and it was they who fixed the cover at $10,000 for the house and $3000 for the contents. Mr Fa'ao said in evidence that he was never asked for a value for insurance purposes and he did not give any figures to the defendant's representatives.

Mr Fa'oa was questioned about two documents produced in evidence which he had signed. The first (undated) is a standard form letter to the Bank instructing it to, "please arrange insurance as under and debit my/our account with the premium(s) ..." There then followed, in difficult to read handwriting, the figures $13,000 for the amount of the cover -- $10,000 for the house and $3000 for the contents. Mr Fa'oa denied that the handwritten figures had been written into the letter at the time he signed.

The second document is the Domestic Proposal Form. It shows clearly the three figures -- $10,000 for the house cover, $3000 for the contents and the total cover of $13,000. The form was signed by Mr Fa'oa on 1 July 1996 but, again, he denied that any of the figures had been written in at the time he signed.

Mr Fa'oa was cross-examined closely about why he would have signed the documents in blank. His response was to the effect that he was told to sign because they were insurance forms. Mrs Vaihu submitted that in signing the forms in the way he did, Mr Fa'oa is now estopped from denying their contents.

Whilst the general rule is that a person is estopped from denying their consent to a document which they have signed; if the signatory has been materially misled as to the contents of the document by the person who induced them to sign, then the plea of non est factum would apply and the document would not be binding.

What is of some concern in the present case is that the documents in question were in the English-language and Mr Fa'oa told the court that he cannot speak or read English. In that situation there is an added responsibility on the Bank to make certain that the contents are adequately explained to the borrower. Some overseas lending institutions invariably take the precaution of giving instructions to the borrower's own solicitor to explain the contents of legal documents associated with a lending transaction. I would have thought that, in a case like the present where some of the documents were not in the Tongan language, the Bank would have been well advised, at the very least, to insist on having a witness present when the contents of the documents were explained and a file record should then have been made confirming that the documents had been read over in the Tongan language and understood by the borrowers and all the parties should then have been required to sign that notation. It appears that no such steps were taken in the present case and, to that extent, the Bank left itself exposed.

On the other hand, I must say that I did form a favourable impression of the defendant's witnesses who handled the loan transaction. Mr Tu'akoi, the insurance officer employed by the defendant Bank, was the person who completed the insurance documents I have just referred to. He admitted that he did not read them to Mr Fa'oa but he told the court that he knew Mr Fa'oa prior to when he met him in relation to this particular transaction and he recalled explaining to him the contents of each document before asking him to sign. He also recalled asking him whether the value of $10,000 for the house suggested by the loans officer was enough and whether it was in order for the house to be insured for $10,000 and the contents $3000 and he told the court that Mr Fa'oa had responded that it was.

The witness said that he believed the figures for the insurance cover had been filled in before Mr Fa'oa signed. He frankly admitted in cross-examination that it can happen on occasions that a borrower will sign documents in blank but that is normally when he (Mr Tu'akoi) is acquainted with the individual and the borrower is anxious to receive the loan monies.

I accept Mr Tu'akoi's evidence in this regard. I have not been persuaded that the documents were in blank at the time of signing but, in any event, I am satisfied that Mr Tu'akoi explained the contents of the insurance forms and the insurance cover figures to Mr Fa'ao. There has never been any suggestion that the insurance officer materially misled the plaintiffs in relation to the contents of the documents so as to bring into play the non est factum principle.

Even had I not been satisfied that the handwritten figures had been inserted or that Mr Tu'akoi had explained the insurance details to Mr Fa'oa before he signed, I still would have been reluctant to find for the plaintiffs. If the first plaintiff had signed the documents in blank as he alleged then he was really agreeing to be bound by the contents whatever they contained. The situation is akin to what Buckley LJ had in mind when he said in Carlisle and Cumberland Banking Co v Bragg [1911] 1 KB 489:

"The true way of ascertaining whether a deed is a man's deed is, I conceive, to see whether he attached his signature with the intention that that which preceded his signature should be taken to be his act and deed. It is not necessarily essential that he should know what the document contains: he may have been content to make it his act and deed, whatever it contained; he may have relied on the person who brought it to him ... and he does not inquire what covenants it contains, or what ... (the) material provisions in at are, but signed it as his act and deed, intending to execute that instrument, careless of its contents, in the sense that he is content to be bound by them whatever they are."

If necessary, I would have held that the plaintiffs' were so bound in the present case. On his own evidence, Mr Fa'oa knew that he was signing insurance forms and his approach appeared to be that that he was content to be bound by the contents whatever they contained.

Quite apart from whether or not the coverage figure of $13,000 had been written into the insurance documents before Mr Fa'oa signed, the question arises how had the bank's staff handling the lending transaction come to settle on a valuation figure which appears, on the face of it, to be so far out of keeping with the claimed replacement value of the dwellinghouse?

The evidence was that Mr Fa'oa had a town allotment in Kanokupolu and he owns the house on that allotment (the "allotment house"). That was not the house that burned down, however. The allotment house is still standing and the plaintiffs' live in it today. The house that burned down was on another allotment in the same village five allotments along the road from the allotment house. The other allotment is owned by 'Epahahame Tuli and the house on the land is said to belong to the plaintiffs. Prior to the transaction giving rise to this proceeding, neither house had been insured.

The statement of claim makes no mention of the fact that the house that burned down is not the one on the plaintiffs' allotment. It only refers to one house which is described as the plaintiffs' "dwellinghouse". In opening his case for the plaintiffs, Mr Niu used the same terminology and made no reference to the fact that the plaintiffs had two houses at Kanokupolu and the one that burned down was not the one on Mr Fa'oa's town allotment.

The plaintiffs' case, in other words, proceeded on the basis that the identity of the house insured was not in issue but, as the evidence unfolded, that turned out to be far from the case.

The first mention of the allotment house was made, almost in passing, by Mr Fa'ao about halfway through his evidence in chief. He had been asked questions about his knowledge of house values back in 1996. He said that he did not have any knowledge at that time of the value of the house that had burned down and the only knowledge he had about valuations generally at that stage was his awareness that his own allotment house had cost about $9000 to build in the late 1980s. He described the building as a 16' x 10' dwelling with a concrete floor and plywood walls. He said that the house on the Tuli allotment, however, was a larger timber house, 30' x 30', with four bedrooms, a kitchen, lounge room and veranda.

The plaintiffs explained in evidence how it was that they came to own the house on the Tuli allotment. Mrs 'Ahoika Tuli was Mrs Fa'oa's aunt. She was a widow. She lived alone in the house. About a month before her death on 14 June 1994, the Fa'oas moved into 'Ahoika's house to look after her and then, following her death, 'Ahoika's four children called a meeting and the eldest son, 'Epahahame, announced that he and his brother and two sisters were migrating overseas and they had decided to gift the house to the Fa'oas. The plaintiffs said that they were still living in the house at the date of the fire. Mr Fa'oa said that when they moved into the Tuli house they simply locked the doors on their allotment house.

In cross-examination it was put to Mr Fa'oa that a Bank officer had gone out to his place and inspected the house to be secured prior to the granting of the loan. Mr Fa'oa denied any visit from a Bank officer and he denied giving any values for insurance purposes to any Bank officer. It was later put to Mr Fa'oa that, according to the Bank officer, it was the allotment house that he had secured the loan over, not the house on the Tuli property. Again, Mr Fa'oa denied that proposition and he went on to say that he had explained to the bank employee how the Tuli house had been gifted to him. He was asked when he had given that information to the Bank officer. After a significant pause, the witness admitted that he had made that statement to the Bank officer when he had come out to inspect the property.

When the obvious inconsistency in his evidence about the Bank officer's inspection was pointed out to him, Mr Fa'oa said that he thought that counsel's earlier questions had been directed at whether the officer had gone out and inspected the allotment house -- not the Tuli house. I did not find that explanation convincing. The earlier questions had been framed in a general way. As translated, they read:

"Q. When you went to apply for this loan, did you go with the Bank officer to check out the security assets?

A. No.

Q. But did they come?

A. No.

Q. Do you know whether he came to your house and inspected the security assets.

A. I don't recall any visits."

In her evidence, Mrs Fa'oa confirmed that a Bank officer had made a visit but she maintained that he had inspected the house on the Tuli allotment. Mrs Fa'oa said that in 1962 when she was one year old, she had been adopted in the traditional Tongan way by her aunt 'Ahoika Tuli and she had, therefore, been brought up and raised in the Tuli house that had burned down.

The following day Mrs Fa'oa was recalled to the witness stand and she explained that the evidence she had given on this point was not correct. She went on to say that the house that burned down had not been built until 1978 and prior to then she had been brought up in another house on the site. Mrs Fa'oa said that she and her husband had married in 1978 and after the marriage they lived in the new house on the Tuli property but she went on to say that they often went "to and fro" between the allotment house and the Tuli house. "Sometimes we lived in the allotment house", she said, "and sometimes we came and stayed at the new house."

In her written submissions, Mrs Vaihu, relied on a concession Mrs Fa'oa appeared to make at the end of her cross-examination to the effect that the dwellinghouse used to secure the loan had been the allotment house and not the house on the Tuli property. Mr Niu took issue with this submission and said in reply that the witness was not talking about the 1996 loan but about "their last loan or latest loan, the one that they presently have."

The question and answer, as translated, read:

"Q. Isn't it the truth that the house that you presently occupy is the house that you secured the loan in 1996 -- 97 with?

A. Yes."

The Fa'oa's bank statements were produced and they show no evidence of any other loan in 1996/97 apart from the loan which is the subject of this litigation. Had Mrs Fa'oa been referring to some other loan transaction then her counsel should have clarified that in re-examination but no questions at all were asked in re-examination about that part of the witness's evidence.

The Bank officer who made the visit to Kanokupolu and carried out the security inspection of the plaintiffs' boat and dwellinghouse was the loans officer at the time, 'Alipate Kisina. Mr Kisina was called as a witness for the defendant Bank. He is now 32 years of age and is a student at the Tonga Teachers' Training College. He worked for the defendant Bank between 1992 and 1996.

Mr Kisina left the Bank in the same year that the loan was taken out so he was no longer working there at the time of the fire in 1998. He gave his evidence on Tuesday 1 October 2002. He told the court that on the previous Thursday, 26 September, 2002, he and an officer from the Bank, Hiva Tatila, had travelled out to Kanokupolu. He said that that was the first time he had been to the village since his inspection back in 1996. He was able to direct Mr Tatila to the house he had inspected back in 1996 and he found that it was still standing. It was the allotment house. He said that he was then taken down the road and shown the concrete foundation of the house that had burned down on the Tuli property but he told the court that that was a different house from the one which he had inspected and he had never seen it before.

Mr Kisina was subjected to a searching cross-examination but he was unshaken in his evidence. It was put to him in cross-examination that on his evidence the plaintiffs were lying when they claimed insurance on a different house. He agreed with that proposition.

As with any civil case, the onus lies on the plaintiff to establish his claim on the balance of probabilities but where fraudulent misrepresentation is relied upon as a defence then the burden of proving the allegation lies upon the defendant. The standard of proof applicable is the civil standard of balance of probabilities but the degree of probability required to establish proof is a high degree because of the gravity of the allegation – see Halsbury, 4th ed, Vol 31, para 1059.

At the end of the plaintiffs' case counsel for the Bank did not open her case but she proceeded immediately to adduce evidence. Although an opening is not mandatory, it is a procedural step provided for in the Rules of Court and it certainly would have been an appropriate step to have taken in the present case, if for no other reason than to clarify the defendant's position in relation to the fraud allegation. Counsel had certainly signalled in her cross-examination that fraudulent misrepresentation was being alleged by the defendant, in that the house in respect of which the insurance claim was made was not the house that had burned down, but this serious allegation had not been pleaded in the defendant's statement of defence.

The statement of defence dated 7 November 2001 responded to the allegations in the statement of claim and alleged that the insurance cover of $13,000 had been the agreed insurance valuation of the house and contents. The only allegation of fraud was contained in paragraph 14 which reads:

"14. That the defendant have (sic) received information that the dwellinghouse is not owned by the plaintiffs and therefore they provided misleading information and or fraud as to ownership of the house which was insured to be theirs on the proposal for insurance form and the insurance policy."

As I understand it, the allegation being made in that pleading is that the dwellinghouse that burned down belonged to the Tulis -- not to the plaintiffs and, therefore, the claim was fraudulent. Had that been the only allegation of fraud then I would have rejected it. The evidence satisfied me that the Tuli house had been gifted to the plaintiffs and they, therefore, had an insurable interest in it at the time the loan was taken out.

The fraud Mrs Vaihu cross-examined on and referred to in her final submissions was the allegation that the house which burned to the ground was not the one that had been insured in the transaction giving rise to the present claim. The house that had been insured, so the defendant now contends, was the allotment house -- not the one on the Tuli property. In her submissions in reply, Mrs Vaihu submits that the fraud being alleged in paragraph 14 of the statement of defence is the same as the fraud now been relied upon and, therefore, there was no need for any amendment to the statement of defence. I reject that submission for the reasons just stated. The allegations are completely different and the new fraud allegation should have been pleaded.

Mr Niu in his submissions emphasised that the alternative ground of fraud now being relied upon had not been raised by the defendant in its statement of defence nor had leave been sought to have it included as an amendment to the statement of defence.

Mr Niu's criticism of the failure of the defendants to plead the new ground of fraud is completely justified. Even accepting that the Bank did not become aware of the situation until Mr Kisina made his visit out to Kanokupolu on 26 September 2002, which was the third day of the hearing, it still behoved counsel to seek an immediate amendment to the statement of defence as soon as Mr Kisina's discovery had been brought to her attention.

The obligation upon the defendant to plead fraud is well-established. Halsbury 4th edition, Vol 36, para 48 states:

"The defendant must in his defence plead specifically any matter which he alleges makes the action not maintainable, or which, if not specifically pleaded, might take the plaintiff by surprise, or which raises issues of fact not arising out of the statement of claim. Examples of such matters are ... fraud or any act showing illegality."

The Supreme Court Practice (the White Book) 1991, Vol 1, in reference to O.18, r.8(1) which requires a party in any pleading subsequent to a statement of claim to specifically plead matters such as fraud, states:

"This rule enforces one of the cardinal principles of the present system of pleading, namely that every defence or reply must plead specifically any matter which makes the claim or defence in the preceding pleading not maintainable or which might take the opposite party by surprise or raises issues of fact not arising out of the preceding pleading. Put shortly, whenever a party has a special ground of defence or raises an affirmative case to destroy a claim or defence, as the case may be, he must specifically plead the matter he relies on for such purpose. The effect of the rule is for reasons of practice and justice and convenience to require the party to tell his opponent what he is coming to the court to prove but the rule does not prevent the court from giving effect in proper cases to defences which are not pleaded."

The question that arises, therefore, is whether the present case is a "proper case" for the court to give effect to the fraudulent misrepresentation defence now relied upon by the defendant even though it has not been pleaded. In determining this issue it is appropriate, in my view, to make an assessment of the strength of the defendant's evidence on the subject.

In terms of the allegation of fraud, credibility was obviously a key issue and the defendant's loans officer, Mr 'Alipate Kisina, was the key witness for the defence. I studied his demeanour closely as he gave his evidence. I found him to be a careful, thoughtful witness and, at the end of his evidence, I was left in no doubt at all that he was telling the truth. The only conclusion I could draw from his evidence was that the plaintiffs were falsely representing to the court that the insurance cover had been taken out over the house that had burned down. The house that Mr Kisina had inspected for security purposes was the allotment house that Mr Fa'oa had shown him. That house is still standing today.