VOL 20 NO 422 REGD NO DA 1589 | Dhaka, Saturday January 14 2012

Culture of default loan thrives in absence of Tort Law

Bangladesh is the only country in the world having no legal provision to identify a wilful or a non-wilful defaulter. Yet all public sector borrowers are considered as non-wilful defaulters and there is no law to make the management liable for the default loan. All stakeholders except businesspersons are indemnified for all of their acts, omissions and conducts, writes M S Siddiqui

M S Siddiqui The most common offences arising from negligence to fulfil contractual obligations and commercial contracts are actual fraud, fraud, wilful fraud, gross negligence, misconduct and wilful default. Some of these are tortuous offences. Bangladesh does not have a Tort Act and the offences of 'wilful misconduct,' 'deliberate default' and 'gross negligence' are almost absent in our legal system. There is hardly any person willing to go to court for redress against tortuous offences. Actual fraud means actual personal dishonesty, and includes reckless disregard as to whether or not an act is a breach of duty. A court defined dishonesty, as in most situations there is little difficulty in identifying how an honestperson would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless, there is a very good and compelling reason, an honestperson does not participate in a transaction, if he knows it involves a misapplication of trust assets to the detriment of the beneficiary. Nor does an honestperson in such a case deliberately close his eyes and ears, or deliberately not ask questions. Honesty is an objective standard. The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. For example, a businessperson, who knowingly breaches his duty, in the honest belief that it was in the interests of his company, would not be guilty of fraud. But, if one believes that he was acting in the interests of the company, he would not be honest if his belief is so unreasonable by any objective standard, no reasonable director could have thought what he did or agreed to do, was for the benefit of his company. This imports, in part, an objective test-the test is not wholly subjective. He can escape liability if he does not know what he is doing is dishonest by ordinary standards. The indemnity is a widely discussed issue for professionals and it is defined in law, rules and code of conducts of the professions. The bureaucrats in government particularly in developing countries are effectively indemnified for their acts. Most of the laws in Bangladesh

haveindemnity clauses for bureaucrats. They have the option of defence of "in the interest of state and innocent or honest state of mind." The laws usually defend them for almost all of wilful and non-wilful acts, omission and commissions. A dishonest state of mind means "consciousness that one is transgressing ordinary standards of honest behaviour." Conscious and reckless indifference as to whether or not an action is in breach of duty, will amount to dishonesty, and accordingly to 'actual fraud.' Recklessness may, of course, also be telling evidence of actual deliberate dishonesty. The use of the word 'actual' in the expression 'actual fraud' excludes an extended meaning of fraud, viz. so called 'equitable fraud,' which is an imprecise concept, involving a breach of duty, but short of actual fraud; it covers unconscionable bargains, abuse of confidence, fraud and undue influence, all of which would usually fall outside the ambit of anindemnity clause or an exculpatory clause in any event. But 'equitable fraud' also includes a breach of fiduciary duty, which may, in the context of exculpatory orindemnity clauses, clearly be material. Fraud is generally thought to mean not only actual fraud, but also to include 'equitable fraud.' If this is correct, it means that the preservation for liability for 'fraud' will also preserve liability for breach of fiduciary duty. Wilful fraud or dishonesty is equivalent to 'actual fraud.' Wilful default means knowing or being reckless as to whether the act or omission complained of is a breach of duty. The expression 'gross negligence' means nothing more than ordinary negligence. The current prevailing view in judiciary is that the words 'gross negligence' means a serious or flagrant degree of negligence, which is a serious, unusual and marked departure from the normal standards. Gross negligence means clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence, but as matter of ordinary language and general impression, the concept of gross negligence seems to be capable of embracing not only conduct undertaken with actual appreciation of the risk involved, but also serious disregard or indifference to an obvious risk. A subjective appreciation of risk is not required. 'Gross negligence' is primarily a civil law concept. The term gross negligence generally requires two elements-a failure to exercise ordinary care in circumstances where the risk of harm was plain for all to see, and the absence of anything which makes the act or omission excusable from the point of view of the wrongdoer. For example, two parties entered into a production and supply contract under a fixed price contract. The project did not progress as planned resulting in significant delays and cost overruns which the buyer alleged was a result of a lack of cooperation of the seller. The contract was terminated with each party arguing that this was in response to a repudiatory breach by the other. The buyer is liable for breach of the contract for suspending work, entitling seller to terminate and claim damages. In assessing the amount of damage to be awarded, the court use to consider the limitation of liability clause contained in the contract which was not to apply where there was 'wilful

misconduct' or 'deliberate default.' The court may be opinionated on the issue of 'wilful misconduct' while referring to conduct of a person who knows that he is committing, or intends to commit a breach of duty, or is reckless in the sense of not caring whether or not he is committing a breach of duty. This was in contrast to 'deliberate default' which meant a default that is deliberate, in that theperson committing the relevant act knew that it was a default. The 'deliberate default' did not extend to recklessness and was, therefore, narrower than 'wilful misconduct.' Wilful misconduct is an intention to do something which the actor knows to be wrong or a reckless act in the sense that the actor is aware that loss may result from his or her act and yet does not care about it. A British land mark decision of Forder vs Great Western Railway Co (1905), in which Lord Alverstone CJ adopted the following definition: "Wilful misconduct means misconduct to which the will is party as contra-distinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that aperson wilfully misconducts himself, who knows and appreciates that it is wrong conduct in his part in the existing circumstances to do, or to fail to omit to do (as the case may be), a particular thing, and yet intentionally does or fails or omits to do it, or persists in the act, failure or omission, regardless of the consequences." In English law, the expression 'wilful default' has been interpreted requiring that the person must know "that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in a sense of not caring whether his act or omission is or is not a breach of duty." Therefore, if the concepts of 'gross negligence' or 'wilful default' are proposed in the course of negotiations then care needs to be taken to ensuring it is clear what the parties to the contract mean by these terms. The parties should consider the particular matters and areas in which loss may arise, and work through these particular scenarios to determine appropriate definitions for these terms. Expressions like 'wilful misconduct' and 'wilful default' are often found in contracts, particularly in limitation and exclusion clauses. Wilful misconduct to be proved there must be either: "an intention to do something which the actor knows to be wrong or a reckless act in the sense that the actor is aware that loss may result from his act and yet does not care whether loss will result or not." 'Wilful default' has received similarly worthy efforts by the courts at clarifying its scope and meaning. It occurs where a person breaches contractual obligations either intentionally or recklessly. The classic exposition of this interpretation derived from the 1885 Court of Appeal in UK case of Re Young and Harston's Contract. 'Wilful,' Lord Justice Bowen opined, generally implies, "nothing blameable," but merely that

"there being a person who is acting as a free agent, which has been done arises from the spontaneous action of his will." Thus the word 'wilful' implies someone who knows what he is doing, and intends to do what he is doing, and is a free agent. Lord Justice Bowen proposed that 'default' is in itself a relative term, in a similar vein to negligence, meaning: "nothing more, nothing less, than not doing what is reasonable under the circumstances" or "not doing something which you ought to do." He summed up by stating that the term 'wilful default' is not a "term of art," despite the fact that it is in very common use in many classes of business contract, and that to try to comprehensively define it would be a 'delusion' and an 'idle pursuit.' While 'case law' provides some assistance in interpreting these terms, it is important to note that their actual meaning will depend heavily on both the other terms of the agreement and the commercial background. Moreover, the courts are likely to apply an intensely fact based approach to determine if these circumstances exist. The default loan is a widely discussed issue and there exists a culture to blame only the borrowers for the default loan. Bangladesh is the only country in the world having no legal provision to identify a wilful or a non-wilful defaulter. Yet all public sector borrowers are considered as non-wilful defaulters and there is no law to make the management liable for the default loan. All stakeholders except businesspersons are indemnified for all of their acts, omissions and conducts. Prof Rehman Sobhan at a seminar held some years back in Dhaka opined that it was not possible to identify the genuine and 'not genuine' borrowers as banking discipline and rule of law did not make such a distinction. The problem of default thus has to satisfactorily resolve the determinant of a deliberate default. The borrowing enterprise itself is unable to generate surplus adequate enough to service its debt. The persistence of default amongst such enterprises, whether wilful or not reflects a more serious problem. In such circumstances serious attention will have to given to resuming control over enterprises which are beyond redemption, whether due to wilful default or due to comprehensive market and/or management failure. The policy toward defaulters would need to be resolved within a wider policy framework which defines policy towards the public and private sector. The government should make a careful discrimination between sincere but unsuccessful borrowers and wilful defaulters. To the extent that there are borrowers who can be categorised as wilful defaulters it would be presumed that they be made liable to instantaneous action in the way of repossession of their industry and/or other collateral against which loans from the DFIs have been obtained. The Artho Rin Adalat Act 2003 is a one way Loan Recovery law (sec 2) only 17 categories of financial institutions can sue borrowers for recovery of loan (Case ref 1998, Sonali Bank and

Agrani Bank). The court has very limited authority of trial. The court will give judgment whether either or both the parties are absent during trial. There will be no issue of trial if defence admit the facts presented in written agreement i.e. the loan amount and interest thereof. The court will not consider anything related to the loan process and loan management etc. If is appeared that the borrower did not disagree with the claim, than there is no issue of consideration of the court. The bank sues the borrowers, if the re-payment is not followed. The court takes into cognizance the statement given by banks as per Bankers Book Evidence Act. The bank only considers the mistake certified by qualified Chartered Accountant. The court does not consider the loss or any other question. The court has no authority to exempt the payment of capital and interest. The writer is part time teacher at Leading University in the city, and pursuing PhD in Open University of Malaysia. He can be reached at email: shah@banglachemical.com