FOLLOW UP OF WEEK’S

WORK– BANKING
(2019-2020)
Banking; Regulatory framework for financial
institutions & financial services
 INTRODUCTION

• The purpose of follow up is to re-emphasise agreed positions

and clarify on any grey areas. This is not meant to be a
repetition of the workshops. It is only meant to re-emphasise
learning areas covered in the workshops
• This presentation does not to go through authorities in detail
and give holdings. Students are encouraged to read the
authorities extensively
 WORKSHOP 1
POSITIONS OF LAW AS PER FACTS

• The relationship established between MEL & HFB is that of a

banker-customer
• Go back and read authorities defining banker, and customer
• Magambo was a consumer on account of being a small firm
Refer to definition of Consumer and Small Firm in the Bank of
Uganda (Consumer Protection) Guidelines 2011
• Document A was not a cheque. It was just a savings
withdrawal slip. Refer to the T&Cs between the bank and
Magambo which provides that no cheque book shall be issued
for a savings account
 POSITIONS OF LAW AS PER FACTS (….ctd)

• The T&Cs specifically provide that no cheque books shall be

issued for savings accounts
• The T&Cs are largely compliant with the Consumer protection
guidelines but there are some clauses which may be open to
challenge. See 4.4, 5.7, 7.1, 8.1 (if the conditions are not
stated at the time of contracting or are unreasonable)
• Document B was NOT an inchoate cheque. It did not have a
complete mandate since one signatory was missing. The
words ‘material particulars’ missing does not include a missing
signature since that is no mandate
 POSITIONS OF LAW AS
PER FACTS (….ctd)

• A Customer who signs an inchoate cheque, gives prima facie

authority to any holder of the cheque to fill it in and he will be
liable on it. The bank is absolved from liability
• Remember liability on a cheque is based on proper mandate,.
It being filled in fully at the time of presentation for payment
(regular and complete on the face of it; even if it was an
inchoate cheque that a holder filled in). Underlying facts like
adequacy of value given, or exceeding authority while filling in
an inchoate cheque do not arise
• However, if the holder of the cheque fills it in beyond the
mandate given, the consumer may have a right of action
against him but this will be under a separate cause of action
 POSITIONS OF LAW AS
PER FACTS (….ctd)

• A forged mandate is wholly inoperative and will make the bank

liable for paying on it
• This is a general rule and there are exceptions e.g. a customer
facilitating fraud, not disclosing the fraud to the bank if discovered
before the bank pays
• A bank’s liability can also be enhanced on account of acting
negligently. See the case of Makau Nairuba Mabel Vs. Crane Bank
H.C.C.S No. 380 of 2009
• Paying a third party cheque immediately violated banking practice,
duty of care and specifically the Uganda Clearing House Rules &
Procedures, 2018. Remember these are signed by BoU and the
Bankers Association. This action is what made Magambo’s attempt
to countermand the cheque fail
 POSITIONS OF LAW AS
PER FACTS (….ctd)

• HFB is liable to Magambo

• HFB can in turn seek indemnity from MIL. Remember there is
a contractual relationship between MIL and HFB in so far as
they honoured a cheque presented by MIL hence a right of
indemnity in the circumstances
• The right of HFB to claim indemnity from MIL after they have
refunded MEL’s money is based on principles of money had
and received and the fact that courts will not permit unjust
enrichment. See Obed Tashobya Vs. DFCU Bank on reading list
 POSITIONS OF LAW AS
PER FACTS (….ctd)

• MIL are NOT holders in due course. They did not offer value
(consideration) to MEL but to the Finance Manager of MEL in
his personal capacity
• This alone should have put MIL on notice when they received
a cheque from MEL directly into their names without them
having offered value to MEL
• HFB can also proceed against the Finance Manager for fraud
 POSITIONS OF LAW AS
PER FACTS (….ctd)

• Briefly highlight other types of negotiable instruments

• Cheques are of very limited value as negotiable instruments
since endorsement is no longer permitted as industry practice
Refer students to the T&Cs and also to the document marked
B with words Not negotiable
• Explain what the words account payee only mean
• Also refer to the T&Cs which provide for account payee only
 POSITIONS OF LAW AS
PER FACTS (….ctd)

• The attempt by HFB to combine the loan account of MIL with

their current account in the circumstances was wrong
• Money had and received cannot be recovered in this manner. It
should be treated as an overdraft facility at best. See Obed
Tashobya case (Supra)
• The interest charged is unconscionable and can be set aside by
court
• Refer students to provisions in Consumer protection guidelines
against aggressive conduct by banks
• Carefully examine the salient features of documents A & B and
identify the payer, payee, mandate, account number, cheque
number, crossed cheque, not negotiable, account payee e.t.c
 Other matters to emphasise.

• The banker-customer relationship and banker-consumer gives

rise to several rights and obligations which must be observed.
E.g. duty to act with due care and skill, confidentiality,
honouring mandates which are complete and regular, duty not
to facilitate fraud, duty to disclose fraud e.t.c.
• The T&Cs greatly vary provisions of the Bills of Exchange of Act.
This is ok since it is a contractual relationship. For example, the
T&Cs provided vary matters provided in the BOE Act e.g.
endorsement of cheques, payment of third party cheques,
drawing money off fixed deposit accounts e.t.c.
• Read the T&Cs and see how they vary the provisions of the BOE
Act, and also provide for common law principles in banking
 ASSIGNMENT 1

1. What do the terms “refer to drawer” mean?

• On 15th January 2020, X Limited supplied iron bars for building
worth UGX 76,800,000 to Mr. Yung Lee.
• Mr. Yung Lee issued X Limited with cheques totaling UGX
76,800,000 drawn on Dongee Bank. Unfortunately, the cheques
were dishonoured for lack of funds.
• When the money did not clear on the account of X Limited, it
inquired of Dongee Bank as to why money had not cleared. The
branch manager of Dongee Bank sent an email to X Limited
reading in part: “The cheques were dishonoured because Mr.
Yung Lee has no money on his account. He is broke. He only has
UGX 50,700 being the bare minimum balance”
 ASSIGNMENT 1 (……ctd)

• Mr. Lee is furious and wants to sue Dongee Bank

a) Advise the Bank on its potential liability
b) If you had a chance to respond to X Limited’s query again on
behalf of Dongee Bank, how would you have hanled it
differently to avoid liability?
 ASSIGNMENT 2

• Use the facts in Assignment 1 with the following variations.

a) You represent X Limited
b) You sued Mr. Yung in summary procedure for the amounts
on the cheques. The action was based on the dishonoured
cheques.
c) What action would X Limited do you expect X Limited to
have taken to be able to maintain the suit?
d) If Mr. Yung files an application for leave to appear and
defend the suit on the basis that the iron bars were of poor
quality and many of them bent after concrete was cast.
What would your response to his application be?
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS (ctd….)

• OCL is a small firm and as such the Bank of Uganda (Consumer

Protection) Guidelines apply
• The workshop deals with project financing. Specifically, OCL
took out a Facilities Agreement. A facilities agreement
combines many different credit facilities of different kinds e.g.
Term loans, overdraft facilities, bank guarantees e.t.c. This is
wider in scope than a mere loan agreement or mortgage
agreement
• Project financing is necessary in instances such as the facts at
hand where a contractor is not being paid upfront and needs
capital to execute works where payments are made later to
avoid tying up capital
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS (ctd….)

• There are different types of securities in the facts. These include

Bank Guarantee, Personal guarantees, mortgages e.t.c.
• Remember there is a duty to perfect securities if a lender is to rely
on them as per Section 105 of the Companies Act, 2012
• Appendix 2 is an on demand guarantee
• Appendix 3 is a contingency guarantee
Identify clauses in the documents above showing their character as
such
• Distinguish between the two types of guarantees.
• Appendix 3 was not well drafted. Each guarantor should have signed
his own. See DFCU Bank (Formerly Gold Trust Bank Limited) V Manjit
Kenty & Another H.C.C.S No. 193 of 2000 (Commercial Court) on execution
of guarantees
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS (ctd….)

• There are different types of securities in the facts. These

include Bank Guarantee, Personal guarantees, mortgages e.t.c.
• Remember there is a duty to perfect securities if a lender is to
rely on them as per Section 105 of the Companies Act, 2012
• Appendix 2 is an on demand guarantee
• Appendix 3 is a contingency guarantee
• Distinguish between the two types of guarantees
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS (ctd….)

• Recovery of the money lost by the bank on account of poor

computation on a previously closed loan account raises the
following issues:
1. Duty of a banker to maintain proper and accurate books of
account of the customer. This duty was breached
2. Right to recover money on account of money had and
received and unjust enrichment (Ref Obed Tashobya case
(supra))
3. Aggressive conduct on behalf of the bank in so far as it
demands that the money be paid immediately
4. Wrongful combination of accounts (two loan accounts)
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS

5. Unconscionable interest rates charged and penal interest

which is higher than the statutory maximum
6. Estoppel on the part of OCL if it can successfully argue and
prove estoppel so as to be discharged from the obligation to
pay
7. Approbation & reprobation principle (Read Golf View case
on your list)
8. Either argument that OCL should pay (money had & received
or unjust enrichment) or that it ought not to pay (estoppel)
are arguable. Provided you do not adopt both arguments in
an exam. You must take a position
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS

9. Recall of a term loan. This is only permissible if there had been an

event of default
10. There was no event of default. See clauses on default in the
Facilities Agreement. Ensure you read them alongside clauses 5.2,
6.2.3 & 6.2.4.
11. The money unpaid on the old loan ought to have at best, been
recovered as an overdraft facility and not turned into a term loan
by merging it with the current loan. Ref: Obed Tashobya case for
guidance
12. Interest cannot be charged on undisbursed amounts
13. The legal fees charged are exorbitant. Look at Advocates
(Remuneration & Taxation of Costs) Rules and can be varied. Ref:
Golf View Inn case
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS

• Signing the SRA does not necessarily mean that OCL cannot
challenge it and avid liability if it can prove estoppel
• However it cannot challenge the agreement but also seek to
rely on it. Approbation & reprobation.
• Once a customer fulfils the conditions of the loan, accepts a
loan offer, and the bank perfects its securities, he becomes
entitled to the loan being disbursed. If the money is not
disbursed, the bank is liable
• The liability above will extend to the liability the borrower
suffers on account of a failed project as a result of lack of
funding (consequential loss). Also see Preamble and clause 2
of the agreement)
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS

• The decision by ABC Bank to delay payment of the on demand

guarantee is wrongful. These guarantees are paid on demand.
The only reason a bank may not pay is if there is fraud. Ref to
relevant authorities and also wording of the guarantee
• Makerere University had no right to demand payment from
OCL because the Bank has refused to pay the guarantee. OCL
is not a party to the guarantee although it is issued on its
behalf
• Makerere University can however recover any damages which
are over and above the bank guarantee and cannot be covered
thereby
 WORKSHOP 2
POSITIONS OF LAW AS PER FACTS

• When a guarantor discharges the obligations of a principle

debtor on a guarantee to the FULL extent of the guarantee, the
guarantor has a right of indemnity, and the securities given by
the principle debtor if the obligations of the debtor are
discharged.
• The guarantor cannot enjoy this right unless and until he has
fully discharged his obligations under the guarantee
• Discuss indemnity and subrogation and distinguish the two
• Ina contingency guarantee, the liability of guarantor cannot be
more than that of a principal debtor
• Read and understand the different heads of damages under the
law (Ref: Frederick Zaabwe case on the list)
 Assignment 3

• What do you understand by the terms indemnity &

subrogation? How are the two interlinked?
• Assuming Ms. Dorocasi Byekwaso borrowed money from
Stanbic Bank under a mortgage. She later took out a further
mortgage from DFCU Bank.
• Mr. Money Bags Muzungu guaranteed the full amount of
Dorocasi’s mortgage to Stanbic Bank.
• Mr. Dorocasi Byekwaso defaulted on both loans.
• Mr. Money Bags fully discharged the obligations of Dorocasi to
Stanbic.
 Assignment 3 (……ctd)

• When he wet to Stanbic Bank to ask for the titles the Dorocasi
gave Stanbic Bank so as to enjoy his rights, Stanbic Bank told
him to wait for DFCU to first recover its money from the sale
of the securities before he can thin of claiming them.
1. What rights was Mr. Mney Bags trying to enforce?
2. Was Stanbic Bank justified in its response to Mr. Money
Bags?
 COPYRIGHT INFORMATION

• Slides and content developed by Tom N. Mbalinda (Head of

Subject, Corporate & Commercial Practice) for Law
Development Centre.

• © Law Development Centre, August, 2020.