Uganda Development Bank Limited v Bulamu Coffee Buyers, Processors & Exporters Limited & 2 Others (Civil Suit 1093 of 2020) [2024] UGCommC 302 (23 September 2024)

# 5 **THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA [COMMERCIAL DIVISION] CIVIL SUIT NO. 1093 OF 2020**

#### 10 **UGANDA DEVELOPMENT BANK LIMITED ] PLAINTIFF**

#### **VERSUS**

#### **1. BULAMU COFFEE BUYERS, PROCESSORS & EXPORTS LIMITED**

# 15 **2. ALOYSIOUS LUBEGA**

**3. NAGGAYI ANNET ] DEFENDANTS**

#### **Before: Hon. Justice Ocaya Thomas O. R**

# 20 **JUDGMENT**

#### **Introduction:**

The Plaintiff, a limited liability company duly incorporated to carry out banking-related business brought this claim against the Defendants jointly and severally for recovery of UGX 719,951,342.02/= being outstanding principal arrears, default penalty fees and interest on 25 a credit facility plus the costs of the suit.

The brief facts are that 1st Defendant as a customer of the Plaintiff on 26th March 2018, applied for and was granted a Trade credit facility to the tune of UGX 10,000,000,000/= (Uganda Shillings Ten Billion Only) at an interest rate of 16% per annum which was

30 repayable in a period of 12 months.

That the said credit facility was secured by a contribution by the borrower to the tune of 20% value of the amounts financed, a registered lien over the stock of coffee finance as well as risk insurance cover for all stocks of goods held in the warehouse, a tripartite field 35 warehousing and storage agreement, a letter of undertaking to cover all costs, insurance on 5 the goods or stock, comprehensive insurance of the pledged security with a lien in favor of the Plaintiff and personal guarantee by the 2nd and 3rd Defendants.

That the 1st Defendant drew down UGX 1,408,198,732/= (Uganda Shillings One Billion Four Hundred Eight Million One Hundred Ninety-Eight Thousand Seven Hundred Thirty-Two

10 only) of the credit facility but breached the repayment terms of the facility by defaulting on the agreed repayment schedule and accrued arrears which compelled the Plaintiff to recall the entire credit facility on 18th April 2019.

That despite being aware of the default, the 1st Defendant failed to rectify the same, and on 15 6th August 2019, the Plaintiff demanded from the Defendants the outstanding loan arrears as of today amounting to UGX 798,213,303/= that had accrued. Following the demand notice, the Defendants responded to the demand stating that they hoped business would stabilize within three months and also requested the Plaintiff not to penalize the 1st Defendant for default which request was denied by the Plaintiff on grounds that the Defendants were not 20 clear on how they would pay off the outstanding amounts.

Further that on 16th September 2019, the 1st Defendant requested for authorization to sell off coffee that was held at the factory premises to enable it clear its outstanding dues and on 5th November 2019, the Defendant deposited UGX 54,880,000/= on the Plaintiff's account 25 which leaves an outstanding balance of UGX 719,951,342.02/= from account numbers 100108032220 and 100108032219 which the Defendants have not paid to-date and it continues to accrue interest.

This matter was filed as a summary suit and the Defendant's made an application to appear 30 and defend which was granted. The Defendants filed a joint Written statement of defense and counterclaimed against the Plaintiff.

The Defendants jointly aver and contend that on the 7th February 2018, the Plaintiff made an offer to the 1st Defendant for a Trade Finance Credit Facility in the sum of UGX 35 10,000,000,000/= and subsequently, a loan agreement dated 26th March 2018 was entered 5 into to that effect. That as a precondition to avail the facility, the 1st Defendant Company contributed a total of 20% of the value of the amount to be financed as security.

That vide a letter dated 5th September 2018 the 2nd Defendant notified the Plaintiff of a potential likelihood of default arising from the drop in coffee prices globally and the same 10 was requested to authorize the release of coffee to a company called Louis Dreyfus Company Limited, that was willing to take the coffee stocks at a profitable price. That the Plaintiff bank

denied the request.

That by a letter dated 2nd April 2019, the Plaintiff wrote a demand notice for the sum of UGX 15 1,605,454,398/= which the parties entered into a series of discussions over, and by another letter dated 18th April 2019, the Bank notified the Defendants of its decision to recall the Trade Finance Facility and also demanded payment of a total sum of UGX 1,408,198,732/=, that the parties also entered into another series of discussions to resolve the claims.

- 20 That another demand notice dated 6th August 2019 for the amount of UGX 798,213,303/= was made to the Defendants. The 1st Defendant through a letter date 26th August 2019, wrote to the Plaintiff notifying it of potential events of default, the said letter also highlighted the frustrating terms of the contract that made it next to impossible for the Defendant company to honor its obligations under the loan agreement and that the same was the subject of a - 25 protracted negotiations between the parties.

Further in the same letter, the 1st Defendant laid down clearly the steps it intended to take to remedy loan situation. However, the Plaintiff company through its lawyers wrote another demand notice dated 28th August 2019 claiming that the 1st Defendant is indebted to the

30 Plaintiff to the tune of UGX 655,756,441.48/=.

That the 1st Defendant wrote to the Plaintiff company on the 16th September 2019 requesting for permission to dispose of its coffee stock at a subsidized rate to not only offset its losses but also reduce on its indebtedness. That the said letter like all the previous ones was not

heeded to by the Plaintiff. Instead by a letter dated 24th 35 September 2019, the Plaintiff

5 Company wrote to the defendant company claiming as per their record that the outstanding amount owed was UGX 657,836,313/=.

The Defendants contend that the Plaintiff through its inaction and blatant refusal to authorize the sale of the coffee stocks as and when it was notified, breached the terms of the 10 loan agreement, frustrated the operations of the defendant company resulting into defaulting on some of its loan obligations.

Further that the UGX 2,000,000,000/= (Two Billion Shillings) contributed by the 1st Defendant company as security for the loan was and is sufficient to cater for the defendant's 15 indebtedness to the Plaintiff.

In counterclaim, the Defendants/Counterclaimants claim against the Counter Defendant/Plaintiff is for declaration that the Counterdefendant breached the terms of its loan agreement with the counterclaimants, a declaration that the counter defendant engaged 20 in a course of action that was intended to frustrate the operations of the counterclaimants to its benefit, a declaration that the Plaintiff/Counter Defendant's purported partial performance of the contract was unsatisfactory and unjust, general damages, interests thereon and costs.

- 25 That the 1st Counterclaimant on numerous occasions notified the Counter defendant of impending potential acts of default and requested for authorization to dispose of its coffee stocks to avert the same and reduce on its indebtedness, however these requests went unheeded by the counterclaimant. - 30 The Counterclaimants aver that the Counter-defendant's conduct above is wrongful, in bad faith and unlawful, and amounts to breach of contract. That by reason of the foregoing, the counterclaimants business has suffered enormous disruptions and the 2nd and 3rd Counterclaimants as directors in the 1st Counterclaimant company have been subjected to great inconveniences and mental anguish.


- 5 The Counterdefendant/Plaintiff replied to the counterclaim and contended that the counterclaimant does not disclose a plausible cause of action against the counter defendant and the counterclaim is frivolous, vexatious, and an abuse of court process and that the conduct of the counterclaimants amounts to approbation and reprobation. - 10 The counter defendant further avers that on 19th February 2019, the 1st Counterclaimant requested the Counter Defendant to release 260.52mt (13 containers) of coffee stock worth UGX 1,626,367,743/= to Olam international Limited which the Counter Defendant accordingly did. However, the 1st Counterclaimant did not receive any payments for the coffee that had been released to Olam International per the 1st Counter claimant's request 15 and the Counter defendant issued a demand notice against the counterclaimants for the outstanding amounts owed from the released coffee stock and that on the 15th April 2019, the 1st Counter claimant responded admitting breach of the payment terms and diversion of the coffee and; the 1st Counter claimant also committed to pay UGX 500,000,000/= and the balance by end of April 2019. - 20

That in the same letter, the 1st Counterclaimant also requested for the release of an additional 117.97mt of coffee worth UGX 736,460,166.75/= to Olam International. That the fraudulent diversion of the coffee stock as admitted by the 1st Counterclaimant without the Counter defendant's notice and consent resulted to the recall of the facility on 18th April 2019 by the 25 Counter defendant. Further that nevertheless, the counter defendant continued to liaise with the 1st Counterclaimant to dispose of the coffee stock in order to reduce on the 1st Counterclaimant's liability and the 1st Counterclaimant made some payments to reduce its indebtedness to the Counter Defendant from 15th April 2019 to 06th June 2019, bringing the total outstanding amount owed to UGX 798,213,303/=.

That the 1st Counterclaimant has always been aware of its obligations to the Counter defendant and on the 14th May 2019, they proposed to pay the outstanding obligations in two payments of UGX 400,000,000/= in June and August 2019. That the upon request by the1st Counterclaimant, the final disposal of the stock and the collateral mangers continued


5 to dispose of the remaining stocks, with the final disposal bringing the total outstanding liability to UGX 655,756,442.48/= which sums were demanded as of 28th August 2019.

That by 24th September 2019, the Counterclaimant's liability had increased to UGX 657,836,373/= as communicated in the Counter defendant's letter. That due to the 10 continuous default, the loan obligations had increased to UGX 719,951,342.02/= and interests on these sums continued to accrue until payment in full, and on the 21st December 2020, the Counter defendant sued the Counter claimants.

### **Representation:**

15 The Plaintiff/Counter defendant was represented by the law firm of S & L Advocates and the Defendants/Counterclaimants were represented by the law firm of M/S Samuel Wegoye Advocates.

#### **Issues:**

- 20 The parties filed a Joint Scheduling Memorandum and the following condensed issues are framed inclusive of the declarations sought in the counterclaim were arrived at for resolution and shall be resolved jointly. - 1. Whether the terms of the Trade Finance Credit Facility were breached and if so by 25 who? - 2. Whether the Defendants are indebted to the Plaintiff to a tune of UGX 805,937,498.74/=? - 3. What remedies are available to the parties?

# 30 **Evidence:**

The Plaintiff/Counter defendant adduced one witness, Ms. Diana Okot Chono, the Plaintiff's Investment Manager who led her evidence in chief by witness statement which was admitted in court record PW1 a cross examined on the same.

35 The Plaintiff/counter defendant exhibited 23 documents filed a trial bundle plus a supplementary which was admitted in court.

- 5 The Defendants/Counter claimants on the other hand adduced one witness Mr. Lubega Aloysious, the 2nd Defendant, a director and shareholder in the 1st Defendant company who led his evidence in chief by way of a witness statement which was admitted in court record as PW 1 and was cross-examined on the same. The Defendant/counterclaimants filed a trial bundle plus a supplementary of 36 documents. - 10

# **Decision:**

I will resolve issue 1 on whether the terms of the trade finance credit facility were breached and if so by who? and issue 2 on Whether the Defendants are indebted to the Plaintiff to the tune of UGX 805,937,498.74/= jointly mainly because the resolution of issue 1 touch on issue

15 2 and also because the Defendants submitted on both issues jointly.

# **Issue 1: Whether the terms of the Trade Finance Credit Facility were breached and if so by who?**

In civil proceedings, the burden of proof lies upon the party who alleges and said party must prove their case on a balance of probabilities if they are to obtain the remedies sought. see *Lord Denning in Miller versus Minister of Pensions (1947)2 ALL ER 372 at page 373*. *See Section 101 and Section 103 of the Evidence Act*.

When a Plaintiff has led evidence establishing his or her claim, he/she is said to have executed the legal burden. The evidential burden thus shifts to the defendant to rebut the plaintiff's claims.

20 To establish whether there was a breach of contract or not, there must first exist a contract. The parties herein do not dispute the existence of the contract.

PW 1 Ms. Diana Okot-Chono in her paragraph 2 of her evidence in chief stated that on 26th March 2018, the Plaintiff/counter defendant entered into a credit facility agreement with the

25 1st Defendant/1st Counter claimant PEX 1, and that pursuant to the credit facility execution, between the period from June 2018 to January 2019, the Plaintiff disbursed a total sum of UGX 8,428,015,139/= of the credit facility to the 1st Defendant/1st Counter claimant to enable it bulk up on its coffee stock.

5 That all the above disbursements were made in thirteen tranches and were extended on unique account numbers per disbursement and those that were also paid off were paid off on the same numbers as exhibited in PEX 21.

In paragraph 3, that under the credit facility letter, the parties agreed that the release of 10 coffee stocks would be on cash-paid basis which payments were applied as repayments to the facility as exhibited in PEX 5 and PEX 7. That on the 06 September 2018, the Plaintiff's credit management committee approved the 1st Defendant's request upon fulfilling the following conditions.

- a) That payment would be received on the 1st Defendant's account and not the Plaintiff's - 15 account as per policy. - b) That the Defendants provide post-dated cheques of UGX 418,740,300/= drawn on the 2nd Defendant's account held in Bank of Africa and UGX 500,000,000/= drawn on the 1st Defendant's account held in Standard Chartered Bank, all in favor of the Plaintiff. - c) That the Defendants avail a copy of the letter to Bank of Africa from the 2nd Defendant 20 instructing Bank of Africa to put hold a hold on his account until all proceeds from the

contract with LD Commodities were transferred to the Plaintiff Bank.

That all this is reflected in the copy of the Plaintiff's memorandum on release of stock exhibited in PEX 6 and following the fulfillment of the conditions by the Defendants, the 25 Plaintiff started approving requests for release of the coffee on credit.

That on other various occasions, at the request of the 1st Defendant, coffee stock was released to its off-takers on credit and the off-takers made payments directly to the Plaintiff which payments were applied to the 1st Defendant's loan as exhibited in PEX 22.

In paragraph 4 DW 1 stated that all material times, the funds under the facility letter were made available to the 1st Defendant and the 1st Defendant made payments directly to the Plaintiff which payments were applied to the 1st Defendant's loan. That under the loan agreement, the Plaintiff had a right to allocate and apply partial payments made by the 1st

35 Defendant in any manner to service the loan and interests accrued as exhibited by the loan statements in PEX 20A and PEX 23.


- 5 That however, despite utilization of the monies disbursed and the release of stock on credit, the 1st Defendant defaulted on its repayment obligations within the terms of the credit facility agreement despite several reminders from the Plaintiff. In Paragraph 4 further that on the 15th April 2019, the 1st Defendant responded admitting breach of the payment terms and diversion of the coffee. The 1st Defendant also committed to pay an initial sum of UGX - 10 500,000,000/= within few days and the balance of the debt by end of April 2019 as exhibited in PEX 10 and owing to the continuous default and the 1st Defendant's fraudulent diversion of the coffee stock without the Plaintiff's prior notice and consent, the Plaintiff recalled the facility on 18th April, 2019. - 15 Counsel for the Plaintiff cited **Future Stars Investments (U) Ltd V Nasuru Yusuf Civil Suit No. 0012 of 2017** to define a breach of contract, that it occurs when a party neglects, refuses or fails to perform any part of its bargain or any term of the contract, written or oral, without a legitimate legal excuse. - 20 Counsel for the Defendants in reply merged issue one and two together in their submission and submitted that the Plaintiff Bank through a series of acts breached its overall duty and obligations to exercise reasonable care in execution of its mandate. Counsel cited **Cooperative Bank of Kenya V Simon Kiplagat Biwot Civil Appeal No. 18 of 2019 at page 5-6**, that a Bank has a duty under its contract with a customer to exercise reasonable care 25 and skill in carrying out its part with regard to operations within its contract with its customer. The standard of that reasonable care and skill is an objective standard applicable to bankers. Whether or not it has been attained has to be decided in light of all relevant facts which can vary almost infinity. - 30 That the Plaintiff abrogated its "mezzanine duty" to the Defendants to explain fully and accurately the nature of the product once the said agent had volunteered to explain it. They ought to have assessed the suitability of the use of letters of credit in line with the nature of business and operation the defendant company was running. That there was a glaring disparity in terms of knowledge and expertise between the Plaintiff Bank and the Defendants - 35 and thus they were owed information duty that was never fulfilled. - 5 Further that the Plaintiff persistently delayed in authorizing the release of Coffee whilst they had overall control over the coffee stock at the warehouse and the same would only be released upon them giving authorization led to loss in value. Counsel submitted that a case in point is in screen 18 bulked at a unit prize of 1840 USD and then sold at a Unit price of 1556 USD which was a price drop of 15%, that in another similar scenario is screen 12 of - 10 Robusta Coffee was bulked at a unit price of 1666 USD and then sold off at a price of 1430 USD and this presented a shortfall of 14% as exhibited in DEX 7, DEX 8, DEX 9 of the defense's trial bundle.

That under Article III of the Loan Agreement, the bank had the authority to order for the sale 15 of coffee when the value dropped below 10%. An option they could have taken to avert loss. The Defendant further argued that there were persistent delays in crediting some of the loan amounts and as a consequence the defendant company suffered penalties that could have been avoided, for instance delay in remitting 34,484 USD received on 18/01/2019 on account No. 8709010715800 marked as PEX 22 which was applied to loan account No. 20 10010108032219 marked as PEX20P on 17/06/2019 notwithstanding that it is subjected to the late payment charge or penalty.

That after analyzing the different loan statements, the said sum seems to have been credited on loan account statement 10010832219 marked as PEX 20P this was on the 29th day of April 25 2019 which is approximately six months later and long after the said loan had expired. And that same was subjected to late penalty charges too which according to Counsel for the Defense's submission is contrary to PW 1's testimony in cross-examination when she stated that the late disbursements were not subject to late payment charges.

- 30 Counsel further submitted that there were other irregularities such as prioritizing accounts that were yet to expire at the expense of those whose due date was imminent for instance, a loan under Account No. 10011616032207 marked as PEX 20F had an expiry date of 07/11/2018 as opposed to loan Account No. 100108032208 marked as PEX 20G with expiry date of 22/11/2018 but the Bank went ahead to apply UGX 6,377,083/= to the latter instead - 35 of applying the same to the facility that would expire first. That that money as per PEX 23


5 item 7 was balance that remained from a sum of UGX 342,693,300/= which was received on the 16th day of October 2018 of which UGX 336,326,226.81/= and the remaining balance of UGX 6,377,083.19/=.

Further that in analyzing the summary of the bank's transactions in PEX 23 item 11 a sum of 10 UGX 568,337,060/= is shown to have been applied to loan account No. 100108032212 in two months of UGX 138,875,676.97/= and UGX 429,461,383.03/=. That however, this loan statement was never availed but on scrutinizing PEX 20K which is the loan statement for Account No. 100108032216 a sum of UGX 138,875,676.97/= was applied on the 29th January 2019 which was disbursed after expiration of the loan and the same was subjected to late 15 payment charges.

That in further analysis of PEX 22 which has a Bank statement in the name of Uganda Development Bank Account No. 8709107158000, it indicates that the bank received a total sum of UGX 9,092,115,733 between 2018 and 2019 in repayments as opposed to a total of 20 UGX 8,428,015,139/=. Counsel submitted that the loan to the Defendant was disbursed in shillings yet value of bulked coffee was in dollars and payments from the off-takers in dollars at an exchange rate that was often concealed from the Defendant company and has always been brought to the attention of the Plaintiff who issued an apology in DEX 21 of the Defendant's supplementary Trial Bundle.

Counsel also submitted that the Defendant company made a contribution of 20% of the loan sum that is, UGX 2,000,000,000/= pursuant to Article VII(a) of the Loan Agreement Marked as PEX 1. That the Defendant purchased coffee worth two billion and this was stocked at warehouse and bank purchased a total of eight billion shillings to make a total of ten billion

30 over which the Plaintiff bank had total control however whilst the bank did recover its principle as per our analysis, the Defendant company made a loss.

That the Plaintiff Bank acted in bad faith in this transaction and the same abrogated its duty to act with reasonable care and skill. As a result, the Defendant company suffered penalties

35 and loss for late payment that have continued to accrue to date.

- 5 Counsel for the Plaintiff reiterated the earlier submission and rejoined on the nature of their relationship that there was no banker-customer relationship between the parties rather it was and is a borrower-lender relationship as the Plaintiff does not provide banking services under section 2 and 3 of the Uganda Development Bank Act and the relationship is documented by the loan agreement in PEX 1. That therefore the authority of *Cooperative* - 10 *Bank of Kenya Ltd V Simon Kiplagat Biwott (supra)* cited by the Defendant is inapplicable to the instant facts as there is no Banker-Customer relationship between the Plaintiff and the 1st Defendant.

Further that the Defendants led no evidence to support their allegation that the Plaintiff's 15 agents led the Defendants into the contract that they did not understand the terms of the facilities of as the loan agreement/credit facility letter in clause 12.10 provided that it was agreed that each of the parties was free to secure independent legal advice or other advice as to the nature and effect of all provisions of the agreement.

20 In response to the allegation of the delay in releasing coffee, counsel submitted that the Defendant's gave no evidence of the allegations as PEX 8 is evidence of a request was made for release of coffee on the 19th February 2019 and on very day coffee was released as can be seen from the stock release form in PEX 8. Further in DEX 3, a request for coffee was made on the 5th September 2018, coffee was released on the 6th September 2018 as seen in DEX 5.

25 That the claim of persistent delay in the release of coffee is without merit.

On the claim of loss of value in coffee counsel submitted that DW 1 confirmed during cross examination that coffee prices are determined by market forces of demand and supply that not influenced by either the Plaintiff or Defendants. That the argument that the Plaintiff had

30 the right to sell coffee when the value dropped below 10% in accordance with Article III of the loan agreement should be considered in whole. That the Article says, that this right is to be exercised in liaison with the borrower. That the Defendants who were running the dayto-day business would know when coffee prices had fallen and upon advising the Plaintiff, the coffee would be sold; and this is what is reflected in PEX 7.

5 On the recovery from proceeds of coffee sales and apportioning payments to accounts, counsel submitted that in PEX 2(legal pledge agreement) it was agreement that of the parties that the proceeds of sale would be applied to first repay expenses and payments made by the Plaintiff in relation to the agreement and the actions of the Plaintiff were in exercise of a contractual right.

That the Defendants issue with how payments on different accounts were apportioned by the Plaintiff is line with PEX 1 as it was agreed that in the event the Defendants paid less than the full amount due and payable to the Plaintiff, it reserved the right to allocate payment in any manner.

On delay in crediting some loan accounts and late penalty charges, counsel submitted that the Defendants claim that they were penalized a sum of UGX 43,000,000/= which the Court was referred to in annexure DEX 40. Counsel submitted that the same in no way talks about a penalty paid by the Defendants, it is rather about a request by the Plaintiff for the 2nd 20 Defendant to avail some documents.

Counsel went on to identify the late payment charges which the Defendants claim accrued in error for the three transactions identified in the Defendant's submissions as follows.

| AMOUNT<br>AND | LATE PENALTY FEE | EXHIBIT | |---------------------------------|--------------------|------------------------------------| | TRANSACTION DATES | | | | USD 34,484 | UGX 2,202,468.90/= | See PEX 20N, page 16 of the | | Received<br>on<br>18/1/2019 | | Plaintiff's<br>trial<br>bundle,3rd | | Applied<br>to<br>Account<br>No. | | last transaction. | | 10010108032219<br>on | | | | 27/6/2019 | | | | UGX<br>788,703,240/= | UGX 5,769,321.57/= | See PEX20N, page 16 of the | | received on 23/11/2018. | | Plaintiff's trial bundle, 3rd | | Amount applied to Account | | last transaction. | | No. (Not<br>provided for) | | |


| Balance: UGX 29,469,496.19 | | | |---------------------------------|------------------------------|-------------------------------| | applied<br>to<br>Account<br>No. | | | | 10010108032219<br>on<br>29 | | | | April 2019 | | | | UGX<br>138,875,676.97/= | UGX 906,545.60/= | See PEX 20K, Page 13 of the | | Amount applied to Account | | Plaintiff's trial bundle, 3rd | | 10010108032216. | | transaction | | Amount<br>received<br>on | | | | 21/12/2018 and applied to | | | | the<br>above<br>account<br>on | | | | 29/1/2019. | | | | | Total contested Late Penalty | | | | charges<br>UGX | | | | 8,878,336.07/= | |

Note: *The (Not provided for) in brackets and italics in the second transaction is inserted by Court, as there was no Account number stated in that position.*

Counsel went on to submit that even if Court is to agree with the Defendants that they paid 10 late penalty charges on the three transactions above, the total equates to UGX 8,878,336.07/=, the Defendants would still be indebted to the Plaintiff.

On the claim of the different currency used in the transaction by the parties, Counsel submitted that it was agreed in DEX 1 in clause 6 that the facility shall be designated in

- 15 Ugandan Shillings and serviced in the same currency. That this is why when payments came in any other currency, it was first converted into shillings by the Plaintiff's bankers. That there was no breach of this agreement and no payment was made to the loan account in dollars and that the Defendants did not lead any evidence show this affected their loan repayment. - 20

Having appreciated the submission of both parties herein, it is not in dispute that the


- 5 transaction in question was documented in the credit facility letter exhibited by both parties in PEX 1 for the Plaintiff and in DEX 1 for the Defendants. This is the *faucet origin* of this transaction in question and everything that went right or wrong has its answer in the Loan Agreement which the Court must first resort to understand the contents of the transaction and the obligations of each party therein. However, the Defendants raised an issue which - 10 in effect implies that they entered into the loan agreement without understanding the terms of the facility as they were convinced by agents of the Plaintiff.

Section 10(1) of the Contracts Act which defines a contract as; -

*"A contract is an agreement made with the free consent of parties with capacity to contract, for a lawful consideration and with a lawful object, with the intention to be*

15 *legally bound".*

From the foregoing definition of contract, it is "an agreement with the free consent of parties…." the concept of mutual free consent is an essential element of an agreement. Unless *consensus ad idem* between the parties is established, no enforceable contract is

20 said to have taken place as there cannot be any agreement unless both parties freely agree to it in absence of which, the agreement is said to be *void ab inito*.

Section 13 of the Contracts Act, provides for the Free consent of parties to a contract. Consent of parties to a contract is taken to be free where it is not caused by—

- 25 (a) coercion; - (b) undue influence, as defined in section 14; - (c) fraud, as defined in section 15; - (d) misrepresentation; or - (e) mistake, subject to sections 17 and 18. - 30

The Defendants argue that the Plaintiff's agents "convinced" them into using the credit facility. I would also like to note that the operative word herein is convinced.

Merriam-Webster. Com Dictionary, Merriam-Webster defines the word "Convince" to mean: *to bring (as by argument) to belief, consent, or a course of action*. The Dictionary provides a

35 synonym of the "Convince" to be "Persuade".

5 The closest to the sets of exceptions outlined in Section 13 that aligns if looked deeply with the Defendants' claim is fraud and misrepresentation. However, the law on fraud is trite and it is that fraud must be specifically pleaded and the particulars to it provided therein the pleadings. See *Kampala Bottlers Ltd V. Damanico (U) Ltd S. C. C. A No. 22 of 1992,* which the Defendants did not plead, and as such it does not arise in this matter.

The second one is misrepresentation, in Section 16(2) of the Contracts Act is provided as: - *Where consent is caused by misrepresentation or by silence which is deemed fraudulent within the meaning of section 15, the contract is not voidable, if the party whose consent was obtained had the means of discovering the truth with ordinary diligence.*

In order for a statement, misstatement, action, or omission to amount to a representation, such as those that are the subject of the misrepresentation, it is said that it must be that which relates to a matter of fact, whether present or past. See *Luzinda v Ssekamatte and 3 Others Civil Suit No. 366 of 2017.*

The Defendants in this claim of misrepresentation did not give further details of the statements of misrepresentation of the facts in regard to the credit facility they obtained and during cross-examination neither DW 1 adduce any evidence that connects the Plaintiff to the said actions of misrepresentation which Defendants claimed was carried by the Plaintiff's

25 agents. In any case, section 16(2) of the Contracts Act as stated above provides a shield to such a claim if the victim party had the means through ordinary diligence to discover such misrepresentation.

Section 12.10 of the Loan Agreement provides for the clause of Independent Advice and 30 verbatim states that: -

*Each of the parties hereto acknowledges that it has been free to secure independent legal and other advice as to nature and effect of all the provisions of this Agreement and that it has either taken such independent legal or other advice or dispensed with the need to do so.*

- 5 Therefore, the Defendants by implication of the foregoing clause had done their due diligence into the credit facility terms they were getting and it is important to note that the Loan agreement is dated 26th March 2018 after the Defendants were presented with the offer letter dated 7th February 2018. - 10 In the same vein, having extensively perused the Loan agreement dated 26th March 2018 between the Plaintiff and the 1st Defendant, and also having equally addressed myself to Section 2 and 3 of the Uganda Development Bank Act, it is my evidenced based opinion that the relationship between the Parties herein is one that lies between a Lender and a Borrower of funds. - 15

In the premises, I do not find any merit in the Defendants' argument that they were convinced or misled into signing the loan agreement or that the nature of the agreement is that of a Banker-Customer relationship.

20 Having established the nature of the contractual relationship between the parties and the legality of it, I move to resolve the actual issue of the breach of contracts. *G. H. Treitel in his book, the Law of Contract, 4th Edition at page 571* notes that breach of contract is committed when a party without lawful excuse refuses or fails to perform, performs defectively, or incapacitates himself from performing the contract.

A breach of contract is basically the violation of any agreed terms of a legally binding contract including non-performance, incomplete performance or miss performance of any of the terms of the contract.

30 In the present case, the parties entered into a loan agreement dated 26th March 2018 wherein each party had set out obligations. The Plaintiff's obligation in his lender-borrower relationship is to release the agreed borrowed sum of money. the Plaintiff adduced PEX 21 in its supplementary trial bundle which shows all the disbursements made to the 1st Defendant which is as follows.

| DATE OF DISBURSEMENT | AMOUNT DISBURSED(UGX) | |----------------------|-----------------------| | 06.06.2018 | 1,612,875,000 | | 14.06.2018 | 650,687,360 | | 25.06.2018 | 528,606,096 | | 09.08.2018 | 771,523,120 | | 24.08.2018 | 448,030,717 | | 02.10.2018 | 471,592,809 | | 08.10.2018 | 413,161,320 | | 17.10.2018 | 469,760,280 | | 18.10.2018 | 469,527,317 | | 30.10.2018 | 986,527,317 | | 29.11.2018 | 606,222,408 | | 31.12.2018 | 500,180,392 | | 22.01.2019 | 499,422,000 | | TOTAL | 8,428,015,139 |

Therefore, in total the Plaintiff disbursed UGX 8,428,015,139/= in 13 different intervals between 06/06/2018 and 31/12/2018 and once on 22/01/2019. Under Article II Section 2.01 of the Loan Agreement the agreed sum was UGX 10,000,000,000/=.

- 10 Article XI of the Loan Agreement provides for Events of Default and Section 11.02 provides for events of default if among others the borrower fails to pay, when due, any part of the loan or any interest on the loan, and any such failure continues for a period of thirty (30) days; the borrower fails to observe or perform any of its obligations under this agreement and any such failure continues for a period of twenty-one (21) working days after UDBL notifies the - 15 borrower of that failure.

PW 1 testified in Paragraph 4.2 of her evidence in chief that despite the utilization of the monies disbursed and release of stock on credit, the 1st Defendant defaulted on its repayment obligations within the tenors of the facility agreement despite several reminders 5 from the Plaintiff. PEX 12 is a notice of recall of the UGX 10,000,000,000/= loan facility dated 18th April 2019 by the Plaintiff for the loan facility addressed to the 1st Defendant and through the 2nd Defendant which follows a default notice and demand for payment of arrears dated 2nd April 2019 which at the time states the arrears to be UGX 1,605,454,398/=. Further in PEX 14 is a demand notice dated 6th August 2019 demanding an outstanding loan balance

of UGX 798,213,303/= as of 6th 10 June 2019.

Despite the Defendant's denial of fault in default in their written statement of defense, the admission and evidence adduced show there was actual default which to the Defendants' opinion as argued is not their fault. PEX 13 is a letter from the 1st Defendant addressed to the

- 15 Plaintiff's Senior Manager Credit dated 13th May 2019 and titled "commitment to pay loan" and in paragraph 4 of the same letter which I shall reproduce here verbatim states that: - *"We also accept our mistakes, in the process we anticipated to cut on losses by giving individual coffee buyers some stock at higher premium but that has been another business error. Nevertheless, we commit to repay the loan in two tranches of UGX 400M as follows.*

*1) UGX 400M payable between May to 30th* 20 *June 2019*

*2) UGX 400M payable between July to 30th August 2019*

*It's our prayer that our request meets your consideration.*

*Bulamu Coffee Ltd is for review of its expired loan facilities but on a different arrangement preferably using landed property. We are committed to redeeming our name".*

The foregoing is an acknowledgment of indebtedness and in the absence of any evidence as is in this case of proof of completion of payment by the Defendants, then it is more likely a clear case of admission.

- 30 *Section 16* of the *Evidence Act* defines admission to be a statement, oral or documentary which suggests any inference as to any fact in issue or relevant fact, and which is made by any persons – as listed in Section 17; Admission by party to proceeding or his or her agent in subsection (1) to which DW 1 falls under being both a party to the suit and a director with authority, signatory of the loan facility, knowledge of the circumstances of the loan facility - 35 and ongoing in the 1st Defendant company.

5 Byamugisha J. A *(as she then was)* in *Mahdvani International S. A V. Attorney General CACA No. 48 of 2004* on acknowledgement of debt that: -

*"An acknowledgment is an admission which must be clear, distinct, unequivocal, and intentional. That there should be no doubt that the debt is being admitted although the amount does not have to be stated and such acknowledgment must be made by the person liable to pay*

10 *or his agent and can be made to the agent of the creditor".*

In the premises, I find that the 1st Defendant breached the terms of the loan agreement by failing to pay the remaining loan arrears regardless of the exact amount in debt.

15 Accordingly, the Counterclaim for breach of contract fails.

I find issue 1 for the Plaintiff.

# *Whether the Defendants are indebted to the Plaintiff to the tune of UGX* 20 *805,937,498.74/=?*

Having already established that the 1st Defendant breached the terms of the loan facility and the terms being that they were contractually obligated to pay the amount borrowed plus the interest therein and in the event of default, as it is in this case, pay the default penalties and charges as well which in this case the Plaintiff claims to be UGX 805,937,498.74/=.

The Plaintiff adduced two Bank statements on pages 65 and 66 PEX 19 of the trial bundles of Account No. 100108032220 in the names of the 1st Defendant with the loan starting period being 01/22/2019 to 04/22/2019 issued on 11/07/2022 with the following breakdown: -

| DETAILS | AMOUNTS/FIGURES (in UGX) | |---------------------------|--------------------------| | Principal Outstanding | 499,422,000.00 | | Interest outstanding | 19,484,299.40 | | Penalty Interest | 271,181,851.00 | | Total Arrears/Outstanding | 790,088,150.40 | | Closing Position | 790,088,150.40 |

On page 66, the Bank statement for Account No. 100108032219 in the names of the 1st 5 Defendant with the loan starting period being 12/31/2018 to 03/31/2019 issued on 11/07/2022 with the following breakdown: -

| DETAILS | AMOUNTS/FIGURES (in UGX) | |---------------------------|--------------------------| | Principal Outstanding | 11,359,867.56 | | Interest Outstanding | 0.00 | | Penalty Interest | 4,489,480.78 | | Total Arrears/Outstanding | 15,849,348.34 | | Closing Position | 15,849,348.34 |

The summation of the two Bank statements is UGX 805,937,498.74/= which is the amount

10 claimed by the Plaintiff. The 1st Defendant contests the figure above and one of the arguments is that they made repayments in US Dollars even though it was contrary to the contract and as a result, the 1st Defendant ended up making extra payments when the US Dollars were converted to Ugandan shillings, which as an argument in my view would mean the opposite if anything.

When the 1st Defendant or its off-takers make the repayments in US Dollars and the agreed upon and calculated currency which I have seen herein is in Ugandan currency, then that means the 1st Defendant paid more in repayment as they claim except, there is no evidence of that as they have failed to discharge their evidentiary burden in this claim.

Further, the use of US Dollars is all made by the 1st Defendants off-takers and it is more likely than not that as a result of an agreement between them, this has nothing to do with the Plaintiff and as such, I equally find this claim without merit.

25 The 1st Defendant also in his argument in defense of this issue claimed that they were unfairly charged default penalties arising from delays of the Plaintiff in crediting some loan accounts and as a result, this led to penalty charges on the 1st Defendant. Despite the Plaintiff arguing otherwise but they did acknowledge delays however, the 1st Defendant identified three transactions where the late penalty was charged and Plaintiff has failed to adduce any

5 evidence to rebut the 1st Defendant's claim of the late penalty charges of UGX 8,878,336.07/= in the three transactions.

In the premises, it is not my duty to descend into the arena and fish for shreds of evidence for litigants and it is trite law that a party who alleges bears the burden of proof. See *Section 101 and Section 103 of the Evidence Act*.

In the same vein, the 1st Defendant failed to rebut the Plaintiff's prima facie evidence as exhibited in all the demand notices and even correspondences from the 1st Defendant such 10 as in PEX 13 the letter from the 1st Defendant addressed to the Plaintiff's Senior Manager Credit dated 13th May 2019 and titled "commitment to pay loan" which is an admittance of indebtedness and the offer to pay UGX 400,000,000/= in two installments is more reasonable and believable than not to the Plaintiff's claim of the amount owed being UGX 805,937,498.74/=.

However, the Plaintiff's failure to also rebut the 1st Defendant's claim of unfair late penalty charges in the 3 (three) transactions makes it an uncontested claim and as such I find that 1st Defendant owes the Plaintiff UGX 805,937,498.74/= minus the penalty charge of UGX 8,878,336.07/= which brings the total outstanding amount owed to UGX 797,059,162.67/=.

The question of the 2nd and 3rd Defendants' liability regarding the 1st Defendant's default is one to be construed in the context of the loan facility engagement documents.

Clause 13 (vi) of the offer letter in DEX 1 on security for the loan facility conditioned that the Defendants provide:

20 *Personal Guarantees of the Company Directors accompanied with a Certificate of net worth of the Company.*

Under Article VII of the Loan Agreement dated 26th March 2018 on Security for the loan facility under Section 7.01 (f) provides that: -

*Personal Guarantees by the Borrower's directors, to wit, - Lubega Aloysius and Naggayi Annet with statements of net worth and a list of their assets and bank accounts.*

Section 68 of the Contracts Act, defines a "guarantor" as a person who gives a guarantee. It further defines a contract of guarantee as a contract to perform a promise or to discharge the liability of a third party in case of default of that third party which may be oral or written.

# This Court in *Pamela Anyoti V Root Capital Inc Miscellaneous Application No.844 of 2023* stated that:-

*"A guarantee is a contractual agreement to make payment of sums due and owing in the event of default by the principal borrower. The Guarantee is a separate security from any of the other* 10 *securities that may have been provided and is enforceable if there is a default by the principal borrower* (in this case, it is common ground that the principal borrower Bulamu Coffee Processors, Buyers, and Exporters has defaulted*). In the event of a default, unless there is a contrary provision of law, a mortgagee is entitled to pursue all securities available simultaneously. The Mortgagee does not need to first attempt recovery or fail to recover as*

15 *against the principal borrower for them to pursue the guarantor(s)".*

In the present case, PEX 3 is the Guarantee agreement entered into between the Plaintiff and the 2nd Defendant, Aloysious Lubega, and 3rd Defendant, Naggayi Annet wherein Article II under the heading "Guarantee and Indemnity" verbatim provides as follows: -

20 Section 2.01 The Guarantor irrevocably and unconditionally:

- *a) Guarantees to the Bank punctual performance by the Borrower of all the Borrower's obligations under the Loan Agreement;* - *b) Undertakes that whenever the Borrower does not pay any amount when due under or in connection with the Loan Agreement, the Guarantor shall immediately on demand pay that amount as if she was the principal obligor.* - *c) Undertakes to indemnify the Bank immediately on demand against any cost, loss, or liability suffered by the Bank if any obligation undertaken by the Borrower becomes unenforceable, invalid, or illegal. The amount of the cost, loss, or liability shall be equal to the amount which the Bank would otherwise have been entitled to recover.* - *d) Guarantees that if and whenever the Borrower shall default in payment of any of the said principal of interest, or charges on the loan, or any other payment under the Loan Agreement, the Guarantor shall forthwith upon first demand by the Bank, pay to the Bank*

*in the currency prescribed in and pursuant of the Loan Agreement, the monies in respect of which such default shall have occurred.*

# Section 2.02 Continuing Guarantee:

*This Guarantee shall be a continuing guarantee and shall remain in full force and full effect until all of the principal, interest, and charges on the Loan, and all other sums payable by the Borrower under the Loan Agreement. Accordingly, the obligations of the Guarantor hereunder shall not be discharged except by performance. (emphasis mine).*

Having established that the 1st Defendant either on its own volition or due to the 2nd and 3rd Defendant's failure to honor their guarantee which in itself is a separate contract entered into

- 10 between the lender and the guarantor(s), still owes the Plaintiff UGX 797,059,162.67/= which as per Section 2.02 of the Guarantee agreement, is only discharged except by performance which has not been done by the Defendants thereby meaning they breached the terms of their contract of guarantee. See *Pamela Anyoti V Root Capital Inc (supra).* - Therefore, the 2nd 15 and the 3rd Defendants are jointly with the 1st Defendant and severally indebted to the Plaintiff to the tune of UGX 797,059,162.67/= for failure to honor their Guarantee agreement in PEX 3.

In conclusion, the Defendants jointly and severally are indebted to the Plaintiff to the tune of UGX 797,059,162.67/=.

## **Issue 3: What remedies are available to the parties?**

Having found for the Plaintiff in all the issues above and the Defendants failed counterclaim, the court shall evaluate only the remedies available to it. The Plaintiff prayed for recovery of

20 the suit amount, interest on the suit amount at a rate of 16% per annum as agreed in the loan agreement until payment in full, and costs of the suit.

#### *Recovery of the suit amount:*

Having found in issue 2 that the 1st Defendant is indebted to the Plaintiff to the sum of UGX 797,059,162.67 as opposed to the amount claimed in the suit. I, therefore, find the Plaintiff is entitled to UGX 797,059,162.67/=

#### *Interest:*

Section 26(1) of the Civil Procedure Act provides that: -

5 *Where an agreement for the payment of interest is sought to be enforced, and the court is of the opinion that the rate agreed to be paid is harsh and unconscionable and ought not to be enforced by legal process, the court may give judgment for the payment of interest at such rate as it may think just.*

The Plaintiff is praying for the enforcement of the interest rate as is in the loan agreement in PEX 1 under Section 5.01 which states that:

- (a) The borrower shall pay interest on the loan at a fixed rate of 16% per annum. - (b)Interest shall accrue from day to day and shall be payable after 90 (Ninety days) from each drawdown in arrears. - (c) Notwithstanding any period of grace granted hereunder to the Borrower in respect of payment of the principal sum of the loan, interest shall accrue and be payable from the date of the first disbursement of the loan.

Section 5.02 provides for penalty interest and states that UDBL (the Plaintiff) shall be entitled to charge interest at the rate of 25% per annum on all overdue principal and interest payments.

It is trite law that the Court's function is not to make contracts between the parties, but the Court must construct the surrounding circumstances of the contract to effectuate the intention of parties and ensure there is no illegality in the transaction. See *Section 10* of the Contracts Act, *Omega Bank V O. B. C Ltd (2005) 8 NWLR* and *Makula International Ltd v His Eminence Cardinal Nsubuga & Anor [1982] UGSC*.

5 In this instant case, the parties already agreed to the interests in PEX 1 and it is not in dispute neither did the Defendants raise any contention about the interest which is where the Court would have come in or even at its motion undertake to examine the rates as I have done in this case and I find the rates are not exorbitant or unjust.

The principle in awarding interest by the Court was discussed in *Sietco v. Noble Builders (U) Ltd Supreme Court Civil Appeal No. 31 of 1995 to the effect that it is a matter of the Court's discretion is applicable. The basis of awards of interest is that the defendant has taken and used the plaintiff's money and benefited***.**

Following the above authority, I take cognizance that this was a loan facility transaction and the 1st Defendant benefitted from the amount disbursed to its use. As to whether it benefitted from the facility as intended or not is neither here nor there, what stands is that the money was disbursed and the 1st Defendant used and benefitted from it.

In the premises, I award the Plaintiff interest on the UGX 797,059,162.67/= at the rate of 16% per annum from 30th September 2020 until payment in full.

## *Costs:*

**Section 27 of the Civil Procedure Act** provides that costs follow the suit unless there is a 10 strong reason to suggest the contrary and are awarded at the court's discretion. See, *Anglo-Cyprian Trade Agencies Ltd v. Paphos Wine Industries Ltd, [1951] 1 All ER 873.* In this instant case, I find that the 1st Defendant's default in paying its loan obligation is the cause of this dispute and as such I award the Plaintiff costs of the suit.

15 Accordingly, upon finding all issues for the Plaintiff, and the lack of merit in the Counterclaim, I equally award the Plaintiff/counter defendant costs of the Counterclaim.

## **In Conclusion:**

I accordingly make the following orders,

- 5 a) The 1st Defendant breached the terms of the loan facility agreement dated 26th March 2018 and the 2nd and 3rd Defendants equally breached the terms of their guarantor agreements respectively entered into on 26th March 2018. - b) The Defendants are jointly and severally indebted to the Plaintiff to the tune of UGX 797,059,162.67/= being the outstanding loan principal, interests, and late penalty 10 charges from the agreement entered into in (a) above. - c) The Plaintiff is entitled to recover UGX 797,059,162.67/= from the Defendants jointly and severally. - d) The Defendants' Counterclaim fails on account of the findings and orders in (a), (b) and (c) above. - 15 e) The Plaintiff is awarded interest of 16% per annum on the suit amount of UGX 797,059,162.67/= from 30th September 2020 until payment in full. - f) The Plaintiff is awarded the costs of the suit against the 1st Defendant. - g) The Counter Defendant/Plaintiff is equally awarded costs in the Counterclaim. - 20 I so order.

**Dated** this \_\_\_\_\_\_\_ day of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_2024, delivered electronically and uploaded on **ECCMIS.** 23rd September


**Ocaya Thomas O. R Judge, 23rd September, 2024.**

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