THE REPUBLIC OF UGANDA,
IN THE HIGH COURT OF UGANDA AT KAMPALA
MISCELLANEOUS APPLICATION NO 389 OF 2012
NIKO INSURANCE (U) LTD}........................................................APPLICANT
ATTORNEY GENERAL} ..........................................................RESPONDENT
BEFORE HONOURABLE JUSTICE CHRISTOPHER MADRAMA
The Applicants application is for unconditional leave to appear and defend High Court Civil Suit No 240 of 2012 between the Attorney General as plaintiff and the applicant as defendant and for costs of the application to be provided for.
The grounds of the application are that on 9 September 2010 the Ministry of Local Government published an invitation for bids for the procurement of 70,000 bicycles under open international bidding which were received on 25 October 2011. Following a faulted evaluation process, a contract was signed between Messieurs Amman Industrial Tools and Equipment Ltd on 26 November 2011 for the supply of 70,000 bicycles at a contract price of US$4,896,500. The procurement process was under the supervision of the interdicted Permanent Secretary Ministry of Local Government, the interdicted principal accountant, the interdicted assistant Commissioner in charge of policy planning, and interdicted Principal Procurement officer, and interdicted Internal Auditor all of the Ministry Local Government currently facing charges in the Anticorruption Court for inter alia abuse of office, causing financial loss, corruption, neglect of duty and uttering false documents.
It was a requirement of the contract that a performance security of 10% of the contract price was required. The contract further stipulated the currency of the said performance bond to be in Uganda shillings. On 25 November 2011 the applicant issued a performance bond on behalf of AITEL preventing due performance by AITEL up to a total of US$489,650. The performance bond required the applicant to undertake to pay the Ministry of Local Government upon the first demand declaring the provider to be in default under the contract, without cavil or argument any sums up to the limit of the bond.
The performance bond is vitiated by the fraud perpetrated by the officers of government who initiated and supervised the faulted procurement process with the intention to defraud the government. In addition the procurement process culminating in financial loss occasioned to the government by the fraud perpetrated by the officers of government some of whom are currently facing charges in the Anticorruption Court where they are facing charges of abuse of office and causing financial loss. The performance bond was materially and fraudulently altered without the consent of and to the prejudice of the applicant as to cardinally change the nature of the original undertaking and thereby vitiating the enforceability of the performance bond. The performance bond was tainted by the fraud perpetrated by the officers of the respondent working together with AITEL and was unenforceable against the applicant. The application raises bona fide triable issues of law and fact which ought to be resolved through adjudication by this honourable court. Lastly the applicant pleads that it has a good defence to the claim as presented in the main suit. The application is supported by the affidavit of Ronald Zake, the Chief Executive Officer of the applicant. The affidavit confirms the facts pleaded in the notice of motion. On information of his advocates, he avers that the performance bond is vitiated by fraud perpetrated by the officers of government who initiated and supervised the faulted procurement process with the intention of defrauding the government.
Under the contract 40% of the value of the letters of credit was to be paid to the supplier on presentation of documents confirming shipment of goods. 60% would be remitted on presentation of an original acceptance certificate issued by the Minister of Local Government and an original delivery note signed by the authorised agent of the Ministry. It was also provided that partial shipment was not allowed. The Ministry of local government through the Permanent Secretary confirmed the receipt of goods when in fact the goods were not received and thereby facilitated the fraudulent activities of AITEL with the intention of occasioned a financial loss to the government. The loss occasioned to the government was a result of the fraud perpetrated by the officers of government currently facing charges in the Anticorruption Court. Upon issuance of the performance bond, the underlying contract was materially altered without consent of and to the prejudice of the applicant. The alterations included movement of the advertising/negotiating/transferring roles from Citibank, New York to Stanbic Bank (U) limited with Citibank remaining the confirming bank. There was waiver of the condition disallowing partial shipment of goods to allow for partial shipment. There was a change of the port of loading from China to India. The changes introduced into the contract by the officers of the government substantially increased the risk borne by the applicant without its consent. The changes were introduced to the detriment of the applicant who would have reassessed the risk had it been informed. Additionally the procurement process had been faulted for illegality by the Public Procurement and Disposal of Public Assets Authority in an investigation report issued on 4 November 2011. Consequently there are bona fide triable issues which ought to be adjudicated upon by the court.
A detailed affidavit in reply is sworn by the deputy Attorney General and Minister of State for Justice and Constitutional Affairs of the Republic of Uganda, Honourable Fredrick Ruhindi. He avers That the Ministry of Local Government on 26 November 2010 awarded to Amman Industrial Tools and Equipment Ltd a contract to supply 70,000 bicycles for the Chairpersons of Parish and Village Councils. The performance bond was issued in favour of Amman Industrial Tools and Equipment Ltd on 25 November 2010. The applicant affirms that they would be guarantors up to a total of US$489,650 which will be payable on the first demand upon the provider being in breach of the contract without cavil or argument. The performance guarantee further provided that the said sums of money would be paid without the need to prove any grounds or reasons for the demand. The performance bond was to be valid from 25 November 2010 to the 24th of May 2011.
On the 10th of May 2011, the Permanent Secretary Ministry of Local Government wrote to the managing director of the applicant company informing him that his client Messieurs Amman Industrial Tools and Equipment Ltd had failed to execute the contract and went ahead to demand that the applicant make good his obligations in the form of the guarantee of US$489,650. The respondent again wrote to the applicant on 23 May 2011 informing them that their bond would expire on Wednesday 25th of May 2011. On 4 August 2011, the applicant’s claims manager wrote to the respondent informing that they had received the completed and signed discharge subrogation voucher of US$489,650 and would start the process of payment and all their reinsurance partners would be called upon to remit their share of the claim. They further undertook to remit the same to Uganda Revenue Authority as advised and expressed gratitude for the respondents continued operation.
On 14 September 2011, the applicant’s representative wrote to the respondent drawing their attention to developments in Parliament at that time and press reports regarding the contract. They went further to illustrate that these developments had a bearing on the operation of the bond and as such sought advice of their lawyers on the operation of the bond before they could proceed.
The matter was referred to the office of the Attorney General who decided to file a summary suit vide HCCS No. 240 of 2012. The basis of the performance bond that was issued by the applicant was that it would become payable on first demand upon the provider being in breach of the contract without cavil or argument. The pending criminal proceedings against the government officials referred to relating to the underlying contract are not related at all to the performance bond that was issued by the applicant and is only a veiled attempt to avoid liability. Consequently the applicant has not demonstrated any plausible defence that would entitle it to be granted leave to defend a summary suit before this court.
At the hearing learned counsels Moses Adriko and Funso represented the applicant while George Kalemera, Senior State Attorney and Elison Karuhanga, State Attorney represented the respondent.
The applicants counsel Moses Adriko summarised the facts. He contended that the procurement process was supervised by the interdicted Permanent Secretary Ministry of Local Government and other officials of the Ministry of local government facing charges in the Anticorruption Court. He submitted that it was a requirement of the contract that the performance security be provided for 10% of the contract price. It was further stipulated that the currency of the performance bond would be in Uganda shillings. On 25 November 2010, the applicant issued a performance bond on behalf of Amman Industrial Tools and Equipment Ltd (hereinafter referred to as the supplier), guaranteeing performance of the underlying contract up to a total of US$489,650 representing 10% of the contract sum. The performance bond provided that the applicant undertook to pay Ministry of Local Government upon their first written demand declaring the provider to be in default under the contract without arguments or cavil up to the amount guaranteed. Learned counsel submitted that the performance bond had been vitiated by the fraud perpetrated by the officials of government as well as Amman Industrial Tools and Equipment Ltd/the supplier.
Because of the fraud perpetrated by officers of the Ministry of Local Government, which fraud was established by the Public Procurement and Disposal of Public Assets Authority, there was breach of the underlying contract which was procured fraudulently or illegality. Secondly the underlying contract was illegally and fraudulently procured by the supplier and fundamentally altered without the consent and to the prejudice of the applicant. The performance bond cannot be performed because it is tainted with the fraudulent actions of the officers of the respondent working in collusion and connivance with the supplier who procured the bond from the applicant. Counsel referred to the investigation report which faulted the procurement process and recommendations by the Public Procurement and Disposal of Public Assets Authority.
Counsel submitted that it is trite law that where a performance guaranteed has been presented, the guarantee/bond must be paid. Generally courts are reluctant to interfere with irrevocable obligations assumed by the party issuing the bond. There is however an exception to the general rule. This is where there has been a clear case of fraud, of which the bank (in this case the insurance company) has had notice of. In those circumstances, the court will not enforce a performance bond against the party who issued it. Learned counsel referred to the case of R.D. Harbottle (Mercantile) Ltd and another versus National Westminster Bank Ltd and others  2 All ER 862 for the exceptional grounds upon which the court would interfere with an irrevocable obligation such as a performance bond obligation.
For the principles upon which courts will grant unconditional leave to appear and defend a summary suit, learned counsel relied on the case of Maluku Interglobal Trade Agencies Ltd versus Bank of Uganda. He submitted that what the court needs is to satisfy itself that there are credible grounds or that there is a credible defence to the summary suit. Where the ground pleaded in defence is fraud, it cannot be proved by way of affidavit evidence. There must be a substantive trial. Secondly the burden of proof where fraud is alleged is that beyond a balance of probabilities. That burden can only be surmounted where there has been adequate evidence adduced before the court through a trial process. Counsel contended that the triable issue is whether there is sufficient proof of fraud to vitiate the performance bond executed in favour of the Ministry of Local Government. The only time when a performance bond cannot be vitiated or nullified is where the fraud has been brought to the attention of the party against whom the obligation must be enforced. Learned counsel further submitted that the fraud has to be the fraud of one of the parties to the underlying contract. He relied on the case of Edward Owen Engineering Ltd versus Barclays Bank International Ltd  1 All ER 976 and the judgement of Lord Denning at page 983.
In the circumstances he prayed that the court allows the matter to proceed for trial and to satisfy itself whether there are sufficient grounds or exceptions to vitiate the performance bond.
In reply the Senior State Attorney Counsel Kalemera assisted by Elison Karuhanga, summarised the facts as contained in the affidavit of honourable Frederick Ruhindi, the deputy Attorney General referred to above. He submitted that the terms of the performance bond or the contract sum is not in dispute. The applicant guaranteed a sum of US$489,650 to be paid to the respondent upon their first written demand declaring that the provider/supplier was in default under the contract. The applicant undertook to make the sum available to the respondent without argument. The applicant additionally undertook to make the payment without the need for the applicant to prove or show any reasons/grounds for the demand for the sum specified therein. Counsel relied on the definition of a performance bond in Black's Law Dictionary 9th edition page 1253.
The grounds upon which an applicant may appear to seek leave for unconditional leave to appear and defend the suit are laid out in the case of Miter Investments Ltd versus East African Portland Cement Company Ltd, MMK Engineering versus Man Trust (U) Ltd MA 128 of 2012 and the principles referred to in those cases found in Odgers Principles of Pleadings and Practice in Civil Actions of the High Court the 22nd edition at pages 71-78. Counsel emphasised the principle that an application for leave to defend a summary suit must demonstrate to the court that there are issues/questions of law or fact in dispute that ought to be tried. The applicant admitted the performance bond was to be paid upon demand by the respondent. A written demand was made in time as averred in the affidavit in opposition. On 4 August 2011 the applicants claim manager wrote to the respondent showing that the applicant received a completed and signed discharge invoice for the amount claimed. In effect they were aware of the obligations and undertook to pay and the respondent begun to wait for them.
Counsel submitted that the applicant was bound to pay upon demand without any argument. So they cannot be allowed to come before the court for leave to appear and defend. The applicant must show that at the trial of the action he may be able to establish a defence. The only defence is the allegations of fraud surrounding the performance bond.
Counsel submitted that the government is a unique litigant. This is because liability does not fall on an individual. When government protects itself by way of a performance bond, it is protecting the government resources not as an individual but to protect public funds. It is done on the behalf of the people of Uganda and cannot be vitiated by allegations of fraud perpetrated by individuals.
Where the court is in doubt, it may order the defendant to deposit money in court before leave to defend is granted. Counsel further contended that the applicant is relies on press reports about Parliament proceedings and the report made by Public Procurement and Disposal of Public Assets Authority, which facts cannot be ascertained. The report of the PPDA is not authenticated by any signature. Counsel submitted that for the applicant to put forward allegations of fraud, it must be clear. Allegations of fraud against the government are absurd. To allege that the government officers committed fraud on the basis of criminal charges in the Anticorruption Court cannot be sustained. By the performance bond government is trying to protect its money and cannot be seen as a beneficiary to any fraud.
Learned counsel contended that the applicant has to show that the government is the fraudster. Under section 13 of the Public Finance and Accountability Act 2003 subsection (ii) that is a definite procedure about appropriation of government funds. Money is released from the Treasury. For government to be capable of fraud, the Finance Minister must be involved, the Accountant General and Parliament must be involved. The gist of the principle is that fraud must be on the beneficiary of the bond. Counsel contended that the court should not allow its process to be used for fraudulent activity. The beneficiary, the government of Uganda, to be fraudulent would need more than a procurement officer or accounting officer. The applicant’s submission is that the government of Uganda was defrauded. The argument is not supported by the authorities. The submission is that the victim of the fraud should not be allowed to call on the guarantee because he is the victim. There are no cases where government is vicariously liable for the fraud of its officers.
Finally counsel submitted that the performance bond was created to deal with a scenario such as in this case. Consequently the Government is entitled to judgement in the summary suit. Alternatively a sum of US$489,650 is deposited in court before leave is granted.
In rejoinder, learned counsel Moses Adriko submitted that the principle of vicarious liability is clear. Government acts through its officers and agents. The acts of the agents bind the government. If those officials chose to act in a manner to defraud the government, there are adequate avenues for redress under the law and the government can recover from them. Counsel submitted that the applicant has proved fraud by one of the parties to the underlying contract. The servants of government have been interdicted and are currently facing prosecution. He prayed that unconditional leave is granted to the applicant to appear and defend the suit as held in the case of Suoza Fiqueredo versus Mooring Hotel (1959) EALR page 425. Given the serious allegations of fraud, learned counsel prayed that the court finds that triable issues have been raised which merit granting the Applicant unconditional leave to appear and defend the summary suit.
I have carefully considered the submissions of learned counsels. The facts of the summary suit and application are generally not in dispute.
The background to the application is that the Attorney General filed an action for a liquidated sum of US$489,650 against the applicant for breach of contract. The government of Uganda through the Ministry of Local Government on 26 November 2010 awarded to Amman Industrial Tools and Equipment Ltd (hereinafter referred to as the supplier) a contract to supply 70,000 bicycles for Chairpersons of Parish and Village Councils. The supplier was required to issue performance security of 10% of the contract price. The performance bond in favour of the supplier was issued on 25 November 2010 where the defendant/applicant confirmed that they would be guarantors up to a sum of US$489,650. The performance bond is dated 25th of November 2010 and addressed to the Ministry of Local Government. In the recitals it is noted that the supplier had undertaken pursuant to a proposed contract to supply 70,000 bicycles for the Chairpersons of Parish and Village Councils in higher and lower local council governments. It notes that the supplier was to furnish a performance security issued by reputable guarantor for the sum specified for compliance with the provider’s performance obligations in accordance with the contract. It is noted that the applicant agreed to give the supplier security. The relevant clause of the performance bond reads as follows:
"Therefore we hereby affirm that we are guarantors and responsible to you, on behalf of the provider, up to a total of US$489,650… and we undertake to pay you, upon your first reading demand declaring the provider to be in default under the contract, without cavil or argument, any sums of sales within the limits of US$489,650… as aforesaid, without you needing to prove or show grounds or reasons for your demand for the sum specified therein.
The security is valid until the 24th day of May 2011.
This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC Publication No. 458, except the subparagraphs (ii) of sub article 20 (a) is hereby excluded."
In a letter dated 10th of May 2011 the Permanent Secretary Ministry of Local Government wrote to the applicant indicating that the supplier had failed to execute the contract for delivery of 70,000 bicycles. In accordance with the terms of the letter of credit, execution was expected to be complete by 25th of February 2011 but due to delays on the part of the supplier, the Ministry extended the execution period up to 25th of March 2011. The extended period lapsed before the equipment was delivered. In accordance with the provisions of the contract the ministry demanded from the applicant US$489,650 without cavil or argument.
Again in a letter dated 23rd of May 2011 the Permanent Secretary Ministry of Local Government wrote to the Manager Claims, of the applicant. In the letter he noted that the bond would expire that week Wednesday 25th of May 2011. He advised that the amount in the performance bond is paid before Wednesday 25th of May 2011.
In a letter dated August 4, 2011 addressed to the Permanent Secretary Ministry of Local Government, the applicant replies and states as follows:
"We refer to the above and confirm receipt of completed and signed discharge subrogation vouchers of US$489,650 earlier sent to you.
We have now started on the processing of payment and all our reinsurance partners have been called upon to remit their share of the claim. We shall soon remit the same to URA as advised.
We take this opportunity to thank you for the continued cooperation."
Soon thereafter and in a letter dated 14th of September 2011 addressed to the Permanent Secretary Ministry of Local Government by the applicant, the applicant notes that there were recent developments in Parliament particularly in the Parliamentary Committee on local government and public service which had been reported in the press in respect of the contract and circumstances surrounding the dealings. They noted that the developments in Parliament have a bearing on the operation of the bond and as such had sought advice of their lawyers before proceeding.
Subsequently, because payment was not forthcoming the Attorney General filed a summary suit and summons was issued on 21 June 2012.
It is further not in dispute that several officials from the Ministry of local government involved in the procurement of the services from the supplier where interdicted and are facing charges of abuse of office and causing financial loss in the Anticorruption Court. The applicant alleges that the contract for the supply of bicycles was illegally and fraudulently procured by the supplier in collaboration with the ministry officials. In other words that there was fraud of one of the parties and that the applicant was entitled to be discharged from its obligations under the performance bond.
The statement of law on the rights and obligations under a performance bond can be found in the case of Edward Owen Engineering Ltd versus Barclays Bank International Ltd  1 All ER page 976 and particularly the judgement of Lord Denning at page 918 paragraph C. After reviewing judicial precedents on the obligations under letters of credit and performance bonds he concludes:
"All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour the guarantee according to its terms. It is not concerned in the least with the relations between the supplier and customer; nor with the question whether the supplier has performed his contractual obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice."
Illustrations given are when the beneficiary presents forged documents in order to obtain payment under the performance bond and the bank has notice of the fraud. Browne LJ at page 984 agrees with Lord Denning and adds that the exception to the irrevocable nature of the performance bond is where the documents under the credit are presented by the beneficiary himself and the bank knows when the documents are presented that they are forged or fraudulent in which case the bank is entitled to refuse payment. His Lordship went on to hold that it is not sufficient to allege fraud, it must be established and he used the words "I should say very clearly established".
The applicant’s case is that it has raised triable issue as to whether there was fraud of one of the parties. The Attorney General on the other hand argued on the nature of the contract executed by the government. The State Attorneys came up with a novel argument that the government is the victim of any alleged fraud, being alleged by the applicant. They asked the court to note that under the Public Finance and Accountability Act 2003 section 13 thereof, no money shall be withdrawn from the consolidated fund except upon the authority of a warrant signed by the Minister and addressed to the Accountant General. They submitted that money is paid on behalf of the public at large and if there was any fraud, the government was the victim. Counsels also submitted that the government cannot be fraudulent without the participation of the Minister and Accountant General.
The applicants counsel on the other hand contended that the Attorney General is vicariously liable for the frauds of its officials. A careful analysis of the doctrine of vicarious liability is that the liability of the government would be to third parties. On the other hand if government is defrauded, it is those who would benefit from government services namely members of the public who would suffer. Counsel for the applicant further emphasised that the government had other ways of recovering its money from any officials who had defrauded it.
I have carefully considered the evidence. A demand was made for payment under the performance bond by May 2011. The demand ought to have been honoured immediately according to the terms of the instrument. Under the terms of the instrument, payment would be made without argument. The government did not have to give any reasons for the demand or show any grounds for the demand. However, it is only in September 2011 that the applicant gives information to the respondent about suspected fraud which information was gleaned from press reporting of Parliamentary proceedings. In other words, in terms of the authorities referred to, the applicant did not have any notice of fraud by the time the demand was made. From the facts alleged in the application did not clear notice of fraud at the time of the demand.
However, novel questions have been raised by both parties as to whether the applicant should be discharged in the circumstances of the case. I have further noted that the submissions of the parties are on the merits of the triable issue which has been raised in the arguments. Additionally, even though there is contention by the applicant’s counsel that fraud has to be proved after evidence has been adduced in an ordinary trial, a contention that has some weight; there is the equally obvious point that the Attorney General’s submissions do not necessarily deny any fraud on the part of government officials. In other words the Attorney General is contending that even if the government officials who were facing charges in the Anticorruption court had committed any fraud; it was the government which was the victim of the fraud and the government was acting on behalf of the public. Consequently the performance bond was supposed to shield the government from such alleged fraud. It is therefore my conclusion that the court should not shut out the applicant from arguing its case. I also agree that fraud can only be established after a trial. The court needs to consider the importance of performance bond guarantees in commercial business. It is however doubtful whether the government can deny that officials of the Ministry of local government are facing charges of abuse of office, causing financial loss and uttering false documents among others. It would be sufficient for the applicant to prove in court that certain charges have been preferred showing that the government officials are suspected to be culpable for certain offences. Such culpability might not be in issue as the government is deemed to have commenced proceedings against the interdicted officials upon probable cause. As to whether such probable cause is sufficient to establish the Applicants allegations is a matter in controversy. Subject to the rights of the interdicted officials to be presumed innocent until proven guilty, the trial of the suit can proceed expeditiously without any need to produce further evidence other than the report of the Public Procurement and Disposal of Public Assets Authority on the alleged transaction without prejudice to the right to produce witnesses in a full hearing and questions of relevance.
Taking into account the belated allegation of fraud, conditional leave to appear and defend will be granted.
The applicant shall deposit in court security for due performance of the bond in the sum of US$489,650 in the event it losses the suit by way of a bank guarantee acceptable to the Registrar of this Court which shall remain valid until the disposal of the suit. The deposit shall be made within 30 days from the date of this ruling.
The applicant is granted leave to file its defence within 14 days from the date of this ruling.
Costs of the application shall abide the outcome of the main suit.
Ruling delivered in open court this 12th day of October 2012
Ruling delivered in the presence of:
George Kalemera SSA and Elison Karuhanga for the Attorney General
Yerusa Nyangoma Principal Procurement Officer and Stella Oguti, legal Officer both from Ministry of Local Government
Moses Adriko for the Applicant in court
Charles Okuni, Court Clerk
Sheila Catherine Abamu, Legal Research Assistant
12th October 2012