Chrismar Hotel Limited v Stanbic Bank Zambia Limited (Appeal 155 of 2016) [2017] ZMSC 20 (3 March 2017)

SCZ SELECTED JU;DGMENT No. 06 OF 2017 P. 160 IN THE SUPREME COURT OF ZAMBIA HOLDEN AT LUSAKA Appeal No. 155/2016 (Civil Jurisdiction) BETWEEN: CHRISMAR HOTEL LIMITED APPELLANT AND STANBIC BANK ZAMBIA LIMITED RESPONDENT Coram: Malila, Kajimanga and Mutuna, JJS On 1st November, 2016 and 3 rd March, 2017 For the Appe llant: Mr. E . B. Mwansa, SC of Messrs EBM Chambers with Ms. D. Findlay of Messrs D. Findlay & Associa tes. ;,.,,, .. For the Respondent: Mr. S. Mambwe of M~ssrs Mambwe, Siwila & Lisimba Legal Practitioners. JUDGlV4ENT Malila, JS, delivered the Judgment of the Court Cases referred to: 1. Musonda v. Investrust Bank (Plc) Appeal No. 198/ 09. 2. Bwnett v. Westminster Bank Ltd. /1966} 1 OE 742. 3. Investrust Bank Plc. v. Alice Sakala T/ A Mutunga Enterprises Appeal No. 195/2015 [SCZ/8/317/2015]. 4. Herbert v. Salisbury and Yeovil Railway Co. /1866] LR 2 q. 221. '• P. 161 J2 5. MCD Civil and Mechanicale Engineering Ltd, Davies Mwenya and Gaumont Bank Ltd. [Selectedjudgment No. 4 of 2015} 6. Union Bank Zambia Ltd. v. Southern Province Cooperative Marketing Union [1977} SCJ. 30. 7. Credit African Bank Limited (in liquidation) v. John Dingani Mudenda [2003] ZR 66. 8. Investrust Bank Plc. v. Samuel Banda TI A Lukusa General Suppliers [Appeal No . . 198/2015}. 9. Trade Kings Limited v. Unilever Plc. and Chesebrough Ponds (Z) and Lever Brothers (Z) Ltd. [2000} ZR 16. 10. Foley v. Hill (1848) 2HLC 28. 11. Bank of the North Limited v. Bernard [1976-1984} 3 NB KR 104 at 109. 12. Falcke v. Scottish Imperial Insurance Company. 13. Gamet v. McKewan [1872} LR 8 Ex.10. 14. Halesowen Presswork Ltd. v. Westminster Bank f 1971} 1 QB 1. Other works referred to: 1. Banking and Financial Services (Cost of Borrowing) Regulations. 2. Halsbury's Laws of England 4 th edn, vol. 3 page 115 para. 155. Bank charges, especially those not expressly agreed to by customers, are increasingly becoming a worrisome consumer controversy in this country. Many a bank customer have quietly grumbled about what is viewed as unagreed debits on customers' accounts made up of variously labeled bank charges. This coupled with the seen1ingly unlimited authority of banks to do what they wish with customers' accounts 1n ensuring their profitability, has generated considerable -- ------.. ---~ J3 P. 162 resentment to so1ne banking practices by consumers of banking services. What precipitated the dispute that ultimately birthed this appeal are some allegedly predatory banking practices undertaken by the respondent bank in respect of the appellant's accounts held with it. The appellant has had a long standing banking relationship with the respondent and held accounts with it through which the appellant enjoyed · credit facilities such as mortgages and debentures availed to the appellant on diverse occasions. In the first half of 2008, the appellant approached the respondent with a view to obtaining some finance leases for certain earth moving and other equipment. The respondent acceded to the appellant's request. Consequently, eight individual, identically worded, finance lease agreements were executed by the parties, each such lease agreement specifying the amount financed together with the finance charges payable for the duration of the facility. The aggregate sum involved in those leases amounted to US$1. 7 million and was secured by I ... P. 163 J4 third party mortgages over Stand No. 4772/M, Chudleigh, Lusaka and Stand No. 6982/3, -Lusaka. Repayment of the sums due under the leases was to be made in monthly installments over a period of sixty (60) months ending on the 30th May, 2013. At the end of the lease period the total repayment was to be US$2,280,121.00. Default in any monthly payment was to attract interest, calculated daily in arrears on the outstanding amount. The appellant's version of events is that it commenced repayments and made a total payment of US$2,036,146.35 up to the 30 th October, 2012 and thereafter an additional lump sum payment of US$377,022.08 on the 4 th December, 2012, bringing the total sum repaid to US$2,413.168.43. The appellant claimed that the respondent, in breach of the terms of the lease agreements, applied and continues to apply various interest charges together with additional charges and expenses which interest and charges were debited to the appellant's account without preferring to the appellant a satisfactory, let alone plausible explanation despite being entreated by the I ... P. 164 JS appellant to do so. The appellant also complained that contrary to the agreed terms on default interest, the respondent applied interest at the rate of 17 per centum per annum, besides the additional charges which the parties did not agree to or specify in the finance lease agreements. The appellant particularised the additional charges applied by the respondent as being: extension charges, late charges, arrears, overdraft cover charges, interest over and above the agreed base rate and an alleged loan facility. The appellant also claimed that contrary to the Banking and Financial Services (Cost of Borrowing) Regulations 1995, the respondent applied penal and/ or default interest totalling US$166,133.00. Furthermore, that the respondent, employing a method not sanctioned by the finance lease agreements, computed and demanded that the appellant pays an additional US$419,515.84 and has refused to release the securities held in respect of the facility until payment of the sum allegedly due is made. • ' J6 P. 165 The respondent, for its part, denied most categorically that any irregular payments or payments unsanctioned by the lease agreements were ever charged, or that it engaged in any practice in relation to the appellant's facilities which were contrary to the law, the agreements between the parties or established banking practice. While admitting that the sum of US$2,280,121.80 had been paid by the appellant, the respondent maintained that the same did not take into account Value Added Tax (VAT) and the fact that the failure by the appellant to abide by the repayment schedule naturally affected the interest calculations. It was the respondent's position that the agreement provided for compound interest which was subject to variation. Additionally, that the extension charges were agreed between the parties 1n the finance lease agreements. They arose as a result of three factors: (a) a change in the base rate from 10 to 12 per centum in November, 2008; (b) a restn1cturing of the facility; and (c) late charges - interest charged on any overdue installments as agreed in the lease agreements. The respondent avouched that the lease agreements provided that an amount would be paid on a ' I J7 P. 166 monthly basis towards the debt and, therefore, the respondent was entitled to interest on any delayed payments. As regards overdraft cover charges, the respondent insisted that the repayment plan on the facilities was such that the appellant would deposit funds in the transaction account. The respondent only collected from that account funds available and applied such funds to the lease repayments as they fell due. Finally, it was the respondent's position that all interest rates were charged as per lease agreement. The learned trial judge heard evidence on behalf of the parties. He also examined the documents tendered in court. He identified two issues as deserving of actual determination and that all other claims by the appellant would follow the determination of those two issues. The first of these issues was whether, having paid the amount of US$2,413, 168.43 before the expiry date of the facility, the appellant settled its liability in full over and above the amount of 0S$2,280, 121.80, being the amount the parties had agreed would be paid up to the end of .. ·· - ··- . .. JS P. 167 the facilities. The second was whether the respondent charged penal interest on the appellant's account. In his judgment given on the 23 rd May, 2016 and now being assailed through this appeal, the learned judge found against the appellant on all its claims except on the issue of VAT. He dismissed the action with costs . It is against that judgment that the present appeal has been launched. The eight grounds of appeal raised are couched in the following terms: "1. That there was no overdraft agreement between the appellant and the respondent, therefore, the respondent was not authorized to create an overdraft and charge overdraft cover charges, therefore, the court below erred in law and in fact in holding that the respondent could apply overdraft cover charges and apply ~ -' these to the appellant's facility. [sic!] 2. The court below erred in law and in fact in failing to address the issue that as there was no agreement or authority from the appellant to the respondent to transfer amounts from the Kwacha Account to the Dollar Account and vice versa, the respondent's unauthorized transfers and creating of overdraft as a result thereof were therefore, wrong and illegal, and subsequent variation of interest charge of 17% and 34% illegal and wrong. [sic!] I [\ \ J9 P . 168 3. That the court below erred in law and in fact in holding that the respondent could overdraw the appellant's account by way of standing orders to cover the lease facility payments and charge interest on the overdraft so created and still apply late charges for the payment of the lease, which ought to have been paid by the overdraft so created. 4. That the court erred in law and in fact when holding that although the agreements between the appellant and the respondent did not provide for extension charges the respondent could unilaterally apply and charge extension charges that were neither communicated to the appellant nor agreed upon, contrary to the terms and conditions of the agreement entered into between the parties. 5. The court did not consider that although the restructuring fee was applied and charged to the appellant on 19th June, 2010 to facilitate the reduction of the monthly installment to US$25,000.00, the respondent continued charging the appellant interest on monthly installment over and above the restructured amount and as such the court erred in law and in fact. 6. The court below erred in law and in fact in failing to address the issue raised by the appellant that the total of all extension charges charged to the appellant was the total sum of US$336,066.32 as per letter dated 9 th August, 2011 as referred to by the court at page J73 of the judgment, whereas the amount actually explained by the respondent in its reconciliation was only US$188,435.08, clearly exhibiting that the difference was late charges or penal interest as per clause 11.3 of the finance lease agreement. JlO P. 169 7 · The court erred in law and in fact in holding that clause 2.4 and clause 11.3 of finance lease agreements are intertwined and both relate to compound interest. 8. The court erred in law and in fact in failing to consider that the late charges were applied by the respondent in addition to compound interest, which are in nature and contrary to the provisions of the Banking and Financial Services (Cost of Borrowing) Regulations, Statutory Instrument Number 179 of 1995 of the Laws of Zambia. I I \ I I I l i I I Both the appellant's and the respondent's counsel filed heads of argument upon which they mainly relied at the hearing of the appeal. State Counsel Mwansa and Ms. Findlay, who appeared for the appellant, argued the eight grounds in three, clusters as follows: grounds one, two and three on the overdraft were argued together. Grounds four and five on extension charges, were treated together while grounds SIX, seven and eight were also argued compositely. In regard to the first cluster of the grounds of appeal, the learned counsel for the appellant made the point that there was no overdraft facility between the appellant and the respondent and that the respondent was, therefore, not authorized to I I \ I I I I I ' \ \ I l ' ' Jll P. 170 create an overdraft and charge overdraft charges. It was according to the learned counsel, a misdirection on the part of the trial court to fail to recognise the fact that in the absence of an agreement or authority from the appellant to the respondent to transfer amounts of money from the appellant's Kwacha account to the appellant's US Dollar account and vice versa, any such transfers were wrongful and illegal. Likewise, argued the learned counsel, the court erred in holding that the respondent could overdraw the appellant's account by way of standing orders to cover the lease facility payments and charge interest on the overdrafts so created and still apply late charges for late payment of the lease. To help illuminate the appellant's grievances, counsel for the appellant raised the following questions: (i) whether there was any agreement between the appellant and the respondent for an overdraft facility; (ii) whether the respondent could apply overdraft cover charged if there was no agreement between the parties for an overdraft; I I I I i I J12 P. 171 (iii) whether clause 14 of the lease finance agreements authorized the transfer from Kwacha to US Dollar accounts and vice versa by the respondent thus creating a facility for which the respondent could charge overdraft cover charges; and (iv) whether the respondent could overdraw the appellant's account by way of standing orders to cover the lease payments and charge interest on the overdraft so created. In answering these questions, the learned counsel for the appellant referred us to the evidence from various portions of the record of appeal. In regard specifically to the first question whether or not there was agreement for an overdraft facility, we were referred to the evidence of DW 1 in cross-examination where the witness confirmed that the appella nt did not request for an overdraft facility from the respondent. Counsel argued that a perusal of the record of appeal shows no evidence whatsoever that the appellant accepted any terms and conditions for an overdraft facility or on the interest applied on I I I I ! i I i \ ' ' I I , ! i i i \ \ I I ' I I I I i \ I l I I i ' . I Jl3 P. 172 the overdraft facility, neither is there any evidence of the appellant being notified of the same. What the evidence on record shows, according to the learned counsel for the appellant, is that the appellant continuously queried and advised that there was no need to create an overdraft. This, notwithstanding, the trial court formed the view that the respondent could apply and charge overdraft cover charges reasoning that 'it was not an overdraft facility per se but overdraft cover charges,' and justified its view on that basis. As regards the transfer of monies from the K wacha to the Dollar account and vice versa by the respondent, the trial court found that this was authorised by common clauses 14. 1 and 14.2 of the finance lease agreements as well as the standing orders. We shall quote these provisions later on in this judgment. The court also held that the standing orders operated in such a way that the overdraft would be created if there were insufficient funds in the account at the time payment was due. After quoting the provisions of clause 14.1 and 14.2, the learned counsel for the appellant submitted that -~ - --- -·•-·-------- J14 P. 173 the trial court vvas wrong in its holding because the facility was in United States Dollars and, therefore, payments were to be made from the appellant's current Dollar account and the standing orders were in respect of the appellant's current Dollar account. In these circumstances, contended the counsel for the appellant, a situation where the Kwacha account became overdrawn ought not to have arisen. In regard to common clauses 14 of the finance lease agreement, the learned counsel contended that although that clause authorised the respondent to transfer money in any of the appellant's accounts towards settlement of its debt, that clause specified that it was particularly in respect of money ,r~ • • ' I ' I paid in by the lessee. Therefore, where no money was paid into or was otherwise made available in the Kwacha account, the respondent did not have authority to debit that account and thus create an overdraft. In fact, argued the learned counsel for the appellant, clause 14 did not mal<e any specific reference to debiting an account that had no money. In this case, therefore, the Kwacha account should not have been debited to -·- - - - - - . J15 P. 174 create an overdraft situation resulting in the application of a unilaterally determined interest rate . According to the learned counsel, the overdrawing on the Kwacha account was a creation solely of the respondent, and the appellant had no role in bringing the situation about. The respondent debited the Kwacha account creating an overdraft to pay the lease monthly installments and applied interest of 36°/o to 37%. In orally supplementing the arguments on the overdraft grounds, Mr. Mwansa, SC drew our attention to clause 17 of the lease agreements regarding non variation and indulgence. He submitted that by its actions the respondent was in breach of that provision. The second limb of the argument put forward by the learned counsel for the appellant appears to b e a logical extension of the argument on the first limb, namely, that if an overdraft was created to pay the lease accounts, there would have been no instances of default in the lease accounts and, therefore, default interest should not have been charged by the respondent. There would, likewise, have been no need for J16 P. 175 clause 2.4 and clause 11.3 to have applied. We were referred to the testimony of PW 1 in the record of appeal which appeared to confirm this position. It was further submitted that the trial court failed to take note of the critical issue whether or not the respondent ought to have applied overdraft charges as well as default interest. Learned counsel referred us to the evidence of PW 1 which confirmed that the respondent imposed both overdraft charges and default interest. It was contended further that the trial court accepted the testimony of DWl in relation to the standing orders which were deemed to have created the overdraft when no funds existed in the appellant's account. The judge noted that respondent needed to be covered by a set off or the account would attract interest. The accounts did, in fact, attract interest and the respondent charged overdraft charges and d efault interest. The learned counsel referred us to the standing orders which, as we have intimated, are common provisions to all finance leases, and submitted that those standing orders J17 P. 176 specified the account to be debited by number, being the appellant's Dollar account. This being so, the respondent could not unilaterally change the terms agreed to by the parties and create a facility in respect of which it applied a higher interest rate as a result of the overdraft created. We were referred to our judgment in the case of Musonda v. Investrust Bank (Plc) 1 where we held, on the facts of that case, that the respondent's bank had departed from the terms and conditions contained in the facility le tte r which formed the loan agreement between the parties and, therefore, that the charging of increased interest by the bank wa s punitive and illegal. It was counsel's prayer that in this ca s e we may find as we did in the Musonda 1 case that the respondent's unilateral creation of an overdraft facility was in breach of the agreement and, therefore, that the charging of interest outside what was agreed upon by the parties was punitive and illegal. Counsel implored us to uphold grounds one, two and three of the appeal on the foregoing basis. Jl7 P. 176 specified the account to be debited by number, being the appellant's Dollar account. This being so, the respondent could not unilaterally change the terms agreed to by the parties and create a facility in respect of which it applied a higher interest rate as a result of the overdraft created. We were referred to our judgment in the case of Musonda v. Investrust Bank (Plc) 1 where we held, on the facts of that case, that the respondent's bank had departed from the terms and conditions contained in the facility letter which formed the loan agreement between the parties and, therefore, that the charging of increased interest by the bank was punitive and illegal. It was counsel's prayer that in this case we may find as we did in the Musonda 1 case that the respondent's unilateral creation of an overdraft facility was in breach of the agreement and, therefore, that the charging of interest outside what was agreed upon by the parties was punitive and illegal. Counsel implored us to uphold grounds one, two and three of the appeal on the foregoing basis. Jl9 P. 178 nonetheless held that those charges were justified as they came about as a result of the appellant's own request for the restructuring of the lease facilities. Counsel posited that the said extension charges and the attendant costs, like its terms and conditions, were not agreed upon by the parties. Counsel also strongly oppugned the respondent's justification of the extension charges on the basis of a change in the base rate in November 2008 and a reduction in the monthly repayment. Counsel insisted that as is clear from the evidence of DW 1 in cross examination the appellant was not notified in writing of the restructuring fee in the sum of US $85,809-40 and that the correspondence relied upon by the respondent does not confirm notification of the fees to the appellant. Again, the learned counsel referred us to clause 17 of the finance lease agreement on non variation and indulgence and submitted that under that clause, any changes 1n the agreement ought to have been in writing and signed by both parties. By unilaterally applying extension charges to restructure the facility, the respondent was in breach of the J20 P. 179 finance lease agreement. To buttress the point that the bank has a duty to its customer to advise the customer of any new terms and to ensure that such advice is received by the customer who must understand the consequences of failure to comply, the learned counsel referred us to the case of Burnett v. Westminster Bank Ltd. 2 . The learned counsel also referred to the case of Investrust Bank Plc. v. Alice Sakala T / A Mutunga Enterprises3 on the freedom of parties to contract on agreed terms. In r egard specifically to ground five of the appeal the learned counsel noted that on the evidence on record, an extension charge of the restructuring of the facility was applied on 29 th June, 200 l and was in the sum of US $85,809-40. This was charged so as to restructure the facility in order that monthly repayments would be down to US $25,000 from US $39,000 per month. Despite all this, however, the respondent continued charging the appellant the original monthly r epaym ent rate. We were invited to consider the effect of this anomaly, notwithstanding the absence of an agreement in .. --- ---- - ----· -··---- Ii il I' ;1 Ii I, I I i I I l i l I l I l I ; I I l J21 P. 180 writing between the parties. Counsel drew our attention to the record of appeal which showed that on 1 st December, 2010 the unpaid lease rentals after the restructuring of the facility was reflected as US $28,410 rather than US $25,000 which should have been payable had the restructuring been effected. It was for this reason that the learned counsel submitted that the trial court was wrong to hold that the restn1cturing was for the appellant's benefit. We were urged to uphold these grounds of appeal. Regarding grounds six, seven and eight, the learned counsel for the appellant assigned error on the part of the trial court in failing to address the issue raised by the appellant that the extension charges imposed on the appellant totaled $336,066-32 while the actual amount explained by us the respondent in its reconciliation was only US $188,435-08 . The difference in these amounts could, according to counsel for the appellant, be explained only in tenns of late charges and penal interest. ·1 '\ :i " ' ; ! , I \ I J22 P. 181 The second point of grievance in regard to this cluster of grounds of appeal is that the court fell into error when it held that clause 2.4 and clause 11.3 of the finance lease agreements are intertwined and both relate to compound interest. The third point was that 1n failing to consider that late charges, which are penal in nature, were applied by the respondent in addition to compound interest, the trial court fell into error. After referring to the specified rate of interest in the offer letter and recapping the provisions of clause 11.3, the learned counsel answered the question posed by themselves in the negative; that the default rate is different from compound interest. Counsel submitted that the parties agreed to the charging of compound interest in clause 2.4 of the lease agreement. However, the default interest was an additional type of interest applied over and above the agreed rate of interest and imposed in the event of default. According to the learned counsel, clause I \ I \ I I J23 P. 182 2.4 of the lease agreement referred to interest on delayed payments which is to be compounded. Clause 11.3 on the other hand related to additional interest to be applied in default which is likewise to be compounded. Therefore, clause 2.4 and 11.3 gave nse to distinct consequences. It was counsel's contention that clause 11.3 imposed punitive interest of 10% above the base rate of 10% and that this could not be equated to compound interest. According to counsel, punitive interest is illegal in this country. Counsel cited Regulation 10(1) of the Banking and Financial Services Act (Cost of Borrowing) Regulations . They also cited numerous authorities, both local and foreig n , in which the courts consistently stated that penal interest is proscribed . These include Herbert v. Salilsbury and Yeovil Railway Co. 4 and our judgment in MCD Civil and Mechanics Engineering Ltd, Davies Mwenya and Cavmont Bank Ltd5 . Counsel also cited Union Bank Zambia Ltd. v. Southern Province Cooperative Marketing Union6 and Credit African Bank Limited (in liquidation) v. John Dingani Mudenda 7 . -------·- -- ··- - - -· -· ·- - J24 P. 183 Counsel submitted that clause 11.3 of the finance lease agreements, which imposed an additional 10%i interest charge when default occurs is penal in nature and should, therefore, be held to be illegal notwithstanding the fact that the parties had agreed to it. For the latter submission, counsel referred us to the case of Investrust Bank Plc. v. Samuel Banda T / A Lukusa General Suppliers8 and quoted a passage from that judgment as follows: "Penal interest on the other hand, is illegal. Even where there is an express agreement between the parties allowing the charging of such interest, it is unenforceable ... " It was submitted that this court should hold as it did in the Investrust case 8 that notwithstanding the parties' agreement the provision relating to penal interest is illegal and, therefore, that any penal interest charges should be reversed. With regard to ground six specifically it was argued by counsel for the appellant that the extension charges applied by the respondent were US$365,066.32 yet, the respondent only offered an explanation for the sum of US$175,997.67, leaving an unexplained balance which, in the view of the appellant, is J25 P. 184 penal interest. Counsel argued that this issue was not addressed by the lower court contrary to the direction that this court has provided to trial courts in many cases including Trade Kings Limited v. Unilever Plc. and Chesebrough Ponds (Z) and Lever Brothers (Z) Ltd9 . It was for all these reasons that we were urged to uphold the appeal on all grounds. At the hearing of the appeal, both State Counsel Mwansa and Ms. Findlay made supplementary oral submissions to buttress the written heads of argument. They also clarified a number of points put to them by the court. Mr. Mambwe, learned counsel for the respondent, was rather brief in his submissions. He placed reliance on the heads of argume nt filed on 25 th October, 2016. In those heads of argument, the learned counsel supported the conclusions made by the trial court in regard to the overdraft charges. He submitted that the lower court was right in holding that there was no overdraft per se but what was charged were overdraft charges. This, according to counsel, is supported by the fact that the appellant admitted having failed to repay the leases in . ··- - -·- - - - - - -- - - - ···- J26 P. 185 the manner agreed and thus fell into arrears, and that there was a standing order on the Dollar account by which the appellant's account was automatically debited when there was no money provided by the appellant, thereby creating an overdraft. In apparent contradiction with the position taken by the learned trial judge that there was no overdraft per se the learned counsel for the respondent submitted that the overdraft was created by the appellant's initial authority via a standing order to the respondent to debit this account. The respondent was accordingly entitled to charge the overdraft cover. Under ground two it was contended that the ground itself was factually incorrect as the court did not fail to address the issue of whether or not there was agreement or authority between the parties to transfer amounts between the appellant's Kwacha and the Dollar accounts. We were referred to the record of appeal. After construing clause 14. 1 of the lease, the learned counsel came to the conclusion that in terms of the agreement and the standing orders alluded to in the - -- ·· - · · - -- - J27 P. 186 arguments relating to ground one, the respondent was within the terms of the lease to create the overdraft and to charge for them. In responding to ground three of the appeal, it was submitted on behalf of the respondent that the issue of late charges is quite distinct from that of overdraft cover charges. The issue of late charges, according to counsel, was specifically addressed by the court as having been grounded in the provisions of clauses 2.4 and 11.3 of the lease agreements. The respondent was accordingly entitled to charge compound interest on late payments and for the overdraft created. In these circumstances, argued counsel for the respondent, the case of Musonda v. Investrust Bank1 referred to by the appellant is not applicable . Regarding ground four of the appeal, the respondent's counsel once again made very laconic submissions. He argued that the court below dealt with the issue of restructuring in its judgment at J72. According to Mr. Mambwe, the evidence on record shows that at the request of the appellant the monthly ---- - - -- - . ~--·- - - - --·- - · -· -- -- J28 P. 187 repayments were reduced from US$29,000 to $25,000 and this inevitably attracted extension charges; that this request was within the ambit of clause 17 of the lease agreements. He referred to the case of Burnett v. Westminster Bank2 which was cited by the appellant's counsel and quoted a passage that reads : "when there is a new arrangement and the customer has signed the application, then obviously he is bound .... " In the present case, according to the learned counsel, extension charges emanating from the restructuring were agreed to and were at the instance of and for the benefit of the appellant. Responding to ground five of the appeal, counsel for the respondent submitted that ground five did not form part of the ratio decidendi of the lower court's judgment and it was, therefore, irrelevant that it may not have been specifically addressed. J29 P. 188 In his brief reaction to the arguments in respect of ground six of the appeal, Mr. Mambwe submitted that the lower court did not need to specifically delve into the disparate figures presented by the parties. It was sufficient that the principles behind the decision on the reliefs sought were stated. He offered no justification for this submission. He also submitted that the trial court sufficiently addressed the issue of late/ penal interest. Turning to ground seven of the appeal, counsel for the respondent maintained that the lower court's interpretation of clause 2. 4 and clause 11. 3 of the leases that the leases were intertwined and related to compound interest, was correct. As regards ground eight, it was contended that a reading of regulation 10(1) of the Banking and Financial Services (Cost of Borrowing) Regulations reveals that a bank or a financial institution is allowed to charge interest on overdue payments and this is not penal. There was no evidence laid before the lower court that any interest charges were penal. J30 P. 189 At the hearing of the appeal, Mr. Mambwe orally clarified a number of issues at the instance of the court. We were beseeched to dismiss the whole appeal. We are grateful to counsel for both sides for their lucid submissions from which we have immensely benefited. We have ~ scrupulously considered the appellant's claim and the respondent's defence against the evidence on record and the arguments that were so ably debated by the learned counsel for the parties. In our considered view, counsel for the appellant has usefully summarized the issues that ought to be appraised in order to determine the first cluster of grounds, namely, grounds one, two and three regarding the overdraft. The pivot upon which the appeal on those three grounds oscillates is that the r espondent bank had no authority whatsoever to create an overdraft which attracted charges to the account of the appellant. And here, it is important to keep the distinction between a loan and an overdraft firmly in mind. A loan is a specified, d efinite amount advanced to the borrower. It is a matter of special arrangement between a banker and a - · - - · - - - - ·--- - - - --- .... J31 P. 190 customer. An overdraft facility, on the other hand, is not a loan in the sum approved which the customer may withdraw at once and which is to be debited against the customer's account. Rather, it is a credit facility enjoyable by the customer on a gradual, as-needs-arise basis to the maximum amount approved by the bank. The limit of the overdraft sum need not be reached by the customer. As we have already intimated the real question determinative of the three grounds under this cluster is that posed by the learned counsel for the appellant in their submissions: was there any agreement for the creation of an overdraft facility, or could the provisions of the lease agreements be construed to have given the respondent sufficient authority to create such an overdraft, or indeed does the common law as it relates to banking allow a bank in the circumstances of the respondent to create an overdraft in the manner the respondent did? This in our view is a fundamental question deserving a fundamental answer as it defines what a banker can and cannot do in regard to a customer's account . ------ - - - - - - - - ·- - --- -- - - -- J32 P. 191 without having a cross-the-table discussion with the customer. The answer to this question should equally be critical as it depends, in our estimation, partly on the construction of the facility documents and partly on the common law powers of a banker. In any case, it is incumbent upon the banker when challenged to explain why it has taken .. <:1 certain course of action in regard to a customer's account without the customer's concurrence, to justify its action by pointing to a legally sanctioned reason empowering it to do so. We must observe that the relationship between a banker and a customer is anchored in the authority and the consensual relationship between the parties. That relationship comes into existence by means of a contract to open an account. The terms of that contract, in the majority of cases, are not expressly agreed but are impliedly those usual in the I I I i banker-customer relationship. It is not one of the terms of that relationship that the banker will lend to its customer, though there is a tacit understanding that the banker will readily consider a request for a loan from its customer. Where a loan is J33 P. 192 asked for, and agreed to, it becomes a separate contract giving rise to what the House of Lords in Foley v. Hill 1° termed as a 'super-added obligation' to the main contract between the parties. This in effect means that a customer has no legal right to a loan or an overdraft. It has to be specifically applied for and the banker has the prerogative whether or not to grant the request. Likewise in the absence of an agreement, express or implied from a course of business, bankers are not bound to allow their customers to overdraw their accounts. An agreement for an overdraft must be supported by good consideration and it must b e express or implied. (See Halsbury's Laws of England 4th edn, vol. 3 page 115 para. 155; Bank of the North Limited v. Bernard11 ) . Conversely, and more pertinently for the present purpose, a banker will not grant its customer an overdraft if the customer does not request for it, nor moreover should an overdrt;l.ft be given to a customer who does not want it. To use the words of Bowen L J in Falcke v. Scottish Imperial Insurance Company12 given in a different context, but nonetheless relevant here: ... - ·-- ---·- ·- -- . · -·- - - - - ----- ------- - - J34 P. 193 "Liabilities are not to be cast on people behind their backs any more than you can confer a benefit on a man against his will." In this case, there is no contest that the overdraft was indeed created. It is also quite rightly common ground that, that overdraft was created following the respondent's default. It is equally not disputed that charges were levied arising from the overdraft so created. We must observe that we are disconcerted by the observation which the learned trial judge made that what was created was not an overdraft per se, whatever he meant by that expression . We say so because both parties, in fact, readily agreed that an overdraft was created. The evidence on record, particularly the responses of DW 1 1n cross examination, clearly shows that there was no agreement whatsoever between the appellant and the respondent for the respondent to create the overdraft facility. The respondent, however, explained that the creation of this overdraft was prompted by the appellant's default and was, in any case sanctioned by the standing order given by the appellant to the respondent to debit his account. ·----- - ----- --· - · - · - - ·· - -- -- -- - ·---- - · ·--·· - - - - ---- J35 P. 194 Mr. Mwansa, SC, in his submissions drew to our attention the common provisions of clause 17 of the lease agreements regarding variations and indulgence. That clause requires that any variations of the terms of lease had to be agreed in writing by the parties. If, therefore, there was no agreement initially for the respondent to create the overdraft on the appellant's account, it follows that the creation of such an overdraft facility should have complied with clause 17. We h ave examined the facility letter of 29th May, 2008 . It sets out the security for the lease facility, and other approval conditions. There is no mention anywhere in that letter about an overdraft facility . We have also perused the lease agreements which are standard for all leases. There is no reference whatsoever to an overdraft facility. Clause 17 which State Counsel Mwansa referred us to does indeed require any variation or indulgence of the lease agreements to be in writing and signed by the lessee and the lessor. No evidence of such variation was produced before the trial court. - - - - · - . ···----- - -- - J36 P. 195 The respondent has put forth an argument that common clause 14.1.1 and 14.1.2 of the finance lease agreement, as well as the standing order allowed the respondent to create an overdraft if there were insufficient funds in the transaction account when these payments were due. We have examined clauses 14. 1.1 and 14.1.2. They state as follows: "14.1.1 The Lessor may at any time before or after this agreement has terminated, take any money paid by the Lessee towards any debt that the Lessee has with the Lessor and apply the same towards another debt the Lessee may have with the Lessor. 14.1.2 The Lessee give up its right to indemnify the debt or account to which any payment will be made." The import of common clause 14 of the finance lease agreements is that the respondent was allowed to transfer money in any of the appellant's accounts towards settlement of his debt. The standing order in this sense was in respect of the appellant's dollar account No. 0240031883101. The question is whether reference in clause 14 to debiting any of the appellant's accounts to settle any amount owed to it meant that the respondent was authorized to debit the appellant's Kwacha -- - · - · -- ·-·- - - - J37 P. 196 account when no money was paid into it and thus, creating an overdraft on that account. This question cannot, of course, be answered in complete disregard of the common law position which confers on a banker, when it is owed money, a privilege not available to other creditors - the right of combina tion or consolidation of accounts. Under this right a banker is entitled to apply a credit balance in favour of the customer on any account against a d ebit balance on the customer's other accounts with the banker. In Garnet v. McKewan 13 a customer had two accounts with his banker at difference branches. One of these was in credit, the other came into debit. The customer was drawing cheques on the account which was in credit when the manager became aware of the d ebit on the other account. He thereupon set off the credit balance against the debit and dishonoured the cu stom er's cheques without giving him notice. It was held that h e was entitled to do so. The right of combining accounts is thus exercisable by the bank without giving notice to the customer. See also Halesowen Presswork Ltd. v. Westminster Bank14 . - ---- - - --- .. - - - -- ··• -- ----- - - J38 P . 197 In the present case, therefore, with or without instructions, the respondent was entitled, in exercise of the right of combination of account, to apply any credit balance on any of the appellant's accounts - such as the Kwacha account - to offset a debit balance on the customer's other account, in this case the dollar account. The events that gave rise to the appellant's grievance are however anything but simple. The respondent debited the appellant's Kwacha account when it did not have a credit balance in order to credit the operational Dollar account from which the leases were serviced. An overdraft was thus created on the Kwacha account. No prior notification, let alone the concurrence of the appellant was secured. The overdraft account so created, attracted overdraft charges. Not only that, the appellant's Dollar account also suffered additional default interest charges under clause 2.4 of the lease agreement which states that: J39 P. 198 "if the Lessee does not make a payment of any amount on or. before the date on which it is due, the Lessee will be charged interest, calculated daily in arrears, on the outstanding amount." As is evident from the record of appeal, the respondent's witness, DWl, explained in cross-examination in the trial court, what exactly was going on. The respondent would create an overdraft, charge on it, and thereafter reverse the amount, creating a default on the lease account and charging default interest on it. The evidence on record further shows that the respondent also freely transferred moneys from the dollar account to the Kwacha account at the prevailing exchange rates to normalise the overdrawn position on the Kwacha account. We s hall revert to the issue of these charges anon. For now it is sufficient for us to state that to the question whether there was any agreement for the respondent to create an overdraft facility on the appellant's Kwacha account, the answer is plainly NO. There was no such agreement. Although the respondent has the common law right of combination of accounts, that right is exercisable only where the customer's J40 ' P. 199 debited account is in credit and where no other arrangement to deal with the delinquent account, such as charging of default interest, have been invoked. It follows from our finding on the creation of the overdraft facility that the respondent was not entitled to charge overdraft cover charges for a facility it should not have created in the first place. This explanation also answers the second question posed by counsel for the appellant. We turn now to the third question whether or not clause 14 did authorize the first respondent to transfer monies from the appellant's Kwacha accounts to its Dollar account and vice versa. We have already scrupulously considered clause 14 of the lease agreements. To us the third question can quite legitimately be answered in the affirmative. Under the banker's right of combination to which we have already alluded, such transfers could plausibly occur and are sanctioned by the common law right of a banker to combine accounts. We have, however, already pointed out that such combination of accounts does presuppose that the debited account is in credit, --·-- - -- - ~ .. . ---- -------- ---- J41 P.200 and therefore does not t echnically exist where the customer's account has no credit balance. · Given the foregoing discussion of the law we are of the view that grounds one and two of the appeal are bound to succeed. We now turn to the question whether the respondent was in order to overdraw the appellant's account to cover the lease payments and a t the same time to charge interest on the overdraft s o created. In the case of Musonda v. Investrust Bank Plc 1 we were confronte d with a s imilar situation. We held in that case that: "The documentary evidence, namely the respondent bank's letters of 5 th September, and 20th October, 2003 which were Facility Letters, whose terms and conditions were accepted and signed for by the appellant, clearly established that the appellant was given loans. But then, five years later in 2008, the respondent bank claims that it allowed the company to operate the account as an overdraft on some terms and conditions contained in the Facility Letters. We have very serious doubts to accept this explanation. Certainly there is no evidence that the appellant accepted to have the Loan facility to be operated as an overdraft. What is clear on the record is ·--·-·--- -- - - - -- --- - - -•·• - ----·-·--·. ·····-- J42 P. 201 that the respondent bank unilaterally switched the loan facility to an overdraft facility. This was, in our view, a breach of the agreements." A very similar situation confronts us here. There was no agreement whatsoever for the creation of an overdraft. What the respondent could lawfully do was to debit any of the appellant's account which was in credit, but not one without a credit balance and thus create an overdraft over which the appellant incurred costs in form of overdraft charges and interest. This 1s the basis of ground three. The appellant's gnevance is simply that it was wrong for the respondent to cause the appellant's account to be overdrawn through the standing order and yet apply late charges for payment of the lease - which ought to have been paid by the overdraft created. The argument that is being made by counsel for the appellant, as we understand it, is a logical one. If the respondent debited the appellant's Kwacha account in order to credit the appellant's Dollar operational account for purposes of effecting payment on the leases, it follows that there should have been ------·· ---- . , . . \ J43 P. 202 no late charges imposed on the appellant. To us, this appears to be a sound argument to make. If on the date agreed for payment of the lease charges there was no credit sufficient to cover the lease, the respondent was entitled to charge default interest in accordance with clause 2.4 which we have earlier on quoted. There is also clause 11 .3 of the lease agreement which entitled the respondent to charge default interest of 10 per annum above base rate. Whatever the bank was doing on the appellant's facility, there appears to us to have been one dominant preoccupation - profit for itself at the expense of the appellant. There is no doubt whatsoever that the respondent bank in the circumstances as described utilised the inability of the appellant to be curr ent on its lease repayments to curve out maximum profitability for itself. If the respondent bank had considered, even for a moment, the financial interests of the appellant, the creation of the overdraft facility and the charging of overdraft charges and default interest at the same time, should not have occurred. It is hugely unfair for the respondent to profit by applying those charges and allowing them to snowball out of control. To us, charging default interest, which ----- ---· - --·- --··-·--· . - .. -- ··- . - J44 P . 203 was sanctioned by the lease agreement in clause 2.4 is perfectly legitimate. And this accords with sub regulation 1 O(a) of Regulation 10 of the Banking and Financial Services (Cost of Borrowing) Regulations made pursuant to the Banking and Financial Services Regulations chapter 387 of the Laws of Zambia which provides that: "A bank .... shall not impose on a borrower any charge or penalty as a result of the failure by the borrower to repay or pay in accordance with the contract governing the loan other than interest on an overdue payment on a loan." Any other late charges and overdraft charges are unduly punitive and ou tside the financial lease agreement. They are p enal in character and thus not allowed. We reiterate what we stated a b out p en a l interest in the case of MCD Civil and Mechanical Engineering Ltd., Davies Mwenya and Cavmont Bank Limited and Cavmont Bank Limited and MCD Civil and Mechanical Engineering Limited, Davies Mwenya3 , reaffirming Union Bank Zambia Limited v . Southern Province Cooperative Marketing Union Limited6 • Ground three has merit, and we uphold it. - -- - ----- -- ----- - - --· -- --- - --- -· - - - - J45 P. 204 Regarding ground four of the appeal, the complaint is that the lower court should not have held that it was lawful for the respondent to charge extension charges on the appellant's account unilaterally without communicating the same to the appellant, particularly given that there was no agreement. The respondent in its reaction to the appellant's averment states in paragraph 9 of its amended defence that extension charges were provided for in the leases and arose as a result of a change in the base rate from 10% to 12% in November, 2008 and also from the restructuring of the facility to reduce the monthly r epayment from US $39,000 to US $25,000 per month. We have examined the twenty-three clauses of the lease agreements (common to all leases). They do not provide for extension of the leases, let alone extension charges. The lease facility letter does not do so either. The only way that this provision could be introduced into the contractual relationship between the parties is by variation of the lease agreements. This would invariably trigger clause 17.1 of the lease agreement --- ·- - - - - - ·· . -------. --·· - - -- · -- - --- J46 P . 205 which, as we have already explained, requires such variation to be in writing and signed by both parties. No such agreement was availed in evidence. What is more, the evidence of DWl, ·which is in the record of appeal, confirms that the respondent was not notified in writing of the extension charges or the restructuring fees in the sum of US $85,809-40. We are inclined to accept State Counsel Mwansa's submission on this point. The imposition of extension charges unilaterally and without notification to the appellant whose account was being d ebited was done in contravention of the lease agreements. In the case of Burnett v. Westminster Bank Ltd.2 which was cited by State Counsel Mwansa in his submissions and also alluded to by Mr. Mambwe, it was stated among other things that: "When there is a new arrangement and the customer has signed the application, then obviously he is bound, but when the bank wishes for its own reasons to impose a new term on the banker customer contract, it must do so in such a way as to leave no possible doubt, and it cannot do so unilaterally. The bank's duty in this regard is fourfold; (i) to advise the customer of the new term; (ii) to ensure that that advice is received by the customer; (iii) to ensure that the customer understands the consequences of failure to comply with whatever he is asked to do; and (iv) that the bank will not be responsible if he fails to ---·· ·---· .. ---- - -- J47 P.206 comply. The variation of the contract thus requires knowledge and consent on the part of the customer, and possibly also consideration." The respondent bank did not in the present case do any of these things. The result is that in imposing extension charges, the respondent bank acted outside the banker customer relationship and the contractual provisions contained in the lease agreements. The extension charges can therefore not hold. Ground four has merit and accordingly succeeds. Ground five of the appeal questions the imposition by the r espondent of a restructuring fee. More specifically the appellant contends tha t the trial judge did not address the issue that even if a restructuring charge was applied on 29th June 2009, the appellant continued charging the appellant interest on a monthly installment over and above the restructured amount. The respondent's short response is that this was considered by the lower court in its judgment and that it arose as a result of the appellant's application. In addressing the issue of the restructuring fee, page J72 the lower court stated the following: -- - - - - -· --- ---- - -- - -- - --· ·-·- - - -•·- - - - - -·- J48 P.207 "It can clearly be seen that as much as the restructuring was not part of the lease agreement, it is something which was requested for by the plaintiff [appellant] for its benefit and agreed by the parties, but it did however come with an unavoidable cost which was part of the cost of restructuring [sic!]." It seems that the court did not indeed go further to consider the question whether the respondent did restructure the facility after it was requested to do so by the appellant and after it had debited the appellant's account with a restructuring fee. In addition to what we have already stated regarding charges imposed outside the agreement between the parties, the restructuring fees in this case were intended to serve a very specific purpose - to enable the first respondent to restructure the appellant's lease facilities. The first respondent promptly debited the appellant's account with a fee of US $85,809 on 29 th June, 2009. By Dece1nber 2010, the appellant's account had still not been restructured. In other words the appellant never got value for the fee it paid. If this was money that had moved from the bank, the respondent would no doubt have -----·--------·-- --- - - ----· - - - - - -~ · ---·- - • J49 P.208 insisted on getting interest on it for everyday that the service paid for remained unperformed. We think that the fee charged as a restructuring fee was not reciprocated by good consideration from the first respondent. It was an extortionist charge in our view. Ground five also succeeds. Ground six al~eges that the lower court did not address the issue that the extension charges which were charged to the appellant v 1ere up to a certain amount. Mr. Marnbwe's brief response on this point was that the trial court did not need to get into the actual figures and to understand the disparities in the figures as to what was debited to the appellant's account. What matters, according to him, were the principles behind the decision on the relief sought. We think with respect to the learned lower court judge that the whole exercise of adjudicating the dispute between the parties require~hat the learned judge should have got into the factual details of the different figures on the debits on the appellant's account. We do not see how else the court would make a genuine assessment on the veracity of the versions of - ·------·- - -------- ------·--- --- ------ · . - - ·- P.209 J50 the story that were being told to the court. To the extent that the court did not get into d etail to comprehend the debits, we agree with counsel for the appellant that the court misdirected itself. Ground six succeeds. Ground seven of the appeal ra.1ses a rather straight forward issue, namely that clauses 2.4 and 11.3 are intertwined and both relate to compound interest. According to counsel for the appellant, such interpretation by the trial court was wrong. The learn ed counsel for the respondent merely1 submitted without more that the interpretation by the trial court was correct. We have earlier on in this judgment made extensive refer en ce to both clau ses 2.4 and 11.3 of the lease agreement. Clause 2.4 en titles the lessor (first respondent) to charge interest calculated in arrears on the outstanding amount if the lessee (appellant) was in d efa ult. Effectively, this provision allowed the respondent to charge compound interest on the arrears on lease repayment. We h ave earlier stated that this - · - - -·-- - - ·· - - -- - - - - -· --- ----· -·- - --- - -·--- -- - --· - JSl P.210 prov1s1on 1s 1n comport with regulation l0{a) of the Banking and Financial Services (Cost of Borrowing) Regulations. Clause 11. 3 on the other hand specifies the rate of interest of 10% per annum above base rate on any amount due to the lessor. Our understanding is that while clause 2.4 gives a general statement that interest is payable on arrears of lease payment, clause 11.3 specifies that interest. In this sense, the two clauses complement each other. The interpretation placed on them by the lower court was therefore correct. Ground seven has no merit and it is dismissed. Regarding ground eight of the appeal, the appellant's grievance is that in addition to compound interest, there were late charges applied by the respondent to the appellant's account and that the lower court did not take this into account. The point made by the learned counsel for the appellant was simply that as compound interest was chargeable in terms of clause 2.4 of the lease agreement, clause 11.3 introduced additional interest to be applied in default, which was equally . - -- ---- ·-··-- ·-- --- - · -- -- --- ----- .... ---··-- - --------- ---~-- - - -- ------ - ... J52 to be compounded and payable at the rate of 10% above base rate. P.211 We have already stated in relation to ground seven that clause 2.4 and 11.3 complement each other. The compound interest chargeable under clause 2.4 on delayed payments has to be paid in accordance with the rate set out in clause 11.3. We do not think, therefore, that clause 11.3 introduces any new and additional penal sanction. If it did, we would not h esitate to state that such charge or fee is penal in nature and, therefore , not allowable. It is for this reason that we do not find merit in ground eight of the appeal. In sum we hold that grounds 1 to 6 of the appeal succeed. The res pondent bank clearly exceeded its liberties by unilaterally creating an overdraft facility without the concurrence of the respondent. The overdraft cover charges were thus wrongfully debited to the appellant's account and ought to be reversed, and it is so ordered. J53 P.212 The appellant was only liable to pay late charges on delayed lease installments compounded as suggested by clause 2.4 and in accordance with the rate of interest set out in clause 11.3. Extension charges that were imposed unilaterally outside the lease agreements are outside the contract and should, accordingly, be reversed. Likewise the restructuring fee for which the appellant drew no benefit should be refunded to the appellant with interest at the rate at which the appellant was being charged for delayed payment of the lease installments, that is to say at 10 per cent per annum above base rate. The exact extension charges paid by the appellant should, together with all other illegitimate charges and debits as we have identified them in this judgment, be reconciled against the amount admitted by the respondent and credit given where it is due. We order tha t the amounts due shall be assessed by the Deputy Registrar. Grounds 7 and 8 of the a ppeal fail for reason we have given. J54 P.213 As the appeal has substantively succeeded, we order costs against the respondent to be taxed if not agreed. ~~-· ..... ............. , -; · ................ . . . M. Malila SC SUPREME COURT JUDGE .. ········~;,;;~~·· ······ SUPREME COURT JUDGE SUPRE JUDGE ----· -- . ----- --- - - --- -- - -- - - -- --- .. - -- .. -- .. ·---. -- ------ --- --- - --- ---