The High Court has clarified the extent to which courts can exercise jurisdiction over disputes subject to arbitration under the Arbitration and Conciliation Act, Cap 5.
The Court reaffirmed that the Arbitration and Conciliation Act (Cap 5) outlines the framework for disputes subject to arbitration, specifically, Section 9 of the Act explicitly limits court intervention in arbitration matters except as provided for under the Act.
The Court also clarified that contracts must be strictly interpreted, and a party's failure to comply with terms cannot be used to justify non-payment for work already done.
Facts
The Plaintiff filed a lawsuit seeking UGX 670,055,400 as an unpaid contractual balance for graduation gowns, UGX 1,224,900,000 for lost expected income, special damages, general damages, interest, and legal costs.
In 2015, the Defendant (Makerere University) invited bids for the supply of graduation gowns. The Plaintiff won the bid and was awarded a 3-year contract (2017–2019) to supply gowns at UGX 90,000 per unit, including a 10% commission for the Defendant.
The Plaintiff alleged that unauthorized vendors and some university staff sold counterfeit gowns, affecting its sales for the 67th and 68th graduations.
For the 69th graduation, the Defendant integrated the cost of gowns into graduation fees and was supposed to remit payments to the Plaintiff. However, the Plaintiff claims the Defendant failed to pay for all supplied gowns, causing financial losses.
Similar issues persisted during the 70th graduation, with the Defendant allegedly failing to pay for supplied gowns, while the Plaintiff struggled with production due to financial constraints.
Defendant's Response
The Defendant acknowledged the contract but claimed the Plaintiff failed to remit the agreed 10% commission for the first two years.
To support the Plaintiff, the Defendant incorporated gown fees into graduation fees and collected payments directly from students. The Plaintiff was then to receive funds based on the actual number of students recorded in the university’s financial system (AIMS).
The Defendant argued that the Plaintiff failed to supply gowns to all graduands, leading to a deficit.
The Plaintiff reportedly failed to pay customs fees for imported gowns, causing delays and embarrassment.
Legal Issues for Determination
Whether the court has jurisdiction over the dispute, given the arbitration clause in the contract.
Whether the Defendant breached the contract.
The appropriate remedies for both parties.
Court's Determination
Jurisdiction of Courts in Arbitration Matters
The Court reaffirmed that the Arbitration and Conciliation Act, Cap 5 outlines the framework for disputes subject to arbitration.
Furthermore, section 9 of the Act explicitly limits court intervention in arbitration matters except as provided for under the Act.
Effect of an Arbitration Clause
The High Court has clarified that as per Section 3 of the Arbitration and Conciliation Act, Cap 5, a dispute is governed by the Act if an arbitration agreement exists between the parties. The agreement must be in writing and may exist as a standalone document or as a clause within a broader contract.
Waiver and Abandonment of Arbitration Rights
The Court reaffirmed that a party may lose its right to arbitrate through inaction, delay, or participation in court proceedings.
Furthermore, if parties engage substantially in litigation without raising arbitration objections, courts may find that the arbitration clause has been abandoned.
Citing the precedent in Security Group Uganda Ltd v Finasi-Ishu Construction SPV – SMC Ltd, the court ruled that arbitration rights could be lost if both parties take substantive steps in litigation.
In relation to case at hand, the court emphasized that invoking arbitration at advanced litigation stages is unreasonable and inconsistent with the arbitration process.
Referring to the precedent of AC Yafeng Construction Company Ltd v The Living World Assembly Ltd & 2 Ors which further confirmed that engaging in litigation on substantive matters can constitute a waiver of the right to arbitrate.
I also agree with this dictum. It is not just and reasonable for a party to seek to commence arbitration when the dispute has already been entertained by the Court and when the suit is at judgment-writing stage, especially when some of the documents on record were procured through discovery which is not available per se in arbitration.
In the Present Case
Both parties actively participated in litigation for over three years without mentioning the arbitration clause.
The defendant failed to contest jurisdiction at the earliest opportunity.
The court concluded that both parties abandoned their right to arbitrate, rendering the arbitration clause inoperative.
Consequently, the court held that it had jurisdiction to determine the dispute.
Whether the Defendant breached the contract.
Mutebi J. reaffirmed that Section 67 of the Contracts Act Cap 284 provides, that any right, duty or liability under a contract may be varied by express agreement or the course of dealing of the parties
The court found the Plaintiff was contractually obligated to produce gowns based on the number of graduands provided by the Defendant.
The Defendant failed to ensure that all graduands purchased gowns from the Plaintiff, leading to financial losses for the Plaintiff.
The Court held that the Plaintiff was entitled to full payment for all gowns produced as per the disclosed numbers in the graduation booklets, regardless of whether all graduates collected them.
The Defendant's argument that only issued receipts should determine payment was rejected.
The Defendant unilaterally altered the fee collection structure in 2018, thereby taking control of gown payments.
The Defendant failed to remit full payments due for the 69th and 70th graduations, leading to a confirmed outstanding balance of UGX 313,029,420.
Partial Rejection of Plaintiff’s Claims
The Plaintiff's claim for additional payments for the 70th graduation was only partially upheld due to discrepancies in gown supply figures.
The Plaintiff's claim for special damages related to outsourced gown production from China was dismissed for violating contractual terms.
The claim for lost income from the 67th and 68th graduations was also found to be exaggerated and partially invalid.
The Appropriate Remedies
The Defendant was ordered to pay UGX 313,029,420 to the Plaintiff for the supplied gowns.
The Plaintiff's claim for special damages and lost income was dismissed due to failure to adhere to contract terms and provide sufficient proof.
The Defendant’s counterclaims were not considered as no formal counterclaim was filed.
Implications
For Suppliers
This ruling underscores the need for clear contractual terms and strict adherence to procurement procedures. Suppliers should ensure compliance to safeguard their rights and avoid disputes.
For Public Entities
Institutions must honor contractual obligations and ensure timely payments to prevent legal challenges and financial liabilities.
For Legal Practitioners
This judgment emphasizes the importance of well-defined contracts to mitigate risks.
Arbitration rights must be asserted early to avoid waiver.
Courts will assess parties' conduct to determine if arbitration rights have been forfeited.
Arbitration clauses may become inoperative if ignored in favor of litigation.
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