Diamond Trust Bank Kenya Limited v Mohamed & another (Civil Appeal E074 of 2021) [2023] KECA 436 (KLR)
The bottom line
#Kenya's Court of Appeal overturned an Sh82 million award against Diamond Trust Bank, holding a bank need not ensure a borrower's building insurance suits the borrower's interests.
What this practically means
#Executive summary
#Key legal issues
#Whether the Bank was under a contractual or tortious duty to ensure the security was insured under a Contractors All Risks policy
No. Clause 7(a) placed the insurance obligation on the borrower; Clause 7(a)(i) did not apply because the Bank was not financing construction; under Clause 7(a)(ii) the Bank's discretion was whether to demand CAR cover, not a duty. The trial judge effectively re-wrote the contract.
The letters of offer show the facilities were for refinancing existing loans and working capital, not construction financing, so Clause 7(a)(i) was inapplicable. Clause 7(a)(ii) required fire, burglary and allied perils cover with the Bank retaining sole discretion to require more. Construing that discretion as a duty to demand CAR cover re-wrote the contract, contrary to National Bank of Kenya v Pipeplastic Samkolit. Nor was there evidence the bank held itself out as an insurer or assumed responsibility under Hedley Byrne; the insurance protected the bank's security, not the customer.
Whether the customer's claim of feigned ignorance of the insurance cover was credible
No. The letter of offer of February 2, 2010 and the Policy Schedule to the Insurance Premium Finance Agreement clearly indicated fire cover, which the customer accepted before an advocate.
Item 10 of the February 2, 2010 letter of offer expressly stated that Jubilee insurance cover was for damage resulting from fire and related special perils, with renewal costs borne by the customer. The customer signed accepting those terms, witnessed by an advocate, and the Policy Schedule described the cover as a fire policy. His assertion that he only discovered the nature of the cover after the collapse was therefore feigned surprise and could not ground a claim of misrepresentation or non-disclosure against the Bank.
Whether the Agency was liable in negligence to the customer
No. The cross appeal failed; the Agency obtained and forwarded quotations for both classes of insurance and had no role in the choice of cover.
The particulars of negligence pleaded against the Bank and Agency were that they chose fire cover to the exclusion of CAR cover. There was no evidence that the Agency was privy to the decision on the choice of cover; on the contrary it pleaded and led evidence that it obtained and forwarded quotations for both classes of insurance and had no role in the choice subsequently made. The trial judge's dismissal of the claim for lack of proof was therefore correct and the cross appeal was dismissed.
Whether the trial Judge erred in rejecting the Bank's counterclaim of Kshs 280,823.43 under the Insurance Premium Finance Agreement for failure of consideration
Yes. Having found the sum was applied for, disbursed into the customer's account, the express consideration clause of the agreement contradicted the finding of no consideration.
The trial judge found the premium financing was offered, accepted and disbursed into the customer's account, yet held there was no consideration because no proposal form or policy was produced. That finding flies in the face of the express provision of the Insurance Premium Finance Agreement reciting the Bank's advance of the premium amount as consideration. The Court set aside that part of the judgment and entered judgment for the Bank for Kshs 280,823.43 with interest at 16% pa.
Whether the Judge erred in awarding the Bank interest at 16.25% rather than the contractual rate
No. The Bank produced no evidence of variations in its base lending rate as the letter of offer required for any variation to be effective.
The consolidating letter of offer provided for interest at the aggregate of the Bank's base lending rate from time to time (presently 14.25%) plus 2%, with any variations to be published in the daily newspapers. The Bank did not present evidence of such variations, so the trial court could not be faulted for applying the 16.25% rate stated in the letter of offer. The complaint on the interest rate therefore failed.
Legal principles established
#- A court cannot re-write the terms of a contract between parties nor impose on a party an obligation not found in the contract; where a contract vests a discretion in one party, the court cannot convert it into a duty owed to the other.
- A bank whose lending terms require only that insurance cover be acceptable to it at its sole discretion owes no duty of care to the customer in the exercise of that discretion, the insurance being for the bank's protection of its security, not for the customer's benefit.
- On a first appeal, the Court of Appeal has a duty to review and reappraise the evidence and draw its own inferences and conclusions.
Court orders
#- 1.Set aside the award in favour of the 1st respondent against the appellant in the amount of Kshs 82,129,963.00
- 2.Dismissed the cross appeal
- 3.Set aside the decision of the trial court dismissing the Bank's counterclaim for Kshs 280,823.43 with interest at 16% pa in respect of premium financing and substituted judgment in favour of the Bank for the said amount
- 4.Upheld the awards in favour of the Bank of Kshs 35,940,514.49 with interest at 16.25% p.a from 2/8/2011 and Kshs 877,753.68 with interest at 16.25% p.a from 2/8/2011, both subject to section 44D of the Banking Act, till payment in full
- 5.The appellant shall have the costs of the appeal
- On appeal from
- High Court of Kenya at Mombasa
- Civil Suit No 16 of 2011 consolidated with Civil Case No 72 of 2012
- Jurisdiction invoked
- First appeal to the Court of Appeal under the Court of Appeal Rules, 2022 (Rule 29(1)(a))
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Diamond Trust Bank Kenya Limited v Mohamed & another (Civil Appeal E074 of 2021) [2023] KECA 436 (KLR)", Case Analysis (2023). Court of Appeal at Mombasa Civil Appeal (judgment dated 14th April 2023). Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2023/436/eng@2023-04-14
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.