Wakilii

Roko Construction Limited v Pearl Jubilee Estates Limited and Another (Miscellaneous Cause 83 of 2021)

High Court · [2021] UGCOMMC 151 · 2021 Application Dismissed AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
Application for interim injunctive relief restraining encashment of bank guarantees pending arbitration
Decision
Application for interim injunction dismissed with costs to the 1st respondent

Observed later treatment

No later-treatment classification is recorded for this judgment.

Citator coverage is limited to judgments in the Wakilii corpus and source-matched treatment records. Absence of a signal is not an assertion that the case remains good law.

AI-generated summary. This summary was generated by AI from the full text of the judgment. It may contain errors or omissions—always read the source judgment before relying on it.

Holding

Held: Application for interim injunction dismissed. While the applicant established a serious question for arbitration, it failed to establish a strong prima facie case of manifest fraud or that the guarantee was called with absolutely no basis. The respondent could honestly have believed in the validity of its demand under the performance guarantee. The balance of convenience favoured the respondent, as an injunction would provide the applicant with complete relief pending arbitration, while the guarantee serves as a contractual risk allocation tool and may expire before arbitration concludes.

Outcome

Application for interim injunction dismissed with costs to the 1st respondent

Facts

On 1 April 2019, the applicant contracted with the 1st respondent to construct 240 apartments for US$ 8,498,797, with completion scheduled for 30 September 2021. The contract was varied on 1 August 2021 to add 120 units for US$ 3,828,645.49, with a revised completion date of 18 December 2021. The applicant obtained an advance payment guarantee for US$ 569,595.04 and a performance guarantee for US$ 1,232,732.48 from the 2nd respondent. The 1st respondent made an advance payment of 10% of the original contract price. Dissatisfied with progress, the 1st respondent terminated the contract on 20 April 2021 when works were only 23% complete. By termination, the 1st respondent had paid US$ 1,824,533 to the applicant. The parties entered a Mutual Release and Settlement Agreement on 5 May 2021, agreeing to a joint audit. The final accounts showed the applicant owed the 1st respondent US$ 929,084, to be paid in 12 monthly instalments from 30 June 2021. The agreement provided that if three consecutive payments were missed, the 1st respondent could recover from the applicant's sister company in Kenya, and failing that, could call on the guarantees. When the applicant defaulted, the 1st respondent called on both guarantees. The applicant then applied for an interim injunction pending arbitration.

Issues

  1. Whether the applicant has a prima facie case with a probability of success to support the grant of an interim injunction restraining encashment of bank guarantees pending arbitration.
  2. Whether the applicant will suffer irreparable harm if the injunction is not granted.
  3. Whether the balance of convenience favours granting the injunction.
  4. Whether the terms for encashment of the guarantees were varied by the Mutual Release and Settlement Agreement.
  5. Whether the call on the guarantees constitutes fraud sufficient to warrant injunctive relief.
  6. Whether the respondent could not honestly have believed in the validity of its demand under the guarantee.

Orders

  • Application dismissed.
  • Costs awarded to the 1st respondent.

Rules and key headnotes

Arbitration — Interim Measures of Protection — Principles for Grant of Injunctive Relief Pending Arbitration
When court is called upon to grant injunctive relief as an interim measure of protection pending arbitral proceedings under section 6 of the Arbitration and Conciliation Act, the court will generally have regard to: (a) the nature and strength of the applicant's case, i.e., whether there is a serious question to be arbitrated, in respect of which the applicant demonstrates a sufficient likelihood of success; (b) whether there is an imminent risk of irreparable loss, by considering whether damages are an adequate remedy to the perceived risk of harm; and (c) the course of action favoured on a balance of convenience, i.e. the course of action that results in the lower risk of injustice if the decision to grant the injunction is incorrect.
Performance Guarantees — Autonomy Principle — Exceptions to the Independence of Demand Guarantees
Demand guarantees are autonomous from the underlying contract and constitute a separate undertaking. Courts will very rarely order a guarantor not to pay a beneficiary who has made an apparently complying demand. The exceptions are: (i) fraud affecting the documents presented by the beneficiary; (ii) illegality in the demand guarantee contract or underlying contract; (iii) the infringement of international obligations and express contractual derogation from the principle of autonomy; and (iv) the total failure of the basis of the contract. The autonomy principle means that a guarantor must pay a demand presented in compliance with the terms of the guarantee, irrespective of whether or not the principal has, in fact, committed a breach of the underlying contract with the beneficiary.
Performance Guarantees — Fraud Exception — Threshold for Establishing Fraud to Restrain Payment
The test for fraud in restraining payment under a demand guarantee is met not by showing breach or other non-compliance with the terms of the underlying contract, but when strong or compelling evidence is led to show that the documents presented to the bank are forgeries or contain any express material misrepresentations. The fraud should rise to the level of egregious conduct — conspicuously, glaringly, or flagrantly bad conduct of a nature that would vitiate the very foundation of the bank guarantee. Courts will not permit a guarantee to be used for a purpose for which it was never generated. The facts should depict that fraud committed by the beneficiary is of such nature that it destroys the entire underlying transaction. Mere error, misunderstanding, non-compliance with the terms of a guarantee or oversight does not translate into fraud.
Performance Guarantees — Two-Stage Test for Fraud — Honest Belief and Bank's Knowledge
When determining fraud in interlocutory proceedings relating to demand guarantees, the courts apply a two-stage test: (a) that the beneficiary could not honestly have believed in the validity of its demand under the guarantee and (b) that the bank knew of the fraud at the time the beneficiary made the demand. It must be seriously arguable on the material available that the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demand under the guarantee. Fraud connotes the absence of an honest belief in either the entitlement to claim under the guarantee or in the amount claimed. Demanding payment in the knowledge of the absence of material entitlement constitutes fraud.
Performance Guarantees — Risk Allocation — Balance of Convenience in Injunction Applications
A performance guarantee serves as an agreed allocation of risk as to which of the parties is to be out of pocket pending resolution of the dispute about breach of the underlying contract. By agreeing that the applicant will provide the demand performance guarantee on the terms set out in the contract, the parties have also agreed to allocate the financial risk of any dispute to the applicant until it is finally resolved. The performance guarantee serves as a risk management tool for the beneficiary, as the guarantor assumes liability for financing the completion of the contract to the limit of the guarantee, should the contractor default on its contractual obligations. Courts are reluctant to grant injunctions restraining payment under demand guarantees because the balance of convenience typically favours allowing the beneficiary to call the guarantee pending resolution of disputes.
Performance Guarantees — Irreparable Harm — Reputational Damage to Contractor
The calling up of a demand guarantee, especially if it is an unfair or fraudulent calling, often has severe consequences for the principal: irreparable damage to commercial reputation; cash liquidity problems; and the risk that the cash will be misappropriated by the beneficiary and no longer recoverable. Courts have recognised that calls upon performance guarantees may cause significant damage to a contractor's reputation and financial standing that is not readily curable by an award of damages. The calling of a guarantee tends to erode the confidence banks and other financers have in the contractor's systems and project management, tarnishes the business image of a contractor, and may diminish prospects of future successful tenders. However, such damage must be established with strong evidence to warrant injunctive relief.
Advance Payment Guarantees — Expiry and Reduction Clauses — Effect of Partial Performance
Advance payment guarantees manage the risk of the contractor's failure to earn the whole of any advance payment from the employer by failing to provide services to an equivalent value. Such guarantees usually contain a reduction clause, whereby the amount of the guaranteed reduces in accordance with monthly certificates until the certified value of work done exceeds the advance payment. A demand guarantee will always have an expiration date, which the beneficiary must respect. Unless a call under the guarantee is filed before the date of expiry, all the beneficiary's rights under the guarantee are forfeited and the guarantor is relieved and discharged from all liability thereunder. A beneficiary cannot honestly believe in the validity of a demand made on a guarantee after its expiry date.

Legislation cited (3)

Cases cited (13)

  • E.A. Industries v Trufoods [1972] EA 420
  • American Cyanamid Co v Ethicon Limited [1975] AC 396
  • Geilla v Cassman Brown Co Ltd [1973] EA 358
  • GAPCO Uganda Limited v Kaweesa and Another (Miscellaneous Application No. 259 of 2013)
  • G&S Engineering Services v MACH Energy Australia Pty Ltd [2019] NSWSC 407
  • Leonardo SpA v Doha Bank Assurance Company LLC [2019] QIC (F) 6
  • Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 3
  • Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 All ER 976
  • Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC)
  • Doosan Babcock Ltd v Commercializadora de Equipos y Materiales Mabe Limitada [2013] EWHC 3010 (TCC)
  • United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd's Rep 554
  • Barclay Mowlem Construction Ltd v Simon Engineering (Aust) Pty Ltd (1991) 23 NSWLR 451
  • Yuanda (UK) Co Ltd v Multiplex Construction Europe Ltd [2020] EWHC 468 (TCC)

Full judgment

↓ Download PDF

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

Roko Construction Limited v Pearl Jubilee Estates Limited and Another (Miscellaneous Cause 83 of 2021) [2021] UGCommC 151 (9 January 2021)
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.