https://new.kenyalaw.org/akn/ke/judgment/kehc/2026/11386

**REPUBLIC OF KENYA** **IN THE HIGH COURT OF KENYA AT MURANG'A** **CIVIL APPEAL NO. E100 OF 2024** **FAULU MICROFINANCE BANK LIMITED ................................... APPELLANT** **VERSUS** **GETRUDE KANYI MUCHOKI ................................................ RESPONDENT** ***(Being an appeal from the Judgment and Decree of Hon. D.C. Soy, Resident Magistrate, delivered on the 9th day of September 2024 in the Small Claims Court at Murang'a in SCOMM No. E086 of 2024)*** **JUDGMENT** INTRODUCTION 1. This appeal arises from the judgment of the learned trial adjudicator, Hon. D.C. Soy, Resident Magistrate, delivered on 9th September 2024 in Murang'a Small Claims Court Case No. E086 of 2024. The Appellant, a microfinance bank, sued the Respondent for the recovery of an outstanding loan balance of Kshs. 283,281.41/-. The trial court dismissed the claim, prompting this appeal. 2. The Appellant, being dissatisfied with the said judgment, lodged a Memorandum of Appeal dated 30th September 2024, raising the following grounds: a. THAT the learned trial Adjudicator, having found that there was a valid contractual relationship between the Appellant and the Respondent, erred in law and fact in dismissing the Appellant's claim for recovery of the outstanding debt. b. THAT the learned trial Adjudicator erred in law and fact in failing to award the penalties on the principal debt and interests as per the express terms of the agreement. c. THAT the learned trial Adjudicator erred in law and in fact in failing to consider the loan account statement and other supporting documents evidencing the default, thereby holding that the court was unable to determine when the default commenced and the amount owing. d. THAT the learned trial Adjudicator, having found that the contract was silent on the issuance of a default notice, erred in law and fact by holding that the Appellant's failure to issue a default notice rendered its claim unenforceable. 3. The appeal was canvassed by way of written submissions. Both the Appellant and the Respondent filed their respective submissions, which this court has carefully considered. **B. BACKGROUND AND FACTS** 4. The substratum of the suit before the trial court was a claim for the recovery of a loan default. The Appellant (then Claimant) averred that on or about 9th December 2019, the Respondent applied for and was advanced a loan facility of Kshs. 500,000/- for working capital purposes. 5. The terms of the loan were contained in a Letter of Offer and a Loan Repayment Schedule. The facility was to be repaid in 18 monthly installments of Kshs. 35,467/- at an interest rate of 32.51% per annum. The Appellant disbursed the loan on 11th December 2019. 6. The Respondent defaulted on the repayment, leading to an outstanding sum of Kshs. 283,281.41/- as at 29th May 2024. Several demands were made, but the Respondent failed to remedy the default, thus leading to the filing of the claim in the Small Claims Court. **C. TRIAL COURT PROCEEDINGS** 7. The matter proceeded for hearing on 26th August 2024. The Appellant called one witness, CW1 Diana Nyokabi Nduati, a Legal Officer, who adopted her witness statement and produced the bundle of documents. The Respondent, despite being present in court and represented by counsel, elected not to call any witnesses or adduce any evidence. 8. The trial court, in its judgment, made several findings that are the subject of this appeal. The court found that there was a contractual relationship between the parties but dismissed the claim. The trial court noted that the Letter of Offer was undated and unexecuted by the Appellant's representative. It further held that the contract was silent on the issuance of a default notice and that the Appellant had failed to provide a detailed statement of account showing how the principal sum was repaid, when the default commenced, and how the final figure was computed. Consequently, the court held that the claim was unenforceable. **D. ISSUES FOR DETERMINATION** 9. This being a first appeal, this court is under a duty to re-evaluate the evidence adduced before the trial court and make its own independent conclusions. (See Selle & Another v Associated Motor Boat Co. Ltd & Others [1968] EA 123). 10. From the record, the grounds of appeal, and the submissions filed by the parties, the following issues arise for determination: ***a. Whether the Appellant proved its claim, and specifically the loan default and the quantum claimed, on a balance of probabilities.*** ***b. Whether the failure to issue a notice of default renders the Appellant's claim unenforceable.*** ***c. Whether the interest rate charged is unconscionable and warrants judicial intervention.*** ***d. Whether the Respondent is entitled to costs of the claim.*** **E. ANALYSIS AND DETERMINATION** **Issue One: Whether the Appellant proved its claim on a balance of probabilities.** 11. The Appellant's claim is based on a contract for a loan facility. The primary documents in support of the claim are the Letter of Offer and the Loan Repayment Schedule. The Respondent’s contention at the trial was that the Letter of Offer was undated and unexecuted by the Appellant's representative, and that the interest rate was exorbitant. 12. The law regarding contracts was succinctly stated in **National Bank of Kenya Ltd v Pipeplastic Sankolit (K) Ltd [2001] eKLR,** where the Court of Appeal held that: ***"A court of law cannot rewrite a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved."*** ***13. This court has perused the documents on record. The Letter of Offer is dated 9th December 2019. While the execution block for the Bank's representative is not dated, the Loan Repayment Schedule, which is an integral part of the offer and acceptance, is signed and dated 9th December 2019. The Borrower's signature is present on both documents. As held in Euromec International Limited v Shandong Taikai Power Engineering Company Limited [2021] eKLR, "When a person signs a document, that signature should denote an intention to be bound by the terms and conditions embodied in the signed document."*** 14. The trial court's finding that the contract was unenforceable due to the lack of the Bank's execution date is a technicality that does not defeat the existence of the contract. The Respondent has not denied applying for or receiving the loan. There is also no evidence of coercion or fraud in the formation of the contract. The Respondent was aware of the terms and proceeded to utilize the facility, thereby accepting the terms. 15. On the issue of default, the Appellant produced a Loan Account Statement as part of its bundle of documents. The trial court dismissed the claim on the basis that this statement was insufficient, as it did not show how the principal sum was repaid and when the default commenced. However, it is a settled principle of law that the burden of proof lies on the party who asserts a fact. While the Appellant has the initial burden of proving the debt, the Respondent also has a duty to rebut that evidence. 16. The Respondent chose not to call any evidence or produce any documents to challenge the Appellant's case. In Trust Bank Limited v Paramount Universal Bank Limited & 2 Others [2009] eKLR, the court held that "where a party fails to call evidence in support of its case, that party's pleadings remain mere statements of fact." The Respondent's failure to testify leaves the Appellant's evidence uncontroverted. 17. The Appellant's witness, a Legal Officer, gave her evidence on oath and produced the documents. She testified that the loan had been in default for 1295 days. The account statement, although not as detailed as the trial court might have wished, shows the disbursement of the loan and the subsequent repayments, leading to the outstanding balance. The Respondent, by not testifying, did not provide any alternative narrative or challenge the accuracy of the statement. 18. In the case of **Janet Kaphiphe Ouma & another v Maries Stopes International (Kenya) [2013] eKLR,** the court cited **Edward Muriga through Stanley Muriga v Nathaniel D. Schulten, Civil Appeal No 23 of 1997,** holding that: ***"In this matter, apart from filing its statement of defence the defendant did not adduce any evidence in support of assertions made therein. The evidence of the plaintiff and that of the witness remain uncontroverted and the statement in the defence therefore remains mere allegations."*** 19. The trial court erred by shifting the burden of proof too heavily onto the Appellant and failing to consider the effect of the Respondent's silence. The Appellant's claim was supported by documentary evidence which, in the absence of any rebuttal, established the debt on a balance of probabilities. ***Issue Two: Whether the failure to issue a notice of default renders the Appellant's claim unenforceable.*** 20. The trial court found that the contract was silent on the issuance of a default notice and that the demand letter served was merely a prequalification to filing the suit. The court further held that the Appellant was required to issue a notice of default to the Respondent before calling up the entire facility. 21. A review of the Letter of Offer, specifically Clause 5(h), provides that "in the event of default, the whole loan amount shall immediately become due and payable." This clause indicates that the loan was a demand loan. A demand loan is one that is payable on demand by the lender, and no formal notice is required to make it due. 22. The Court of Appeal in **Equity Bank Ltd v Mwangi & another [2021] KECA 64 (KLR),** held that for a demand loan, the cause of action accrues on the date of demand. The Appellant issued a demand letter on 5th June 2024. This demand letter, contrary to the trial court's finding, served a dual purpose: it was both a demand for repayment and a notice of default. The Respondent's failure to repay after the demand crystallised the default and gave the Appellant the right to seek a remedy in court. 23. Furthermore, the Appellant's consistent reminders and calls, while not formal notices, put the Respondent on notice that her account was not in good standing. The Respondent, being a knowledgeable businesswoman, could not have been unaware of her obligations under the loan agreement. To hold that the contract was unenforceable simply because a specific phrase "notice of default" was not used amounts to elevating form over substance and is contrary to the principles of substantive justice as enshrined in Article 159(2)(d) of the Constitution. ***Issue Three: Whether the interest rate charged is unconscionable and warrants judicial intervention.*** 24. The Respondent challenged the interest rate of 32.51% per annum as being exorbitant. The Appellant, on the other hand, submitted that it is a microfinance institution exempt from the Banking Act's interest capping provisions and that the Respondent voluntarily entered into the contract. 25. The relationship between a bank and its customer is contractual. The parties are free to negotiate the terms, including the interest rate. The courts have been reluctant to interfere with contractual rates unless they are shown to be unconscionable or oppressive. (See **Five Forty Aviation Limited v Erwan Lanoe [2019] eKLR).** 26. In the recent case of **Kanwal Sarjit Singh Dhiman v Kenshaji Jivraj Shah (Civil Appeal No. E380 of 2023),** the Court of Appeal struck a balance between freedom of contract and equitable intervention. The court emphasized that while parties are bound by their contracts, courts can intervene when a contract is oppressive or unconscionable. 27. In this case, the Respondent is a businesswoman who had previously obtained loans and was clearly aware of the terms and conditions of the facility. She signed the Loan Repayment Schedule, which clearly stated the interest rate and the total amount payable. There is no evidence that she was coerced into signing the agreement or that the bank took advantage of her. 28. Additionally, the Appellant is a licensed microfinance institution. Section 54(1)(d) of the Banking Act exempts it from the provisions of the Act, including the interest rate capping introduced by Section 33B. The Appellant is therefore at liberty to charge interest rates based on its risk assessment and cost of funds. 29. While the interest rate may appear high, it was a term of a contract that the Respondent willingly entered into. There is no evidence of unconscionable conduct on the part of the Appellant. Therefore, this court finds no basis to interfere with the contractual interest rate. ***Issue Four: Whether the Respondent is entitled to costs of the claim.*** 30. The Appellant was not successful in its claim before the lower court but it is successful in this appeal. Section 27 of the Civil Procedure Act provides that costs follow the event. The court has not been presented with any reason to depart from this general principle. The Appellant is therefore entitled to the costs of the claim in the lower court and the costs of this appeal. **F. CONCLUSION AND FINAL ORDERS** 31. Having re-evaluated the evidence and the law, this court finds that the learned trial Adjudicator erred in law and fact by: i. Dismissing the Appellant's claim despite the existence of a valid contract and unchallenged documentary evidence. ii. Placing an undue burden of proof on the Appellant and failing to take into account the Respondent's failure to adduce any evidence to rebut the claim. iii. Finding that the contract was unenforceable due to the absence of a formal default notice, contrary to the explicit terms of the Letter of Offer which made the loan a demand loan. 32. Consequently, the appeal is hereby allowed. The judgment of the Honourable Resident Magistrate, D.C. Soy, delivered on 9th September 2024 in Murang'a Small Claims Court Case No. E086 of 2024 is hereby set aside. In lieu thereof, this court makes the following orders: a. Judgement is hereby entered for the Appellant (the Claimant in the lower court) against the Respondent for the principal sum of Kshs. 283,281.41. b. Interest on the principal sum from the date of filing the claim in the lower court (9th July 2024) until payment in full, at court rates. c. The costs of the claim in the lower court and the costs of this appeal are awarded to the Appellant 33. Right of Appeal 30 days. **DATED, SIGNED AND DELIVERED AT KAKAMEGA ONLINE THIS 24 TH DAY OF JULY, 2026.** **S.N MBUNGI** **JUDGE** **In the presence of:-** **CA:** Zilda/ Velma Mr Mwangi holding brief for Ms Nyaga for the Applicant present online. MS Mwangi for the Respondent present online.