[2022] UGCommC 99


# THE REPUBLIC OF UGANDA

# IN THE HIGH COURT OF UGANDA AT KAMPALA

(coMMERCtAL COURT DTVTSTON)

# Miscellaneous Cause No. 15 of 2022

ROKO CONSTRUCTION LTD::::::::::::::::::::::::::::::::r:::::::::APPLICANT

## VERSUS

### 1. THE AGA KHAN UNIVERSITY

2. ABSA BANK (U) LTD: : : : : : : : : : r: : : :: : : : : : : : :: : : : : : :: : : :: : :RESPONDENTS

# BEFORE HON. JUSTICE RICHARD WEJULIWABWIRE RULING

### INTRODUCTION

20 The Applicant brought this Application by Chamber Summons under Section 6 of the Arbitration and Conciliation Act and Rule 13 of the Arbitration Rules, First Schedule to the Arbitration and Conciliation Act, Section 33 of the Judicature Act and Section 98 of the Civil Procedure Act for orders that an interim measure of protection issues by way of a temporary injunction, restraining the 2nd Respondent from effecting payment to the 1't Respondent,

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its agents, servants, assignees, employees or anyone deriving authority from

25 30 it, from receiving payment or enforcing demands or encashment of the Performance Security No. 400/19 worth USD 88,637.90 issued by the 2nd Respondent for the benefit of the 1't Respondent in relation to a Contract for the construction of a mockup building at Nakawa, pending final determination of the Arbitration proceedlngs commenced by the Applicant against the lstRespondent under the Arbitration Contract and for costs of the Application to be provided for by the Respondents. The Application was supported by the Affidavit of Mark Koehler, the Applicant's director. The 1't Respondent filed an Affidavit in reply deposed by Anosh Elavia, the 1st Respondent's Project Manager.

#### 35 REPRESENTATION

At the hearing, the Applicant was represented by M/s Newmark Advocates while the 1st Respondent was represented by M/s ENSafrica Advocates. Both padies filed their written submissions.

#### 40 SUBMISSIONS AND DETERM!NATION.

This Application is primarily made under Section 6 of the Arbitration and Conciliation Act cap. 4 which provides that:

"A party to an arbitration agreement may apply to the courl, before or during arbitral proceedings, for an interim measure of protection, and the courT may grant that measure".

The conditions that have to be fulfilled in order for a court to grant an interim measure of protection were outlined in the case of Pan-Afric lmpex (U) Ltd vs Barclays Bank PLC and Absa Bank Ltd, MA No. 804/2007, where Justice FMS Egonda-Ntende held that;

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⁵⁰ 'Firstly there must be an arbitration agreement between the parlies. A pafty to such an agreement may then apply for such an interim measure before or after the commencement of arbitral proceedings. lf the arbitral proceedings have commenced, the Applicant would have to be a pafty to these proceedings, and a pafty to the agreement giving rise to the arbitration proceedings."

ln the case of AC Yafeng Construction Limited v Registered Trustees of Living Word Assembly Church, MA No. 0112021, Justice Stephen Mubiru held that;

"When court is called upon to grant injunctive relief as an interim measure of protection pending arbitral proceedings, the courl will generally have regard to the following:

- a) the nature and strength of the Applicanf's case, i.e., whether there is a serlous question to be arbitrated, in respect of which the Applicant demonstrates a sufficient likelihood of success; - b) whether there is an imminent risk of irreparable /oss, by considering whether damages are an adequate remedy to the perceived risk of harm and, - c) the course of action favored on a balance of convenience, i.e. the course of action that results in the lower risk of injustice if the decision to grant the injunction is incorrect... - d) An injunction as an interim measure of protection is not to lssue where the peiormance guarantee in question is an unconditional one

Clause 20.6 of the Contract dated 28rh May 2019, marked as Annexture A to the Affidavit in support provides that;

'lf a dispute arises between the parties in connection with or arising out of this Contract or breach thereof and upon which a written notice is issued by one party to the other, the Pafties shall attempt fo setf/e such dispute by discussions among their senior management. All disputes occurring during the course of the project and on which a mutually acceptable resolution was not reached shall not, demonstrably, be allowed by the Contractor to impede or hamper the progress of works which shall continue as per schedule and can only be referred to arbitration after the lssue of the Taking Over Ceftificate by the Employer.

However, if the dispute is not settled amicably, within forlylwo (42) Days of such written notice, (or such fufther period as the pafties may agree) the same shall be settled by international arbitration without resofting to coutls. The following points should be noted about the arbitration process;

- a) The dispute shall be finally settled under the Rules of Arbitration of the lnternational Chamber of Commerce (Rules) and under its ausplces, - 95

b) The dispute shall be settled by three arbitrators appointed in accordance with the Rules.. .

According to the Applicant the dispute that arose between the parties stems from the 1't Respondent's act of applying to cash the performance guarantee.

- 100 The Applicant's Counsel submitted that pursuant to Clause 20.6 of the Contract dated 28th May 2019, after realizing that the acts of the 1't Respondent in applying to cash the guarantee were illegal, arbitrary, and fraudulent they decided to apply for arbitration. - 105 110 115 Counsel submitted that the law is that a demand made according to the terms of the performance bond must be paid except in cases of fraud. (See; National Housing & Construction Co. Ltd V Lion Assurance Co. Ltd, CS No. 239/201 3). Counsel contended that the 1't Respondent committed acts of fraud because according to the performance guarantee, the 1st Respondent's claim must bear the confirmation of the Beneficiary's bankers that the signatures thereon are authentic yet the claim herein does not bear such confirmation. That the Project Manager had connived with the 1't Respondent to deny the Applicant a certificate of completion of takeover yet the Applicant had completed the performance of the contract. That by addendums dated the 16th day of September 2020 and 8th December,2021 , the 'l 't Respondent took over payment of the suppliers & sub-contractors directly, which meant that the Applicant had no direct control over them regarding performance because timely performance was dependent on prompt payments by the 1't Respondent.

120 That in breach of the said addendums, the 1't Respondent failed to pay the suppliers and sub-contractors in time thereby delaying completion of the contract within time agreed and yet fraudulently shifted the blame to the

f,

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Applicant. That the 1st Respondent also refused to pay the Applicant for the work done under certificate 4 which delayed performance of the contract and yet shifted the blame on to the Applicant with an ulterior motive to cash the performance guarantee.

ln reply, the 1't Respondent's Counsel submitted that the 2nd Respondent is duty bound to honor a call made on the Performance Security notwithstanding any dispute raised by the Applicant in any court or tribunal.

130 Counsel contented that a performance guarantee is a bond taken out by the contractor, usually with a bank or insurance company (in return for payment of a premium), for the benefit of and at the request of the employer, in ^a stipulated maximum sum of liability and enforceable by the employer in the event of the contractor's default, repudiation or insolvency.

135 The purpose of performance guarantees in the construction industry is to perform the role of an effective safeguard against non-performance, inadequate performance or delayed performance and its production provides a security as readily available to be realized when the prescribed event occurs

140 There are two types of performance guarantees, namely, Conditional guarantees or default bonds, whereby the surety accepts "joint and several" responsibility for the performance of the contractor's obligations under the contract; and Unconditional guarantees or on-demand bonds, which is a covenant by the surety (usually a bank) to indemnify the employer following contractor's default and subject to stated terms.

145 Paragraphs 2 and 3 of Annexture B to the Affidavit in support, which is the performance guarantee dated 7th June 20'1 9 states that;

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'We Barclays Bank of Uganda Limited hereby undeftake to pay the amounts payable under this guarantee unconditionally and irrevocably without any demur, merely on the first written demand from the employer. Any such demand made on the bank shall be conclusive as regards the amount payable by the bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding USD 88,637.90

We underlake to pay the employer the amount that is due under this guarantee not withstanding any dispute or disputes raised by the contractor in any suit or proceeding pending before any court or tribunal relating thereto...'

160 165 Premised on the foregoing, the Performance Security in the instant case is characterized as an on-demand/unconditional guarantee. This indemnity structure allows the beneficiary to claim directly against the financial institution without first having to pursue the contractor or prove the contract's breach. The terms of the guarantee do not require the guarantor to decide whether the employer and contractor have or have not fulfilled their obligations under the underlying transaction, with which the guarantor is not concerned. lt only required a statement of default by the l"tRespondent without an indication of the nature of the default. Unconditional or Ondemand performance guarantees constitute primary independent obligations placed on a guarantor to make payment of a guaranteed amount.

170 ln this performance guarantee, the 2nd Respondent agreed to provide ^a performance guarantee of USD 88,637.90 payable to the 1't Respondent on demand.

> v Page 7 of 13 ln paragraph 8 of the guarantee it was agreed that the guarantee is valid up to February 2021 or the issuance of the certificate of final completion unless expressly extended in writing by the 2nd Respondent. Paragraph 9 states that i75 any claim must bear the confirmation of the beneficiary's bankers that the signatures thereon are authentic.

Fraud is the only exception where a demand made according to the terms of the performance bond may not be paid. lndeed Annexture B to the supplementary Affidavit in support which is the 1.t Respondent's claim does 1Bo not bear the confirmation of the Beneficiary's bankers that the signatures thereon are authentic as stipulated under Paragraph 9 of the performance guarantee.

The Supreme Court, in the case of Fredrick Zaabwe vs. Orient Bank & O'rs SCCA No. 04 of 2006, relying on Black's Law Dictionary 6th Edition at 185 page 660, defined fraud to mean the intentional perversion of the truth by ^a person for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or her or to surrender a legal right. That it is a false representation of a matter or fact whether by words or by conduct, by false or misleading allegations or concealment of that which r90 deceives and it is intended to deceive another so that he or she shall act upon it to his or her legal injury.

ln Kampala Bottlers Ltd v Damanico (U) Ltd, Civil Appeal No.2211992, Court stated that the general principle of law is that fraud must be proved strictly and the burden of proof is more than on a balance of probabilities 195 generally applied in civil matters. Based on the established parameters for categorization of an act as a fraud, I do not find lack of confirmation by the Beneficiary's bankers that the signatures on the 1st Respondent's claim are

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authentic, to meet the parameters that would categorize that omission as a fraud. lt could only possibly amount to a breach of contract, which in any case can be dealt with in the arbitral proceedings but would not hamper encashment of unconditional guarantees.

The allegations of fraud to be the basis upon which the application to have the guarantee cashed and as a underpinning the omission by the 2nd Respondent to pronounce themselves on the authenticity of the signatures raised as the subject of the dispute are not sufficiently proved to raise a serious question to be arbitrated.

On whether there is an imminent risk of irreparable loss that cannot be compensated by an award of damages, the Applicant's Counsel submitted that if the 2nd Respondent cashes the Performance Security to the 1't

- Respondent, the Applicant's account will be depleted thereby exposing it to countless suits by the service providers, employees, sub-contractors and that its reputation will be destroyed beyond repair and that they will have been condemned unheard. He further submitted that if the 2nd Respondent cashes the Performance Security to the l"tRespondent, Court will be 210 - allowing illegal enrichment yet the Applicant has fully completed the work. That if court denies the Applicant the temporary injunction, the damage caused shall be unbearable and cannot be atoned for in damages. That once the said sum is cashed, it shall be hard for the Applicant to recover from the l"tRespondent because it is not resident in Uganda and has no known 215 - assets in Uganda where the Applicant can recover the money if paid. ln reply, the Respondent' Counsel submitted that the Applicant is a reputable entity undertaking the development of a hospital with capacity to pay damages awarded against it and whatever alleged breach that may arise is based on breach of contract that can be compensated in damages if at all 220

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))q the arbitrator finds the Applicant in breach of the contract.

ln the case of E. L. T Kiyimba-Kaggwa v Hajji Katende Abdu Nasser [1985] HCB 43, court defined irreparable injury to mean that the injury must be a substantial or material one, that is, one that cannot adequately be compensated for in damages.

230 235 240 ln AC Yafeng construction (supra), which was rightly cited by the Respondent, Justice Mubiru stated that the only condition precedent for calling on a demand guarantee is a written notice to the guarantor and that an interim measure of protection will be issued if the Applicant shows that the performance bond in issue is a conditional one, the employer is attempting to call on the performance guarantee beyond the circumstances in which a call is permitted or the employer's call is founded on a claim that is specious, fanciful or untenable. That an injunction should not be granted lightly because it would put the beneficiary in precisely the same position it sought to avoid, that it can be paid first and talk later. He held that damages are an adequate remedy since the Applicant's claim in the prospective arbitration was for breach of contract.

Paragraph 8 of the guarantee stipulates that the guarantee is valid up to February 2021 or the issuance of the certificate of final completion unless expressly extended in writing by the 2nd Respondent. According to Annexture

245 C to the Affidavit in support, on 19th February 2021 and 28th May 2021 ,the performance guarantee was extended from 1Oth February 2021 lo 30th July 2022 respectively.

This being an unconditional performance guarantee, the guarantor's obligation herein is to make payment of the guaranteed amount once the beneficiary makes a demand with a bona fide claim of a breach of contract.

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According to paragraph 3 of Annexture H to the Affidavit in support, the 1"t Respondent made the demand to the 2nd Respondent stating as follows;

'We, the employer hereby notify the bank by declaring in writing that the contractor has failed in peiorming its obligations under the contract by not completing the works by the completion date as stipulated under the contract despite various extensions granted by the employer from time to time.'

Upon issuance of this letter to the 2nd Respondent, the Applicant applied to this court for an interim order which was granted for three days and later extended until hearing and completion of the main cause which is the instant one. According to the above case, the only condition precedent for calling on a demand guarantee is a written notice to the guarantor which was done on 25th April 2022 as highlighted above. ln my view, if the Applicant was determined to fulfil the contract, an extension of the guarantee by more than a year was sufficient time for them to do so. 260 265

There is no plausible reason proffered why the 1't Respondent should be barred, any further, from accessing their guarantee. The 1't Respondent cannot be denied their entitlement simply because the Applicant will

- allegedly face a risk of countless suits and its reputation will be destroyed. This is speculative. None the less, in the event of a breach of contract, the successful party would be entitled to damages and additionally, there are well established procedures for recovering from non-residents. lt is my finding therefore that the Applicant can be compensated in damages if 270 - breach by the 'l 't Respondent is established. According to the case of E. L. T Kiyimba-Kaggwa v Hajji Katende Abdu Nasser (supra) the balance of convenience is considered where the court is 275

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in doubt. However, in the instant case, the Applicant has not been able to prove that it will suffer irreparable injury. The fact that the Applicant was given many opportunities to complete the contract but did not do so serves to discount any facet of a prima facie case with a probability of success.

An unconditional performance guarantee does not require any proof of default. The beneficiary will generally receive payment of the full amount upon presentation of a written statement to the issuer stating that the contractor has failed to perform. The only condition precedent for calling on a demand guarantee is a written notice to the guarantor which was done as indicated in Annexture H to the Affidavit in support, on 25th Aprll 2022when the l"tRespondent made a written demand to the 2nd Respondent clting breach of contract by the Applicant who has, to date not completed, way past the time stipulated in the contract. 285 290

This tilts the balance of convenience in the 1st Respondent's favor.

The Respondent is at liberty to make a call on the security, which the 2nd Respondent is duty bound honor.

,o( The Application is accordingly dismissed with costs and the lnterim measure of protection issued on 13th May 2022 is hereby set aside.

I so order

Deliver at Kampala this 28th day of July 2022

, 30 rd Wejuli Wabwire

JUDGE


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