Kanyankole & Another v Equity Bank (U) Limited & 2 Others (Civil Suit 341 of 2018; Civil Suit 950 of 2017) [2023] UGCommC 265 (10 October 2023)

### THE REPUBLIC OF UGANDA

# IN THE HIGH COURT OF UGANDA AT KAMPALA ICOMMERCIAL DIVISION]

## CIVIL SUIT NO.950 of 2017 AND 341 OF 2018

# CHARLES KANYANKORE KIKATSI DAIRY FARMERS LTD: : : : : : : : : : : : : : : : : : : : : : : PLAINTIFFS VERSUS

l. EQUTTY BANK (U) LTD

2. TWINE DAN

3. CHRISTIAN LIFE MINISTRIES

: :: :: :: : : : : : : : : : : : :DEFENDANTS

## BEFORE: HON. LADY JUSTICE ANNA B. MUGENYI JUDGMENT

The Plaintiffs separately filed each suit against the Defendants but the two were later consolidated into one. In Civil Suit No.950 of 2017, the Plaintiffs sued the Defendants jointly and severally for a declaration that the Defendant is in breach of the duty of providing a complete and true facility account statement, the duty to act honestly and service of due notices of default as required by law, a declaration that the advert of the suit properties on the 23'd day of November 2017 was irregular and in contravention of the law, a permanent injunction, general damages and costs of the suit.

Civil Suit No. 341 of 2018 was filed by the Plaintiffs against the Defendants jointly and severally for a declaration that the l't Defendant breached the fiduciary duty owed to the Plaintiffs, and they also grossly and fiaudulently undervalued the I't

Plaintiffs property comprised in Plot 3l Mpanga close, Bugolobi LRV 3062 Folio 24, declaration that the 1't Defendant inflated and fraudulently misrepresented the value of the property comprised in Kyadondo Block 38 Plot 45 situate at Makerere, a declaration that the mortgage in respect of the 2 properties was obtained through fraud and that the same is null and void, an order cancelling the mortgage transactions and directing the I't Defendant to refund to the Plaintiffs USD 320,000 paid under the mortgages, a declaration that the sale ofthe properties were illegal, null and void, an order cancelling the registration of the 2nd and 3'd Defendants as proprietors, general damages, interest and costs ofthe suit.

The brief facts constituting the Plaintiffs'case are that the I't Plaintiffpurchased the Bugolobi property from Umutoni Gatariki and was registered as the proprietor on the 23'd day of April 2003. That on the 22nd day of December 2013, the l't Plaintiff and a one Emmanuel Kanyankore incorporated the 2nd Plaintiff for purposes of carrying on business. In May 2016, officials from the l't Defendant interested the l't Plaintiff in purchasing the Makerere property upon the failure of the then registered proprietor Donie Company Ltd to service its loan with them. The l't Defendant further intimated to the I't Plaintiff that they were selling it to them at about 600% of its open market value under a forced sale arrangement of the mortgage.

Therefore, on 29m August 2016, the l\$ Defendant offered the 2nd Plaintiff <sup>a</sup> banking facility of USD 2,300,000 to enable it purchase and complete the rooms on the 4th floor of the Makerere property, and upon the 1't Defendant's request, the Bugolobi property was offered as additional security. The Makerere property was then sold to the 2nd Plaintiff at USD 2,100,000 and it was registered in the name of the 2nd Plaintiff on 12th February 2017. USD 200,000 was disbursed to the 2nd Plaintiff for completion works. That the 2"d Plaintiff carried out work in excess of USD 250,000 and commenced paying the loan by depositing USD 320,000 in their account held by the 1't Defendant.

That upon default in repayment, the 2nd Plaintiff consented vide Civil Suit No. 1387 of 2017 that the 1't Defendant would sell the property to realise the debt. That on 5th April 2018, the lstDefendant advertised the properties and indicated that they were subject to reserve price but on 4th May 2018, the Plaintiffs obtained an interim order maintaining the status quo. That on l6th January 2019,the Plaintiffs were evicted from the Makerere propefty by the I't and 2nd Defendants following sale to the 2'd Defendant at USD 89,208, and the Plaintiff discovered that the properties were both sold under private treaty without their consent. That the l\$ Defendant neither disclosed the purchase price of the Bugolobi property and neither did they account for the proceeds.

It is the Plaintiffs' contention that the l't Defendant grossly undervalued both properties and that they owed the Plaintiffs a legal and fiduciary duty to disclose to them the value of the Makerere property prior to executing the mortgage deeds. That the 1'1 Defendant acted in breach of its duties. The Plaintiff further contends that the I't Defendant acted fraudulently, illegally with intent to cheat them my misrepresenting that the Makerere property was worth USD 3,200,000 at the time of purchase and the mortgage; and later valued it at less than half of the purchase price after the Plaintiffs had improved it. That the properties were purchased months after the date of auction indicated in the newspaper advert, therefore they were sold by private treaty without the consent of the Plaintiffs, and without proper directions from the Court. That the actions ofthe l't Defendant have caused the Plaintiffs much stress and financial loss, hence this suit.

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The 1't Defendant in their Written Statement of Defence denied the allegations and aver that the Makerere property was purchased on an 'as- is' basis upon the willingness of the Plaintiff without any misrepresentation, fraud or deceit. That the sale was by private treaty upon negotiations. In addition, that the I't Defendant freely applied for the banking facility and that the same was advanced to him, and that he unequivocally pledged both properties as security. The lst Defendant therefore avers that the Plaintiff defaulted on the credit facility of USD 2,300,000 yet they took benefit of the loan; and that the allegation that the Defendant was supposed to sell only either the Bugolobi or Makerere property is not true.

That upon the default, the 1't Defendant commenced foreclosure proceedings and upon unsuccessful attempts to amicable settlement, the Plaintiff filed HCCS No. 950 of 2017 seeking interlocutory measures seeking to block the process. That the said application was disposed of by consent of the parties that the Plaintiff clears the statutory 30% of the outstanding loan, and failure of which the Defendant would proceed with foreclosure. The Defendant avers that it was upon such failure that they advertised the two properties and instructed Elite Reality Limited to inspect and value them; and that the values were not kept secret from the Plaintiff. That after the expiry ofthe Court Order stopping the sale ofthe properties, the 2'd and 3'd Defendants offered to purchase them and that they were not under any legal obligations to obtain the Plaintifls consent before the purchase or to conduct any investigations. Therefore, that they obtained indefeasible titles to the respective properties.

The l't Defendant also filed a Counterclaim for the recovery of USD 1,659,904 being the outstanding loan balance, plus general damages, interest and costs. The Counterclaimant avers that on 29ft August 2016, they advanced a facility of USD 2,300,000 to the Counter Defendants. That the facility was secured by a mortgage

on the Bugolobi property and the Makerere property. That upon default, the Counterclaimant foreclosed and sold the securities. That they did not fully recover the loan from the sale as it recovered USD 420,000 and UGX 3,300,000,000/ from the sale of the Bugolobi and Makerere properties respectively. That the balance remains owing to date hence this Counterclaim.

### REPRESENTATION

The Plaintiffs were represented by tv{/S Ekirapa & Company Advocates and IWS Agaba, Bulungu, Namusiita Advocates, while the l't and 3'd Defendants were jointly represented by IWS Katende Ssempebwa & Company Advocates, Solicitors and Legal Consultants, IWS Sowali, Katamba & Company Advocates. The 2nd Defendant was represented by Ir4/S MACB Advocates.

### JUDGMENT

I have carefully read the pleadings as well as listened to the testimonies of the witnesses and considered the submissions of the parties herein. The Issues for determination by this Court are:

- l. Whether the mortgage executed between the 2nd Plaintiff and the I't Defendant was based on fraud? - 2. Whether the l't Defendant acted in breach of its fiduciary duty owed to the Plaintiffs? - 3. Whether the 2nd and 3'd Defendants are bonafide purchasers for value without notice of any fraud, illegality or irregularity committed by the l't Defendant if any;

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- 4. Whether the I't Defendant lawfulty sold the Makerere and Bugolobi properties to the 2nd and 3'd Defendants respectively? - 5. Whether the Plaintiffs are liable to the I't Defendant to the tune of USD 1,600,000 under the mortgage? - 6. Whether the Parties are entitled to the remedies sought?

Issue I

## Whether the mortgage executed between the 2nd Plaintiff and the lst Defendant was based on fraud?

Counsel for the Plaintiffs submitted that the I't Defendant misrepresented to the Plaintiff by exaggerating and inflating the value of the Makerere property in order to entice and lure the Plaintiffs into executing the mortgage to purchase the Makerere property. That PW I said in his witness statement that the 1\$ Defendant had intimated that the value of the property was between USD 3,200,000 and USD 3,500,000 but sold to them at USD 2,100,000, and that the valuation at the time of sale was UGX 9,400,000,000/ as market value and UGX 7,050,000,000/ forced value. Counsel added that according to PE 16, being that the dollar exchange rate in August 2016 was UGX 2,479, the market value for the property was approximately USD 3,791,851 and USD 2,843,888 forced value.

That PW I also testified that the I't Defendant's officials advised them that they add the Bugolobi property as additional security but that it would be retumed if the loan was part paid and that they offered the security upon such promise. That upon failing to pay the loan, the 2nd Plaintiff filed M. A. No. 1387 of 2017 wherein they consented to the sale of the mortgaged property to realise the loan sums. That the

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Plaintiffs were shocked that the properties were sold at lower prices than those given to them by the l't Defendant on 28th March 2018; and added that had the l\$ Defendant valued the Makerere property before selling to them, the Plaintiff would never have purchased it. Therefore, that the l't Defendant committed fraud by concealing and fraudulently misrepresenting the value of the Makerere property, and that the I'r Defendant contravened Regulation ll (l) of the Mortgage Regulations 2012 which requires valuation before sale and the I't Defendant gave 2012 values which was only disclosed to the Plaintiffs on 28th March 2018 after the consent was executed.

In reply, Counsel for the I't and 3'd Defendants submittid that the mortgage was executed lawfully without any fraud and added that one of the clauses in the offer tetter (PE 5) encouraged the borrower to seek an independent legal opinion from a legal counsel in order to understand all the terms in the letter and append initials on all the pages ofthe letter. Counsel added that the Plaintiffinitialled on all the pages confirming that they had understood all the terms of the offer letter. In addition, that since PW I said he was a qualified lawyer, the Plaintiff should be held at the standard of a qualified lawyer who understood the terms of the loan.

He added however that the Plaintiff is raising issues not pleaded like that of fraud in relation to the mortgage it entered in with the Plaintiff and yet the Plaintiff did not produce any evidence to that effect, but instead only alleges that the sale of the property to them in 2016 was based on fraud. Counsel submitted that those were two different transactions the first being for the sale of the house and the second being taking out a mortgage to pay for the Makerere property. That the Plaintiff <sup>s</sup> issue is that the mortgage was based on fraud therefore if they had an issue with the way the sale was done by private treaty they should have raised it in a separate

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claim challenging how the sale was done and whether there was a valuation report. He concluded that the issue should therefore be dismissed.

However, Counsel for the I't Defendant then submitted that the allegation on fraud during sale in August 2016 has no merit. Counsel added that the price of the Makerere property was never inflated as it was not based on the valuation report of 2012 and that DW 5 expunged paragraphs 9 and 10 from his witness statement so the Plaintiff cannot rely on it. He added that there is no legal requirement for a seller to value the property on behalf of a buyer. He also relied on the ruling in Srr John Bageire V Ausi Matovu CACA No. 7 of 1996 where emphasis on investigations on land was made because land is not vegetables bought from unknown sellers. He therefore submitted that the 2"d Plaintiffs failure to carry out independent valuation of the property cannot be fraud on the part of the I't Defendant. That the 1't Defendant did not make any misrepresentations regarding the price of the property but only sold it as is. That whatever was agreed upon was in the agreement and that clause 4.1 ofPE 6 said the agreement supersedes all prior agreements between the parties therefore the assertions by PW I that the property had a higher value is baseless.

Counsel also submitted that the I't Defendant did not violate Regulation l1 of the Mortgage Regulations because both DW 5 and DW 6 testified that there was a valuation report before the sale but that they did not rely on the report of2012. He added that the validity ofthe 2016 report is not in issue because the issue before the Court is on the mortgage not the sale which they could have chosen to terminate but did not; and that the Plaintiffs have failed to prove fraud. In addition, he said it was not true that the Bugolobi property was offered merely for comfort and that it was not under threat for sale, that instead the property was listed as security in the Offer Letter. That the mortgaged property was just partial security

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for the loan and that the valuation report has no bearing on the allegation of fraud as a basis for the mortgage.

Counsel submitted that it was the 2nd Plaintifls obligation to value the property under Clause 7 of the Offer letter and he cited the case of Male H. Mabirizi K. Kiwanuka V The Kabaka of Buganda Civil Application No. 0257 of 2017 where it was held that 'nobody can purport to enjoy the fruits from his or her own wrongs.' He added that still under Annexure II of PE 5, the I't Defendant had the discretion to value the securities at any time, therefore, the loan could first be disbursed. Lastly in relation to disbursing a loan in excess of the forced sale value of the mortgaged property, Counsel submitted that according to the evidence of DW 5, the criteria used to determine the borrower's ability to repay the loan was based on the borrower's cash flow and collateral and that securities taken do not form the basis of the amount to be extended to the borrower.

In rejoinder, Counsel for the Plaintiffs submitted that the allegation of seeking for a relief on an issue which was not pleaded should be ignored as the issue of inflation and misrepresentation of the value of the Makerere property was pleaded in paragraph 3 (c) of the Amended Plaint. Further that separating the two transactions is absurd as they are inteftwined as seen in Clause 3 (a) of PE 6, the Land Sale Agreement for the Makerere property which stipulated that the consideration would be USD 1,900,000 by way of loan to be issued to the buyer by the seller. Counsel concluded that the value at which the suit property was sold to the 2nd Plaintiff under the mortgage arrangement is part and parcel of the issue whether the mortgage was based on fraud.

Having carefully considered the evidence on record and the submissions from both Counsel in respect oflssue 1 above, I find as below.

\-\* Whereas Counsel for the Defendants had raised an objection that the evidence of alleged fraud produced by the Plaintiffs was in relation to the sale of the Makerere property and not the mortgage, and that the two transactions are different, I am inclined to agree with the Plaintiffs' Counsel that the two transactions are intertwined and cannot be separated from one another because it was upon the offer made by the I't Defendant to the 2nd Plaintiff to purchase the Makerere Property that the loan was advanced to finance purchase of the property; and it then followed that a mortgage was executed to secure the said loan.

According to the Schedule of PE 5 on page 38 of the Plaintifls trial bundle (PTB), the purpose of the facility was to finance purchase of property and in Annexure II on page 43 of the PTB, part of the securities forthe loan were legal mortgages on both the Makerere and Bugolobi properties. Further, the Sale Agreement between the I't Defendant and the 2nd Plaintiff (PE 6) in Clause 3 on page 50 of the PTB, provided that the buyer would pay the consideration by way ofloan to be issued by the seller to the buyer and that repayment of the loan would be secured by a legal mortgage over the property issued by the buyer. Therefore, I find that in one way or another, the price of the Makerere property influenced the 2nd Plaintiffs decision of agreeing to purchase it and subsequently enter into the mortgage agreement to finance the purchase.

Subsequently, I will now consider whether the 1't Defendant fraudulently misrepresented the price of the Makerere property by way of inflation to entice the 2"d Plaintiff to enter into the mortgage.

The term 'fraud' was explained by the Supreme Court in the case of Fredrick f K Zaabwe v Orient Bonk Ltd ond 5 Ors Civil Appeal No. 4 of 2006 where the Court cited the definition in Black's Law Dictionary 6'h Edition page 660 as:

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" An intentional pertersion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation ofa matter offact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which deceives and is intended to deceive another so that he shall act upon it to his legal injury. Anything calculated to deceive, whether by a single act or combination, or by suppression of truth, or suggestion ofwhat is false, whether it is by direct falsehood or innuendo by speech or silence, word of mouth, or look or gesture...

It is the Plaintiffs'case that the I't Defendant concealed the price ofthe property by inflating the same and yet sold to them at a much lower price and also that they did not carry out valuation of the property as required by Regulation 11 before selling it to them. Regulation 1I (1) and (2) of the Mortgage Regulations 2012 provides:

"(l) The mortgagee shall before selling the property, value the property to ascertain the current market value and the forced sale value of the proper\$.

(2) For the purposes of sub regulation (l), the valuation report shall not be made more than six months before the date of sale."

Whereas the Plaintiffs argue that the I't Defendant relied on a valuation report of 2012 lo sell the property to them, it is the l't Defendant's case that the property was purchased on an as-is basis by private treaty. The purpose of the provisions of Regulation 1 I above is to protect the mortgagor and to ensure that the mortgaged property is sold at the best price, therefore, any perversion of truth on price by selling the property at a lower price would instead be detrimental to the original owner/mortgagor to wit Donie Company Limited, and not the 2nd Plaintiff. However, even if the 2'd Plaintiff claims that it is the alleged inflated price which

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influenced their decision to purchase the property, they were at liberty to reject the offer because the price was much lower but they did not and instead proceeded with the purchase and duly executed the mortgage wilfully.

In addition, the Plaintiffs' independent valuation carried out by Oringo & Co Consulting Valuers (PE 13) estimated the market price at UGX 10,500,000,000/, while this was approximately 2 years later, it still gives a picture of what the price would have been then. Also, the Plaintiffs' claim that the I't Defendant knew that the property was not sufficient to secure the loan but misrepresented the price may not stand because the 2nd Plaintiff ought to have sought for independent legal advice before accepting the facility and allowing to pledge both properties as security. Whereas the lst Defendant had the duty to value the property before sale, the 2nd Plaintiff wilfully entered an agreement to purchase the land and therefore they are bound.

Also, from the definition of fraud above, it can be a false representation of a matter of fact either by words, or conduct or false misleading allegations or by concealment. In this case, Clause 2 of PE 6 the Sale Agreement shows that the total consideration for sale was agreed at USD 2,100,000, and therefore, in the absence of any evidence of misrepresentation or false misleading allegation or concealment, I find that there was no fraud and that the 2nd Plaintiff wilfully purchased the property. Failure to carry out a valuation pursuant to Regulation <sup>11</sup> alone, if at all, without intent to defraud does not mean the mortgage was executed by fraud. Besides, clause b of Annexure I to PE 5 laid out a condition that the buyer would submit a professional valuation report on the secured properties by a registered valuer approved by the bank. It was not done.

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The 2nd Plaintiff duly executed the Mortgage and since it is trite law that a party is bound by their signature, whether or not they read the contents of the document because they are expected to have done so, in the absence of any evidence of fraud or misrepresentation, the 2nd Plaintiff cannot plead 'non est factum' (See L'Estrange v E. Graucob Ltd U934J 2 KB 394 and, Aida Atiku V Centenary Rural Development Bank Limited Civil Suit No. 0754 of 2020).

About PW I's claim that the I't Defendant's officials intimated that the Bugolobi property was just added for comfort and would not be sold if part of the loan was paid,, Section 92 of the Evidence Act (Cap 6,) is clear on the exclusion of oral agreements where the terms of the contract are required to be reduced to the form of a document and has been proved, except in specific circumstances like ffaud, intimidation, and illegality. This issue is accordingly resolved in the negative.

#### Issue 2

## Whether the I't Defendant acted in breach of its fiduciary duty owed to the Plaintiffs?

Counsel for the Plaintiffs submitted that the I't Defendant was in breach of its fiduciary duty when in processing the mortgage they failed to establish the market value of the Makerere property at least 6 months before the sale of the same to the 2nd Plaintiffand also breached the condition precedent in the banking facility offer requiring them to carry out a valuation ofthe properties before disbursement and instead enticed the Plaintiffs to enter into a fraudulent mortgage. He further submitted that the I't Defendant also failed to sell the property by public auction and went ahead to sell without a valuation report.

In reply, Counsel for the Defendants cited clause 4 of PE 9, the Consent Order to submit that it was a sale by Court order, not by public auction, and therefore that

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since the 2'd Plaintiffhad failed to pay, he had consented to sale by private treaty in writing. He added that the Court did not state an),where that the sale would be by public auction and that the advertisement was to inform the public that if the Plaintiff did not pay the property would be sold. He even added that the sale agreements of the two properties A7 and ,A,9 in the Defendant's trial bundle (DTB) both have mentioned in their preambles that the sale was pursuant to the Court Order of 18th March 2018, and therefore that the Plaintiff had consented to it in Miscellaneous Application No. <sup>I</sup>3 87 of 2017 .

In rejoinder, Counsel for the Plaintiffs submitted that because of the unique facts of the case, there existed a fiduciary relationship between the Plaintiffs and the l't Defendant; and relied on the case of Guma Paulino V Bank of Africa (U) Ad A. 2 Others HCCS No. 0013 of 2008 on how to establish a fiduciary relationship to the effect that 'there must be an allegation ofdependency by one party and a voluntary assumption by the other party to advise, counsel and protect the weaker parfy.' He added that the Plaintiffs relied and trusted the 1't Defendant's representation as to the value of the Makerere propety before purchasing it at an inflated price and ended up losing both properties. That the I't Defendant abused this trust.

Taking into consideration the evidence on record and the submissions by both Counsel, below is my finding.

In the case of Guma Paulino case (supra), Justice Stephen Mubiru ably elaborated on fiduciary relationships and held that they may be implied in law when premised upon the specific factual situation surrounding the transaction and the relationship of the parties. He also added that it is not imposed on the lender by the mere existence of a lender-borrower relationship. In specific application to mortgages, the leamed Judge held that the bank does not owe the debtor fiduciary

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responsibilities and that it is a general creditor-debtor relationship except in three instances; the first is where the mortgagor was dependent on the bank and the bank undertook to advise, counsel and protect him or her as the weaker party. He added that for that to exist, the bank must be aware that the mortgagor is placing trust and confidence in them, as well as relying on their counsel. Secondly, he held that it also exists where the bank takes on extra services and receives a greater economic benefit than from a typical transaction or where the bank exercises extensive control. Lastly, that it also arises where the mortgagor has been induced to enter into the transaction by the borrower's misrepresentation, whereupon his or her equify to set aside the transaction will be enforceable against the Bank if either the borrower was acting as the Bank's agent or the Bank had actual or constructive notice ofsuch undue influence or misrepresentation.

Drawing from the above holding, whereas the Plaintiffs claim to have relied on the 1't Defendant's representation on the price of the property, clause b of Annexure I in the Offer letter (PE 5) requiring the l't Plaintiff to carry out valuation of the properties does not show dependency on the I't Defendant or even an undertaking by the I't Defendant to advise or counsel the 2'd Plaintiff.

I, therefore, find no evidence pointing towards the existence of a fiduciary relationship between the 2nd Plaintiff and the I't Defendant, therefore, there was no such breach. This Issue is also resolved in the negative.

### Issue 3

Whether the 2nd and 3'd Defendants are bonafide purchasers for value without notice of any fraud, illegality or irregularity committed by the lst Defendant if any

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Sections 176 and 181 of the Registration of Titles Act offer protection for bonafide purchasers except where there is fraud. The term 'bonafide purchaser'is defined by Black's Law Dictionary, 8th Edition at page l29l as:

"One who buys something for value without notice of another claim to the property and without actual and constructive notice of any defects in or informalities claims or equities against the seller's title, one who has in good faith paid valuable consideration for property without notice of prior adverse claims. "

The Supreme Court elaborated on the term 'bonafide purchaser'in the case of David Sekajja Nalima V Rebecca Musoke, Supreme Court Civil Appeal No. I2 of 1985 where it was defined as:

"A person who purchased the land without the notice of any suitable interest or claim. The tests of a bonafide purchaser are that (she) he:

- l) Must have a valid certificate of title from a person registered as proprietor not through fraud or otherwise. - 2) Must have paid valuable consideration for the land. - 3) Must have acted in good faith without notice of fraud whether actual or constructive or implied. "

The Court in Honnington Njuki V George ll/illiam Musisi U9991 KALR <sup>794</sup> added one last requirement that the vendor was a former registered owner of the property.

In the instant case, the 2nd and 3'd Defendants purchased the mortgaged properties pursuant to A7 and ,A,9 on pages 9l and 124 of the I't Defendant's Trial Bundle respectively which show that the properties were purchased for valuable

consideration hence UGX 3,300,000,000/ and USD 420,000 respectively. The 2nd Defendant's duplicate certificate of title is 2DE 4 onpage l4 of the 2nd Defendant's Trial Bundle. Whereas the 2nd and 3'd Defendant purchased the property by private treaty without verif,ing to confirm whether or not the mortgagor had consented to the sale, there was a Court order and Consent authorising the sale, and an advertisement in the newspaper as Court directed.

Therefore, I find that no evidence was produced to show that the purchases were not done in good faith without any defect in title and the 2nd and 3'd Defendants are bonafide purchasers for value. This issue is answered in the affirmative.

#### Issue 4

# Whether the I't Defendant lawfully sold the Makerere and Bugolobi properties to the 2nd and 3'd Defendants respectively?

Counsel for the Plaintiffs submitted that sale was marred with fraud, illegality and irregularities to which all the Defendants were prily. He added that since clause 2 ofPE 9, the Consent Order gave a directive ofadvertising the sale ofthe property for a minimum period of 30 days, it is his submission that the sale envisaged by the Consent was sale by public auction. That the said advertisement was tendered in as PE 12 and it read, 'NOTICE OF INTENDED SALE BY PUBLIC AUCTION', therefore that the I't Defendant had actual, constructive and imputed notice that the sale under the advert was to be by public auction and not private treaty.

Counsel cited Section 28 (l) (d) of the Mortgage Act 2009 and Regulalion 10 of the Mortgage Regulations to the effect that 'where a mortgagee is exercising the power of sale, the sale may be by public auction unless the mortgagor consents to a sale by private treaty.'He also relied on Seclion 29 of lhe Actto say there is no protection for a purchaser in cases where there is fraud, misrepresentation or other

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dishonest conduct on the part of the mortgagee and the purchaser has actual or constructive notice. He added that the l't Defendant claims to have sold the properties by private treaty but did not adduce evidence ofa written consent from the Plaintiffs, and that the 2nd and 3d Defendants'Advocates ought to have known that they needed the consent.

counsel then added that even ifthe sale was by order ofcourt, it should have been conducted in a manner directed by the Court according to Regulation 9 of the Regulations, and Court did not make further directives beyond the Order. That under Regulation l6 (2) of the Mortgage Regulations, purchasers who suffer loss under sale by private treaty can only sue the mortgagee for damages. That the sale of the Makerere property was done illegally as it was concluded before a valuation report was availed, in contravention of Regulation ll (l) and (2) of the Mortgage Regulations; and that the intentional behaviour of failure to include a date on 2DE 3 is an act of fraud and dishonesty intended to conceal that the Makerere property was sold before it was valued. He cited the case of Frederick Zaabwe where careless execution of documents amounted to fraud.

Counsel added that the suit properties were transferred to the 2nd and 3rd Defendants before they fully paid for the properties. zDE 4 shows that the certificate of title was transferred to the 2nd Defendant's name on 18fr December 2018, and paragraph I I of DW 3's witness statement shows that the last instalment of the money was paid on 22d March 2019. That for the 3'd Defendant, both the payment and transfer of title were effected on23d August 2019. Therefore, that a transfer of suit property without receiving full payment amounts to fraud, dishonesty and illegality because Regulation 15 of the Mortgage Regulations provides for execution of transfer instruments after payment of the full purchase

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\$'0 price. And therefore, that the 2"d and 3'd Defendants are not bonafide purchasers for value too.

In reply, Counsel for the Defendants submifted that the Plaintiffs relied on PW 2's Valuation Report for the value of the Makerere property yet it was never scientific and could not reflect the true value of the property. He submitted that the property was sold at a reasonable price above the forced sale value given by Knight Frank, an independent valuer, and the largest valuation company in Uganda, whom they retained to value the properties before sale. Counsel relied on the evidence of DW 4, the Managing Director of Knight Frank, who explained the scientific methods used during valuation and also that the bad condition ofthe property at the time of valuation affected the price. That DW 4 also noted that they used a higher monthly rental income provided by the Plaintiff which was different from the much lower figure admitted to by PW l, therefore, the valuation should have returned a much lower amount.

Counsel also relied on the evidence of DW 3 to submit that even with a higher rent income provided by the Plaintiff, DW 3's valuation of the Bugolobi property was higher than that of PW 2. He concluded that PW 2 used inappropriate methods of valuation and he concluded that the properties were never undervalued at the time of sale to both the 2nd and 3'd Defendant, and he invited Court to rely on the more credible report ofthe 1't Defendant.

On the mode of sale, Counsel for the Defendants submitted that the sale was by Order of Court, consented to by all parties which amounted to a written consent envisaged under Regulation 10 of the Mortgage Regulations which authorised the 1" Defendant to sell the properties by private treaty. He also noted that the Order did not mention anywhere that the sale should be by public auction, and the only

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requirement for advertisement of the property was simply to inform the public that the Plaintiffs did not pay the 30Yo as ordered and that the properry would be sold. He added that the preambles of the sales agreements included that the sale was by Court Order and consent of the parties in the Consent Order, therefore that the sale by private treaty was lawful.

In rejoinder, Counsel reiterated that the Court Order envisaged sale by public auction and that the 2nd and 3'd Defendants said they learnt about the sale through the advertisement which read'sale by public auction.' That since the sale was due to the failure by the Plaintiffs to pay the 3002 under Regulation 13, the Defendants should have at least made another advert under Regulation 13 (7) of the Regulations. That the Defendants conceded that they did not purchase the properties by public auction.

It is not in dispute that the 2"d Plaintiff defaulted in repaying the loan, and that the parties entered a consent (PE 9 on page 66 ofthe PTB) wherein the l't Defendant was authorised to advertise the property for a minimum period of 30 days on or after the 4th of April 2018 to settle the Plaintiffs loan obligations. In Clause 4 of the said PE 9, the lstDefendant was at liberty to sell the mortgaged property if the Plaintiffs failed to discharge the loan within the 30 days. The Plaintiffs failed to deposit the 30oh and therefore the property was advertised in the Daily Monitor dated 5th April 2018, annexed as PE l2 on page 103 ofthe PTB. Subsequently, the properties were sold to the 2nd and 3'd Defendants respectively.

The contention now is on the legality of the sale considering the Plaintiffs claims that it was sold by private treaty without the consent of the Plaintiffs, and that the sale was conducted without valuation of the properties.

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Under Section 20 (e) of the Mortgage Act 2009, sale of the mortgaged property is one of the remedies that a mortgagee has upon default of the mortgagor. Looking atPE9, it is undisputed that this was a case of sale of the mortgaged properties by order of Court which is provided for under Regulation 9 of the Mortgoge Regulations 2012 and reads thus:

"Where the court makes an order for sale of mortgaged property, the sale shall be conducted in the manner directed by court. "

Similarly, sale by order of Court is also provided for under Order 22 Rule 75 of the Civil Procedure Rules SI 71-l that:

"Sales of immovable property in execution of decrees may be ordered by any court. "

Going by the provisions of Regulation 9 above, the sale was to be conducted in the manner directed by the Court. In the instant case, PE 12 is proof that the I't Defendant adverlised the properties as directed by Court when the 2nd plaintiff failed to deposit 30% of the outstanding sum. Since PE 9, did not speciff the mode of sale but gave the I't Defendant the right to sell in case of default, I find that there is no illegality in the sale of the mortgaged properties. The plaintiffs agreed to the sale and they ought to have known that failure to pay would automatically entitle the I't Defendant to sell off the said property. It is trite law that parties are at liberty to enter a consent as long as it is not an illegality, and they are obligated to honour their agreements. The Plaintiffs cannot therefore try to avoid obligation as every'thing that the l't Defendant did was within their consent and order of the court. This court will not imply anything which was not expressly included in the Consent Order.

<sup>27</sup> N{-u

In Megarry & ll/ade, 'The Law of Real Properly,,, Sevenlh Edition, Sweet & Maxwell, par. 25-014 at 1102-3, every mortgagee has a power of sale provided that the mortgage was made by a deed, and that the mortgage money is due or the legal date of redemption has passed. The I't Defendant therefore was exercising his right to sell as the money was due and since he fulfilled all the directions of the court to which the Plaintiffs consented by appending their signatures to the said consent order.

I, therefore, find that the lst Defendant lawfully sold the Makerere and Bugolobi properties to the 2nd and 3'd Defendants respectively.

## Issue 5

## Whether the Plaintiffs are liable to the l,t Defendant to the tune of USD 1,600,000 under the mortgage?

Counsel for the Plaintiffs submitted that since the loan advanced to the plaintiffs was based on a fraudulent mortgage characterised by dishonesty and bad faith, the Plaintiffs are not indebted to the I't Defendant since the mortgage is null and void. He added that the mortgage value of USD 2,300,000 was only book value as the Plaintifls account was credited with USD 200,000 to renovate the Makerere property. That USD the 2,100,000 was never credited to their account and that the demand is unfair and without basis.

In reply, Counsel for the 1't Defendant relied on the evidence of DW 5 and submitted that the Plaintiff admitted to signing the mortgage deeds and only repaid about l50% of its payment obligations, therefore, that the Plaintiffs have not come to Court with clean hands. That the I't Defendant did not fully recover the outstanding amount from the sale of the mortgaged properties. That the outstanding balance is shown in A12 and Al3 to be USD 1,659,904. Counsel also

u

added that the Plaintiffs do not dispute their computation of the loan balance except for the overdraft facility by Ivan Ddungu which is explained by Al4 and refunded upon the instructions of the 1.t Plaintiff.

In rejoinder, counsel submitted that the ls Defendant lured the plaintiff in a well calculated and well-designed move to purchase an inflated property, therefore, by awarding the USD 1,600,000, the Court would be sanctioning an illegality and allowing the I't Defendants to benefit from their wrongs.

I have carefully considered the submissions from both counsel and looked at the evidence on record and I find that whereas it is true that that the 2"d plaintiff only received usD 200,000 from the I't Defendant for renovation, the loan facility according to the Schedule of PE 5 on page 38 of the prB indicated that the USD 2,100,000 was for the purchase of the Makerere property and the USD 200,000 which the Plaintiff received on their account was for the completion of the said property. Indeed, the sale agreement (PE 6) between the 2nd plaintiff and the l.t Defendant shows that the said property was sold at a consideration of USD 2,100,000 on page 50 ofthe Plaintiffs trial bundle. The 2 facilities are reflected in account statements Al2 and A13.

whereas counsel for the Plaintiffs said the Plaintiffs had made credit deposits of usD 305,251.32 from the bank statements, counsel for the l't Defendant said the total amount paid was USD 320,000. However, from the evidence of DW 5, at the time the consent was entered into, the outstanding amount was USD 2,385,425.98. In December 2018, the Bank of Uganda exchange rate was 3702, therefore the money from the Makerere property was approximately USD 891,410.05 and the Bugolobi property was sold at USD 420,000 which brings the total sum realised from the sale of the mortgaged property to USD 1,3 I 1,410.05.

Nil^\$

I find, therefore, that the outstanding balance is USD 2,385,425.98 minus USD 1,311,410.05 which is equal to USD 1,074,015.3.

## Issue 6

## Whether the Parties are entitled to the remedies sought

On the remedies sought, the Plaintiffs prayed for a declaration that the lst Defendant breached several provisions of the Mortgage Act 2009 and the Mortgage Regulations 2012, and that the sale was unlawful. However, it has been held above that the I't Defendant was not in breach as they sold the mortgaged properties according to the directions of the Court pursuant to Regulation 9 olthe Mortgage Regulations 2012 and Order 22 Rule 75 of the Civil Procedure Rules SI 7I-I . Therefore, this prayer is denied.

About the declaration that the I't Defendant inflated the price of the Makerere property to entice the 2"d Plaintiff to purchase and that the Mortgage was illegal, I find that prayer is denied because the Plaintiff s own valuation in PE 13 by Oringo & Company Consulting Valuation Surveyors put the market value at approximately UGX 10,500,000,000/ and the forced value at UGX 6,300,000,000/ which I find not to be very far away from the value that they purchased the property in 2016. In dollars at the rate of 3701 the price would be USD 2,836,304.70 and 1,701,782.82. The property was purchased at USD 2,100,000. Therefore, the price was not inflated but rather may have later been sold at relatively lower prices to the 2nd and 3'd Defendants since Oringo & Company Consulting Valuation Surveyors was the Plaintiffs' independent valuer. Subsequently, since the mortgage was not obtained by fraud, the prayer for an oder for review of the mortgage is declined.

\$sl.b

The Plaintiff also prayed for cancellation of the registration of the 2nd and 3'd Defendants as owners. However, since the sale of the mortgage properties was lawful and the 2d and 3'd Defendants were found to be bonafide purchasers for value, they acquired good title according to Section 29 of lhe Mortgoge Act which provides:

"A purchaser in a sale effected by a mortgagee acquires good title except in a case of fraud, misrepresentation or other dishonest conduct on the part of the mortgagee ofwhich the purchaser has actual or constructiye notice. "

The protection of a purchaser was also discussed in,,The Law of Reat Propergt,', Megarry and Ll/ade (supra) par. 2 5-0 I 6 at page I I 03 that:

"The purchaser's title is not impeachable merely because none of the three specified eyents has occurred or the power of sale has in some way been irregularly or improperly exercised. "

Since there is no evidence to suggest that the 2d and 3'd Defendants had any notice of fraud etc. (which, in any case, has not been proved) their titles cannot be invalidated.

It follows therefore, that the Plaintiffs' prayer for general damages of UGX 500,000/ is also denied.

In the premises, the suit against the Defendants is hereby dismissed with costs to the Defendants.

Judgment is entered for the Counterclaimant in the following orders:

l. The 2"d Phintiff is indebted to the l.t Defendant to the sum of USD 1,074,015.3.

<sup>25</sup> b S\$,

- 2. Interest on (l) above at a commercial rate of ll%o per annum from the date of filing the suit until payment in full. - 3. With regard to the prayer for general damages, this Court is of the considered view that this prayer is catered for by the agreement of the parties as shown in the schedule to the offer letter wherein the parties agreed that default interest of l0Yo per annum in addition to the applicable interest rate would be charged in the event of any default on the repayment of the facility; and that such interest shall be payable at any time on demand and represents a reasonable pre-estimate of the loss to be suffered by the Bank in funding the default ofthe Borrower.

The grant of an order for general damages is therefore declined and instead an order for payment of default interest as agreed on above is granted to the Cou nterclaimant.

4. The costs of the Counterclaim are awarded to the Counterclaimant.

trww

HON. LADYJUSTICE ANNA B. MUGENYI

DATED tp-|.\*ptl ro