[2018] KECA 379 (KLR)

IN THE COURT OF APPEAL

AT NAIROBI

(CORAM: GITHINJI, OKWENGU & J. MOHAMMED, JJ.A.)

CIVIL APPEAL NO. 254 OF 2016

BETWEEN

KEZIAH NJAMBI

MAINGIT/A ARRIVALS TEXTILE SHOP.........APPELLANT

AND

BARCLAYS BANK OF KENYA LIMITED.......RESPONDENT

(Being an appeal from the Judgment and Decree of the High Court of Kenya

at Nairobi (Lady Justice Sewe.) delivered on 12thday of October, 2016

inH.C.C.C No. 773 of 2012)

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JUDGMENT OF THE COURT

[1] This is an appeal from the judgment of the High Court (Olga Sewe J.) dismissing the appellant’s suit, for permanent injunction to restrain the respondent from recalling a loan of Kshs. 16,000,000/- and from taking steps towards realization of charged security known as L.R. No. 25404, Grant IR 87128 Tigoni (Suit Property).

[2. 0] The facts on which the suit was based are briefly as hereunder.

[2. 1] The appellant and her husband Samuel Maingi Kibe (deceased) and who were trading as Arrival Textile Shop had a business account No. 2025607506 with the respondent at its River Road Branch. On 25th May 2012 jointly, they applied for a loan of Kshs. 16,000,000/- (16 million) to purchase a residential house at Tigoni. The respondent (bank) accepted the application and made an offer in terms of the letter of offer dated 29th June, 2012. The terms of the offer included a requirement that there would be a first rank legal charge over the suit property in favour of the bank for Shs. 16 million and that there would be an adequate fire insurance cover over the suit property.

[2. 2] The letter of offer contained special conditions, namely that;

(a) Security to be perfected before drawdown.

(b) Annual creditor life insurance premiums to be provided for as they fall due.

(c) Mortgage protection cover for Kshs. 16,000,000/- to be taken over the borrowers and pro rata premium amount for the period up to the last day of the month of February to be debited from account 2025607506

(d) Loan repayments to be provided for as they fall due. Two missed repayments will be treated as an event of default and will trigger calling up the entire debt.

(e) Payments to be made to the vendor by the bank’s documentation and securities centre through the bank’s lawyers upon perfection of securities.

On 30th June, 2012 the appellant and the deceased accepted the offer and an agreement was executed by the parties on the same day. In addition, the appellant and the deceased executed a standing order on 30th June, 2012, authorizing the bank to debit account No. 2025607506 with the monthly repayment instalments of Kshs. 329,627 on 20th August 2012 and on 20th of every month until the loan is fully paid.

Under the same standing order instructions, the appellant and the deceased instructed the bank to finance the premiums for insurance and add to the loan as per the prevailing interest rate.

[2. 3] The bank referred the appellant and deceased to The Kenya Alliance Insurance Company Limited(Kenya Alliance) for medical examination and completion of the group mortgage protection policy, and on 12th July 2012, the insurance company accepted to insure the appellant and the deceased, each for a sum of Kshs. 16 million.

[2. 4] The appellant and the deceased executed the legal charge over the suit property on 6th August, 2012 and the loan was disbursed on 13th August 2012. On 21st August, 2012, the first loan installment of Shs. 329,677/= was recovered from the amount and the account debited in that sum.

[2. 5] The appellant’s husband died shortly thereafter on 1st September, 2012. The appellant reported at Tigoni Police Station that the deceased fell down the stairs in the suit property sustaining fatal injuries. The death was also reported to the bank. On 24th September 2012, the bank requested the insurance company to process the claims in respect of the outstanding loan amount. The bank later intimated that insurance was not perfected due to omission by the chargors to pay the premiums, and demanded full payment of the loan from the appellant and in default threatened to realize the security.

[2. 6] The appellant pleaded that she was not in default of the loan repayment and that it was the bank which was in breach of the contract for failing to waive any further loan repayment after the demise of the deceased as the bank was meant to have fully insured the loan.

[3] The bank admitted the contract of lending as pleaded but denied that it was in breach of the contract or negligent in relation to placement of the mortgage protection policy. The bank’s case was briefly as follows:

The bank directed the appellant to take out a policy with Pan Africa Life Assurance Company. On 2nd July, 2012, the Chargors effected a policy with Pan Africa Assurance and supplied the bank with policy documents executed by both chargors. On 13th August, 2012, the bank made debits of Kshs. 106,256 on the chargors account for payment for mortgage protection cover to Pan Africa Life Assurance Company (Pan Africa). On 15th August, 2012 the appellant instructed the bank to recall the policy with Pan Africa Assurance and reverse the debits as they were taking a cover with Kenya Alliance and would finance the premiums and pay directly to Kenya Alliance. Since the obligation of obtaining a policy cover was on the chargors, the bank was forced to reverse the debits pending the completion of the cover by Kenya Alliance. At the time of death of the deceased, the chargors had not deposited the policy of insurance with the bank and the bank was unaware of the premium rate of the life policy and could not therefore have made payments to Kenya Alliance.

[4] The learned judge in her judgment framed two issues thus:

(1) Whether there was a valid life mortgage insurance cover in place at the time of death of the plaintiff’s husband;

(2) Whose responsibility was it to ensure that the cover was in place?

Upon reviewing the evidence, the learned judge made a finding, in essence, that, the proposal forms for cover with Pan Africa was cancelled; that although Kenya Alliance had accepted the Chargor’s proposal, no premiums were paid and no policy was issued; and that there was no valid life mortgage protection cover at the time of death of the appellant’s husband.

In respect to the second issue, the court made findings thus:

“(i) It was the defendant’s responsibility to ensure that premiums were paid by way of debits from the chargors account when they fell due. Nevertheless, such premium could only be paid if there was a valid insurance cover in place.

(ii) It was the obligation of chargors to ensure not only that a policy was in place but also that the policy was duly deposited with defendant for compliance purposes.

(iii) The defendant’s role in paying the premiums was, in the premises, auxiliary to and dependent on the policy being issued in the first place.

(iv) Since there was no valid policy in place and since it was the duty of the plaintiff to ensure the policy was in place, the plaintiff’s claim for a permanent injunction is without foundation.

(v) Any allegations of negligence by the plaintiff against the defendant are, in my view, issues that the plaintiff is at liberty to pursue separately if she so wishes.”

[5] The appellant, by the grounds of appeal, assail those findings. Mr. Mwangi Kigotholearned counsel for the appellant submitted, amongst other things, that it was the bank’s contractual obligation to effect the policy; that parties spelt in clear terms how the respective insurance policies would be put in place; that the chargors had no option of securing insurance policies outside the agreed contract framework; the allegation that the chargors opted to avail a policy of insurance on their own is an attempt by the bank to escape liability; that requiring a valid policy to be put in place before payment of premiums is putting the cart before the horse; that only parties to contract can vary the terms of the contract and the bank was not competent to cancel the policy provided by Pan Africa; that if it were possible for the bank to cancel the policy it was prudent for the bank to ensure before such cancellation that there was alternative mortgage protection cover in existence and that it was erroneous for the learned judge to distinguish the cases of Mary Wambui Muturi vs. Housing Finance Company Limited (2012) eKLRandAnne N. Parmena v HousingFinance Company of Kenya Limited– Court of Appeal Nairobi Civil Appeal No. 239 of 2007from the instant case. (SeeMary Wambui Muturi’s and Anne N. Permena’s case).

[6]On the other hand, Ms. Muthee for the bank submitted, inter alia, that at the time of draw down, there was a mortgage protection cover with Pan Africa signed by the chargors; that the cover was cancelled at the instance of the chargors who sought to take a cover with Kenya Alliance which was to be paid for separately; that the chargors attended medical examination for purpose of cover by Kenya Alliance but no policy was issued; that Clause 6(d) and (e) of the charge provided that it was the duty of the chargors or borrower to insure and deposit with the bank the policies of insurance; that although the bank did pursue the issue of policy documents it was not bound to do so as the obligation rested entirely with the chargors; that upon the demise of the appellant’s husband the partnership became a sole partnership in the name of the appellant and the appellant had sole responsibility for payment of the loan; and that the question of insurance does not vitiate the responsibility of a surviving spouse to fulfill her contractual obligations as the charged property devolved upon her on the death of her husband.

[7]The appellant’s case as pleaded was based on the breach of a lending contract. The appellant alleged that the bank had breached the contract by failing to deduct the premiums payable to Kenya Alliance for mortgage protection policy and pay such premiums, and as a result there was no mortgage protection cover for her deceased husband at the time of his death. The appellant further alleged that had the premiums for mortgage protection policy been paid, the insured risk would have crystallized at the demise of the appellant’s husband and Kenya Alliance would have fully repaid the loan. Thus, the appellant claimed that she was not in default of the loan repayment and the bank should be restrained from recalling the loan or taking any steps towards the realization of the security.

[8] There is no dispute that the bank advanced a loan of Shs. 16 million to the appellant and her deceased husband for the purchase of a house and that the bank fully paid the purchase price to the vendor’s advocates. There was also no dispute that the loan was repayable by monthly instalments of Shs. 329,627 to be debited from the business account and that the appellant and her deceased husband issued a standing order to the bank to be affecting the monthly repayments from the business account.

Lastly, there was no dispute that the appellant’s husband died on 1st September 2012 and the bank was notified of the fact of death and that only one loan instalment had been paid and the appellant did not service the loan thereafter.

[9] At the trial, the appellant relied on her statement of facts and did not call witnesses. On re-examination by her counsel, she stated that the bank gave two choices of insurers – Kenya Alliance and Pan Africa; that she and her husband chose Kenya Alliance; that she did not tell Samuel Mutia Mukiti – an employee of the bank that she wanted to change the name of insurer to Kenya Alliance; that she did not attempt to secure insurance with Pan Africa Insurance and that the signatures on Pan Africa’s proposal forms were not hers or that of her deceased husband.

[10] The bank called two witnesses Castro Kipkemboi Mutai and Samuel Mutia Mukitiwho relied on their statements. According to Castrol Kimpemboi Mutai who was the Bank’s Recoveries Officer, the chargors effected a policy with Pan Africa and supplied the bank with a policy document; that the chargors later commenced the process of getting an alternative insurance cover with Kenya Alliance; that by 13th August, 2012 when the bank disbursed the loan, the chargors had not deposited a policy of insurance from Kenya Alliance; and that the bank on the same day debited Shs. 106,256 for purposes of making premium payments to Pan Africa. On his part, Samuel Mutia Mukiti stated that the appellant called him on 15th August, 2012 inquiring about the debit of Kshs. 106,256; that after he confirmed to her that the debit was for premium payment to Pan Africa, the appellant told him that Kenya Alliance would provide a cover and asked him to confirm with Kenya Alliance; that Mr. Wameni from Kenya Alliance made the confirmation and stated that the chargors would make premiums payments directly to Kenya Alliance and that the chargors instructed the bank to recall the policy and reverse the debits.

Samuel Mutia Mukiti also stated that he had known the appellant for 3 to 4 years and was her Relations Manager – Customer Adviser. Both Castro Kipkemoi Mutai and Samuel Mutia Mukiti stated that the bank could act on oral instructions from a customer followed by written instructions and that after the policy was re-called, the chargors had seven days to provide a replacement cover.

[11] The learned judge made a finding that the appellant and her husband instructed the bank to pay the requisite premiums by way of direct debits from their account and that pursuant thereto, the bank did pay some premiums to Pan Africa before drawdown. Further, the learned judge made a finding that the said policy was cancelled. Although the court did not expressly find that the cancellation was on the instructions of the chargors, it is implicit from the judgment that the Court believed the bank’s case particularly the evidence of Samuel Mutia Muketi which the court referred to; that the chargors instructed the bank to cancel the policy and opted to take a policy with Kenya Alliance. This is clear from the court’s findings that the chargors did not pay premiums to Kenya Alliance to bring into effect the proposed mortgage protection cover and that the bank’s role in paying premiums was auxiliary to, and dependant on the policy being issued in the first place.

[12] It was a question of fact whether the chargors instructed the bank to recall the policy with Pan Africa and reverse the debit entries and whether the chargors informed the bank that they would take a policy with Kenya Alliance and pay premiums directly. The trial court believed the evidence of the bank. There were two policies dated 2nd July 2012 each allegedly executed by the appellant and her husband placing cover with Pan Africa. The appellant denied placing mortgage protection cover with Pan Africa and denied signing the policy. Surprisingly, the appellant’s counsel submits in this appeal that the bank could not validly cancel the policy. This is inconsistent with the appellant’s case at the trial. There was also a proposal for loan protection assurance from the Kenya Alliance executed by the appellant and her husband on 5th July 2012 and the acceptance of the insurance by Kenya Alliance, 12th July 2012.

There was communication by email between the officers of the bank regarding the insurance culminating in an email dated 16th August, 2012 from Samuel Mutia Muketi as follows:

“At the point of communication the client has had their medical examinations and mortgage cover (domestic package organized by Kenya Alliance. The payment terms have been agreed with client and Mr. Wameni from Kenya Alliance has confirmed that they are in the process of finalizing on the process where the client agreed to pay separately NOT via the account. Mr. Wameni is to forward the documents to the bank after he is through with the process at their end. We regret any mix-up and request you assist in reversing the deductions.”

Both Castro Kipkemoi and Samuel Mutia Muketi are senior officers of the bank and the evidence of Samuel Mutia Mukiti is supported by the email dated 16th August, 2012. Their evidence was credible.

[13] In the premises, there was ample and credible evidence that the chargors instructed the bank to recall the policy and reverse the debits on the promise that they would replace the Pan Africa policy with a policy from Kenya Alliance and pay the premiums directly to Kenya Alliance. Oral evidence to show the existence of a distinct oral agreement to rescind or modify the terms of letter of offer relating to the provision of mortgage protection cover is admissible under the proviso (iv) ofSection 98of theEvidence Act.

[14] The appellant’s contentions that it was the bank’s obligation to ensure that there was a mortgage protection cover and that the mortgage life protection cover was a condition precedent to disbursement of the loan facility were considered by the learned Judge and rejected; Clause 6(a) of the charge provided in part that:

“in the event of conflict between the covenants agreements, conditions restrictions, stipulations and provisions contained in the facility letter or such other agreements and this charge, the covenants, agreements, conditions, restrictions , stipulations and provisions contained in this charge shall prevail.”

Further, clause 6(d) of the charge required the chargors to insure the property against fire and such other risks as the bank may from time to time specify, and, by clause 6(e), the chargors were required to deposit with the bank policies of insurance and duly pay the premiums at least seven days before the expiry of any policy. And as clause 28 of the charge provides, failure by the bank to exercise or delay in the exercising a right or remedy provided by the charge does not constitute a waiver of the right or remedy.

The appellant’s counsel correctly submitted that a contract of insurance in respect of mortgage protection cover is a contract between the borrower and the insurance company. Further, the proposal from Kenya Alliance shows that it is the borrowers who filled the proposal forms and Kenya Alliance accepted to cover them. It is not contended that the provision of the mortgage protection policy is a legal requirement under a contract of lending. Indeed, the general provisions relating to changes in Part VII of the Land Act do not refer to such a policy. It is the bank which imposed such a condition on the borrowers at its option and, in that case, it had a right to waive the condition which itself imposed.

[15] We are satisfied that the learned judge construed the letter of offer as read with the provisions of the charge correctly that it was the responsibility of the chargors to ensure that the policy was in place. The chargors having varied the conditions of the letter of offer they were required to pay the premiums directly to Kenya Alliance which they failed to do.

[16] The appellant relied on the High Court decision in Mary Wambui Muturi which was followed by this court in Anne N. Parmena’s case and submitted that it was erroneous for the learned Judge to distinguish it from the instant case. In Mary Wambui Muturi’scase, the administratix of the estate of the deceased chargor brought a suit against the chargee contending that since the loan was secured by a mortgage protection cover the estate of the deceased chargor was legally discharged from settling the debt upon the death of the chargor. At the hearing of that suit, it was disclosed that the insurance company had made a substantial payment although it claimed that the deceased chargor had not paid premiums and that the payment was ex gratia. Upon reviewing the evidence, the court made a finding that it was the lender’s obligation to ensure that the cover was in place and that it was negligent in not ensuring that the cover was in place. In addition, the court made a finding that the lender had made an equivocal offer to the administratrix of the deceased estate that the ex gratia payment by the insurance company had settled the debts except for a relatively small amount. It is on that basis that the court made a finding that the estate was fully discharged from paying the outstanding debt.

[17] In the Anne N. Parmena case, a legal representative of the deceased charger filed a suit against the chargee and contending that a mortgage life insurance policy must have been taken out by the deceased chargor or that in the alternative the chargee was estopped from denying that life insurance was taken out. One of the issues that the court had to decide was whether the mortgage life protection insurance policy was in force in relation to the deceased borrower. The evidence disclosed that the chargee confirmed in writing to the legal representative that the insurance company had paid a substantial amount on ex gratia basis and that the payment did not fully redeem the loan. The court considered the provisions of the charge instrument which provided that the chargee was to exclusively arrange for insurance cover and which prohibited the deceased from taking out any insurance policy. The court also considered that the chargee had continued holding out to the chargors’ legal representative that an insurance policy had been effected. Ultimately this Court made a finding that the chargee having made representations that a life cover was in place was estopped from alleging that there was no life cover and gave judgment for the plaintiff.

[18] In the judgment appealed against, the judge distinguished the Mary Wambui Muturicase on the ground that there was a policy in place in that case. The respondent distinguishes the Mary Wambui Muturi and Anne N. Parmena cases from the present case on the ground that there was no insurance cover in place and on the further ground that as the business was a partnership, it changed to sole proprietorship upon the death of one partner and the surviving partner had the sole responsibility for the loan.

[19] It is evident that in the two cases relied on by the appellant, the decision of the court was based on the peculiar facts of each case essentially that according to the terms and conditions of the contract of lending it was the responsibility of the chargee to arrange for mortgage protection life policy. As we have demonstrated above, the letter of offer as read with the charge instrument in this case placed the responsibility on the chargors and the chargors having failed to pay premiums directly to Kenya Alliance, the respondent cannot be held to be in breach of the contract.

[20] The facts in this appeal are unique. The suit was brought on the assumption that had the mortgage protection life policy been effected in respect of the deceased chargor, the loan would have been fully paid by the Insurance company and, hence the appellant would have been discharged from paying the loan. The charged property was jointly owned by the deceased and the appellant and upon the death of her husband, by section 49 of the Land Act and section 91(4)(b) of the Land Registration Act, vested in the appellant. By clause 4 of the charge document, the obligations of the chargors to pay the loan are joint and several. As the proposal forms from Kenya Alliance indicate, two mortgage protection life policies would have been issued, each to cover the deceased and the appellant individually. The suit related to the policy which should have been issued to cover the deceased and not the appellant. It is the terms of the policy which should have been issued that would have aided the court to determine, in the present scenario, if the death of one insured would have discharged the loan liability of the surviving insured chargor.

In the absence of such a policy, it would be speculative to find that a mortgage protection life policy relating to the deceased would have discharged the loan and the appellant’s liability from payment.

[21] Lastly, the respondent stated in para 13 of the statement of defence thus:

“The defendant’s right to exercise its statutory power of sale cannot be vitiated by the absence of an insurance policy and to do so would mean that an insurance policy ranks pari passu to a charge document.”

That legal issue was not articulated at the trial and the court did not make a finding on it. In addition, the respondent did not file a notice affirming the decision on that ground. It follows that the Court cannot decide the issue at this stage.

[22] However, it is appropriate to refer to the remedy sought in the suit by the appellant. The main relief sought in the suit was a permanent injunction in terms already indicated. A “Charge” is defined in section 2 of the Land Act as, inter alia, an interest in land securing the payment of money, and, the instrument creating a charge.

A charge is not merely a contract of lending between a lender and a borrower. It is also governed by the elaborate statutory provisions in part VII of the Land Act and Part V of the Land Registration Act. By section 90 and read with section 96(1) of the Land Act, the chargee has power to exercise power of sale of the charged land, if,inter alia, the chargor defaults in payment of money due under a charge and if all, the requisite notices have been served on the chargor.

[23] In this case, the appellant paid only one instalment of Shs. 329,627/- out of Shs.16 million borrowed to purchase the charged property. No further payment has been made since the death of the appellant’s husband in September 2012.

The injunction sought by the appellant is an equitable remedy. Thus, the appellant invoked the equitable jurisdiction of the court. Since equity normally follows the law, grant of permanent injunction could not have been appropriate. In addition, according to principles of equity, an equitable relief which would have the result of unjustly enriching the appellant could not have been granted.

[24] For the foregoing reasons, the appeal has no merit and it is hereby dismissed with costs to the respondent.

Dated and Delivered at Nairobi this 27thday of July, 2018.

E. M. GITHINJI

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JUDGE OF APPEAL

H. M. OKWENGU

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JUDGE OF APPEAL

J. MOHAMMED

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JUDGE OF APPEAL

I certify that this is a true copy of the original

DEPUTY REGISTRAR