[1998] UGHC 36

## THE REPUBLIC OF UGANDA

## IN THE HIGH COURT OF UGANDA AT KAMPALA

## CIVIL SUIT 1287/97

## MUHINDO ENTERPRISES LTD ...................................

- VERSUS -

GREENLAND BANK LTD ...................................

## BEFORE: THE HONOURABLE LADY JUSTICE C. K. BYAMUGISHA

## JUDGEMENT

The plaintiff a limited liability company by its amended plaint dated 02/03/98 sued the defendant seeking the following reliefs:

- $a)$ a declaration that the acquisition and transfer of the ceramics factory by the defendant was fraudulent and illegal; - $b)$ an order cancelling entry of transfer vide instrument No. 294150 of 20th May 1998 and reinstatement of the plaintiff as the registered proprietor - General damages for breach of contract. $C$ ) - d) Punitive and/or compensatory aggravated damages. - A declaration that the act of the defendant in demanding for 60/ share holding $e)$ in the plaintiff company was illegal and in breach of banking ethics, rules and practice. - $f$ Costs and any other relief.

$\mathbf{1}$

A resume of the facts leading to these proceedings seem to be the following: The $\lambda$ plaintiff was a customer of the defendant. At the time of filing this suit, was the registered owner of a Ceramics factory comprised in Freehold Register Volume 76 Folio 21 Plot 3 at Kasirize Mukono District. The said factory was purchased from the Government of the Republic of Uganda under its privatisation and divestiture programme. Some of the funds were provided by the defendant under an arrangement contained in exhibits D.3 and D.4 both dated 12th April 1996.

After the purchase the plaintiff through a company called African Ceramics and Porcelain Company which was incorporated thereafter caused the said company to prepare a feasibility for purposes of its rehabilitation and modernisation. The study (exhibit P.1) was done and presented to the defendant. The purpose of the presentation was to enable the plaintiff access some funds under a line of credit called the Investment Term Credit Refinance Fund operated by the Bank of Uganda. The defendant bank was one of the Commercial bands in the country who were accredited to Bank of Uganda and could borrow the funds on behalf of its customers.

When the feasibility study was presented to the defendant it was appraised and in the $D.22$ words of Mutebi the project officer, it was found viable and approved. On the 28th February 1997, the Managing Director of the bank submitted the project proposals to the Bank of Uganda and applied for a loan of Us \$996,300 on behalf of the plaintiff. In return Bank of Uganda wrote to the Managing Director of the defendant a letter dated 27/06/97 (exhibit D. V) approving a loan totalling Us \$982,000 in respect of the defendant's client for purchase of new machinery and equipment required for the rehabilitation of the ceramics factory.

On 14th July 1997 the defendant wrote to the plaintiff informing it that the Bank of Uganda had approved the required project financing under the following terms:-

$\overline{2}$

Amount of Refinance

Us \$982,000 equivalent to Shs. 1,041.902,000

100/ Foreign Component

Us \$926,000

80/ Working capital:

Us \$56,000

rate of conversion applied is shs. 1,061 to Us \$1 although the rate of exchange icable on the date of release of the refinance will determine your liability.

Loan Period:

7 years, including 2 years of grace. Repayment to be made in 10 equal semiannual instalments commencing two years from the date of the first instalment.

Refinance Period:

12.69/ to be charged by B. O. U. Interest will be repayable quarterly viz 1st January, 1st April, 1st July and 1st October of each year. The refinance rate shall be reviewed half yearly effective 1st January and 1st July of each year and will apply to outstanding balances.

Greenland Bank charges:

The bank will charge 5/ p.a on (Total amount disbursed/outstanding amount) on top of the Bank of Uganda Refinance rate;


). Disbursement.

Will be made on request as provided for in the ITCRF guidelines.

### 6. Procurement:

Of goods and services shall be made in accordance with IDA guidelines and approval of this bank IRO goods to be imported an application for confirmation of L/C will be made by you to ITCRF of Bank of Uganda who will instruct Citibank, New York, to confirm the L/C.

#### 7. Repayment:

The refinance amount shall be repaid in accordance with the a motivation schedule to be communicated to you at the end of December and June of each year.

#### 8. Security:

- Plot 3 Volume 31 Folio 17 developed land at Kasirize in Goma Sub $i)$ county, Kyagwe. - Debenture on all company assets including machinery and equipment ii) to be purchased; - Personal guarantee of each of the Directors. iii) - You will complete security documentation with this bank before funds iv) are disbursed.

Reprrrlinq

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You are advised to open fl senarate account for the operation of this facility at the IIead office. You rvill also fulDislt us \\'ith llle ltrllorving returns to be sublnittctl to B. O,U

-Quarterly Progress Report on implementation of the project.

-Statement of accounts of the project and utilization/comPletion certificates.

-Yearly audited statements of accounts of accounts.

If the terms and conditions of the above facility are acceptable to you, please sign the duplicate copy of this letter of offer and return it to you, please sign the duplicate copy of this letter of offer and return it to ur/./

The ptaintiff accepted the terms offered and executed a mortgage (exhibit P.3) on ,atL rhe property mentionedf a debenture (exhibit P.4). In return ihe defendant executed ^a t promissory note (exhibit P.6). At the request of the plaintiff a letter of credit No. ²¹⁹ (exhibit D.1) was opened in favour of tonrho Motors for the supply of a number of items, l-hc lcrter was irrevocable and operationa[ only if the World Bank issued its commitment. 'l'he negotiating bank was Standard Chartered Bank which was supposed to claim reimbursement from Citibank New York. After this the defendant commenced what I would consider to be fresh negotiations with the plaintiff. Apparently the plaintiff had some Chinese expens rvho were supposed to participate in the ceramic project. The defendant rvanred ro know when the Chinese experts were likely to come and provide equity funds.


A series of meetings rvere held to resolve the dispute to no avail. In one the defendant advanced the plainrifT a sum of shs. 32 million as some :ilngs ,-t-: - capital. A number of letters were exchanged but the differences over 'ivesto ^r remained unresolved which culminared in the letter of 12llll97 (exhibit P..r, ng rhe plaintiff that the bank cannor proceed rvirh the financing of rhe projecr

The defendant on its part denied generally the allegarions in the ptainr. In 1: :ticular it averred in paragraph nine thereof thar the feasibility study (exhibit p.l) which was the basis for granting ITCRF loan lost credibility when a major shareholder and technical expert dropped out; that the rerms bf the letter of credit (exhibit D.l) which were opened in July 1997 were not observed and the financial credibility and ability uf the main sponsor, Mr. Jamal Muhindo was complerely eroded to the extent that no prudenr Financier would pump money in a project sponsored by him.

The following were the agreed issues:-

- (a) Whether the defendant committed a breach of:- - (i) ITCRF refinancing loan agreemenr; - (ii) the mortgage deed;

Debenrure deed.

- (b) Whether the plaintiff frustrated rhe performance qf rne ITCRF refinance loan agreement. - (c) Whether the rransfer of rhe ceramics facrory was fraudulent and/or illegal. - (d) Reliefs if any.

The plaintiffs called rhree rvirnesses namely Muhindo (P. W.l), Bwire (P > W.2) and Wadembere (P. W.3). The def-ence on its part called fbur wirnesses to wit Sekimpi (D. W. !),

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Mutebi (D. W.2), Kasujja (D. W.3) and Musanje (D. W.4).

An appraisal of the testimony given, the following seem not to be disputed:-

The relationship between the plaintiff and defendant was one of banker and customer. $(1)$

- There were two separate transactions between the parties namely the purchase of the $(2)$ Ceramics factors by the plaintiff with a facility partly provided by the defendant and the ITCRF refinancing loan in which the defendant was acting as the intermediary bank. - The defendant withdrew from proceeding with the terms contained in exhibit P.2. $(3)$ - The Ceramics factory which had been mortgaged to the defendant as part of the $(4)$ conditionalities for the ITCRF loan was transferred into the names of the defendant during the trial of this case.

Both counsel made length written submissions in support of the respective cases.

In order to determine the first issue, regard must be had to the relationship which exists between a bank and its customer which is usually contractual. In all cases where the customer has dealings with third parties, the bank acts as an agent of its customer. The plaintiff applied for a loan through the offices of the defendant. Its application was forwarded to Bank of Uganda on 28th February 1977 and the Bank of Uganda replied on 27th June 1997 (exhibit D.5) giving the loan. The testimony of Wadembere was to the effect that Bank of Uganda does not deal with sub-borrowers but the accredited Commercial banks like the defendant. Therefore the defendant was acting as the agent of the plaintiff in the latters dealing with Bank of Uganda and the suppliers of materials for the rehabilitation of the Ceramics factory. In all these dealings the bank had a duty to act diligently with regard to the manner it handles instructions from its customer. Failure to do so would amount to gross negligence and a breach of that duty. See <u>Uganda Commercial Bank v. Makerere</u>


# University [1980] H. C. B. 53; Uganda Co-operative Union Ltd v. Uganda Commercial Bank [1980] H. C. B. 133.

In the matter now before Court, it was the plaintiff's case that the defendant as its agent breached its contractual relationship when it cancelled the loan after introducing a new element of equity contribution, when it was not part of the terms given in exhibit P.2.

On the part of the defendant, it was submitted that there was no contract, that the letter of 14/07/97 (exhibit P.2) was merely informing the plaintiff of the position in Bank of Uganda; that the letter of Credit (exhibit d.1) was not operational and that the advancement of shs. 32 million to the plaintiff was just a sign of good will and extreme consideration on the part of the defendant, and it was to enable the plaintiff to carry out renovations of the factory pending fulfilment of the terms of the facility.

## Was there a contract?

The answer to this question must be sought in the rules which have been laid down over the years in the law particularly those relating to offer and acceptance. If there has been an offer to enter into legal relations on definite terms and that offer is accepted by the person who was offered the terms, the law considers that a contract has been made, whether there has been an acceptance of the offer made can be informed from the words which the parties have used. Parties to a valid contract obtain and incur reciprocal rights and obligations.

In the matter now before me, the parties reduced the agreement (contract) into writing and so no extrinsic evidence is required to add or subtract from what was put in writing. The letter of 14/07/97 (exhibit P.2) contained terms of offer which were accepted by the plaintiff. Therefore a binding contract was made when the terms offered were accepted.

After getting acceptance of the terms by the plaintiff the defendant executed a promissory note (exhibit P.6) in accordance with <u>clause seven</u> of exhibit D.5. It also opened


^aletter of credit (exhibir D.l) and it was the responsibility of the bank to appiy tbr its confirmation in accordance with clause 5 of the same exhibit. The bank did not. Therefore Bank of Uganda could not insrrucr citibank N.y to confirm the krter of credit, or ask the world Banli to issue it' special commirment in favour of the negotiating bank which was co\e Standard chanered Ba,k. The gue of the det'endant in the whole project was clearry spert out and it is therefore uncrear to me why rhe defendant hrrned round and demanded equiry contribution from a Mr. Dong after it had committed itself in black and white. It is therefore my finding that the det'endant was in breach of its obligations towards its customer under the ITCRF loan, the debenture and the legat mortgage.

The second issue is whether the plaintiff frustrated the performance of rhe contracr. In his submission counsel for the plaintiff referred ro the case of Horvard & Co. (Africa) Ltd v. Burton [1964]EA in which the doctrine of frustration was judiciary considered Essentially for this doctrine to apply there should be no fault on the parr of either pany ro the contract. It has the effect of discharging the parties tiom their contractual obligations. Therefore frustration cannot be by one party but it must be due to circumstances which make it impossible for the furure performance of the contract.

The onus is on the pany alleging frustration to prove ir.

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In rhe instant case, ir was alleged by the defendant that the letter of the plaintiff dated 3ll10l9'7 (exhibit D.9) was rhe srraw thar broke rhe camel's back. with respecr I do not agree. In rhe letrer the plainriff was questioning the sinceriry and credibility of the bank as far as the project was concerned. The defendant bank had the Bank of Uganda guidelines (exhibit D.2) which contained conditionaliries for alr those apprying for the loan. The participating banks had a duty to ensure rhar the cus(omer who is apptying for the ITCRF line of credit complies with those guiderines before the participating bank submitted any


application for a loan to Bank of Uganda. There was no contractual relationship between Bank of Uganda and the plaintiff. The testimony of Wadembere $(P. W.3)$ was to the effect that Bank of Uganda did not deal directly with sub-borrowers like the plaintiff. The contents of exhibit D.5 seems to support this position in my view. Having opened a letter of credit, it was the responsibility of the defendant bank to apply to Bank of Uganda for its confirmation so that the supplier is paid. The defendant did not do so. The plaintiff had no access to the facility except through the defendant. It cannot therefore be said that the plaintiff frustrated the terms contained in exhibit P.2 and D.5.

The third issue is whether the transfer of the Ceramic factory into the names of the defendant was illegal and fraudulent. It is not disputed that the factory was transferred by the defendant into its names on 04/05/98. This was justified by Kasujja D. W.3 who stated that the bank was realising its security since the plaintiff had defaulted on the repayment of a loan amounting to shs. $464,967,620$ = on its Jinja Road Branch.

A/C No. 00-02-404105-000. The defendant had also sent a demand not (exhibit P.8) dated 11th May 1998 to the plaintiff.

It was submitted by the plaintiff that the transfer of the suit property was fraudulent because no consideration was paid and the plaintiff's equitable right of redemption was violated.

On the defendant's part it was submitted that no fraud was proved since the intention of the transfer was realisation of security. It was also the case for the defendant that as a registered mortgagee it had power to transfer the property and any instrument signed by it is valid and effectual to all intents and purposes as per section 94 of the Registration of Titles Act.

It was further submitted that section 19 of the Financial Institutions Statute authorises a financial institution like the defendant to secure a debt on any immovable property and in the


event of default in repayment of such debt hold in immovable property for reassures at the earliest moment suitable for the institution. It was therefore submitted that the incondant transferred the property to itself with the intention of realising its security and not a sefraud the plaintiff.

I must say at once that dealing with property in a manner inconsistent with rights of the owner is an act of fraud.

In the matter now before me, the property which the defendant transferred itself had been mortgaged purposes of the ITCRF facility and the plaintiff was required to open a separate account for the loan at the head office of the defendant on Kampala Road. The mortgage deed (exhibit P.3) was executed for that purpose. It provided among other things that during the continuance of the security.

"no person shall be registered as proprietor of the mortgaged property or any part thereof without the consent in writing of the bank"

It was also provided in Clause 3B that in the event of default the bank would exercise its powers conferred by the mortgage deed, the Registration of Titles Act and the Mortgage Decree. All the powers conferred by these statutes do not provide for the mortgagee to transfer the mortgaged property to itself. Since the mortgage deed was reduced in writing the bank cannot be heard to say that it transferred the property to itself for purposes of later selling the mortgaged property to realise the money due and owing. In any case the property was released from the mortgage the moment the bank transferred the property to itself. Therefore it could not sold as mortgaged property but as the property of the bank as registered proprietor of the property but not as mortgagee. I think that the two are certainly different. The defendant is in my view bout by the terms of the mortgage deed. Therefore its action of transferring the property of the plaintiff into its own names when it has not


purchased the same was contrary to the terms of the mortgage deed the Registration of Titles Act and the Mortgage Decree. It is therefore itlegal and fiaudutent, I so find.

The last issue to deal with are the reliefs which the plaintiff is entitled to. In view of my findings that rhe defendant transferred the plaintiffs ceramics factory illegally, it is entitled to an order cancelling the entry of transfer of thc detendanr's name and reinstaring the plaintiff's name as the registered proprietor. The position of the panies should remain as at the 20th May 1998 when rhe transfer was effected. The plaintiff also claimed general damages for breach of contract. The general rule with regard to damages in breach of contract were set out in the case of IIadl I} xcnd:rle (1854)9 Exch. 341 where rhe Coun said:

"where two parties have made a contract which one of them has broken, rhe damages which the orher party ought to receive in respect of such breach should be such as may fairly and reasonably be considered either naturally is in accordance to the usual course of things from such a breach itself or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it. "

Applying the above principle ro the facrs of the case, ir was submitted by counsel for the plaintifT that it is entitled to damages as a result of the breach and the issue was one of quantum. He claimed thar the plaintiff shower.l that if the defendant had performed its part it would have earned profits amounting to Uganda shillings 1,773,9'72,0001 =. He srated thar loss of profits was foreseeable. He dismissed the det'endant's testimony contained in exhibit d.9 as mere fabrication.

On the defendants it was submitted that no damages should be awarded since the plaintiff suffered no loss. counset submitted that the feasibiliry study was presented the

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defendant tbund many figures were exaggerated. Counsel relied on the case of Kibona Brothers ^A encies vs Ugan da Nletal Products and Enanrellins Co. Ltd ll981lH. C. B.7s when it was held inter alia that damages have to be not more than necessary to compensate the plaintiff to a position he would have been in if the contract had been performed.

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In the instant case, I have no doubt in my mind rhat when the panies entered into the contract, the defendant as the plaintiff's agenr knew thar it had a duty ro act ditigently in ^a manner pertaining ro the loan facility. It also knew the purpose for which the loan was required and it also knew that the plaintiff would suffer damages if rhe disbursement wenr wrong. The defendant harl advanced money ro the plaintiff to purchase ,t. ..,rrni.h[it f\ had to be repaid using rhe profirs from the factory. I rhink the plaintiff had brought itself within the rule set our in Hadlev v Baxendale case for an award of general damages for the loss suffered which rvas in their contemplation at the time of the comract. The question is one of quantum. There is no mathematical formula to measure the quannrm of damages. But I am satisfied as a whole that the plaintiff has succeeded in proving its case and the loss. I therefore think tha( the sum of shs. 300,000,000/ = (three hundred million shillings) would be adequate compensation and will meer the ends oijusrice I wili nor award any punirive damages as these have been taken care of the award of compensatory damages. In any case no authority was referred to by counsel to show that punitive or exemplary damages can be awarded in breaches of contract.

In the result, judgment is entered in tavour of the plaintiff againsr rhe defendanr under the following terms:-

- 1. A declaration that the acquisirion and transfer of the ceramics factory by the defendant was illegal. - 2. An order cancelling the entry of transfer and the reinstatement of the parties positions


as at the 30/05/98.

3 General damages ofshs. 300,000,000/ = which will carry interest ar the rate of6/ p.a from the date of judgmenr till paymenr in full.

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Costs of the suir. 4

C. K. Byamugisha

Judge

# THE REPUBLIC OF UGANDA

# IN THE HIGH COURT OF UGANDA AT KAMPALA

## CIVIL SUIT NO. 1287 OF 1997

MUHINDO ENTERPRISES LTD....................................

#### **VERSUS**

GREENLAND BANK LTD....................................

## **DECREE**

THIS SUIT having been heard and finally determined by JUSTICE C. K. BYAMUGISHA coming this 10th May, 1998 for final judgment read by<br>the Deputy Registrar(Civil) GODFREY NAMUNDI in the presence of MOHMED MBABAZI counsel for the plaintiff and DAVID MULIRA counsel for the defendant.

IT IS HEREBY ORDERED and DECREED that

- $1.$ The plaintiff's suit against the defendant succeeds upon the following findings: - - The defendant breached its obligations towards the $a)$ plaintiff under the Investment Term Credit Refinance Fund loan, Debenture and Legal Mortgage. - $b)$ The act of the defendant in transferring the property of the plaintiff comprised in FRV 76 Folio at KASIRIZI measuring approx 10.21 acres into its own names when it had not purchased the same was contrary to the terms of the mortgage deed, the Registration of Titles Act and the Mortgage Decree and was therefore illegal and fraudulent. - $C$ ) The plaintiff suffered loss and damage as a result of the defendant's breach of contract. - 2. The plaintiff is entitled to and accordingly judgment is entered in its favour for:- - A declaration that the acquisition and transfer of the $a)$ ceramics factory by the defendant was illegal. - $b)$ order cancelling the entry of transfer An and reinstatement of the parties positions as at 20th May, 1998.

$C$ ) An award of general damages of $300,000,000/=$

That the award of general damages shall carry interest at the 3. rate of 6% per annum from the date of judgment till payment in full.

AND IT IS FURTHER ORDERED and DECREED that the defendants do pay taxed costs of this suit to the plaintiff.

GIVEN under my HAND and the SEAL of this HONOURABLE COURT this... $\mathcal{A}$ day of.... $\mathcal{A}$ day....... 1999.

### **PARTICULARS**

- Order of cancellation of instrument No. 294150 of 20th May, 1. 1998 in the Land Register and Duplicate Certificate of Title of FRV 76 Folio 21 at Kasingiri. - Order for reinstatement of the parties position on the Land $2.$ Register as of 20th May, 1998. - General damages of Three hundred million (Shs. 300,000,000/=) 3. - $\overline{4}$ . Interest at 6% per annum from 10th May, 1999 till payment in full.

4NZI K 32VICI $\langle \mathcal{L} \rangle$ $\mathcal{A}$ $\mathcal{L}$ $\mathcal{S}$ APPROVE THE TERMS THIS DECREE COUNSEL FOR THE PLAINTIFF)

REGISTRAR

WE APPROVE THE TERMS-OF THIS MREGREE& LUBULWA ADVOCATES (COUNSEL FOR THE DEFENDANT)<br>P. O. BOX 21057 KAMPALA

DRAWN AND FILED BY NYANZI, KIBONEKA AND MBABAZI ADVOCATES PLOT 38 WILLIAM STREET P. O. BOX 6710 KAMPALA.

$MM/jd$

decree.muh