The Unconscionability doctrine - Even an otherwise valid contract may be voided or modified when terms are oppressive or exploitative: The case of Dhiman v Shah (Civil Appeal E380 of 2023) [2025] KECA 1264 (KLR)

Full Case: Dhiman v Shah(Civil Appeal E380 of 2023) [2025] KECA 1264 (KLR)

Procedural History

• The dispute originates from High Court, Nairobi, Commercial Case No. 205 of 1999.
• The respondent (Shah) sued for recovery of loan amounts plus interest and sought sale of property secured by a memorandum of charge.
• In 1999, an ex parte judgment was entered awarding the respondent sums and authorizing sale of the secured land.
• The property was sold by public auction; respondent obtained vesting order; he became registered owner and evicted the appellant.
• The appellant applied to review and set aside the ex parte judgment; this was dismissed.
• Appellant appealed to Court of Appeal (Civil Appeal No. 33 of 2007). In July 2015, the Court of Appeal set aside the ex parte judgment, remitted the case for retrial, deeming the draft defence as filed.
• On retrial, the High Court upheld the agreement, the vesting, and dismissed the counterclaim.
• The appellant (Dhiman) lodged the present appeal (E380 of 2023) challenging the High Court’s decision.

Facts of the Case

• On 17 December 1996, Dhiman and Shah entered a loan agreement: Shah would lend Ksh 13,000,000 in three tranches:
1. Ksh 2,500,000 on or before execution
2. Ksh 2,500,000 on 31 January 1997
3. Ksh 8,000,000 on 2 April 1997
• In fact, only Ksh 7,000,000 was advanced:

• Ksh 2,500,000 on 17 December 1996
• Ksh 2,500,000 on 31 January 1997
• Ksh 2,000,000 on 5 August 1997

• The loan was to carry 36% interest per annum, payable quarterly. The first two tranches were secured by promissory notes and a memorandum of charge over the property LR No. 209/8192/8 (owned by the appellant).
• The appellant defaulted on payments including interest, and by February 1999 had not repaid principal or interest.
• The respondent filed suit in February 1999 claiming Ksh 13,813,132.25 plus interest, and sought sale of the property and deficiency judgment.
• Because the appellant did not enter appearance or defence, interlocutory (ex parte) judgment was entered in 1999, and the property was sold via court process, with the respondent himself bidding and securing registration.
• The appellate history noted above followed, culminating in the 2015 Court of Appeal’s order setting aside the ex parte judgment and remitting for retrial.
• On retrial, the High Court found the loan agreement valid, upheld the security, and held appellant’s counterclaim time‑barred, among other findings.

Issues on Appeal

The Court of Appeal distilled the grounds into four main questions:

1. Whether the vesting order and consequential orders remained valid after the ex parte judgment was set aside in 2015.
2. Whether the loan agreement was enforceable, considering alleged deviations from its terms, illegality, or unconscionability.
3. Whether the respondent’s suit was premature, i.e., filed before the contractual time for repayment had arisen.
4. Whether the appellant’s counterclaim was time‑barred or otherwise valid.

Additionally, issues of whether the interest rate was unconscionable or illegal under the Banking Act, whether the contract was materially breached or compromised, and whether unjust enrichment principles should apply were also debated.

Holding (Decision)

• The appeal is partly allowed.
• The Court of Appeal set aside the High Court’s orders (19 September 2019).
• The ex parte judgment of 16 September 1999 and all consequential orders (including vesting order) were declared null and void by virtue of their being based on the ex parte judgment which had been set aside.
• The respondent’s title to LR No. 209/8192/8 is revoked; the land register is to be rectified in favour of the appellant.
• The appellant is ordered to pay the respondent Ksh 4,000,000 (the outstanding loan sum) with interest at court rates from 19 September 2019.
• Should the appellant fail to pay, the suit property may be sold by public auction for recovery of the debt.
• Because both parties succeed in part, no costs order is made.

Reasoning

1. Effect of setting aside ex parte judgment & consequential orders
• The Court held that setting aside the ex parte judgment in 2015 logically nullified all orders that emanated from it (sale, vesting, transfers).
• The respondent argued the sale and vesting orders remained valid because they were never appealed or set aside by the appellant. He contended that special procedure should have been invoked to challenge them (Orders of Civil Procedure).
• The Court rejected this, reasoning that because the foundation (ex parte judgment) was voided, its offspring orders cannot stand.
• The Court conceded that the 2015 judgment did not expressly mention “consequential orders,” but held that the intent to set aside all dependent orders was implicit.
2. Enforceability of the loan agreement; Unconscionability
• The appellant challenged the contract on multiple grounds:
  a) Material deviation / compromise — the fact that only Ksh 7 million was disbursed (not the full 13 million) and deviations in timing.
  b) Illegality under the Banking Act (i.e., unauthorized lending).
  c) Unconscionable interest terms (36% per annum, compounded quarterly) leading to extreme escalation.
• On material deviation: The Court held that the deviations did not render the entire contract unenforceable. The appellant was first in material breach by failing to meet interest obligations, thus justifying the respondent’s refusal to advance further funds.
• On illegality under the Banking Act: The Court found no evidence that the respondent was operating as a banking institution or that the agreement contravened statutory restrictions. Ordinary individuals may lend to one another, unless proven otherwise.
• On unconscionability: The Court held the terms were unconscionable, notably the compound interest over many years resulting in astronomical figures far disproportionate to the principal. The Court declared the agreement void on that ground.
3. Prematurity / timing of suit
• The appellant argued the suit was prematurely filed (before contract matured). The Court addressed this but found that the appellee was entitled to act when default and nonpayment became clear, especially given the appellant’s failure to meet interest obligations.
4. Counterclaim / time-bar
• The High Court had held the appellant’s counterclaim was time-barred, treating it as a contractual claim subject to a 6-year limitation. The appellant argued his counterclaim was proprietary (seeking restitution of land) and not subject to the limitation.
• The Court of Appeal considered that issue moot in light of its primary holding (that the vesting order is void and contract unenforceable).
5. Unjust Enrichment / Restitution
• Since the agreement is void, the Court did not merely leave the parties as they were. To prevent unjust enrichment, the Court ordered Dhiman (appellant) to repay Ksh 4,000,000 (the amount he had actually received and not repaid) with interest at court rates.

Legal Principles & Doctrines Applied

• Unconscionability doctrine: Even an otherwise valid contract may be voided or modified when terms are oppressive or exploitative.
• Effect of voiding a foundational judgment: When a judgment is set aside, orders dependent on it cannot stand.
• Restitution / unjust enrichment: When a contract is void, equitable doctrines may require recovery or return of value to prevent one party being unjustly enriched.
• Freedom of contract limited by equity: Parties are bound by terms, but courts may intervene when enforcement would result in manifest injustice.
• Limitation of actions: Where counterclaims are based on contract, they may be subject to limitation periods unless they involve proprietary/land rights (though the Court treated that issue as moot).

Disposition / Orders

• The High Court's judgment of 19 September 2019 is set aside.
• The orders and judgment of 16 September 1999 (ex parte) and all consequential orders (sale, vesting, transfers) are declared null and void.
• The respondent’s title to the suit property is revoked; register rectified in favour of appellant
• The appellant is to pay Ksh 4,000,000 with interest from 19 September 2019; failure to pay enables public auction of the property.
• No costs order (since each party succeeds in part).

 Disclaimer: This article is for informational purposes only and does not constitute legal advice.