Bonaventure Munyangoga

LEGAL ADVICE ON BANK LOANS AND GUARANTEES By Munyangoga Bonaventure Lawyer Email:- Brief facts Premier Contractors Ltd (PCL), a private limited liability company incorporated in Uganda, is in the business of construction. In October 2018, it obtained a tender to construct a building for URA. To finance its activities, it obtained a loan facility from ABC Bank (U) Ltd. The latter also issued a bank guarantee for the benefit of URA in the event that PCL breached its agreement with URA. The Directors of PCL also gave personal guarantees to the Bank. The loan facility was secured, and the securities were perfected. In February 2019, ABC Bank notified PCL that UGX 400,000,000 had been credited to the latter’s account by mistake. The bank demanded that the money be paid back in three days with interest at 25% per annum, non-compliance of which attracted a 2% further penal interest will be charged. PCL confirmed the mistake which it had used under the assumption that it was payment from one of its debtors. It is willing to sell its securities to pay but not the amount as claimed. The bank recalled the loan facility, froze payments to PCL under the facility and demanded the above sum, together with that under the loan facility with interest. The bank claims that by the SRA executed on the 1st June 2019, PCL waived its right to complain. Law applicable 1. The Financial Institutions Act 2004 2. The Contracts Act 2010 3. The Evidence Act Cap. 6 4. Bank of Uganda (Financial Consumer Protection) Guidelines 2011 5. Case law. Issues 1. Whether ABC Bank (U) Ltd is entitled to a refund of UGX 400,000,000, being money that was credited to PCL under a mistake. 2. Whether ABC Bank (U) Ltd is entitled to interest on the sum in issue 1 above. 3. Whether the actions of ABC Bank (U) Ltd, in recalling the loan facility and refusing to advance further payments thereunder, were lawful. 4. Whether the threats advanced by ABC Bank Ltd breached PCL’s rights, if any in the circumstances. 5. Whether ABC Bank’s threat of taking legal action against PCL is tenable? 6. Whether URA can lawfully recover the amount of the Bank Guarantee from PCL? 7. Whether the directors of PLC are liable under the personal guarantees issued? Resolution of Issues/Tasks. Issue 1: Whether ABC Bank (U) Ltd is entitled to a refund of UGX 400,000,000, being money that was credited to PCL under a mistake. It is ABC Bank (U) Ltd.’s case that it acted under a mistake when it credited UGX 400,000,000 to PCL’s account. It notified this instance to PCL which acknowledged that indeed the said sum was credited to it by mistake. The principle of law is that in a banker-customer relationship, a banker has a duty to act in accordance with the lawful requests of its customers in normal operation of its customers’ accounts. See Stanbic Bank (U) Ltd v Uganda Crocs Ltd SCCA No 4 of 2004. However, where such a banker, in exercising such duties, makes payments to the customer’s account under a mistake of fact, the bank is prima facie entitled to recover it as money had and received. See Halsbury’s Laws of England Vol. 3(1) 4th Edn para. 184. A payment is said to be made under a mistake of fact if it is made honestly, notwithstanding that the payer has means, of which he did not avail himself, of knowing the true facts. See Imperial Bank & Canada v Bank of Hamilton [1903] AC 56. Without prejudice to the above, it is further a principle at equity that it is inequitable to allow a party to retain money paid by mistake and that person having already undertaken to repay it, as that would amount to unjust enrichment. See Obed Tashobya v DFCU Bank Ltd HCCS No. 742 of 2004. In that case, the plaintiff had withdrawn money based on cheque drawn in his favour. The cheque was later dishonored when the plaintiff had already withdrawn most of the money. And the Defendants sought to recover the same from him. The plaintiff recognized the mistake and paid some of it. It was held that the defendant was entitled to recover the sums in equity and at common law. In this case, it is agreed by both parties that the bank, acting under a mistake of fact, credited PCL’s account with UGX 400,000,000. In fact, PCL is willing to pay back the sum, if it is given more timepreferably August 2019 being the date when it expects to be paid by URA. PCL has also shown willingness to pay the money by selling its securities. Accordingly, the bank is entitled to a refund of the said amount of money both at common law and in equity. Issue 2: Whether ABC Bank (U) Ltd is entitled to interest on the sum in issue 1 above. It is ABC Bank (U) Ltd.’s case that it is entitled to interest on the sum of UGX 400,000,000 that it credited to PCL’s account under a mistake of fact. The bank has gone ahead to calculate that interest at a rate of 25% per annum payable after three days from when the notice of the mistaken payment was made to PCL; and a further 2% per annum in case of default. The principle of law is that interest is charged under a contract or is awarded to a successful party by a court of law. See Obed Tashobya v DFCU Bank Ltd HCCS No. 742 of 2004. In regard to interest awarded by a court of law, the principle of law is that in equity, interest is awarded whenever a party deprives another of money which the latter could have used in its business. See Wallesteiner v Moir [1975] 1 ALLER 849; cited with approval in Obed Tashobya v DFCU Bank Ltd[supra]. Such interest may be compound where the party in fault retained the sums fraudulently, or simple where the party at faulty merely retained the sums of money in issue. See Obed Tashobya v DFCU Bank Ltd HCCS No. 742 of 2004. In that case, the court noted that where the plaintiff had been notified of the mistake, the money became received by the plaintiff for the defendant’s use and was as such wrongfully retained by the plaintiff. It held that accordingly the defendant was entitled to interest chargeable on all overdrafts, and awarded interest of 6% per annum. However, in the instant case, the bank is claiming interest of 25% per annum and additional 2% per annum as penal interest for default. That interest was neither under any contract, usage nor was it awarded by any court. As such, the Bank’s claim is not founded in law. If the bank intends to obtain interest, it may institute court action for an award of the same. Issue 3: Whether the actions of ABC Bank (U) Ltd, in recalling the loan facility and refusing to advance further payments thereunder, were lawful. In this case, ABC Bank (U) Ltd recalled the loan facility it had advanced to PCL and halted further advancements as had been agreed under the said facility. On top of that, the Bank is claiming UGX 1,888,200,400 being the principal debt owed by PCL and interest thereon as per the loan facility. In cases such as the instant one, where parties put their transaction in writing by executing a valid written contract, the principle of law is that the duties, rights, obligations and any other aspect relating to the parties in that transaction is restricted to that written document as the source of the same. Put shortly, where parties reduce their agreement into writing, they are bound by them and evidence of the transaction is obtained from such document. See Sections 91 and 92 of the Evidence Act Cap. 6; and Golf View Inn (U) Ltd v Barclays Bank (U) Ltd HCCS No. 358 of 2009. In addition, but without prejudice to the above, it is also a principle of law that where a person causes another to believe a thing to be true and to act upon that belief, the former is precluded from denying the truth of it under the doctrine of estoppel. See Section 114 of the Evidence Act Cap. 6; and Golf View Inn (U) Ltd v Barclays Bank (U) Ltd HCCS No. 358 of 2009. In this case, the loan facility agreement was reduced into writing. The agreement clearly stipulates that the lender’s rights of recovery are accelerated upon an event of default. See para. 11.1 of the Loan Facility. The events that constitute an event of default are clearly stipulated under para. 10 of the Loan Facility. It is not stipulated anywhere that failure to pay money mistakenly advanced to PCL constitutes an event of default to invoke para. 11.1. Secondly, under paragraph 14, the parties agree that the loan facility document constitutes all the terms that they intend to be bound by and that there is no other arrangement between them in respect to the transaction except the written agreement. Therefore, ABC Bank (U) Ltd is bound to the agreement and this implies that its action of recalling the loan for reasons other than those in the contract were unlawful. Issue 4: Whether the threats advanced by ABC Bank Ltd breached PCL’s rights, if any in the circumstances. In this case, ABC Bank (U) Ltd threatened charging penal interest and foreclosing the mortgages and realise the securities to the loan facility. The threat of penal interest has already been dealt with under issue 2 above. The threat to foreclose the mortgages is made by the bank under the weight of a Securities Realisation Agreement [SRA] purported to have been executed by the parties on 1 st June 2019 wherein PCL agreed to sell the mortgaged properties to settle the outstanding sums in 6 months. The principle of law is that parties of sound mind are free to enter into a contract constituting rights and obligations binding upon them. See Section 10 of the Contracts Act 2010. In fact, an SRA has been recognized as such contract in Golf View Inn (U) Ltd v Barclays Bank (U) Ltd HCCS No. 358 of 2009 where Justice Hellen Obura emphasized that one cannot benefit from an SRA and then later claim that it is unenforceable at such party’s own convenience. However, for such SRA or any other contract to constitute a waiver, it must be established that the party alleged to have waived their right had knowledge of such right and the intention of foregoing it. Blacks Law Dictionary 7th Edn at page 1574; cited with approval in Golf View Inn (U) Ltd v Barclays Bank (U) Ltd HCCS No. 358 of 2009. In this case, not only is the SRA itself not attached as an Annexture by the Bank, there is no established fact that PCL was aware of its rights at the time of signing the SRA, let alone that it intended to forego such rights under the said SRA. Accordingly, the bank does not have a valid claim under the SRA in so far as a waiver is concerned. TASK B Whether ABC Bank’s threat of taking legal action against PCL is tenable? The principle as established in L’strange vs Gracoub Ltd (1934) KB 349 by Scrutton LJ is that once an agreement is reduced into writing and executed by the parties, the parties are bound and its wholly immaterial whether the parties read the document or were not aware of the contents of the same, with the exception of fraud and misrepresentation. This envisaged in the Evidence Act Section 92 as the Parole Evidence Rule. According to the facts, its not disputable that PCL entered into a Loan Facilities Agreement voluntarily, thus binding on both parties. The agreement was that ABC Bank extends a loan of shs.4.8 million In Golf view Inn (U) Ltd vs Barclays Bank HCCS No. 358/2009, it was held that once parties have executed agreements, they are bound by them and evidence of the terms of the agreement should be obtained from the agreement itself and no extrinsic evidence shall be admitted. Under the principle of approbation and reprobation, Scrutton LJ in Verschures Creameries Ltd vs Hull & Netherlands Steamship Co. Ltd (1921) 2 KB 608 at 612 held that one cannot approbate and reprobate at the same time. A person cannot say that at one time that a transaction is valid and thereby obtain some advantage to which he could only be entitled on the footing that its valid, and then turn around and say its void for the purpose of securing some other advantage. Therefore, though PCL used the money thinking it was from one of its clients, it cant claim it never received the money because it was to its advantage. ABC Bank can as well claim that the money was paid under mistake of fact thus entitling it to a refund. Imperial Bank &Canada vs Bank of Hamilton (1903)AC 56 stated that a payment is made under a mistake of fact if its so made honestly, notwithstanding that the payer has means of which he didn’t avail himself of knowing the true facts Barclays Bank Ltd vs W.J Simms Son &Cooke (Southern) Ltd (1980) QB 677 at 695 held that if a person pays money to another under a mistake of fact which causes him to make to make the payment, he is prima facie entitled to recover it as money paid under mistake of fact. According to the facts, ABC Bank erroneously placed on PCL’s bank account a sum of shs. 400 million thus amounting to mistake of fact. Obed Tashobya vs DFCU Bank Ltd HCCS NO. 742/2004,stated that if money paid by mistake is to be recovered, the following conditions must apply;  Payment to the payee must not be made under mandate from the customer so that a debt is created between a bank and customer  The mistake must be one of fact , not law  The mistake must cause the payment. However, PCL can claim negligence on the part of the Bank as it would have taken extreme measures to protect its customers. Lord Warrington in Lloyd Bank vs E.B Savoy&Co. (1933)AC 201 stated that in determining the standard to be applied in considering whether the bank acted negligently or not, reference should be made to the practice of reasonable men carrying on the business of bankers and endeavouring to do in such a manner as maybe calculated to protect themselves and others against fraud. TASK C Whether URA can lawfully recover the amount of the Bank Guarantee from PCL? Section 68 of Contracts Act, 2010 defines a contract of Guarantee as a contract to perform a promise or to discharge the liability of a third party in case of default of that third party, which maybe oral or written. Paragraph 3 of BOU Financial Consumer Protection Guidelines defines a guarantee to mean any document, notice or other written statement containing an undertaking, however described, given by the guarantor promising to fulfil the obligations or discharge the liability of a 3rd party if that 3rd party fails to do so. According to the facts, its ABC Bank that issued a Bank guarantee for the benefit of URA. The primary duty of the guarantor is to ensure that the principal debtor pays off the debt. Moshi vs Lep Air Services (1973)AC 331 held that a contract of guarantee gives the guarantor an obligation to see to it that the debtor performs his obligations to the creditor. Section 71 CA provides that the liability of the guarantor is to the extent of the liability of the principal debtor. Where the principal debtor fails to pay the principal debt, its then the liability of the guarantor to pay the principal debt. UCB Corporate Service ltd vs Clyde &Co. (2002) 2 ALLER 257 held that so long as the there was a duly executed guarantee, the guarantor is bound by its undertaking. According to the facts, ABC Bank executed a demand guarantee in favour of URA and since PCL could not perform, the Bank has the responsibility of paying URA. Section 81 CA provides that where the guarantee pays the principal debt, then its vested with all the rights the creditor had against the debtor. Therefore, URA can only recover the bank guarantee from the bank upon PCL failing to pay up the debt. TASK D. Whether the directors of PLC are liable under the personal guarantees issued? Section 68 of Contracts Act, 2010 defines a contract of Guarantee as a contract to perform a promise or to discharge the liability of a third party in case of default of that third party, which maybe oral or written. Paragraph 3 of BOU Financial Consumer Protection Guidelines defines a guarantee to mean any document, notice or other written statement containing an undertaking, however described, given by the guarantor promising to fulfil the obligations or discharge the liability of a 3rd party if that 3rd party fails to do so. In Barclay’s bank of Uganda v. Jung Hang and Anor. HCCS No.39 of 2009, a guarantee was defined as a promise to be liable to a debt on failure to perform some legal obligation of another. From the instant facts is evident that the directors of PLC gave personal guarantees which were not to exceed the sum of 4 billion shillings. The law has long been settled, the liability of the guarantor is to the extent to which the principle debtor is liable unless the contract provides otherwise and that liability takes effect after default by the principle debtor. Refer to section 71(1) Contracts Act 2010. However the primary duty of the guarantor is to ensure that the principal debtor pays off the debt. Refer to Moshi vs Lep Air Services (1973) AC 331. Be that as it may, a contract of guarantee has vitiating factors that need to be considered and they include the following: i) Misrepresentation. A guarantee which is obtained by misrepresentation made by a creditor or with knowledge and assent of the creditor coercing a material part of the transaction is void. Refer section 83 Contracts Act Para 6(5) BOU Guidelines states that prior to a person acting as a guarantee, a financial services provider shall advise the person of the quantum and nature of the potential liabilities involved. A contract of guarantee like any other contract is liable to be avoided if induced by material representation of existing fact. Refer McKenzie v Royal Bank of Canada (1934) AC. ii) Mistake of fact. This is where consent to agreement is obtained by mistake of fact parties are mistaken as to the essential element of the contract. Refer to section 17(1) contracts Act. A contract is void where one of the parties operates under mistake of fact of fact essential to the contract. iii) Undue influence. If one of the parties is in position to dominate the will of the other party and he uses it to induce them into a contract then its void. Refer section 14 contracts Act In these facts it’s clear that the bank first of all didn’t advise the directors as to the extent and nature of the liabilities, secondly the bank was possessed with a duty to advise them to seek independent legal advice which they did not. As if that’s not bad e they didn’t fully advance the full loan to PLC. In the alternative even if they were to be held liable for the 4 billion to which they guaranteed they still have rights under the contracts Act. If they pay they would have the rights to demand that money from the company. Refer to section 81 They would also be entitled to the benefit of every security which creditor has against the principle debtor. Refer to section 82 They would have a right of indemnification refer to section 85. In the case of shell Uganda ltd vs. Captain Naeem Chaudhry HCCS No.174 of 2004 court stated that guarantor’s right of indemnity against the principal debtor the law is that the surety who has actually met the liability which he undertook to answer for is entitled to be indemnified. In conclusion therefore the potential liability of the personal gurantees is ony to the 4 billion shillings.