Court of Appeal upholds enforceability of loan agreement containing property transfer clause upon default — affirms binding effect of parties’ free consent and rejects alleged illegality as a defence

Waboga David
6 days ago
7 min read

Introduction

In Uganda, parties generally enter into loan agreements and pledge property title as security. Upon default, it is not uncommon for the defaulting party to later challenge the legality or enforceability of the agreement in an attempt to backtrack on the contractual obligations. These disputes often turn on whether the security arrangement was lawful, whether possession and subsequent improvements were justified, and whether restitution should be made where one party has benefited from the other’s expenditure.

The Court of Appeal in Paul Kanyansi v Fred Hasibiri (Civil Appeal No. 56 of 2021) [2025] UGCA 260 (6 August 2025) has held that where a loan agreement clearly stipulates the consequences of default — including the creditor’s right to take possession and make improvements — such terms are enforceable under the Contracts Act, provided they were freely agreed to without fraud or misrepresentation.

The Court affirmed that denying reimbursement for proven improvements would amount to unjust enrichment, and that equity requires a party seeking to redeem property to first refund the value of such improvements.

This decision reinforces the principle that commercial certainty and the sanctity of contract will be upheld, and that courts will not permit parties to evade obligations voluntarily assumed, even where possession of the secured property becomes contentious.

Facts of the Case

On 8 August 2005, the appellant (borrower) and the respondent (lender) entered into a written “friendly loan” agreement under which the respondent advanced UGX 6,650,000 to the appellant. The agreement provided that:

The appellant would secure the loan with his incomplete premises on Plot 9, Samson Were Road, Busia Town Council.
The loan was to be repaid in full by 29 August 2005.
Clause 2 stipulated that in the event of default, the transaction would mutate into an outright sale of the property to the respondent at his option.
The appellant surrendered the lease offer for the property to the respondent and agreed that any repayment would be acknowledged in writing.

The appellant defaulted on repayment. The respondent applied to the Busia District Land Board for a lease offer in his name, which was granted, and subsequently obtained a certificate of title. He then invested in completing and improving the building, making it habitable.

The Appellant lodged a caveat on the property.

The respondent filed Civil Suit No. 127 of 2005 in the High Court seeking:

A declaration that the property had lawfully transferred to him as an outright sale;
A permanent injunction against the appellant;
Removal of a caveat;
General and exemplary damages; and
Costs.

The appellant filed a defence and counterclaim, asserting that:

He had partially repaid UGX 1,000,000;
The property remained his;
The respondent had trespassed, and
He was willing to redeem the property by paying the outstanding loan balance of UGX 5,650,000.

At trial, the High Court on 24 October 2018 found that the respondent’s title was null and void but ordered that the appellant could redeem the property by:

Paying the outstanding loan of UGX 6,650,000; and
Paying UGX 118,000,000 to reimburse the respondent for improvements.

The court also awarded the appellant nominal damages of UGX 2,000,000 and costs of the main suit and counterclaim, but held that trespass had not been proved.

Grounds of Appeal

The appellant challenged:

The order to pay UGX 118,000,000 for improvements, arguing it sanctioned an illegality and was neither pleaded nor proved.
The rejection of his claim for general damages.

The trial court’s failure to find trespass.

Key Issues on Appeal

Whether the order to compensate the respondent for improvements was lawful
Whether the appellant was entitled to general damages
Whether trespass was established

Appellant’s Submissions

1. Alleged Error in Award of UGX 118M

The appellant contended that the trial court erred in ordering him to redeem the property by paying UGX 118,000,000/= for improvements made by the respondent. Since the court had found that the respondent initially took possession of the property illegally, any subsequent improvements were argued to be unlawful and therefore not compensable.

Awarding this sum, the appellant submitted, effectively sanctions an illegality, contrary to the legal principle of ex turpi causa non oritur actio—that no cause of action arises from a wrongful act.

2. Inconsistency in Remedies

The appellant further argued that the court had already determined that the respondent was not entitled to any remedies.

Granting compensation for improvements contradicts this earlier finding and disregards the principle of volenti non fit injuria—one cannot complain about harm to which they consented.

3. Lack of Pleading and Proof

The appellant maintained that the value of the improvements was neither specifically pleaded in the proceedings nor substantiated with admissible evidence.

The award, therefore, contravened established precedent, including Isaiah Kabali & Anor v Attorney General, Interfreight Forwarders v EADB, and Fang Min v Belex Tours & Travel Ltd.

Respondent’s Submissions

1. Existence and Enforcement of the Agreement

The respondent emphasized that the parties entered into a valid written loan agreement:

Loan Amount: UGX 6,650,000/= advanced to the appellant.
Security: The appellant’s uncompleted premises.
Clause 2: In the event of default, the loan would automatically mutate into an outright sale of the property to the respondent at his option.

The appellant defaulted on repayment, and the respondent lawfully exercised his contractual right to take possession.

2. Rightful Improvements

At the time of takeover, the property was incomplete and dilapidated. The respondent invested significant resources to complete and upgrade the premises into habitable apartments.

The appellant now seeks to benefit from these improvements without reimbursing the costs, which the respondent argued would be unjust.

3. Consent and Binding Nature of the Contract

The appellant freely signed the agreement and admitted under cross-examination that he understood the default-to-sale clause. In the absence of fraud or misrepresentation, a signed contract is legally binding, and its terms must be enforced.

4. Compensation and Prevention of Unjust Enrichment

The trial court’s award of UGX 118,000,000/= reflected the value of the property improvements after accounting for pre-existing value and rental income.

Denying the respondent reimbursement would unjustly enrich the appellant.

The respondent relied on legal principles of unjust enrichment (Mahabir Kishore v Madhya Pradesh) and restitution (Lipkin Gorman v Karpnale).

5. Legitimate Expectation

The respondent submitted that he had a legitimate expectation to recover the costs of improvements in the event the property reverted to the appellant. The doctrine of restitutio in integrum supports restoring a party to the position they would have been in had the breach not occurred.

6. Evidence on Value of Improvements

Contrary to the appellant’s claims, evidence of the improvements’ value was presented and considered by the trial court, justifying the UGX 118,000,000/= award. The respondent argued that rejecting this award would amount to unjustly benefiting the appellant at the respondent’s expense.

Court of Appeal’s Reasoning

1. Binding Nature of the Agreement

The loan agreement was clear and enforceable under section 9 of the Contracts Act.

The Court emphasized the enforceability of the signed loan agreement:

“It is a well-established legal principle that when a document containing contractual terms is signed, then in the absence of fraud or misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.

The appellant acknowledged his indebtedness under the agreement and further conceded that in default, the loan would translate into a sale. He testified that he signed the agreement because he was in need of money, which the respondent provided.”

The Court relied on section 9 of the Contracts Act, Cap 284, noting that a contract made with free consent, lawful consideration, and lawful object is binding.

2. Mutation Clause and Improvements

Upon default, the contract lawfully allowed the respondent to take over and improve the property.
Denying compensation would unjustly enrich the appellant.
The UGX 118 million award was supported by evidence of market value at the time of judgment.

Regarding the conversion of the loan into a sale and subsequent property improvements, the Court stated:

“The respondent’s actions were a legitimate exercise of contractual rights following the appellant’s undisputed default. The respondent took over possession of the incomplete premises and made significant improvements, constructing apartments. Denying him compensation would result in unjust enrichment of the appellant.”

The Court cited principles of restitution and unjust enrichment:

Mahabir Kishore & Madhya Pradesh – three elements: enrichment, expense at the plaintiff’s cost, and retention is unjust.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 722 – recovery of money or benefit where retention is unconscionable.

3. Illegality Argument Rejected

Even if possession was disputed, the improvements arose from a contractual right triggered by default.

Equity requires a party benefiting from another’s investment to make restitution.

The appellant contended that awarding compensation sanctioned an illegality. The Court rejected this, reasoning:

“Even if possession was disputed, the improvements arose from a contractual right triggered by default. Equity requires that a party benefiting from another’s investment must make restitution. To deny compensation would be to allow unjust enrichment.”

The Court cited Nipun Norattam Bhatia v. Crane Bank Ltd, which emphasized restitution to prevent unconscionable retention of another’s investment.

4. Legitimate Expectation

The Court held that the respondent had a legitimate expectation to recover his expenditure:

“The contract explicitly allowed the respondent to take over and improve the property upon default. Therefore, when the property reverted to the appellant, the respondent was entitled to be restituted for the monies and resources expended on construction and improvement.”

Citing Bank of Uganda v. Kibuuka & 4 Others – clear promises or consistent practice can give rise to legitimate expectation.

The respondent had a legitimate expectation to recover his expenditure if the property reverted to the appellant.

5. General Damages & Trespass

The Court found no basis for general damages, as the respondent’s possession was under a contractual arrangement.

The Court found no basis for general damages or trespass claims:

“General damages are payable as the direct natural or probable consequence of a wrongful act.

The appellant’s claim did not arise from any breach by the respondent but from his own default. Likewise, trespass was not proved, as possession was exercised under a contractual right.”

Trespass was not proved.

Holding

The appeal failed on the UGX 118 million award; the trial court was correct in requiring the appellant to pay for improvements before redeeming the property.
Claims for general damages and trespass were dismissed.
The Court affirmed that compensation for improvements under a valid loan-to-sale agreement prevents unjust enrichment and respects contractual and equitable principles.

Key Takeaways

A loan agreement that stipulates property transfer upon default can be upheld where parties freely consented.
Courts will prevent a party from reclaiming improved property without compensating the party who made the improvements.
Legitimate Expectation in Private Contracts – Where a contract allows possession and development upon default, a possessor can expect restitution if ownership is reversed.
A party cannot rely on alleged illegality to escape contractual obligations they knowingly undertook.
Courts may rely on evidence from trial to assess improvement value, even if not extensively pleaded, where both parties addressed it.