Reynolds Construction Company (N) Limited v The Attorney General & 2 Others (Miscellaneous Cause 127 of 2023) [2024] UGCommC 275 (31 January 2024)

Full Case Text

THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA (COMMERCIAL COURT DIVISON) **MISC. CAUSE NO. 0127 OF 2023**

IN THE MATTER OF A REFERENCE TO ARBITRATION

IN THE MATTER OF AN APPLICATION FOR A MANDATORY INTERIM **MEASURE OF PROTECTION**

**UNDER THE ARBITRATION AND CONCILIATION ACT CAP 4**

## REYNOLDS CONSTRUCTION COMPANY (N) LTD:::::::APPLICANT **VERSUS**

#### **1. THE ATTORNEY GENERAL**

# **2. MINISTRY OF FINANCE, PLANNING**

AND ECONOMIC DEVELOPMENT

3. MIZRAHI TEFAHOT BANK LTD (UMTB)::::::::::::::::::::::::::::::::::::

### **BEFORE: LADY JUSTICE ANNA B. MUGENYI RULING**

This application is brought by way of Notice of Motion under Section 6 of the Arbitration and Conciliation Act Cap 4, section 33 of the Judicature Act Cap 13,

section 98 of the Civil Procedure Act Cap 71, Rule 13 of the Arbitration Rules, Order 52 Rules 1 & 2 of the Civil Procedure Rules S. I. 71-1. for the following orders:

a. An order of an interim measure of protection be issued by way of a mandatory temporary injunction restraining the first and second respondents and their nominees, agents, servants or assignees from making any claims for payment

under the Performance Guarantee pending the determination of the arbitral proceedings unless and until authorised to do so by the tribunal to be appointed to determine the matters referred to Arbitration (the 'Tribunal').

b. An order of an interim measure of protection be issued by way of an order of specific performance requiring the first and second respondents and their nominees, agents, servants or assignees to withdraw immediately the requests for payment made under the Performance Guarantee Reference Ref. GT201121 dated 23 December 2010 9the 'Performance Guarantee') pending the determination of the Arbitration.

c. An order of an interim measure of protection be issued by way of an order maintaining the status quo pending the determination of the arbitral proceedings commenced by the Claimant by Notice of Arbitration dated 13 November 2023 (the 'Arbitration').

d. Costs of the Application be provided for.

The Application is supported by the affidavit of Sharly Buchbut, the Applicant's Managing Director. The Application was opposed by the affidavit of Ramathan Ggoobi, the Permanent Secretary/ Secretary to the Treasury in the Ministry of Finance, Planning and Economic Development. The 3rd respondent filed an affidavit in reply to the application in support of the same.

### Grounds of the application

The grounds of the application are elaborated in the affidavit in support of the application but briefly are that the Applicant and the Second Respondent entered into a Contract dated 29th December 2010 for the Reconstruction of Mbarara-Ntungamo-Kabale-Katuna Road Section of the Northern Corridor; Lot 3 Contract

No. 2010/259-788 financed by the European Community, with funds provided from 10th European Development Fund(EDF) programme. Pursuant to the Contract, on behalf of the Applicant, the Third Respondent issued a Performance Guarantee No. GT201121 dated 23rd December 2010 in the sum of EUR 6,580,855.81 to the beneficiary, the Second Respondent. The Contract provided that Second Respondent was entitled to make a claim under the Performance Guarantee if and to the extent that (a) defects appeared and/or damage was caused to the works done by the Applicant (the 'Works') during the Defects Liability Period expired;(b) the defects and/or the Contract;(c) the Applicant failed to repair the defects and/or damage

having been asked to do so; and (d) the Second Respondent incurred cost repairing the defects and/or damage. The Works were substantially completed and provisional acceptance certificates were awarded as follows;

(a) 14th August 2015(km 95 to km 137) – certificate issued on 16th July 2016 (b) 2nd December 2015 (km 137 to km 160) – certificate issued 16th July 2016 and

On 6th February 2018, representatives from the Applicant, the Second Respondent's Supervisor, Uganda National Roads Authority, the Supervisor's

Representative and the European Union inspected the Works, confirming that the Works were complete and that the Defects Liability Period had expired as of 6th February 2018. The Contract required the Final Acceptance Certificate to be issued to the Applicant by UNRA no later than 8th March 2018(being 30 days after the expiration of the Defects Liability Period.) In breach of this requirement, while the COWI issued a Final Acceptance Certificate to UNRA for signature on or about 15th February 201, UNRA failed to issue the certificate at the time, and has not issued the certificate more than five years later. The Contract also

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required UNRA to prepare and sign the Final Statement of Account no later than 7th April 2018 (being 30days from issuing the Final Acceptance Certificate to UNRA for signature on 15th February 2018, UNRA failed to issue the certificate at the time, and has not issued the certificate more than five years later. Further that the Contract required that the Performance Guarantee was released no later than 22nd May 2018, (being 45 days after the Final Statement of Account was to be issued); and following the issuance by COWI of a Final Acceptance Certificate and the Final Statement of Account on the 15th February 2018, the

Applicant requested for the cancellation of the Performance Guarantee and sometime in 2018, the Bank cancelled the Performance Guarantee and retired the facility.

The Applicant averred that while the Applicant did not know at the time, in May 2018- more than three months after the Defects Liability Period had expired- the Works were damaged by the exceptionally heavy rainfall and earth tremors. That on 26th February 2020- more than two years after the Defects Liability Period had expired and more than twenty-one (21) months after the Works suffered damage UNRA requested the Applicant to attend a meeting during which the Applicant was informed about the damages to the Works. At the requested meeting held on 27th February 2021, the Applicant confirmed that (1) the Works had been constructed in accordance with the contractual design and specifications; (2) the Works had been fully inspected and certified by COWI at every stage; and (3) the Works had been the subject of a detailed audit by the European Commission. The Applicant confirmed that, while the Applicant was not responsible for the defects, which appeared and/or damage which occurred after the end of the Defects Liability Period, the Applicant was willing to repair the damage (the Remedial Works) under a new contract.

More than a year later on 22nd February 2021, the Applicant received via email a letter from the Second Respondent dated 11th January 2021, in which the Second Respondent alleged that the Applicant was in default due to the Applicant's "unwillingness to undertake any remedial works", and that another contractor will be engaged to undertake the Remedial Works and that the Second Respondent will commence the process of cashing the Performance Guarantee to pay for the same. On 23rd February 2021, the Applicant notified the Second Respondent that it was not in default as the Applicant was not responsible for defects which appeared and/or damaged which occurred after the end of the Defects Liability Period. The Applicant reminded the Second Respondent that the Applicant had indicated it was willing to perform the Remedial works under a new contract during the 27th February 2020 meeting and noted that the Applicant remained willing to perform the Remedial Works under a new contract but the Second Respondent did not take up the Applicant's further offer to rectify the defects.

The Applicant claims that although they did not know at the time, on 21st May 2021, the Second Respondent wrote to the Third Respondent requesting the cashing of the Performance Guarantee and on 17th June 2021, the Third Respondent replied to the Second Respondent that they had cancelled the Performance Guarantee sometime in 2018 in accordance with Article 15.8 of the

General Conditions of Contract. On 12th July 2021, the Second Respondent reiterated their demand to cash the Performance Guarantee to the Third Respondent and on 10th August 2021, the Third Respondent notified the Second Respondent that they had retained Counsel in Uganda to provide a legal Opinion in regard to the request to cash the Performance Guarantee and on 2nd September

2021 and 28th September 2021, the Applicant wrote to the Respondents requesting an amicable settlement meeting with the contract.

The Applicant averred further that whereas on 9th September 2021, the First Respondent responded positively, on 16th September 2021, the Second Respondent rejected the Applicant's request for an amicable settlement meeting and subsequently notified the third Respondent that the Performance Guarantee should be cashed immediately. On 14th October 2021, M/S Kampala Associated Advocates (KAA) the third Respondent's counsel, reiterated that they had already cancelled the Performance Guarantee and that there is in fact no guarantee to cash or enforce as the same was already released/cancelled.

On 14th December 2021, the Head of Delegation to Uganda of the European Union wrote to the third respondent demanding payment of the Bank Guarantee by 30th December 2021 and on 30th December 2021, KAA referred to their earlier correspondence and replied to the EU reiterating that the Bank had no obligation to cash the performance Guarantee. On 6th January 2022, the First Respondent indicated that, while he considered that the Second Respondent was entitled to cash the Performance Guarantee, they welcomed every effort to resolve this matter amicably, and on 11th January 2022, the Applicant accepted the First respondent's proposed amicable approach to settling the matter and requested a

meeting at the earliest time convenient to all concerned.

The Applicant stated that the resolution of the dispute assumed additional urgency on 18th February 2022, when the third respondent received a letter from the Director the European Commission Directorate General for International Partnership(Africa), improperly threatening the third respondent with various sanctions if the third respondent did not pay the sums claimed within five

working days. That on 24th February 2022, with the second respondent refusing to participate in amicable settlement of the dispute in regard to the payment of remedial works using the Performance Guarantee, and no date fixed for amicable settlement with the First respondent, the Applicant served a notice of conciliation in accordance with Article 68.3 of the General Conditions of Contract.

In the notice of conciliation, the Applicant requested conciliation of the dispute regarding the allegation that the applicant is liable for the costs of rectifying damage suffered in a section of the reconstructed road in May 2018(after the Defects Liability Period had ended) and the derivative dispute regarding the second respondent's attempt to cash the Performance Guarantee to pay the remedial works. The parties had previously convened a conciliation board to determine the Applicant's claim for further payment due to the prolonged contract duration and on 15th March 2022, following a response from Simmons and Simmons, the third Respondent's Lawyers in Brussels, Belgium dated 22nd February 2022, the Director, European Commissions Directorate General of International Partnerships-Africa further improperly threatened the third Respondent with economic sanctions for non-compliance with her directives of 18th February 2022.

On 15th March 2022, upon the Applicant's request that the conciliation board convened to determine the Applicant's claims for further payment due to the prolonged contract duration should also address the dispute, the conciliation board agreed to address all disputes together and later on 15th March 2022, UNRA ( on behalf of the Second Respondent) notified the conciliation board that the conciliation board agreements were "null and void" and requested that the conciliation board halt the proceedings. The following day, on 16th March 2022, via email the conciliation board notified the Parties that the conciliation process

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was ceased "until further notice". On 26th March 2022, notwithstanding that the supervisor, UNRA(on behalf the second respondent) had notified the applicant and the conciliation board on 15th March 2022 that the conciliation board agreements were "null and void" and requested that the conciliation board halt the proceedings, the second respondent suggested that the "existing" conciliation board be used to conciliate the dispute as to whether the applicant is liable for the cost of rectifying the damage suffered in May 2018, and if so, the amount for which the Applicant was liable. The second respondent refused to conciliate the derivative dispute regarding the second respondent's attempt to cash the

Performance Guarantee to pay the Remedial Works.

On 28th March 2022, the applicant informed the second respondent that since they sought to exclude the cashing of the performance guarantee from the conciliation and improperly restricted the scope of the conciliation process, having previously refused to participate in the amicable settlement of the dispute at all; and UNRA ( acting on behalf of the second respondent) having declared the conciliation board agreements "null and void" the applicant considered that the conciliation process had failed and/ or had been rejected by the second respondent, and would refer the dispute to arbitration. On 29th March 2022, the applicant issued a notice of arbitration pursuant to Article 68.4 of the special and General Conditions of Contract and following correspondence dated 1st April 2022 and 19th April 2022, the first respondent replied to the applicant's notice of conciliation and letter dated 14th April 2022 stating that they were amenable to an amicable settlement meeting scheduled for 22nd April 2022. Following the amicable settlement meeting chaired by the First Respondent on 22nd April 2022, the Applicant and second respondent executed a conciliation agreement, where it was agreed that the disputes;(i) prolongation claim and (ii) liability for the alleged defects after

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On 27th August 2022, the first respondent forwarded conciliation body

agreements to the second respondent and again requested for funding for the conciliation following an earlier request made on 11th August 2022. On 28th September 2022, the applicant, the first and second respondents signed the agreements with the conciliation body members and were ready for conciliation, but in a surprise twist of events by letter dated 17th October 2023, the second respondent alleged that conciliation had failed because no settlement had been reached within the maximum time period of 120days from the notification request. The applicant by letter dated 3rd November 2023, notified the second respondent that conciliation had not failed and expressed willingness to continue with the conciliation. The applicant also proposed to the first respondent to fund the conciliation process by letter dated 8th November 2023. By letter dated 25th October 2023, received by the third respondent on 9th November 2023, the second respondent called the Guarantee and requested the third respondent to transfer the sum of Euro 6,580,855.81 to the EU bank account not later than 14 days from the date of receipt of the demand.

On 13th November 2023, that applicant issued a notice of arbitration pursuant to Article 68.4 of the Special and General Conditions of Contract. The relief sought in the Arbitration in respect to the remedial works dispute is indicated in the Notice of Arbitration dated 13th November 2023 (annexure $LL$ ).

The Applicant sought grant of the interim measure of protection so that the status quo can be preserved and so that the arbitral tribunal shall have an opportunity to decide on whether the applicant should be made to pay for remedial works by cashing the performance guarantee( or at all); and stated that if the performance guarantee is cashed, it is shall cause the applicant colossal loss, injury and irreparable damage to the applicant's hard earned reputation given that the European Development Fund of contract permits performance guarantees to be cashed only if the contractor is proven to be in default; and that the applicant has commenced arbitral proceedings by way of notice of arbitration against the first and second respondents, that raises a prima facie case on several contractual issues and the said arbitration has a high probability of success.

Further that the irreparable injury that the applicant stands to suffer includes a loss of cash flow Euro 6,580,855.81 equivalent to approximately Ugx 27,000,000,000which cash flow loss would prevent the applicant from bidding for and/or executing future construction projects in Uganda and thus affecting the livelihood of numerous Ugandan subcontractors and suppliers and the economy at large. That the irreparable injury that the applicant stands to suffer also included a loss of hard earned good reputation having successfully constructed and developed over 5,000KM's of road projects in Uganda 2022 to date including Nebbi- Arua. Karuma- Olwiro, Kagamba-Rukungiri, Kasese -Kikorongo-Katunguru, Hima- Kasese-Kilembe, Jinja-Bugiri, Kabale-Kisoro- Bunagana/Kyanika, Mukono -Kalagi- Kayunga-Bukoloto-Njeru and Mukono-Katosi-Kisoga-Nyenga-Njeru Roads among others and never having had a performance guarantee cashed by employer. Further that the irreparable injury that the applicant stands to suffer also included a loss to future business, since the applicant would now be required

- to disclose in future tenders and bids that one of its performance guarantees was cashed(in circumstances when the Performance Guarantee could only be cashed if the applicant was in proven default) which will cause significant prejudice to the applicant when bidding for future projects and will mostly like resulting in the applicant failing to win tenders and contracts in the future. - ne Applicant also stated that an order of mandatory interim measure of rotection by way of an order of specific performance requiring the first and econd respondents and its nominees, agents, servants or assignees to withdraw ne request for the payment to be made under performance guarantee is

necessary so that the Arbitral proceedings are not rendered nugatory.

- n their Affidavit in reply, the 1st and 2nd respondents averred that the Applicant and he Government of Uganda represented by the Ministry of Finance, Planning and conomic Development with counterpart funding from the European Union entered nto a contract on 29th December, 2010 for the reconstruction of Mbarara-Ntungamo-Labale-Katuna Road section of the Northern Corridor vide Lot 3 No. 2010/256-788 or the sum of Euros 65,808,588.09 for a duration of 36months with a completion ate of 2nd August 2014. Pursuant to the terms of the contract, Mizrahi Tefahot BAN imited issued a performance guarantee in December, 2010 to the contracting Authority for the sum of Euros 6,580,855.81 being 10% of the contract sum. The - erformance Guarantee obligates Mizrahi Tefahot Bank Limited as primary obligor ) pay the guaranteed sums without objection or legal proceedings of any kind upon demand stating that the contractor has failed to perform its contractual obligations nd the performance guarantee provides for the manner with which the guarantee in be released in accordance with Article 15.8 of the General Conditions of ontract (GCC).

The 1st and 2nd respondents averred that that Article 51.3 of the GCC provides that the supervisor shall issue to the Contracting Authority or its duly recognized representative and to the contractor a final statement of account showing the final amount to which the RCC is entitled under the contract and that the Contracting Authority or its duly recognized representative and the RCC shall sign the final statement of account as acknowledgment of the full and final value of the work implemented under the contract. That owing to defects including the cracking of the surface asphalt which the Applicant attempted to but failed to correct through the Defects Liability Period, the Supervisor (Uganda National Roads Authority\_could

## not issue the final statement of account

Further that the Applicant wrote to Mizrahi Tefahot Bank Limited on 19th May 2018 requesting for cancellation of the guarantee and attached a Final Statement of Account that was not signed by the Contracting Authority nor its duly recognized representative (UNRA); that the Performance Guarantee provides for the manner in which the guarantee can be cancelled and that the Final Statement of account was never signed by the Permanent Secretary, Ministry of Finance; and that the Applicant submitted another Final Statement of Account dated 24th May, 2019 and the same was not endorsed by the Contracting Authority or its Representative. The supervisor engaged a consultant, Transport Laboratory Institute Limited to carry

out an audit which established that the cause of the defects was due to deficiencies in the contract quality control during asphalt preparation. The Applicant was invited for the meeting to discuss the findings and recommendations of the consultant with a view of agreeing to workable plan to close off the project. The applicant subsequently rejected the attributions of the failures in the road to him by the consultant and refused to remedy the defects on the basis that it had already been discharged from the contract.

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The supervisor then requested the contracting authority to demand payment of the contractor's performance guarantee in order to finance the necessary remedial works and on 11th January, 2021 the National Authorizing officer informed the Applicant of their intention to start the process of cashing the contractor's performance guarantee

The 1st and 2nd respondents contend that as a result of the failure to correct the defects, the supervisor did not issue a final statement of account duly signed by the contracting Authority or its representative and RCC; and that in a letter dated 21st May, 2021, by the 2nd respondent to Mizrahi Tefahot Bank, London which provided the Guarantee (Obligor), notifying the Bank of the default by the Applicant, relating to the failure of asphalt surface and demanding the Bank to cash the performance guarantee in accordance with the terms of the Guarantee. The bank responded vide a letter dated 17th June 2021 advising that the performance Guarantee was cancelled in accordance with Article 15.8 of the contract. Article 15.8 of the GCC provides that the performance Guarantee shall be released within 45 days of issuing of the signed Final Statement of Account referred to in Article 51 for its total amount except for amounts which are the subject of amicable settlement, arbitration or litigation. On 12th July 2021, the 2nd respondent responded to the Bank asserting that the Performance Guarantee had never been released since the Final Statement of

Account duly signed by the contracting Authority or its authorized representative and the contractor had never been issued to the Bank in line with the GCC 15.8 and

$51.3.$

The 1st and 2nd respondents further averred that the Applicant filed Miscellaneous Application No. 99 of 2022 arising from Misc. Cause No. 43 of the 2022 wherein they sought an interim order of injunction to be issued against the respondents, their agents or assignees restraining them from cashing or drawing down the Applicant's

performance Guarantee pending the determination of the temporary injunction; and that Justice Esta Nambayo delivered the ruling on 7th March 2022 and found no merit in the application and dismissed the same with costs. Further that the Applicant filed Misc. Cause No. 43 of 2022 seeking for an order of Certiorari quashing the decision of the respondent to cash draw down the performance guarantee, an order of the prohibition restraining them from cashing the guarantee, declaration that the respondent exceeded their authority in issuing the performance guarantee among other orders and on 15th March 2022, Justice Esta Nambayo delivered judgment and did not grant the orders sought.

The 1st and 2nd respondents contend that the Applicant and the National Authorizing Office signed an agreement on 4th May 2022 to refer the dispute to conciliation in respect of the contract for the construction of Mbarara-Ntungamo- Kabale-Katuna section of the Northern Corridor Route 64M Lot 3 contract No. 2010/259-788; that Article 2(c) of the Conciliation agreement sated that Ministry of Finance, Planning and Economic Development stayed any existing proceedings relating to the performance guarantee against the bank for the duration of the conciliation process; and that clause 3 of the conciliation agreement specifically provided that in the event of failure of the conciliation process, the Ministry of Finance, Planning and Economic Development is at liberty to resume the process of cashing the performance guarantee.

Further that the Minister of Finance, Planning and Economic Development and National Authorizing Officer wrote to the applicant on 17th October 2023 and noted that no settlement had been reached within the maximum time period of 120 days from the notification request and that the conciliation process had failed; and in a letter dated 25th October 2023, the Deputy National Authorizing officer and the Head

of EU Delegation wrote to the Bank lifting the suspension on the guarantee call of 21st May 2021 and resuming the process of cashing the performance guarantee.

The 1st and 2nd respondents contend further that owing to the defects in the road, the government of Uganda stands to lose Euro 6,580,855.81 if the performance Guarantee is not cashed to enable the payment of a new contractor or repair the defects arising from the applicant's work; that this case does not provide special circumstances that warrant the grant of a mandatory injunction; that if this order of injunction granted, the Arbitration will not be rendered nugatory; that there is no irreparable damage likely to be suffered by the Applicant that cannot be atoned by way damages and that the balance of convenience lies in the respondents' favour as the public and the state shall be more inconvenience than the Applicant if the said performance Guarantee is not recovered to enable the necessary remedial repairs to the road to be undertaken immediately.

The Applicant then filed an affidavit in rejoinder stating that the contract was performed, the works provisionally accepted after works were completed in sections; that is, KM (95-137) on 14th August 2015, KM (137-160) on 2nd December 2015 and Kisoro Link on 27th May 2016. The final date of completion being 27th May 2016. The works were consequently finally accepted by Uganda National Roads Authority, COWI and the European Union Representative on 6th February 2018. That the works

were accepted after a partial Final inspection on 13th June 2017 and a Final inspection on 15th February 2018, whereat the Applicant, the Supervisor, the Supervisor's Representative and the second respondent's representative were all present.

The Applicant contends that the Performance Guarantee is governed by Article 15 of the general conditions of contract(GGC) and under Article 15.7 prior to making any claim on the Guarantee, the applicant should have been notified on or before 6th February 2018 and not in February 2021 (three years later) after the Guarantee was discharged in accordance with Article 15.8 of the General Conditions of Contract; and that the Performance Guarantee contained several underlying conditions which included a condition that the Guarantee will be released in accordance with Article 15.8 of the General Conditions of contract.

Further that pursuant to Article 51.3, the final statement of account was prepared and signed on 23rd April 2019 by the Supervisor's Representative and issued to the Applicant who signed it on 24th May 2019 and that subsequently on 18th June 2019, the Supervisor's Representative forwarded the final statement of account to the Supervisor who received the same on 18th June 2019. That the letter dated 19th March 2018 was never received by the applicant and the applicant only became aware of it by email dated 22nd February 2021, following the second respondent's letter dated 11th January 2021 which enclosed the letter; and that the said letter was issued after the contract was fully performed and after the defects liability period (DPL) had lapsed and after the Final Acceptance Certificate had been issued by the supervisor. The contractual performance was issued for thirty- six months from the date of commencement of works and DLP was for three hundred sixty -five days (one year). The Applicant averred that the letter $(Annex C)$ contains an admission by supervisor of receipt of the draft final acceptance certification from the supervisor's representative and an undertaking by the supervisor to process the final acceptance certification as required under Article 62.2 of the GCC; that Annex D is dated 15th February 2018 and the Final account is submitted by the supervisor's representative not the applicant; that the applicant was only notified of the engagement of the consultant, TRL Ltd (hereinafter the Consultant) by the supervisor's representative, when he was requested for comments on the study sometimes in December 2019; and that the applicant rejected the findings of the report dated May 2019, but issued

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Further that the letter in Annex H was never served on the applicant and the applicant only became aware of it by email dated 22nd February 2021, when they received the

2nd respondent's letter dated 11th January 2021 which attached the said letter. That the first draft of the Final Statement of Account was issued by the supervisor's representative on 15th February 2018 and the Final Statement of Account was then re-issued on 18th June 2019 and pursuant to Article 51.2 of the Special Conditions of contract, the supervisor was under a mandatory obligation to sign the prepared final statement of account within thirty (30) days from the issue of the certificate of final acceptance and there was no provision for the supervisor not to sign the final statement of account.

The Applicant stated that the Guarantee was released/discharged in accordance with the contract as confirmed by the applicant and third respondent in their various

correspondences; that the applicant filed Misc. Cause No. 43 of 2022 for Judicial Review challenging the decision making process to cash the Performance Guarantee and the resultant Miscellaneous Application No. 98 of 2022 for temporary injunction and Miscellaneous Application No. 99 for an interim order to maintain the status quo pending the Judicial Review Application; that the interim injunction was only dismissed because the judge erred in law, when she applied the wrong principles for an interim injunction and ruled that the applicant did not have a prima facie case with a probability of success in Judicial Review; that the applicant withdrew Misc. Application No. 98 of 2022 for a temporary injunction because it was futile to argue the same in view of the decision in Misc. Application No. 99 of 2022 for an interim injunction and that the applicant did not argue Misc. Cause No. 43 of 2022 for Judicial Review due to an agreement between the parties to withdraw the suit and to refer all the disputes to conciliation.

Further that the applicant has indeed commenced arbitration which the 1st respondent has assented to by his letters of 29th November 2023 and 8th December 2023; that there is no loss to the Government of Uganda since the money claimed in the

Guarantee of Euros 6,580,855.81 can still be recovered by the government of Uganda through the arbitration; that this application has merit since there is no miscarriage of justice which will be occasioned to the respondents by an order of interim measure of protection preserving the status quo pending the arbitration; that a temporary injunction is necessary to preserve the status quo so that the arbitration which is the respondent is a party to is not rendered nugatory; that if the Performance Guarantee is cashed, the applicant is likely to suffer irreparable injury which cannot be adequately compensated for by damages and that the balance of convenience lies heavily with the applicant who stands to lose not only the Euros 6,580,855.81(UGX 27,000,000,000) but also their future business and their hard earned reputation built over decades with International Banks, International Funding and Credit Agencies,

Government, Ministries, Departments, Authorities and Agencies who would all shun a contractor whose Performance Guarantee was cashed for non -performance. Further that that this application has merit since there is an urgent and serious threat of execution of cashing the Performance Guarantee which would render the arbitration nugatory.

In the affidavit in reply of the 3rd Respondent, it is averred that the applicant, Reynolds Construction Company(Nig) Ltd, a fully owned subsidiary of SBI, entered into a construction contract with the 2nd respondent, dated 29th December 2010 to reconstruct the 65KM section of the Norther Corridor Route between Mbarara-Ntungamo-Kabale-Katuna in Uganda (the project and the Works). Article 15 (performance guarantee) of the contract required the contractor to provide a guarantee for the full and proper performance of the contract to the contracting authority, in the amount specified in the special conditions that is 10% of the contract price, being €6,580,855.81. The contractor accordingly requested the 3rd respondent to issue the performance guarantee in favour of the 2nd respondent and on 23rd December, 2010 the 3rd respondent issued a performance guarantee, Guarantee No. GT201121 on behalf of the contractor in favour of the 2nd respondent as the contracting Authority to support the reconstruction of the Mbarara to Katuna road, Lot No. 3. The performance guarantee was to be released in accordance with Article 15.8 of the General Conditions of Contract(GCC) referred to in Article 51 of the GCC which is to the effect that the release will take place within forty-five (45) days of the issuing of the final statement of account.

The 3rd Respondent further averred that through a letter dated 19th May, 2018, the applicant informed the 3rd respondent of its return of the retention guarantee and performance guarantee issued on 1st March, 2012 and 23rd December, 2010 respectively in relatively in relation to the project. The 3rd respondent was provided with a copy of the Final Certificate and the Final Acceptance Certificates that had been signed by the resident engineer. The contractor further instructed the 3rd respondent to proceed to cancel the aforementioned guarantees; and pursuant to the receipt and confirmation of the above instructions from the applicant, the 3rd respondent cancelled the two guarantees from its books and through an email dated 21st May 2018, the 3rd respondent communicated to the applicant, its cancellation of the performance guarantee.

On 2nd June 2021, the 3rd respondent received the first demand for payment of the amount under the Performance Guarantee by letter dated 21st May 2021 signed by the European Union and the contracting authority and the 3rd respondent immediately responded to the above letter on 17th June 2021 informing the 2nd respondent that performance guarantee was cancelled after the issuance of the Final Statement on 14th June 2019 in accordance with Article 15.8 and 51 of the GCC. The 2nd respondent reiterated their demand for payment of the performance guarantee by the letter dated 12th July 2021 and through a letter dated 16th September 2021 addressed to the applicant and copied to the 3rd respondent, the 2nd respondent reiterated its intention to proceed with the cashing of the performance guarantee. In response to the letter dated 16th September 2-21, on 14th October 2021, the 3rd respondent informed the 2nd respondent that the Performance Guarantee had since been cancelled on the applicant's instruction in accordance with clause 15.8 of the General Conditions and there was in fact no performance guarantee to enforce/ encash. On 9th November 2023, the 3rd respondent received another letter dated 25th October 2023 seeking for cashing of the performance guarantee on ground that conciliation had failed.

The 3rd Respondent averred that the 2nd respondent's demanded for the payment of the guarantee is invalid as the 3rd respondent had already cancelled the Performance Guarantee on the instructions of the Applicant and in accordance with clause 15.8 of the General Conditions of contract before the 2nd respondent made any demand; that the status quo is that there is no valid guarantee to be enforced by the 2nd respondent as the said guarantee expired, was released and cancelled in the accordance with clause 15.8 of the general conditions of the contract before the 2nd respondent made demands for payment; that there is an arbitration agreement between the applicant and 2nd respondent, a dispute has arisen as to the validity of

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the 2nd respondent's demand for payment under an already cancelled guarantee and the 2nd respondent having commenced arbitration proceedings, the conditions under section 6 of the Arbitration and Conciliation Act have been satisfied.

Counsel for all the parties made extensive oral submissions to support their claims which have been considered by the Court in this Ruling and the same can be found on court record.

## **REPRESENTATION**

The Applicant was represented by M/s Verma & Partners while the 1st and 2nd

Respondents were represented by the Attorney General's Chambers and the 3rd Respondent by M/s Kampala Associated Advocates.

## **RULING**

I have carefully read all the pleadings in this matter and listened to the submissions of all the parties herein. The main Issue for determination before this Court is whether this is a proper case for issuance of interim measures of protection by way of the various orders sought by the Applicant in this Application.

Before submissions on the above issue were made by the parties, counsel for the Applicant and counsel for the 3rd Respondent who did not oppose the application sought the guidance of Court in respect of, inter alia, whether the present application was properly before the Court given that in their opinion Conciliation proceedings had not begun nor failed and, therefore, that there was no need to have the matter referred for Arbitration until the Conciliation process had been concluded as agreed

in the contract between the parties.

Counsel for the 1st and 2nd Respondents submitted to the effect that the Conciliation process failed and the Arbitration process had commenced with the Applicant issuing a Notice of Arbitration and the constitution of an Arbitral tribunal by all parties concerned.

I have looked at the pleadings and observed that a Notice of Conciliation was issued by the Applicant in a letter dated 23rd February 2022 and responded to by Minister of Finance, Planning and Economic Development in a letter dated 25th March 2022 in which, among other things, the request for conciliation was agreed to in as far as

$21$

only payment for or completing remedial works was concerned. Subsequently, an Agreement to refer the disputes in issue to Conciliation was entered into by the Applicant and the Government of the Republic of Uganda on 4th May 2022.

I have also seen communication between the parties wherein the Minister of Finance, Planning and Economic Development/ National Authorising Officer in a letter to the Applicant dated 17th October 2023, while making reference to the conciliation agreement signed on 4th May 2022, noted that since no settlement had been reached within the maximum period of 120 days from the notification request the conciliation process had failed. On the other hand, the Applicant responded to the said letter on 3rd November 2023 and stated to the effect that it was not true that the conciliation process had failed since several pertinent steps had been taken including signing of

- the conciliation agreements, and that the 120 days had not lapsed since conciliation was yet to commence and could not therefore have failed. - In a letter dated 8th November 2023, the Applicant's lawyers wrote to the Attorney General and informed him, inter alia, that the sole reason for the failure of commencement of conciliation was lack of funds and proposed that conciliation is commenced by the Applicant meeting the costs of the conciliation members until and subject to the conclusion of the conciliation process. - Article 68 of the General Conditions for Works Contracts (GCC) which provides for settlement of disputes, in clause 68.3 provides thus:

"In the absence of an amicable settlement, a Party may notify the other Party in writing requesting a settlement through conciliation by a third person. If the European Commission is not a party to the contract, the commission can accept to intervene as such a conciliator. The other Party shall respond to this request for conciliation within 30 days. Unless the Parties agree otherwise, the maximum time period laid down for reaching a settlement through conciliation shall be 120 days from the notification requesting such procedure. Should a Party not agree to the other Party's request for conciliation, should a Party not respond in time to that request, or should no settlement be reached within the maximum time period, the :onciliation procedure is considered to have failed".

## **crticle 68.4** of the said GCC further provides that:

If the amicable settlement procedure and if so requested the conciliation procedure ils, each Party may refer the dispute to either the decision of a national jurisdiction arbitration as specified in the Special Conditions".

From the record as seen above, it is clear that the Applicant and the Government of Uganda failed to reach a settlement within 120 days from 23rd February 2022 when the Notice of Conciliation was issued and June 2022 when the said maximum time period of 120 days elapsed. According to Article 68.3 above, the conciliation process then is considered to have failed. Counsel for the Applicant themselves confirmed in their letter of 8th November 2023 that the reason for failure to commence conciliation was lack of funds.

The argument by the Applicant and their counsel that the conciliation process had not commenced and therefore could not have failed does not hold water and is misleading because, besides the process failing in accordance with Article 68.3 above and as stated in their own letter of 3rd November 2023, pertinent steps had been taken towards the commencement of the said process including issuance of a Notice of Conciliation and signing of a conciliation agreement.

Further, the Applicant, by filing a Notice of Arbitration dated 13th November 2023 and appointing an Arbitral Tribunal confirmed the failure of the conciliation process and proceeded to invoke Article 68.4 of the GCC above mentioned to that effect. Further still, the Applicant has filed that present application under the Arbitration and Conciliation Act seeking interim measures of protection pending determination of the arbitral proceedings.

From the fore going, I find that the Conciliation process in issue failed in accordance with Article 68.3 of the GCC and the Applicant then opted for Arbitration proceedings to ensue for which a Notice of Arbitration was issued and an arbitral panel put in place.

Going back to the merits of the present Application, the same was made under section 6 of the Arbitration and Conciliation Act and Rule 13 of the Arbitration Rules amongst other provisions of law.

## Section 6 of the Arbitration and Conciliation Act provides that:

"Interim measures by the court

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

Where a party applies to the court for an injunction or other interim order and the arbitral tribunal has already ruled on any matter relevant to the application, the

court shall treat the ruling or any finding of fact made in the course of the ruling as conclusive for the purposes of the application".

By the above provision of law, courts are given discretionary power to grant or not grant interim measures of protection before or during arbitration proceedings.

As held in the case of John Sekaziga and another v Church Commissioners Holding Company Ltd Miscellaneous Cause 15 of 2013, the Applicant is required to prove that there is an arbitration agreement and that the dispute is a dispute contemplated within the arbitration clause which would be the subject matter of the arbitration proceedings.

In the same case it was also held that considerations for the grant of a temporary injunction are relevant and the Honourable Judge proceeded to highlight the same therein thus; that the Applicant has an arguable case or prima facie case that merits consideration by the arbitral tribunal..., the Applicant would suffer irreparable injury that cannot be atoned for by an award of damages and if in doubt, the court shall determine the case on the balance of convenience.

The Honourable Judge held further that in establishing whether there is a prima facie case, the court can only rely on the affidavit evidence which in any case is the basis for reaching the decision as to whether there is an arguable case that would be presented or has been presented before the arbitral tribunal.

Case law has also established that "the subject matter of a temporary injunction is the preservation of the existing state of affairs pending litigation. It is aimed at protecting property from being wasted, damaged, alienated, sold, removed, or disposed off, regardless of the litigant's rights of claims to such property. Court's duty is only to preserve the existing situation pending the disposal of the substantive suit. In exercising this duty, court does not determine the legal rights to property but merely preserves it in its actual condition until legal title or ownership can be established or declared" (Byaruhanga & 2 others v Kabagahya Miscellaneous Application 564 of 2016).

It became evident to this Court that the applicant and 2nd respondent entered into a contract that provided, inter alia, for mechanisms for settlement of disputes and that upon failure of the conciliation process, the applicant initiated arbitration proceedings geared towards determining disputes that appear to have arisen between the parties. It is, however, important to note that the 3rd respondent was never a party to the above mentioned contract and it therefore follows that it was not a party to the arbitration agreement between the applicant and 2nd respondent. This positon is further cemented by the fact that the 3rd respondent is not involved in the arbitration proceedings which were commenced by the applicant on 13th November 2023 when they issued a Notice of Arbitration.

Be that as it may, I have read the affidavit evidence of the parties and it is clear that the dispute amongst all the parties herein arises from the cancellation of the Performance Guarantee in issue by the 3rd respondent and the demands for cashing the same by the 2nd respondent, hence the nature of the applicant's prayers for orders for interim measures of protection in respect of claims/ requests for payment under the said Performance Guarantee made by the 1st and 2nd respondents.

The brief chronology of events that gave rise to the dispute above mentioned is discerned from the affidavit evidence adduced in Court by the parties and is as follows:

- 1. A Performance Guarantee No. GT 201121 dated 23rd December 2010 in the sum of EUR 6,580,855.81 was issued by the 3rd respondent to the beneficiary, the $2^{nd}$ respondent; - 2. The facility was cancelled and retired by the 3rd respondent sometime in 2018 following the issuance by COWI (the Supervisor's Representative, the Supervisor being Uganda National Roads Authority (UNRA)) of a Final Acceptance Certificate and the Final Statement of Account on 15th February 2018; - 3. The 1st and 2nd respondents in February 2021 communicated to the applicant and informed them, inter alia, that they were in default due to unwillingness to undertake any remedial works and that another contractor will be engaged to take the remedial works and that the 2nd respondent would commence the process of cashing the Performance Guarantee to pay for the same; 4. The applicant denied liability for any default and indicated willingness to

perform remedial works under a new contract;

- 5. The 2nd respondent in May 2021 wrote to the 3rd respondent requesting the cashing of the Performance Guarantee and in June 2021, the 3rd respondent replied to the 2nd respondent that they had cancelled the Performance Guarantee sometime in 2018; - 6. In July 2021 and subsequently in September 2021, the 2nd respondent reiterated their demand to cash the Performance Guarantee to the 3rd

respondent and in October 2021, the 3rd respondent's counsel reiterated that the Performance Guarantee had been already cancelled and that there is in fact no guarantee to cash or enforce as the same had already been released /cancelled;

- 7. In response to a letter by the Head of Delegation to Uganda of the European union demanding payment of the bank guarantee in December 2021, counsel for the 3rd respondent referred to their earlier letter and reiterated that the bank had no obligation to cash the Performance Guarantee; - 8. Following attempts to conciliate the matter that failed, the 2nd respondent by letter dated 25th October 2023 to the 3rd respondent called the Guarantee and requested the 3rd respondent to transfer the sum of Euro 6,580,855.81 to the EU bank account not later than 14 days from the date of receipt of demand after which a Notice of Arbitration dated 13th November 2023 was issued by

the applicant.

Having concluded as above, this Court had the opportunity to study the Notice of Arbitration issued by the applicant on 13th November 2023 and noted that the disputes before the arbitral tribunal indicate that they are in respect of a prolongation claim and liability for alleged defects appearing/ damage caused after the end of the defects liability period.

The applicant, however, indicated and submitted to the effect that as seen in the Notice of Arbitration the dispute includes a derivative dispute as to whether the respondent is entitled to claim payment of any monies due in respect of the Remedial Works by claiming payment under the performance guarantee reference number GT201121 dated 23 December 2010 issued to the Contracting Authority pursuant to Article 15.1 of the contract.

With regard to the above submission, the parties brought to the attention of Court the fact that the Performance Guarantee in issue was cancelled by the 3rd respondent sometime in 2018 having been instructed to do so by the applicant on 19th May 2018 and upon presentation to it of the final certificate and final acceptance certificate that had been signed by the Resident Engineer (COWI).

In effect, therefore, there is no performance guarantee in existence and neither is there any monies for encashment against the same as demanded by the 2nd respondent. It is the considered opinion of this Court, therefore, that as a result of the fore mentioned the alleged derivative dispute does not arise and is rendered redundant and of no consequence as the 2nd respondent cannot benefit from claiming payment of monies under a Performance Guarantee that does not exist.

This means that the disputes between the applicant and the 2nd respondent under the arbitral proceedings initiated in November 2023 are confined to the prolongation claim and liability for remedial works, if at all, and who is liable to pay for the same. The said disputes are the only disputes contemplated by the arbitration agreement between the applicant and the 2nd respondent which does not apply to the 3rd respondent who, as earlier stated, is not a party to the said arbitration agreement.

From the fore going and for emphasis, it became clear to this Court that firstly, there is no arbitration agreement between the applicant and 3rd respondent in respect of the Performance Guarantee and how it would operate and or be cashed (which is the basis of this application) since the contract regarding the same was between the Contracting Authority and the 3rd respondent only; secondly, that the arbitration agreement in issue is between the applicant and the 2nd respondent only; and thirdly that the disputes subject to the arbitration agreement between the applicant and 2nd respondent were in respect of prolongation and payment for completing remedial works which are not the subject of the present application that was made in respect of interventions sought regarding claims/ demands for payment under the Performance Guarantee.

In other words, the legality or illegality of cancellation/ attempt at cashing of the Performance Guarantee is not a dispute contemplated in the arbitral proceedings that have commenced between the applicant and the 2nd respondent. In any case the 3rd respondent is not a party to the said arbitral proceedings and the hands of the arbitral tribunal may be tied in as far as its inability to handle the said dispute in the absence of the 3rd respondent who admitted that they issued the said Performance Guarantee and cancelled the same on instructions of the applicant is concerned.

Further, the 1st and 2nd respondents brought to the attention of Court their contention that the Performance Guarantee in issue was cancelled in error because the

documents to be presented before its cancellation i.e. the final acceptance certificate and statement of account were signed by the Supervisor's Representative/ Resident Engineer (COWI) and not the Supervisor as provided in the contract. The respondents submitted to the effect that it was stated in the Performance Guarantee in issue that it would be released in accordance with Article 15.8 of the General Conditions of Contract which provided that "unless the contract provides otherwise the performance guarantee shall be released within 45 days of the issuing of the signed final statement of account referred to in Article 51, for its total amount except for amounts which are the subject of amicable settlement, arbitration or litigation."

## In Article 51.3 of the same General Conditions of Contract, it is provided that:

"The Supervisor shall issue to the Contracting Authority or to its duly authorised representative, and to the Contractor, the final statement of account showing the final amount to which the Contractor is entitled under the contract. The Contracting Authority or its duly authorised representative and the Contractor shall sign the final statement of account as an acknowledgment of the full and final value of the work implemented under the contract and shall promptly submit a signed copy to the Supervisor. However, the final statement of account shall not include amounts in dispute which are the subject of negotiations, conciliation, arbitration or litigation".

Reference was also made to Article 62.2 of the General Conditions of Contract which provides that:

"The works shall not be considered as completed until the final acceptance certificate has been signed by the Supervisor and delivered to the Contracting Authority, with a copy to the Contractor".

The 1st and 2nd respondents also referred to Article 5 of the Special Conditions of Contract which provided for Supervisor (UNRA) and Supervisor's Representative (in this case COWI) and in Article 5.3 therein it is stated that:

"The Supervisor's Representative shall carry out the necessary duties for the supervision and checking of the works and the testing and examination of the materials used and the quality of construction. The Supervisor's Representative shall have no authority to relieve the Contractor of any of his obligations under the Contract. He shall have authority to issue Administrative Orders about the nature or amount of any works within the scope of the day-to-day management of the Works. He shall have no authority to agree any claim from the Contractor".

The Applicant's contention, on the other hand, is to the effect that that they completed the works and the defects liability period expired but the Supervisor (UNRA) refused to sign the final acceptance certificate and statement of account despite the same having been signed by the Supervisor's representative/ COWI on 15th February 2018 and early 2019. Further that the contract required the performance guarantee be released no later than 45 days after the final statement of account was to be issued and that following the issuance by COWI of a final acceptance certificate and the final statement of account on 15th February 2018, the applicant requested for the cancellation of the Performance Guarantee and sometime in 2018, the bank cancelled the Performance Guarantee and retired the facility.

Further that the Supervisor is guilty of unconscionable conduct and should not be seen to benefit from the same.

Without going into the merits of the arbitral proceedings and given the fact that the disputes before he arbitral tribunal do not include the legality or illegality of cancellation/ attempt at cashing of the Performance Guarantee, a close look at the contract between the applicant and the 2nd respondent and more specifically Articles 15.8, 51.3, 62.2 of the GCC and Article 5 of the SCC and the final acceptance certificate and statement of account signed by the Resident Engineer (COWI) / Supervisor's Representative revealed that the Performance Guarantee in issue was cancelled in contravention of the terms of the contract between the applicant and 2nd respondent. This conclusion by this Court is arrived at because not only were the final acceptance certificate and the final statement of account clearly not signed by the Supervisor (UNRA) as contemplated by the provisions in the contract, but also the Contracting Authority did not sign the statement of account as required by the said contract.

Not only does cancellation/release of a Performance Guarantee involving such huge amounts of money as in this matter without presentation of duly endorsed crucial documents/ certificates constitute a fundamental breach of contract, but also smirks of gross dishonesty and lack of good faith on the part of the applicant. The final acceptance certificate in a contract such as the one in this matter signifies that the project has been completed according to specifications; and the final statement of account outlines the financial aspects, ensuring all payments and adjustments are accounted for. Together they formally conclude the contractual obligations and signify the end of the project; and it is upon presentation of these important documents duly signed by the Supervisor (in this case UNRA) and not the Supervisor's Representative/ Resident Engineer (in this case COWI) to avoid deceitful and fraudulent claims that a Performance Guarantee can be cancelled/ released.

It must be noted that a temporary injunction is an equitable remedy meant to restrain unlawful or unauthorised interference with private rights and an applicant seeking this remedy must come with clean hands. In the present matter, not only is there no arbitration agreement between the applicant and 3rd respondent in respect of the dispute contemplated by this application regarding cancellation and or cashing the Performance Guarantee, but also there was a blatant breach of contract by the applicant that does not merit the granting of the orders sought herein because they do not come with clean hands.

Suffice it to note that if the applicant was aggrieved by the alleged unconscionable conduct/ actions of the 1st and 2nd respondents as claimed, their remedy lay in the provisions of Article 63 of the contract on breach of contract which they themselves acknowledge allegedly occurred and should have proceeded to initiate legal proceedings against the 1st and 2nd respondents in that regard in accordance with the contract, but not outright breach of the terms of the contract by cancelling a Performance Guarantee based on certificates signed by a Supervisor's Representative/ Resident Engineer (COWI) who clearly under the same contract had no authority whatsoever to agree any claim from the Contractor or relieve him of any of his obligations under the contract.

From the evidence on record, I find that the status quo in this matter is that a Performance Guarantee was issued by the 3rd respondent in favour of the 2nd respondent which was eventually cancelled by the 3rd respondent on the instructions of the applicant and for which the 1st and 2nd respondents have demanded that it is cashed.

It is the firm opinion of this Court that granting the orders sought by the applicant in this application will not result in preservation of the said existing state of affairs and will be in vain because the demands/ requests in issue have already been made by the 2nd respondent and the Performance Guarantee itself does not exist having been cancelled by the 3rd respondent thereby rendering the orders sought in this application overtaken by events. Further, there is no property to protect from being wasted, damaged, alienated, sold, removed, or disposed off which, as stated earlier, is the main purpose for granting a temporary injunction.

Further, on the issue of whether not granting the orders sought herein will render the arbitral proceedings nugatory, as earlier stated, the issues raised by this application are in respect of the legality or illegality of the cancellation of / demands for cashing the Performance Guarantee which is not a dispute contemplated by the arbitration agreement in issue and neither is it a dispute indicated in the Notice of Arbitration.

In any case the determination of the said issues in the absence of the 3rd respondent who is not party to the arbitration agreement by the arbitral tribunal will tantamount to revoking their right to a fair hearing and will cause a miscarriage of justice. In fact, the Contracting Authority may consider seeking legal redress against the 3rd respondent and the applicant in respect of the issues aforementioned.

In conclusion and from all the above, I find that this is not a proper case for issuance of interim measures of protection by way of the various orders sought by the Applicant in this Application.

I do not find it necessary to address the rest of the conditions required for the grant of a temporary injunction in this matter at this point.

This Application is accordingly dismissed with costs to the 1st and 2nd respondents.

M. B. J. Will HON. LADY JUSTICE ANNA B. MUGENYI

## $311224$ DATED

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