Wakilii

Power City Contractor Ltd v Ecobank Uganda Ltd (HCCS 307 of 2012)

High Court · [2014] UGCOMMC 78 · 2014 Judgment for Plaintiff AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
First instance civil suit for declaration of non-indebtedness and return of securities, with counterclaim for payment of fees and interest.
Decision
Plaintiff's suit succeeds in part; counterclaim dismissed; securities to be returned to plaintiff; no damages awarded; each party bears own costs.

Observed later treatment

No later-treatment classification is recorded for this judgment.

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Holding

The High Court held that advance payment guarantees issued by a bank which expressly provide they shall only become valid and effective upon deposit of advance payment funds into the client's account cannot be enforced—and do not constitute valid consideration—where those funds are never deposited. Because the guarantees remained inoperative, the plaintiff was not liable for quarterly fees or interest charged by the bank, and was entitled to the return of its securities. The court found that by drafting the guarantees to be conditional on the action of a third party (the employer), the bank contributed to the impossibility of performance of the facility agreement. Both parties were relieved of their obligations under the doctrine of frustration.

Outcome

Plaintiff's suit succeeds in part; counterclaim dismissed; securities to be returned to plaintiff; no damages awarded; each party bears own costs.

Facts

Power City Contractors Ltd applied to Ecobank Uganda Ltd for credit facilities consisting of advance payment guarantees (APGs) and performance guarantees (PGs) to enable it perform a rural electrification contract for employer LTL Projects (Pvt) Ltd. Ecobank issued two APGs in September 2010 but never issued the PGs. The APGs were submitted to the employer and the plaintiff commenced work in October 2010. However, the employer never deposited advance payment funds into the plaintiff's account with Ecobank. The APGs contained a clause stating they would only become valid and effective upon deposit of advance payment into the plaintiff's account with the guarantor bank. In March 2011, Ecobank wrote to the employer indicating the APGs were 'inactivated' due to non-receipt of funds. The plaintiff obtained alternative guarantees from Leads Insurance Ltd and in September 2011 returned the Ecobank APGs, which the employer had rejected as invalid. Ecobank refused to return the plaintiff's securities and instead demanded payment of UGX 72,627,832.43 for fees, interest and charges. Ecobank's case was that the plaintiff had been negligent in not immediately informing them of the rejection, thereby incurring quarterly fees and debit interest.

Issues

  1. Whether all the guarantees or bonds were issued, collected from the Defendant and used by the Plaintiff?
  2. Whether the Plaintiff received any consideration from the Defendant for the sum of Uganda shillings 72,627,832.43?
  3. Whether the Defendant is entitled to fees under the facility letter dated 1 September 2010 for the Advance Payment Guarantees?
  4. Whether the parties are entitled to the remedies sought?

Orders

  • Declaration that the Plaintiff is not indebted to the Defendant in respect of the Advance Payment Guarantee issued in favour of LTL Projects (Pvt) Ltd for the benefit of the Plaintiff.
  • Order for the Defendant to release to the Plaintiff all securities deposited for purposes of the facility offer exhibit P1.
  • Plaintiff's suit succeeds in part with each party to bear its own costs.
  • Defendant's counterclaim dismissed with each party to bear its own costs.

Rules and key headnotes

Bank Guarantees — Advance Payment Guarantees — Conditional Validity — Requirement of Deposit Before Effectiveness
An advance payment guarantee which expressly provides that it shall remain valid and in full effect only from the date of advance payment into the client's account with the guarantor cannot be enforced where no such payment is ever deposited, and the guarantee remains inoperative throughout the period it is held by the beneficiary.
Consideration — Failure of Consideration — Conditional Consideration Not Fulfilled
Where a bank issues a guarantee that is conditional on the action of a third party and that condition is never fulfilled, the guarantee does not constitute valid consideration for the facility agreement because it has no value and cannot be enforced.
Frustration of Contract — Impossibility of Performance — Conditional on Third Party Action
A contract is frustrated where its performance is made conditional on the actions of a third party who is not a party to the contract and that third party never performs the required act, rendering the contract incapable of being implemented and relieving both parties of their obligations under the doctrine of frustration.
Bank Charges — Entitlement to Fees — Where Guarantee Never Became Operative
A bank is not entitled to charge quarterly fees, interest or other charges for an advance payment guarantee that never became operative due to non-fulfilment of a condition precedent stated in the guarantee instrument itself, even where the guarantee was issued and temporarily held by the beneficiary.
Bank Guarantees — Nature and Characteristics — Performance Bonds Distinguished from True Guarantees
Performance bonds and advance payment guarantees are not true guarantees but are stringent forms of contract of indemnity, with the essential character of a performance bond being more akin to a promissory note than to a guarantee — it is an undertaking to pay a specified sum in the event of breach rather than a promise to ensure performance, and the obligation is independent of the underlying contract between the account party and the beneficiary.

Legislation cited (4)

Cases cited (10)

  • Curie v Misa (1875) LR 10 Exch 153
  • Fibrosa Spolka Akeyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
  • Godfrey Katabi v Total Uganda Ltd (HCCS 687 of 2000)
  • Lee Parker v Izzet (No 2) [1972] 2 All ER 800
  • Aberfoyle Plantations Ltd v Cheng [1959] 3 All ER 910
  • JK Patel v Spear Motors Ltd (Civil Appeal No 4 of 1991)
  • Krell v Henry [1903] 2 KB 740
  • Taylor v Caldwell (1863) 3 B & S 826
  • Fibrosa Spolka Akeyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122
  • Chandler v Webster [1904] 1 KB 493

Full judgment

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The original judgment as reported. Read the original PDF before relying on any passage.

Power City Contractor Ltd v Ecobank Uganda Ltd (HCCS 307 of 2012) [2014] UGCommC 78 (13 June 2014)
Source: this page presents Wakilii’s issue analysis and metadata for a publicly reported Ugandan judgment. Any AI-generated summary is marked as such. Judgment text is sourced from the Uganda Legal Information Institute (ulii.org). Wakilii is not affiliated with ULII.