IN THE HIGH COURT OF MALAWI

COMMERCIAL DIVISION

BLANTYRE REGISTRY

COMMERCIAL CASE NUMBER 101 OF 2021

BETWEEN

FARGO LIMITED………………………………..……………......CLAIMANT

AND

ECOBANK MALAWI LIMITED………………………………....DEFENDANT

Coram: HON. JUSTICE C.W.M MALONDA

Mr. John Suzi Banda, Counsel for the Claimant

Mrs. Isabella Mndolo, Counsel for the Defendant
Thoko Mwale, Court Clerk.
Mrs. G. Mtambalika, Court Reporter

Mesikano-Malonda J

JUDGEMENT

INTRODUCTION

1. FARGO (the Claimant), a construction company, had a long running

business relationship with Ecobank Malawi Limited (the Defendant) a
commercial bank.
2. Over a period of over 8 years, Fargo was provided access to various
credit facilities by the Defendant, including overdraft facilities. The

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 condition of the overdraft facilities provided for charging of penalty
interest, which was triggered by default in timely repayment of the loan.
Along the way, incidents did occur that occasioned Ecobank invoking
the charging of the Penalty interest, resulting in the debt piling up to
an astronomical figure.
3. Fargo seeks the Court’s declaration that the Ecobank’s charging of
penalty interest was illegal, unlawful, unenforceable, and against
public policy. Fargo further prays to the Court that it re-opens the loan
transaction under section 3 of the Loan Recovery Act and determine
that it is harsh and unconscionable.
4. Further, Fargo seeks an order declaring that the outstanding balance
on the credit facilities was MK136,079,158.91 as of 31st December,
2020 and not Ecobank’s counter-claims that the sum
MK1,343,203,284.26 as outstanding.
5. Ecobank refutes the claim and counterclaims for the outstanding
balance of MK1,343,203,284.26, furthermore, a realisation of the
securities pledged.

FACTS

6. Though the parties have presented their facts in an almost complicated

way. The detailed facts of this case are straightforward. The claimant is
a construction company and the Defendant, a commercial bank. In May
2018, the claimant obtained credit facilities, being a K1.5 billion
overdrafts and a K1.3 billion bank guarantee from the Defendant’s
bank.
7. The claimant and defendant made a credit facility agreement in which
the claimant used two properties as security ( among other unspecified
securities). The credit agreement was that the overdraft would be
payable at a base lending rate of 25% per annum. It further had a
penalty interest clause which stipulated that any amounts above this
limit would attract further penalty interest at 10% per annum. The
interest and penalty interest were agreed to. The facility was to last until
2018, however, the claimant did not clear this and it continued to
accrue interest. The defendant went to claim this amount but the

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 claimant failed to pay, which resulted in the defendant issuing a
statutory notice to exercise its power of sale over the securities.
8. The claimant believes that this kind of penalty interest is illegal and
against public policy. The Claimant pleads with the court to reopen the
transaction in line with Section 3 of the Loan Recovery Act. The
claimant seeks an order declaring that the outstanding balance on the
credit was MK136,079,158.91 as of 31st December 2020. The
defendant claims that MK1,343,203,284.26 is outstanding and has
counter-claimed for the balance.

ISSUES FOR DETERMINATION

9. The following matters were agreed to proceed to trial:

(a) Whether the parties agreed to the terms and conditions of the credit
facility advanced to the Claimant; If so
i. Whether the Defendant breached those terms; if so
1. Whether the Defendant distorted the loan balance
resulting in an error in the Balance owed, resulting
in the Claimant being charged a penalty interest;
2. Whether the penalty interest charge is lawful
warranting reopening of the transaction, in light of
public policy, section 3 of the Loans Recovery Act,
harsh and unconscionable or whether the penalty
interest charge was fair compensation based on the
Claimants risk profile;
ii. Whether the Defendant is entitled to the counterclaim of
MK1,343,203,284.26 and all reliefs thereunder;
iii. Whether the outstanding balance on the credit facilities is
MK136,079,158.91 or MK1,343,203,284.26;
iv. Whether the Defendant is entitled to realise the securities
following failure by the Claimant to pay the outstanding balance;
v. Whether the Claimant is entitled to the claims in the Statement
of Case;

LAW

Standard and burden of proof

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10. This being a civil matter, the applicable standard of proof, is proof on a
balance of probabilities, see Miller v Minister of Pensions [1947] 1 All ER
372. The burden of proof rests upon the party asserting the affirmative of
the issue – see Malawi Distilleries Ltd v Sichilima [2001-2007] MLR (Com)
164.
11. The Supreme Court in Commercial Bank of Malawi v Mhango [2002-
2003] MLR 43 (SCA) highlighted that the burden of proof in a particular case
depends on the circumstances in which the claim arises. It was also stated
that the law on burden of proof in civil matters is an ancient rule founded on
mature considerations of good sense and should not be departed from
without strong reasons.
12. The Claimant has the burden of proving the elements of his/her suit. See
Commercial Bank of Malawi v Mhango [2002-2003] MLR 43 (SCA). See
also Tembo and others v Shire Buslines Ltd [2004] MLR 405.
13. It is a well settled principle of law which is embedded in the Latin maxim “ei
incumbit probation qui decit non negat” that the burden of proof lies on
the party alleging a fact of which corrective rule is that he who asserts a
matter must prove it. The party on whom lies a burden of proof must adduce
evidence of the disputed facts or fail in his contention. See, Donnie Nkhoma
v. National Bank of Malawi Civil Cause No. 2174 of [1996]
14. The rest of the law related to penalty interest and unconscionable conduct
is properly explained and cited in my analysis.

ANALYSIS

15. The Claimant paraded his evidence through two witnesses. PW1 Aamir
Jakhura and PW 2 Hamlet Malika. The Defendant paraded his evidence
through two witnesses, DW 1 Tionge Mkandawire and DW2 George
Mphuza.
16. In summary the testimony of PW1 is as follows:
17. The K2.8 billion loan was secured by two properties. He showed the letter
in which all of the terms were agreed see exhibit AJ1. The claimant had
been repaying the loan but due to financial difficulties, they were unable
to finish and the Defendant’s inclusion of the penalty interest resulted in
their loans being unreasonably bloated.

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18. It is the testimony of PW1 that the Defendant has overcharged interest
on numerous occasions and the claimant appointed a creditor to analyze
the loan but before it could be finished, the defendant sent a letter
claiming the sum of MK 1.6 billion or to resell the charged properties. The
claimant further engaged another bank which told them that the penalty
interest was illegal and that the defendant’s interest was overstated by
K1.5 billion. However, the defendant rejected the claimant’s claims
without recalculating or reconsidering the amount. After meetings with
the defendant, the amount was reduced from 1.6 billion to 1.3 billion
without a proper explanation.
19. It is submitted that the 1.3 billion owed includes penalty interest which
is not justifiable since the normal interest is already high.
20. In cross examination, the witness said that he had accepted the terms
when applying for the loan. He said that he found out the interest rate
was unjustifiable after he spoke to another bank. He presented evidence
that the defendant’s calculations were wrong.
21. In cross-examination, PW1 confirmed that prior to the Defendant
advancing the credit facilities, it was giving the Claimant offer letters that
contained the terms and conditions of each credit facility. PW1 also
confirmed that the said terms and conditions included the term on the
pricing of the credit facilities and that under the pricing term was the
provision for interest to be applied and the default rate.
22. He further confirmed that the Claimant agreed to the terms and
conditions when it accepted the offer letters and signed them. The Board
Resolution, see Exhibit TM9 also refers.
23. The next testimony was from PW2 Hamlet Malika. The witness is a
certified auditor. He testified that in November 2018, he was engaged by
the claimant to review and compute interest payable over the credit
facilities. He calculated the interest between 1st Jan 2018 and 1st Jan
2021 He used the rates provided to do the computations. He found that
the difference between his calculations and the defendant’s calculations
was MK1.4 billion. However, he did not include the penalty interest in his
calculations as he thought it was unlawful. He noted two problems with
the defendant’s calculations, firstly computation errors and secondly that
the defendant was applying penalty interest.

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 24. In cross-examination, PW1 admitted that the Claimant exceeded the
approved limit and that the same happened more than once.
25. PW 2 further testified that the penalty rate was applied in two instances,
either when the facility had expired, or when the limit was exceeded. In
his view, it is standard practice that when the transaction limit is
exceeded, the system notifies the client and therefore penalizing a client
who was not warned is unfair. He finally submitted that the figure is big
because of the addition of the penalty interest, without this, the amount
owing would be MK136 million.
26. The Defendant is challenging the proceedings as well as claiming the sum
of MK1,343,204,284.26 as the outstanding balance on the credit facility
it advanced to the Claimant in 2018, interest thereon, an order that the
Defendant exercise its power of sale over the properties securing the
repayment of the credit facility availed to the Claimant, collection costs,
and costs of the action (counter-claim) from the Claimant.
27. The Defendant on the other hand testified that it complied with the terms
of the credit facilities and that interest was calculated in accordance with
the terms and conditions of the credit facilities. In the evidence in chief
of Tiwonge Mkandawire, DW1 in paragraph 15 of her witness statement
and George Phuza, DW2 in paragraph 18 of his witness statement, the
testimony is that the Defendant applied interest according to the
contractual agreements between the parties.
28. The defendant admits that the Claimant was charged penalty interest
rate when he exceeded the agreed limit.
29. See Exhibit AJ1, TM 12 and GP4 which is the credit facility, the subject
matter of these proceedings provided the following on interest:

Interest Advances in Current Account will attract interest at EMW’s base lending rate (currently at
Rate 25% per annum). EMW may in its sole discretion revise its base interest rate by notice in
the newspaper and the Borrower acknowledges that such notice shall be adequate. If the
new interest rate is not acceptable to the Borrower, they shall immediately pay all
outstanding sums before the commencement of the new rate. Interest shall apply and be
computed on a daily basis on the portion of the facility utilized by the Borrower. The interest
charge shall be passed into the customer’s account on monthly basis and if an outstanding
balance at any time shall exceed the facility limit due to monthly and interest charges, the
Borrower shall arrange as soon as possible to bring the outstanding balance within the
credit limit.

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 Any amounts above the limit for Advances in Current Account will attract a penalty interest
Default at EMW’S base lending rate plus a margin of 10% per annum. In the event that EMW having
Rate to pay claims made against Fargo Limited under the guarantee due to non-compliance with
the guarantee’s terms and conditions, any amounts for such claims settled will attract a
penalty interest at EMW’s base rate (currently 25% per annum) plus a margin of 10% per
annum.

30. The Defendant argues that the additional interest for any amount above
the limit for advances in current account is headed “Default Rate” but
inside the clause, the Defendant uses the term “penalty interest”. Thus,
it may be argued that on the face of the credit facility itself, the additional
interest is penalty interest and therefore unenforceable.
31. In some cases, cited the mere use of the word “penalty” is not conclusive
and therefore does not render the provision penal and unenforceable. The
defendant invites the court to consider the real nature of the transaction.
see Clyde Engineering and Shipping Co Ltd v Don Jose Ramos
Yzquierdo Y Castaneda [1905] AC 6] , and Harry Gunda t/a Halls
Protective Clothing General Dealers v Indebank Limited Commercial
Case No. 186 of 2015 cases .
32. The Defendant further argues , by distinguishing the current case and
the Harry Gunda case (supra) , that the nature of the transaction
between the parties herein was very much like the one in the Speedy’s
Ltd v Finance Bank of Malawi [2001-2007] MLR (Com) 373 case in so
far as it involved an overdraft facility and is therefore very different from
the nature of the transaction in the cases of Harry Gunda case (supra)
and National Bank case (supra) which involved a loan facility in which
periodic instalments were to be made to repay the loan.
33. The Defendant’s witnesses both testified and in cross-examination their
evidence that the default, otherwise referred to as penalty interest rate
was never intended to punish the Claimant as a Borrower. Rather, it
was intended to compensate the Defendant for taking unknown and
unmitigated risk on the Claimant (emphasis is mine).
34. Refer to paragraph 9 of GP and paragraph 18 of TM. The Defendant
through its witnesses also defended their use of 10% for the unmitigated
risk instead of any other rate.
35. Is 10% extravagant, exorbitant or unconscionable? The Defendant
answers in the negative. DW2 stated that the use of 10% was not

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 extravagant, exorbitant, or unconscionable, because the Reserve Bank of
Malawi, the Regulator of Financial Services Industry would have
prevented or stopped the Defendant from using that rate.
36. I have attempted to explore the meaning of unmitigated risks since it is a
fancy word that the Defendant has used on several occasions. According
to Black’s Law Dictionary, Ninth Edition, mitigation is defined as, “to
make less severe or intense”. Meaning, to mitigate is to take measures
that reduce the damage caused by an event or something. Unmitigated
risks therefore mean risks that are not mitigated or the absence of
measures to reduce the damage that will result from defaulting in a loan.
37. In the Harry Gunda case (supra), 10% as default/penalty interest rate
was held to be extravagant, exorbitant and unconscionable. The court
opined that 2% would have been a genuine pre-estimate of loss. Though
in the National Bank case (supra), the Court held a different view of
that conclusion. My immediate take on that issue is that what is
commercially justifiable and what is excessive, is subjective and may tend
to differ from case to case and from time to time. See Sikwese J in Mulli
Brothers Ltd v National Bank of Malawi and another Commercial
Case Number 92 of 2016 (unreported). It should therefore not be a sore
spot for litigants if courts come up with different interest rates which are
classified as exorbitant or not. The Court has discretion and latitude to
change such goalposts as such are relative to the case at hand. However,
what remains constant is whether the penalty interest is financially
justifiable or not in that particular case.
38. The Defendant further argues that unless there is indeed empirical
evidence to the effect that the 10% rate is extravagant in the financial
services industry for overdraft facilities, the court should not hold the
rate extravagant. The Defendant has not denied the use of a penalty
interest rate in its calculation.
39. I will now turn my attention to my analysis of the evidence and the law.

(a) Whether the parties agreed to the terms and conditions of the
credit facility advanced to the Claimant;

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40. At this point it is clear that the parties are in agreement, in terms of the
facts, especially the following:
41. It is agreed by the parties that they agreed to the terms and conditions of
all the credit facilities and the Defendant advanced to the Claimant,
including the facility of May, 2018 which is the subject matter of these
proceedings valued at MK2,800,000,000.00 comprising of
MK1,500,000,000.00 as Advances in Current Account (overdraft) and
MK1,300,000,000.00 as guarantee see Paragraph 4 of PW1 AJA, the
witness statement of Aamir Jakhura, and paragraph 5 of GP, the witness
statement of George Phuza, DW2 refer. See also the credit facility itself
duly executed by both parties signifying their agreement to the terms and
conditions of the credit facility appearing as exhibit AJ1, TM12 and GP4.
The said facility also provided for default interest or in some parts it is
referred to as penalty interest in the agreement. The same was to be
charged on any amount which is incurred above the limit for the
advances in the current account. According to the default interest
provision, if the account exceeded the said amount above the limit, it was
going to attract penalty interest at the Defendant’s base lending rate plus
a margin of 10% per annum. The credit facilities were further secured by
properties Title Number Mapanga 99 and Nkolokoti 288 among other
securities, which the Defendant would have power of sale over, in the
event of eventual default of payment.
42. Therefore, to answer the question whether the parties agreed to the terms
and conditions of the credit facility, it is my finding that the answer is in
the positive.
43. Moving on to the next closely related issue :
If so :
i. Whether the Defendant breached those terms
44. Based on the evidence tendered by both parties, I find the answer in the
negative. The Defendant is not in breach of the terms of the contract, as
he was simply enforcing what is in the terms and conditions of the
contract. This is because the claimant did not dispute the inclusion of
the provision in the terms and conditions of the contract, however, he
started to dispute after he went to another Bank and he was informed
that the provisions on Penalty interest were not lawful.

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45. Where the parties have entered into a business transaction, the common
intention to enter into legal obligations is presumed: see Edwards vs
Skyway Ltd (1964) 1 WLR 349; Rose and Frank Co. vs J.R. Crompton
& Bros, Ltd (1924) UKHL 2. If a contract is in writing, the courts have
long insisted that, as a general rule, the parties are to be confined within
the four corners of the document in which they have chosen to enshrine
their agreement. Neither of the parties may adduce any evidence to show
that his intention has been misstated in the document. It has thus been
held that it is firmly established as a general rule of law that parole
evidence cannot be admitted to add to, vary or contradict a deed or other
written instrument. See Ecobank Malawi Limited vs. Harvey
Kalamula, Civil Cause Number 434 of 2013. Though I qualify this
position by stating that the courts are willing to set aside a contract where
it is shown that the other party engaged in unconscionable conduct or an
unconscientious use of power, Alec Lobb (Garages) Ltd v Total Oil
(Great Britain) Ltd [1985] 1 All E.R. 303.
46. I will now move on the next issue for determination:

i. if so;
1. Whether the Defendant distorted the loan balance
resulting in an error in the Balance owed, resulting in
the Claimant being charged a penalty interest;

47. Based on my findings in issue (a) in the paragraphs above, consequently,

this affects the finding in this issue for determination. It is my finding
that the defendant did not necessarily distort the balance owed by the
Claimant out of error, but rather out of sanctioning penalty interest as
per the agreed terms and conditions of service. As a general principle of
common law of contract, parties are free to agree on whatever terms they
want to govern their contractual relationship, cited in Engen Malawi V
Beatrice Kachingwe Commercial Case Number 260 Of 2015
(Unreported), see also Suisse Atlantique Societe d’Armement
Maritime SA v N.V. Rotterdamsche Kolen Centrale [1967] 1 A.C. 361
and Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827.
Modern legal policy favors the furtherance of trade, as such, commercial

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 men are accorded the utmost liberty of contracting, Homburg
Houtimport B.V. v Agrosin Private Ltd (The Starsin) [2003] UKHL 12,
[2003] 3 W.L.R. 711.
48. Moving onto the next issue for determination:

2. Whether the penalty interest charge is lawful warranting

reopening of the transaction, in light of public policy,
section 3 of the Loans Recovery Act, harsh and
unconscionable or whether the penalty interest charge was
fair compensation based on the Claimants risk profile;
49. Looking at all the evidence and the pleadings, it seems this is the real
bone of contention between the parties. This is the smoking gun if I may
put it that way! This whole case revolves around whether it was lawful or
not for Ecobank Malawi to charge Fargo penalty interest. The rest of the
issues which have been brought before this court are merely bells and
whistles. The real issue is whether it is legal or not to charge penalty
interest, and if it is not, the transaction should be re-opened. I will
attempt to summarise the submissions from both parties.

Claimants submission on re-opening money lending transactions under

the Loans Recovery Act

50. The claimants submits as follows: Section 3 of the Loan Recovery Act
provides that:

“(1) Where proceedings are taken in any court for the recovery of any
money lent after the commencement of this Act, or the enforcement
of any agreement or security made or taken after the
commencement of this Act, in respect of money lent either before
or after the commencement of this Act, and there is evidence which
satisfies the court that the interest charged in respect of the sum
actually lent is excessive, or that the amounts charged for
expenses, inquiries, fines, bonus, premium, renewals or any other
charges, are excessive, and that, in either case, the transaction is
harsh and unconscionable, or is otherwise such that a court of

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 equity would give relief, the court may reopen the transaction, and
take an account between the lender and the person sued, and
may, notwithstanding any statement or settlement of the account
or any agreement purporting to close previous dealings and create
a new obligation, reopen any account already taken between
them, and relieve the person sued from payment of any sum in
excess of the sum adjudged by the court to be fairly due in respect
of such principal, interest, and charges, as the court having regard
to the risk and all the circumstances, may adjudge to be
reasonable; and, if any such excess has been paid, or allowed in
account, by the debtor, may order the creditor to repay it; and may
set aside, either wholly or in part, or revise, or alter, any security
given or agreement made in respect of money lent by the lender,
and if the lender has parted with the security may order him to
indemnify the borrower or other person sued.

(2) Any court in which proceedings might be taken for the recovery of
money lent by a lender shall have and may, at the instance of the
borrower or surety or other person liable, exercise the like powers
as may be exercised under this section where proceedings are
taken for the recovery of money lent; and the court shall have
power, notwithstanding any provision or agreement to the
contrary, to entertain any application under this Act by the
borrower or surety, or other person liable, notwithstanding that
the time for repayment of the loan, or any instalments thereof, may
not have arrived.”

51. In the cited case of National Bank of Malawi Ltd vs- Lilongwe Gas
Company Limited (supra), a loan transaction was re-opened when the
Defendant applied for the same under Section 3 of the Loans Recovery
Act herein challenging inclusion of penalty payments.
52. Further, the Court in Harry Gunda case (supra) observed that Section 3
of the Loans Recovery Act herein provides a source of remedy to a person
who is challenging the charging of penalty interest. The Court stated;

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 “Our Banking Act makes no provision for the rule against
penalties. There appears to be no clear provision in other
legislation such as the Competition and Fair Trading Act
and the Consumer Protection Act addressing this issue except
for the matter of banks colluding on interest charges. As
such, common law, equity, and Section 3 of the Loans
Recovery Act are the only sources of relief to borrowers.
(Emphasis added).”
53. It would appear that in this case the Court did not consider section 43
of the Competition and Fair Trading Act and the complementary
provisions in the Consumer Protection Act. For posterity, I have
therefore discussed the provisions briefly in the subsequent paragraphs
to flush out relevant provisions the Court could have considered.

Defendants submissions on re-opening transaction under the Loan

Recovery Act

54. The defendant submits as follows : Section 3(1) and (2) of the Loan
Recovery Act, Cap 6:04 of the Laws of Malawi provides:

2. Where proceedings are taken in any court for the recovery of any
money lent after the commencement of this Act, or the enforcement
of any agreement or security made or taken after the
commencement of this Act, in respect of money lent either before
or after the commencement of this Act, and there is evidence which
satisfies the court that the interest charged in respect of the sum
actually lent is excessive, or that the amounts charged for
expenses, inquiries, fines, bonus, premium, renewals or any other
charges, are excessive, and that, in either case, the transaction is
harsh and unconscionable, is otherwise such that a court of equity
would give relief, the court may reopen the transaction, and take
an account between the lender and the person sued, and may,
notwithstanding any statement or settlement of the account or any
agreement purporting to close previous dealings and create a new
obligation, reopen any account already taken between them, and

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 relieve the person sued from payment of any sum in excess of the
sum adjudged by the court to be fairly due in respect of such
principal, interest, and charges, as the court having regard to the
risk and all the circumstances, may adjudge to be reasonable;
and, if any such excess has been paid, or allowed in account, by
the debtor, may order the creditor to repay it; and may set aside,
either wholly or in part, or revise, or alter, any security given or
agreement made in respect of money lent by the lender, and if the
lender had parted with the security may order him to indemnify
the borrower or other person sued.
3. Any court in which proceedings might be taken for the recovery of
money lent by a lender shall have and may, at the instance of the
borrower or surety or other person liable, exercise the like powers
as may be exercised under this section where proceedings are
taken for the recovery of money lent; and the court shall have
power, notwithstanding any provision or agreement to the
contrary, to entertain any application under this Act by the
borrower or surety, or other person liable, notwithstanding that
the time for repayment of the loan, or any instalments thereof, may
not have arrived.

55. In the case of Mulli Brothers Ltd v National Bank of Malawi and
another Commercial Case Number 92 of 2016 (unreported) Sikwese
J. stated the following:
“The court will decide that a transaction is harsh and unconscionable
if it is satisfied from the evidence of the borrower that the interest
charged in respect of the sum actually lent is excessive, or that the
amounts charged for expenses, inquiries, fines, bonus, premium,
renewals or any other charges are excessive. What is excessive will
depend on the circumstances of each case.”
56. Digesting the testimonies, it is agreed that on more than one occasion the
Claimant defaulted in fulfilling their credit arrangement, resulting in the
Defendant charging default/penalty interest as per their contractual
agreement. This resulted in the overall amount owed by the Claimant
becoming so inflated and impossible to clear for the Claimant. This

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 triggered the Defendant moving in and exercising their power of sale over
the securities charged (properties Title Number Mapanga 99 and
Nkolokoti 288 among other securities).
57. With more focus on penalty interest, this is an issue which has been
litigated and decided by this Court in past cases. Both parties have cited
similar cases which they have canvassed from their divergent point of
view.
58. Much as the Defendant has tried to argue that this court is not bound by
the decisions of another court of similar jurisdiction, especially the
decided High Court cases, I am convinced that one should be more than
persuaded especially when the facts and relevant law are similar. I am
more persuaded by the views of the MSCA see Chaponda & Anor. v
Kajoloweka & Ors MSCA Civil Appeal 5 of 2017, which explains a
more detailed preposition,
“The High Court has persistently and consistently upheld this
decision in , Trustees of Women and Law (Malawi) Research and
Education Trust v Attorney General, and very recently in The
State and Attorney General , ex parte Lameck Mtoza and other
ex-employees of Malawi Savings Bank. As stated earlier, the court
a quo chose to depart from binding precedent and did not explain its
reason for doing so. In this regard what Dr. McNight R.E. Machika
observed in his book entitled The Malawi Legal System: An
lntroduction perhaps should help all courts in the conduct of
business that comes before it:
"Broadly stated, the common law doctrine of precedent is to the
effect that each court in the hierarchy of courts is bound by the
principles established by prior decisions of courts above it in
the hierarchy and the courts of equal standing are with certain
qualifications, bound by their own prior decisions (emphasis is
mine). In a practice statement the Lord Chancellor of England
announced modification in the Practice of the House of Lords.
Though the House continues to regard its previous decisions as
normally binding, it now feels free to depart from any decision
"when it appears right to do so." A marked relaxation in the
practice of the court of Appeal too has been noted. One can say

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 very little against judges paying the greatest attention to earlier
decisions of their colleagues in an effort to decide cases as they
have always been decided. Human nature ensures this and
justice according to law demands no less. But more is
demanded by the English doctrine than this. It is that when a
Judge is faced with a decision binding on him because it was
delivered either by a court above him in the hierarchy or by one
of co-ordinate jurisdiction, in theory he is bound to apply the
principle laid down there though to his mind it is clear that the
principle is wrong or incorrect. The doctrine of precedent is used
interchangeably with the principle of stare decisis, which
means to stand by decisions and not to disturb settled matters.
The principle of stare decisis is of ancient origin and the reasons
for it were stated to be stability and certainty in the law,
convenience, and uniformity of treatment of all litigants. The
idea was that a system of law which lacks certainty and
stability would be faulty and undesirable. It would be
impossible for a lawyer to give any dependable advice to a
client. The result would be that the judge would apply to each
particular case his own personal views and would substitute
the desires of the law by his own desires. The decision of the
court would lose all semblance of justice. As Spenser Wilkinson,
C.J. explained in Kharaj v. Khan [1923-1960] ALR. The
result would be that the law will fall into confusion. In this state
of confusion confidence in the honesty and integrity of the
courts and is in their impartiality would not be maintained.
Uncertainty in the law would lead to chaos and a breakdown
of organized society”
59. My understanding of the above position is that, the courts of equal
standing are with certain qualifications, bound by their own prior
decisions. These certain qualifications include, but are not limited to
similar relevant facts and similar relevant law. It would therefore be
appropriate for me to take due consideration to the previous cases on
penalty interest which have been decided by the High Court, especially

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 considering that the MSCA has not yet made a pronouncement on the
same cases on appeal.

Claimants submissions on the law on penalty interest

60. The Claimant submits as follows: Penalty interest, is interest which is

charged when a party defaults on its contractual obligations. It is triggered
by, among other defaults, non-payment of the loan after the prescribed
agreed repayment period has lapsed. see, NBS Bank Limited vs- Modern
Business Management Limited and Henry Redson Mwale Commercial
Case Number 81 of 2012.
61. In Harry Gunda t/a Halls Protective Clothing General Dealers v
Indebank Limited Commercial Case No. 186 of 2015 it was observed that
our statutory laws as they presently stand do not prohibit penalty interest.
It is governed by common law under penal rule.
62. As regards whether penalty interest clauses are penal clauses and therefore
unenforceable, the starting point is the case of Lordsvale Finance plc vs-
Bank of Zambia [1996] QB 752 in which the court was considering a
common form provision in a syndicated loan agreement for interest to be
payable at a higher rate during any period when the borrower was in default.
It was held that the clause was valid because its predominant purpose was
not to deter default but to reflect the greater credit risk associated with a
borrower in default. The Court resonated that;
“no reason in principle why a contractual provision the effect of which
was to increase the consideration payable under an executory
contract upon the happening of a default should be struck down as a
penalty if the increase could be explained as commercially justifiable,
provided always that its dominant purpose was not to deter the other
party from breach…

If the increased rate of interest applies only from the date of default
or thereafter, there is no justification for striking out as a penalty a
term providing for a modest increase in the rate. I say nothing about
exceptionally large increase. In such cases it may be possible to
deduce that the dominant function is in terrorem the borrower”

Page 17 of 33
63. From the Finance plc vs- Bank of Zambia [1996] QB 752, it seems to be
the position that for default interest rates to be enforceable the following
conditions must apply; the increased rate of interest must only apply from
the date of default and the increase in rate must be modest. Thus, the courts
will be unlikely to interfere with such an agreement as long as the rate of
interest is not extortionate.
64. In the local case of Harry Gunda (supra), the Court seemed to agree with
the proposition in the Bank of Zambia case (supra) as regards penalty
interest. The Court stated;
“The 10% is exorbitant compared to the gravest possible loss to be
suffered by the defendant on default by the plaintiff. In my view, 2%
would be a possible genuine pre-estimate of loss. This is in line with
my finding in Speedy’s Ltd v Finance Bank of Malawi at p. 338
para a. that an additional 1.5% interest on accounts in excess of
overdraft was reasonable”

65. However, in the case of NBS Bank Limited vs- Modern Business
Management Limited and Henry Redson Mwale (supra), the Claimant
claimed penalty interest. The Court found that the same was not part of the
parties’ agreement so it could not be awarded. The Court further stated;
“So even if the parties herein had agreed that penalty interest would
be charged on default, there would still have been the need for them
to justify that that interest does not offend the rule against penalties.
In the present case such justification is lacking. Thus, I do not see how
I would have upheld the claim for penalty interest herein.”

66. Further, in National Bank of Malawi Ltd vs- Lilongwe Gas Company
Limited (supra) the Court had reservations with the observations made by
the Honourable Judge in the Harry Gunda case (supra) and indeed the
position in the Bank of Zambia case (supra). Justice Katsala, as he then
was, stated;
“The judge did not explain the basis for finding that 2% would possibly
be genuine pre-estimate of loss following a default. There is no
indication that that he had the benefit of empirical evidence for him to
come to such a conclusion. I do not think that this is a matter which a

Page 18 of 33
 judge can come to such a conclusion without examining evidence.
These observations also apply to the 1.5% suggested in the Speedy’s
case (supra)

In my judgment, compound interest would and does take care of the

fear that may have exercised the judge’s mind to come up with the
suggested percentages of interest.”

67. Thus, in the said case of National Bank of Malawi Ltd vs- Lilongwe Gas
Company Limited (supra), the Court refused to enforce a penal clause in
the contract for the following reasons;
i. The said penal provision was not commercially justifiable at
the time the contract was made in that there was no evidence
that its predominant purpose was not to deter default but to
reflect the greater credit risk associated with a borrower in
default.

ii. There was no relationship between the money to be paid as a

penalty and the loss that was to be suffered or actually
suffered by the Bank as a result of the breach of contract by
the borrower. Thus, the penalty was found not to be a genuine
pre-estimate of the loss to be suffered by the Bank on the
borrower’s defaulting on the instalments.

iii. There was no proof that the Bank had legitimate interest
beyond the compensatory which justified the imposition of the
additional financial burden on the borrower in the form of
penalty interest.

iv. The provision imposed an additional obligation on the

borrower as a punishment for the non-observance of a
contractual stipulation. The said additional obligation was
also found to be secondary with intent to punish the borrower
for any failure to pay the agreed instalments.

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The Court, in the above cited National Bank of Malawi case, concluded
by saying that;
“When money is borrowed on compound interest basis, a borrower
who defaults on repayments pays interest on interest because the
interest which accrues during the period he is in default is capitalized.
This means that when a borrower defaults on loan repayments, he
suffers more interest because the longer he keeps the borrowed
money, the more interest on interest he will pay. In my view, this
takes care of the greater credit risk associated with a borrower in
default. The lender is compensated for being kept out of the use of his
money by the compound interest that continues to accrue on the loan.
It is sufficient compensation for the greater credit risk. As such, there
is no justification for the lender to demand additional interest on top
of the agreed interest simply because the borrower has defaulted on
repayments. Thus, I do not see any commercial justification for a
default interest or indeed a penalty fee. The concept of commercial
justification advanced by Colman J in Lordsvale Finance pie v
Bank of Zambia (supra) and many other cases that applied it (see
Euro London Appointments Ltd v Claessens International Ltd
[2006] 2 Lloyd's Rep 436 and General Trading Company
(Holdings) Ltd v Richmond Corpn Ltd [2008] 2 Lloyd's Rep 475), in
my opinion, does not sound legitimately convincing. To demand
penalty fee and/or default interest at whatever rate is commercially
unjustified. It is simply punishing the borrower for failing to perform
his primary contractual obligation, if not blatant extortion. Surely, the
law should not condone that. It is even more hair raising when you
bear in mind the economy we operate in, where interest rates on the
money market can get as high as 40, 45% per annum or even higher.
To charge 5 or 10% on top of 40 or 45%, or more as penalty interest is
pure profiteering and/or "an example of common practice exploitation
and not banking" (per Dr Mtambo J in Gunda t/a Halls Protective
Clothing General Dealers v Indebank Ltd (supra))…On the
foregoing, it is my judgment that the provision requiring the defendant
to pay a penalty fee of K14,500.00 following a default on repayment
of the agreed instalments is penal. And it is unenforceable.”

Page 20 of 33
Defendants submissions on Penalty Interest

68. The Defendant submits as follows: A penalty is a punishment for non-

observance of a contractual stipulation and it consists of the imposition
of an additional or different liability upon breach of the contractual
stipulation: Legione v Hateley (1983) 152 CLR.
69. The general common law rule is that penalty clauses in contracts are
unenforceable. The origins of this rule can be traced back as far as the
16th Century when the courts at that time were concerned and wanted to
prevent exploitation in an age when credit was scarce and borrowers were
vulnerable. See the landmark case of Cavendish Square Holding BV v
El Makdessi, ParkingEye Ltd v Beavis [2015] UKSC 67, 3 WLR 1373.
70. The mere use of the term “penalty” or “liquidated damages” in a contract
is not conclusive of the rights of the parties to the contract. The court in
the case of Clydebank Engineering and Shipbuilding Company Ltd v
Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6 was determining
whether a clause providing that late delivery was to be penalised under
the contract at the rate of £500 per week was a penalty clause or a
liquidated damages clause. The lower court held that it was a liquidated
damages clause and on appeal, the House of Lords upheld the provision
as a genuine liquidated damages clause stating that though parties to a
contract who use the word “penalty” or “liquidated damages” may prima
facie be supposed to mean what they say, the expression used is not
conclusive.
71. In the case of Dunlop Pneumatic Tyre Co. v New Garagr and Motor
Co [1915] AC 79, the court sought to restate the law on penalty rule. It
distinguished between penalty clauses which are unenforceable and
liquidated damages clauses which are enforceable provided that the
specified sum is a genuine pre-estimate of loss. Lord Dunedin laid down
four tests that were designed to be helpful in determining whether or not
a clause was an unenforceable penalty. The four tests are:
b. It will be held to be penalty if the sum stipulated for is extravagant
and unconscionable in amount in comparison with the greatest loss
that could conceivably be proved to have followed from the breach.
(Illustration given by Lord Halsbury in Clydebank Case.
c. It will be held to be a penalty if the breach consists only in not paying

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 a sum of money, and the sum stipulated is a sum greater than the
sum which ought to have been paid (Kemble v. Farren).
d. There is a presumption (but no more) that it is penalty when “a single
lump sum is made payable by way of compensation, on the
occurrence of one or more or all of several events, some of which may
occasion serious and others but trifling damage” (Lord Watson in Lord
Elphinstone v. Monkland Iron and Coal Co).
e. It is no obstacle to the sum stipulated being a genuine pre-estimate of
damage, that the consequences of the breach are such as to make
precise pre-estimation almost an impossibility. On the contrary, that
is just the situation when it is probable that pre-estimated damage
was the true bargain between the parties. (Clydebank Case, Lord
Halsbury; Webster v. Bosanquet Lord Mersey).
72. In the celebrated case of Lordsvale Finance plc v Bank of Zambia
[1996] QB 752 which is also the leading English case on default interest
rates, the case concerned a syndicated commercial loan agreement in
which a provision was made that in the event of default, the defendant
was to pay interest during the period of default at the aggregate rate of
the cost of obtaining dollar deposits to fund the banks’ participation, the
margin (which was defined as 1.5%) and an additional, but unexplained,
1%. The borrower defaulted and argued that the extra 1% constituted a
common law penalty. Amidst authorities that such clause was penal
and therefore unenforceable, Colman J disagreed and held that the
clause was valid because its predominant purpose was not to deter
default but to reflect the greater risk associated with a borrower in
default. He observed that by defaulting, the debtor had changed the
nature of the agreement and could no longer expect to be charged the
same amount for the facility as he had done previously. The 1% increase
was therefore justifiable.
73. The Lordsvale case was applied with approval in the cases of Cine Bes
Filmicilik ve Yapimcilik v United International Pictures [2004] 1
CLC 401; Murray v Lesuireplay plc [2005]IRLR 946 and Cavendish
Square Holding BV v El Makdessi, ParkingEye Ltd v Beavis (supra).
Lord Mance in the ParkingEye case put it as follows: “in a whole
series of cases across the world, courts have taken the cue from

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 Lordsvale and held that provisions in loan agreements for
uplifting the interest rate for the future after a default should not
be regarded as penalties, save where the uplift is evidently
extravagant”. What constitutes an evidently extravagant uplift was not
defined. Colman J did not attempt to specify the upper limits of
acceptable rates in the Lordsvale case. Even in the Cavendish case, the
UK Supreme Court did not define what is extravagant, exorbitant and
unconscionable. In Clyde case, it was held that it is impossible to lay
down any abstract rule as to what may or may not be extravagant or
unconscionable to insist upon without reference to the particular facts
and circumstances of a particular case.
74. The Supreme Court of England and Wales in the case of Cavendish
Square Holding BV v El Makdessi, ParkingEye Ltd v Beavis (supra)
revisited the law on penalty rule after 100 years since the Dunlop case.
Up until this case, the general principle was that a clause was a penalty
if its primary purpose was to punish breach (i. e. that it was in terrorem)
rather than to compensate the other party for its losses. Consequently,
an alleged penalty clause could be defended on the basis that it
constituted ‘a genuine pre-estimate of loss’ or liquidated damages’. The
Cavendish case is the landmark decision on the law on penalty rule.
The court faulted the four tests laid by Lord Dunedin in the Dunlop
case for earning the status of quasi-statutory when that was not the
intention. The Supreme Court also noted that the Dunlop test has been
applied too rigidly, particularly in cases where there is a clear
commercial justification for including a penalty clause or where there
may be interests beyond the compensation which justify the imposition
on a party in breach an additional financial burden. The Supreme Court
thus found “deterrence” and “genuine pre-estimate of loss” as being
unhelpful and that the test needed redefining hence it set out a new test
for determining whether or not a contractual provision will be
considered penal and therefore unenforceable. The new test is:
Whether the impugned provision is a secondary obligation which
imposes a detriment on the contract breaker out of all proportion to
any legitimate interest of the innocent party in the enforcement of the
primary obligation.

Page 23 of 33
75. Lord Hodge on page 255 expanded on this test stating that the “correct
test for a penalty is whether the sum or remedy stipulated as a
consequence of a breach of contract is exorbitant or unconscionable when
regard is had to the innocent party’s interest in the performance of the
contract”.
76. It has been said that the test in the Cavendish case could be divided as
follows:
1. Has a primary obligation been breached which has
triggered a secondary obligation?
2. If so,
i. is any legitimate business obligation protected by that
secondary obligation? Or
ii. does the secondary obligation impose an obligation that is
extravagant, exorbitant or unconscionable?
iii. The UK Supreme Court also referred to the importance of
considering the circumstances in which the parties entered
into the contract. The court stated the following:
In a negotiated contract between properly advised parties of
comparable bargaining power, the strong initial presumption must be
that the parties themselves are the best judges of what is legitimate
in a provision dealing with consequences of breach.

77. The above cited foreign cases have been discussed in our local
jurisdiction and applied or considered in various degrees in the few cases
on penalty interest.
78. It is the Defendant’s position that the cases are all High Court decisions
which are not binding on this court just as the cited foreign cases. Our
Supreme Court of Appeal is yet to make a decision on the matter. As will
be observed below, the position in our local jurisdiction whether or not
default/penalty interest rate is penal and therefore unenforceable is not
yet settled. The respective Judges decided the cases before them as they
deemed appropriate.
79. See Speedy’s Ltd v Finance Bank Malawi Ltd [2001-2007] MLR (Com)
373. In this case in which the court was not called upon to determine

Page 24 of 33
 whether the additional interest to be charged on amounts in excess of
overdraft was penal and therefore unenforceable, the court itself observed
that it was “customary for a bank to charge extra interest on amounts in
excess of overdraft”. The court then opined that 1.5% was reasonable and
awarded it.
80. It is this additional interest that has been the subject of litigation in this
matter.
81. See Harry Gunda t/a Halls Protective Clothing General Dealers v
Indebank Ltd Commercial Case Number 186 of 2015 (Unreported).
In this case, loan agreements executed between the Plaintiff and the
Defendant provided for interest at the Defendant’s base lending rate then
at 39 % per annum plus a margin of 5% making a total of 44%. On
default, however, the rate would be increased by an additional 10%. The
Plaintiff defaulted in repaying the loans. The total of the default interest
collected by the Defendant was K56,864,112.90. The Plaintiff sued the
Defendant to recover that sum contending that the default interest
collected by the Defendant was a penalty and not a genuine pre-estimate
of loss in that it was held in terrorem of the performance of the primary
obligation to pay debt plus normal interest thereby rendering it void and
unenforceable. The court in that case applied the cases of Dunlop and
Cavedish. The court held that the 10% additional interest on default was
penal and therefore unenforceable. The court found that the 10% was not
a genuine covenanted pre-estimate of the actual damage to be suffered
by the Defendant as a result of breach; rather that it was a penalty in
terrorem of the primary obligation to pay the principal and interest on the
due dates and therefore unenforceable; that the Defendant did not
adduce sufficient evidence to show that there was a legitimate reason for
the additional 10% interest on default in terms of the Plaintiff’s increased
risk on default; that 10% was extravagant compared to the gravest
possible loss to be suffered by the Defendant on default.
82. The court in that case acknowledged that the penalty clause was not
penalty merely because the clause so stated. The court was also quick to
clarify that the decision was not a blanket authority that penalty/default
interest is not recoverable as that would have been inconsistent with the
authorities the Court had referred to and applied. In other words, it is not

Page 25 of 33
 a blanket authority that penalty/default interest is penal and therefore
unenforceable. This is in sharp contrast to the decision in National Bank
of Malawi v Lilongwe Gas Company Ltd Commercial 165 of 2016
(unreported)on and Coal Co) where the court in no uncertain words
stated that any default interest or penalty interest at any rate is not
commercially justifiable but pure punishment to the borrower to perform
his primary contractual obligations.
83. See National Bank of Malawi v Lilongwe Gas Company Ltd
Commerical Case Numbner 165 of 2016 (unreported). In this case, a
loan agreement executed between the Plaintiff and the Defendant
provided for interest at the Plaintiff’s prevailing lending rate and
K14,500.00 for every default. The Defendant defaulted in repaying the
loan. Subsequently, the Plaintiff commenced the action claiming the sum
of K31,424,072.42 plus 10% penalty interest on default. The Defendant
admitted obtaining the loan but argued that he was not liable to pay
penalty interest as the same was unenforceable. He took out a motion
under section 3 of the Loans Recovery Act for the reopening of the loan
transaction. The court found that the parties had not agreed that the
Plaintiff would be entitled to penalty interest of 10% in the event of
default. Rather, that the Plaintiff would charge the defendant K14,500.00
for every default. The court held that the agreed provision on payment of
K14,500.00 in default was penal as the amount was additional to what
the Plaintiff was entitled to and it was also the Defendant’s secondary
obligation to his primary obligation to pay under the contract. The court
went on to hold that the Plaintiff had not adduced evidence to show that
the provision was commercially justifiable at the time the contract was
made. The court disagreed with the reasoning in Lordsvale case. The
court stated that the UK Supreme Court in Cavedish case had serious
misgivings about the test in the Lordsvale case. But as demonstrated
above, the UK Supreme Court applied with approval the Lordsvale case,
in particular on commercial justification. In fact, it is the very reason the
court in Harry Gunda case said that holding that penalty interest is not
recoverable would be inconsistent with the authorities it referred to. The
court then held that any default interest or penalty interest at any rate is
not commercially justifiable. That it is pure punishment to the borrower

Page 26 of 33
 to perform his primary contractual obligations. The court as submitted
above disagreed with the Lordsvale case for not sounding legitimately
convincing. Equally, the court did not agree with the Harry Gunda case
on the acceptable rate of default /penalty interest.

The Court’s Finding on Penalty Interest

84. I have considered all cases cited and others related to the issues at hand.
I have paid much attention to the case of National Bank of Malawi v
Lilongwe Gas Company Ltd Commercial Case Number 165 of 2016
(unreported) and Harry Gunda t/a Halls Protective Clothing General
Dealers v Indebank Ltd Commercial Case Number 186 of 2015
(Unreported), among the many cases canvassed by both parties. My keen
interest and persuasion from the above two cases is based on the fact
that these are the two leading Malawian cases in which the issue of
penalty interest have been extensively discussed by the Courts in Malawi.
The rest of the are from England and other jurisdictions.
85. I distinguish the current case and the case of National Bank and the
Gunda case, because unlike in the National Bank case, in the current
case, the wording of the Contract between the parties clearly provides
that “such claims …will attract a penalty interest”. In the current case,
there is no dispute regarding the construction of the contract, the
nomenclature or its meaning. The Defendant has admitted that they
charged Penalty interest because it was justified based on the risk profile
of the Claimant.
86. The Defendant has justified their imposition of penalty interest. The
Defendant’s witnesses both testified and in cross-examination that the
default/penalty interest rate was never intended to punish the Claimant
as a Borrower. Rather, it was intended to compensate the Defendant for
taking unknown and unmitigated risk on the Claimant. Refer to
paragraph 9 of GP and paragraph 18 of TM. The Defendant through its
witnesses also defended their use of 10% for the unmitigated risk instead
of any other rate. However, my question is then, what is the unmitigated
risk, when the Defendant had used the Claimants property as security
for the same loans? I am of the view that by securing through a charge

Page 27 of 33
 or some form of security, the risk is to a great extent mitigated. The fact
that after default in payment, the Defendant is now able to exercise their
power of sale over the securities shows that the Defendant’s precarious
position has always been protected by the securities (properties Title
Number Mapanga 99 and Nkolokoti 288 among other securities).
87. It is therefore my finding that the imposition of penalty interest on a
secured debt is not commercially justifiable and it is unconscionable.
“Unconscionability” refers not only to the unreasonable terms but to the
behavior of the stronger party, which must be morally culpable or
reprehensible, as the objectionable terms have been imposed on the
weaker party in a reprehensible manner, see Irvani v Irvani [2001]
Lloyd’s Rep.412.
88. It is my finding that the Defendant cannot be compensated through the
penalty interest and also be compensated through the holding of
collaterals such as the securities placed over the properties of the
Claimant at the same time. It is my further finding that the provision
requiring the claimant to pay penalty interest is penal and unenforceable
because the claimant's loans were already subjected to appropriate credit
risk management measures which in turn mitigated any potential loss
that the Defendants would suffer in the event of default. In the face of
this being a secured loan in which the Defendant is holding security over
the Claimant's properties, there was no need to sanction penalty interest,
as reasonable efforts had already been taken to mitigate the unknown
losses by the Defendant. In this case, the penalty interest clause was an
excessive measure that created an additional and unnecessary burden
on the Claimant. If the loans taken by the Claimant were none
performing, then the Defendant ought to have moved in to exercise their
power of sale over the securities. Rather than charging penalty interest
and waiting for the Loan to balloon such that the Claimant is choked in
debt, then move for the final kill by exercising the Power of sale over the
securities. The Defendant clearly had no lawful reason to apply both.
89. The fact that it is an industry norm to charge penalty interest does not
mean that it is appropriate to do so. Commonness does not confer
legality, see Katsala J (as he was then) in National Bank of Malawi

Page 28 of 33
 v Lilongwe Gas Company Ltd Commercial Case Number 165 of 2016
(unreported) in which the Court stated that:
“Thus I am in no doubt that the provision is penal. The argument that
it is the practice in the banking industry to levy such penalties on
borrowers who default on their loan repayments, in my view, does not
change the true nature of the provision. Commonness does not confer
legality. It remains penal, and as such, it is frowned upon by the
Courts”.
90. Similar to the sentiments of Katsala J, I have not reached this decision
without careful consideration of its impact on Banking practice in
Malawi. It is a known fact that it is the business of banks to buy and sell
money. However, such businesses should be done within the boundaries
of the law. Contractual provisions must be legal, see the case of W v
Commissioner of Taxes 5 MLR 135. Banks should not continue to
impose penalty interest as it is punitive in nature. Imposing penalty
interest provisions is an unfair contractual term, and therefore
unconscionable.
91. So to answer the question whether the penalty interest charge is
lawful warranting reopening of the transaction, in light of public
policy, section 3 of the Loans Recovery Act, harsh and
unconscionable or whether the penalty interest charge was fair
compensation based on the Claimants risk profile. My finding is that
penalty interest is not lawful and therefore this warrants the reopening
of the transaction under section 3 of the Loans Recovery Act. It is my
further finding that the penalty interest charge was unfair considering
that the Claimants risk profile is more favourable as it was supported by
the securities (properties Title Number Mapanga 99 and Nkolokoti 288
among other securities) which he surrendered to the Defendant to
mitigate any potential risks for the Defendant in transacting with him.
92. Unconscionable conduct is also well discussed in both local and foreign
case law. I also cite the case of Boustany v Piggot (1995) 69 P. & C.R.
298 the Privy Council stated the following principles which were also
adopted by the Court of Appeal in England in Irvani v Irvani [2001]
Lloyd’s Rep.412:

Page 29 of 33
 1. There must be unconscionability in the sense that the objectionable
terms have been imposed on the weaker party in a reprehensible
manner;
2. “unconscionability” refers not only to the unreasonable terms but to
the behavior of the stronger party, which must be morally culpable
or reprehensible;
3. Unequal bargaining power or objectively unreasonable terms are no
basis for interference in equality in the absence of unconscionable or
extortionate abuse where, exceptionally and as a matter of common
fairness, “it is unfair that the strong should be allowed to push the
weak to the wall”;
4. A contract will not be set aside as unconscionable in the absence of
actual or constructive fraud or other unconscionable conduct; and
5. The weaker party must show unconscionable conduct, in that the
stronger party took unconscientious advantage of the weaker party’s
disabling condition or circumstances.

This case was cited by Katsala J as he was then, in the case of Engen
Malawi V Beatrice Kachingwe Commercial Case Number 260 Of
2015 (Unreported).

93. Much as both parties did not cite nor consider arguing the consumer
protection provisions of the law in Malawi, it is worthwhile to consider
that unconscionable conduct is an unfair trade practice that is prohibited
by the Law in Malawi as well. see Section 43 (1) g of the Competition
and Fair Trading Act which provides that:
“A person shall not in relation to a consumer engage in
unconscionable conduct in carrying out trade in goods or services”

See also Section 6(1) f of the Consumer Protection Act, which provides
that

“(1) A supplier or trader of technology, goods or services shall not engage

in any unfair trade practices”.

Page 30 of 33
94. The courts are willing to set aside a contract where it is shown that the
other party engaged in unconscionable conduct or an unconscientious
use of power, Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd
[1985] 1 All E.R. 303.
95. The Claimant has managed to demonstrate that the application of penalty
interest was unconscionable and it warrants the transaction to be re-
opened under the Loans Recovery Act.
96. This Court will in subsequent paragraphs, make appropriate Orders to
substitute the Penalty Interest charged by the Defendant.
97. I now move onto the next issue for consideration:

ii. Whether the Defendant is entitled to the counterclaim

of MK1,343,203,284.26 and all reliefs thereunder

98. It is admitted by both parties that the Claimant is still indebted to the
Defendant. However, the Defendant is claiming that his debt is
MK1,343,203,284.26, whilst the Claimant is of the view that the debt is
MK136,079,158.91. The Defendant has included penalty interest in his
calculation, whereas the Claimant has removed penalty interest in their
computation.
99. Based on my finding on the unlawfulness of penalty interest, it is my
further finding that the Defendant is not entitled to the amount as
pleaded in their counterclaim, in as far as the reliefs include the addition
of penalty interest. The Defendant is therefore limited in their Counter-
claim and reliefs, to restrict themselves to the amounts due, except for
penalty interest.
100. I will move on to the next issue for determination:

iii. Whether the outstanding balance on the credit facilities

is MK136,079,158.91 or MK1,343,203,284.26

101. Based on my finding on the unlawfulness of penalty interest, it is my

further finding that the Defendant is not entitled to the amount as
pleaded in their counterclaim as outstanding balance, in as far as the
reliefs include the addition of penalty interest. The Defendant is

Page 31 of 33
 therefore limited in their Counter-claim and reliefs, to restrict
themselves to the amounts due, with the exception of penalty interest.
With regard to this finding, this court will Assess the actual amount
outstanding during assessment proceedings so that both parties will
have an opportunity to present their full computation of the amounts
owed, with the exclusion of penalty interest.
102. I will now move on to the next issue.
iv. Whether the Defendant is entitled to realise (sell) the
securities following failure by the Claimant to pay the
outstanding balance

103. With regards to this issue, the Defendant has shown their determination
to exercise their power of sale over the securities properties Title Number
Mapanga 99 and Nkolokoti 288 among other securities. However, it is
my finding that it is premature at this stage to conclude that the
Claimant has failed to pay the outstanding balance. This is because the
application of penalty interest has provided an inaccurate figure to be
sanctioned as the outstanding balance. The inaccuracy is arising out of
the application of the penalty interest charge.
104. It is therefore my finding, and directions, that the Defendant is entitled
to realise (sell) his securities (properties Title Number Mapanga 99 and
Nkolokoti 288 among other securities) only if the Claimant fails to pay
the outstanding balance 30 days after the court issues an Order of
assessment of the amount owed.
105. I will move onto the next issue for determination.

vi. Whether the Claimant is entitled to the claims in the

Statement of Case

106. It is my finding that the Claimant is entitled in part to the claims in the
statement of case because he has successfully argued the critical heads
of arguments that have a bearing on the final outcome of the case.
However, the Claimant is entitled to what this Court will Order in the
next paragraphs.

RULING

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 107. In conclusion, therefore, the Claimant has been successful in some but
not all the substantive heads of arguments.
108. It is my finding that the Defendant is liable to rectify the computation
and only after they have not been paid their amounts owed by the
Claimant, should they move in on the securities.
ORDER
109. It is ordered that the Claim is successful in part.
110. The Counter-claim is not successful in full, pending assessment and
payment of amounts due to the Defendant. The counter-claim has only
been dismissed to the extent of the Penalty interest, however, part of the
Counter-claim is lawful.
111. It is further Ordered that each party pays its own costs as it is fair that
each party bears its own costs. In the same vain, I will not award the
Defendant debt collection costs as pleaded as the Claim lacks merit, see
Perfecto Pest Control (PVT) Ltd vs- Malawi Leaf Company Limited,
Civil Cause No. 261 of 2012, see also J.L. Kankhwangwa and
Others –vs- Liquidator Import and Export (MW) Limited, M.S.C.A.
Civil Appeal Number 4 of 2009.
112. The assessment of the amount owed by the Claimant shall be done by
the Assistant Registrar within 30 days of this Judgement.
113. The Claimant shall pay all the amounts assessed within 30 days of the
Order of Assessment.
114. Should the Claimant fail to pay the assessed amount in full within the
stipulated period, the Defendant shall proceed to exercise its power of
sale over the securities held.
115. Should the parties opt to compute jointly the amount owed by the
Claimant, both parties can settle the amount through an agreed Order
which should be filed with this Court within 30 days of this Order.

Pronounced in Open Court in Blantyre this 7th day of December 2023

……………………………………………
Charlotte Wezi Mesikano Malonda
JUDGE

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