On Lenders ensuring their interest rates and loan terms are commercially reasonable and fair, especially when privately negotiated - The Case of Dhiman v Shah (Civil Appeal E380 of 2023) [2025] KECA 1264 (KLR)

Case Details

• Court: Court of Appeal, Nairobi, Appeal No.: E380 of 2023
• Lower Court: High Court at Nairobi (Makau, J), H.C. Commercial Case No. 205 of 1999
• Judgment Date: July 11, 2025 (Kenya Law)

 Factual Background

1. Loan Agreement (1996–1997):
• Respondent (Shah) lent the Appellant (Dhiman) Ksh 13 million in three installments (Ksh 2.5m, Ksh 2.5m, and Ksh 8m) (Case).
• Only Ksh 7 million was actually disbursed: Ksh 2.5m (Dec 1996), Ksh 2.5m (Jan 1997), and Ksh 2m (Aug 1997) (See Case).
• The agreement included a 36% per annum interest rate, payable quarterly, and security over land (LR 209/8192/8) via promissory notes and charge (See Case).

 

Issues on Appeal

• Unconscionability: Dhiman argued the 36% compounded interest and associated terms were excessively oppressive.
• Validity of Security: Whether the charge securing the loan over Appellant’s property was validly created.
• Preventing Unjust Enrichment: If the agreement was void, what fair restitution was appropriate?

 

 Court of Appeal’s Decision

1. Unconscionability Doctrine Applied
• Court ruled the interest rate and compounding structure amounted to “extortionate” and “oppressive” terms.
• It invoked the unconscionability doctrine, affirming that equity can intervene when contract terms offend justice and conscience.
2. Contract Declared Void
• The loan agreement was set aside, along with the order transferring the mortgaged land.
3. Equitable Restitution
• To prevent unjust enrichment, Dhiman was ordered to repay Ksh 4 million (reflecting actual disbursement minus void portions), at a fair interest rate of 12% per annum (See Case).
4. Land Vesting Nullified
• Any vesting or title change arising from the High Court’s earlier judgment was nullified.

 

Legal Significance

• Balance of Freedom vs Fairness: The Court underscored that while parties are free to contract, courts may intervene when terms are shockingly unfair.
• Kenyan Unconscionability Standard: The decision reinforces the distinction between procedural unfairness (absence of free consent) and substantive unfairness (overly harsh terms).
• Precedent for Loan Agreements: Lenders must ensure their interest rates and loan terms are commercially reasonable and fair, especially when privately negotiated.

 

🏛️ Implications for Practice

For Lenders	For Borrowers
Ensure transparency and fairness in financial terms.	Can challenge oppressive loan terms under equity.
Avoid private lending with punitive interest to evade regulation.	Be aware of rights to restitution even if original contract is void.
Secure legal advice and document informed consent.	Monitor unjust enrichment orders and equitable interest rates.