Introduction and Background
1. By their plaint dated 16 th February 2009, the Plaintiffs state that on or about 10 th November 1982, they applied for a loan of Kshs. 286,200.00 from the Defendant to buy tenant purchase House No. 87 in the Langata Civil Servants Housing Scheme which the Defendant had apparently financed to build on behalf of the Civil Servants Housing Company Limited . They claim that Between 1991 and 2002, they paid the Defendant a total of Kshs. 4,050,313.50 in interest and expenses but despite these payments, the Defendant's records in 2002 showed an outstanding balance of Kshs. 2,302,507.25.
2. The Plaintiffs aver that they discovered that the Defendant had been applying interest monthly, contrary to the agreed annual terms in the Charge document and after a complaint, the Defendant acknowledged the error in 2003, refunded Kshs. 581,305.22 and wrote off the remaining balance of Kshs. 2,302,507.25. That further scrutiny revealed additional anomalies, including charging interest for a period of 12 months before the loan was even disbursed, increasing the interest rate from 14% to 16% without providing the required one-month notice and applying this increased rate for over six years without proper notice.
3. That the Defendant offered a final settlement of Kshs. 113,454.97, which the Plaintiffs refused and the Plaintiffs hired forensic accountants, M/s Omanwa & Associates, who concluded that, as of 31 st December 2008, the Defendant was still indebted to the Plaintiffs for Kshs. 6,538,326.04 due to the overpayment caused by the Defendant’s actions. They accuse the Defendant of charging interest on a monthly instead of annual basis, charging interest for non-existent periods, unlawfully increasing the interest rate without notice, mismanaging the loan account which led to inflated payments, continuing to demand payments and harass the Plaintiffs through advocates and auctioneers even after the loan was effectively paid off and violating statutory duties under the Banking Act and the Central Bank of Kenya Act .
4. For these reasons, the Plaintiffs are praying to the court for Kshs. 6,538,326.04 for the overpaid amount, with interest, general and exemplary damages for mental distress, embarrassment and breach of duty, Kshs. 132,500.00 for the fees paid to the accountants, interest and costs of the suit.
5. The Defendant responded to the suit through its amended defence dated 8 th June 2009 denying all allegations of fraud, negligence, or illegal operation of the loan account. The Defendant asserts that the Plaintiffs were in perpetual default on their monthly instalment payments, which caused the loan balance to accrue contractual and penal interest as per standard banking practice. The Defendant disputes the Plaintiffs' claim that interest was to be applied annually and it avers that Clause 3 of the Charge document provided for interest to be applied monthly and not annually. It denies that it admitted any liability and states that any refunds or offers made were made in good faith, on a without prejudice basis, in line with good banking practice and without any admission of liability.
6. In the alternative, the Defendant states that if any errors or mistakes occurred in the Plaintiffs' loan account, they were honest mistakes, they were not made negligently or with fraudulent intent and that they were rectified promptly once pointed out, with all overpaid monies refunded. The Defendant claims that the Plaintiffs' claim is statutorily barred because it relates to matters that are over 27 years old and it further pleads laches, stating that the delay is prejudicial because the Defendant no longer employs the potential witnesses who could have testified on its behalf, which led to a miscarriage of justice.
7. The Defendant accuses the Plaintiffs of not coming to court with clean hands and avers that the Plaintiffs are perpetual defaulters of their loan obligations and therefore should not be entitled to relief from the court. The Defendant contends that the Plaintiffs' suit is materially defective as it discloses no reasonable cause of action, it denies all particulars of loss and damage claimed by the Plaintiffs and puts them to strict proof thereof and prays that the Plaintiffs' suit be dismissed with costs.
8. At the hearing, the 1 st Plaintiff testified on behalf of the Plaintiffs (PW 1) and relied on his witness statement dated 21 st July 2020 and he produced their List and Bundle of Documents of the same date (PExhibit 1-12). They also called, Evans Maeba, an accountant at M/s Omanwa & Associates (PW 2), who adopted his report dated 2 nd January 2009. The Defendant did not call any witness of produce any evidence in support of its defence. After hearing the parties, the court directed them to file written submissions which are on record and since the same are a mirror of the parties’ positions highlighted above, I will not rehash the same but make relevant references in my analysis and determination below.
Analysis and Determination
9. As these are civil proceedings, it should not be lost that the court’s determination is on a balance of probabilities and is guided by the principle that he who alleges must prove. Denning J., in Miller v Minister Of Pensions [1947]2 All ER 372 discussed the burden of proof and he stated as follows:
“That degree is well settled. It must carry a reasonable degree of probability , but not so high as is required in a criminal case. If the evidence is such that the tribunal can say: ‘we think it more probable than not’, the burden is discharged, but, if the probabilities are equal, it is not. Thus, proof on a balance or preponderance of probabilities means a win, however narrow . A draw is not enough. So, in any case in which the tribunal cannot decide one way or the other which evidence to accept, where both parties’ explanations are equally (un) convincing, the party bearing the burden of proof will lose, because the requisite standard will not have been attained.”
10. The aforementioned position has now been espoused by our superior courts and finds statutory comfort in sections 107 and 108 of the Evidence Act(Chapter 80 of the Laws of Kenya) which provide as follows:
107. Burden of proof.
(1) Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.
(2) When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.
108. Incidence of burden.
The burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either side.
(Also see Ignatius Makau Mutisya v Reuben Musyoki Muli [2015] KECA 612 (KLR )
11. Further, I am in agreement with the Defendant’s submission that even though it did not call any witness or produce evidence, the Plaintiffs still have a duty to prove their case on a balance of probabilities as is required by law. This was held by the Court of Appeal in Karugi & another v Kabiya & 3 others [1983] KECA 38 (KLR) where it was stated that, “The burden was always on the Plaintiff to prove his case on a balance of probabilities even if the case was heard as formal proof”. Likewise, failure by a defendant to contest the case does not absolve a plaintiff of the duty to prove the case to the required standard hence in Gichinga Kibutha v Caroline Nduku [2018] KEELC 3981 (KLR) the Court held that, “It is not automatic that instances where the evidence is not controverted the Claimants shall have his way in Court. He must discharge the burden of proof. He must prove his case however much the opponent has not made a presence in the contest.”
12. From the parties’ submissions, the court is being asked to determine the following abridged issues:
a) Whether the suit is statute barred
b) Whether the Defendant improperly administered the mortgage account
c) Whether the Defendant unlawfully varied the contractual interest rate
d) Whether the Defendant overcharged the Plaintiffs
e) Whether the Defendant’s admission of overpayment establishes liability
f) Whether the Defendant was entitled to levy professional, legal, valuation and auctioneer's charges
g) Whether the Defendant breached its duty of good faith and proper accounting
h) Whether the Plaintiffs are entitled to General Damages
i) Whether the Plaintiffs have proved their case
j) Whether the Plaintiffs are entitled to the remedies sought
Suit being time barred
13. The Defendant submitted that the suit is time-barred under section 4(1)(a) of the Limitation of Actions Act as actions founded on contract must be brought within six years of the cause of action accruing. That the events complained of, that is, variations in interest, debiting legal and auctioneer fees and interest charges accrued in the 1980s and 1990s but the suit was filed in 2009, over 20 years later.
14. The Defendant submitted that the Plaintiffs' claim that the Bank acknowledged liability thus restarting limitation under section 23(3) is unfounded and that under section 24(1), an acknowledgment must be unequivocal. The Defendant avers that the 2003 and 2004 letters were explicitly marked "without prejudice" and without admission of liability, maintaining only that Kshs. 113,000.00 was refundable and consequently, the Court lacks jurisdiction.
15. In response, the Plaintiffs submitted that the suit is not barred by limitation or laches and that after the loan account was operated, the Defendant reviewed the account, recalculated sums, refunded monies, wrote off large amounts and acknowledged additional sums due to the Plaintiffs. The Plaintiffs contended that these actions constitute continuing transactions and acknowledgments that reset or interrupt the limitation period and that the Defendant cannot reopen, recalculate and settle accounts while simultaneously claiming the Plaintiffs are time-barred from challenging those same accounts
16. It is not in dispute that under section 4(1)(a) of the Limitation of Actions Act, actions founded on contract are barred after six years from the date the cause of action accrued. However, section 23(3) of the same Act goes on to state that this right of action accrues when ‘…… the person liable to or accountable therefore acknowledges the claim or makes any payment in respect of it and ‘ the right accrues on and not before the date of the acknowledgement or the last payment.’ From the evidence, it is clear that the parties corresponded on the status of the loan account between 1999 and 2005. Whereas the Defendant submitted that its letters of 17 th November 2003, 25 th February 2004 and subsequent correspondence were explicitly made on a “without prejudice” basis and without admission of liability, my perusal of these letters show that there is no explicit "without prejudice" notation. They are straightforward letters making settlement offers and responding to the Plaintiffs' queries, providing explanations and clarifications. It therefore follows that the letters are admissible as evidence and can constitute valid acknowledgments under section 23(3) of the Limitation of Actions Act .
17. As stated, for a letter to constitute an acknowledgment under section 23(3), it must be in writing, signed by the person making the acknowledgment and be an unequivocal admission of a debt or liability. The letter of 17 th November 2003 is in writing, is signed by the Defendant’s Manager, Debt Recovery and unequivocally states that " Based on the adjustments the final amount that is now due to you is Kshs.113,454.97." It then goes on to explicitly make an offer to pay, " Please advise whether this is acceptable to you to enable us make the refund and conclude this long outstanding matter. " I find that this is a clear and unequivocal acknowledgment that the Defendant owes the Plaintiffs money and it is therefore an acknowledgment of a debt and the limitation period would begin to run from that date, not from the earlier dates when the original errors occurred. The Plaintiffs filed their suit in April 2009, which is within six years after the acknowledgment and therefore, they were within time. This and further letters by the Defendant on 16 th May 2005 and 31 st July 2005 also counts as an intervening event as the parties appear to have been negotiating and the Bank reconciling the loan account meaning that time therefore froze as this reconciliation was being undertaken (see Bhupinder Singh Dogra v Coast Development Authority [2021] KEHC 7822 (KLR) ].
18. It is for these reasons that I find that the suit is not statute barred as it was filed within six years from the date in which the cause of action arose which was as from November 2003 whereas the suit was filed five years and five months later
Improper administration of the mortgage account
19. The Plaintiffs submitted that the Defendant fundamentally breached its contractual and fiduciary obligations in managing the mortgage facility. That the facility was governed by specific terms in the Letter of Offer, Memorandum as to Advances and Charge document but the Defendant charged interest inconsistent with agreed contractual rates from the inception and rendered un-reconcilable account statements. They contended that in banking disputes, the lender bears the evidential burden to prove that all debits, charges and interest variations were contractually authorized but the Defendant failed to discharge this burden.
20. The Defendant submitted that the errors in calculation were corrected in good faith in 2003 and that third-party costs including legal, valuation and auctioneer fees were deemable principal expenses incurred as a direct result of the Plaintiffs' persistent default between 1983 and 1991, as permitted under the Charge and that copies of receipts were provided, making these non-refundable. The Defendant submitted that it derived no benefit, its write-offs and refunds were remedial measures executed in good faith without prejudice and not an election to admit liability for the Plaintiffs’ current claim.
21. Going through the evidence, the Defendant, in its letter of 17 th November 2003 states in part that:
"In our earlier analysis we inadvertently included an interest charge for 1982. This was an oversight since the loan was released in November, 1983. We have adjusted our analysis to accommodate the fact that the loan was released in November, 1983…..Based on the adjustments the final amount that is now due to you is Kshs.113,454.97"
22. PW 1 testified and it was not disputed that the Defendant acknowledged errors and refunded Kshs. 581,305.22 by way of cheque to the Plaintiffs and that the Defendant wrote off Kshs. 2,302,507.25 that it had previously claimed was outstanding. In its letter of 25 th February 2004, the Defendant provided explanations but did not deny liability for the previous overcharged amount. It stated "We hope the above information clarifies all the issues raised... and shall appreciate if this matter is put to rest at that." The Defendant’s letter of 27 th May 2003 and attached statement also indicated that the loan account had a zero principal and interest balance and the Defendant stated that the account had been closed.
23. From the Defendant’s own admissions above, it is my finding that the Plaintiff’s account was improperly managed.
Variation of the contractual interest rate
24. The Plaintiffs submitted that the variations in interest rates were unlawful, irregular and unenforceable and that parties are bound by their voluntary contracts and courts or parties cannot unilaterally alter terms unless expressly permitted by agreement and proper procedure is followed as was held in National Bank of Kenya Ltd v. Pipeplastic Samkolit (K) Ltd & another [2001] KECA 362 (KLR) .
25. The Plaintiffs contended that the Defendant failed to prove the specific clause authorizing the variation, the occurrence of circumstances justifying the variation, service of requisite notices and proper computation of the revised interest.
26. On its part, the Defendant submitted that under section 48 of the Evidence Act, an expert witness owes an overriding duty of objective impartiality to the Court but PW2 admitted in his testimony that he was acting solely as the Plaintiffs' witness to justify their figure and that expert testimony must be tested against primary facts. The Defendant argued that PW2 relied strictly on unverified document copies supplied by the Plaintiffs without seeking internal ledgers or clarifications from the Bank and that his report is inadmissible hearsay under section 63 of the Evidence Act. That the report arbitrarily assumed interest should remain capped at 14% while ignoring variation clauses and unjustifiably rejected valid enforcement expenses in cases of default.
27. As per the Letter of Offer dated 16 th November 1982, I note that Clause 1(b) provides that “ Interest is calculated on the amount of the advance to 31st December following the date of the advance and thereafter on the balance owing at the 1st January in each year. The Mortgage Deed or Charge confers on the Company the right, on giving notice, to increase or decrease the rate of interest .” Thus the Letter of Offer expressly refers to the Charge document for the power to vary interest and it requires notice to be issued for any variation. However, I note that it does not specify the period of notice or the form it must take.
28. Going through the Charge document dated 15 th November 1983, I note that Clause 5(i) on the interest rate provides that "The Chargor will pay interest on the principal sum for the time being outstanding ... at the rate of fourteen per centum (14%) per annum ... or at such other rate as the Chargee shall from time to time determine in accordance with the provisions of sub-clause (iii) of this Clause ." Clause 5(ii) provided for the power to vary as follows: "The Chargee shall have power from time to time to vary the rate of interest payable hereunder (including the right to vary the minimum rate of interest and the periodical rests at which interest is calculated) provided that the Chargee shall give to the Chargor not less than one month's previous notice in writing of any such variation and such variation shall take effect on the date specified in such notice."
29. Clause 5(iii) then provides for Increased Monthly Instalments that: "In the event of the Chargee requiring an increase in the rate of interest under the provisions of sub-clause (ii) of this Clause the Chargee will notify the Charger of the amount of the resulting increased monthly instalments payable under the provisions of Clause 3 hereof and the first of such increased monthly instalments shall become due and payable on the first day of the month next after notification of the amount thereof to the Charger ."
30. From the above, I find that the Defendant had the power to vary the rate "from time to time”, it was to give "not less than one month's previous notice in writing" of any variation , t he notice was to specify the date on which the variation takes effect and the Defendant was to notify the Plaintiffs of the amount of the resulting increased monthly instalments and the increased instalments become due "on the first day of the month next after notification". The initial interest rate was also set at 14% per annum which was the agreed contractual rate.
31. In the Defendant’s letter of 16 th October 1993, it informed the 1 st Plaintiff that: “ WE THEREFORE HEREBY GIVE YOU NOTICE THAT IN ACCORDANCE WITH THE RELEVANT CLAUSE OF THE MORTGAGE CHARGE OVER YOUR PROPERTY. YOU ARE REQUIRED TO PAY INTEREST AT THE INCREASED RATE OF 29% PER ANNUM FROM THE FIRST DAY OF SEPTEMBER, 1993 ON ALL MONIES DUE TO OR TO BECOME DUE TO THE COMPANY FROM TIME TO TIME ON THE SECURITY OF SUCH MORTGAGE." This notice states the increase takes effect "from the first day of September, 1993." However, the letter is dated 16 th October 1993 meaning the Defendant is purporting to apply the increased rate retroactively, before the notice was even given which is a clear breach of Clause 5(ii), which requires notice before the variation takes effect. Even if the notice were valid, it gives only approximately two weeks whereas the Charge contract requires "not less than one month's previous notice."
32. There is also a letter dated 20 th November 1997 stating that “Due to the high increase in the cost of funds and other operating expenses we have been forced to revise interest rates upward on all mortgage facilities as indicated herebelow effective from 1st December 1997 :- All Residential property facilities 20% per annum” This letter is also problematic because it is dated 20 th November 1997 and the increase takes effect on 1 st December 1997 which is only 10 days' notice whereas the Charge requires "not less than one month's previous notice." Clause 5(iii) also requires the Defendant to notify the Defendants of the amount of the resulting increased monthly instalments but there is no evidence this was done.
33. There is also a letter dated 3 rd March 1999 by the Defendant stating: "We are pleased to advise that we have further reduced our interest rate on your mortgage Account No 201892419 to 24.00% with effect from 1st March, 1999." While the Defendant was reducing the rate, this letter demonstrates that the Defendant was varying the rate without following the contractual notice procedure. The reduction is effective from 1 st March 1999, but the letter is dated 3 rd March 1999 which again, is an improper retroactive application and there is no evidence the Defendant notified the Plaintiffs of the new monthly instalment amount as required by Clause 5(iii).
34. Another letter dated 1 st September 2000 states “We are pleased to advise that we have further reduced our interest rates w.e.f. 1st September, 2000 as follows: Residential rates - from 24% to 22% p.a." The Letter is dated 1 st September 2000 and is effective from 1 st September 2000 which is a variation with zero days' notice. The letter also states " your new monthly installment will be Kshs.37,224.61 exclusive of ledger fees and Insurance” which is the first time the Defendant has provided the required notification under Clause 5(iii). However, as I have found, this is only for this one variation and there is no evidence of compliance for earlier variations.
35. It is thus clear that the Defendant is trying to rely on the very variations it failed to properly implement I find that the principle of "he who comes to equity must come with clean hands" applies as the Defendant cannot benefit from its own failure to comply with the contractual notice requirements. Since the variations were unlawful, any interest charged above the contractual rate of 14% was unauthorized and the Plaintiffs are entitled to a refund of all interest paid above 14%, plus interest on that amount (see Francis Joseph Kamau Ichatha v Housing Finance Company of Kenya Limited [2014] KEHC 3619 (KLR)]. The Defendant failed to notify the Plaintiffs of the resulting increased monthly instalments as required by Clause 5(iii) which means the Plaintiffs were left uncertain about what they were required to pay, which caused additional stress and financial hardship.
36. It is therefore my finding that the Defendant unlawfully varied the contractual interest rate
Overcharging the Plaintiffs
37. The Plaintiff submitted that overcharging was proven on a balance of probabilities and that PW 2’s report and statements showed substantial discrepancies. Further, that the Defendant acknowledged computational errors by refunding a portion of the overcharged sums and that an admission against interest is strong evidence and that once overcharging was admitted through partial refund, the burden shifted to the Defendant to justify the remainder of disputed charges, which it failed to do. I indeed agree with the Plaintiffs that based on my findings above, the Defendant definitely overcharged the Plaintiffs by improperly applying interest rates on the loan that irregularly ballooned the outstanding amount.
Admission of overcharging and liability
38. Having found that the Defendant admitted overcharging the Plaintiffs some amounts, the question then is whether this admission amounts to a liability on the Defendant’s part. The Plaintiffs submitted that the Defendant’s conduct constitutes conclusive proof and admission that the mortgage account was improperly maintained. That the Defendant took explicit actions including recomputing the account, refunding Kshs. 581,305.22.00, writing off Kshs. 2,302,949.00, releasing title documents, discharging the Charge and acknowledging an additional Kshs. 113,454.97 due.
39. The Plaintiffs submitted that the Defendant cannot approbate and reprobate by admitting overpayment or mistakes through its conduct while denying liability in court and they relied on inter alia the court’s decision in Royal Ngao Holdings Limited v N.K. Brothers Limited [2020] KEHC 2550 (KLR) to assert the doctrine of estoppel against approbation and reprobation. The Defendant also relied on this decision and submitted that the doctrine does not apply to it as approbation and reprobation requires a party to make an election between two courses of action and receive a benefit therefrom. The Defendant reiterated that it derived no benefit and that its write-offs and refunds were remedial measures executed in good faith without prejudice and not an election to admit liability for the Plaintiffs’ claim.
40. In its letter of 17 th November 2003, the Defendant admitted that it made errors in its calculations, that it inadvertently charged interest for 1982, that it overcharged the Plaintiffs and that it owed the Plaintiffs Kshs.113,454.97 as of the date of the letter. It was also not disputed that the Defendant refunded Kshs. 581,305.22 to the Plaintiffs which was an acknowledgment that the Plaintiffs had overpaid by at least that amount. Also not disputed was that the Defendant wrote off Kshs. 2,302,507.25 that it had previously claimed was outstanding which is also an acknowledgment that the Plaintiffs did not owe that amount. The Defendant discharged the Plaintiffs' property from the charge which was an acknowledgment that the loan had been fully repaid. The letter of 27 th May 2003 by the Defendant also indicated that the loan had been repaid and there was no debit balance.
41. However, going through the evidence, I find that the Defendant never admitted that the Plaintiffs overpaid by Kshs. 6,538,326.04 or that PW 2’s report is accurate. In fact, the Defendant heavily disputed this report and its findings citing various methodological flaws. The Defendant also never admitted that the Plaintiffs are entitled to interest on the overpayment at commercial rates or that the Plaintiffs are entitled to general or exemplary damages. The Defendant's position has always been that the total overpayment was Kshs. 694,761.22, that is, Kshs. 581,305.22 and Kshs. 113,454.97 of which Kshs. 581,305.22 has already been refunded, leaving only Kshs. 113,454.97 outstanding.
42. Therefore, the Plaintiffs still bore the burden of proving the specific amount of Kshs. 6,538,326.04 and I find that the Defendant's admissions are evidence of overcharging, but they are not conclusive proof of the full amount claimed. Whereas I can agree that the Defendant is estopped from denying that errors were made in the account, that the Plaintiffs were overcharged and that it owed the Plaintiffs Kshs. 581,305.22 and Kshs.113,454.97, theDefendant is not estopped from denying the larger figure of Kshs. 6,538,326.04.
Levying of professional, legal, valuation and auctioneer's charges
43. The Plaintiffs submitted that these charges were unauthorized, unlawful and must be reimbursed with interest and that a chargee can only recover expenses expressly authorized by the Charge document and the law. They contended that the Defendant failed to strictly prove the necessity, contractual authorization, actual expenditure, or connection of these charges to the Plaintiffs' account.
44. My perusal of the Letter of Offer indicates that Clause 10 on Legal Fees provides that "Legal fees payable by you." , Clause 1(b) on Bank Exchange and Charges provides that "Bank exchange and charges must be paid by the Applicant” and the General Provisions state that "The Applicant must acquaint himself with any liability there may be in respect of road or sewage connection charges and as to his ability to meet such liability." I find that the Letter of Offer is vague on what charges may be levied, it mentions "legal fees" but does not specify what they cover or how they are calculated, it mentions "bank exchange and charges" but does not define them and there is no mention of auctioneers fees, valuation fees or other professional charges.
45. The Charge contains more detailed provisions including Clause 9 on Expenses which provides that:
"The Chargee may from time to time make such payments as it may consider expedient to any person whether the Chargor or anyone acting at the Chargor's request or a receiver or a subsequent chargee or to any person acting on the instructions of the Chargee in connection with completing maintaining repairing amending altering or improving the said property or for outgoings in relation thereto or for any costs or expenses incurred by the Chargee for the enforcement protection or improvement of the security hereby created and all money so paid shall be deemed to be principal money hereby secured and shall carry interest at the rate for the time being payable hereunder from the date of the same being paid by the Chargee and shall be repayable
[...truncated]
1. By their plaint dated 16 th February 2009, the Plaintiffs state that on or about 10 th November 1982, they applied for a loan of Kshs. 286,200.00 from the Defendant to buy tenant purchase House No. 87 in the Langata Civil Servants Housing Scheme which the Defendant had apparently financed to build on behalf of the Civil Servants Housing Company Limited . They claim that Between 1991 and 2002, they paid the Defendant a total of Kshs. 4,050,313.50 in interest and expenses but despite these payments, the Defendant's records in 2002 showed an outstanding balance of Kshs. 2,302,507.25.
2. The Plaintiffs aver that they discovered that the Defendant had been applying interest monthly, contrary to the agreed annual terms in the Charge document and after a complaint, the Defendant acknowledged the error in 2003, refunded Kshs. 581,305.22 and wrote off the remaining balance of Kshs. 2,302,507.25. That further scrutiny revealed additional anomalies, including charging interest for a period of 12 months before the loan was even disbursed, increasing the interest rate from 14% to 16% without providing the required one-month notice and applying this increased rate for over six years without proper notice.
3. That the Defendant offered a final settlement of Kshs. 113,454.97, which the Plaintiffs refused and the Plaintiffs hired forensic accountants, M/s Omanwa & Associates, who concluded that, as of 31 st December 2008, the Defendant was still indebted to the Plaintiffs for Kshs. 6,538,326.04 due to the overpayment caused by the Defendant’s actions. They accuse the Defendant of charging interest on a monthly instead of annual basis, charging interest for non-existent periods, unlawfully increasing the interest rate without notice, mismanaging the loan account which led to inflated payments, continuing to demand payments and harass the Plaintiffs through advocates and auctioneers even after the loan was effectively paid off and violating statutory duties under the Banking Act and the Central Bank of Kenya Act .
4. For these reasons, the Plaintiffs are praying to the court for Kshs. 6,538,326.04 for the overpaid amount, with interest, general and exemplary damages for mental distress, embarrassment and breach of duty, Kshs. 132,500.00 for the fees paid to the accountants, interest and costs of the suit.
5. The Defendant responded to the suit through its amended defence dated 8 th June 2009 denying all allegations of fraud, negligence, or illegal operation of the loan account. The Defendant asserts that the Plaintiffs were in perpetual default on their monthly instalment payments, which caused the loan balance to accrue contractual and penal interest as per standard banking practice. The Defendant disputes the Plaintiffs' claim that interest was to be applied annually and it avers that Clause 3 of the Charge document provided for interest to be applied monthly and not annually. It denies that it admitted any liability and states that any refunds or offers made were made in good faith, on a without prejudice basis, in line with good banking practice and without any admission of liability.
6. In the alternative, the Defendant states that if any errors or mistakes occurred in the Plaintiffs' loan account, they were honest mistakes, they were not made negligently or with fraudulent intent and that they were rectified promptly once pointed out, with all overpaid monies refunded. The Defendant claims that the Plaintiffs' claim is statutorily barred because it relates to matters that are over 27 years old and it further pleads laches, stating that the delay is prejudicial because the Defendant no longer employs the potential witnesses who could have testified on its behalf, which led to a miscarriage of justice.
7. The Defendant accuses the Plaintiffs of not coming to court with clean hands and avers that the Plaintiffs are perpetual defaulters of their loan obligations and therefore should not be entitled to relief from the court. The Defendant contends that the Plaintiffs' suit is materially defective as it discloses no reasonable cause of action, it denies all particulars of loss and damage claimed by the Plaintiffs and puts them to strict proof thereof and prays that the Plaintiffs' suit be dismissed with costs.
8. At the hearing, the 1 st Plaintiff testified on behalf of the Plaintiffs (PW 1) and relied on his witness statement dated 21 st July 2020 and he produced their List and Bundle of Documents of the same date (PExhibit 1-12). They also called, Evans Maeba, an accountant at M/s Omanwa & Associates (PW 2), who adopted his report dated 2 nd January 2009. The Defendant did not call any witness of produce any evidence in support of its defence. After hearing the parties, the court directed them to file written submissions which are on record and since the same are a mirror of the parties’ positions highlighted above, I will not rehash the same but make relevant references in my analysis and determination below.
Analysis and Determination
9. As these are civil proceedings, it should not be lost that the court’s determination is on a balance of probabilities and is guided by the principle that he who alleges must prove. Denning J., in Miller v Minister Of Pensions [1947]2 All ER 372 discussed the burden of proof and he stated as follows:
“That degree is well settled. It must carry a reasonable degree of probability , but not so high as is required in a criminal case. If the evidence is such that the tribunal can say: ‘we think it more probable than not’, the burden is discharged, but, if the probabilities are equal, it is not. Thus, proof on a balance or preponderance of probabilities means a win, however narrow . A draw is not enough. So, in any case in which the tribunal cannot decide one way or the other which evidence to accept, where both parties’ explanations are equally (un) convincing, the party bearing the burden of proof will lose, because the requisite standard will not have been attained.”
10. The aforementioned position has now been espoused by our superior courts and finds statutory comfort in sections 107 and 108 of the Evidence Act(Chapter 80 of the Laws of Kenya) which provide as follows:
107. Burden of proof.
(1) Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.
(2) When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.
108. Incidence of burden.
The burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either side.
(Also see Ignatius Makau Mutisya v Reuben Musyoki Muli [2015] KECA 612 (KLR )
11. Further, I am in agreement with the Defendant’s submission that even though it did not call any witness or produce evidence, the Plaintiffs still have a duty to prove their case on a balance of probabilities as is required by law. This was held by the Court of Appeal in Karugi & another v Kabiya & 3 others [1983] KECA 38 (KLR) where it was stated that, “The burden was always on the Plaintiff to prove his case on a balance of probabilities even if the case was heard as formal proof”. Likewise, failure by a defendant to contest the case does not absolve a plaintiff of the duty to prove the case to the required standard hence in Gichinga Kibutha v Caroline Nduku [2018] KEELC 3981 (KLR) the Court held that, “It is not automatic that instances where the evidence is not controverted the Claimants shall have his way in Court. He must discharge the burden of proof. He must prove his case however much the opponent has not made a presence in the contest.”
12. From the parties’ submissions, the court is being asked to determine the following abridged issues:
a) Whether the suit is statute barred
b) Whether the Defendant improperly administered the mortgage account
c) Whether the Defendant unlawfully varied the contractual interest rate
d) Whether the Defendant overcharged the Plaintiffs
e) Whether the Defendant’s admission of overpayment establishes liability
f) Whether the Defendant was entitled to levy professional, legal, valuation and auctioneer's charges
g) Whether the Defendant breached its duty of good faith and proper accounting
h) Whether the Plaintiffs are entitled to General Damages
i) Whether the Plaintiffs have proved their case
j) Whether the Plaintiffs are entitled to the remedies sought
Suit being time barred
13. The Defendant submitted that the suit is time-barred under section 4(1)(a) of the Limitation of Actions Act as actions founded on contract must be brought within six years of the cause of action accruing. That the events complained of, that is, variations in interest, debiting legal and auctioneer fees and interest charges accrued in the 1980s and 1990s but the suit was filed in 2009, over 20 years later.
14. The Defendant submitted that the Plaintiffs' claim that the Bank acknowledged liability thus restarting limitation under section 23(3) is unfounded and that under section 24(1), an acknowledgment must be unequivocal. The Defendant avers that the 2003 and 2004 letters were explicitly marked "without prejudice" and without admission of liability, maintaining only that Kshs. 113,000.00 was refundable and consequently, the Court lacks jurisdiction.
15. In response, the Plaintiffs submitted that the suit is not barred by limitation or laches and that after the loan account was operated, the Defendant reviewed the account, recalculated sums, refunded monies, wrote off large amounts and acknowledged additional sums due to the Plaintiffs. The Plaintiffs contended that these actions constitute continuing transactions and acknowledgments that reset or interrupt the limitation period and that the Defendant cannot reopen, recalculate and settle accounts while simultaneously claiming the Plaintiffs are time-barred from challenging those same accounts
16. It is not in dispute that under section 4(1)(a) of the Limitation of Actions Act, actions founded on contract are barred after six years from the date the cause of action accrued. However, section 23(3) of the same Act goes on to state that this right of action accrues when ‘…… the person liable to or accountable therefore acknowledges the claim or makes any payment in respect of it and ‘ the right accrues on and not before the date of the acknowledgement or the last payment.’ From the evidence, it is clear that the parties corresponded on the status of the loan account between 1999 and 2005. Whereas the Defendant submitted that its letters of 17 th November 2003, 25 th February 2004 and subsequent correspondence were explicitly made on a “without prejudice” basis and without admission of liability, my perusal of these letters show that there is no explicit "without prejudice" notation. They are straightforward letters making settlement offers and responding to the Plaintiffs' queries, providing explanations and clarifications. It therefore follows that the letters are admissible as evidence and can constitute valid acknowledgments under section 23(3) of the Limitation of Actions Act .
17. As stated, for a letter to constitute an acknowledgment under section 23(3), it must be in writing, signed by the person making the acknowledgment and be an unequivocal admission of a debt or liability. The letter of 17 th November 2003 is in writing, is signed by the Defendant’s Manager, Debt Recovery and unequivocally states that " Based on the adjustments the final amount that is now due to you is Kshs.113,454.97." It then goes on to explicitly make an offer to pay, " Please advise whether this is acceptable to you to enable us make the refund and conclude this long outstanding matter. " I find that this is a clear and unequivocal acknowledgment that the Defendant owes the Plaintiffs money and it is therefore an acknowledgment of a debt and the limitation period would begin to run from that date, not from the earlier dates when the original errors occurred. The Plaintiffs filed their suit in April 2009, which is within six years after the acknowledgment and therefore, they were within time. This and further letters by the Defendant on 16 th May 2005 and 31 st July 2005 also counts as an intervening event as the parties appear to have been negotiating and the Bank reconciling the loan account meaning that time therefore froze as this reconciliation was being undertaken (see Bhupinder Singh Dogra v Coast Development Authority [2021] KEHC 7822 (KLR) ].
18. It is for these reasons that I find that the suit is not statute barred as it was filed within six years from the date in which the cause of action arose which was as from November 2003 whereas the suit was filed five years and five months later
Improper administration of the mortgage account
19. The Plaintiffs submitted that the Defendant fundamentally breached its contractual and fiduciary obligations in managing the mortgage facility. That the facility was governed by specific terms in the Letter of Offer, Memorandum as to Advances and Charge document but the Defendant charged interest inconsistent with agreed contractual rates from the inception and rendered un-reconcilable account statements. They contended that in banking disputes, the lender bears the evidential burden to prove that all debits, charges and interest variations were contractually authorized but the Defendant failed to discharge this burden.
20. The Defendant submitted that the errors in calculation were corrected in good faith in 2003 and that third-party costs including legal, valuation and auctioneer fees were deemable principal expenses incurred as a direct result of the Plaintiffs' persistent default between 1983 and 1991, as permitted under the Charge and that copies of receipts were provided, making these non-refundable. The Defendant submitted that it derived no benefit, its write-offs and refunds were remedial measures executed in good faith without prejudice and not an election to admit liability for the Plaintiffs’ current claim.
21. Going through the evidence, the Defendant, in its letter of 17 th November 2003 states in part that:
"In our earlier analysis we inadvertently included an interest charge for 1982. This was an oversight since the loan was released in November, 1983. We have adjusted our analysis to accommodate the fact that the loan was released in November, 1983…..Based on the adjustments the final amount that is now due to you is Kshs.113,454.97"
22. PW 1 testified and it was not disputed that the Defendant acknowledged errors and refunded Kshs. 581,305.22 by way of cheque to the Plaintiffs and that the Defendant wrote off Kshs. 2,302,507.25 that it had previously claimed was outstanding. In its letter of 25 th February 2004, the Defendant provided explanations but did not deny liability for the previous overcharged amount. It stated "We hope the above information clarifies all the issues raised... and shall appreciate if this matter is put to rest at that." The Defendant’s letter of 27 th May 2003 and attached statement also indicated that the loan account had a zero principal and interest balance and the Defendant stated that the account had been closed.
23. From the Defendant’s own admissions above, it is my finding that the Plaintiff’s account was improperly managed.
Variation of the contractual interest rate
24. The Plaintiffs submitted that the variations in interest rates were unlawful, irregular and unenforceable and that parties are bound by their voluntary contracts and courts or parties cannot unilaterally alter terms unless expressly permitted by agreement and proper procedure is followed as was held in National Bank of Kenya Ltd v. Pipeplastic Samkolit (K) Ltd & another [2001] KECA 362 (KLR) .
25. The Plaintiffs contended that the Defendant failed to prove the specific clause authorizing the variation, the occurrence of circumstances justifying the variation, service of requisite notices and proper computation of the revised interest.
26. On its part, the Defendant submitted that under section 48 of the Evidence Act, an expert witness owes an overriding duty of objective impartiality to the Court but PW2 admitted in his testimony that he was acting solely as the Plaintiffs' witness to justify their figure and that expert testimony must be tested against primary facts. The Defendant argued that PW2 relied strictly on unverified document copies supplied by the Plaintiffs without seeking internal ledgers or clarifications from the Bank and that his report is inadmissible hearsay under section 63 of the Evidence Act. That the report arbitrarily assumed interest should remain capped at 14% while ignoring variation clauses and unjustifiably rejected valid enforcement expenses in cases of default.
27. As per the Letter of Offer dated 16 th November 1982, I note that Clause 1(b) provides that “ Interest is calculated on the amount of the advance to 31st December following the date of the advance and thereafter on the balance owing at the 1st January in each year. The Mortgage Deed or Charge confers on the Company the right, on giving notice, to increase or decrease the rate of interest .” Thus the Letter of Offer expressly refers to the Charge document for the power to vary interest and it requires notice to be issued for any variation. However, I note that it does not specify the period of notice or the form it must take.
28. Going through the Charge document dated 15 th November 1983, I note that Clause 5(i) on the interest rate provides that "The Chargor will pay interest on the principal sum for the time being outstanding ... at the rate of fourteen per centum (14%) per annum ... or at such other rate as the Chargee shall from time to time determine in accordance with the provisions of sub-clause (iii) of this Clause ." Clause 5(ii) provided for the power to vary as follows: "The Chargee shall have power from time to time to vary the rate of interest payable hereunder (including the right to vary the minimum rate of interest and the periodical rests at which interest is calculated) provided that the Chargee shall give to the Chargor not less than one month's previous notice in writing of any such variation and such variation shall take effect on the date specified in such notice."
29. Clause 5(iii) then provides for Increased Monthly Instalments that: "In the event of the Chargee requiring an increase in the rate of interest under the provisions of sub-clause (ii) of this Clause the Chargee will notify the Charger of the amount of the resulting increased monthly instalments payable under the provisions of Clause 3 hereof and the first of such increased monthly instalments shall become due and payable on the first day of the month next after notification of the amount thereof to the Charger ."
30. From the above, I find that the Defendant had the power to vary the rate "from time to time”, it was to give "not less than one month's previous notice in writing" of any variation , t he notice was to specify the date on which the variation takes effect and the Defendant was to notify the Plaintiffs of the amount of the resulting increased monthly instalments and the increased instalments become due "on the first day of the month next after notification". The initial interest rate was also set at 14% per annum which was the agreed contractual rate.
31. In the Defendant’s letter of 16 th October 1993, it informed the 1 st Plaintiff that: “ WE THEREFORE HEREBY GIVE YOU NOTICE THAT IN ACCORDANCE WITH THE RELEVANT CLAUSE OF THE MORTGAGE CHARGE OVER YOUR PROPERTY. YOU ARE REQUIRED TO PAY INTEREST AT THE INCREASED RATE OF 29% PER ANNUM FROM THE FIRST DAY OF SEPTEMBER, 1993 ON ALL MONIES DUE TO OR TO BECOME DUE TO THE COMPANY FROM TIME TO TIME ON THE SECURITY OF SUCH MORTGAGE." This notice states the increase takes effect "from the first day of September, 1993." However, the letter is dated 16 th October 1993 meaning the Defendant is purporting to apply the increased rate retroactively, before the notice was even given which is a clear breach of Clause 5(ii), which requires notice before the variation takes effect. Even if the notice were valid, it gives only approximately two weeks whereas the Charge contract requires "not less than one month's previous notice."
32. There is also a letter dated 20 th November 1997 stating that “Due to the high increase in the cost of funds and other operating expenses we have been forced to revise interest rates upward on all mortgage facilities as indicated herebelow effective from 1st December 1997 :- All Residential property facilities 20% per annum” This letter is also problematic because it is dated 20 th November 1997 and the increase takes effect on 1 st December 1997 which is only 10 days' notice whereas the Charge requires "not less than one month's previous notice." Clause 5(iii) also requires the Defendant to notify the Defendants of the amount of the resulting increased monthly instalments but there is no evidence this was done.
33. There is also a letter dated 3 rd March 1999 by the Defendant stating: "We are pleased to advise that we have further reduced our interest rate on your mortgage Account No 201892419 to 24.00% with effect from 1st March, 1999." While the Defendant was reducing the rate, this letter demonstrates that the Defendant was varying the rate without following the contractual notice procedure. The reduction is effective from 1 st March 1999, but the letter is dated 3 rd March 1999 which again, is an improper retroactive application and there is no evidence the Defendant notified the Plaintiffs of the new monthly instalment amount as required by Clause 5(iii).
34. Another letter dated 1 st September 2000 states “We are pleased to advise that we have further reduced our interest rates w.e.f. 1st September, 2000 as follows: Residential rates - from 24% to 22% p.a." The Letter is dated 1 st September 2000 and is effective from 1 st September 2000 which is a variation with zero days' notice. The letter also states " your new monthly installment will be Kshs.37,224.61 exclusive of ledger fees and Insurance” which is the first time the Defendant has provided the required notification under Clause 5(iii). However, as I have found, this is only for this one variation and there is no evidence of compliance for earlier variations.
35. It is thus clear that the Defendant is trying to rely on the very variations it failed to properly implement I find that the principle of "he who comes to equity must come with clean hands" applies as the Defendant cannot benefit from its own failure to comply with the contractual notice requirements. Since the variations were unlawful, any interest charged above the contractual rate of 14% was unauthorized and the Plaintiffs are entitled to a refund of all interest paid above 14%, plus interest on that amount (see Francis Joseph Kamau Ichatha v Housing Finance Company of Kenya Limited [2014] KEHC 3619 (KLR)]. The Defendant failed to notify the Plaintiffs of the resulting increased monthly instalments as required by Clause 5(iii) which means the Plaintiffs were left uncertain about what they were required to pay, which caused additional stress and financial hardship.
36. It is therefore my finding that the Defendant unlawfully varied the contractual interest rate
Overcharging the Plaintiffs
37. The Plaintiff submitted that overcharging was proven on a balance of probabilities and that PW 2’s report and statements showed substantial discrepancies. Further, that the Defendant acknowledged computational errors by refunding a portion of the overcharged sums and that an admission against interest is strong evidence and that once overcharging was admitted through partial refund, the burden shifted to the Defendant to justify the remainder of disputed charges, which it failed to do. I indeed agree with the Plaintiffs that based on my findings above, the Defendant definitely overcharged the Plaintiffs by improperly applying interest rates on the loan that irregularly ballooned the outstanding amount.
Admission of overcharging and liability
38. Having found that the Defendant admitted overcharging the Plaintiffs some amounts, the question then is whether this admission amounts to a liability on the Defendant’s part. The Plaintiffs submitted that the Defendant’s conduct constitutes conclusive proof and admission that the mortgage account was improperly maintained. That the Defendant took explicit actions including recomputing the account, refunding Kshs. 581,305.22.00, writing off Kshs. 2,302,949.00, releasing title documents, discharging the Charge and acknowledging an additional Kshs. 113,454.97 due.
39. The Plaintiffs submitted that the Defendant cannot approbate and reprobate by admitting overpayment or mistakes through its conduct while denying liability in court and they relied on inter alia the court’s decision in Royal Ngao Holdings Limited v N.K. Brothers Limited [2020] KEHC 2550 (KLR) to assert the doctrine of estoppel against approbation and reprobation. The Defendant also relied on this decision and submitted that the doctrine does not apply to it as approbation and reprobation requires a party to make an election between two courses of action and receive a benefit therefrom. The Defendant reiterated that it derived no benefit and that its write-offs and refunds were remedial measures executed in good faith without prejudice and not an election to admit liability for the Plaintiffs’ claim.
40. In its letter of 17 th November 2003, the Defendant admitted that it made errors in its calculations, that it inadvertently charged interest for 1982, that it overcharged the Plaintiffs and that it owed the Plaintiffs Kshs.113,454.97 as of the date of the letter. It was also not disputed that the Defendant refunded Kshs. 581,305.22 to the Plaintiffs which was an acknowledgment that the Plaintiffs had overpaid by at least that amount. Also not disputed was that the Defendant wrote off Kshs. 2,302,507.25 that it had previously claimed was outstanding which is also an acknowledgment that the Plaintiffs did not owe that amount. The Defendant discharged the Plaintiffs' property from the charge which was an acknowledgment that the loan had been fully repaid. The letter of 27 th May 2003 by the Defendant also indicated that the loan had been repaid and there was no debit balance.
41. However, going through the evidence, I find that the Defendant never admitted that the Plaintiffs overpaid by Kshs. 6,538,326.04 or that PW 2’s report is accurate. In fact, the Defendant heavily disputed this report and its findings citing various methodological flaws. The Defendant also never admitted that the Plaintiffs are entitled to interest on the overpayment at commercial rates or that the Plaintiffs are entitled to general or exemplary damages. The Defendant's position has always been that the total overpayment was Kshs. 694,761.22, that is, Kshs. 581,305.22 and Kshs. 113,454.97 of which Kshs. 581,305.22 has already been refunded, leaving only Kshs. 113,454.97 outstanding.
42. Therefore, the Plaintiffs still bore the burden of proving the specific amount of Kshs. 6,538,326.04 and I find that the Defendant's admissions are evidence of overcharging, but they are not conclusive proof of the full amount claimed. Whereas I can agree that the Defendant is estopped from denying that errors were made in the account, that the Plaintiffs were overcharged and that it owed the Plaintiffs Kshs. 581,305.22 and Kshs.113,454.97, theDefendant is not estopped from denying the larger figure of Kshs. 6,538,326.04.
Levying of professional, legal, valuation and auctioneer's charges
43. The Plaintiffs submitted that these charges were unauthorized, unlawful and must be reimbursed with interest and that a chargee can only recover expenses expressly authorized by the Charge document and the law. They contended that the Defendant failed to strictly prove the necessity, contractual authorization, actual expenditure, or connection of these charges to the Plaintiffs' account.
44. My perusal of the Letter of Offer indicates that Clause 10 on Legal Fees provides that "Legal fees payable by you." , Clause 1(b) on Bank Exchange and Charges provides that "Bank exchange and charges must be paid by the Applicant” and the General Provisions state that "The Applicant must acquaint himself with any liability there may be in respect of road or sewage connection charges and as to his ability to meet such liability." I find that the Letter of Offer is vague on what charges may be levied, it mentions "legal fees" but does not specify what they cover or how they are calculated, it mentions "bank exchange and charges" but does not define them and there is no mention of auctioneers fees, valuation fees or other professional charges.
45. The Charge contains more detailed provisions including Clause 9 on Expenses which provides that:
"The Chargee may from time to time make such payments as it may consider expedient to any person whether the Chargor or anyone acting at the Chargor's request or a receiver or a subsequent chargee or to any person acting on the instructions of the Chargee in connection with completing maintaining repairing amending altering or improving the said property or for outgoings in relation thereto or for any costs or expenses incurred by the Chargee for the enforcement protection or improvement of the security hereby created and all money so paid shall be deemed to be principal money hereby secured and shall carry interest at the rate for the time being payable hereunder from the date of the same being paid by the Chargee and shall be repayable
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