THE REPUBLIC OF UGANDA,

IN THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

CIVIL APPEAL NO 03 OF 2016

KARANGWA JOSEPH}.........................................................................APPELLANT

VERSUS

KULANJU WILLY}............................................................................RESPONDENT

(APPEAL FROM THE JUDGMENT AND DECREE OF HIS WORSHIP KAGODA

BEFORE HON. MR. JUSTICE CHRISTOPHER MADRAMA IZAMA

JUDGMENT

This judgment arises from an appeal by the Appellant, appealing against the decision of his
worship Kagoda Moses Samuel Ntende delivered on 5th February, 2016 against the whole of the
decision and orders therein. The grounds of the appeal are as follows:

1. The learned trial magistrate erred in law and in fact when he held that the Respondent’s
case disclosed a cause of action against the Appellant.
2. The learned trial magistrate erred in law and in fact in holding that the contract of
guarantee existed between the Appellant and the Respondent in the absence of such a
contract in writing.
3. The learned trial magistrate erred in law and in fact in holding that an oral contract whose
subject matter exceeds 25 currency points is valid and enforceable.
4. The learned trial magistrate erred in law and in fact in holding that the Respondent is
entitled to recovery of US$5000 from the Appellant.

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The Appellant proposes in the memorandum of appeal that the appeal be allowed and the
judgment and orders of the trial court to be set aside with costs in the High Court and in the court
below.

The Appellant was represented in the proceedings by Counsel Wilfred Nuwagaba of Messieurs
Niwagaba advocates & solicitors. The Respondent was represented in the proceedings by
Counsel Patrick Bugembe of Messieurs Lutaakome & company advocates. The court was
addressed in written submissions.

Submissions of Counsel for the Appellant

The Appellants Counsel addressed grounds 1, 2 and 3 of the memorandum of appeal together.
He submitted that the grounds 1, 2 and 3 relate to the finding of the trial magistrate that there was
a contract of guarantee and that section 10 of the Contracts Act, Act 7 of 2010 does not apply to
indemnity and guarantee which according to the trial magistrate is only provided for under Part
VII of the Act and section 68 in particular. The Appellants Counsel submitted that the finding of
the trial magistrate that there was an oral contract of guarantee was wrong for there can be no
such contract if it does not comply with the legal requirements.

The Appellant’s Counsel submitted that section 10 (5) and (6) of the Contracts Act are applicable
to contracts of guarantee which guarantee under section 10 (7) is defined under Part VIII of the
Act and specifically section 68. The trial magistrate erred to find that there was a contract of
guarantee when there was none in writing and more so whose value exceeded 25 currency points
as it is a mandatory requirement under section 10 (6) and section 10 (5) read together with the
schedule under section 2 of the Contracts Act 2012.

The Appellant’s Counsel contended that there are three parties to a contract of guarantee namely,
the creditor, the principal debtor and the guarantor. Throughout the trial the existence of the
creditor and the relationship between the alleged creditor and the principal debtor was not
proved. No evidence was tendered to prove that the alleged Aizhou Peng Sheng Agriculture and
Forestry Machinery Company had sued the Respondent or the Appellant and nowhere did it
appear that the Respondent had become liable to the creditor in any way whatsoever. The

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absence of the alleged creditor in the entire trial renders the existence of the alleged guarantee
not proven.

Furthermore, the Appellant’s Counsel submitted that under the provisions of section 71 (1) of the
Contracts Act, a guarantor is only liable to the extent to which the principal debtor is liable and
yet the Appellant’s alleged liability as an alleged principal debtor to the said Aizhou Peng Sheng
Agriculture and Forestry Machinery Company was never proved on the balance of probabilities
by the alleged creditor which Creditor never gave any evidence in court nor authorised by way of
power of attorney the Respondent to sue on its behalf. There was no evidence to prove the
simplest debt. Counsel further submitted that a claim based on an international transaction would
require the alleged creditor to prove the existence of the dealing between it and the Appellant by
production of at least international trade documents such as document proving orders, shipment,
delivery etc but none was tendered at the trial. Moreover section 71 (2) of the Contracts Act 2010
provides that the liability of the guarantor takes effect upon default by the principal debtor.

The existence of a contract in clear terms as to payments, mode and time must be ascertained but
in this particular case there was none. Consequently the Respondents claim did not meet the
statutory requirements under section 10 (5) and (6) as well as section 71 (1) and (2) of the
Contracts Act and a claim based on an alleged contract of guarantee that is in contravention of
the Contracts Act is illegal null and void (see Bostel Bros Ltd vs. Hurlock (1948) 2 All ER 312
and HCCS 503 of 2012 MTN (U) Ltd vs. Three Ways Shipping Group).

The Appellant’s Counsel further submitted that the order to pay US$5000 for onward
transmission to the Chinese company when there was not a claim for indemnity by them is
clearly outside the scope of the principles of guarantees and cannot be upheld by this court. The
Respondent had never been sued by the alleged creditor. He never paid the alleged creditor and
the provisions of section 69 of the Contracts Act are not applicable to him and therefore he could
not sue as an indemnity holder and entitled to the decree passed by the trial court.

Ground 4

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The Appellant’s Counsel submitted that the trial magistrate not only failed to correctly interpret
the law vis-à-vis the pleadings on record and evidence adduced but also wrongfully reviewed the
evidence on record.

The trial magistrate considered documents only tendered for identification purposes but not
admitted as exhibits as if they had any evidential value. The learned trial magistrate heavily
relied on PID 13, PID14, PID 15 and PID16 in finding for the Respondent. The Appellant’s
Counsel submitted that the documents tendered for identification cannot be considered as having
any evidential value and the trial magistrate erred in law in considering them and relying on
them. Articles for identification are clearly distinguishable from exhibits and do not in law pass
as evidence and cannot be relied upon by the court (see judgment of Justice Bashaija K Andrew
in Civil Appeal Number 23 of 2014 between Kiyimba Noor vs. John Nagenda Mulinde at
page 11 thereof).

The trial magistrate's review of the evidence was in total disregard of the pleadings on record and
one such instance is the finding that the Appellant paid Uganda shillings 14,000,000/= to the
Respondent and that the claim by the Appellant that it was for purchase of herbicides was an
afterthought since it had not been pleaded. Yet paragraphs 2, 3 and 4 of the written statement of
defence denied anything to do with the alleged contract of supply of spray pumps between the
Appellant and the said Aizhou Peng Sheng Agriculture and Forestry Machine Company. The
trial magistrate seems to imply that pleadings must capture the evidence a party wants to give
during the trial which is not the case.

The Appellant’s Counsel further submitted that the trial magistrate erred in law when he relied
on the evidence of PW2 and PW3 which was clearly hearsay evidence and therefore inadmissible
since none of the two witnesses knew anything about the creditor and whether it ever transacted
with the Appellant and if so the terms thereof.

He submitted that the trial magistrate further erred in law in awarding interest when the creditor
was not shown to be claiming it under any contract and when there was no evidence of a claim
by the alleged beneficiary creditor against the Appellant. There was even no evidence of a claim
against the Respondent by the alleged creditor. He contended that the damages of Uganda

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shillings 4,000,000/= and interest were excessive and the trial magistrate acted injudiciously to
make such awards.

In conclusion, the Appellant’s Counsel submitted that this was a case where the Respondent
alleged that there was a contract of guarantee that is non-existent in law and which even if it
existed has not been acted upon by the creditor who should be the beneficiary wants to get rich
personally by abuse of court process. He invited the court to set aside the judgment of the trial
magistrate and allow the appeal with costs in this court and in the lower court.

Reply by the Respondent’s Counsel

In reply the Respondent’s Counsel submitted that in light of the evidence adduced by the
Appellant and his witnesses, there is a contract between the Respondent and the Appellant in the
form of a contract of guarantee. According to section 68 of the Contracts Act, a contract of
guarantee means a contract to perform a promise or to discharge the liability of a third-party in
the case of default of the third-party, which contract may be oral or written.

A contract of guarantee among other things means a contract to perform a promise. According to
Black's Law Dictionary, a promise is a manifestation of an intention to act or refrain from
acting in a specified manner, conveyed in such a way that another is justified in understanding
that a commitment has been made, or a person's assurance that the person will or will not do
something.

Section 68 of the Contracts Act 2010 is essentially an interpretation section for Part VIII thereof
and it specifically defines what amounts to a contract of guarantee. The section is purely an
autonomous provision and is not subject to the provisions of section 10 of the Contracts Act. He
submitted that the intention of legislature was to have such a contract either in oral or written
form. In light of the provisions of section 68, a contract by guarantee can either be oral or written
and evidence adduced by the Respondent and Appellant reveals that there was an oral contract of
guarantee between the Respondent and the Appellant. The Appellant adduced evidence to the
effect that he overwhelmingly assisted the Respondent who is his friend in obtaining his goods
which were bound to be sold to another buyer after the Appellant failed to clear the balance of
US$15,928 and after his tremendous efforts as illustrated in his witness statement. The Appellant

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managed to get the said goods moreover at a reduced price of US$10,000 and remained with the
balance of US$5000 which promised to pay having obtained the container for the said goods and
assessed their condition based on the Appellant’s promise. The Respondent guaranteed the
Chinese company which sent the goods and agreed that the balance of US$5000 would be
cleared after the Appellant had obtained the goods. The Respondent also adduced evidence to the
effect that he gave the Appellant his bank account so that he deposits a sum of US$5000 for
onward remittance to the Chinese company and the Appellant deposited Uganda shillings
14,000,000/= equivalent of US$5000 on his account number 2520096358 in Centenary Bank and
the Appellant gave him a copy of the deposit slip for purposes of confirming that he deposited
the said sum of money on his account.

In his cross examination, the Appellant accepted having deposited the said money on the
Respondent’s account and even accepted that he is the one who signed on the deposit slip
marked PID3. The Appellant also admitted during cross examination that he knows the
commercial invoice which was attached to the Respondent statement and marked as P ID1. The
Respondent adduced evidence to the effect that the Appellant operated a business under the name
of Masaka Farm Stores. During cross examination, the Appellant stated that the telephone
number reflected on the said invoice is his and that his box number is P. O. box 28689 Kampala
which is the exact box number reflected on the said invoice. Therefore there is cogent evidence
on record to prove that it is the Appellant who ordered for the goods reflected in the said invoice
and that he cannot turn around and contend that he has never ordered for the spray pumps
reflected in the said invoice.

The Respondent’s Counsel submitted that the promise in the instant case was made by the
Appellant to the Respondent such that he can be in a position to assist him in obtaining his spray
pumps from the Chinese company. The Respondent fulfilled his obligation by ensuring that the
Appellant obtained his goods. This was at a reduced price but the Appellant refused to fulfil his
promise of paying the balance of US$5000. As a result of the Appellant's refusal to fulfil his
obligations, liability falls on the Respondent in his capacity as the person who guaranteed the
Chinese company the payment of the balance immediately upon the buyer having obtained the
goods and assessed the condition of the spray pumps. It is therefore the Respondent’s obligation
and duty under such circumstances to ensure that he obtains the sum of US$5000 from the
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Appellant and remit it to the Chinese company. The Respondent as a prudent businessman and
who usually transact business with the said Chinese company cannot wait to be sued by the
company in order for him to demand from the Appellant the payment of the balance and on the
same point he invited the court to consider the evidence of the Respondent to the effect that
Nancy (the manager of the Chinese company in charge of Africa) is now demanding from him
the balance of US$5000 and he is bound to lose his business relations with the Chinese company
as a result of the Appellant's refusal to pay the balance of US$5000. He is the person who
guaranteed and assured the manager of the said Chinese company that the balance would be paid
immediately upon the container having been sent to the buyer.

Basing on the evidence adduced by the Respondent, there is a contract in the form of a contract
of guarantee between the Appellant and the Respondent which is permissible under section 68 of
the Contracts Act 2010. He invited the court to disregard the submissions of the Appellant’s
Counsel to the effect that the contract of guarantee is illegal, null and void.

Furthermore, the Respondent’s Counsel submitted that the evidence adduced by the Respondent
clearly reveals that there is a creditor which is the Chinese company; a principal debtor who is
the Appellant and a guarantor who is the Respondent. The document which proves the existence
of any dealing between it and the Appellant can among other things be derived from the
commercial invoice attached to the Respondent’s statement as P ID1. This document was
admitted by the Appellant during cross examination. Pursuant to the Appellant's own admission
of the invoice coupled with the Appellant’s submission of the deposit slip PID 3, he is barred by
estoppels from denying the documents under the doctrine of estoppels under section 114 of the
Evidence Act. Since Masaka Farm Stores is a business name of the Appellant, he is barred by
estoppels from denying the fact that he knows the Chinese company, from whom he ordered the
spray pumps reflected in the said invoice and that he deposited a sum of 14,000,000/- Uganda
shillings on the Respondent’s account as part payment for the spray pumps. The Appellant’s
allegation to the effect that he was praying for herbicides which he had purchased from the
Respondent is a hoax, a mere fabrication and is not in any way pleaded in the Appellant’s written
statement of defence and in his witness statement. He invited the court to disregard the
Respondent’s submissions to the contrary. The submissions by the Respondent’s Counsel in
respect of section 71 of the Contract Act in so far as it contends that the Respondent’s default on
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the part of the debtor are false because the evidence on record clearly reveals that the Appellant
defaulted in the fulfilment of his obligations.

In reply to ground four, the Respondent’s Counsel submitted that having perused the judgment of
the trial magistrate, there is no document marked PID 13, PID14 and PID 15 referred to. With
regard to the documents marked PID 1 and PID 3, the trial magistrate did not err in relying on
the said documents because they were admitted by the Appellant during cross-examination and
the doctrine of estoppels applies.

He further submitted that the trial magistrate did not err in finding that the Appellant paid
Uganda shillings 14,000,000/= to the Respondent and that the claim by the Appellant that the
payment was for herbicides was an afterthought. The pleadings of the Respondent clearly
revealed that he based his claim on the Appellant’s deposit of a sum of 14,000,000/= to the
Respondent’s account for onward remittance to the Chinese company. The deposit slip was
marked PID 3 which implies that he was at all material times aware of the fact that the
Respondent hinges his claim on the said fact among others and therefore if it was true that his
deposit of the said money was for a purpose different from that suggested by the Respondent, he
ought to have specifically pleaded the same in his written statement of defence and also included
it in his written evidence in chief so as to give the Respondent an opportunity to reply to the
same. Moreover, the Appellant also stated during cross examination that he did not even inform
his lawyer about the said allegation. By the Appellant bringing up the said allegation in cross
examination without pleading the same, it amounts to a departure from pleadings contrary to
Order 6 rule 7 of the Civil Procedure Rules.

Finally Counsel submitted that the evidence of PW2 and PW3 is not hearsay evidence and the
trial magistrate did not err in law in awarding interest and damages of Uganda shillings
4,000,000/=. The sum of money awarded as general damages is reasonable in the circumstances
and the Appellant’s submission is contrary to the law and false. He prayed that the appeal is
dismissed with costs.

Submissions in rejoinder by the Appellant’s Counsel

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In rejoinder the Appellant’s Counsel reiterated submissions that there is no evidence of the
contract of guarantee.

Secondly reliance on documents by the trial magistrate which were never tendered in evidence
was erroneous and as such the documents including PID 1 and PID 3 were relied on contrary to
the law.

With respect to the submissions on estoppels under section 114 of the Evidence Act and in
particular the doctrine of estoppels, does not apply and there are no proven facts to establish the
doctrine of estoppels. The submission that the Appellant admitted the transaction in cross
examination does not hold water since no alleged admitted document was tendered in evidence.
He invited the court to find no merit in the Respondent’s submissions and to allow the appeal
with costs to the Appellant in this court and in the lower court.

Judgment

I have carefully considered the Appellant’s appeal as disclosed in the memorandum of appeal
and the submissions of Counsel. I have duly considered the evidence from the record and the
pleadings which gave rise to the hearing and subsequently to the appeal. To give a proper
background to this suit in the lower court, I will set out the pleadings in terms of the plaint and a
written statement of defence.

The record of proceedings indicates that the Respondent filed this suit on 4 th February, 2015 at
the Chief Magistrate's Court of Mengo and claimed as against the Defendant for recovery of
US$5000 equivalent to Uganda shillings 14,000,000/=, general damages, interests and costs. The
crux of the pleading is that the Plaintiff helped to buy goods for the Defendant in that the
Defendant had failed to pay for the goods. The Plaintiff negotiated with the supplier who had
alerted him that there were goods lying somewhere unpaid. The Plaintiff promised to get a buyer
for the goods and thereafter notified the Defendant. The Defendant had only paid US$8000 and
he failed to clear the balance of US$15,928 when the supplier contacted the Plaintiff. The
Plaintiff negotiated the price down for the balance of US$ 15,928 and the supplier agreed to
receive US$ 10,000 instead of US$ 15,929 which had remained unpaid. The supplier further
agreed to release the goods from Mombasa upon being paid US$ 5,000 on the strength of a

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guarantee from the Plaintiff that the balance would be paid upon the buyer accessing and
inspecting the goods (for fitness of purpose). The goods were released and given to the
Defendant. However the Defendant refused to pay the guaranteed amount of US$ 5,000 being
the balance out of the US$ 10,000. The Plaintiff further averred that the Defendant had paid him
Uganda shillings 14,000,000/= which is the equivalent of US$ 5,000 that he remitted to the
supplier for the release of the goods.

I have also perused the Defendant's written statement of defence in which the Defendant averred
that the Plaintiff’s pleadings do not disclose a cause of action against the Defendant and that the
suit is frivolous and vexatious and an abuse of court process. Thirdly, he averred that the court
had no jurisdiction to hear the suit. Without prejudice and in the alternative the Defendant
averred that he had never ordered goods and failed to pay the price thereof from Aizhou Peng
Sheng Agriculture and Forestry Machinery Company. The Defendant denied knowledge of the
said Nancy and having any transactions or communications between her and himself or the
Plaintiff.

In the further alternative the Defendant/Appellant averred that he never had any contract of sale
of goods with the Plaintiff or the Chinese company and that he has never dealt with the said
Nancy. Thirdly, he never had any contract of guarantee with the Plaintiff nor ever contemplated
one more so in favour of one Nancy or the Chinese company. No contract in law exists between
the Defendant and the Plaintiff in respect of the unspecified and un-described spray pumps
allegedly supplied by a Chinese company.

The first three grounds of appeal deal with point of laws and for ease of reference the grounds
are:

1. The learned trial magistrate erred in law and in fact when he held that the Respondent’s
case disclosed a cause of action against the Appellant.

2. The learned trial magistrate erred in law and in fact in holding that a contract of guarantee
existed between the Appellant and the Respondent in the absence of such a contract in
writing.

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 3. The learned trial magistrate erred in law and in fact in holding that an oral contract whose
subject matter exceeds 25 currency points is valid and enforceable.

The first ground is whether the learned trial magistrate erred in law and fact in holding that the
Respondent’s suit disclosed a cause of action against the Defendant/Appellant. I have carefully
considered the second and third grounds and indeed they are intertwined with the first ground
which has to do with whether the plaint disclosed a cause of action. Ground number two simply
holds that there was no contract of guarantee between the parties which is the same as saying that
there is no cause of action or that the action cannot be maintained on a point of law. Ground
number 1 may be necessary to argue from the pleadings alone. Ground number three is of the
same import except that it holds that because the alleged contract was an oral contract, it was
unenforceable as it does not comply with the acceptable ingredients of a contract under section
10 of the Contracts Act. Ground two and three are based on the interpretation of sections 10 and
68 of the Contracts Act 2010.

I have carefully perused the judgment of the trial court and the three grounds arise from or are
based on the judgment of the learned trial magistrate at pages 3 to 5 of the judgment. The learned
trial magistrate held that he had considered the provisions of section 10 of the Contracts Act and
held that section 68 of the Contracts Act relates to interpretation for part VIII which deals with
indemnity and guarantee and which specifically defines what amounts to a contract of guarantee
and was therefore in line with the submissions of the Plaintiff's Counsel. He held that section 68
of the Contracts Act was an autonomous provision which should be read in isolation of section
10 which generally defines what amounts to a contract. He therefore found that there was a
contract by guarantee which can be oral or written. He further found that the
Defendant/Appellant had made a promise to the Plaintiff/Respondent in order to be assisted in
obtaining spray pumps from the Chinese company.

I have carefully considered the pleadings as well as the written submissions of Counsel. Before
delving into the definition of a contract under section 10 of the Contracts Act as well as section
68 thereof, the Plaintiff averred in paragraphs 4 (i) and (o) that they devised a strategy in which
they represented to one Nancy of Aizhou Peng Sheng Agriculture and Forest Machine Company

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that there was another buyer of the consignment, the subject matter of the suit rather than the
Appellant/Defendant in the lower court.

In other words it is abundantly clear that the Respondent represented or misrepresented to the
alleged company in China that there was another buyer of the goods other than the
Appellant/Defendant who had failed to pay for the same. So by misrepresentation, the alleged
contract could not be between the Appellant/Defendant as the buyer and the Chinese company
with the Respondent as a guarantor. The misrepresentation was against a party on whose behalf
the suit has been filed in the sense that the Plaintiff/Respondent is seeking to be paid a sum of
US$5000 which is averred in the plaint as due and owing to Aizhou Peng Sheng Agriculture and
Forest Machine Company according to the plaint and which was the balance to be paid upon the
buyer inspecting the contents of the container containing the spray machines. In other words the
seller of the machines was and is supposed to be kept ignorant of the fact that the spray machines
were coming to the Defendant/Appellant who had failed to pay for the same. It is specifically
averred as follows and I will later make comments about the amount of money involved.

The Plaintiff averred that he and the Defendant are businessmen dealing in agricultural inputs
and products and had been friends for a long period of time. The Plaintiff and the Defendant
transacted business at Container Village. It is averred that the Plaintiff and the Defendant usually
buy their inputs from China from a company called Aizhou Peng Sheng Agriculture & Forestry
Machinery Company. In November 2014 the Plaintiff received an SMS from one Nancy, a
manager in the said company in charge of Africa requesting him to buy spray pumps which the
Defendant while trading as Masaka Farm Store had ordered for and failed to fully clear payments
for the same. The manager informed the Plaintiff that the Defendant had only paid a sum of
US$8000 and he failed to clear the balance of US$15,928 and the company decided to sell the
spray pumps to another person who would be in a position to pay the balance. The said Nancy
sent to the Plaintiff/Respondent a copy of the invoice to the same effect. A copy of the invoice
was attached to the plaint as annexure "A". The invoice concerns 792 pieces of agricultural
sprayers with the CIF Price to Mombasa at US$ 23,923.40. In paragraph 4 (3) of the plaint it is
averred that the Plaintiff informed Nancy that he had just imported goods from the same
company and it still had enough stock and informed him that they could assist the supplier by
him getting another prospective buyer. Thereafter he informed the Appellant/Defendant about
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what transpired. The Defendant informed him that he was still interested in buying the goods and
they had indeed paid a sum of US$8000 and remained with a balance of US$15,928 which he
could not pay due to financial constraints. It is averred that the Defendant/Appellant informed
him that he only had US$5000 and he had requested Nancy to accept it and release the goods.
However Nancy refused and insisted that the Defendant/Appellant first clears all the outstanding
balance. In paragraph 4 (h) it is averred that the Defendant informed the Plaintiff/Respondent
that he had US$5000 which he was willing to pay and he requested the Plaintiff/Respondent to
devise all possible means to see to it that he does not lose the said goods. In paragraph 4 (i) it is
averred as follows:

"that the logical solution which the Plaintiff and the Defendant devised for purposes of
preventing the Defendant from losing the said goods was that the Plaintiff would inform
Nancy that he had got a buyer who was willing to buy the said goods and that for him
(the Plaintiff) would act as a middleman in the said process and that the Plaintiff does
inform Nancy that the buyer whom he got had requested for a reduction in the balance of
US$15,928 to at least US$10,000 since the container for the said goods had overstayed at
Mombasa Port and it had accumulated a lot of demurrage charges."

It is averred that Nancy after negotiations and various discussions agreed to forfeit the rest of the
money and settled for the balance of US$10,000. It is further averred that the parties agreed that
the buyer would first assess the condition of the sprays which had overstayed in the container
and that the buyer was willing to pay US$5000 and the balance within a very short period after
the buyer had seen the container and after the Plaintiff had guaranteed to pay the balance of
US$5000 which was the balance to be paid. It is averred that Nancy accepted the proposal and
the Plaintiff informed the Defendant accordingly and the Defendant deposited a sum of
14,000,000/= equivalent to US$5000 on the Plaintiff’s account as reflected in the bank statement
and a deposit slip attached and marked B and C respectively. The deposit is dated 24 th
November 2014 and is for 14,000,000/= Uganda shillings.

It is averred that the Plaintiff remitted the money to Nancy who released the container. The
Defendant received the container in the presence of the Plaintiff and all the spray pumps therein

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were offloaded in his presence and none of the spray pumps was found to be in a bad condition.
In paragraph 4 (o) of the plaint it is averred as follows:

"The reason why it was not revealed to Nancy that it was the Defendant still interested in
purchasing the goods is that if Nancy got to know the said fact, she would have cancelled
the whole deal since the business relations between Nancy and the Defendant was not
good and Nancy could no longer deal with him."

It is lastly averred that sometime later Nancy started demanding the balance of US$5000 from
the Plaintiff and the Plaintiff informed the Defendant accordingly. It is averred that despite
numerous interventions from various businessmen and from KACITA, the Defendant still
refused to pay the said sum of money and to date has never paid the balance of US$5000. It is
averred that Nancy is still demanding from the Plaintiff the balance of US$5000. The Plaintiff's
grievance as averred in the plaint is that he is bound to lose his good business relationships with
the Chinese company. It is averred that the Plaintiff guaranteed and assured the manager that the
buyer would pay the balance.

Ordinarily a person who “guarantees” is also known as a guarantor.

I have duly considered the definition of a contract under section 10 of the Contracts Act 2010
and that of a guarantee under section 68 which provisions are reproduced below for ease of
reference. Under section 10 an agreement that amounts to a contract is defined as follows:

“10. Agreement that amounts to a contract.

(1) A contract is an agreement made with the free consent of parties with capacity to
contract, for a lawful consideration and with a lawful object, with the intention to be
legally bound.

(2) A contract may be oral or written or partly oral and partly written or may be implied
from the conduct of the parties.

(3) A contract is in writing where it is—

(a) in the form of a data message;

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 (b) accessible in a manner usable for subsequent reference; and

(c) otherwise in words.

(4) Nothing in this Act shall affect any law in Uganda relating to contracts by
corporations or generally.

(5) A contract the subject matter of which exceeds twenty five currency points shall be in
writing.

(6) A contract of guarantee or indemnity shall be in writing.

(7) In this section, “guarantee” and “indemnity” have the meaning assigned to them in
Part VIII of this Act.”

Section 10 is a general provision which provides for an agreement that amounts to a contract. In
other words it deals with agreements which are enforceable as contracts. The Appellant
particularly relies on subsections 5 and 6 of section 68. In subsection 5 it is provided that a
contract the subject matter of which exceeds twenty five currency points shall be in writing. On
this ground alone the Appellant’s contention is that the learned trial magistrate erred in law to
find that there was a contract when the sum of US$ 5,000 exceeded twenty five currency points
and is the subject matter of the alleged contract. From those premises a contract which is oral and
exceeds twenty five currency points does not amount to a contract. The Respondent on the other
hand relied on section 68 which also defines a contract of guarantee. This brings in the second
controversy as to what amounts to a contract of guarantee. Subsection 6 of section 68 of the
Contracts Act provides that “a contract of guarantee or indemnity shall be in writing.”

The Plaintiff/Respondent’s Counsel submitted and the trial Magistrate agreed with him and held
that section 68 of the Contracts Act is an autonomous provision and allows a contract of
guarantee or indemnity to be either in writing or oral. The Appellant’s Counsel contended that
the learned trial magistrate erred in law so to find.

Section 68 of the Contracts Act defines the following terms as follow:

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 ““contract of guarantee” means a contract to perform a promise or to discharge the
liability of a third party in case of default of that third party, which may be oral or
written;

“contract of indemnity” means a contract by which one party promises to save the other
party from loss caused to that other party by the conduct of the person making the
promise or by the conduct of any other person;

“guarantor” means a person who gives a guarantee;

“indemnity” means an undertaking by which a person agrees to reimburse another upon

“principal debtor” means a person in respect of whose default a guarantee is given.

The definition of a contract of guarantee under section 68 of the Contacts Act is contradictory to
section 10 (6) which expressly provides that a contract of guarantee shall be in writing and uses
the expression “shall be in writing” which is mandatory language. Yet section 68 provides that a
contract of guarantee may be oral or written and uses a permissive language. Nevertheless,
section 10 (6) provides for a contract of guarantee but under section 10 (7) provides that a
contract of ““guarantee” and “indemnity” have the meaning assigned to them in Part VIII of this
Act.” Under Part VIII a specific and detailed definition is given of a contract of guarantee or
indemnity in the sense that it is written that: “a contract of guarantee” means a contract to
perform a promise or to discharge the liability of a third party in case of default of that third
party, which may be oral or written;” The major question is whether the promise has to be to a
third party. Can there be a guarantee without there being a third party in the picture?

Without harmonizing what is an apparent conflict between section 10 (6) which prescribes that
the contract shall be in writing and section 68 of the Contracts Act which permits an oral
contract, the definition itself and not the form of the contract itself should first be considered. A
contract of guarantee is a contract to perform a promise or to discharge the liability of a third
party in case of default of that third party. For the provision to be harmonized with section 10 of
the Contracts Act it means that any contract of guarantee which exceeds 25 currency points shall
be in writing but a contract “of guarantee” which is less than 25 currency points may be oral.
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This may be taken from the provision of section 10 itself. Section 10 permits a contract to be
either oral or in writing as a general rule. It provides under section 10 (2) that “A contract may be
oral or written or partly oral and partly written or may be implied from the conduct of the
parties.” It therefore does not exclude an oral contract. Sections 5 and 6 prescribe that a contract
that exceeds twenty five currency points shall be in writing. Moreover it specifically prescribes
that a contract of guarantee shall be in writing by stating that: “a contract of guarantee or
indemnity shall be in writing.” Because section 68 permits a contract of guarantee or indemnity
to be made orally, it has to apply to contracts whose value do not exceed twenty five currency
points. The Appellant’s submissions have merit in that regard. Generally a contract which
exceeds twenty five currency points shall be in writing. The requirement under section 10 (5) of
the Contracts Act for the contract to be in writing is mandatory. On the other hand the
requirement under section 68 as to whether a contract of guarantee may be in writing or oral is
couched in discretionary language and is therefore permissive. Imperative language for instance
by use of the word “shall” makes what is prescribed mandatory. On the other hand by using the
word “may”, the provision is permissive and may or may not be followed. The question should
therefore be whether the contract is void or unenforceable.

The other point is whether there was a contract to discharge the liability of a third party and
whether this is the essence of a contract of indemnity or guarantee. As far as the contract or
alleged contract is concerned, there is no third party in the picture. The alleged relationship is
between the Appellant and the Respondent. In fact the seller of the goods was not supposed to
know about the arrangement between the Appellant and the Respondent. The seller or supplier of
the goods should therefore be excluded in establishing whether a binding relationship existed
between the two parties. The third party had no knowledge of the Defendant/Appellant except as
a misrepresentation of fact that the buyer was not the Appellant/Defendant. In considering the
obligations between the parties it is an obligation alleged to be based on the promise to pay the
Plaintiff/Respondent a sum of US$ 5,000 for the benefit of a third party. There was no third party
in the alleged agreement because the supplier was not supposed to know of the existence of the
Defendant/Appellant.

Was it then a contract to perform a promise to a third party? First of all paragraph 4 (l) of the
plaint shows that it is the Plaintiff who is the guarantor of payment to the third party or supplier
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of the goods. I will quote the paragraph in full. The Plaintiff averred in paragraph 4 (l) of the
plaint as follows:

“That the Plaintiff informed the Defendant accordingly and then the Defendant requested
the Plaintiff to inform Nancy that since the container for the said spray pumps had
overstayed at Mombasa, the buyer was desirous of first assessing the condition of the
spray pumps in the container before he can fully pay the said sum of $10,000 and that the
buyer was willing to pay $5000 and then pay the balance after assessing the condition of
the spray pumps. Nancy at first refused the said proposal but after further discussions she
heeded to the said proposal after the Plaintiff having assured him that the balance would
be sent within a very short period of time after the buyer has seen the container and after
the Plaintiff having guaranteed to him that the balance of $5000 was going to be paid.”

The paragraph shows that the Plaintiff/Respondent acted as a middle man between a fictitious
buyer and the supplier when in actual fact the parties to the suit/this appeal agreed to a scheme to
have the goods released to the Defendant. It is the Plaintiff who guaranteed the payment before
the balance was released through a partial deception. The Plaintiff has now become liable to pay
up presumably after collecting the money from the buyer from the perspective of the supplier. It
is apparent from the plaint that the Plaintiff purported to act for a fictitious buyer when in fact he
was allegedly acting for the Defendant who is alleged to have already paid US$ 8,000 and failed
to pay the balance of the total price for the goods whereupon the supplier informed the Plaintiff
about the goods and the Plaintiff agreed to get another buyer to buy the goods. This state of facts
also appears in the written testimony of the Plaintiff/Respondent.

The fictitious buyer promised to pay the total consideration agreed at US$10,000 through
payment of a deposit of USD$ 5,000, whereupon the goods would be released and the balance
paid. Where was the contract of guarantee? If it is a contract to perform a promise, to who was
the promise made? From the pleadings the promise was made to the Plaintiff by the Appellant.
The judgment of the learned trial magistrate is as follows:

“And the promise which Counsel for the Defendant claims not to have ever been made
for the promise of the benefit of the Defendant. I find this to have been made by the
Defendant to the Plaintiff such that he can be in position to assist him in obtaining his
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 spray pumps from the Aizhou Peny Sheng Agriculture and Forest Machine Company. In
where the Plaintiff did hence fulfilling his obligation by ensuring that the Defendant
obtained his goods moreover at a reduced price but the Defendant refused to fulfill his
promise of paying the balance of US$5000.

This completed with the evidence of PW2 Musoke Titus and PW3 Mayanja Kato who
turned to which ever and on all occasions the Defendant was not refuting the claim of the
balance of $5000 it clearly shows that there existed a contract between the Plaintiff and
the Defendant by guarantee."

In other words the court held in the above quoted many words that there was a contract to
perform a promise. Secondly, it was the Defendant who promised to pay the Plaintiff. This
contract was an oral contract and implied from the conduct of the parties. Firstly, the learned trial
magistrate erred in law to enforce an alleged contract of guarantee which exceeded 25 currency
points which was not proved to be in writing under the mandatory provisions of section 10 (5) of
the Contracts Act. The holding that section 68 of the Contracts Act was autonomous is
erroneous since section 10 (7) refers and applies section 68 of the Contracts Act. The two
provisions have to be read in harmony and not in isolation with one another and this is the clear
intention of legislature under section 10 (7) of the Contracts Act.

Secondly, the price of the goods negotiated with an alleged third party buyer was only US$
10,000 as the total consideration for the goods. Yet the Defendant had allegedly already paid
US$ 8,000 and further released the equivalent of US$ 5,000 or shillings 14,000,000/= to the
Plaintiff. This is a total of US$ 13,000. If the supplier went ahead with the sale to another buyer
as was its intention, was the Defendant/Appellant going to be refunded his US$ 8,000? It was
very improbable for the supplier to bargain for less than the balance without dealing with the
original buyer namely the Defendant. Was the Defendant going to forfeit the US$ 8,000 or was
he going to be refunded or get the equivalent of the money in goods from the 8,000 US$ from the
subsequent buyer?

According to the Oxford Dictionary of Law, 6th Edition at page 246, a guarantee is a
secondary agreement in which a person known as the Guarantor is liable for the debt or default
of another known as the principal debtor who is the party primarily liable for the debt.
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According to Geraldine Mary Andrews and Richard Millet in “Law of Guarantees” page 3 a
contract of guarantee in the true sense, is a contract whereby the surety or Guarantor promises
the creditor to be responsible, in addition to the principal for the due performance by the
principal debtor of the existing or future obligations to the creditor, if the principal debtor fails to
perform those obligations.

In Yeoman Credit Ltd vs. Latter and Another [1961] 2 All ER 294 at 296 a contract of
guarantee was defined as a contract to answer for the debt, default or miscarriage of another who
is to be primarily liable to the promise. In the case of Moschi vs. LEP Air Services Ltd and
Others [1972] 2 All ER 393 at 400 Lord Diplock held that:

“The law of guarantee is part of the law of contract. The law of contract is part of the law
of obligations. The English law of obligations is about their sources and the remedies
which the court can grant to the obligee for a failure by the obligor to perform his
obligation voluntarily. Obligations which are performed voluntarily require no
intervention by a court of law. They do not give rise to any cause of action.

English law is thus concerned with contracts as a source of obligations. The basic
principle which the law of contract seeks to enforce is that a person who makes a promise
to another ought to keep his promise. This basic principle is subject to an historical
exception that English law does not give the promisee a remedy for the failure by a
promisor to perform his promise unless either the promise was made in a particular form,
e.g. under seal, or the promisee in return promises to do something for the promisor
which he would not otherwise be obliged to do, i.e. gives consideration for the promise.”

At page 401

“By the beginning of the 19th century it appears to have been taken for granted, without
need for any citation of authority, that the contractual promise of a guarantor to guarantee
the performance by a debtor of his obligations to a creditor arising out of contract gave
rise to an obligation on the part of the guarantor to see to it that the debtor performed his
own obligations to the creditor. ...

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 It is because the obligation of the guarantor is to see to it that the debtor performed his
own obligations to the creditor that the guarantor is not entitled to notice from the
creditor of the debtor’s failure to perform an obligation which is the subject of the
guarantee, and that the creditor’s cause of action against the guarantor arises at the
moment of the debtor’s default and the limitation period then starts to run. It is also why,
where the contract of guarantee was entered into by the guarantor at the debtor’s
request, the guarantor has a right in equity to compel the debtor to perform his own
obligation to the creditor if it is of a kind in which a court of equity is able to compel
performance” (Emphasis added)

In all the above definitions, there is a third party who is owed money and the guarantor agreed to
be liable on the failure of the principal debtor. The liability is to a third party. Furthermore the
guarantor can bring an action against the debtor to compel the debtor to perform his obligation to
the creditor. If we take the creditor to be the supplier company from China, there would be a
problem with this as the supplier does not know the buyer and only knows the
Plaintiff/Respondent. In other words there is no contract between the principal debtor and the
supplier or creditor.

In this case the third party is making a demand on the guarantor but does not know who the
principal debtor or buyer is. Secondly the creditor or supplier has not yet collected his US$
5,000. From the pleadings that money still owes. The only liability that remains is that to a third
party and not to the Plaintiff/Respondent as far as the supply of goods is concerned. The
Respondent only caused the goods to be released by telling a false story about a fictitious buyer
paying US$ 5,000 which is 50% of a negotiated balance consideration. To put it clearly he was a
middleman between a fictitious person and the supplier of the goods. Yet he came to court and
informed the trial court that he hatched a scheme with the Defendant/Appellant to have the goods
released to the Appellant who had failed to pay for the balance of the price because he had no
money. The scheme succeeded and the court is supposed to endorse it. The Respondent
admittedly has not yet incurred any liability of having lost any money. The overall result is that
the contract, if any, between the Appellant and the Respondent is not enforceable through court
process as it aids the Respondent in the deception of any innocent supplier. If the Respondent
had a cause of action against the Appellant in equity then the maxim “he who comes to equity
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must come with clean hands” applies. In this case the Respondent’s cause of action cannot
proceed on the footing of equity and the learned Magistrate erred in law in not disposing of the
suit on a point of law.

The first three grounds of appeal succeed and there is no need to consider the last ground. The
decision of the trial Magistrate is set aside and substituted with a decision to dismiss the suit in
the lower court with costs of this appeal and at the lower court.

Judgment signed by me on 24th August 2017 for delivery by the Registrar on 24th August, 2017.

Christopher Madrama Izama

Judge

Judgment delivered in the presence of:

Mr. Patrick Bugembe for the Respondent

Mr. Isaac Okurut Holding brief for Mr. Nuwagaba Wilfred for the Appellant

Both parties present

Charles Okuni: Court Clerk

Judgment delivered upon request of Hon. Justice Christopher Madrama

Thaddeus Opesen

ASSISTANT REGISTRAR

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24th August, 2017

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