Credit Africa Bank Limited (In Liquidation) v Mudenda (SCZ 10 of 2003) [2003] ZMSC 73 (18 September 2003)

CREDIT AFRICA BANK LIMITED (IN LIQUIDATION) v JOHN DINGANI MUDENDA Supreme Court Sakala, CJ, Chibesakunda and Silomba, JJS 7th August, 2002 and 19th September, 2003 (SCZ Judgment No. 10 of 2003) Flynote Banker and Customer – Compound interest – Express agreement necessary. Banker and Customer – Penal interest or charges – whether alloed. Headnote This is an appeal against the ruling of the learned Commissioner of the High Court dated the 18th August, 1997, in which he declined to review his earlier judgment of the 9th of April, 1997. In particular, the appellant is appealing against that part of the riling in which the learned commissioner states: “The above being the case, it cannot be said that the requirement for an agreement to pay compound interest or acquirescene is bad law. The defendant did not agree to pay compound interest and did not acquiesce to the payment of the same. The question of compound interest does not arise.” Held: 1. 2. 3. 4. The Banking and Financial Services (Cost of Borrowing) Regulations made pursuant to the Banking and Financial Services Act prohibit the imposition of any charges or penalties on the borrower for late repayments or payments made contrary to a contract governing a loan. The charging of compound interest can only be sustained if there is express agreement between the parties to the charging of compound interest or if there is evidence of consent or acquiescence to the same. A customer must be made aware of the intention of the Bank to charge an unusual rate of interests such as compound interest. The rate of interest must move with times and must take into account the prevailing commercial practices and therefore, the rate of interest awarded by the court would normally be guided by the rate of interest which a depositor is likely to earn had he placed it in an interest bearing account of a reasonable nature. Cases referred to:- 1. 2. Union Bank Zambia Limited v Southern Province Cooperative Marketing Union (1995- 1997) ZR, 207. Zambia State Insurance Corporation Limited v Serioes Farms Limited (1987) ZR, 93. Legislation referred to: 1. 2. 3. Judgments Act, Chapter 81, of the laws of Zambia, Section 2. Law Reform (Miscellaneous Provisions) Act, Chapter 74, of the Laws of Zambia, Section 4. The Banking and Financial Services (Cost of Borrowing) Regulations Statutory Instrument No. 129 of 1995 Works referred to: 1. 2. 3. Chitty on Contracts, Volume 2, 1994, Edition. Rules of the Supreme Court (White Book) 1995 Edition Order 6/2/10 Halsbury’s Laws of England, 3rd Edition, Vol. 14, Para. 1177. C. Hakasenke, Hakasenke and Company for the Appellant N. Mutuna, of NKM Associates for the Respondent Judgment SILOMBA, JS, delivered the judgment of the Court. This is an appeal against the ruling of the learned Commissioner of the High Court dated the 18th of August, 1997, in which he declined to review his earlier judgment of the 9th of April, 1997. In particular, the appellant is appealing against that part of the ruling in which the learned Commissioner states:- “The above being the case, it cannot be said that the requirement for an agreement to pay compound interest or acquiescence is bad law. The defendant did not agree to pay compound interest and he did not acquiesce to the payment of the same. The question of compound interest does not arise.” As far as we can ascertain, the facts giving rise to the present appeal are that the respondent, through a legal mortgage dated the 12th of May, 1995, obtained a loan in the sum of K10, 000,000 from the appellant. Subsequently, the respondent failed in his obligation to service the mortgage, whereby the appellant bank was compelled to take out the originating summons on the 8th of January 1996, seeking orders for the payment of all monies owing under the mortgage, interest and foreclosure. Before the originating summons could be determined by the learned High Court Commissioner, the parties entered into a consent order on the 28th of March, 1996, on the terms put forward by the respondent in his letter at page 40 of the record of appeal. Following the consent order, the respondent made two payments amounting to K15, 000,000, which were acknowledged by the appellant. Apparently, no further payments were made and by the terms of the consent order, the respondent filed a writ of Fieri Facias to levy the sum of K29, 387,173.17 through the sell, at an auction, of the goods and chattels of the respondent. With this development, the respondent applied, by way of summons and affidavit in support, for leave to review the consent order under Order 39 of the High Court Rules, alleging that at the time the consent order was concluded, he was under the impression that interest was simple and not compound. On review, the learned High Court Commissioner agreed with the respondent and varied the consent order on the basis that the mortgage deed was vague in its provision for the calculation of interest “in accordance with bank practice.” Among other things, the consent order was varied to include interest on the principal at bank rate per annum from 12th of May 1995, to the 28th of March 1996, the date of the consent order and thereafter at 6 percent per annum. The appellant then applied for the review of the order to set aside the consent order but the application was refused – hence this appeal. There were three grounds of appeal which were presented by the appellant bank. Besides, both the appellant and the respondent filed their respective heads of argument upon which they relied. The first ground of appeal was that the learned trial Commissioner erred in law and in fact in holding that the requirement for agreement to pay compound interest or acquiescence is not bad law. In his submission in support of the first ground Mr. Hakasenke, Counsel for the appellant, told the Court that there was no submission in the Court below by the appellant that the requirement for an agreement to pay compound interest or acquiescence was bad law. He said that the basis for raising the matter before us was to put the record straight, adding that it was and still is the position of the appellant that compound interest is payable by agreement, acquiescence or custom. Mr. Mutuna, Counsel for the respondent, did not respond to this ground either in his oral submission or in his heads of arguments. This is as it should be because the appellant was simply trying to put the record straight. On our part we have had occasion to peruse the record of appeal at pages 75 to 80, which constitute the appellant’s submission in support of the application for review of the judgment of the 9th of April, 1997. At page 79 (third line from top), the submission reads in part - “As such, even if actual acquiescence were to be required, which is no longer good law …” The reference to acquiescence as being no longer good law cannot be denied. What the Counsel for the appellant should have disputed, if he had re-read his submission, is the inclusion of or reference to ‘agreement’ as being bad law. To the extent that the submission is categorical in conveying the wrong impression that acquiescence is no longer good law, we do not think that the learned trial Commissioner was wrong in re-stating the correct position of the law. He was certainly on firm ground. Having put the record straight we now move to the second ground of appeal, which is, that the learned trial Commissioner erred in law and in fact in holding that the respondent in this appeal did not agree to pay compound interest. In support of this ground, Mr. Hakasenke stated that the requirement to pay compound interest was provided for in the mortgage deed (now at pages 17-25 of the record of appeal), entered into between the respondent and the appellant and dated the 12th of May, 1995. He drew our attention to Clause 1 of the mortgage deed under which the mortgagor (meaning the respondent) covenanted with the mortgage (meaning the appellant) “to pay and discharge on demand all monies and liabilities . … including charges of interest at current rates … which interest shall be calculated in accordance with bank practice with such commission …” Mr. Hakasenke submitted that the calculation of compound interest on loans was a very well known bank practice. He cited Chitty on Contracts (3), at page 619, paragraph 36-227, in aid. He has also referred the Court to Order 6/2/10 (4) which provides under (e) as follows:- “The practice whereby banks charge customers compound interest has become recognized as a usage of bankers, and as such is implied into a contract between the banker and customer …” He, accordingly, submitted that when Clause 1 of the mortgage provided for interest to be calculated in accordance with bank practice, the bank practice was clearly one of compounding interest. He urged the Court to find that the learned trial Commissioner’s holding to the contrary was a misdirection which should be set aside and that in its place the Court should order that the bank practice in this matter was to compound interest. In addition, Mr. Hakasenke stated that apart from the usual bank practice of calculating compound interest, the respondent had clearly acquiesced to the payment of compound interest. He illustrated his point by referring the Court to a letter dated 4th of March, 1996, found at page 40 of the record of appeal, in which the respondent proposed to liquidate the amount of K20, 499,031.00 through installments. According to Mr. Hakasenke, the K20, 499,031 was lifted from the appellant’s statement of account and included compound interest. At page 41 of the record of appeal is a response from the appellant dated the 6th of March, 1996, in which the proposed mode of repayment of the outstanding amount was accepted as proposed by the respondent. In the same letter, the appellant cautioned the respondent that the outstanding amount had risen to K28, 279,733.27, as at 3rd of March, 1996 Mr. Hakasenke submitted that on the basis of the proposal to pay in installments, a consent order was signed by the legal representatives of the parties. Mr. Hakasenke observed that prior to the signing of the consent order and while the respondent and the appellant exchanged letters, there was no protest from the respondent on the charging of compound interest. The legal Counsel contended that in fact it was the respondent himself who acknowledged that K20, 499,031 was outstanding as at 4th of March, 1996, in his letter at page 40 of the record of appeal. This figure was later corrected to read K28, 279,733.27, as at 3rd of March, 1996, by the appellant without any single protest from the respondent that the amount contained compound interest, he said. He pointed out that in fact the respondent paid the first instalment of K5, 000,000 following the signing of the consent order and thereafter failed to honour the terms of the consent order. On the 14th of June, 1996, long after the last date on which he had undertaken to pay off the whole debt, the respondent issued a cheque for K10, 000,000 and appealed to the appellant to restructure his accounts. Mr. Hakasenke stated that even at that late stage, the respondent never raised any query on compound interest. The respondent, however, sought to impeach the consent order on the basis that the appellant was charging compound interest when the appellant issued a writ of fifa, Counsel said. It has been argued by Mr. Hakasenke that had the respondent not defaulted in his payments, he would have paid the whole amount, including compound interest. He, accordingly, asked the court to order the respondent to pay the sum due to the appellant, plus compound interest thereon, as agreed in the mortgage deed or as acquiesced to by the respondent by setting aside the learned trial Commissioner’s ruling on review. In his counter - submission, Mr. Mutuna, Counsel for the respondent, told the Court that the appellant was not entitled to charge compound interest in the absence of an express agreement to do so or evidence of acquiescence by the borrower to pay compound interest. He has cited the case of Union Bank Zambia Limited v Southern Province Co-operative Marketing Union (1), as his authority. In his elaboration, he stated that Clause 1 of the mortgage deed at page 19 of the record of appeal, which had been relied upon by the appellant, did not amount to an agreement binding upon the respondent (as borrower) to pay compound interest. He stated that this Court had made it very clear in the Union Bank case (above), that the universal practice of banking was to charge simple interest on loans but that when it came to an unusual interest of compound interest there had to be an agreement. On acquiescence, the respondents’ learned counsel submitted that there was no evidence in support to prove that the respondent acquiesced in the payment of compound interest. With regard to the statements of account at pages 57 and 58 of the record of appeal, to which the appellant’s learned counsel had referred to earlier on, Mr. Mutuna said that the documents did not show that compound interest was payable. On penalties that were being imposed by the appellant as reflected in the statements of accounts at pages 57 and 58 of the record of appeal, Mr. Hakasenke conceded to Mr. Mutuna’s submission that the charges were an unauthorized under the law. We have visited Regulation 10 (i) of the Banking and Financial Services (Cost of Borrowing) Regulations made under the authority of the Banking and Financial Services Act, Chapter 397 of the laws and note, with satisfaction, that the said Regulation specifically outlaws the imposition of any charges or penalties on the borrower for late repayments or payments made contrary to a contract agreement governing the loan. With the concession by Mr. Hakasenke, we do not intend to pursue this matter further; we shall, therefore, order the appellant to knock out from the principal sum any charges or penalties that have so far been levied and in the event of a disagreement the matter shall be referred for assessment by the learned Deputy Registrar. On the charging of compound interest, we wish to reiterate our well known stand that the basis for charging such interest can only be sustained if there is express agreement between the parties to the charging of compound interest or if there is evidence of consent or acquiescence to the same. In the case of Union Bank Zambia Limited v Southern Province Co- operative Marketing Union Limited (1), cited to us by the respondent’s learned Counsel, we stated that “by the universal custom of bankers, a banker has the right to charge simple interest at a reasonable rate on all overdrafts or loans. However, when it comes to an unusual rate of interest - such as compound interest - express agreement is required, or in the alternative evidence of consent or acquiescence to such a practice or custom.” Mr. Hakasenke has drawn our attention to Clause 1 of the mortgage deed as quoted above arguing that it was bank practice to charge compound interest. We do not agree with his stand on the matter for the simple reason that the concept of bank practice is a peculiar concept to commercial banking; as such members of the public wishing to borrow from banks are presumed not to know what bank practice is in relation to the charging of compound interest. The learned trial Commissioner, commenting on Clause 1 of the mortgage deed, said in his judgment at page 10 of the record of appeal:- “This clause which is relied upon is vague because it does not state what this bank practice is and there is no evidence to show that the defendant knew this practice.” We entirely agree with the learned trial Commissioner’s comments and we would go further to caution commercial banks that if a customer wishes to borrow from a bank, he must be made aware of the intention of the bank to charge an unusual rate of interest, that is, compound interest. It must be the inescapable duty of a bank to state that it wishes to charge compound interest on the loan, obtain agreement of the customer to the charging of compound interest and then proceed to make express provision for the charging of compound interest in the mortgage deed or loan agreement. We wish to comment further that the stand taken by the appellant, through its counsel, is not supported even by Chitty on Contracts (3), cited to us by Mr. Hakasenke. At page 619, paragraph 36-227, this is what the learned authors of Chitty on Contracts have stated:- “Compound interest is payable either by agreement or custom but not otherwise.” The learned authors then go on to explain how compound interest is calculated by practice of bankers. The most important point to bear in mind is that the principle in Chitty on Contracts is the same as that expounded in the Union Bank case, that is, that “compound interest is payable either by agreement, consent, acquiescence or custom. With regard to Order 6/2/10 (4), which states that “the practice where banks charge customers compound interest has become recognized as a usage of bankers, and as such is implied into a contract between the banker and customer …” cannot, with due respect to counsel, be the law in Zambia. On the basis of our reasoning, as outlined above, we do not think that Clause 1 of the mortgage deed dated the 12th of May, 1995, amounted to an express agreement under which the respondent can be said to have agreed to pay compound interest. Under the same ground two, we were treated to further arguments from counsel for the appellant and the respondent on whether or not the respondent acquiesced to the payment of compound interest. Having ruled that there was no express agreement to pay compound interest, the argument of the appellant that the respondent acquiesced to the compounding of interest, appears to us, to be an argument in the alternative. In their submissions, no authorities were cited to us to explain the law on acquiescence but nonetheless we have duly considered the arguments whereby we venture to make certain observations. The term acquiescence is defined in Halsbury’s Laws of England, (5). The learned authors assert that the term is used in two senses, thus:- “In its proper legal sense it implies that a person abstains from interfering while a violation of his legal rights is in progress; in another sense it implies that he refrains from seeking redress when a violation of his rights, of which he did not know at the time, is brought to his notice.” Based on the facts of this case and the definition of acquiescence given to us by the learned authors of Halsbury’s Laws, can we say that the respondent was not interested in challenging the appellant when a violation of his legal rights, as a mortgagor, was being perpetrated by the appellant? Would it be correct to say that the respondent never took any action when a violation of his legal rights was made known to him in the course of his relationship with the appellant? The answers to both questions are in the negative for lack of clear evidence to show that the respondent was aware of the illegal charging of compound interest but did nothing to redress the situation. To the contrary, the evidence is that, as soon as he became aware that the appellant was charging compound interest, he moved the lower court under Order 39 of the High Court Rules for leave to review the consent order of the 28th of March, 1996 and succeeded, inter alia, in having it varied to provide for the charging of simple interest and the exclusion of penalties on late payments of the loan. It is common cause that the respondent initially borrowed K10, 000,000 for which a mortgage deed was entered into on the 12th of March, 1995. In a letter dated 4th of March, 1996, at page 40 of the record of appeal, it is apparent to us that the initial K10, 000,000 had swelled to K20, 499,031.00, which the respondent proposed to liquidate by 30th of April, 1996. We shall assume that at that stage he was not aware that K20, 499,031.00, included compound interest. After paying K15, 000,000, the respondent was served with a writ of fifa dated the 12th of June, 1996, in which the appellant levied execution for the sum of K29, 387,173.17, plus interest at 84 percent per annum. At this stage he became aware that compound interest was being charged. According to the affidavit in support of an application for review (see page 36 of the record) and the submission of counsel, the respondent was convinced that the new figure could only have come about through the charging of compound interest. The learned trial Commissioner agreed with the respondent and on that basis proceeded to vary the consent judgment. We have been referred to the bank statements at pages 57 and 58 of the record of appeal, which were sent to the respondent. The argument of the appellant is that upon receipt of the statements, the respondent never raised the issue of compound interest. We have had occasion of examining the statements and our view is that they do not contain information on compound interest, descriptive enough to be easily understood by a layman, such as, the respondent. We, therefore, agree with Mr. Mutuna that the bank statements do not show that compound interest was payable. This court cannot, in the circumstances, positively conclude that the respondent ought to have known about the charging of compound interest, but took no measures to stop the illegal practice. In all, we are saying that the respondent did not acquiesce in or consent to the charging of compound interest and the net result is that the second ground of appeal is unsuccessful. We now move to deal with the third and last ground of appeal, which was not argued in the oral submissions of counsel. It reads:- “The learned trial Commissioner erred in law and in fact in holding that the rest of judgment in this matter sought to be reviewed remain the same and thus holding, inter alia, that interest after the consent judgment shall be 6 percent per annum.” Mr Hakasenke reiterated, in his written submission, that the rate of interest payable on the loan before and after judgment was expressly agreed upon by the parties in Clause 1 of the mortgage deed. He has submitted that the express agreement on interest payment was in conformity with the proviso to Section 4 of the Law Reform (Miscellaneous Provisions) Act (7). In his view, by ordering 6 percent per annum interest, the learned trial Commissioner did not follow the agreement of the parties which was current both, before and after judgment. We have been referred to the case of Zambia State Insurance Corporation Limited v Serioes Farms Limited (2), in which this court held that the rate of interest must move with times and must take into account the prevailing commercial practices and that, therefore, the interest awarded by the court would normally be guided by the rate of interest which a depositor is likely to earn had he placed it in an interest bearing account of a reasonable nature. Admittedly, that has been our stand. From the outset we wish to point out that the respondent’s Counsel did not argue this ground in his heads of arguments. The point the appellant is making is that, the interest that the learned trial commissioner ordered to apply to the mortgage sum before and after the consent judgment was not only unrealistic, but contrary to the agreement as specified in Clause 1 of the mortgage deed of the 12th of May, 1995. We have had occasion to look at the consent order of the 28th of March, 1996, and note that the order does not specify the rate of interest to govern the loan, let alone, the loan that remained outstanding after the consent order. However, when the consent order was reviewed this is what the learned trial commissioner ordered in relation to interest in his judgment of the 9th of April, 1997:- “Judgment is entered for the plaintiff for the principal plus interest at bank rate per annum from 12th of May, 1995, to the 28th of March, 1996, the date of the consent judgment, thereafter 6 percent per annum.” In keeping with the contents of Clause 1 of the mortgage deed, the appellant has urged the court to ignore the 6 percent imposed by the learned trial commissioner and instead order that the current rates applicable before the consent order shall continue to apply to the amount outstanding after the consent order. While we agree that interest rates must be realistic enough to take into account the prevailing commercial practices, we refuse to accede to the request that the current rates before the consent order was signed must continue to apply even after the consent order in respect of the outstanding amount. We have already said that the charging of compound interest under the guise of Clause 1 of the mortgage, before the consent order was illegal. It follows that this rate of interest cannot be allowed after the consent order. We are familiar with the fact that the amendment to the Judgment Act (6) was effected by Parliament in 1997. In the amendment to Section 2 of the Act, Parliament removed the provision relating to interest at the rate of 6 percent per annum after judgment or order. In its place, Parliament empowered courts to determine interest, which in any case should never exceed the current lending rate determined by the Bank of Zambia. Having due regard to the fact that the consent order was entered into on the 24th of March, 1996, well before the amendment to the Judgment Act, we have no cause for interfering with the order of the learned trial commissioner as outlined above. On the basis of our reasoning, ground three is also unsuccessful. In the whole, the appeal is dismissed with costs to be taxed in default of agreement. Appeal dismissed