' The Respondent herein was the Plaintiff before the trial court where he sued the Defendant/Appellant seeking the following orders: -
Payment forthwith of the outstanding loan balance of Kshs. 5,000,000.
An Order of Injunction restraining the Defendant, its agents, or servants from demanding monthly loan repayments until the said balance is disbursed.
Costs of this suit.
Any other relief the Court may deem fit and just to grant.
The Respondent’s case was that he on 20th August 2015 entered into an agreement with the Appellant for a loan facility of Kshs. 20,000,000.
The loan facility was secured by a legal charge over the Respondent’s property known as North Mugirango/Ikonge/2345, which charge was duly registered and stamped in November 2015. The Respondent averred that, under the said agreement, the Appellant/Defendant was obligated to release the full loan amount of Kshs. 20,000,000 upon completion of the charge registration but that only Kshs. 15,000,000 was disbursed to the Plaintiff, leaving an outstanding balance of Kshs. 5,000,000.
The Respondent averred that the purpose of the loan was to complete construction on the charged property, which would in turn generate income to facilitate the loan repayment after a six-month grace period.
The Respondent further averred that as a result of the Appellant’s failure to release the full amount, he was unable to complete the building project within schedule but that despite the shortfall, he commenced repayment of the loan based on the full agreed amount of Kshs. 20,000,000 , thus causing him financial prejudice that made it impossible for the Plaintiff to service the loan repayments as originally planned.
The Appellant filed its Statement of Defence and Counterclaim in which it denied all the allegations made in the Plaint. The Appellant however admitted that a loan facility of Kshs. 20,000,000 was granted to the Respondent on the strength of a charge registered over property known as North Mugirango/Ikonge/2345. The Appellant emphasized that the loan facility was subject to the terms and conditions contained in the Letter of Offer and Charge Document dated 27th November 2015.
According to the Appellant, it was an express term of the contract that if any circumstance arose during the tenure of the loan which, in its opinion, could materially affect the Respondent’s ability to perform his obligations, such circumstance would constitute an event of default , rendering the entire loan immediately due and payable.
The Appellant asserted that during the pendency of the loan, it came to light that the Respondent’s property had been earmarked for partial demolition by the Kenya National Highways Authority (KENHA) for encroaching onto a road reserve thus affecting its value and consequently compromising the Appellant’s security interest over the property.
The Appellant added that due to the said encroachment and boundary dispute, it lawfully withheld the last tranche of Kshs. 5,000,000 , citing material adverse circumstances and invoking the event of default clause in the charge instrument.
The Appellant noted the existence of a pending suit in the Environment and Land Court, ELC No. 272 of 2016 John Kabinga Ongwenya & 3 Others vs. Kenya National Highways Authority , in respect to the said charged property and contended that the outcome of the said suit would directly affects its rights over the property.
It was the Appellant’s case that the legal charge over the suit property was properly executed and registered in accordance with the law, and that the Respondent remained indebted to it.
The Appellant confirmed that Kshs. 15,000,000 was disbursed to the Respondent while Kshs. 5,000,000 was withheld due to the adverse developments from KENHA and reiterated that by virtue of the KENHA encroachment, the Respondent’s property was rendered insecure, thus constituting an event of default under Clause 9 of the Charge .
The Appellant stated that as a result of the default, it recalled the entire facility which stood at Kshs. 16,213,784.87 as at 20th June 2018, inclusive of accrued interest.
The Appellant contended that interim injunctions restraining it from demanding loan repayments had greatly prejudiced its financial rights, as the Respondent continued to owe it substantial sums.
The Appellant referred to the ongoing ELC No. 272 of 2016 case, which it argued directly impacted on the enforceability of its security rights over the suit property.
The Appellant sought the following orders in the Counterclaim: -
That the Respondent’s suit be dismissed with costs.
That judgment be entered for the Appellant on the Counterclaim for: - Kshs. 16,213,784.87 as at 20th June 2018;
Interest at commercial rates from 25th April 2017 until full payment;
General damages with interest;
Costs of the Counterclaim and the suit with interest; and
Any other relief the Honourable Court deems fit and just to grant.
Summary of the Evidence
The Plaintiff, John Kabinga Ongwenya (PW1) adopted his witness statement dated 28th March 2017, reiterated the contents of the Plaint and produced several exhibits, including: -
PExbt 1: Loan Agreement
PExbt 2: Certificate of Official Search
PExbt 3: Statement reflecting loan repayments
PExbt 4: Demand notice
PW1 explained that even though the Kenya National Highways Authority (KENHA) placed markings (“X”) on the building, claiming it encroached onto a road reserve, the Appellant’s valuers and planners had previously inspected and approved the site. He confirmed that he commenced repayment of the loan based on the full Kshs. 20 million, but that due to the failure of the Defendant to release the balance, he could not complete the building and generate income to repay the facility.
He stated that he sought the court’s intervention to compel the bank to release the remaining Kshs. 5,000,000 and suspend monthly repayments until the full loan was disbursed.
On cross-examination, the Respondent confirmed he had filed a separate suit against KENHA over the encroachment issue and had obtained a judgment in his favor. He explained that he has not been able to fully repay the loan as the bank continued to make deductions despite a court order restraining repayment.
On re-examination, PW1 reiterated that the bank still owed him Kshs. 5,000,000 since the property remained charged, and he sought the court’s assistance to enforce the agreement.
DW1, Charles Sifuna Simiyu, the Appellant’s Credit Manager adopted his witness statement dated 28th August 2018 and produced the following documents as exhibits: -
Letter of Offer dated 20/08/2015
Charge dated 25/11/2015
Loan Agreement dated 25/11/2015
Deed of Assignment of Rental Income
Photographs of the suit property
Letter from KENHA dated 14/09/2016
Drawings from Nyamira County Physical Planning Office
Loan account statements (June 2018)
Operating account statements (June 2018)
DW1 testified that the Plaintiff applied for a loan of Kshs. 20,000,000, which was to be disbursed in tranches as construction progressed. The first disbursement of Kshs. 10,000,000 was made, followed by Kshs. 5,000,000, totalling Kshs. 15,000,000.
He stated that before the final disbursement, the bank’s project manager reported that the property had been earmarked by KENHA for demolition as it had encroached on a road reserve and that following this discovery, the Appellant withheld the last tranche of Kshs. 5,000,000 citing the event of default clause in the Charge and Letter of Offer.
DW1 stated that the loan terms allowed the bank to recall the facility if circumstances adversely affecting the security arose. He asserted that the Respondent’s property markings and the boundary dispute with KENHA compromised the bank’s security interest thus justifying the decision to withhold further funds.
During cross-examination, DW1 confirmed that the Respondent was qualified for the loan and that the bank had disbursed the first two tranches after inspections. He admitted the bank retained the final payment due to the KENHA issue but maintained that the Respondent breached the contract by defaulting on repayments after the grace period had expired.
He acknowledged that the project was incomplete and that the Plaintiff had filed a separate case against KENHA, though the bank was not a party to that suit.
At the close of both cases the trial court rendered a verdict in favour to the Respondent upon finding that it was undisputed the Plaintiff had applied for and been advanced Kshs. 15 million, and that Kshs. 5 million remained undisbursed. The trial Court observed that the KENHA earmarking alone did not conclusively prove demolition or render the property valueless and that the mere act of marking did not justify the Bank’s unilateral decision to withhold the loan balance.
The trial Court further noted that the Bank had already advanced three-quarters (¾) of the loan and was therefore obliged to complete disbursement to enable the Plaintiff to finish construction and start repayment. The trial court found that Bank’s failure to disburse the balance was a breach of the contract.
The trial Court also observed that the Plaintiff’s separate suit against KENHA had been decided in his favour, thus further weakening the Bank’s justification for withholding funds.
The Court concluded that the Plaintiff did not breach any loan terms, and the Defendant was in breach by failing to fulfil its contractual obligation. The trial court issued the following orders: -
Judgment is entered for the Plaintiff against the Defendant for the loan balance of Kshs. 5,000,000 with costs and interest.
The Defendant’s counterclaim for Kshs. 16,213,784.87 and general damages is dismissed with costs.
The parties were directed to modify their contract to resume normal repayment once the Bank releases the balance.
The Appeal
Aggrieved by the decision by the trial court, the Appellant filed the instant appeal challenging the findings, conclusions, and orders of the learned magistrate. The Appellant listed eleven (11) grounds of appeal summarized as follows:
That the trial court erred in holding that the Appellant was in breach of the Loan Agreement and Charge Document dated 25th November 2015.
That the magistrate erred by failing to find that the Appellant lawfully withheld the last tranche of Kshs. 5,000,000 due to the earmarking of the Respondent’s property by KENHA, which constituted a reasonable and legal cause.
That the court failed to find that the KENHA seizure constituted an event of default, justifying the Appellant’s action in halting disbursement and demanding repayment.
That the magistrate erred in failing to find that the Respondent was in breach of the loan contract for not servicing the loan after the six-month grace period, regardless of the last tranche.
That the court misdirected itself by ordering the Appellant to pay the Kshs. 5,000,000 without accounting for the Respondent’s default and ongoing breach.
That the magistrate exceeded judicial authority by rewriting the loan terms, contrary to legal principles that courts should not alter contracts voluntarily entered into by parties.
That the court failed to find that the Respondent was indebted to the Appellant in the sum of Kshs. 16,213,784.87 as at 20th June 2018.
That the court erred in dismissing the Appellant’s Counterclaim dated 28th August 2018, terming it unmerited without due consideration.
That the court failed to appreciate that the earmarking of the suit property placed the Appellant’s financial interest at significant risk.
That the judgment offends Order 21 Rule 4 and 5 of the Civil Procedure Rules 2010 and should therefore be set aside ex debito justitiae (as of right, in the interest of justice).
That the magistrate failed to adequately consider the Appellant’s submissions, leading to an erroneous and unjust finding.
The Appellant seeks the following orders in the appeal: -
That the entire judgment of the Chief Magistrate’s Court be set aside in its entirety.
That the Appellant’s Counterclaim dated 28th August 2018 be allowed as prayed.
That the finding that the Appellant was in breach of the contract dated 25th November 2015 be set aside.
That the order directing the Appellant to pay the Respondent Kshs. 5,000,000 be vacated.
That the order directing the parties to agree on a fresh loan repayment arrangement be set aside.
That the Costs of this appeal be awarded to the Appellant.
Any further orders as this Honourable Court may deem just and fit to grant.
The Appeal was canvassed by way of written submissions which I have considered.
Issues for Determination
Upon considering the record of appeal, the grounds advanced, and the rival submissions, I find that the following issues arise for determination: -
Whether the trial court erred in holding that the Appellant was in breach of the loan agreement.
Whether the KENHA earmarking of the Respondent’s property constituted an event of default justifying the withholding of the loan balance.
Whether the trial court erred in dismissing the Appellant’s counterclaim for Kshs. 16,213,784.87.
Whether the trial court misdirected itself by rewriting or varying the contract between the parties.
What orders should issue, including on costs.
Analysis and Determination
Breach of Contract
It is not disputed that the Respondent applied for and was granted a loan of Kshs. 20 million , and that Kshs. 15 million was disbursed, leaving a balance of Kshs. 5 million. The Appellant’s justification for withholding the remainder of the loan was that the property had been earmarked by KENHA for demolition.
Clauses 13 and 9 of the Letter of Offer and Charge Document respectively empowered the Appellant to recall or suspend disbursement in the event of circumstances that could materially affect the borrower’s ability to perform, or if the security was compromised.
My finding is that the trial court correctly noted that the mere earmarking of the property by KENHA did not amount to an actual demolition or extinguishment of title, nor was the Appellant’s security rendered valueless. The Appellant did not tender any evidence to show that the building had been demolished, the title cancelled, or the charge invalidated. In Housing Finance Co. of Kenya vs. Gilbert Kibe Njuguna [2005] eKLR , the court held that: -
“A lender cannot unilaterally depart from an agreement under the pretext of risk unless there is demonstrable impairment of the security.”
Similarly, in Mrao Ltd vs. First American Bank of Kenya Ltd [2003] eKLR , the Court of Appeal stated that: -
“The contractual relationship between lender and borrower must be honoured in good faith; neither party should arbitrarily frustrate performance.”
In the present case, it is clear that the Appellant had already advanced three-quarters of the facility and that the project was ongoing. My finding is that the prudent and reasonable course to take would have been for the Appellant to complete disbursement while securing its rights through other remedies such as insurance, or to seek a variation of the loan terms by mutual agreement and not unilateral termination.
I therefore find that the Appellant’s refusal to release the loan balance amounted to a breach of the loan agreement.
KENHA Earmarking
On the issue of whether the KENHA earmarking amounted to a default, the Appellant relied on the “event of default” clause to justify its action. My take is that an event of default must however relate to an act or omission attributable to the borrower, or a material impairment of the security.
In the instant case, however, the earmarking by KENHA was a supervening event, not caused by the Respondent, and was in any case, later resolved in his favor in ELC No. 272 of 2016 . It is instructive to note that the Appellant, though aware of this favourable outcome, did not review its position after the ELC judgment. In Givan Okallo Ingari & Another vs. Housing Finance Co. of Kenya [2007] eKLR , the Court held:
“An event of default cannot arise from circumstances beyond the control of the borrower unless specifically contemplated by the contract.”
Taking a cue from the decision in the above cited case, I find that the trial court was justified in its finding that the Appellant’s invocation of the default clause was unwarranted.
Counterclaim
The Appellant made a counterclaim for Kshs. 16,213,784.87, being the outstanding loan balance, plus damages and interest. The evidence before the trial court showed that the Respondent had commenced repayment and even suffered deductions, though the facility was not fully disbursed. The Appellant did not demonstrate how the figure of Kshs. 16,213,784.87 was computed, or that the Respondent had benefited from the full facility. In Diamond Trust Bank Kenya Ltd vs. Ply & Panels Ltd [2022] KECA 251 (KLR) , the Court of Appeal emphasized that: -
“A lender must strictly prove the amount claimed in a counterclaim by producing statements or reconciliations consistent with contractual terms.”
Having regard to the fact that the loan facility was incomplete and further, that deductions had begun prematurely, I find that the trial court rightly dismissed the counterclaim as unproved.
Rewriting of the Contract
The Appellant argued that by ordering both parties to renegotiate repayment terms, the trial court rewrote the contract. It is trite that Courts have no mandate to vary terms voluntarily agreed upon by parties. This is the position that was taken in National Bank of Kenya Ltd vs. Pipeplastic Samkolit (K) Ltd [2002] 2 EA 503 , where the Court of Appeal stated:
“A court of law cannot rewrite a contract between parties. They are bound by its terms unless coercion, fraud or undue influence are pleaded and proved.”
My finding is that the trial court’s directive to the parties to renegotiate the repayment terms was, in the circumstances of this case, not tantamount to a rewriting of the contract , but was a consequential order aimed at restoring the parties to their contractual footing after the Bank’s breach. This was an equitable measure to ensure performance resumes upon full disbursement.
Merits of the Appeal
Having reviewed the entire record and the authorities cited, I find no misdirection or error of law in the trial court’s findings. The evidence supports the conclusion that the Appellant was in breach, and that the Respondent proved his case on a balance of probabilities.
Disposition
In the end, I find that the appeal lacks merit and I hereby dismissed it in its entirety.
Accordingly, I make the following final orders: -
The appeal is dismissed .
The judgment and decree of the Chief Magistrate in Nyamira CMCC No. 74 of 2017 are upheld. .
The Respondent is awarded costs of the appeal and interest thereon.
'
Payment forthwith of the outstanding loan balance of Kshs. 5,000,000.
An Order of Injunction restraining the Defendant, its agents, or servants from demanding monthly loan repayments until the said balance is disbursed.
Costs of this suit.
Any other relief the Court may deem fit and just to grant.
The Respondent’s case was that he on 20th August 2015 entered into an agreement with the Appellant for a loan facility of Kshs. 20,000,000.
The loan facility was secured by a legal charge over the Respondent’s property known as North Mugirango/Ikonge/2345, which charge was duly registered and stamped in November 2015. The Respondent averred that, under the said agreement, the Appellant/Defendant was obligated to release the full loan amount of Kshs. 20,000,000 upon completion of the charge registration but that only Kshs. 15,000,000 was disbursed to the Plaintiff, leaving an outstanding balance of Kshs. 5,000,000.
The Respondent averred that the purpose of the loan was to complete construction on the charged property, which would in turn generate income to facilitate the loan repayment after a six-month grace period.
The Respondent further averred that as a result of the Appellant’s failure to release the full amount, he was unable to complete the building project within schedule but that despite the shortfall, he commenced repayment of the loan based on the full agreed amount of Kshs. 20,000,000 , thus causing him financial prejudice that made it impossible for the Plaintiff to service the loan repayments as originally planned.
The Appellant filed its Statement of Defence and Counterclaim in which it denied all the allegations made in the Plaint. The Appellant however admitted that a loan facility of Kshs. 20,000,000 was granted to the Respondent on the strength of a charge registered over property known as North Mugirango/Ikonge/2345. The Appellant emphasized that the loan facility was subject to the terms and conditions contained in the Letter of Offer and Charge Document dated 27th November 2015.
According to the Appellant, it was an express term of the contract that if any circumstance arose during the tenure of the loan which, in its opinion, could materially affect the Respondent’s ability to perform his obligations, such circumstance would constitute an event of default , rendering the entire loan immediately due and payable.
The Appellant asserted that during the pendency of the loan, it came to light that the Respondent’s property had been earmarked for partial demolition by the Kenya National Highways Authority (KENHA) for encroaching onto a road reserve thus affecting its value and consequently compromising the Appellant’s security interest over the property.
The Appellant added that due to the said encroachment and boundary dispute, it lawfully withheld the last tranche of Kshs. 5,000,000 , citing material adverse circumstances and invoking the event of default clause in the charge instrument.
The Appellant noted the existence of a pending suit in the Environment and Land Court, ELC No. 272 of 2016 John Kabinga Ongwenya & 3 Others vs. Kenya National Highways Authority , in respect to the said charged property and contended that the outcome of the said suit would directly affects its rights over the property.
It was the Appellant’s case that the legal charge over the suit property was properly executed and registered in accordance with the law, and that the Respondent remained indebted to it.
The Appellant confirmed that Kshs. 15,000,000 was disbursed to the Respondent while Kshs. 5,000,000 was withheld due to the adverse developments from KENHA and reiterated that by virtue of the KENHA encroachment, the Respondent’s property was rendered insecure, thus constituting an event of default under Clause 9 of the Charge .
The Appellant stated that as a result of the default, it recalled the entire facility which stood at Kshs. 16,213,784.87 as at 20th June 2018, inclusive of accrued interest.
The Appellant contended that interim injunctions restraining it from demanding loan repayments had greatly prejudiced its financial rights, as the Respondent continued to owe it substantial sums.
The Appellant referred to the ongoing ELC No. 272 of 2016 case, which it argued directly impacted on the enforceability of its security rights over the suit property.
The Appellant sought the following orders in the Counterclaim: -
That the Respondent’s suit be dismissed with costs.
That judgment be entered for the Appellant on the Counterclaim for: - Kshs. 16,213,784.87 as at 20th June 2018;
Interest at commercial rates from 25th April 2017 until full payment;
General damages with interest;
Costs of the Counterclaim and the suit with interest; and
Any other relief the Honourable Court deems fit and just to grant.
Summary of the Evidence
The Plaintiff, John Kabinga Ongwenya (PW1) adopted his witness statement dated 28th March 2017, reiterated the contents of the Plaint and produced several exhibits, including: -
PExbt 1: Loan Agreement
PExbt 2: Certificate of Official Search
PExbt 3: Statement reflecting loan repayments
PExbt 4: Demand notice
PW1 explained that even though the Kenya National Highways Authority (KENHA) placed markings (“X”) on the building, claiming it encroached onto a road reserve, the Appellant’s valuers and planners had previously inspected and approved the site. He confirmed that he commenced repayment of the loan based on the full Kshs. 20 million, but that due to the failure of the Defendant to release the balance, he could not complete the building and generate income to repay the facility.
He stated that he sought the court’s intervention to compel the bank to release the remaining Kshs. 5,000,000 and suspend monthly repayments until the full loan was disbursed.
On cross-examination, the Respondent confirmed he had filed a separate suit against KENHA over the encroachment issue and had obtained a judgment in his favor. He explained that he has not been able to fully repay the loan as the bank continued to make deductions despite a court order restraining repayment.
On re-examination, PW1 reiterated that the bank still owed him Kshs. 5,000,000 since the property remained charged, and he sought the court’s assistance to enforce the agreement.
DW1, Charles Sifuna Simiyu, the Appellant’s Credit Manager adopted his witness statement dated 28th August 2018 and produced the following documents as exhibits: -
Letter of Offer dated 20/08/2015
Charge dated 25/11/2015
Loan Agreement dated 25/11/2015
Deed of Assignment of Rental Income
Photographs of the suit property
Letter from KENHA dated 14/09/2016
Drawings from Nyamira County Physical Planning Office
Loan account statements (June 2018)
Operating account statements (June 2018)
DW1 testified that the Plaintiff applied for a loan of Kshs. 20,000,000, which was to be disbursed in tranches as construction progressed. The first disbursement of Kshs. 10,000,000 was made, followed by Kshs. 5,000,000, totalling Kshs. 15,000,000.
He stated that before the final disbursement, the bank’s project manager reported that the property had been earmarked by KENHA for demolition as it had encroached on a road reserve and that following this discovery, the Appellant withheld the last tranche of Kshs. 5,000,000 citing the event of default clause in the Charge and Letter of Offer.
DW1 stated that the loan terms allowed the bank to recall the facility if circumstances adversely affecting the security arose. He asserted that the Respondent’s property markings and the boundary dispute with KENHA compromised the bank’s security interest thus justifying the decision to withhold further funds.
During cross-examination, DW1 confirmed that the Respondent was qualified for the loan and that the bank had disbursed the first two tranches after inspections. He admitted the bank retained the final payment due to the KENHA issue but maintained that the Respondent breached the contract by defaulting on repayments after the grace period had expired.
He acknowledged that the project was incomplete and that the Plaintiff had filed a separate case against KENHA, though the bank was not a party to that suit.
At the close of both cases the trial court rendered a verdict in favour to the Respondent upon finding that it was undisputed the Plaintiff had applied for and been advanced Kshs. 15 million, and that Kshs. 5 million remained undisbursed. The trial Court observed that the KENHA earmarking alone did not conclusively prove demolition or render the property valueless and that the mere act of marking did not justify the Bank’s unilateral decision to withhold the loan balance.
The trial Court further noted that the Bank had already advanced three-quarters (¾) of the loan and was therefore obliged to complete disbursement to enable the Plaintiff to finish construction and start repayment. The trial court found that Bank’s failure to disburse the balance was a breach of the contract.
The trial Court also observed that the Plaintiff’s separate suit against KENHA had been decided in his favour, thus further weakening the Bank’s justification for withholding funds.
The Court concluded that the Plaintiff did not breach any loan terms, and the Defendant was in breach by failing to fulfil its contractual obligation. The trial court issued the following orders: -
Judgment is entered for the Plaintiff against the Defendant for the loan balance of Kshs. 5,000,000 with costs and interest.
The Defendant’s counterclaim for Kshs. 16,213,784.87 and general damages is dismissed with costs.
The parties were directed to modify their contract to resume normal repayment once the Bank releases the balance.
The Appeal
Aggrieved by the decision by the trial court, the Appellant filed the instant appeal challenging the findings, conclusions, and orders of the learned magistrate. The Appellant listed eleven (11) grounds of appeal summarized as follows:
That the trial court erred in holding that the Appellant was in breach of the Loan Agreement and Charge Document dated 25th November 2015.
That the magistrate erred by failing to find that the Appellant lawfully withheld the last tranche of Kshs. 5,000,000 due to the earmarking of the Respondent’s property by KENHA, which constituted a reasonable and legal cause.
That the court failed to find that the KENHA seizure constituted an event of default, justifying the Appellant’s action in halting disbursement and demanding repayment.
That the magistrate erred in failing to find that the Respondent was in breach of the loan contract for not servicing the loan after the six-month grace period, regardless of the last tranche.
That the court misdirected itself by ordering the Appellant to pay the Kshs. 5,000,000 without accounting for the Respondent’s default and ongoing breach.
That the magistrate exceeded judicial authority by rewriting the loan terms, contrary to legal principles that courts should not alter contracts voluntarily entered into by parties.
That the court failed to find that the Respondent was indebted to the Appellant in the sum of Kshs. 16,213,784.87 as at 20th June 2018.
That the court erred in dismissing the Appellant’s Counterclaim dated 28th August 2018, terming it unmerited without due consideration.
That the court failed to appreciate that the earmarking of the suit property placed the Appellant’s financial interest at significant risk.
That the judgment offends Order 21 Rule 4 and 5 of the Civil Procedure Rules 2010 and should therefore be set aside ex debito justitiae (as of right, in the interest of justice).
That the magistrate failed to adequately consider the Appellant’s submissions, leading to an erroneous and unjust finding.
The Appellant seeks the following orders in the appeal: -
That the entire judgment of the Chief Magistrate’s Court be set aside in its entirety.
That the Appellant’s Counterclaim dated 28th August 2018 be allowed as prayed.
That the finding that the Appellant was in breach of the contract dated 25th November 2015 be set aside.
That the order directing the Appellant to pay the Respondent Kshs. 5,000,000 be vacated.
That the order directing the parties to agree on a fresh loan repayment arrangement be set aside.
That the Costs of this appeal be awarded to the Appellant.
Any further orders as this Honourable Court may deem just and fit to grant.
The Appeal was canvassed by way of written submissions which I have considered.
Issues for Determination
Upon considering the record of appeal, the grounds advanced, and the rival submissions, I find that the following issues arise for determination: -
Whether the trial court erred in holding that the Appellant was in breach of the loan agreement.
Whether the KENHA earmarking of the Respondent’s property constituted an event of default justifying the withholding of the loan balance.
Whether the trial court erred in dismissing the Appellant’s counterclaim for Kshs. 16,213,784.87.
Whether the trial court misdirected itself by rewriting or varying the contract between the parties.
What orders should issue, including on costs.
Analysis and Determination
Breach of Contract
It is not disputed that the Respondent applied for and was granted a loan of Kshs. 20 million , and that Kshs. 15 million was disbursed, leaving a balance of Kshs. 5 million. The Appellant’s justification for withholding the remainder of the loan was that the property had been earmarked by KENHA for demolition.
Clauses 13 and 9 of the Letter of Offer and Charge Document respectively empowered the Appellant to recall or suspend disbursement in the event of circumstances that could materially affect the borrower’s ability to perform, or if the security was compromised.
My finding is that the trial court correctly noted that the mere earmarking of the property by KENHA did not amount to an actual demolition or extinguishment of title, nor was the Appellant’s security rendered valueless. The Appellant did not tender any evidence to show that the building had been demolished, the title cancelled, or the charge invalidated. In Housing Finance Co. of Kenya vs. Gilbert Kibe Njuguna [2005] eKLR , the court held that: -
“A lender cannot unilaterally depart from an agreement under the pretext of risk unless there is demonstrable impairment of the security.”
Similarly, in Mrao Ltd vs. First American Bank of Kenya Ltd [2003] eKLR , the Court of Appeal stated that: -
“The contractual relationship between lender and borrower must be honoured in good faith; neither party should arbitrarily frustrate performance.”
In the present case, it is clear that the Appellant had already advanced three-quarters of the facility and that the project was ongoing. My finding is that the prudent and reasonable course to take would have been for the Appellant to complete disbursement while securing its rights through other remedies such as insurance, or to seek a variation of the loan terms by mutual agreement and not unilateral termination.
I therefore find that the Appellant’s refusal to release the loan balance amounted to a breach of the loan agreement.
KENHA Earmarking
On the issue of whether the KENHA earmarking amounted to a default, the Appellant relied on the “event of default” clause to justify its action. My take is that an event of default must however relate to an act or omission attributable to the borrower, or a material impairment of the security.
In the instant case, however, the earmarking by KENHA was a supervening event, not caused by the Respondent, and was in any case, later resolved in his favor in ELC No. 272 of 2016 . It is instructive to note that the Appellant, though aware of this favourable outcome, did not review its position after the ELC judgment. In Givan Okallo Ingari & Another vs. Housing Finance Co. of Kenya [2007] eKLR , the Court held:
“An event of default cannot arise from circumstances beyond the control of the borrower unless specifically contemplated by the contract.”
Taking a cue from the decision in the above cited case, I find that the trial court was justified in its finding that the Appellant’s invocation of the default clause was unwarranted.
Counterclaim
The Appellant made a counterclaim for Kshs. 16,213,784.87, being the outstanding loan balance, plus damages and interest. The evidence before the trial court showed that the Respondent had commenced repayment and even suffered deductions, though the facility was not fully disbursed. The Appellant did not demonstrate how the figure of Kshs. 16,213,784.87 was computed, or that the Respondent had benefited from the full facility. In Diamond Trust Bank Kenya Ltd vs. Ply & Panels Ltd [2022] KECA 251 (KLR) , the Court of Appeal emphasized that: -
“A lender must strictly prove the amount claimed in a counterclaim by producing statements or reconciliations consistent with contractual terms.”
Having regard to the fact that the loan facility was incomplete and further, that deductions had begun prematurely, I find that the trial court rightly dismissed the counterclaim as unproved.
Rewriting of the Contract
The Appellant argued that by ordering both parties to renegotiate repayment terms, the trial court rewrote the contract. It is trite that Courts have no mandate to vary terms voluntarily agreed upon by parties. This is the position that was taken in National Bank of Kenya Ltd vs. Pipeplastic Samkolit (K) Ltd [2002] 2 EA 503 , where the Court of Appeal stated:
“A court of law cannot rewrite a contract between parties. They are bound by its terms unless coercion, fraud or undue influence are pleaded and proved.”
My finding is that the trial court’s directive to the parties to renegotiate the repayment terms was, in the circumstances of this case, not tantamount to a rewriting of the contract , but was a consequential order aimed at restoring the parties to their contractual footing after the Bank’s breach. This was an equitable measure to ensure performance resumes upon full disbursement.
Merits of the Appeal
Having reviewed the entire record and the authorities cited, I find no misdirection or error of law in the trial court’s findings. The evidence supports the conclusion that the Appellant was in breach, and that the Respondent proved his case on a balance of probabilities.
Disposition
In the end, I find that the appeal lacks merit and I hereby dismissed it in its entirety.
Accordingly, I make the following final orders: -
The appeal is dismissed .
The judgment and decree of the Chief Magistrate in Nyamira CMCC No. 74 of 2017 are upheld. .
The Respondent is awarded costs of the appeal and interest thereon.
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