KENNETH GITONGA NYAGA AND NJIRU JANE WAMWARI VS ICHAIN HUB LIMITED AND TRISHA MUTHONI MURANGI AND 1 Others

1. By a Plaint dated 8^th June, 2020, the Plaintiffs seeks entry of judgment against the Defendants for a declaration that the Defendants had breached their contractual obligations, repayment of the alleged sums of Kshs.54,024,000/- and USD 160,874.80 for the 1^st and 2^nd Plaintiff respectively, general damages, interest thereon and costs.
2. The Plaintiffs' case is that between 2018 and 2019, they entered into various investment contracts where the Defendants promised to pay them a monthly interest of 20% of the invested amount every month and refund the principal 10 months from the contract dates. The Plaintiffs were required to deposit an agreed investment amount to the 1^st Defendant’s bank account. They could also make additional payments. They therefore signed numerous investments contracts at different times of the year, running simultaneously and with each expiring 10 months from the contract date.
3. However, the Defendants failed to pay the outstanding amounts despite numerous demands. They also issued the Plaintiffs bad cheques which bounced when deposited, leading to the filing of this suit.

RESPONSE

1. The Defendants opposed the Plaint by filing a joint Statement of Defence dated 28^th July 2020 denying that they failed to remit the Plaintiffs capital and interest. They averred that their forex trading business was halted abruptly when the Central Bank of Kenya issued a memo dated 16^th August 2019 captioned “Unlicensed Online Foreign Exchange” warning the public from dealing with unlicensed online foreign exchange dealers. That CBK also issued a letter of the same date to Commercial Banks, Mortgage Finance Companies and Microfinance banks to stop them from dealing with unlicensed online foreign exchange dealers.
2. The Defendants further averred that the 1^st Defendant sought but failed to obtain a license to trade forex due to stringent standards. That the 1^st Defendant promptly informed the Plaintiffs of the predicaments and proposed full refund of the capital and interest. That the contracts between the 1^st Defendant and the Plaintiffs were terminated on 9^th September 2019 hence the interest did not accrue for the entire 10 months contract period. That agreed interest rate was 10%. That the contracts provided that forex trading was a risky business and that the 1^st Defendant had the right to unilaterally amend their terms. That the 1^st Plaintiff opened an extra account with the 1^st Defendant but the agreed interest rate was not 20% as claimed.

REPLY TO DEFENCE

1. The Plaintiffs filed a Reply to Defence dated 19^th October 2020 joining issue with the Defence save its admissions and reiterating the Plaint.

EVIDENCE

1. The suit was first heard by Hon. Mativo J. (as he then was). The Plaintiffs called two witnesses, the 1^st and 2^nd Plaintiffs, KENNETH GITONGA NYAGA (Mr. Nyaga) and NJIRU JANE WAMWARI (Ms. Wamwari) as PW1 and PW2 respectively.
2. Mr. Nyaga adopted his witness statement dated 21^st September 2020, reflective of the Plaint, as his evidence in chief. He produced the Plaintiffs’ bundle of documents dated 8^th June 2020. He stated that he signed the first investment contract in November 2018.
3. That the payments were forthcoming until July 2019 when the first breach occurred. That it was agreed that the money would be ploughed back to the 1^st Defendant but the payments were also not made in August and September 2019.
4. Upon cross-examination Mr. Nyaga could not recall the exact date of the first investment agreement claiming that the Defendants had not given it back to him. He admitted that the contracts had a clause stating that trading is a risk. He was firm that he did not get the email dated 10^th September 2019 even though it was addressed to his email address. However, he acknowledged that the Defendants started sending memos that they wished to stop trading. He pointed out that the Defendants continued to accept deposits not exceeding Kshs. 4.7M and even confirmed that it was okay to continue trading through a phone conversation. He mentioned that he had produced WhatsApp messages but admitted that he did not have evidence of the phone conversation.
5. In re-examination, Mr. Nyaga stated that he did not agree to lose his investment or the interest guaranteed under the contract. That he was not consulted regarding the termination of the contract.
6. Ms. Wamari adopted her witness statement dated 21^st October 2020, similar to the Plaint, as her evidence. She stated that she signed the first contract with the Defendants on 19^th December 2018. The Defendant’s defaulted in payment of interest in May 2019. They then paid the interest for May in June 2019 but not for June. Therefore, her last investment was made in June 2019.
7. During cross-examination, Ms. Wamwari confirmed that although the Defendants were involved in forex trading, she was aware that they were to do different things. That the contract stated that trading is risky. That despite receiving other emails, she did not receive the email terminating the contract. That she received messages asking her to re-invest.
8. The Defendants called one witness, TRISHA MUTHONI MURANGI (Ms. Murangi) as DW1. She adopted her witness statement dated 21^st October 2020, similar to the Defence as her evidence in chief. She also produced the Defendants’ bundle of documents dated 28^th July 2020, marked as
9. Upon cross-examination, Ms. Murangi stated that trades forex because they could not comply with the CBK Regulations. She also stated that they began having business challenges in August 2019 because of the CBK memo. The problems escalated when they were categorised as unlicensed. They agreed to re-invest and pay the Plaintiffs since they are their relatives and could give them more time. She admitted that she did not have proof that in 2019, she paid the 2^nd Plaintiff USD 2,000 in cash. She stated that the contracts were terminated on 10^th June 2019. She admitted that she did not consult the Plaintiffs when she decided to cancel the contract.

SUBMISSIONS

1. The Plaintiffs and the Defendants filed written submissions dated 1^st September 2021 and 12^th October 2021 respectively. The Plaintiffs submitted that the Defendants breached their contractual obligations under the various investment contracts. That Defendants have admitted that they are indebted to the Plaintiffs. That each of the contracts ran for the full period of 10 months and did not terminate in September 2019 as claimed by the Defendants. That further, the Defendants were running a Ponzi scheme.
2. The Defendants submitted that the 1^st Defendant was neither an authorized dealer nor licensed and had not obtained any permit from CBK to transact exchange business without a license and hence was in total breach of Sections 33A & B of the Central Bank Act. They relied on Root Capital Incorporated v Tekangu Farmers’ Co-operative Society Ltd & another [2016] eKLR to argue that contracts not complying with statutory provisions are usually unenforceable because it is against public interest and Trans Mara Sugar Co Ltd & another v Ben Kangwaya Ayiemba & another [2020] eKLR to argue that Courts do not enforce contracts which are in contravention with statutes.

ANALYSIS AND DETERMINATION

1. I have considered the pleadings, evidence, submissions and authorities cited. The issues for determination are:-
   1. Whether the investment agreements are enforceable.
   2. Whether the Plaintiffs have proved their claim to the required standard.
   3. Whether the Plaintiffs are entitled to the reliefs sought.
   4. Whether this Court should pierce the corporate veil and hold the 2^nd and 3^rd Defendants personally liable to satisfy the decretal sum.
2. On the first issue, the Defendants submitted that the investment contracts entered into between the parties were illegal for non-compliance with Sections 33A (1), (3) and 33B of the Central Bank Act which provide as follows:-
   "(1) Subject to subsection (3), no person shall, in Kenya, transact foreign exchange business except an authorized dealer.

(3) Notwithstanding the provisions of subsection (1), the Bank may permit such person or class of persons as it may specify, to transact foreign exchange business without a licence, subject to such conditions as it may impose.

Section 33B "(1) A person proposing to transact foreign exchange business shall, before commencing such business, apply to the Bank for a licence."

1. The general rule is that contracts which are illegal at formation are unenforceable by the Court. However, the Court of Appeal has established an exception to that rule where a party relies solely on the illegality of the contract without additional proof of either pressure or undue influence. In  Nathalal Raghavji Lakhani v H.J. Vaitha & Another

[1965] EA 452, it was held:-

“…. a plaintiff is not entitled to relief in a court of equity on the ground of illegality of his own conduct. In order to obtain relief, he must prove, not only that the transaction was illegal, but something more: he must prove either pressure or undue influence. If all he proves is an illegal agreement, he is not entitled to relief…”

1. In this suit, the Defendants have demonstrated the illegality but nothing more to show either pressure or undue influence. Accordingly, the ground that the investment contracts are unenforceable due to illegality fails.
2. The next issue is whether the Plaintiffs have proved their claim against the Defendants to the required standard. The Plaintiffs produced the various investment agreements showing that they invested capital with the Defendants to be fixed for 10 months and that the agreed interest rate of 20% per month was payable monthly. The Defendants did not dispute that the 1^st Defendant entered into the various agreements and accepted the capital invested.
3. However, the Defendants claimed that on 9^th September 2019 it terminated the various contracts with the Plaintiffs through emails sent to their known email addresses. This was purportedly due to the CBK memo and letter of August 2019 warning the public from engaging 16^th August 2019 cautioning Commercial Banks, Mortgage Finance Companies and Microfinance banks and the general public from dealing with unlicensed online foreign exchange dealers. The Defendants produced an email dated 10^th September 2019 sent from the 1^st Defendants email address ichainhub@gmail.com to the 1^st and 2^nd Plaintiffs’ email addresses henry.wamwea@omw.co.ke and janwam25@gmail.com at 12.10PM and 11.14am respectively   forwarding an attached letter of termination dated 9^th September 2020.
4. The Plaintiffs challenged the validity of the termination notice issued by the Defendant based on lack of receipt. However, during trial, the Plaintiffs were hard-pressed to explain how they did not get the notice which were sent through emails which they had been previously corresponding.
5. The Defendants on their part argued that they could terminate the agreement unilaterally by giving the Plaintiffs a termination notice. They relied on Clause 8 which states:-

“8. Term and Termination of the Agreement

8.1 The Agreement shall enter into force the moment it is signed. 8.2 The company has the right to amend the terms and conditions of the agreement unilaterally by notifying the client thereof before the amendments take effect by the deadlines and in the manner set forth in the general terms and conditions of the company”

1. However, from my reading, the above clause does not grant the 1^st Defendant company the right to terminate the agreement simply by issuing a termination notice. It only allowed the 1^st Defendant to unilaterally amend the terms of the contract by notifying them before such amendments took effect. As such, I find that the termination of 9^th September 2020 by the Defendants was not valid.
2. The Defendants postulated that it was because of the CBK notice and memo dated 16^th August 2019 cautioning the public from dealing with unlicensed online foreign exchange. However, I am not convinced by this argument. The CBK notice states as follows:-

“CENTRAL BANK OF KENYA

PUBLIC NOTICE

UNLICENCED ONLINE FOREIGN EXCHANGE (FOREX) DEALERS

The attention of the Central Bank of Kenya (CBK) has been drawn to the emergence of unlicenced and unregulated online foreign exchange (forex) dealers and platforms. Some of the characteristics of these dealers and platforms include:

1. The platforms are downloadable on Google Play and Apple App Store, and aggressively market themselves through social media and mass emails.

2. They purport to offer the best forex deals in the market.

3. They collect and or receive funds from customers in exchange for foreign or local currencies.

4. They do not have the requisite licences issued by CBK or the Capital Markets Authority (CMA).

5. They have inadequate anti-money laundering and consumer protection safeguards.

The purpose of this notice is to warn members of the public against dealing with unlicenced and unregulated online forex dealers. They should only deal with genuine and licenced financial institutions and entities. Members of the public are therefore advised to confirm the licencing status of forex dealers from the CBK website (www.centralbank.go.ke) and/or CMA website (www.cma.or.ke) before engaging with the dealers, as they risk being defrauded and losing their money to unlicenced and unregulated forex dealers.

Complaints regarding unlicenced forex dealers may be forwarded to the Banking Fraud Investigations Unit through the address herein below:

Banking Fraud Investigations Department

Extelcoms House

Haile Selassie Avenue

P. O. Box 60000 – 00200

NAIROBI

CENTRAL BANK OF KENYA

AUGUST 16, 2019”

1. A similar notice was issued by the CBK on July 11, 2018. The position of the law is that any person transacting foreign exchange business must either be licensed or have a permit to trade without a license. See Sections 33A and B cited above.
2. The Defendants admitted that the 1^st Defendant was neither an authorized dealer nor licensed and had not obtained any permit from CBK to transact foreign exchange business without a license under

Section 33A of the Act.

1. Therefore, given the foregoing, the conclusion is that Defendants

fraudulently misrepresented to the Plaintiffs that it was a licensed foreign exchange trader to persuade them to enter into the subject investment contract. No true agreements existed between the Plaintiffs and the 1^st Defendants.

1. I find and hold that the agreements have come to an end through rescission. Black’s Law Dictionary, 2^nd Edition defines rescission as follows:-

“Rescission, or the act of rescinding, is where a contract is cancelled, annulled, or abrogated by the parties, or one of them. In Spanish law, nullity is divided into absolute and relative. The former is that which arises from a law, whether civil or criminal, the principal motive for which is the public interest ; and the latter is that which affects only certain individuals. “Nullity” is not to be confounded with “rescission.” Nullity takes place when the act is affected by a radical vice, which prevents it from producing any effect; as where an act is in contravention of the laws or of good morals, or where it has been executed by a person who cannot be supposed to have any will, as a child under the age of seven years, or a madman, (un niño o demente.) Rescission is where an act, valid in appearance, nevertheless conceals a defect, which may make it null, if demanded by any of the parties; as, for example, mistake, force, fraud, deceit, want of sufficient age, etc.” (With emphasis)

1. I therefore find that the contract has ended through rescission.
2. I now move to the issue of whether the Plaintiffs are entitled to the reliefs sought. The 1^st and 2^nd Plaintiffs claimed Kshs.54,024,000/- and USD. $160,874.80 respectively. These amounts are inclusive of the principle and interest.
3. However, through the remedy of rescission, the Court places the parties in the position they were prior to the aborted agreement. Accordingly, I find that the Plaintiffs are only entitled to the capital invested.
4. The Plaintiffs also sought general damages for breach of contract. However, as per the Court of Appeal for East Africa in Dharamshi v Karsan [1974] EA 41, general damages for breach of contract are not allowed because:-

“As a general principle, the purpose of damages for breach of contract is, subject to mitigation of loss, the claimant is to be put as far as possible in the same position he would have been if the breach complained of had not occurred. The measure of damages is in accordance with the rule established in the case of Hadley v Baxendale (1854) 9. Exch.341 that the measure of damages is such as may be fairly and reasonably be considered arising naturally from the breach itself or such as may be reasonably contemplated by the parties at the time the contract was made and a probable result of such breach. Such damages are not damages at large or general damages but are in the nature of special damages and they must be pleaded and proved.”

1. In conclusion, Judgment is entered for the Plaintiffs against the Defendants jointly and severally for the capital invested only with interest at court rate from the date of filing of the suit until payment in full. The Plaintiffs are awarded costs of the suit.

DATED, SIGNED AND DELIVERED VIRTUALLY at NAIROBI this 3^rd DAY OF FEBRUARY 2025

………………………………..

J.W.W. MONG’ARE

JUDGE

In the Presence of:-

1. Mr. Mbulu for the 1^st and 2^nd Plaintiffs.
2. N/A for the Defendant.
3. Amos- Court Assistant