[2009] UGCA 61

# HE REPUBLIG OF UGANDA k^ ffwft

### IN THE COURT OF APPEAL OF UGANDA AT KAMPALA

HON JUSTICE A. E. N. MPAGI. BAHAGEINE, JA. HON JUSTIGE C. N. B. KITUMBA, JA. HON JUSTICE C. K. BYAMUGISHA, JA. S GORAM:

## CIVIL APPEAL NO 54 OF 2OO4

# o INSURANCE COMPANY OF EAST AFRICA (U) LTD. ==APPELLANT

### AIG (U) llt{llf f p===========================filf \$pQN DENT VERSUS

²⁰ (Appeal from the Judgment of the High Court of Uganda (Commercial Division) Kampala, (Lugayizi, J) HCCS .38412002

#### JUDGMENT OF KITUMBA. JA.

²⁵ This is an appeal from the judgment of the High Court of Uganda (Commercial Division) Kampala, whereby the appellant was ordered to pay the respondent Shs 25,605,084 as an outstanding premium under the reinsurance contract and also interest on the above sum at the rate ol 2O%o p.a. from 31l8l2OO1 till payment in full.

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The facts of this appeal are not in dispute and are as follows: -

lnsurance Company of East Africa (U) Ltd, the appellant and AIG (U) Ltd, the respondent, are both insurance companies. ln the year 2001,

the appellant insured a German Company Strabag/ Stirling in respect of road repair in Eastern Uganda. The insurance policy dated 9th February 2001 in favor of Joint Venture Srabag /Stirling for an insured sum of Euros 23,000,000. The premium there under was Euros 103,500. The s appellant requested the respondent to reinsure part of the risk as the risk was big. The respondent accepted to reinsure 19.38% of the risk and issued a reinsurance policy dated 1't June 2001. Under this policy, the respondent was entitled to a premium of Euros 20,058 (UGS. 27,279,288).

l0 The insurance brokers, (Allianz) delayed to pay due premiums to the appellant who in turn delayed to pay the respondent. Allianz requested the appellant to accept installment payments which it did.

However, Allianz later turned around and informed the appellant that it was entitled to Euros 103,500 as premium and supposed to insure only

rs 10% oI the risk and not the entire insured risk of Euros 23,000,000 as had been done in February 2001.

ln consequence of that the appellant advised the respondent to scale down it's participation to 10% on the sum earlier envisaged in its reinsurance policy. The respondents rejected the proposal and insisted zo that the appellant should pay the agreed premium. The appellant made a payment of UGS. 2,182,343 to the respondent. Subsequently, the respondent sued the appellant in High Courl seeking to recover its full premium under the reinsurance policy.

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During the trial the following four issues were framed for determination.

- 1. Whether the plaintiff was entitled to stay on cover for more than 30 days? - 2. Whether there was a common mistake belween the plaintiff and the defendant? - 3. Whether the defendant should be estopped from pleading common mistake? - 4. The available remedies.

The learned trial Judge answered the 1"t, and the 3'd issues in the affirmative and the second issue in the negative. On the 4th issue the learned judge ordered the appellant to pay the following. l0

- 1. A sum of shillings 25,605,084 as outstanding premium under the reinsurance contract. - 2. lnterest at the rate of 2Oo/o p.a. from 1't/8/2001 till payment in full. - 3. Costs of the suit. l5

The appellant dissatisfied with, the judgement and orders of the learned trial Judge has filed its appeal in this court on the following grounds:

1. That the learned trial iudge erred in law and in fact when he held that Section 34(1) and (2) of the lnsurance Act Cap 213 Laws of Uganda gives an insurer the option to decide whether a contract of insurance is void or voidable when premium there under is un paid for 30 daYs. I ²⁰

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- 2. That the learned trial judge erred in law and fact when he held that the plaintiff (respondent) and the defendant (Appellant) were entitled to remain on cover for more than 30 days. - ⁵ 3. That the learned trial Judge erred in law and in fact when he held that the defendant (appellant) and the plaintiff (respondent) did not operate under common mistake. - 4. That the learned trial judge erred in law and in fact when he held that the defendant (appellant) was estopped from relying on the defence of common mistake.

### 5. That the learned trial judge erred in granting the remedies prayed for by the plaintiff (respondent).

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When the appeal came up for hearing, learned counsel Mr. Peters Musoke appeared for the appellant and learned counsel, Mr. John Magezi represented the respondent.

Counsel for both parties argued the grounds of appeal in the following two batches; grounds 1 and 2 jointly and grounds 3 and 4 jointly. I shall handle the appeal in the same manner. I ²⁰

> On the first batch, Mr. Peters Musoke, counsel for the appellant, referred to Section 34(1) and (2) of the lnsurance Act Cap 213.

He argued that the issue to be resolved in this matter is whether ^a contract of lnsurance where premium is not been paid for 30 days is void or voidable under the lnsurance Act Cap, 213 Laws of Uganda. He submitted that under Section 34(1) and (2) of the lnsurance Act after 30

s days if no premium has been paid, the policy is no longer valid. That in the instant case, the policy is dated 1/6/2001 on Exhibit P2, thirty days would end on 30/6/2001, and as the premium was not paid within these thirty days the policy was rendered void according to law. According to counsel, the only exceptions when it can be altered beyond thirty days is l0 business emanating from a broker licensed under the Act. He submitted that the business in the suit did not emanate from a broker. The appellant directly contacted the respondent which rendered the exception inapplicable. He argued that the only remedy available to the insurance company in this case is the expenses incurred.

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Counsel for the respondent, supported the learned trial judge's judgement. He contended that in Section 34 of the lnsurance Act, the word "shall" is not mandatory but should be read as "may". He conceded that there was a contract between the parties which did not emanate from a broker, and section 34 (1) and (2) must be read together. There is no illegality created by extending credit since avoidable means voidable. He contended that the intention of the legislature was to make the contract voidable and quicken the payment of premiums.

25 Respondent's counsel submitted further that the appellant continued to assure the respondent that it was going to pay and there was no change at all in the amount that was re insured. The respondent decided to

remain on cover hoping for the payment. He submitted that it is at the option of the parties to remain on cover or not. When the cover is removed the contract is void and unenforceable. ln the circumstances the respondent decided to keep on cover leaving the contract valid in law and entitled to premium agreed upon in the contract.

I have listened to the submissions of both counsel and perused the record. The issue in grounds I and 2 revolves around Section 34(1) and (2) of the lnsurance Act Cap 213 Laws of Uganda. And is; -

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'Whether the appellant was entitled to stay on cover for more than 30 days and whether a contract of insurance on expiry of 30 days when the premium has not been paid becomes void or voidable under the lnsurance Act'.

Section 34 of the Insurance Act provides; - Credit on Premium t5

> 1. An lnsurer shall not allow credit on the premium payable for more than thifi days except for business emanating from the broker licensed under this Act.

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- 2. Where the insured fails to pay premium within the period provided under subsection (1), the policy shall be avoidable and the insurer shall be entitled to recover fhe expenses incurred. - Section 34 (1) of the lnsurance Act is couched in mandatory terms. The insurer is not allowed to extend credit on a premium for more that thirty 25

days. The subsection states that the insurer "shall not" allow credit for more than thirty days.

The exception which is provided for under the Act is for business emanating from a licensed broker under the Act. ln the appeal before court the appellant dealt directly with the respondent and there was no broker in the transaction. ln the circumstances the exception does not apply to this case.

Counsel for the respondent has vehemently argued that the section l0 does not create an illegality in case credit is extended in excess of thirty days. He has urged court to treat the word avoidable appearing in section 34 (2) as voidable. According to him the insurer is free to treat the insurance contract as valid even if the premium is not paid for a period exceeding thirty days.

l5 Black's law Dictionary 6th Edition P.136 defines "avoid" as follows:- 'To annul, cancel, make void. To destroy the efficacy of anything to evade or escape'.

Osborne's concise law Dictionary 8'h Edition P.38 defines "avoid"

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" To make void. A person is said to avoid a contract when he sets up a defence in a legal proceeding taken to enforce it some defect which prevents it from being enforceable"

I am of the considered view that where the insured does not pay the premium within the time stipulated in subsection 1 then according to subsection 2, his failure to pay is a defence in legal proceedings to enforce the contract by either party to the insurance contract. The 25

intention of the legislature was to ensure that in insurance transactions payments are made promptly, at least within thirty days. With due respect, the learned trial judge erred in law when he held that the respondent was at liberty to extend credit to the appellant in excess of thirty days whereas that was prevented by the law.

-5 This would dispose of the whole appeal but in case I am wrong I tackle grounds 3 and 4 on common mistake.

On these grounds, counsel for both parties adopted their submissions in the High Court. Mr. Musoke contended that the judge erred in law when he held that there was common mistake between the parties and the appellant was estopped from pleading it. He submitted that both parties made the same mistake, which involved the mistaken belief that the subject matter of their contract was in existence. The mistake made was one as to the quality of what had been contracted about. He argued that the parties believed they were contracting as to a sum insured of Euros 23,000,000 whereas not. That the common mistake in this case was an operative mistake which rendered the contract at common law void ab initio. Consequently all concerned must be returned to the position they were in before the contract was made. t0 l5 t 20

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Counsel for the respondent submitted that it was a unilateral mistake and does not affect the respondent. There was never a mistake between the appellant and the respondent. Relying on Bell Vs Uniliver Bros

zs LTD (1932) A. C, he submitted that there is no right to rescide for unilateral mistake. He be pointed out that if it transpired later that the appellant and Allianz were mistaken about the sum insured and the premium payable, that that was their business. They should not be seen to drag the respondent into it. He added that the respondent did not operate under ^a s fundamental common mistake in respect of the reinsurance contract. The reinsurance contract came into existence after the appellant and Strabag had signed the insurance contract, which the respondent was not a party to. The respondent and the appellant agreed upon the said terms well knowing that there was a standing contract of insurance l0 between the appellant and Strabag where the sum insured and the premium payable were settled. He prayed court to uphold the judgment of the High Court.

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I have listened to both counsel's submissions, evidence on record in rs relation to the law, ln order to successfully apply common mistake the situation must be such, as if the contract had never existed. The mistake must go to the root of the contract and it is operative. lt nullifies consent and renders the contract void ab initio.

I zo 25 ln the circumstances at hand the question is whether the parties herein operated under a common mistake that went up to the root of the reinsurance contract. I fully agree with the learned trial judges' findings that the parties herein did not operate under a fundamental common mistake in respect of the reinsurance contract. The reinsurance contract came into existence after the appellant and Strabag had signed the insurance contract which the respondent was not a party to. The

respondent and the appellant discussed the terms, there was no third

pany involved when they were entering into the contract. The respondent agreed upon the said terms well knowing that there was a standing contract of insurance between the defendant and Strabag where the sum insured and the premium payable were settled.

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ln the circumstances I will attribute the mistake on the appellant not the respondent. Had the appellant involved the third party Allianz while entering into the contract with the respondent I would accept the plea of common mistake. ln the instant case, it was a new contract between the r0 appellant and the respondent totally different from the first contract entered into by the appellant and Allianz which contained different terms clear to both parties. Therefore, the consequential agreement between the appellant and Allianz to alter the said figure on account of common mistake between themselves could only amount to a unilateral mistake 15 which did not affect the respondent and therefore the reinsurance contract.

ln the circumstances, I would hold that there was no common mistake between the appellant and the respondent and therefore, the appellant 20 cannot rely on the defence of common mistake.

ln the result, I would hold that this appeal succeeds on ground 1 and 2. I would order that the respondent pays costs of this appeal. Dated at Kampala this......05th ......day of ...... August......2009

### C. N. B. KITUMBA JUSTICE COURT OF APPEAL

### JUDGMENT OF HON A. E. N. MPAGI. BAHIGEIN E. JA

5 I agree the appeal should succeed as proposed by Kitumba JA in the lead Judgment. Since Byamugisha, JA also agrees. lt is so allowed on terms on the lead judgment.

Dated at Kampala this ......51h .....day of ... August...2009

#### JUDGMENT OF HON. C. K. BYAMUGISHA JA

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I had the benefit of reading in draft form the judgment prepared by Kitumba JA which has just been delivered. I agree with the reasons she has given and the orders proposed therein. I would allow the appeal with costs both here and the court below.

Dated this ...5'h ...day of ....... August 2009

# THE REPUBLIG OF UGANDA

## IN THE COURT OF APPEAL OF UGANDA AT KAMPALA

s GORAM: HON JUSTICE A. E. N. MPAGI. BAHAGEINE, JA. HON JUSTICE C. N. B. KITUMBA, JA. HON JUSTICE C. K. BYAMUGISHA, JA.

## l0 GIVIL APPEAL NO 54 OF 2OO4

o INSURANCE COMPANY OF EAST AFRIGA (U) LTD. ==APPELLANT

l5 VERSUS ArG (U) LTMTTED RESPONDENT

²⁰ (Appeal from the Judgment of the High Court of Uganda (Commercial Division) Kampala, (Lugayizi, J) HCCS .38412002

#### JUDGMENT OF KITUMBA. JA.

²⁵ This is an appeal from the judgment of the High Court of Uganda (Commercial Division) Kampala, whereby the appellant was ordered to pay the respondent Shs 25,605,084 as an outstanding premium under the reinsurance contract and also interest on the above sum at the rate of 20o/o p.a. from 31lBl2O01 till payment in full.

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The facts of this appeal are not in dispute and are as follows: -

lnsurance Company of East Africa (U) Ltd, the appellant and AIG (U) Ltd, the respondent, are both insurance companies. ln the year 2001,

the appellant insured a German Company Strabag/ Stirling in respect of road repair in Eastern Uganda. The insurance policy dated 9th February 2001 in favor of Joint Venture Srabag /Stirling for an insured sum of Euros 23,000,000. The premium there under was Euros 103,500. The s appellant requested the respondent to reinsure part of the risk as the risk was big. The respondent accepted to reinsure 19.38% of the risk and issued a reinsurance policy dated l"tJune 2001. Under this policy, the respondent was entitled to a premium of Euros 20,058 (UGS. 27,279,288).

- r0 The insurance brokers, (Allianz) delayed to pay due premiums to the appellant who in turn delayed to pay the respondent. Allianz requested the appellant to accept installment payments which it did. However, Allianz later turned around and informed the appellant that it was entitled to Euros 103,500 as premium and supposed to insure only - 15 10% of the risk and not the entire insured risk of Euros 23,000,000 as had been done in February 2001.

ln consequence of that the appellant advised the respondent to scale down it's participation to 10% on the sum earlier envisaged in its reinsurance policy. The respondents rejected the proposal and insisted 20 that the appellant should pay the agreed premium. The appellant made a payment of UGS. 2,182,343 to the respondent. Subsequently, the respondent sued the appellant in High Court seeking to recover its full premium under the reinsurance policy.

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During the trial the following four issues were framed for determination.

- 1. Whether the plaintiff was entitled to stay on cover for more than 30 days? - 2. Whether there was a common mistake between the plaintiff and the defendant? - 3. Whether the defendant should be estopped from pleading common mistake? - 4. The available remedies.

The learned trial Judge answered the 1't, and the 3'd issues in the affirmative and the second issue in the negative. On the 4th issue the learned judge ordered the appellant to pay the following. l0

- 1. A sum of shillings 25,605,084 as outstanding premium under the reinsurance contract. - 2. lnterest at the rate of 2O% p.a. from 1"1812001till payment in full. - 3. Costs of the suit. l5

The appellant dissatisfied with, the judgement and orders of the learned trial Judge has filed its appeal in this court on the following grounds:

1. That the learned trial judge erred in law and in fact when he held that Section 34(1) and (2) of the lnsurance Act Cap 213 Laws of Uganda gives an insurer the option to decide whether a contract of insurance is void or voidable when premium there under is un paid for 30 days. a ²⁰

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- 2. That the learned trial judge erred in law and fact when he held that the ptaintiff (respondent) and the defendant (Appellant) were entitled to remain on cover for more than 30 days. - 3. That the learned trial Judge erred in law and in fact when he held that the defendant (appellant) and the plaintiff (respondent) did not operate under common mistake. - 4. That the learned trial iudge erred in law and in fact when he held that the defendant (appellant) was esfopped from relying on the defence of common mistake.

## 5. That the learned trial iudge erred in granting the remedies prayed for by the plaintiff (respondent).

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When the appeal came up for hearing, learned counsel Mr. Peters Musoke appeared for the appellant and learned counsel, Mr. John Magezi represented the respondent.

Counsel for both parties argued the grounds of appeal in the following two batches; grounds 1 and 2 jointly and grounds 3 and 4 jointly. I shall handle the appeal in the same manner. o ²⁰

> On the first batch, Mr. Peters Musoke, counsel for the appellant, referred to Section 34(1) and (2) of the lnsurance Act Cap 213.

He argued that the issue to be resolved in this matter is whether ^a contract of lnsurance where premium is not been paid for 30 days is void or voidable under the lnsurance Act Cap, 213 Laws of Uganda. He submitted that under Section 34(1) and (2) of the lnsurance Act after 30

5 days if no premium has been paid, the policy is no longer valid. That in the instant case, the policy is dated 11612001 on Exhibit P2, thirty days would end on 30/6/2001, and as the premium was not paid within these thirty days the policy was rendered void according to law. According to counsel, the only exceptions when it can be altered beyond thirty days is business emanating from a broker licensed under the Act. He submitted that the business in the suit did not emanate from a broker. The appellant directly contacted the respondent which rendered the exception inapplicable. He argued that the only remedy available to the insurance company in this case is the expenses incurred. l0

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Counsel for the respondent, supported the learned trial judge's judgement. He contended that in Section 34 of the lnsurance Act, the word "shall" is not mandatory but should be read as "may". He conceded that there was a contract between the parties which did not emanate from a broker, and section 34 (1) and (2) must be read together. There is no illegality created by extending credit since avoidable means voidable. He contended that the intention of the legislature was to make the contract voidable and quicken the payment of premiums.

Respondent's counsel submitted further that the appellant continued to assure the respondent that it was going to pay and there was no change at all in the amount that was re insured. The respondent decided to 25 remain on cover hoping for the payment. He submitted that it is at the option of the parties lo remain on cover or not. When the cover is removed the contract is void and unenforceable. ln the circumstances the respondent decided to keep on cover leaving the contract valid in s law and entitled to premium agreed upon in the contract.

I have listened to the submissions of both counsel and perused the record. The issue in grounds I and 2 revolves around Section 34(1) and (2) of the Insurance Act Cap 213 Laws of Uganda. And is; -

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'Whether the appellant was entitled to stay on cover for more than 30 days and whether a contract of insurance on expiry of 30 days when the premium has not been paid becornes void or voidable under the lnsurance Act'.

Section 34 of the lnsurance Act provides; - Credit on Premium t5

> 1. An lnsurer shall not allow credit on the premium payable for more than thirty days except for business emanating from the broker licensed under this Act.

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- 2. Where the insured fails to pay premium within the period provided under subsection (1), the policy shall be avoidable and the insurer shall be entitled to recover the expenses incurred. - Section 34 (1) of the lnsurance Act is couched in mandatory terms. The insurer is not allowed to extend credit on a premium for more that thirty 25

days. The subsection states that the insurer "shall not" allow credit for more than thirty days.

The exception which is provided for under the Act is for business emanating from a licensed broker under the Act. ln the appeal before

5 court the appellant dealt directly with the respondent and there was no broker in the transaction. ln the circumstances the exception does not apply to this case.

Counsel for the respondent has vehemently argued that the section does not create an illegality in case credit is extended in excess of thirty days. He has urged court to treat the word avoidable appearing in section 34 (2) as voidable. According to him the insurer is free to treat the insurance contract as valid even if the premium is not paid for a period exceeding thirty days. l0

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Black's law Dictionary 6th Edition P.136 defines "avoid" as follows:- 'To annul, cancel, make void. To destroy the efficacy of anything to evade or escape'. l5

Osborne's concise law Dictionary 8th Edition P.38 defines "avoid"

" To make void. A person is said to avoid a contract when he sefs up a defence in a legal proceeding taken to enforce it some defect which prevents it from being enforceable" o ²⁰

I am of the considered view that where the insured does not pay the premium within the time stipulated in subsection 1 then according to subsection 2, his failure to pay is a defence in legal proceedings to enforce the contract by either party to the insurance contract. The 25

intention of the legislature was to ensure that in insurance transactions payments are made promptly, at least within thirty days. With due respect, the learned trial judge erred in law when he held that the respondent was at liberty to extend credit to the appellant in excess of s thirty days whereas that was prevented by the law.

This would dispose of the whole appeal but in case I am wrong I tackle grounds 3 and 4 on common mistake.

On these grounds, counsel for both parties adopted their submissions in the High Court. Mr. Musoke contended that the judge erred in law when he held that there was common mistake between the parties and the appellant was estopped from pleading it. He submitted that both parties made the same mistake, which involved the mistaken belief that the subject matter of their contract was in existence. The mistake made was l0

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one as to the quality of what had been contracted about. He argued that the parties believed they were contracting as to a sum insured of Euros 23,000,000 whereas not. That the common mistake in this case was an operative mistake which rendered the contract at common law void ab initio. Consequently all concerned must be returned to the position they were in before the contract was made. l5 o ²⁰

> Counsel for the respondent submitted that it was a unilateral mistake and does not affect the respondent. There was never a mistake between the appellant and the respondent. Relying on Bel! Vs Uniliver Bros

LTD (1932) A. C, he submitted that there is no right to rescide for unilateral mistake. 25

He be pointed out that if it transpired later that the appellant and Allianz were mistaken about the sum insured and the premium payable, that that was their business. They should not be seen to drag the respondent into it. He added that the respondent did not operate under ^a fundamental common mistake in respect of the reinsurance contract. The reinsurance contract came into existence after the appellant and Strabag had signed the insurance contract, which the respondent was not a party to. The respondent and the appellant agreed upon the said terms well knowing that there was a standing contract of insurance between the appellant and Strabag where the sum insured and the premium payable were settled. He prayed court to uphold the judgment of the High Court.

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l5 I have listened to both counsel's submissions, evidence on record in relation to the law, ln order to successfully apply common mistake the situation must be such, as if the contract had never existed. The mistake must go to the root of the contract and it is operative. lt nullifies consent and renders the contract void ab initio.

20 ln the circumstances at hand the question is whether the parties herein operated under a common mistake that went up to the root of the reinsurance contract. I fully agree with the learned trial judges' findings that the parties herein did not operate under a fundamental common mistake in respect of the reinsurance contract. The reinsurance contract zs came into existence after the appellant and Strabag had signed the insurance contract which the respondent was not a party to. The

respondent and the appellant discussed the terms, there was no third

party involved when they were entering into the contract. The respondent agreed upon the said terms well knowing that there was a standing contract of insurance between the defendant and Strabag where the sum insured and the premium payable were settled.

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ln the circumstances I will attribute the mistake on the appellant not the respondent. Had the appellant involved the third party Allianz while entering into the contract with the respondent I would accept the plea of common mistake. ln the instant case, it was a new contract between the appellant and the respondent totally different from the first contract entered into by the appellant and Allianz which contained different terms clear to both parties. Therefore, the consequential agreement between the appellant and Allianz to alter the said figure on account of common mistake between themselves could only amount to a unilateral mistake which did not affect the respondent and therefore the reinsurance contract.

ln the circumstances, I would hold that there was no common mistake between the appellant and the respondent and therefore, the appellant zo cannot rely on the defence of common mistake.

ln the result, I would hold that this appeal succeeds on ground 1 and2. I would order that the respondent pays costs of this appeal. Dated at Kampala this......05th ......day of ...... August......2009

C,N. B. KITUMBA JUST]GE COURT OF APPEAL

## JUDG MENT OF HON A. E. N. MPAGI-BAHIGEINE, JA

5 I agree the appeal should succeed as proposed by Kitumba JA in the lead Judgment. Since Byamugisha, JA also agrees. lt is so allowed on terms on the lead judgment.

Dated at Kampala this ...... Sth .....day of ... August...2009

## JUDGMENT OF HON. C. K. BYAMUGISHA. JA

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I had the benefit of reading in draft form the judgment prepared by Kitumba JA which has just been delivered. I agree with the reasons she has given and the orders proposed therein. I would allow the appeal with costs both here and the court below.

Dated this ...5'h ...day of ....... August 2009