THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMAPALA
MISC. APPLICATION No. 684 OF 2013
[ARISING OUT OF CIVIL SUIT NO. 427 OF 2013]
UAP INSURANCE UGANDA LIMITED ::::::::::::::::::::::::::::::::::: APPLICANT
NATIONAL HOUSING CONSTRUCTION COMPANY LTD ::::::::::::::: RESPONDENT
BEFORE HON. MR. JUTSTICE B. KAINAMURA
The applicant, UAP Insurance Uganda Ltd brought this application under the provisions of O 36 r 4 CPR seeking for orders that it be granted unconditional leave to appear and defend HCCS No 427 of 2013 now pending before this court and for costs of this application. The application was supported by the affidavit of Paul Mukame the Operations Manager of the applicant. The respondent filed an affidavit to oppose the application deponed to by Judith Katabazi an Acting Company Secretary of the respondent.
In the summary suit, the respondent claims recovery of a sum of USD 1,813,881 (United States Dollars One Million Eight Hundred Thirteen Thousand, Eight Hundred Eighty One), on the basis of a Performance Bond issued by the applicant in favour of the respondent payable upon demand and without the defendant needing to prove or show any grounds or reasons for its demand.
Briefly the facts upon which Civil Suit No 427 of 2013 was based were that on 15th July 2011 the respondent entered into a Contract with M/s NH – MKP Builders Ltd (NH – MKP) to construct condominium apartments in Naalya at a contract price of USD 18,138,812. On 22nd July 2011M/s NH – MKP Builders Ltd entered a sub-contract for the construction the aforementioned apartments with M/S MKP Builders SDN BHD (MKP) the nominated sub-contractor in the Main Contract. Persuat to Clause 2 of the Main Contract M/s NH – MKP Builders Ltd was required to obtain a Performance Bond in favour of the respondent as security for compliance with its obligations in the contract. On 1th November 2011 M/s NH – MKP Builders Ltd executed a performance bond No. 101/132/1/000685/2011 with the applicant in favour of the respondent wherein it was agreed that the applicant shall pay a sum USD 1,813,881 to the respondent upon demand without the respondent needing to prove or show grounds or reasons for its demand for the sum specified.
The Performance Bond was tenable up to 17th April 2013. On 4th February 2013, the respondent made a demand on the applicant and after a series of correspondence, on 24th April 2013, the applicant communicates to the respondent that it was not liable on the Performance Bond. The respondent then filed HCCS No.427 of 2013 by Summary Procedure for recovery of the sums secured by the Performance Bond. The applicant now brings this application for unconditional leave to defend the suit.
In his affidavit in support of the application, Mr. Paul Muhame Operations Manager of the applicant averred that at the time the applicant issued the Performance Bond, it was aware/knew that M/s NH – NKP was the Company entrusted with the construction of the condominium flats at Naalya and it was prepared to honour its obligations in event M/s NH – MKP failed to perform the Construction. He goes on to state that when on 4th February 2013 they received a letter from the respondent that NH – MKP had failed to implement the construction contract, they carried out an investigation which revealed among other things that NH – MKP is a Joint Venture Company between the respondent and M/s MKP Builders SDN BHD having been incorporated as such on 7th July 2011, that a week after incorporation of NH – MKP i.e. on 15th July 2011, a contract was entered into between the respondent and NH – MKP for the construction of the condominium flats at Naalya, that a week later i.e. 22nd July 2011 NH – MKP the main contractor sub contracted the contract for the condominium flats to MKP who is the other shareholder in NH – MKP, that the said sub constructor MKP assumed all the responsibilities and liabilities of NH – MKP under the Main Contract for the construction of the condominium flats, that the investigations have further revealed that on 4th February 2013 when the respondent called upon the Performance Bond they also called upon an Advice Payment Guarantee issued by M/s Lions Assurance Company Ltd on the grounds that MKP had failed to implement the construction contract, that this was premised on the advance payment paid under the Sub-Contract a clear indication that the respondent was aware that it was MKP which was the one constructing the condominiums which pointed to a fraudulent claim being made by the respondent on the applicant since the former knew all along that it was MKP executing the construction and that a failure by MKP to implement the building contract does not give rise to a claim against the applicant to come good on the Performance Guarantee.
In the affidavit in reply/opposition Judith Katabazi the Company Secretary of the respondent averred that the Performance Bond in issue indicated that the applicant shall pay the respondent a sum of USD 1,813,881 on demand without the respondent providing any reasons for the demand, that NH – MKP defaulted on the agreement and as a result the respondent made a demand on the Performance Bond, that the applicant did not contest the demand but sought more information to enable it process the claim, that the applicant has to date refused to honour the respondent’s demand for payment under the Performance Bond, that the applicant’s application for grant of leave to defend does not raise triable issues, that the Head Contract was in possession of the applicant when it issued the Performance Bond and the said Head Contract clearly indicated MKP as the nominated sub-contractor, that the discoveries of the applicant set out in paragraph 9 of the affidavit in support relate to underlying transactions and not the Performance Bond, that the allegations of fraud are not supported by the facts and that the applicant is assumed to have carried out due diligence before it issued the Performance Bond.
At the hearing of the application the applicant was represented by Mr. B. Tumusinguze of M/s Sebalu & Lule Advocates and Legal Consultants while the respondent was represented by Mr. I WaluKanga of MMAKS Advocates. Both Counsel filed written submissions.
In brief Counsel for the applicant’s submissions were that the applicant’s contention is that the party that should have applied for the Performance Bond should have been MKP and not NH – MKP since the Performance Bond could only be issued under the Sub-Contract and not the Head Contract. Counsel urged that the above contention is premised on that facts that:- the performance bond was issued on the 4th day of November 2011when the Head Contract was no longer in force, the Sub-Contract also provided for a Performance Security so it was MKP and not NH – MKP to provided it, the Sub-Contract provided that the Sub Contractor was to assume all the responsibilities and liabilities of the Contractor, the contract had been substantially sub-contracted by over 98% and that it was MKP and not NH – MKP that was paid the advance payment as per contract.
Counsel further submitted that it was the contention of the applicant that the very basis upon which the Performance Bond was obtained by NH – MKP was wrong and the respondent now claiming under the bond is clothed with actual knowledge of who was supposed to provide the Performance Bond because it was a signatory to the Sub-Contract.
Counsel urged that the applicant issued the Performance Bond on the understanding that NH – MKP would undertake the performance of the Contract but that even at the time the bond was issued the Contract had already been Sub-Contracted.
Counsel further urged that the claim under the bond is riddled with fraud since the respondent at the time it made the demand on the bond knew that the party who was bound to issue the bond was MKP and not NH – NKP as it was MKP which was doing the construction and which had failed to carry out the construction. Counsel urged that whereas it is a general rule that performance bounds are independent instruments from the contracts that give rise to them, fraud is an exception to the general rule. He relied on Owen Engineering Vs Barclays Interration  Q B 159 and Uganda Commercial Bank Vs Mukome Agencies  HCB 22
Counsel further urged that the Performance Bond was procured by a party that was under no legal obligation to provide one.
In conclusion, Counsel submitted that at this stage the applicant only needs to show triable issues to succeed (see George Begumiss Vs East African Development Bank Misc. Application No 451 of 2010 and Bitasase and Another Vs Mugambe HCCS 470 of 2012)
Counsel pointed out the triable issues as:-
Whether the Performance Bond was issued under the Head Contract or under the Sub-Contract.
Whether the construction and subsequent failure to implement the project was by NH-MKP or MKP.
Which of the two Companies MKP or NH – MKP was dully bound/obliged to issue the Performance Bond.
Whether the applicant would be liable under the Performance Bond provided by the NH – MKP when the Sub – Contract provided that it was MKP to provide the Bond.
Whether the demand/claim of the Respondent is vitiated by fraud.
Counsel concluded by submitting that as the application raises genuine triable issues, it should be allowed and the applicant granted unconditional leave to appear and defend the suit.
In reply Learned Counsel for the respondent disagreed with the applicant’s contention that NH – MKP was the wrong party to the Performance Bond. Counsel pointed to the wording in the Performance Bond in particular the preamble and the wording in the Head Contract in particular Cluase 2, 3 and 5. Counsel further reiterated that Performance Guarantees are independent of underlying contracts. Counsel quoted from Paget’s Law of Banking (12th edition 2003) at page 730 which says:-
“The principal that underlies demand guarantee is that each contract is autonomous. In particular, the obligations of the guarantor are not affected by the disputes under the underlying contract between the beneficiary and the principal. If the beneficiary makes an honest demand, it matters not that between himself and the principal he is entitled to payment. The guarantor must honour the demand….”
Counsel urged that the Performance Bond was executed in line with the Head Contract, which Head Contract indicated MKP as the nominated sub-contractor. Accordingly the Sub-Contractor was at all times envisaged under the Head Contract and as such the Sub-Contract did not relieve NH - MKP of its obligations to the respondent under the Head Contract.
Leaned Counsel for the respondent also disagreed with contention raised by Learned Counsel for the applicant that at the time the Performance Bond was issued there was a Sub-Contract and as such the Head Contract was no longer in force as it had been overtaken by the Sub-Contract. Counsel for the respondent quoting from Black’s Law Dictionary 9th Edition at pg 373 which defines a Sub-Contract as:-
“A secondary contract made by a party to a primary contract or part of it”
reasoned, quite rightly in my view, that the primary contract was between NH – MKP and the respondent whereas the Sub- Contract was between NH –MKP and MKP and such the two contracts were district and the Sub – Contract could not be said to bring an end to the Head-Contract.
While agreeing that fraud is the only exception to the principal of documentary credit being autonomous, Counsel for the respondent urged that the fraud must speak to the contents of the documents themselves and must be attributed to the beneficiary of the credits. Counsel urged that the fact that the Performance Bond was provided by NH – MKP while the construction was to be carried out by MKP was not fraud as alleged by the applicant. Counsel further urged that for the application to succeed, the applicant must prove actual fraud and that there is no fraud in executing sub-contracts in construction agreements. Counsel concluded by urging that for the application to succeed, the applicant has to prove a good defence to the demand and show bonafide triable issues. A mere allegation of fraud is not sufficient to afford the applicant leave to appear and defend the suit. Counsel therefore invited court to disregard the applicant’s submissions, dismiss the application and enter a Decree in favour of the respondent.
In response to the Respondent’s submission, Learned Counsel for the applicant reiterated his earlier submission that at the time the applicant executed the Performance Bond, NH – MKP had already substantially sub-contracted the contract. The Head Contract had been overtaken by events and subsumed in the Sub-Contract which also provided for MKP to issue a Performance Guarantee and all the responsibilities and liabilities that NH – MKP had under the Head Contract had now been taken over by MKP. Accordingly Counsel urged, the Performance Bond that was procured by NH – MKP had no legal bisis/foundation. Counsel further urged that even in as far as the sub-contract was envisaged under the Head Contract, the effect of the Sub-Contract was that it was not partial but complete since there was no residual work for NH – MKP to do under the construction contract and it is therefore not true that the Sub-Contract did not relieve NH – MKP of its obligations under the Head Contract.
On the question of fraud, Counsel urged that fraud is demonstrated by the respondent in presenting a demand on the Performance Bond well knowing it had no legal basis, since it was all along aware that the construction contract had been Sub-Contracted and knew who was performing the construction contract. Counsel concluded by stating that NH – MKP was only bound to issue a Performance Guarantee in the period before 22nd July 2011since after that date the contract was fully given to another party. Counsel called upon court to grant the appellant unconditional leave to appear and defend.
I have given due consideration to the application and reviewed the supporting affidavits and submissions by Counsel. The principles to be applied by Court under O 36 r 4 CPR in considering on application for leave to defend a Summary Suit are now well settled. These principles have been conversed in the submissions by both Counsel. What needs to be determined by Court is whether there are triable issues which need judicial consideration before Court makes its decision. At this stage court does not have to determine the merits of the triable issues. (see George Begumisa Vs East African Development Bank) (supra)
As borne out in the affidavits and submissions on record, the triable issues are the status and enforceability of the Performance Guarantee issued under the Head Contract viewed alongside the provisions of and as impacted by the Sub-Contract. Of particular relevance is whether the demand on the Performance Bond is vitiated by fraud.
It was the contention of the applicant that the party that should have applied for the Performance Bond should have been MKP and not NH – MKP. According to the applicant at the time the Performing Band was issued, the Head Contract was no longer in force ostensibly because most of the work and obligations under the Head Contract had been sub-contracted under the Sub-Contract. The applicant further points to the fact that the advance payment had been paid to MKP and not NH – MKP and that the Head Contract which required NH – MKP to provide the guarantee had been overtaken by events and subsumed in the Sub-Contract which on its own required MKP to issue a Performance Bond to the contractor NH – MKP. The respondent disagreed with the above contention and submitted quite rightly in my view, that the wording of both the Performance Bond and the Head Contract clearly attest to the fact that NH – MKP the contractor was under obligation to take out the Performance Bond and that the Contractor shall sub contract the Contract to a Nominated Subcontractor who is MKP.
I will first deal with the contention by Learned Counsel for the applicant that since NH – MKP had substantially sub contracted the building of the apartments to MKP then the Head Contract that required NH – MKP to provide the Guarantee had been overtaken by events and subsumed in the sub-contract, and that in fact the Head Contract was no longer in force. Respectfully I disagree.
One needs to look at the nature and character of NH – MKP Builders Limited (NH-MKP). It is provided under sub clause (b) of the Preambular Clause of the Head Contract that:-
“The employer desires to procure the Contractor in whom it is a share holder, to carry out the constaruction works………………..”(emphasis mine)
This is a clear indication that right from the design stage of the project, the respondent wished to be part of the contractor that was to take up the project.
It is not un common for big Companies to form a Special Purpose Vehicle (SPV) some times called Special Purpose Entity (SPE) for purposes of fulfilling specific and limited transactions. Once formed they are separate from the sponsoring/parent Company for legal and other purposes. They may be formed and controlled by several entities i.e in form of a Joint Venture Company. In the case under review, NH – MKP Builders Limited was incorporated on 7th July 2011 with National Housing and Construction Company Ltd (the responsibility) holding 51% shares and MKP Builders SDN BHD (MKP) holding 49% shares.
The Head Contract was entered into on 15th July 2011. All this viewed alongside the sub clause in the Preambular Clause cited above is clear manifestation of the intent and purpose of the whole transaction. This coupled with the provisions of Clause 5 section on the Particular Conditions of Contract of the Head Contract clearly points to the conclusion that the structure and documentation of the transaction were perfectly legal and not uncommon in transactions of this nature. I am therefore inclined to agree with Learned Counsel for the respondent that NH – MKP was the right party to the Performance Bond. I so hold.
This holding in effect answers the main issue under contention i.e. whether the Guarantee was riddled with fraud. I therefore find no fraudulent intent on the part of the respondent.
In making this application, the applicant raised what it indicates as triable issues hence warranting the grant of unconditional leave to appear and defend. As earlier noted in this ruling the triable issues relate to the question under which contract should the Performance Bond have been issued, which company MKP or NH – MKP was dully bound to issue the Performance Bond and whether the demand/claim is vitiated by fraud. My holding above that it is not uncommon for projects of this nature to be structured the way this was, and that it was perfectly legal answers the issues raised and in the result this application fails.
I note that the applicant does not dispute the fact that liability on a Performance Bond arises on demand and that the applicant agreed unconditionally and irrevocable to pay the sums claimed to the respondent on first demand. The applicant only raised fraud as a vitiating element but that has been dealt with above.
Accordingly judgment is hereby entered for the Plaintiff/Respondent for the sum of USD 1,813,881 (United States Dollars One Million Eight Hundred Thirteen Thousand, Eight Hundred Eighty One) with costs for this application and the suit.