Hatton National Bank Limited v.
Helenluc Garments Ltd. and Others
HATTON NATIONAL BANK LIMITED
v.HELENLUC GARMENTS LTD. AND OTHERS
SUPREME COURTDHEERARATNE, J.,
PERERA, J. ANDWIJETUNGA, J.
S.C. APPEAL NO. (CHC) 7/97
C. (CIVIL) NO. 19/96 (1)
MAY 11, 1999
Contract – Banking facilities – Overdrafts secured by mortgage of property andguarantee – Prescription of action by the Bank in respect of overdrafts andmortgage – Prescription Ordinance – Action against guarantors – Waiver of theright to plead prescription.
The appellant Bank (the plaintiff) by its plaint dated 27.5.96 instituted actionagainst the 1st respondent (the 1st defendant) and the 2nd to 6th respondents(2 to 6 defendants) for recovery of monies advanced on overdraft facilities providedto the 1st defendant company. As security for monies advanced on overdrafts,the 1st defendant had by a mortgage bond dated 21.12.82 mortgaged andhypothecated certain movable properties to the Bank. The rights under thesetransactions which were initially with the Dubai Bank were later assigned to anotherBank and finally to the plaintiff. By a guarantee dated 27.01.82 the 2nd to the6th defendants agreed to pay all monies due from the 1 st defendant to the Bank.The Commercial High Court dismissed the action on the ground that it wasprescribed,
The action had been filed on the basis that the demand on the overdraft facilitieswas made on 21.05.96. The cause of action arose on such demand; henceprescription would begin to run from that date both as regards the monies dueon overdrafts as well as the mortgage bond which was given as security forrepayment of the sums payable by the 1st defendant.
Overdrafts are loans by the banker to the customer, and in general nodemand is necessary, so that time runs against the banker in respect ofeach overdraft from the time when it is made. A bank cannot, therefore,recover against a customer on an overdraft which has lain dormant for
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the prescriptive period which in Ceylon, in the absence of a written contract,would be three years. The overdraft facility in dispute was granted at orabout the time the hypothecary bond was signed and hence the claim isprescribed.
As regards the mortgage bond, ten years had lapsed from the date ofthe mortgage or hypothecation. As such the action based on the bondis prescribed in terms of section 5 of the Prescription Ordinance.
2. The 2nd to the 6th defendants had in the guarantee made by them agreedto waive the plea of prescription. Such an agreement is valid and enforce-able whether it is made before or after the period of limitation. Hence,the plaintiff is entitled to pursue the action against those defendants.
APPEAL against the judgment of the (Commercial) High Court, Colombo.
Romesh de Silva, PC with Palitha Kumarasinghe for plaintiff-appellant.
Defendants-respondents absent and unrepresented.
Cur. adv. vult.
September 09, 1999
This is an appeal by the plaintiff-appellant from the judgment ofthe Commercial High Court, Colombo, dated 9.5.97 dismissing theplaintiffs action, after ex parte trial.
The plaintiff, by its plaint dated 27.5.96, sought to recoverfrom the defendants-respondents, jointly and/or severally, a sum ofRs. 6,702,067/31, together with interest thereon at 24% from 1.1.96until payment in full.
It was pleaded in the plaint inter alia that at the request of the1st defendant, the Dubai Bank Ltd. provided loan/overdraft/bankingfacilities to the 1st defendant, and as security for repayment, the 1stdefendant by Mortgage Bond No. 1232 dated 21.12.82 attested byD. M. Swaminathan, Notary Public, mortgaged and hypothecatedcertain moveable property to the said Bank.
SCHatton National Bank Limited v.
Helenluc Garments Ltd, and Others (Wijetunga, J.)367
The said Dubai Bank Ltd. by deed of Assignment No. 2548 dated27.9.89 attested by V. Murugesu, Notary Public, assigned all rightsunder the said Mortgage Bond No. 1232 to the Union Bank of theMiddle East Ltd.
The said Union Bank of the Middle East Ltd., subsequentlyknown as the Emirates Bank International Ltd. by deed of AssignmentNo. 621 dated 17.9.92 attested by R. de S. Munasinghe, Notary Public,assigned all rights under the said Mortgage Bond to the plaintiff.
By guarantee dated 27.1.82, the 2nd to 6th defendants agreed topay all moneys due from the 1st defendant to the Dubai Bank Ltd.
By the Deeds of Assignment aforementioned, all rights under thesaid guarantee too came to be assigned to the Union Bank of theMiddle East Ltd. and thereafter to the plaintiff.
As the 1st and/or the 2nd to 6th defendants failed and neglectedto pay the aforesaid sum of Rs. 6,702,067/31 together with interest,the plaintiff instituted action for the recovery of the same.
The learned High Court Judge dismissed the action on the groundthat the plaintiff's action was prescribed in law.
It was submitted on behalf of the appellant that the overdraftfacilities given to the 1st defendant became payable only upon demandand thus no cause of action arose on the principal transaction untila demand for payment was made by the plaintiff. As the MortgageBond was given as security for repayment of the sums payable bythe 1st defendant, no cause of action arose on the bond too untilsuch a demand was made. It was, therefore, contended that the causeof action arose from the date of demand and not from the date ofthe bond; and the demand having been made on 21.5.96, prescriptionwould begin to run only from that date.
In regard to the contention that the overdrafts became payable onlyon demend, I would refer to Weeramantry: Law of Contracts, vol. II,section 873 at page 833 which states that "overdrafts are loans by
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the banker to the customer, and in general no demand is necessary,so that time runs against the banker in respect of each overdraft fromthe time when it is made. A bank cannot therefore recover againsta customer on an overdraft which has lain dormant for the prescriptiveperiod which, in Ceylon in the absence of a written contract, wouldbe three years".
This view finds support in Chitty on Contracts (27th ed. – 1994)vol. I section 28 – 025 at page 1338 where it states that "An overdraftis a loan by the banker to the customer. At common law, in the caseof an overdraft repayable on demand, a demand was in general nota condition precedent to bringing an action and time ran against thebanker in respect of each advance from the time when it was made".
In the absence of any material to show that the parties to thisaction had contracted otherwise, I am of the view that a demand wasnot a condition precedent to an action based on the principal trans-action. No evidence has been led as to when this overdraft wasgranted. The learned trial Judge was right in thinking that it wasgranted at or about the time the hypothecary bond was signed andthat the claim was prescribed.
As regards the Mortgage Bond, the relevant provision of thePrescription Ordinance applicable is section 5. Dr. Weeramantry (ibid)at section 866, page 821 has admirably paraphrased that section inone long sentence as follows:
“No action shall be maintainable –
for the recovery of any sum due upon any hypothecation ormortgage of any property or
upon any bond conditioned for –
the payment of money;
the performance of any agreement or trust; or
the payment of penalty
SCHatton National Bank Limited v.
Helenluc Garments Ltd, and Others (Wijetunga, J.)369
unless the same be commenced –
In the case of an instrument payable at or providing forthe performance of its condition within a definite time, withinten years of the expiration of such time and
(£>) In all other cases –
within ten years from the date of such instrument ormortgage or hypothecation, or
of last payment of interest thereon, or
of the breach of the condition."
On the facts of this case it would appear that the date from whichprescription would commence to run is the date of the instrument.The learned trial Judge was therefore right in holding that an actionbased on the hypothecary bond is prescribed.
I shall now consider the position of the 2nd to 6th defendants inregard to the question whether the cause of action against them istime-barred.
It is relevant to consider the effect of clause 16 of the guarantee(P7), where the 2nd to 6th defendants specifically agreed that “weand each of us hereby agree that so long as the monies hereinmentioned or any part thereof is owing by the Customer to the Bankor has not already been paid to the Bank by the Customer or byus the liability of us and each of us to pay the same shall subsistand the monies herein mentioned shall be recoverable from and bethe liability of us and each of us jointly and severally notwithstandinganything to the contrary herein or in any rule of law or equity or thePrescription Ordinance or any statute contained and we hereby furtheragree that we or any of us shall not plead the Prescription Ordinanceor any of its provisions or any rule of statute or other law as a barto the Bank suing us or any of us for the recovery of the moniesherein mentioned or any part thereof" – (emphasis added).
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Weeramantry (ibid] in section 844 at page 797 states under theheading: 'Agreements not to plead limitation' that "it is not contraryto public policy for parties to enter into an agreement not to pleadlimitation. Such an agreement is valid and enforceable in English Lawif supported by consideration, whether it be made before or after thelimitation period has expired. The same observation holds good forour law, except that such an agreement need not be supported byconsideration”.
Chitty (ibid) dealing with the English Law on 'Agreements not toplead the statute' also states at section 28 – 080 at page 1365 that"an express or implied agreement not to plead the statute, whethermade before or after the limitation period has expired, is valid ifsupported by consideration, and will be given effect to by the Court”.
The plaintiff can therefore claim the benefit of the aforementionedclause of the agreement not to plead limitation, insofar as the 2ndto 6th defendants are concerned, and I would accordingly hold thatthe provisions of the Prescription Ordinance would not operate as abar to the plaintiff suing them for the recovery of the moneys dueunder the guarantee.
For the reasons stated above, I would set aside the judgment ofthe learned High Court Judge dated 9.5.97 and remit the case to theHigh Court. Since the 2nd to 6th defendants have defaulted in theirappearance, I direct that appropriate steps be taken in terms of section85 of the Civil Procedure Code as regards the plaintiffs case againstthose defendants.
There will be no costs.
DHEERARATNE, J. – I agree.
PERERA, J. – I agree.
Appeal in respect of
2nd to 6th defendants-respondents allowed.
HATTION ANTIONAL BANK LIMITED V HELENLUC GARMENTS LTD. AND OTHERS