Michael Wanjau Matu & 1 other v Aram Wambugu Waweru

b. Interest and default charges as provided in the loan agreements with effect from 1st June 2023 until payment in full. c. Kshs. 30,000 being valuation fees. d. Kshs. 63,630 being legal and land administration fees. e. General damages. f. Costs of the suit. 4. The Defendant entered appearance on 29th June 2023 and filed a Statement of Defence dated 17th July 2023, generally denying the Plaintiff’s claim. While conceding that he entered into the Business Loan Agreement dated 22nd September 2022 and the subsequent addenda, he averred that the terms of the agreements, particularly the short repayment period, the monthly interest rate of 3% and a default penalty of up to 5% per day, are oppressive, unconscionable, and contrary to public policy and therefore unenforceable. 5. The Defendant further contended that the debt had been fully satisfied following appropriation by the Plaintiffs, and transfer into their own names of the collateral, being Laikipia Daiga Umande Block 4/396 and 4/398, which he had deposited with the Plaintiffs as security for the loan. 6. It was further the Defendant’s case that the orders sought by the Plaintiff in the suit, including the prayers for valuation fees, pre-litigation legal fees, and general damages, were unfounded and are not recoverable. 7. The matter proceeded for hearing on 25th February 2025, when the Plaintiff’s case was heard and closed. The defence case was heard on 12th March 2025. Both parties called one witness each. Plaintiff ’s Evidence 8. The 1st Plaintiff, Michael Wanjau Matu, testified in support of the Plaintiffs’ case and adopted his written witness statement dated 30th May 2023, as his evidence in chief. The witness also produced the documents in the bundle of documents in the Plaintiff’s List of Documents dated 30th May 2023. 9. Mr. Matu testified that the Plaintiffs advanced to the Defendant as a friend, a total of Kshs. 22,149,000 under three agreements, to wit, the Business Loan Agreement dated 22nd September 2022, the Addendum dated 21st October 2022, and the Further Addendum dated 28th November 2022. 10. According to the witness, the initial agreement was for a sum of Kshs. 15,000,000, and was to be repaid within three months and two weeks at an interest rate of 3% per month, with an additional 1% in case of default. The Defendant also provided as collateral Laikipia Daiga Umande Block 4/398 and Laikipia Daiga Umande Block 4/396, and that the agreements allowed the Plaintiffs to transfer the properties or seek other legal remedies upon default. 11. That under the Addendum Agreement, the Plaintiffs advanced a further sum of Kshs. 2,450,000; and under the Further Addendum, an additional Kshs. 4,699,000, was advanced. The loans under both addenda were attracting 3% monthly interest and a default penalty of 5% per day from the fifth day after default. 12. The witness testified that on 6th December 2022, the Defendant defaulted when a cheque issued under the first agreement was dishonoured. The Defendant also defaulted under the two Addenda in January 2023. It was his testimony that the default by the Defendant made him transfer the collateral in his name, but the amount realized therefrom was not enough to cover the whole debt. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 2

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13. Mr. Matu maintained that the collateral was insufficient, as a valuation by the Plaintiffs’ valuers, Precision Valuers Limited, placed its open market value at Kshs. 4.8 million and forced sale value at Kshs. 3.6 million, far below the sums advanced. Additionally, it was his testimony that the collateral did not extend to the Addendum and Further Addendum loans, and that the agreements expressly preserved the Plaintiffs’ right to pursue other remedies. 14. Under Cross-examination by Ms. Wairimu, Counsel for the Defendant, the witness admitted that he is not licensed to undertake money-lending business, but only advanced the monies to the Defendant as a friend. According to him, lending money without a licence is not illegal. He also admitted that the loans carried an interest rate of 3% per month and a default penalty of 1%, but denied that the interest rate was beyond the permitted rate. The witness also admitted to having transferred the collateral to his name, but asserted that the monies realized therefrom were insufficient to cover the whole debt. 15. According to Mr. Matu, the Defendant’s indebtedness to the Plaintiffs under the agreements still stood at Kshs. 33,330,225 as at the date of filing of this suit. 16. The witness asserted that the Defendant remained in default of both principal and accrued interest, and that the Plaintiffs had suffered financial loss and inconvenience as a result. Consequently, he urged the Court to allow the suit and grant the reliefs sought in the Plaint. Defendant’s Evidence 17. The Defendant, Mr. Aram Waweru Wambugu, testified and adopted his written witness statement dated 31st October 2024. He confirmed that he entered into three loan agreements with the Plaintiffs: A Business Loan Agreement dated 22nd September 2022, an Addendum dated 21st October 2022, and a Further Addendum dated 28th November 2022. 18. It was however his evidence that these agreements were illegal and void ab initio, as the Plaintiffs were unlicensed moneylenders engaged in the illegal business of shylocking, contrary to the Central Bank of Kenya Act. He further asserted that the agreements were unconscionable, citing unreasonably short repayment periods, 3% monthly interest rate, and the 1% monthly default interest rate, and that the total claim of Kshs. 33,423,855 was more than double the principal sums advanced. 19. The witness stated that the Plaintiffs unlawfully took possession of his title deeds to Laikipia Daiga Umande Block 4/396 and Laikipia Daiga Umande Block 4/398 without registering any charge, in contravention of the Land Act and the Land Registration Act. 20. He alleged that the Plaintiffs had already transferred ownership of the properties to themselves, but continued to pursue repayment, amounting to unjust enrichment. He asserted that the properties offered as collateral were sufficient to cover the amounts disbursed and produced valuation reports in that regard. 21. He concluded by urging the Court to find that the agreements were illegal, unconscionable, and unenforceable. 22. Directions were given as to the filing of submissions. The Plaintiffs, through the law firm of Tripple OK Law LLP Advocates,filed their submissions dated 26th March 2025, whilst the Defendant, through Kabugu & Co. Advocates,filed his dated 19th May 2025. Analysis and determination 23. Having duly considered the pleadings, evidence, and submissions of the parties, the issues that arise for determination, in my view, are as follows: - https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 3

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a. Whether the loan agreements and addenda are legal and enforceable. b. Whether, having appropriated and transferred the collateral, the Plaintiffs can sustain further claims against the Defendant. c. Whether the Plaintiffs are entitled to the reliefs sought. Whether the loan agreements and addenda are legal and enforceable 24. The Defendant contended that the Plaintiffs are unlicensed moneylenders engaged in the illegal business of shylocking, and that consequently, the loan agreements were invalid and unenforceable for being founded on illegality. He urged that the Court cannot lend its support to an arrangement tainted by illegality. 25. The Plaintiffs, on the other hand, submitted that the loans advanced to the Defendant were friendly loans extended purely on the basis of trust and goodwill arising from the cordial relationship between the parties. They stated that the Defendant had approached them seeking financial assistance to start a business in the Democratic Republic of Congo, and they agreed to assist him as friends, not in the course of any moneylending business. 26. I have considered the rival arguments, and I find that there was no evidence adduced before the Court that by lending money to the Defendant, the Plaintiffs were engaged moneylending business. Evidence on record reveals that this was money advanced by the Plaintiffs to the Defendant on account of the parties’ friendship, with an agreement that the same was to be repaid with some interest. This is not prohibited under any law. The Court of Appeal in Dhiman v Shah (Civil Appeal E380 of 2023) [2025] KECA 1264 (KLR) dealt with a similar issue and held as follows: “ But was the Agreement in violation of public policy for violating section 3(1) of the Banking Act? We do not think so. The Banking Act applies to banking institutions which are in the regulated business of lending money for interest. There was no evidence presented before the trial court that the respondent was engaged in any such business. Instead, this was a “friendly” loan by two individuals who were known to each other. There is no law that proscribes individuals from lending each other money for interest. The prohibition only kicks in where there is evidence that the individual so lending, in fact, engages in habitual business and is otherwise acting as a banking institution by stealth or in the shadows. Without any such evidence, there is no basis for invalidating the Agreement between the two parties on public policy grounds.” 27. Further, the Court in the case of Solomon Muvinga Kitheka v Benard Oyugi [2015] eKLR, the Court upheld the validity of a friendly loan and stated: “ In my view the law does not prohibit a person from using his own resources to lend money to a friend on agreed terms.” “In the present case the terms and conditions of the loan were agreed to in writing. They were later reviewed by the same parties under a subsequent agreement. Each of the parties had capacity to enter into legal agreements and were of sound mind. I find nothing illegal or immoral about the lending herein or the agreements entered into between the parties. I find that the arrangements or agreements entered into were legal and enforceable by the court. I thus agree with the finding and decision of the learned trial magistrate that they were valid agreements between contracting parties. I find nothing illegal or immoral about the lending https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 4

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herein or the agreements entered into between the parties. I find that the arrangements or agreements entered into were legal and enforceable by the court. I thus agree with the finding and decision of the learned trial magistrate that they were valid agreements between contracting parties. I will thus also dismiss Civil Appeal No. 9 of 2013.” 28. The Court is of the view that parties having mutually contracted on a friendly basis as persons of sound minds and exercising their own free will, are bound by the terms of the friendly loan agreements, including the provision as to the payment of interest on the loan sum. 29. In the premises, I find not supported by evidence and law, the Defendant’s argument that the subject agreements were founded on illegality and therefore void ab initio. No evidence was adduced that the Plaintiffs were engaged in habitual money lending business, as to require licensing under the Banking Act. 30. Regarding interest and penalty clauses, the Defendant contended that the interest rate of 3% per month (36% per annum) and penalties of 5% per day were excessive, punitive, unconscionable, extortionate, and therefore unenforceable. The Defendant in support of this argument, cited, among others, the Court of Appeal decision in Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited [2014] KECA 319 (KLR), where the High Court declined to enforce a friendly loan agreement that imposed interest at 10% per week and a default penalty of 20% per day. 31. The Plaintiff, on the other hand, submitted that the Defendant voluntarily entered into the loan agreements after reading and understanding their terms, including the applicable interest rates. They emphasized that the interest provisions in the Business Loan Agreement, the Addendum, and the Further Addendum were expressly set out and mutually agreed upon before execution. Having appended his signature thereto, the Defendant was bound by those terms. 32. It was further the Plaintiffs’ submissions that the agreed interest rate was fair and reasonable, having been premised on a mutual understanding that the loan would be repaid within a short period. They argued that the total amount claimed had only escalated due to the Defendant’s failure to honour his repayment obligations, and not because the rate itself was oppressive or extortionate. 33. Relying on the Court of Appeal decision in LTI Kisii Safari Inns Ltd v DEG [2011] KECA 1, the Counsel for the Plaintiffs asserted that the terms of the loan agreement were not extortionate since the Defendant was not in a position of weakness; the agreements were entered into voluntarily among friends and were based on express requests made by the Defendant. They asserted that there was no evidence that the Plaintiffs acted in bad faith or exploited the Defendant in any way. 34. Accordingly, the Plaintiffs urged the Court to find that the agreed 3% monthly interest rate and the 1% penalty clauses were neither extortionate nor unconscionable and that the Defendant’s allegations in that regard were without merit. 35. I have keenly analyzed the parties’ arguments, including the authorities as cited by the parties’ respective Counsel on this issue. While it is correct, as argued by the Plaintiffs that the law recognizes the principle of freedom of contract, as articulated in National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd & Another [2001] eKLR, it is equally correct that courts have similarly recognized that freedom of contract is not absolute and may be limited where the terms are unfair, unconscionable, or contrary to public policy as was stated by the Court of Appeal in the case of LTI Kisii Safari Inns Ltd v DEG [2011] KECA 1. 36. The Court of Appeal (Po Kiage, Wk Korir, Jm Ngugi), in its decision in the case of Dhiman v Shah [2025] KECA 1264 (KLR), applied the principle in LTI Kisii Safari Inns Ltd v DEG (supra), and https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 5

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affirmed the position that where the terms of a contract are manifestly one-sided and oppressive and therefore unconscionable, the court has a duty to intervene to prevent exploitation. The Court stated as follows: “ In Kenya, the doctrine of unconscionability — though not always expressly named — is recognized and applied through general principles of equity, fairness, and public policy under the law of contract. In National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd & another [2001] eKLR, this Court emphasized that while courts do not interfere with parties’ freedom to contract, they will not enforce a contract that is "illegal, immoral, or unconscionable." 37. The doctrine of unconscionability in contract law has consistently been upheld by the Kenyan Courts to protect parties against contracts that are so unfair and oppressive as to offend the sense of justice. In Dhiman v Shah (supra), the Court of Appeal stated that the doctrine allows a court to refuse to uphold a contract, or specific terms of it, if they were imposed in a way that took undue advantage of one party’s vulnerability, ignorance, or lack of bargaining power. 38. The Court of Appeal at paragraph 52 of its judgment in the case of LTI Kisii Safari Inns Ltd v DEG [2011] KECA 1 stated that: “ (52) This is also an equitable doctrine. There are at least three prerequisites to the application of a doctrine, firstly, that the bargain must be oppressive to the extent that the very terms of the bargain reveals conduct which shocks the conscience of the court. Secondly, that the victim must have been suffering from certain types of bargaining weakness, and, thirdly, the stronger party must have acted unconscionably in the sense of having knowingly taken advantage of the victim to the extent that behavour of the stronger party is morally reprehensible.” 39. In the present case, it is not disputed that the contractual interest rate was 3% per month. It is equally not disputed that the agreements provided for a penalty clause of 5% per day on the amounts defaulted. The Court notes that while the initial agreement provided for a default penalty rate of 1% per month above the contractual rate, the two subsequent addenda, however, modified the penalty clause to 5% per day. It is this rate that the Plaintiffs have applied in demanding the outstanding sum. 40. Bearing in mind the principles in Dhiman v Shah (supra), the Court is of the view that an interest rate of 36% per annum, though high, is not per se unlawful, particularly where voluntarily agreed upon. However, a penalty of 5% per day, which translates to 150% per month, is in the view of the Court, clearly extortionate and unconscionable. Such a bargain reveals a conduct that shocks the conscience of the court, and cannot, in the view of the Court, be enforced. 41. Accordingly, I therefore find that while the contractual interest at 3% per month is enforceable, the penalty clause at 5% per day is punitive and must be struck down. Whether, having appropriated and transferred the collateral, the Plaintiffs can sustain further claims against the Defendant. 42. The Defendant’s main argument is that the collateral provided was sufficient to offset the loans advanced to him. The Defendant points out that the Plaintiffs have already fully satisfied the debt by transferring the collateral properties (Laikipia Diga Umande Block 4/396 and 4/398) into their own names, in addition to receiving cheque payments. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 6

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43. The Defendant further submitted that the Plaintiffs’ transfer of the said properties was unlawful and in contravention of Section 79(9) of the Land Act, 2012, which provides that a chargee holding an informal charge may not take possession of or sell the charged property without a court order. Consequently, Counsel urged this court not to enforce the contracts for having been tainted with illegality. Reliance was placed on Nairobi Civil Appeal No. 165 of 2007 – D. Njogu & Company Advocates v National Bank of Kenya Limited [2016] eKLR. 44. The Plaintiffs disputed the Defendant’s assertion that the collateral provided was sufficient to offset the loan. They point out that the Defendant, during cross-examination, expressly admitted that under agreements, the Plaintiffs retained several options in the event of default, including the right to institute recovery proceedings. 45. Having perused the agreements, I note that the Defendant deposited with the Plaintiffs title deeds for two properties, being Laikipia Daiga Umande Block 4/396 and Laikipia Daiga Umande Block 4/398, as collateral for the Business loan. This clearly amounted to creation of an informal charge under Section 79(6) of the Land Act, 2012, which provides as follows: “ 79. Informal charges “79(1) An owner of private land or a lessee, by an instrument in the prescribed form, may charge the interest in the land or a part thereof for any purpose including but not limited to securing the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition. (6) An informal charge may be created where— a. a chargee accepts a written and witnessed undertaking from a chargor, the clear intention of which is to charge the chargor’s land or interest in land, with the repayment of money or money’s worth, obtained from the chargee plus interest as agreed by the chargor and the chargee"; b. the chargor deposits any of the following— i. a certificate of title to the land; ii. a document of lease of land; iii. any other document which it is agreed evidences ownership of land or a right to interest in land. 7. A chargee holding an informal charge may only take possession of or sell the land which is the subject of an informal charge, on obtaining an order of the court to that effect. 7. An arrangement contemplated in subsection (6)(a) may be referred to as an “informal charge” and a deposit of documents contemplated in subsection (6) (b) shall be known and referred to as a “lien by deposit of documents.” 7. A chargor shall not possess or sell land whose title documents have been deposited by a chargee under an informal charge without an order of the court.” https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 7

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46. It is also plain from the agreements that under Clause 5 of the first agreement, Clause 10 of the second agreement, and Clause 12 of the third agreement, the Plaintiffs retained several options in the event of default, including instituting recovery proceedings. It therefore follows that the Defendant’s arguments that the debt in question was fully satisfied by the Plaintiffs’ realization of the securities is not an accurate reflection of the terms of the contracts. 47. In fact, there is nothing under Section 79 of the Land Act, 2012, barring a chargee from pursuing more than one remedy concurrently, including realizing the security and recovering the balance of the debt. The appropriation of the properties did not, therefore, automatically discharge the entire loan. 48. However, the Plaintiffs are under a duty to give credit for the value of the appropriated properties when computing the outstanding balance. The Plaintiffs can only recover the debt to the extent not satisfied by the market value of the land as at the date of transfer. 49. What then was the market value of the subject properties as at the date of the transfer? 50. The Defendant, in his testimony, told court that a valuation conducted on his behalf reported that the two properties had a combined value of Kshs. 15 million. He produced in evidence a valuation report dated 14th February 2024 by Bron Valuers Limited, registered valuers, indicating that Laikipia Daiga Umande Block 4/398 had a market value of Kshs. 8,000,000/- as at 14th February 2024, whereas Laikipia Daiga Umande Block 4/396 has a market value of Kshs. 7,000,000/- as at the same date. 51. The Plaintiffs, on the other hand, told court that two properties had a combined value of Kshs. 4,800,000/-. They produced in evidence a valuation report dated 11th April 2023 by Precision Valuers Limited, indicating that Laikipia Daiga Umande Block 4/396 had a market value of Kshs. 2,200,000/-, whereas that of Laikipia Daiga Umande Block 4/396 was Kshs. 2,600,000/-. 52. From the two valuation reports, it is obvious that one of them (or even both) is not accurate. Whereas the Plaintiffs argued that their valuation report dated 11th April 2023 is more accurate, I find that, given the wide disparity in the market values of the two properties as reported by the two valuers, it would not be appropriate for the court at this stage to attempt an evaluation to determine which one of the two reports is accurate. 53. The proper procedure, therefore, in my view, is to order a fresh valuation to be undertaken by a government valuer. Accordingly, I hereby direct that market value of the two properties as at the date of the transfer be ascertained by a government valuer appointed by the Chief Government Valuer. Whether the Plaintiffs are entitled to the reliefs sought 54. Having found that the loan agreements are valid, that the interest clause is enforceable, but that the penalty clause is unconscionable, I hold that the Plaintiffs are entitled to recover the outstanding principal and contractual interest at 3% per month, less the value of the appropriated properties. 55. As regards valuation fees and legal fees incurred prior to filing suit, I find that these are not recoverable absent a specific contractual or statutory basis. On general damages, it is trite law that such are not ordinarily awardable for breach of contract, as restated in Hadley v Baxendale (1854) 9 Exch. 341 and consistently applied in our jurisprudence. See Nyamweya v Asakania [2025] KEHC 1702 (KLR) where the Court stated that: “ as a general rule general damages are not recoverable in cases of alleged breach of contract and that has been the settled position of law in our jurisdiction, and with good reason. In Dharamshi Vs. Karsan[1974] EA 41, the former Court of Appeal held that general damages https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 8

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are not allowable in addition to quantified damages with Mustafa J.A expressing the view that such an award would amount to duplication.” 56. Further, the Court (Majanja J.) in the case of Consolata Anyango Ouma v South Nyanza Sugar Co. Ltd [2015] eKLR stated as follows on the reason why general damages, as a general rule, are not awardable in a claim for breach of contract: “ The next question is whether the appellant was entitled to damages as a result of the breach. As a general principle, the purpose of damages for breach of contract is, subject to mitigation of loss, the claimant is to be put as far as possible in the same position he would have been if the breach complained of had not occurred. This is principle is encapsulated in the Latin phrase restitution in integrum (see Kenya Industrial Estates Ltd v Lee Enterprises Ltd NRB CA Civil Appeal No. 54 of 2004 [2009] eKLR, Kenya Breweries Ltd v Natex Distributors Ltd Milimani HCCC No. 704 of 2000 [2004] eKLR). The measure of damages is in accordance with the rule established in the case of Hadley v Baxendale (1854) 9. Exch. 341 that the measure of damages is such as may be fairly and reasonably be considered arising naturally from the breach itself or such as may be reasonably contemplated by the parties at the time the contract was made and a probable result of such breach (see Standard Chartered Bank Limited v Intercom Services Ltd & Others NRB CA Civil Appeal No. 37 of 2003 [2004]eKLR). Such damages are not damages at large or general damages but are in the nature of special damages and they must be pleaded and proved (see Coast Bus Service Ltd v Sisco Murunga Ndanyi & 2 others, NRB CA Civil Appeal No. 192 of 92 (UR) and Charles C. Sande v Kenya Co-operative Creameries Ltd, NRB CA Civil Appeal No. 154 of 1992 (UR))”. 57. In the present case, the Court has already found that, as compensation, the Plaintiffs are entitled to interest at the rate of 36% per annum on the principal sum; awarding damages again would, in my view, amount to double compensation. Consequently, I therefore decline to award general damages. 58. Accordingly, I enter judgment for the Plaintiffs against the Defendant as follows: i. The Defendant is liable to pay the principal sum of Kshs. 22,149,000, less credit for the market value (as at the date of the transfer) of the properties Laikipia Daiga Umande Block 4/396 and 4/398. ii. Interest is payable at the contractual rate of 3% per month on the reducing balance, from the date of default until payment in full. iii. The Plaintiffs’ prayers for general damages, valuation fees, and pre-suit legal fees are dismissed. iv. Costs of the suit are awarded to the Plaintiffs. Further Orders on Valuation 59. For purposes of determining the final decretal sum payable: a. The value of Laikipia Daiga Umande Block 4/396 and Laikipia Daiga Umande Block 4/398 shall be ascertained by a Government Valuer appointed by the Chief Government Valuer. b. The valuation shall reflect the open market value as at 8th November 2024, being the date of appropriation. c. The Valuer shall file a Valuation Report to this Court within ninety (90) days of this judgment. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 9

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60. d. The costs of the valuation shall be borne equally by the Plaintiffs and the Defendant. e. A final decree shall thereafter issue for the net sum, together with interest and costs as provided. It is so ordered. SIGNED, DATED, AND DELIVERED IN VIRTUAL COURT THIS 9TH OCTOBER 2025 ADO MOSES JUDGE In the presence of: C/A – Moses ………….……….. for the Plaintiffs ...………….…..... for the Defendant https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/16565/eng@2025-10-09 10

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