Court dismisses appeal over ‘oppressive’ interest

The High Court in Nairobi has dismissed an appeal by a borrower who sought to overturn a judgment that turned a Sh1.95 million loan into a Sh17.16 million debt.

Phillip Musundi had asked the High Court to overturn a lower court ruling that refused to review a default judgment entered against him in July 2018.

The dispute stems from a loan advanced by Bental Services Limited in September 2014, which the respondent claimed was at an interest rate of 15 per cent per month until payment in full, as well as costs and interest.

“The respondent’s claim was that on or about September 29, 2014, it advanced to the appellant a loan of Sh1,950,000 at the appellant’s request, on terms that the amount would be repaid with interest at 15 per cent per month in four equal monthly instalments of Sh487,500,” court documents show.

“The respondent claimed that the said loan was secured by four post-dated cheques issued by the appellant.”

“But the appellant requested the respondent not to present the cheques for payment and instead undertook to repay the loan directly, but failed to honour the said commitment,” court documents show.

The case was marked by repeated defaults and despite being informed of the company's intention to sue, Musundi failed to settle the amount due, leading to the suit.

 A first default judgment in March 2016 was set aside by consent to allow Musundi to file a defence, but he failed to do so, leading to a second default judgment in July 2018.

By the time the matter reached a head in 2023, the principal sum had ballooned through interest.

However, Musundi contended that the resulting decree of Sh17,160,000 from a loan of less than Sh2 million was "oppressive and unconscionable" and violated public policy.

He cited the ‘in duplum’ rule [a consumer protection legal principle] under the Banking Act, which prevents interest from exceeding the principal amount.

“The appellant claimed that his failure to file a defence and to follow up on the matter was caused by prolonged ill health, including a cardiac condition for which he has been in and out of hospital since 2014,” court documents show.

“He further deposed that due to his medical condition, advanced age and the disruptions occasioned by the Covid-19 pandemic, he lost contact with his former advocate and was unable to participate in the proceedings.”

But Bental Services Limited countered that the in duplum rule applies exclusively to banks and financial institutions.

They asserted that the respondent did not fall under those categories and that the interest was "freely negotiated between the parties in line with the principle of freedom of contract".

Further, the appellant had taken no steps for over four years after the decree was issued.

Delivering the judgment on April 1, Justice Njoki Mwangi found divergent schools of thought on whether the Banking Act’s interest limits apply to non-banking entities.

“There conceivably could be two opinions on whether section 44A of the Banking Act applies to both banking and non‑banking institutions,” the judge ruled.

“Such issues are best addressed on appeal, not through an application for review. Therefore they do not constitute an error apparent on the face of the record.”

The court also dismissed Musundi’s claim that ill health and the Covid‑19 pandemic had prevented him from following the case, noting that the medical evidence was insufficient and that his inaction for more than four years was unjustified.