THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMPALA
CIVIL SUIT NO. 351 OF 1991
BEFORE: HON. AG. JUDGE REMMY K. KASULE
The Plaintiff company sued the Defendant, representative of Government, for recovery of Shs.160,421,762/= being unpaid balance of payment, with Compound interest calculated from 26.09.90 up to 31.05.05, for construction works executed by Plaintiff to the Government owned Kitante Hill School Premises, Kampala.
The Plaintiff’s claim is denied by the Defendant, contending that the Plaintiff was paid in full, for the services rendered.
Both parties agree that, as between them, an unwritten contract for the Plaintiff to execute construction works on the stated premises was executed in 1988. The Plaintiff executed the works to completion by 24.08.88 and was paid some money by
Defendant over time. Plaintiff persisted to demand of the Defendant for further payment.
The issues framed are:-
2. Whether there was breach of contract.
3. Whether the Plaintiff is entitled to the remedies sought.
The first issue is what were the terms of the contract between the Plaintiff Company and the Government Ministry of Education. On the basis of the agreed upon facts, and the un controverted evidence, of PW1, Abdul Kyambadde, Plaintiff’s Managing Director, which is believed by Court, Court holds that the contract of execution of repairs upon Kitante Hill School was not written and was entered into in or about 1988.
The Contract was not subjected to tendering process before execution and there was no agreed upon fee payable to Plaintiff by Defendant for execution of the works. The Plaintiff executed the contract by carrying out the stipulated repairs, completed the same by 24.08.88, after which, the Defendant carried out inspection, was satisfied and Shs. 3,029,630/= was agreed upon as the sum payable to the Plaintiff. Later, as it will be shown in this Judgment, both parties agreed to charge compound interest on the balance of the unpaid contract sum.
The second issue is whether there was breach of contract. The crust of the dispute in this issue is one of what interest was and is payable on the settled sum of shs.3,029,630/=.
The Plaintiff bases his claim on the premise that the Defendant failed to pay the whole amount in time and so the unpaid balance plus compound interest is what is due to him.
The Defendant on the other hand, asserts that he paid Plaintiff, over time, the whole amount in full, that is principal plus simple interest, for the period of delay in payment and thus the Plaintiff is not entitled to any further payment.
It is necessary to decide, in the circumstances of this case, what type of interest is chargeable on the contract sum. At the time of contracting both parties did not address the issue of interest payable.
While both simple and compound interest measure the time value of the initial sum of money, that is the principal, compound interest reflects the time value component to interest payments, while simple interest does not. Compound interest is thus interest upon interest. Simple interest makes a distinction between money owed as principal and money owed as interest. Compound interest, on the other hand, treats a shilling as a shilling and in this way is a more precise measure of the value of possessing money for a period of time.
Thus compound interest compensates better the one entitled to payment under a contract, and yet is not paid. This is because it takes care of the consequences of delayed payment, namely loss of opportunity cost, risk and inflation.
Opportunity cost reflects the uses of the money which are foregone while waiting for it. Risk involves the uncertainty inherent in delaying possession of the money. Money in one’s actual possession is a certainty, but the expectation of the same money in future involves uncertainty. This negatively affects the actions of the one entitled to the money. Money expected is ofted subjected to inflation trends. Inflation reflects the fluctuation in price levels. It eats into the value of the shilling in that with inflation rising a shilling will not buy as much goods or services to-morrow as it does to-day.
Because compound interest is more realistic as a measure of value of possessing or non-possessing, money over a period, banks, money lenders, and financial systems, generally apply compound interest as opposed to simple interest in their dealings: See: G.H. Sorter, M.J. Ingberman and H.M. Maximon: Financial Accounting: An Events and Cash Flow Approach (1990) at P.14.
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