Financial Institutions can only charge interest stipulated in the contract

National Industrial Credit Bank Limited V Aquinas Francis Wasike & another

Court of Appeal at Nairobi

Civil Appeal No. 54 of 2007

Mwera, Azangalala & Sichale JJ.A

October 16^th, 2015

Reported by Emma Kinya & Maxwell Mwangi

Brief Facts

The parties entered into a hire purchase agreement which the second respondent was a guarantor. The appellant had financed the 1^st respondent to buy a motor vehicle registration for a principal sum of Sh.3,412,500/=. The agreement stated that the repayment was to be spread over 47 months at Sh.130,250/= per month. The hire purchase interest was agreed at Sh.2,871,960/=, worked on a flat rate of 21.04% p.a., with the motor vehicle as security. The total purchase price was therefore to be Sh.6,284,460/=.

In the alternative, it was also agreed that the 2^nd respondent undertook to repay all the sums due and payable by the 1^st respondent in event of a default by the deed of guarantee.

Though the 1^st respondent had paid a total of 4,564,478/=,the appellant repossessed and sold the motor vehicle at 2,033,898/= to recover the 1^st respondents arrears after alleging that there was a default. The appellant then allowed a rebate of 1,289,451/=, crediting it to the 1^st respondent’s account thereby reducing the owed sum. The 1^st respondent still remained in arrears of 445,531/=, 103,969/= on account of bank charges, repossession expenses and administration costs and another 469,392/= interest charged on late payments. The total came to 1,018,892/=.

The appellant suit for recovery of the amount owed was struck out because there was no agreement on late payment interest and that the specified interest rate was 21.04% and not 33.9% as varied by the appellant. Moreover, the respondent was awarded special damages for the lost amount after the sale of the motor vehicle. The appellant appealed the decision of the lower court.

Issues

1. Whether the appellant was entitled to charge interest on installments paid late where the hire purchase agreement was silent.
2. Whether the appellant was entitled to vary the interest on the hire purchase amount without informing the respondent.
3. Whether the appellant was entitled to reposses and sell the motor vehicle after wrongful calculation of the amount outstanding.
4. Whether the 1^st respondent was entitled to special damages or general damages.

Contract Law - hire purchase agreement - variation of interest in a hire purchase agreement- late payment of installments - acceptance of installments paid late as waiver of interest - whether the appellant was entitled to charge interest on installments paid late where the hire purchase agreement was silent on the same - whether the appellant was entitled to vary the interest on the hire purchase amount without informing the respondent.

Held

1. The question of the interest charges in the agreement led to the dispute. While the appellant maintained that under the agreement there was interest to be levied on late payment of instalments and that the flat rate of 21.04% stood to be revised and varied to 37% and then reduced to 33%p.a. as the appellant felt necessary, the respondents held the view that the flat rate was not revisable and there was no provision for levying of any interest on late payments.
2. The space for “Late Payment true rate” had no indication as to the percentage rate payable. Unlike the specified flat interest rate space containing 21.04% p.a., the late payment part had no rate to be paid. The space was left blank which meant that no interest was intended or payable on any instalments that were not paid on time. If the parties intended that a charge of interest be levied on this, they would have said so by stating the rate of interest in the agreement. Therefore, there was no interest payable on late payment of instalments since a written contract was read, understood and applied by what it expressly said.
3. The appellants’ position was that the 1^st respondent’s account fell in arrears and so the motor vehicle was repossessed when a default occurred. The 1^st Respondent paid a sum of Kshs. 4,564,478 of the total of Kshs. 6,284,460 by the time of repossession.  They had not paid the full amount since the amount due at the time of termination included a variation of the specified flat interest from 21.04% p.a. raised to 37% and back to 33.9% p.a.
4. The appellant repossessed the motor vehicle and terminated the contract on a wholly wrongly and improperly computed sum, which it considered as due and owing in order to precipitate repossession. In that regard, the repossession was unlawful if not premature and the appellant was not entitled to it. The appellant was entitled to exercise the right to repossess, but not in the way it went about it. It used a wrong computation and arrived at the sum that informed the move to repossess and terminate the agreement.
5.  The car being sold at 3 million was sold at an under value. The special damages were to be equivalent to the true value of the motor vehicle at the time it was sold.
6. The trial court was in a position to determine the dispute but not on account of general damages as those did not normally fall to be awarded in cases where breach of a contract had been alleged and proved. That was not a case to apply the principle of restitution in integram since an error had not been found on the part of the agreement. Therefore, the High Court should have considered to award special damages, if the same had been pleaded and proved, and not general damages as it did.

The award to the 1^st Respondent set aside. Suit against the 2^nd respondent dismissed.

Cases

East Africa

1. Orion East Africa Ltd v Housing Finance Company of Kenya Ltd Civil Case No 914 of 2001 – (Distinguished)

2. Kenya Power & Lighting Company Ltd v Abel Momanyi Birundu Civil Appeal No 19 of 2011 - (Followed)

Statutes: None Referred to

Texts & Journals

1. Guest, AG., (Ed) (1994) Chitty on Contract London: Sweet & Maxwell  27^th Edn Vol 2 para 36-224

2.  Trayner, J., (Ed) (1894) Latin Maxims & Phrases London: William Green & Sons 4^th Edn

Advocates: None Mentioned