Failure to Repay a Loan and Breach of Settlement Terms Constitutes Contractual Breach, and Intermediaries/Guarantors May be Liable for Mishandled Collateral, Rules High Court at Kampala

Waboga David
Oct 10
4 min read

FACTS

The case originated from a loan dispute. On 6th July 2019, R.L. Jain Limited (the counter claimant) advanced a short-term loan of UGX 107,000,000 to the 1st counter defendant (Seremba Hamiduh) for six months to finance the purchase of disposable goods.

The 2nd counter defendant (Ntale Remigio) guaranteed repayment, while the 3rd counter defendant (Coronet Consult Ltd) agreed under a collaboration agreement to monitor and control the 1st counter defendant’s stock and report to the lender.

The borrower repaid only UGX 9,000,000 and defaulted on the balance.

Subsequently, a Memorandum of Loan Settlement dated 15th October 2019 was executed between R.L. Jain Ltd, the 1st, and 3rd counter defendants. Under this, the borrower agreed to provide replacement security in the form of land at Mengo (Mawokota Block 301 Plot 583) and to remit 80% of weekly sales to repay the loan.

However, the 3rd counter defendant released goods under its control to the 1st counter defendant, who sold them without remitting proceeds.

The outstanding debt as of 24th January 2020 was UGX 146,060,000.

The defendants failed to appear at trial, and the hearing proceeded ex parte.

ISSUES

Whether the 1st counter defendant breached the loan agreement.
Whether the 3rd counter defendant breached the collaboration agreement.
What remedies were available to the counter claimant?

LEGAL REPRESENTATION

For the Counter Claimant (R.L. Jain Ltd), Mr. Samuel Ayebare and Ms. Deepa Verma of M/s Verma & Partners.
For the Counter Defendants, None (the case proceeded ex parte).

SUBMISSIONS

Counsel for the counter claimant argued that the 1st counter defendant’s failure to repay the loan balance of UGX 98,000,000 plus accrued interest constituted a clear breach of contract, citing Cargo World Logistics Ltd v Royale Group Africa Ltd (HCCS No. 157 of 2013), where breach was defined as “breaking an obligation which a contract imposes, conferring a right of action for damages on the injured party.”

Regarding the 3rd counter defendant, counsel submitted that releasing the goods under its control without authorization from the counter claimant amounted to a breach of the collaboration agreement. The breach deprived the counter claimant of repayment security and caused financial loss.

COURT’S FINDINGS

Justice Boniface Wamala agreed with the counter claimant and resolved all issues in its favour.

On breach of the loan agreement
The Court held that the 1st counter defendant breached the loan agreement by paying only UGX 9,000,000 out of UGX 107,000,000 and failing to remit 80% of daily or weekly sales as agreed in the memorandum of settlement.

“From the evidence, no other payment was made by the 1st counter defendant beyond the sum of UGX 9,000,000/=. The agreed payment of 80% of the daily or weekly sales under the memorandum of loan settlement was not made. This amounted to a breach of contract by the 1st counter defendant.”

On breach of the collaboration agreement
The Court found that the 3rd counter defendant, Coronet Consult Ltd, violated its contractual duty under the collaboration agreement by releasing the 1st counter defendant’s stock, valued at UGX 208,400,000, without authorization.

“It has further been shown by the counter claimant that the said stock was released by the 3rd counter defendant to the 1st counter defendant who sold it without remitting the requisite payment to the counter claimant. This conduct was in breach of the collaboration agreement.”

On remedies
The counterclaimant was entitled to specific performance, payment of the outstanding loan balance of UGX 146,060,000.

The Court awarded UGX 10,000,000 as general damages for loss of use of funds and inconvenience, guided by Hadley v Baxendale (1894) 9 Exch 341, Kibimba Rice Ltd v Umar Salim (SC Civil Appeal No. 17 of 1992), and Uganda Commercial Bank v Kigozi [2002] 1 EA 305.

Interest on general damages was set at 8% per annum from the date of judgment until payment in full.

Costs were also awarded to the counter claimant.

The Court declined to award compound interest, citing Attorney General v Virchand Mithalal Sons Ltd (2009 UGSC 13), noting that the transaction did not justify such an award.

HOLDING

The counterclaim succeeded in full, and judgment was entered jointly and severally against the 1st and 3rd counter defendants for:

UGX 146,060,000 as the outstanding loan balance.
UGX 10,000,000 as general damages.
Interest on general damages at 8% per annum from the date of judgment until payment in full.
Costs of the counterclaim.

“In all, therefore, the counter claim succeeds and judgment is entered against the 1st and 3rd counter defendants jointly and severally…”

KEY TAKEAWAYS

A borrower’s failure to repay a loan as agreed and to comply with a settlement memorandum constitutes breach of contract under Ugandan law.
Entities that act as intermediaries or guarantors under a collaboration agreement can be held liable for breach if they release or mishandle collateral contrary to contractual terms.
Compound interest is generally prohibited in loan contracts unless expressly agreed upon and not unconscionable.
Even where proceedings are ex parte, a plaintiff or counter claimant must still prove their case on a balance of probabilities.

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