United Bank of Africa (U) Limited v Makafra Contractors Limited & 2 Others (Civil Suit 902 of 2016) [2023] UGCommC 210 (14 November 2023)

### THE REPUBLIC OF UGANDA

# IN THE HIGH COURT OF UGANDA AT KAMPALA JCOMMERCIAL DIVISIONI

## CryIL SUIT NO.9O2 OF 2016

# UNITED BANK OF AFRICA (U) LIMITED::::::::::::::::: PLAINTIFF VERSUS

### 1. MUKAFRA CONTRACTORS LTD

## 2. ALIGANYIRA FRANCIS DEFENDANTS

## 3. BAKIGUNJA CHRISTINE

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

The Plaintiff filed this suit against the Defendants jointly and severally for recovery of UGX 174,339,5181, interest at commercial rate bank rate from the date of default until payment in full and for costs of the suit.

The brief facts constituting the Plaintiffs case are that on the 13s day of August 2012,the 1't Defendant executed a finance facility with the Plaintiff for a loan of UGX 125,000,000/; wherein the l't Defendant was to repay the money plus interest in one instalment at the end of the tenor period of 90 days. On the same day, the 2nd and 3'd Defendants executed personal guarantees and the I't Defendant also executed a legal mortgage over property comprised in FRV 624 Folio 1 I Plots 21- 25 Balyebuga Road Kasese as security for the loan, payable in 90 days. That on 26m March 2013, a further sum of UGX 75,000,000/ was advanced to the l't Defendant wherein a further charge was created on the said property in Kasese.

That upon default by the I't Defendant, the Plaintiff constantly demanded the outstanding amount of UGX 261,421,397/ from the 2nd and 3'd Defendants who also refused or neglected to pay. Therefore, in exercise of its rights, the Plaintiff initiated foreclosure proceedings on 5th November 2014 in relation to the Kasese property and sold it for UGX 120,000,000/ and applied the proceeds towards offsetting the outstanding sum leaving a balance of UGX 174,339,518/. That in September 2015, the Defendants approached the Plaintiff with the intention of settling the debt and made payment of UGX 5,000,000/ but have not make good their commitment hence this suit.

The Defendants in their joint Written Statement of Defence wherein the Defendants denied the claim and aver that the Plaintiffis not entitled to any ofthe prayers sought. They filed a Counterclaim for the recovery of the under sale value from the Plaintiff, the difference between the sale value of the mortgaged property and its actual market sale value, general damages, punitive damages, interest and costs of the Counterclaim. It is the Defendants' case that when the Plaintiff engaged CBRE (CB Richard Ellis Uganda) Ltd to value the mortgaged property, it was valued at UGX 1 ,200,000,0001 and a forced sale value of UGX 600,000,000/ but that they sold it at UGX 120,000,000/. That the Plaintiff did not re-value or readvertise the property yet most of the money was used in improving it. That the sale process was in secret and no proper bidding was done, and the l"t Defendant was deprived of their hard eamed money.

In their reply to the Written Statement of Defence and Counterclaim, the Plaintiff reiterated that they commenced foreclosure proceedings and sold the property and applied the proceeds to settling the outstanding loan. They aver that the Counterclaim is incompetently before the Court and prayed that it be dismissed with costs.

#### REPRESENTATION

The Plaintiff was represented by lWs Bluebell Legal Advocates (Formerly IWs Kaddu & Partners Advocates) whereas the Defendants were represented by IWs Mujurizi, Alinaitwe & Byamukama (MAB) Advocates.

#### JUDGMENT

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

- 1. Whether the Defendants breached the finance facilify agreements executed with the Plaintiff. - 2. Whether the foreclosure and sale of the mortgaged property was lawful. - 3. Whether the Plaintiff is entitled to the remedies sought.

#### Issue <sup>1</sup>

## Whether the Defendants breached the finance facility agreements executed with the Plaintiff.

It was submitted for the Plaintiff that a loan facility of UGX 120,000,000/ was advanced to the l't Defendant on l3th August 2012, and a further sum of UGX 75,000,000 was advanced on 26th March 2013. That according to PWl, the loan was secured by a legal mortgage over the mortgaged property and personal guarantees by the 2nd and 3'd Defendants. He added that there is no doubt that the said sums were disbursed to the l't Defendant and that they defaulted in repayment, and that DWl confirmed the indebtedness during cross examination. He concluded

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that the Defendant breached the contract by failing to fulfil their obligation to repay the loan.

In reply, Counsel for the Defendants submitted that neither of the demand notices complied with Section of the Mortgage Act and Regulation 25 of the Mortgage Regulations. He cited that the default notice dated 20h January 2014 was not acknowledged and that there is no proof of service for the notice dated llfr October 2012. Therefore, that since there is no proof of the mandatory 30 days' notice, the basis of the claim is not proved as the loan statement tendered in Court was incomplete. He concluded that the claim remained a mere allegation, therefore that the Plaintifffailed to prove its case.

I have carefully considered submissions from both Counsel and find as follows. According to PEl and PE3, it is not in dispute that loan facilities of UGX 125,000,000/ and UGX 200,000,000/ were advanced to the I't Defendant respectively, both repayable in 90 days. Further, according to PE7, the loan statement of the i't Defendant, there is evidence of some payment, however, the issue is whether or not there was default in repayment, hence breach of the contract. According to PE3, several demand noticed were issued and served on the 1't Defendant.

Breach of contract occurs whenever a party who entered a contract fails to perform their promised obligations. The Court defined 'breach of contract' in the case of Ronald Kasibante v Shell Uganda Limited HCCS No. 542 of 2006 where it was held:

"breach of a contract is the breaking of the obligation which a contract imposes, which confers a right of action for damages on the injured party. It entitles him to treat the contract as discharged if the other party renounces the contract or makes

its performance impossible or substantially fails to perform his promise. The victim is lefi with suing for damages, treating the contract as discharged or seeking a discretionary remedy. "

In this case, both facilities were repayable in 90 days in one bullet payment at the end of the tenor with interest payable monthly, therefore, in order to determine whether or not there was breach, it is important to ascertain whether all the money was paid back within the 90 days for each facility agreement.

According to the Plaintiff, the first sum of UGX 120,000,000/ was advanced on 136 August 2013, and according to PEl, going by the 90- day payment period, the loan would be due around l3m November 2013. However, it is not clear why the Plaintiff issued a notice of default (PE4) dated 5th October 2012 requesting the l't Defendant to clear the balance by l ls October 2012before the expiry ofthe tenor yet payment should have been made in one bullet at the end of the tenor. That notwithstanding, when the final demand was made in the demand dated 20th January 2014, the 90-day tenor of the second facility of UGX 75,000,000/ advanced on 26th March 2013 had also expired.

In addition, DWI in paragraph 6 of his witness statement admitted to having financial difficulties that prevented him from paying the loan on schedule and added that he was in communication with the Plaintiff.

In his submissions, Counsel for the Defendants does not dispute failure to repay the loan on the part of his client; but instead claims the demand notices upon which this suit is premised do not comply with the mandatory requirements of the Mortgage Act and Regulations.

It is my considered opinion that the above argument does not in any way relieve the lstDefendant from his obligation ofrepaying the loan. Therefore, I find that the

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lst Defendant defaulted on repaying the loan and therefore they breached the finance facility agreements PEI and PE3.

The first issue is answered in the affirmative.

#### Issue 2

### Whether the foreclosure and sale of the mortgaged properfy was lawful.

It was submitted for the Plaintiff that all the necessary notices were issued and that the 2nd Defendant admitted to having knowledge of the same. Counsel cited the notice dated 5th October 2012,the final demand notice dated I't October 2013, the notice dated 22nd October 2013 and the final notice dated 24s October 2013 stating the intention to auction the mortgaged property. He added that an auction notice to sale was attached.

Counsel further cited Section 26 (l) of the Mortgage Act allowing a mortgagee to exercise his power of sale where the mortgagor is in default, and he added that the Plaintiff even complied with Regulation 8 of the Mortgage Regulations by advertising the property in the New Vision Newspaper of 7th April 2014 (PEl2) before selling the property. He added that DWI confirmed the advertisement in paragraph 8 of his witness statement.

Counsel for the Plaintiffalso added that valuation ofthe property was done by East African Consulting Surveyors and Valuers and that they discovered encumbrances and came to the value of UGX 1,000,000/. He added that an independent valuer was later requested by both parties and that it is the Valuation Report which was relied upon by the Plaintiff, therefore, that the foreclosure was lawful.

In reply, Counsel for the Defendants submitted that the Defendants challenged the sale and filed a Counterclaim for the recovery of the under sale value due to

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wrongful sale and undervaluation citing the Plaintiffs failure to comply with Sections 19 and 26 (2) of the Mortgage Act and Regulations ll and 25 of the Mortgage Regulations. Counsel added that a default notice requiring the Defendant to make right his default within 45 working days was not given and that the notice of sale was not served. In addition, Counsel submitted that the Plaintiff sold the property at a giveaway price of UGX 120,000,000/ yet the independent valuer valued it at UGX 1,200,000,000/ fair market price and UGX 600,000,000/ forced sale value.

Counsel for the Defendants further submitted that the Plaintiff engaged another valuer who valued the property at a papercon value of UGX I ,000,000/ without the Defendant's consent, in breach of the duty to act with reasonable care to obtain a reasonable price. Counsel also added that the sale appears to be by private treaty without the consent of the Defendants in violation of Regulation 10 because there was no sale after the 30 days as required by the law, and that the property was sold on 5th November 2014,,7 months after advertisement. He added that the property ought to have been re-advertised in line with Regulation 13 (2) and 3(7) of the Mortgage Regulations. That the Plaintiff did not carry out another valuation therefore they contravened Regulation 1l (l) and (2) of the Regulations.

In relation to the claims on encumbrances, Counsel argued that the Plaintiff did not produce evidence to prove the same and that the valuer did not come to explain the suspicious valuation (PE8) of UGX 1,000,000/. He also added that the act of the purchaser paying in l2 instalments was illegal, dishonest and done in bad faith to the disadvantage of the Defendants. He concluded that the foreclosure was unlawful.

\N Upon careful consideration of the evidence and submissions from both parties, the following is my findings. Under Section 20 of the Mortgage Act, sale of mortgaged property is one of the remedies a mortgagee has in the event of default by a mortgagor, or where he or she does not comply with the notice served on him or her under section 19 of the Act. Further, a mortgagee's right to foreclose is provided for under Secdon 26 (l) of the Mortgage Act which provides:

" llthere a mortgagor is in default of his or her obligations under a mortgage and remains in default at the expiry of the time provided for the rectification of that default in the notice seryed on him or her under section l9(3), a mortgagee may exercise his or her power to sell the mortgaged land."

In this instant case, since it has been determined that the l't Defendant was in default of repaying the loan, it follows therefore that the Plaintiff was exercising the right to foreclose under the Act. However, the issue now before this Court is whether or not it was conducted lawfully.

The good practices of sale of mortgaged property were listed in the case of Sendagire Stephen & Nanyombi Gladys v DFCU Limited & 2 Others HCCS No. 26 of 2008 where Court held that:

"lt is now the statutory duty that despite the right of a mortgagee to see the mortgaged property in recovery of the debt owned by the mortgagor, it owes a duty of care to do thefollowing:

l. The first rule is not to act in secret. The Mortgagee should also obtain the best price and not act in badfaith.

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- 2. Yalue the property before sale to establish the current market and forced sale value, obtain the best price and not to sell the secured property under the forced sale and under value price. - j. Property before sale should be advertised afier the mortgagor has been notified. - 4. Method of sale. Public auction is competitive and more transparent and if private treaty is used, the best price and involvement of the mortgagor is preferable especially access to information. "

In line with the above decision, I will now deal with the issues cited by the Defendants starting with that of failure to give a 45 days'notice under Section t9 (2) of the Mortgage Act which provides:

"Where the mortgagor is in default of any obligation to pay the principal sum on demand or interest or any other periodic payment or any part of it due under any mortgage or in the fulfilment of any coyenant or condition, express or implied in any mortgage, the mortgagee may serve on the mortgagor a notice in writing of the default and require the mortgagor to rectify the default within forty five working days "

Looking at PE4 from pages 39 to 44 of the Plaintiffs Trial Bundle (PTB), it is not in dispute that several demand notices were issued to the 1't Defendant. Whereas it is true that none of the notices gave the Defendant 45 days to settle the loan, it is also true that the sale did not happen before the expiry of 45 working days. Therefore, I find that although the Plaintiff did not comply with the requirements ofSection 19 (2) above, the same had no effect on the sale which happened several months later and the Defendant had not yet settled the outstanding sum.

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Secondly, on the issue ofthe non-service ofthe notice ofsale under Section 26 (2) of the Mortgage Act, the formal demand notice dated 24th October 2014 atpage 43 of the PTB notified the Defendant of the intended sale and even had a notice attached on page 44 of the PTB. Therefore, I find that Section 26 (2) of the Mortgage Act was complied with, hence no breach by the Plaintiff.

Further, in regards to failure to re-advertise the property before sale, DE3 shows that the property was advertised in the New Vision newspaper of 7s April 2Ol4 in accordance with Section 28 (2) of the Mortgage Act which requires that the date of auction will not be earlier than 30 days from the advert. The advert clearly stated that the date of sale to be 30 days from the date of the advert. lJnder Regulation 8@) of the Mortgage Regulations, sale before the expiry of 2l days from the notice is prohibited. In this case, the Plaintiff admits that the sale happened seven months after the advertisement, therefore, it is confirmation that the sale happened after the 2l working days from the date of service ofthe notice and also that the date of auction or sale was after 30 working days from the date of the advertisement. Regulation l3 (2) and (7) of the Mortgage regulations on a fresh advertisement is only applicable where the sale was adjourned or stopped, which is not the case in this instant matter. Therefore, I find that there was no need for a readvertisement of the property before sale, and the Defendant was not in any way prevented from exercising their right of redemption. Therefore, I find no fault on the part of the Plaintiff in this regard.

On the requirement to value the property before sale in accordance with Regulation <sup>1</sup>I ( I ) and (2) of the Mortgage Regulations which also requires that the valuation report should not be made more than 6 months before the sale, Counsel for the Plaintiff submitted that the Plaintiff relied on the Valuation Report of the East African Consulting Services (PE8). The said report is dated 5th August 2014 and

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according to the Land Sale agreement (PE5), the property was sold on 5ft November 2014. The other valuation report dated 12th June 2012 was made before the facility agreement was even signed meaning it was for purposes of ascertaining the value of the property for its suitability as security. In addition, the Plaintiff stated that they relied on PE8 before the sale not the report of2012. Therefore, the sale was made within six months from the valuation report date, hence the Plaintiff was not in violation of Regulation l1 (l) and (2) of the Mortgage Regulations.

I have taken note of the Defendants' submissions that the valuer was not called to defend the allegations about the encumbrances but I have also looked at page 57 of the PTB where the valuer explained the encumbrances. However, since the property was sold at a higher value than the peppercom value of UGX 1,000,000/ stated by the valuer and no encumbrance was registered on the Certificate of Title, this claim has no merit.

Finally, as to whether the Plaintiff breached their duty to take reasonable precautions to obtain the fair or true market value of the property at the date of sale, without a rush to sell at a low price, it was submitted for the Defendants that the payment made in 12 equal instalments was illegal and contrary to Regulation l4 (1) of the Mortgage Regulations which requires that the purchaser must deposit 30% of the purchase amount within one working day to the Officer conducting the sale. In the case of Sendagire Stephen & Nanyombi Gladys v DFCU Limiled 6upra), it was held that 'the Mortgagee should also obtain the best price and not act in badfaith.'

From the evidence on record, the Plaintiff advertised the property as required and carried out a valuation before sale, therefore, I do not find any evidence to show

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that they acted in bad faith or that they did not act reasonably to obtain the best price.

In relation to payment by instalments, Regulation 14 of the Regulations is to the effect that the purchaser deposits 30% of the purchase amount within one working day and finishes payment within twenty one working days, failure of which, his or her money is refunded by the officer conducting the sale and the property is either resold to the second highest bidder or it is re-advertised. In this instance, the purchaser was allowed to pay the money in 12 instalments therefore the money was not refunded to the purchaser. I find that this contravenes Regulation 14 but it in itself does not make the sale unlawful. In the premises, I find that the foreclosure and sale of the mortgaged property was lawful.

This issue is answered in the affirmative.

#### Issue 3

## Whether the Plaintiff is entitled to the remedies sought.

The Plaintiff prayed for an order for payment of UGX 174,339,518 as the Defendants had prayed for UGX 480,000,000/ being the difference in forced sale price and actual sale price.

I will start with the Counterclaim wherein the Counterclaimant arrived at this amount basing on the valuation carried out in 2012 before the money was advanced. The Plaintiff made it clear that they relied on the valuation report of 2014. Whereas the 2014 report may have some unconfirmed allegations on encumbrances which led to an absurd amount, this Court cannot rely on the 2012 report to allow the Counterclaim. Therefore, the Counterclaim fails especially that it was not proved that the sale was unlawful.

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Subsequently, the Plaintifls claim succeeds although I have noted that Iiom PE7 the loan statement, on 23'd August 201 6 when the loan was written off, it was UGX 153,967,568.92/. The Plaintiff has not justified the UGX 174,339,5181 they are claiming. I therefore, make an order for payment of UGX 153,967,568.921. lJnder 5,6I (1) Conlracls Act "a party who suffers breach of contract is entitled to compensation for the /oss ". Further, in Barclays Bank of Uganda Ltd v Bakojja Civil Suit 53 of 2011 it was held that: "the only compensation for non-payment of debt is payment ofdebt."

### <sup>I</sup>nterest

The Plaintiff also prayed for interest at commercial rate from the date of default until payment in full.

According to the Facility letter signed by the parties on l3'h August 2012, the parties agreed on an interest rate of 3lo/o p.a. and the same rate on UGX 153,967,568.921 above is awarded from the date of default until payment in full.

#### General damages

It is trite law that the award of general damages is a discretion of Court to compensate a party for the inconvenience suffered, arising from the direct and natural consequences of the actions of the other party. (See Uganda Commercial Bankv Kigozi (2002)l EA 305).

In this case, the parties agreed that should any obligation under the facility not be discharged at maturity, the outstanding amount on the account shall afiract a monthly penal charge at a rate to be determined by the bank plus the interest rate running on the facility.

It is the considered opinion of this Court that the said monthly penal charge would have been sufficient to compensate the Plaintiff for inconvenience suffered but since the agreement is silent on the applicable charge, I am unable to award the same.

# Costs

It follows that a successful party should be awarded costs, therefore costs of the suit are hereby awarded to the Plaintiff.

HON. LADY JUSTICE ANNA B. MUGENYI DATED t.tf..l.rr..l.x.r-. J