Jelangant & another v Mwananchi Credit Limited & another (Civil Case 374 of 2018) [2023] KEHC 19922 (KLR) (Commercial and Tax) (10 July 2023) (Judgment)
Neutral citation:
[2023] KEHC 19922 (KLR)
Republic of Kenya
Civil Case 374 of 2018
A Mabeya, J
July 10, 2023
Between
Eunice Jelangant
1st Plaintiff
George M. Khaniri
2nd Plaintiff
and
Mwananchi Credit Limited
1st Defendant
Mistan Auctioneers
2nd Defendant
Judgment
1.By a plaint dated July 18, 2017 and amended on December 5, 2022, the plaintiff sought various prayers against the defendants. These included; a permanent injunction to restrain them from selling or dealing with the suit property known as Nairobi Block/82/7303; a declaration that the interest levied of 10% per month contravened the in duplum rule and was illegal, unconscionable and oppressive; a declaration that the principal amount was paid and the charge dated November 11, 2016 over the property was null and void, a declaration that the penalty and default charges clogged the plaintiffs equity of redemption, an order applying interest at 12% p.a on the principal sum of Kshs 7 million, a declaration that the public auction scheduled for 25/07/2017 was illegal together with costs of the suit.
2.The defendants filed a joint statement of defence and counterclaim dated August 17, 2017. They denied the plaintiff’s claim and prayed for judgment against the plaintiffs for declarations that there was a legal charge dated November 11, 2016 over the suit property, that the 2nd plaintiff owed the 1st defendant Kshs 15,005,121/67 as at June 12, 2017 and for payment of the said sum failure of which the suit property be sold by public auction.
3.The dispute between the parties related to the loan agreement between the 2nd plaintiff and the 1st defendant dated November 9, 2016 for Kshs 7 million. The same was repayable in 2 monthly instalments of Kshs 700,000/= on December 9, 2016 and Kshs 7,700,000/= on January 9, 2017, respectively.
4.The parties dispute was on clause 4 and 5 of the agreement which provided that, in case of default, the 2nd plaintiff would pay interest at 10% per month and incur penalty charges for continued default. The plaintiffs’ case was that though the agreement provided that the 1st defendant was to charge the property, it failed to do so and had no enforceable rights over the plaintiff.
5.The plaintiff defaulted and on January 12, 2017, the 1st defendant demanded payment of Kshs 9,317,000/-. On July 10, 2017, the 1st defendant instructed the 2nd defendant to advertise the property for sale. The plaintiffs obtained injunctive orders on July 21, 2017 stopping the sale on condition that they paid the admitted principal sum of Kshs 7million within 60 days.
6.The plaintiffs paid the principal sum, albeit late and the question for trial was the interest payable. On October 12, 2022, the court directed the parties to file submissions on interest. The plaintiffs’ submissions were dated December 5, 2022 whereas those of the defendants were dated February 14, 2023.
7.The plaintiff submitted that the 10% monthly interest rate offended the in duplum rule which was applicable to the 1st defendant. That the interest rate was unconscionable and exorbitant as it translated to 120% per annum and was thus commercially unreasonable and immoral. That the harsh conditions on the repayment period and interest imposed a heavy burden on the 2nd plaintiff and the court could interfere where the bargain was unduly harsh and overwhelmingly in favor of one party.
8.That the agreement did not provide for the penalty charges and it was unclear how they were arrived at. That the 1st defendant’s computation clogged the 2nd plaintiff’s equity of redemption.
9.The defendant on the other hand submitted that it was not for courts to re-write contracts between parties. That the 2nd plaintiff voluntarily accepted the terms of the agreement.
10.On in duplum, the defendants submitted that the 1st defendant was a non-deposit taking micro finance company that issued loans against a collateral thus the in duplum rule was inapplicable to it and neither was the 1st defendant regulated by the Microfinance Act cap 493D. That the 1st defendant was also not listed in section 2 of the Central Bank Act in its schedule of banks and financial institutions thus the Act was inapplicable. That the agreement was thus regulated by general principles of contract law.
11.That 10% interest was thus chargeable having been a term that was voluntarily agreed to by the plaintiff. That the payable amount per month was Kshs 70,000/- multiplied by 16 months thus Kshs 11,200,000/= and penalties which arrived to the amount claimed by the 1st defendant.
12.That if this court found that the rule was applicable, then the amount payable to the 1st defendant for interest was Kshs 7 million.
13.This court has considered the submissions, pleadings and evidence before it. The issues for determination are whether the 1st defendant is bound by the in duplum rule such that the 10% monthly interest rate is illegal, and whether the 10% interest rate is unconscionable.
14.“In duplum” is a latin phrase derived from the word “in duplo” which loosely translates to “in double”. Simply stated, the rule is to the effect that interest ceases to accumulate upon any amount of loan owing once the accrued interest equals the amount of loan advanced, it ceases to accrue.
15.The defendants contended that the in duplum rule was not applicable to it as it was not regulated under the Banking Act. The court is aware of the decision in Desires Derive Ltd v Britam Life Assurance Co (K) Ltd (2016) eKLR, wherein it was held that the rule was only applicable in the circumstances of banks only.
16.There has been different interpretations on the application of this rule as seen in various cases including Lee G Muthoga v Habib Zurich Finance (K) Limited & another [2016] eKLR and Mwambeja Ranching Company Limited & another v Kenya National Capital Corporation [2019] eKLR.
17.In Mwambeja Ranching Company Limited & another v Kenya National Capital Corporation (supra), the Court of Appeal held: -
18.In Mugure & 2 others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR) (Civ) (19 August 2022) (Judgment), the court held that: -
19.This court reiterates the foregoing here. In its opinion, the in duplum rule was a principle that was imported into our laws to address a social and public interest issue wherein lenders would target defaulters as profit making machines. The rule is an answer to the need to have a reprieve for borrowers by doing away with exploitation through ensuring that lenders, be they banks, unregulated institutions or private lenders, are motivated to recover debts owed at the earliest opportunity and are limited in what they can recover.
20.In this regard, I hold that the rule is not only applicable to banks and financial institutions under the Banking Act but it extends to all lenders. A narrow interpretation of the application of the rule will defeat justice. It will be discriminatory in that, those who borrow from banks will enjoy greater protection leaving those borrowing from elsewhere exposed. Borrowing is borrowing and it would be inequitable for one group in society to be treated differently.
21.The 1st defendant lends money to Kenyans against collaterals and recovers the same at an interest. Being a lender who earns an interest, the same is subject to the rule.
22.This court is not the first to arrive at a similar finding. In Francis Mbaria Wambugu v Jijenge Credit Limited [2020] eKLR, the court found that a microfinance institution was bound by the in duplum rule and stated: -
23.The upshot is that the in duplum rule is applicable to the 1st defendant. Consequently, once the 10% per month interest was applied and the amount due surpassed the principal amount, it contravened the rule.
24.The second issue also related to the 10% per month interest rate. The plaintiffs submitted that the rate was unconscionable and exorbitant and that it clogged their equity of redemption.
25.The principal loan amount was Kshs 7 million which has been repaid. The defendant demanded Kshs 15,005,121,67 as at June 12, 2017 over and above the principal sum. The court is being asked to find that the application of that rate of interest as unconscionable. It was also submitted that the agreement did not provide for penalties and the 1st defendant could not explain how the same were calculated.
26.In Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited (2014) eKLR, the Court of Appeal stated: -
27.Further, in the case of John G. Kamunyu & another v Safari ‘M’ Park Motors (2013) eKLR where the plaintiff’s argument was that the loan agreement entered into was unconscionable due to the usurious compounded monthly interest rates of 30%, the court entered judgment in favour of the defendant for the loan advanced to the plaintiff together with interests at court rate. The court stated: -
28.In the present case, the loan advanced was Kshs 7 million which has already been repaid. The 1st defendant demands a staggering Kshs 15,005,121,67 as interest and penalties as at June 12, 2017. The defendant claims interest until judgment. That would be a remarkable amount.
29.An interest rate of 120% per annum in my view would be unconscionable and oppressive if the loan repayment was for a longer period. In John G. Kamunyu & another v Safari ‘M’ Park Motors (2013) eKLR, the court stated that: -
30.It is thus apparent that a court of law will not interfere with contracts entered into by two consenting parties and the interest agreed upon unless the terms are on the face of it illegal, unconscionable, oppressive and fraudulent. It will also interfere where the terms amount to unjust enrichment at the expense of a desperate borrower.
31.In the present case however, it is very clear that the plaintiffs entered into the contract well knowing what they were doing. The high interest rate charged was due to the short repayment period of 2 months. That contract in my view was not unconscionable until the default made the amount due exceed the principal sum.
32.Further, I find that the parties agreed that default charges would be levied on the outstanding amount. However, since the contract was silent on how it would be computed, the same could not be charged by the defendant. The clause for the charging of default charges therefore became in-operative and unenforceable uncertainty. The high rate of interest charged together with the default charges that were levied thereby clogged the plaintiffs’ equity of redemption.
33.The upshot is that the plaintiffs have been able to prove that the terms of the contract were unconscionable. However, a court of law cannot allow a party who has willingly entered into a lawful contract to bolt therefrom unless there was fraud.
34.In this case, I make a finding that in view of the application of the in duplum rule, the defendant is entitled to recover from the plaintiffs a maximum of Kshs 7 million only.
35.Accordingly, judgment is hereby entered for the defendant against the plaintiffs for Kshs 7 million only. There will be no more interest. For reasons that the plaintiffs were partially successful, each party shall bear own costs.It is so decreed.
DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF JULY, 2023.A. MABEYA, FCIArbJUDGE