[2024] UGCommC 96

# THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA (COMMERCIAL DIVISION)

# **MISCELLANEOUS APPLICATION NO. 0616 OF 2023** ARISING FROM CIVIL SUIT NO. 0912 OF 2022

1. EXIM BANK (U) LTD

2. UKUTULU LTD

3. HABASA NELSON ::::::::::::::::::::::::::::::::::::

### **VERSUS**

LATIGO COLLINS ::::::::::::::::::::::::::::::::::::

# (Before: Hon. Justice Patricia Mutesi)

## **RULING**

## **Background**

This application was brought under Sections 5(1) and 9 of the Arbitration and **Conciliation Act Cap 4 and Rule 8 of the Arbitration Rules seeking orders that:**

- 1. Civil Suit No. 0912 of 2022 be referred to arbitration. - 2. Civil Suit No. 0912 of 2022 be dismissed. - 3. Costs of this application be provided for.

Briefly, the grounds of this application are that:

- 1. The Respondent filed Civil Suit No. 0912 of 2022 against the Applicants, the subject matter of the dispute being the fraudulent sale and transfer of the shares he owned in the $2^nd$ Applicant. - 2. The Articles of Association of the $2^nd$ Applicant provides for arbitration as the mode of dispute resolution for any dispute. - 3. The existence of this arbitration clause is operative, binding, enforceable and thus ousts the jurisdiction of this Honourable Court. - 4. It is in the interest of justice that this application be granted.

The application is supported by an affidavit affirmed by Nelson Habasa, the 3^rd Applicant and the Managing Director of the 2^nd Applicant. He stated that the Respondent filed Civil Suit No. 0912 of 2022 ("the main suit") in this Court against the Applicants seeking orders and declarations that the 2^nd and 3^rd Applicants were in breach of contract and in breach of trust, and that they had been fraudulent in their dealings thereby prejudicing his rights. In their written statement of defence, the Applicants disputed the claim and stated that the Respondent actually tendered a resignation letter dated 2^nd February 2021 and that, in that letter, he wilfully sold his shares. Mr. Habasa further stated that the Articles of Association of the 2^nd Applicant contain an operative, binding and enforceable arbitration clause. That clause provides that any differences arising between the company and any of the members or their respective representatives touching anything done or arising out of the relationship between the parties shall be referred to 2 arbitrators. He concluded that the main suit is incompetent, premature and an abuse of court process since the said arbitration clause ousts this Court's jurisdiction.

I note that, from the ECCMIS record in this application, the Respondent did not file an affidavit in reply to the application. There is a presumption in law to the effect that the failure by a respondent to file an affidavit in reply implies that that respondent is not challenging or opposing the application (See Kaahwa Francis V Commissioner Land Registration, HCMA No. 2 of 2012). Additionally, facts adduced by affidavit evidence that are neither denied nor rebutted are presumed to be admitted (See William Akankwasa v Registrar of Titles, HCMA No. 33 of 2008).

Where a party is duly served and they do not respond to the application, there is no other inference that can be deduced from such conduct than that of admission (See Wamala Abdu V Commissioner Land Registration, HCMC No. 16 of 2021). I hasten to add that a respondent who fails to file a reply to an application filed and served on him or her puts himself or herself outside the realm of the Court and loses the legal standing to make any representations to the Court in that matter. Accordingly, the submissions of the Respondent are hereby struck off the record and will not be considered in deciding this case.

Nevertheless, although this application is unopposed, I shall still examine it to ascertain whether or not there is legal justification for it to be allowed and for the orders sought to be issued by this Court.

### **Issue arising**

Whether Civil Suit No. 0912 of 2022 should be referred to arbitration.

## **Representation and hearing**

At the hearing of the application, the 2^nd & 3^rd Applicants were represented by Mr. Munanura Gibson of E. Elijah & Co. Advocates. Mr. Benjamin Ayebare Matuza appeared for the 1^st Applicant, while Mr. Okumu Daniel & Mr. Ponsiano Nyeko, appeared as counsel for Respondent. However while all counsel were directed to file their affidavits, as stated above the Respondent did not file an affidavit in reply to the application.

Save for the Respondent's submissions which have been struck off the record, I have considered all the other materials filed in this application, including the submissions of the parties and the laws and authorities cited.

### Determination of the issue

# Whether Civil Suit No. 0912 of 2022 should be referred to arbitration.

The brief facts of the dispute, as can be gathered from the pleadings, are that in 2019, the Respondent, Habasa Nelson and Kiyemba Yasir incorporated the 2^nd Applicant. The Respondent and Kiyemba Yasir owned 30% of the shares each while Habasa Nelson owned 40% of the shares. These 3 people became directors while one Siraji Ali became the secretary. The 3 directors opened a bank account for the $2^{nd}$ Applicant in the $1^{st}$ Applicant.

The 3 directors conducted the business of the 2^nd Applicant successfully until sometime in October 2022 when a resolution of the 2^nd Applicant was filed in the Companies' registry to the effect that the Respondent had resigned from directorship in the 2^nd Applicant. The Respondent insists that he never resigned and that the resolution was a forgery by the other 2 directors. On the other hand, the 2^nd and 3^rd Applicants maintain that the resolution was genuine and that the Respondent actually resigned from his position as a director in the 2^nd Applicant. Another resolution was filed stating that the Respondent had sold all his shares in the 2^nd Applicant and it was similarly contested.

In December 2022, through its other 2 directors, the 2^nd Applicant signed a stone quarry agreement with one Strabag International GMBH for the supply of stone materials for the upgrading of the Atiak – Adjumani highway. In that agreement, Strabag International GMBH agreed to pay a total of USD 325,000 to the 2^nd Applicant as consideration for the materials. The money was to be paid in 5 instalments into the 2^nd Applicant's bank account in the 1^st Applicant. Strabag International GMBH paid a total of USD 275,000 to the 2^nd Applicant which was subsequently withdrawn by the 2^nd Applicant.

The Respondent's case against the Applicants in the main suit seems to be that he was pushed out of the 2^nd Applicant so that the other 2 directors can share the proceeds of the stone quarry agreement, and of other later agreements without him. The Respondent's case also seems to be that the 1^st defendant failed in its duty of due diligence when it accepted the payment instructions from the other 2 directors without his endorsement and consent.

It is not in doubt that the Articles of Association of the 2^nd Applicant contain an arbitration clause (Clause 76 thereof). This clause provides:

"If, whenever any difference arises between the company and any of the members, their respective representative, touching the construction of these Articles herein contained or any act of anything made or done or arising out of the relation existing between the parties by reason of their presence or of the act, such differences shall be referred to two arbitrators to be appointed by each party in difference, or an umpire to be chosen by the arbitrators before entering in the consideration of the matters referred to them and every such difference shall be conducted with the provision of the laws for arbitrators for the time being in force in Uganda". Emphasis mine.

I am satisfied that the above clause is clear, binding and enforceable between the Applicant and the Respondent. However, the clause is not binding on the $1^{\rm st}$ Applicant who is not privy to the 2^nd Applicant's Articles of Association. It is trite law that an arbitration agreement or clause only binds the parties who consent to it. Although courts generally favour arbitration as a mode of dispute resolution, they will not compel the arbitration of claims that are outside the scope of an arbitration agreement. This scope is delimited by the nature of claims anticipated by, and the parties to, the arbitration agreement. (See AC Yafeng Construction Company Ltd v The Living World Assembly Ltd, HCCS No. 0739 of 2021.)

Having analysed all the materials on record, I remain unsure why the 2^nd and 3^rd Applicants included the $1^{st}$ Applicant as a party to this application. The $1^{st}$ Applicant neither filed an affidavit nor submissions supporting the application. The 1^st Applicant also failed to appear at the hearing of the application. Basing on these facts, it is not clear whether or not the 1^st Applicant, as a 3^rd party to the arbitration clause, is interested in this application in any way.

What is clear is that the Respondent's claims in the main suit can be classified into 2 broad clusters. The 1^st and larger cluster involves those claims relating to his alleged resignation from directorship, his alleged sale of all his shares in the $2^nd$ Applicant and the alleged mismanagement of the $2^nd$ Applicant's funds by the other directors. The 2^nd and smaller cluster involves the claims concerning to the 1^st Applicant's role in the withdrawal of the 2^nd Applicant's funds from its bank account held in the $1^{st}$ Applicant.

In my considered view, the 1^st cluster of claims in the main suit, as described above, is amenable to arbitration because it involves parties who are privy to the 2^nd Applicant's Articles of Association and, accordingly, parties who are bound by Clause 76 thereof which dictates that all disputes arising between the 2^nd Applicant and any of its members or their representatives are to be resolved in arbitration. On the other hand, the 2^nd cluster of claims in the main suit, as described above, are not amenable to arbitration because they involve the 1^st Applicant who is not privy to the 2^nd Applicant's Articles of Association and, as such, who is not bound by the arbitration clause therein.

This Court cannot compel the 1^st Applicant to go for arbitration together with the Respondent, the 2^nd and 3^rd Applicants. However, there is nothing in the law or practice which bars this Court from severing the Respondent's claims against the 1^st Applicant in the main suit from the remainder of his claims against the $2^nd$ Applicant and its other directors and members.

I am aware that there is a connection between the 2 clusters because it is the $1^{st}$ Applicant who is alleged to have facilitated the mismanagement of the 2^nd Applicant's funds through its failure to conduct due diligence before honouring payment instructions. Nevertheless, this connection is a light and fleeting one and does not render the two clusters so interrelated that they cannot be resolved separately. In fact, once the arbitrator has finally decided the legality of the circumstances surrounding the Respondent's exit from the 2^nd Applicant, and the directorship of the $2^nd$ Applicant at the times when the monies were withdrawn from its account is conclusively ascertained, this Court stands to

benefit since it will then be easier to answer the question of whether or not the 1^st Applicant was wrong to honour the respective payment instructions.

Since there are 2 distinct clusters of claims in the main suit which are severable and extricable from each other, I am confident that the arbitrator will be able to conveniently and conclusively resolve the $1^{\text{st}}$ cluster of claims involving the $2^{\text{nd}}$ Applicant and its members. The Court shall, in the meantime, stay the main suit pending the end of the arbitration. After the delivery of the award, the parties should return to this Court to deal with the remainder of the claims against the $1^st$ Applicant in the main suit.

Considering the above findings, this application partially succeeds and I make the following orders:

- The dispute between the Respondent and the 2^nd and 3^rd Applicants in $\mathbf{1}$ Civil Suit No. 0912 of 2022 is dismissed and referred to arbitration. - Civil Suit No. 0912 of 2022 is stayed pending the conclusion of the ii. arbitration. - Costs of this application shall abide by the outcome of Civil Suit No. iii. 0912 of 2022.

a a dinless

**Patricia Mutesi JUDGE**

$(30/04/2024)$