Implied Term of Arrangement - Essay Example

Narni Pty Ltd v National Australia Bank Limited [1998] VSC 146 Case Studies Introduction In 1989, Narni Pty Ltd was engaged in private nursing home business. Narni Pty Ltd used to write cheques on the defendant- The National Australian Bank Ltd, the bank dishonored several cheques which were drawn on Narni No 2 Cheque account which had been maintained at the Elwood branch. After the dishonor of the cheques by the bank, debenture securities were redeemed and an agent of the mortgage in possession was appointed and disposed the business on 17th August 1989. The reason why Narni Pty Ltd moved to court to sue the bank was the wrongful dishonor of the cheques. The conduct of National Australia Bank Limited clearly shown there was an agreement to exceed the overdraft Limit hence creating an implied term in the contract which barred the bank from terminating the extended overdraft limit without a notice. Narni suffered losses from the dishonor of the cheques hence had to sue the bank for damages. Implied term of arrangement and why significant for Narni and banker- customer relationships According to the agreement made between the bank and Narni, overdraft limit was $ 65,000 hence honoring $ 40,000 would exceed the approved limit. However, their October 1988 agreement provided for provision of finance for the renovations which were being carried out by Carrum Nursing Home and at the same time the bank would continue honouring the cheques notwithstanding the approved limit of $ 65,000. By the implied conduct of the two parties, the approved limit was varied to $ 100,000 hence creating an “overdraft extension”. At the end of 1988, all assets of Narni had been financed by loans to the total of $ 896,165 hence Narni was responsible for making $ 66, 718 per annum installments as payments for the loan. Majority of the income also came from Federal Department of Health and Community services (DCS) as advance payments at the beginning of each month. The total income of 1988 stood at $ 225 M where patient contributions were below $ 400, 000 with majority of the income being advance payments by DCS at the rate of $ 150,000 per month. From the account transactions history, the account always had a credit balance at the beginning of each month and a debit balance at the end of the month. DCS would pay between $ 90,000 to $ 124,000 as initial payment to the account and another final payment after two weeks which made that the balance would be above the extended overdraft limit of $ 100,000. However, withdrawals would occur evenly throughout the month with majority being wage payments which accounted for 62%of expenses which translates to $ 1.4 M which was paid after every two weeks. In some months, wages would amount to $ 120,000. The Branch manager would approve overdraft facilities depending on the account balances of the account. Below is a summary of the account balance for the six months from January to June 1988. Month Start Balance Zero Balance Date End Balance January 1988 $99,716.09 CR (5/1) 20 $24,669.34 DR (1/2) February 1988 $66,069.68 CR (2/2) 19 $47,512.02 DR (1/3) March 1988 $59,282.35 CR (2/3) 17 $69,168.08 DR (6/4) April 1988 $26,683.13 CR (7/4) 14 $94,162.28 DR (3/5) May 1988 $1,533.12 DR (4/5) 2 $87,897.80 DR (1/6) June 1988 $7,016.25 CR (2/6) 10 $71,675.53 DR (1/7) From the account balance figures, extended credit facility was provided in every month while payments in to the account from DCS delayed were delayed in some months meaning the account would still have a debit balance at the beginning of the month and an overdraft would still be approved. In July 1988, the same trend continued with automatic payments from DCS of $ 109, 608 leading to account credit balance of $ 29, 582. From the transactions of July 1988, the end of the month account balance was overdrawn. The account reflected a debit balance at the start of August 1988 but it was reduced by a deposit of $ 85, 671 to settle to a debit of only $ 1,375. In September, the account was overdrawn to a debit of $ 117, 562 at the end of the month. Cheques were still paid by the Branch manager thought the account was overdrawn. The assistant regional manager did not exercise due care and skill since he was not authorized to allow an account to exceed the approved limit. From the evidence adduced in court, though there was formal credit limit application form which was not produced in court, the bank would avail allow the account to be overdrawn above the approved limit pending the DCS payments in to the account. In June, when Narni was still servicing his loans, Mr Kealy who was the branch manager still allowed loan repayments by Narni from the account totaling $ 48,000 to Norma Caringal. The account was having a debit balance of $ 50,000 for more than two months in September. Mr. Riddiford, who had the authority of credit facility approvals, could visit the branch manager and ought to have been advised on the account status hence by his failure to give a notice to Narni he was contented with the extended credit facility. From Mrs. McCarthy evidence, the bank manager did not follow the formal agreements with the customers hence was sympathetic of the needs of Narni. According to the conduct of the bank in the case analysis, it gives rise to overdraft extension when the account balance was more than $ 100,000 but it failed to dishonor cheques which were drawn within the $ 100,000 without any adequate notice to Narni. According to the contract between the Bank and Narni, the bank was required to pay cheques when funds was available in the sense that an agreement existed to overdraw to a certain limit and funds existed for the transaction without exceeding the limit. All transactions whether withdrawals, acceptances, bank cheques, periodical payments or bills exchange were to be made to extend permitted by the bank according to the documents which were produced by Narni in the Authority to Transact Banking Business in November 19871. After the extended credit agreement in October 1988, the bank continued to allow credit facilities above the $ 100,000 limit which is evidenced by the account balance in the following months. Month Opening Balance Zero Balance Date End Balance November 1988 $40,398 CR (3/11) 21 $68,934 CR (1/12) December 1988 $41,975 CR (2/12) 13 $47,470 DR (23/12) January 1989 $76,462 CR (24/12) 11 $96,378 DR (8/2) February 1989 $5,384 CR (1/2) 2 $127,464 DR (1/3) March 1989 $12,680 DR (2/3) - $173,961 DR (3/4) April 1989 $60,341 DR (4/4) - $128,287 DR (1/5) May 1989 $20,520 DR (2/5) - $174,568 DR (2/6) The conduct of the bank gave rise to credit extension. According to the historical view of the courts, banks have certain characteristics which include the keeping of current accounts in their books, the duty to accept deposits and place them for customers’ credit and the ability to honor cheques and other transfer orders which may be drawn by the customers on the bank2. Currently most banks offer a variety of services which can be classified in to deposits and savings, money transmission, lending, foreign exchange services and specialized advice and other informational services. Banks also participate in investment and trust services through numerous banking products like life assurance, tax planning and share plans3. In the lending function, banks offer overdraft services, personal loans and other bridging loans. Banks also transmit money through cheques acceptance, credit transfer, standing orders and directs debits in to the customers account4. The bank and customer relationships are usually contractual though personal customers may not have a signed contract with the bank which specifies the duties, the obligations and rights of the bank and the customer5. In such instances, like in the case above, the rights and obligations of both the customer and the bank are governed by the implied contract which is established by common law6. The Australian code of Banking practice seeks promote the disclosure relevant information to the customers and ensure effective and informed relationships between the banks and the customers7. According to the banking Act, a person becomes a customer of the bank when an account id opened (Woods V. Martins Bank 1959). If such contract does not exist banks are liable for tort. According to banking act of 1959, bank and customer relationship, banks should protect the confidentiality of the customer information unless where the individual customer gives consent for disclosure or when it is necessary to pursue genuine interests of the business8. The implied terms of the banker and customer relationship requires the bank to receive customers’ deposits and pay cheques and comply with written orders from the customer when there is sufficient amount of money in the customer account9. Banks should also provide the customer with sufficient notice before closing the account if it is in credit and must act on valid instructions from the customer and not on any forgery10. Estoppel and claims that amounted to estoppel According to the law, estoppel is a rule of evidence which prevents one party to a contractual relationship from denying what he has previously stated or what has been legally established. Estoppel will protect one party to a contract from damage by another party’s voluntary conduct which may include concealment of material facts to the transactions. Estoppel enables the plaintiff to support claims for damages which may have been incurred from the reliance of the misleading misrepresentation of the other party. In the proceedings, the bank was estopped from claiming that it would not dishonor cheques drawn within the limit of “at least $ 100,000” without a notice to Narni. Narni relied on the conduct of the bank in honoring the cheques when the account balance was below $ 100,000 debit hence he believed the same trend and terms would continue to exist unless the bank notified him in writing. Narni heavily relied on this implied term in his business transactions hence he incurred damages from the bank’s failure to maintain the same practice in their banker and customer relationship11. Narni claimed $ 8, 236,007 that amounted to estoppel however some losses had being incurred by Mrs. McCarthy who was an employee of Narni hence the loss had to be reduced to $ 8, 031,058. In arriving at the damages, the court considered the cash flows which the nursing home would generate until January 2000. Conclusion National Australian Bank Limited had breached an implied term in the contract since it would allow extended credit facility of more than $ 100,000. The bank failed to provide a notice to Narni who had relied on the credit facility in his businesses. Failure to provide the credit led to the loss of the nursing business hence the bank was guilty of breach of a contractual term even though it was not expressly specified in the contract document. Reference list: Batten, Richard and Pearson, Gail. Understanding Australian consumer credit law: a practical guide to the national consumer credit reforms. Sydney. CCH Australia. 2010. Gilles, Peter. Business law. Sydney. 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