THE REPUBLIC OF UGANDA,
IN THE HIGH COURT OF UGANDA AT KAMPALA
MISCELLANEOUS APPLICATION NO 411 OF 2013
(ARISING FROM HCCS NO. 239 OF 2013)
LION ASSURANCE COMPANY LIMITED}.................................... APPLICANT
NATIONAL HOUSING AND CONSTRUCTION COMPANY LTD} ... RESPONDENT
BEFORE HON MR. JUSTICE CHRISTOPHER MADRAMA IZAMA
The Applicant's application is for unconditional leave to appear and defend High Court civil suit number 239 of 2013 filed by way of a summary suit against the applicant by the respondent company.
In the summary suit the respondent claims US$3,627,762 on the basis of an advance payment guarantee taken out by Messieurs MKP Builders SDN BHD Ltd on 16 November 2012.
The applicant seeks an order for unconditional leave to appear and defend the suit and for costs of the application. The grounds of the application are that the applicant has a good, bona fides and meritorious defence to the suit. Secondly the applicant asserts that it is not indebted to the respondent. Thirdly that it is in the interest of justice that the applicant is granted unconditional leave to appear and defend the suit.
The application is supported by the affidavit of Newton Jazire who at the time of the transaction was the Operational Manager of the applicant. The deposition of the operational manager of the applicant is that the applicant is in various products such as insurance policies, insurance bonds and guarantees. In November 2012 the applicant was approached by officials of MKP Builders SDN BHD with a request to provide a guarantee/bond for a sum of US$3,627,760.00 from the period 27th of December 2012 to 26 December 2013. It was on the representation of MKP the Builders SDN BHD that it had been contracted by the respondent to construct apartments at Naalya for a contract sum of US$18 million. On further representation that the contract required a guarantee/bond as a precondition for the release of an advance payment under the contract by the respondent, the applicant issued an advance payment guarantee number B1/BON/POL/0007481 dated 16th of November 2012 for an amount not exceeding US$3,627,762. 00
The advance payment guarantee (APG) was understood by the applicant to relate to an amount of US$3,627,762.00 to be advanced to MKP Builders SDN BHD under its contract with the respondent. An APG cannot lead to an existing date but is issued in respect of amounts to be advanced which explains the nomenclature used to describe it. The deponent avers that in fact not advance payment or any amount at all was made to MKP Builders SDN BHD against or as a result of the APG.
By letter dated 4th of February 2013 the respondent demanded payment of US$3,627,762.00 under the APG and the applicant immediately responded by requesting pertinent information which the respondent refused to provide. Consequently the applicant carried out its own investigations headed by the deponent and established the following facts. By a construction contract dated July 15, 2011 the respondent contracted NH -MKP Builders Ltd to evict 312 condominium apartments at Naalya for the sum of US$18,138,812.00. The respondent is a majority shareholder in NH – MKP Builders Ltd. By a subcontract dated July 22, 2011 NH-MKP Builders Ltd subcontracted MKP Builders SDN BHD to perform the construction contract for a sum of US$17,959,220.00. MKP builders SDN BHD had no contractual relationship with the respondent. NH-MKP builders Ltd did not make any advance payment to MKP builders SDN BHD as required by the sub contract. Payment is made on 28 July 2011 and October 5, 2011 were not made to MKP Builders SDN BHD, a foreign company registered under Part X of Uganda’s Companies Act but rather to MKP Builders SDN the HD (Uganda) Ltd and both payments were made long before the APG was issued and accepted by the respondent. The main contract and the sub contract were terminated on January 23, 2013. The main contract and subcontract had identical terms in clause 2 thereof which provided that the advance payment would be made against receipt of an advance payment guarantee and in the amount and currency equal to the advance payment.
The applicant also established that Leads Insurance Company Limited had previously issued an APG in favour of the respondent for US$3,627,762.00 due to expire on December 27, 2012. In November/December 2012, investigations into corrupt practices in the Ministry of public service in Uganda revealed that one of the principal shareholders in Leads Insurance Company Limited was a key suspect corrupt practices and the Insurance Regulatory Authority suspended the licence of Leads Insurance Company Limited. Prior to the date of the APG and as early as May 2012, the respondent was aware that the contract was not been performed and that the money advanced under the main contract ought to be recovered and the Leads Insurance guarantee/bond but the respondent refused to call on the Leads Insurance guarantee/bond. The respondent and MKP builders SDN BHD opted, in fraudulent contrivance, to obtain a fresh guarantee from the applicant, unsuspecting innocent insurance provider, so as to cover themselves should the possibility that the Leads Insurance guarantee could not be called upon to materialise. The applicant did not issued the APG in consideration for the respondent not terminating the main or subcontract as there was no contract between the respondent and MKP Builders SDN BHD.
The deponent further avers that against or on the basis of approved certificates, on several dates including 1st of March 2012, and 16th of May 2012, the respondent having obtained certified value on the construction project, paid to the NH – MKP Builders Ltd a sum in excess of US$1,005,570 as a result of which the respondent, actually recovered value for part of the money advanced under the main contract. Additional request for payment and a certificate number four in the sum of US$1,114,826.00 and which certificate was approved by the respondent have deliberately not been met yet value equivalent to the said US$1,114,826.00 has been received by the respondent as a result of which the respondent has frustrated the main contract in order to be able to claim under the APG. It would amount to an abuse of the process of court and to unjust enrichment for the respondent claim the full sum of US$3,627,762.00 without first taking into account the value of the work that was done and which the respondent either paid for or approved payment for. The value is in the minimum US$2,120,333.00.
It is accordingly the applicant's assertion is that the respondent brought the suit with a fraudulent intention as it seeks to recover an amount which ignores is not to, or is using the process of court to be able to demonstrate attempts to recover the money paid out in relation to the construction project for purposes of accountability or provisioning in its accounts or to cover up the real problems affecting the construction project. The consideration for issuing the APG was not the decision by the respondent to terminate any contract as in any event the respondent had no contractual relationship with MKP Builders SDN BHD and therefore could not terminated it.
That the applicant has a good, bona fide and meritorious defence to the claim which would in fact and law discharge the applicant fully. The amount claimed in the suit is not due or payable by the applicant to the respondent and the applicant is not indebted in the sum claimed or at all. If payment or deposit of the full amount being fraudulently claimed in the suit is set as a condition precedent for the applicant to present a defence, it would present an onerous an insurmountable burden which would make it impossible for the applicant to access to justice before court. Finally the operations manager of the applicant reiterates the grounds in the notice of motion.
In reply the company secretary of the respondent Ms Jane Bitek Langoya, opposing the applicant's application. She deposes that on the 13th of may 2013 the respondent filed a summary suit against the applicant seeking recovery of US$3,627,762 which claim arose out of an unconditional and irrevocable advance payment guarantee (APG) executed by the applicant in favour of the respondent. The applicant has no honest defence to the respondents claim and no triable issues arise which merit the granting of leave for the applicant to file a defence.
The basis of the respondent's suit is that on 15 July 2011 the respondent executed the contract with the NH – MKP Builders Ltd to construct 312 condominium apartments split into 12 blocks each with four floors each in Naalya, a suburb of Kampala district had a contract price of US$18,138,812. Pursuant to clause 5 of the contract, MKP Builders SDN BHD was nominated as a subcontractor. Under the contract between the respondent and NH – MKP Builders Ltd, the respondent undertook to pay 20% of the contract price to NH – MKP Builders Ltd by way of an advance payment against receipt of an advance payment guarantee. Pursuant to the contract, NH – MKP Builders Ltd subcontracted MKP Builders SDN BHD. It was agreed between MKP builders SDN BHD, the respondent and NH MKP Ltd that MKP builders SDN BHD takes out in favour of the respondents an advance payment guarantee against any advance payments.
Pursuant to clause 3 of the subcontract Messieurs Leads Insurance Ltd executed an advance payment guarantee in favour of the respondent. On 29 July 2011, the respondent advanced monies to MKP Builders SDN BHD against the APG. The advance payment guarantee executed by Leads Insurance Ltd was due to expire on 22 December 2012. MKP Builders SDN BHD was requested before the expiry of the guarantee by an e-mail dated 5th of November 2012 to have it renewed. On 16th of November 2012, in response to the request of the respondent and to avoid termination of the subcontract, MKP builders SDN BHD took out another APG under bond number B1/BON/POL/000 7481 (APG) from the applicant.
The applicant agreed with the respondent and that the APG to unconditionally and irrevocably guarantee as a primary obligator and not mere surety to pay on first demand and without any objection whatsoever a sum of US$3,627,762 to the respondent on demand. The APG was valid and in full effect from the date of the advance payment builders SDN BHD until the respondent received full payment of the sums guaranteed but in any event not later than 26th of December 2013. The APG in favour of the respondent was inter alia executed in consideration of the respondent not terminating and/or suing on the initial APG issued by leads insurance Ltd that was bound to expire as mentioned above. On 4 February 2013, the respondent recalled the guarantee and demanded payment of the sums in the APG from the applicant. On 11 February 2013, the applicant responded to the respondent's demand effectively denying liability and advising the respondent to have recourse against MKP Builders SDN BHD. Despite numerous demands, the applicant refused to honour its unconditional and irrevocable APG.
The respondent’s deponent further avers that the applicant admitted certain matters namely that it executed an APG in favour of the respondent for an amount not exceeding US$3,627,762. Secondly the APG was unconditional and irrevocable and executed by the applicant as a primary obligator and not a mere surety and that the applicant would pay on first demand and without any objection the sums guaranteed. Thirdly that no change or addition to or other modifications of the terms of the contract or of the works to be performed there under or of any of the contract documents which may be between the respondent and the applicant shall in any way released the applicant from liability under the APG and notice of any such change or modification was waived. The guarantee was valid from the date of advance payment under the contract to the respondent received full payment from the applicant but in any event no later than 26th of December 2013. The APG was signed by Newton Jazire and duly witnessed by the applicants Company Secretary. Consequently the APG was not executed on the understanding that the respondent was to advance the aforementioned sums to MKP the Builders SDN BHD. Neither the APG nor any other document indicated that the applicant was under the impression that MKP Builders SDN BHD was to be advanced the said monies. On the contrary the APG referred to in the contract between the respondent and NH - MKP Builders Ltd in relation to the advance payments. The APG was valid from the date of the advance payment in the contract until 26 December 2013. The APG was further prepared by the applicant and does not in any way presuppose that it only related to advance payments that were to be made to MKP Builders SDN BHD. The APG provided that it was executed in accordance with the contract between the respondent and NH – MKP Builders Ltd and in relation to advance payments of the above contract. The contract provided under clause 2 thereof that the employer (respondent) undertakes to pay the contractor 20% of the contract sum as advance payment against receipt of an advance payment guarantee from a bank or insurance company (the applicant) that is acceptable to the employer. It is not in doubt that the applicant was well aware that any payment from the respondent was upon advance payment guarantee and any attempts to distance itself from its obligations is a ploy to deprive the respondent of its monies. It was dishonest to contend that the APG was fraudulent executed as it was not in doubt that the applicant voluntarily accepted the APG in favour of the applicant who had never corresponded with it or requested it to execute such a guarantee. The APG was executed in ordinary course of business by the applicant without any, connivance on the part of the respondent. Furthermore the respondent never frustrated any contract with NH – MKP Builders Ltd to exploit the applicant. The APG unequivocally provided that the applicant was a primary obligator and not mere surety and that the sums guaranteed were payable on the first demand and without any objection on the part of the applicant. The applicant in making these representations to the respondent pointed beyond doubt that it would make good no matter the reason of recalling the guarantee. Finally the deponent avers that the applicant has no defence at all to the respondents claim and any alleged defence is a sham to delay justice and deprive the respondent of its monies. The application for leave does not raise any triable issues to merit granting leave to the applicant.
In rejoinder Newton Jazire for the applicant deposes as follows. He read and understood the affidavit in reply of Jane Bitek Langoya, the Corporation Secretary of the respondent. He reiterated his averment that the applicant's application raises serious bona fide triable issues that go to the root of any credibility the respondent seeks to attach to the terms of the APG. Firstly the applicant has never been a party to any discussions between the respondent and NH - MKP Builders Ltd or MKP builders SDN BHD and was therefore not the cause of the new view taken and advanced by the respondent that the APG was valid and in full effect from the date of the advance payment in July 2011 and October 2011 or the APG was executed in consideration of the respondent not terminating the construction contract and or suing on the initial APG issued by Leads Insurance Ltd.
The applicant issued the APG with a legitimate expectation and understanding that it is related to an amount to be advanced and not an amount already advanced under a previous guarantee, which was in any case still running. The applicant issued the APG in order to satisfy a condition precedent to a further advance payment under the construction contract but no advance payment was in fact made. If the applicant had merely taken over an existing liability from Leads Insurance Company limited it would have done so by way of an endorsement rather than the issuance of the APG. An endorsement is the only document attached to an insurance policy that modifies the policy by changing the coverage afforded under the policy and is the only document used to take over an existing liability. The respondent was advancing an argument that was fraudulent because it was making a demand under a guarantee in respect of which no money was advanced by it. Secondly in respect of which it enjoyed no contractual relationship with MKP Builders SDN BHD. Thirdly in respect of which the amount indicated as guaranteed in the APG is not 20% of the contracted amount in the subcontract.
The applicant's deponent further avers that the terms of the APG were dictated upon the applicant by MKP Builders SDN BHD which stated that the respondent would only accept an advance payment guarantee worked as appears in the APG. The applicant had no reason to doubt that a presentation that MKP Builders SDN BHD had never defaulted in its performance of the contract. The APG was for an amount not exceeding US$3,627,762.00 and not for the payment of US$3,627,762.00 as contended by the respondent’s deponent. The applicant investigations revealed additionally that on 8 November 2012 the respondent sought to carry out an in-depth search of its partner MKP builders SDN BHD. When it found that there were significant problems associated with MKP builders SDN BHD, it insisted that MKP builders SDN BHD obtain an advance payment guarantee and when this was issued by the applicant, the respondent, in order to ensure it was properly secured, on December 12, 2012 asked for the re-insurers. About 50 days later, the respondent made a demand on the APG, all in the knowledge that it did not advance any money to MKP Builders SDN BHD. There are several companies in existence such as MKP builders SDN BHD Uganda limited; MKP builders SDN BHD Ltd and MKP builders Uganda limited, all of which appear to have the same principals. The respondent frustrated the main contract by refusing to pay certificate number 4 in the sum of US$1,114,826 and which certificate was approved by the respondent for payment, in order to be able to claim on the APG. The deponent believes that the purpose of the claim against the applicant on the APG is among others to be able to obtain cash flow to pay certificate number 4 which the respondent is facing an imminent suit about. The witness asserts that he knows the expiry date of judgement such as the APG does not retire the guarantee that rather means that any payments made under it at the date of expiry are not covered. The Leads Insurance Company Limited guarantee is still valid for a claim by the respondent. The practice in Uganda is to issue guarantees for one year at the time practice was prevailing at the time the applicant was approached for the APG. At that time the existing contract was covered by the leads insurance company limited guarantee which also subsequently extended by an endorsement recover the full length of the contract of 18 months. The above factors demonstrate that the respondent brought the suit with a fraudulent intent. The deponent has satisfied his belief and knowledge that the applicant has a good, bona fide and meritorious defence to the claim which will in fact and law discharge the applicant fully and which cannot be properly presented by way of affidavits. The amounts claimed in the suit are not due and payable by the applicant to the respondent and as such the applicant is not indebted in the sum claimed or at all. The amounts being fraudulent the claim in the suit should not be ordered to be deposited by the applicant as a condition precedent representing its defence as it would present an onerous and insurmountable burden which would make it impossible for the applicant to access justice before the court. Finally the deponent avers that it is in the interest of justice that the applicant is granted unconditional leave to appear and defend the suit on its merits.
At the hearing of the application counsel Fred Mpanga holding brief for counsel and Mr Kalibala Earnest of Messrs AF Mpanga, Advocates represented the applicant company while the respondent was represented by Isaac Walukagga of Messrs Masembe, Makubuya, Adriko, Karugaba and Sekatawa Advocates. It was agreed that counsels would file written submissions for purposes of managing the time of the court.
Subsequently the applicant filed submissions of 14 pages and the respondent replied with submissions of 22 pages. The applicant further filed a rejoinder of 8 pages. Counsels were not satisfied that all points had been canvassed. The respondent sought leave to clarify on one issue in the applicants in rejoinder which he submitted was not addressed in the reply. With the leave of court and the consent of counsel the respondent further filed a two-page Sur – rejoinder and the applicant replied to it in another two-page written submission.
I have carefully considered the voluminous application and the reply and rejoinder thereto all of which amount to voluminous pleadings together with the documents attached. This is in addition to the voluminous written submissions of counsel. Obviously the principles for the grant of leave for a defendant to appear and defend a summary suit are not complex. What needs to be established by the applicant is whether the defendant has triable issues which merit judicial consideration before a final judgement can be pronounced on the matters raised in the summary suit.
Summary of submissions of the applicants counsel
The applicant summarised the facts as contained in the affidavit sworn by Newton visited on 23 May 2013 and another on 10 July 2013 and attachments thereto. The summary is that by a contract dated 15th of July 2011, the respondent contracted NH – MKP Builders Ltd to erect 312 condominium apartments at Naalya for a sum of US$18,130,812.00. By a subcontract dated July 22, 2011, NH – MKP Builders Ltd subcontracted MKP builders SDN BHD for a sum of US$70,959,220 to implement the same contract. Under the main contract, the respondent was paid 20% of the contract price to NH – MKP Builders Ltd on receipt of an advance payment guarantee under clause 2 of the main contract. Under the subcontract, NH – MKP Builders Ltd was to pay 20% of the subcontract amount to MKP builders SDN BHD on receipt of an advance payment guarantee. The main contract which commenced on the 2 July 2011 was for 18 months while the subcontract which was executed on the 2 July 2011 commenced on a date unknown but was also for 18 months. Leads insurance company Ltd, at the instance of MKP builders BHD SDN issued an advance payment guarantee dated 27th of July 2011 for the amount of US$3,627,762 in favour of the respondent and the same was extended by an endorsement running from 27 July 2012 to 27th of December 2012 which covered the contract period. Clause 2 of the main contract provided that the Employer and that took to pay the contractor 20% of the contract sum as an advance payment against the receipt of an advance payment guarantee from a bank or insurance company that is acceptable to the Employer in an amount and currency equal to the advance payment. Clause 2 of the contract provided that the contractor and that took to pay the subcontractor 20% of the contract sum in advance against the receipt of an advance payment guarantee from a bank or insurance company acceptable to the contractor in the amount of currency equal to the advance payment. On the 27th of July 2011 and 5 October 2011 Uganda shillings 4,700,000,000/= and US$1,755,000 respectively was paid by the respondent to MKP Builders SDN BHD (Uganda) Ltd and MKP Builders SDN BHD Ltd (U) Ltd. The applicant issued an advance payment guarantee dated 16th of November 2012. On 4 February 2013 the respondent made a demand on the applicant for the sum of US$3,627,762.
Counsel submitted that the issue for determination was whether the applicant’s application disclosed bona fide triable issues so as to warrant the grant of leave for the applicant to appear and defend the suit.
The grounds for leave to appear and defend the suit under order 36 of the Civil Procedure Rules are well settled. Firstly the applicant is required disclose bona fide issues for trial, of questions of law or fact according to the case of Maluku Interglobal Agencies Ltd versus Bank of Uganda  HCB at page 65. Secondly where a gaming defence of fact or law is disclosed, the applicant is entitled to unconditional leave to defend the action. If the applicant has a plausible defence, he should be permitted to defend the suit unconditionally according to Abu Baker Kato versus Tomson Muhwezi [1992 – 1993] HCB 212. Thirdly where the court is in doubt as to whether the proposed defence is being made in good faith, the court may order that the defendant deposit money in court before leave is granted according to Miter Investments Ltd versus East African Portland Cement Company Ltd Miscellaneous Application Number 336 of 2012. Fourthly in an application for leave to appear and defend a summary suit, the court is not required to determine the merits of the suit. The purpose of the application is not to prove the applicants defence to the suit but to ask for an opportunity to prove the defence through a trial. What the court determines is whether the defendant has a good cause to be given leave to defend according to Godfrey Gatete and another versus William Kyobe  1 ULR 158. Fraud cannot be established through affidavit evidence in light of the standard of proof required.
The law on demand guarantees is well-settled in that they are autonomous from the underlying contract and that when a demand is made under such a guarantee, it should be settled especially if the wording is such as to make it clear that the guarantor undertook to make good upon demand without proof or conditions. The settled exception to the is fraud according to the case of Niko Insurance (U) Ltd versus Attorney General Miscellaneous Application Number 389 of 2012. The guarantor does not undertake to pay on demand what is tainted with fraud. According to Paget's Law of Banking 13th edition, a beneficiary demand is fraudulent if the beneficiary has no right to payment under the underlying contract and the beneficiary has not genuine belief in such a right. See paragraph 34.9 at page 870. The relevant date for knowledge of the fraud is a date prior to payment.
Lastly the court is enjoined to ensure that its processes are not used to legalise fraudulent transactions. The court is therefore required to consider the grounds advanced by the applicant for leave to defend a suit judiciously without considering the merits of the suit. The question is whether there are bona fide issues or a plausible defence made in good faith.
The applicant’s case is that the respondents claim in the suit is a fraudulent one. The standard of proof required at this stage is not as high. It is sufficient for the applicant to establish a better looking at all the factors the applicant’s claim, the applicants claim related to fraud is one that can be established at the trial. The court has a duty in considering the application to act within the constitutional requirement to act in conformity with the values, norms and aspirations of the people of Uganda.
Firstly the applicants counsel submitted that an APG is a tool frequently used in large construction contract to secure the performance of the obligations in respect of advances that are to be made to contractors or in respect of the advance itself. It is not a tool to secure already existing obligations or liabilities unless of course it says so in its wording.
It is an agreed fact that no money was advanced as a result of or in the relation to the applicants APG. The respondent on the other hand contends that the applicant took on an existing liability. This would be illogical and is manifestly against insurance conventions on APG’s. The applicant's contention is that it issued a guarantee as a condition precedent to a payment that was to be made. The respondent's contention is that the APG was issued in consideration of the respondent not terminating the contract. It is however not clear which contract was been referred to. The respondent was not a party to the subcontract and could not have terminated it. It was observed without evidence to contend that the applicant issued the APG in order for the contract not to be terminated. Nothing is provided to show that the applicant was aware that a contract was about to be terminated and that the applicant agreed that in consideration of the contract not been terminated, it would issue an APG.
The proposal form shows the representation made to the applicant that there was an $18 million contract under which an advance payment was to be made. There was no representation about an existing liability. When a demand was made on the APG, the applicant's response was to request for information relating to advance payments made after 27th of December 2012 which is the date when the Leads Insurance APG expired. No information has been provided to date about advance payments. There were two APG’s. One for Leads Insurance and another for the applicant. The only evidence was advance payments made on account of the Leads APG. The applicant can only be liable if advance payments were made against its APG. The applicant cannot be liable to the respondent in the absence of proof that an advance payment was made against the applicant's APG.
On APG did not take over an existing liability and it was not an endorsement of an existing liability thereby taking over the liability. Counsel disagreed with the reliance of the respondent on the words "this guarantee shall remain valid and in full effect from the date of the advance payment under the contract until the employer receives full repayment of the same amount from the contract but in any case not later than 26 December 2013" as proof of the applicant taking over an existing liability. He wondered whether the contract being referred to was the $18.1 million contract order $17.9 million contract. The facts revealed that the respondent did not advance any money to NH – MKP Builders Ltd under clause 2 of the main contract nor did NH – MKP Builders Ltd advance any money to MKP Builders SDM BHD as required by its close to the subcontract. Facts further show that 20% of the amount in the main contract was different from the 20% of the amount in the subcontract. Secondly the words "from the date of the advance payment under the contract" do not refer to an already existing advance but rather to an advance that would be made under the contract after the APG was issued by the applicant. MKP builders requested for the bond to be released later indicated that the bond was submitted to the respondent and payments were being awaited. It is clear that the applicant and MKP builders SDM BHD expected that the respondent was meant to advance money after the applicant's APG was presented to it.
Demand payment under an APG without having advanced any money is a fraudulent act on the part of the respondent. The respondent is aware that he did not make any advance payments under the main contract, which is the only contract to which it is a party. The demand itself is therefore a fraudulent misrepresentation of facts in order that the respondent can benefit. To attempt to portray the applicant APG as the one under which the 2011 advance payments were made is fraudulent because the respondent knows that this assertion is not true and certainly not made in good faith or on the ground of any honest to belief. The applicant is a PG as an endorsement of the Leads APG is fraudulent because the respondent knows that it is not true. To bring and seek to maintain the applicant's suit is in fact and in law an act of fraud. On the ground that no advance payment on APG was advanced, the applicant should be permitted to defend the suit for the liquidated sum.
The applicants counsel further submitted on the amount claimed.
He submitted that it is generally true as a general rule that autonomy is the principle applicable to demand guarantees. However the court should consider the following facts which point to further acts of fraud. The main contract was for US$18,138,812 inclusive of VAT. It was executed on 15 July 2011 and provided that the respondent would advance 20% of the contract sum to NH MKP Builders Ltd on receipt of an APG. The Leads APG was issued on 27th of July 2011 and the first advance payment was made on 29th of July 2011 MKP Builders SDN BHD (Uganda) Ltd. Not advance payment was made to NH - MKP Builders Ltd as required by the main contract. Under the main contract 20% would be US$3,627,762. That contract was however never performed.
The contract was for US$70,959,220 inclusive of VAT. It was executed on 22nd of July 2011. And provided that NH - MKP Builders Ltd would advance 20% of the contract sum to MKP Builders SDN BHD on receipt of an advance payment guarantee. NH - MKP Builders Ltd never did so under this contract, 20% would be US$3,591,844.
Even with the knowledge that the main contract was value required a guarantee of US$3,627,762 was never performed and was actually replaced by a contract of a lesser value to which the respondent was not a party. Consequently it was never or would never be called upon to make any advance payment, the respondents still insisted on taking an APG in respect of the full value under the main contract. Evidence shows that the main contract was not to be performed and in fact never was. To insist on recovering an amount based on a contract it knows was never performed is an act of fraud that goes to the root of the claim and must be interrogated at the trial and not by way of affidavits. On the face of the claim bona fide triable issues and a plausible defence are disclosed.
Furthermore in the relation to the amount claimed, the main contract provided in clause 14.2 of the general conditions that the advance payment would be recovered by way of percentage deductions from payment certificates. Counsel submitted that assuming US$3,627,762 was actually advanced for the project; evidence provided by the applicant is that the respondent was satisfied with the performance by the contractor and issued payment or approved for payment a total of 3 certificates. The respondents answer is that the applicant promise to make good payment no matter the reason for recording the guarantee. Simple arithmetic puts the total amount paid or approved for payment by the respondent in respect of work done at US$2,174,199. The importance of the fact is contained in the Lion Assurance APG which provides in paragraph 2 thereof that the guarantee was in the amount not exceeding US$3,627,762. Consequently the amount guaranteed was a ceiling and the actual amount owing had to be ascertained. In those circumstances it was fraudulent to claim the full amount of US$3,627,762. Counsel submitted that this was another triable issue which ought to be dealt with after hearing the defendants defence.
Furthermore the amount stated to have been advanced was also stated to be inclusive of VAT. If the respondent indeed made any payments, it must have taken the benefit of the VAT paid out in its returns to Uganda Revenue Authority in the month following the one when payments were made. If indeed the benefit was taken by the respondent, it cannot six of the court to recover the same amount simply because it appears in the total amount shown in the APG. Counsel contended that the VAT issue needed to be investigated by the court.
on 29 July 2011, the sum of Uganda shillings 4,700,000,000/= was advanced by the respondent not to NH -MKP Builders Ltd, the contractor in the main contract but to MKP Builders SDN BHD (Uganda) Ltd. On 5 October 2011 US$1,755,000 was again advanced by the respondent not to the contractor in the main contract NH-MKP Builders Ltd, but to MKP Builders SDN BHD (U) Ltd. It is not clear whether these two recipients are one and the same company. However the existence of several companies with similar names shows MKP Builders SDN BHD Uganda Limited, MKP Builders Uganda Limited, MKP Builders SDN BHD Ltd and NH-MKP Builders Ltd. What is clear is that none of the recipients of the advance payments was NH-MKP Builders Ltd as required in the main contract or MKP Builders SDN BHD as required under the subcontract. There is also no evidence that NH – MKP Builders Ltd advanced any money to any person as it is a requirement under clause 2 of the subcontract. The parties to whom advance payments were made are not the parties to the main or subcontract. The respondent did not have the contract with any of those parties mentioned. The respondent advanced monies to persons not capable of being described either in the main contract or the subcontract under clause 2 thereof.
This suspicious of relationship between the respondent and the company is described coupled with unexplained payments and changes in the contract values show fraudulent connivance on the part of the respondent and the companies involved.
Relationship and fraudulent connivance
Counsel submitted that the applicant provided evidence of the relationship between the respondent and other parties which has not been denied. The respondent is the majority shareholder in NH - MKP Builders Ltd with MKP Builders SDN BHD being the minority shareholder. NH-MKP Builders was awarded and $18.1 million contract which the parties never intended to be performed. The a few days after the contract was signed, NH – MKP Builders Ltd subcontracted the minority shareholder MKP Builders SDN BHD on a $17.9 million contract which is represented as being not breached. The principal signatories that the same for both entities in the main contract and similar to the subcontract. The difference between the contract sum in the main contract and the subcontract is not explained and the applicant intends to present at the trial evidence that this amount was given out in unlawful and fraudulent commissions. The respondent caused in connivance with MKP Builders SDN BHD an advance payment guarantee to be procured from an innocent third party when it was in possession of the Leads APG which will still valid and could be enforced.
After realising that there could be problems with the project, the respondent decided on 8 November 2012 to conduct a thorough search by the Uganda Registration Services Bureau on its partner MKP Builders SDN BHD. Thereafter, the respondent worked closely with MKP Builders SDN BHD to procure an advance payment guarantee from an innocent third party, the applicant as evidenced by e-mail communications attached. The e-mail evidence was that on 11 December 2012, the respondents acting CEO wrote to the Chief Financial Officer instructed payment of amounts due in the 4th certificate amounting to US$1,114,826. The very next day instead of making this payment, the respondent now acting through its Company Secretary wrote to the applicant inquiring about the reinsurers. As soon as the respondent was satisfied that the Lion APG could be called upon if necessary, it refused to make the payment to MKP Builders SDN BHD. Instead the respondent issued a demand on the applicant for the amount of US$3,627,762. When requested for information, the respondents opted to bring a suit in order to hide the issues around the fraudulent connivance between itself, NH-MKP Builders Ltd, MKP Builders SDN BHD, MKP Builders SDN BHD (Uganda) Ltd and MKP Builders SDN BHD Ltd (U) Ltd.
The respondent frustrated the underlying contract by refusing and or failing to pay an amount it had approved in certificate number 4. Although this amount was approved for payment on December 11, 2012, it was never paid. This was because the respondent either on its own or in collaboration with the contractor you there was an APG to call on. In total counsel submitted that several triable issues arise which also disclosed genuine/possible defences made in good faith and leave the applicant to file the defence should be granted unconditionally.
As far as authorities are concerned, counsel for the applicant relied on the case of Niko Insurance (U) Ltd versus Attorney General Miscellaneous Application Number 389 of 2012, where the court granted conditional leave on similar facts. He submitted that the lease was conditional because unlike the present case, Niko insurance had accepted liability and had started processing payments. Secondly there was a belated allegation of fraud after processing of payment had begun. In the applicants case however, a request for information to ascertain the basis of the demand to pay was made immediately upon receipt of the demand and has never been responded to.
In the case of Miter Investments Ltd versus East African Portland Cement Company Ltd Miscellaneous Application Number 534 of 2012, conditional leave was granted on the ground that the applicant had issued dishonoured cheques. In this case the court observed that it was the principal of procedural justice that all parties should as far as possible be heard according to the principles of fair trial enshrined in article 28 (1), 44 (c) and 126 (2) (e) of the Constitution of the Republic of Uganda. In the case of MM Kaye engineering Ltd versus Mantrust (U) Ltd Miscellaneous Application Number 796 of 2012, the condition to deposit cash of Uganda shillings 50,000,000/= was set aside on an application for review and substituted with an order for alternative security.
Lastly counsel referred to the case of Safa Ltd versus Banque Du Caire 2 Lloyds Report 600 where Waller LJ held that if a bank can establish the claim with the real prospect of success, that the demand was fraudulent even if it had no clear evidence of fraud at the time of the demand, it may also be unjust to enter summary judgement against the bank because the bank has a reasonable prospect of succeeding in a defence. Though the "real prospect" is based on the English rules, under order 36 of the Ugandan Civil Procedure Rules, applications are guided by the discretion of the court. Finally counsel reiterated prayers that the court grants leave the applicant to file leave to appear and defend the suit on the merits unconditionally with costs to abide the outcome of the main suit.
In reply the respondent's submissions as summarised below:
The Respondents summary suit is for recovery of US$3,627,762 and costs of the suit arising from an irrevocable advance payment guarantee in favour of the respondent payable on demand. On 4 February 2013 the respondent demanded for payment of the basis of the APG and the applicant did not pay hence the filing of the suit. It is an admitted fact that on 16 November 2012, the applicant executed an APG in favour of the respondent agreeing to pay a sum not exceeding 3,627,762 to the respondent on first demand and without any objection. The APG was procured by Messieurs MKP Builders SDN BHD in favour of the respondent. The dispute concerns payment of US$3,627,762 by the applicant to the respondent. Secondly that the money is not due on account of alleged fraud by the respondent.
Both parties relied on the affidavit evidence. The respondent’s evidence is that MKP procured the APG in its favour from the applicant. Pursuant to the APG, the applicant guaranteed as a primary obligated to pay a sum of US$3,607,762 to the respondent on first demand without any objection whatsoever from making any claim against MKP first.
After stating the law applicable to applications for leave to defend the suit under order 36 in the case of Begumisa George versus East African Development Bank miscellaneous application number 451 of 2010 counsel submitted that the respondent’s suit was appropriately brought under order 36. The sums in the APG are liquidated and the applicant has no good defence to the respondents claim.
Counsel submitted that the matter should turn on the wording of the APG bond number B1/BON/POL/0007481 which provides inter alia that the applicant agrees to:
"unconditionally and irrevocably to guarantee as primary obligated and not mere surety to pay on first demand and without any objection whatsoever a sum of US$3,627,762 to the respondent on demand. We further agree that no change or addition to all other modification of the terms of the contract or works to be performed there under or any of the contract documents which may be between employer and the contractor shall in any way release us from any liability under the guarantee and we waive notice of any such change, addition or modification."
The APG is a demand guarantee executed in favour of the respondent. The witnesses cannot feign to have relied on representations of MKP as the understood the intricacies on demand guarantees.
Counsel submitted that the law on demand guarantees is that it should be given effect according to their terms. Counsel relied on the case of Gold Coast Ltd versus Caja De Ahorros Del Mediterrano and others  1 All ER at page 142. A bank which gives a performance guarantee must honour the guarantee according to its terms. Counsel submitted that the applicant agreed unconditionally, irrevocably to pay the sums claimed the respondent on first demand. Summary judgement was entered in the case of Gold Coast Ltd (supra) based on the terms of the guarantee. The court emphasised the undertaking which was expressed to be irrevocable and unconditional to make payment on first demand. It was emphasised that the obligation expressed to be an irrevocable and unconditional undertaking meant that the bank will pay on a first written demand. Consequently counsel submitted that liability arises on demand.
In the law of contracts, volume 2 under the heading of Performance Guarantees page 1529 the author's right that the unusual fixtures of civil cases as being that the bank celebrity arises only a demand by the creditor notwithstanding that it may appear on the evidence that the principal is not in any way in default or that the creditor himself is in default under the principal contract. Clear evidence is needed to prove that the beneficiaries demand his fraudulent to the knowledge of the bank if the bank is to be restrained from paying under such a guarantee of bond. Performance guarantees are virtually promissory notes payable on demand.
Halsbury's laws of England fourth edition at page 58 provides that because a guarantee is an access the contract, the principal obligation will not merge in the guarantee even if the principal obligation is merely a simple contract and the guarantee is made by deed. Counsel further submitted that demand guarantees like the APG in question are autonomous; the obligations of the guarantors are not affected by disputes pertaining to the underlying contract. According to Paget’s law of banking 12th edition 2002 at page 730 the principle that underlies demand guarantees is that each contract is autonomous. The obligations of the guarantor are not affected by disputes underlying the contract between the beneficiary and the principal.
In summary the principles that govern demand guarantees are that the guarantee is autonomous and obligations set out in ancillary agreements shall never merge. Secondly in construing demand guarantees, effect is given on the terms of the guarantee. Thirdly liability on demand guarantees arises on mere demand by the creditor. Consequently the court is not enjoined to investigate beyond the APG. The only exception is fraud that must be attributed to the creditor and must be on the guarantee of bond sought to be enforced. This is not the case in the applicants matter. Simply alleging fraud for purposes of opted leave to defend the suit will not suffice.
Fraud on the basis of alleged absence of advance payment
Counsel reiterated the applicant’s submissions on the basis of there being no underlying advances made against the APG and therefore making the demand fraudulent. The respondents counsel submitted that in the case of National Social Security Fund and another versus Alcon International Ltd Supreme Court civil appeal number 15 of 2009 at page 33 thereof fraud was defined as unintentional perversion of truth for purposes of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. Fraud requires a wilful act and is therefore distinguishable from a negligent misrepresentation. A representation is fraudulent not only when the person making it knows it to be false but also when he ought to have or must be taken to have known that it was false.
Counsel submitted that the key consideration is whether the applicant is making a bona fide defence on the premises of fraud against the respondent. The respondent made a direct advance payment to MKP as envisaged in the payment documentation marked D2 in the affidavit in response. NH - MKP was a joint-venture comprised of the respondent and MKP. Consequently the argument that no advance payment was made after the execution is unfounded. Secondly the APG is an autonomous contract whose obligations never fuse with the obligations in the underlying contract. The APG clearly shows that it is related to advance payments set out the main contract for the construction of 312 condominium apartments split into 12 blocks each of 4 floors. It provided inter alia: "In accordance with the provisions of the contract refers above, in relation to advance payments of the above mentioned contract…"
The contract referred to provided for a single advance payment to MKP. The respondent fully knew when and how the advance payments were to be made. The advance payment could not have been made after execution of the APG as the contract referred to in clause 2 in the APG by the applicant stated that the advance payment had been against the first advance payment guarantee with Leads Insurance which was duly acknowledged in the applicant’s affidavit. The defences are an afterthought. This is because until the respondent made a demand on the APG, the applicant did not raise this issue. Accordingly, fraud cannot be founded on the absence of the advance payment on the APG as construed by the applicant. The argument that the respondent was fraudulent because no advance payment on the APG had been made is not a bona fide defence because of the autonomy of the APG and the fact that the APG referred to a contract which clearly indicated that the advance payment had to be made against an advance payment guarantee, the first having been issued a Leads Insurance Ltd.
On a question of the amount claimed
The Respondents Counsel submitted that the applicant’s position is that the respondent needs to compute it first in light of the works done. This is a sham. The APG put the ceiling on sums to be paid by the applicant to the respondent on demand. It was payment of an amount not exceeding US$3,627,762. The respondent cannot be faulted for claiming what it is entitled to under the APG.
Concerning VAT, the respondents counsel contends that this argument is misconceived. This is because firstly it was never pleaded anywhere in the applicants affidavit and that it is evidence from the bar. Secondly the APG does not mention VAT. This sum in the APG is a liquidated sum and not subject to computation. The argument is therefore misconceived because of the autonomy of the APG and the court should be disregarded.
Alleged advancement of monies to non-parties
The argument that money is where advanced to non-parties is untenable. The legal doctrine is that obligations of the respondent and third parties should not be fused with the obligation of the applicant in the APG. If this was permitted, the whole purpose of demand guarantees would be lost. Nonetheless, MKP is clearly not aggrieved on account of some non-payment of it dues. The APG was executed at the request of the company described as MKP builders SND BHD Ltd. The complaint here is that neither NH - MKP nor MKP builders SND BHD received advance payment from the respondent. Respondents counsel's submission is that this is not a bona fide defence. The payment certificates sets out the sums payable as advance payments. Payments were made to the same company MKP according to the respondent affidavit D2. In evidence is a letter dated 19th of November 2012 addressed to the applicant indicating a request from MKP to the applicant to release the bond in issue in return for a sum of Uganda shillings 187,000,000/= on the respondent put in funds. The additional complaint that the applicant was not paid this money. It meant that MKP was put in funds by the respondent and there is only one MKP. There is no suspicious relationship as contended by the applicant and the relationship between MKP and the respondent was a business relationship.
Relationships and fraudulent connivance:
The Applicant attacked the Respondent’s dealings with MKP on the ground that there was fraudulent connivance between the two. The argument is based on the main contract between the respondent and NH - MKP, a subcontract between the respondent and MKP, the initial advance payment guarantee from Leads Insurance Ltd, the demand with the APG and the difference in the sums between the subcontract and the head contract.
RAFF – A is the head contract between the respondent and NH - MKP for construction of the apartments. NH – MKP in turn entered into a contract with MKP which is RAFF – B. Because this was a business deal, the subcontract price could never have been the same as the contract price. The dealings were at arm’s length and there is no indication of fraud whatsoever. It was not even envisaged at this stage that the respondent would at one point ever deal with the applicant. The demand for payment on the APG was made at the right time. Correspondences attached as AFF1 – D2 emphasise that the business relationship between the respondent, MKP and NH - MKP was not a sham. The contention that the respondent could not recall the guarantee after the CEOs e-mail is extremely presumptuous. To reduce the respondent’s business dealings with MKP as fraudulent is a desperate attempt to avoid payment under the APG.
On the contention that the respondent executed the APG when it had a valid advance payment guarantee in its favour by Leads Insurance Ltd. Counsel submitted that by the time the APG was executed, the Leeds bond was due to expire according to RAFF – E and E2. The e-mails were requesting MKP to renew the guarantee. It is therefore untenable to argue that the APG was fraudulently taken out to take advantage of the applicant. In any case if the applicant is aggrieved, it is or is at liberty to take out legal action against MKP but not to avoid its obligations under the APG.
I have duly considered the voluminous pleadings of the parties coupled with the affidavit evidence, the written submissions of counsels and authorities cited.
There is no controversy about the principles to be applied by the court under order 36 of the Civil Procedure Rules in considering an application for leave to defend a summary suit. I will not repeat the principles as summarised in the written submissions of counsel. What I need to emphasise is that all the applicant needs to establish is that there are triable issues which merit judicial consideration before a final decision can be made on the plaintiffs claim. I also agree that the court does not need to determine the merits of the triable issues. Just like in applications for leave to appeal to the Court of Appeal, what the applicant needs is to establish is that there are arguable points to be presented and a plausible defence to the summary suit. Furthermore, in applications for temporary injunctions, similar considerations are applied in determining whether the plaintiff/applicant has a prima facie case with a probability of success or an arguable case or plausible defence if it is a defendant. In such instances, controversial questions of fact need not be finally determined on the basis of affidavit evidence without subjecting the deponents of the affidavits to cross examination. In other words the final determination of those points of fact in controversy ought to await the trial of the suit on merits. In applications for leave to defend the suit however, the consideration is whether the applicant should be granted leave to appear and defend the suit. The underlying policy consideration for grant of leave is that there are certain transactions which do not require a business person or a claimant to go through the ordinary trial procedure before realising a judgement. This is based on the broad premise that the defendant has no defence to the suit.
Obviously it is easy to assert that the defendant has no defence to the suit where there is a bill of exchange such as a cheque issued in favour of the plaintiff. It is however more protracted where the transaction involves contractual provisions and actions taken under them. Where a claim is based on contract as enabled by order 36 rule 2 (a) (ii) of the Civil Procedure Rules which concerns a suit on a bond or contract written for payment of a liquidated amount of money, as is the plaintiff's case, the court has to read the bond or contract and establish any defence within the considerations in the bond or contract.
The starting point is therefore to read the performance bond which forms the basis of the plaintiffs/respondents summary suit under which the applicant/defendant in the summary suit seeks leave to defend the suit. Prior to reading the bond, it is necessary to examine the claim in the summary suit itself. The plaintiffs claim in the summary suit is for recovery of a sum of US$3,627,762. It is pleaded that on 15 July 2011 the plaintiff executed a contract with Messieurs NH – MKP Builders Ltd for construction of 312 condominium apartments split into 12 blocks each with 4 floors each in Naalya in Kampala district at a contract price of US$80,138,812. Pursuant to clause 5 of the contract, the shares MKP Builders SDN BHD was nominated a subcontractor. Under the contract between the Respondent/Plaintiff and NH-MKP Builders Ltd, the respondent undertook to pay 20% of the contract price to the subcontract as advance payment against the receipt of an advance payment guarantee (APG). The contract was permitted to subcontract some of the work to a nominated subcontractor that is MKP SDN BHD Ltd. It was agreed between the plaintiff and NH – MKP Ltd that shares MKP SDN BHD Ltd should take out in favour of the plaintiff and advance payment guarantee before receipt of advance payments by the Plaintiff/Respondent. A subcontract was executed between NH– MKP Builders Ltd and MKP Builders SDN BHD Ltd for construction of the condominium apartments. Pursuant to clause 3 of the subcontract Messieurs MKP Builders SDN BHD agreed to provide the plaintiff/respondent with an advance payment guarantee from Messieurs Leads Insurance Ltd against the receipt of the advance payment. On 29 July 2011 the monies were duly transferred to MKP Builders SDN BHD Ltd. The advance payment guarantee issued by Messieurs Leads Insurance Company was due to expire on 22 December 2012 before the plaintiff received for repayment of the APG made to MKP Builders SDN BHD Ltd. It is averred that Messieurs MKP Builders SDN BHD Ltd were letter requested by e-mail dated 2 November 2012 to renew their APG. On 16 November 2012 in response to the plaintiff/respondent's request and to avoid termination of the subcontract, Messieurs MKP Builders SDN BHD took out another APG under bond number B1/BON/POL/0007481 from the applicant/defendant. Under the guarantee the defendant/applicant agreed with the plaintiff to unconditionally and irrevocably guarantee as primary obligator and not mere surety to pay on first demand and without any objection whatsoever a sum of US$3,627,762 to the plaintiff/respondent on demand. The guarantee was valid and in full effect from the date of the APG under the said contract until the plaintiff received for repayment of the monies advanced to MKP Builders SDN BHD Ltd but in any event not later than 22 December 2013.
The plaintiff/respondent avers in the summary suit that the guarantee was executed in consideration of the plaintiff/respondents to this application not terminating or suing on the initial APG issued by Leads Insurance Ltd that was about to expire. On 4 February 2013, the plaintiff recalled the guarantee and demanded payment of the monies in the APG guaranteed from the defendant. On 11th of February 2013, the defendant/applicant to this application responded effectively denying liability and advising the plaintiff/respondent to have recourse against MKP Builders SDN BHD Ltd. Consequently the applicant/defendant in the summary suit despite numerous demands failed or refused to honour its unconditional and irrevocable APG. It is further averred that the applicant/defendant executed a demand guarantee and it is duty bound to unconditionally pay the sums under the guarantee on demand.
The two contracts in issue are attached to the affidavit in reply of Jane Bitek Langoya, the Company Secretary of the respondent to this application and the plaintiff in the main suit. A copy of the main contract is annexure "A" to the affidavit of the said deponent and is between National Housing and Construction Company Ltd and NH – MKP Builders Ltd. Clause 2 of the contract provides as follows:
"The Employer hereby undertakes to pay the Contractor 20% of the contract sum as advance payment against receipt of an advance payment guarantee from a Bank or Insurance Company that is acceptable to the Employer, and in the amount and currency equal to the advance payment."
The contract was executed on 15 July 2011 under clause 10 thereof provided that the contract shall be deemed to have commenced on 22 July 2011 and shall be for a period of 18 months. On 22 July 2011 NH – MKP Builders Ltd entered into a subcontract agreement with MKP Builders SDN BHD wherein the subcontractor MKP Builders SDN BHD agreed to construct the Naalya Pride Project in accordance with the terms and conditions of the contract between National Housing and Construction Company Ltd and NH – MKP builders Ltd. The contract is annexure "B" to the affidavit of the Company Secretary of the respondent company. Clause 2 of the contract is a reproduction of clause 2 of the main contract referred to above and for ease of reference is quoted as follows:
"The Contractor hereby undertakes to pay the Subcontractor 20% of the contract sum as advance payment against receipt of an advance payment guarantee from a Bank or Insurance Company that is acceptable to the Contractor, and in the amount and currency equal to the advance payment."
Consequently it is only the parties which changed but the contract remained the same. An advance payment guarantee by Leads Insurance Ltd dated 27th of July 2011 and with the reference to the construction of 312 condominium apartments split into 12 blocks each 4 floor each. The first paragraph of the APG is revealing about the purpose of the APG and provides as follows:
"In accordance with the provision of the contract referenced above, in the relation to advance payments of the above-mentioned contract, MKP Builders SDN BHD Ltd of PO Box 9421 Kampala (hereinafter called "the contractor") shall deposit with the employer an insurance guarantee to guarantee its proper and faithful performance of the obligations imposed by the said clause of the contract, in the amount of US$3,627,762.
In the second paragraph Leads Insurance Ltd as instructed by the supplier, agreed to:
"unconditionally and irrevocably to guarantee as primary obligator and not as Surety merely, the payment to the employer on its first demand without whatsoever of objection on our part and without its first claim to the supplier, in the amount not exceeding US$3,627,762."
The last paragraph of the APG provided that the guarantee shall remain valid and in full effect from the date of the advance payment under the contract until the employer receives for repayment the same amount from the contractor but in any case not later than 27th of July 2012.
Annexure D1 to the affidavits of the Company Secretary of the respondent is a payment certificate issued on 20 July 2011 giving a total advance payment of US$3,627,762 advice to NH – MKP Builders Ltd. It indicated that the planned commencement date of the contract was 1st September 2011 and the planned completion date was 28 February 2013. Annexure D2 is a customer payments request form of the respondent company showing that US$1,775,000 was payable to the beneficiary MKP Builders SDN BHD Ltd (U) Ltd. According to paragraph 7 (iv) of the affidavits of the company secretary of the respondent, the said amount of money was advanced against an APG to the contractor. Subsequently when the APG was about to expire, MKP was advised that it was about to expire on 22 December 2012, MKP Builders SDN BHD took out another APG from the applicant. This was supposedly to avoid termination of the subcontract. The APG in issue is annexure "F" to the affidavit of the Corporation Secretary under bond number B1/BON/POL/0007481 from the applicant.
Annexure "F" is the advance payment guarantee of the applicant and addressed to the respondent company. It also concerns construction of 312 condominium apartments split into 12 blocks each with 4 floors. For ease of reference I shall quote the APG in full and it provides as follows:
"In accordance with the provisions of the contract referenced above, in relation to advance payments of the above-mentioned contract, MKP Builders SDN BHD Ltd of PO Box 9421, Kampala (hereinafter called "Contractor") shall deposit with the employer an insurance guarantee to guarantee is proper and faithful performance of the obligations imposed by the said clause of the contract, in the amount of US$3,627,762 (and figure in words)
We, the undersigned Lion Assurance Company Ltd of PO Box 7658, Kampala legally domiciled… (Hereinafter called "guarantor") as instructed by the Supplier, agree unconditionally and irrevocably to guarantee as primary obligator and not as Surety merely, the payment with the employer on its first demand without whatsoever of objection on our part and without its first claim to the supplier, in the amount not exceeding US$3,627,762 (amount in words).
We further agree that no change or addition to all other modification of the terms of the contract or of the works to be performed there under or of any of the contract documents which may be between the employer and the contractor shall in any way release us from any liability under this guarantee, and we here waive notice of any such change addition or modification."
This guarantee shall remain valid and in full force from the date of the advance payment under the contract until the employer receives full repayment of the same amount from the contractor and in any case not later than 26th of December 2013."
I have carefully considered the controversy as revealed by the pleadings, the documents attached which have been quoted above and the submissions of counsel. The first controversy relates to clause 2 of the main contract which provides that payments are to be made against an advance payment guarantee obtained by the subcontractor. The applicant’s argument is that no advance payment has been made after the issuance of its APG. Their argument is that the APG was to secure future advance payment to the contractor. The additional argument is that the applicant did not take over an existing APG. If the applicant had taken over an existing APG i.e. that of Leads Insurance Ltd, it would have done so by way of endorsement and not the issuance of a new APG. The respondent on the other hand argues that payments had been made to the contractor and the applicant was guaranteeing repayment to the respondent under the same clause of the contract i.e. clause 2 thereof. It is not disputed that the Leads Insurance APG guaranteed the same repayment under clause 2 of the contract. By an endorsement annexure "C2" attached to the affidavit in support of the notice of motion by Newton Jazire, Leads Insurance Ltd endorsed the APG it had issued to continue running from 27th of July 2012 of 27 December 2012. The original APG it had issued expired on 27 July 2012 according to annexure "C1".
The contention of the respondent is that the applicant is required upon first demand to pay up without any argument or objection. Secondly, the bank or insurance company is not required to inquire about the underlying contract between the respondent and the contractor. Payments were being guaranteed by the APG. The APG which is a form of a performance bond has got to be interpreted on its own terms. Both parties are in agreement that the exception to the general rule that payment is made upon demand is where the bank or insurance company is aware of fraud. The question raised by the applicant is whether the demand by the respondent is fraudulent. This is because it had not made any advance payment against the APG. A literal reading of clause 2 of the main contract which requires obtaining an APG by the subcontractor speaks for itself. It provides as follows:
The Contractor hereby undertakes to pay the Subcontractor 20% of the contract sum as advance payment against receipt of an advance payment guarantee from a Bank or Insurance Company that is acceptable to the Contractor, and in the amount and currency equal to the advance payment.
The Contractor referred to is NH- MKP Builders Limited and the subcontractor is MKP Builders SDN BHD of Malaysia. The contract sum is US$17,959,220. Clause 3 further provides that the APG shall be in favour of National Housing and Construction Company Ltd. The complexity is that the contractor undertook to pay the subcontractor MKP Builders SDN BHD of Malaysia. The contractor subsequently obtained an APG from Leads Insurance Ltd. That APG was for US$3,627,762. Did it represent 20% of the US$17.9 million? Furthermore the advance was supposed to be in the amount and currency equal to the advance payment. Newton Jazire the deponent in support of the application avers that the nomenclature of the APG is that it is issued prior to the advance payment. Aside from the complexity in parties, the applicant’s case is simply that there was no advance payment as envisaged by the contract.
It is my humble opinion that any previous advances against the APG issued by Leads Insurance Ltd cannot, strictly construed, and on a literal reading without further context, be interpreted to be the advance payment envisaged under the APG issued by the applicant. The applicant APG was issued on 16 November 2012 before expiry of the Leads Insurance Ltd APG. Subsequently, a demand was made on the applicant in early 2013. Resolution of the issues demands interpretation of the contracts. It requires determination finally. It cannot be said at this stage that the applicant has no arguable case.
I have carefully considered the first ground that no advance payment has been made against the APG issued by the applicant. Secondly, the assertion of the applicant, that a demand for payment in those circumstances would be fraudulent.
The few authorities I have read on performance bonds suggest that the bonds are issued prior to the matter been secured having been done. According to the Geraldine Mary Andrews and Richard Millet in the textbook on the Law of Guarantees second edition 1995 at page 444, the essential character of a performance bond is defined in the following words:
"The essential character of the performance bond is more akin to a promissory note than to a true guarantee. It is an undertaking to pay a specified sum to the beneficiary in the event of a breach of contract, rather than a promise to see to it that the contract will be performed. Similarly, the obligations of the bank or other financial institution which issues the performance bond are much more analogous to obligations arising under a letter of credit than to those arising under a guarantee."
Osborn's Concise Law Dictionary seventh edition at page 306 defines a performance bond as follows:
"A bond agreed with a creditworthy third-party, e.g. a bank, to ensure completion of contract works. It is common in construction projects. The bondholder undertakes to pay an employer a sum of money on default in completion of works by a contractor.”
There is an arguable point for the assertion that what was being guaranteed is an advance payment which was yet to be issued. This is not withstanding the argument that the advance payments had already been issued and the APG was extending an existing guarantee. That assertion requires trial not only about the practice but also the law. To conclude the point at this stage would be without sufficient material. It might be too risky to shut out the applicant at this stage of the proceedings. What is important is that it would be fraudulent to issue the demand without the occurrence of what is envisaged in the contract and the responded has not yet resisted this view. The assertion that the APG has to be issued prior to what is being guaranteed been performed is supported by judicial precedents. In the case of Edward Owen Engineering Ltd v Barclays Bank International Ltd  1 All ER 976, concerned a performance guarantee. The Libyan customers, before any contract was concluded, stipulated that there should be a performance guarantee. It was to be a condition precedent to their entering into any contract at all. On the other hand the obligation of the bank or insurance company is to pay without enquiring about what is going on between the buyer and seller. 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. He quoted the American Practice in the case of Sztejn v J Henry Schroder Banking Copn ((1941) 31 NY Supp 2d 631 at 633) that:
‘It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade. ... the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller.’
Of course the illustration shows that an unscrupulous seller may make a demand on the bank without supplying the goods. In such cases, the bank is not obliged to pay. In the respondents authority namely Gold Coast Ltd versus Caja de Ahorros del Mediterraneo and others  1 All ER 142, the buyers obligation to make each stage payments was conditional upon the simultaneous delivery of a prescribed refund guarantee from the defendant banks to the buyers bank in the amount of the payment. In that case therefore, a guarantee was issued prior to payments. It was a condition precedent. The same principle appears on the analogy of principles on letters of credit in the case of United City Merchants (Investments) Ltd and others v Royal Bank of Canada and others  2 All ER 720 judgment of House of Lords. Lord Diplock held at page 725 on the purpose the law:
“The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.
To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.
In other words the seller is assured by a guarantee before parting with possession of his goods. In the cases reviewed the performance bond is a condition precedent to the supply of goods. The implication is that the APG assures the respondent or the customer before he or she parts with anything to the person obliged to obtain the Advance Payment Guarantee. The applicant's argument as I understand it is that after the issuance of the APG, the respondent never supplied anything to MKP SDN BHD Ltd, the subcontractor. Of course there is another counterargument to the effect that the respondent is not a party to the subcontract. Moreover the APG was issued to the respondent and not to the contractor.
An additional view is that a guarantee can guarantee an existing obligation. In the respondents case it is argued that the APG was issued so that the contractor’s contract is not terminated. It was to guarantee repayment. However the interpretation is not based on the strict interpretation of clause 2 of the contract and may require more evidence. Evidence is required on how the APG of the applicant came to be executed in the circumstances and even before the expiry of the Leads Insurance Ltd APG. Furthermore, I need not dwell on the amount guaranteed and whether in fact money had been advanced as asserted by the respondents and the entire amount secured by the APG had in fact been advanced. What is material for the moment is whether the issuance of a demand against the APG was fraudulently made. In the circumstances therefore there is a bona fide triable issue which merit consideration by the court. Having come to the conclusion that there is a bona fide triable issue, there is no need to consider whether other triable issues arise as they can become the subject of the written statement of defence. It only means upon establishing the first triable issue that the respondent is not in the circumstances entitled to any summary judgement.
Last but not least on the above point, the precedents reviewed demonstrate one feature which is that at least one of the parties who requested for the issuance of a performance bond is normally privy to the underlying contract. Therefore before taking leave of the matter, the contractor as noted above is NH – MKP Builders Ltd and the subcontractor MKP Builders SDN BHD Ltd. The advance payment is to be made by the Contractor namely NH –MKP Builders ltd to the subcontractor MKP Builders SDN BHD Ltd. Much as MKP Builders SDN BHD was contracted to carry out the main contract under the same terms, there is technically no contractual relationship between the Respondent and MKP Builders SDN BHD Ltd other than the contractual clause 5 of the main contract which refers to MKP Builders SDN BHD of Malaysia as the nominated subcontractor. The executed subcontract however is between the NH – MKP Builders and MKP Builders SDN BHD Ltd. The respondent was supposed to Advance NH – MKP Builders Ltd 20% of the contract price of US$ 18,138,812 under clause 2 thereof while NH – MKP Builders Ltd was required to advance 20% of US$ 17,219,220 by clause 2 of the subcontract to MKP Builders SDN BHD ltd. The APG procured from is a bond to pay the Employer. However the term “Employer” is not defined by the subcontract dated 22nd July 2011 which contract is between the contractor and subcontract. The Employer is only mentioned in the main contract.
My conclusion is that the applicant's fate should not in the circumstances be decided without a hearing. Secondly under the same circumstances the applicant is entitled to unconditional leave to appear and defend the action. This would obviously give the respondent a chance to advance the strict interpretation rule that the underlying relationships should not be taken into account in construing the APG and to prove that there is no fraud whatsoever involved in it’s the demand. On the basis of the first point alone, the applicant’s application succeeds. The applicant will file its written statement of defence within 14 days from the date of this order.
Costs of this application will abide the outcome of the main suit.
Ruling delivered on the 16th of September 2013
Christopher Madrama Izama
Judgment/Ruling delivered in the presence of:
Earnest Kalibala for the Applicant
Andrew Bwengye Ankunda holding brief for Isaac Walukagga Counsel for the respondent
Respondent represented by Emma Wangota respondent’s legal officer.
Christopher Madrama Izama
16th of September 2013
Andrew Bwengye seeks leave to apply for leave to appeal the ruling to the Court of Appeal.
The respondent should make a formal application for leave within 14 days from the date of this ruling for leave to appeal the ruling to the Court of Appeal.
Christopher Madrama Izama
16th of September 2013