Court name
Commercial Court of Uganda
Judgment date
7 February 2017

Eden International School Ltd v East African Development Bank Ltd (HCCS-2015/271) [2017] UGCommC 81 (07 February 2017);

Cite this case
[2017] UGCommC 81
Short summary:

CL, Import and export

 

THE REPUBLIC OF UGANDA

IN THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

HCCS NO. 271 OF 2015

 

EDEN INTERNATIONAL SCHOOL LTD::::::::::::::::::::::::::::::    PLAINTIFF

VERSUS

EAST AFRICAN DEVELOPMENT BANK LTD    ::::::::::::::::::::   DEFENDANT

 

BEFORE: THE HON.  JUSTICE DAVID WANGUTUSI

 

J U D G M E N T:

Eden International School Limited herein referred to as the Plaintiff brought this suit against East African Development Bank which shall be referred to as the Defendant in these proceedings. The Plaintiff’s claim against the Defendant is for breach of contract, general and aggravated damages as well as a declaration that the interest upon interest and interest upon principal in arrears is illegal and unenforceable.

PW1 Hon. Kenneth Kakuru an advocate of the Courts of Judicature at that time together with his wife as directors of the Plaintiff were informed by a friend in July 2004 that the Defendant had been given money by Bank of Uganda to fund educational projects at low interest rates. This fund was called the Apex fund and it will herein after be referred to as the Fund. PW1 met with an employee of the Defendant in charge of the Fund and discussed the construction of a school hoping to benefit from the low interest rate of 3% above the Bank of Uganda rate.

The Defendant agreed with the Plaintiff’s proposal and on the 10th of November 2004 it agreed to extend a loan of UGX 600,000,000/= to the Plaintiff payable within six years, ExhP1.

The purpose of the loan is provided for in Article 11 section 2.01(c) of ExhP1 for the procurement of furniture and equipment, and the completion of buildings within the scope of the project.

PW1 told court that the school opened on 7th February 2007 but was unable to attract the projected enrollment as it progressively fell in arrears because it was facing competition from a similar project within the same municipality also funded by the Defendant. Because of the foregoing reasons the Plaintiff fell back on servicing of the loan and sought a rescheduling of the loan.

The two parties met on the 16th of October 2007 and agreed to reschedule the loan. On the 16th October 2007 the Defendant wrote to the Plaintiff approving the rescheduling of the loan on the following terms;

  1. The first principal installment to start from February 2009.
  2. The loan to be repaid within a period of six years from February 2009.
  3. All outstanding interest arrears as at 15th June 2007 after adjusting the rate to comply with the rates charged under the EIB/BOU scheme to be cleared before 15th October 2007.
  4. Interest to be charged on the loan on the basis of the rate advised by Bank of Uganda plus a percentage margin of 4%. The rate shall be annually adjusted.
  5. The project to be monitored very closely by EADB( at least two times per school semester)
  6. Other terms and conditions shall remain as per the original Loan Agreement dated 10th November, 2004.

On the 22nd October 2007 the Plaintiff agreed with the following terms and conditions for the rescheduling of the EADB’s loan under the Loan Agreement dated 10th November 2004.  PW1 stated that in a meeting with the Defendant on 3rd October 2014 he presented a written proposal ExhP4 suggesting that payment of UGX 100,000,000/= could be made by the Plaintiff to complete service of the loan. There is no evidence to show that the Defendant was in agreement because the Plaintiff was notified on 8th October 2014 of the outstanding loan  that was due to a sum of UGX 158,167,087.38/= however PW1 on behalf of the Plaintiff paid UGX 100,000,000/= ExhP7 on 13th October.

The parties adjusted the maturity date of the loan on 15th October 2014 to enable the Plaintiff service the loan. The Defendant notified the Plaintiff on 20th October 2014 of the unpaid balance of UGX 58,167,087.38/= and intimated that the amount should be paid on or before May 2015 without interest or charges. Although I have not seen any document to that effect this testimony of PW1 was not challenged.

It is clear that the Defendant was to charge interest on the loan in accordance with lending rates applied to the Fund not exceeding 3% per annum above the Bank of Uganda rate but could revise them and notify the Plaintiff before they took effect. The Plaintiff avers that it was comfortable with the interest of 12.16% per annum between 2004 and 2007 and after the rescheduling of the loan from 2007 to 2013 interest was 12.82% however from 2013 to 2014 it more than doubled to 23.26% without the Defendant notifying the Plaintiff.

The Plaintiff contends that charging interest based on the revised rates without notification was illegal and all money paid above the known interest of 12.82% be refunded.  

The Defendant was served but did not file a defence nor seek leave to file a defence out of time. The matter was fixed for hearing exparte for 23rd August 2016. Interestingly on the morning of the hearing Mr. Barnabas Tumusinguze a senior counsel from Sebalu and Lule Advocates appeared and stated that he was appearing on behalf of the Defendant. He sought an adjournment so as to pursue a settlement with the Plaintiff. This was surprising because on the 9th August 2016 the said firm had written to court denying that they represented the Defendant. Counsel wrote;

 “The record at the court file will show that we are not on record as     representing the Defendant and that service had been accepted in error.”

The court had to issue fresh service to the Defendant. Notwithstanding the foregoing, when Mr. Tumusinguze appeared on 23rd August 2016 and said Sebalu and Lule represented the Defendant and that an adjournment be granted to enable them settle the matter, court granted the adjournment to 30th September 2016. On 30th September 2016 both advocates appeared. The settlement had failed. The Plaintiff’s advocate prayed that the hearing proceeds. Again Mr. Tumusinguze said he had no instructions to proceed.

 “My instructions were only to propose a settlement. I do not know how much is owed. If there is to be a hearing I do not have instructions to proceed. I wish to take my leave.” He said and left.

Court concluding that the Defendant did not wish to defend the suit, allowed the Plaintiff to proceed.

The issues raised in the circumstances include;

  1. Whether the Defendant can be sued?
  2. Whether the interest charged by the Defendant is in breach of the contract?
  3. Whether interest upon interest/penalty charged by the Defendant is harsh and unconscionable and therefore unenforceable?
  4. Whether the Plaintiff is entitled to the remedies prayed for?

The first issue whether the Defendant can be sued arises as a question in this matter due to the immunities and privileges provided under The East African Development Bank Act Cap 52, 1985. Articles 49 and 52 of the Act which provides that the directors, alternates, officers and employees of the Defendant are immune from civil process with respect to acts performed by them in their official capacity unless this immunity has been waived.

The Act clearly protects the bank from legislative and executive action other than individuals and private companies.

In my view that is the most normal position because the bank enters with contractual responsibility with individuals and private companies. It would be most unfair to deny the bank’s customers redress when the bank fails to meet its contractual obligation. There would be no redress to an individual or private company. A critical look at Article 53 of the Charter provides for interpretation and application of the Charter in these words;

Any question of interpretation or application of the provisions of this Charter arising between any member and the bank or between two or more members of the bank shall be submitted to the board of directors for decision.”

Further in Article 54 which deals with arbitration provides;

If a disagreement shall arise between the bank and a member or between the bank and a former member of the bank including a disagreement in respect of a decision of the Board of Directors under Article 53 of this Charter such disagreement shall be submitted to arbitration by a tribunal of three arbitrators. One of the arbitrators shall be appointed by the bank, another by the member or former member concerned and the third unless the parties otherwise agree, by the Executive Secretary of the Economic Commission for Africa or such other authority as may have been prescribed by regulations made by the Board of Directors.”

The foregoing provisions provide for dispute resolution between the bank and the members. The Charter does not provide for third parties. Article 44 of the Charter in my view which has often been mistaken to provide absolute immunity in my view restricts this application on only the member states former and current but does not prevent third parties who have entered contractual relationship with the Defendant from pursuing redress against the Defendant where they are aggrieved.

In my view the legislature could not have meant the immunity to be absolute. It could not have been intended to extend to transactions between the bank and a third party such as the Plaintiff.  In the Supreme Court decision in Concorp International Ltd vs. East and Southern Development Bank SC No.19 of 2010 where a similar provision “the bank shall enjoy immunity from every form of legal process” was held to restrict only those transactions between the Defendant and the member states but did not restrict third parties from pursing their claims arising out of contractual relations between the Defendant and themselves.

It means that an aggrieved third party who had dealings with the bank has the right to sue the Defendant in a competent court. To hold otherwise would be contrary to public policy. Therefore I find that the Plaintiff could sue in regard to this matter.

In regard to whether the interest charged by the Defendant is in breach of the contract the Plaintiff contends that the interest rate could only be changed after notification and that in the absence of such notification the interest rate remained at 12.16% as at 22nd November 2007. The Plaintiff further contends that since the change of interest rate to 23.26% was not communicated to them all the sums that accrued based on the new interest rate were illegally obtained and should be refunded to the Plaintiff. From the communication dated 12th March 2015 ExhP9 the Defendant admitted that they indeed revised the interest rates from 8.82% to 19.26% on which they added 4% above the Bank of Uganda rate thus bringing it to 23.26%.   Breach of a contract is a violation of a contractual obligation by failing to perform one’s own promise; Blacks Law Dictionary 8th Edition Page 222. Section 3.02(c) of the Loan Agreement provided for interest as follows;

The company shall pay to EADB interest on the principal amount of the loan advanced and outstanding from time to time at a rate per annum equal to the EADB Base Rate for Uganda Shillings (to be conclusively determined and advised in writing by EADB from time to time plus a margin of 3%( three percent) per annum; PROVIDED that EADB may in its discretion and from time to time revise the interest loan applicable to the Loan and/or the formula for its determination, and the Company shall, once notified by EADB of such revision, be bound to pay EABD interest at such revised interest rate. Based on the foregoing formula, the indicative interest rate applicable to the Loan as of the Approval