Sunday, August 17, 2008

UNJUST ENRICHMENT THROUGH ECOMONIC DURESS: HIGH COURT DECISION REVERSED

Reported by Michael Murungi

(This report was also published in the August 18, 2008 edition of the Daily Nation newspaper (page 14 column 1) under the heading 'Politics Finally Cost Media Owner Shs. 56M)

Kenya Commercial Bank Ltd & another v Samuel Kamau Macharia & 2 others [2008]eKLR (www.kenyalaw.org)
Court of Appeal at Nairobi
P.K. Tunoi, E.M. Githinji & J.W. Onyango Otieno JJ.A
July 31, 2008

The Court of Appeal has reversed a decision of the High Court awarding Kshs. 56 Million to businessman and media magnate Samuel K. Macharia in a protracted litigation with government-owned financial institutions that had the high drama of the political intrigues characteristic of the 1980’s and 90’s.

Justice (Rtd.) Richard Kuloba had in January 2003 ruled in favour of Macharia and his company, Madhupaper International Ltd, after he found that the Kenya Commercial Bank (KCB), the Kenya Commercial Finance Company (KCFC) Ltd and the Kenya National Capital Corporation had abused the influence of the then President Dianel Arap Moi and Joseph Arap Letting, then the Head of Public Service and Secretary to the Cabinet, in applying unconscionable pressure and economic duress on Macharia and his company to overpay a loan by over Kshs. 56 Million. (see Madhupaper International Ltd & another V Kenya Commercial Bank Ltd & 2 others [2003] KLR 31 or on www.kenyalaw.org case search).

Madhupaper had borrowed Kshs. 50 Million from the three institutions in 1981 with a view to establishing a plant for the manufacture of tissue paper from recycled waster paper collected within the city of Nairobi. As a security for the loan, Madhupaper had given the lending institutions a charge over all its assets. After the company defaulted in its repayments, the lenders executed the terms of the charge by placing it in receivership to recover an outstanding Kshs. 54 Million made up of the balance of the unpaid principal sum and interest.

Macharia filed three suits against the lenders and the government but he would later withdraw them after the parties reached a negotiated settlement. Under that settlement, Madhupaper paid Kshs. 54 million in settlement of the loans and withdrew its litigation and in return, KCB and the other two lenders lifted the receivership. However, one week later, the lenders returned the money to Madhupaper and restored the receivership citing certain conditions that Madhupaper had attached to the settlement which they did not find acceptable. Further negotiations ensued and in July 1989, when soaring interest and other costs had raised the outstanding loan to over Kshs. 110 Million, Madhupaper executed a deed which would later become the subject of renewed litigation. Under the deed, Madhupaper paid Kshs. 110 Million to the lenders in full and final settlement of the loans. The receivers were recalled and Macharia finally resumed the management of Madhupaper.

In 1992, Macharia and Madhupaper filed a suit in the High Court claiming that their actual indebtedness at the time of the deed was Kshs. 54 Million and that the extra Kshs. 56 million had been extracted from them through undue influence and fraud. After almost a decade of litigation, Justice Kuloba delivered a judgment in which he analyzed and applied the principles of economic duress, restitution and unjust enrichment. He found that Macharia and Madhupaper had been subjected to illegitimate pressure and had been coerced through the unconscionable conduct of KCB and the other lenders to pay surplus monies over and above what they actually owed. Accordingly, judgment was entered in favour of Macharia and Madhupaper in the amount of Kshs. 56 million representing the surplus monies paid to the financial institutions. KCB and the other lenders had filed an appealed against the decision in 2004.

While the Court of Appeal agreed with the High Court’s exposition of the principle of unjust enrichment and its application to Kenya – generally, that a person who has received an unjust benefit at the expense of another should not be allowed to retain the benefit – it differed with the manner in which the High Court had applied the principle to the facts of the case. Restitution or repayment cannot be ordered where the benefit in question was conferred through a valid legal obligation owed by the claimant to the defendant, the Court of Appeal observed. In other words, a person who has an honest claim in law to the money of another person, whether though a loan agreement, a charge, etc, cannot be said to have been unjustly enriched if he is paid that which was legally owed to him.

Having evaluated the evidence on which the High Court had based its decision, the Court of Appeal found that the agreement for the payment of Kshs. 110 Million had voluntarily signed by the parties to it in the presence of their directors or advocates. In fact, Appeal Judge P. Tunoi noted that “Macharia and Madhupaper were represented by some of the most able and prominent counsel in the country”. Macharia had signed the deed on behalf of Madhupaper in the presence of his advocates without raising any protest or question as to their willingness to pay the money and they had not challenged the validity of the deed.

Moreover, the Court found no evidence of any compulsion or duress having been brought upon Macharia and Madhupaper to pay the money. In fact, the High Court had been wrong in finding that KCB and the other lenders had roped Joseph Arap Letting into the affair “for the purpose of creating terror” in Macharia and Madhupaper. On the contrary, the Court of Appeal found, it was Macharia who had courted the intervention of the then President Moi and Letting. There was no evidence of any direct intervention by the former President or at least any undue intervention by Letting.

The Court of Appeal further observed that Macharia and Madhupaper had voluntarily committed themselves to pay by entering into a valid deed. Therefore, by making the payment, they were performing an obligation owed to KCB and the other institutions which had a valid and honest claim against them. The High Court had arrived at a wrong decision after it had misdirected itself by misconstruing the facts and the evidence, and on that account, the Court of Appeal had the jurisdiction to interfere with the decision.

The judgment of the High Court was set aside and substituted with an order dismissing Macharia’s claim. Macharia and Madhupaper were ordered to pay to the other parties the costs of the appeal.

The writer is an advocate and the Assistant Editor of the Kenya Law Reports.

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