THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMPALA
(COMMERCIAL DIVISION)
MISCELLANEOUS APPLICATION NO. 0664 OF 2009
[ARISING FROM CIVIL SUIT NO. 0410 OF 2009]
SEMBULE INVESTMENTS LTD.:::::::::::::::::APPLICANT/DEFENDANT
VERSUS
UGANDA BAATI LTD. :::::::::::::::::::::::::::::::::RESPONDENT/PLAINTIFF
BEFORE: HON. LADY JUSTICE IRENE MULYAGONJA KAKOOZA
RULING
The applicant/defendant brought this application under the provisions of Order 36 rule 4 of the Civil Procedure Rules and s.98 of the Civil Procedure Act seeking for leave to defend a suit for a sum of shs 1,475,394,037/=, being the price of goods supplied to her, and the costs of the suit. The grounds of the application were that the defendant is not indebted in the amount claimed; that the sum claimed did not arise out of an ordinary contract for supply of goods and that the defendant has a good defence to the suit.
The application was supported by an affidavit deposed by Tony Nsubuga, the Finance Manager of the defendant which was dated 13/11/2009. The plaintiff filed an affidavit in reply to oppose the application deposed by Rakesh Bhatnagar, the Chief Operations Officer of the Plaintiff Company, and dated 9/07/2010.
In his affidavit in support, Mr. Nsubuga averred that from about 01/06/2008 to the date of the application, the defendant was in a Joint Venture Arrangement (JVA) with the plaintiff for the operation a Tube and Rolling Mill under the name of Sembule Safal Steel Ltd. A letter of intent dated 27/10/2008 was attached to the affidavit as Annexure “A”. That under the arrangement the plaintiff was to make a capital contribution of shs. 4,500,000,000/= to the Joint Venture and the sums claimed by the plaintiff accrued out of the said JVA, the goods for which payment was claimed having been supplied as a contribution in lieu of cash. Mr. Nsubuga further averred that the defendant issued undated cheques to the plaintiff as security or in recognition of the plaintiff’s contribution which were never meant to be banked. He explained that the cheques were guarantees for performance of the contract and represented a trade custom referred to as “show me the money.” A letter dated 5/11/2008 said to contain the agreed terms of the joint venture was attached to the affidavit as Annexure “B”.
Mr. Nsubuga further averred that on the other hand, the defendant was to contribute to the joint venture under the trade name of Sembule Safal Steel Ltd. by providing land, machinery and storage facilities. Further that the defendant company was willing to complete the JVA if the plaintiff would put up their capital contribution of shs. 3,024,605,963/=. He finally averred that the amount claimed by the plaintiff was not due or payable and the defendant was surprised that a suit had been filed, at all.
In his affidavit in rejoinder, Mr. Bhatnagar averred that there was never a JVA with the defendant but rather negotiations from the late part of 2008 to around June 2009 when the negotiations collapsed. Emails messages relaying that information were attached to the affidavit as Annexure “R1” and “R2.” He further averred that no company was ever incorporated as alleged by the defendant and the letter of intent relied on was simply a proposal for a joint venture. That the sums claimed by the plaintiff were for goods received and used by the defendant in furtherance of their own business and not for the benefit of any joint venture company. Further that the goods had been consumed and the defendant made no attempt to return them to the plaintiff; that the undated cheques were issued as security for goods received on the understanding that the same would be paid for according to the invoices attached to the plaint. And in an ironic twist of the facts in the dispute, Mr. Bhatnagar tongue-in-cheek averred that the defendant had failed to “show him the money” since 2008 contrary to the guarantee that goods taken on credit shall be paid for as is a trade custom.
Mr. Bhatnagar further averred that the letter dated 30/10/2008 which the applicant sought to rely on as containing terms of the joint venture was simply a counterproposal, proving that all that existed between the parties were only negotiations and no agreement. Further that all transactions between the parties were in the normal course and custom where the defendant received goods on credit. He finally asserted that the defendant owed shs. 1,475,394,037/= to the plaintiff and she had no defence to the suit.
In an affidavit in rejoinder, Mr. Nsubuga averred that the plaintiff entered into a commercial arrangement under the now botched Sembule Safal Steel Ltd. trade venture and operations commenced without any written agreement because the parties were men of commerce and major players; so they moved ahead of their lawyers whom they left to deal with legal formalities. Further that the plaintiff was to contribute to that venture by payment of shs. 4.5 Billion, partly in cash and partly in kind by supplying raw steel materials; that the plaintiff supplied raw materials worth shs. 1,475,394,037/= as a minor contribution of its capital leaving an amount of shs. 3,024,605,963/= outstanding; that the plaintiff so derailed the joint venture and occasioned loss to the defendant and having breached the contract, the plaintiff could not claim a refund of monies contributed. Finally, that the registration of the joint venture company was a mere formality.
At the hearing of the application, Mr. Dennis Sembuya for the applicant submitted that the application raised triable issues in the application because the cheques upon which the plaintiff’s suit was based were not issued as consideration for the goods supplied but as security or as recognition of the plaintiff’s contribution to a joint venture with the defendant. That the cheques were issued pursuant to a trade custom referred to as “show me the money” which he said existed between the parties, and they were not meant to be banked. He argued that this was evident from the fact that some of the cheques were not dated and others were not duly signed by the two signatories to the defendant’s bank accounts. He charged that the plaintiff illegally banked the cheques which were meant to be the defendant’s contribution to the joint venture, drew money from the defendant’s accounts and caused loss to the defendant. That because the defendant intended to raise a counterclaim for breach of contract and for damages of an amount greater than the plaintiff’s claim in the suit she was entitled to unconditional leave to appear and defend the suit.
Mr. Sembuya relied on the decisions in Zzimwe Hardware & Construction Enterprises v. Barclays Bank (U) Ltd, HCMA 114/2008 and Maluku Interglobal Agency Ltd. v. Bank of Uganda [1985] HCB 65, among others, for his submission that an applicant is entitled to an order for leave to appear and defend a suit under Order 36 CPR if they show that there are triable issues between the parties to be determined in the suit.
In reply, Mr. Peters Musoke for the defendant submitted that the defendant’s intention in filing this application was to delay the recovery of the sums due to the plaintiff. That this was evident from the fact that while the application had been filed more than a year ago it was always the plaintiff’s counsel that made the effort to fix it for hearing. He argued that there was no joint venture arrangement between the parties when the plaintiff supplied the goods for which the defendant issued cheques. He relied on the dates of the invoices issued for the goods. Further that the documents attached to the plaintiff’s affidavit in support of the application constituted evidence to show that there was only an intention to enter into a joint venture and negotiations were going on but they were never finalised.
Mr. Musoke went on to submit that there was a definite link between the invoices and the cheques issued by the defendant to show that the cheques were issued for the goods supplied. Further that since the defendant was unable to show that they did not use the goods in their business and could not return them to the plaintiff, they had an obligation to pay for them. He concluded that the application raised no triable issues and ought to be dismissed and judgment entered for the plaintiff.
The rationale of Order 36 was succinctly stated in Zola & Another v. Ralli Brothers Ltd. & Another [1969] EA 691 at 694, a decision about the Kenya equivalent of our then Order 33 CPR as follows:-
“Order 35 is intended to enable a plaintiff with a liquidated claim, to which there is clearly no good defence, to obtain a quick and summary judgment without being unnecessarily kept from what is due to him by the delaying tactics of the defendant. If the judge to whom the application is made considers that there is any reasonable ground of defence to the claim the plaintiff is not entitled to summary judgment. … Normally a defendant who wishes to resist the entry of summary judgment should place evidence by way of affidavit before the judge showing some reasonable ground of defence.”
The high cost of litigation and the premium of holding cash when interest rates are high greatly increase the attractiveness of procedural shortcuts such as Order 36 to commercial plaintiffs. And in a jurisdiction where the courts are inundated with work with the lists becoming longer every day, the benefits of Order 36 become even more attractive and they ought to be exploited to enable appropriate litigants to obtain summary judgments where the rights of those that owe them are found not to be prejudiced by that procedure.
The criteria to be considered by a court entertaining an application for leave to appear and defend are not without trouble. But first, recourse has to be had to the CPR wherein Order 36 rule 7 provides as follows:-
“If it appears to the court that any defendant has a good defence to or ought to be permitted to appear and defend the suit, and that any other defendant has not such defence and ought not to be permitted to defend, the former may be permitted to appear and defend, and the plaintiff shall be entitled to issue a decree against the latter, …”
{My Emphasis}
The rule itself seems quite clear in that it expressly states that a defence advanced on an application for leave to defend must be a “good defence.” What leads to the murkiness in the area are the various interpretations that have been given to the rule. There is a long line of authorities to the effect that on an application for leave to defend a suit, the applicant has got to prove that there is a bona fide triable issue of fact or law that he will advance in defence of the suit. In Churanjilal & Co. v. A. H. Adam (1950) 17 EACA 92, the Court of Appeal for East Africa ruled that a defendant who has a stateable and arguable defence must be given the opportunity to state and argue it before court. The High Court of Uganda followed that decision in Maluku Interglobal Trade Agency v. Bank of Uganda [1985] HCB 65, at 66 where the principle was succinctly laid down as follows:-
“Before leave to appear and defend is granted the defendant must show by affidavit or otherwise that there is a bona fide triable issue of fact or law. When there is a reasonable ground of defence to the claim, the defendant is not entitled to summary judgment. The defendant is not bound to show a good defence on the merits but should satisfy the court that there was an issue or question in dispute which ought to be tried and the court should not enter upon the trial of the issues disclosed at this stage.”
The decision in Maluku Interglobal was affirmed by Okello, JA (as he then was (dissenting) in Photo Focus (U) Ltd. v. Group Four Security Ltd. C/A Civil Appeal No. 30 of 2000 (unreported), but Kitumba and Engwau, JJA, were of the view that a denial of indebtedness, per se, was a defence that was good enough for purposes of obtaining leave to appear and defend a suit under summary procedure. While affirming the decision in Maluku Interglobal, Okello, JA, observed that though it was a decision of the High Court it was to be respected for it properly stated the position of the law. He thus held that one who seeks leave to appear and defend should state the defence with sufficient particularity to appear genuine. What seems to be unclear in this area of the law therefore is whether the applicant must show a good defence or whether merely showing that there are triable issues is sufficient. I say so because in Kotecha v. Mohammed [2002] 1 EA 112, the Court of Appeal of Uganda ruled, (Berko, JA, with Okello and Engwau, JJA, concurring) that:-
“The summary procedure on specially endorsed plaint under Order 33 of our Civil Procedure Rules is similar to a writ specially endorsed under Order 3, rule 6 (Order 14, rule 1) of the English Rules of the Supreme Court. Therefore English authorities on that rule are of persuasive authority and provide (a) useful guide. Under the English Rule the Defendant is granted leave to appear and defend if he is able to show that he has a good defence on the merit(s); or that a difficult point of law is involved; or a dispute as to the facts which ought to be tried; or a real dispute as to the amount claimed which requires taking an account to determine; or any other circumstances showing reasonable grounds of a bona fide defence. See Saw v Hakim 5 TLR 72; Ray v Barker 4 Ex DI 279.”
I take it that the decision of the Court of Appeal in Kotecha v. Mohammed is now what binds this court. And it is no different from the time honoured decision in Churanjilal & Co. v. A. H. Adam (above) where Graham Paul, V-P, stated that “It is desirable and important that the time of creditors and of courts should not be wasted by the investigation of bogus defences.” The principles in Kotecha v. Mohammed will therefore be applied here.
It is also the generally accepted view that the court should not enter upon a trial on any of the issues raised at this point. However, in that regard, in Corporate Insurance Co. Ltd. v. Nyali Beach Hotel Ltd. [1995-1998] EA 7, the Court of Appeal of Kenya ruled that leave to defend will not be given merely because there are several allegations of fact or of law made in the defendant’s affidavit. The allegations are investigated in order to decide whether leave should be given. As a result of the investigation even if a single defence is identified or found to be bona fide, unconditional leave should be granted to the defendant. The court went on to rely on the decision of Madan, JA, in Gupta v. Continental Builders [1978] KLR 83 at 87, and Pall, JA, observed that the merits of the issues are investigated to decide whether leave to defend should be given. He went on to state that sometimes the prima facie issues which are preferred are rejected as unfit to go to trial being by their very nature, as disclosed to the court, incapable of resisting the claim. Further that the court does not thereby shut out any genuine defences, but what happens is that the court does not accept the prima facie issues as genuine. The same view was expressed by the High Court of Uganda in Abubakar Kato Kasule v. Tomson Muhwezi [1992-1993] HCB 212, where Kireju, J, (RIP) ruled:
“In all applications for leave to appear and defend under Order 33 rules 3 and 4, the court must study the grounds raised to ascertain whether they raised a real issue and not a sham one, i.e. the court must be certain that if the facts alleged by the applicant/defendant were established, there would be a plausible defence; if the applicant/defendant has a plausible defence he should be allowed to defend the suit unconditionally.”
I therefore take it that the defendant who seeks leave to defend must disclose a good defence as is stated in Order 36 rule 7 CPR. I am of the view that the documents supplied by both parties would be sufficient to prove this without any additional evidence. I will therefore go on to examine the defences that were articulated for the defendant in order to establish whether they are good or plausible and therefore warrant granting her an order to appear and defend the suit.
The defendant does not contest the amount claimed but the plaintiff but only says he has a counterclaim against her. Defendant also seems to say that there is an important point of law to be tried in that she issued cheques but they were not meant to be banked but the plaintiff banked them illegally. Contrary to the generally accepted principle, it has been proposed that points of law may be taken on an application such as this one. Home & Overseas Insurance Co. Ltd. v. Mentor Insurance (UK) (In Liquidation) [1990] WLR 153 (adopted in Corporate Insurance Co. Ltd. v. Nyali Beach Hotel Ltd., above) is authority for the proposition that:-
“If the defendant’s only suggested defence is a point of law and the court can see at once that the point is misconceived the plaintiff is entitled to judgment. If at first sight the point appears to be arguable but with a relatively short argument can be shown to be plainly unsustainable the plaintiff is also entitled to judgment.”
I will therefore consider the points of law raised here for they seem not to require any further evidence other than what is on record to put them to rest. The defendant claims that there was a joint venture arrangement between the parties, while the plaintiff disputes it. The issue raised is whether there was a contract between the parties towards which the plaintiff was supplying goods in lieu of a contribution of money due per contract. Mr. Sembuya argued that the terms of the Joint Venture Agreement (JVA) were reflected in Annexure “B” and “C” to the affidavit in rejoinder and that the parties went on an implemented the terms therein by having the plaintiff supply wire rods and galvanised iron sheets as a contribution to the capital for the JVA. I therefore carefully perused the two documents in relation to other documents that were attached to the various affidavits.
Annexure “B” to Mr. Nsubuga’s affidavit in rejoinder which defendant sought to rely on consisted of two email messages exchanged on 10/02/2009 and 11/02/2009. The first was from Rakesh Bhatnagar to Francis Sembuya and in it he referred to a meeting that was held in Mr. Sembuya’s office on 9/02/2009. The email was to confirm the gist of what was discussed in the meeting and to request Mr. Sembuya to particularly attend to item (G) of the issues discussed, i.e. resolutions by the Directors and Shareholders of the defendant to give a go ahead to the venture. Mr. Bhatnagar forwarded with his email an earlier email that he had sent to Mr. Salgar Narayanan and which contained the details of the discussion between Mr. Sembuya and Mr. Bhatnagar. And for clarity of the arguments that follow as well as to facilitate an understanding of my final decision in this matter, I will reproduce several of the key documents on which the decision is based in some detail. In his email of 10/02/2009 Mr. Bhatnagar wrote:-
“Mr. Francis met me yesterday (9.2.2009) and we discussed as under:
(A)
The name of the venture(,) they still are particular to start from SEMBULE … Hence let us accept it and agree the TITLE “SEMBULE SAFINTRA STEEL LTD”. They will get clearance from the REGISTRAR OF COMPANIES for it.
(B) The consideration for the assets has been agreed at USH 4.5 BILLION with great persuasion.
(C) SEMBULE will permit us to fence the areas under the JV separate with separate entry.
(D) Consideration for the UBL Tube Mill and business will be discussed in due course after stabilisation of operations under JV.
(E) SEMBULE will shift ROLL FORMERS, Barrel corrugaror, Shearing M/C and EXPANDED Metal machine from TUBE MILL premises at JV’s Costs.
(F) UBL can supply WIRE RODS, GP & COLOUR COILS to SEMBULE STEEL MILLS on PD Cheques. Roofings prevailing prices will be the criteria for INVOICING.
(G) SEMBULE will arrange BOARD RESOLUTION for selling ASSETS duly approved in DIRECTORS as well as SHAREHOLDER’S meetings.
(H) We are now awaiting the copy of MALAWI SHAREHOLDERS AGREEMENT proposed by Mr. Narayanan being short and explicit.
Any suggestions, precautions to be kept in mind please guide.”
I was not able to agree with the submission that the contents of the email reproduced above connected the supply of goods to the joint venture. Item (B) thereof referred to consideration for assets, not a contribution to the joint venture. The other item that related to consideration was Item (D) but it was to do with consideration for the Tube Mill, not necessarily the joint venture. I also came to the conclusion that if the plaintiffs had intended the supply of goods to defendant to serve as consideration for the joint venture, they would not have covered the transaction with the issue of post dated cheques as they did in (F) above. In fact, the contents of clause (F) seem to be very certain. Invoices were to be issued for the goods and they would be priced according to the rates charged by “Roofings”. It also seemed to me that at the meeting referred above, the parties did not only discuss the terms of a joint venture arrangement but they also discussed terms for the purchase of some of the assets of the defendant.
Annexure “C,” also sought to be relied on by the defendants, was a letter dated 15/11/2008 from Christopher Sembuya to Mr. Rakesh Bhatnagar and it was captioned “AGREED TERMS AND CONDITIONS OF JOINT VENTURE”. It referred to a meeting held on 31/10/2008 between Safal Group (Mr. Neelesh Shah and Mr. Bhatnagar) and Mr. Francis Sembuya and Michael Kabengwa for Sembule Group. It was stated therein that the parties had agreed as follows:
“1. The joint venture company will be called Sembule Safal Steel Limited.
2. The management will be appointed and controlled by the board of Directors.
3. Sembule Group does not need to give its books of accounts to Safal.
4. Safal will send machinery experts within the next 10-14 days.
5. Safal will have 51% shareholding while Sembule will have 49%.
6. The board will always have equal representation by the two shareholders.
Basing on the valuations and the current market prices of machinery, Safal will send Sembule Steel Mills Ltd. their monetary offer for 51% share in the joint venture by the end of November. After both parties have agreed on the amount to be paid to Sembule Steel Mills Ltd, instructions will be given to lawyers to draft a Joint Venture Agreement.”
It would appear from the letter above that the amount to be paid by the plaintiff to the defendant as a contribution to the joint venture had not been agreed upon. It was therefore not true that the amount that the plaintiff was supposed to contribute to the joint venture was settled at shs. 4.5 Billion, as the defendant would have this court believe.
But before that, there was Annexure “A” to the affidavit in support, a letter dated 27/10/2008 from Rakesh Bhatnagar to M/s Sembule Steel Mills Ltd. It was captioned “Letter of Intent for Joint Venture” and it contained proposed terms and conditions that had been discussed by the Board of Directors of the plaintiff company. By a letter dated 30/10/2008 from Sembule Steel Mills to Mr. Bhatnagar as the CEO of the plaintiff, Mr. Christopher Sembuya sent a counter proposal, also captioned “Letter of Intent.” It contained certain terms and conditions which Mr. Christopher Sembuya informed Mr. Bhatnagar were their initial proposals for the JV.
I was therefore inclined to agree with Mr. Musoke for the plaintiff that all the documents that the defendant sought to rely on to prove the joint venture were simply part of negotiations to that end. No conclusion was reached about the terms of the venture, and that is clearly shown by all of the documents attached to the affidavits. And though Mr. Nsubuga stated in paragraph 5 of his affidavit in rejoinder that a Letter of acceptance and affirmation of the commitment to pay a capital contribution of Ushs 4.5 billion was attached to the affidavit as Annexure “A” and “B” this was not borne out by evidence. I could not construe the copy of a cheque for shs. 5,107,861/= in favour of Knight Frank (U) Ltd. (Annexure “A1”), and the acknowledgement of receipt thereof (Annexure “A2”), a valuation report by Knight Frank stating the “Forced Sale Values for Plot 3A Sembule Road” (Annexure “A3”), as well as the emails of Mr. Bhatnagar of 10th and 11th February 2009 (Annexure “B”) as acceptance of affirmation by the plaintiff of the proposed terms of the joint venture.
For sometime after the emails of 10/02/2009 and 11/02/2009, there seems to have been no written communication between the parties until 11/06/2009 when Mr. Bhatnagar sent an email to Mr. Francis Sembuya (Annexure “D” to the affidavit in rejoinder). In his email, Mr. Bhatnagar complained that the defendant owed the plaintiff approximately shs. 1.5 billion; that the proposed joint venture was being delayed due to a lack of mutual understanding of the concept among the shareholders of the defendant and Mr. Francis Sembuya who represented them in negotiations should take his time to convince them. He then concluded as follows:-
“Meanwhile we are badly pressed for money and seeking your clearance to bank cheques covering above outstanding on 22nd June 09. Please make necessary arrangements with your bank for prompt clearance. Accordingly we are advising our marketing department to act as per this schedule.”
I was unable to understand the last paragraph quoted above as an indication that the cheques related to the joint venture and that the plaintiffs were seeking for permission to bank them contrary to the alleged arrangement. Rather, I understood Mr. Bhatnagar to be following up on the request to date the undated cheques and ensure that there were funds in the defendant’s accounts before plaintiff could bank the cheques. Following that, it appears that Mr. Christopher Sembuya wrote to Mr. Bhatnagar but that letter was not on record. In response, Mr. Bhatnagar sent an email dated the 22/06/2009 (Annexure “R1” to his affidavit in reply) in which he expressed his frustration at the continuing changes in the terms of the Joint Venture that had been agreed to by the defendant. He wrote:
“… We wish to inform that we cannot entertain any further changes in the TERMS OF REFERENCE for JV discussed, agreed and finalised by you on behalf of SEMBULE GROUP.
We expected you to join in the discussions indicated in the attached letter but we really fail to understand the reasons. Anyway our stand remains firm as above.
As regards banking the cheques amounting to Ushs 1.5 Billion appx please note it relates to supply of WIRERODS AND COILS. Hence it should not be mixed with the proposed JV arrangements. As per our telephonic conversation of date we will hold these cheques till tomorrow afternoon for banking. It appears some of these cheques have been issued from Standard Chartered Bank where your account stands closed and we have informed you separately. This is serious and please rectify by close of the day today.
Please pass on the copy of this email to your father positively while you make arrangements for funds in the bank to avoid embarrassments/legal proceedings.”
The next communication that appears on the record was a letter from Mr. Christopher Sembuya to Mr. Bhatnagar dated 23/06/2009 (Annexure “D” to the affidavit in support), in response to Mr. Bhatnagar’s email. It Mr. Christopher Sembuya wrote:-
“This is in reference to your letter dated Monday 22 June 2009 to Mr. Francis Sembuya, in connection with our earlier letter of June 19, 2009 on the Sembule/Safal joint venture, discussions of which are yet to be completed.
Joint ventures are normal enterprises carried out in interest of the parties involved and mutual understanding. And this is done when matters involved are cleared.
We began our discussions knowing that the GI Steel Section will remain where it is. This is because it cannot be moved to any other place. Demarcation of the two parties, Sembule/Safal from Sembule Steel Mills was also to be done in a manner to be agreed upon by the two parties.
Issues referred to above should not be resolved through letters we are writing to each other! Meetings are the best answers to settle these matters. I suggest we meet when one of your Directors comes to Uganda.
On cheques, again we should not ignore the purpose for which they were written, they are all connected with the joint venture. Let us move well to set up the Joint Venture.”
Given the contents of Annexure “D” to the affidavit in support of this application, there remained no doubt in my mind that the joint venture did not exist. Negotiations were underway but they seem to have fallen through. I am fortified in coming to that decision by the contents of Annexure “R2” to the affidavit in reply wherein on the 13/07/2009, Mr. Bhatnagar wrote an email to M/s Francis and Christopher Sembuya in which he terminated the negotiations. He stated:-
“It appears that our THOUGHTS FOR THE JOINT VENTURE CONCEPT are not matching. Hence we do not wish to proceed any further with this proposal.
Yes we are still open for negotiations to OUTRIGHT PURCHASE of said business OR part of the asset as mutually agreed.
Before we even proceed for these negotiations if you are willing we kindly request once again to clear the outstanding of Ushs 1.49Bn (appx) preferably in next two days.
Please take it as a polite but last reminder/opportunity to settle this matter amicably. Alternatively we are advising our LEGAL COUNSEL by copy of this email to proceed with appropriate legal actions for recovery.
Mr. Neelesh Shah and other Senior members of SAFAL GROUP will be here in the week starting 3rd August and will be too glad to meet you all with prior arrangements but subject to clearance of OVERDUES as indicated earlier.”
In view of the above, the defence that the cheques issued to the plaintiff were all according to a Joint Venture arrangement or agreement cannot be sustained because there was no such arrangement or agreement. The defence that the defendant was in breach of the alleged contract for a joint venture therefore also could not, prima facie, be sustained.
Can the plaintiff then recover the amounts due according to the invoices supported by the cheques in this suit? The position on actions based on cheques in this jurisdiction is fairly settled. Order 36 of the CPR specifically provides for them. And in Kotecha v. Mohammed (above) the Court of Appeal pronounced itself on such actions as follows:-
“The English authorities, particularly James Lamont and Company Limited v. Hyland Limited [1950] 1 KB 585; Brown, Shipley and Company Limited v. Alicia Hosiery Limited [1966] (Lloyds) Rep 668, establish that a Bill of Exchange is normally to be treated as cash. The holder is entitled in the ordinary way to judgment. If he is a seller who has taken bills for payment, he is still entitled to judgment: no matter that the Defendant has a cross claim for damages under the contract of sale or under other contracts. The buyer must raise those in a separate action.”
Although the appeal in Kotecha v. Mohammed succeeded and the defendant was allowed to appear and defend the suit in the lower court, that was because he was able to prove that his case fell among the exceptions to the rule. He had indicated in his affidavit in support that the debt for which he issued the cheque in question had been paid. Enforcement of the payment of monies due on the bill against him, without first establishing whether the debt was paid or not, would have been unjust.
Otherwise, the general rule regarding suits based on bills of exchange was stated in James Lamont & Co. Ltd. v. Hyland Ld [1950] KB 585, at 591, as follows:-
“In such cases, although it is not easy wholly to reconcile the authorities, a rule more favourable to the plaintiff has in general prevailed, the court treating the execution of a bill of exchange either as analogous to a payment of cash, or amounting to an independent contract within the wider contract in pursuance of which it was executed and nor dependent as regards its enforcement on due performance of the latter.”
The decision was affirmed by Denning M.R in Brown Shipley & Co. Ltd. v. Alicia Hosiery, Ltd. [1966] 1 Lloyds Rep. 668, at 669 when he ruled:
For many years the courts in this country have treated bills of exchange as cash. In James Lamont & Co. Ltd. v. Hyland Ld [1950] KB 585, this court declared that where there is an action between the immediate parties to a bill of exchange, then in the ordinary way judgment should be given upon that bill of exchange as for cash and it is not to be held up by virtue of some counterclaim which the defendant may assert, even, as in that case, a counterclaim relating to the specific subject-matter of the contract. Here the counterclaim is in relation to a different contract altogether from that which initiated the bill of exchange.”
It will be recalled that the Court of Appeal of Uganda affirmed both of the decisions above in Kotecha v. Mohammed although they were not applied. Applying the principles stated therein to the instant case, I would say that not only is the counterclaim proposed by the defendant in respect of another contract, the alleged Joint Venture Arrangement, but the contract of sale of goods in issue can be cleanly severed from the alleged joint venture. The defendant is at liberty to bring a separate suit to determine the counterclaim. It is therefore my carefully considered opinion that judgment for the amount on the cheques in issue cannot be held up except by reason of a plausible defence under the Bills of Exchange Act.
To that end, Mr. Sembuya argued that some of the bills were not dated, and others had been signed by only one of the signatories to the defendant’s accounts, a fact that was not denied by the plaintiff. He went on to stated that this should be understood to mean that the defendant issued the cheques with the intention that they should not be banked to collect the amounts due but as a custom referred to as “show me the money.” The defendant further contends that the plaintiff who banked some of the cheques did so illegally contrary to the terms of the JVA. But it was argued for the plaintiff on the other hand that some of the cheques were banked and returned unpaid which entitled it to an action on all the cheques issued.
A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer (s.2 (1) Bills of Exchange Act). And a cheque is defined as a bill of exchange drawn on a banker payable on demand (s.72 (1) Bills of Exchange Act). It is implied from the definition of a bill of exchange, and therefore a cheque, that it is by its very nature unconditional. One cannot issue a cheque on any conditions, except if those conditions are notified to the banker. This is because the cheque/bill is addressed to the drawee, in this case the banker, not to the bearer of it. The plaintiff presented some of the cheques to the defendant’s bankers and according to paragraph 12 of the affidavit in rejoinder, some were paid. The cheques attached to the plaint showed that those that were issued against the Bank of Africa were deposited and returned marked “Refer to Drawer”. After giving notice of dishonour to the defendant, the plaintiff’s only recourse was to a suit such as this one under s.47 (2) of the Bill of Exchange Act.
Would the absence of a second signature and dates on some of the cheques invalidate them? Starting with the absence of the second signature on some of the cheques, the defendants deliberately issued those cheques with only one of the signatures required. Though such an instrument would not be paid by their bankers, it would not exempt the defendant company from the promise to pay contained in the cheque. The defendant would still be liable to make good the amount in the cheque even with one signature on an action such as this one because a cheque is an unconditional order to the banker to pay. The plaintiff could validly demand that the defendants make good the instrument, as they had, by providing the second signature.
Regarding the omission to include dates on some of the cheques, section 2 (4) of the Bills of Exchange Act is conclusive. It provides that a bill is not invalid by reason that it is not dated; neither is it invalid by reason that it does not specify the value given or that any value has been given therefore. In addition, s.19 (1) of the Bills of Exchange Act provides as follows:-
19. Inchoate instruments
(1)
Where a simple signature on a blank stamped paper is delivered by the signer in order that it may be converted into a bill, it operates as a prima facie authority to fill it up as a complete bill for any amount the stamp will cover, using the signature for that of the drawer, or the acceptor, or an endorser; and, in like manner, when a bill is wanting in any material particular, the person in possession of it has a prima facie authority to fill up the omission in any way he or she thinks fit.”
{My Emphasis}
According to s. 19 (2) of the Act, in order that any such instrument when completed may be enforceable against any person who became a party to it prior to its completion, it must be filled up within a reasonable time, and strictly in accordance with the authority given. The plaintiff therefore did not have to wait for the defendant to fill in the dates of the instruments that were not inserted by the defendant’s officers. They could have inserted reasonable dates and presented the cheques for payment to the defendant’s bankers and they would have been well within their legal rights.
That above being the law relating to the cheques and the goods supplied, the defence that the cheques were issued in compliance with a trade custom referred to as “show me the money” flies in the face of established principles of commercial practice as well as several provisions of the Bills of Exchange Act.
And as I observed in Dembe Trading Enterprises v. Bidco (U) Ltd, JJA HCMA No. 28/2008, the practice among businessmen and women in Uganda of issuing cheques as security with the instructions that they should not be banked or negotiated should be strongly discouraged because it goes against the very nature of such negotiable instruments. One cannot have a trade custom or practice that purports to turn the law completely on top of its head and for that reason the courts should not countenance customs such as “show me the money”. Although the drawer may avoid payment of a cheque by ensuring that there are no funds on their account that should not absolve him/her in the event of a suit such as this one based on the cheque.
I think that businessmen and women have come to take this alleged custom/practice, which is in fact a blatant illegality, as valid because they have not a clue about the legal implications and the gravity of issuing and accepting cheques. They therefore carelessly issue cheques in spite of the provisions of s.385 (1) (b) of the Penal Code Act which makes it an offence to issue a cheque, well knowing that one does not have the funds to meet the payment ordered in their account. But ignorance of the law is not a defence. The drawer of a cheque is presumed to know the implications of his/her action and should be held liable for it (see s.26 Bills of Exchange Act). The payee accepts the cheque and becomes a holder in due course; they should hold the bill in good faith and for value, if they have no notice of any defect in the title of the person who drew or negotiated it. They should be able to negotiate it for value, or bank it, with no fear that it will not be honoured on the sometimes whimsical instructions of the drawer of it.
In conclusion, the defendant’s proposed defences were all, prima facie, unsustainable and therefore a sham. No genuine or plausible triable issues were raised by the application and it is dismissed with costs. Judgment is therefore hereby entered for the plaintiff in the sum of shs. 1,474,394,037/= and the costs of the suit.
Irene Mulyagonja Kakooza
JUDGE
11/05/2011
