Criticos v National Bank of Kenya Limited (as the successor in business to Kenya National Capital Corporation Limited 'Kenyac') & another
The bottom line
#Kenya's Court of Appeal ruled a guarantor only owes the capped sum, and a bank that sells property unlawfully or hikes interest unconscionably must pay massive damages.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.What is the nature and extent of the appellant's liability under the charge and the guarantee?
- 2.Was the sale of the charged property illegal by virtue of existence of injunctive court orders?
- 3.Was the suit property sold at an undervalue?
- 4.Was the appellant entitled to an award of damages for loss of income/profits?
- 5.Was the appellant entitled to costs in HCCC No. 132 of 2009?
- 6.Is the counter-claim valid?
Key legal issues
#Nature and extent of the guarantor's liability under the charge and guarantee
The appellant's liability rested with the guarantee only, limited to the guaranteed sum; the guarantee was a separate, secondary obligation.
The Court construed the charge and guarantee together: the loan amount and the guaranteed amount were both Ksh. 20 million, and the charge restated the guarantee undertaking. Relying on Rajnikantkhetshi Shah and Lalji Karsan Rabadia, it held that where a guarantee caps liability at a fixed sum, the guarantor is liable only to that extent, and that a guarantor's liability is secondary to the principal debtor's.
Unconscionability of the interest rate variation
Raising interest from 19% per annum to 35% per month (420% per annum) was unconscionable and unenforceable despite a variation clause.
Although the charge allowed the bank to vary interest, the Court held the discretion was not absolute, following Pius Kimaiyo Langat and Margaret Njeri Muiruri. The exorbitant rate, compounded without notice, contributed to the indebtedness; equity intervenes against harsh, unconscionable and oppressive bargains such as Kenya Commercial Finance v Ngeny.
Legality of the sale in the face of injunctive orders
The sale on 5th September 2007 violated valid court orders; counsel for the parties were present when the orders were issued and the respondents were deemed aware of them.
The trial court had found the content of the interim orders unknown and service unproven. This Court disagreed, noting the record showed counsel present when orders were issued and that the parties were defendants in that matter, so the respondents ought to be deemed aware; the sale was therefore in violation of valid orders.
Whether the property was sold at an undervalue and damages payable
The property was sold at an undervalue; the appellant's uncontroverted valuation was accepted, discounted for the sisal crop and timing, yielding special damages of Kshs. 2,284,101,000.
The Mwaka Musau valuation was detailed, supported by photographs, tested in cross-examination and never rebutted by a 2010 valuation. Following Stephen Kinini Wang'ondu and Attorney General v Zinj, unchallenged expert valuation suffices for special damages. The Court discounted the sisal value by 50% and the total by a further 10% for the two-year delay after the sale, applying section 99(4) of the Land Act.
Validity of the respondents' counterclaim
The counterclaim was without basis and its dismissal by the High Court was left undisturbed.
Having found the bank's conduct - excessive interest, refusal of redemption offers and sale at a gross undervalue in breach of the duty of good faith - the Court concluded the recovery suit was misguided and the counterclaim failed.
Legal principles established
#- Where a guarantee limits the guarantor's liability to a fixed sum, the guarantor is liable only to the extent of the guaranteed sum and not the entire debt, and a guarantor's liability is secondary to that of the principal debtor.
- A bank's contractual discretion to vary interest is not unfettered; courts will not enforce unconscionable, oppressive or usurious interest rates.
- A sale of charged property effected while valid injunctive orders subsist, with the chargee's counsel present when the orders were issued, is a violation of court orders.
- Expert evidence can only be challenged by another expert; uncontroverted expert valuation evidence supported by photographs cannot be wished away.
- A person prejudiced by an unauthorised, improper or irregular exercise of the power of sale has a remedy in damages under section 99(4) of the Land Act, 2012.
Court orders
#- 1.Set aside the judgment and decree of the High Court, save for the dismissal of the counterclaim which was left undisturbed
- 2.A declaration that the plaintiff is discharged and released from all liability under the Legal Charge dated 29th January, 1991 and Guarantee dated 22nd January, 1991
- 3.A declaration that the defendant did not have any legal right to exercise the statutory power of sale in respect of LR No. 5865/2 and that the agreement for sale and transfer dated 5th September, 2007 were executed in contempt of the injunctive orders issued in Milimani HCCC No. 270 of 2007 and Milimani HCCC No. 108 of 2006
- 4.A declaration that the sale of LR No. 5865/2 for the sum of Kshs. 55,000,000 to the 2nd defendant was a gross under value
- 5.A mandatory injunction compelling the 1st defendant to pay to the plaintiff the sum of Kshs. 35,000,000 being the surplus realised from the sale of LR No. 5865/2
- 6.Damages of Kshs. 2,284,101,000 for the unauthorised, improper and irregular sale, with interest at court rates from the date of judgment until payment in full
- 7.Costs of the suit
- 8.Cross-appeal dismissed for want of merit
- 9.No order as to costs of the appeal
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
Wrote the judgment
Wrote the judgment
- On appeal from
- High Court of Kenya at Nairobi
- MCC Civil Suit No. 757 of 2009
- Jurisdiction invoked
- First appellate jurisdiction under the Court of Appeal Rules (Rule 29(1) of the Rules of this Court invoked); appeal against High Court judgment
Relief refused
#Respondents' cross-appeal seeking setting aside of the dismissal of their counterclaim in HCCC No. 132 of 2009 and judgment on the debt
The counterclaim was found to be without basis; the recovery suit was misguided
Costs of the appeal to either party
The Court made no order as to costs despite allowing the suit with costs
Costs
Costs of the suit awarded to the appellant; on the appeal itself, 'We make no order as to costs'; cross-appeal dismissed with no costs order stated
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
We set aside the Judgment and decree of the High Court, save for the dismissal of the counterclaim which we leave undisturbed, substituting therefor an order that the amended plaint is allowed in the following terms;
The cross-appeal is dismissed for want of merit.
We make no order as to costs.
unless otherwise provided, where a guarantee limits the guarantor's liability to a fixed sum, the guarantor will be liable to the extent of the guaranteed sum only and not the entire debt.
Nor should any court lend its support to such onerous, unconscionable and plainly usurious conduct by lenders.
It appears to us, therefore, that the sale of the suit property that took place on 5th September, 2007 was in violation of valid court orders.
A person prejudiced by an unauthorised, improper or irregular exercise of the power of sale shall have a remedy in damages against the person exercising that power
Issues in the judgment
#Arithmetic inconsistency in the damages computation
Duplicate paragraph numbering - two paragraphs numbered 28
Inconsistent spelling of the valuer's name (Mwaka/Mweka/Mweke Musau)
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Criticos v National Bank of Kenya Limited (as the successor in business to Kenya National Capital Corporation Limited 'Kenyac') & another", Case Analysis (2022). Appeal 80 of 2017. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2022/870/eng@2022-04-28
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.