Westpac NZ Ltd v Patel
[2013] NZHC 1011
•9 May 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-6788 [2013] NZHC 1011
UNDER Part 12 of the High Court Rules
IN THE MATTER OF an application for summary judgment
BETWEEN WESTPAC NZ LIMITED Plaintiff
ANDYATISH MORAR PATEL & ANOR Defendants
Hearing: 6 May 2013
Appearances: M Powell and P Shackleton for Plaintiff
G Thwaite and S Kim for Defendants
Judgment: 9 May 2013
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
9 May 2013 at 5 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Simpson Grierson, Private Bag 92518, Wellesley Street, Auckland –
Kenton Chambers lawyers – [email protected]
(Counsel: Mr G Thwaite - [email protected])
WESTPAC NZ LIMITED V PATEL & ANOR HC AK CIV-2012-404-6788 [9 May 2013]
Background
[1] The plaintiff, Westpac New Zealand Limited (“Westpac”), applies for summary judgment against the defendants. This case arises out of two separate lending agreements which the plaintiff entered into with the defendants. The first was for the advance of funds to enable the defendants to purchase what the parties called the “Fitzgerald Property”. For that purpose on 12 May 2011 the plaintiff advanced a sum of $698,000 secured by first registered mortgage over the Fitzgerald Property. The second advance was of the sum of $272,000 secured by a registered mortgage pursuant to a loan agreement dated 30 June 2011 to enable the defendants to purchase what the parties described as the “Swanson Property”.
[2] The following chronology is taken from the submissions for the plaintiff. The matters stated are uncontested.
[3] Around May 2011, the defendants approached Westpac for a loan to purchase the Fitzgerald Property for investment purposes.
[4] As part of the application process, Westpac received:
a) a signed statement of assets and liabilities confirming the defendants had a net asset position of $346,000;
b) financial statements for Y & Zad Limited for the years ending 31
March 2010 and 31 March 2011 along with projections for the year ending 31 March 2012. The financial statements for the year ending
31 March 2011 showed a net profit of $177,683.50. The projected profit for the year ending 31 March 2012 was $177,598;
c) a registered valuation for the Fitzgerald Property showing a market value of $905,000;
d) a lease agreement for the Fitzgerald Property;
e) an agreement for sale and purchase for the Fitzgerald Property also showing a rental income of $3,000 per annum;
f) various bank statements;
g) various GST Returns; and
h) financial statements for S.Y. Trading Limited for the years ending 31
March 2009 and 31 March 2010.
[5] On 12 May 2011, Westpac advanced the defendants the sum of $698,000 to purchase the Fitzgerald Property pursuant to a Choices Home Loan Agreement dated
11 May 2011 (“91 Loan Agreement”). Westpac’s advances under the 91 Loan
Agreement were secured by a first registered mortgage over the Fitzgerald Property.
[6] Around June 2011, the defendants approached Westpac for a further loan for the purpose of purchasing the Swanson Property, also for investment purposes.
[7] In addition to the financial information already provided, Westpac was provided with a copy of the agreement for sale and purchase along with a separate rental agreement for the Swanson Property. Both confirmed that it was tenanted and generating $340 per week in rent.
[8] On 1 July 2011, Westpac advanced the defendants the sum of $272,000 pursuant to a loan agreement dated 30 June 2011 (“92 Loan Agreement”) for the purchase of the Swanson Property. The advance was secured by a first registered mortgage over the Swanson Property.
[9] The defendants defaulted on their loan repayments. On 4 July 2012, Westpac made demand on the defendants for the sum of $20,159.40 which was outstanding. No payment was received.
[10] On 23 July 2012, Westpac served notices under s 119 of the Property Law Act 2007 (“PLA Notices”) on the defendants. The PLA Notices expired unremedied.
[11] Following expiry of the PLA Notices, Westpac exercised its power of sale and sold the properties.
[12] The net proceeds of sale extinguished the defendants’ indebtedness under the
92 Loan Agreement and a separate current account. However, a shortfall remains owing under the 91 Loan Agreement.
Issues
[13] The plaintiff, Westpac, seeks summary judgment against the defendants for the shortfall owing following the sale of secured properties at 46 Fitzgerald Road, Drury (Fitzgerald Property) and 3/324 Swanson Road, Henderson (Swanson Property) (together, Properties).
[14] The defendants oppose Westpac’s summary judgment application on the basis that the defendants have a counterclaim or set-off against Westpac. The defendants allege that Westpac breached implied terms of the relevant contracts which were implied by:
a) clause 1.2(b)(iv) of the Code of Banking Practice (Fourth Edition) of July 2007 (Code), that Westpac would “…act fairly and reasonably towards you in a consistent and ethical way”; and
b)clause 5.1 of the Code, that Westpac would “…only provide Credit to you or increase your Credit limit when the information available to us, leads us to believe you will be able to meet the terms of the Credit Facility”.
[15] This is not a case where there is any substantial issue of fact in dispute. Rather, the outcome of the application will be determined by the Court’s conclusions as to the applicable law when applied to the defendants’ contentions concerning the implied terms.
Implication of the code of practice terms into the contract by custom
[16] Mr Thwaite for the defendants submitted:
The criteria for implication of a term by custom are: (a) notoriety;
(b) certainty;
(c) reasonableness;
(d) no inconsistency with explicit terms; and
(e) proof by clear and convincing evidence.
[17] Authority for this submission was given as being Woods v N J Ellingham & Co Ltd,1 Everist v McEvedy2 and Burrows, Finn and Todd Law of Contract in New Zealand.3
[18] I accept that that is an accurate summary of Henry J’s judgment in Woods
and I intend to be guided by it to the extent that it is applicable to the case before me.
[19] It was the case for the defendants that both of the provisions of the banking code to which reference has already been made were implied into the contract between the parties. This was said to have resulted from a “custom” to this effect.
[20] The first issue that arises therefore is whether it is arguable that there is a notorious practice of the kind the defendants suggest there is which is established by clear and convincing evidence.
[21] I do not accept that the defendants succeed at this threshold stage. There is no evidence that such is the case.
[22] The submission also misconceives the operation of custom in this area.
[23] It is stated in the Law of Contract in New Zealand4 that:
1 Woods v N J Ellingham & Co Ltd [1977] 1 NZLR 219 (SC).
2 Everist v McEvedy [1996] 3 NZLR 348 (HC) at 360.
3 Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis) at paragraph 6.3.1.
It is a well-established rule that a contract may be subject to terms that are sanctioned by custom, whether commercial or otherwise, although they have not been expressly mentioned by the parties.
[24] I respectfully agree with that statement of the position. The authority which is relied upon in support of the proposition is the well-known case of Hutton v Warren.5 That case was concerned with the basis upon which a tenant was by custom required to farm a demised property. The custom in that case involved the situation where a tenant of a farm had expended work and labour and used seed on the farm of which he was a tenant but which he would be prevented from enjoying
the resulting crops because of the fact that he was departing the property before the harvest season.6 The tenant in the specific case had been given notice to quit.
[25] In judgment, the Exchequer Court of Pleas considered that the terms of the custom were imported into the lease arrangements between the parties. The judgment of the Court which was delivered by Parke B includes the following passage:
The common law, indeed does so little to prescribe the relative duties of landlord and tenant, since it leaves the latter at liberty to pursue any cause of management he pleases, provided he is not guilty of waste, that it is by no means surprising that the Courts should have been favourably inclined to the introduction of those regulations in the mode of cultivation which custom and usage have established in each district to be the most beneficial to all parties.
[26] The justification that is provided seems to suggest that where the subject matter of the contract between the parties makes no provision for a particular point and where it is desirable, if not necessary, for there to be a provision which governs their relationship in the area in question, the courts will import into the contract the terms of an applicable custom in order to supply the deficiency in the parties’ contractual terms. There is a considerable difference between the milieu in which cases, of which Hutton is one, were decided in the early 19th century and the banking contract between a bank and its customer in the 21st century. In the former
period, elaborate all-embracing written contracts of the type which the parties in this
4 Burrows, Finn and Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at paragraph 6.3.1.
5 Hutton v Warren (1836) 1 M & W 466 (Exch).
6 At page 518.
case entered into would have been unknown. In an era long before the time when complex contracts could be readily reproduced by way of photocopiers, scanners, computers and the like, it would be common for deeds that parties entered into not to be comprehensive in their effect. There would be lacunae that, unless filled, would mean that contingencies which ought to have been provided for were not in fact covered. The readiness of the courts to supply the deficiency by importing the provisions of local customs is understandable in that context.
[27] By contrast, the documentation produced for the two loans in this case runs to some 43 pages of printed material, much of which is in fine type. That documentation comprises the contractual documents which the parties agreed would regulate the transaction between them and their relationship. The total mentioned excludes the mortgage instruments that were actually registered.
[28] The case for the defendants is that it is “arguable” that the Court should conclude that still further provisions ought to be implied into the parties’ contract and therefore summary judgment is inappropriate.
[29] But the issue for the Court is precisely the question that is supposed to be the subject of the “custom”. Mr Thwaite’s argument amounts to a submission that there is a body of provisions or conditions which parties to like arrangements to those which were entered into in this case customarily adhere to. But it is for the Court to determine whether, assuming that factual matter is established, the Court ought to recognise that matters have reached the point where the parties actually recognise that they do not just observe the custom but, further, there is good reason why the Court ought to authoritatively determine that the custom forms part of the binding contractual arrangements.
[30] Finally, Mr Thwaite submitted that in the High Court judgment of Forivermor v ANZ National Bank7 Justice Goddard had confirmed that a custom existed whereby the terms of the Code were imported into the contracts between customers and banks. I do not read that judgment as being to that effect. The Judge
in that case was asked to accept that the contract between the parties in that case
7 Forivermor v ANZ National Bank [2012] NZHC 1763.
included a requirement that the bank would treat the client fairly and reasonably. The view was expressed that most people would expect that the Bank would do so anyway.8 The Judge concluded that in any case on the facts before her, the Bank had treated the client fairly and reasonably.9 I do not read the judgment as containing a deliberate pronouncement on the correctness of the proposition that a custom of the
kind which the defendants contended for here exists in New Zealand. I read the comments in that judgment as providing support for the view that generally people will expect their bank to deal with them in a fair and reasonable way which is, with respect, a commonsense observation. Because of Justice Goddard’s finding that the Bank had acted fairly and reasonably and did not breach the Code’s clause that the Bank would only provide credit or increase a credit limit when the information available to the Bank leads it to believe the customer will be able to meet the terms of the credit facility, it was unnecessary for her Honour to express a finding as to whether these terms were implied terms of the contract due to custom.
[31] My conclusion is that it has not been established that it is arguable that, through the adoption of the Code, a custom of the kind which the defendants claim exists has come into existence in New Zealand.
[32] There have been a number of attempts made by parties to banking contracts
to assert that the provisions of the Code were to be implied into the contracts. So far as I know none of them have been based upon an explicit submission that such implication arises from the adoption of a custom. But in all cases attempts to have the terms implied into the contract had been rebuffed.
[33] An example is to be found in the case of Clarke v Westpac Banking
Corporation10, in which Paterson J stated:
…the Code does not impose a duty of care which alters the equitable principles referred to above. They may be sound rules of business practice but they do not in my view, impose a legal obligation under which Mr Clarke can avoid liability under the guarantee or bring a counterclaim for a breach of duty of care.
8 At [105].
9 At [104].
10 Clarke v Westpac Banking Corporation (1997) 6 NZBLC 102,182 (HC).
[34] Clarke was recently affirmed by the High Court in The Hong Kong and Shanghai Banking Corporation Limited v Howe11 where the defendants argued that the provisions of the Code were implied into the contract between the parties. In that case I rejected a submission in reliance on both Clarke and the earlier decision of Dungey.12
[35] Of course, it is not the position of the Court to impose upon the parties contractual provisions that the parties did not think of but which the Court thinks would be desirable additions to their contracts. Whether the origin of such additional terms might be found in customary practices would not matter.
[36] Against that background I turn to consider the specific submissions which Mr
Thwaite made.
[37] There is no evidence that it was notorious that parties conducted themselves on the basis that the contract included terms of the kind which the defendants here contend for. The fact that the Code includes such a term does not establish the existence of a custom of this kind. There is no question that the Code contains such a provision. But in my view the Code may be seen as a document which is no more than advisory in its intent.
[38] The defendants’ arguments lack merit in any case.
[39] As I have already noted, the case for the defendants is that the Bank ought not to have lent as much as it did to them. It was said that the statements of financial position which the defendants provided raised concerns about their ability to fund the deposit and to pay the instalments on the loans.
[40] Even if it could be said of this contract that it imported a provision that the Bank was required to act fairly and reasonably towards the customer, it is not arguable in my view that the Bank ought to have considered whether it was
conducive to the defendants’ interests to enter into this contract and to discourage
11 The Hong Kong and Shangai Banking Corporation Limited v Howe [2012] NZHC 2066.
12 Dungey v ANZ Banking Group (NZ) Ltd [1997] NZFLR 404 (HC).
them from doing so because of concerns that the Bank ought reasonably to have concerning whether they could manage the loans.
[41] Making the assertion that it would be reasonable for the Bank to undertake the kind of oversight of the borrowers’ arrangements is not, on its own, sufficient. Some analysis of the reasons why that is so has to be advanced before it can be accepted that there is a convincing argument that the parties would regard it as fair and reasonable for the Bank to have the obligation contended for. Just because the Bank is an institution of financial substance which could possibly carry the expense accompanying the alleged duty is not sufficient. That seems to be a tacit premise for the argument that the Bank is in fact under a duty.
[42] In general terms it must be accepted that banks have expertise in the area of assessing whether a given borrower is a good credit risk. The fact that they are adept at carrying out such analyses begs the question of whose benefit they should deploy their abilities in this area. It must also be recalled that the Bank’s analysis of loan applications involves elements of risk analysis. The Bank will ask itself whether there is a reasonable chance that the customer will service the loan and therefore produce the profits that the Bank hopes to derive from the transaction. But it asks the second question which is whether the security margin available under the mortgage or other security is sufficient to ensure that even if the borrower defaults, the Bank’s position will be protected. By structuring its security correctly, and having regard to penalties for early repayment, an ability to pass on the expenses of enforcing its claim against the mortgagors etc, the Bank would expect that in most cases it would not suffer a loss. It would get back its principal which it should then be able to re-circulate.
[43] A borrower has less room to manoeuvre. Borrowing generally involves greater risks in the case of default because it is almost certain to lead to substantial losses on the part of the borrower. The borrower does not have the comfort of an indemnity.
[44] Therefore while at first sight, it might seem that the interests of the Bank and the customer coincide at the point where a decision to lend money is made, that is not in fact the case. The Bank has a higher risk tolerance.
[45] If the arguments for the defendant are correct, the Bank’s decision to lend would not be governed by assessing whether a transaction fell within a range of risks that was acceptable to it alone. Indeed a loan might fall into that category and yet the bank would be required to decline to lend because the proposal could cause harm to the customer. There is entirely lacking a sound policy basis upon which it could be said that institutions such as banks, because they happen to be involved in the business of lending money, should also have imposed upon them the obligation of providing advice about the commercial wisdom of their customers’ proposed transactions.
[46] Further, it is not necessary to impose an obligation on the Bank to advise the customer. There are other professional sources to which customers can have resort to obtain advice about the desirability of proposed loans - sources such as chartered accountants and financial advisers and budget organisations.
[47] While the proposed obligation seems to be beguilingly simple, closer examination is required to understand what the Bank would have to consider before giving conscientious advice about whether the transaction was desirable from the customer’s point of view in the sense of being one that involved a loan which might not be supportable by the customer. It might be rhetorically asked, for example, whether the Bank should go so far as considering if the customer’s sources of income from the business are sustainable to the point where the customer will be able to continue managing the loan?
[48] Nor is imposing such an obligation on the plaintiff consistent with the status that banks have traditionally had at law and equity. Traditionally, it has been recognised that the function of the bank is to lend money by way of arms-length transactions. Absent special considerations relating to the transaction, banks are not regarded as fiduciaries for their customers. There is no suggestion in the circumstances of this case that the Bank voluntarily gave advice to the defendants on
the general wisdom of the transaction13 which might take the case out of the run-of- the-mill category and so expose the plaintiff to some type of obligation to take care.
[49] Additionally counsel for the plaintiff referred me to the case of in Bartle v GE Custodians14 where Randerson J commented (at paragraph 351) that it would be a curious state of affairs if a borrower could seek loans from a lender and then complain that the lender had complied with that request. I respectfully agree with the Judge’s remarks.
[50] The matters that I have just mentioned reinforce the current authority which has rejected the proposition that the provisions of the Code ought to be implied into contracts between bankers and their customers.
Decision
[51] I conclude that the defendants do not have an arguable defence. The plaintiff is entitled to summary judgment in the following terms:
a) Judgment for the sum of $213,915.40;
b)Interest on the sum of $213,915.40 at the rate of 11.24% per annum and compounding monthly on the 12th day of every month from 25
January 2013 until the date of the hearing, 6 May 2013 ($6,800.01);
c) Costs of $12,736.00 and disbursements of $1,486.30.
[52] I do not intend to make an order for the payment of interest calculated for the period from judgment until anticipated repayment. In that regard, I intend to adopt
the approach I took in my judgment in ASB Bank Ltd v Teng.15
13 As was the position in Lloyds Bank Limited v Bundy [1975] QB 326 (CA).
14 Bartle v GE Custodians [2010] 1 NZLR 802 (HC). The High Court judgment was overturned by
the Court of Appeal: Bartle v GE Custodians Ltd [2010] NZCA 174; [2010] 3 NZLR 601, but restored by the Supreme Court: GE Custodians v Bartle [2010] NZSC 146; [2011] 2 NZLR 31.
15 ASB Bank Ltd v Teng HC Auckland CIV-2006-404-5849, 15 March 2007.
J.P. Doogue
Associate Judge
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