The Supreme Court has reaffirmed the limits on the enforceability of harsh interest clauses in commercial contracts, affirming that courts may temper interest rates where gov't delay imposes unfair...
- Waboga David
- Sep 13
- 10 min read
Coram
Owiny-Dollo, CJ; Tibatemwa-Ekirikubinza, Musoke, Madrama, Kibeedi, JJ.SC.
Lead Judgement
Chief Justice Owiny-Dollo
Introduction
The enforceability of harsh interest clauses in commercial contracts remains a critical issue in Ugandan jurisprudence, particularly where prolonged government delay in meeting contractual obligations imposes unfair and disproportionate burdens on contracting parties.
Courts are increasingly called upon to balance the sanctity of contractual freedom with the equitable principle that interest should not operate as a punitive device but rather be used for compensation.
In this context, the Supreme Court of Uganda recently pronounced itself in the case of Dr. Maj. Rtd. Anthony Jallon Okullo v. Attorney General, a decision that has far-reaching implications for contractual enforcement, commercial certainty, and government accountability. The case addressed the enforceability of a contractual interest rate of 24% compounded annually over more than two decades of government default. The Supreme Court was tasked with determining the extent to which it could temper interest obligations under section 26 of the Civil Procedure Act, without undermining the principle of freedom of contract.
The judgment clarifies the scope of judicial discretion in varying interest rates, affirms the enforceability of compound interest in principle, and sets important limits on the award of damages alongside interest.
Facts
In 1988, following a peace accord between the Government of Uganda and the Uganda Peoples Democratic Movement/Army, the Ministry of Defense contracted the Appellant, Dr. Maj. Rtd Anthony Jallon Okullo, a medical practitioner, to provide medical services to Lt. Col. Angelo Okello, a rebel leader who fell ill.
The agreement stipulated that the government would cover all expenses and pay Dr. Okullo at a later date. Dr. Okullo provided medical services in Uganda and accompanied the patient to Kigali, Jeddah, Brussels, and Rome, incurring significant costs. After Lt. Col. Okello’s death, Dr. Okullo conducted a post-mortem at the government’s request to dispel claims of foul play.
Dr. Okullo submitted two invoices to the government:
US$ 68,950 for professional services.
US$ 24,200 for expenses (transport, accommodation, and meals).
The total principal sum was US$ 93,150, with an agreed compound interest rate of 24% per annum to account for delays and currency fluctuations.
The government delayed payment for 25 years, making partial payments of UGX 138,455,750 (equivalent to US$ 55,434) in 2011 and UGX 94,200,000 (equivalent to US$ 37,716) in 2012, leaving the accrued interest unpaid.
Dr. Okullo filed a suit in the High Court claiming the following;
Special damages of US$ 19,362,821 (or its equivalent in UGX).
Compound interest at 24% per annum from filing until payment.
General damages for breach of contract.
Interest on general damages at 8% from the contract date until payment.
Costs of the suit.
High Court Determined as follows;
The High Court rejected the claim for US$ 19,362,821, finding it unsubstantiated.
It awarded US$ 3,066,400.44 as special damages, applying a 15% compound interest rate on the principal sum of US$ 93,150 (reduced from the agreed 24% due to perceived harshness).
General damages of UGX 500,000,000 were awarded as “nominal damages” for inconvenience, opportunity costs, and inflation.
Costs were awarded, including a certificate for two counsel.
Dissatisfied, the appellant appealed the High Court decision to the Court of Appeal, which determined that;
The Court of Appeal partially allowed the government’s appeal and dismissed Dr. Okullo’s cross-appeal.
It found the 15% compound interest rate harsh and unconscionable, substituting it with 6% simple interest on US$ 93,150 from the contract date to the filing of the suit.
General damages were reduced to UGX 50,000,000, with interest on the decretal sum from the judgment date until payment.
The court held that the High Court judge was functus officio when awarding costs for two counsel.
Aggrieved, Dr. Okullo appealed to the Supreme Court.
Issues
The Supreme Court addressed the following key issues:
Whether the Court of Appeal erred in substituting the agreed 24% compound interest with 6% simple interest, thereby causing a miscarriage of justice.
Whether the Court of Appeal used incorrect premises to determine that the 24% compound interest rate was harsh and unconscionable.
Whether the Court of Appeal failed to judicially evaluate the evidence, leading to an erroneous conclusion.
Whether the Court of Appeal improperly interfered with the High Court’s discretion, causing a miscarriage of justice.
Whether the Court of Appeal considered extraneous matters in its decision, resulting in an injustice.
Submissions of the Parties
Appellant’s Submissions (Dr. Okullo)
On Ground 1
The Appellant submitted that the Court of Appeal erred by substituting compound interest with simple interest. Section 26(1) of the Civil Procedure Act allows courts to vary only the rate of interest, not the type (compound vs. simple). The agreed compound interest was binding absent fraud or vitiating factors.
Grounds 2, 3, 4, and 5
The Court of Appeal wrongly found the 24% rate harsh and unconscionable without evidence. The court failed to consider Bank of Uganda lending rates in 1991 (39%) and 1992 (42%), which were higher than 24%. Referenced precedents where courts upheld high interest rates (e.g., Interfreight Fowarders v EADB (36%), Premchandra Shedndi v Aximos Oleg (20%)). Further submitted that the commercial nature of the transaction justifies a higher interest rate.
Submitted that the lower court relied on irrelevant factors, such as the conduct of the government officer and the alleged staleness of the claim, despite evidence that Dr. Okullo pursued payment diligently.
Further submitted that the High Court’s reduction to 15% already addressed any harshness, and the Court of Appeal’s further reduction to 6% simple interest was unjustified.
Respondent’s Submissions (Attorney General)
The Court of Appeal correctly exercised its discretion under Section 26(1) to vary the interest rate, as 24% compound interest was harsh and unconscionable.
The High Court erred by applying Section 26(2) and (3) instead of Section 26(1), which allows courts to adjust unconscionable interest rates.
Interest rates on US dollar transactions in Uganda rarely exceed single digits, justifying the reduction to 6% simple interest.
Dr. Okullo was guilty of laches (delay) in pursuing the claim, which inflated the interest amount.
The UGX 500,000,000 general damages award was excessive and not nominal, as no loss was proven linking the breach to Dr. Okullo’s sale of his property.
Rejoinder by Appellant
The cases cited by the Respondent were distinguishable, as they did not involve agreed-upon interest rates or compound interest.
The High Court’s reduction to 15% was a reasoned exercise of discretion, and the Court of Appeal’s interference was unjustified.
Court’s Findings
The Supreme Court, per the lead judgement of Chief Justice Owiny-Dollo, made the following findings:
Jurisdiction and Scope of Review
As a second appellate court, the Supreme Court’s role is to determine whether the Court of Appeal properly executed its duty as a first appellate court, per Milly Masembe v Sugar Corporation and Kifamunte Henry v Uganda. It can re-evaluate evidence if the Court of Appeal applied incorrect principles.
Section 26 of the Civil Procedure Act
Section 26(1) allows courts to vary the rate of interest if it is harsh and unconscionable but does not permit changing the type of interest (e.g., from compound to simple).
The High Court erred in citing Section 26(2) and (3) but inadvertently complied with Section 26(1) by reducing the rate to 15% while preserving compound interest.
The Court of Appeal erred by substituting compound interest with simple interest, as Section 26(1) limits judicial discretion to varying the rate only.
Harsh and Unconscionable Interest Rate
The court applied Common Law principles, codified in Section 26(1), to assess whether the 24% compound interest was a penalty clause.
Citing Cavendish Square Holding BV v Tatal El Makdessi and Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, the court held that a clause is penal if it imposes a disproportionate detriment compared to the innocent party’s legitimate interests.
The 24% rate, when compounded over 25 years, became “enormous” and penal, justifying judicial intervention. However, the Court of Appeal’s reduction to 6% simple interest was excessive and ignored the commercial nature of the transaction.
Commercial Nature of the Contract
The contract was a commercial transaction, as Dr. Okullo, a private medical practitioner, rendered professional services for an agreed fee, using personal funds. The Court of Appeal erred in deeming it non-commercial.
Evidence of Loss
The Court of Appeal wrongly concluded that Dr. Okullo failed to prove loss linked to the breach. Evidence showed he mortgaged his house in 1996 due to financial distress caused by the government’s 25-year delay in payment, leading to its loss in 1998 (Sempra Metals Ltd v Inland Revenue Commissioner).
There was a clear causal connection between the government’s breach and Dr. Okullo’s financial woes.
Extraneous Considerations:
The Court of Appeal improperly considered:
The “cavalier attitude” of the government officer, despite evidence (Exhibit C1) that the 24% rate was agreed upon expecting prompt payment within one month.
The alleged staleness of the claim, ignoring evidence (Exhibit C4) that Dr. Okullo pursued payment diligently.
The stability of the US dollar, which was irrelevant given the commercial context and Bank of Uganda lending rates (39%–42% in 1991–1992).
Appropriate Interest Rate:
The court adopted a 9% compound interest rate, equivalent to a 30% simple interest rate, as reasonable and not penal, considering:
Bank of Uganda lending rates in 1991 (39%) and 1992 (42%).
Precedents awarding high interest rates in commercial transactions (Interfreight Fowarders (36%), J.K Patel v Spear Motors (30%)).
Using the compound interest formula (A = P(1 + r/n)^(nt)), the court calculated the accrued interest, accounting for partial payments in 2011 and 2012, resulting in US$ 790,262 as special/liquidated damages.
General Damages
The High Court’s UGX 500,000,000 award as “nominal damages” was excessive, as nominal damages are symbolic for minimal harm.
The Court of Appeal’s reduction to UGX 50,000,000 was influenced by extraneous factors and failed to account for Dr. Okullo’s anguish, anxiety, and loss of his house due to the breach.
The Supreme Court reinstated UGX 500,000,000 as general damages, with 6% simple interest from the High Court judgment until payment.
Costs:
The Court of Appeal’s finding that the High Court was functus officio when awarding costs for two counsel was not addressed, as it was not raised in the appeal grounds.
Concurring Opinion (Tibatemwa-Ekirikubinza, JSC)
Justice Tibatemwa-Ekirikubinza concurred in the result but delivered a detailed opinion clarifying the scope of the court’s discretion under Section 26(1) of the Civil Procedure Act (CPA). While the Chief Justice limited judicial intervention to the rate of interest, Tibatemwa-Ekirikubinza, JSC, reasoned that discretion extends to both the rate and the nature of interest (i.e., whether simple or compound).
Her Lordship emphasized that the purpose of awarding interest is compensatory rather than punitive. Interest, like damages, seeks to restore a party to the position they would have been in had the breach not occurred, but without leading to unjust enrichment. She illustrated the stark disparity between compound interest at 24% per annum over 22 years (yielding USD 95.4 million) and the same percentage applied as simple interest (yielding USD 508,419). This, she reasoned, demonstrated why courts must evaluate both the rate and the mode of calculation to avoid oppressive outcomes.
On general damages, Tibatemwa-Ekirikubinza, JSC, agreed with the Court of Appeal that the award must be minimal where substantial interest is already granted. While interest compensates for the financial deprivation, general damages should address non-monetary losses such as inconvenience or distress.
Applying the principle in Hadley v Baxendale [1854] 9 Ex. 341, she found no proximate link between the government’s delayed payments and the appellant’s later loss of property through a voluntary mortgage and sale. Accordingly, she upheld the UGX 50 million awarded by the Court of Appeal as reasonable and proportionate.
Concurring Opinion of Justice Christopher Madrama Izama, JSC
Justice Christopher Madrama Izama concurred with the Chief Justice’s reasoning but emphasized several additional points. He noted that under section 26(1) of the Civil Procedure Act, courts may only interfere with the rate of contractual interest where it is harsh and unconscionable, but not with the type of interest agreed upon by the parties. Accordingly, the Court of Appeal erred when it substituted compound interest with simple interest, as that exceeded the scope of judicial discretion under the Act.
On the applicable rate, Justice Madrama reasoned that while the parties had agreed to 24% compound interest, such a rate would be harsh and unconscionable in light of prevailing financial conditions and the fact that the debt was denominated in U.S. dollars. He instead fixed the contractual compound interest at 9% per annum from the date of breach until the High Court judgment, after which simple interest at 15% per annum would apply until full payment, reflecting both the principle of restitutio in integrum and the extraordinary delay of over 25 years in settlement.
Justice Madrama further underscored that keeping the appellant from his entitlement for such a protracted period amounted to a violation of his constitutional right to property under Article 26 of the Constitution. In his view, absent the partial payments already made, the case would have warranted an award of aggravated damages to mark the state’s deliberate and unjustified delay in settling a lawful contractual obligation.
Concurring and Partly Dissenting Opinion of Justice Muzamiru Mutangula Kibeedi, JSC
Justice Muzamiru Mutangula Kibeedi, JSC, agreed in principle with the Chief Justice that courts may intervene in contractual interest where the agreed rate is harsh, unconscionable, or penal.
However, he stressed that the type of interest (simple or compound) cannot be divorced from the rate, since in practice they operate as “Siamese twins.” A rate that appears reasonable under simple interest may become unconscionable under compound interest. Thus, in his view, the Court’s discretion under section 26(1) of the Civil Procedure Act should extend to considering both the rate and the type of interest in order to prevent unjust outcomes.
Justice Kibeedi faulted the Court of Appeal for reducing the High Court’s award to 6% simple interest without adequately considering commercial realities, including government bureaucracy, prevailing bank rates for foreign currency loans, and the higher risks of contracting with the state. He opined that while judicial notice of banking rates was proper, the Court of Appeal should have adjusted the award upwards to reflect these risks.
On the award of general damages, Justice Kibeedi departed from the majority. He reiterated that interest is compensatory and ordinarily excludes additional general damages for breach of contract, as awarding both risks duplicating remedies. He relied on Ugandan precedent (Francis Sembuya v Allports Services (U) Ltd [2000] UGSC 8) and comparative jurisprudence (Kenya’s Tourist Development Corporation v Sundowner Lodge [2018] eKLR).
Accordingly, he would have disallowed the award of UGX 500 million in general damages proposed by the Chief Justice.
Although in the minority on this point, Justice Kibeedi maintained that once parties have agreed on an interest clause, courts should be slow to superimpose general damages, since interest sufficiently compensates for loss of use of money.
Holding
The Supreme Court, by majority decision, allowed the appeal in part and made the following orders:
The Court of Appeal’s substitution of compound interest with simple interest was set aside, as Section 26(1) does not permit varying the type of interest.
The Appellant was awarded Special/liquidated damages of US$ 790,262, calculated at 9% compound interest on US$ 93,150 from February 22, 1989, to September 9, 2015, accounting for partial payments.
General damages of UGX 500,000,000.
Interest was awarded of 15% simple interest on the special damages (US$ 790,262) from the High Court judgment (September 9, 2015) until payment in full.
And 6% simple interest on the general damages (UGX 500,000,000) from the High Court judgment until payment in full.
The Appellant was awarded two-thirds of the costs of the Supreme Court appeal and full costs in the lower courts.
Grounds 1, 3, 4, and 5 of the appeal succeeded; Ground 2 failed.
Key Takeaways
Courts will uphold freely negotiated interest clauses unless oppressive.
Courts may temper interest rates where state delay imposes unfair burdens on taxpayers.
Majority allows limited general damages alongside interest; minority (Kibeedi JSC) warns this risks double compensation.
Read the full decision below
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