[2020] UGCA 2158

### THE REPUBLIC OF UGANDA IN THE COURT OF APPEAL OF UGANDA AT KAMPALA CIVIL APPEAL NO. 73 OF 2005

# **GREENLAND BANK LTD (IN LIQUIDATION):::::::::::::::APPELLANT**

#### VERSUS

## RWENZORI PROPERTIES LTD:::::::::::::::::::::::::::::::::::RESPONDENT

(Appeal from the decision of the High Court, before Arach – Amoko, J (as she then was), dated 12^th July, 2005, in Civil Suit No. 281 of 1998.)

## BEFORE: HON. LADY JUSTICE ELIZABETH MUSOKE, JA. HON. MR. JUSTICE CHEBORION BARISHAKI, JA. HON. MR. JUSTICE REMMY KASULE, AG. JA.

#### JUDGMENT OF THE COURT

This appeal is from the decision of the High Court (Arach-Amoko, J. (as she then was)) wherein the Court held that the appellant was bound by the guarantee dated 28^th February 1996, in respect of a company called J. Lutta & Co. Inc.

#### Background.

On 28^th February, 1996, the appellant executed an agreement with the respondent wherein the appellant guaranteed to pay the respondent any sum that became due from J. Lutta & Co. Inc under a Tenancy Agreement also dated 28^th February, 1996. J. Lutta & CO. Inc defaulted on its rental obligations and the respondent made a demand to the guarantor/appellant in the sum of USD 59,136.48. However, the appellant did not comply with the demand. The respondent instituted Civil Suit No. 281 of 1998 seeking to recover a total sum of USD 59,136.48, interest and costs of the suit.

The appellant's case at trial was that its liability under the guarantee was discharged when the respondent varied the terms of the Tenancy Agreement without the appellant's consent.

The trial Judge made a finding that the Guarantee of 28^th February, 1996 was enforceable against the appellant. The appellant was directed to pay

USD 37,908 or its equivalent in Uganda shillings, interest at 24 % from the date of filing the suit till payment in full on the said sum and costs of the suit.

The appellant, being dissatisfied with the decision of the trial Court appealed to this Court on the following grounds:

- $"1.$ The learned trial Judge erred in law and fact in holding that the guarantee of 28^th February, 1996 between the appellant and the respondent was enforceable against the appellant on the strength of clause 8 of the tenancy agreement between the respondent and M/S J. Lutta & co. Inc. - $2.$ The learned trial Judge erred in law and fact in awarding interest of 24% p.a on the decretal sum in United States Dollars, from the date of filing the suit till payment in full. - 3. The delay from the filing of written submissions on 29^th May 2000 to the date of delivery of the Judgment on 12^th July, 2005 deprived the learned trial Judge of the benefit of immediacy and occasioned a miscarriage of justice."

#### Representation.

At the hearing of the appeal, the appellant was represented by Mr. Isaac Walukaga; while the respondent was represented by Mr. Cyrus Baguma

#### Submissions.

Counsel for either party, with leave of Court, relied upon their written submissions filed in this Court.

#### Ground 1.

On ground 1 of the appeal, counsel for the appellant faulted the learned trial Judge for holding that the appellant was liable for the sums claimed by the respondent on the strength of a contract/tenancy agreement which the appellant was not privy to. In that regard, counsel submitted that the learned trial Judge erred in finding that the appellant's liability was triggered by clause 8 of the Tenancy Agreement to which the appellant

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was not privy. In counsel's view, the terms of the said Tenancy Agreement were, therefore, not binding on the appellant.

Counsel for the appellant further submitted that the effect of clause 8 of the Agreement was that no delay in the payment of rent would exonerate the appellant from its obligations. Counsel contended that the above provision was in conflict with the terms of the Guarantee which was the binding Agreement between the appellant and the respondent.

Counsel relied on Harlsbury's Laws of England 4^th Edition, and submitted that parties to a contract cannot create obligations for third parties not privy to the contract. Further, that the exceptions to the above general rule include: agency; assignment of choses in action; carriage of goods; commercial letters of credit; covenants concerning land; claims in tort; proprietary or possessory rights; registered companies; and sub bailments. It was counsel's submission that the appellant's contract with the respondent was not an exception to the general rule on privity of contract.

Counsel prayed that the trial Judge's finding that the appellant was liable to pay a sum of USD 37,908 on the basis of clause 8 of the Tenancy Agreement be set side.

In reply, counsel for the respondent submitted that the learned trial Judge properly applied the law to the facts and was guided by the authorities presented by the respondent in arriving at her decision. Further, that the appellant's submissions at trial support the findings and decision of the learned trial Judge that the Guarantee was enforceable on the basis of clause 8 of the Tenancy Agreement.

Counsel made reference to the finding of the learned trial Judge that the appellant would have been discharged under the guarantee but for the provisions of clause 8 of the Tenancy Agreement. He then submitted that the learned trial Judge could not be faulted for adhering to the terms of the contract of the parties.


Counsel for the respondent further submitted that the Guarantee signed between the appellant and the respondent clearly stated that the Guarantee had been made pursuant to the Tenancy Agreement dated 28^th February, 1996. In that regard, the appellant could not rightly say that it was a stranger to the Tenancy Agreement which was incorporated in the Guarantee and was subject of the said Guarantee.

Counsel relied on Oxford Dictionary of Law, 6^th Edition, and submitted that a guarantee agreement was secondary to the primary obligation. The appellant's obligations were created by the Tenancy Agreement and that the appellant could not, therefore, claim to be a stranger to the same. Counsel further cited Geraldine Mary Andrews and Richard Millet in "Law of Guarantee" Pg 142 that the surety's obligations are to be interpreted as co-extensive with those of the principal debtor. Counsel contended that it was an aspect of the principle of co-extensiveness that a surety would be discharged from its liability under the guarantee when the principal paid off the debt or performed the obligation. In the present case, that the principal had not yet been discharged.

Counsel submitted that the appellant was liable under clause 8 of the Tenancy Agreement, and as such, ground 1 of the appeal should fail.

As a first appellate Court, this Court is required, as one of its duties, to reappraise the evidence that was adduced in the Court below and to draw inferences of fact there from. (See rule 30(1) of the Judicature (Court of Appeal rules) Directions SI 13-10, Pandya Versus R [1957] EA $570$ ).

We have carefully considered the evidence adduced at trial, as well as the submissions of counsel as regards ground 1 of the appeal.

It was undisputed that by Agreement dated 28^th February, 1996, the respondent and J. Lutta & Co Inc entered into a Tenancy Agreement where the appellant herein was required to provide a guarantee. On the same day, the appellant issued a guarantee to the respondent in respect of the

Tenancy. In the course of the Tenancy, the respondent invoiced J. Lutta & Co Inc on several occasions as follows:

- 1. 5^th March, 1996, to the tune of USD 23,166.00, and J. Lutta & Co Inc paid USD 23,620.09 on 1^st July, 1996 after reminder dated 20^th May, 1996; - 2. 4^th September, 1996, to the tune of USD 49,329.54, and J. Lutta & Co Inc paid USD 49,184.54 on 2^nd October, 1996; - 3. 11^th November, 1996, to the tune of USD 2,386.80 which invoice was not attended to immediately by J. Lutta & Co Inc; - 4. 25^th February, 1997, to the tune of USD 51,716.34 which amount was paid by J. Lutta & Co Inc in two installments on 8^th May, 1997 and $13^th$ June, 1997: - 5. 1^st September, 1997, to the tune of USD 59,185.62, which was never paid.

On 21^st November, 1997, the respondent made its first demand on the appellant under the guarantee and the appellant did not honor the demand.

The appellant's case at trial was that the respondent in failing to make a demand upon the appellant promptly upon the default by J. Lutta & Co Inc and in allowing the said tenant to have freedom as to the time of payment of rent, the appellant had varied the terms of its contract with the tenant. According to the appellant, the said variation of the contract prejudiced it in a substantial manner because had the guarantee been called promptly, the claim would have been USD 23,620.99 only.

The learned trial Judge accepted the appellant's evidence that if the appellant had not tolerated the default by Lutta & Co Inc (Tenant) and stuck to the terms of the tenancy agreement, the appellant's liability would

$\mathsf{S}$

have been only USD 23,620.09. In that regard, that the respondent had varied the terms of the contract materially which was prejudicial to the appellant. The learned trial judge then made a finding that basing on the above, the appellant would have been discharged under the guarantee owing to the respondent's breach, but for clause 8 of the tenancy agreement.

Clause 8 of the Tenancy Agreement stated as follows:

"8. PROVIDED ALWAYS AND IT IS HEREBY DECLARED that any neglect by the Tenant forbearance or delay in payment of the rent and other payments as and when the same became due or delay in taking steps to enforce performance or observance of the several covenants and stipulations herein contained or any other act, omission or thing whereby (but for this provision) the Guarantor(s) might be released or exonerated shall not release or in any case lessen or affect the liability of the Guarantor(s) under the guarantee on the part of the guarantor(s) herein before contained".

In essence, the effect of clause 8 of the Tenancy Agreement reproduced above was that delay in payment of rent by Lutta & Co Inc or failure by the respondent to enforce the timely payment of rent would not discharge/exonerate the appellant of its obligations created under the quarantee.

According to the appellant, it was not privy to the Tenancy Agreement between the respondent and Lutta & Co Inc, and therefore, the above provision in the said Tenancy Agreement could not be enforced against it.

A contract of guarantee as defined under the Contracts Act, is a contract to perform a promise or to discharge the liability of a third party in case of default of that third party. In that regard, we find that the appellant's obligations as a guarantor were created by the Tenancy Agreement. It is therefore, not correct to say that the Guarantee was completely independent of the Tenancy Agreement. The appellant could not have bound itself under the Guarantee without knowing the liability created under the Tenancy Agreement.

We accept the submission of counsel for the respondent that a guarantee obligation is accessory to the principal debtor's obligations and that the doctrine of privity does not apply in such a case. The appellant's obligations under the Guarantee were co-extensive to the Tenancy Agreement since the guarantee agreement arose as a result of the Tenancy Agreement.

Basing on the above, we find that the appellant was bound by clause 8 of the Tenancy Agreement. We are unable to fault the trial Court that the appellant was not discharged from its obligations under the Guarantee for the respondent's breach, owing to the above Clause in the Tenancy Agreement.

Ground 1 of the appeal is, therefore, disallowed.

#### Ground 2

On ground 2 of the appeal, counsel for the appellant submitted that the rate of 24% p.a from the date of filing the suit till payment in full awarded to the respondent by the trial Judge was unconscionable and manifestly high. Counsel relied on Stanbic Bank Uganda Ltd Versus Hajji Yahaya Sekalega T/A Sekalega Enterprises, High Court Civil Suit No. 185/2009 and Nipun Norratam Versus Crane Bank Ltd, Court of Appeal Civil Appeal No.75 of 2006, for the above submission.

Counsel prayed that the rate of 24% on the decretal sum awarded by the trial Court is set aside and be replaced with 6%.

In reply, counsel for the respondent submitted that the rate of 24% p.a interest awarded by the trial Court was reasonable considering that the average commercial bank lending rate was 26% p.a. Counsel further submitted that the trial Judge judiciously exercised her discretion in making the award and that the appellate Court has no basis to interfere with such discretion.

Counsel further submitted that the facts in Nipun Norratam Versus Crane Bank Ltd, Court of Appeal Civil Appeal No.75 of 2006 relied

$7$

upon by the appellant were distinguishable from the present case. This was considering that the interest awarded in Nipun Norratam was compounded weekly at a rate of 36% while interest awarded in the present case was 24% per annum.

Counsel prayed that the interest awarded by the learned trial Judge be upheld.

We have considered the submissions of counsel on either side and the authorities relied upon in support of and against this ground of appeal.

It is trite that the award of interest as well as the determination of the rate of interest is in the discretion of court. (See Omunyokol Versus Attorney General, Supreme Court Civil Appeal No. 06 of 2012). It is also a settled position of the law that an appellate court will not interfere with an award of interest by a trial court unless the trial judge failed to take into account a factor or factors he or she ought to have taken into account or where the award is so high or so low as to be regarded an erroneous estimation. (See Crane Bank Ltd Versus Nipun Norrattam Bhatia, Supreme Court Civil Appeal No. 2 of 2014).

From the record, the trial Judge awarded interest of 24% per annum on the decretal sum of USD 37,908 or its equivalent in Uganda Shillings from the date of filing the suit till payment in full. According to the appellant, the rate of 24% per annum for a sum in USD was unconscionable and high.

We accept the submission of counsel for the appellant that the rate of 24% awarded by the learned trial Judge was high and unconscionable. This is also taking into consideration the nature of this case where although the appellant was found to be liable under the Guarantee, the respondent was also in breach of the terms of the Tenancy Agreement. Besides, the amount of 24% per annum was unconscionable taking into account that the Court rate is 6%. Accordingly, we shall reduce the interest rate from 24% to 8% per annum from the date of Judgment till payment in full.

In the result, ground 2 of the appeal is answered in the affirmative.

#### Ground 3

Counsel for the appellant submitted that the trial Judge took more than 5 years to deliver her Judgment. He further pointed out that while the submissions were made on 29^th May, 2000, however, the Judgment was delivered on 12^th July, 2005. Counsel relied on Division Ltd & Ors Versus Standard Chartered Financial Services Ltd & Anor, Court of Appeal (Nairobi) Civil Appeal No.88 of 2000, for the submission that the inordinate delay to deliver the Judgment deprived her of the benefit of immediacy. In counsel's opinion, that was the reason for the trial Court's decision in making an order that the appellant was bound by a contract which it was not privy to. Counsel further submitted that had the trial Judge maximized the benefit of immediacy, she would not have made the said erroneous orders.

It was counsel's submission that the delay occasioned a miscarriage of justice and an unfair determination of the suit.

In reply, counsel for the respondent submitted that although the delay was unexplained by the trial Judge, it did not cause any miscarriage of justice. In counsel's view, the delay instead gave the trial Judge ample time to consider the parties' submissions and to properly evaluate the evidence.

Counsel further submitted that the above was an afterthought since the appellant had never complained about the delay.

We find that indeed there was a delay between the time of hearing the case and the time of passing Judgment. However, upon our careful perusal of the Judgment, we did not find any blatant unexplained errors which could be attributed to the delay. There was no injustice caused on the appellant owing to the delay in passing Judgment.

This ground of appeal must fail.

In the result, this appeal partially succeeds. We substitute the trial Court's order as to payment of interest at 24% per annum as follows:

The appellant shall pay interest of 8% per annum on the İ. decretal sum of USD 37,908 or its equivalent in Uganda Shillings from the date of Judgment till payment in full.

Considering that this appeal partly succeeds, each party shall bear its own costs in this Court.

We so order.

Dated at Kampala this ....................................

Elizabeth Musoke Justice of Appeal.

**Cheborion Barishaki** Justice of Appeal.

**Remmy Kasule**

Ag. Justice of Appeal