Court determines validity of notice of change in interest rate by bank through the newspaper

As reported in the Kenya Law Newsletter Issue No.11 /2013 
http://www.kenyalaw.org/newsletter/

Christopher Ndolo Mutuku & another vs. CFC Stanbic Bank Limited
Civil Case No. 74 of 2011
The High Court of Kenya at Nairobi
Milimani Law Courts
Commercial & Admiralty Division
A. Mabeya J.
On 15th February, 2013.
Reported by Emma Kinya and Victor Andande

A dispute arose between the parties arising from a loan facility advanced by the defendants a bank, to the plaintiffs who were customers . It was contended that the plaintiffs fell into arrears which necessitated the defendant to exercise its statutory power of sale to recover the outstanding amount. However, the plaintiff claimed that the bank had habitually altered the rate of interest without duly informing the plaintiff’s  in breach of the contract.

Issues:

i. Which document was applicable to the plaintiffs loan facility between the General Terms and Conditions of the Application form of the Loan facility (GTC) and the Charge Instrument?

ii. Which document was to be relied on where there was conflict in provisions on the rate of interest?

iii. Whether publication in the newspaper of notice of change of interest rates by the bank amounted to sufficient notice.

iv. Whether the alteration of the interest rates accruing from a bank loan without due notice being served personally to the plaintiff was in breach of the express provisions of the Charge Instrument.

v. Whether notice of the change of the interest rates was applicable retrospectively in the circumstances.

Held:

1. Where the lender opted to use the media as a form of communication, it ought to have expressly stated so in the security instrument.  Thus the publication in the newspaper of the change in interest rate was in contravention of the Charge instrument.

2. The purpose of the notice to a borrower was to put him on notice of the intended increase or decrease in liability. With the usual penal consequence that followed default in making an adequate repayment on the stipulated time, media publication would not have given a borrower adequate, convenient and effective notice to be able to carry out his obligations under the Charge document to adjust the repayment on time.

3. Since the Bank could render a Statement of Account on monthly basis to all its customers, it would likewise have made commercial sense if the Bank notified its borrowers individually of changes in the interest rates that would increase the borrower’s liability or burden as and when they arose.

4. Any publication in the newspapers of the change in the rate of interest was not in accordance with the contract between the parties and did not affect the rate of interest on the facility.

5. Whilst a Letter of offer could have incorporated the General Terms and Conditions (GTC) of a lender, once a subsequent document of contract such as a Charge was executed, it was expected that all terms and conditions contained in the Letter of offer or such GTC were expressly incorporated or they automatically merged with the Charge.

6. Where a conflict arose between the terms and conditions in the letter of offer and the Charge, the provisions of the Charge were to prevail because the Charge document was the later in time and it was assumed that when the parties executed the same, they were aware of the provisions of the earlier documents.

7. Whilst the Defendant had the right to vary its rate of interest, notice of such variation should have been given to the Plaintiffs in terms of the Charge Instrument. Thus, since the GTC had not provided for the mode of giving notice, the only way notice of change of interest could have been effected was as provided for in the Charge Instrument.

8. Since there was variance in the rate of interest provided for by the letter of offer and the Charge, the Charge document would prevail because it had been signed by both parties whereas the Letter of Offer had been signed by the defendant only. Therefore, the interest rate would have been as per the Charge document until there was service of change of interest rate.

9. The bank letter that purported to apply the change in the interest rate retrospectively was contrary to the Charge instrument which required that such change would have been effective from the first day of the month next after notification.

Costs of the application to be in the cause.

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