Union Bank Zambia Ltd v Souther Province Co-operative Marketing Union Ltd (SCZ JUDGMENT No 7 of 1997) [1997] ZMSC 62 (28 May 1997)

UNION BANK (ZAMBIA) LTD v SOUTHERN PROVINCE CO-OPERATIVE MARKETING UNION LTD (1995 - 1997) ZR 207 (SC) I SUPREME COURT A NGULUBE CJ, SAKALA and LEWANIKA JJS 6 February and 27 May 1997 I (SCZ JUDGMENT No 7 of 1997) B Flynote Contract - Interest charged by bank - Penal interest and penalty interest - Whether allowed. I Headnote Appeal by the bank against the judgment of the High Court and cross-appeal by the respondent (the bank's C customer) in matter relating to the charging and awarding of interest and arrangement fee. Bank took out a writ for the amount allegedly owing and the respondent counterclaimed on grounds of overcharging and overpayment of interest and other charges. The Commissioner had mistakenly disallowed the 'arrangement fee' component, while the respondent cross-appealed against the allowance of compound interest as the bank D had compounded both the simple and the penal interest. Held: I (i) Disallowance of the 'arrangement fee' due to misunderstanding, as the respondent did not deny this item, which was consequently allowed. (ii) A bank had the right to charge interest at a reasonable rate on overdraft but unusual rates such as E compound interest require an agreement. I (iii) Penal interest is certainly not part of banking practice and custom in Zambia and, even if there had been an agreement to pay penal interest, such would have been liable to be I struck down for being a penalty objectionable at common law. F (iv) A revaluation must be done by the bank to establish the proper amount of the compound interest. Cases referred to: (1) Trans Trust SPRL v Danubian Trading Co [1952] 2 QB 297. (2) Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915] AC 79. I Work referred to: G Halsbury's Laws of England. S Mwananshiku of Mung'omba Associates, for the appellant. M Mutemwa of Mutemwa Chambers, for the respondent. I Judgment H Ngulube CJ delivered the judgment of the Court. For convenience, we will refer to the appellant as 'the bank' and to the respondent as the 'customer'. The bank agreed to lend up to K400 million to the customer and, in this I connection, the customer on 6 May 1993 I executed a promissory note undertaking to pay on demand the said sum with interest thereon from that date at the rate of 5 % over the published rate with a minimum of 135 % per annum. At the same time, the customer signed what was termed a letter of set-off agreeing, among other things, that any money standing to the customer's credit on any account held with the bank shall be I held by the bank as security for J 1995 - 1997 ZR p208 NGULUBE CJ indebtedness of the customer '. . . upon banking account or upon any discount or other account or for any other matter or thing including the usual banking charges . . .'. We will return to the letter of set-off a little later. There was a 'letter of instalments' whereby the customer undertook to service the loan limit of K400 A million instalments; another letter also dated 6 May 1993 confirming the execution of the 'demand promissory note' and requesting the bank to disburse the loan by crediting the same to the customer, and, above all, another letter of the same date (to which we will again return) and which was called 'letter of arrangements' B whereby the customer acknowledged the bank's right to cancel the loan facility at any time, in which event the customer undertook to I I I I I pay the bank 'all dues together with all other charges due by' customer. As it turned out, the customer only drew out K200 million. According to the bank, the amount was disbursed on 17 C May 1993. The promissory note had been guaranteed by the Government and by April 1994, just about one year later, the debt had increased in the bank's reckoning from K200 million to a colossal K898 215 755,08. The customer had made some payments totalling K120 million but the bank had charged both compounded. After deducting K850 900 000 paid by the Government on the guarantee, there was a balance of K47 615 D 755,08 for which the bank took out a writ. The customer resisted the claim and counterclaim that there had been overcharging and overpayment on interest and other charges. After trial, the learned trial commissioner adjudged that the customer did not owe the bank the K47 odd E million but that, instead, it was the bank which owed money to the customer when it went beyond normal interest and exacted penal interest totalling K340 969 277,88, K14 million arrangement fees and K300 000 as legal fees. It was the learned commissioner's finding that the customer did not draw any money in excess of what had been agreed and that the bank could not claim interest and other charges beyond what had been F agreed in the promissory note. The Court further found that the bank wrongly sought to recover penal interest from the customer on account of penalties inflicted on the bank by the Bank of Zambia because of the bank's own overdrawn position with the Central Bank, in contravention of the prescribed liquidity G requirements. It was the finding of the Court that the Bank could not expect to pass such penalties to the customer which was not party to the arrangements or problems between the bank and Central Bank. In the circumstances, the learned trial commissioner ordered the bank to refund the customer the sum of K355 269 H 272,88 found to have been wrongly debited to the customer's account, with interest at average bank rate from the date the Government paid K850 900 000 up to 21 July 1995 (which was the date of the trial) and thereafter at 6 % until the refund is made. The bank has appealed against the disallowance of the arrangement fee and the penal interest whilst the I customer has cross-appealed against the non-disallowance of compound interest and non-recalculation of proper interest since the bank had compounded both the simple interest and the penal interest. The first ground of appeal complained against the disallowance of the arrangement fee of K14 million. The evidence showed that the amount was in fact not in dispute and I appeared in both parties' computations. J I I I I 1995 - 1997 ZR p209 NGULUBE CJ Even the submissions at the end of the trial showed that the amount was not disputed. At the hearing of this appeal counsel for the customer, quite properly in our view, did not attempt to resile from the position adopted throughout by the customer. The learned trial commissioner must have misunderstood the parties on this point. The appeal on this ground is allowed and the arrangement fee is awarded to the bank and does not fall A to be refunded. The issue of real substance in this appeal concerns the charging and awarding of interest. A number of authorities were cited and we take this opportunity to affirm that I there can hardly be any serious quarrel with B the legal position as it emerges from the authorities. This is that - to borrow from the language of Halsbury's Laws of England (vol 3, 4th ed para 160) - by the universal custom of bankers, a banker has the right to charge simple interest at a reasonable rate on all overdrafts or loans. However, when it comes to an C unusual rate of interest - such as compound interest - express agreement is required, or in the alternative, evidence of consent or acquiescence to such a practice or custom. In the case at hand, there was evidence on record that the bank debited the customer's account at regular intervals and this is reflected in the documents, especially the bank's computation of the customer's indebtedness. When the customer itself D worked out its own computation, the document on record shows that the customer equally added interest at regular intervals. The principle of compounding the interest was clearly mutually accepted and we can not now entertain the cross-appeal and say that the bank was not entitled to charge compound interest. The E documentary I I I I I evidence showed that the customer was only questioning the rates being applied from time to time and the frequency of debiting the interest which seemed to have been done twice rather than once per month. The customer also rejected outright the debiting of penal interest, which is an even more extraordinary or unusual type of interest than compound interest. The major ground of appeal was directed at trying to F persuade the Court that this unusual kind of interest (which it seems was equally compounded) ought not to have been disallowed. Before we deal with the actual submissions and arguments on the issue, we would like to recall that the general rule where has been non-payment of money by due date - in breach of agreement - is to compensate the party owed with an award of interest which serves the same purpose as general G damages. The rules of remoteness as formulated in the leading cases (such as Hadley v Baxendale [1843 to 1860] All ER report 461; Vitoria Laundry v Enock Percy Kavindele Appeal No 98 of 1995) preclude recovery of special damages or losses which can not have been within the contemplation of the parties or H which can not have been reasonably foreseeable at the time of entering into the transaction. Conversely, while interest is the normal compensation for failure to pay money by due date, the award for damages can not be ruled out completely if the loss suffered was within the contemplation of the parties; otherwise the I consequences, ie the other damage suffered as a result of non-payment, are as a rule too remote - see Trans Trust SPRL v Danubian Trading Co [1]. Furthermore, the law has always generally frowned upon penalties, including any penalty for non-payment of money. It seems to us I that even where there has been specific agreement that upon failure to pay a sum of money in J I I I 1995 - 1997 ZR p210 I I I NGULUBE CJ breach of contract a larger sum shall become payable, this would be a classic example of a penalty provision which can generally not be entertained. This is the effect of one of the rules expounded in the leading case of Dunlop Pneumatic Tyre Co v New Garage and Motor Co [2] in relation to a sum stipulated which is A extravagant and unconscionable; a sum in terrorem of the other party rather than the genuine pre-estimate of loss. Considerations of remoteness and the principle of penalties are relevant in this appeal where the ground advanced was ill-fated from the start. Mr Mwananshiku attempted an ingenious argument: he submitted that B penal interest is part of banking and custom in Zambia and invited us to take judicial notice of the practice of levying penal interest on accounts which are overdrawn or which have exceeded the agreed limit. No fact and no authority was drawn to our attention for any such alleged practice and custom. We specifically C decline to take judicial notice of this phenomenon which is neither notorious nor widespread. What was happening was that the bank would start with the balance due, to which would be added interest of well over 100 % at monthly or fortnightly intervals; to the resultant compounded balance would then be added penal D interest at 150 % over the same monthly or fortnightly periods to produce a new and twice compounded balance; and so repeated until the Government made payment on its guarantee. Mr Mwananshiku submitted that penal interest is part of banking practice and custom in Zambia. It most certainly is not. He also argued that such penal interest is triggered off by the customer exceeding the K200 E million limit. As there was no such right to penal interest, the event contended for as triggering the same could not have done so and in any event the promissory note in this case had a limit of K400 million, twice the amount relied upon by counsel. Mr Mwananshiku argued that it should have been found, from the 'letter of F set off' and the 'letter of arrangement' previously mentioned, that there was an agreement to pay penal interest. He submitted that the phrase 'the usual banking charges' included the penal interest as did the phrase 'all dues together with all other charges'. All we can say is that this was a courageous submission. The phrases relied upon could not conceivably be construed as constituting an agreement to pay penal G interest. Above all, even if there had been such agreement, it would have been liable to be struck down and not enforced for being a penalty objectionable at common law. Mr Mutemwa's arguments on behalf of the customer in this behalf were all valid. We I I I I I are not surprised that the Government intervened to affirm the H common law when it passed a Statutory Instrument (no 179 of 1995) under the Banking and Financial Services Act (21 of 1994) to formally ban penal interest. It follows that we consider the learned trial commissioner to have been on firm ground when he disallowed penal interest. He was fully justified by the I evidence and documents on record when he concluded to the effect that there was here an attempt by the bank to recoup from the customer penalties inflicted on it by the Central Bank as the regulatory authority. The ground of appeal numbered three is to the effect that if the bank has to refund any money payment should be to the Government and not to the customer. We regard this ground to have been of doubtful J value. I I 1995 - 1997 ZR p211 I NGULUBE CJ The parties before Court are the bank and the customer and even if the Government were entitled to be indemnified by the customer (as undoubtedly the Government is if they have not already been indemnified) the party entitled to enforce judgment and to take out any writs for the purpose will be the customer. The A customer surely knows that the Government is entitled to be indemnified and that if the public money paid by the guarantor has not already been reimbursed by the customer then, of course, proof of the receipt of the refund by the Government directly from the bank would suffice to I discharge the bank's obligation to the customer under the judgment of the Court. B The fourth ground of appeal simply served to underline that there is legal support for the payment of compound interest which even Mr Mutemwa concedes to have been accepted by the parties. We do not disturb the findings below to the extent that they established the right of the bank to charge compound interest. However, there was a valid point made in the cross-appeal, namely that the Court below should C have directed a recalculation of the proper compound interest due. This is because the penal interest which was properly disallowed had been added to the opening balances from time to time and so served to inflate the figures. We direct that such recalculation be done by the bank and that if the resultant figures are not D agreed, there is liberty to either party to apply to High Court to settle the figures. There was another point raised concerning the duration of the pre-trial interest awarded on the refund. We do not disturb the lower Court's exercise of discretion in this respect since, quite clearly, there are cases where a judgment might be E so delayed that it would be unjust to increase the total sum of interest payable by a party. In sum, the appeal succeeds on the question of the arrangement fee. The cross-appeal succeeds on the question of recalculating the proper compound interest due. The penal interest already ascertained and adjudged to be refundable below should be refunded forthwith. In all the circumstances of this case and given F the outcome, each side will bear its won costs of this appeal. Appeal allowed in part. Cross-appeal allowed in part. I I I I 1995 - 1997 ZR p212