UAP Old Mutual Insurance Uganda Limited v Rwenzori Hydro (PVT) Limited & Another (Miscellaneous Application 446 of 2024) [2024] UGCommC 230 (26 June 2024)

Full Case Text

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# **IN THE HIGH COURT OF UGANDA SITTING AT KAMPALA COMMERCIAL DIVISION**

Reportable Miscellaneous Application No. 0446 of 2024 (Arising from Civil Suit No. 0233 of 2024)

In the matter between

## **UAP OLD MUTUAL INSURANCE UGANDA LIMITED APPLICANT**

**And**

# **1. RWENZORI HYDRO (PVT) LTD**

**2. NYAMAGASANI 11 HPP LIMITED RESPONDENTS**

**Heard: 08 April, 2024. Delivered: 26 June, 2024.**

*Summary procedure – the applicant must show a state of facts which lead to the inference that at the trial of the suit he or she may be able to establish a defence to the plaintiff's claim - The court merely considers whether the facts alleged by the applicant constitute a good defence in law and whether that defence appears to be bona fide - While it is not incumbent upon the applicant to formulate the defence with the precision that would be required in evidence, nonetheless the applicant must do so with a sufficient degree of clarity to enable the court to ascertain whether the applicant has deposed to a defence which, if proved at the trial, would constitute a good defence to the suit - Leave to appear and defend must be given only if the court is satisfied that there is a triable issue in the sense that there is a fair dispute to be adjudicated - To merit a grant of leave to appear and defend, the defence proffered must amount to more than mere assertion or statement. There must be substance to the proposed defence*

*Construction - demand performance bonds - Courts will very rarely order a guarantor not to pay a beneficiary who has made an apparently complying demand - If the beneficiary makes an honest demand, it matters not whether as between himself and the principal he is entitled to payment - Any demand within the maximum amount stipulated in the demand guarantee* *must, in principle, be paid by the guarantor, irrespective of whether the underlying contract has, in fact, been breached and irrespective of the loss actually suffered by the beneficiary - The guarantor is concerned only with the terms of the demand, not with the question of whether or not it is justified - The conditions giving rise to the obligation to pay are found exclusively in the demand guarantee and the terms of the underlying contract are of no relevance - To prove unconscionability, there must be evidence pointing towards unfairness, abusive and/or dishonest conduct, going beyond a mere breach of contract - a finding of unconscionability will be reversed where the Court is satisfied that there is a genuine dispute between the parties to the underlying contract.*

### **RULING**

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#### **STEPHEN MUBIRU, J.**

#### Introduction:

- [1] On or about 9th February, 2017 and 31st March, 2017 M/s VS Hydro Uganda Limited alongside M/s VS Hydro (Pvt) Limited and the 1st respondent executed three separate Engineering, Procurement and Construction Turnkey Contracts in respect of the Nyamagasani I Hydro power project, Nyamagasani II Hydro power project and Kakaka Hydropower project in Kasese District respectively, which required the M/s VS Hydro Uganda Limited to obtain advance payment and performance guarantees from a reputable insurance company, to secure the repayment of the sum of US \$ 3,000,000 advanced to the M/S VS Hydro Uganda Limited under a facility letter dated 11th August 2020. The M/s VS Hydro Uganda Limited duly obtained the requisite guarantees from the applicant, who issued on condition of M/s VS Hydro Uganda Limited and M/s VS Hydro (Pvt) Limited issuing general counter indemnities, while their directors, Mr. Benthotage Nishan Chandana Mahanama and Mr. Prabodha Keshana Sumanasereka were required to take out personal counter indemnities. The applicant then issued the following performance bonds; - i. A Performance Bond No. 010/132/1/001055/2017 for US \$ 2,577,020 dated 29th July, 2021 issued in favour of the 1st respondent securing the 1st respondent's

performance of its contractual obligations as Contractor pursuant to the EPC contract dated 3rd March, 2017 between the M/S VS HYDRO UGANDA LIMITED and the 1st respondent in respect of Nyamagasani I Hydro Power Project.

- ii. A Performance Bond No. 010/132/1/001054/2017 for US \$ 1,322,150 dated 25th May, 2021 issued in favour of the 2nd respondent securing the M/S VS HYDRO UGANDA LIMITED's performance of its contractual obligations pursuant to the EPC contract dated 31st March, 2017 between the M/S VS HYDRO UGANDA LIMITED and the 2nd respondent in respect of Nyamagasani II Hydro Power Project. - [2] On basis of the contracts dated 9th February, 2017 and 31st March, 2017 respectively, alongside the two bonds, the respondents contracted M/s VS Hydro Uganda Limited to design, build and complete the Nvamagasani I Hydro Power Project (performance bond (ii) above) and the other for the design, building and completion of the Nvamagasani II Hydro Power Project (performance bond (i) above). It was an express term of the two Performance Bonds (in keeping with Clauses 4.2 of the EPC Conditions) and the Particular Conditions of Contract that in the event that they were due to expire before the completion of the two contractors' obligations under the EPC Contract, then the 1st respondent would be at liberty to require the extension of the Bonds and that if the Bonds was were not extended by the date 28 days prior to the expiry date, then a demand could be made on them within that 28 day period for payment of the full amount of the Performance Bond on the basis of the contractors' failure to obtain their extension. - [3] By its letter dated 30th November 2021, the 1st respondent notified both contractors that they had not executed and completed all the works under the EPC Contract

nor had they remedied the defects and accordingly, required both contractors to extend the validity of the Performance Bonds in accordance with the terms of the Bond and of Clause 4.2 of the EPC Contract. On the same day both contractors wrote to the applicant requesting it to extend the bonds 28 days before the expiry. Both contractors were unable to cause the extension of the Performance Bonds within the said 28 days of its expiry.

- [4] Accordingly, by its letter of 5th December, 2021, the 1st respondent made a demand on the applicant for payment of the US \$ 2,577,020 and US \$ 1,322,150 guaranteed under the two Bonds respectively, based on the said failure to extend them in accordance with Clause 4.2 of the EPC Contracts. Although both performance bonds imposed on the respondents the duty to seek their extension when deemed necessary, and whereas the respondents were at all time aware that the applicant would need to seek approval of the regulator before extension of the guarantees could be done, it is only on 30th November, 2021 that the respondents notified the applicant of the need to procure an extension of the two bonds. - [5] It is on that account that by Miscellaneous Application No. 30 of 2022, M/s VS Hydro (Pvt) Limited, M/s VS Hydro Uganda Limited, Mr. Benthotage Nishan Chandana Mahanama and Mr. Prabodha Keshana Sumanasereka sought a temporary injunction order restraining the applicant, its agents, receivers, managers, servants, assignees or any other person acting under or pursuant to their authority, from effecting payment on the demand made on the two performance bonds, among others, until final determination and disposal of High Court Civil Suit No. 22 of 2022. It was their case that the issue for determination in the main suit was whether the respondents were in breach of the Engineering, Procurement and Construction Turnkey Contracts and thus it was unjust for the applicant to honour the call.

[6] In a ruling delivered on 13th March, 2023 this Court held that the operative words of the performance Bonds showed that their extension had to be initiated by the respondents, since each of them provided that;

> …..the Beneficiary may require the principal to extend this guarantee if the obligations to be performed by the principal under the contract have not been performed by the date 28 days prior to the expiry date. We undertake to pay you such guaranteed amount upon receipt by us, within such period of 28 days, of your demand in writing and your written statement that the principal has not performed its obligations for reasons not attributable to the Beneficiary, and that this guarantee has not been extended.

- [7] The Court found that the extension was sought in bad faith since renewal was sought belatedly. Nevertheless, on the same date M/s VS Hydro Uganda Limited wrote to the applicant requesting for extension of the two bonds. On 2nd December, 2021 the applicant made an undertaking to have them renewed. It was thus found unconscionable for the respondents to have relied on circumstances of their own making to make a call on the bonds since it was practically impossible to procure that extension timeously. The Court therefore found that a strong *prima facie* case of an unfair or unconscionable calling of the guarantee had been made out. - [8] It is on that account and upon consideration of the overall "balance of convenience" or the "balance of justice" the circumstances at the time were found to be in favour of the grant of the interlocutory injunction. The application was accordingly allowed. A temporary injunction was issued restraining the applicant, its agents, receivers, managers, servants, assignees or any other person acting under or pursuant to their authority, from effecting payment the performance bond issued in favour of M/s VS Hydro Uganda Limited securing its performance of its contractual obligations as Contractor pursuant to the EPC contract dated 3rd March, 2017 in respect of Nyamagasani I Hydro Power Project; and the Performance dated 25th May, 2021 issued in favour of M/s VS Hydro (Pvt) Limited securing its performance of its contractual obligations pursuant to the EPC contract dated 31st March, 2017

in respect of Nyamagasani II Hydro Power Project until final determination and disposal of the main suit, or further orders of this Court.

- [9] When High Court Civil Suit No. 22 of 2022 came up for hearing on 4th December, 2023 the Court found that the parties before court were bound by a valid and operative arbitration clause. Section 5 (1) of *The Arbitration and Conciliation Act* required the court before which proceedings were being brought in a matter which was the subject of an arbitration agreement, if a party so applied after the filing of a statement of defence and both parties having been given a hearing, to refer the matter back to the arbitration. Moreover section 9 of the Act provided that except as provided in the Act, no court was to intervene in matters governed by the Act. The unlimited original jurisdiction of the court could not override that provision (see *Babcon Uganda Ltd v. Mbale Resort Hotel Ltd, C. A. Civil Appeal No. 87 of 2011*). For the foregoing reasons the suit was stayed and the parties were directed to resolve their dispute by arbitration in accordance with their agreement. By extension, the temporary injunction that had restrained the applicant from honouring the call on the two performance bonds, automatically lapsed. - [10] Thereafter the respondents on 26th February, 2024 filed High Court Civil Suit No. 233 against the applicant seeking recovery of the full amount of the performance bonds by way of a a specially endorsed plaint, on ground that there was no complying rejection of the demand, wherefore the applicant is precluded in law from claiming that the demand did not constitute a compliant demand and is obligated to pay on the demand pursuant to Article 20 (b) of the *Uniform Rules for Demand Guarantees* (URDG).

#### The application.

[11] This application by Notice of motion is made under the provisions section 98 of *The Civil Procedure Act*, Order 36 rule 4 and Order 52, rules 1 and 3 of *The Civil Procedure Rules*. The applicant seeks leave to appear and defend the suit. It is the applicant's case that the applicant has a good and plausible defence to the respondents' claim in Civil Suit No. 0233 of 2024. The suit raises triable issues meriting determination by this honourable court including but not limited to: (i) the calls on the performance bonds were unconscionable and made in bad faith; (ii) the calls on the counterindemnities did not amount to admission of liability under the performance bonds; (iii) the applicant did not call on all the counterindemnities as claimed in the plaint; (iv) the demands on the performance bonds were duly rejected by the applicant; (v) the suit is premature given that the performance dispute under the EPC Contracts is yet to be resolved in arbitration. Therefore, there are triable issues of law and fact with real prospect of success raised in this case, and it is just and equitable that the applicant be granted unconditional leave to appear and defend the suit.

#### The affidavit in reply;

- [12] In the respondents' affidavit in reply, it is averred that pursuant to both Clause 4.2 of the EPC General and Particular Conditions of Contract as well as pursuant to the terms of the Performance Bonds, it was agreed that in the event that the Performance Bonds were due to expire before the completion of VS Hydro's obligations under the EPC Contracts, then the respondents would be at liberty to require the extension of the Performance Bonds and that if the Performance Bonds were not extended by the date 28 days prior to the expiry date, then a demand could be made on them within that 28 day period for payment of the full amounts of the Performance Bonds on the basis of the failure by VS Hydro to obtain extension of the Bonds. The Performance Bonds were not extended and it was on this basis that the respondents made the demands for payment thereof. - [13] The demands were valid as they were based on the non-renewal of the Performance Bonds 28 days prior to their expiry their renewal having been required in accordance with Clause 4.2 of the EPC General and Particular Conditions of Contract as well as pursuant to the terms of the Performance Bonds.

The failure to renew the said Bonds, rendered the applicant liable to pay the full amount of the Performance Bonds. A purported rejection of the Performance Bonds is ineffective pursuant to Clauses 24 (e) of the URDG which requires a rejection to be within five (5) business days of the demand. The letters of rejection were required to unequivocally reject the demands as opposed to (wrongly) inviting further documentation to be submitted and then the letters should also have stipulated the discrepancy for which the rejection is made. The letter of 9th December, 2021 was couched and titled as a response to a demand on an "Advance Payment Bond" as opposed to a Performance Bond and the request for a detailed breakdown of the outstanding amount and of repayments made by the principal as at the date of the call could only arise in relation to an "Advance Payment Bond" and not a "Performance Bond." It is correct that the applicant's demands for recovery under the counter-indemnities is irrelevant to the consideration of its liability under the Performance Bonds. However, this point does not raise a triable issue as it does not extinguish or impact the applicant's liability under the Performance Bonds by reason of non-renewal thereof.

- [14] In accordance with Clause 5 (a) of the URDG, the applicant's obligations and liability under the Performance Bonds are entirely independent of the rights and obligations of the respondent and VS Hydro under the EPC Contracts. Furthermore, pursuant to Clause 4.2 of the EPC Contract, if amounts are paid on a Bond in excess of the entitlement of the employer, that amount is recoverable by the Contractor through Arbitration. On the 12th July 2021, VS Hydro issued a letter requesting for a "Taking-Over Certificate" pursuant to Clause 10.1 of the EPC Contract on the wholly alien basis of the issuance by UETCL of a Commercial Operations Date letter under the PPA. - [15] The said letter was transmitted by VS Hydro's email to the respondent of 15th July 2021. By the respondent's email dated 30th July 2021, it rejected VS Hydro's request for the issuance of a Taking-Over Certificate as to VS Hydro's knowledge, several substantial items remained outstanding and further the evaluation for the

issuance of a "Taking-Over Certificate" is entirely different from that required for the issuance by UETCL of a COD letter under the PPA. By its email of the 30th July 2021, VS Hydro conceded that there were indeed several outstanding items in relation to the "Taking-Over Certificate" that needed to be completed. By the letters of its legal advisors, Cliffe Decker Hofmeyr ("CDH"), both dated the 7th January, 2022 specifically Paragraph 16 thereof, VS Hydro again requested the issuance of a Taking-Over Certificate. This further request was again rejected through the respondent's detailed letter dated the 4th February, 2022.

[16] There is no injunction in place restraining payment of the two Performance Bonds sued upon as the Suit on which the injunction was based abated on the referral of the underlying dispute to arbitration. The matters which were referred to arbitration relate to the rights and obligations of the parties under the EPC Contract and the matters which pertain to the Performance Bonds are justiciable before the Court and not before the Arbitrator.

#### Submissions of counsel for the applicant.

[17] Counsel for the applicant submitted that the triable issue is that the call on the bond was unconscionable and void under clause 3 of the contract agreement the two bonds were secured to guarantee the works. Clause 1.1.5.8 of the general conditions of contract the works include temporary ones. Paragraphs 26, 27 and 28 of the affidavit in support explain the unfairness. The works secured by the bonds had reached commercial operations and that date had been confirmed by the UETCL prior to the call on the bonds. Annexure "U" and "V" of the affidavit confirm the date which signified performance of the obligations and therefore a call on the bond for the full amount was unfair an unconscionable. The respondent had knowledge of the fact that the project had reached the commercial operations by virtue of UETCL confirming the date. They could not in good faith have called on the bonds since the contractor had discharged substantially their contractual obligations. - [18] Claiming on basis of failure to extend could not form a proper basis since the language of the two bonds required a call if the obligations to be performed by the Principal had not bene performed by 28 days prior to the expiry of the bonds. The securities were for performance and calling for non-extension was not in good faith. The calls were made despite the respondents having been deemed to have taken over the two projects as per CI – C (iv) attached to the affidavit in reply. The email from the contractor to the employer in response to that of the employer. The team had taken over full responsibility of the operations of the plant. The timing of the extension; on 30th November, 2021 the respondents made the request for extension yet they had already received and had knowledge of commercial operations having been confirmed by UETCL. On 2nd December, 2021 the applicant made an express confirmation they would be extended for a further 8 months period subject to regulatory approval. Two days later the call was made on 5th December, 2021. Two days after the undertaking could not have been a reasonable time expected of the applicant to process regulatory approval. This is supported by the authorities in the bundle filed. - [19] The issues are; whether the issuance of commercial operations signifies the works can be used hence a call on the full amount if the securities is not a fair call. The 3rd authority determined there was unconscionable conduct. Whether that would disentitle the respondents from making a call. Whether being fully aware of the commercial stage having been achieved they were entitled to make a call on the full amount. Under the contact there was a provision for the employer to accept parts of the works deemed complete. Whether in refusing to issue a take-over certificate after confirmation of the operations date are deemed to have acted bona fide on calling on the bonds. The contract provides for deemed take over. Whether the reason for failure to renew was a proper ground for making a call. The legal effect of a confirmation of operations date requires facts to be established by a full trial.

- [20] Paragraph 34 of the supporting affidavit the deponent states that the court determined that on 4th December, 2023 the underlying dispute was referred to arbitration. The Court determined that the liability of the applicant would crystallise after the award. Tw suit therefore was brought prematurely. The applicants were parties to the suit which was referred to arbitration. The applicant issued demands on the counter indemnities as per para 6.15 in the plaint. It is an issue for trial. The rejection of the calls by letters dated 9th December, 2091 annexes B1 and B2 which were the responses to the calls which was made. - [21] The applicant stated that they were non-compliant. The bond numbers clearly show that they were the performance bonds. A liberal approach should be taken under article 24 A of the URDG it may reject the demand or approach the instructing party for waiver. The applicant followed that obligation and now it is a triable issue. The authority No. 4 empowers court to look at the factual matrix. The bond numbers relate to performance bonds not advance payment bonds. The PPA is a related contract and forms part of the EPC Clause 1.1.6.9 of the p[articular conditions. It is not an alien document; it is incorporated by reference. Clause 1.1.6.5 of the general conditions. The code cannot be alien. The autonomy principle does not preclude the court from considering the underlying transaction.

## Submissions of counsel for the respondents.

[22] Counsel for the respondents submitted that the suit is by the employer against the guarantor and the contention is that calls were made and the payments were not made. In the plaint the case is on two performance bonds, annexure A and G. The underlying contract requited performance bonds to be current. The supplementary affidavit annexure C (viii) clause 4.2 ta page 11 the obligations extended to defects period and had to be renewed. There is a provision for indemnity. The bond annexure "A" the last two paragraphs it shows that the taking over certificate expires the bond. It was a contractual obligation of the contractor to extend it before the 28 days. Clause 4.2 of the particular conditions of contract the bond had to be in place for 70 days after taking over in accordance with 10.1. The case sighted as 2 is in relation to contractors. The skeletal submissions and the concept commercial operations and of taking over certificate is different. The argument that non-extension is not a ground.

[23] Annexure B1Vadn B2 of the affidavit in reply para (vi). At page 20 is the demand and they mistook it for an advance payment bond and required matters of that type of bond. This was not a rejection but was asking for more calls. This was a performance bond not an advance payment bond. B (i) at page 17 is the 1.3 million bond was written not to the 2nd respondent but to Rwenzori and was delivered therefore to the wrong party. The counter indemnity call is abandoned. Rejection does not absolve liability. The hunter authority would require them to stay the suit. The underlying contract is for reference purposes only. The test in 2.49 of the treatise does not apply.

## The decision.

- [24] Under Order 36 rule 4 of *The Civil Procedure Rules*, unconditional leave to appear and defend the suit will be granted where the applicant shows that he or she has a good defence on the merits; or that a difficult point of law is involved; or that there is a dispute which ought to be tried, or a real dispute as to the amount claimed which requires taking an account to determine or any other circumstances showing reasonable grounds of a bona fide defence (see *M. M. K Engineering v. Mantrust Uganda Ltd H. C. Misc Application No. 128 of 2012*; *Bhaker Kotecha v. Adam Muhammed [2002]1 EA 112*; and *Makula Inter global Trade Agency v. Bank of Uganda [1985] HCB 65*). The applicant should demonstrate to court that there are issues or questions of fact or law in dispute which ought to be tried. The procedure is meant to ensure that a defendant with a triable issue is not shut out. - [25] In an application of this nature, there must be sufficient disclosure by the applicant, of the nature and grounds of his or her defence and the facts upon which it is

founded. The second consideration is that the defence so disclosed must be both bona fide and good in law. To this end, the applicant cannot merely rely on conclusions in law but must set out actual evidence. A court that is satisfied that this threshold has been crossed is then bound to grant unconditional leave. Where court is in doubt whether the proposed defence is being made in good faith, the court may order the defendant to deposit money in court before leave is granted.

- [26] Wherever there is a genuine defence either to fact or law the defendant is entitled for leave to appear and defend. The applicant is not at this stage required to persuade the court of the correctness of the facts stated by it or, where the facts are disputed, that there is a preponderance of probabilities in their favour, nor does the court at this stage endeavour to weigh or decide disputed factual issues or to determine whether or not there is a balance of probabilities in favour of the one party or another. The applicant must show a state of facts which lead to the inference that at the trial of the suit he or she may be able to establish a defence to the plaintiff's claim, in which case he ought not to be debarred of all power to defeat the demand upon him. The court merely considers whether the facts alleged by the applicant constitute a good defence in law and whether that defence appears to be bona fide. In order to enable the court to do this, the court must be apprised of the facts upon which the defendants rely with sufficient particularity and completeness as to be able to hold that if these statements of fact are found at the trial to be correct, judgment should be given for the defendant. - [27] The applicant, in his or her affidavit in support of the application, must fully disclose the nature and grounds of the defence and the material facts on which it is based. The applicant must depose to facts which, if accepted as the truth or proved at the trial, would constitute a defence to the plaintiff's claim. While it is not incumbent upon the applicant to formulate the defence with the precision that would be required in evidence, nonetheless the applicant must do so with a sufficient degree of clarity to enable the court to ascertain whether the applicant has deposed to a defence which, if proved at the trial, would constitute a good defence to the suit.

- [28 Such a defence should not be averred in a manner that appears to be needlessly bald, vague or sketchy. If the defence is based upon facts, in the sense that material facts alleged by the plaintiff in the plaint are disputed or new facts are alleged constituting a defence, the court does not attempt to decide these issues or to determine whether or not there is a balance of probabilities in favour of the one party or the other. If the defence is averred in a vague, bald or sketchy manner, that may be taken into account when determining whether the applicant has a bona fide defence or not. - [29] On the other hand, a triable issue is one capable of being resolved through a legal trial i.e., a matter that is subject or liable to judicial examination in court. It has also been defined as an issue that only arises when a material proposition of law or fact is affirmed by the one party and denied by the other (see *Jamil Senyonjo v. Jonathan Bunjo, H. C. Civil Suit No. 180 of 2012*). A judgment under summary procedure is based upon a contention that all necessary factual issues are settled or so one-sided that they need not be tried. Leave to appear and defend must be given only if the court is satisfied that there is a triable issue in the sense that there is a fair dispute to be adjudicated. The issue raised should not be illusory or sham or practically moonshine. Consequently, when an application for leave to defend is made on basis of the existence of triable issues of fact, the applicant must fully disclose the nature and scope of the material facts to be tried. - [30] The law requires that the defendant, in his affidavit supporting the application, must fully disclose the nature and grounds of the defence and the material facts on which it is based. All that the court enquires, in deciding whether the applicant has set out a bona fide defence, is: (a) whether the applicant has disclosed the nature and grounds of its defence; and (b) whether on the facts so disclosed the applicant appears to have, as to either the whole or part of the claim, a defence which is bona tide and good in law.

- [31] A frivolous defence is one whose intention is to stall and wrongfully delay settlements of a legitimate claim. By raising frivolous defences and defending the indefensible, such tactics needlessly prolong cases, waste courts' time and other resources. A defence is frivolous where it lacks an arguable basis either in law or fact. Put another way, a defence is frivolous when either (1) the factual contentions are clearly baseless, such as when allegations are the product of delusion or fantasy; or (2) the defence is based on an indisputably meritless legal theory. The factual theory presented by the applicant is clearly meritless. - [32] To merit a grant of leave to appear and defend, the defence proffered must amount to more than mere assertion or statement. There must be substance to the proposed defence. Mere averment in the affidavit supporting the motion will not suffice unless the document to support of the averment is attached. The Court will examine the motion for specificity as also the supporting material for sufficiency and then pass appropriate orders. If the applicant's pleadings do not give sufficient details, they will not raise plausible defence, and the Court can reject the application and pass a decree. According to Order 6 rule 30 (1) of *The Civil Procedure Rules*, the court may order any pleading to be struck out on the ground that it discloses no reasonable answer and in case of the defence being shown by the pleadings to be frivolous or vexatious, may order judgment to be entered accordingly, as may be just. - [33] In an application for leave to appear and defend a suit seeking payment under a demand performance bond, the Court has to consider whether there is a challenge to the validity of the bond itself upon which payment is claimed, and whether the conditions as specified in the writing are satisfied. If the challenge to the validity is not substantial and the conditions as specified in the writing are met, *prima facie* leave should not be granted and judgment ought to be entered against the guarantor to fulfil its obligation.

[34] It is the applicant's contention that the defences / triable issues in the underlying suit include; - (i) the calls on the performance bonds were unconscionable and made in bad faith; (ii) the calls on the counterindemnities did not amount to admission of liability under the performance bonds; (iii) the applicant did not call on all the counterindemnities as claimed in the plaint; (iv) the demands on the performance bonds were duly rejected by the applicant; (v) the suit is premature given that the performance dispute under the EPC Contracts is yet to be resolved in arbitration

## i. Scope of possible defences available to a guarantor in respect of demand guarantees.

- [35] The independence of the demand guarantee from the underlying contract has the effect that, in principle, the guarantor must pay a demand presented in compliance with the terms of the guarantee, irrespective of whether or not the principal has, in fact, committed a breach of the underlying contract with the beneficiary. Therefore, Courts will very rarely order a guarantor not to pay a beneficiary who has made an apparently complying demand. However, in order to preserve the autonomy between the guarantor's obligations, on the one hand, and the rights and obligations of the parties to the underlying contract on the other, the law applies a separate, more stringent, test in the case of objections against the payment of demand guarantees. - [36] The exceptions are; (i) fraud affecting the documents presented by the beneficiary (for example if they have been forged). Fraud is not limited to dishonesty or fraudulent intent, but extends to an absence of objective good faith, as where no reasonable person would have considered the demand to be justified e.g. if the beneficiary had no honest belief in the validity of its demand; (ii) illegality in the demand guarantee contract or underlying contract; (iii) the infringement of international obligations and express contractual derogation from the principle of

autonomy; and (iv) the total failure of the basis of the contract, i.e. the reason for its existence.

[37] A demand guarantee may be defined as an undertaking given for payment of a fixed or maximum sum of money on presentation to the party giving the undertaking of a demand for payment (nearly always required to be in writing) and such other documents (if any) as may be specified in the guarantee within the period and in conformance with the other conditions of the guarantee. Most demand guarantees are payable on "first written demand" or "simple demand" without any additional documents. In *Edward Owen Engineering Ltd v. Barclays Bank International Ltd and another [1978] 1 QB 159; [1978] 1 Lloyd's Rep 166; and [1978] 1 All ER 976* Lord Denning MR held that performance guarantees were virtually promissory notes payable on demand. He also stated that;

> All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice.

[38] Similarly in *R D Harbottle (Mercantile) Ltd. v. National Westminister Bank Ltd., [1978] 1 QB 146; [1978] 2 All E. R. 862 at 870*, Judge Kerr states:

> It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated

in the contracts.... Otherwise, trust in international commerce could be irreparably damaged.

- [39] A demand guarantee stands on a similar footing to a letter of credit, and so in the same way the bank which gives a performance guarantee must honour that guarantee according to its terms. The bank is not concerned with the relations between the supplier and customer and whether or not the supplier has performed his contractual obligations (see Group *Josi Re v. Walbrook Insurance Co Ltd. and others [1996] 1 WLR 1152 at page 801* and *Deutsche Ruckversicherung AG v. Walbrook Insurance Co Ltd and others [1994] 4 All ER 181*). - [40] Demand guarantees, being a substitute for cash, are created to provide the beneficiary with a speedy monetary remedy against the principal to the underlying contract, and to that end they are primary in form and documentary in character. This means that the demand guarantee is an abstract payment undertaking, which is expressed to be payable solely on presentation of a written demand and / or any other specified documents conforming to the terms of the undertaking, and is independent of the underlying contract. In view of this, any demand within the maximum amount stipulated in the demand guarantee must, in principle, be paid by the guarantor, irrespective of whether the underlying contract has, in fact, been breached and irrespective of the loss actually suffered by the beneficiary. This is in contrast to the suretyship guarantee that is an undertaking to be answerable for another's debt or default, and is triggered only by proof of actual default and is not independent of the underlying contract, and which is limited to the amount of loss suffered from the default within the maximum amount stipulated in the guarantee. In this regard, demand guarantees differ from surety guarantees or bonds, in which the security lender (i.e., surety) is only involved if the principal party defaults in the performance of an obligation. - [41] The operative words of the performance guarantee Bond No. 010/132/1/001055/2017 for US \$ 2,577,020 dated 29th July, 2021 and Performance Bond No. 010/132/1/001054/2017 for US \$ 1,322,150 dated 25th May, 2021 show that they required the respondents to submit;

…..a demand in writing and [a] written statement stating that; (a) the Contractor is in breach of its obligation(s) under the Contract, and (b) the respect in which the Contractor is in breach.

- [42] It would appear that the performance guarantees in the instant case are absolute, requiring only a statement of default from the beneficiary, without an indication of the nature of the default, or the presentation of a certificate by an engineer or surveyor, or presentation of a judgment or arbitral award. The applicant giving the guarantee is concerned only with the terms of the demand, not with the question of whether or not it is justified. Irrespective of the existence of any disputes between the parties, such a bond can be invoked by the beneficiary as per stipulations therein. By those expressions, the advance payment guarantees *prima facie* imposed an obligation on the applicant, The applicant, upon demand made on it, which was to be conclusive as regards the amount due and payable by it under the guarantee, to pay the applicants the amount so demanded absolutely and unconditionally, notwithstanding any dispute or disputes raised by the respondents and notwithstanding any legal proceedings pending in any court or tribunal relating thereto. - [42] These clearly are demand performance guarantees under which, subject to the fraud exception, the applicant's obligations are autonomous from the underlying contract between the respondent beneficiaries and M/s VS Hydro Uganda Limited together with M/s VS Hydro (Pvt) Limited as principals; which means that, in principle, the applicant must pay if proper complying documents are presented, even if the respondent beneficiaries and the principals have not stipulated that there is a default under the underlying EPC contracts. - [43] Demand guarantee undertakings rest on two legal principles: the principle of documentary or strict compliance, and the independence principle. The first legal

principle essentially means that the guarantor is obliged to pay if the documents submitted with the demand for payment comply with the terms of the demand guarantee. The second legal principle is that the guarantor's obligations against the beneficiary are determined in the instrument itself, and are independent, or abstract, of the underlying contract between the applicant for, and the beneficiary of, the guarantee, as well as the contract of mandate between the applicant and guarantor.

## ii. Whether the applicant has the defence of fraud in the documents presented, rather than the underlying transaction, available to it.

- [44] A provision common to all the bonds is that "This Performance Bond shall be governed by the Laws of Uganda and shall be subject to the Uniform Rules for Demand Guarantees, published as number 758 by the International Chamber of Commerce, except as stated above." A call on a bond which is subject to the URDG No. 758 must be supported by a written statement stating: (i) that the contractor is "in breach of his obligations under the underlying contract," and (ii) "the respect in which" the contractor is "in breach." Article 15 of URDG No. 758 states that the demand (or a supporting document) must state in "what respect the applicant is in breach of its obligations under the underlying relationship." - [45] Where there is a condition precedent stipulated in the underlying contract, a failure to include a statement in satisfaction of such a condition in the call with make the call invalid. A failure to include such statements or any documents expressly required to be annexed to the demand would therefore make the call noncompliant. In such a case the court may grant an injunction to restrain (a) the beneficiary from making a call on the bond, where it is in breach of an express obligation, or (b) the bank or other surety making payment when a call has been made.

[46] In their respective statements of demand dated 5th December, 2021 when making calls on the two Performance Bonds, the respondents stated as follows;

> By this demand letter we hereby inform you that as of 5th December, 2021 the principal has breached the contract, particularly the principal is in default of Clause 4.2 of the Contract, having (for reasons not attributable to us), failed to extend the Bond period prior to 28 days before the current expiry of the Bond. The deadline was exceeded on 3rd December, 2021.

[47] In response to the two calls, the applicant by its letters dated 9th December. 2021 replied as follows;

> We refer to captioned subject. This is to acknowledge receipt of your letter dated 05th December, 2021 but received by us on 07th December, 2021 making a demand on the bond number 010/132/1/001054/2017 [and Bond number 010/132/1/001055/2017 respectively]. Kindly take note and adhere to the requirements for calling the Bond as stipulated in the Bond wording namely;

- Detailed statement with a breakdown of the outstanding amount (US \$ 1,322,150); [and US \$ 2,577,020 respectively]. - Repayments made by Principal as at date of call.

You are also required to complete the attached claim form. Please add support documentation. In the meantime, we are engaging the principal (M/s VS Hydro Uganda Limited) for a written statement regarding the same. We have also notified our Reinsurers for a Cash Call.

[48] Article 20 (b) of URDG No. 758 requires the guarantor to pay when the guarantor determines that a demand is complying. Alternatively, when the guarantor determines that a demand under the guarantee is not a complying demand, it may reject that demand (see Article 24 (a) of URDG No. 758). It is noteworthy that in its reply, the applicant was non-committal. It instead required the respondents to provide "a breakdown of the outstanding amount" and information regarding "repayments made by [the] Principal as at date of call," yet the terms of the guarantee only required the respondents to present a demand in writing with a written statement, "stating that; (a) the Contractor is in breach of its obligation(s) under the Contract, and (b) the respect in which the Contractor is in breach," both of which requirements were met by the respondents' statements of demand dated 5th December, 2021.

[49] The fraud exception generally applies in two ways; when the issuer of a demand guarantee knows that a document, although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognise such a document as complying with the terms of the demand guarantee. Where the documents or the underlying transaction are tainted with intentional fraud, the guarantee need not be honoured by the guarantor, even though the documents conform on their face (see *NMC Enterprises v. Columbia Broadcasting System, Inc14 U. C. C. REP. SERV. 1427 (N. Y. Sup. Ct. 1974*). It is critical to the efficacy of these financial arrangements that as between beneficiary and guarantor the position crystallises as at presentation of a demand, and that it is only in the case of fraudulent presentation or demand by the beneficiary that the guarantor can resist payment against an apparently conforming demand. The applicant neither raised nor did it query the validity of the documents constituting the calls. Therefore, there is neither a defence nor any triable issue related to fraud in the documents presented.

## iii. Whether there are triable issues regarding a rejection of the calls.

[50] According to Article 24 (a) and (d) of the URDG No. 758, when the guarantor determines that a demand under the guarantee is not a complying demand, it may reject that demand. Once it does so, it is required to give a single notice to that effect to the presenter of the demand. The notice should state: (i) that the guarantor is rejecting the demand, and (ii) each discrepancy for which the guarantor rejects the demand. It is evident therefore that the applicant's letters dated 9th December, 2021 in response to the calls did not constitute a rejection of the calls for being non-compliant.

[51] Requiring the respondents to provide "a breakdown of the outstanding amount" and information regarding "repayments made by [the] principal as at date of call," did not mean that the debt had to be undisputed or finally determined before the applicant's obligation to pay could be triggered. Such a request could not deprive the beneficiary of the benefit of an unconditional security. Therefore the 2nd respondent's call complied with the requirements of the guarantee and the request was only erroneously intended to verify the sum payable, a fact with which the applicant should not have been concerned at all since it was not one of the specified requirements for making a call on the guarantee. Presumably the applicant's reply was directed at Article 25 of URDG No. 758 under which the amount payable under the guarantee has to be reduced by any amount paid under the guarantee, which is not applicable to performance guarantees. Therefore, there is neither a defence nor are there any triable issues related to rejection of the calls.

## iv. Whether unconscionability in the underlying transaction provides a defence or raises triable issues from a guarantor's perspective.

[52] Three core principles underpin the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantees (URDG 758): the independence or autonomy principle, the documents principle and the strict compliance principle. By virtue of those principles, demand guarantees, standby letters of credit, and commercial letters of credit are all treated as autonomous contracts whose operation will not be interfered with by courts on grounds irrelevant to the guarantee or credit itself. Guarantors are concerned with documents, rather than with goods, services or performance of the underlying contract (see *Leonardo S.p. A v. Doha Bank Assurance Company LLC [2019] QIC (F) 6; [2020] QIC (A) 1*). Under the autonomy principle, an issuing bank must make payment under a demand guarantee on receipt of compliant documents irrespective of any dispute which may have occurred in respect of the underlying transaction.

- [54] The independence or autonomy principle, insulates the bond or guarantee from the terms in the underlying contract. This is important because the autonomous nature of the bond or guarantee means that conditions giving rise to the obligation to pay are found exclusively in the bond or guarantee. This independence principle is embodied in Article 5 (a) of the URDG 758. As discussed by the Privy Council in *Alternative Power Solution Ltd v. Central Electricity Board [2014] UKPC 3,* there is a bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts, but the presumption is rebuttable (see *IE Contractors v. Lloyd's Bank [1990] 2 Lloyd's Rep. 496*). However, the appropriateness of the distinction between letters of credit and demand guarantees had been doubted in a more recent English Commercial Court judgment with suggests that the intention of the URDG is that the principle of strict compliance should apply both to letters of credit incorporating UCP 600 and demand guarantees incorporating URDG (*see Teare J in Sea-Cargo Skips v. State Bank of India [2013] EWHC 177 (Comm*). - [55] The essential characteristic of a demand guarantee is that it is independent of the underlying transaction between the applicant and the beneficiary that prompted the issuance of the guarantee. Further, a demand guarantee is also independent of the instruction relationship pursuant to the applicant having requested the guarantor to issue the guarantee in favour of the beneficiary. The conditions giving rise to the obligation to pay are found exclusively in the demand guarantee and the terms of the underlying contract are of no relevance (*see Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] 1 All ER 976, [1978] 1 QB 159, [1977] 3 WLR 764, [1978] 1 Lloyds Rep 166*). A direct consequence brought about by the independence principle is the "pay first, argue later" rule; the beneficiary of a demand guarantee can expect payment under the guarantee as soon as it is able to tender the documents stipulated in the demand guarantee,

irrespective of any dispute arising from any of the contracts other than the demand guarantee itself.

- [56] There are three core principles applicable to on-demand bonds under English law: (i) on-demand bonds are regarded as the equivalent of cash and an injunction that prevents a guarantor from complying with its obligations under such an instrument is seen as interfering with that principle; (ii) it is inherent in agreeing to provide an on-demand bond that the party providing that bond has agreed to payment being made notwithstanding the existence of a dispute as to the beneficiary's entitlement to payment; and (iii) the guarantor has made a promise and generally the court will not use its coercive powers to cause a guarantor to dishonour its promise and thereby run the risk of damage to its reputation. - [57] When utilised as intended, the performance bond ensures that the construction can continue despite the contractor's failure to perform, or failure to adequately perform. The performance bond is valuable precisely because it allows the beneficiary to continue construction even when recovery of damages is uncertain; the beneficiary can immediately find another contractor to continue work which may otherwise delay the completion of dependent works. However, because of the potential for abusive calls that do not amount to fraud, some jurisdictions now recognise unconscionability as a ground for restraining a guarantor from honouring a bond, at the instance of the principal. While fraud will almost always constitute a component of unconscionable conduct, not every unconscionable conduct will necessarily amount to fraud. - [58] The "unconscionability" exception has been expressed as referring to conduct lacking bona fides, and not unfairness in a loose sense; it contains elements of abuse, unfairness and dishonesty. It is not possible to list or categorise what amounts to unconscionability as it all depends on the facts of each case. Generally, the exploitation of vulnerability or situational disadvantage and insistence upon rights in circumstances which make that insistence harsh or oppressive, provides

a useful link to the conceptual analysis of unconscionable demands under ondemand guarantees. It involves conduct with elements of unfairness in the call on the performance bond; where the conduct of the beneficiary amounts to opportunistic and unfair advantage-taking of the principal's situation, then such a demand for payment is unconscionable. non-compliance with principles of good faith is the defining indicator of unconscionability. It is the insistence upon contractual rights and freedoms but in a way which is inconsistent with the spirit and intendment of the contractual relationship itself. While fraud means that the beneficiary did not honestly believe there had been a breach of contract when the call was made, on the other hand, unconscionability denotes elements of unfairness, reprehensible conduct or acts lacking in good faith such that the court would restrain the unfair party, i.e. the beneficiary, from calling on the bond.

[59] It would seem from the modern authorities in jurisdictions such as Singapore, Malaysia, Australia and South Africa that in the case of on demand guarantees or performance bonds the courts are now more willing to look beyond the fraud exception and consider unconscionability as a separate and independent ground to allow for a restraining order on the beneficiary. To prove unconscionability, there must be evidence pointing towards unfairness, abusive and/or dishonest conduct, going beyond a mere breach of contract. Unfairness *per se* does not necessarily amount to unconscionability although in every instance of unconscionability there will be an element of unfairness. Simply showing that there are disputes between the parties pursuant to the underlying contract *per se* will as well not suffice. As in the case of fraud, to establish unconscionability there must be placed before the court manifest or strong evidence of some degree in respect of the alleged unconscionable conduct complained of, not a bare assertion. This additional ground of "unconscionability" should only be allowed with circumspection where events or conduct are of such degree such as to prick the conscience of a reasonable and sensible man.

- [60] Each case has its own specific facts and governing contract, and the court's decision is largely dependent on the facts of each case. In order to strike a balance between the principle of party autonomy and the court's concern in regulating dishonest and unconscionable behaviour on the part of beneficiaries, this Court is persuaded to recognise the ground of unconscionability. Before this court in Miscellaneous Application No. 30 of 2022, evidence was presented to show that under Clause 4.2 of the EPC contracts the performance bonds were to remain valid until takeover of the three projects. Upon take over, the performance bonds would lapse. Common to both performance bonds is a stipulation that; "following the receipt by us of an authenticated copy of the taking-over certificate for the whole of the works under clause 10 of the conditions of the Contract, this performance Bond shall be deemed to expire." Annexures L1 to L4 of the affidavit in rejoinder show that UETCL indicated the projects had reached commercial operation. - [61] It was found to be unconscionable to call a performance bond when the work it secured had been substantially and properly performed. An unexplained delay in seeking an extension of a bond may, in certain circumstances, be illustrative of *mala fides* and go some way to proving unconscionability. It was therefore the finding of this Court in Miscellaneous Application No. 30 of 2022 based on the evidence before Court at the time, that the events which led to the calls on the guarantees were such as would "prick the conscience of a reasonable and sensible person." In that application, M/s VS Hydro Uganda Limited, M/s VS Hydro (Pvt) Limited, Mr. Benthotage Nishan Chandana Mahanama and Mr. Prabodha Keshana Sumanasereka as applicants, satisfied the threshold of a seriously arguable case that the only realistic inference on the facts was the existence of unconscionability. Consequently, the Court found that in the calls made on the two performance bonds, a false representation had implicitly been made as regards their failure to substantially and properly perform their obligations in the underlying contract. - [62] On basis of the evidence availed to court at that stage, the applicants had furnished *prima facie* proof of unconscionable conduct on the part of the respondents forming the basis of their call on the two performance bonds. The court could not, based only on the contractual documents without looking into any additional evidence beyond that, rule decisively on the existence or otherwise of unconscionable behaviour. Instead, the Court observed that although the merits of the parties' respective cases and their relative strengths were not to be considered at that stage, it was of the view that a strong *prima facie* case of unconscionability had been established as between the applicants, as the principals, and the respondents, as beneficiaries, both being parties to the underlying EPC Contracts. The same cannot be said of the applicant in the instant application since each contract is autonomous. - [63] Firstly, according to Article 5 (a) of the URDG 758, guarantees are separate transactions from the contract on which they are based or to which they are related. Therefore, whenever the beneficiary demands for the payment, under that separate contract, the Guarantor is expected to pay that amount. The unique value of these bonds or guarantees is that the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the principal in relation to the performance or indeed existence of the underlying contract, the guarantor is personally undertaking to pay him provided that the specified conditions are met. These are not tripartite transactions between the insurance company (guarantor), the beneficiary (creditor) and the party at whose instance the bond, guarantee or letter is issued (the principal debtor) but, simply transactions between the insurance company and the beneficiary. - [64] If the beneficiary makes an honest demand, it matters not whether as between himself and the principal he is entitled to payment. The guarantor must honour the demand, the principal must reimburse the guarantor (or counter-guarantor) and any disputes between the principal and the beneficiary, including any claim by the principal that the drawing was a breach of the contract between them, must be

resolved in separate proceedings to which the guarantor will not be a party. In any event, pursuant to Clause 4.2 of the EPC Contract, if amounts are paid on a Bond in excess of the entitlement of the respondents, that amount is recoverable by the Contractors through Arbitration.

- [65] Secondly, relief against unconscionable conduct evolved in the equity jurisdiction as a protection mechanism against the exploitation of the vulnerability of people with a special disability, which over time courts made recognition of the possibility of its broader application to include people who are disadvantaged due to the superior bargaining position of the other party. The juridical basis for adopting unconscionability as a relevant ground (separate from and independent of fraud) when considering the grant of restraining orders, lies in the equitable nature of the injunction. The unconscionability exception applies where it would be unfair for the beneficiary to realise his security pending resolution of the substantive dispute. While considerations of conscionability are applicable in relation to the use of the injunction as equitable interlocutory relief, the same cannot be said of applications for leave to appear and defend where substantive defences are to be considered. - [66] Thirdly, the equitable intervention to restrain the unconscionable conduct on the part of the beneficiary calling under a demand guarantee aims to achieve a fair balance of interests between the principal and the beneficiary, pending the resolution of their underlying dispute either by litigation or arbitration. While litigation was on 4th December, 2023stayed in light of an operative, binding and enforceable submission to arbitration, there is no indication, more than six months later, of reference of the underlying dispute to arbitration. The applicant cannot present as a possible defence to the suit, matters that were referred to arbitration as between the parties to the underlying dispute since it is not privy to the EPC contracts. In these circumstances, public policy demands that contracts freely and consciously entered into must be honoured. It is indeed crucial to economic development that individuals should be able to trust that all contracting parties will be bound by obligations willingly assumed.

- [67] Lastly, a finding of unconscionability will be reversed where the Court is satisfied that there is a genuine dispute between the parties to the underlying contract. For example, in *Sulzer Pumps Spain, SA v Hyflux Membrane Manufacturing (S) Pte Ltd [2020] SGHC 122*, the Court discharged an *ex parte* injunction obtained by Sulzer restraining Hyflux from calling on an unconditional first demand bond. Hyflux had engaged Sulzer as its sub-contractor to supply and install pumps for a desalination plant in Oman. Sulzer provided the bond to Hyflux as security for its warranty obligations. Between November 2017 and May 2019, the pumps repeatedly failed. According to Hyflux, the recurring failures were caused by design flaws and Sulzer was therefore in breach of its warranty obligations, which entitled Hyflux to call on the bond. Sulzer then obtained an *ex parte* injunction to prevent the call. - [68] At the inter partes hearing, Sulzer argued that the injunction should be maintained as Hyflux's call on the bond was unconscionable. The High Court rejected Sulzer's argument and discharged the injunction. First, the Court affirmed the high threshold for establishing unconscionability, which requires the applicant to show a strong prima facie case of unconscionability. Second, the Court affirmed that calling on the bond where there is a genuine dispute as to the root cause analysis does not amount to unconscionability. Sulzer denied the existence of the alleged design flaws and argued that the failures were caused by Hyflux's misuse of the pumps. The Court agreed with Hyflux that it is not necessary for the Court to go into the merits of the dispute. The evidence and arguments raised by Hyflux sufficiently demonstrated a genuine dispute between the parties. Accordingly, Hyflux's call was not unconscionable. - [69] Third, the Court acknowledged that delay in calling on a bond may, in certain circumstances, show unconscionability. However, this was not the case here even though Hyflux had made the call more than six months after the pumps had been fixed, and nearly two years after the pump failures first arose. The Court noted that a long-drawn dispute may require a longer time for the beneficiary to monitor the

situation and decide whether to call on the bond, the nature of the dispute and the depth of disagreement may also be material factors and, further, the fact that the call was made just prior to the bond's expiry does not ipso facto indicate any untoward conduct. Fourth, the Court did not consider the fact that Hyflux was undergoing restructuring proceedings to be relevant to the analysis on unconscionability. The exposure of the obligor to the financial constraints of the beneficiary is not good enough reason to bar a call, since that is part and parcel of the contractual arrangement that the parties have made between themselves in arranging for the performance bond.

- [70] In conclusion therefore, a temporary restraining order does not affect the guarantee as security nor the beneficiary's rights in it. It merely postpones the realisation of the security until the principal is given an opportunity to prove its case. Considerations of conscionability therefore and not meant to afford a defence to a guarantor. Such considerations are relevant when a temporary injunction is sought, where the question is whether or not it would be fair to allow the beneficiary to receive payment under the performance bond before the substantive dispute as to the principal's liability has been considered and finally determined, but not in absence of a substantive dispute as between the guarantor and the beneficiary, where the only question is whether there is an entitlement to such payment. In such cases the only real defence is the fraud exception (i.e. where there is a fraudulent claim and the guarantor knows that the demand is fraudulent), Therefore, unconscionability is neither a defence nor does it raise triable issues in a suit between the beneficiary and the guarantor. - v. Whether the circumstances surrounding the attaining of commercial operations of the projects and failure to issue a take-over certificate affords the applicant a defence or raises triable issues.

[71[ In the letter dated 23rd August, 2021, addressed to The Director, Rwenzori Hydro (Pvt) Ltd, the Managing Director / CEO of Uganda Electricity Transmission Company Ltd (UETCL) wrote as follows;

> Reference is made to your letter dated 20th August, 2021 confirming that all necessary tests as stipulated under schedule 5 of the PPA, which was signed on 16th December, 2016 between Rwenzori Hydro (PVT) and UETCL were completed; and subsequently the subject hydro power plant was commissioned successfully on 19th August, 202l. Furthermore, you requested UETCL to acknowledge 19th August, 2021 as the official Commercial Operations Date for the subject plant. This therefore, is to confirm the Commercial Operations Date for the Nyamagasani 1 Hydro power plant as 19th August, 2021.

- [72] That correspondence is evidence of the fact that the Nyamagasani 1 Hydro power plant was commissioned on 19th August, 2021. Therefore, by the time the respondents made calls on the two performance bonds, the work the two bonds secured, had been substantially and properly performed such that by virtue of the terms contained therein, they would expire upon the applicant receiving an authenticated copy of the taking-over certificate for the whole of the works, a function to be performed by the respondents. The respondents however contend that by its email of the 30th July 2021, M/s VS Hydro Uganda Limited conceded that there were indeed several outstanding items in relation to the "Taking-Over Certificate" that needed to be completed. - [73] By the letters of its legal advisors, Cliffe Decker Hofmeyr, both dated the 7th January, 2022 specifically paragraph 16 thereof, M/s VS Hydro Uganda Limited again requested the issuance of a Taking-Over Certificate. This further request was again rejected through the respondent's detailed letter dated the 4th February, 2022. Moreover, where there is a genuine ongoing dispute, the more unlikely it is for the Court to find unconscionability in the call *(see Sulzer Pumps Spain, SA v. Hyflux Membrane Manufacturing (S) Pte Ltd [2020] SGHC 122*).

- [74] It is therefore evident that the nature of the dispute concerning the failure or refusal to issue the taking-over certificate is generally within the underlying contract to which the applicant has no privity. The applicant cannot raise issues relating to the enforcement of contracts to which it is not privy. The issue as to whether or not attaining commercial operations satisfies the requirements of issuance of the taking-over certificate do not arise at all in the current underlying suit between the applicant and the respondents. The applicant is in no way concerned with any dispute that the respondents may have with the contractors. From the pleadings in the suit the underlying EPC contracts are irrelevant since the applicant's contract with the respondents is autonomous and independent of them. In the absence of fraud, the issuer's obligation to pay is absolute upon receipt of a complying call on the bonds. - [75] Having perused the affidavits in support of the application, considered the submissions of both counsel and the intended defences, I have formed the view that the proposed defences do not present an arguable basis either in law or fact, and neither are there triable issues associated with them in the underlying litigation between the applicant and the respondents. The application accordingly fails and is hereby dismissed with costs to the respondents. - [76] According to Order 36 rule 5 of *The Civil Procedure Rules*, where, after hearing an application by a defendant for leave to appear and defend the suit, the court refuses to grant such leave, the plaintiff is entitled as against the defendant to a decree. Consequent thereto, judgment is entered for the respondents severally against the applicant in the following terms; (i) in respect of the 1st respondent, a sum of US \$ 2,577,020 owed on Performance Bond No. 010/132/1/001055/2017 dated 29th July, 2021; and (ii) in respect of the 2nd respondent, a sum of US \$ 1,322,150 owed on Performance Bond No. 010/132/1/001054/2017 dated the 25th May 2021. The two awards are to bear interest at the rate of 4% per annum each from the date of judgment until payment in full. The respondents are awarded the costs of the suit.

Delivered electronically this 26th day of June, 2024 ……Stephen Mubiru…………..

Stephen Mubiru Judge, 26th June, 2024

Appearances;

For the applicant : M/s S&L Advocates. For the respondents : M/s MMAKS Advocates.