Court name
Commercial Court of Uganda
Judgment date
14 October 2013

Lamba Enterprises v Attorney General (Miscellaneous Application-2013/386) [2013] UGCommC 173 (14 October 2013);

Cite this case
[2013] UGCommC 173

THE REPUBLIC OF UGANDA,

IN THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

MISCELLANEOUS APPLICATION NO 386 OF 2013

ARISING FROM CIVIL SUIT NO 245 OF 2013

LAMBA ENTERPRISES LTD}................................................APPLICANT/PLAINTIFF

VERSUS

ATTORNEY GENERAL}................................................RESPONDENT/DEFENDANT

BEFORE HON. MR. JUSTICE CHRISTOPHER MADRAMA IZAMA

RULING

The Applicants application is for a temporary injunction to issue to restrain the Respondent or agents from recovering or making any claim arising from Performance Guarantee reference number EUG/PP/042/12D an Advance Payment Guarantee reference number EUG/BP/0 42/12B both amounting to US$558,600.62 pending determination of the main suit. Secondly it is for an order for the costs of the application to be in the cause.

The grounds of the application as set out in the chamber summons are that sometime around 11 July 2012, the Applicant was contracted by the Government of Uganda represented by the Ministry of Education and Sports for construction of Bufunjo Seed Secondly the School and Katungulu Seed Secondary School an expansion of Kamwenge Seed Secondary School Lot 12 at a total contract price of US$1,862,002.05 exclusive of VAT for the execution and completion of the works and the remedy of any defects therein.

The contract was secured by Performance Guarantee referenced above of US$182,220.21 and an Advance Payment Guarantee of the above reference worth US$372,400.41 both amounting to US$558,600.62. The Respondent terminated the contract and is threatening to recover the Performance Guarantee and the Advance Payment Guarantee (APG). The Applicant has sued the Respondent and the suit is pending hearing and determination. The Applicant has great chances of success in the application and the suit. The Applicant seeks an order of the court to restrain the Respondent from recovering the money pending determination of the suit. The Applicant asserts that if the Respondents are not restrained, then the main suit may be rendered nugatory. Finally it is the Applicant’s assertions that it is in the interest of justice that the order is issued.

The application is supported by the affidavit of the Yashaba Gerald, a director and manager of the Applicant herein after referred to as the Applicant’s deponent. The Applicant’s deponent repeats the grounds in the chamber summons and does not add any facts. The facts in support of the application are primarily contained in annexure "A" to be affidavit in support of the Applicant’s deponent. However paragraph 2 of the Applicant’s deponent affidavit which attaches annexure "A" only indicates that copies of the agreements are attached and marked annexure "A". The agreements under that paragraph relate to the construction of two schools and expansion of a third school named in that paragraph.

The affidavit in reply and opposition is disposed to by Margaret Nabakooza, Principal State Attorney from the Attorney Generals Chambers. In her deposition she states that it is true that the Ministry of Education and Sports executed a contract with the Applicant for construction works and that a copy of the contract indeed appears as annexure "A" to the affidavit in support of the application. Upon reading correspondence between the Employer Ministry and the Contractor dated 12th of June 2013, she knows that since the Sts were handed over to the Applicant on 16 October 2012, there had never been any progress up to the time the contract was terminated. The Applicant was in fundamental breach of the general conditions of contract clause 59.2 because as a donor funded project it was time barred with an official end date of 31st of December 2014, it was recommended that the Employer Ministry terminated the contract as the Applicant had stopped work without the Project Managers authorisation. Contrary to the Applicants affidavit in support, upon termination of the contract on 2 April 2013, the Permanent Secretary of the Employer Ministry made a written demand declaring the Applicants to be in default under the contract and instructed the managing director of Ecobank Ltd to liquidate both guarantees and credit the amount to the project account in bank of Uganda. The total sum of both guarantees is US$558,600.62. Contrary to the affidavit in support of the application, the Applicants would has no chance of success as the Plaintiffs claim is premature, bad in law, and misconceived. Furthermore the Applicant has not in any way demonstrated that it will suffer irreparable loss that cannot be atoned for by an award of damages and therefore it was not a proper case for the exercise of the courts powers to grant the order sought in the application.

In rejoinder Gerard Yashaba deposes that it is not true that the Plaintiffs claim is premature as the Defendant was duly served with a statutory notice which it acknowledged in its defence. In rebuttal to paragraph 4 of the affidavit in reply that the contract was terminated for fundamental breach, the deponent deposes that the reply is on the merits of the suit and not appropriate for the instant application. The Applicant secured the grants using its securities comprised in plot 6 – 8 volume 3467 folio 12 Kawuku Lane Gaba, which will automatically be sold if the Respondents are allowed to claim the guarantees.

The Applicant is represented by Counsel Osinde Nathan of Messrs Osinde and Company Advocates and the Attorney General by State Attorney Gerard Batanda.

The Applicants Counsel submitted that the injunction sought is to restrain the Respondent or agents from recovering or making claims arising from a performance guarantee and APG amounting to US$ 558,600.63. The grounds therefore are in the affidavit of Yashaba Gerard, a director and manager of the Applicant. There was a contract between the Applicant and Respondent/Ministry of Education for construction of Bufunjo Seed Secondary School and Katungulu Seed secondary school and Expansion of Kamwenge Seed Secondary School collectively called the Seed Secondary Schools or SSS. It was for a contract price of US$ 1,862,002.05.  The contract was secured by a performance guarantee for 186,220.21 US$ and also Advance Payment Guarantee for 372,400.41 US$. The contract was terminated by the Respondent who wrote a letter of demand for liquidation of the two guarantees. The Applicant has following termination instituted HCCS 245 of 2013 challenging termination and praying for a permanent injunction restraining the Respondent from enforcing the two guarantees.

Grounds of the Application

Counsel relied on the grounds set out in the application and illustrated in the authorities cited. In the case of Buzira Njovu Development Company Ltd vs. Idah Nantaba MA 141 of 2013 the court applied in dictum in the case of American Cynamid vs. Ethicon case. What the Applicant needs to establish is that there is a substantial question to be investigated with a chance of success, irreparable injury which cannot be atoned for by an award of damages and that the balance of convenience favours the Applicant for the junction to be issued.

In Performance Bonds cases the authorities are that relied on are the High Court of New Delhi in Punj Lloyd Insulations Ltd vs. State Bank of India and Another RFA 578/2004 and CM 142 91/2004. In that case the High Court of India gave two exceptions to the rule that a beneficiary of a performance guarantee is entitled to realise the amount guarantee on demand. These are irretrievable injury and extraordinary special equities.

The Applicant’s Counsel submitted that the substantial question to be investigated in the main suit is that the Applicant is challenging the manner in which the contract was terminated. The Respondent terminated it for lack of performance. Issue of performance is not that the Applicant failed to perform and this is the main contention. Performance failed because the Respondent froze accounts of the Applicant thereby frustrating all the activities of the Applicant including performance of the contract. Counsel submitted that the Applicant has a very strong case against the Respondent to allow the Applicant to take the money was to condone their activities which appears calculated to recover the Performance Bond. He invited the court to find that there is a substantial question to be investigated.

The next question is whether the Applicant would suffer irreparable injury. For the bank to provide the bonds there was an arrangement through creation of credit facilities between the bank and the Applicant whereby the Applicant asked for various activities to guarantee their various contracts. One of the securities was land on Plot 6-8 Volume 3467 folio 12 at Kawuku Lane Gaba. In the event that the Performance Bonds and APG are liquidated, the bank has no choice but to sell the property to realise sums debited. The Applicant will never recover if the property is sold and would have suffered irreparable injury.

The relationship between the Applicant and their bankers would have been tainted and no one can tell how damaging that will be. Such injury is incapable of being atoned for by way of damages.

Balance of convenience:

If the court grants the application, the circumstances of the case clearly show that the Applicant would suffer greatly if the money is removed. It is much safer and convenient for the Applicant if the money remained pending determination of the main suit. The Applicant has not prayed for any restriction to stop the Respondent from re tendering the contract. In any case the money the Respondent used is in relation to advance payment. The balance of convenience is therefore in favour of the Applicant.

Generally according to the Indian High Court Authority cited, courts are reluctant to grant injunction against Performance Bonds except in two circumstances. There are in cases of fraud which the Applicant does not intend to lead in this matter and secondly in cases of irreparable injury or harm. Where special equities are considered the court will not allow the guarantees to be liquidated.  In the case of Itek Corporation vs. First National Bank of Boston (citation and authority not supplied), an Iranian bank provided performance guarantee to a company and later the US Government blocked all accounts of companies associated with the Iranian Government. It became difficult to execute a contract by way of exportation of trade goods. It became impossible to trade and the contract was terminated. The court upheld contention of the exporter that any claim for damages against the purchaser if decree by US courts would not be executed and realisation of bank guarantee /letters of credit would cause irreparable harm to the Plaintiff. We submit that the Plaintiff had his accounts totally blocked by the Respondent and to allow the very Respondent access to Performance Bonds would result into irreparable harm. The Respondent cannot hold the hand of the Applicant and expect the Applicant to feed.    

In reply Counsel Gerard Batanda relied on the affidavit of Harriet Nabakooza for the facts in opposition. The Respondents case is that there was a contract between the Applicant and the Ministry of Education annexure “A” to Applicant’s affidavit. The Applicant failed to perform the contract and it was terminated under clause 59 (2) of the agreement for fundamental breach. Consequent upon termination the Permanent Secretary of the Employer Ministry communicated to the Applicant and their bankers. He requested Ecobank Ltd to liquidate both the guarantees and the APG in the amount of 558,600.62 US$. This request to liquidate the facilities was premised on the unequivocal and irrevocable performance security issued by Echo Bank Annexure “D”. This money reflected in annexure “D” was remitted to the Applicants who confirmed receipt of the same in annexure “F”. The Applicant seeks to invite the court to restrain the Respondent from receiving from the bonds. However the prayer is overtaken by events because the demand was made and all that remains is to effect the payment and there is nothing more to restrain.

Counsel drew the courts attention to similar applications. In Victor Construction Ltd vs. Uganda National Roads Authority, the Respondents Counsel argued that in such injunctions ordinary principles do not apply and the court agreed. Such cases are governed by principles of autonomy of the contract.  The only exception is fraud. It must be a fraud of a serious nature as to vitiate the underlying transaction but in this case there is no plea of fraud at all.

The Applicants rely on frustration in that because of freezing of their accounts they were incapacitated from performing the contract. To deny the application would in effect be giving the Respondent a chance to benefit. However the Respondents Counsel maintains that this is false because all pleadings on record have no single reference to a cause of action under the doctrine of frustration of a contract. Secondly on a matter of procedure, the Applicant’s Counsel’s submission in that regard was evidence from the bar.  The affidavit in support of chamber summons and rejoinder all fall short of bringing to the attention of court the argument of frustration or evidence thereof.

There is no evidence when the alleged frustration occurred. The Plaintiffs failed to perform from the date of hand over of the sites. Taken as it is it is not possible to ascertain whether the termination came before or after termination.

Furthermore the Respondents Counsel submitted that the Applicant’s case is that they have not restrained the Respondent from retendering the contract and the balance of convenience is in the Applicant’s favour. The Respondent is in possession of the APG against which the Applicant received payment and is holding funds that are supposed to be used for the project that is the subject of the contract. The only to re-tender is after receiving reimbursement for the money advanced. Counsel relied on Paget’s Law of Banking 13th Edition at page 866 for the statement that the purpose of a Performance Bond is to provide security which is to be readily and promptly realisable when the prescribed event occurs. The prescribed event was the Applicant’s default. The performance security is subject to uniform rules of demand guarantees. Under article 2 under the ICC rules is enshrined the autonomy principle. A performance guarantee is in principle an autonomous contract entitled to freedom from interference from the court on grounds extraneous to the guarantee itself. The performance security was between the Respondent and the bank and the Applicant was not a party to it. The Applicant has no standing to seek the proposed orders in this application by virtue of the autonomy principle.

In the case of Edward Owen Engineering Ltd vs. Barclays Bank [1978] 1 ALL ER 976 and page 982 per Denning LJ gave the exception of fraud which as to be clearly established to the autonomy principle. Lastly the Respondent’s Counsel distinguished the Indian Authority of the High Court of Delhi of Punj Lloyd Insulations ltd vs. State Bank of India and another (supra). In that case the appellant sought to restrain the beneficiary of a performance security before cashing it and he interestingly joined the bank. The appellant failed in the application. Secondly it was not decided basing on the uniform rules for demand guarantees.

In the premises the Respondents Counsel  invited the court to dismiss the application and further prayed under section 98 Civil Procedure Act for the court to makes consequential orders directing the bank to liquidate the facility under its terms and for costs.

In rejoinder Counsel  Nathan Osinde submitted that on the question of the autonomy principle and the fact that the Applicant is not a party, page under page 24 of the contract/agreement and paragraph 2.3 thereof the performance guarantees are part of the contract to which the Applicant is a party. It binds both parties and the Applicant has a say on what happens.

Secondly about the freezing the affidavit in rejoinder we stated that paragraph 4 touches on the merits of the case and is the gist of the main suit.    We showed a main suit with arguable points. On paragraph 4 of the plaint, we showed that on the 8th of November 2012, the Plaintiff’s bank account was indeed blocked by the Uganda Police.  On 20th November 2012 the Plaintiff informed the Defendant on the restriction on the account.  It is true that the advance payment was made. The said money is part of the money that has been restricted on the accounts. Still the Applicant secured the facilities. On the Applicant on frustration we indicated on paragraph 5 of plaint that the contract was delayed due to frustration by an even outside the contract.  

The case of Victor Construction Company ltd (Supra) is distinguishable. There are not very many authorities on injunctions and Performance Bonds. Various authorities cited show clearly that as a general principle, courts do not interfere. The Indian authority of the High Court of Delhi expounds on the issue of Performance Bond injunctions. The judge stated that originally the only exception was fraud and subsequently two other principles were developed. There are the grounds of irreparable injury and extraordinary special equities.

Lastly, on the submission that there is nothing to restrain, the application includes orders to stop the Respondent from recovering the money because the money is still in the bank.

Ruling

I have carefully considered the Applicants application, the affidavit evidence, the submissions of Counsel and authorities availed to the court.

I will commence by saying that the principles upon which this court exercises jurisdiction in applications for temporary injunctions are not in dispute at all and there is no need, except where necessary, to restate the principles. Suffice it to refer to the basic outline of principles upon which the Applicant relies to argue this application. The first principle is that the application must disclose an arguable case which merits judicial consideration or in other words, a prima facie case with a likelihood of success. The second is that the Applicant would otherwise suffer irreparable injury which cannot be atoned for by an award of damages if the application is not granted. Thirdly in case the court is in doubt on the first two principles, the application would be decided on the balance of convenience.

The Applicant’s case is that there are substantial questions to be investigated in the main suit in that the Respondent froze the bank accounts of the Applicant which frustrated the performance of the contract. Consequently determination of the contract for non-performance was caused by the Respondent itself and it would be inequitable to liquidate the Performance Bonds for the alleged default of the Applicant. Secondly the Applicants case is that it would suffer irreparable injury because its real estate property was pledged to the banks which organised the security of the Performance Bonds and upon liquidation of the Performance Bonds, the concerned banks will sell the security deposited by the Applicant to realise their money. The Applicant maintains that, the realisation of the security would cause irreparable loss that cannot be atoned for by an award of damages. The irreparable injury includes the effect that the Applicant’s relationship with its bankers would be tainted.

The Respondents case on the other hand is that the contract was terminated for fundamental breach under clause 59 (2) thereof. Secondly the Permanent Secretary of the Employer Ministry under the contract has already written a demand to liquidate the Performance Bond for a sum of US$558,600.62. Thirdly there is nothing to restrain and the orders of the court would be in vain because the Respondent has already acted by writing the demand to liquidate the security.

As far as the law is concerned, the Respondent’s case is that in such cases, the principle of autonomy of contracts applies. The only exception to the principle is where the Applicant advances a ground of fraud of the beneficiary to the bond. It is however abundantly clear that the Plaintiff/Applicants case is not based on fraud on the part of the Respondents servants. The Applicants rely on frustration due to the freezing of their accounts which allegedly incapacitated them from performing the contract. However frustration was neither pleaded nor proved by affidavit evidence. Counsel further relied on the autonomy principle that performance guarantees can be liquidated on demand without reference to the underlying contract or any dispute between the parties in the underlying contract. The only exception against liquidation on demand occurs in cases of fraud attributable to the beneficiary.

In rejoinder the Applicant’s case is that on page 24 and paragraph 2.3 of the contract, the Applicant is obliged to arrange performance guarantees and therefore the Applicant is a party to the contract and can bring an action in respect thereof. Concerning the freezing of the Applicants account, the affidavit in rejoinder of the Applicant deposes that its accounts were blocked on 8 November 2012. On 20 November 2012, the Applicant informed the Respondent’s servants about the freezing of its accounts. The Applicant admits that advance payment was made but because it could not access its accounts, it could not perform. Furthermore under paragraph 5 of the plaint, the Applicant indeed pleads frustration. The Applicant reiterated submissions on the exceptions to the autonomy principle for courts not to interfere with Performance Bonds. Previously the only ground upon which the court could interfere with the right to be paid on demand was fraud but recently other principles have been developed which include the ground of irreparable injury and extra ordinary special equities.

I will start with the point of law premised on the assertion of the Respondent’s Counsel that the orders sought in the application would be in vain because the Respondent has already made the demand for liquidation of the Performance Bonds.

It is the undisputed evidence of the Respondent that in a letter dated 2nd of April 2012, the Permanent Secretary Ministry of Education and Sports wrote to the Managing Director of the Plaintiff/Applicant Company terminating the contract. In the letter the PS writes inter alia as follows:

"The Ministry of Education and Sports Contracts Committee at its 324th meeting held on Friday, 1 March 2013 decided to terminate your contract in respect of the above captioned project.

You have been found to be in fundamental breach of contract as per clause 59.2 (g) of the conditions of contract.

You are therefore hereby instructed as follows:-

1) To stop all activities with immediate effect.

2) Not to take away any materials on the sites.

3) Not to take away any tools and equipment until the final accounts for the projects have been prepared..."

On the same day the Permanent Secretary wrote to the managing director of Ecobank Uganda limited concerning performance guarantee reference number EUG/PP/042/12D worth US$186,220.21 and Advance Payment Guarantee reference EUG/PP/042/12B worth US$372,400.41 issued on 14th of August 2012 in favour of the Ministry of Education and Sports at the request of the Applicant. The PS notified the bank that the Applicant was found to be in fundamental breach of the contract under clause 59.2 (a) and (g) of the contract. Consequently they instructed the bank to unconditionally liquidate the guarantees. The total sum of both guarantees is US$558,662.

Ground 1 of the order sought in the temporary injunction is to restrain the Respondent or agents from recovering or making any claim arising from performance guarantee referenced above. On the second part of the order sought, the Respondent has already made the claim for liquidation of the performance guarantees and the bank is not a party to this application. In other words, there is nothing to restrain as far as the prayer for restraining the Respondent from making the claim is concerned. The claim has been made.

Authority for the court not acting in vain is the Kenyan High Commercial Court Case of East African Foundry Works (K) Ltd v Kenya Commercial Bank Ltd [2002] 2 EA 371 with which I am in agreement where Ringera J discharged an ex parte injunction order to restrain the appointment of a receiver when in fact the receiver had been appointed at the time the order was issued. He said at page 376 of the law report:

“And I have already found that though the Plaintiff was not made aware of the appointment of a receiver on 17 September 2002, his advocate was made aware of the fact before the application was presented to court on 23.9.2002. In those circumstances, I agree with Mr Akiwumi’s submission that the ex parte order made was irregular and should not stand. I also agree that the court acted in vain.”

On the first part of the order sought, which is to restrain the Respondent or agents from recovering the sums claimed, more consideration is to be given to this aspect of the order.

I have considered the second aspect of the order in light of the letter requesting for liquidation of the Performance Bonds. It has to be considered in the light of the bond itself as to what it commands the bank to do upon receiving a demand from the Respondent. This requires a consideration of what the obligations of the bank are and therefore the issue is on the merits of the Application and requires evaluation of the evidence and applicable law.

As far as the evidence is concerned Ecobank in the performance security referenced EUG/PP/0 42/12 D which is the performance guarantee taken out by the Applicant in favour of the Respondent issued a bond addressed to the Permanent Secretary Ministry of Education and Sports for a sum of US$186,200.21. The bank undertook to pay the Employer Ministry upon the first written demand declaring the Contractor  to be in default under the contract, without cavil or argument, any sum or sums within the limits of the amount guaranteed. They waived the necessity of first demanding the debt from the Contractor  before presenting the demand. The guarantee was to be valid until 28 days from the date of issue of the certificate of completion. These were subject to the uniform rules for demand guarantees, ICC publication number 458 except subparagraphs (ii) of sub paragraph 20 (a) which were excluded. As far as this Performance Bond is concerned, it is not in dispute that the Respondent made a written demand to the bank already. Can the Respondent be restrained? The obligation technically is now upon the bank to comply with the terms of the demand. In the letter of demand dated 2 April 2013 and admitted in evidence, the Respondent gave its account number with the Bank of Uganda and the account title.

It is an agreed fact from the submissions that the Respondent has not been paid by the Bank pursuant to its written demand and in fact the Respondents Counsel seeks an order of this court to direct the bank to pay. In other words the ball is in the court of the bank. The bank is not a party.

The second aspect of the evidence is that the Applicant was paid according to the advance payment certificate annexure "E" to the affidavit of Harriet Nabakooza a sum of US$372,400.41 according to the payment certificate dated 31st of August 2012. Annexure "F" is a letter dated 28th of August 2012 from Ecobank indicating that the Applicant had requested for and the bank had issued an Advance Payment Guarantee for US$372,400.41 and performance guarantee for US$186,220.21. This certified that the guarantees were authentic and issued by Ecobank Uganda limited. Consequently advance payment was received by the Applicant against an Advance Payment Guarantee issued by Ecobank. Ecobank also issued the performance guarantee bond in favour of the Employer Ministry/Respondent.

If an order is made, because the Respondent has no further role in the matter, it has to be made against and complied with by the bank. Can the court make a binding order against the bank? In the Kenyan case of Agip (K) Ltd v Vora [2000] 2 EA 285 it was held by the Court of Appeal of Kenya that where the party sought to be restrained has acted, the proper application is for an order of a mandatory injunction. They held that at page 290:

            “That application in its relevant parts prayed for orders that:

            “1.       …

             2.        That the Defendant be restrained by itself, its agents and or servants from evicting, stopping or in any other way interfering with the Plaintiff’s operation of Tusks Service Station pending the hearing of this suit or further orders of the court.

3.        That the Defendant be restrained from terminating the Plaintiff’s operator Licence Agreement”.

It is quite evident, from the prayers in the application that the Respondents sought to stop interference by Agip with what they perceived to be their rights under the licence. We are absolutely clear in our mind that the Respondents did not seek any order on the basis that any property which is in dispute, in the suit, was in danger of being wasted, damaged or alienated or was wrongfully to be sold by Agip. The Respondents did not go to the superior court, on the basis of an application that Agip threatened or intended to remove or dispose of its property, being the station, in any circumstance affording a probability that the Respondents will be obstructed in the execution of any decree in the suit. It is our view therefore, that Order XXXIX, rule 1 of the Civil Procedure Rules cannot be invoked in the circumstances of this case, to found a prayer for injunction. The learned Commissioner, in our judgment, was wrong to have granted the injunction orders having as their basis Order XXXIX, rule 1 of the said Rules.”

The Respondents were already in possession and the Applicant never sought a mandatory injunction. Similarly in this case the Respondent has acted and in the absence of a prayer for mandatory injunction, no negative order of restraint will do.

My first concern initially arose from the provisions of Order 41 rule 3 of the Civil Procedure Rules and I did inform the Applicants Counsel about the rule. The rule provides that the court shall in all cases, before granting an injunction, direct notice of the application for an injunction to be given to the opposite party. In other words  an injunction cannot be issued against Ecobank because it is not a party and no notice thereof has been issued to Ecobank. Secondly the Applicant has not sought a mandatory injunction or order against the Respondent to retract the letter of demand. Thirdly arguments were made about the parties to the Performance Bond. On the face of the Performance Bond, the Applicant is not a party. The undertaking to pay was made by Ecobank Ltd which to repeat is not a party to the application. The unfortunate wording of the orders sought in the application is as follows:

"That a Temporary Injunction doth issue restraining the Respondent or their agents from recovering or making any claim arising from performance guarantees…"

The only words “from recovering” do not add any weight to the Applicant’s application. The process of recovering or making the claim was completed. In my opinion therefore, the Respondent’s submission is correct. The Applicant’s application has been overtaken by events because no order of restraint can be made against the Applicant that can have an impact of stopping the payment the bank is obliged to make under the terms of the bonds. To be able to stop the payment, the bank has to be made a party.

The Applicants contention is that at page 24 of the contract paragraph 2.3 provided that the following documents are part of the contract. Namely the performance guarantee and the bank guarantee for advance payment. Page 24 is an annex to the main contract and is entitled "contract data". The actual provisions dealing with the securities are found in the contract document itself. Clause 51.1 provides that the Employer shall make advance payment to the Contractor  of the amounts stated in the contract data by the date stated in the contract data, against provision by the Contractor  of an unconditional guarantee in a form and by a bank acceptable to the Employer in amounts and currencies equal to the advance payment.

Secondly, clause 52.1 provides that the performance security shall be provided to the Employer not later than the date specified in the letter of acceptance and shall be issued in an amount and form by a bank or surety acceptable to the Employer. In other words it is the obligation of the Applicant to provide an Advance Payment Guarantee and Performance Bond under clause 51.1 and 52.1 of the contract. The stipulation in the contract data that the documents mentioned therein inclusive of the Advance Payment Guarantee and Performance Bond/guarantee are part of the contract does not add much to the contract stipulation. It only provides that the documents would be part of the contract. It does not provide that the terms of the Performance Bonds would be part of the contract. It only provides that the documents would be part of the contract. It is the same as saying that the Applicant is under an obligation to obtain the Performance Bonds and Advance Payment Guarantee.

Additionally the contract data which is a summary provides on page 26 and item 51.0 that the advance payment shall be 20% of the contract price and will be paid to the Contractor  not later than 56 days after provision by the Contractor  of an acceptable and unconditional bank guarantee as provided for in clause 51.1 of the contract. Secondly on the same page paragraph 52.0 provides that the performance Security shall be for an amount equivalent to 10% of the contract price. The standard form of the performance security acceptable to the Employer shall be an unconditional bank guarantee of the type presented in section IX of the bidding documents. Both stipulations are to the effect that the bank guarantee shall be an unconditional guarantee. The nature of the unconditional guarantee can be discerned from the document itself.

Read in context, it means that the Applicant is obliged as part of the contract to secure the above-mentioned guarantees. However the document speaks for itself. It is issued by the bank in favour of the Respondent. The contract only gives the obligation to provide the guarantee. The guarantee itself is however an independent document and can stand on its own.

This leads to the second aspect of the problem of the Applicant. Ecobank is not a party to the suit. Ecobank has not refused to pay. In the case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976, It was the bank that the Plaintiff sought to restrain from paying under the performance guarantee. The Plaintiff was under an obligation to secure the guarantee in the underlying contract. Lord Denning held that any dispute between the buyer and seller must be settled between themselves. The bank or insurance company has to pay except in cases of fraud.  In other words and as can be seen the bank was a party. Secondly the dispute between the buyer and the seller does not have to affect the bank. In other words any dispute between the Applicant as the Contractor  (the supplier of services) and the Respondent as the Employer (the consumer of services) does not have to affect the person who issued the Performance Bond or Advance Payment Guarantee. This is a consideration of the question of parties to this suit and does not have to relate to the merits of whether the bank is obliged to pay or whether there are any grounds to stop the bank from paying. Illustrations from case law will demonstrate who are necessary parties to an application for injunction.

In the case of United City Merchants (Investments) Ltd and others v Royal Bank of Canada and others [1982] 2 All ER 720, it was the bank which refused to pay hence the action. In the authority relied upon by the Applicant namely Messieurs Punj Lloyd Installations Ltd versus State Bank of India and Another RFA 578/2004 & CM 14291/2004 delivered by the High Court of Delhi at New Delhi, an injunction was sought against the second Defendant restraining him from cashing a bank guarantee and the bank was a party. The second Defendant opposed the Plaintiff from liquidating the security. However the bank was a party as the first defendant. In the case of Victoria Construction Works Ltd versus Uganda National Roads Authority Miscellaneous Application Number 601 of 2010 arising from HCCS number 377 of 2010, the application was brought to restrain the Respondent authority or agents from claiming or demanding advance sums from Advance Payment Guarantee. It was alleged in that application that the Respondent was in advanced stages of recalling/withdrawing the Advance Payment Guarantee. In other words what sought to be restrained were the efforts of the Respondent to make a claim or demand under the Advance Payment Guarantee issued by Ecobank. The application assumed that no effective demand had been made for liquidation of the Advance Payment Guarantee. According to Geraldine Mary Andrews in the Law of Guarantees Second Edition 1995 at page 443:

"Performance Bonds are essentially unconditional undertakings to pay a specified amount of money to a named beneficiary, usually on demand, and sometimes on the presentation of certain specified documents."

It is an undertaking to pay a specified sum to the beneficiary in the event of breach of contract. Where the beneficiary seeks payment in accordance with the terms of the bond, the bank or insurance company must pay. According to Geraldine Mary Andrews (supra) at page 444:

“It is well established that if the beneficiary seeks payment in accordance with the terms of the bond, the bank must pay, regardless of how unfair that might be to the account party. This is exemplified by the leading case of Edward Owen Engineering Ltd versus Barclays Bank International Ltd [1978] QB 159."

The learned authors further advance the view at page 460 of the Law of Guarantees (supra) that:

"It is highly unlikely that the account party would ever succeed in persuading an English court to grant him an injunction restraining the bank which issued the Performance Bond (or, if there is a chain, the bank which is liable to pay under it) from making payment, once a demand has been made against it in accordance with its terms.

Exceptions to the general rule are discussed in the context of the duty or obligation of the bank or insurance company to pay. Where the bank or insurance company is not a party, the orders made may be in vain due to the nature of the obligations of the bank and that the irrevocable Performance Bond or Advance Payment Guarantee.

It is therefore my finding that the bank is a necessary party. Secondly the Applicant’s application is in breach of the mandatory provisions of Order 41 rule 3 of the Civil Procedure Rules which provide as follows:

"The court shall in all cases, before granting an injunction, direct notice of the application for an injunction to be given to the opposite party."

The bank is not an opposite party in this application yet the injunction is substantially to restrain the bank from paying the Respondent. The Applicant of course has a right to bring the application as a supplier of the service guaranteed but the bank is a necessary party to the remedy sought because of its obligations under the terms of the Performance Bond and Advance Payment Guarantee. In the premises, the Applicant’s application is incompetent. Before taking leave of the matter, I need to comment about one factor submitted on by the Applicants Counsel. The Applicants Counsel agreed that the Advance Payment Guarantee was issued and that the Respondent’s servants did pay the Applicant the contractual advance payment. However, the Applicant could not use this money because the accounts had been frozen.

In other words, there is some money available in the account of the Applicant that can atone for some of the amount guaranteed by the Performance Bonds. Furthermore, the Performance Bonds only reimburse the Respondent for monies not yet lawfully expended. In the premises, I do not see much prejudice to the Applicant if the order is refused as the project monies are allegedly in an account though frozen. The Applicant’s application is incompetent and is accordingly dismissed with costs.

Ruling delivered in open court on 14 October 2013

 

Christopher Madrama Izama

Judge

Ruling delivered in the presence of:

Nathan Osinde counsel for the Applicant

Gerard Batanda for the respondent,

Charles Okuni: Court Clerk

No parties present

 

Christopher Madrama Izama

Judge

14th October 2013