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A commentary on the Court of Appeal ruling in National Bank Limited & another v Basil Criticos, 2022

Jerameel Kevins Owuor Odhiambo The court will not interfere where parties have contracted on arm’s length basis. However, by its equitable jurisdiction, this court will set aside any bargain which is harsh, unconscionable and oppressive or where having agreed to certain terms and conditions, thereafter imposes additional terms upon the other party. Equity can intervene to relieve that party of such conditions.

Introduction

In May 2022, there was breaking news that was sponsored by the Court of Appeal decision. These were some of the headlines captured by different media stations ‘Former MP gets Sh 2B in Court fight with National Bank of Kenya’, ‘ Local Bank in Crisis After Court Orders Kshs 2.2 Billion Compensation to Former Member of Parliament,’ ‘NBK to pay ex-MP Basil Criticos Sh 2.2 Billion’, ‘Bank Ordered to Pay Sh 2.2 Billion to Former Taveta Member of Parliament Basil Criticos’, ‘NBK Ordered to Pay Former MP Ksh 2.2 Billion’, ‘National Bank to Pay Ex-Taveta MP Ksh 2.23 Billion over a Mispriced Land Auction.’ All and sundry wanted to get to know the facts of the case to know whether the compensation given by the court was justifiable or not.

Kenya National Capital Corporation did advance a loan of KES 20,000,000 to Agro Development Company Limited. Basil Criticos was a director and a shareholder of the borrower. The loan was secured by inter alia a personal guarantee offered by National Bank dated 22nd January 1991 and a legal charge dated 29th January 1991 registered over all that property known as L.R No.5865/2 owned by the Kenya National Capital Corporation Limited.[1]

Allen Gichuhi while commenting on the case noted as follows: the appeal was about a bank that trampled on the rights of a guarantor whose land was sold at a gross undervalue in contempt of injunctive orders that were in place. The bank acted in bad faith and refused to accept the Appellant’s offer of Ksh 63 million to redeem the charged property and instead sold the land for Ksh 55 million. Strangely, it later sued the Appellant under his guarantee of Ksh 20 million without refunding the surplus of Ksh 35 million which was an express admission that his liability was limited to Ksh 20 million. The Appellant’s land had 7000 acres of sisal, buildings and various crops on 15,994.5 acres and was sold for a paltry Ksh 3,439 per acre[2].’

The facts of the case were as follows:

Basil was a guarantor for the sum of KES 20 million. When the borrower defaulted, the bank called up the guarantee and imposed interest that was accompanied at 35% per month which amounted to 420% per annum. At one time the bank had in 2006 found a purchaser for 300 acres of the charged property offering Ksh 28,500,000.

In an unfortunate twist of events, the bank reneged on an earlier agreement to subdivide part of the land to settle the debt and instead ignored injunctive orders obtained by some of the purchasers, who with the consent of the bank purchased various plots and paid deposits to the bank, sold the entire land (inclusive of the subdivisions) for KES 55 million.

In one of the fastest conveyancing transactions in history, the sale agreement between the bank and the purchaser was executed in the morning and the property transferred to the purchaser in the afternoon without payment of a single cent. The full purchase price was paid six months later in defiance of injunctive orders that barred the bank from accepting the purchase price.

The case was heard by three different High Court judges. After two judges were transferred, the last judge who came at the tail end of the trial dismissed the suit and failed to justly determine the real issues in controversy and ignored the evidence and the law on the liability of a guarantor and the right to redeem charged property.

One important factor is that the bank never produced any counter valuation report to rebut the concise valuation report submitted by the guarantor’s expert Valuer and instead relied on a biased valuation report by a government Valuer which was relied upon at the time of the unlawful sale. It is also important to point out that the bank’s own valuation reports done years later before the same gave a higher value for the property.[3]

At the Court of Appeal, the learned judges after critically looking at the matter at stake did set aside the judgment by the High Court and ordered a refund of a surplus of KES 35 million and damages of Ksh 2,284,101,000. Here is a snapshot of the Court of Appeal judgement: In instance where the guarantee limits the guarantor’s liability to a fixed sum, the guarantor will be liable to the extent of the guarantor only and not to do the entire debt of the principal debtor. It was unconscionable for the bank to demand the impossibly high rate of 35% per month amounting to 420% per annum which was grossly unfair and oppressive as no court would lend support to such onerous, unconscionable and plainly usurious conduct by lenders. The sale of the charged property was in violation of valid injunctive orders in place. The High Court erred in failing to take cognizance of the fact that the various injunction orders had been issued in the presence of the bank’s advocates and personal service on the bank was required.[4]

The Court of Appeal agreed with the decision by the Supreme Court in Attorney General v Zinj Limited 2021 where the Supreme Court held that a trial court in assessing compensatory damages for wrongful sale of land must be guided by a valuation report which can only be countered by another valuation report. In the absence of a counter-valuation report that would perhaps have shown a breach of fundamental principles of valuation, there was no basis for the court to interfere with the award on assessment of damages. The bank was liable under Section 99 (4) of the Land Act which reads: a person prejudiced by an unauthorized, improper or irregular exercise of the power of sale shall have a remedy in damages against the person exercising that power.[5]

The import of this decision was that failure to produce an alternative valuation report in rebuttal is fatal to a charge’s defence when faced with a claim for damages; the equity of redemption and the limitation of liability under a guarantee are vital factors to be considered by a chargee when exercising its statutory power.

The aforementioned decision brings to the core of this paper’s commentary. After the decision was made, the National Bank of Kenya and Kenya National Capital Corporation Limited filed an application for certification and leave to appeal to the Supreme Court and stay of execution against the judgment dated 28th April 2022.

The Applicants vide the application dated 13th May 2022 expressed under Article 159, 163 (4) (b) of the Constitution, Section 3B of the Appellate Jurisdiction Act and Rules 1(2), 42 and 43(3) of the Court of Appeal Rules 2022 the applicants prayed for the following orders:

The court be pleased to certify that the applicants intended appeal to the Supreme Court raises questions of general public importance, warranting the grant of leave to appeal to the Supreme Court against the judgement and orders of the court.

Pending the hearing and determination of the applicant’s intended to appeal to the Supreme Court, the Honourable Court be pleased to grant an order of stay of execution of the judgement and orders of the court.

The application was premised on the grounds that the intended appeal to the Supreme Court raises issues of general public importance in relation to inter alia, whether a guarantee for a specific sum is discharged by payment only of the specific sum, notwithstanding the express provisions therein for payment of interests, costs and other charges contrary to the earlier decisions in respect thereof, including the decision of the Court in Javaid Igbal & Another 2018; whether the doctrine of continuing guarantee clauses is applicable to Kenya to enable extending obligations of the guarantor so long as the principal borrower has any liability or obligation to the creditor under the charge. The Applicants contend that the said issues ought to be considered by the Apex Court; that the intended appeal is arguable and that unless stay is granted, the National Bank of Kenya will suffer an irreparable injury which cannot be compensated by an award for damages should its intended appeal to the Supreme Court be successful.

On the other hand, the respondent opposed the application vide replying affidavit sworn on 20th may 2022. The salient points are: the court has no jurisdiction to stay execution of its judgment because it is functus officio; the application does not raise any matters of general public importance as set out in Hermaneus Phillipus Steyn v Giovanni Gnechi-Ruscone 2013; where a dispute is primarily resolved by interpreting an agreement between parties, such a dispute cannot be a matter of general public importance; the applicants have not shown that there are inconsistencies in the jurisprudence relating to the issue of applicability of continuing guarantee clauses; the application is a disingenuous attempt by the applicants to craft an issue that was not pleaded and was never determined by the Court of Appeal, since the decision of the court was limited to the extent of the respondent’s liability as a guarantor and never entailed an interpretation of the principle of continuing guarantee clauses.

On the issue of the award of damages, the respondent contended that it is not a matter affecting the banking industry, since the award of damages is against a chargee that has acted in contempt of court orders and sold the charged property at a gross undervalue. Rather, it was a good precedent for the banking industry to be cognizant of the sacrosanct duty to observe the rule of law, the equity of redemption and that damages would be assessed if the statutory power of sale was abused. Furthermore, no evidence whatsoever had been produced to demonstrate that the applicants are incapable of paying the decretal amount or meets its obligations.

Senior Counsel Oraro, learned Counsel for the applicants, submitted that the issue raised in the judgment of the court directly and substantially affects all players within the banking and financial sector be they depositors, borrowers, lenders and the public, who place heavy reliance on the terms of the charges and/or personal guarantees as security for facilities advanced. Therefore, only a decision of the Supreme Court can settle the law regarding the applicability and enforcement of charges and guarantees, hence fostering stability and certainty with respect to advances, securities and obligations of competing parties within the banking and financial sector.

Counsel Kigata Caxstone who was representing the respondent reiterated that the Court lacks jurisdiction to grant stay of execution because it is functus officio. Counsel further submitted that the applicants have not met the criteria in Hermanus Phillipus Steyn v Giovanni Gnechi-Ruscone because they have not demonstrated a substantial point of law that will have a significant bearing on the public interest.

The learned Judges in determining the matter considered the Supreme Court mandate as enshrined in the Constitution to be specific Article 163 (3), (4) & (5). Relevant to the case in question is Article 163 (4) (b) of the Constitution which provides that the Supreme Court may hear appeals from the Court of Appeal when it is a matter of public interest. The applicants cited the above constitutional provision in seeking leave to appeal to the Supreme Court. The learned Judges noted that the issue at stake is determining whether the intended appeal raises issues of general public importance.

In Hermanus Phillipus Steyn v Giovanni Gnechi-Ruscone, the Court appeal held that:

The test for granting a certificate to appeal to the Supreme Court as a court of the last resort is different from the test for granting leave to appeal to an intermediate court for example from the High Court to the Court of Appeal. In such cases, the primary purpose of the Appeal is correcting injustices and errors of fact or law and the general test is whether the appeal has realistic chances of succeeding. If that test is met, leave to appeal will be given as a matter of course. In contrast, the requirement for certification by both the Court of Appeal and the Supreme Court is a genuine filtering process to ensure that only appeals with elements of general public importance reach the Supreme Court.[6]

The Supreme Court in Malcolm Bell v. Hon. Daniel Toroitich Arap Moi enumerated the full range of governing principles to grant leave to appeal to the Supreme Court as follows:

  1. For a case to be certified as one involving a matter of general public importance, the intending appellant must satisfy the Court that the issue to be canvassed on appeal is one the determination of which transcends the circumstances of the particular case and has a significant bearing on the public interest;
  2. Where the matter in respect of which certification is sought raises a point of law, the intending appellant must demonstrate that such a point is a substantial one, the determination of which will have significant bearing on the public interest;
  3. Such question or questions of law must have arisen in the Court or Courts below, and must have been the subject of judicial determination;
  4. Where the application for certification has been occasioned by a state of uncertainty in the law, arising from contradictory precedents, the Supreme Court may either resolve the uncertainty, as it may determine, or refer the matter to the Court of Appeal for its determination
  5. Mere apprehension of miscarriage of justice, a matter most apt for resolution [at earlier levels of the] superior courts, is not a proper basis for granting certification for an appeal to the Supreme Court; the matter to be certified for a final appeal in the Supreme Court, must still fall within the terms of Article 163 (4) (b0 of the Constitution.
  6. The intending applicant has an obligation to identify and concisely set out the specific elements of general public importance which he or she attributes to the matter for which certification is sought;
  7. Determinations of fact in contests between parties are not by themselves, a basis for granting certification for an appeal before the Supreme Court;
  8. Issues of law of repeated occurrence in the general course of litigation may, in proper context, become matters of general public importance so as to be a basis for appeal to the Supreme Court;
  9. Questions of law that are, as a fact, or as appears from the very nature of things, set to affect considerable numbers of persons in general or as litigants may become matters of general public importance, justifying certification for final appeal in the Supreme Court;
  10. Questions of law that are destined to continually engage the workings of the judicial organs, may become matters of general public importance justifying certification for final appeal in the Supreme Court;
  11. Questions with a bearing on the proper conduct of the administration of justice, may become matters of general public importance, justifying final appeal in the Supreme Court.

The learned Judges were of the view that mere enumeration of issues as matters of general public importance does not suffice; there must be cogent demonstration that the issues identified are within the ambit and definition of matters of general public importance. Public interest can be defined as something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular localities, which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, state or national government.

The judges proceeded to note;

Flowing from our analysis of the facts of this case, the law and the conclusion arrived on the issues addressed above, we are not satisfied that the applicant has identified and concisely set out the specific elements of general public importance to merit the leave sought to lodge an appeal to the Supreme Court. The dispute between the parties was a commercial loan between a lender, borrower and guarantor. The applicant has not shown how a private commercial agreement between the parties, failure to repay a loan is a matter of general public importance. This Court in its duty as the first appellate court re-evaluated the evidence and made findings of facts on the evidentiary matters that were in controversy which by themselves cannot be a basis for granting the leave sought.[7]

On whether the doctrine of continuing guarantee clauses is applicable to Kenya to enable extending obligations of the guarantor so long as the principal borrower has any liability or obligation to the creditor under the charge, the learned judges were in consonance with the submission by the respondent and thus noted that the said issue was never pleaded and thus cannot be determined by the court. The Court’s decision was limited to the issues captured and it never entailed an interpretation of the principle of continuing guarantee clauses.

On whether the applicants raised a substantial point of law; the learned judges held that;

It is noteworthy that to be substantial, a question of law must be debatable, not previously settled by the law of the land or any binding precedent, and must have a material bearing on the decision of the case and/or the rights of the parties before it, if answered either way.

[8]The word substantial prefixed to question of law does not refer to the stakes involved in the case, nor intended to refer only to questions of law of general importance, but refers to impact or effect of the question of law on the decision between the parties. Substantial questions of law means not only substantial questions of law of general importance, but also substantial question of law of general importance, but also substantial question of law arising in a case between the parties.. any question of law which affects the final decision in a case is a substantial question of law as between parties. A question which arises incidentally or collaterally, having no bearing on the final outcome, will not be a substantial question of law. There cannot, therefore, be a straitjacket definition when a substantial question of law arises in a case.

The court has the duty to ensure that the case does not involve a mere question of law but a substantial question of law. Hence, an applicant must satisfy this test to acquire jurisdiction under Article 164 (4) of the Constitution.

The proper test for determining whether a question of law raised in the case is substantial would in our opinion, be whether it is of general importance or whether it directly and substantially affects the rights of the parties of the parties and if so whether it is either an open question in the sense that it is not finally settled by this court.[9]

To be question of law involving in the case there must have been a foundation laid in the proceedings, the question should emerge from the findings of facts arrived at by the court so that it becomes necessary to decide that question of law so as to arrive just and proper decision. If the question is settled by the highest court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question ought not be a substantial question of law.

On stay of execution, the Court reaffirmed the decision of the Court of Appeal in [10]Dickson Muricho v Timothy Kagondu & 6 others 2013 where it was held:On the issue of whether this court has jurisdiction to stay execution of its order or stay any proceedings after the final delivery of its judgement and pending the hearing and determination of an intended appeal to the Supreme Court, we are of the view that once this court has pronounced the final judgement, it is functus officio and must down its tools. In the absence of statutory authority, the principle of functus officio prevents this Court from reopening a case where a final decision and judgement has been made. In our considered view that subject to the Court of Appeal’s jurisdiction to certify matters of appeal to the Supreme Court, the proper forum to seek and apply for stay of execution after the judgement by the Court of Appeal is the Supreme Court’.[11]

Founded on this above reasoning, the learned Judges rightly observed that the Court has no power to issue an order to stay of execution once it has passed judgement. Perhaps, the court can only exercise the restricted jurisdiction of considering applications for leave to appeal to the Supreme Court as provided under Article 163 (4) (b) of the Constitution.

By virtue that all arguments propounded by the applicants failed to appease the learned judges. Only one thing was remaining. You can guess. Am sure you guessed burial rights. The application was found to lack merit and thus its dismissal with the costs to Basil Criticos.

Conclusion

In a nutshell, the National Bank of Kenya (NBK) will have to pay Former Taita Member of National Assembly KES 2.2 billion.  It will however be interesting to note if the bank will adhere to the court’s decision for the bank’s net income that ended in September this year was 5.4 billion. The compensation that the National Bank of Kenya will have to pay to Basil Criticos is half of its income for the nine months that ended on September last year. Being a nation that is governed by the rule of law it is expected that National Bank of Kenya adheres to the Court of Appeal decision. How that will happen isn’t our business. Moreover, this is a lesson to other lenders that if they use the same script definitely their fall is looming and perhaps the penalty will be dire that they can’t bear.

Jerameel Kevins Owuor Odhiambo is a law student at University of Nairobi, Parklands Campus.


[1] Civil Appeal No. 80 of 2017

[2] Allen Waiyaki Gichuhi, A Commentary on the Basil Criticos v National Bank Judgement: Damages for Wrongful Sale of a Security (9th May 2022).

[3] Ibid

[4] Supra; See also Civil Appeal No. 80 of 2017

[5] Basil Criticos v National Bank of Kenya Limited & Another delivered on 28th April 2022

[6] Hermanus Phillipus Steyn v Giovanni Gnechi-Ruscone-Civil Application No. Nai.Sup 4 of 2012

[7] Supra

[8] State Bank of India & Others v S.N Goyal, AIR 2008 SC 2594

[9] Chunila v. Mehta & Sons Limited v Century SPG & Manufacturing Co. Ltd 1962 AIR 1314, 1962 SCR Supl.

[10] Dickson Muricho Muriuki v Timothy Kagondu Muriuki & 6 others 2013

[11] Ibid

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The Platform for Law, Justice & Society is published by Gitobu Imanyara & Co every month principally to offer a platform for informed and critical discussion of the National Values and Principles set out in Articles 10 (2) of the Constitution of Kenya.

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