Case analysis: Ham Enterprises Ltd vs Diamond Trust Bank (U) Ltd-PART I - Daily Post Uganda

Case analysis: Ham Enterprises Ltd vs Diamond Trust Bank (U) Ltd-PART I

By Prof. Agasha Mugasha

High Court of Uganda, Commercial Division, Miscellaneous Application No. 654 of 2020 of 7 October 2020. Per Curiam Hon. Dr Justice H.P. Adonyo.


The Court decision in Ham Enterprises Ltd v Diamond Trust Bank (U) Ltd has caused some consternation in the financial services industry and the legal profession in Uganda, and possibly in the wider Eastern Africa region, because it struck at the heart of the burgeoning trade in cross-border financial services.

In a seemingly simple case of a lender in Kenya extending a credit facility across the border to a borrower in Uganda, the court held, in a preliminary application, that the financial institution (bank) performed an illegal function since it was not licenced to carry out financial business in Uganda.

It is a disturbing court decision for any business with cross-border operations and, in broader perspective, anyone who expects future performance of their contract because in private, business and public life society subsists and moves forward largely by trusting in the fair play of your counterparties and the robustness of the public regulatory system.

The present consternation should be ameliorated, however, because it is generally accepted in legal circles that the court decision was an outlier and that the legal system and regulatory regime in Uganda are well placed to redress the deficiencies. This comment will begin with the question whether the judge should have decided this case at all, before moving on to matters of public law and policy matters arising from the role of the central bank as the regulator of financial institutions, and then concluding with observations on selected private law aspects of the decision. This comment concludes that the Judge should have dismissed the application pending the interrogation of the issues in the main cause.

The Facts

The facts of the case were relatively straightforward. A Ugandan business obtained some large loans in Kenya from a Kenyan financial institution. The borrowers were really two related companies and their owner, but for this essay we shall say that there was one business borrower and one loan.

The security for the loan comprised of properties in Uganda. To facilitate payment of money from the Ugandan business to the Kenyan financial institution, the contract provided that payment would be made to an escrow account held at the Ugandan subsidiary of the Kenyan financial institution, which was obliged to relay the money to Kenya.

When the borrower struggled with scheduled payments, the lender deducted money from the borrower’s account in furtherance of the contract, to which the borrower objected by bringing a court action in Uganda.

Before that court action could be heard, the borrower brought an application in Uganda seeking the declaration that all the credit facilities were void from the outset since, allegedly, the Kenyan financial institution was carrying on financial business in Uganda without a licence, and that, therefore, it was engaged in illegal activities and the activities were illegal. That decision on that preliminary application is the subject of this comment.

Exercise of Jurisdiction – Was the High Court of Uganda the appropriate forum for this case?

An unmissable feature: The standout element in the Ham Enterprises Ltd v DTB case was the cross-border nature of the transaction and the claim: a Ugandan business borrowed from a Kenyan financial institution in Kenya, and the Kenyan institution had a monetary claim against a Ugandan business.

An early question in any court proceedings should be if the court is seized of jurisdiction in the matter, and in a case with a cross-jurisdictional element, the question becomes if the case should be heard in this jurisdiction, the other jurisdiction, or any other jurisdiction.

Most lending agreements would address this issue by an express choice of law and choice of jurisdiction clause. Such a clause would say, for example, that ‘any disputes under this agreement will be governed by Kenyan law and will be decided by the High Court of Kenya sitting in Nairobi’, or ‘the disputes under this agreement will be governed by Ugandan law and will be determined by the High Court of Uganda sitting in Kampala.’

It is possible to separate the ‘choice of law’ from the ‘choice of jurisdiction’ and provide, for example, that the dispute between the parties shall be determined in accordance with Kenyan law by the High Court of Uganda sitting in Kampala.

Alternatively, the agreement could provide for the application of English law by the Ugandan courts sitting in Kampala. Tentatively, though, we note that we do not know what the contract provided for in Ham Enterprises Ltd v DTB.

Types of clauses: Choice of jurisdiction clauses take one of three forms, according to Deutsche Bank AG v Sebastian Holdings Inc [2009] EWHC 3069 (Comm), [2010] 1 All ER (Comm) 808.

The first and most stringent form is the exclusive jurisdiction clause, which specifies one jurisdiction (or sometimes one of two, dependent upon specified circumstances), in which the parties must then litigate, often providing for methods of service and even for specific courts within the jurisdiction.

It is a breach of contract for a party to issue proceedings against the other in any other jurisdiction than the agreed exclusive jurisdiction and any litigation brought in a jurisdiction that is not specified ought to be dismissed with costs.

The next most stringent clause is a non-exclusive jurisdiction clause with a waiver of forum non conveniens (FNC) – (it means that the forum is not appropriate). “This will normally provide for one (or possibly more than one) jurisdiction in which a party may be sued by the other party, and there is a waiver of FNC, which means that the non-exclusive jurisdiction so chosen is elevated above others, because, with regard to that jurisdiction, but not as to any others, the parties agree not to assert that to be sued there would be inconvenient, oppressive or expensive.

If a party then issues proceedings in the chosen, but non-exclusive, jurisdiction, and the other party then asserts forum non conveniens, that party is in breach of contract in doing so.” The third and lowest in the hierarchy is the non-exclusive jurisdiction clause.

This may be accompanied by the ‘another jurisdiction acceptance’ clause. This clause allows proceedings to be brought anywhere and may generate simultaneous proceedings in different jurisdictions, which situation may also arise if the parties do not specify any preferred jurisdiction for litigation.

The prospect of parallel proceedings and the risk of conflicting decisions is real, as illustrated in A. Mugasha, “Global Financial Transactions and Jurisdictional fragmentation: Inconsistent Decisions by Leading Trans-Atlantic Courts” (2011) 29 Penn State International Law Review 553-579.

In the case of Ham Enterprises Ltd v DTB, the matters of choice of law and choice of jurisdiction appear not to have been raised by the litigants at all; the question then becomes, should the judge have raised them on his own volition? I believe that he had a duty to do so.

The case could not be properly disposed of without knowing if the court in Kampala was competent to decide it and what law was applicable. The judge had to read the choice of law and choice of jurisdiction clause; and to do that, he had to delve in the substantive action and possibly receive submissions on the point. Therefore, the case could not be finally determined at the preliminary application level.

Let us assume that there was no such clause in the credit agreement, even if the judge had looked. In that instance, the judge should have applied the conflict of laws approach, also known as private international law.

According to the traditional approach of that topic, the court should determine the proper law of the contract by looking at the transaction as a whole and all the circumstances of the case (see the early case of Mount Albert Borough Council v. Australasian Assurance Society Ltd. [1938] AC 224 at 240 as subsequently developed and locally applied, and Dicey, Morris & Collins on the Conflict of Laws).

The short formulation is that the court applies the system of law with which the contract has the closest and most substantial connection. The question then becomes, which transaction and what are the circumstances of the case?

The Ham Enterprises Ltd v DTB case had six key connections:

  • the lender was in Kenya,
  • the loan contract was made in Kenya,
  • the location of the debt (situs) was Kenya;
  • the mortgaged property was in Uganda and the registration of the securities happened in Uganda,
  • the collection agent was in Uganda;
  • the borrower was in Uganda.

Other factors that could have been considered were the currency of the loan (but dollars are neutral to Kenya and Uganda); and the language of the document (but English is neutral to Kenya and Uganda). Without pre-empting a detailed analysis of the matter in the case under study, we note that, in the absence of contrary evidence, the legal authorities have gravitated towards saying that the law governing loans or credit facilities is the law of the place where the credit was extended i.e., where the loan was disbursed or availed of. That is why most international financial facilities are governed by English law or the law of New York State.

It bears emphasis that this is a complex topic that requires a detailed consideration by the court since the proper law depends on the facts of each case; still, there are some generally agreed principles. First, the solution adopted by the court should encourage the economic and social development of the country.

That is usually achieved by promoting certainty in commercial transactions, and in turn, respecting the expressed intentions of the parties. Where there is no express choice, the court should not disappoint the parties and should apply a system of law that preserves the contract, rather than striking it down. In other words, the court should endeavour to hold the contract as valid because that is the presumed intention of the parties: J. -G. Castel, Introduction to Conflict of Laws, page 183-187).

Therefore, without the benefit of knowing what the parties expressly agreed upon and, therefore, what was documented in the choice of law and choice of jurisdiction clause in the Ham Enterprises Ltd v DTB case, and without any evidence displacing the general approaches to the subject, the case was governed by Kenyan law and should have been decided by the appropriate court for the Kenyan city where the loan was made. Further, on this analysis, the court should have been disinclined to apply Ugandan law since that application resulted in the loan contract being declared invalid.

To add a qualification to the above, that there will readily be a case where the cross-border lender (DTB (K)) accepts the law and jurisdiction of the borrower (Uganda) for ease of access to, and enforcement of, the security in the borrower’s jurisdiction. This possibility cannot be ruled out in the instant case since the borrower’s relationship bank was DTB (Uganda), the borrower’s counsel were in Uganda, and, to buttress those two elements, the legal systems of Uganda and Kenya are similar.

Regardless of one’s preferred analysis, it is evident that some crucial information was not considered by the court and that this was a complex matter that required a detailed consideration by delving into the merits of the case.

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Dr Agasha Mugasha is a professor of Law at Bishop Stuart University in Mbarara. He was previously a Professor of Law at the University of Essex 2000-18; and was also the Chairperson of the Uganda Law Reform Commission 2011-15.

He has written the only book on syndicated loans in the world titled The Law of Multi-bank Financing: Syndicated Loans and the Secondary Loan Market (Oxford University Press, 2007).

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