In a judgment delivered in Eldoret, the appellate court overturned a High Court decision that had freed businessman Chepkonga Chebon from liability under a guarantee securing loans advanced by Consolidated Bank of Kenya to Lomsons Enterprises Ltd.
The court also reinstated the bank’s right to sell land charged as security to recover a Sh76 million debt.
The ruling clarifies an important aspect of commercial lending by affirming that courts must enforce guarantee agreements according to their terms where the parties expressly contemplated future restructuring of credit facilities.
“A court of law cannot rewrite a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved,’ said the court.
The dispute arose after Consolidated Bank advanced Lomsons Enterprises an initial Sh6 million facility, which was later restructured in 2012 into facilities totalling Sh76 million and secured by guarantees, including Mr Chebon’s property. Mr Chebon offered his property, Eldoret Municipality/Block 10/1747, as security under a charge and guarantee.
After the borrower defaulted, the bank moved to recover the outstanding debt by exercising its statutory power of sale over the property.
Mr Chebon challenged the move, arguing that the bank had fundamentally altered the lending arrangement by restructuring the facilities into a Sh76 million term loan without consulting him. In the lawsuit filed in 2015, he maintained that the changes discharged him from his obligations as guarantor.
He also argued that the bank was attempting to recover amounts outside the guarantee, had breached the rule limiting recoverable interest, failed to exhaust remedies against the principal borrower, issued defective statutory notices and had not properly valued the property before seeking its sale.
The High Court agreed with him in 2020, holding that converting the overdraft facilities into term loans fundamentally changed the original bargain. It declared the intended sale unlawful, discharged Mr Chebon from the guarantee, ordered the charge over his property removed and permanently restrained the bank from selling the land.
The High Court held that it was impermissible for the lender to issue a notice for the entire sum due to it and further, that Mr Chebon’s liability was limited to Sh5.6 million as at March 2015.
Consolidated Bank was aggrieved with that judgment and appealed. The lender argued that the High Court had ignored express provisions in both the charge and the deed of guarantee allowing it to restructure, split and vary credit facilities without obtaining the guarantor’s consent.
The bank also argued that the guarantee contained an anti-discharge clause preserving the guarantor’s obligations despite any restructuring, indulgence or variation granted to the borrower.
Allowing the appeal, the three-judge bench said the High Court had misinterpreted the parties’ contractual obligations.
“Looking at the terms of the charge and the guarantee, it is apparent that the variation referred to was indeed contemplated in the guarantee contract,” the judges said.
The judges found that the restructuring could not, by itself, discharge the guarantor because the agreements expressly authorised such changes.
“Additionally, in finding that the splitting of the loan was a variation meriting the discharge of the charge without settlement of the liability, the trial court erred,” they said.
The court added that the High Court had improperly rewritten the parties’ bargain.
“A court of law cannot re-write a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved,” the judges said.
The appellate court also rejected findings that the bank had failed to comply with statutory requirements before initiating the sale.
“On the question whether the requisite statutory notices had been served, we have reviewed the record and confirm that all the notices were served on the principal borrower and guarantors. Further, there is evidence that the valuation of the property was done,” the judges said.
The court set aside the High Court judgment in its entirety, dismissed Chebon’s suit and authorised Consolidated Bank to proceed with its statutory power of sale.