When Can Courts Interfere with Contracts in Kenya? Understanding the Doctrine of Unconscionability

Introduction: Balancing Freedom to Contract vs. Fairness in Law

Kenyan contract law is anchored in the principle of pacta sunt servanda, freedom of contracts, and the notion that parties are bound by their contracts and must honour their terms. However, courts retain equitable jurisdiction to intervene where a contract or clause is so unfair, oppressive, or one-sided that it offends the court’s conscience. This is the essence of the doctrine of unconscionability, a common law principle recognised under the Law of Contract Act and applied through English common law via the Judicature Act.

The Court of Appeal’s decision in Kanwal Sarjit Singh Dhiman v Keshavji Jivraj Shah [2025] KECA 1264, dated 11 July 2025, provides a landmark exposition of this doctrine, affirming that unconscionable contracts are voidable and subject to judicial scrutiny.

Brief Facts of the Kanwal Sarjit Singh Dhiman v. Keshavji Jivraj Shah Case

On 17th December 1996, Kanwal Sarjit Singh Dhiman (the appellant) and Keshavji Jivraj Shah (the respondent) entered into a loan agreement. The respondent agreed to lend the appellant a total of Kshs. 13,000,000 in three instalments. However, in practice, only Kshs. 7,000,000 was advanced in three tranches between December 1996 and August 1997.

Key terms of the agreement included:

• The loan was to be repaid with interest at 36% per annum, compounded quarterly, and payable in arrears.
• The first two instalments were secured by promissory notes and a memorandum of charge over the appellant’s property (L.R. No. 209/8192/8).
• The appellant had the option to take the third instalment of Kshs. 8,000,000, but this was never advanced.

The appellant defaulted on repayment, and by February 1999, no part of the loan or interest had been paid. The respondent sued for recovery of the outstanding amount, enforcement of the security, and sale of the charged property.

Procedural history:

• The High Court entered an ex parte judgment in favour of the respondent for Kshs. 17,020,365.40 plus interest at 36% per annum.
• The respondent executed against the charged property, purchased it at auction, and had it transferred into his name.
• The appellant later succeeded in having the ex parte judgment set aside on appeal, leading to a retrial.

At retrial, the appellant argued that the agreement was unconscionable, having been entered into under financial duress with an exorbitant and oppressive interest rate, and that the respondent had exploited his vulnerability.

The High Court dismissed the appellant’s defence and counterclaim, holding the contract enforceable. The appellant appealed to the Court of Appeal.

The Court of Appeal, in its 2025 judgment, found that the interest rate and compounding effect were so oppressive and unconscionable that enforcing the contract as written would be contrary to equity and public policy.

The Court set aside the contract as unconscionable but ordered the appellant to repay the principal sum with reasonable interest of 12 % from the date of the High Court Judgment of 19 September 2019 to avoid unjust enrichment.

The Court opined as follows in paragraph 77 of the Judgment:

“It is not in question that this astronomical figure exceeding Kshs. 69 billion on a principal sum of Kshs. 4 million is a disproportionate escalation; it is not merely commercially unreasonable; it is, in the eyes of equity and good conscience, oppressive and unconscionable. As demonstrated above, courts in Kenya have consistently held that where the terms of a loan agreement result in punitive or extortionate financial consequences — particularly through excessive compounding over long durations — they may be struck down or moderated. This is because equity abhors oppression and refuses to enforce contractual provisions that shock the conscience of the court. In the present case, the sheer disparity between the original loan and the amount which Page 33 of 35 would now be due evidences a contract whose enforcement, without judicial intervention, would undermine principles of fairness, good faith, and proportionality. We, therefore, find the contract between the parties void for unconscionability.”

Legal Framework: The Unconscionable Doctrine

Unconscionability is an equitable doctrine that empowers courts to refuse to enforce contracts or terms that are so unfair, oppressive, or one-sided that they shock the court’s conscience. The doctrine is rooted in the principles of equity, fairness, and public policy.

Types of Unconscionability

Kenyan courts typically assess unconscionability under two broad categories:

1. Procedural Unconscionability

It focuses on the contract formation process. Indicators include:

• Lack of negotiation or informed consent
• Misrepresentation or non-disclosure
• Language barriers or complexity
• Surprise clauses hidden in fine print
• Absence of legal advice or independent counsel

In Dhiman, the appellant argued that he signed the agreement under financial duress and without full understanding of the implications, including the 36% interest rate and the vesting of property rights.

2. Substantive Unconscionability

This examines the actual terms of the contract. Examples include:

• Excessive interest rates or penalties
• Unfair arbitration clauses (e.g., requiring arbitration in a foreign jurisdiction)
• Clauses that deny legal remedies or disproportionately benefit one party
• Terms that result in unjust enrichment or financial ruin

The judgment made clear that courts typically require some measure of both procedural and substantive unconscionability before intervening. The goal is never to rewrite bad bargains by parties, but to ensure that contracts are not used as instruments of injustice.

What Parties Should Do When Entering into a Contract

To avoid contracts being challenged as unconscionable, parties should:

• Ensure transparency: Clearly explain and document all terms, especially those that may be onerous or unusual.
• Allow for negotiation: Avoid “take-it-or-leave-it” terms and allow both parties to negotiate.
• Avoid undue pressure: Ensure that both parties freely consent without duress or undue influence.
• Avoid exploiting vulnerabilities, such as financial distress or lack of legal knowledge
• Seek independent advice: Particularly when there is an imbalance in experience or knowledge, parties should seek legal counsel.
• Document the process: Keep records of negotiations and communications to demonstrate fairness and informed consent.

Red Flags That Suggest Unconscionability

• Complex terms are hidden in small print.
• One party is dictating terms without negotiation.
• Lack of Transparency or Informed Consent.
• Excessive Interest Rates or Penalties
• Drastic disparities in what each party stands to gain or lose, i.e lack of mutual benefit.
• Procedural Irregularities, e.g.  Signing under pressure, duress, or time constraints, no witnesses, improper execution or Failure to comply with statutory formalities (e.g., stamp duty, registration)

Remedies for Unconscionability in Kenya

In Kenyan contract law, when a court finds a contract or clause to be unconscionable, it has wide equitable discretion to fashion remedies that restore fairness and prevent unjust enrichment. Here’s a structured overview of the key remedies available:

1. Rescission of the Contract
   • The court may declare the entire contract void or set it aside.
   • This restores both parties to their pre-contractual positions.
   • Common where the contract was induced by duress, undue influence, or gross imbalance.
2. Severance of Unconscionable Clauses
   • If only specific terms are unconscionable, the court may strike out or modify those clauses.
   • The rest of the contract remains enforceable.
   • Often applied to interest rates, penalty clauses, or arbitration terms.
3. Restitution and Refunds
   • The court may order the return of money or property unjustly retained.
   • In Dhiman v Shah, the appellant was ordered to repay KShs. 4 million plus interest of 12% since the date of the High Court judgment to avoid unjust enrichment despite the contract being voided.
4. Rectification of Property Registers
   • If unconscionability led to improper land transfer, the court may order revocation of title and rectification of the land register.
   • This remedy was granted in Dhiman v Shah, where the vesting order was nullified.
5. Limitation of Interest and Charges
   • Courts may cap interest rates or disallow compounding if deemed oppressive.
   • This aligns with the in duplum principle and equitable doctrines.
   • In Ajay Shah v Guilders Bank, the court enforced a reduced interest rate due to unconscionability.
6. Declaratory Relief
   • Courts may issue declarations that a contract or clause is unenforceable, illegal, or contrary to public policy.
   • Useful in guiding future conduct and preventing similar exploitation.
7. Damages (in rare cases)
   • If one party suffered a loss due to unconscionable conduct, compensatory damages may be awarded.
   • This is less common and usually secondary to restitution or rescission.

How Njaga & Co Advocates LLP Can Help

At Njaga & Co Advocates LLP, we offer strategic, client-focused legal support to ensure contracts are fair, enforceable, and aligned with Kenyan law. Our services include:

1. Contract Review & Risk Assessment
   We identify unconscionable clauses and advise on enforceability, especially in cross-border or high-stakes agreements.
2. Drafting & Negotiation Support
   We help clients structure contracts that reflect balanced obligations and protect against future disputes.
3. Litigation & Dispute Resolution
   We represent clients challenging unconscionable contracts and defending against unfair enforcement.
4. Strategic Advisory for Corporates
   We guide organisations in developing ethical contracting frameworks that align with governance and compliance standards.
5. Specialized Support in Property-Linked Contracts
   We assess the legality and fairness of security arrangements, vesting clauses, and interest computations.

Conclusion: Equity as a Shield Against Exploitation

While freedom of contract is a cornerstone of commercial law, Kenyan courts will not hesitate to intervene where the terms are grossly unfair, oppressive, or the product of undue influence or deception. The doctrine of unconscionability serves as a vital safeguard against exploitation and imbalance. Parties are advised to approach contract formation with transparency, fairness, and legal guidance.

Engaging legal counsel is essential to ensure your contracts withstand scrutiny, whether you’re a corporate entity, investor, or individual.

Njaga & Co Advocates LLP stands ready to support you at every stage of the contractual process, from negotiation to dispute resolution with meticulous legal insight, strategic foresight, and unwavering client care.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult a qualified advocate for personalized legal guidance.