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BANK OF UGANDA
v
BANCO ARABE E.SPANOL
COURT OF
APPEAL OF UGANDA AT KAl\1P ALA
COURT OF APPEAL CIVIL APPEAL NO.23 OF
2000
(ON APPEAL FROM HIGH COURT CIVIL SUIT. No.527 OF
1997)
BEFORE:
HON MR. JUSTICE G.M KATO, JA
HON.MR. JUSTICE S.G.
ENGWAU, JA
HON. LADY JUSTICE C.N.B KITUMBA, JA
October 20,
2000
JUDGMENT
G.M. OKELLO, JA: This is an appeal against the judgment of the
High Court (BYAMUGISHA, J) dated February 22, 2000. It was entered against the
appellant
for a sum of US $ 1,762,374.51 as principal and interest on a loan of
US$ 1,000,000, plus Ug.Shs.20,000,000/= being general damages
for breach of
contract with interest at 18% per annum
The brief facts giving rise to
this appeal are as follows:
On November 11, 1987, the Uganda Government
signed a loan agreement with the respondent in Madrid, Spain. The loan was for
US$ 1,000,000
The appellant’s representative George Nteeba signed the same
agreement on behalf of the appellant as a guarantor. The loan
was to be repaid
in 7 installments on the following dates: October 11, 1990, April 11, 1991,
October 11, 1991, April 13, 1992, October
13,1992, April 13, 1993, and October
13, 1993. The respondent was to reimburse or release the loan money to the
Uganda Government
within 180 days from the date of signing the agreement, but
that date was extended to October 11, 1989.
On May 21, 1991, the first
installment was paid together with accrued interest amounting to US$ 195,914.43;
prior to that date the
borrower had on July 24,1990, paid US$ 52,767.36 as
interest. After the payment of May 21, 1990, no further installment was paid
by
the borrower despite several demands for payment. The respondent eventually made
demands to the appellant to pay the debt in his
capacity as a guarantor, still
no payment was made.
The respondent finally sued the appellant as a
guarantor under Clause 18 of the agreement. In its defence the appellant denied
liability
to pay the debt. It gave a number of reasons one of which was that its
liability was limited to causing the borrower pay the debt.
The other reason was
that the contract had been frustrated by Uganda Government's policy of
liberalisation of coffee trade and dealing
in foreign currency. The trial judge
rejected the defences and entered judgment in the terms already stated, hence
this appeal.
There are 6 grounds of appeal. The main ground is the first, the other 5
grounds were argued in the alternative. The grounds are:
1. The Learned Trial
Judge en-ed in law in holding that the loan agreement was enforceable against
the appellant as guarantor although
it was not executed under seal. IN THE
ALTERNATIVE TO GROUND 1 ABOVE;
2. The Learned Trial Judge erred in law
and in fact in holding that the Appellant’s liability was not discharged
by the variation
of the draw down date for the loan by the Respondent and the
Government of Uganda without the consent of the Appellant as guarantor
and
outside the scope of Clause 4 of the Loan Agreement.
3. The Learned Trial
Judge erred in law and in fact in holding that the Appellant's liability was not
discharged by the several renewals
and extensions of the repayment dates for the
various loan installments, granted by the Respondent to the Government of
Uganda, without
the consent of the Appellant.
4. The Learned Trial Judge
erred in law and in fact in holding that the failure by Respondent to make
prompt and contemporaneous demands
upon the Appellant on default by the
Government of Uganda in payment of each of the six unpaid installments of the
loan did not amount
to a waiver or release of the Appellant's
liability.
5 The Learned Trial Judge erred in law and in fact in holding
that the liability of the Appellant under Clause 18 of the Loan Agreement
was
personal.
6. The Learned Trial Judge erred in law and in fact in holding
that the Appellant's obligations as guarantor were not extinguished
by
frustration at law.
Although the learned counsel for the appellant Mr. Masembe Kanyerezi had at first indicated to argue ground 6 before ground 5, he ended by arguing the grounds in the order they are indicated above. I propose to deal with them in the same order, starting with the first ground.
The gist of Mr.
Kanyerezi's argument on ground one was that the appellant could not be held
liable on an agreement which was not executed
under the appellant's seal.
According to him failure to have the agreenrent executed under seal rendered the
agreement' unenforceable
against the 'Appellan bank, as it was against the
bye-laws of the appellant in particular paragraph 3(e) of the bye-laws. In
support
of his argument he also relied on the following authorities: CHITTY ON
CONTRACTS 22nd Ed. Volume J pages 190-195, A.R. Wright and Sons
Ltd. v Romford Borough Council [1957]1 QB 431 at pages 435 and
437.
On his part, Mr. Justine Semuyaba, on behalf of the respondent,
submitted that the bye-laws made by the Bank of Uganda were not relevant
to this
case because in the agreement it was specifically agreed in Clause 16 that the
contract would be goven1ed by the English
law.
According to him, under
the Corporate Bodies' Contracts Act 1960 a contract entered into without the
seal of a corporate body is not
rendered invalid by reason only of lack of a
seal on the contract He also submitted that cases quoted by the appellant's
counsel
which were decided before 1960 were not relevant to this
case
Although this issue of invalidity of the contract due to absence of
the seal was never pleaded by the appellant in his written statement
of defence
and was not framed as an issue, the learned trial judge using her discretion
under Order 13 rules 3 and 5 of Civil Procedure Rules, decided to deal
with the matter after it had been raised by Mr. Bossa who testified on behalf of
the appellant. After considering
the matter at length, she came to the
conclusion that the contract was valid and she proceeded to give her reasons why
she thought
so. I agree with her holding on this issue.
In Clause 16(a)
of the loan agreement which was signed by the representative of the appellant,
all the par1ies agreed that the law
to govern the operation of the agreement was
the English Law. The relevant part of Clause 16(a), which was tendered by the
respondent
in these proceedings as Ex.P1 reads as follows:
"This agreement shall be governed by and construed in accordance with English law, and the parties hereto irrevocably submit to the non-exclusive jurisdiction of English courts.........."
There is no doubt that the word
"parties" used in the Clause was intended to include the appellant, since this
was a tripartite agreement.
The parties freely and clearly chose the English law
to govern their dealings. I agree with Mr, Semuyaba's contention that paragraph
3( e) of Bank of Uganda bye-laws which requires all agreements of guarantee to
bear the Bank's seal is not applicable to the present
case. The law to be
followed on this matter is to be found in Corporate Bodies’ Act
1960, an English statute which does not require a seal to be endorsed on a
contract in order to make it valid. Cases decided before
this Act was enacted
must be viewed with caution. Clause 16(a) of the agreement put the Uganda laws
out of application when interpretation
of this agreement is in issue. Although
the Clause totally excluded the application of Uganda laws, it gave the courts
in this country
discretionary jurisdiction to hear cases involving the
agreement, by using the phrase "non-exclusive jurisdiction of English courts".
If it was the intention of the parties to apply the Uganda law they would have
used the same expression used when deciding on the
jurisdiction.
I agree
with Mr. Kanyerezi's submission that the condition and enforcement of a contract
is governed by law; but I do not agree with
him when he says that the law to be
followed here is the bye-laws made by the Bank of Uganda, the parties opted out
of that law under
Clause 16(a) of the agreement I have not been persuaded by his
argument that Mr. George Nteeba was incapable of signing the agreement
on behalf
of the appellant The learned trial judge correctly held that the power of
attorney given to Mr. Nteeba by the appellant
was intended to bind the appellant
in matters concerning the loan agreement. The deed authorising Mr. Nteeba to act
on behalf of
the appellant was sealed and it gave him powers to sign the
agreement (see Ex.P3).
Her decision is backed by the opinion of the
Attorney General (Ex.P4) in particular paragraphs 5-8 which read as follows:
“
1. ................................
2. .........................................
3. ..................................
4. ...................................
5. Under the Bank of Uganda Act (Act 5 of 1966) the Bank of Uganda is a body corporate capable of entering into an agreement and has a common seal which may be duly authenticated by the Governor and Secretary of the Bank.
6. In accordance with the laws of Uganda, an Agreement signed by a donor, of a Power of Attorney is as valid and effective as if it were signed by the donor of such Power of Attorney.
7. In my considered opinion the Agreement was Concluded and executed for and on behalf of the Government and the Bank of Uganda by their Respective Attorneys in accordance with the Laws.
8. Furthermore in my considered opinion the Agreement is valid and constitutes legally binding and enforceable obligations on the Government and the Bank of Uganda in accordance with the terms and conditions thereof and there are no more legal requirements to be fulfilled to make the Agreement more binding on the Government and the Bank of Uganda."
Mr. Kanyerezi attacked this opinion on a number of grounds one
of them being that the Attorney General was not acting on behalf of
the
appellant bank so the appellant cannot be bound by his opinion. According to
him, for the bank to be bound the opinion should
have been given by an
independent counsel and not a counsel who was acting for the
borrower.
With due respect to the learned counsel, this argument is not
supported by evidence, In his testimony, Mr. Bossa who was a sole witness
for
the appellant did not say that the Attorney General had no power to give an
opinion on behalf of the appellant. All he said when
under cross-examination and
re-examination was that the Attorney General did not address the issue at hand
and that he did not agree
with some aspects of his (Attorney General's) opinion.
That is not the same thing as saying that the Attorney General was not acting
on
behalf of the appellant when he gave his opinion. I am of the view that the
Attorney General was acting on behalf of the appellant
when he gave his opinion
about the legality of the agreement and his opinion is binding on the
appellant.
Another complaint raised by the appellant's counsel was that
the Attorney General's opinion was given on December 22, 1987 and yet
the
agreement was signed on November 11, 1987, which means the opinion was given
about a month and half later. The answer to this
argument is to be found in
Clause 3 of the agreement which reads:
"3. This agreement will enter into full force and effect as of the date on which ARESBANK receives a legal opinion, satisfactory to the Bank, about the legality, validity and enforceability of this Agreement."
My understanding of this clause is that although the contract
was signed on November 11, 1987, it could not be operational until the
opinion
of the Attorney General about the legality of the agreement was received. The
clause made the Attorney General's opinion
a condition precedent. The contract
remained in abeyance until the respondent received the opinion in February 1988
according to
the evidence of Fernando Marques (P.W.I). This complaint cannot be
sustained.
Before taking leave of this ground of appeal, I have found it
necessary to point out that the telex signed by Mr. Walusimbi, Ag. Director
External Management officer on behalf of the appellant dated February 15, 1991,
leaves no doubt as to the liability of the appellant
to pay the respondent. The
telex reads as follows:
"1657:
43754 AREB E 61059 UGABANK UG
15
FEBRUARY 1991
TO: BANCO ARABE ESP ANOL S.A. MADRID, SPAIN
FROM:
BANK OF UGANDA
THIS REFERS TO LOAN AGREEMENT DTD 11 NOV 1987 FOR USDT 1,000,000.00 FOR PURCHASE OF PP BANK WAGONS, AND TR TELEXES DEMANDING PAYMENT OF PRINCIPAL AND INTEREST AMOUNTING TO USD I43,643.73 DUE ON 28 JAN 91 STP
WE DO NOT DISPUTE THE CLAIM, THE DELAY IN PAYMENT IS BEING CAUSED .BY OUR PRECARIOUS FOREIGN EXCHANGE POSITIONSTP WE. ARE HOWEVER, DOING EVERYTHING IN OUR MEANS TO ENSURE THAT PAYMENT IS EFFECTED IN DUE COURSE STP
REGARDS
J Y K W ALUSIMBI AG, DIRECTOR, EDMO BANK OF UGANDA"
I do not agree with Mr. Kanyerezi’s interpretation of this
telex that it was only saying that the claim by the respondent against
the
borrower was valid. The contents of the telex are clear and Mr. Walusimbi was
definitely writing on behalf of the appellant not
the borrower. The holding of
the learned trial judge as to the purpose of Walusimbi's telex is quite correct
and it was not irrelevant
as Mr. Kanyerezi would like me to believe.
For
the reasons given above I find no merit in ground one. It must fail.
The
second ground of appeal concerns alterations on the draw down period. Mr.
Kanyerezi submitted that the learned trial judge was
wrong when she held that
the alteration on the draw down date was not substantial and was not prejudicial
to the appellant's interests.
According to him the judge applied a wrong test
when determining this issue and that had she applied a correct test she would
have
come to a different conclusion that the alteration had in effect discharged
the appellant. He further argued that the mere fact that
the appellant was aware
of some of the alterations was not enough to hold the appellant on the contract.
On this point he relied
on: CHITTY ON CONTRACTS 22nd Edition Volume
1 pages 446-448 and Holmes v Brunskill [1878] Q.B 495 Mr.
Kanyerezi also contended that although the alteration did not affect the loan
sum, it had the effect of the appellant remaining
exposed under the guarantee
for a longer period than it had expected.
On the other hand, Mr. Semuyaba
submitted that the judge correctly held that the alteration in draw down date
was not substantial
and did not amount to discharging the appellant. He
contended that the agreement did forbid such an extension although it provided
for shortening of the time. He pointed out that since the appellant made payment
of U$ 10,000 as commitment fee after the extension
of time that meant the
appellant was agreeable to the alteration and consented to it
(alteration).
The law regarding to alteration in terms of contract
between creditor and borrower where such alteration affects the guarantor is
summarised in CHITTY ON CONTRACTS 22nd Edition volume two at page 447
paragraph 1016 as follows:
"Any alteration, however bona fide, by the creditor and the principal, without the assent of the surety, of the terms of the original agreement so far as they relate to the subject-matter in respect of which the surety became responsible for the principal, will exonerate the surety unless it is self-evident that the alteration is unsubstantial. or one which cannot be prejudicial to the surety, or unless it is provided for in the guarantee. And when the alteration is not of this trivial character, the court will not, in an action against the surety, inquire as to the effect of it, or allow the question whether the surety is discharged or not to be determined by a finding as to its materiality.” (My emphasis).
This principle offers some
exceptions when the alteration may not discharge the guarantor even where he has
not given his consent.
Some of the exceptions are: where it is self-evident that
the alteration is unsubstantial, or is not prejudicial to the position
of the
surety. In the instant case the judge based her decision on these exceptions
when she held that the alteration in relation
to the draw down date did not
discharge the appellant. I agree with her holding on this point and the reasons
she gave in support
of her decision.
It may be added here that the issue
as to whether or not an alteration in the contract discharges the guarantor will
depend on the
facts of each individual case. In the instant case Mr. Fernando
Marques (PWI) explained as to why it was necessary to extend the
date for draw
down. The reason was that by the time the agreed time of 180 days would have
matured the contract would not have matured
because some of the conditions
precedent had not been fulfilled. Two of those conditions were that an opinion
of the Attorney General
had to be received before the agreement was operational.
The respondent did not receive the opinion until February 1988, long after
the
signing of the agreement. The second condition was that the respondent could
only release the US $1,000,000 after commercial
invoices in respect of the
railway wagons had been provided by the supplier. The invoices were not received
until October 1989, that
was about a year after the agreement had been signed.
Without these conditions being fulfilled the agreement remained
un-operational.
The extension of time for draw down was therefore
necessitated by the peculiar circumstances of this particular agreement. The
alteration
was not of substantial nature and was not prejudicial to the
interests of the appellant at all.
Mr. Wa1usimbi's telex sent to the
respondent admitting liability was written on February 15, 1991, long after the
alteration being
complained of in this ground had been sent to the appellant.
Had the appellant been seriously concerned about this alteration it
would not
have admitted liability in that telex. I do not agree with Mr.. Kanyerezi's
submission that this telex by Mr. Walusimbi
was irrelevant to the issue of
alterations. The document was quite relevant to the whole of this case as it
admitted appellant's
liability to pay the respondent. In fact on this admission
alone the respondent could have been entitled to judgment under Order
11 rule 6
of Civil Procedure Rules if the case did not involve some other issues and if
the respondent had so wished. In my view
this same telex also negated the
appellant’s contention that it never consented to the alterations in
dispute. I am inclined
to agree with Mr. Semuaba's submission that the
respondent was well aware of and consented to the extension of the draw down
date
judging from the conduct of its officials who never objected to the
alteration and later on admitted liability, The second ground
of appeal must
fail.
The third ground is also about alterations, except that here it is
concerned with extension of time in connection with the repayment
of the debt.
It was the contention of the appellant's counsel that the extensions granted to
the borrower by the respondent had the
effect of discharging the appellant from
its liability as a guarantor. He conceded that the appellant was aware of some
of the extensions
but it never consented to them. He hastened to submit that
knowledge of the extensions or alterations without express consent was
not
enough to bind the appellant. He relied on the authorities of Holmes v
Brunskill [1878] Q.B 495, Pollock v Everest [1876] 1 Q.B 669 and
CHITTY ON CONTRACTS Volume 2 page 446.
Mr. Semuyaba did not agree that
there were any alterations or extension of time for repayment by the respondent.
According to him
the respondent was only reminding the borrower and the Bank of
Uganda of the debt as agreed under Clause17 of the agreement
One
important matter to be decided upon here is whether or not there were
alterations by the respondent in respect of the dates of
payment I have had the
opportunity of reading the telexes which the appellant’s counsel regard as
extensions, After a careful
consideration of these documents I have to agree
with Mr. Semuyaba's submission that these were reminders to the borrower and the
guarantor; the mention of new dates was only of commercial] necessity to inform
those concerned as to when the respondent expected
the payment after the
previous dates had expired. Since these notices did not amount to alteration in
the terms of the agreement,
the authorities quoted by Mr. Kanyerezi cannot be
relied upon, Even if the telexes were to be treated as alterations, they were in
favour of the appellant and the borrower as they offered them more time to
organise their resources for payments At any rate the
so called alterations did
not alter the loan sum, The judge was right in her finding that the renewals did
not discharge the appellant.
In view of the reasons stated above and in ground
two, this ground too must fail.
The substance of the fourth ground of
appeal is that the respondent did not contemporaneously make its demand for
payment after each
installment fell due, According to the appellant's counsel,
the judge was wrong
have dealt with this matter generally . In his view
had she dealt with it specifically she would have found that the guarantor was
relieved of it’s obligation b failure of the respodent to make a demand on
each default.
It is trite law that mere temporary inaction or forbearance
by the creditor to take action against a guarantor does not discharge
the
guarantor from his obligations: (see Alwi A. Saggay v Abed Ali Algeredi
[1961] EA 767). In her judgment the learned trial judge dealt with this
issue as follows:
“The agreement as a whole did not specify the period within which a demand had to be made by the plaintiff The plaintiff notified the principal debtor and the guarantor through many telexes that a default had occurred These telexes were sent in line with Clause 7 of the agreement. Admittedly the telexes were not tested in accordance with Clause 18 but they were reminders that a default had occurred and that payment was not being punctually effected. Since the defendant received all the telexes it was put on notice that the borrower had defaulted and soon or later the creditor would be calling on the guarantor to pay.”
This passage shows that the judge specifically
dealt with the issue of demand for payment. It has to be emphasized that Clause
18
of the agreement did not specify as to when demand was to be made to the
guarantor. According to evidence of Fernando Marques (PWl)
and paragraph 7 of
the plaint the cause of action was against the appellant arose on July 24, 1995
when a telex was sent to the appellant
in form of a first demand. In my
considered opinion the demand was enough, the respondent's claim could not be
defeated by mere failure
by the respondent to make demands for payment each time
an installment fell due. The appellant's liability to pay fell due on July
24,
1995 when the respondent decided to make a demand for payment but not before
that date. The fourth ground cannot succeed.
The appellant's complaint
in the fifth ground is that the trial judge was wrong when she held that the
liability of the appellant
under Clause 18 of the agreement was personal. Mr.
Kanyerezi's submission on this issue was to the effect that the appellant's
obligation
was to cause the Uganda Government to pay the loan but the appellant
did not undertake to pay the loan in the event of the borrower
defaulting. It
was his view that the judge was wrong when she extended the appellant's
liability beyond causing the principal to
pay, Mr. Semayaba submitted to the
contrary. It was his view that Clause 18 of the agreement imposed an obligation
upon the appellant
to repay the loan in the event of the Government of Uganda
failing to do so.
The law relating to the duty of the guarantor or surety
to repay a loan is that once the principle borrower defaults the guarantor
has a
duty to repay the loan. See Moshi vRep Air Services Ltd and Anor [1972] 2
All.E.R 393 in particular at pages 407 – 409.
In the instant case
the appellant bank bound itself to repay the loan under Clause 18(a) of the loan
agreement which reads as follows:
“We, the Bank of UGANDA (The Guarantor), a banking institution established under the Laws of UGANDA, and being the central bank of the borrower, hereby unconditionally and irrevocably jointly and severally guarantee the due and punctual payment of any and all amounts payable by the BORROWER under the Loan Agreement in accordance with the provisions set forth herein, In the case of any failure by the BORROWER to punctually pay any interest on, or principal of, or any other amount due under the Loan Agreement, We hereby agree on first demand made by tested telex to cause such payment to be made to you in compliance with the obligations of the BORROWER. Payment by the Guarantor shall be made to ARESBANK in the place and in the manner specified in ARESBANK'S demand, without raising any exception or objection of whatsoever nature, (the State of Israel and the Republic of South African being excluded)”
The wording of this clause is clear in it’s meaning the
learned trial judge correctly held that the appellant was liable to
repay the
loan when the borrower defaulted. The appellant's liability was not limited to
causing the borrower pay. This ground of
appeal must also fail.
The
sixth and last ground of this appeal is that the learned trial judge erred in
law and fact when she held that the appellant's
obligation as a guarantor was
not extinguished by frustration.
In his forceful submission Mr.
Kanyerezi argued that the contract was frustrated by government’s
liberalisation of coffee trade.
According to that policy the proceeds of sale
from coffee were not to pass through the appellant Bank for the appellant to
channel
any money to the respondent as it had been agreed under Clause 18 (b)
and (c) of the agreement. He submitted that Clause 4(d)(iii)
upon which the
respondent relied did not concern the appellant but it concerned the respondent
and the Uganda government in respect
of purchase of railway wagons from a third
party called INIRAlL.
On this issue, Mr. Semuyaba, submitted that
relevant clauses in the agreement ruled out the issue of frustration and that
the learned
trial judge was correct in holding that the contract had not been
frustrated. The doctrine of frustration operates as a defence in
appropriate
situations. In modern times its operation has been greatly limited as may be
seen in the following passage taken from
CHITTY ON CONTRACTS 27th
Edition pages 1095-1096:
“Although the doctrine of frustration is of respectable antiquity, having been established in its present form in 1863 in Taylor v. Caldwell. It currently operates within rather narrow confines. This is so for two principal reasons. The first is that the courts do not wish to allow a party to appeal to the doctrine of frustration in an effort to escape from what has proved to be a bad bargain; frustration is "not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains.."
The second is that parties to commercial contracts commonly make provision within their contract for the impact which various possible catastrophic events may have on their contractual obligations. This, force majeure clauses and hardship and intervener clauses are frequently inserted into commercial contracts. The effect of these clauses is to reduce' the practical significance of the doctrine of frustration because, where express provision has been made in the contract itself for the event which has actually occurred, then the contract is not frustrated. Therefore the wider the ambit of contractual clauses, the narrower is the scope of the doctrine of frustration.”
This statement of the law shows that
contracting parties can easily opt out of the doctrine as was the case in the
present case. I
agree with Mr. Semuyaba’s contention that relevant clauses
of the agreement made the doctrine of frustration inoperative. The
clauses are:
4(d)(iii), 11 and18 (e). They read as follows:
“4(d)(iii) none of the obligation of the BORROWER under this Agreement shall be impaired by any breach, frustration or non-fulfillment of the contract of or by any matter of claim by any person relating to or arising out of the contract and the BANK shall not be concerned in any circumstances with the contract or any such matter or claim.
11. The BORROWER hereby covenants and undertakes with the BANK that, from the date of this agreement to the date upon which all monies owing by the BORROWER to the BANK under this agreement are paid in full, it will not create or permit to subsist any encumbrance over any of its revenues or assets present or future without the written consent of the BANK.
18(e) The BANK OF UGANDA guarantees ARESBANK that the foregoing undertaking and instructions will not be in any way modified or variedby any person as body or public authority of any kind, and that they will remain in full force and effect with all the payment obligations of the borrower hereunder are completely extinguished.”
With due respect I do not agree with Mr. Kanyerezi when he says
that clause 4(d)(iii) does not bind the appellant. All the clauses
in the
agreement are binding on the appellant.
The Act amounting to frustration
upon which the appellant is relying is that of the government’s
liberalisation policy of the
coffee trade. By this policy both the appellant and
Uganda Government lost control over the proceeds of sale of coffee and foreign
currency. Even if the doctrine had not been ruled out by the above clauses,
still it would not have been proper for the appellant
to rely on frustration
which was self-induced by both the borrower and the appellant's agents. When
under cross examination Mr. Bossa
(D.W.l) admitted that under the Bank of Uganda
statute, the appellant is supposed to advise the government on financial and
economic
policies and that it also acts as government agent in financial
matters. In view of this position of the appellant, it had a duty
to advise the
government against the policy of liberalisation of coffee trade and more so
since the appellant and the government
had already committed themselves to
paying the respondent out of coffee sales which had to be channeled through the
appellant Bank.
I find Mr. Abdulga M Raghei's (P.W.2’s) testimony somehow
revealing. He stated that although the coffee sales were not available
for
payment of this loan, there were other sources from which the appellant would
have obtained money to repay the loan 'as other
systems were working." It is not
clear as to why the appellant never advised the government to resort to some
other sources in order
to honour its obligation. It has been stated in CHITTY
ON CONTRACTS 27th Edition at page 1130 thus:
"The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it. Thus a contracting party cannot rely on self induced frustration, that is on a frustration due to his own conduct or to the conduct of those for whom he is responsible.”
The appellant having contributed to the alleged frustration
cannot rely on it as a defence. The learned trial judge was justified
in
rejecting this defence. Like all other grounds, this one must also
fail.
In final result, I would dismiss this appeal with costs to the
respondent, here and in the court below.
Since ENGWAU,JA, and KITUMBA, JA
agree, the appeal is dismissed with costs in this court and the court
below.
BANK ARABE ESPANOL
v
BANK OF UGANDA
HIGH COURT OF UGANDA AT
KAMPALA
(COMMERCIAL COURT)
HIGH COURT CIVIL SUIT NO.527 OF
1997
BEFORE: HON. LADY JUSTICE C. K. BYAMUGISHA
February 22, 2000
Cases referred to:
A.R Wright & Son Ltd v Romford Boroud
Council [1957] Q.B. 41
Gabriel Moschi v Lep Dir services Ltd and Lep
Transport, Ltd [1972] 2 All ER 393
Halme v Brunskill [1877J 3
Q.B.D. 495
J.W Higgins Ltd v Mayor Alderman and Burqesses and Barqain of Northampton [1927] Ch. 128
National and Grindlays Bank Ltd v
Patel and Others [1969] EA 403
Legislation referred
to:
1967 Constitution Article 35
Bank of Uganda Act (No. 5/1966) now
repeated
Civil Procedure Act Section 26 (2)
Civil Procedure Rules Order
6 rule 5
Evidence Act section 93
Judicature Statute section 35
JUDGMENT
BYAMUGISHA , J: The plaintiff by its amended plaint dated
November 21, 1997, sued the defendant claiming the following reliefs:
1. The sum of US $ 1,413,604.70 {United States dollars one million, four hundred and thirteen thousand six hundred and four seventy cents as at the 14th day of March, 1997 when the Suit was first filed;
2. Accrued interest at the libor interest rate of 1 3/4 p.a and a delay interests of libor 3% p. a and thereafter till payment in full.
3. Interest on I, 2 and 3 above at the rate of 45% per annum until payment in full.
4. Costs of the Suit.
5. Any further and alternative relief that the court may deem fit and necessary.
The facts leading to the institution of this Suit are not
seriously contested. On November 11, 1987, or thereabouts, a loan agreement
No.
1406 (Exhibit P.1) was signed between the Government of the Republic of Uganda
as the borrower, the plaintiff as the lender
and the defendant as the guarantor.
The loan was for the sum of United States dollars one million and it was fully
disbursed. The
loan was intended to purchase 100 tank wagons for Uganda Railways
Corporation. The signing ceremony took place in Madrid Spain. The
loan was
supposed to be fully repaid within a period of three and a half years between
October 11, 1990 and October, 13, 1993 in
seven equal semi-annual installments
of US dollars $142,857.16 each. By a Bank of Uganda Cheque No. 9775 (Exhibit
P.6) the first
installment was paid. Thereafter, no more payments were made
despite repeated demands and reminders from the plaintiff to the Government
of
Uganda and Bank of Uganda. On .July 24, 1995, by a tested telex, the plaintiff
made a demand to the defendant as guarantor for
the payment of the outstanding
loan together with accrued interest. The money was supposed to be paid within a
period of seven days
on the plaintiff's account No. 544-7-627 with Chemical Bank
New York. The tested telex was received by the defendant but no money
was paid
and the plaintiff filed this Suit in accordance with the provision of the
guarantee agreement/clause.
In its amended written statement of defence dated October 2, 1998, the defendant averred in paragraph five thereof that it was discharged of its obligations as guarantor by the plaintiff disbursing the loan outside the scope of the contract and by the plaintiff continually renewing the loan facilities without the consent of the defendant. In paragraph six it was contended that the defendant as guarantor has no obligation to repay the outstanding loan and interest as the guarantor was limited in scope and the payment arrangement contained in clause 18 was frustrated by the liberation of foreign exchange dealings which prevented the defendant from recovery any money in coffee sales contracts. The following were the agreed issues namely:
1. Whether the Government of Uganda is indebted to the plaintiff and if so have much;
2. Whether the scope of the guarantee is clause 18 of the loan agreement is such as to make the Bank of Uganda liable for the un recovered loan sum and accrued interest;
3. Whether the plaintiff waived the defendants obligations as guarantor by failing to make prompt demands on the defendant on the default of each of the installments;
4. Whether the scope of the guarantee was defeated by the doctrine of frustration;
5. Whether the defendant is liable on the guarantee in light of the alteration of the contractual obligations in as far as the loan facility was continually renewed outside the scope of the contract;
6. Whether the advances made by the plaintiff to the Government of Uganda was within the terms of clause 4 A of the contract and if not whether the defendant as guarantor can be made liable for these money's advanced outside the scope of the contract;
7. Whether the loan agreement in relation to Bank of Uganda is valid;
8. Remedies if any.
I shall begin with the issue of whether the Government of Uganda is indebted
to the plaintiff. Generally both parties to the Suit
agreed that a loan
agreement (Exhibit P.1) was signed in Madrid Spain on behalf of the Government
of Uganda by Robert Ekimu holding
powers of Attorney granted by the Minister of
Finance. On behalf of Bank of Uganda, George Nteeba the Chief Accountant of the
Bank
signed on its behalf holding powers of Attorney granted by the Governor.
The signatures were affixed in the presence of O. M. J.
Ndawula Senior Principal
State Attorney. On the plaintiff's part it was signed by the General Manager
Salem Zenaty in the presence
of Domingo Olago Attorney of law of the plaintiff.
The signing ceremony was performed on November 11, 1987. The parties also agree
that a loan of US $ one million was disbursed by the plaintiff. The repayment
was guaranteed by the defendant. Under clause 5 of
the loan agreement, the loan
was supposed to be repaid in seven equal semi-annual installments commencing
twelve months from the
draw down date. The loan was drawn on the October 11,
1989 and the repayment schedule accrued on the following dates:-
October 11,
1990; April 11, 1991; October 11, 1991; April 13, 1992; October 13, 1992; April
13, 1993; and October 13, 1993. The evidence
which was adduced and not
challenged was that the Government of Uganda through the defendant repaid the
first installment together
with interest. The rest of the installments on the
principal debt together with the accrued interest and delayed interest have to
date not been paid. The defendant through its witness Joseph Bossa accepted that
position. Therefore the plaintiff has established
the existence of an
enforceable debt. The first issue will therefore be answered in the affirmative.
The next issue to determine
is whether the loan agreement is valid and
enforcement against the defendant Bank. This issue was framed after the
testimony of Joseph
Bossa and it was not part of the pleading of the defendant.
The law on pleadings is very clear and in particular Order 6 rule 5 of
the
Civil Procedure Rules which requires parties to raise by their pleadings;
“All matters which show the action or counter-claim not to be maintainable, or that the transaction is either void or voidable in point of law and all such grounds of defence or reply as the case may be, as if not raised would be likely to take the opposite party by surprise........ ”
The defendant therefore offended this rule and even
when the plaintiff gave its evidence, the question of whether the agreement it
was trying to enforce against the guarantor was valid or that was not raised. Be
that as it may, Order 13 rule 2 of the Civil Procedure
rules, gives power to the
court to frame issues from the following materials:
(a) allegations made on Oath by the parties, or by any persons present on their behalf, or made by the advocates of such parties;
(b) allegations made in the pleadings or in answers to interrogates delivered in the Suit;
(c) the contents of the documents produced by either party;
In addition
to that rule 5 of the same order gives power to the Court.
“at anytime before passing a decree amend the issues or frame additional issues or such terms as it thinks fit, and all additional may be such amendments issues or as necessary for determining the matters in controversy between the parties shall be so made a framed.”
These provisions I
think are in line with the provisions of section 35 of the Judicature
Statute which vests power into the High Court in exercise of its original
jurisdiction to grant all such remedies both legal and equitable
as any of the
parties is entitled to so as to settle all matter in controversy between the
parties. The purpose is to avoid a multiplicity
of Suits. It is therefore my
considered opinion that the issue of whether the loan agreement is valid was
framed in light of the
above legal provisions. The testimony of Joseph Bossa and
the submissions of Counsel for the defendant was that under the Bank of
Uganda Act (No. 5/1966) now repeated and the by-laws made there under
(Statutory Instrument No. 157/69) provided now contracts by the Bank should
by-laws and rule 1 thereof, the custody of the seal of the Bank is entrusted to
the Secretary who;
“Shall take all steps necessary to ensure its proper use and safety.”
Rule 2 provides that the common seal shall be
affixed to a document,
(a) In the presence of the Governor and the Secretary or Deputy Governor and the Secretary; or
(b) In the absence of the Secretary, in the presence of the Governor or Deputy Governor and one officer of the Bank designated in that behalf by the Board.
(c) In the absence of the Governor and Deputy Governor in the presence of the Secretary and two other Officers of the Bank designated in that behalf by the Board.
Rule 3 gives a list of documents whose execution
has to be under seal and these include contracts of agency or guarantee.
It was Counsel’s submission that it is a mandatory requirement of
the constitution of the defendant that contracts of guarantee
to which it is a
party must be under seal. He referred Court to an exempt from CHITTY ON
CONTRACTS where the learned author stated
an old common law rule that a
corporation can only contract under seal. He also relied on a number of
authorities namely A.R Wright & Son Ltd v Romford Boroud Council
[1957] Q.B. 413 where Goddard C.J. at page 435 held that:
“From very early times in our law the general rule has been that and unsealed contract is enforceable neither by nor against a Corporation;”
J.W Higgins Ltd v Mayor Alderman and Burqesses and Barqain of
Northampton [1927] Ch. 128 where the Court held that there was no contract
between these parties at all until the seal of the Counsel was put
to the formal
contract entered into. Counsel however conceded that the although the whole
agreement is not void, the portion of it
and more specifically clause thereof
comprising a guarantee by the defendant is invalid and unenforceable as being
contrary to the
defendant's constitution.
On the plaintiff's part it was
submitted that the defendant is estopped from alleging that the guarantee clause
is invalid. Counsel
pointed out that the person who signed was authorised to
sign by the Governor of the Bank. He also relied on the legal opinion of
the
Attorney General given in pursuant to clause 3 of the loan agreement in which
the learned Attorney General reaffirmed the validity
of the agreement to the
plaintiff. Counsel also pointed the payments which the defendant made to the
plaintiff these were: (1) the
commitment fee of US $ 10,000/= and the first
installment and interest there on. He also relied on the admissions made by Mr.
Walusimbi
the Ag. Director of External Debt Management with the defendant. The
telex dated February 15, 1991, was addressed to the plaintiff
with regard to the
delay in paying the sum of US $ 143,646 plus interest which was due. In the
telex, Walusimbi stated that inter
alia that; “we do not dispute
the claim”. In the said telex the author referred to the loan agreement
signed on November 11,
1987. The other areas which counsel touched to show that
the agreement was valid is the written statement of defence paragraph 6
(a) in
which the defendant admitted that under clause 18 (a) of the loan agreement it
understood in the event of failure by the borrower
to pay the principal or
interest to cause such payment to be made to the leader in compliance with the
obligations of the borrower.
On the use of the seal, counsel pointed out that
there are officers who are supposed to be present where the seal is used. He
pointed
out that the loan agreement was signed in Madrid Spain by Mr. Nteeba who
was authorised under the byelaws to use the seal and therefore
could not have
used it outside the premises of the Bank of Uganda. Moreover, it was counsel's
contention that the illegality being
raised by the defence was not brought to
the notice of the plaintiff.
Since the parties reduced their
transactions into writing, it is necessary to peruse through them and see what
was agreed upon. I
must also state that this was a tripartite agreement and
there was no separate guarantee agreement between the plaintiff and the
defendant. Therefore if the agreement as a whole is not void as Counsel for the
defendant submitted, I do not see how it can be invalid
in one part. The
preamble states in part the considerations for the granting of the loan. The
defendant guaranteed the plaintiffs
the borrowers of obligations to repay the
loan the consideration for the plaintiff granting the same the plaintiff granted
the loan.
A condition precedent was contained in Clause 3 of the agreement. This
clause provided that the agreement will enter into full force
and effect as of
the date on which the plaintiff received a legal opinion satisfactory to itself
about the legality, validity and
enforceability of the agreement. Clause 10
(c) of the loan the agreement is also relevant. It says:
“The borrower has obtained all the necessary approvals and authorisation for this facility and specially represents and warrants that:
(i)
. . . . . . . . .
(ii) This facility was obtained with prior permission of
the Bank of Uganda”.
The Attorney General as the principal legal
advisor to the Government of Uganda and in accordance with article 35 of the
1967 Constitution gave his legal opinion (Exhibit P.4). In regard to Bank
of Uganda, the defendant herein, he stated in clause 5 thereof as follows:
“Under the Bank of Uganda Act (Act 5/1966) the Bank of Uganda is a body Corporate capable of entering into an agreement and has a common seal which may be duly authenticated by the Governor and Secretary of the Bank.”
On the powers of Attorney the Attorney-General in clause 6
said:
“In accordance with the laws of Uganda, an agreement signed by a donor/ of a power of Attorney is as valid as if it were signed by the donor of such power of Attorney.”
On the legality and enforceability of the agreement, he
said:
"Furthermore in my considered opinion the agreement is valid and constitutes legally binding and enforceable obligation on the Government and the Bank of Uganda in accordance with the terms and conditions thereof and there are no more legal requirements to be fulfilled to make the agreement more binding on the Government and the Bank of Uganda.”
Having stated that,
I think I agree with the testimony of D.W 1 and the submission of Counsel for
the defendant that under the bye-laws
governing the execution of document, a
contract of
guarantee between the defendant and another party has to be
executed under seal. The seal as rightly submitted is affixed in the presence
of
the officers specified thereof. The same byelaws provide in rule 2(3) thereof
that:
“Unless an instrument bearing the common seal is also signed in accordance with the immediately preceding sub-bylaws, the instrument shall not be regarded as having been validly sealed.”
Now it is common ground
that the loan agreement was signed in Madrid Spain by Charles Nteeba on behalf
of the defendant. Under the
bye-laws, he could not have legally affix the seal
of the defendant because he is not one of the specified officers authorised to
do so. Even if he had affixed it on the loan agreement , the seal would have
been of no legal consequence since the Governor and
the Secretary of the Bank
were not in Madrid. Is the loan agreement invalid in respect of the defendant? I
think not first, the defendant
signed the loan agreement without imposing any
condition as to its legality and enforceability. Secondly the power of attorney
given
to George Nteeba (Exhibit P. III) authorised him to sign, execute and
deliver the loan agreement and generally to do all acts necessary
or expedient
for the proper execution of the loan agreement. It was declared that the power
of Attorney would be irrevocable as long
as the loan agreement shall remain in
force. The contents of this power of Attorney whose language is clear and
unambiguous binds
the defendant to the loan agreement in my view. The power is
still in force since the loan remains unrepaid. Thirdly, the legal opinion
of
the Attorney-General assured the plaintiff that there no more legal requirements
to be fulfilled to the make the agreement more
binding on the Bank and the
Uganda Government. Fourthly, Mr. Walusimbi in his telex already referred to
reiterated the commitment
of the guarantor and the borrow to pay the loan if the
foreign exchange position improves. All these declarations and recitals which
are certain, precise and unambiguous bind the defendant to the loan agreement. I
am therefore not persuaded that the loan agreement
is invalid against the
defendant. That issue would be resolved in the negative.
The fourth
issue is whether the scope of guarantee was defeated by the doctrine of
frustration. Since the defendant guaranteed the
obligations of the Government of
Uganda as borrower, the Court will resort to the agreement to answer to answer
the fourth issue.
Clause 4 (d) (Ill) is relevant in this regard. It
says:
“None of the obligations of the borrower under this agreement shall be impaired by any breach, frustration or non-fulfillment of the contract of or by any matter of claim by any person relating to or arising out of the contract and the Bank shall not be concern in any circumstances with the contract or any such matter or claim.”
Clause 11 was a special Covenant. It
says:
“The borrower hereby covenants and undertakes with the Bank that from the date of this Agreement to the date upon which all monies owing by the Borrower to the Bank under this Agreement are paid in full, it will not create or permit to subsist any incumbrance over any of its revenues or assets present or future without the written consent of the Bank.”
The
provisions of these clauses are also clear and precise. In particular
frustration was ruled out as a cause for non-payment of
the loan. Moreover, the
defendant as .the Banker of the Borrower, the manager of the external loans of
the Borrower and advisor on
monetary, fiscal and economic policies cannot be
heard asserting that the liberalisation of the coffee trade was a bad policy
after
all. I am therefore not persuaded that the repayment of the loan was
frustrated. There is nothing on record to show that the borrower
and guarantor
became insolvent as a result of the liberation policies. The issue will be
resolved in the negative.
I shall deal with issues No.5 and 6 together
because they concern the alterations. D.W 1 in his testimony testified that the
defendant
is not liable because the draw down date was changed and the defendant
did not consent to that change. The loan was disbursed on
October 11, 1989. Some
correspondence between the plaintiff and the Borrower were exchanged. The
guarantor did not assent to these
extensions. Counsel for the defendant relied
on a number of authorities which are to the effect that any alteration however
bonafide
between the creditor and principal debtor without the assent of the
surety will exonerate the sure_ unless it is clear that the alteration
is
unsubstantial and un prejudicial counsel contended that clause 4 (a) of the loan
agreement was materially altered without the
consent of the defendant. The other
alterations referred to by Counsel was a batch of telexes (Exhibit P.7) in which
the plaintiff
informed the borrower that it had not been paid the amounts due.
The amount were renewed to another date. The telexes were copied
to the
defendant counsel contended that the renewal of the facility without the
defendant's consent discharged the guarantee.
On the part of the
plaintiff, counsel submitted that the testimony of P.W 1 was to the effect that
before the agreement could be effective
and binding, a legal opinion had to be
received from the Attorney General. The opinion was received in January 1988. On
the extension
of the draw down date, counsel referred to various telexes sent by
the plaintiff to the Borrower and guarantor asking for the extension.
He
submitted that the telexes were copied to the defendant. The last telex dated
September 15, 1989 was addressed to the Ministry
of Finance and Mr. Ivan
MulinD.W.a a director in the defendant Bank. In the telex, according to counsel,
the Borrower and guarantor
were asked whether the extension would cause any
inconvenience and if so the matter should be raised with the plaintiff. Counsel
stated that the guarantor did not raise objection. Finally, counsel relied on
Walusimbi’s telex of February 15, 1991 to the
plaintiff as evidence to
show that the guarantor was still bound by the terms of the loan agreement. It
seems trite law that if the
creditor alters the course of dealing with the
debtor and this has the effect of giving rise to a different debt from the one
which
had been guaranteed then this would discharge the guarantor. This position
was stated in the case of Halme v Brunskill [1877J 3 Q.B.D. 495 when
COTTON L. J. said:
“The true rule in my opinion is that if there is any agreement between the principal with reference to the contract guaranteed, the surety ought to be consulted and that if he has not consented to the alteration although in cases where it is without inquiry evident that the alteration is unsubstantial or that it cannot be otherwise than beneficial surety, the surety be the may not to discharged...”
In another case of National and
Grindlays Bank Ltd v Patel and Others [1969] EA 403 DICKSON J.
said:
“It is trite law that if a creditor, without the consent of the guarantor makes some material alteration to his arrangements with the debtor, the guarantee is discharged.”
For the defendant to succeed
on the issues of alteration, it has to show that the alteration in the draw down
date was substantial
and prejudicial to itself. This is largely because the
guarantee normally extends only to the debt contracted by the principal debtor
at the time when the guarantee is entered into. In the now before the loan
contracted and matter Court, guaranteed by the defendant
was US $ one million.
Changing the draw down date did not have any effect on the amount guaranteed by
the defendant. In any case,
the defendant was consulted and requested by the
plaintiff to state its objections if any on the alterations. It kept quiet.
Later
its official Walusimbi wrote to the plaintiff acknowledging indebtedness
and promising to pay. As for the renewal of the loan facility,
I do not think
this was a material alteration from the loan guaranteed by the defendant.The
telexes in my view, were a gentleman
way of demanding payment. In any case if
the Borrower had performed its obligations of making prompt and punctual
payments as agreed,
the renewals would not have occurred. It is therefore my
finding that the alterations were not substantial since they did not alter
the
nature of the debt guaranteed by the defendant.
The second and most
substantive issue to determine in this case is whether the defendant is liable
personally for the debt. Clause
18 of the agreement spelt out the obligations of
the defendant and for purposes of clarity I shall reproduce it in full. It said:
“18 (a) We, the Bank of Uganda (the Guarantor, a Banking institution established under the laws of Uganda and being the Central Bank of the borrow, hereby unconditionally and irrevocably jointly and severally guarantee the due and punctual payment of any and all amounts payable by the Borrower under the Loan Agreement in accordance with the provisions set forth herein.
In the case of any failure by the borrower to punctually pay any interest on or the principal of, or any other amount due under the Loan Agreement, we hereby agree on first demand made by tested telex to cause such payment to be made to you in compliance with the obligations of the Borrower. Payment by the Guarantor shall be made to ARESBANK in the place and in the manner specified in ARESBANKS demand, without raising any exception or objection of whatsoever nature. (the state of Israel and the Republic of South Africa being excluded).
(b) If Aresbank does not receive such payment within seven days after its demand, it will be entitled to claim payment from the Libyan Arab Uganda Bank in accordance with the terms set forth below.
(c) The Bank of Uganda undertakes and commits itself to domicile payments by foreign buyers of Coffee sales contracts denominated in US Dollars, for a minimum amount at least equal to US $ 1,000,000 US dollars (one million dollars)
(d) The Bank of Uganda hereby irrevocably instructs and orders the Libyan Arab Uganda Bank (LAUB) to apply the proceeds of such Coffee contracts, channeled through it, to cancel any and all amounts of whatsoever due by the BORROWER under the Loan Agreement.
(e) The Bank of Uganda guarantees ARESBANK that the foregoing under taking and instructions will not be in any way modified or varied by any person or body or public authority of any kind and that they will remain in full force and effect with all the payment obligations of the borrower hereunder are completely extinguished.”
It is common ground that the
loan agreement was not repaid in full and that on July 24, 1995, the plaintiff
sent the tested telex
to the defendant directing the money to be paid on the
plaintiff's account No. 544-7-627 with chemical Bank New York. The amount
demanded was US$ 1,225,184.27. Payment was expected within seven days. No
payment was made.
It was submitted by counsel for the plaintiff that the
defendant's undertaking under the guarantee clause was three fold:
1) It unconditionally and irrevocably, jointly and severally guaranteed the due and punctual payment of all amounts payable by the borrower under the loan agreement. 2) In case of any failure by the borrower to punctually pay any interest on or principal of or any other amount due under the loan agreement the defendant agreed on first demand made by tested telex to cause such payment to be made in compliance with the obligations of the borrower. 3) The defendant undertook to pay the plaintiff in the place and manner specified in the plaintiff's demand without raising any exception or objection of whatsoever nature.
Counsel cited a number of authorities which
spelt out the obligations of the guarantor which is essentially to answer for
the obligations
of the borrower should the latter default. The case of
Gabriel Moschi v Lep Dir services Ltd and Lep Transport, Ltd [1972] 2 All
ER 393 where it was held that in the absence of any other agreement to the
contrary, guarantor at common law was to see
the obligations of the to it that
the debtor performed his subject the obligations which of were the guarantee.
Counsel concluded
his submissions by stating that the defendant is liable for
the debt since the creditor need not even have sued the principal debtor.
While responding to the above submission counsel stated that on proper
interpretation of Clause 18 (a) the obligations of the defendant
in the event of
demand being made was not to pay the plaintiff but to cause payment to be made
to the plaintiff. He pointed out two
matters which he claimed were distinct. One
of them was that the defendant had no personal liability to pay the sum demanded
from
its own resources and the second was merely seeking to cause payment to be
made. He stated that on reading Clause 18 (b) it is foreseeable
that the
plaintiff may make a demand but fail to be paid under this arrangement. He
claimed that the liability of the defendant was
not of a personal nature but was
only to be used to access funds belonging to the principal debtor. A guarantee
by its very nature
is a separate or secondary agreement in which the guarantor
will become liable for the debt of the principal debtor if the latter
defaults.
Since the parties before court have taken a diametrically opposed position on
the scope of Clause 18 the duty of the court
is to determine which position
represents the what was agreed upon. In doing so, the language used in the
document is the determining
factor in accordance with the provision of section
93 of the Evidence Act. The section provides that:
“When the language used in a document is plain in itself, and when it applies accurately to existing facts, evidence may not be given to show that it was not meant to apply to such facts.”
Is the language
in the guarantee clause plain? I think it is my understanding of the language
used is that the defendant guaranteed
without any condition the punctual payment
of and all amounts payable by the borrower under the loan agreement. It also
guaranteed
in case of any failure, by the borrower to punctually pay my interest
on or principal of or any other amount due under the agreement
on first demand
made by tested telex to cause such payment to be made to the plaintiff in
compliance with the obligations of the
borrower. The payment by the defendant
under the same clause had to be made to the plaintiff in the manner and place
specified by
it without raising any exception or objection of whatever nature.
In a nutshell the above were the obligations of the guarantor while
testifying
as to why the defendant did not pay D.W.I stated that no demand was made on it
and that it had no legal obligations to
pay. He also testified that no demand
was made by the plaintiff within the contractual period.
The agreement
as a whole did not specify the period within which a demand had to be made by
the plaintiff. The plaintiff notified
the principal debtor and the guarantor
through many telexes that a default had occurred. These telexes were sent in
line with Clause
17 of the agreement. Admittedly the telexes were not tested in
accordance with Clause 18 but they were reminders that a default had
occurred
and that payment was not being punctually effected. Since the defendant received
all these telexes, it was put on notice
that the borrower had defaulted and soon
or later the creditor will be calling upon the guarantor to pay.
The
guarantee, in my view was a second collateral for the repayment of the loan in
the event of the principal debtor failing to pay.
I am not persuaded by the
submissions of counsel for the defendant, that the scope of the guarantee was
not of a personal nature
but was only to be used to access funds belonging to
the principal debtor. This is contrary to what was agreed.
The clause,
“Payment by the Guarantor shall be made to Aresbank without raising any
exception or objection of whatsoever nature”
did not give defendant access
to funds belonging to the principal debtor in my view. The liability created by
this clause was personal.
The plaintiff is liable for the debt. The last issue
to deal with are the reliefs. In view of my findings, the plaintiff is entitled
to the reliefs prayed for in the plaint. The first head of claim was the
outstanding sum on the loan, accrued interest and delayed
interest. At the
conclusion of the trial, the calculations done by the plaintiff was that the sum
of US$ 1,762,374.51 is due and
owing. The defendant did not dispute the amount
and therefore it will be awarded. The second relief sought was general damages
for
breach of contract. The law which has been set out in numerous authorities
is that where two or parties enter into a contract which
one of them has broken,
the damages to be awarded must have been in the contemplation of both parties at
the time of the contract.
The quantum is at the discretion of the court. The
subject matter of the agreement was a loan whose repayment was supposed to end
in 1993. The parties are both bankers and knew the consequences of default and
the consequences of recovery the same. The plaintiff
suggested the figure of 20
Million Shillings as adequate compensation. The defendant raised no complaint
about it. I will therefore
allow it interest on the decretal sum at the rate of
45% per annum was prayed for. Section 26 (2) of the Civil Procedure Act
was discretionary powers to the court to order the payment of interest on the
principal sum at a rate which the court deems reasonable.
What amounts to a
reasonable rate is a question of fact. The rate of 45% prayed for by the
plaintiff does not appear to me to be
reasonable. It is a higher scale. I will
award the current banking rate of 18% on the principal sum and general damages.
Judgment will be entered in favour of the plaintiff against the
defendant in the sum of US$ 1,762,374.51 which will carry interest
at the rate
of 18% p.a from the June 2, 1997, (the date of filing the suit) till payment in
full. General damages of Shs. 20,000,000/=
which will carry the same interest
from the date of judgment till payment in full.The plaintiff is awarded the
taxed costs of the
suit.
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