Enforcement of Contracts

UGANDA LAW REFORM COMMISSION

CONFERENCE

ON

DOING BUSINESS IN UGANDA: NEED FOR REFORM?

7- 8TH DECEMBER, 2004

SPEKE RESORT MUNYONYO

TITLE OF PAPER:Enforcement of Contracts

Presented by:Christopher Bwanika

Advocate/Partner

Kalenge, Bwanika, Kimuli & Co; Advocates

P.O. Box 8352,

Kampala.

E-mail:

Facsimile 041-345437

ENFORCEMENT OF CONTRACTS

1.0INTRODUCTION

Ugandans in their day today business activities enter into relations expressly or impliedly, which have binding obligations. In some cases they set out explicitly to enter into written contracts where terms agreed upon are clearly reduced on paper. In other situations they transact business by word of mouth and by inference from their conduct and circumstances surrounding the dealings the law construes contracts to have been concluded. The latter cases usually surprise a number of businessmen who often believe that there is no contract because there is no written document popularly termed “bwiino” (or “ink” in English) when the law infers a valid contract from the dealing. The Practicing Lawyer quiet often encounters disputes where a party who by all standards and other evidence available, clearly entered into a contract but through sharp practice or sheer fraud seeks to renege on his or her obligations under the cover of absence of a written documents. It is therefore more common in our jurisdiction to have the “contracts” (or “Ndagaano”, as it is commonly known) written by the more serious businessmen.

There are however a number of business dealings, especially where parties in good times have mutual trust and respect for each other, where oral binding contracts are entered into. In this paper we make an analytical examination of the law (legal framework) procedures, practice, government policies and implementation machineries relating to enforcement of contracts in so far as doing business in Uganda is concerned. We specially discuss the nightmares business people go through in Uganda to enforce contracts concluded with Government, which by all standards, is the biggest contractor in all businesses.

We focus on the inadequacies within the existing legal framework and make recommendations geared at reforming the law and practices in the enforcement of contracts. It is hoped that the recommendations made will facilitate improved and increased business activity in this Country.

2.0Definition of contract:

2.1A contract is made where parties have reached an agreement, or where they are deemed to have reached an agreement. That is to say, when one party accepts an offer made by another, then a contract is made. A Contract therefore is the undertaking between a person and another (this includes artificial persons e.g. Companies) which the law will, if necessary, enforce in case either of the parties fails to carry out his bargain so that the legitimate expectation of the other in the realization of his object may not be defeated.

The parties are free to agree about anything and everything on all that which is lawful provided it is not against Public Policy. They make their own rules as to what shall bind them or that that will not bind them. This is what is referred to as freedom of contract. The function of the law is generally only involved, apart from determines questions of breach of contract, when the parties have failed to provide in their agreement for some contingence or event that gives rise to the dispute in question. Sometimes the contingence or event may have been provided for in the agreement but in uncertain or equivocal terms. The law therefore comes in to construe the agreement of the parties, to determine what the parties meant by the terms they used, to decide what the parties meant or what the parties must be taken to mean even in the absence of express terms, and to arrive at the facts in order to establish whether the contract has been invalidated or broken.[1]

Generally speaking the parties are at liberty to come to an agreement in any terms they choose, and in some cases are free to choose the law by which their agreement will be governed.

2.1Essential elements of a simple contract

There are three fundamental elements in any simple contract and these are:-

• Agreement:The parties must have reached or deemed to

have reached an agreement.

• Intention:The parties must have intended, or be deemed

to have intended, to create a legally binding relation in their agreement.

• Consideration:The terms of the of the agreement must

show that some advantage moved from either party.

2.2Form of contract

The law governing creation and enforcement of contract in Uganda evolved from English Law. As is the case in English law, there are no particular requirements providing for the form of a simple valid contract in Uganda.[2]A contract may therefore be in writing or oral (by word of mouth). The law may however in special cases require certain contracts to be in writing, for instance under the Employment Act.[3] In other cases the law may require that contracts be made under seal. These kinds of contracts are referred to as special contracts and they include debentures, mortgages, charges, e.t.c. executed by companies incorporated under the Companies Act. Almost all contracts entered into in Uganda are simple contracts as distinguished from special contracts as defined above.

2.3Common types of contracts in Uganda

The contracts that are common in Uganda and which are enforced in the daily business life are contracts for sale of goods, contracts for sale of land, contracts of service, building or construction contracts. In the banking sector the rampant contracts are loan and securities agreements.

3.0ENFORCEMENTS OF CONTRACTS IN UGANDA

To enforce a contract is to ensure obedience to it or its performance.

We earlier on discussed in this paper that parties are free to agree on anything and everything and can choose their own rules to bind them. In so doing the parties can at the outset agree on penalties in case of breach, terms of disengagement or termination, arbitration or dispute resolution and other enforcement measures where they can even agree on enforcing the contract without reference to Court [4]

3.1Enforcement through arbitration and conciliation

The Center for Arbitration And Dispute Resolution (CADER) is a statutory corporation that was set up under The Arbitration And Conciliation Act, to facilitate arbitration and conciliation proceedings and also promote use of alternative dispute resolution.

The business world has made loud and clear outcries about the ordinate delays in hearing and disposing off commercial cases. In arbitration a limited time frame is set to hear and conclude the dispute and a speedier resolution of disputes is anticipated.

The awards made under arbitration are recognized as binding and successful parties apply to Court for enforcement as if the awards were decrees of the Court[5]. With appropriate selection of arbitrators and serious parties, considerable successes have been registered in enforcing contracts through arbitration and conciliation and the business community applauds the introduction of CADER.

3.2Enforcement through court process

The traditional and common approach before the business community in Uganda became more aware of Alternative Dispute Resolution was to take Court action to enforce contracts.

The delays characterized by protracted litigation coupled with the frustrations faced in enforcing Court Judgments has continually discouraged businessmen to have recourse to Court. The Commercial Court nonetheless is kept busy every day adjudicating over commercial contracts. Judgments are continually being passed and enforced through attachment and sale of properties where the Judgment Creditor is lucky to trace any viable assets. Cases have started emerging where execution by attachment of property is found to be unfeasible, to commence bankruptcy or insolvency proceedings. In other cases Judgment Creditors have applied to Court for attachment of Judgment Debtors (natural persons) i.e. the arrest and detention of judgment debtors in Civil Prison. In a number of cases payments have been realized to avert the unsavoury effects and stigma of imprisonment.

3.3Glimmer of Hope Under the Insolvency regime

There is an established culture among the people of Uganda of not settling their debts or meeting their obligations as they fall due.

The law of bankruptcy and liquidation has been in our statute books since colonial times. However, the law has largely stayed disuse mainly because most business people did not know about it. The law is scattered in different legislations, for instance the Bankruptcy Act Cap.67 and the Deeds of Arrangements Act Cap.75, which relate to Individual insolvency; and the Companies Act Cap 110, which governs liquidation of Companies. Other legislation relating to the law of insolvency include the Mortgage Act Cap.229, The Debts (Summary Recovery) Act Cap.74 and other pieces of scattered legislation which make it difficult for lay business people to read and understand.

There is however a recent awakening to invoke the law, which has taken many defaulting business people, including Judgment debtors, by surprise. There was for instance a case in 2001 where a bankruptcy petition was brought against a former government minister who had failed to meet his contractual obligations.[6] Earlier on in the year 2000 another bankruptcy cause had been brought to enforce payment against a firm of lawyers. In both cases the debtors promptly settled the matter to avert adjudication.[7]

Experience and studies have therefore shown that if Uganda puts in place an effective insolvency law and procedure, a new culture and business etiquette of fulfilling contractual and financial obligations will be inculcated in the business sector. Studies have been carried out and recommendations have been made for reform of this area of the law, which, if implemented, will give hope for future enforcement of contracts. In particular a recommendation has been made to consolidate all the insolvency law into one user-friendly code, which will be easier for the business community to understand and appreciate.

A recommendation has also been made to ease and shorten the procedures of commencing and concluding insolvency proceedings. It is hoped that this will make the insolvency regime attractive to the business community and improve the performance of contracts and financial obligations among other things.

4.0THE CHALLENGE OF ENFORCING CONTRACTS AGAINST GOVERNMENT

Government is the biggest contractor as well as debtor in most commercial activities that take place in the Ugandan Economy..

The Government of Uganda has since the colonial era enjoyed crown privileges like those enjoyed by Her Majesty’s Government in England[8]Under The Government Proceedings Act Cap.77, no execution or attachment is permissible to force payment by Government of any monies awarded by Court against Government or any Government Department or Officer of Government[9]. The Treasury Officer of Accounts has on several occasions been summoned to Court to show cause why he should not be committed to Civil Prison for contempt of Court upon failure to pay as directed in the Certificate of Order. However, the state and the Treasury Officer have turned up with sometimes undeliverable and hair rising excuses that Courts, rather unfortunately, have readily accommodated. Indeed there is no known record where Courts have remanded a Treasury Officer of Accounts for contempt of court even though government has remained the largest debtor in the economy for years and years. The present enforcement system is therefore inadequate and highly ineffective and therefore needs to be reviewed.

Sadly, these privileges have been extended to other government Corporations. The assets and properties of Uganda Railways Corporation, for example, are expressly protected from any execution proceedings by operation of law. [10] This has extended the inadequacies of enforcement of contracts and judgments beyond the government itself.

Studies have shown that Governments failure to meet its contractual obligations – particularly the failure to pay its debts fulfill its financial obligations towards business people and establishments which deal with it is responsible for the dismal performance of the affected business people towards their own obligations. Consequently, this has created a multiplier effect of failure to pay debts and accelerated insolvency cases.[10]

5.0RECOMMENDATIONS FOR REFORM

We all agree that the law does not operate in a vacuum and therefore, the legal framework that is in place impacts greatly on business.

We need to effect changes in the law, policies and strategies in Order to develop modern laws that support a competitive economy. We need Laws that will promote the growth of the Private Sector and encourage investments. A healthy business environment demands for a smooth system of enforcement of contracts.

We therefore propose that:-

a)The Commercial Court continues to implement the wide range of reforms and initiatives made under the Commercial Justice Reform Programme because the business community’s hope of ensuring effective and expedient enforcement of commercial contracts largely lies there. The Public wishes to see this Court being accessible to all businesses and processing of all commercial cases expeditiously.

b)The Alternative Dispute Resolution machinery under CADER should strictly operate under a set timetable to ensure that cases that go for arbitration do not become protracted hearings. There has been a tendency of Arbitration turning out to delay the resolution of the dispute even further. Cases have come up where the arbitral awards are appealed to the High Court and even higher appellate courts. This is undesirable as it renders the process a waste of time and resources.

c)The recommendations made to the Law Reform Commission for reform of the Insolvency law to revise, refine it and consolidate it into a uniform single user friendly code be immediately implemented.[11] A strong insolvency regime as we have discussed above strongly supports enforcement of contracts in an economy. Studies in Uganda have proved so when the law in this area has been used.

d)The law relating to Crown Privileges under the Government Proceedings Act Cap.77 is archaic to modern business practices. It should be revised to balance between the dictates of commerce, fair trading and development or the one hand and protection of the state on the other hand. In Uganda case studies have shown that Government has contributed to the exit of many trading concerns and businessmen with a multiplier effect.

A leaf could be borrowed from Local Governments (Amendment) Act 2001 where execution against the property of a local Government is not prohibited wholesale but is restricted until after six (6) months. [11]We propose that even for Government, execution by attachment should be possible say after one year. The businessmen argue that they are forced to over price or over quote when they are dealing with Government to take care of the delayed payments and other rigours involved in recovering from Government. This is why there is a popular saying that it is usually “air” suppliers who thrive on trading with Government.

It is my sincere hope that fellow participants in this workshop will join me in making the above strong recommendations to Government and to make a wake up call to our Legislature to consider the various proposals for the reform of our Commercial Laws which are over due.

A strong regime or legal framework and Government Policy on enforcement of contracts will influence the incentives and Uganda’s economy’s degree of entrepreneurship. The World Bank Studies (Supra) noted that economies with more efficient and speedy procedures for enforcement of contractual rights attract more investments. We should take heed.

1

[1]See Chitty on contracts general principles 21st Ed. Sweet & Maxwell PP1-15

[2] English Law of contract applies in Uganda by virtue of S.2 of The Contract Act Cap.73

[3] The Employment Act Cap.219 Section 11 requires a contract of service for 6 months or more to be in writing, Section 14 of the same Act requires foreign contracts and contracts with an illiterate to be in writing

[4] The Arbitration And Conciliation Act Cap.4 Laws of Uganda provides for mechanisms for Alternative Dispute Resolution (ADR) and makes Provision for Arbitration and Conciliation of disputes. S.3 thereof allows parties to put an arbitration clause in their agreement which for purposes of the Act Constitutes an Arbitration agreement.

[5] Sections 35 and 36 of the Arbitration And Conciliation Act Cap4

[6] Bankruptcy cause No.1 of 2001

[7] Bankruptcy cause No.19 of 2000.

[8] The Government proceedings Act Cap.77 adopted the Crown Proceedings Act 1947 of the United Kingdom, which restricts execution of Court Orders against Government.

[9] See S.19(4) Cap.77

[10] See. S. 53 of the Uganda Railways Corporation Act cap 331 Laws of Uganda

[10] In Reste Corner Hotel Ltd V Attorney General HCCS No.1087 of 1999 and Buwaya Construction Ltd –V- Attorney General HCCS No.1 of 1991 it transpired that the Plaintiffs in both cases failed to meet their contractual obligations (loan repayment obligations) and lost their assets and undertakings because they failed to enforce their contracts against Government in time. They both borrowed money to execute work.

[11]Pistor Ralser and Gelfer (2000) cited in Bankruptcy around the World: Explanations of its Relative use (Development Research Group The World Bank Studies Nov.6, 2002 Version) at P.10 noted that the laws on the books have limited effects on financial market development but that measures of effective enforcement do.

[11] S.7 (2) Local Governments (Amendment) Act 2001 provides that “…..no execution or attachment or process in such nature shall be issued out of any court for enforcing payment by a Local Government of any money or costs against its fixed assets and statutory transfers provided the execution or attachment may be made against any other property after six months from the date of Judgment, Order or decree”.