A. BACKGROUND.
1. This appeal emanates from the judgement and decree of Hon. V.M. Mochache, Resident Magistrate/Adjudicator delivered on 2nd February, 2024 in Milimani SCCC No. E8665 of 2023 Rosky Credit Limited v Belinda Katsila Akinyi.
2. The Appellant relies on the following grounds of appeal, as set out in the memorandum of appeal dated 26th February, 2024:
i. THAT the learned trial Magistrate erred in law and fact by finding that the Appellant is to pay the Respondent a sum of Ksh.216,225/-.
ii. THAT the learned trial Magistrate erred in law and fact by not adhering to the in duplum rule which is enshrined in law.
iii. THAT the learned trial Magistrate erred in law and fact by not considering the submissions of the of Appellant with regards to the in duplum rule.
iv. THAT the learned trial Magistrate erred in law and in fact by not considering the Appellant’s submissions on the unconscionability of the terms of the Agreement between the Appellant and the Respondent.
3. The Appellant proposes that the appeal be allowed, and that this Court sets aside the judgement of the trial Court and substitutes the same with an order dismissing the claim before the trial court with costs. The Appellant also seeks costs of this appeal.
4. As this is a first appeal, I am obligated, pursuant to Section 78 of the Civil Procedure Act and as articulated in Selle v Associated Motor Boat Co. Ltd [1969] E.A. 123, to re-assess, re-analyze and re-evaluate the evidence presented before the trial court and to arrive at my own conclusions, bearing in mind that I neither saw nor heard the witnesses testify.
5. In Selle, Sir Clement De Lestang observed that:
“This Court must consider the evidence, evaluate it itself and draw its own conclusions, though in doing so it should always bear in mind that it neither heard witnesses and should make due allowance in this respect.
However, this Court is not bound necessarily to follow the trial judge’s findings of fact if it appears either that he had clearly failed on some point to take account of particular circumstances or probabilities, materially to estimate the evidence or if the impression based on the demeanour of a witness is inconsistent with the evidence in the case generally.”
6. The duty of the first appellate court was also discussed by the Court of Appeal for East Africa in the case of Peters v Sunday Post Limited [1958] EA 424 in which it was held that the appropriate standard of review established in cases of appeal can be stated in three complementary principles:
“i. First, on first appeal, the Court is under a duty to reconsider and re-evaluate the evidence on record and draw its own conclusions;
ii. In reconsidering and re-evaluating the evidence, the first appellate court must bear in mind and give due allowance to the fact that the trial court had the advantage of seeing and hearing the witnesses testify before her; and
iii. It is not open to the first appellate court to review the findings of a trial court simply because it would have reached different results if it were hearing the matter for the first time.”
B. THE PLEADINGS BEFORE THE TRIAL COURT.
7. The matter before the trial court was based on contract. In its Statement of Claim dated 13th October, 2023, the Respondent herein (the Claimant before the trial Court) pleaded that, at the Appellant’s request, it advanced to her a loan facility in the sum of Ksh.190,000/- on 15th February, 2022, which was repayable within twelve (12) months and was to attract interest at the rate of 5% per month.
8. The Respondent further pleaded that, as security for the loan, the Appellant offered motor vehicle registration number KCH 360V as collateral. It was averred that the Appellant was also liable to pay a monthly vehicle tracking charge of Ksh.2,000/- in respect of the said motor vehicle.
9. The Respondent alleged that the Appellant subsequently tampered with the tracking device installed on the motor vehicle, thereby rendering it impossible for the Respondent to trace and repossess the collateral upon the Appellant’s default.
10. It was further pleaded that, despite repeated demands, the Appellant failed, neglected and/or refused to repay the loan in accordance with the parties’ agreement. According to the Respondent, the Appellant’s default constituted a breach of contract and resulted in her unjust enrichment.
11. The Respondent averred that, as at August, 2023, the outstanding amount due and owing, comprising the principal sum together with accrued interest and vehicle tracking charges, stood at Ksh.216,225/-.
12. The Respondent further pleaded that the Appellant’s conduct had occasioned it financial loss and inconvenience, for which she was liable. Consequently, the Respondent prayed for judgement against the Appellant in the sum of Ksh.216,225/-, together with interest at court rates and the costs of the suit.
13. The Appellant resisted the Respondent’s Claim by filing a response dated 20th November, 2023 in which she contended that she had neither tampered with the tracking device installed on motor vehicle registration number KCH 360V nor frustrated the Respondent’s ability to repossess the alleged collateral. She further denied having defaulted in the repayment of the loan, maintaining that she had already paid the Respondent a total sum of Ksh.192,000/- towards the loan advanced.
14. The Appellant further contended that the Respondent’s claim for Ksh.216,225/- was unlawful as it offended the in duplum rule, arguing that interest ought to have ceased to accrue once it equaled the outstanding principal on the non-performing loan. She maintained that the Respondent was engaged in the business of lending money and was therefore subject to the application of the in duplum rule as pronounced in the case of Mugure & 2 Others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR) (Civ) (19 August 2022) (Judgment). It was her case that the interest, penalties and other charges levied by the Respondent were exorbitant, unlawful and exceeded the principal sum advanced.
15. The Appellant further averred that the claim was incompetent for want of particulars of the alleged breach of contract and unjust enrichment. She denied being in breach of the parties’ agreement or having intended to unjustly enrich herself.
16. While admitting that she had obtained the loan from the Respondent, the Appellant asserted that several of the contractual terms governing the facility, including those relating to default interest, penalties and the realization of the alleged security, were oppressive, unconscionable and unenforceable.
17. The Appellant additionally pleaded that the penalty clauses, which she contended translated into an annual penalty rate of 520% in addition to interest at 60% per annum and vehicle tracking charges, were manifestly harsh, oppressive and unconscionable. She further alleged that the Respondent had acted contrary to Section 9(1)(c) of the Microfinance Act, by conducting its business in a manner detrimental to its customers and further contended that the Respondent was not licensed by the Central Bank of Kenya as required under the Act. Consequently, she prayed for the dismissal of the Appellant’s claim with costs.
C. THE EVIDENCE BEFORE THE TRIAL COURT.
18. The parties relied on their pleadings, witness statements and lists of documents filed in the trial court.
19. The Respondent’s witness, Vincent Ngochoch, filed a statement dated 13th October, 2023 in which he stated that he was the Respondent’s Collections Manager and was therefore conversant with the facts giving rise to the dispute. He stated that the Respondent was engaged in the business of credit financing and that the Appellant was one of its customers, having been advanced a loan facility of Ksh.190,000/- on 15th February, 2022.
20. He further stated that the Appellant had applied for the loan and offered the logbook for motor vehicle registration number KCH 360V as security. According to him, the vehicle was valued, fitted with a tracking device and thereafter jointly registered in the names of the Appellant and the Respondent as collateral for the loan.
21. The witness stated in his statement that the loan was repayable within twelve months and attracted interest at the rate of 5% per month. He stated that the Respondent failed to repay the loan as agreed and tampered with the vehicle tracking device, thereby frustrating the Respondent’s efforts to trace and repossess the motor vehicle offered as security.
22. The witness further stated in his statement that despite repeated demands and the issuance of a notice of intention to sue, the Appellant failed and/or refused to settle the outstanding debt, which stood at Ksh.216,225/- as at August 2023, comprising the principal amount, accrued interest and vehicle tracking charges.
23. He maintained that the Appellant’s failure to honour her contractual obligations amounted to a breach of contract and unjust enrichment, and accordingly urged the trial Court to enter judgement against the Appellant in terms of the Statement of Claim.
24. The Respondent filed a list comprising the following documents.
- Loan application form.
- Loan repayment agreement.
- Letter of offer dated 15th February, 2022.
- Customer Statement.
- Demand letter dated 7th September, 2023.
- WhatsApp extract message send to the Appellant.
25. The Appellant filed a witness statement dated 20th November, 2023 in which she confirmed that the Respondent had advanced her a loan of Ksh.190,000/- on 15th February, 2022.
26. She stated in her statement that she had applied for the loan and offered the logbook for motor vehicle registration number KCH 360V as security and that the vehicle was valued, fitted with a tracking device and thereafter jointly registered in the names of the Respondent and herself as security for the loan.
27. The Appellant further stated that she continued servicing the loan as agreed and denied the allegation that she tampered with the vehicle tracking device. She relied on a payment schedule demonstrating the repayments she had made and maintained that, by the time she filed her response, she had paid the Respondent a total of Ksh.192,280/-.
28. The Appellant further stated in her statement that, during the subsistence of the loan, she discovered that the Respondent had transferred the motor vehicle, which had been offered as security, into its own name without informing her. She denied having breached the loan agreement or intending to unjustly enrich herself, but expressed apprehension that the Respondent intended to dispose of the motor vehicle in order to recover what she considered to be unconscionable interest and penalty charges contrary to the law. She accordingly prayed that judgement be entered in her favour in terms of her response to the claim.
29. The Appellant filed a list comprising the following documents:
- Loan repayment agreement.
- Letter of offer dated 15th February, 2022.
- Repayment schedule.
D. THE PARTIES’ SUBMISSIONS BEFORE THE TRIAL COURT.
30. The record shows that, upon the close of the hearing, the trial court granted both parties an opportunity to canvass their respective cases by way of written submissions. While the Appellant duly filed its submissions, the Respondent failed to file any submissions despite having been afforded sufficient opportunity by the trial court. Consequently, the trial court determined the dispute without the benefit of the Respondent's submissions.
31. In its submissions before the trial court, the Appellant contended that the Respondent had failed to discharge the burden of proof imposed by Sections 107 and 109 of the Evidence Act. She argued that although the Respondent alleged that she had tampered with the motor vehicle tracking device, no documentary or other credible evidence had been adduced to substantiate that allegation.
32. Relying on the decision in Evans Otieno Nyakwana v Cleophas Bwana Ongaro [2015] eKLR, she submitted that the legal burden rested upon the party asserting the existence of the alleged facts and that the Respondent had failed to satisfy that burden.
33. The Appellant further submitted that the Respondent’s monetary claim offended the in duplum rule. While acknowledging having received the loan facility and having made repayments amounting to Ksh.192,000/-, she disputed the alleged outstanding sum of Ksh.216,225/-, contending that the interest, penalties and other charges claimed exceeded the principal amount advanced. She relied on the decision in Mugure & 2 Others v Higher Education Loans Board (supra), to argue that the in duplum rule applies to entities engaged in the business of lending, and maintained that the Respondent’s claim was therefore unlawful and unenforceable. The Appellant also invoked the doctrine of stare decisis under Article 163(7) of the Constitution, citing Gatirau Peter Munya v Dickson Mwenda Kithinji & 2 Others [2014] eKLR in support of the binding nature of superior court decisions.
34. The Appellant also argued that the Respondent’s of claim was legally deficient for failing to plead with particularity the alleged breach of contract and the basis of the claim for unjust enrichment. She submitted that pleadings are required to define the issues for determination, inform the opposing party of the case to be met, and prevent speculative or unsubstantiated claims. According to the Appellant, the Respondent had neither demonstrated the manner in which she had breached the lending agreement nor explained how she had allegedly been unjustly enriched.
35. Finally, the Appellant submitted that although she admitted obtaining the loan, several terms of the lending agreement were oppressive, unconscionable and therefore unenforceable. She specifically challenged the contractual provisions imposing default interest at the rate of 10 per cent per week above the agreed interest rate, as well as the repossession clause permitting immediate seizure and sale of the collateral upon default without notice. She argued that the cumulative effect of the agreed interest, penalty charges and ancillary fees resulted in exorbitant charges that offended public policy.
36. In support of that proposition, she relied on Anjeline Akinyi Otieno v Malaba Malakisi Farmers Co-operative Union Ltd [1998] eKLR, contending that although parties are generally bound by the principle of freedom of contract, courts will decline to enforce contractual terms that are manifestly harsh, oppressive or unconscionable. She further argued that the Respondent’s conduct contravened Section 9(1)(c) of the Microfinance Act by acting in a manner detrimental to the interests of its customers, and accordingly urged the trial court to dismiss the suit with costs.
E. THE TRIAL COURT’S FINDINGS.
37. In her judgment delivered on 2nd February, 2024, the learned trial Magistrate identified four issues for determination, namely: whether the terms of the loan agreement were oppressive, unconscionable and therefore unenforceable; whether the amount claimed offended the in duplum rule; whether the Respondent had proved its case on a balance of probabilities; and the appropriate reliefs to be granted.
38. On the question whether the contractual terms were oppressive or unconscionable, the learned trial Magistrate held that courts are bound to enforce contracts freely entered into by parties and cannot rewrite the terms thereof in the absence of vitiating factors such as coercion, fraud or undue influence.
39. Relying on the decision in National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd (2002) 2 E.A. 503; [2001] eKLR, the trial court found that the Appellant had neither pleaded nor proved any such vitiating factors. It consequently concluded that the parties had voluntarily negotiated and agreed to the terms of the loan agreement and that there was therefore no legal basis upon which the court could interfere with or rewrite the parties’ bargain.
40. The trial court further held that the agreed interest rate of 5% per month and the applicable default interest could not be regarded as harsh, oppressive or unconscionable, in the circumstances.
41. With regard to the Appellant’s reliance on the in duplum rule, the learned trial Magistrate acknowledged the Appellant’s contention that the amount claimed exceeded the principal sum advanced and the decision in Mugure & 2 others v Higher Education Loans Board (supra).
42. The trial court accepted that the rule was applicable to the Respondent but held that the burden of proving its violation rested upon the Appellant under Section 107 of the Evidence Act. The court reasoned that the mere fact that the total amount claimed exceeded the principal loan did not, without more, establish a breach of the rule, particularly because the claim comprised not only interest but also contractual car-tracking charges. It therefore found that the Appellant had failed to demonstrate that the interest component alone had exceeded the principal amount so as to offend the in duplum rule.
43. Having rejected the Appellant’s defences, the learned trial Magistrate found that the loan had been advanced to the Appellant and had not been fully repaid. She accordingly held that the Respondent had proved its case on a balance of probabilities and entered e in its favour for Ksh.216,225/- together with costs of the suit and interest at court rates from the date of filing suit until payment in full.
44. It is the foregoing findings of the trial court that the Appellant is now dissatisfied with and consequently challenges through the present appeal.
F. THE APPELLANT’S SUBMISSIONS.
45. In support of the appeal, the Appellant submits that that the learned trial Magistrate erred both in law and in fact by failing to apply binding legal principles governing the doctrine of stare decisis, the in duplum rule, the burden of proof, unconscionable contractual terms and the protection of borrowers under the Constitution and statute.
46. The Appellant urges this Court to set aside the impugned judgement on the ground that it sanctioned an unlawful claim founded on excessive interest and penalties.
47. The Appellant first submits that the learned trial Magistrate failed to adhere to the doctrine of stare decisis by declining to follow binding High Court authority on the application of the in duplum rule. Reliance is placed on Mugure & 2 Others v Higher Education Loans Board (supra), in which the High Court held that the in duplum rule applies not only to banks but also to entities engaged in the business of lending, and that interest and penalties which exceed the outstanding principal amount violate the rule as well as the constitutional rights of borrowers.
48. According to the Appellant, the Respondent, being a lender, fell squarely within the ambit of that decision and was therefore precluded from recovering interest and penalties exceeding the principal amount.
49. The Appellant further submits that the learned trial Magistrate ignored the binding effect of superior court decisions contrary to the doctrine of precedent. In support of this proposition, reliance is placed on Gatirau Peter Munya v Dickson Mwenda Kithinji & 2 Others [2014] eKLR, which is cited for the proposition that Article 163(7) of the Constitution entrenches the doctrine of stare decisis and requires lower courts to faithfully apply binding precedent.
50. The Appellant also relies on Jane Wambui Weru & 2 Others v Simon Muiruri & Another [2012] eKLR for the proposition that subordinate courts are obliged to follow decisions of superior courts and that failure to do so constitutes a serious judicial error warranting appellate intervention.
51. It is further submitted that the learned trial Magistrate failed to appreciate that enforcement of the Respondent’s claim violated the Appellant’s constitutional rights under Articles 40 and 46 of the Constitution. The Appellant argues that, as held in Mugure & 2 others, the recovery of interest and penalties beyond the principal amount amounts to an infringement of a borrower’s right to property and consumer rights. Consequently, it is contended that the trial court erred in enforcing what the Appellant characterizes as an illegal claim founded upon a violation of the in duplum rule.
52. The Appellant next challenges the trial court’s findings regarding the burden of proof. It is submitted that the learned trial Magistrate wrongly held that the Appellant had failed to prove a violation of the in duplum rule under Section 107 of the Evidence Act.
53. According to the Appellant, the court ought instead to have taken judicial notice, pursuant to Section 59 of the Evidence Act, of Section 44A of the Banking Act, which codifies the in duplum rule. The Appellant argues that Section 44A limits recovery in respect of non-performing loans to the outstanding principal, contractual interest not exceeding that principal and reasonable recovery expenses, and that the pleaded figures alone demonstrated that the Respondent’s claim exceeded those statutory limits.
54. It is therefore contended that the learned trial Magistrate erred in holding that the difference between the principal advanced and the amount claimed did not, without further evidence, establish a breach of the rule.
55. The Appellant also faults the trial court for holding that the agreed interest rate of 60% per annum was intended to discourage default and was therefore not unconscionable. It is argued that interest is intended to compensate a lender for the use of money and not to punish borrowers or deter default. The Appellant submits that, by characterizing the contractual interest as a deterrent against default, the learned trial Magistrate effectively rewrote the law governing lending transactions and sanctioned an arbitrary deprivation of property contrary to Article 40 of the Constitution.
56. The Appellant further submits that the learned trial Magistrate failed to consider the Appellant’s intention and conduct in relation to the alleged default. Reliance is placed on Nyali Limited v Attorney General [2008] eKLR, which is cited for the proposition that a loan default occasioned by genuine financial hardship should not automatically attract punitive consequences without considering the borrower’s intention and efforts to regularize repayment.
57. The Appellant contends that the evidence demonstrated that repayments had been made whenever circumstances permitted, that there was no fraudulent intention to default at the inception of the loan agreement and that the trial court wrongly presumed that the Appellant had intended to default merely because it upheld the contractual default interest.
58. The Appellant also submits that the learned trial Magistrate erred in rejecting the contention that the loan agreement contained oppressive and unconscionable terms. It is argued that the contractual provisions imposing default interest of 10% per week above the agreed rate, together with clauses permitting immediate repossession and sale of the security motor vehicle without notice, resulted in oppressive financial consequences. Reliance is placed on Anjeline Akinyi Otieno v Malaba Malakisi Farmers Co-operative Union Ltd [1998] eKLR, in which the Court of Appeal held that contractual terms which are manifestly harsh, oppressive, unconscionable or exorbitant ought not to be enforced by the courts.
59. The Appellant contends that the cumulative effect of the agreed interest, default penalties and ancillary charges fell squarely within that description.
60. The Appellant further argues that the learned trial Magistrate misapplied the decision in National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd & Another [2001] eKLR by treating it as authority that courts can never interfere with contractual terms. According to the Appellant, that decision was rendered before the enactment of Section 44A of the Banking Act and before the promulgation of the Constitution.
61. It is submitted that the statutory codification of the in duplum rule and the constitutional protection of property and consumer rights have since qualified the principle of absolute freedom of contract, with the result that courts may decline to enforce contractual terms that contravene statute or constitutional norms.
62. Finally, the Appellant submits that the Respondent’s conduct contravened Section 9(1)(c) of the Microfinance Act by acting in a manner detrimental to the interests of its customers through the imposition of excessive interest, penalties and recovery mechanisms. It is contended that the learned trial Magistrate failed to appreciate that enforcement of such terms infringed the Appellant’s constitutional rights under Articles 40 and 46 of the Constitution.
63. On those grounds, the Appellant urges this Court to allow the appeal, set aside the judgement of the trial court, dismiss the Respondent’s claim, and award the costs of the appeal.
G. THE RESPONDENT’S SUBMISSIONS.
64. The Respondent, on the other hand, submits that the appeal is devoid of merit and that the learned trial Magistrate properly evaluated both the evidence and the applicable law before entering judgement in its favour. It contends that the judgement awarding it Ksh.216,225/- was fully supported by the documentary evidence produced before the trial court and that none of the grounds of appeal discloses any error of law or fact warranting appellate interference.
65. With respect to the first ground of appeal, the Respondent submits that the Appellant admitted obtaining a loan of Ksh.190,000/- pursuant to the loan agreement dated 15th February, 2022, under which the loan was repayable within twelve months together with interest at the agreed rate of 5% per month.
66. It argues that the Appellant also executed a repayment schedule requiring monthly instalments of Ksh.22,055.56/- but subsequently defaulted in repayment.
67. According to the Respondent, the customer statement produced before the trial court clearly demonstrated the payments made by the Appellant, the interest accrued and the outstanding balance as at 15th August, 2023, thereby justifying the amount claimed.
68. It further submits that although the Appellant challenged the interest rate as oppressive and unconscionable, she neither established any legal basis for setting aside the contractual terms nor proved that she had repaid the loan in accordance with the agreement.
69. The Respondent therefore maintains that the trial court correctly declined to rewrite the parties’ contract and properly entered judgement for the amount claimed.
70. On the issue of the in duplum rule, the Respondent submits that the learned trial Magistrate correctly found that the rule had not been violated. It argues that the sum of Ksh.216,225/- did not comprise accrued interest alone but consisted of the outstanding principal, contractual interest and monthly car-tracking charges payable under the loan agreement. It contends that the Appellant failed to demonstrate that the interest component had exceeded the principal amount and therefore failed to establish any breach of the in duplum rule.
71. The Respondent further submits that, in any event, Section 44A of the Banking Act, which codifies the in duplum rule, is inapplicable to the present dispute because the Respondent is neither a bank nor a financial institution within the meaning of Section 2(1) of the Banking Act. It argues that it merely engages in the business of credit financing, does not receive deposits from members of the public, is not regulated by the Central Bank of Kenya, and is therefore outside the statutory framework governing banks and financial institutions.
72. In support of that proposition, the Respondent relies on Momentum Credit Limited v Kabuiya (Civil Appeal E035 of 2022) [2022] KEHC 13705 (KLR), in which the High Court held that Section 44A of the Banking Act did not apply to the contractual relationship between the parties in that case.
73. The Respondent accordingly urges this Court to uphold the trial court’s finding that the parties’ rights and obligations were governed by the terms of the loan agreement rather than Section 44A of the Banking Act.
74. In response to the Appellant’s complaint that the learned trial Magistrate failed to consider the submissions on the in duplum rule, the Respondent submits that the record demonstrates otherwise. It points out that one of the issues expressly identified for determination was whether the amount claimed offended the in duplum rule and that the trial court analyzed and determined that issue in its judgement. According to the Respondent, the complaint that the issue was ignored is therefore not borne out by the record.
75. Finally, the Respondent submits that the allegation that the learned trial Magistrate failed to consider the Appellant’s arguments regarding the alleged unconscionability of the loan agreement is equally unfounded. It argues that the trial court expressly identified that issue as the first question for determination, considered the pleadings, witness statements, documentary evidence and submissions and correctly held that, in the absence of pleaded and proved vitiating factors such as fraud, coercion or undue influence, the court could not rewrite the parties’ contract. The Respondent therefore urges this Court to find that the learned trial Magistrate properly addressed all the issues raised before her and to dismiss the appeal with costs.
H. THE APPELLANT’S SUPPLEMENTARY SUBMISSIONS.
76. In rejoinder by way of supplementary submissions, the Appellant challenges the Respondent’s reliance on Momentum Credit Limited v Kabuiya (supra) which had been cited for the proposition that Section 44A of the Banking Act and the in duplum rule were inapplicable
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1. This appeal emanates from the judgement and decree of Hon. V.M. Mochache, Resident Magistrate/Adjudicator delivered on 2nd February, 2024 in Milimani SCCC No. E8665 of 2023 Rosky Credit Limited v Belinda Katsila Akinyi.
2. The Appellant relies on the following grounds of appeal, as set out in the memorandum of appeal dated 26th February, 2024:
i. THAT the learned trial Magistrate erred in law and fact by finding that the Appellant is to pay the Respondent a sum of Ksh.216,225/-.
ii. THAT the learned trial Magistrate erred in law and fact by not adhering to the in duplum rule which is enshrined in law.
iii. THAT the learned trial Magistrate erred in law and fact by not considering the submissions of the of Appellant with regards to the in duplum rule.
iv. THAT the learned trial Magistrate erred in law and in fact by not considering the Appellant’s submissions on the unconscionability of the terms of the Agreement between the Appellant and the Respondent.
3. The Appellant proposes that the appeal be allowed, and that this Court sets aside the judgement of the trial Court and substitutes the same with an order dismissing the claim before the trial court with costs. The Appellant also seeks costs of this appeal.
4. As this is a first appeal, I am obligated, pursuant to Section 78 of the Civil Procedure Act and as articulated in Selle v Associated Motor Boat Co. Ltd [1969] E.A. 123, to re-assess, re-analyze and re-evaluate the evidence presented before the trial court and to arrive at my own conclusions, bearing in mind that I neither saw nor heard the witnesses testify.
5. In Selle, Sir Clement De Lestang observed that:
“This Court must consider the evidence, evaluate it itself and draw its own conclusions, though in doing so it should always bear in mind that it neither heard witnesses and should make due allowance in this respect.
However, this Court is not bound necessarily to follow the trial judge’s findings of fact if it appears either that he had clearly failed on some point to take account of particular circumstances or probabilities, materially to estimate the evidence or if the impression based on the demeanour of a witness is inconsistent with the evidence in the case generally.”
6. The duty of the first appellate court was also discussed by the Court of Appeal for East Africa in the case of Peters v Sunday Post Limited [1958] EA 424 in which it was held that the appropriate standard of review established in cases of appeal can be stated in three complementary principles:
“i. First, on first appeal, the Court is under a duty to reconsider and re-evaluate the evidence on record and draw its own conclusions;
ii. In reconsidering and re-evaluating the evidence, the first appellate court must bear in mind and give due allowance to the fact that the trial court had the advantage of seeing and hearing the witnesses testify before her; and
iii. It is not open to the first appellate court to review the findings of a trial court simply because it would have reached different results if it were hearing the matter for the first time.”
B. THE PLEADINGS BEFORE THE TRIAL COURT.
7. The matter before the trial court was based on contract. In its Statement of Claim dated 13th October, 2023, the Respondent herein (the Claimant before the trial Court) pleaded that, at the Appellant’s request, it advanced to her a loan facility in the sum of Ksh.190,000/- on 15th February, 2022, which was repayable within twelve (12) months and was to attract interest at the rate of 5% per month.
8. The Respondent further pleaded that, as security for the loan, the Appellant offered motor vehicle registration number KCH 360V as collateral. It was averred that the Appellant was also liable to pay a monthly vehicle tracking charge of Ksh.2,000/- in respect of the said motor vehicle.
9. The Respondent alleged that the Appellant subsequently tampered with the tracking device installed on the motor vehicle, thereby rendering it impossible for the Respondent to trace and repossess the collateral upon the Appellant’s default.
10. It was further pleaded that, despite repeated demands, the Appellant failed, neglected and/or refused to repay the loan in accordance with the parties’ agreement. According to the Respondent, the Appellant’s default constituted a breach of contract and resulted in her unjust enrichment.
11. The Respondent averred that, as at August, 2023, the outstanding amount due and owing, comprising the principal sum together with accrued interest and vehicle tracking charges, stood at Ksh.216,225/-.
12. The Respondent further pleaded that the Appellant’s conduct had occasioned it financial loss and inconvenience, for which she was liable. Consequently, the Respondent prayed for judgement against the Appellant in the sum of Ksh.216,225/-, together with interest at court rates and the costs of the suit.
13. The Appellant resisted the Respondent’s Claim by filing a response dated 20th November, 2023 in which she contended that she had neither tampered with the tracking device installed on motor vehicle registration number KCH 360V nor frustrated the Respondent’s ability to repossess the alleged collateral. She further denied having defaulted in the repayment of the loan, maintaining that she had already paid the Respondent a total sum of Ksh.192,000/- towards the loan advanced.
14. The Appellant further contended that the Respondent’s claim for Ksh.216,225/- was unlawful as it offended the in duplum rule, arguing that interest ought to have ceased to accrue once it equaled the outstanding principal on the non-performing loan. She maintained that the Respondent was engaged in the business of lending money and was therefore subject to the application of the in duplum rule as pronounced in the case of Mugure & 2 Others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR) (Civ) (19 August 2022) (Judgment). It was her case that the interest, penalties and other charges levied by the Respondent were exorbitant, unlawful and exceeded the principal sum advanced.
15. The Appellant further averred that the claim was incompetent for want of particulars of the alleged breach of contract and unjust enrichment. She denied being in breach of the parties’ agreement or having intended to unjustly enrich herself.
16. While admitting that she had obtained the loan from the Respondent, the Appellant asserted that several of the contractual terms governing the facility, including those relating to default interest, penalties and the realization of the alleged security, were oppressive, unconscionable and unenforceable.
17. The Appellant additionally pleaded that the penalty clauses, which she contended translated into an annual penalty rate of 520% in addition to interest at 60% per annum and vehicle tracking charges, were manifestly harsh, oppressive and unconscionable. She further alleged that the Respondent had acted contrary to Section 9(1)(c) of the Microfinance Act, by conducting its business in a manner detrimental to its customers and further contended that the Respondent was not licensed by the Central Bank of Kenya as required under the Act. Consequently, she prayed for the dismissal of the Appellant’s claim with costs.
C. THE EVIDENCE BEFORE THE TRIAL COURT.
18. The parties relied on their pleadings, witness statements and lists of documents filed in the trial court.
19. The Respondent’s witness, Vincent Ngochoch, filed a statement dated 13th October, 2023 in which he stated that he was the Respondent’s Collections Manager and was therefore conversant with the facts giving rise to the dispute. He stated that the Respondent was engaged in the business of credit financing and that the Appellant was one of its customers, having been advanced a loan facility of Ksh.190,000/- on 15th February, 2022.
20. He further stated that the Appellant had applied for the loan and offered the logbook for motor vehicle registration number KCH 360V as security. According to him, the vehicle was valued, fitted with a tracking device and thereafter jointly registered in the names of the Appellant and the Respondent as collateral for the loan.
21. The witness stated in his statement that the loan was repayable within twelve months and attracted interest at the rate of 5% per month. He stated that the Respondent failed to repay the loan as agreed and tampered with the vehicle tracking device, thereby frustrating the Respondent’s efforts to trace and repossess the motor vehicle offered as security.
22. The witness further stated in his statement that despite repeated demands and the issuance of a notice of intention to sue, the Appellant failed and/or refused to settle the outstanding debt, which stood at Ksh.216,225/- as at August 2023, comprising the principal amount, accrued interest and vehicle tracking charges.
23. He maintained that the Appellant’s failure to honour her contractual obligations amounted to a breach of contract and unjust enrichment, and accordingly urged the trial Court to enter judgement against the Appellant in terms of the Statement of Claim.
24. The Respondent filed a list comprising the following documents.
- Loan application form.
- Loan repayment agreement.
- Letter of offer dated 15th February, 2022.
- Customer Statement.
- Demand letter dated 7th September, 2023.
- WhatsApp extract message send to the Appellant.
25. The Appellant filed a witness statement dated 20th November, 2023 in which she confirmed that the Respondent had advanced her a loan of Ksh.190,000/- on 15th February, 2022.
26. She stated in her statement that she had applied for the loan and offered the logbook for motor vehicle registration number KCH 360V as security and that the vehicle was valued, fitted with a tracking device and thereafter jointly registered in the names of the Respondent and herself as security for the loan.
27. The Appellant further stated that she continued servicing the loan as agreed and denied the allegation that she tampered with the vehicle tracking device. She relied on a payment schedule demonstrating the repayments she had made and maintained that, by the time she filed her response, she had paid the Respondent a total of Ksh.192,280/-.
28. The Appellant further stated in her statement that, during the subsistence of the loan, she discovered that the Respondent had transferred the motor vehicle, which had been offered as security, into its own name without informing her. She denied having breached the loan agreement or intending to unjustly enrich herself, but expressed apprehension that the Respondent intended to dispose of the motor vehicle in order to recover what she considered to be unconscionable interest and penalty charges contrary to the law. She accordingly prayed that judgement be entered in her favour in terms of her response to the claim.
29. The Appellant filed a list comprising the following documents:
- Loan repayment agreement.
- Letter of offer dated 15th February, 2022.
- Repayment schedule.
D. THE PARTIES’ SUBMISSIONS BEFORE THE TRIAL COURT.
30. The record shows that, upon the close of the hearing, the trial court granted both parties an opportunity to canvass their respective cases by way of written submissions. While the Appellant duly filed its submissions, the Respondent failed to file any submissions despite having been afforded sufficient opportunity by the trial court. Consequently, the trial court determined the dispute without the benefit of the Respondent's submissions.
31. In its submissions before the trial court, the Appellant contended that the Respondent had failed to discharge the burden of proof imposed by Sections 107 and 109 of the Evidence Act. She argued that although the Respondent alleged that she had tampered with the motor vehicle tracking device, no documentary or other credible evidence had been adduced to substantiate that allegation.
32. Relying on the decision in Evans Otieno Nyakwana v Cleophas Bwana Ongaro [2015] eKLR, she submitted that the legal burden rested upon the party asserting the existence of the alleged facts and that the Respondent had failed to satisfy that burden.
33. The Appellant further submitted that the Respondent’s monetary claim offended the in duplum rule. While acknowledging having received the loan facility and having made repayments amounting to Ksh.192,000/-, she disputed the alleged outstanding sum of Ksh.216,225/-, contending that the interest, penalties and other charges claimed exceeded the principal amount advanced. She relied on the decision in Mugure & 2 Others v Higher Education Loans Board (supra), to argue that the in duplum rule applies to entities engaged in the business of lending, and maintained that the Respondent’s claim was therefore unlawful and unenforceable. The Appellant also invoked the doctrine of stare decisis under Article 163(7) of the Constitution, citing Gatirau Peter Munya v Dickson Mwenda Kithinji & 2 Others [2014] eKLR in support of the binding nature of superior court decisions.
34. The Appellant also argued that the Respondent’s of claim was legally deficient for failing to plead with particularity the alleged breach of contract and the basis of the claim for unjust enrichment. She submitted that pleadings are required to define the issues for determination, inform the opposing party of the case to be met, and prevent speculative or unsubstantiated claims. According to the Appellant, the Respondent had neither demonstrated the manner in which she had breached the lending agreement nor explained how she had allegedly been unjustly enriched.
35. Finally, the Appellant submitted that although she admitted obtaining the loan, several terms of the lending agreement were oppressive, unconscionable and therefore unenforceable. She specifically challenged the contractual provisions imposing default interest at the rate of 10 per cent per week above the agreed interest rate, as well as the repossession clause permitting immediate seizure and sale of the collateral upon default without notice. She argued that the cumulative effect of the agreed interest, penalty charges and ancillary fees resulted in exorbitant charges that offended public policy.
36. In support of that proposition, she relied on Anjeline Akinyi Otieno v Malaba Malakisi Farmers Co-operative Union Ltd [1998] eKLR, contending that although parties are generally bound by the principle of freedom of contract, courts will decline to enforce contractual terms that are manifestly harsh, oppressive or unconscionable. She further argued that the Respondent’s conduct contravened Section 9(1)(c) of the Microfinance Act by acting in a manner detrimental to the interests of its customers, and accordingly urged the trial court to dismiss the suit with costs.
E. THE TRIAL COURT’S FINDINGS.
37. In her judgment delivered on 2nd February, 2024, the learned trial Magistrate identified four issues for determination, namely: whether the terms of the loan agreement were oppressive, unconscionable and therefore unenforceable; whether the amount claimed offended the in duplum rule; whether the Respondent had proved its case on a balance of probabilities; and the appropriate reliefs to be granted.
38. On the question whether the contractual terms were oppressive or unconscionable, the learned trial Magistrate held that courts are bound to enforce contracts freely entered into by parties and cannot rewrite the terms thereof in the absence of vitiating factors such as coercion, fraud or undue influence.
39. Relying on the decision in National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd (2002) 2 E.A. 503; [2001] eKLR, the trial court found that the Appellant had neither pleaded nor proved any such vitiating factors. It consequently concluded that the parties had voluntarily negotiated and agreed to the terms of the loan agreement and that there was therefore no legal basis upon which the court could interfere with or rewrite the parties’ bargain.
40. The trial court further held that the agreed interest rate of 5% per month and the applicable default interest could not be regarded as harsh, oppressive or unconscionable, in the circumstances.
41. With regard to the Appellant’s reliance on the in duplum rule, the learned trial Magistrate acknowledged the Appellant’s contention that the amount claimed exceeded the principal sum advanced and the decision in Mugure & 2 others v Higher Education Loans Board (supra).
42. The trial court accepted that the rule was applicable to the Respondent but held that the burden of proving its violation rested upon the Appellant under Section 107 of the Evidence Act. The court reasoned that the mere fact that the total amount claimed exceeded the principal loan did not, without more, establish a breach of the rule, particularly because the claim comprised not only interest but also contractual car-tracking charges. It therefore found that the Appellant had failed to demonstrate that the interest component alone had exceeded the principal amount so as to offend the in duplum rule.
43. Having rejected the Appellant’s defences, the learned trial Magistrate found that the loan had been advanced to the Appellant and had not been fully repaid. She accordingly held that the Respondent had proved its case on a balance of probabilities and entered e in its favour for Ksh.216,225/- together with costs of the suit and interest at court rates from the date of filing suit until payment in full.
44. It is the foregoing findings of the trial court that the Appellant is now dissatisfied with and consequently challenges through the present appeal.
F. THE APPELLANT’S SUBMISSIONS.
45. In support of the appeal, the Appellant submits that that the learned trial Magistrate erred both in law and in fact by failing to apply binding legal principles governing the doctrine of stare decisis, the in duplum rule, the burden of proof, unconscionable contractual terms and the protection of borrowers under the Constitution and statute.
46. The Appellant urges this Court to set aside the impugned judgement on the ground that it sanctioned an unlawful claim founded on excessive interest and penalties.
47. The Appellant first submits that the learned trial Magistrate failed to adhere to the doctrine of stare decisis by declining to follow binding High Court authority on the application of the in duplum rule. Reliance is placed on Mugure & 2 Others v Higher Education Loans Board (supra), in which the High Court held that the in duplum rule applies not only to banks but also to entities engaged in the business of lending, and that interest and penalties which exceed the outstanding principal amount violate the rule as well as the constitutional rights of borrowers.
48. According to the Appellant, the Respondent, being a lender, fell squarely within the ambit of that decision and was therefore precluded from recovering interest and penalties exceeding the principal amount.
49. The Appellant further submits that the learned trial Magistrate ignored the binding effect of superior court decisions contrary to the doctrine of precedent. In support of this proposition, reliance is placed on Gatirau Peter Munya v Dickson Mwenda Kithinji & 2 Others [2014] eKLR, which is cited for the proposition that Article 163(7) of the Constitution entrenches the doctrine of stare decisis and requires lower courts to faithfully apply binding precedent.
50. The Appellant also relies on Jane Wambui Weru & 2 Others v Simon Muiruri & Another [2012] eKLR for the proposition that subordinate courts are obliged to follow decisions of superior courts and that failure to do so constitutes a serious judicial error warranting appellate intervention.
51. It is further submitted that the learned trial Magistrate failed to appreciate that enforcement of the Respondent’s claim violated the Appellant’s constitutional rights under Articles 40 and 46 of the Constitution. The Appellant argues that, as held in Mugure & 2 others, the recovery of interest and penalties beyond the principal amount amounts to an infringement of a borrower’s right to property and consumer rights. Consequently, it is contended that the trial court erred in enforcing what the Appellant characterizes as an illegal claim founded upon a violation of the in duplum rule.
52. The Appellant next challenges the trial court’s findings regarding the burden of proof. It is submitted that the learned trial Magistrate wrongly held that the Appellant had failed to prove a violation of the in duplum rule under Section 107 of the Evidence Act.
53. According to the Appellant, the court ought instead to have taken judicial notice, pursuant to Section 59 of the Evidence Act, of Section 44A of the Banking Act, which codifies the in duplum rule. The Appellant argues that Section 44A limits recovery in respect of non-performing loans to the outstanding principal, contractual interest not exceeding that principal and reasonable recovery expenses, and that the pleaded figures alone demonstrated that the Respondent’s claim exceeded those statutory limits.
54. It is therefore contended that the learned trial Magistrate erred in holding that the difference between the principal advanced and the amount claimed did not, without further evidence, establish a breach of the rule.
55. The Appellant also faults the trial court for holding that the agreed interest rate of 60% per annum was intended to discourage default and was therefore not unconscionable. It is argued that interest is intended to compensate a lender for the use of money and not to punish borrowers or deter default. The Appellant submits that, by characterizing the contractual interest as a deterrent against default, the learned trial Magistrate effectively rewrote the law governing lending transactions and sanctioned an arbitrary deprivation of property contrary to Article 40 of the Constitution.
56. The Appellant further submits that the learned trial Magistrate failed to consider the Appellant’s intention and conduct in relation to the alleged default. Reliance is placed on Nyali Limited v Attorney General [2008] eKLR, which is cited for the proposition that a loan default occasioned by genuine financial hardship should not automatically attract punitive consequences without considering the borrower’s intention and efforts to regularize repayment.
57. The Appellant contends that the evidence demonstrated that repayments had been made whenever circumstances permitted, that there was no fraudulent intention to default at the inception of the loan agreement and that the trial court wrongly presumed that the Appellant had intended to default merely because it upheld the contractual default interest.
58. The Appellant also submits that the learned trial Magistrate erred in rejecting the contention that the loan agreement contained oppressive and unconscionable terms. It is argued that the contractual provisions imposing default interest of 10% per week above the agreed rate, together with clauses permitting immediate repossession and sale of the security motor vehicle without notice, resulted in oppressive financial consequences. Reliance is placed on Anjeline Akinyi Otieno v Malaba Malakisi Farmers Co-operative Union Ltd [1998] eKLR, in which the Court of Appeal held that contractual terms which are manifestly harsh, oppressive, unconscionable or exorbitant ought not to be enforced by the courts.
59. The Appellant contends that the cumulative effect of the agreed interest, default penalties and ancillary charges fell squarely within that description.
60. The Appellant further argues that the learned trial Magistrate misapplied the decision in National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd & Another [2001] eKLR by treating it as authority that courts can never interfere with contractual terms. According to the Appellant, that decision was rendered before the enactment of Section 44A of the Banking Act and before the promulgation of the Constitution.
61. It is submitted that the statutory codification of the in duplum rule and the constitutional protection of property and consumer rights have since qualified the principle of absolute freedom of contract, with the result that courts may decline to enforce contractual terms that contravene statute or constitutional norms.
62. Finally, the Appellant submits that the Respondent’s conduct contravened Section 9(1)(c) of the Microfinance Act by acting in a manner detrimental to the interests of its customers through the imposition of excessive interest, penalties and recovery mechanisms. It is contended that the learned trial Magistrate failed to appreciate that enforcement of such terms infringed the Appellant’s constitutional rights under Articles 40 and 46 of the Constitution.
63. On those grounds, the Appellant urges this Court to allow the appeal, set aside the judgement of the trial court, dismiss the Respondent’s claim, and award the costs of the appeal.
G. THE RESPONDENT’S SUBMISSIONS.
64. The Respondent, on the other hand, submits that the appeal is devoid of merit and that the learned trial Magistrate properly evaluated both the evidence and the applicable law before entering judgement in its favour. It contends that the judgement awarding it Ksh.216,225/- was fully supported by the documentary evidence produced before the trial court and that none of the grounds of appeal discloses any error of law or fact warranting appellate interference.
65. With respect to the first ground of appeal, the Respondent submits that the Appellant admitted obtaining a loan of Ksh.190,000/- pursuant to the loan agreement dated 15th February, 2022, under which the loan was repayable within twelve months together with interest at the agreed rate of 5% per month.
66. It argues that the Appellant also executed a repayment schedule requiring monthly instalments of Ksh.22,055.56/- but subsequently defaulted in repayment.
67. According to the Respondent, the customer statement produced before the trial court clearly demonstrated the payments made by the Appellant, the interest accrued and the outstanding balance as at 15th August, 2023, thereby justifying the amount claimed.
68. It further submits that although the Appellant challenged the interest rate as oppressive and unconscionable, she neither established any legal basis for setting aside the contractual terms nor proved that she had repaid the loan in accordance with the agreement.
69. The Respondent therefore maintains that the trial court correctly declined to rewrite the parties’ contract and properly entered judgement for the amount claimed.
70. On the issue of the in duplum rule, the Respondent submits that the learned trial Magistrate correctly found that the rule had not been violated. It argues that the sum of Ksh.216,225/- did not comprise accrued interest alone but consisted of the outstanding principal, contractual interest and monthly car-tracking charges payable under the loan agreement. It contends that the Appellant failed to demonstrate that the interest component had exceeded the principal amount and therefore failed to establish any breach of the in duplum rule.
71. The Respondent further submits that, in any event, Section 44A of the Banking Act, which codifies the in duplum rule, is inapplicable to the present dispute because the Respondent is neither a bank nor a financial institution within the meaning of Section 2(1) of the Banking Act. It argues that it merely engages in the business of credit financing, does not receive deposits from members of the public, is not regulated by the Central Bank of Kenya, and is therefore outside the statutory framework governing banks and financial institutions.
72. In support of that proposition, the Respondent relies on Momentum Credit Limited v Kabuiya (Civil Appeal E035 of 2022) [2022] KEHC 13705 (KLR), in which the High Court held that Section 44A of the Banking Act did not apply to the contractual relationship between the parties in that case.
73. The Respondent accordingly urges this Court to uphold the trial court’s finding that the parties’ rights and obligations were governed by the terms of the loan agreement rather than Section 44A of the Banking Act.
74. In response to the Appellant’s complaint that the learned trial Magistrate failed to consider the submissions on the in duplum rule, the Respondent submits that the record demonstrates otherwise. It points out that one of the issues expressly identified for determination was whether the amount claimed offended the in duplum rule and that the trial court analyzed and determined that issue in its judgement. According to the Respondent, the complaint that the issue was ignored is therefore not borne out by the record.
75. Finally, the Respondent submits that the allegation that the learned trial Magistrate failed to consider the Appellant’s arguments regarding the alleged unconscionability of the loan agreement is equally unfounded. It argues that the trial court expressly identified that issue as the first question for determination, considered the pleadings, witness statements, documentary evidence and submissions and correctly held that, in the absence of pleaded and proved vitiating factors such as fraud, coercion or undue influence, the court could not rewrite the parties’ contract. The Respondent therefore urges this Court to find that the learned trial Magistrate properly addressed all the issues raised before her and to dismiss the appeal with costs.
H. THE APPELLANT’S SUPPLEMENTARY SUBMISSIONS.
76. In rejoinder by way of supplementary submissions, the Appellant challenges the Respondent’s reliance on Momentum Credit Limited v Kabuiya (supra) which had been cited for the proposition that Section 44A of the Banking Act and the in duplum rule were inapplicable
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