Dhiman v Shah (Civil Appeal E380 of 2023) [2025] KECA 1264 (KLR) (11 July 2025) (Judgment)

Key Facts

Transaction Type

Issues

• What principles did the court consider when determining whether a contract was unconscionable?
• Whether an agreement between two non-bank parties could be found to charge unconscionable interest, contrary to section 3(1) of the Banking Act.
• Whether courts could interfere with contracts where the parties had already agreed on the terms.
• Whether the terms of a loan agreement that may result in punitive or extortionate financial consequences, particularly through excessive compounding over long durations, could be struck down or moderated.
• Whether the High Court could declare a contract void for being unconscionable and order the release of the security to the creditor while at the same time ordering for the unpaid principal amount to be repaid.

Holdings

• The court held that the parties' contract was a total breach, not a total failure, and that the respondent was entitled to rescind the agreement due to the appellant's failure to repay the loan and interest as per the terms.
• The agreement did not violate the Banking Act (Cap 488) section 3(1) because the respondent was not a licensed banking institution, and there was no evidence of habitual lending or banking business operations.
• The ex parte judgment, vesting order, and consequential orders were set aside, reverting the suit property to the appellant. The appellant was ordered to repay Kshs 4,000,000 at court rates to avoid unjust enrichment.
• Courts do not rewrite contracts for 'bad bargains' but will void unconscionable terms that are oppressive, unjust, or shock the conscience of the court.
• The doctrine of unconscionability was applied to void the contract, as the 36% annual interest compounded quarterly over 28 years rendered the agreement oppressive and disproportionate (Kshs 4 million principal ballooning to Kshs 69 billion).

Remedies

• If the appellant fails to pay the outstanding amount, the suit property will be subjected to sale by public auction to recover the loan.
• The appeal is partly allowed, with specific orders set aside and remedies granted.
• All the orders granted by the High Court in its judgment dated 19 September 2019 are set aside.
• The respondent's title to the parcel of land LR No. 209/8192/8 is revoked, and the land register is rectified in favor of the appellant.
• No order as to costs is made in the case.
• The orders granted in the ex-parte judgment dated 16 September 1999 and all consequential orders were null and void by virtue of being set aside by the Court's 31 July 2015 judgment.
• The appellant is ordered to pay Kshs 4,000,000 with interest at court rates (12%) calculated from 19 September 2019.

Contract Value

Monetary Damages

Legal Principles

Precedent Name

• Mutanga Tea & Coffee Company Ltd v Shikara Limited & another
• Mohamed Mahmoud Jabane v Highstone Butty Tongoi Olenja
• Kenya Commercial Finance Company Ltd v Kipng'eno Arap Ngeny & another
• Geoffrey Muthinja Kabiru & 2 others v Samuel Munga Henry & 1756 others
• Commercial Bank of Australia Ltd v Amadio
• LTI Kisii Safari Inns Ltd & 2 others v Deutsche Investitions-Und Entwicklungsgesellschaft ('Deg') & others
• National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd & another
• Trans Mara Sugar Co Ltd & Ben Kangwaya Ayiemba
• Strydom v Vendside Ltd
• Mursal Guleid & 2 others v Daniel Kioko Masau
• Ajay Indravadan Shah v Guilders International Bank Ltd
• Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited
• Jamii Bora Bank Limited v Wapak Developers
• Benard Kiprono Bett v Benard Kiprono Koech
• CIS v Directors, Crawford International School & 3 others
• Speaker of the National Assembly v Karume
• Patrick Kimathi Muchena v Michael Mwasa Kilonzo
• Selle v Associated Motor Boat Co Ltd

Key Disputed Contract Clauses

• The loan agreement's clause specifying a 36% annual interest rate compounded quarterly over nearly three decades was central to the dispute. The court found this rate oppressive and unconscionable, as it would have inflated a Kshs 4 million principal to over Kshs 69 billion, violating principles of fairness and proportionality.
• The agreement required the appellant to repay the first and second instalments (Kshs 2.5 million each) with interest before accessing the third instalment of Kshs 8 million. The appellant defaulted on these payments, leading to the respondent withholding the remaining Kshs 6 million and triggering the contract's rescission for breach.

Cited Statute

• Land Registration Act (Cap 300)
• Limitation of Actions Act (Cap 22)
• Banking Act (Cap 488)
• Registration of Titles Act (Cap 281)
• Law of Contract Act (Cap 23)
• Stamp Duty Act (Cap 480)
• Appellate Jurisdiction Act (Cap 9)

Judge Name

• P. O. Kiage
• Joel Ngugi
• W. K. Korir

Passage Text

• The agreement between the parties was void for unconscionability. The loan terms—charging 36% annual interest compounded quarterly—would have inflated a Kshs. 4,000,000 balance to over Kshs. 69 billion, which was deemed oppressive and unconscionable.
• The doctrine of unconscionability in contract law as a safeguard against contracts that were so unfair or one-sided that enforcing them would offend the sense of justice. At its core, the doctrine allowed a court to refuse to uphold a contract, or specific terms of it, if they were imposed in a way that took undue advantage of one party's vulnerability, ignorance, or lack of bargaining power.
• The sheer disparity between the original loan and the amount which would now be due evidences a contract whose enforcement, without judicial intervention, would undermine principles of fairness, good faith, and proportionality. We, therefore, find the contract between the parties void for unconscionability.

Damages / Relief Type

• The 36% annual interest rate compounded quarterly was declared unenforceable as unconscionable.
• Appellant ordered to repay Kshs 4,000,000 with interest at court rates (12%) from 19 September 2019.
• The contract was rescinded due to unconscionable terms, specifically the 36% annual interest rate compounded quarterly over 30 years.
• Conditional order allowing the property to be sold by public auction if the appellant fails to repay the principal and interest.
• The court declared the loan agreement void for unconscionability and set aside the ex parte judgment and vesting order.