THE SUPREME COURT REAFFIRMS THAT ONLY PARTIES TO A CONTRACT (OR THOSE VALIDLY ASSIGNED) CAN SUE OR BE SUED ON IT. MERE PERFORMANCE OF A CONTRACT DOES NOT SUBSTITUTE FOR FORMAL ASSIGNMENT OR NOVATION.

Cleopatra Abikiira
Apr 28
8 min read

Brief of NATIONAL SOCIAL SECURITY FUND & W. H SSENTOOGO T/A SSENTOGGO Versus ALCON INTERNATIONAL LIMITED CIVIL APPEAL NO. 15 OF 2009

Decision rendered on: 8th February 2013

Area of Law: Contract law, Assignment of Contract, Fraud, Arbitration, Public Policy

INTRODUCTION

Imagine you award a multi-million-dollar construction contract to a company you trust, only to later discover that, without your knowledge, the company secretly handed over the entire project to another entity you never contracted with.

Now imagine that when things go wrong, they not only sue you for terminating the contract but also claim victory through an arbitration process you never agreed to, based on that secret handover to another company.

This is the reality in National Social Security Fund & W.H. Ssentoogo t/a Ssentoogo versus Alcon International Limited, Civil Appeal No. 15 of 2009, where a building project's failure exposed gaps in the assignment of contracts without consent, the limits of arbitration, and the sanctity of public policy, corporate transparency, and the sanctity of contracts.

Key Questions This decision established are:

Can a company enforce a contract it was never formally a party to?
Does fraud override an arbitral award, even if the process seemed fair?
When should courts step in to override arbitration, and why?

This appeal arose from a failed construction contract between Alcon International Ltd and the National Social Security Fund (NSSF), which ended amid accusations of wrongful termination, fraud, and failure to honour arbitration processes.

Although the dispute was initially referred to arbitration and an award issued in favour of Alcon, the appellants challenged the entire process, alleging bias, misconduct, and fundamental errors.

Upon full consideration, the Supreme Court allowed the appeal, setting aside the judgments of the Court of Appeal, the High Court, and the arbitral award itself. The Court ordered that the dispute be remitted to the High Court for a proper and expeditious trial on its merits.

In doing so, the Court emphasized that arbitration proceedings must be conducted within the limits of the law and that allegations of fraud or misconduct cannot be brushed aside lightly.

BACKGROUND OF THE CASE

On 21st July 1994, Alcon International Ltd entered into a contract with NSSF to complete a partially constructed building located on Plot No.1 Pilkington Road, Kampala. W.H. Ssentoogo, trading as Ssentoogo and Partners, was appointed as the project architect.

The project faced numerous design changes and variations, leading to a supplementary agreement on 8th June 1996. To accommodate the expanded works, NSSF extended the project deadline to 31st May 1998.

However, tensions escalated when NSSF issued notices of default to Alcon on 11th December 1997 and 30th April 1998, citing breach of contractual obligations. Alcon denied any wrongdoing, but NSSF proceeded to terminate the contract on 15th May 1998.

Alcon filed High Court Civil Suit No. 1255 of 1998, accusing NSSF and Ssentoogo of wrongful termination, collusion, and fraud. It also claimed that NSSF had refused to invoke the contractual arbitration process in good faith. Alcon sought a range of remedies, including declarations, special damages, and general damages.

In response, the High Court declined to grant a temporary injunction but referred the matter to arbitration and stayed the main suit. Despite resistance from NSSF in the appointment process, an arbitrator was eventually appointed. Arbitration proceedings went ahead, resulting in an award largely in Alcon’s favour.

NSSF and Ssentoogo challenged the arbitration, filing applications to remove the arbitrator for bias and to set aside the award for misconduct and errors of law. These applications were dismissed, and the Court of Appeal upheld the lower court’s decisions, prompting the current appeal to the Supreme Court.

ISSUES RAISED

Whether the learned Justices of Appeal erred in law in upholding an arbitration award for breach of contract to the respondent in the absence of a cause of action against the appellants.

2. Whether the learned Justices of Appeal erred in law in upholding an arbitration award that was obtained illegally and contrary to public policy.

3. Whether the learned Justices of Appeal erred in law in holding that the learned trial judge did not err in staying the suit and referring the matter to arbitration.

4. Whether the learned Justices of Appeal erred in law in holding that the arbitrator did not misconduct himself.

HIGHLIGHT

The Supreme Court found merit in the appeal. It held that the arbitration proceedings were fundamentally flawed and that the alleged causes of action were not properly assessed. The Court emphasized that where allegations of fraud and collusion are raised, they should not be summarily dismissed or brushed aside through arbitration without proper judicial inquiry.

RULING

The Supreme Court allowed the appeal and set aside the judgment and orders of the Court of Appeal, the High Court, and the arbitral award and remitted the case back to the High Court for expeditious trial on its merits.

Resolution of Grounds;

Ground One; Whether the learned Justices of Appeal erred in law in upholding an arbitration award for breach of contract to the respondent in the absence of a cause of action against the appellants.

The Appellants, led by Mr. Tumusingize, argued that the respondent, Alcon International Uganda, had no cause of action because it was never a party to the original building contract signed between NSSF and Alcon International Kenya.

Mr. Tumusiime for the Respondent, argued that although the signature on the contract belonged to Alcon Kenya, a family agreement reassigned the performance to Alcon Uganda and everyone, even NSSF through its actions, treated Alcon Uganda as the real builder.

The court upheld the sanctity of privity and contractual consent, finding that performance alone could not substitute for a valid assignment, and so the first ground of appeal succeeded.

The court reinforced the doctrine of privity of contract. While the law permits assignment and novation, for an assignment to be valid, the fundamental elements of a contract must still be satisfied. Specifically, there must be a clear offer and acceptance, an intention to create legal relations, and mutual consent between the original and new parties. Furthermore, all involved parties must be aware of and agree to the change in contracting parties.

Ground two; Whether the learned Justices of Appeal erred in law in upholding an arbitration award that was obtained illegally and contrary to public policy.

The court ruled that the fraudulent conduct of substituting companies without NSSF’s knowledge undermined the validity of the arbitral award. It invoked the principles from Stephen Lubega vs Barclays Bank, noting that fraud must be proven and particularized. Additionally, the court cited Christ for All Nations vs Apollo Insurance Co. Ltd to emphasize that public policy is violated when actions contradict national laws, the Constitution, or morality. The deliberate concealment of crucial information was deemed to have tainted the entire contract and arbitral award, leading the court to allow the appeal and declare the award invalid.

Public policy demands transparency, honesty, and fairness in legal processes, making fraud a key factor in determining whether an award is valid.

Ground three; Whether the learned Justices of Appeal erred in law in holding that the learned trial judge did not err in staying the suit and referring the matter to arbitration.

The Court of Appeal ruled that the trial judge erred in referring the matter to arbitration prematurely. There was no valid application from either party for the matter to be referred, nor had the parties been allowed to make submissions on this decision. Additionally, it was found that the second appellant, not being a party to the arbitration agreement, should not have been subjected to arbitration. Consequently, the Court of Appeal struck off the second appellant from the proceedings and held that the trial judge's decision to refer the matter to arbitration was not in compliance with the law. The third ground of appeal was thus upheld.

The court emphasised the legal principle that courts can refer matters to arbitration when an arbitration agreement is present. However, this must be done per statutory provisions, such as Section 5 of the Arbitration Act, which sets out when a court can stay proceedings and refer matters to arbitration. A party must apply for this referral, and all parties must agree. In this case, the trial judge's decision to refer the matter to arbitration was flawed because it was premature, lacking an application by the parties and a hearing on the matter.

Ground Four; Whether the learned Justices of Appeal erred in law in holding that the arbitrator did not misconduct himself.

The appellants argued that the learned Justices of Appeal erred in concluding that the arbitrator did not commit misconduct. Additionally, the appellants argued that adjournments granted during the proceedings justified the award of costs.

The respondent's counsel acknowledged that the arbitrator did find that the 2nd appellant should not have been made a party to the proceedings. They argued that the arbitrator's discretion to deny costs was sound, citing the 2nd appellant’s voluntary participation in the proceedings and his failure to challenge his position. The respondent also referred to the case of Sheikh Jama vs. Dubat Farah (1959) EA 789 to support the argument that the court could deny costs, provided it gave sound reasons.

The court agreed that the 2nd appellant should not have been made a party to the arbitration agreement. However, it found the arbitrator's reasoning for denying costs to the 2nd appellant insufficient. Therefore, the court allowed the appeal in favor of the 2nd appellant, ruling that the denial of costs was an error.

The court emphasized that while arbitrators have discretion over costs, they must provide sufficient reasons for their decisions, particularly when denying costs to a party. In this case, the lack of a solid justification for the denial of costs led the court to allow the appeal and rule in favor of the 2nd appellant.

Key Takeaways

Doctrine of Privity of Contract Reinforced
The Court reaffirmed that only parties to a contract (or those validly assigned with clear consent) can sue or be sued on it. Mere performance of a contract does not substitute for formal assignment or novation without proper agreement by all parties involved.
Fraud and Public Policy are Paramount
Allegations of fraud, especially where fraud vitiates the contract, must be scrutinised by the court. Arbitration cannot cure contracts tainted by fraud or concealment of material facts, as this is contrary to public policy.
Strict Compliance with Arbitration Referral Process
Courts should not prematurely refer cases to arbitration without a valid application by a party and without hearing both sides. Arbitration must strictly comply with statutory requirements like Section 5 of the Arbitration and Conciliation Act.
Misconduct of Arbitrators
Arbitrators must act within legal and procedural bounds. They must offer sound reasoning for decisions, particularly concerning cost awards. Failure to provide clear reasons can amount to misconduct, justifying setting aside the award.
Transparency and Fair Process in Arbitration
Arbitration processes must uphold fairness, openness, and respect for parties' rights. Awards obtained through illegality or involving parties improperly joined are invalid.
Expeditious Trial Required After Setting Aside
When arbitration is set aside due to serious flaws, courts must order an expeditious hearing on the merits rather than allowing further delay or injustice.

Rules of Law Principles Established

Principle	Explanation
Privity of Contract	A contract can only bind and be enforced by parties who entered into it or were properly assigned with mutual consent. Assignment requires clear agreement and notification.
Fraud Invalidates Contracts and Arbitration	Fraud must be particularized and proved. Contracts and arbitral awards tainted by fraud are unenforceable as a matter of public policy.
Proper Referral to Arbitration	A court can only stay proceedings and refer to arbitration if a valid arbitration agreement exists, a proper application is made, and parties are heard.
Arbitrator Misconduct and Award Setting Aside	An award can be set aside if the arbitrator acts beyond their powers, fails to fairly treat parties, or issues decisions without sufficient reasoning.
Public Policy and Arbitration	Awards that contravene national laws, the Constitution, or established morality offend public policy and are therefore invalid.
Costs Must Be Justified in Arbitration	Arbitrators have discretion to award costs, but must provide sound reasons, especially when denying costs to a successful party.

Conclusion

The case reechoes key legal principles of assignment and contractual freedom, fraud and public policy, and the enforceability of arbitral awards.

It highlights the importance of ensuring that parties in a contract or arbitration are properly bound by the agreement and that any involvement in proceedings is legitimate.

The court’s decision to allow the appeal underscores the importance of fairness in arbitration, particularly when arbitral awards lack sufficient reasoning or procedural fairness. Ultimately, the case reaffirms the need for transparency, equity, and adherence to legal standards in arbitration and contractual matters.

Cleopatra Abikiira

Read the brief below