[1994] UGSC 40

# IN THE SUPREME COURT OF UGANDA

## AT MENGO

(CORAM: WAMBUZI, C. J., ODOKI, J. S. C., AND ODER, J. S. C.)

#### CIVIL APPEAL NO. $37/93$

## BETWEEN

BUKOTO FARMERS AND GENERAL MERCHANDISE LTD.

**APPELLANTS**

#### A N D

LIBYAN ARAB UGANDA BANK) 1. BANK OF UGANDA $2.$

$\overline{a}$

**RESPONDENT**

(Appeal from the judgment of the High Court of Uganda (L. E. M. Mukasa-Kikonyego,J.) dated 12th July, 1983.

$...$

I N

## CIVIL SUIT NO. 302/1989

#### Judgment of A. H. O. Oder, J. S. C.

This is an appeal against the judgment of the High Court dismissing the Applicants' Suit instituted to recover sums of money alleged to have been lost in Foreign exchange transactions.

The Appellant is an incorporated Company which at the material time carried on import and export business in Kampala. The first Respondent is a Commercial Bank also carrying on banking business in Uganda. The Appellant was it's customer for purposes of the transactions in question. The second Respondent is the Central Bank of Uganda, established by the Bank of Uganda Act, 1966.

Sometime in 1987, the Appellant applied through its banker, the first Respondent, to the second Respondent for purchase of Kenya shillings $396,494/$ to import animal feeds pre-mixes from M/S Unga Ltd. of Kenya. It deposited Uganda shillings $34,301,600/$ = as local cover, and letters of credit for the Kenya currency were opened in favour of Unga Ltd. on account of the Appellant. This was the amount of local cover required to buy Kenya shillings $396,494/$ at the rate of exchange of Uganda shillings $86/80$ to sh. $1/$ = Kenya money, the ruling rate at the time. When Unga Ltd. failed to supply the feeds, the Appellant instructed the 1st Respondent to cancel the letters of credit in favour of Unga Ltd. and open letters of credit in favour of M/S Nutrichen Ltd. a U. K. firm, in the sum of pound sterling $£14.532.00$ . This was the

equivalent of Kenya Shs. 396, 494/=, for the same quantity of feeds.

On or about 10th August, 1987, the first Respondent recovered the Kenya shillings $396,494/$ = from Unga Ltd. and resold it to the second Respondent. The resale was carried out at the old exchange rate of Shs. $86/80$ and not at Shs. $3/70$ which was the new exchange rate due to the currency reform and devaluation exercise that had in the meantime taken place under The Currency Reform Statute of 1987. By so applying the old exchange rate of Shs.86/80 the second Respondent caused loss of Uganda Shs. 105,000/= to the Appellant. There was also a short-fall of Uganda Shs. 1,050,000/= from what was necessary to cover the purchase of pound sterling £14,534,00. Consequently, the Appellant had to top up to the required amount. The two sums are the losses which the Appellant claimed from the Respondents in the suit. It also prayed for a declaration that the Appellant was entitled to sell to the second Respondent the sum of Kenya Shs. 396, 494/= at the rate of exchange of Uganda Shs. $3/70$ .

In their joint written statement of defence, the Respondents denied the Appellants' claims, saying in effect that when the letters of credit in favour of Unga Ltd. were cancelled, the Appellant's foreign exchange of Kenya Shs.396,494/= had to be surrended to, and re-purchased, by the 2nd Respondent at the exchange rate of Shs.86/80 at which it had been purchased in the first place by the Appellant. This was done in accordance with the requirements of existing foreign exchange policy and regulations which governed foreign transactions between the second Respondent and purchasers of foreign currency. Consequently, the Respondents were not liable to the Appellant for the claims made in the Suit.

Four issues were framed at the trial:

Was it correct for the 1st Defendant to accept Uganda $1.$ Shs. 34,415,679 (old currency) in return for Kenya Shs. 396,494/= on 10th August, 1987 instead of Shs. 1, 477, 028/= (new currency)?

Was the Plaintiff entitled to recover Shs.1,056,000/ $=$ $2.$ paid to the 1st Defendant to top up the payment for the new letters of credit in pounds sterling?

- What was the liability of the 2nd Defendant? $3.$ - Quantum of damages to the Plantiff, if any. $4.$

$3 \cdot \cdot \cdot \cdot$ /The

The Appellant adduced evidence from its Managing Director, Samwiri Mirundi (P. W.1), in support of its claims, and to illustrate that the second Respondent did not act consistently in application of its policies and regulations which allegedly required that unutilised foreign exchange should be surrendered at the rate at which it had been purchased. Joab Turyamureba (P. W.2), the Managing Director of the Appellant's sister Company, testified to the effect that on 13th January, 1987, his Company, M/S Corn Industries, purchased from the 2nd Respondent Kenya Currency for import of drugs from Unga Ltd. of Kenya, and opened letters of credit for Kenya Shs.57,000/= in favour of the suppliers. There was a shortage of drugs. So, not all the value of the letters of credit was utilised, leaving a balance of Kenya Shs. $34,450/$ = which was subsequently credited to that Company's account at the Uganda Commercial at the ruling rate subsequent to the currency reform and devaluation.

For the Respondents two banking officials gave evidence. Francis Emuron (D. W.1) was a Principal Banking Officer in the second Respondent Central Bank, and Benon Mugisha Bahemuka (D. W.1) a Manager in-Charge of letters of credit and Imports and the Uganda Commercial Bank. The gist of their evidence was first that as a matter of policy and practice, laid down in 1982, when unutilised foreign exchange was surrendered to the 2nd Respondent, it was repurchased at the rate at which it had originally been purchased from the 2nd Respondent and not at the ruling rate if it was different. Two reasons were given in justification of the policy and practice. First, the Central Bank wanted to prevent speculation on foreign currency; second, the Central Bank and the customer concerned would know who was to bear losses due to exchange rate fluctuations. A distinction was, therefore, made between foreign currency perviously bought from the Central Bank and that which was sold to it for the first time. It was necessary to do this because a customer could buy foreign currency specifically for speculative purposes, hoard it and later sell it when the exchange rate was higher. It was also done to encourage customers to bring in surplus foreign exchange at the prevailing rate, especially if that rate was higher than the previous rate.

According to Emuron (D. W.1), the policy and practice of 1982 was accepted by all concerned; but he did not know whether it was made by way of a Statutory Instrument, legal notice, general notice, or a circular. By practice, it was brought to the notice of all customers who surrendered funds to the Central Bank. As an operational official Emuron (D. W.1) knew that a und practice as being in force, but did not know the basis.

$4 \cdot \cdot \cdot \cdot /$ evidence

$3'$

The second aspect of the Respondents' evidence was to show that the repurchase at the prevailing rate of the unutilised Kenya Currency surrendered by the Appellant's sister Company, Corn Industries Ltd., was an error, and not an inconsistent application of the 2nd Respondent's policy and regulations.

The learned trial Judge answered the first issue in the positive, holding that under the laws applicable, the 2nd Respondent was authorised to make regulations and formulate policies governing transactions between the Bank and its customers. The Currency Reform Statute, 1987, was intended to reform and devalue the Uganda shillings. It was not intended to abrogate the existing regulations and policies of the 2nd Respondent, such as those relating to the rate of exchange applicable at any given time. Hence, all existing rules and policies not abolished by that Statute continued to apply. The Statute specifically provided for devaluation and demonetization. It did not abolish the rates of exchange which were applicable to the exchange currencies prior to the Statute coming into force. Consequently, it was correct for the 1st Respondent to have accepted Uganda Shs. 34,415,679/= (old currency) in return for Kenya Sns.396,494/= on 10th August, 1987 instead of Uganda Shs. 1,477,028/= (new Currency).

The learned trial Judge answered all the other issues in the negative.

Only one ground of appeal was set out in the memorandum. It is that the learned trial Judge erred in law when she held that it was right of the 2nd Respondent to refund the Appellant's money at the rate of Uganda Shs.86/80 to 'K' Shs.1.00 instead of the then current rate of exchange which was Shs. 3/70 to 'K' Shs. 1.00.

It must be observed that the appeal appears not to have been made against the 1st Respondent, though it was dragged in as a party. It was made only against the 1st Respondent.

I think that the ground of appeal must fail.

The only issue in this appeal, as I see it, is not the one which Mr. Kateera, learned Counsel for the Appellant, convassed so ably before us. The issue, according to him, concerned the obligation of a person who undertook to pay a sum of money but before doing so the due intrisic value of money changed / to devaluation or revaluation of the relevant currency. Was the person bound to pay the amount originally due or the one subsequent to the change in value of the currency? According to the learned Counsel, the principle of nominalism

$5 \cdot \cdot \cdot \cdot$ /required

required that a debt expressed in the currency of any Country should be paid in the nominal amount of whatever currency was legal tender at the time of the payment irrespective of any fluctuations which might have occurred in the value of the currency in terms of, for instance, gold, sterling or any other currency, betw een the time when the debt was incurred and the time of payment. In the instant case, the principle required that the Appellant should have been refunded its Uganda Currency used to purchase the Kenya Currency at the prevailing rate of exchange and not at the old rate at which the Kenya Currency had been purchased.

With respect, I do not agree with Mr. Kateera's contension that this case concerned the 2nd Respondent to repay money to the Appellant after the Uganda Currency had been devalued. The authorities to which he referred to are not relevant to this case. In my opinion the real issue in this case was whether the Respondent was entitled to accept back the Appellant's unutilised Kenya Currency of Shs.396,494/= at the rate of Uganda Shs. 86/80 which was no longer the prevailing instead of Shs. 3/70 which was the prevailing rate. Which rate was applicable?

I think that the 2nd Respondent could buy the Kenya Currency in question at the rate of Shs. 3/70 as the Appellant contended it should have done, or at Shs, 86/80 which it contended it was entitled to do, only under the powers conferred on it by the Bank of Uganda Act, 1966 (hereinafter referred to as "the Act", before it was repealed by the Bank of Uganda Statute, 1993. First it could do so by virtue of the provisions of Section 23(1) of the Act, which provided that:

"The Bank may purchase and sell external Currencies and purchase, sell, discount and rediscount bills of exchange and Treasury Bills drawn in or at places outside Uganda and maturing within one hundred and eighty four days exclusive of days of grace from the date of acquisition".

(The under-lining is mine). I think that the Kenya shilling is an external Currency for purposes of this Section. The transactions involved in this case amounted to a purchase of the Kenya Currency under consideration by the 2nd Respondent.

Secondly, Section 20 of the Act as amended provided that:

$6$ .... /Subject

$\overline{5}$

"(1) Subject to the provisions of any enactment relating to exchange control, the Bank may buy and sell the shilling against any external currency.

For the purposes of the preceeding sub-Section, $(2)$ (a) the bank may quite different rates of exchange in respect of different spot transactions; (b) the Minister may, by Statutory Instrument, make regulations for the purposes of carrying out or giving effect to the provisions of this Section".

The effect of sub-Section (2)(a) was that when the Bank was selling or buying the shilling against any external currency it might quote different rates of exchange in respect of different spot transactions. In my view, this appears to have entitled the bank to seal or buy the shilling at any rate of exchange it deemed appropriate in any transaction it might be involved at any particular time.

The provisions of Section 20 of the Act was implimented by the Minister by Statutory Instrument No.124 of 1982, which established a Foreign Currency Auction Committee to carry out the functions of the Bank under that Section. This meant that the function of buying and selling the shilling was to be carried out by auction of external currencies against which the shilling was bought or sold. In doing so, the Committee was entitled to apply different rates of exchange in respect of different spot transactions to which I have already referred.

It has to be pointed out that the Foreign Currency Auction Committee established by S.1 No.124 of 1982 for purposes of Section 20 of the Act had the same membership as the Foreign Currency Auction Committee established by Statutory Instrument No. 125 of 1982 for purposes of Section 13 of the Act. That Section appears to have been concerned mainly with determination of the "external value of the shilling" as opposed to "rates of exchange", which was the concern of Section 20.

Section 13 provided as follows:-

The Minister may, on the recommendation of the Board, $!!(1)$ by Statutory Instrument, either, (a) determine the external value or values of the shilling in relation to any convertible currency or basket of currencies, or,

$(b)$ where the shilling is floating, appoint a Committee to determine, from time to time, the external value or values of the shilling in relation to any convertible currency or basket of currencies.

(2) The determination of the value or values of the shilling shall be made in accordance with any internal agreement to which purpose<br> ugenca is a cartine econsisting of nine members, was;<br> of the Money Market Committee, consisting of nine members, was;<br> of the Money Market Committee, con was: transactions which the Government has decided will be financed at a

The purposes of the second Committee, known as the "Foreign Currency Auction Committee" was to -

"To determine / value for purposes of exchange rates for transactions which are not financed at a preferential rate".

the

It was not stated anywhere in the Act whether the "external value or values of the shilling" under Section 13 was the same or different from "rates of exchange" at which the Bank was authorised to "buy and sell the shilling against any external currency" under Sec. 20(1) of the Act. But it would appear that the two did not mean the same thing. However, whatever might be the case, it appears that since it was the same Foreign Currency Auction Committee which determined the value of the shillingsfor transactions which were not financed at a preferential rate when the shilling was floating for purposes of Section 13, when buying and selling the shilling against the value or values of external currencies in any transaction for purposes of Section 20 of the Act, the Committee must do so in relation to the value of the shilling against the external Currency concerned.

In the instant case it appears to me that the tansactions that the parties participated in were more to do with rates of exchange under Section 20 than with determination of the external value of the shilling under Section 13 of the Act. If the shilling was floating at the relevant time, it would seem that the Foreign Currency Auction Committee that fixed the rate at which the 2nd Respondent upurchased the sum of Kenya Shs. 396, 494/= had to do so in relation to the external value of the Uganda Shsilling against the Kenya Currency.

$8$ $\cdots$ /However,

.7

preferential rate".

However, in view of the inadequacy in the Appellant's pleadings and evidence adduced I find that it failed to make out a case against the Respondents. It neither pleaded nor proved that the 2nd Respondent, in the discharge of its functions under the provisions of Section 20 of the Act, was bound to purchase the sum of Kenya Shs.396,494/= at the rate of Shs.3/70 after coming into force of the Currency Reform Statute of 1987. It was the Appellant making claims against the Respondents. The onus, therefore, lay on it to prove its case. In my opinion, it failed to discharge that burden on the balance of probability.

The manner in which the 2nd Respondent appears to have exercised its Statutory powers in the instant case also calls for some remarks. Having apparently relied on public policy and Statutory powers as its defence to the Suit, it ought, in my view, to have indicated clearly the basis of such policy and the nature of its powers and where the same may be found by customers such as the Appellant. Needless to say, it is a sad commentary for the 2nd Respondent's standard of operation for its official who testified as an expert Emuron (D. W.1) to have said that that he did not know the basis of such a policy whether it was stated in a Statutory Instrument or a general circular.

The second unsatisfactory aspect of the 2nd Respondent's exercise of its functions in this case is the apparent inconsistency of the application of the relevant policy. The evidence of Samwiri Mirundi (P. W.1) and Turyamureba (P. W.2) indicates that the policey and practice was inconsistently applied in the case of the Appellant's sister Company. The explanation that it was an error sounds to me pretty unconvincing.

For the reasons given, I would dismiss this appeal with costs.

Dated at Mengo this [[the day of April, 1994.

ODER, JUSTICE OF THE SUPREME COURT.