The Enforcement of Bank Guarantee as a Form of Security An Examination of the Law and Practice in Uganda

ABSTRACT 

The research study looked at the general introduction of banking in Uganda, the back ground, how it evolved from pre-independence to the present date of banking, it also looked at the nature, creation and performance of bank guarantee. The study looked at the guarantee as a form of security, its essential requirement being consideration, agreement and intention to create legal relation, capacity to give a guarantee, the requirement of writing, it looked at different ways of discharging a contract of guarantee that is by payment, release of the principal debtor, by agreement to give time, by material variation of principal contract, by material variation of contract discharge in legal position of parties, discharge by an act or omission by creditor, determination by notice, by death and mental incapacity or bankruptcy. The study investigated on the vitiating elements in a contract of guarantee that is mistake, fraud, misrepresentation and non-discloser, unconscionable transactions, duress, and undue influence, all of these elements can lead the contract of guarantee void or voidable. The research study looked at the analysis of the available remedies to the aggrieved parties and the effect of a bank guarantee under family set up,Report on third party guarantee and family relationships highlight the potential dangers for guarantors that a raise out of misunderstanding the document or the transaction Research confirms that many guarantor sign without an understanding of the nature of the transaction. Guarantors experience both factual and legal misunderstanding about the transaction as a result of misrepresentations, failure to read or understand the documents, lack of business experience and different cultural expectation. The laws in place should be amended so that they state the clear laws that govern the parties under the contract of guarantee and they should spell out the extent of liability for party in a contract of guarantee, a final protective mechanism is to draft the scope of liability of the original guarantee in such a way as to encompass future agreements on substantially different terms. The usual ‘all moneys’ clause is the obvious mechanism. Yet the lender may find considerable resistance from the guarantor to the use of the clause in this context since it is not really a proper description of his initial obligation, which is a guarantee of a specific facility. Finally the research analyzed the recommendations and conclusions of the study.

TABLE OF CONTENTS

Approval

Acknowledgment

Dedication

Declaration~

Table of contents v

List of statutes~ ix

Lists of case x

List of abbreviations~xiv

Abstract xv

CHAPTER ONE

THE GENERAL INTRODUTION OF BANKING IN UGANDA 1

LO INTRODUTION

Li.

L2. Statement

Background of a Banking problem in Uganda~ 7

1.3. Purpose of the study~9

1.4. Main objectives of the study~9

1.5 Hypothesis 9

1.6. Specific objectives g

1.7. Research questions~9

1.8 Scope of the study~10

1.8.1. Geographical scope~10

1.9 Significance of the Study 10

1.10 Methodology 10

1.11. Literature Review 10

1.12. Chapterisation 16

1.13 Conclusion 16

CHAPTER ~ 17

THE NATURE, CREATION AND PERFORMANCE OF BANK GUARANTEE~o.m17

2.0 Introduction 17

2.1 Types of Bank Guarantee 19

2.2 Guarantees as a form of Security 21

2.3 Guarantee and indemnity distinguished ..~......23

2.4 The nature of the Contract of guarantee 24

2.5 The essential Requirements for the Creation of a Contract of guarantee ..~........27

2.5.1 Consideration 27

2.5.2 Agreement

2.5.3 Capacity to create legal relations and give intention a guarantee. 29

2.5.4The requirement for writing 30

2.5.6 The Discharge of a contract of guarantee .. . . ~.... .........30

2.5.7 Payment

2.5.9 Agreement to give time .. ... . .. ~.... . . . ........ . .......~. .31

2.6 Material variation of the principle contract~32

2.6.2 Termination by death ..~....33

2.6.2 Determination by mental incapacity or bankruptcy .........................33

2.6.3 Elements vitiating a contract of guarantee~34

2.6.4 Mistake~ 34

2.6.5 Fraud, misrepresentation and non-discloser ......................................~.35

2.6.6The effect of non-disclosure ...,.,,..,,.......~.36

2.6.7 Unconscionable transactions 37

2.6.8 Duress 37

2.6.9 Undue influence 38

2.7 Conclusion 39

CHAPTER THREE

THE EFFECTIVENESS OF THE LAWS GOVERNING BANK GUARANTEE IN UGANDA

10 INTRODUCTION 40

3.1 The Legal Regime Governing Bank Guarantee in Uganda ~40

3.2 The international laws governing Bank guarantee...~...41

3.2.1 The URDG 458 Uniform Rules for Demand Guarantees of 1992 ................,.....41

3.3 The local laws governing Bank guarantee~43

3.3.lThe Contracts Act No. 7 of 2010~43

3.3.2 The Contract Act 2010~45

3.3.4 The Bank of Uganda Act Cap 51 ..............................~.47

3.3.5 The Bank of Uganda Financial consumer protection guidelines ....................,.....48

3.4 The public Finance and Accountability Act No 6 of 2003~. .,,,....48

3.4.1 The Public Finance and Accountability Regulations 2003 50

3.4.2 The Mortgage Act 2009 ~ 51

3.5 Conclusion ...... . . 53

CHARTER

THE ANALYSIS OF THE AVAILABLE REMEDIES TO THE AGGRIVED PARTIES UNDER THE CONTRACT OF GUARANTEE AND THE EFFECT UNDER FAMILY SET-UP

4.0 Introduction 54

4.1 The rights of the guarantor 54

4.2 The guarantor’s rights as against principal debtor 55

4.3 Guarantor’s Rights as against the creditor 57

4.4 Co-Guarantor’s Rights as against other co- guarantors 58

4.5 Liability of the guarantor 59

4.6 The Enforcement of Bank Guarantee /When Liability Arises 61

4.7 The effect of bank guarantee under family set up 63

4.8 Seeking Independent legal Advice 64

4.9 The problems &the enforcemept of Bank guarartee In Uganda ..........................67

4.10 ConclusIon

CHAPTER FIVE n.seann•••••••n••••n••n•••••••••••••••n•••••••••••••~•••••n•n~••~•••••s•••••••••..n.•••7O

RECOMMENDATIONS AVID CONCLUSION •i•enns••e••••••••s••••~•••••••••••••••n•n••n••7O

5.0 IntroductIon

5.1

5.2 Reladrig the stdct adherence of the doctilne of secrecy.......................................70

5.3 SensItIzation

5.4 ‘rhe role of Bank of Uganda •..t.e.eee...eeee...e..................nm.~mnnnn7l

5.5 AssIstance ~ Guarantors ................................................................~.71

5.6 “rhere should be a data service center for guarantors ..........................................71

5.7 ilie enlbrcenient of fi’ie edstlrig lavvs .................................................~........72

5.10

5.11

BIBI.IOGRAPHY

ConclusIon

ProvIsion of Relevant

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