KAMPALA – The Commercial Division of the High Court directed dfcu Bank to pay Uganda National Roads Authority (UNRA) UGX. 60 billion, resulting from a botched road construction deal.
The bank had declined to release the money following an ex-parte interim court order issued by Justice Suzan Abinyo in a case in which Polat Yol Yapi San Vstie A.S, sued the roads authority over termination of the contract in 2020.
UNRA had contracted Polat to upgrade Muyembe-Nakapiripirit 92km road and secondary link roads (25 km) to paved standard, but terminated the agreement on grounds of non-performance.
In her ruling, Justice Jeanne Rwakakooko, directed dfcu Bank to pay UNRA the money.
“I direct the applicant to immediately execute the payments to UNRA as earlier directed and pursuant to the demand letter dated January 18, 2022,” Rwakakooko directed.
She also set aside an interim order issued on January 27, this year and extended on February 28, restraining UNRA from enforcing, collecting, or calling on the advance payment guarantee and performance guarantee issued to dfcu Bank and KCB Bank (U) Limited.
The court noted that Polat, the contractor, is the principal who took out the demand guarantee and a performance guarantee from the bank in favour of UNRA as the beneficiary.
The judge said because the performance guarantee is ‘on demand’ the beneficiary has powers to demand the sums in the event of the contractor’s default, repudiation, or insolvency.
Rwakakooko explained that the purpose of performance guarantees in the construction industry is to be an effective safeguard against non-performance, inadequate and delayed performance.
The judge ruled that the agreements concerning the advanced payment guarantee, which the bank undertook to pay, is independent of the contract between Polat and UNRA.
She, therefore, says any dispute that arises therefrom has no bearing on the guaranteed agreements and the obligations undertaken by the bank.
Background
On November 7, 2019, UNRA entered a contract for civil works with Polat for the upgrade of the roads to paved standards.
In accordance with the conditions of the contract, payments in the sums of $12,413,382 (sh44.7b) and sh14.3b, were advanced by UNRA to the contractor.
The payments were made against advanced payment guarantees issued by dfcu Bank Nos. ABG022019120659 and ABG012019120658, respectively.
However, in 2020, UNRA terminated the contract, on grounds of non-performance.
But the contractor run to court, challenging UNRA’s actions, contending that the delays in construction works were because of supply shortages occasioned by the COVID-19 pandemic.
The two parties are currently undergoing arbitration proceedings to resolve the dispute.
On December 12, 2019, at the request of the contractor, the bank issued to UNRA two on-demand advanced payment guarantees, namely, advanced payment guarantee of sh59b.
Demand
In a letter dated January 18, 2022, UNRA demanded the bank to pay the money.
The bank examined UNRA’s demand within five business working days and concluded that it should be paid. But a dispute arose between UNRA and the bank, regarding the period the bank should have affected payment.
UNRA argued that the bank should have effected payment by January 27, 2022, but the bank says it could not after receiving an ex-parte interim court order issued by Justice Suzan Abinyo regarding the matter.
The bank claimed that the contractor had threatened to pursue contempt of court proceedings against it, hence affecting payment of the money to UNRA.
In the application, the contractor submitted that the order restrains the bank from paying UNRA.
On the other hand, UNRA contended that the order does not restrain payment of the money by the bank.
The roads authority, therefore, threatened the bank with both regulatory censure and a suit if it does not complete payment of the money.
This prompted the bank to institute an interpleader application, seeking direction from the court on whether to pay UNRA.
The application was supported by the affidavit of Angelina Namakula-Ofwono, the bank’s chief legal officer/company secretary.
The court, therefore, allowed the application and directed the bank to pay UNRA.
Guarantee terms
The bank irrevocably undertook to pay UNRA a sum not exceeding the secured sums on receipt of the authorities complying demand, stating that either the contractor utilised the advanced payment for purposes other than mobilisation in relation to the works.
The guarantees were to expire on December 6, this year and were subject to the Uniform Rules for Demand Guarantees, 2010 Revision, International Chamber of Commerce (ICC) Publication No.758 excluding sub-article 15 (a).
