Court stops friendly Sh7m loan that grew to Sh69bn

The judgment sets a precedent against predatory lending, targeting private lenders and shylocks who seize high-value assets like land and livestock over small unpaid debts inflated by exorbitant interest rates.

The verdict stems from an agreement struck on December 17, 1996, where businessman Kanwal Sarjit Singh Dhiman borrowed Sh7 million from his friend Kenshavji Jivraj Shah in a private loan deal that was priced at 36 percent per annum.

Mr Dhiman defaulted after repaying Sh3 million, pushing the claim to Sh69 billion and loss of his prime land in Nairobi’s high-end Lavington estate.

But a Business Daily analysis shows a Sh4 million loan would grow to Sh29.8 billion when compounded interest of 36 percent is applied.
In a judgment delivered on July 11, three Court of Appeal judges ruled that a court can interfere and rewrite a contract if the resulting agreement is “highly oppressive or unfair”.

“The facts show that the appellant was loaned Sh7 million and repaid Sh3 million, leaving a balance of Sh4 million unpaid. If we, for the sake of argument, used this figure to calculate the amount payable as at today under the terms of the parties’ agreement, the amount would be slightly over Sh69 billion!” reads the judgment.

“In the present case, the sheer disparity between the original loan and the amount which would now be due evidences a contract whose enforcement, without judicial intervention, would undermine principles of fairness, good faith, and proportionality. We, therefore, find the contract between the parties void for unconscionability.”

At 36 percent, the loan was priced at more than double the May average lending rate of 15.44 percent.

Mr Dhiman and Mr Shah had initially signed an agreement for a Sh13 million loan in three instalments, with Sh2.5 million being tapped on the deal date, Sh2.5 million at the end of January 1997 and Sh8 million on April 2, 1997.

The private loan was priced at 36 percent annually, with interest payable quarterly.

The first two instalments were secured by a Sh2.5 million promissory note and a parcel of land in Lavington, Nairobi.

However, Mr Dhiman received the first two instalments, followed by another Sh2 million, but failed to start servicing the loan, triggering the legal battle.

Mr Shah sued Mr Dhiman in February 1999 at the High Court seeking Sh13.8 million as principal and interest and asked the court to allow him to sell the land that had been pledged as security.

He won the case in August the same year, with his friend being ordered to pay Sh17 million plus interest.

Armed with the High Court judgment, Mr Shah proceeded to attach Mr Dhiman’s land and put it up for auction.

He applied to court to allow him to also put in a bid. The court allowed him in June 2006 and he proceeded to register himself as the owner of the land and obtained court orders to evict his friend.

Mr Dhiman appealed the decision in 2007 but was referred back to the High Court in July 2015 for a retrial, with the appeal court directing that he be given a chance to be heard.

During the retrial, Mr Dhiman told the court that he signed the agreement under dire need of financial assistance and his friend took advantage of his situation to charge unreasonable interest.

He argued that he had shown all willingness to pay the debt, including making a Sh3 million partial payment, but his friend was “hellbent” on taking the land.

However, Mr Shah told the court the agreement was signed in the presence of a senior lawyer and that Mr Dhiman willingly agreed to pay, being “a businessman of many years standing.”

“A court of law cannot rewrite a contract between the parties… it is ordinarily no part of equity’s function to allow a party to escape from a bad bargain,” said the High Court in the judgment that has now been overturned.

Mr Shah told the court he was not aware of any law that required an individual to lend money without interest and that he based the 36 percent interest rate on the strength that banks were at that time charging customers 42 percent per annum, and treasury bonds were up to 54 percent per annum.

Central Bank of Kenya data show interest rates in December 1996 were at 28.5 percent.

The High Court ruled for the second time in favour of Mr Shah, saying Mr Dhiman was “not blind or otherwise incapacitated” and he did not lack an alternative when he entered into the contract.

Mr Dhiman moved to the Court of Appeal, arguing that the High Court erred.

The appeal court ruled that while the loan was “friendly” and that there was no law prohibiting individuals from lending to each other, the law prohibits contracts that take “undue advantage of one party’s vulnerability, ignorance, or lack of bargaining power.”

The court ordered Mr Shah to return the Lavington land to Mr Dhiman, who has been ordered to clear the Sh4 million loan at a court rate of 12 percent to be calculated since the High Court judgment of September 19, 2019.

This means Mr Shah will pay Sh6.88 million.

“It is not in question that this astronomical figure exceeding Sh69 billion on a principal sum of Sh4 million is a disproportionate escalation; it is not merely commercially unreasonable; it is, in the eyes of equity and good conscience, oppressive and unconscionable,” the judges said.

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