MUGASHA

10/10/20

Case Comment:
Ham Enterprises Ltd v Diamond Trust Bank (U) Ltd.
High Court of Uganda, Commercial Division, Miscellaneous Application No. 654
of 2020 of 7 October 2020. Per Curiam Hon. Dr Justice H.P. Adonyo.

Introduction

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

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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

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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 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

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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: (i) the lender was in Kenya, (ii)
the loan contract was made in Kenya, (iii) the location of the debt (situs) was Kenya; (iv) the
mortgaged property was in Uganda and the registration of the securities happened in
Uganda, (v) the collection agent was in Uganda; and (vi) 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
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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.

Public law and public policy concerning the central bank regulation of financial institutions

The absence of a license or other official document: The court case of Ham Enterprises Ltd v
DTB involved the role of a public sector player, the Bank of Uganda, in the regulation and
supervision of financial institutions or, viewed from the opposite side, the requirement for a
private sector institution, at issue here was DTB (K), to obtain a licence from the central
bank before plying its trade. A classic court case known to every student of banking law in
the Commonwealth, from Antigua to Zambia, is United Dominions Trust Ltd v Kirkwood
[1966] 2 QB 431 (CA). The issue in that case was whether United Dominions Trust Ltd (UDT),

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which was neither licenced to carry on banking business nor registered as a money lender
could recover its loan which, on the face of it, was unlawful for the lack of registration and
the absence of a licence by UDT. As many lawyers would recall, UDT was still able to
recover its loan despite not being licenced as a bank or a registered moneylender. While
United Dominions Trust v Kirkwood was not on all fours with Ham Enterprises v DTB, the
upshot is that the lack of a licence is not fatal to recovery of a loan. Commercial law courts
will be creative and promote certainty in financial transactions by veering towards
upholding the validity of contracts willingly entered.

Enforcement of a public duty: More pertinently from the public law perspective is whether a
private litigant (such as Ham Enterprises Ltd) can enforce during litigation a public duty
(such as the licencing of banks by the central bank). One can think of some cases, such as
the high profile United City Merchants (Investments) Ltd v Royal Bank of Canada (The
American Accord) [1983] AC 168 (HL) where, in the Court of Appeal, the court held that the
violation of the Bretton Woods agreement (public policy) was a bar to recovery; however,
the general global approach is that it is up to the regulatory authority to enforce its
mandate. That has always been the rule. If X buys a vehicle on credit from Y, a yard in
Kampala, X cannot contest Y’s demand for payment because at the time the car was sold, Y
had not renewed its trading licence. The enforcement of matters concerning licences does
not involve private players among themselves. In the instant case, it was up to the Bank of
Uganda to enforce the provisions of the Financial Institutions Act concerning the licencing of
a financial institution and, therefore, a private litigant could not validly rely the on the
absence of a licence to wriggle out of its contractual obligations. In that way, members of
the society can confidently deal with the numerous public and social institutions around
which our lives are based.

No one can benefit from his or her own wrongdoing: The Application claimed that the
financial institution operated illegally and that, therefore, the loan was irrecoverable since it
was illegal. As a matter of law and policy, illegality cuts both ways: one cannot rely on his or
her own illegality as a cause of action or as a defence to a claim. This public policy principle,
which has been enshrined in decisional law, is a mirror image of the well-known principle
that he who comes to equity must come with clean hands: see Moore Stephens (a firm) v
Stone Rolls Limited (in liquidation [2009] UKHL 39, affirming Beresford v Royal Insurance Co

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Ltd [1938] AC 586 – “The court will not assist a claimant to recover a benefit from his own
wrongdoing,” and also Gray v Thames Trains Ltd, June 2019; R v Horseferry Road
Magistrates Court, ex parte Bennett (1993). On this principle, Ham Enterprises Ltd could not
validly rely on the ‘illegality’ as a cause of action to wriggle out of its contractual obligations.
If there was any illegality, therefore, the Applicant’s claim should not have been entertained
since it was knowingly privy to the illegality.

If we assume, for only a fleeting moment, that the financial institution operated illegally,
then there is the separate surprise of the remedies granted by the court. Ignoring the
tension between the declaration that the financial institutions had breached some
agreements by deducting money from the borrower and the declaration that the credit
contract offered to the plaintiff was void ab initio and unenforceable, let us focus on the
latter. Because the court held the credit contract to be void ab initio, the court ordered the
refund of money that had been deducted from the borrower’s account and the return of all
the securities held by the financial institutions. The curious thing about these remedies was
because they enabled the borrower to claw back its money and security while not returning
to the lender the funds that were initially lent. Normally, remedies take one of two forms.
The court may order that the parties ‘disengage’, and at that point the loss falls where it lies.
If, on the other hand, the court orders that transactions should be unwound, then the
unwinding takes place for both parties.

The central bank wears different hats. The Bank of Uganda, like other central banks, is
mandated to do several things, including functions that may be packaged together in two
sets for present purposes: (i) to steer monetary policy and ensure financial stability and (ii)
to regulate and supervise banks and other specified financial institutions or functions. The
Bank of Uganda has called for ‘calm’ in the wake of the Ham Enterprises Ltd v DTB case, and
has reportedly issued statements such as the following:

“Bank of Uganda would like to reassure all stakeholders and the general public that
the BOU remains committed to ensuring a resilient, sound and stable financial
sector.”

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While the functions of the central bank complement one another, this sound bite is not the
one that is directly relevant to the situation. The issues in Ham Enterprises Ltd v DTB were
not about the soundness of a financial institution and stability of the financial system;
rather, the issues concerned the second function that was mentioned above, i.e. the
regulation and supervision of the front office operations of the banks. It would have been
more reassuring if the statement from the Bank of Uganda was along the lines of “The Bank
of Uganda regulates financial institutions in accordance with internationally recognised
standards and we have a robust supervisory system for enforcing the regulations.”

Other selected aspects of the decision

Was it a syndicated or bilateral loan? A syndicated loan is one where two or more financial
institutions offer a loan to a borrower or one group of related borrowers on the basis of
common terms in the same set of documents. The lenders may act together from the
outset, in which case it may be called a primary syndication or direct syndication; while in
other instances, a lender makes the initial loan, and then transfers the loan or portions in
the loan to other lenders, in which case it is called a secondary syndication either by way of
a loan participation or sub-participation. A bilateral loan, on the other hand, is one that
involves one lender and one borrower or one group of related borrowers: see A. Mugasha,
The Law of Multi-bank Financing (Oxford University Press, 2007, chapter 1.

The court decision is not entirely consistent on the facts whether the credit facility was
extended to Ham Enterprises Ltd by DTB (Uganda) in Uganda and then transferred to DTB
(Kenya), which would be one type of a syndicated loan (the sale of a loan commitment
before disbursement), or, if the transaction was sourced and initially documented in
Uganda, but the drafting of final documents, the offer and disbursement all occurred in
Kenya (which would be a bilateral credit facility). On balance, it seems to have been a
bilateral credit facility where DTB (Uganda) referred its client whose needs it could not fully
accommodate to its more resourced parent company in Kenya . On this point, the Judge
wrote (at page 20, lines 15-20):

“[I]t is clear to me that … DTB (K) offered credit facilities to the 1 st and 2nd
Applicants outside Uganda and within the letter of offer tied the same to DTB

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Uganda Limited … to act as its agent to collect funds for the repayment of the
said facilities.”

Possible irrelevance of Ugandan law to the main component of the case: The above quoted
sentence should have been conclusive of the fact that the credit facilities were not offered
in Uganda; and following on from that, should have militated against the application of
Financial Institutions Act of Uganda to the lending transaction since it is hornbook law that a
statute does not have extra-territorial application (unless it explicitly sets out to do that).
The notable exception is the one pointed out above; and that is, if the credit agreement
specifically provided that it was governed by the laws of Uganda (which matter was not
addressed by the court and whose answer we do not know). So, basing on what we know,
the Financial Institutions Act of Uganda was not the proper statute to apply to the case of
Ham Enterprises Ltd v DTB.

The distinction between the main transaction and ancillary services: The above quoted
sentence also contains two important observations that should have been further
elucidated about cross-border business, especially banking, transactions, in order to
advance the legal analysis. The first is that a single loan transaction may have multifarious
connections and it is important to distinguish between the main transaction and supporting
services. Let us illustrate some of the connections with a hypothetical bilateral loan
extended in Kampala and secured by a mortgage: (i) where was the loan initiated – in a
Kafunda / Joint in Wandegeya; (ii) where were the terms of the loan negotiated – at the
borrower’s office in Old Kampala; (iii) where were the credit documents signed – at the
bank’s documentation centre at Forest Mall in Lugogo; (iv) where was the mortgage
registered – at the Lands office in Nakasero; (v) where were the funds be availed / disbursed
from – at the bank’s headquarters on Kampala road; (vi) where are the repayments made –
at the borrower’s local branch in Kyanamukaka. Now alter the above hypothetical scenario
and imagine the complexities of a cross-border transaction where some of these places
would be in different countries with different laws! The clear message from these
hypothetical scenarios is, therefore, that for purposes of legal analysis, it is important to
distinguish between the main business transaction and other ancillary transactions.

In the case of Ham Enterprises Ltd v DTB, the main business transaction was the act of
lending, and that took place in Kenya. It is not sufficient to say that “these things were tied
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together” because legal analysis demands that we de-segregate them and, if necessary,
apply different laws to the different segments. For instance, the validity of the registration
of the mortgage securities in Uganda would have to be determined by Ugandan laws
regardless of whether the lending transaction was governed by Kenyan laws.

Correspondent banking relationships and other limited agency relationships: Lastly, the
above quoted sentence includes a very important aspect of banking (and the wider financial
institution) practice that was not adequately addressed by the court; namely, that banks
utilise correspondent relationships and other forms of limited agency to conduct banking
business across the globe. If a Ugandan working in Kalgoorlie, Australia utilises Western
Union in Australia to send money to her mother in Rwashamaire in Uganda, it cannot
credibly be argued that Western Union (Australia) is doing business in Uganda because the
Ugandan franchise performed the limited agency function of paying on its behalf. The same
correspondent relationships are at play when traders utilise letters of credit to pay overseas
business counterparts, or when parents pay school fees for their children studying abroad.
In the Hams Enterprises Ltd v DTB case, DTB (U) performed the very limited function of
collection agent, basically limited to receiving money and transmitting it to the owner in
Kenya. Thus, DTB (U) was neither a general agent according to the principles of agency law
(Bowstead and Reynolds on Agency (18th ed, art 1 (1), nor an agent bank as used in
syndicated loans (see A. Mugasha, The Law of Multi-bank Financing, above, chapter 9), nor
engaged in agency banking (as used in banking business to mean an agent for either deposit
taking, lending or both: see State Savings Bank of Victoria v Permewan Wright, (1915) 19
CLR 457 at 470-71) and according to the specific meaning in the Financial Institutions Act.

Conclusion

As seen above, there is crucial information that is not known about the facts of the case and
that necessarily reduces the accuracy of any commentary, including this one. Based on the
limited information that we have, the High Court of Uganda was neither an automatic forum
for the case, nor was the law of Uganda the inevitable choice. Those same gaps in the
available information point to the error of finally disposing of the case at the preliminary
application stage.

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The applicant’s case was that the financial institution had engaged in illegality, and the court
roundly penalised the financial institution; and yet the applicant, who had knowingly
participated in that very same transaction, walked away with a windfall. That goes against
commercial certainty, public policy and established law, as we so argued above. Admittedly,
there are some murmurs in Uganda about international businesses which utilise local
subsidiaries to engage in financial crime and others who deprive the state of tax revenue by
initiating transactions in Uganda and booking them abroad, and that perception may
influence some approaches to international players; on the other hand, there are many
genuine business practices of booking a transaction with a parent company or subsidiary
that is better able to handle it. The judge made some adverse comments on this point that
may form the basis of future commentary.

This paper also argued that the matter of licences and authorisations for financial
institutions is best left to the relevant regulator to enforce and that the absence of a licence
does not excuse the performance of the financial obligations of a party to a contract. Lastly,
the paper also reiterated long-standing legal doctrine that a party cannot take advantage of
its own wrong, and for that reason, the paper expressed reservations about the decision
and remedies granted by the court.

The instant case broadly illustrated important matters of financial institution practice that
require further public awareness and also alluded to financial regulations that may require
updates; this author believes that the Uganda judiciary is competent to cure the infelicities
in the instant decision and that the Bank of Uganda will do the needful.

This is a first and quick draft of ideas that I am likely to develop into a future academic
publication. Please bear that in mind if you are so minded using this draft and do not
hesitate to contribute to my ideas and understanding.
Prof. Agasha Mugasha
Bishop Stuart University
Mbarara.
Formerly Professor of Law, University of Essex, UK, 2000-2018.
E. mugasha2000@yahoo.co.uk
T. 0772472235
WhatsApp: +447591543643.
10 October 2020.

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