The High Court of Uganda has clarified that the loss of employment by one co-borrower in a jointly taken salary loan does not amount to frustration of the loan contract. This decision reinforces the principle that contractual obligations remain binding even when external circumstances make performance more difficult but not impossible.
Facts
The case involved an ex-employee and his wife who sued their employer bank after it refused to disburse a previously approved salary loan. The bank had initially approved the loan after the borrowers met all necessary requirements and executed the required documentation. However, before disbursing the loan, the bank received communication from its holding company about a departmental restructuring that could lead to job losses, including in the employee’s department. Based on this possibility, the bank recalled the loan facility.
Holding
Justice Patricia Mutesi has reaffirmed that once a loan offer is accepted by the borrower and communicated to the lender, it becomes legally binding. The lender cannot unilaterally revoke the offer unless there are clear contractual provisions allowing such revocation. A party to a loan agreement cannot withdraw from its obligations simply at will.
The court held that unless the bank’s restructuring instructions specifically listed employees who would be terminated, the bank’s refusal to disburse the loan was unfair. The mere possibility of job loss did not justify the bank’s decision, particularly when the borrower was still employed at the time of the loan recall.
The court noted that if the impact of the restructuring on staff was uncertain, the prudent course of action would have been to delay a final decision on the loan until the restructuring process was completed. Acting prematurely deprived the borrowers of their right to the approved loan facility.
While lenders naturally exercise caution when a borrower faces potential job loss, this does not amount to frustration of the loan contract. The court clarified that:
The possibility of employment termination does not render a salary loan contract impossible to perform.
The lender retains discretion on whether to disburse the loan despite potential risks, depending on the stage of the loan process.
Implications for Borrowers and Lenders
This decision is welcome to the business community in Uganda, as it reaffirms the principle that lenders cannot arbitrarily withdraw approved loans without a clear contractual basis. It also highlights that borrowers remain bound by their loan obligations, even in cases of employment uncertainty. Lenders must exercise due diligence in assessing risks but cannot assume contract frustration merely due to anticipated job loss.
For financial institutions, this decision reinforces the importance of clearly defining loan approval and disbursement conditions in loan agreements. Borrowers, on the other hand, should be aware that job loss—while making repayment more challenging—does not nullify their contractual obligations.
Read the full decision below
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