UNCONSCIONABLE TRANSACTIONS IN BANKING: A CRITICAL STUDY ON THE

LAW RELATING TO BANK AND CUSTOMER RELATIONSHIP IN UGANDA

BY

RWAMBALE DOUGLAUS

LLM-CL/28224/143/DU

A RESEARCH THESIS SUBMITTED TO THE SCHOOL OF LAW IN PARTIAL

FULFILLMENT OF THE REQUIREMENT FOR THE A WARD OF

A MASTERS DEGREE IN COMMERCIAL LAW OF KAMPALA

INTERNATIONAL UNIVERSITY

OCTOBER, 2018

i
 DECLARATION
I, Rwambale Douglaus, declare that this thesis is my original piece except where due
acknowledgement is made in the text and it does not include materials for which any other
University degree or diploma has been awarded.

Signed ………………………………………….

RWAMBALE DOUGLAUS

LLM-CL/28224/143/DU

Date: ……………………………………………

i
 APPROVAL
I clarify that I have supervised and read this study and that in my opinion; it conforms to
acceptable standards of scholarly presentation and is fully adequate in scope and quality as a
thesis in partial fulfillment for the award of Master of Laws (Commercial Law) Degree of
Kampala International University.

Signature of the Supervisor …………………………………

Name of the Supervisor MR. MUHAMUD SEWAYA

Date …………………………………….

ii
 DEDICATION
I dedicate this piece of work to my precious parents; the Right Reverend Dr. Bishop Hannington
Bahemuka and his queen Madam Bahemuka B Zebia who have always prayed for my success.
My brothers and relatives, without forgetting my only grandmother Edronah Kabahindi who
discovered my talent and encouraged me to study law. And lastly but not least Favor Mcklyn
Reighner and Favor Mitchell Glory. May this research be a source of inspiration to you in the
days to come.

iii
 ACKNOWLEDGMENTS
First and foremost, I would like to express my heartfelt gratitude to the Almighty God, whose
sufficient providence and protection towards the completion of this work.

Completion of this research has been as a result of both direct and indirect support of many
people to whom I owe acknowledgement. First, I thank my Lecturer and supervisor Mr. Sewaya
Muhamud for the remarkable sacrifices he has made over time and the steadfast to endlessly
guide me throughout the completion of the research, without whose support the contribution of
this study to the existing body of knowledge would not have taken place.

Sincere appreciation to the coordinator LLM class, Madam Kanoel Rose, for the intellectual
guidance and mentoring that have been afforded to me right from the inception of this study to
its conclusion.

I wish to express gratitude to my other LLM lecturers, Mr. Kyazze Joseph, Mr. Kabuye Isaac,
Mr. Jimmy Walabyeki, Mr. Tajudeen Saani, Mr. Kirunda Robert, Dr. Kigula John, Dr. Muhamad
Kibuka, and Dr. Semugenyi Fred, for their contributions towards the completion of this research.

I am greatly indebted to my parents; the Right Reverend Dr. Bishop Hannington Bahemuka and
Zebia Bahemuka for their encouragement, moral support, motivation, love and for being such
great parents. Further acknowledgment goes to all my class mates, Dinah Nabugye, Drani David
Epalu, Arthmon Nduwimana, and Mulaho Muhamad Ali. Finally, I am also grateful to Favor
Mcklyn Reighner, Favor Mitchell Glory, and Counsel Ssematiko John for being co-operative and
willing to help with my research.

iv
 LIST OF STATUTES
Uganda

The 1995 Constitution of the Republic of Uganda (as amended)

The Anti-Corruption Act, 2009

The Anti-Money Laundering Act, 2013

The Bank of Uganda Act, Cap 51

The Bill of Exchange Act, Cap 68

The Civil Procedure Act, Cap 71

The Children’s Act, Cap 59 (as amended, 2016)

The Contract Act, 2010

The Electronic Transactions Act Law No.8 2011

The Evidence (Bankers Book) Act, Cap 7

The Financial Institutions Act, 2004 (as amended, 2016)

The Income Tax Act, Cap 340

The Judicature Act, Cap 13 (as amended)

The Land Act, Cap 227

The Leadership Code Act, Cap 167

The Mortgage Act, 2009

The Registration of Titles Act, Cap 230

The Sale of Goods Act, Cap 82

Guidelines

The Bank of Uganda Financial Consumer Protection Guidelines June, 2011

The Code of Banking Practice of June, 2011

v
The Uganda Bankers Association Code of Conduct, 2010

Regulations

The Credit Reference Bureau Regulation, 2005 No. 59

The Civil Procedure Rules S 1- 71

The Financial Institutions (Credit Reference Bureau) Regulations, 2005

Bills

The Consumer Protection Bill, 2004

LIST OF CASES

Uganda
vi
Active Automobile Spares Ltd v Crane Bank and Rajesh Pakesh, Supreme Court Civil Appeal
No. 21 of 2001

Asam Products and another v National Bank of Commerce, Court of Appeal Civil Appeal no. 51
of 2003

Ayebazibwe v Barclays Bank Uganda Ltd & 3 Ors (Civil Suit No. 165 of 2012); [2014]
UGCOMMC 34

Banex Ltd v Cold Trust Bank Civil Appeal No. 29 of 1995 (SCU) (unreported)

Bank of Baroda (U) Ltd v Wilson Buyonjo Kamugunda [2006] UG Civil Appeal No. 10

Bank of Uganda v Banco Arabe Espanol SCCA No. 8 of 1998

Barclays Bank of Uganda Ltd v Godfrey Mubiru (1998) SCCA No.1

Barclays Bank of Uganda v Jing House & Guo Odong [2012] 9 UGCOMMC 5

Byesi Harriet v Kamugisha HCCR No. 26 of 2011

Cunsultant Surveyors & Planners v Standard Bank (U) Ltd (1984) HCB

DFCU Bank v Manjit Kent & Anor [2012] UGCOMMC 51

Esso Petroleum Co. v UCB CA No. 14 of 1992

Fredrick J. K Zaabwe v Orient Bank Ltd & Ors (2006) SCCA No. 4

Gladys Nyangire v DFCU Bank HCCS No. 78 of 2007

Haji Abdu Nasser Katende Vs Vithalidis Haridas & Co. Ltd. C. A. No. 84 of 2003

HSGS Impex Uganda Ltd v Bakama Enterprises Ltd & Another Civil Suit No. 787 of 2014,
[2015] UGCOMMC 116

Ivy Enterprises Ltd v Orient Bank Ltd & Another (HCCS No. 147 of (2012), [2013]
UGCOMMC 66

vii
John Bagaire Vs Ausi Matovu C.A. No. 7 of 1996

Juuko v Opportunity Uganda Ltd, (Civil Suit No.327 Of 2012) [2015] UGHCCD 67

Kakooza Abdulla vs. Stanbic Bank Uganda Ltd Misc. Applic. No. 614 of 2012

Kaniki Karisa Kaniki v Commercial Bank Ltd & 2 Ors (2015) HCCC No. 37

Kassim Mpanga v Uganda (Cr. Appeal No. 30 of 1994), [1995] UGSC 14

Kenya Seeds Co. Ltd v Nathaniel Kipkorir Tum & Anor (2010) HCCS No. 180

Kornark Investment (U) Ltd v Stanbic Bank Uganda Ltd [2012] 16 UGCOMMC 6

Makula International v His Eminence Emanuel Cardinal Nsubuga 1982 HCB 11

Mobil (U) Ltd v UCB (1982) HCB 64

Mutaka v Uganda Post Ltd (Civil Suit No. 690 of 2002) [2002] UGHCCD 71

Nalima & 4 Ors V Sebyala & 4 Ors (Misc. Application No. 396 of 2013), [2014] Ughcld 27 (18
August 2014)

Nasolo v DFCU Leasing Co. Ltd HCCS No. 0432 of 2006 [2014] UGCOMMC 19 (14 February
2014)

Nasolo Farida v DFCU Leasing Company Ltd HCCS No. 536/2006

Nipun Narattam Bhatia v Crane bank Ltd [2013] UGCA 26

Nipun Norattam Bhatia v Crane Bank Ltd [2013] UGCA 26, Civil Appeal No. 75 of 2006

Obed Tashobya v DFCU Bank Ltd (HCT -00-CC-CS), [2007] UGCOMMC 45

Prof. Nsereko V Barclays Bank of Uganda Ltd & 2 Ors (Civil Suit No. 18 of 2009), [2015]
Ughcld 18

viii
Samuel Black T/A SB Coaches v DFCU Bank Ltd (Civil Suit No. 416 of 2009), [2015]
UGHCCD 69

Sanjay Datta v Okello (2013) UGCOMMC 44

Sentongo v J. Kabugo Ltd & 2 Ors Civil suit no. 342 of 2014

Stanibic Bank Uganda Ltd v Uganda Crocs Ltd (Civil Appeal No. 4 of 2004)

Shalimar Flowers Self Help Group v Kenya Commercial Bank (2015) HC Civil Cause No. 17

Stanbic Bank v Atyaba Agencies Commercial Court Division. Mis. Appl. No. 235 of 2006

Stanbic (U) Ltd v Joseph Aine & Ors [2006] UG Commercial Court Case No. 38

Sylvan Kakugu Tumwesigye v Trans Sahara International General TRDG LLC (HCT-00-CC-
CS-0095 of 2005), [2005] UGCOMMC 66

Uganda v Ojangole (Criminal Case No.1 of 2014), [2014] UGHC 2

Wamono v Equity Bank Uganda Ltd & Anor (MA No. 600 of 2012), [2013] UGCOMMC 98

East Africa (E.A)

Kibwana & Another v Jumbe [1990-94] 1 EA 223 (CAT)

Madhvan and Company Ltd and another v Mugarura and others [2010] 2 EA

Onjallah v Kenya Commercial Bank Ltd (2004) 2 EA 253

Shah v Guilders International Bank Ltd [2002] 1 EA 269 (CAK)

Olinda De Souza Figueiredo v Kassamali Nanji [1963] 1 EA 381

Kenyan Cases

Gathiba v Gathiba, [2001] 2 EA 342

Kenya Grange Vehicle Industries Ltd v Southern Credit Banking Corporation Ltd (2014) KLR

ix
Ngengi Muigai & Another v East African Building & Another [2006] KLR

Simba Commodities Ltd v Citibank N.A (2013) KLR Civil Case No. 236

Standard Chartered Bank Kenya Ltd v Intercom Services Ltd & 4 Ors (2004) KLR

United Kingdom Cases

Bank of Baroda Ltd v Punjab National Bank Ltd [1944] AC 176

Barclays Bank v O’Brien [1994] 1 AC 180

Barclays Bank Plc v O’brien [1993] QB 103

Barclay’s Bank PLC v Quin-acre Ltd & another (1992) 4 ALLER 331

Barton v County NatWest Ltd [1999] Lloyds Report Bank 408, CA

Brown v Westminister Bank (1964) 2 Lloyds Rep 187

Burnett v Westminister Bank Ltd [1966] 1 QB 742; [1965] 3 ALLER 248

Burnett v Westminister Bank Ltd [1966]1 QB 742

Eddy v Bank of New South Wales [1877] Knox 299

Fabrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

FCT v ANZ Banking Group Ltd (1979) 143 CLR 499

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

Foley v Hill (1848) Vol. H.L

Great Western Railway versus London and county bank [1901) AC 414

Green Wood v Martin Bank Ltd (1959) 1 QB 55

Joachimson v Swiss Bank Corporation (1921) 3 KB 110

x
Karak Rubber Company Ltd v Burden and Others (No.2) [1972] 2 ALLER 1210

Ladbroke v Todd [1914] Com. Case 256

L’Estrange v Graucob [1934] 2 KB 394

Lloyds Bank v Bandy [1975] QB 326

Lombard Tricity Finance Ltd v Paton [1989] 1 ALLER 918

London Joint Stock Bank v Macmillan and Another (1918) AC 777

Mannai Investment Co. v Eagle Star Life Assurance [1997] A.C. 749, HL

Moschi v Lep Air Services [1973] AC 331

Multiservices Book- building Ltd and others v Marden [1978] 2 ALLER 489

National Westminister Bank Plc v Morgan (1983) 3 ALLER 8

Olex Focas Pty Ltd v Skoda export Co. Ltd

Paragon Finance PLC v Nash & Staunton [2002] 2 ALLER 248

Royal Bank of Scotland v Etridges No. 2 (2001) UK HL [2002] 2 AC 773

Royal Bank of Scotland v Etridge (No. 2) [1998] 4 ALLER 705, (1999) 14 (4) J.I.B.L 115

Royay Bank of Scottland v Etridge, at AC 797; ALL ER 460

Selangor United Rubber Estates Ltd v Cradock (No. 3) (1968) 2 ALLER 1073

Taylor v Chester (4) (1869) L.R.4 QB. 309

Tournier v National Provincial & Union Bank of England [1924] 1 KB 461

Turner v Dunne [1996] QCA 272

United Dominion Trust v Kirkwood (1966) 2 QB 431

xi
Woods v Martins Bank Ltd (1950) 1 QB 55

Australian Cases

ACCC v Lux Distributors [2013] FCAFC 90

ACCC v Berbatis Holding Pty Ltd (2000) 169 ALR 324; [2000] FCA 2

ANZ Banking Group v Karam [2005] NSWCA 344

ASIC v National Exchange Pty Ltd [2005] FCAFC 226

Astran Financial Services Pty Ltd v Bank of Queensland Ltd [2010] FCA 1010

Attorney General (NSW) v World Best Holdings Ltd, [2005] NSWCA 261

Atkins v National Australia Bank (1994) 34 NSWLR 155

Australian Competition and Consumer Commission v C .G Berbatis Holdings Pty Ltd, [2000]

Bar- Mordecai v Hillston [2004] NSWCA

Bertis (2003) 214 CLR 51

Blomley v Ryan (1956) 99 CLR 362

Blomley v Ryan and Amadio [1956] HCA 81; (1956) 99 CLR 362; and (1983) 151 CLR 447

Choice Constructions Pty Ltd v Janceki [No. 3] [2011] WASC 358

Commercial Bank of Australia v Amadio (1983) 151 CLR 447

Commercial Bank of Austria Ltd v Hulls (1884) 10 VLR (L) 110

Commonwealth v Verwayen (1990) 170 CLR

Garcia v National Australia Bank (1998) 194 CLR 395, 135 ALR 614

Janson v Janson [2007] NSWSC 1344

xii
Janson v Janson [2007] NSWSC 1344

Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315

Tonto Home Loans Australia Pty Ltd (2011) 15 BPR 29

Other Cases

Commissioner of Income Tax v The Bank of Chettinad 47 NLR 25

Lisciondro v Official Trustee (1995) ATRP

The Bank of Chettinad Commissioner of Income Tax 49 NLR 409 (PC)

Spurling Ltd v Bradshaw [1956] 1 WLR 461

Standand Bank of West Africa v Attorney General of Gambia [1972] 3 ALR COMM 449

Sunderland v Barclays Bank Ltd (1938) L DAB 163

US International Marketing v National Bank of New Zealand Ltd [2004] 1 NZLR 589 (CA)

Westminister Bank Ltd v Hilton (1926) 43 TLR 124

TABLE OF CONTENTS

DECLARATION ..............................................................................................................................i

APPROVAL .................................................................................................................................... ii

DEDICATION ................................................................................................................................ iii

xiii
ACKNOWLEDGMENTS .............................................................................................................. iv

LIST OF STATUTES ......................................................................................................................v

LIST OF CASES............................................................................................................................. vi

ABSTRACT................................................................................................................................ xviii

CHAPTER ONE ........................................................................................................................... 1

GENERAL INTRODUCTION .................................................................................................... 1

1.1 Background of the Study .......................................................................................................... 1

1.2. Statement of the Problem ......................................................................................................... 9

1.3. Research questions ................................................................................................................... 9

1.4. Objectives............................................................................................................................... 10

1.4.1. General Objective ............................................................................................................... 10

1.4.2. Specific Objectives ............................................................................................................. 10

1.5. Hypothesis.............................................................................................................................. 10

1.6. Significance of the Study ....................................................................................................... 10

1.7. Scope of the Study ................................................................................................................. 11

1.8. Theoretical framework ........................................................................................................... 11

1.8.1. Consent Theory ................................................................................................................... 12

1.8.2. Fiduciary Liability Theory .................................................................................................. 13

1.9. Methodology .......................................................................................................................... 15

1.10. Literature Review................................................................................................................. 15

1.11. Organizational layout ........................................................................................................... 20

1.12. Conclusion ........................................................................................................................... 21

CHAPTER TWO ........................................................................................................................ 22

AN OVERVIEW OF BANKING LAW IN UGANDA ............................................................ 22

2.1. Introduction ............................................................................................................................ 22

xiv
2.2. History and Evolution of banking in Uganda ........................................................................ 22

2.3. Functions of the Bank of Uganda .......................................................................................... 25

2.4. Nature of the relationship of a banker and a customer .......................................................... 26

2.5. Classification of relationship ................................................................................................. 28

2.5.1. General relationship ............................................................................................................ 28

2.5.2. Special relationship ............................................................................................................. 30

2.5.3. Duties owed by a banker to a customer .............................................................................. 38

2.5.4. Duties Owed by the Customer to the Banker...................................................................... 46

2.6. Conclusion ............................................................................................................................. 49

CHAPTER THREE .................................................................................................................... 51

THE LEGAL POSITION OF UNCONSCIONABLE DEALING IN BANKING

TRANSACTIONS AND THE LAW RELATING TO BANK CUSTOMER
RELATIONSHIP ........................................................................................................................ 51

3.1. Introduction ............................................................................................................................ 51

3.2. The perspective of unconscionable transaction by the English Courts .................................. 51

3.3. The Doctrine of unconscionable transaction.......................................................................... 52

3.4. The view unconscionable transaction in Uganda legal systems ............................................ 54

3.5. The Current Legal Framework............................................................................................... 57

3.6. The Bank of Uganda Act, Cap 51.......................................................................................... 58

3.7. The Financial Institutions Act of 2004, as amended 2016 .................................................... 59

3.8. The Contract Act, 2010 .......................................................................................................... 60

3.9. The Bills Of Exchange Act, Cap 68....................................................................................... 64

3.10. The Consumer Protection Bill, 2004 ................................................................................... 65

3.11. The Bank of Uganda Consumer Protection Guidelines June, 2011 .................................... 66

3.12. The Code of Banking Practice June, 2011 ........................................................................... 68

3.13. Conclusion ........................................................................................................................... 73

xv
CHAPTER FOUR ....................................................................................................................... 74

UNCONSCIONABLE TRANSACTIONS IN BANKING AND IT’S EFFECTS ON BANK

CUSTOMER RELATIONSHIP ................................................................................................ 74

4.1. Introduction ............................................................................................................................ 74

4.2. Negative Effects of Unconscionable Transaction in banking ................................................ 74

4.3. Unconscionable Transaction and Its Positive Effects ............................................................ 76

4.4. Penalties and Remedies.......................................................................................................... 78

4.5. Controlling Unconscionable Transactions in Banking .......................................................... 79

4.5.1. Problem analysis ................................................................................................................. 79

4.5.2. Evaluation of unconscionable conduct ............................................................................... 79

4.5.3. Enforcement/control mechanism ........................................................................................ 80

4.5.3.1. Common law safeguard ................................................................................................... 80

4.5.3.2. Legal safeguards .............................................................................................................. 81

4.6. Conclusion ............................................................................................................................. 82

CHAPTER FIVE ........................................................................................................................ 83

CONCLUSION AND RECOMMENDATIONS ...................................................................... 83

5.1. Summary ................................................................................................................................ 83

5.2. Commercial Morality ............................................................................................................. 86

5.3. Means of Imposing Standards................................................................................................ 87

5.4. Difficulties in Regulating Fairness ........................................................................................ 88

5.5. Broad Legislative Standards .................................................................................................. 88

5.6. Conclusions ............................................................................................................................ 89

5.7. Recommendations .................................................................................................................. 91

5.7.1. Legal reforms ...................................................................................................................... 91

5.7.1.1. Proposal for legislation to control bank customer relationship ....................................... 91

xvi
5.7.1.3. Transformation of the old rules of contract law............................................................... 93

5.7.1.4. Broadening of the common law principle to avoid discriminatory categories ................ 94

5.7.1.5. Inclusion of Unconscionable Conduct in the Financial Institutions Act, 2016 ............... 94

5.7.2. Institutional framework of the banking sector .................................................................... 95

5.7.2.1. Need to Emphasize Independent professional legal Advice ............................................ 95

5.7.2.2. Credit provider’s responsibilities ..................................................................................... 96

5.7.2.3. Need to Create the Trade Practices Commission............................................................. 96

5.7.2.4. Judicial Intervention in Unconscionable Bargains .......................................................... 97

5.7.2.5. Supervision ...................................................................................................................... 97

5.7.3. Bank and customer relationship .......................................................................................... 98

5.7.3.1. Customers, should fully understand all the Terms of the Transaction ............................ 98

5.7.3.2. Customers should negotiate the outcome they want ....................................................... 99

5.7.3.3. Customers Should Read carefully the Agreements they Sign ......................................... 99

5.7.3.4. How to avoid engaging in unconscionable conduct ........................................................ 99

BIBLIOGRAPHY ....................................................................................................................... 101

xvii
 ABSTRACT
Unconscionable transaction in banking is a contract induced by undue influence where the
relationship subsisting between the parties to a contract is such that one of the parties is in a
position to dominate the will of the other party and use that position to obtain an unfair
advantage over another party, and that comes about in situations where one of the parties to the
contract, holds a real or apparent authority, stands in a fiduciary relationship over another
party. This study has critically analyzed unconscionable transactions in banking and how it
affects bank and customer relationship in Uganda’s banking sector, it has examined the
effectiveness of the legal regime and the laws relating to bank customer relationship, as while as
the challenges and effects. It’s evident that unconscionable transactions in its various forms on
the part of customers and the banks, is a big challenge affecting the health of the banking sector
in Uganda. This is because unconscionable transactions in banking and the law relating to bank
customer relationship is not specifically provided for in the statutes, especially in the Contract
Act, 2010, and the Financial Institutions Act of 2004 which was amended by the Financial
Institutions Amendment Act 2016 thus creating an ambiguity on the laws governing it. The
research methodology adopted in this research work is doctrinal which has collected both
primary and secondary data. And also both qualitative and quantitative approaches have been
used, which helped the researcher to collect and present systematic data. Thus the researcher
has suggested, and made recommendations, that there is need for legislating bank and customer
relationship, necessary/ better legal reforms be put in place and institutional frameworks of the
banking sector.

xviii
 CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

Banking system in Uganda has been dynamic and this has created gaps that need to be filled in
respect of the policies and laws. In recent decades, the financial service industry had been
subjected to various major transforms due to computers which are used now in electronic
banking and telecommunications,1 For instance the partnership between banks and mobile
money.

In the recent past, unconscionable transactions in banking appear to have become a common
practice which is tarnishing the banking business and the relationship between banks and
customers they would enjoy. Under Section 14 of the Contract Act, 2010 explains
unconscionable transaction, as a contract induced by undue influence where the relationship
subsisting between the parties to a contract is such that one of the parties is in a position to
dominate the will of the other party and use that position to obtain an unfair advantage over the
other party, where the party holds a real or apparent authority over the other party; the party
stands in a fiduciary relationship to the other party; or the mental capacity of the other party is
temporarily or permanently affected by reason of age, illness, mental or bodily distress.

Section 14 (3) of the Contract Act, 2010 provides that where a party who is in a position to
dominate the will of the other party, enters into a contract with that other party and the
transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the
burden of proving that the contract was not induced by undue influence shall be upon the party in
a position to dominate the will of the other party. A party is said to stand in a fiduciary
relationship to another party if the party has duties involving good faith, trust, special confidence
and candor towards that other party, such as a relationship between an attorney and a client, a
guardian and a ward, a principal and an agent, an executor and an heir, a trustee and a

1Santhav, N. Mahendhiran, S. Muthi, “Information Utilizing Technologies for Value”, Journal

of Global Business and Technology (2006) Vol 2) (1).
1
beneficiary or a landlord and tenant. 2 This thesis is geared towards examining the legal regime of
unconscionable transactions in banking and how it can best be reformed to reflect the issue of the
law relating to bank customer relationship.

The controversies surrounding this area of the law intensified because equitable doctrines which
either fall under the umbrella of ‘unconscionable transactions’ or, in some other way, have as
their ‘fundamental principle’ a notion that equity will respond to conduct which is
‘unconscionable’ have developed independently. 3 More specifically then, duress occurs when
contractual assent is procured by “illegitimate pressure” brought to bear by one party over the
other.

The term ‘unconscionable’ is, used across a broad range of the equity jurisdictions. The term
describes in various applications the formation and instruction of conscience by reference to
well-developed principles. It may be said that breaches of trust and abuses of fiduciary position
manifest unconscionable conduct; but whether a particular case amounts to a breach of trust or
abuse of fiduciary duties determined by reference to well-developed principles, though specific
and flexible in character. It is to those principles that the Court has first regard rather than
entering into the case at that higher level of abstraction involved in notions of unconscionable
conduct in some loose sense where all principles are at large.4 Nevertheless, since guarantees
frequently involve persons who have close relationships to each other, there is probably a greater
risk of duress being associated with guarantees than with other kinds of commercial contracts.

Cases involving guarantees have proved a fertile ground for the courts to consider the parameter
of unconscionability, both in equity and under statute. Vulnerable guarantors continue to enter in
to sureties which may be both improvident and unfair. Recent cases have involved wives,5
elderly parents,6 siblings,7 de facto spouses8 and others in a close relationship to the guarantor.9

2 The Contract Act, 2010 of Uganda, Section 14

3 Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315, (Gleeson and McHugh, Gummow,
Hayne and Heydon).
4 Australian Competion and Consumer Commission v C. G Berbatis Holdings Pty Ltd, [2000]

FCA 2, 23 (French).
5 Burrawong Investments Pty Ltd v Lindsay [2002] QSC 82.
6 Watt v State Bank of New South Wales.
7 Equuscorp Pty v Worts [2000] VSC 179.

2
In general terms though, the defense of duress is concerned mainly with the issue of whether the
guarantor was placed under unacceptable pressure, or under an illegitimate threat. Common law
and equitable concepts in respect of duress apply equally to both guarantees and contracts
generally.

In earlier times, before the intervention of statute, plaintiffs could seek relief at common law und
er the Amadio10 principles, or, in the special case of wives,under the rule in Yekey v Jones.11 The
common law rules apply to guarantees given to support both consumer and business borrowings.

The imperative to organize and define the boundaries of the distinct categories of case falling
under the umbrella of ‘unconscionable conduct’ and the general law’s reaction to that conduct
was recognized by French when his Honour was a judge of the Federal Court of Australia at first
instance, ‘The boundary defined by union of these classes of cases are potentially unstable as the
taxonomy of applications of unconscionable conduct may shift under the unwritten law to the
level of a general unifying concept or be subsumed in the more accurate idea of
‘unconscientious’ conduct’.12 Contracts of guarantee are being signed in situations where the
guarantors have little or no information or are misinformed about important aspects of the
transaction such as the borrower’s loan or the financial soundness of the business they are
supporting.

Furthermore, over recent decades, legislatures have authorized courts to rearrange the legal rights
of persons on the basis of vague general standards which are clearly capable of misuse unless
their application is carefully confined. 13 Unconscionability is such a standard.14 Such guarantees
are therefore given with an inadequate understanding of crucial aspects of the transaction, which

8 Liu v Adamson [2003] NSWSC 74; State Bank of NSW v Hibbert (2000) NSWSC 628.
9 Kran v National Australia Bank [2003] VCSCA 92 (brothers in- law); ANZ Banking Group Ltd
v Alirezai [2004] QCA 6 (close friends).
10 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 (‘Amadio’).
11 (1939) 63 CLR 649, affirmed in Garcia v National Australia Bank Ltd (1998) 194 CLR 395

(‘Garcia’).
12 Australian Competition and Consumer Commision v C.G Berbatis Holdings Pty Ltd.
13 Attorney General (NSW) v World Best Holdings Ltd, [2005] NSWCA 261, 119-21 (Per

Spigelman).
14 Legal wise, a Paper Presented at the Litigating Contract Disputes Seminar (20th November

2012).
3
in general terms would relate to the financial viability of the business secured and the nature and
extent of the liability

Unconscionability is a well-established but narrow principle in equitable doctrines. It has been

applied over the centuries with considerable restraint and in a manner which is consistent with
the maintenance of the basic principles of freedom of contract. It is not a principle of what
‘fairness’ or ‘justice’ or ‘good conscious’ requires in the particular circumstances of the case.
Unconscionability is a concept which requires a high level of moral obloquy. If it were to be
applied as if it were equivalent to what was ‘fair’ or ‘just’, it could transform commercial
relationships (emphasis added).15 Common law and equity both accept the principle that a party
ought not to be held to a contract unless he or she is a free agent, but the contribution made by
common law in this domain is confined to the avoidance of contract produced by duress, a term
which has a limited meaning.

Horrigan observes that the present trend in the cases and commentary suggests that the statutory
standard of unconscionable conduct goes beyond the meaning given by the ‘unwritten law’. 16 But
Professor Horrigan also points out that the new statutory indicators simply provide a frame work
in which conduct may be assessed. He observes that the listed indicators of statutory
unconscionability might apply, depending on the nature and circumstances of the case, either
independently or in combination. Accordingly, it would be unlikely for a court to be satisfied
because of the presence of, say, one of the indicators or even more that a finding of
unconscionable conduct should inevitably follow which rein enforces the significance of the
‘imposed norms of conduct’ analysis.

It is dangerous for practitioners, either when advising or when pleading cases, to take a
simplified ‘indicator-by-indicator’ approach and pleading towards the positive conclusion that
the conduct, was in all the circumstances ‘unconscionable’. 17 It has been pointed out that

15 Ibid
16 See ASIC v National Exchange Pty Ltd [2005] FCAFC 226; ANZ Banking Group v Karam
[2005] NSWCA 344; and Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389.
17 Harringan’s analysis that the new statutory indicators simply provide a framework in which

conduct may be assessed. Extracted from his paper on unconscionable conduct in commercial
transactions, Issue 73: July 2015.
4
circumstances that would traditionally constitute unconscionable conduct may also be seen as
constituting actual undue influence.

Whilst the statutory indicators provide the relevant framework, context and circumstances as
well as a flexible approach remain highly relevant as they always have been. Advice and
pleadings should account for this.18 Such an analysis makes it clear that the effectiveness of
independent advice as a mechanism for protecting guarantors can vary according to the
circumstances in question.

A bank can be defined as financial intermediary that accepts deposits and channels them into
lending activities and a fundamental component of the financial system as well as active players
in financial markets. The definition of the term “bank” was a judicial debate in the past, owing to
the lack of a satisfactory statutory definition. 19

Lord Denning MR remarked in United Dominion Trust v Kirkwood 20 that there are two
characteristics usually found in bankers today;

(a)They accept money from and collect cheques for their customers and place them to their
credit
(b) They honour cheques or orders drawn on them by their customers when presented for
payment and debit their customers accordingly.
However, today reference to judicial interpretations of the said term would not be necessary in
Uganda since there are several statutes that define the term.
“Bank” is defined under section 3 to mean a company licensed to carry on financial institution
business as its principal business, as specified in the Second Schedule to this Act and includes all
branches and offices of that company in Uganda. 21 More so, a bank means the bank of Uganda
established under the Bank of Uganda Act 1993. 22

18 Chris Tam, above n 9, 11.

19 See, Commissioner of Income Tax v The Bank of Chettinad 47 NLR 25; The Bank of Chettinad
Commissioner of Income Tax 49 NLR 409 (PC).
20 (1966) 2 QB 431.
21 See, The Financial institutions Act of 2004 which was amended by the financial institutions

Act 2016, Section 3.

22 Section 2 provides for the establishment of bank of Uganda.

5
A customer, when it also comes to defining the word customer the dilemma is still the same and
it is not easy to define it with exactness. It seems that the major factor determining whether or
not a person is a customer must depend on whether or not such a person has or will have an
account with the bank.23

The term Customer means an individual or a small firm who uses, has used, or is or may be
contemplating using, any of the products or services provided by a financial services provider;24
whereby, a financial services provider, means a bank, a credit institution, a microfinance deposit
taking institution, a forex bureau or a money remittance company which is regulated by Bank of
Uganda.25

Financial institution is an establishment that focuses on dealing with financial transactions, such
as investment, loans and deposits. Financial institutions are composed of organizations such as
banks, trust Companies, insurance Companies and Investment dealers.26

And according to the Financial Institutions Act of 2004 which was amended by the Financial
Institutions Amendment Act 2016, “financial institution” means a company licensed to carry on
or conduct financial institutions business in Uganda and includes a commercial bank, merchant
bank, mortgage bank, post office savings bank, credit institution, a building society, an
acceptance house, a discount house, a finance house or any institution which by regulations is
classified as a financial institution by the Central Bank;27

Since emerging from civil war in 1987, the Ugandan authorities have been successfully
implementing an ambitious program of macroeconomic adjustment and structural reforms with
extensive financial and technical assistance from the international donor community. The
government has substantially reduced its involvement in the commercial sector. Fundamental

23 Read the case of Great Western Railway Co. v London and County Banking Co. Ltd (1901)
AC 414.
24 See, The Bank of Uganda Financial Consumer Protection Guidelines June, 2011, Section 3.
25 See, The Financial Institutions (Anti-Money Laundering Regulations), 2010, under Section 7

that provides for ‘Know Your Customer’ Rules and Procedures.

26 www.investopedia.com/f/financialinstitution.asp FI (FI) Definition/Investopedia. Accessed on

1st December 2015.

27 The Financial Institutions Act of 2004 which was amended by the Financial Institutions

Amendment Act 2016, Section 3.

6
and far-reaching reforms have been implemented in the areas of tax policy and administration,
public expenditure and services, monetary policy and operations, commercial banking, foreign
trade and exchange systems (including complete liberalization of external capital transactions),
and privatization. State-owned commodity marketing boards and official price controls have
been eliminated, as have all interest rate controls, commercial bank credit ceilings, and
administrative credit allocations. Although Uganda still faces substantial challenges, the results
achieved thus far have been encouraging: real economic growth has been strong, inflation has
remained low for half a decade, and the incidence of poverty has been substantially reduced.28

The government's economic reform program has been supported by substantial legislative
reforms, which have strengthened and enhanced the efficiency of fiscal and monetary policy and
improved the compilation and dissemination of statistical information.29 The Bank of Uganda
Act, Cap 51, vested the Central Bank with the responsibility of maintaining monetary stability. 30
The Financial Institutions Act of 2004 which was amended by the Financial Institutions
Amendment Act 2016, established clearly the responsibility of the bank of Uganda to set and
enforce prudential regulations for commercial banks, 31 that the bank will be required to set aside
a separate pool of funds that can be accessed under the Islamic Banking model. And that there
could also be the entry of banks that exclusively deal with Islamic Banking,32 and the
Constitution underscores the independence of the Governor of the bank of Uganda. 33 The tax
system has been simplified and streamlined with the introduction of a value-added tax and a
model income tax law. These legislative reforms have enabled the bank of Uganda to implement
a system of indirect monetary control, and have enabled the government too, progressively to
improve the efficiency and transparency of the tax system. The government clearly sets forth its

28 IMF staff, ‘An assessment of the Ugandan Practices on the full set of 25 Basle core Principles:
information obtained from various statutes and regulations, and discussions with Uganda
authorities and market participants’ (May- June 1999).
29 www.imf.org/external/rp/fad/trans/index.htm. Accessed on 18th September 2015, at 7:43 pm.
30 See, Sections 4 (2) para. (a), (f), (j); and also see 32 (2) of the same Act.
31 The Financial Institutions Act of 2004 which was amended by the Financial Institutions Act

2016, Section 131 (a).

32 According to, Herman Kasekende, the Managing director, Standard Chartered Bank Uganda.
33 Article 161 (2).

7
policy objectives and proposed public expenditure program in the budget address to parliament
each year.34

The nature of financial institutions we have in Uganda among others includes savings and loans,
which started largely in response to the exclusivity of commercial banks. There was a time when
banks would only accept deposits from people of relatively high wealth, with references, and
would not lend to ordinary workers. Savings and loans typically offered lower borrowing rates
than commercial banks and higher interest rates on deposits; the narrower profit margin was a
byproduct of the fact that such savings and loans were privately or mutually owned. And credit
unions which typically offer higher rates on deposits and charges lower rates on loans, in
comparison to commercial banks.35

Uganda also has private banks, investment and merchant banks, Islamic banks, which will fill the
need for financial services that are compliant with Islamic rules concerning interest. Sharia law
forbids the charging, or acceptance, of interest or other fees related to borrowing money.36 This
has been introduced by the financial institution Act, as amended 2016.

Industrial banks also are a special category of financial institution that exists for very specific
purposes. Industrial banks are financial institutions owned by non-financial institutions.
As they are able to lend money, industrial banks are often used by their parent companies to
facilitate financing for customers.37 Uganda has made notable improvements in enhancing
transparency practices in key areas, especially fiscal and monetary policy and banking
supervision.38

34 Ibid
35 Stephen. D. Simpson, CFA, “The Banking System”, Non-Bank Financial Institutions.
36 Ibid
37 Read: The Banking System: Non-Bank Financial Institutions/Investopedia

<http://www.Investopedia.com/university/banking-systemll.asp#izz3tfd2ZP2U> accessed on 11th

October 2015.
38 See, The Financial Institutions Act of 2004 which was amended by the Financial Institutions

Act 2016, Section 79.

8
1.2. Statement of the Problem
The issue of unconscionable transactions in banking and the law relating to bank customer
relationship has been a thorny issue in Uganda in the recent past. Nevertheless, unconscionable
transactions in banking and the law relating to bank customer relationship is not specifically
provided for in the statutes, especially in the Contract Act, 2010, and the Financial Institutions
Act of 2004 which was amended by the Financial Institutions Amendment Act 2016 thus creating
an ambiguity on the laws governing it. The law governing unconscionable transactions in
banking and the law relating to bank customer relationship is still lacking in that a lot of
questions still arise and more related challenges are encountered day by day with a few
applicable laws need a lot of concentration to be coordinated towards making a better and firm
law to regulate the banking business.

Nevertheless, the laws relating to bank customer relationship, that are in place help a lot in
regulating banking transactions, but the law is still inadequate. This is because there is no perfect
law and law is always subject to change as conditions in society change.

It is in this light that the researcher seeks to examine the legal position of unconscionable
transactions in banking and the law relating to bank customer relationship in Uganda and see its
impact in society with a view of understanding its success and failures and make necessary
recommendations.

1.3. Research questions

a) What are the national laws and policies regulating banking systems in Uganda?

b) What are the existing legal regime, and challenges within the context of
unconscionable transactions in banking in regard to bank and customer relationship?

c) What are the effects of unconscionable conduct on bank customer relationship?

d) What are the reforms necessary to address the issues regarding unconscionable
transaction in banking?

9
1.4. Objectives
1.4.1. General Objective
The main objective of this thesis is to analyze unconscionable transactions in banking and how it
affects bank customer relationship in the banking sector of Uganda.

1.4.2. Specific Objectives

While carrying out the study, the researcher was guided by the following objectives.

a) To examine the national laws and policies regulating banking systems in Uganda;

b) To ascertain the efficiency of the existing legal regime within the context of
unconscionable transactions and critically study the existing law relating to bank customer
relationship and the challenges accruing thereto;

c) To examine the effects of unconscionable transactions on bank customer relationship in

the banking sector;

d) To suggest for reforms necessary to address issues regarding unconscionable transaction

in banking.

1.5. Hypothesis
Unconscionable transactions in banking, has a negative effect on the law relating to bank
customer relationship on the banking sector in Uganda.

1.6. Significance of the Study

The findings of this study will contribute to the existing body of knowledge in the field of
unconscionable transactions in banking and the law relating to bank customer relationship in
Uganda. The research study has examined the laws and policies regulating bank customer
relationship in the banking sector of Uganda, thus, this will be helpful to the law makers in the
parliament of Uganda, both the private and public sector, and to various institutions, as it will act
as a guide and source of reference in amending the already existing laws such as the Contract
Act 2010, and other statutes that did not fully provide for the issue of unconscionable
transactions in banking. The information provided in this study will be used by legal scholars in

10
higher institutions of learning most especially subsequent researchers in the area of commercial
law since the study has pointed out most of the silent futures concerning unconscionable
transactions in banking and the law relating to bank customer relationship in Uganda.
The findings in this research will help the government of Uganda and bankers to stick to the
ethical and the various banking principles imposed on them by law in addition to making
reference to the legal framework that this study has suggested. This is expected to contribute
towards the improvement of the law governing the Banking sector in Uganda since it has
analyzed the laws and gave a clear perception of unconscionable transactions in banking, by
discussing its effects, challenges in relation to bank customer relationship in the Ugandan
banking sector.

1.7. Scope of the Study

The thesis analyzes the existing laws such as the Contract Act. 2010, and the Financial
Institutions Act. 2004, which was amended by the Financial Institutions Act 2016 and other laws
in regard to the issue of unconscionable transactions in banking, and bank customer relationship,
through identifying the gaps in the laws and policies that are in place. The geographical area to
be covered during the research is the country Uganda. The research consider a general overview
of the impacts, success, failures of the law relating to bank customer relationship and the laws
accruing thereto in Uganda. It further focused on the business values that are attached with bank
customer relationship and the loopholes therein that need to be bridged. The research further
examined the legality of the existing regulations, policies and laws. It will highlight the
challenges faced by the legislatures to incorporate unconscionable transactions in the Ugandan
banking laws and in particular the law relating to bank customer relationship with its elaborate
features as a legally acceptable Banking practice in Uganda.

1.8. Theoretical framework

This section is reviewing the literature on the various theories, such as the Consent theory, and
the Fiduciary Liability theory which other scholars have identified and serves as the guiding
principle in analyzing unconscionable transactions in banking and the law relating to bank
customer relationship in Uganda.

11
1.8.1. Consent Theory
The notion of true assent, despite the dominant role of apparent assent in the objective theory of
contract, remains an overriding consideration in unconscionable assent. 39 In bargain principle
and its limits, professor Eisenberg40 provides the case for a doctrine of unfair pervasion within
the principle of unconscionable conduct. He proposes a strict enforcement. It is important to
make clear the “true assent” it is not necessarily subjective or actual assent. 41

A consent theory specifies that a promisor incurs a contractual obligation, the legal enforcement
of which is morally justifiable by manifesting assent to legal enforcement and thereby invoking
the institution of contract.42 Bernette43 concludes that the basic of contractual obligation is not
promising per se.

Black Movant44 offers this succinct statement of consent theory; appreciation of limitations of
objective assent presupposes that individuals are not compelled to honor obligations that were
not willingly assumed. This is the essence of a consent theory of contract which does not
recognize objective manifestations as dispositive of assent. While an objective approach to
determination of consent is probative, consent theory seeks confirmation of the reality of that
assent. In the best case scenario, only true consent substantiates enforcement of obligations
specified in the agreement. Consent theory represents amoral and realistic refinement of the
freedom of contract notion, parties may bargain freely; however, the objective manifestations of
their assent may require greater verification. True consent validity rests with established real or
palpable assent. Thus, objective manifestations, such as a signature on a form, may not constitute
the genuine assent necessary to justify enforcement. 45

39 Larry. A. Dimatteo & R. L. Bruce, “A consent theory of Unconscionability: An Empirical

Study of Law in Action”, 33 FLA. ST. U. L. REV 1067 (2006).
40 Melvin Eisenberg, “The Bargain Principle and its limits”, 95 HARY. L. REV. 741.
41 Ibid
42 Randy E. Bernett, “A consent Theory of Contract”, 86 Colum. L. REV. 269 (1986).
43 Ibid
44 Larry A. Dimatteo EQ, “Contract theory, Evaluation of Contractual intention”, (1998).
45 Ibid

12
1.8.2. Fiduciary Liability Theory
Banker relationships with those who use their services are recognized to have fiduciary nature in
at least some of their aspects. The relationships of banks with those who dealt with them were
treated just as instances of debtor and creditor, traditionally, things were different. Mutual
obligation were thought to be entirely described by the terms of the contractual relations
subsisting between the parties46 or, as Bankes J observed in 1921 in Joachimson v Swiss Bank
Corporation,47 that in ordinary cases of bank and customer, their relationship depend entirely or
mainly on implied contract. Despite Epperson’s ‘deposit’ of money with the bank, property in
the money was treated as transferred outright. No formal relation of trustee and cesti que trust in
respect of money was still seen to be present. The bank is only obliged to account to the
depositor for the value of what was entrusted. Mutual obligation of the parties from the time of
deposit are expressed accordingly on a “running account” basis, which in the paradigm of an
exclusively contractual relation.

Fiduciary relationship associated with a party’s reliance on another may take two types; - they
may take on the one hand, be “one sided”. This is where a party places trust in and relies on the
other because he or she is reasonably entitled to do so in the circumstances, or because the reliant
party is in a position of vulnerability, subordination or information inequality. On the other hand,
reliance may be “two sided” where it is mutual, or reciprocated, as in a partnership or joint
venture. However, we are concerned with the “one sided” case, where the customer relies on the
bank’s trustworthiness and trust is invested in the bank. The reliant party is often, but not always
vulnerable or unequal in relation to banking institution.

Several legal and equitable regimes compete to regulate this type of reliance. First, there is the
fiduciary relationship of trust, or what we normally think of as fiduciary relationship. A person
relies on the other as he may be entitled to do so, and if the other disappoints that reliance then a
fiduciary relationship of the normal type may have been breached. Next there are typical facts
which the remedy of undue influence attends to. A vulnerable or unequal party is in relationship
places his trust in a stronger or more competent. If this reliance is exploited by the stronger party,

46 Glover, John, “Banks and Fiduciary Relationship”, (1995), Vol 7: Iss. 1, Article 5, Bond Law
Review.
47 Joachimson v Swiss Bank Corporation (1921) 3 KB 110- 17, Per Banks.

13
a series of remedial obligations is available to limit the stronger party’s overreaching. Fiduciary
relationship of trust may be often found in value influence type of case. The “unequal” or
“vulnerable” type of reliance does not often attract the normal species of fiduciary relationship in
Uganda as it is in common law.48 For example, in the case of Juuko v Opportunity Uganda Ltd, 49
in this case, the plaintiff was suspended from the employment and summarily dismissed on
grounds that she had breached the Company’s Business Ethics and Conduct Policy by confirming
receipt of UGX 50,000,000/= and later reversing it to UGX 45,000,000/= . The plaintiff gained
employment at the Faula Uganda Limited and now Opportunity Uganda Limited as
Administrative Assistant, she ascended to Teller Management and was confirmed as Teller
Attendant. The plaintiff was implicated in the loss of UGX 5,000,000/= following an inter-branch
transaction between the defendant’s Kawempe and Kira branches. The plaintiff was suspended
from her employment and she was terminated from the same service by the defendant. In this
case, counsel relied on the case of Barclays Bank of Uganda Ltd v Godfrey Mubiru, 50 to state that
the standard of the duty of care and diligence expected from bank managers in the performance of
their duties is more as compared to other businesses. The plaintiff agreed that a reasonable banker
would exercise due diligence in handling of bank cash. Further, it was stated that;

Managers in the banking business have to be particularly careful than managers of most
businesses. This is because banks manage and control money belonging to other people
and institutions perhaps in their thousands and therefore are in a special fiduciary
relationship with their customers whether actual or potential…moreover, and the Judge
was of the opinion that in the banking business, any careless act or omission, if not
quickly remedied, is likely to cause great losses to the bank and its customers. That
irregular or unconditional banking acts or behavior could lead to speculation about and
the undermining of the reputation of the appellant and therefore loss of customers and
investors upon which the business of the bank depends.

48 G. John, “Banks and Fiduciary Relationship”, (1995), Vol 7: Iss.1, Article 5, Bond Law
Review.
49 (Civil Suit No. 327 of 2012) [2015] UGHCCD 67.
50 SCCA No. 1 of 1998; see, also Mutaka v Uganda Post Ltd (Civil Suit No. 690 of 2002) [2002]

UGHCCD 71.
14
1.9. Methodology

The research methodology adopted in this research work is doctrinal research approach meaning
that the study was based on the library materials involving both primary source and secondary
sources of data. The primary sources included; the 1995 Constitution of the Republic of Uganda
(as amended) as the principle Law, the Contract Act. 2010, the Financial Institutions Act. 2004,
which was amended by the Financial Institutions Act. 2016, and the Bank of Uganda Act.
Cap.51, the Mortgage Act. 2009, the Bank of Uganda Financial Consumer Protection Guidelines
June. 2011, the Code of Banking Practice of June 2011, and the Consumer Protection Bill, 2004.

The secondary sources have included case Law analysis and the available literature on the issue
of unconscionable transactions in banking, And also text books have been consulted, articles,
working papers, reports, journals and a great deal of knowledge has been got from the internet,
given the fact that little materials have been written on the subject matter in Ugandan context.

For the purpose of meeting the objectives of the study, the researcher uses analytical approach
and explanatory research designs in which qualitative and quantitative as well as descriptive data
in nature is collected from the available literature sources, which helps the researcher to get and
show systematic data. Data collected is analyzed in accordance with the ‘Grounded theory’
technique. The researcher also employs observation as a technique while carrying out the study
to critically study the available case law, legislations and articles in law journals thus acquiring
the data. And other useful materials necessarily to facilitate the purpose of this project have been
used so as to gain substantial knowledge on the subject matter and thus make factual
contributions in this area of study.

1.10. Literature Review

It is the author’s intention to make a critical analysis of the existing literature concerning
unconscionable transactions in banking and the law relating to bank customer relationship in
Uganda.

15
The research is limited to the definition put in place by the scholar such as Bryan Horrigan,
Jaani Riordan51 to mention but a few. These scholars have done a great job, putting in place a
series of definition of unconscionable transactions in banking owing to their specific different
backgrounds. Yet the question as to which of these definitions, descriptions or meaning should a
student of law or a learned person or even a lay man align with. However, this research has not
propounded a new theory or definition of unconscionable transactions in banking and other than
the definitions advanced by the different scholars. The authors of On Equity recognize that
‘unconscionable’ is a term which can mislead and confuse 52 but which is generally recognized as
having two meanings.

The first meaning is equity’s recognition of a range of circumstances, the authors refer to, fraud,
breach of fiduciary duty, undue influence and ‘other’ in which ‘unconscionability’ may be
understood as: the fundamental principle upon which equity acts, namely that a party having a
legal right shall not be permitted to exercise it in such a way that the exercise amounts to
unconscionable conduct.53

Unconscionable dealing is the ‘unconscientious use of a superior position to the detriment of a

party who suffers from some special disability or is in some special position of disadvantage’
such dealing is said to occur ‘whenever one party by reason of some condition or circumstance is
placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is
then taken.54

51 (2004).
52 Young, Croft and Smith, ‘On Equity’, [5.220], referring to the Discussion in Tanwar
Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315, 324-6.
53 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 461 (emphasis added);

Also see Bertis (2003) 214 CLR 51, 72-3 [42] - [43]; Stern v McArthur (1988) 165 CLR 489,
526-7.
54 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR at 461- 2 (Per Mason).

16
Unconscionable conduct as a principle was initially designed to uphold equity and fair play. 55 It
defines unconscionable behavior as that which attracts censure and justifies the courts in granting
relief to those who suffer by it.

Robert also conceptualized unconscionable conduct to exist where vulnerable party lacks both
freedom and information which the vulnerable party ought to have access to, but which is either
misleading or incomplete. He was of the view that essentially, unconscionability operates in
situations where there is unequal bargaining power between parties, and the stronger party
unconscientiously exploits the weakness or vulnerability of the other party. Indeed, this finding is
true since unconscionable conduct56 involves undue influence, and where there is undue
influence, the weaker party cannot have freedom in bargaining the terms of the transaction. The
above when applied to banking business it requires that the stronger party to such arrangements
must be especially vigilant to ensure that they neither, know nor have reason to believe that any
such factors are operating on the parties with whom they do business. 57

Simmonds made the following findings: that age does not of itself (as distinct from in
combination with other factors) represent a ‘special disadvantage’. In any event, His Honour
found that age did not make a significant contribution to any special disadvantage; although
illiteracy and lack of education often indicates special disadvantage. Simmonds note that lack of
business knowledge can be a factor weighing on special disadvantage, particularly where the
transaction is not a common place one, such as one involving refinancing or second mortgages.
His Honour found that emotional dependence can also weigh as a factor in support of a special
disadvantage.58 However, it is important to note that his honour misdirected himself when he
found that age was not a factor to contribute to special disadvantage, since in contract law age is
an essential element of a varied contract. But he was right in his other findings that can lead to
special disadvantage.

55 In Australia, the doctrine was put into practice by the High Court in the Blomley v Ryan case
and its validity was further strengthened in the Commercial Bank of Australia Ltd v Amadio case
of 1983.
56 R. N. Moles, and B. Sangha, “Recent Developments in Unconscionability”. Networked

Knowledge-Law Lectures< http://netk.net.au/molescv.asp> accessed on 7th October, 2015.

57 Ibid
58 See, Choice Constructions Pty Ltd v Janceki [No. 3] [2011] WASC 358.

17
The doctrine of unconscionable conduct as a narrow but independent basis for relief came into
prominence in Australia with Commercial Bank of Australia v. Amadio.59 This is true not only of
transactions involving consumers, but also, with some qualifications, those between commercial
parties.

The question whether a Contract or conduct generally, is unconscionable is an issue of law for the
court but it depends on the facts of the case. One frequently-quoted definition is that conduct is
unconscionable if it shocks the conscience of the court that is, if it shocks the public conscience. 60
The classic definition in the United States is that unconscionable conduct when is apparent in any
transaction no man in his senses and not under delusion would make on one hand, and as no
honest and fair man would accept on the other. 61 The second part of the definition requires the
court to consider the morality of the transaction on objective grounds and focuses on the result
achieved by the stronger party because of the position of strength. But what of the first part?
Unconscionability, while it has been the basis for relief when one side is under a delusion, 62 has a
much wider reach. There is a group of cases63 in which the plaintiff was not under any delusion,
but while there was knowledge of the situation, consent was tainted in some way. Finally there is
another class of case, outside the purview of the definition, and not necessarily even relating to a
contract between the parties in which the decision has rested on a notion of unconscionability
perhaps loosely referable to the second part of the definition but not always the first.64 These
cases rest on "unconscionability" but outside the narrow doctrine of "unconscionable
transactions".

One writer has described "unconscionable" as a conclusion rather than a definition.65 This
approach has its dangers: it invites the courts to list the facts giving rise to the conclusion rather

59 (1983) 151 C.L.R 447.

60 See, the case of Hume v United States (1889) 132 U.S. 406.
61 See, Multiservice Bookbinding Ltd v Marden [1979] 1 Ch. 84 at 110.
62 See, Blomley v Ryan (1956) 99 C.L.R. 362; Louth v Diprose (1992) 110 A.L.R 1.
63 See, Alec Lobb (Garages) Ltd v Total Oil Great Britain Ltd [1983] 1 ALLER 944; Cresswell v

Potter [1978] 1 W.L.R 255.

64 See, Commonwealth of Australia v Verwayan (1990) 170 C.L.R 394.
65 J.D Davies, “New Directions in the Employment of Equitable Doctrine in England and

Wales”, in T.G. Youdan (ed.) Equity, Fiduciaries and Trust, (1989), Carswell Co. Ltd, Toronto,
Pp. 365-381 at p. 379.
18
than the principles on which the finding is made,66 but given that what is regarded as
unconscionable depends on the facts of each case, it is difficult to give a definition which
encompasses the range of possibilities. This difficulty has been recognized by the courts.
Therefore there is an issue as to whether "unconscionability" is appropriate to be included within
legislation as a standard-setter, a normative word. Where it is used within a statute, breach of
which results in civil liability only, the argument for precision is not as compelling as in a penal
statute but it cannot be ignored. At the practical level the difficulty with the use of
"unconscionability" in the statutes lies in knowing what behavior will be in breach and what will
not. A difficulty with definition notwithstanding, “unconscionable” has found its way onto the
statute books.67

Lore bum, stated that the meaning should be determined in "a plain and not in any way technical
sense" and noted that as "in the case of fraud, it is neither practicable nor expedient to attempt any
exhaustive definition."68 That definition "is a poor instrument when used to determine whether a
transaction is or is not unconscionable". If the court as a matter of law finds the contract or any
clause of the contract to be unconscionable at the time it was made the court may refuse to
enforce the contract, or it may enforce the remainder of the contract without the unconscionable
clause, or it may so limit the application of any unconscionable clause as to avoid any
unconscionable result.69

When it is claimed or appears to the court that the contract or any clause thereof may be
unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to the
commercial setting, purpose and effect of the contract in order to aid the court in making a
determination.70

Some indication of the meaning of "unconscionable" in this section is provided by the Comments
which usually accompany the section, although the cases must of course provide the final answer.
This meaning focused on the behavior of the parties, the principle in that law is one of the

66 R. A. Hillman, J.B. McDonnell, “Common Law and Equity”, Under the Uniform Commercial
Code, (1985), Warren, Gortham and Lamont, Boston, at 6.
67 Ibid
68 See, Samuel v Newbold (1906) A.C 461.
69 See, the Uniform Commercial Code Articles 2-302.
70 Ibid

19
prevention of oppression and unfair surprise and not of disturbance of allocation of risks because
of superior bargaining power.71 This indicates that in Uganda, unconscionability, at least in the
commercial area, operates on unreasonably harsh and unbargained for allocation of risks.
However, this is subject to criticism for defining "unconscionable contracts" in light of the
general commercial background and commercial needs of the particular trade or case, the sections
of the law appears one-sided as to be unconscionable under the circumstances existing at the time
of making the contract.72

It should be noted that, it is not possible to define unconscionability. It is not a concept but a
determination to be made in light of a variety of factors not unifiable in a formula.

1.11. Organizational layout

The study will be divided in five chapters. The first Chapter contains the proposed content of
generally introduction, statement of the problem, objectives of the study, methodology, literature
review, and significance of the study, scope, theoretical framework and Organizational layout. In
particular Chapter one discusses the concept of unconscionable transactions in banking and the
law relating to bank customer relationship at large; its forms and how it has grown to be
assimilated in the banking sector in Uganda and it will contain different concepts, which among
others will define a Bank, who is a customer. Chapter two discusses an overview of banking law
and practice in Uganda. It will go ahead to explain the different relationships and duties that both
the banks and customers owe to one another and the liabilities in case of breach of the duties.
Chapter three provides an analysis on legal regime and other factors governing unconscionable
transactions in banking and the law relating to bank customer relationship in Uganda. Chapter
four discusses the effects of unconscionable transactions in banking and how it affects Bank
customer relationship in Uganda. Chapter five gives the recommendations and concluding
remarks regarding the unconscionable transactions in banking and the law relating to bank
customer relationship in Uganda.

71 See, the Extracts from the works on “Contracts and Equity” used by the Court in the
Campbell Soup Co. v Wentz Case.
72 Ibid

20
1.12. Conclusion
Unconscionable transactions appear to be developing as a narrow doctrine in Uganda’s banking
sector. While the literature available does not limit the doctrine to consumers, the requirement of
“special disadvantage” suggests, it will rarely be applicable to commercial plaintiffs. This calls
for the Contract Act, 2010 to be amended in order for it not to be limited in effect.

This chapter establishes the background information, an overview of banking practice in Uganda,
statement of the problem, research questions, research objectives, hypothesis, and significance of
the study, scope of the study, research methodology, review of literature, and finally the
organizational layout.

21
 CHAPTER TWO

AN OVERVIEW OF BANKING LAW IN UGANDA

2.1. Introduction
The chapter is aimed at examining banking Law in Uganda. The discussion will analyze the
history and evolution of banking Law in Uganda, the functions of the bank of Uganda, the nature
of relationship between the bank and its customers, and how this relationship is classified into
general and special relationship. It will go ahead to define a bank, who is a customer, the duties
and how to avoid liability and the circumstances under which a bank can be involved in
unconscionable transactions.

2.2. History and Evolution of banking in Uganda

Banking as a social practice never arose in the abstract. It has its origin in the metamorphosis of
the capitalist mode of production as Marx stated that,
The banking system so far as its formal organization and centralization is
concerned, was the most artificial and most developed product turned out by
capitalist made of production dealing on immerses’ power over commerce
industry, it possesses indeed the form of universal book keeping and distribution
of means of production on social scale but solely form.73

On the eve of colonialism, Uganda was taking an autonomous course until the forces of
capitalism interfered with the social economic conditions prevailing with the social economic
conditions prevailing in the pre-colonial Uganda. The British imperialists officially declared
Uganda a protectorate in 1894. British finance capital and imperialism had a strategy for Uganda
and how it could contribute to the world capitalist system. The whole social, political and
economic setup was disrupted reorganized in line with the interests of finance capital.74

However, a sound operation of banking was not possible without money which is central to the
capitalist system of production. The economy was already monetized and commodities were

73 K. Marx, ‘The Process of Capitalist Production as a whole’ (1959) (3) 1959, p.606.
74 Ibid
22
bought with money. The appearance of money in the colonial economy and the money
transactions between labour finance capitals provided the foundation on which the early
commercial banks were built. It is on this point that Uganda formed part of the currency area
served by the East African Currency, established in London towards the end of 1919 to issue and
redeem East African Currency in exchange for United Kingdom pound sterling.75 And prior to
the establishment of the East African Board the Currency circulating in Kenya and Uganda was
the Indian rupee, notes silver coins hence the origin of local world “rupiya” for money.

Therefore, capitalism in Uganda was identified as production of agricultural raw materials and
tropical food products. So Uganda became part of the international capitalist system through
commercial unions like the British cotton growing association. It was extension of capitalist
relation into colonial Uganda which necessitated the establishment and importation of banks
more so, commercial banks and other credit institutions in Uganda.

On 24th May 1966 an Act of parliament was passed that created Bank of Uganda.76 The Bank of
Uganda was established in 1966 to succeed the African Currency Board that was established in
1919. With its headquarters in London, the board had since 1920 served the whole of East
African including at one time or another, Uganda, Kenya, Tanganyika, Zanzibar, Somali land,
Eritrea, Ethiopia and Eden.77 The legislation setting up the Bank of Uganda received the
presidential assent on 28th May 1966 and the Bank of Uganda Act has been amended several
times since then.

Before 1966, Uganda was a member of the East African Community Currency Board established
by the British Colonial Administration in 191978 with its headquarters in London. The major task
of the board was to issue and redeem the East African currency in exchange for the United
Kingdom pound sterling. Initially the board was designed to serve the British colony.79

In anticipation of independence for the East African countries, the board was reconstituted in
1960 and its headquarters was transferred from London to Nairobi in Kenya. When Uganda in

75 Banking in Uganda 6th March 1970 p.3.

76 Bank of Uganda Act.Cap 51.
77 Ibid
78 Charles Enyondo, ‘Evolution of bank of Uganda, bank archivist’.
79 Charles Abuka, Director Research Bank of Uganda.

23
1962,80 Tanganyika in 1961, and Kenya in 1963 attained independence, it became apparent that
currency board would not serve the interest and aspirations of the newly independent states.
There was pressure to create independent central banks. In 1962, Tanganyika engaged Erwin
Elumenthal as senior official to Duetsche Bundies Bank, the central bank of the Federal Republic
of Germany to advice on the establishing a Central Bank and he recommended a two tier system
under which each territory, whilst a central bank for the whole of East Africa would supervise
the operations of the state banks. The extent to which a national sovereignty could be shared to
achieve a coherent policy on monetary matters became a matter of contention and a concept of
heavily decentralized bank was unacceptable.81

On 2nd February 1965, the Government of Uganda indicated intentions to establish several
financial institutions including bank of Uganda with a range of central banking functions and the
duties and powers are provided for under the Act.82

The much awaited reforms, expected to boost operations of banks in the country, were passed by
the parliament. The legislators passed the Financial Institutions (amendment) Act, 2016 that
introduces three new products: Islamic Banking, Bank insurance and Agent Banking, to
Uganda’s banking sector. 83 “These amendments are a very welcome development in the banking
sector as they enable enhanced latitude for the financial institutions to offer more and better and
convenient services to clients thus enhancing financial inclusion.84 The Financial Institutions
Act, 2004 was outdated and did not provide an opportunity for the banking sector to explore new

80 Evolution of Bank of Uganda.

81 Ibid
82 Ibid
83 See, Christine Alupo (insert), the Director Communications Bank of Uganda gives some

insight on what is required for Islamic Banking as well as other products to be utilized.
84 Fabian kasi the Managing Director Centenary Bank, see, the Daily Monitor, Kampala

Wednesday December 2015. http://www.monitordirectory.co.ug. Accessed on 16th December

2015.
24
products.85 “For instance, the Act did not permit the conduct of Islamic Banking, which has
become a popular financial institutions business because of its rate reliance of profits,”86

Additionally, banks were not allowed to appoint agents to work on their behalf as well as
prohibited from selling insurance. More so, the Financial Institutions Act of 2004, as amended
by the Financial Institutions Amendment Act 2016, did not have provisions for regulating mobile
banking and mobile transactions. “Also, due to the passage of time, the Financial Institutions Act
of 2004, as amended by the Financial Institutions Amendment Act 2016 have become outdated in
light with the present day policies, international obligations, globalization and technological
developments,”87

Notably, commercial banks will now also be able to appoint agents across the country without
necessarily having to set-up brick and mortar structures. Agency Banking allows commercial
banks to use an agent to take deposits on their behalf or also provide a mechanism for
withdrawals, a model similar to that of mobile money.88

2.3. Functions of the Bank of Uganda

Article 161 of the 1995 Constitution, provides that the Bank of Uganda shall be the Central Bank
of Uganda and it shall be the only authority to issue the currency of Uganda.89 Indeed it is worth
noting that the Bank of Uganda has achieved its objectives since the functions of the Bank of
Uganda shall be to formulate and implement monetary policy directed to economic objectives of

85 According to Mr. Fred Omach, State Minister for Finance in charge of general duties.
86 http://www.Monitor.co.ug/business/how.amended- financial- law-could-revolutionise-
banking/688322-3027954-item-01-iqtq6fz/index.html. Accessed on Wednesday December
2015.
87 http://www.Monitor.co.ug/business/proposedgroundbreaking-when-the-mobile-phone-

became-a-bank/688616-3345460-9t8no5z/index.html . Accessed on Wednesday December

2015.
88 Herman Kasekende, described this move as one that will “revolutionise banking in Uganda

because agency banking allows us to be everywhere. ” “Banking through retail agents appeals to
policy makers and regulators because it has the potential to extend financial services to the
unbanked and marginalised communities,” he added. Several banks have struggled to set up shop
across the country due to the expensive cost of operating branches. This has partly been used to
explain the sudden rise in mobile money accounts and sluggish growth of bank accounts.
89 The 1995 Constitution of the Republic of Uganda (as amended).

25
achieving and maintaining economic stability.90 Without prejudice to the generality of subsection
(1), the bank; Shall maintain monetary stability; maintain an external assets reserve; issue
currency notes and coins; be the banker to the Government; act as financial adviser to the
Government and manager of public debt; advise the Government on monetary policy as is
provided under section 32 (3); where appropriate, act as agent in financial matters for the
Government; be the banker to financial institutions; be the clearinghouse for cheques and other
financial instruments for financial institutions; supervise, regulate, control and discipline all
financial institutions and pension funds institutions; where appropriate, participate in the
economic growth and development programmes.

2.4. Nature of the relationship of a banker and a customer

The relationship between a banker and a customer depends on the activities; products or services
provided by bank to its customers or availed by the customer. Thus the relationship between a
banker and customer is the transactional relationship.91 Bank’s business depends much on the
strong bondage with the customer. “Trust” plays an important role in building healthy
relationship between a banker and customer.92
In Foley V. Hill,93 this case provides the genesis for the principle that the relationship between
banker and customers is that of contract.

There is an argument that the relationship of a banker and customer consists of a general contract
which is basic to all transactions together with special contracts which arise in relation to the
specific transactions or services that the Bank offers. The nature of the contract is described in a
leading case of Joachimson V. Swiss Bank Corporation,94 Lord Atkin in this case described that
contract in the following terms;

90 See The 1995 Constitution of the Republic of Uganda, Article 162 (1) and (2); also The Bank
of Uganda Act, Cap 51 laws of Uganda, Sections 4 and 32 (3).
91 E. P Ellinger, “Reflections of Recent developments concerning the relationship of banker and

customer” (4th edn, The Canadian Business Law Journal 1988) 129.
92 G. John’s, ‘Article on Banks and Fiduciary relationships’, (1995) (7) (1), Article 5 Bond Law

Review.
93 Foley v Hill (1848) Vol. H.L.
94 Jachimson v Swiss Bank Corporation (1921) Vol. 3 A.B. 110.

26
 I think that there is only one contract made between the bank and its customer. The terms
of that contract involve obligations on both sides and require statements. They appear
upon consideration to include the following provisions. The bank undertakes to receive
money and to collect bills for its customers account. The proceeds so received are not to
be held in trust for the customer but the bank borrows the proceeds and undertakes to
repay them. The promise to repay is to repay at the branch of the bank where the
account is kept and during banking hours. It includes a promise to repay any part of the
amount due against the written order of the customer addressed to the bank, at the
branch. It is a term of the contract that the bank will not cease to do business with a
customer except upon reasonable notice. The customer on his part undertakes to
exercise reasonable care in executing his written orders so as not to mislead the bank or
to facilitate forgery. I think it is necessarily a term of such contract that the bank is not
liable to pay the customer the full amount of his balance until he demands payments from
the bank at the branch at which a current account is kept.

Banking is a trust-based relationship. There are numerous kinds of relationship between the bank
and the customer. The relationship between a banker and a customer depends on the type of
transaction.95 Thus the relationship is based on contract,96 and on certain terms and conditions.

These relationships confer certain rights and obligations both on the part of the banker and on the
customer.97 However, the personal relationship between the bank and its customers is the long
lasting relationship. Some banks even say that they have generation to generation banking
relationship with their customers. The banker customer relationship is fiducially relationship.98
The terms and conditions governing the relationship is not be leaked by the banker to a third
party.99

95 See Onjallah v Kenya Commercial Bank Ltd (2004) 2 EA 253.

96 Woods v Martins Bank Ltd (1950) 1 QB 55.
97 See Kihangire Nicholas, ‘Banker customer relationship’. Posted 7th June 2012.
98 G. John ‘Banks and Fiducially relationships’, (1995) (7) (1) Bond Law Review.
99 Ibid

27
2.5. Classification of relationship
The relationship between a bank and its customers can be broadly categorized into General
Relationship and Special Relationship.100

2.5.1. General relationship

a). Debtor-Creditor: The general legal relationship of bank and customer is contractual
relationship, started from the date of opening an account. When customer deposits money into
his bank account, the bank becomes a debtor of the customer. No new contract is created every
time there is a new deposit as the account is continuing in nature. The banker is not, in the
general case, the custodian of money all it has to do is to exercise duty of care as it was stated in
the case of Kornark Investment (U) Ltd v Stanbic Bank Uganda Ltd,101 the plaintiff in this case
was a limited liability company incorporated and carrying on business in Uganda. It brought this
action against the defendant bank seeking declaratory orders that the freezing of its account
number 0140028293401 with the defendant and by the defendant was unlawful, it sought an
order to allow the plaintiff operate its account, damages for inconvenience, interest on all
pecuniary awards and costs of the suit.

The plaintiff contended that the actions of the defendant are unlawful and unjustified and a
breach of the duty between banker and customer. The plaint further averred that it has been
denied the use of the above money by the defendant and the same has brought inconvenience and
loss to the plaintiff for which the plaintiff claimed general damages. It was held that the plaintiff
in this case proved a breach of the customer/bank relationship as far as the freezing of the
balance of its money is concerned.

Which case cited the case of Karak Rubber Company Ltd v Burden and others (No.2),102 where
the contractual duty of care is analyzed and explained at length in the decision of the Chancery
Division by Brightman J, the court relied on the case of Selangor,103 where it was held that the
nature of the contract is that a relation between a banker and his customer is akin to that of a

100 Ibid; see also the case of Esso Petroleum Co. v UCB CA No. 14 of 1992.
101 [2012] 16 UGCOMMC 6.
102 [1972] 2 ALLER 1210.
103 (1968) 2 ALLER 1073.

28
debtor and creditor. The drawing and paying of the customers' cheques as against money of the
customers in the banks hands shows a relationship of principal and agent. The cheque is an order
of the principal addressed to the agent and to pay out the principal’s money in the agent's hands
the amount of the cheque to the payee thereof.

The money paid into a bank account becomes the property of the bank and bank has a right to
use the money as it likes. The bank is not bound to inform the depositor the manner of utilization
of funds deposited by him. Bank does not give any security to the debtor (depositor). The bank
has borrowed money but does not pay money on its own, as banker is to repay the money upon
payment being demanded. Thus, bank’s position is quite different from normal debtors.104

b). Creditor–Debtor: when the bank lends money to his customer, the relationship between the
bank and customer is reversed as was in the case of Barclays Bank of Uganda v Jing House &
Guo Odong.105 In this case, Jinda Textiles Corporation Ltd, covenanted to repay to the plaintiff
herein a sum of US $ 2,450,000 together with interest thereon, Jinda defaulted on repayment of
the loan and the bank appointed a receiver in order to recover the monies owed.

By guarantees in writing, the defendants guaranteed repayment of all liabilities of the company
to the plaintiff. The plaintiff made a demand on the company but the company failed/neglected to
make payment to the plaintiff. It is a guaranteed obligation on the guarantor to pay the debt in the
event of default by the principal debtor.106 The defendant’s deed executed guarantees and
promised to be liable for the debts of the principal debtor, a condition which was precedent
before the lending bank would advance any monies. The guarantees were executed as additional
securities to secure the repayment of the credit facilities and as the principal debtor.

It is submitted that once the guarantee agreement is properly executed, the guarantor is bound to
pay in the case the principle debtor defaults.107 Then the bank takes the position as a creditor of
the customer and the customer becomes a debtor of the bank. Borrower executes documents and

104 http://www.lawteacher.net/free- law-essays/commercial- law/general- legal-relationship-

between-bank-and-customer-commercial- law-essay.php#ixzz3np1FiFeN. Accessed on 9th

October 2015.
105 [2012] 9 UGCOMMC 5.
106 See Moschi v Lep Air Services [1973] AC 331 at 348 (Per Lord Diplock).
107 See, Stanbic Bank v Atyaba Agencies SCCA No. 2/2005.

29
offer security to the bank before utilizing the credit facility. Therefore, the general relationship
between bank and its customer is that of a debtor and a creditor.108

2.5.2. Special relationship

a) Bank as a trustee
The bank as a trustee, this means both expressions ‘constructive trust’ and ‘constructive trustee’.
As it was stated in the case of Stanbic (U) Ltd v Joseph Aine & Ors,109 that a constructive trust
arises by operation of law whenever the circumstances are such that it would be unconscionable
for the owner of property (usually but not necessarily the legal estate) to assert his own
beneficial interest in the property and deny the beneficial interest of another. However, the
constructive trustee really is a trustee. He does not receive the trust property in his own right but
by a transaction by which both parties intend to create a trust from the outset and His possession
of the property is colored from the first by the trust and confidence by means of which he
obtained it, and his subsequent appropriation of the property to his own use is a breach of that
trust. The bank as a constructive trustee is said to be ‘liable to account as a constructive trustee’.

“A trustee” is bound to deal with the trust-property as carefully as a man of ordinary prudence
would deal with such property if it were his own; and, in the absence of a contract to the
contrary, a trustee so dealing is not responsible for the loss, destruction or deterioration of the
trust-property.110 ’

In case of trust banker customer relationship is a special contract. When a person entrusts
valuable items with another person with an intention that such items would be returned on
demand to the keeper the relationship becomes of a trustee and trustier. Customers keep certain
valuables or securities with the bank for safekeeping or deposit certain money for a specific
purpose (Escrow accounts) the banker in such cases acts as a trustee.111

108 See the case of Begumisa George v East African Development Bank. Miss. Appl. No. 451 of
(2010); also see Kihangire Nicholas, ‘Banker customer relationship’. Posted 7th June 2012.
109 [2006]UG Commercial Court Case No. 38.
110 Ibid
111 Ibid

30
b) Bailee – Bailor

Section 88 of the Contract Act, 2010, defines “Bailment” “bailor” and “bailee”. A “bailment” is
the delivery of goods by one person to another for some purpose, upon a contract that they shall,
when the purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them. The person delivering the goods is called the “bailor”.
The person to whom they are delivered is called, the “bailee.”112

However, the above statutory definition is similar to the definition propounded in the case of
Sylvan Kakugu Tumwesigye vs. Trans Sahara International General TRDG LLC,113 The facts of
the case are that on or about 3rd December, 2001 the plaintiff bought a motor vehicle a Toyota
Corona Primo from World Auto Motors, a company based in the United Arab Emirates at
USD$2,200/=. The motor vehicle the subject of the suit was one of the five motor vehicles the
plaintiff had bought in the United Arab Emirates. Inside the suit motor vehicle were placed an
assortment of goods worth US$1150 which included; four food warmers worth US$ 200, four
car tool boxes worth US$ 200, one radio cassette prayer worth US$ 100, two speakers worth
US$ 200, one phone worth US$ 250, and one camera worth US$ 200.

The plaintiff then contracted the defendant at its Dubai branch office to ship the said 5 vehicles
(inclusive of the suit motor vehicle with assorted items inside it) from the United Arab Emirates
to Mombasa. The defendant is alleged to have accepted the said 5 vehicles for shipment.
However, only 4 vehicles minus the suit vehicle with goods arrived at Mombasa. The plaintiff
then made several demands at the defendant’s Kampala office to account for the suit motor
vehicle but the said motor vehicle disappeared without trace. The defendants also did not
compensate the plaintiff for the said loss.

In that case, Justice Kiryabwire defined a contract of bailment as, a transaction under which
goods are delivered by one party (bailor) to another (bailee) on terms which normally require the
bailee to hold the good ultimately to redeliver them to the bailor or in accordance with his
directions.

112
The Contract Act, 2010, Section 88 interpretation for Part ix.
(HCT-00-CC-CS-0095 of 2005); [2005] UGCOMMC 66; also see, P. S Atiyah, “The Sale of
113

Goods”( 6th Edition, Pitman 1980) p 7.

31
Under Section 89 of the Contract’s Act, where a person in possession of goods under another
contract holds goods as bailee, that person becomes a bailee under the existing contract and the
owner becomes the bailor of the goods although the goods may not have been delivered by way
of bailment.

This was the position in the case of HSGS Impex Uganda Ltd v Bakama Enterprises Ltd &
Another,114 that when the parties entered into the second agreement requiring the Defendant to
return the goods, the Defendants ceased to be owners of the batteries and simply became
possessors. The Plaintiff on the other hand gained ownership of the batteries and the Defendants
were therefore holding the batteries on behalf of the Plaintiff as bailees and the Plaintiff as
bailor. Court therefore held that there was a contract of bailment between the Plaintiff and the
Defendants.

Banks secure their advances by obtaining tangible securities. In some cases physical possession
of securities goods (Pledge), valuables, bonds etc., are taken. While taking physical possession of
securities the bank becomes bailee and the customer bailor. Banks also keeps articles, valuables,
securities etc., of its customers in Safe Custody and acts as a Bailee. As a bailee the bank is
required to take care of the goods bailed.115

c) Lessor and lessee

A lease of immovable property is a transfer of a right to enjoy such property, made for a certain
time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of
money, a share of crops, service or any other thing of value, to be rendered periodically or on
specified occasions to the transferor by the transferee, who accepts the transfer on such terms.116
Providing safe deposit lockers is as an ancillary service provided by banks to customers. While
providing Safe Deposit Vault/locker facility to their customers’ bank enters into an agreement
with the customer.117 The agreement is known as “Memorandum of letting” and attracts stamp
duty.

114 (Civil Suit No. 787 of 2014); [2015] UGCOMMC 116.

115 Ibid
116 http://lawschoolguide.blogspot.com/2012/06/banker-customer-relationship-by-nish.html.

Accessed on 9th October 2015.

117 Ibid

32
The relationship between the bank and the customer is that of lessor and lessee. In the case of
Nasolo v DFCU Leasing Co. Ltd.118 The plaintiff filed this action for breach of contract and
conversion. The Plaintiffs claim is that the Defendant leased a bus registration number 432 UDU
to the Plaintiff under a written understanding that upon successful completion of payment of
rental fees, the bus will become the property of the Plaintiff. That by 17 January 2001, the
Plaintiff had paid all the monthly rental fees with extra pay of Uganda shillings 4,338,317/=. On
17 January 2001 for no justifiable cause the Defendant's agents in the course of their
employment impounded the bus on the pretext that the Plaintiff had defaulted on payment of
rentals. The Defendants have since converted the bus to their own use with the intention of
permanently depriving the Plaintiff of ownership thereof.

His Lordship Christopher Madrama in that case stated that, the agreement described the parties
as the lessee and the lessor, and that the relationship is governed by an express agreement. Banks
lease (hire lockers to their customers) their immovable property to the customer and give them
the right to enjoy such property during the specified period i.e. during the office/ banking hours
and charge rentals as it was stated in the case of Gladys Nyangire v DFCU Bank 119 that failure to
pay rentals was a fundamental breach of the finance lease. And it was submitted that there was a
breach by the plaintiff through failure to pay the rentals as and when they fell due. Bank has the
right to break-open the locker in case the locker holder defaults in payment of rent. Banks do not
assume any liability or responsibility in case of any damage to the contents kept in the locker.
Banks do not insure the contents kept in the lockers by customers.120

The lessor retains legal ownership of the property during the lease term as a form of security for
receipt of the full rentals payable on the lease. This right gives the owner the ability to
immediately repossess its property in the event of default by the lessee in payment of rental
obligations.121

118 HCCS No. 0432 of 2006 [2014] UGCOMMC 19 (14 February 2014).
119 HCCS No. 78 of 2007.
120 Ibid
121 See Chris Tom, “Leasing Finance”, 2nd Edition.

33
This in relation to banking, it’s in the form of finance leasing and finance leasing is a form of
long term finance that developed to be known as finance leasing.122 For example in the case of
Samuel Black T/A SB Coaches v DFCU Bank Ltd,123 the plaintiff, Samuel Black t/a SB Coaches
brought this suit against DFCU Ltd (hereinafter referred to as the Defendant) for breach of
contract under Lease. In this case, Hon. Lady Justice Hellen Obura cited the case of Nassolo
Farida v DFCU Leasing Company Ltd HCCS No.536/2006, where Hon. Justice Lameck Mukasa
quoted Chitty on Contracts, 27th Edition Vol.7 with approval where finance leasing was defined
as follows;

In a finance lease, the lessee selects the equipment to be supplied by a

manufacturer or dealer but the lessor (a finance company, which in this regard
is a bank) provides funds, acquires title to the equipment and allows the lessee
to use it for all (or most) of its expected useful life. During the lease period, the
usual risks and rewards of ownership are transferred to the lessee, who bears
the risk of loss, destructions and depreciation of the leased equipment (fair
wear and tear only expected) and of its obsolescence or malfunctions. The
lessee also bears the costs of maintenance, repairs and insurance. The regular
rental payments during the rental period are calculated to enable the lessor
amortise its capital outlay and to make a profit from its finance charges. At the
end of the primary leasing period, there will frequently be a secondary leasing
period during which the lessee may opt to continue to lease at a nominal rental
or the equipment may be sold and a proportion of the sale proceeds returned to
the lessee as a rebate of rentals. The lessee thus acquires any residual value in
the equipment, after the lessor has recouped its investment and charges. If the
lease is terminated prematurely, the lessor is entitled to recoup its capital
investment (less the realizable value of the equipment at the time) and its
expected finance charges (less an allowance to reflect the accelerated return of
capital). The bailment which underlines finance leasing is therefore only a

122 The Financial Institutions Act of 2004 which was amended by the Financial Institutions
Amendment Act 2016, Section 3 (k) of.
123 (Civil Suit No. 416 of 2009); [2015] UGHCCD 69.

34
 device to provide the finance company with a security interest (reversionary
right).124

The rationale for this, is that where a lessor leases property to a lessee under a finance lease, the
lessee is treated as the owner of the property;125 and the lessor is treated as having made a loan to
the lessee, in respect of which payments of interest and principal are made to the lessor equal in
amount to the rental payable by the lessee.126

d) Agent and principal

Section 118 of the Contract Act, 2010 defines “an agent” as a person employed to do any act for
another or to represent another in dealings with third persons. The person for whom such act is
done or who is so represented is called the principal.127

Thus an agent is a person, who acts for and on behalf of the principal128 and under the latter’s
express or implied authority and the acts done within such authority are binding on his principal.
Banks collect cheques, bills, and makes payment to various authorities’ viz., rent, telephone bills,
insurance premium etc., on behalf of customers. Banks also are bound by the standing
instructions given by its customers. In all such cases bank acts as an agent of its customer, and
charges for these services.129

For instance in the case of Avi Enterprises Ltd v Orient Bank Ltd & Another,130 the plaintiff was
at all material times a customer of the first defendant having opened current account and the
second defendant was employed by the first defendant. The second defendant while executing
her duties, advised the plaintiff through its directors to obtain an overdraft facility and invest it
by lending the monies to the second defendant for the repayment of the plaintiff with interest

124 HCCS No. 536/2006; Finance Leasing is governed by the Principles of Common Law which
are invoked under the Judicature Act, Cap 13 (as amended), Section 14 (2) (b) (i); See also The
Income Tax Act, Cap. 340 (as amended), Section 59.
125 The Income Tax Act, Cap 340 (as amended) Section 59 (1) (a).
126 The Income Tax Act, Cap 340 (as amended), Section 59 (1) (b).
127 See The Contract Act, 2010, Section 118.
128 Ibid
129 Ibid
130 (HCCS No. 147 of (2012) [2013] UGCOMMC 66.

35
after one month. Consequently the Plaintiff applied for the loan and the first defendant approved
a loan and advanced all the money to the second defendant. The second defendant was given the
money, after one month the second defendant failed to deposit the loan money with interest.

And in that case, it was stated that a banker/customer relationship is based on contract law and
the terms are implied by banking practice. It was not a contract which was ordinary but with
extended liabilities in offering other services such as collecting services. Liabilities for other
services are based on other relationships such as the duty of care and principal/agent relationship.
It was thus held in that case that the existence of an implied contract between the plaintiff and the
first defendant is not in doubt to be called principle and agent.

e) As a Custodian

A custodian is a person who acts as a caretaker of something.131 For example in the case of
Sanjay Datta v Okello132 the parties in this case agreed that the plaintiff was to pay directly to
Departed Asian property bank account. In this regard, the bank held it as a custodian. Banks take
legal responsibility for a customer’s securities while opening a bank account. The bank becomes
a custodian. These also include situations where the bank holds moneys in trust for its customer,
where the holding of money in trust is expressly permitted under the law. A trust is defined by
the Black's Law Dictionary, as a right enforceable solely in equity, to the beneficial enjoyment of
property to which another person holds the legal title. Furthermore for a trust to be valid, it must
involve specific property, reflect the settlor's intent, and be created for a lawful purpose. Further
the definition of the trust under Section 1 of the Trustees Act cap 164 laws of Uganda which
extends the meaning of trust to implied and constructive trusts. This reflects the definition in
Gathiba v Gathiba,133 where the court approved the definition in Osborn's Concise Law
Dictionary. In that case it was held that a resulting trust is an implied trust where the beneficial
interest in property comes back, or results for the benefit of the person or his representative who
transferred the property to the trustee or provided the means of obtaining it. These include where
upon purchase, property is conveyed into the name of someone other than the purchaser, there is

131 See The Children Act, Cap 59, Section 1 (f).

132 (HCT-00-CC-CS-0081-2013) (2013) UGCOMMC 44.
133 [2001] 2 E.A 342; see, also Kenya Seed Co. Ltd v Nathaniel Kipkorir Tum & Anor (2010)

HCCS No. 180.

36
a resulting trust in favour of him or her who advances the purchase money but not where it
would defeat the policy of the law.

f) As a Guarantor

The Contract Act defines “garantor” to mean a person who gives a guarantee.134 And according
to Paget’s law of Banking,135 a guarantee is defined as “apromise to be liable for the debt, or
failure to perform some other legal obligation of another”. Banks give guarantee on behalf of
their customers and enter in to their shoes, as it was held in the case of Bank of Uganda v Banco
Arabe Espanol136 in this case the government of Uganda as the guarantor was liable to pay the
loan amounts plus interests. The government of Uganda executed a loan agreement with the
respondent in 1987 for US$ 1,000,000. The Bank of Uganda was a guarantor to the government
and agreed to pay the sums. There was a condition precedent that the Attorney General had to
give a legal opinion of the enforceability of the agreement which he duly gave. Court accepted
the Attorney General's opinion and held that the guarantor was liable to pay the loan amounts
plus interest.

It was a requirement for advancing money to the company that the banks required a personal
guarantee, which personal guarantees were executed. The company defaulted and guarantors
became liable for the monies owing. In order for the plaintiff to recover their money it filed a suit
against the guarantors. Guarantee is a contingent contract. As per the contract Act guarantee is a
“contingent contract ". Contingent contract is a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen.137 For example in the case of Stanbic
Bank v Atyaba Agencies138 it was held that the contract of guarantee has to be construed strictly.
It would thus be observed that banker customer relationship is transactional relationship. In the

134 The Contract Act, 2010, Section 68 interpretation for Part viii.
135 11th Edition Chapter 35 P. 617; See also, Croswell Encyclopaedia of Banking Law, E-
Securities at par.2001.
136 SCCA No. 8 of 1998.
137 The Contract Act, 2010, Sections 2 and 28; also see the Oxford Dictionary of law at p. 246 for

the definition of guarantee.

138 SCCA No. 2/2005.

37
case of DFCU Bank v Manjit Kent & Anor139 The plaintiff Gold Trust Bank limited (now dfcu
bank ltd) filed this suit against the defendant’s Manjit Kent and Rajesh Kent for recovery of the
sum of ushs. 23,616,698/= being the money owing under a deed of guarantee, interest and costs.
By a deed of guarantee and indemnity, the defendant guaranteed to indemnify the plaintiff on
demand the debt owed by k-pac ltd (herein after referred to as the principal debtor), a customer
of the plaintiff, in the sum limited to ushs. 100,000,000/=, plus charges and interest accruing
after demand. It was stated that the extent of liability of a guarantor is dependent on the contract.
“The guarantor is a favored debtor, he is entitled to insist upon rigid adherence to the terms of
his obligation by the creditor and cannot be made liable for more than he has undertaken”.

It is submitted that a contract of guarantee, like any other contract, can be unconscionable in
nature, where there has been a material misrepresentation of fact including entry into the
contract.140 Also where a misrepresentation is made fraudulently and it is of a kind that would be
likely to induce the person to enter into the contract,141 there is a presumption of reliance in favor
of the victim of the misrepresentation.

In conclusion, the bank customer relationship the position is either a creditor or a debtor
depending upon whether the bank has lent money or accepted deposits. It is important to note
that various transactions gives rise to different relations, and discussed above are the
transactional relationships though the list is not exhaustive. The relationship developed between
a banker and customer involves some duties on the part of both.

2.5.3. Duties owed by a banker to a customer

A banker has certain duties vis-à-vis his customer, and these include the following; According to
Paget’s law on banking, the duties owed by the bank to the customers relate to the carrying out
the banker’s payment instructions, dealing with securities deposited with the bank and the way
the bank handles information concerning the affairs of the customer.

139 [2012] UGCOMMC 51; see also Halsbury’s Laws of England 4 th Ed. Vol. 20 Par 183; also
see, G. M. Andrews and M. Richard, “Law of Guarantees”, at p. 193.
140 See, Hulsbury’s laws of England Fourth Edition para. 103
141 Barton v County NatWest Ltd [1999] Lloyds Report Bank 408.

38
a) Duty to maintain secrecy

Banker has a duty to maintain secrecy of customers' accounts. Maintaining secrecy is not only a
moral duty but bank is legally bound to keep the affairs of the customer secret. The principle
behind this duty is that disclosure about the dealings of the customer to any unauthorized person
may harm the reputation of customer and the bank may be held liable. The duty of maintaining
secrecy does not cease with the closing of account or on the death of the account holder, it
continues even when the account is dormant, even after the closure of the account and the
termination of the bank customer relationship.

Article 27 of the Constitution 1995, provides for the Right to privacy of person, home and other
property, that no person shall be subjected to unlawful search of the person, home or other
property of that person; or unlawful entry by others of the premises of that person. No person
shall be subjected to interference with the privacy of that person’s home, correspondence,
communication or other property.142

More so, the above duty is echoed in Section 45 (1) and (2) of the Bank of Uganda Act, that
provides for declaration of Secrecy, that the members of the board and officers and employees of
the bank shall be bound by a declaration of secrecy and shall not, except as may reasonably be in
the performance of their functions, disclose to any person any material information acquired in
the performance of their functions unless called upon to give evidence in a court of competent
jurisdiction or to fulfill other obligations imposed by law. And every former member of the
board, officer or employee of the bank shall continue to be bound by the declaration of secrecy
after the termination of service and shall not except with the prior written permission of the bank
disclose any material information acquired by him or her in that capacity, unless he or she is
called upon to give evidence in a court of competent jurisdiction or to fulfill other obligations
imposed by law.143

The bank’s duty of secrecy is a special doctrine of its own, which cannot be equated to a similar
duty found in any other kind of professional relationship.144

142 The 1995 Constitution of the Republic of Uganda (as amended), Article 27.
143 The Bank of Uganda Act, Cap 51, Section 45 (1) and (2).
144 See Tournier v National Provincial & Union Bank of England [1924] 1 KB 461 (Per Atkin).

39
The obligations of confidentiality in relation to banking law stem from common law, in the
leading case of Tournier v National Provincial and Union Bank of England.145 The bank had
released information related to the plaintiff's debt to the bank to his employers, and this
subsequently led to his dismissal. The Court of Appeal confirmed that it is an implied term of the
banker/customer contract that the banker has a duty of secrecy. In the circumstances of the case,
it was found that the bank had breached its duty, and the court found for the plaintiff. However,
it should be noted that the duty of secrecy of a bank extends to all information and transactions
that go through the customer’s account, including securities and guarantees and beyond the state
of the customers actual account, it also extends to information and knowledge acquired by the
bank even before the bank customer relationship was in contemplation.146 Abreach of the duty of
secrecy through wrongful disclosure of information could result in breach of contract,147 and the
bank may also be liable for damages for any resulting defamation.148 It should be noted however,
that the duty of confidentiality on a bank is not absolute,149 in the above case Bankes stated that
confidentiality may be breached, and those exceptions that were recognized under common law,
are now incorporated in the Ugandan statutes which include the following;

i) Where disclosure is made under compulsion of law;150 ii) Where

there is a duty to the public to disclose;151 iii) Where the interests

145 [1924] 1 KB 461.

146 See, W. S. Weerasooria, “law relating to Banking and Inter-Related Services”, Colombo,
(1997) at p. 93.
147 FCT v ANZ Banking Group Ltd (1979) 143 CLR 499.
148 Ibid
149 See, the decision in Tourniers case.
150 See, The Evidence (Banker’s Book) Act, Cap 7, Section 6; also The Anti- Corruption Act,

2009,Sections 13, 14 & 15; The Income Tax Act, Cap 340, Section 131 (1); also The Civil
Procedure Rules S 1- 71, under Order 23; see also The Leadership Code Act, Cap 167, Section
28; also the case of Standand Bank of West Africa v Attorney General of Gambia [1972] 3 ALR
COMM 449.
151 See The Anti-Money Laundering Act, 2013, Sections 4, 9-10, 16, and 103; also The Financial

Institutions Act of 2004 which was amended by the Financial Institutions Amendment Act 2016
Section 129-130.
40
 of the bank requires disclosure;152 iv) Where the disclosure is made
by the express or implied consent of the customer.153

The decision was more recently affirmed by the Court of Appeal in 1989 in Lipkin Gorman v
Karpnale.154 Therefore, the primary rule in banking law is that all information relating to the state
of a customer’s account, or any of his transactions with the bank, or any information relating to
the customer acquired through the keeping of his account is confidential. A banker shall not
publish or disclose any information regarding the affairs of a financial institution or customer of
a financial institution, unless the customer consents.155 And in the case of Obed Tashobya v
DFCU Bank Ltd. (Supra),156 it was stated that the bank in collecting cheques and other
instruments for a customer acts as a mere agent or conduct pipe to receive payments. Thus, the
banker customer relationship has elements of agency and as a general rule an agent owes a duty
of loyalty and confidentiality of his principle.

The banker’s duty in processing payments for customers and others was extensively discussed
by the Court of Appeal in the case of Standard Chartered Bank Kenya Ltd v Intercom Services
Ltd and 4 others.157 In that case, the signatories of the impugned cheque for over Shs
17,000,000/= put on special clearance by the bearer were employees of the Customs and Excise
Department. This case discussed the Bank’s duty of confidentiality to its customers, per Githinji
J. A among the duties of a collecting banker, there exists an express and implied duty arising
from a contract between a banker and the customer.

This implies that, it is reasonable for the Bank to act with due care and in the interest of its
customer. The duty calls upon the Banker to exercise skill while dealing with transactions on the
customer’s account.

152 See, Sunderland v Barclays Bank Ltd (1938) L DAB 163.

153 The Financial Institutions Act of 2004 which was amended by the Financial Institutions
Amendment Act 2016, Section 78 (2) & (3); also, The Credit Reference Bureau and the issue of
secrecy, Section 3; also The Financial Institutions (Credit Reference Bureau) Regulations, 2005,
Rules 3, 5, 6, 16, 18, 19, & 25.
154 [1989] 1 WLR 1340.
155 See, The Bank of Uganda Act, Cap 51, Section 40 (3).
156 [2007] UGCOMMC 45.
157 (2004) KLR.

41
b) Duty to provide proper accounts

Banks are under duty bound to provide proper accounts to the customer of all the transactions
done by him. Bank is required to submit a statement of accounts. For instance the bank shall, as
soon as may be practicable after the end of each quarter, make a quarterly return of its assets and
liabilities, and the return shall be published in the Gazette and a copy submitted to the
Minister.158 And more so, the accounts of the bank shall be audited, at least once every financial
year, by the Auditor General or an auditor appointed by him or her to act on his or her behalf.
This was seen in the case of Kassim Mpanga v Uganda,159 where a team of auditors were saint to
the Masaka branch to audit the books of accounts, and in that case it was stated that the act done
by the bank manager was contrary to the policy of the Bank that all overdrafts had to be secured.

More so, part VIII of the Bank of Uganda Act, Cap 51; provides for accounts and financial
statements, that banks shall maintain accounts with central and other banks and act as
correspondent, banker or agent for any central or other bank or other monetary authority outside
Uganda and for any international monetary authority established under Government auspices;
and accept from its customers for custody securities and other articles of value;160

c). Duty to Honour Cheques

Cheque Transactions, the Bills of Exchange Act defines a “cheque” as a bill of exchange drawn
on a banker payable on demand.161 The bank must pay cheques drawn by a customer in legal
form on the branch where the customer’s account is maintained subject to certain requirements.
a) The checque should be presented for payment during banking hours or within a reasonable
margin of time after the bank’s advertised hour of closing. b) There should be sufficient funds in
the customer’s account to meet the cheques drawn by the customer or else a prior arrangement
should have been made by the customer with the bank for the payment of the cheques drawn by

158 Ibid
159 (Cr. Appeal No. 30 of 1994); [1995] UGSC 14; see also, Wamono v Equity Bank Uganda Ltd
& Anor (MA No. 600 of 2012); [2013] UGCOMMC 98.
160 See, Section 29 (2) (e) and (f).
161 The Bill of Exchange Act, Cap 68, Section 72 (1).

42
him/her. 3. There should be no legal impediments to the payment of the cheques. The cheque is
also required to be drawn in proper form.162

Paget and Lord Chorley take a different view, where Weerasooria also seems to agree, that “the
bank should pay as far as possible.163 ” In any event, the bank must act without delay in discharging its
obligations to pay its customer’s cheques. The bank must either pay or refuse the payment
by dishonor.164 However, bank is entitled to a reasonable time to ascertain whether the customer has
sufficient balance to meet the cheque presented to the bank for payment.165

d) Bank’s Fiduciary Duty

In English law, the “general contract” giving rise to bank-customer relationship does not create a fiduciary
relationship.166 The rationale for this is that banks engage in business with a view of profit quite different
from a fiduciary. “The word "fiduciary" has been defined by Osborn's Concise Law Dictionary167 to
mean: A person who holds a position of trust in relation to another and who must therefore act
for the persons benefit. Or a fiduciary relationship exists where someone is in a position of trust
such as solicitors and their clients."

However, under a “special contract” where the bank becomes a trustee, agent or etc. of the
customer, such situations may impose fiduciary duties on the bank.168 Apart from this
distinction; case law has recognized a fiduciary duty on banks in certain limited transactions, as
per the words of his Lordship Lawrence Gidudu in the case of Uganda v Ojangole169 Where the
court dealt with an issue of fiduciary duties that;

A fiduciary is the highest standard of care at either equity or law. A fiduciary is expected
to be extremely loyal to the person to whom he/she owes the duty (Principal). She/he must

162 Commercial Bank of Austria Ltd v Hulls (1884) 10 VLR (L) 110.
163 Westminister Bank Ltd v Hilton (1926) 43 TLR 124.
164 Bank of Baroda Ltd v Punjab National Bank Ltd [1944] AC 176 at 184.
165 Eddy v Bank of New South Wales [1877] Knox 299.
166 See, E.P. Ellinger, E. Lomnicka & R. Hooley, “Modern Banking Law” (4th edn Oxford:

Oxford University press, 2006).

167 11th Edition.
168 National Westminister Bank Plc v Morgan (1983) 3 ALLER 8; Barclays Bank Plc v O’brien

[1993] QB 103.
169 (Criminal Case No.1 of 2014); [2014] UGHC 2; also see, Ayebazibwe v Barclays Bank

Uganda Ltd & 3 Ors (Civil Suit No. 165 of 2012); [2014] UGCOMMC 34.
43
 not put personal interests before the duty and must not profit from that position as a
fiduciary, unless the principal consents. Fiduciaries must conduct themselves at a level
higher than that trodden by the crowd and the distinguishing or overriding duty of a
fiduciary is the obligation of individual loyalty.

Accordingly, a fiduciary duty could arise; a).When the bank provides investment advice or
financial advice to the customer.170 b). When the customer pledges an asset or signs a guarantee
to secure the debt of another customer171 . And c) .When the bank acts as an agent or trustee
for the customer. 172

This was stated in the case of Obed Tashobya v DFCU Bank Ltd , 173 the plaintiff
operated a local current account in the defendant’s Masaka branch. He deposited a cheque No.
008428 (hereinafter referred to as the ‘suit cheque’), drawn on Citibank Philippines in his favour
for his local shilling account. The plaintiff was advised by the defendant to open a dollar account
in order to receive his funds and he duly opened up the suit account with the defendant’s William
Street branch. On the same day this account was credited and the plaintiff made two withdrawals
thereon. The plaintiff made another withdrawal leaving a balance on the account. The plaintiff
was informed by the defendant’s manager, William Street branch, that the suit cheque had been
dishonoured. The plaintiff met with the defendant’s officials and they informed him of the need
to recover the money. The plaintiff volunteered to deposit money on the suit account. The suit
account was debited leaving it overdrawn. The defendant set-off the plaintiff’s account and the
plaintiff was subsequently denied access to his account and his cheques were dishonoured. In
this case it was stated that in collecting cheques and other instruments for a customer a banker
acts basically as a mere agent or conduct pipe to receive payment.

170 Ibid 132 at p. 130.

171 Lloyds Bank v Bandy [1975] QB 326.
172 J. C. T Chuah, “General Aspects of Lender Liability under English Law” in W. Blair (Ed)

Banks, Liability and Risk (3rd edn London: LLP 2001) at p. 40.
173 (HCT -00-CC-CS) [2007] UGCOMMC 45; also see, Halsbury’s laws of England 4 th Edition.

Reissue at para 216-7.

44
Furthermore, in the case of Shalimar Flowers Self Help Group v Kenya Commercial Bank,174 the
Plaintiff was a self-help group comprised of flower farm workers of Shalimar Flowers
Company. The self-help group would receive commissions from flower buyers abroad under the
Fair Trade Programme which funds would be deposited into their accounts. They were therefore
not using the account for trading as such. It is because of the nature of the group and funds it
received that the Farm Manager at Shalimar Flowers Company who was not a member of the
self-help group acted as a mandatory signatory.

It was held that, the bank ought to have satisfied itself that the signatories were not misusing
their positions to defeat the intentions and purposes of the group. That all the red flags were
waving in this case, but the Defendant by not exercising reasonable care and skill, missed or
ignored them, thereby allowing the withdrawal, in quick succession, of large sums of money
donated to flower workers as commissions. The Judge found on a balance of probability that the
Defendant bank was negligent in the manner in which it handled and approved the nine
payments and is 100% liable.175

It was stated in that case, that the Bank had to ensure that transactions on the group’s accounts
were properly authorized by the recognized signatories, and to direct any inquiries or
correspondence to the numbers given by the customer. That the paying Banker must pay in good
faith and in the ordinary course of business while exercising reasonable care and skill.176

In contrast to the English law, the Ugandan law has broadened the application of fiduciary
duties177 in respect of banks in consideration of the power and control which the banks
exercise over their customers as seen in the current economic environment.178 This seems

174 See, High Court of Kenya Civil Cause No. 17 of (2015); see also, Simba Commodities Ltd v
Citibank N. A. Civil Case No. 236 of 2003 (2013) KLR; also, Kenya Grange Vehicle Industries
Ltd v Southern Credit Banking Corporation Ltd (2014) KLR.
175 Ibid
176 Ibid
177 G. John, “Banks and Fiduciary Relationships”, (1995), Bond Law Review; Vol.7:Iss.1,

Article 5. Available at: http://epublications.bond.edu.au/blr/vol7/iss1/5. Accessed on 28th

October 2015.
178 See, R. P. Shinar, “The Bank’s Fiduciary Duty” :Banking & Finance Law Review (2006) (22)

(1).
45
to be a healthy approach in view of the social realities in developing countries, such as Uganda,
where the banks wield extensive influence over the bargaining status of their ordinary customers.

2.5.4. Duties Owed by the Customer to the Banker

a) The customers have to give all necessary information available to his banker
The customers must exercise reasonable care to inform the bank of his or her account, that it has
been forged. This means if any forgery arrives, the customer owes a duty to the bank. This was
the principle in the case of London Joint Stock Bank v Macmillan and Another,179 The brief facts
of this case are that a firm who were customers of a bank entrusted the duty of filling out their
cheques to a clerk whose integrity they had no reason to doubt. The clerk presented to one of the
partners for signature a cheque drawn in favour of the firm or bearer. There was no sum on
words written on the cheque in the space provided and there were the figures 2 in the space
intended for the figures. The partner signed the cheque. The clerk subsequently tampered with
the cheque by adding the words one hundred and twenty pounds in the space that had been left.
The clerk then presented that cheque for payment at the firm’s bank and received a hundred and
twenty pounds out of the firm’s account. The question was whether the bank would then be
liable to the firm for that loss that was perpetrated by their own clerk.

The House of Lords held that the firm had been guilty of a breach of duty arising out of the
relation of a banker and customer to take care in the mode of drawing the cheque and that the
alteration of the cheque by the clerk was a direct result of that breach of duty. And accordingly
the bank was entitled to debit the customer’s account with the amount of that cheque.180 From
the above decision, Lord Finley summed up that duty at page 789 as follows:

The relationship between a banker and a customer is that of debtor and creditor with a
super added obligation on the part of the banker to honour the customers’ cheques if the
account is in credit. A cheque drawn by a customer is in points of law a mandate to the
banker to pay the amount according to the tenor of the cheque. It is beyond dispute that
the customer is bound to exercise reasonable care in drawing the cheque to prevent the

179 (1918) AC 777; see also the Code of Good Banking practice, where (iii) at p. 6, provides that
the customer report to the Bank without delay, loss of cheque book, misuse or suspected
misconduct.
180 Ibid

46
 banker being misled. If he draws the cheque in a manner which facilitates fraud, he is
guilty of a breach of duty as between himself and the banker and he will be responsible to
the banker for any loss sustained by the banker as a natural and direct consequence of
this breach of duty.181

b) Reasonable care

The customer has a duty to the banker to exercise reasonable care in drawing cheques so as not
to perpetuate as the customer and banker are under a contractual relationship it is obvious that is
drawing a cheque, the customer is bound to take usual and reasonable steps to prevent forgery. If
a cheque a written order in drawn in such a way as to facilitate or enable a third party increase
the amount on the cheque through dishonest means, forgery is in such circumstances is not a
remote but a very natural consequence of negligence the customer is liable.

More so, it is the duty of the customer to exercise reasonable care in executing his/her written
order so as not to mislead the bank or to facilitate forgery. The same principle was laid down in
the case of Joachimson v Swiss Bank Corporation.182 This duty had already been recognized in
the case of London Joint Stock Bank V Mac Millan and Athur,183 where the House of Lords said
that a cheque drawn by a customer is in point of law a mandate to the banker to pay the amount
according to the tenor of the cheque. It is therefore beyond dispute that the customer is bound to
exercise reasonable care in drawing the cheque and if he/she does in a manner which facilitate
fraud, he/she is guilty of breach of duty as between himself or herself and the banker, and he then
will be responsible to the banker for any loss sustained by the banker as a natural and direct
consequence of his breach of duty.

In Mobil (U) Ltd v UCB,184 a cheque drawn for Shs. 10,301 was altered to read Shs. 40,301. High
court held that a customer and a banker, being under a contractual relationship, the customer in
drawing cheques is bound to take usual and reasonable precautions to prevent forgery. And has a
duty to the banker for disclose forgeries against the bank in relation to his account as he

181 Ibid at page 789; See more at: http://www.kenyalawresourcecenter.org/2011/07/duty-of-

customer-owed-to-bank-in.html#sthash.ffM6BBw8.dpuf. Accessed on 28th October 2015.
182 (1921) 3 KB 110.
183 (1918) AC 777.
184 (1982) HCB 64.

47
discovers them, In the case of Green Wood V Martin Bank Ltd.185 Court held that if the
customers known that an entry ‘Maa’ is his or her passbook or statements of account is wrong
but keeps silent, the customers will be precluded from asserting the error once the bank has
changed its position. Also the same principle was in the case of Brown V Westminister Bank.186

C) Duties to take precaution to prevent forged cheques

In the case of Nigeria Advertising Service Ltd V United Bank Of Africa,187 court noted that a
customer who knows that his or her signature is being forged on cheques has a duty to his or her
bank to inform it of such fact without waiting until the banks position is altered for the worse and
if he/she fails to carry out this duty , he/she will be stopped from contending against the bank
that payment should have been made on later forged cheques, but if the customer is merely silent
for a period after learning of the forgery of his or her signature during which time the position of
the bank is not altered, his or her conduct cannot be held to be an admission or adoption of
liability or an estoppels. For example in the case of Bank of Zambia V Ag of Zambia, It was
stated that a bank may be entitled to charge a customer for payment made on a forged cheque if
the customer, negligent conduct was the proximate cause of the loss being such that it induced
the bank to pay on the forgery.188

A customer must make a written demand for payment in a particular form of accounts. The
written order or cheque had to be addressed to the bank and branch where the customer’s account
is held. However contemporary banking presents unique traits. There is no strict adherence to
this rule and customers can in most banks access this money during normal banking this is
dependent on each particular bank and working days.189

The customer must go to or instruct his or her bank when he/she requires payment, It is not
incumbent on the banker to seek out the customers. This is contrary to the normal lending

185 (1959) 1 QB 55.

186 (1964) 2 Lloyds Rep 187.
187 Nigeria advertising services Ltd v United Bank of Africa; see also S. C. Bihari, “Article on

Bank-Customer Relationship. Accessed on 28 th October 2015.

188 See, S. C. Bihari, “Article on Bank-Customer Relationship”. Accessed on 28 th October 2015
189 See, T. S. Chamila, “Article on the Law Relating to the Bank-Customer Relationship: Some

salient duties of Banks. Posted on 25th February 2010.

48
requirements whereby it’s the debtor who should seek out his creditor to effect payment.190
However, also it is a well-known recognized practice of bankers in this country not to open an
account for a new customer without first ascertaining the respectability of the customer. For
example in the case of Bank Of Baroda (U) Ltd v Wilson Buyonjo Kamugunda,191 Two brothers
named Ham Kamugunda and Godfrey Katanywa, owned land upon which they lived in
Lake Mburo National Park in Mbarara District. At some point in time, probably in 1980s, the
Uganda Government acquired the land of the two brothers, evicted them from the land and
undertook to compensate them. The two brothers died in 1988 before receiving the compensation
for their land. The plaintiff got letters of Administration to administer the estate of his father. In
the course of his search for the compensation, he learnt from officials of the Ministry of Lands
and from the Bank of Uganda that compensation had in fact been effected and that
a cheque for shs 80m/= had been issued in the names of the two dead brothers and that the
proceeds were in Baroda Bank (U) Ltd, the present defendant. It transpired then that indeed a
Uganda Government cheque No.E003100764 for shs 80m/= had been issued on 23rd December,
1996 in the names of the dead brothers. It was stated in this case that a bank has a duty to make
inquiries if there is anything to arouse suspicion that the cheque is being wrongfully dealt with.
Establishing the customer’s identity and the circumstances under which the cheque was obtained
can assist in doing so. Otherwise the bank will be liable for breach of duty.

Before making demand for payment, the customer must be sure that his account has the
necessary funds to meet his or her order.192 Alternatively he/she can (customer) make prior
arrangements for over draft facilities to be available from his/her banker. A customer must pay
reasonable interest and omission and other charges for banking services.193

2.6. Conclusion

In conclusion, it should be noted that the history of banking originated from the metamorphosis
of capitalist mode of production, which was gotten from the power over commerce industry, and
due to evolution in 1965, the government of Uganda started the Bank of Uganda with the

190 Ibid
191 See, (Civil Appeal No. 10 of 2004) [2006] UGSC No. of 2006.
192 See Commercial Bank of Austria Ltd v Hulls (1884) 10 VLR (L) 110.
193 See, S. C. Bihari, ‘Bank-Customer Relationship’. Accessed on 28th October 2015.

49
function to issue the currency of Uganda. However, it is also important to remember that the
relationship that exists between the bank and its customers is contractual in nature, which is
classified to include both general and special relationship. It is thus submitted that if both the
bankers and their customers have put into practice/complied to the respective duties and
obligations they owe to one another, it could lead to improved bank customer relationship and
help reduce the problem of unconscionable transaction in Uganda’s banking sector.

50
 CHAPTER THREE

THE LEGAL POSITION OF UNCONSCIONABLE DEALING IN BANKING

TRANSACTIONS AND THE LAW RELATING TO BANK CUSTOMER
RELATIONSHIP

3.1. Introduction
This chapter discusses the legal position of unconscionable dealing in banking transactions; it
analyzes the current legal framework and the available legislations, which will help to give a
clear guide to the business of banking transactions in Uganda. Among the Laws to be discussed,
is the Bank of Uganda Act, Cap 51, the Financial Institution Act, 2004 which was amended by
the Financial Institution Act, 2016, the Contract Act, 2010, the Bill of Exchange Act, Cap 68, the
Bank of Uganda Consumer Protection Guideline June 2011, and the Code of Banking Practice
June, 2011.
This chapter is intended to have a detailed explanation of the laws that regulate and govern bank
customer relationship in Uganda, something that is intended to help the researcher to critically
analyze the legal position of unconscionable transaction in banking. That’s why the researcher in
chapter two first traced the history and evolution of banking in Uganda, as well as discussing
both the general and special relationships that both the banks and customers owe to one another,
this has provided the researcher with enough knowledge to properly analyze the issue of
unconscionable transactions in banking.

3.2. The perspective of unconscionable transaction by the English Courts

The test of unconscionable conduct was developed and this test sets out two circumstances
whereby conduct will be deemed unconscionable. The first being when ‘unconscientious
advantage is taken of an innocent party whose will is overborne so that it is not independent and
voluntary’ and secondly, when ‘advantage is taken of an innocent party who, though not

51
deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to
what is in his best interest.194

Unconscionable conduct refers to a situation “in which a party makes unconscientious use of his
superior position or bargaining power to the detriment of a party who suffers from some special
disability or is placed in some special situation of disadvantage.”195

This definition is similar to the definition offered under the Contract Act, 2010 the concept of
unconscionable conduct is not limited to the common law meaning and as a result is more widely
defined. According to its ordinary meaning, unconscionable conduct will arise where there is
serious misconduct that is so against conscience that it warrants intervention by the court to grant
relief. Often it will be that the circumstances surrounding the conduct are unfair and
unreasonable,196 however there must also be an absence of morality in order to constitute
unconscionable conduct,197
Conversely, the restricted meaning of unconscionable conduct has led other commentators to
argue that it is time to give business people like banks, the same broad statutory protection
against unconscionable conduct as is provided to customers by various statutory and case Law
decisions, since there are many instances where a business person is in a similar position to that
of a customer. Interestingly, Senator Schacht, the Minister for Small Business, “announced the
Federal Government's intention to extend the statutory regime for unconscionable conduct to
situations where a commercial relationship exists between two businesses and where one of the
two parties enjoys significant bargaining power.”198

3.3. The Doctrine of unconscionable transaction

The principles governing unconscionability appear reasonably settled. Essentially, the doctrine
has three elements:

194 Schacht, Trade Practices Reform to Protect Small Business, the Australia, 22 nd September
1995, at P.6.
195 Ibid
196 Ibid
197 See, The Contract Act 2010.
198 Ibid

52
 a). Procedural unconscionability; which refers to the disadvantage suffered by a
weaker party in negotiations.199

The stronger party is taking advantage of the fact that the consumer either lacks enough
knowledge or understanding of the contract or is incapable of making an independent decision.
The trader does not point out that the consumer has avenues in getting help in clearly
understanding the contract. So in this case, the trader is taking advantage of the consumer's lack
of understanding for his own benefit.

b). Substantive unconscionability; which refers to the unfairness of terms or

outcomes.200

This could also point towards the use of undue influence/ coercion.201 In this example, the
consumer is not in a position to make an independent decision based on the fact that undue
influence is made to bear upon him/her.

Most often the previous leads to the latter case but not always. The court will not determine
whether someone has a good or bad bargain, merely whether they had the opportunity to
properly judge what was best in their own interests. Since unconscionability usually results from
an imbalance in bargaining power, customers of banks can easily suffer to unconscionability.202

It is said that equity intervenes to vindicate the requirements of good conscience. Mason put it
that fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable
conduct are all species of unconscionable conduct in one sense. Clearly the judge was intending
to provide illustrations of what may be regarded as circumstances giving rise to unconscionable
conduct in its fullest sense. However, his use of the words “unconscionable conduct” as part of
the illustration of what amounts to “unconscionable conduct” can appear confusing. What it
means is that the extent to which we can provide a code, or list of circumstances in which this

199 Ibid
200 Ibid, see also Mason at 465
201 See J. Goldring and L. Maher, “what is Uncoscionability?” (1990) 1 CCLJ 230, at p. 245.
202 Unconscionable conduct under the Australian consumer Law and commercial Bank of

Australia v Amadio
53
will occur is very limited. What we have to fall back on as all skilled professionals ultimately
have to do is our own good judgment.203

According to the observation of Mason, he observes that “lack of assistance or explanation

where assistance or explanation is necessary” will give rise to problems. He noted that “many of
the other factors mentioned in Blomley case might well be subsumed in this all those who are
infirm, illiterate, drunk or sick etc, might be appropriate candidates for assistance or
explanation, as indeed were the parents in Amadio”. He continued to say that, clearly if someone
is drunk then they should not make large gifts or enter into contracts until they sober up. People
who are illiterate or infirm also need some special assistance to ensure that they are both fully
informed of what they are doing and are acting with a free will.204 However, the recent cases of
“emotional dependency” give rise to issues which are not so easily resolved and which may have
the effect of seriously limiting one’s contractual rights or rights of ownership.

3.4. The view unconscionable transaction in Uganda legal systems

However, despite the above discussion which is substantially premised on English Law, the
authorities below explains unconscionable transactions in banking with much emphasis on
mortgage transactions which is more rampant in regard to circumstances in Uganda.

In the case of Alice Okiror & Micheal Okiror v Global Capital Save Ltd & Another,205 the High
Court of Uganda in June 2012, delivered a ground-breaking judgment regarding inter alia
execution of mortgages by mortgagees and unconscionable interest rates. The Borrower Alice
Okiror obtained a loan from the Global Capital Save 2004 Limited, against a mortgage of her
family home. The Borrower and her husband filed a suit seeking declarations that they had paid
the loan in full, that the mortgage was invalid and seeking the return of their certificate of title.206

203 Ibid
204 Ibid
205 (2010) H.C.C.S No. 149.
206 See, the decision of the High Court on validity of mortgages and Unconscionable interest

(H.C.C.S) No. 149 of 2010; The case of Alice Okiror & Michael Okiror v Global Capital Save
Limited & Ben Kavuya (2004).
54
Court held that the mortgage had not been properly executed and was therefore invalid. The case
was distinguished from the case of Olinda De Souza Figueiredo v Kassamali Nanji 207 in
which it was held that there is no requirement for a mortgagee to sign the mortgage instrument in
order to make the instrument effective and there is nothing which requires the mortgage
instrument to be signed by both the mortgagor and mortgagee before it can properly be
registered. However, it is important to note that in Olinda De Souza Figueiredo (supra) the
mortgage deed was not in the form of a loan agreement.208

Court held that the spousal consent under the Land Act must be in writing in the prescribed form.
Without written consent, the mortgage could be held to be invalid. In this case the interest
charged at 12% per month (144% per annum) was harsh and unfair and the Court exercised its
discretion to award an interest of 25% per annum as proposed by the Plaintiffs.209

Furthermore, in Haji Abdu Nasser Katende v Vithalidis Haridas & Co. Ltd case still show more
literature on how fraud affect mortgages, in that case, an Advocate of Courts of Judicature of
Uganda and a Judge of the Appellate Division of International Criminal Court at Hague, Holland
(ICC) purchased and became the registered proprietor of land comprised in Kyadondo Block 208
Plot 44 (the suit land) at Keti Falawo, Kawempe Kampala measuring approximately one (1)
acre. This was in 1978.210

The Plaintiff discovered that while he was out of the country, Nile Bank Limited , that was
succeeded by Barclays Bank of Uganda Ltd (the 1st Defendant) basing a forged Power of
Attorney created a mortgage for the 2nd Defendant for a loan of Shs.30,000,000/=. The
Plaintiff’s signature on the mortgage deed and Power of Attorney was forged. Forgery is an
element of fraud. Fraud can be participatory but fraud can also be imputed on the person that

207 [1963] 1 EA 381.

208 Ibid.
209 Ibid
210 See, Haji Abdu Nasser Katende v Vithalidis Haridas & Co. Ltd (C.A. No. 84 of 2003 Court of

Appeal).
55
ought to have been aware of the fraud and condoned it, or benefited from it or used or accepted
to use it to deprive another person of his rights.211

The third Defendant had a duty to satisfy himself through diligent search that the mortgage was
proper. If he had taken this essential diligent step he should have found the questionable
execution of the mortgage deed. And His worship could not emphasize this requirement more
than Honourable G. Okello J. A. (as he then was) stated in the case of John Bagaire v Ausi
Matovu C.A. 7 of 1996 (C.A.) where his Lordship stated that:

Lands are not vegetables that are bought from unknown sellers. Lands are very valuable
properties and buyers are expected to make thorough investigations not only the land but
also of the seller before purchase.212

Also unconscionable transactions in banking appear in ‘security pledged to a financial institution

or banks, where such securities stand the risk of being sold and the intended sale is within the
contemplation of the parties to the loan agreement.

The requirement for spousal consent prior to execution of a mortgage in respect of a matrimonial
home is explicitly provided for in section 39(1) (a) (i) of the Land Act. Secondly Section 6(1) of
the Mortgage Act places a duty on a prospective mortgagee faced with the prospects of a
matrimonial home as security to satisfy itself that the spousal consent referred to in section 5 is
informed and genuine. In addition the spouse(s) should provide a signed and witnessed
document indicating that they have indeed received independent advice on the said mortgage and
have understood and assented to the terms and conditions thereof. Finally, as a general rule,
whenever the relationship between a debtor and a proposed surety is ‘non-commercial’, or the
surety does not stand to benefit from the transaction or is, otherwise, one where the surety
reposed trust and confidence in the debtor; a mortgagee is required to take reasonable steps to
satisfy itself that the surety’s consent to stand as such has not been procured by undue influence,

211 Ibid
212 See, John Bagaire v Ausi Matovu (C.A No. 7 of 1996).
56
misrepresentation or other misconduct by the debtor.213 Failure to take such steps, a mortgagee
would be deemed to have constructive notice of the surety’s right to set aside the transaction.214

It was held, therefore, that the mortgagee herein should have exercised the common law duty
placed upon it to ascertain whether both sureties understood the implications of standing surety
in the present transaction. No material was furnished to this court as would prima facie
demonstrate that this was done.215

The legal right of a mortgagee to sale mortgaged land upon default is recognized in section 20(e)
of the Mortgage Act. However, the remedies available to the mortgagee under that section
presuppose the existence of a valid mortgage.216

3.5. The Current Legal Framework

An adequate legal framework for banking supervision currently exists in Uganda.217 However, a
number of areas have been identified where legislative amendment is required to move toward
full implementation of the Basle Core Principles which is a report that is aimed at considering
the transparency practices in the area of monetary and financial policies, Fiscal Transparency,
and on Principles for Effective Banking Supervision. The government committed to introducing
in parliament in 2015 a new Financial Institution System that is expected to make further
improvements. This is due, at least in part, to the legal requirement that the Bank of Uganda must
"consult" with the Minister when revoking a bank license. Also, the banking supervisor does not
have the complete authority to reject an application for a banking license. Currently, under the
Financial Institution System, an aggrieved applicant may appeal to the Minister, who shall deal
with the appeal in consultation with the Central Bank.218 The Bank of Uganda has wide powers

213 See, Halsbury’s Laws of England, Vol. 77, 2010, 5 th Edition, Paras. 147-8.
214 Ibid
215 Ibid
216 See, Section 20 (e) of the Mortgage Act, 2009.
217 Section 79 of the Financial Institutions Act of 2004 which was amended by the Financial

Institutions Amendment Act 2016.

218See, IMF staff team from the African, Fiscal Affairs, Monetary and Exchange Affairs, Policy
Experimental IMF report on observance of standards and codes: Uganda. Development and
57
of intervention under the Financial Institution Act, including seizure,219 replacement of
management and directors,220 and liquidation.

3.6. The Bank of Uganda Act, Cap 51

This was enacted in 1966 and has gone several amendments through 2000. This Act establishes
the Bank of Uganda as the Central Bank of Uganda. Section 2 (1) of the Act provides that “the
Bank of Uganda established under the Bank of Uganda Act, 1966 shall continue as the central
Bank of Uganda.”221 Section 4 (1) lays down the functions of the Bank is momentary policy
directed to economic objectives of achieving and maintaining economic stability.”222

This means that among many functions the bank of Uganda is also the clearing house for
cheques and other financial institutions to supervise, regulate, control and discipline all financial
institutions223 . Thus this Act regulates all the works of financial institutions to stabilize the
economy in a desired way. The bank of Uganda should use its mandate to control the business of
banks in order to curb the vice of unconscionable transaction in banking of Uganda.

The Bank of Uganda is the regulator and supervisor of the formal banking sector, including
commercial banks, credit institutions and finance companies, Microfinance Deposit Institutions,
Forex Bureau and Money Remitters. Bank of Uganda regulated and supervised financial
institutions that mobilize deposits, including banks, Microfinance Deposit Institutions, and credit
and finance companies that are authorized to mobilize deposits and make collateralized and non-
collateralized loans to customers.224

Review, and Statistics Departments on the basis of information provided by Ugandan

Authorities, (August 1999).
219 The Financial Institutions Act of 2004 which was amended by the Financial Institutions

Amendment Act. 2016, Section 8 (c).

220 Section 57 (1) (a) and (b) of the same Act (as amended).
221 The Bank of Uganda Act, Cap 51, Section 2 (1).
222 See, The Bank of Uganda Act, Cap 51, Section 4 (1).
223 The Bank of Uganda Act, Cap 51, Section 4 (2).
224 Ibid

58
The Bank of Uganda issued Bank of Uganda Consumer Protection Guidelines in 2011 which
Bank of Uganda supervised financial institutions are encouraged to follow.225 The Guidelines are
thorough, covering fair treatment, transparency, preventing over-indebtedness, privacy of client
data, and mechanisms for complaints resolution.226 The Bank of Uganda is stepping up its
financial consumer protection role with increased communications and establishment of a “Key
Facts” document, which must be presented to any customer of a Bank of Uganda-supervised
financial institution.227

The only challenges of supervision/enforcement of the guidelines may be weak, and the
guidelines apply only to Bank of Uganda-supervised financial institutions and their agents.228
Leaving a large gap in comprehensive financial consumer protection.

3.7. The Financial Institutions Act of 2004, as amended 2016

This Act provides the regulatory frame work for the financial sector in Uganda. Section 4 (1)
provides for prohibition against transacting financial institution business. Subsection 3 (c),
provides that, a financial institution shall not hold itself out as a financial institution listed in the
second schedule or an Islamic bank or other Islamic financial institution unless it holds the
appropriate license.229

Meaning that any financial institution must be having a valid license and such must be a
company and the business to be transacted by any financial institution must be specified in its
license.230

225 See, Bank of Uganda. 2015. Overview of the Financial Sector in Uganda.
226 See, Bank of Uganda. 2014. Status of Financial Inclusion in Uganda.
227 See, Social Performance Task Force, in Conjunction with its Responsible Inclusive Finance

working group. For more information visit: http://sptf.info/working- groups/responsible-

inclusive-finance-rif. Accessed on 3rd April 2016.
228 Ibid
229 The Financial Institutions Act of 2004 which was amended by the Financial Institutions

Amendment Act 2016, Section 4 (3) (c).

230 Ibid

59
Furthermore, Section 4 (3) (d) provides that “A financial institution shall not enter into Islamic
contracts or otherwise conduct Islamic financial business which is not in accordance with this
Act.231

Section 34 of the Financial Institutions Act 2004 (as amended 2016) provides for prohibitions on
insider transactions. That a financial institution shall not grant or permit to be outstanding a loan
or credit accommodation to any of its affiliates and associates, directors, persons with executive
authority, substantial shareholders or to any of their related persons or their related interests
except on terms which are non-preferential in all respects including creditworthiness, term,
interest rate and the value of the collateral.232

This basically means that financial institutions when doing business, should not impose terms no
more favorable than those which would be offered under prevailing conditions to persons. More
so, that the terms or interest rate to be charged to the persons it is transacting business with should
not be harsh or unconscionable in nature. And it is submitted that this provision of the Act is
geared to words ensuring bank and customer relationship in banking transactions.

3.8. The Contract Act, 2010

The Contract Act which was assented to on 22nd April, 2010, an Act meant to codify the law
relating to contracts and to provide for other related matters. Section 14 of the Contract Act
provides for undue influence, that a contract is influenced by undue influence where the
relationship subsisting between the parties to a contract is such that one of the parties is in a
position to dominate the will of the other party and uses that position to obtain an unfair
advantage over the other party. Especially where, the party stands in a fiduciary relationship to
the other party.233

This is the law in Uganda that governs unconscionable transactions in banking and thus
upholding bank customer relationship since unconscionable conducts in contracts is regulated,
and the same law under subsection 3 provides that where a party who is in a position to dominate

231 The Financial Institutions Act of 2004 which was amended by the Financial Institutions
Amendment Act 2016, Section 4 (3) (d).
232 Ibid
233 See, The Contract Act, 2010, Section 14.

60
the will of the other party, enters into a contract with that other party and the transaction appears,
on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that the
contract was not induced by undue influence shall be upon the party in a position to dominate the
will of the other party.234

This burden imposed by the law however, has made banks in this country to always avoid
unconscionable conducts when transacting businesses with its customers since in contracts or
business with its customers it is always presumed that banks stand in the fiduciary relationship
and this burden rest with them235 For example, in the case of Fredrick J. K Zaabwe v Orient
Bank Ltd & Ors,236 the Appellant, an advocate indebted to the Law Council, gave a power of
attorney over his property to a company called Mars Trading company limited, part owned by
one of his friends and clients, to enable the company to borrow money from a bank. In exchange
of the power of attorney, the client gave the Appellant a personal cheque to pay to the Law
Council. The cheque was dishonored. The company used the power of attorney to mortgage the
appellant’s property to Orient Bank to secure a loan, which loan was used exclusively for the
business of the company. The company defaulted on the loan and the Bank sold the Appellant’s
property to a third party who evicted the Appellant. The Appellant filed a suit against the Bank,
the company, the Bank’s Lawyer, who also acted for the purchaser, and the auctioneers
challenging the mortgaging and sale of his property and alleging fraud on the part of the
respondent.

In that case, the Court found the bank liable for the loss of the appellant raising the duty of care
owed by a banker to a person whose property is mortgaged through a power of attorney. That the
company was a customer of the bank and the bank considered and evaluated the business
proposal of the company and agreed to finance it. The Bank must have known that the Appellant,
as owner of the mortgaged property, was not part of the company be it as shareholder or director.
The money was put on the loan account of the company which used it to the full knowledge of
the Bank. It was held that a fiduciary relationship exists between a bank and owner of property
that is being used to secure a loan facility, which requires the Bank to make a full disclosure to
the owner of property in so far as the loan is concerned. Since the Bank did not make this

234 Ibid
235 Ibid
236 SCCA No. 4 of 2006.

61
disclosure, the Bank was jointly and severely liable to the Appellant for the loss. This is because
the Bank had, to the very least, constructive notice of the fraud that the company was committing
but chose to ignore it. That a prudent Bank should have asked itself why a person would give
away his property to secure the borrowing of another for a transaction in which he had no
interest at all. And on account of that fraud, the mortgage was declared null and void.

And however, this was the same position that the House of Lords lay in the case of Barclays
Bank v O‘Brien,237 where Mr. O'Brien was a chartered accountant and he also had a shareholding
in a company in which he was an auditor. The company was experiencing financial difficulty and
the bank wished to find security for the company debts. Mr. O'Brien offered the matrimonial
home as security. He told his wife that the charge was limited to £60,000 and that it was only to
last for a few weeks. Initially the wife refused to sign but was later persuaded to sign as the
husband told her that the company would fail if she did not and that her son, who also had an
interest in the company, would lose his home. In fact the charge was not limited in the amount or
time. The wife agreed to sign the charge. The manager of the bank had left sent the documents to
their local branch with instructions that the wife was to be advised of the full extent of the
liability and that the wife should be advised to take independent advice before signing. However,
the bank clerk got the wife to sign and failed to carry out the instructions.238

The bank sought to enforce the charge and the wife raised undue influence and misrepresentation
in her defense to have the charge set aside, it was held in this case that the defense based on
undue influence failed because the wife was held to exercise independence of thought on
financial matters and was used to dealing with the family finances whilst her husband was
working away. The wife was successful with regards to misrepresentation. The charge was set
aside as the bank had constructive notice of the misrepresentation and failed to take reasonable
steps to ensure that the charge had been obtained without influence or that Mrs. O'Brien was
aware of the full extent of liability. In this case, Lord Brown Wilkinson introduced the Concept
of Constructive notice and set out the steps required to be taken by banks to avoid being fixed
with Constructive notice.239

237 [1994] 1 AC 180.

238 Ibid
239 Ibid

62
Therefore, that a creditor is put on inquiry when a wife offers to stand surety for her husband's
debts by the combination of two factors: (a) the transaction is on its face not to the financial
advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in
procuring the wife to act as surety, the husband has committed a legal or equitable wrong that
entitles the wife to set aside the transaction.240

It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy him that
the wife's agreement to stand surety has been properly obtained, the creditor will have
constructive notice of the wife’s rights. And his Lordship in his Judgment had this question as to
what then are the reasonable steps which the creditor should take to ensure that it does not have
constructive notice of the wife's rights, if any? Normally, the reasonable steps necessary to avoid
being fixed with constructive notice consist of making inquiry of the person who may have the
earlier right (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require
of banks and other financial institutions that they should inquire of one spouse whether he or she
has been unduly influenced or misled by the other. His Lordship made it clear that he has been
considering the ordinary case where the creditor knows only that the wife is to stand surety for
her husband's debts. And he did not exclude exceptional cases where a creditor has knowledge of
further facts which render the presence of undue influence not only possible but probable. In
such cases, the creditor to be safe will have to insist that the wife is separately advised.241

The aim of the independent legal advice is to rebut the presumption of undue influence or any
other wrongdoing and to ensure that the consent given by the surety is of her independent free
will.242

Given the conflicting views of the independent legal advice requirement, the Court of Appeal in
Royal Bank of Scotland v Etridge (No. 2)243 had attempted to provide some clarity and
consistency to the reasonable steps tests, as well as introduce new ones. That the existence of the
special relationship gives rise to a presumption that the transaction was obtained as a result of

240 Ibid
241 Ibid
242 W. Simone, Revisiting Barclays Bank v O’Brien and independent legal advice for vulnerable

sureties.
243 See, [1998] 4 ALLER 705, (1999) 14 (4) J.I.B.L 115.

63
undue influence by the stronger party in the relationship over the weaker party, the presumption
of undue influence only arises upon proof of the existence of a special relationship. The effect of
the presumption is that the weaker party will be able to seek equitable relief, unless the
presumption of undue influence is rebutted by the stronger party.244

Lord Nicholls asserted that a presumption arising by virtue of a recognized class of relationship
is ‘irrebuttable.’245 This approach has, however, been rightly rejected in Australia.246 However, it
is difficult to rebut such a presumption and even being able to explain the relationship in some
other way, such as that the parties were also in a de facto relationship, will not guarantee
success.247

3.9. The Bills Of Exchange Act, Cap 68

The Bill of Exchange Act. Cap 68, is an Act relating to bills of exchange, cheques and
promissory notes. “Bill” means bill of exchange, and “note” means promissory note; Bill of
exchange is defined to mean, an unconditional order in writing, addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to or to the order of a
specified person or to bearer.

Section 78 (2) of this Act imposes duties to banker as to crossed cheques. That when the banker
on whom a cheque is drawn which is so crossed, nevertheless, pays it, or pays a cheque crossed
generally otherwise than to a banker, or if crossed specially otherwise than to a banker to whom
it is crossed, or his or her agent for collection being a banker, he or she is liable to the true owner
of the cheque for any loss he or she may sustain owing to the cheque having been so paid; but
where a cheque is presented for payment which does not at the time of presentment appear to be
crossed, or to have had a crossing which has been obliterated, or to have been added to or altered
otherwise than as authorized by this Act, the banker paying the cheque in good faith and without
negligence shall not be responsible or incur any liability, nor shall the payment be questioned by

244 Ibid
245 See, Royay Bank of Scottland v Etridge, at AC 797; ALL ER 460.
246 See, Janson v Janson [2007] NSWSC 1344, at p. 93.
247 See, the Case of Bar- Mordecai v Hillston [2004] NSWCA, at p. 149.

64
reason of the cheque having been crossed, or of the crossing having been obliterated or having
been added to or altered otherwise than as authorized by this Act, and of payment having been
made otherwise than to a banker or to the banker to whom the cheque is or was crossed, or to his
or her agent for collection being a banker, as the case may be.248

The above duty is best explained in the case of Barclay's Bank PLC v Quin-acre Ltd &
another249 , where it was held that where a red signal manifests itself, the banker's duty may be
even more stringent. Legal principles which govern the relationship between a bank and its
customer are well settled. The duty of a bank is to act in accordance with the lawful requests of
its customer in normal operation of its customer's account consequently, a banker who has paid a
cheque drawn without authority or in contravention of the customer's orders or negligently
cannot debit the customer’s account with the amount. A banker is under a duty of care to its
customer which may require him to question payment.250 If the banker pays and debits its
customers in reliance on signature being his customer's, which is not so, he cannot charge its
customer with that payment, in paying cheques, a banker must not be negligent and cannot
charge its customer with money lost through his negligence.251

3.10. The Consumer Protection Bill, 2004

The Consumer Protection Bill, 2004, is an Act to provide for consumer’s rights against
fraudulent and deceptive practices by sellers and suppliers of goods and services, to promote
ethical standards in relation thereto and to establish small claims court and other matters
connected to or incidental to.252

Consumer protection refers to the protection afforded to a consumer not only against fraud and
dishonesty in commercial dealings but also oppressive bargains and qualitatively deficient goods

248 The Bills of Exchange Act, Cap 68, Section 78 (2).

249 (1992) 4 ALLER 331.
250 See, Banex Ltd v Cold Trust Bank Civil Appeal No. 29 of 1995 (SCU) (unreported); See, also

Harsbry’s laws of England, 4th Edition, Vol. 3 (1) par. 175.

251 See, Pagets, “Law of banking” (11th edn Megrah (ed), Butterworths, 1966) at pages 365 and

269; See, also Cunsultant Surveyors & Planners v Standard Bank (U) Ltd (1984) HCB, Cited in
the case of Stanibic Bank Uganda Ltd v Uganda Crocs Ltd (Civil Appeal No. 4 of 2004).
252 See, The Consumer Protection Bill, 2004.

65
and services. Consumer protection is an ancient law, yet little has been done in this regard in this
country. There is at present no legislation in Uganda which deal with certain aspects of consumer
protection.253

This bill is good if passed into law to safeguard consumer’s rights, because clause 11 of the bill
provides that a person shall not in the conduct of any business, trade or commerce or in the
furnishing of any service engage in deceptive advertising. And the deceptive conduct will
include; any representations made by statements, words or any depiction; and the extent to which
the advertisement fails to reveal material facts about the goods or services to which the
advertisement relates.254

3.11. The Bank of Uganda Consumer Protection Guidelines June , 2011

These Guidelines shall apply to; all financial services providers regulated by Bank of Uganda in
respect of business they transact in Uganda; and the agents of all financial services providers
regulated by Bank of Uganda in respect of business the agent transacts in Uganda.

The Bank of Uganda has also established Guidelines for Bank of Uganda Supervised financial
institutions. The Guidelines for Consumer Protection where issued by Bank of Uganda and
became effective in 2011, there is no generally applicable consumer protection law in Uganda,
nor a market conduct regulator with the specific mandate of financial services consumer
protection for the institutions that are not prudentially regulated.255 The guidelines for consumer
protection are comprehensive, covering prevention of over-indebtedness, transparency, fair and
respectful treatment, privacy of client data, and mechanisms for complaints resolution.

The Bank of Uganda consumer protection guidelines state that, when a financial services
provider gives advice to a consumer, the financial services provider shall ensure that the advice
is suitable, taking into account the circumstances and needs of the consumer. Any product or
service which the provider recommends a consumer to buy is suitable for the consumer. There is

253 See, The Uganda Law Reform Commission, Chapter 2.

254 See, The Consumer Protection Bill, 2004 Clause 11.
255 Smart Compaign. 2015. What Happens to Microfinance Clients who default? An exploratory

study of Microfinance.
66
no other product or service available to the financial services provider that would be more
suitable for the consumer.256 The financial services provider keeps sufficient records of each
piece of advice it has given to a consumer to enable it to demonstrate that it has complied.

It clearly informs the consumer of any actual or potential conflict of interest. Where a consumer
is unable to repay a loan, a financial services provider has the right to take steps to recover the
amount owed. However, a financial services provider cannot claim unreasonable costs and
expenses which the financial services provider has incurred; must provide the consumer with a
detailed breakdown of the costs and expenses incurred; may offset the outstanding amount owed
with any credit balances in the consumer’s other account or accounts with the financial services
provider; and must not try to recover the debt from a third party, including the consumer's family
members or friends if the third party has not signed a contract to guarantee the liability of the
consumer. Debt recovery should be transparent and assets to be sold should have a fair value that
is in line with the market rate.257

Regulation 5 of the Guidelines provides that the relationship between a financial services
provider and a consumer shall be guided by three key principles: Fairness, Reliability, and
Transparency.258 That is why; Part II of the Bank of Uganda Financial Consumer Protection
Guidelines, 2011, provides that, a financial services provider shall act fairly and reasonably in all
its dealings with a consumer. And that, a financial services provider shall not: offer, accept or
ask for bribes or other ‘gifts’ or unfair inducements; take advantage of a consumer whether or
not he or she is able to fully understand the character or nature of a proposed transaction; include
an unconscionable term in an agreement; or exert undue influence or duress on a consumer to
enter into a transaction.259

The government also has taken steps to improve financial literacy and knowledge of consumer
rights in relation to financial services. In March 2015, the Bank of Uganda announced a national
communications campaign to increase public awareness of the Financial Consumer Protection

256 Ibid
257 Smart Compaign. 2015. What Happens to Microfinance clients who default? For a revealing
analysis of debt collection practices by Microfinance Institutions in Uganda.
258 The Bank of Uganda Financial Consumer Protection guideline June, 2011, Regulation 5.
259 The Bank of Uganda Financial Consumer Protection Guidelines June, 2011, Regulation 6 (1)

(a), (ii), (iv), (v), (vi).

67
Guidelines. As of April 2015, all customers of Supervised Financial Institutions were issued with
Key Facts Documents for any deposit or loan.260 While there are financial consumer protection
regulations and guidelines for Bank of Uganda Supervised Financial Institutions, financial
consumer protection falls under multiple agencies, and different regulations for the institutions
that they regulate.261

There are no disclosure rules requiring insurance providers to share information with consumers
or official regulations covering micro-insurance distribution channels, despite an increase in
service levels and efforts to introduce micro-insurance. Additionally, there continues to be a
limited understanding of insurance and its benefits, as well as a very low level of trust for
insurance providers.262

3.12. The Code of Banking Practice June, 2011

Uganda Bankers Association is the umbrella body of commercial banks in Uganda and one
development bank. The Association has a code of conduct for members, offers a complaints
handling and redress system for customers of member banks, and offers a variety of consumer
protection information on its website, including consumer rights and responsibilities with respect
to various products and communications with banking institutions, how to file a complaint with
the Uganda Banker’s Association and the steps in the process. The Uganda Banker’s Association
also launched a financial literacy campaign in 2015 for the public to increase financial awareness
among Ugandans and to enhance knowledge about banking services.263

The Uganda Bankers’ Association came up with the Code of Banking Practice, which has
fostered good governance and international best practices in the banking industry. This has
greatly contributed to the enhancement of public confidence in the banking sector. More so, it
has undoubtedly contributed to overall integrity and security of the banking sector and it has

260 Bank of Uganda Financial Consumer Protection Guidelines: Know Your Rights.
261 See, Social Performance Task Force, in Conjunction with its Responsible Inclusive Finance
working group of April 2016.
262 See, Microscope (2015), cited in a Research Conducted by Social Performance Task Force.

Available at http://sptf.info/resources/resource-center. Accessed on October 2nd 2015.

263 Ibid

68
helped further to nurture the already conducive working relationships between the various banks
and their customers.264

Ugandan Banks have adhered to this, since the Code is drawn up to guide all member banks of
the Uganda Bankers’ Association in their relationship with their customers with regards to the
services they offer because of this, immense benefits have been accorded to customers through
better and standardized services.265

Furthermore, the Code of Banking Practice has promoted and maintained high standards of
professional and moral behavior within the banking sector. This has ensured that customers are
adequately equipped to make informed decisions on which services to subscribe to at any given
time.266

However, much as the Code is in place, the Code is brief and this is seen from the appearance of
many fraudulent Micro Finance Institutions and a continued sense of lack of transparency in the
banking industry, has eroded public confidence in many financial products offered by formal and
informal institutions alike. The government has proposed several amendments to the current laws
governing the financial sector, which would allow financial institutions to make use of agents to
reach a greater number of customers.267

The Code serves as a guide to the customer when transacting with the bank to understand his
rights and responsibilities as well as the Bank’s responsibilities in serving the customer. The
Banks are committed by this Code to meeting the standards set out in the Code. It is provided
that the bank relationship with the customer will be guided by four key principles, namely
fairness, transparency, accountability and reliability.268

The Code provides for customer entitlements and responsibilities, which provides that the banks
shall act fairly, reasonably and ethically towards the customer and provide the customer with at
least 20 business days (or 5 business days in the case of credit agreements) notice before the

264 See, the remarks by E. T.Mutebile, at the Launch of the Uganda Bankers’ Association Code
of Conduct, Kampala, 2 December 2010.
265 Ibid
266 Ibid
267 See, the Bank of Uganda Microscope Report 2015.
268 See, the Preamble of the Code of Banking Practice of June, 2011.

69
implementation of changes in the terms and conditions, fees and charges, the discontinuation of
products and/ or services and the relocation of premises.269

This is echoed in the case of Sentongo v J. Kabugo Limited & 2 Ors,270 in this case the Plaintiff
entered into an understanding with the Defendants after they approached him and he accepted to
pledge his land comprised in Freehold Register Volume 435, Folio 8, Plot 579, at Kawempe, as
security for a loan for the 1st Defendant. The 2nd and 3rd Defendants who are Directors in the
1st Defendant Company personally guaranteed the loan. The Defendants jointly and severally
agreed to pay the loan within 15 months and issued Standard Chartered Bank Cheque No.
000200, in the sum of Shs. 110,000,000/-, to cover the principal sum of the loan acquired from
Equity Bank Ltd. The Defendants also issued another Standard Chartered Bank Cheque No.
000284 as consideration for the Plaintiff for utilization of his property as security for the said
loan.
It was agreed that the loan would be repaid by the Defendants not later than the date of the first
cheque and that they would make timely remittances on the loan and interest repayments as
agreed with Equity Bank. In breach of the understanding, the Defendants defaulted in repayment
of the loan, prompting the Plaintiff to repay the same. The high court of Uganda was of the view
that the 25% rate interest sought by the Plaintiff would be harsh and unconscionable. And her
worship Lord Flavia Senoga Anglin was of the view that this kind of agreement is based on trust.
She relied on the case of Shah v Guilders International Bank Ltd,271 where the court held that
“Where the parties to a dispute had not agreed on the rate of interest payable, section 26 (1) of
the Civil Procedure Act, conferred upon the court the discretion to award and fix interest rates
with regard to decrees for the payment of money. Where the rate of interest had been agreed, the
court was obliged to enforce the agreed rate unless it was illegal, unconscionable or
fraudulent”. Court exercised its discretion to award interest at the rate of 21% per annum from
the date of filing the suit until the date of judgment. This decision was fortified by the principle
established by decided cases that “in commercial transactions it is recognized that any sums due

269 The Code of Banking Practice June, 2011, Rules (3), and 3.1.
270 See, Civil suit no. 342 of 2014.
271 [2002] 1 EA 269 (CAK).

70
attract higher interest rates unlike general damages”. But even then, court is mindful of the
principle that in exercising its discretion, “the rate of interest awarded must be reasonable.”272

The award of interest is guided by established principles. Either it is the court rate, or
commercial rate, or central bank rate. At least there ought to have been a guideline. This is
especially so as the Civil Procedure Act prevents courts from enforcing payment of interest that
is harsh and unconscionable.273 Section 26 of the Civil Procedure Act provides as follows: On
Interest, that;

Where an agreement for the payment of interest is sought to be enforced, and the court is of
opinion that the rate agreed to be paid is harsh and unconscionable and ought not to be
enforced by legal process, the court may give judgment for the payment of interest at such
rate as it may think just;

Where and insofar as a decree is for the payment of money, the court may, in the decree,
order interest at such rate as the court deems reasonable to be paid on the principal sum
adjudged from the date of the suit to the date of the decree, in addition to any interest
adjudged on such principal sum for any period prior to the institution of the suit, with further
interest at such rate as the court deems reasonable on the aggregate sum so adjudged from
the date of the decree to the date of payment or to such earlier date as the court thinks fit;

Where such a decree is silent with respect to the payment of further interest on the aggregate
sum specified in subsection (2) from the date of the decree to the date of payment or other
earlier date, the court shall be deemed to have ordered interest at 6% per year.274

From the above quotation, it is evident that English law for a long time has accepted a third
category of remedy that is generally different from that in tort and contract that provides against
unjust enrichment or benefit.275

272 See, Kibwana & Another v Jumbe [1990-94] 1 EA 223 (CAT).

273 See, Nipun Narattam Bhatia v Crane bank Ltd [2013] UGCA 26, (Kenneth Kakuru).
274 See, The Civil Procedure Act, Cap 71, Section 26; See, The Bank of Uganda Financial

Consumer Protection Guideline, 2011, Regulation 8 (4).

71
In the case of Asam Products and another vs. National Bank of Commerce;276 this court found
that interest at 25% per annum which included as agreed penalty of 5% was neither harsh nor
unconscionable. Interest in that case was in respect of a loan granted to the appellant in that
appeal by the respondent Bank. The appellant had defaulted. The loan was in Uganda Shillings.
In this particular appeal, there was no loan. Furthermore, the agreement itself did not even
mention that upon refund of USD 37,500/= under clause 2, that the appellant would pay any
interest. Court was of the view that, if the parties had wanted interest to accrue, they would have
clearly stated so in clause 2 of the agreement. But they did not. And thus, the appellate court
found no basis upon which the judge awarded interest. The court had inclined to allow this
appeal and set aside the order of the High Court in respect of interest and substitute it with order
of refund of USD 37,500/= with simple interest at a rate of 6% per annum from date of this
judgment until payment in full, something that would have been more appropriate. This is
because the interest charged on US dollar was far less than that charged on Uganda Shillings.
But it did not do so, because it was as a result of the exchange rate and the central bank rate.277

But however, in a Kenyan case of Kaniki Karisa Kaniki v Commercial Bank Ltd & 2 Ors,278 in
this case the Plaintiff took out a Kshs.2.5 million loan from the 1st Defendant guaranteed by a
registered mortgage over the subject property. The loan fell into arrears and the 1st & 2nd
Defendants sold the property to the 3rd Defendant. There now lies the issue of whether or not the
loan was still owing at the time of sale, whether or not the sale was lawful and whether the
interest charged was unconscionable? Court found that, the developers of the interest rate
chargeable were at a better position to explain the facts. Section 39 of the Central Bank Act in
2000 when the Nairobi Suit was instituted provided that:

The Bank may, from time to time, acting in consultation with the Minister, determine and
publish the maximum and minimum rates of interest which specified banks or specified
financial institutions may pay on deposits and charge for loans or advances:

275 See, The speech of Wright in the case of Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe
Barbour Ltd [1943] AC 32 at 61.
276 See, Court of Appeal Civil Appeal no. 51 of 2003.
277 Ibid
278 HCCC No. 37 of 2015.

72
 Provided that the Bank may in consultation with the Minister determine different rates of
interest; for different types of deposits and loans; and for different types of specified banks
and financial institutions. And the Banking Act, Section 44 provided that; No institution
shall increase its rate of banking or other charges except with the prior approval of the
Minister.

There is no indication that the Commerce Bank sought the Minister's approval so as to increase
the interest or rates. The 1st Defendant informed the Plaintiff that the interest was at 40% due to
default in repayments.

D.K. Maraga, J in Ngengi Muigai & Another v East African Building & Another,279 in a suit
seeking injunctive prayers where the mortgagor contended that the interest charged was too high
stated that:

The interest charged by the first defendant is exorbitant and unconscionable. According to
him he said that the amount should not exceed twice the sum advanced.

In this case, His worship was of the view that, the correct interest rate to be charged is 25% per
annum as per the mortgage document.

3.13. Conclusion

In conclusion, Ugandan laws should be enacted on the spirit and tests that was developed by the
English Courts, something that will help victims of such conduct that is to say where ones will is
overborne to deprive that person an independent and voluntary decision or where the party is
unable to make a worthwhile judgment within what is best for him/her to have a legal redress
within the Acts of parliament. It is surprising that unconscionable transaction in banking has not
even been considered elaborately by the above Acts, nor have the numerous laws in place been
implemented. It may be hoped that in the future Uganda’s respect for the above laws may grow
and the problems that even today arise due to unconscionable transaction in banking, will instead
be brought to the Courtroom, Bank’s customer care desk and dealt with, using the available laws
in place.

279 [2006] KLR.

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 CHAPTER FOUR

UNCONSCIONABLE TRANSACTIONS IN BANKING AND IT’S EFFECTS ON BANK

CUSTOMER RELATIONSHIP

4.1. Introduction
This chapter discusses unconscionable transactions in banking and the likely effects on the bank
customer relationship. This will help to analyze in depth the term unconscionable transaction.
Unconscionable conduct, is a term used in contract law to describe a defense against the
enforcement of a contract based on the presence of terms unfair to one party.280 Unconscionable
transactions in banking has been explained in terms of both positive and negative effects, the
same chapter also outlined penalties and remedies that can be ordered, analysis of the problem,
evaluation, and the enforcement/ control mechanism.

4.2. Negative Effects of Unconscionable Transaction in banking

Typically, an unconscionable contract is held to be unenforceable because no reasonable or
informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to
benefit, because the consideration offered is lacking, or is so obviously inadequate, that to
enforce the contract would be unfair to the party seeking to escape the contract.281 For example
in the case of Wakanyira George David v Globle Capital Save Ltd & Ors,282 where the plaintiff
obtained a loan from the defendants and gave land titles to two of his properties as security for
the said loan. The sum of money borrowed was to be paid back within 6 months at an interest
rate of 10% per month. He was asked to sign two agreements of sale, a power of attorney and a
transfer form as further security for the loan. That the understanding between the parties was that
the transaction was a loan and that the two properties were security for the loan. That less than
three months into the agreed six month period the first defendant fraudulently without the
plaintiff’s consent and while there was no default in the monthly interest payment, transferred

280 Ibid 218 above.

281 The text is available under the creative commons Attribution-ShareAlike license. Last
modified on 7th August 2015, at 05:20, (access on 28 October 2015)
282 (2006) UGHCCD No. 560.

74
the above properties to the third defendant (Rutungu Properties Ltd a company owned by the
first defendant). The defendants then proceeded to issue eviction notices to his tenants who were
occupying the plaintiff’s property. As a result of this sudden transfer of the property, the plaintiff
was not able to recover his movable properties therein.
It is submitted in that case that if there was a money lending agreement then the interest charged
therein of 10% p.m. is illegal under Section 12 (1) of the Money Lenders Act. Cap 273 as being
harsh and unconscionable. That based on the alleged terms of the loan agreement the duration of
the loan was six months, but the said properties were transferred into the third defendant’s names
within one month.

Thirdly that the transfer was illegal and fraudulent as according to the two transfer forms the two
properties in question though elaborately developed were declared to be empty plots, with a view
to make an under-declaration for stamp duty purposes. It is submitted that a contract is bad if it
offends public policy. For example in the case of Dr. Kaijuka Mutabazi Emmanuel v Fang Min
SCCA No. 23 of 2007. Furthermore, in the case of Samuel Kizito Mubiru & Another v G.W.
Byansiba & Another,283 it was held that by public policy any transaction designed to defraud the
Government of its revenue is illegal.

It should however be noted from the above holdings, that once it comes to the courts notice that
the contract or any transaction between the bank and its customer was either illegal or involved
an unconscionable conduct between the parties neither can the court enforce such a contract nor
the parties to it get any remedy such as refund of the consideration to such a contract.

In support of the above argument, Counsel in the case of Avi Enterprises Ltd v Orient Bank Ltd
& Anor284 relied on the case of Byensi Harriet v Kamugisha J.B.285 where Justice Andrew
Bashaija quoted from Royal Bank of Scotland v Etridges286 for the doctrine of undue influence as
a ground of relief developed by the courts of equity. From the doctrine of undue influence the
common law courts developed the principle of duress. Counsel relied on the proposition of law

283 [1985] HCB 106.

284 (HCCS No. 147 OF (2012), [2013] UGCOMMC 66.
285 See, HCCR No. 26 of 2011.
286 See, No. 2 (2001) UK HL [2002] 2 AC 773.

75
that where unacceptable means is used to procure a transaction, the law will not permit the
transaction to stand on the grounds of improper or undue influence.

Judges are no more constrained under the new legislative regime than previously. Plaintiffs must
still plead and prove the relevant substratum of facts if they are to succeed in their claim. For
example, in Astran Financial Services Pty Ltd v Bank of Queensland Ltd, 287 Buchanan J of the
Federal Court of Australia observed that a ‘conclusion that conduct is unconscionable requires
the identification of a standard in behaviour which is not to be equated merely with a list of
factors to which a Court may have regard’.

Furthermore, an unconscionable transaction in banking also has an effect on contracts of

guarantee. For instance In Halsbury's laws of England,288 it is written that a contract of
guarantee, like any other contract, can be avoided where there has been a material
misrepresentation of fact including entry into the contract, even if the misrepresentation is
innocent. It was also held in the case of Barton v County NatWest Ltd289 that where a
misrepresentation is made fraudulently and it is of a kind that would be likely to induce the
person to enter into the contract, there is a presumption of reliance in favour of the victim of the
misrepresentation. The creditor then has the burden of proving that there was no reliance by the
victim on the misrepresentation.

4.3. Unconscionable Transaction and Its Positive Effects

There are circumstances where an innocent party or a party in disadvantageous position is likely
to recover under a transaction that is unconscionable. This is because English law for a long time
has accepted a third category of remedy that is generally different from that in tort and contract
that provides against unjust enrichment or benefit. In the case of Fibrosa Spolka Akcyjna v
Fairbairn Lawson Combe Barbour Ltd,290 Lord Wright had this to say on unjust enrichment: The
claim in the action was to recover a prepayment of Pounds 1,000 made on account of the price

287 [2010] FCA 1010, [355].

288 Halsbury’s laws of England 4th Edition Para 103.
289 [1999] Lloyds Report Bank 408, CA.
290 [1943] AC 32 at 61.

76
under a contract which had been frustrated. The claim was for money paid for a consideration
which had failed. He said that;

It is clear that any civilized system of law is bound to provide remedies for cases of what has
been called unjust enrichment or unjust benefit, which is to prevent a man from retaining the
money of or some benefit derived from another which it is against conscience that he should
keep. Such remedies in English law are generally different from remedies in contract or in tort,
and are now recognized to fall within a third category of the common law which has been called
quasi-contract or restitution (emphasis added).

Restitution is an equitable remedy. Courts have long held that actions for money had and
received lie “for money paid by mistake, or upon a consideration which happens to fail, or for
money got through imposition (express or implied) or extortion or oppression or undue
advantage taken of the plaintiff’s situation contrary to laws made for the protection of persons
under those circumstances”. As Lord Mansfield CJ put it in the case of Moses v Macferlan that,
“The gist of this kind of action is that the defendant, upon circumstances of the case is obliged by
the ties of natural justice and equity to refund the money.”291

The above common law doctrine is provided for in Section 16 (4) and (5) of the Uganda’s
Contract Act, 2010 which provides for the same remedies to the party in a contract who pays
money through a mistake, duress, and undue influence, in such a circumstance court can order
the refund of the money paid or an order for specific performance or quantum meritus.

For the defense of unconscionability to apply, the contract has to have been unconscionable at
the time that it was made; later circumstances that make the contract extremely one-sided are
irrelevant. There are no standardized criteria for determining unconscionability; it is a subjective
judgment by the judge, not a jury, and is applied only when it would be an affront to the integrity
of the judicial system to enforce such a contract. Upon finding unconscionability, a court has a
great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract
against the party unfairly treated on the theory that they were misled, lacked information, or

291 Ibid
77
signed under duress or misunderstanding; it may refuse to enforce the offending clause, or take
other measures it deems necessary to have a fair outcome. Damages are usually not awarded.

In simple terms it means that unconscionability serves as a defense when it appears that the
contract has been misrepresented to another who suffers as a result of the misrepresentation.

4.4. Penalties and Remedies

If the court determines that unconscionable conduct has occurred, a variety of remedies may be
ordered including:- 292

a) Compensation for loss or damage; the party who suffers the breach is entitled to receive
from the party who breaches the Contract compensation for any loss or damage caused to
him or her. But it is important to note that compensation is not given for any remote and
indirect loss or damages by reason of the breach.293
b) financial penalties; where a sum of money is named in the Contract as the amount to be
paid in case of a breach or where a contract contains any stipulation by way of penalty,
the party who complains of the breach is entitled, whether or not actual damage or loss is
proved to have been caused by the breach, to receive reasonable compensation not
exceeding the amount named or the penalty stipulated, as the case may be.294
c) Having the contract declared void in whole or in part; here the promise may dispense
with or remit, wholly or in part, to a promisor. Where a party to a contract incurs
expenses for the purposes of performance of the contract, which becomes void after
performance, the court may discharge the other party, wholly or in part, from making
compensation for the expenses incurred.295
d) Having the contract or arrangement varied; the parties to a contract shall perform or offer
to perform their respective promises, unless the performance is dispensed with or excused

292 Article available https://www.gov.au/business/anti-competive-behaviour/unconscionable-

conduct#penalties-and-remedies. (accessed on 28th October 2015); also see generally Section 16
of the Contract Act, 2010.
293 See, The Contract Act, 2010, Section 61 (1), (2).
294 See, The Contract Act, 2010, Section 62 (1).
295 See, Sections 52 and 54 (2) (b) of the same Act.

78
 under the law and the parties may accept instead of the promise, any satisfaction which
he or she thinks fit.296
e) A refund or performance of specified services. This happens where a party to a contract,
is in breach, the other party may obtain an order of court requiring the party in breach to
specifically perform as contracted.297

4.5. Controlling Unconscionable Transactions in Banking

4.5.1. Problem analysis

In the modern context, bank customer relationship cannot be perceived merely as an ordinary
contractual relationship, governed only by the consensus of the parties. Circumstances reveal that
the state also has an important stake in regulating the bank customer relationship.298 It is a
common ground that in majority of the circumstances, customers of banks stand in an inferior
status, compared to the status of the banks when it comes to bargaining power. In such situations
the state acts as a surrogate for the customers and compels banks to meet standards purportedly
in the interest of the customers.299 This is done by way of various regulations imposed on the
banking industry. Though these regulations may vary with the type of the customer, the
underlying objective is to broaden the scope of challenging the conduct of banks in performance
of their duties.300

4.5.2. Evaluation of unconscionable conduct

Banks very often use standard forms when entering into contracts with their customers. These
standard forms favour the banks and more often, could be detrimental to the customers’ interests,
further, certain contractual terms, such as exclusion clauses and variation clauses, incorporated

296 Ibid Sections 33 (1) and 52 (c).

297 Ibid
298 See, R. Cranston, “Principles of Banking law” (2nd edn Clarendon: Oxford University press,

2002) at p. 144.
299 Ibid
300 See, R. Goode, “Consumer Credit legislation” Butter worth [loose- leaf].

79
into contracts between the bank and the customer, more often disfavor the interests of the
customers.301

But nonetheless, the Bank of Uganda Financial Consumer Protection Guidelines, in its part II
provides for obligations of the financial services provider, that a financial services provider shall:
ensure that any information given to a consumer whether in writing, electronically or orally is
fair, clear and transparent; ensure that the information is easily comprehensible so that a
consumer can make an informed choice about a product or service; ensure that the information is
written in plain English and in a font size of not less than 10 point, so that it is clear and
readable; where a consumer is unable to understand English, provide an oral explanation in a
language the consumer understands; where a consumer is unable to understand written
information, explain orally to the consumer the written information; ensure that where an oral
explanation in paragraph 8(1) (d) and (e) has been provided to the consumer, the consumer shall
have a third party to countersign as evidence that an oral explanation has been given to the
consumer; and ensure that information on its products and services is updated and current and
easily available at its branches, websites and any other communication channels which it uses;
and ensure that it discloses at its branches, websites, advertisements, promotional materials and
any other communication channels which it uses that it is regulated by Bank of Uganda.302

4.5.3. Enforcement/control mechanism

4.5.3.1. Common law safeguard

The common law has devised various mechanisms to curb the detrimental effects caused to the
customers through standard forms, exclusion clauses, and variation clauses. Variation clauses are
employed to vary the existing terms in the contract. Once a customer signs a contract, he/she is
generally bound by the terms of it, even if he/she has not read the terms.303

301 The effect of exclusion clauses is to limit or exclude the bank’s liability arising out of the
bank customer relationship. See, chitty on contracts 22 nd Edition, Volume 1.
302 See, The Bank of Uganda Financial Consumer Protection Guidelines June, 2011, Regulation

8 (1).
303 See, L’Estrange v Graucob [1934] 2 KB 394.

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However, this common law rule is subject to a number of limited exceptions. If the document
does not appear to be contractual or though it appears to be contractual if the customer is affected
by fraud, misrepresentation, undue influence and unconscionability, then, the customer would
not be bound by it.304 In the event of absence of the signature or lack of notice, the customer may
be able to argue that the bank’s written terms have not become part of the contract.305 Exclusion
clauses in the contract may be construed against the bank under the contra proferentum rule, in
cases of ambiguity or where the rules of construction fail.306 Variation clauses may be void for
uncertainty.307 And may not become terms unless the customer is given reasonable notice of the
variations, more importantly the customer needs to accept the variations for the same to be given
legal effect.308

4.5.3.2. Legal safeguards

Apart from the common law, statute law also has stepped in, to regulate/control bank customer
relationship in various ways, adding and filling the gaps of the common law. Out of a variety of
statutes that regulate banks, legislations such as the bank of Uganda Financial Consumer
Protection Guidelines, Contract Act and Code of Good Banking Practice provide wide scope for
challenging the conduct of banks in Uganda.309
However, the provisions of the statutory law above, exclude certain contracts, which may come
under the scope of banking business.310 The Contract Act of Uganda though confined to
consumer contracts, extend far beyond dealing with exclusion clauses.311 It is submitted that its
provisions are appropriate especially in dealing with consumers due to the weaker bargaining
power of that category. Apart from traditional common law mechanisms, the Contract Act of

304 Ibid 229 above.

305 For instance, Burnett v Westminister Bank Ltd [1966]1 QB 742; Spurling Ltd v Bradshaw
[1956] 1 WLR 461, Where Lord Denning said, “Some clauses which I have seen would need to
be printed in red ink on the face of the document with a red hand pointing to it before the notice
could be held to be sufficient”. At p. 466.
306 When contra proferentum rule is employed, the relevant terms of the contract are construed

against the maker. See, D.J Bakibinga laws of Contract.

307 See, Paragon Finance PLC v Nash & Staunton [2002] 2 ALLER 248; Lombard Tricity

Finance Ltd v Paton [1989] 1 ALLER 918.

308 See, Burnett v Westminister Bank Ltd [1966] 1 QB 742; [1965] 3 ALLER 248.
309 See, The Contract Act, 2010; also The Code of Good Banking Practice in Uganda.
310 Ibid
311 Ibid 228 above at p. 150.

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Uganda, 2010 has extended the scope of challenging banks by new principles such as
misrepresentation, undue influence, and unconscionable conduct.312 The main piece of consumer
protection guidelines in Uganda, which is the bank of Uganda Financial Consumer Protection
guideline, 2011, contains provisions such as transparency, fairness, and reliability in its part II as
obligations of the financial services provider or business entities.313 However, the success of this
provision is yet to be seen in respect of banking.

4.6. Conclusion
In this chapter attention is given to the protective or what needs to be considered, to develop a set
of measures to protect banking transactions from being seen to be unfair, to make it immune
from, or at least to minimize its risk of, being set aside or modified by the Courts. However, the
concept of unconscionable transaction underpins many grounds for relief which do have
application, albeit some of it limited in the commercial arena. An examination of the cases
suggests some courts at least appear to be making tentative attempts at determining morality in
the commercial arena even if this is not yet clearly enunciated or defined.

312 Mason, put it in Amadio’s case that “fraud, misrepresentation, breach of fiduciary duty, undue
influence and unconscionable conduct are all spicies of unconscionable conduct in one sense”.
313 See, The Financial Consumer Protection Guidelines, 2011, Regulation 5.

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 CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1. Summary
This chapter focuses on the concluding remarks of the whole thesis right from the start and the
necessary recommendations which can help the regulators and other stakeholders. From all the
analysis established above concerning unconscionable transactions in banking and the law
relating to bank customer relationship which has been dealt with. It is important to note that
this research work is not meant to propound new theories, but rather to analyze the existing
literature by the various researchers as well as the laws that are in existence to tackle the above
problem of study.

The study based on both qualitative and quantitative approach to collect data, which the
researcher has analyzed analysed in accordance with the ‘Grounded theory’ technique. And in
trying to answer research question one that relates to the available national laws and policies
regulating banking systems in Uganda, the following are the results:

Unconscionable conduct does not have a precise legal definition as it is a concept that has been
developed on a case by case basis by courts over time.314 Conduct may be unconscionable if it is
particularly harsh or oppressive.315 To be considered unconscionable, conduct it must be more
than simply unfair it must be against conscience as judged against the norms of society.316
Business behavior may be deemed unconscionable if it is particularly harsh or oppressive, and is
beyond hard commercial bargaining.317

314 See, Commercial Bank of Australia v Amadio (1983) 151 CLR 447 at p. 461 (Per Mason).
315 See, V. Paul article on, “Uncoscionability and Good faith in business transactions”, National
Commercial Law Seminar Series, on 21 October 2013.
316 See, R. N. Moles, Article on Recent Developments in Unconscionability.
317 Ibid

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For example, Ugandan law finds transactions or dealings to be 'unconscionable' when they are
deliberate, involve serious misconduct or involve conduct which is clearly unfair and
unreasonable.318

Throughout the research, it is found out that unconscionability invariably results from an
imbalance in bargaining power. In this regard individuals and small companies may well be able
to establish that they were subject to unconscionability, but whereas large corporations like the
financial institutions are not so easily accommodated.319 Thus something that still creates loop
halls in the law governing bank customer relationship. This answers research question two, since
the exisiting laws have not been effective enough to resolve and tackle the accruing challenges
thereto. The law has remained unclear when it comes to determining what unconscionable
conduct mean, for instance; the duty imposed on the stronger party is the duty to act reasonably
that is to say that assistance or explanation need only be provided where the stronger party either
knows or ought to know of the other party’s disadvantage. For example in Amadio case, it is
suggested that if the stronger party can show that the transaction was “fair, just and reasonable”
then the transaction may not be impugned.320 Thus this test still creates problems to the
inexperienced disadvantaged customers/consumers involved in transactions with the banks who
have much more experience than the customers.

However, it is important to note that a new concept has been added by general and contractual
law and has been passed by Ugandan courts, on whether the Expropriated Properties Act
nullified dealings in both property and employment contracts. Courts are of the view that;

There is unfair bargain where a party to it imposed objectionable terms in a normally

reprehensive manner… which affects its conscience, for example where an advantage has
been taken of a young, inexperienced or ignorant person to introduce a term which no
sensible, well advised person would accept.321

318 See, generally the Contract Act, 2010, Sections 15- 16.
319 Ibid 246 above.
320 Ibid
321 Madhvan and Company Ltd and another v Mugarura and others [2010] 2 EA at page 502.

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A bargain cannot be unfair and unconscionable unless one of the parties to it has imposed the
objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his
conscience.322 This holding is in line with the definition given in the Mortgage Act, 2009 which
explains “unconscionable” to mean unfair or oppressive, involving procedural abuses relating to
terms of contract where the terms of the contract violate reasonable expectations of the parties;323
thus, it is the researchers view that this reform in the law is necessary to address the issues
regarding unconscionable transaction in banking.

This is to ensure that the stronger party is aware of the other party’s disadvantage or ought to be
sentient of their issues. In the Amadio case the verdict suggests that if the stronger party can
prove in the court that the contract was fair, just and reasonable,324 then the transaction may not
be impugned.

It is important to note that unconscionable transactions in banking and bank customer are
intertwined, since the former affects the later to seize and visa-versa. The business of banking
has undergone a radical transformation from its inception throughout the years. It has been
recognized from the above discussion that banks in dealing with its customers, tend to exert wide
influence over not only their customers, but also the overall economy. In the light of this, the
banking law has developed various means to regulate the affairs of banking business through the
various codes and statutes that govern banking business.325 Thus, the customers of banks in
Uganda should have hope, since the law makers and the recommendations below if taken use of
and the already existing laws are in the process to be more implemented in order for the
relationship that subsist between the banks and customers to be strengthened.326

The notion of unconscionable conduct in its broadest sense has enlivened the
law in Uganda since the early 1980’s. The Courts have signaled their preparedness

322 See, Multiservices Book- building Ltd and others v Marden [1978] 2 ALLER 489; 502.
323 The Mortgage Act, 2009, Section 1.
324 http://www.lawteacher.net/free- law-essays/contract- law/commercial-bank-of-australia-v-

amadio-contract- law-essay.php#ixzz3pooiGJP. Accessed on 29th September 2015.

325 For example the Bank of Uganda Financial Consumer Protection Guidelines, 2011 and the

Code of Banking Practice June 2011 of Uganda.

326 Ibid

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to reconsider the rules of contract law in the light of the principle of unconscionability.327
Echoing developments in the Australia, United States and Canada, the Courts have shown a
growing willingness to intervene even in bank-customer dealings to remedy unconscionable
behavior.328 But this work has pointed to what is still an ad hoc redressing of unconscionable
behaviour. Some redress has been achieved within existing heads of relief.329 In such disparate
heads as equitable estoppel, duress and relief from penalties, inequality of bargaining strength is
a common feature.330 But this inequality is not the basis for the relief. The courts have given
relief because of unfair behaviour where it has been possible to point to settled legal
principles.331 Relief under the narrow equitable doctrine of unconscionable transactions has not
been so readily extended to commercial parties. This work has considered the difficulties of
using "unconscionability" as a bare standard of commercial behaviour and has pointed to the
problems of a court-imposed view of what is appropriate commercial behaviour.

5.2. Commercial Morality

The difficulty stems partly from the problem of determining standards of fairness in
commercial dealings.332 In dealings between individuals or between bank and customer
there is a reasonably clear idea of community standards at any given time.
These dealings are informed by standards of personal morality. But commercial
morality in dealings between businesses is not as easily determined, given that
business is driven by the need to make profits. In particular, underlying
unconscionability is a notion that one party owes a duty to consider the other in their

327 See, the case of Madhvan and Company Ltd v Mugarura [2010] 2 EA at page 502.
328 See, the provision of Section 52 A of the Trade Practices Revision Act 1986 (Cth), into the
TPA, where it provides that, “a Corporation shall not, in trade or Commerce, in connection with
the supply or possible supply of goods or services to a person, engage in conduct that is, in all
the circumstances, unconscionable.”
329 ACCC v Berbatis Holding Pty Ltd (2000) 169 ALR 324; [2000] FCA 2 at pages, 8 and 20

(Per French, as he then was).

330 See, Section 21 paragraph 41 of the Explanatory memorandum to the amending Act stated

that: “the provision embodies the equitable concept of unconscionable conduct as recognized by
the High Court in Blomley v Ryan (1956) 99 CLR 362.”
331 See, Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
332 See, Tonto Home Loans Australia Pty Ltd (2011) 15 BPR 29, 699; [2011] NSWCA at p. 291

(per Allsop).
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dealings. In the narrow doctrine of "unconscionable transactions" this duty involves
ensuring the stronger party does not procure a bargain by taking unfair advantage of
the other party’s particular weakness or disability.333 But it is far from clear that a
disability such as illiteracy or old-age in an individual can be equated with weak
bargaining strength brought about by small size in a commercial operator.334 In particular,
the courts look for "special disadvantage" and of itself, being economically weaker is
not "special."335 Therefore it is difficult to determine, in the absence of legislative
direction, the nature of the duty, if any, which one party in business owes to another
outside of honesty. This point to a problem with any general legislative standard such as "harsh
and unconscionable."

5.3. Means of Imposing Standards

There are difficulties in determining a standard is not necessarily a reason for
failing to impose standards. The failure of small business because of harsh contracts
carries its own social and economic costs. The issue is, if it is determined that in some
circumstances parties in business for example banks owe duties beyond honesty towards the
other, how should these standards be imposed? One approach is to be more specific about the
nature of the duty of fairness. Parliament has determined that duties of fairness are owed in
certain commercial dealings. Thus there is intervention in particular in contracts as provided in
Contracts Act No.7 of 2010. Another approach has been to nominate particular problems to be
redressed such as unfair exclusion clauses. Statutes are only one means of imposing standards.
Codes of practice, both voluntary and mandatory, have been used in banking. This work has
pointed to the strengths and weaknesses in each approach.

333 See, The Contract Act, 2010, Sections 14, and 15.
334 See, J. H. KEOGH, “the case against unconscionable conduct”:Barristar at Law.
335 See, Lisciondro v Official Trustee (1995) ATRP 41-436.

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5.4. Difficulties in Regulating Fairness

This thesis has suggested that specific statutes have had successes in
redressing some harsh practices.336 However, it has also pointed to the lack of a specific Act to
deal with that problem, such statutes to regulate what fairness is. The Bank of Uganda (The
Central Bank) supervises commercial banks337 and determines the interest rate on loans.
However any attempt to regulate prices would go against the thrust of the market economy and
interfere with attempts to encourage competition and if left to the courts, judges would be
making economic decisions for banks.338 Given the difficulties, proponents of regulation thus
often point to the value of general legislation imposing a broad standard which can catch
unconscionable conduct whenever it arises.339

5.5. Broad Legislative Standards

The Contracts Act No.7 of 2010 provides a model for a general legislative approach to
unconscionable behaviour. But this work has pointed to considerable criticism of the section, in
particular that it lacks a rigorous methodology.340 Given that it can be invoked by banks and
customers, the need for a rigorous methodology is important. The complexity of commercial
contracts ought not to allow for them to be readily overturned by the courts. It can appear trite in
this area to appeal for certainty, yet banks obviously do require certainty of legal rules and
consistency in their application.341 In Uganda, the Parliament has been reluctant to extend

336 For example, The Bank of Uganda Financial Consumer Protection Guidelines and the Code
of Banking Practice June, 2011.
337 See, The Financial Institutions Act of 2004 which was amended by the Financial Institutions

Amendment Act 2016, Section 79.

338 For example, see, the decision of Batt in the case of Olex Focas Pty Ltd v Skodaexport Co.

Ltd at p. 356, where he stated the principle that, “that people should not, by an appeal to strict
legal rights, cause hardship to others by violating their reasonable expectations”; and also that
of Allsop in ACCC v Lux case, where he said, “that the task of the court is the evaluation of the
facts by reference to a normative standard of conscience”.
339 See, the decision of Allsop, in the case of ACCC v Lux Distributors [2013] FCAFC 90; at 23,

where he said, “That the existence of State legislation directed to elements of fairness is a fact to
be taken into account.”
340 See, the Contract Act, 2010 of Uganda.
341 See, The Bank of Uganda Act, Cap 51, Section 2 (3), generally where it provides that, a bank

may enter into contracts that may be expedient.

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general legislative relief for unconscionable conduct to banks.342 Hence although there was a
review of the Contracts Act No.7 of 2010 to include reliefs to businesses and persons affected by
unconscionability, this was not forthcoming. Similarly the widening of the unconscionability
provisions of the Mortgage Act in the form of has not greatly enlarged the scope for business and
bank customers to seek redress for harsh bargains.343 Outside the supply of consumer goods and
services, where there is scope to examine the terms of supply themselves, relief is linked to the
equitable doctrine which so far depends on a "special disadvantage". For this reason, as the law
stands in Uganda , unconscionable conduct, used in the sense of the principles developed in
Blomley v. Ryan and Amadio holds only small comfort for businesses and bank customers faced
with harsh contracts.344

5.6. Conclusions
Despite the findings and the recommendations that have been analyzed in this thesis, and the
various reforms and amendments that have been made in the Financial Institutions Act, 2004
which was amended by the Financial institution Act, 2016, though they are going to help to build
and strengthen bank and customer relationship, still much is needed when it comes to the
contract Act, 2010, which also still needs some amendments and reforms in order to cater for the
issue of unconscionable transactions in banking, it is submitted that the recent development in
the law of banking brought about by this thesis is merely bringing it into line with what
laypersons would assume it to be, and always to have been. At this note, it is important to echo
verbatim some of the preambles of statutes that regulate banking business in Uganda, such as the
Bank of Uganda Act, Cap 51, the Financial Institutions Act, 2004 respectively. The Act clearly
provides that it intended “to amend and consolidate the bank of Uganda Act for regulating the
issuing of legal tender, maintaining external reserves and for promoting the stability of the
currency and a sound financial structure conducive to a balanced and sustained rate of growth of
the economy and for other purposes related to the above”. This statement shows that with a
better banking, the economy can grow, and it called for a conducive financial structure in order

342 For example both the Contract Act, 2010 and the Financial Institutions Act of 2004 which
was amended by the Financial Institutions Act 2016, does not have a general relief for
unconscionable conduct.
343 See, generally the Mortgage Act, 2009 of Uganda.
344 [1956] HCA 81; (1956) 99 CLR 362; and (1983) 151 CLR 447, (respectively).

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to promote bank customer relationship in Uganda, then why banks keep on promoting bad
banking practices such as unconscionable dealings in banking transactions.
Furthermore, the Financial Institutions Act, 2004 is An Act that was meant “to revise and
consolidate the law relating to financial institutions in order; to provide for the regulation,
control and discipline of financial institutions by the Central Bank; and to repeal the Financial
Institutions Act, Cap. 54 and to provide for other related matters”, despite the provision that other
related matters of banking in its literal meaning, the issues of unconscionable transactions in
banking was not fully tackled. But still, despite this law being in place, customers of banks have
continued to be cheated and made to sign Contracts which they do not understand, and worst of
all not advised to always seek independent professional legal advice whenever they are
negotiating transactions with their banks, and the banks that have been identified of doing this to
its customers some have gone unpunished or have not faced any disciplinary action from the
bank of Uganda.

The object of the bill, 2015 to amend the Financial Institutions Act, 2004, was to provide for
Islamic banking; to provide for banc assurance; to provide for agent banking; to provide for
special access to the credit reference Bureau by other accredited credit providers and service
providers; to reform the deposit protection fund; and for related purposes. Despite the several
repeals that have been made in the Financial institutions Act, to replace the Financial Institutions
Act, Cap 54 and that of 2004, it was enacted among other things, to address the crisis in the
banking sector of the late 1990’s that resulted into the closure of several commercial banks. The
crisis in the banking sector at the time was largely attributed to the loopholes in Cap. 54, but still
despite the several amendments that Uganda has made in this Act, for instance the Financial
Institutions Act, 2004, which was amended by the Financial Institutions Act, 2016, did not
comprehensively deal with the issue of unconscionable transactions in banking, hence calling for
another amendment in the same law. Uganda parliament is argued to avoid repeating the same
mistakes that has kept for many years the banking sector in Uganda to remain in crisis, for
instance cap. 54 also did not deal with the issue of restrictions to shareholding and directors’
insider borrowing, which lead to the collapse of many commercial banks because the capital of
the banks was returned to the shareholders of the banks hence putting depositors who are the
customers at risk of losing their deposits. Even at the time of enactment of the Financial
Institutions Act, 2004, and the several amendments in Act, 2016, it was considered adequate in

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ensuring that Financial Institutions were better regulated and more properly managed than was
the case prior to its enactment. If the issue of unconscionable transactions in banking is not a
gently dealt with, it will delay Uganda to achieve its economic growth, hence leading to further
subsequent problems in years to come in the banking sector. Therefore the reform process
should have started yesterday. And it is in this vein that the researcher suggests for the following
recommendations;

5.7. Recommendations
Having critically analyzed the various laws and regulations put in place to fight/control
unconscionable transactions in banking, It is on this note that this thesis, would like to
recommend that; both the banks and its customers should make use of the following
recommendations below; The following recommendations may assist businesses and customers
to avoid becoming a victim of unconscionable conduct.345

5.7.1. Legal reforms

5.7.1.1. Proposal for legislation to control bank customer relationship
At present in Uganda, there is no law that regulates bank and customer. The relationship is purely
controlled by custom and common law. The banker and customer relationship is a contractual
relationship based on a contract between the parties.346 As a contractual relationship, it is
governed by contract law.347 Besides the contract Act, 2010 which does not provide the customer
with the protection he or she requires against the bank.348 Much of the law on bank customer
relationship is based on English common law. There is a need to codify common law principles.
Therefore, Ugandan courts should do exactly what the Israeli courts did by adopting a unique
approach in determining that the banking contract is a special contract (a fiduciary contract).349

345 Article available at https://www.accc.gov...Austrialian Competition & Consumer Commission

(Anti-competitive behavior) accessed on October 2nd 2015; also see, Unconscionable Conduct in
business-margaret River…Article available at www.margretriverbusiness.com>Articles.
Accessed on October 2nd 2015- Some practical tips to avoid becoming a victim of
unconscionable conduct.
346 E.P. Ellinger, E. Lomnicka, “Modern Banking Law”, (2011) 5th Edition.
347 Ibid
348 P. S. Ruth, “The Bank’s fiduciary Duty” (2007), 36 Common L. World Rev. at 27.
349 Ibid

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Under a fiduciary contract, the bank, as a fiduciary, is subject to a fiduciary duty vis-à-vis the
beneficiary, the customer.350 The fiduciary duty imposes a very high standard of behavior on the
bank, much higher than the standard imposed on it under contract law. By adopting a fiduciary
approach, the customer is granted very wide protection against the bank.
However, the implementation of the existing contract law in the banking context creates a
problem. The Contract Act, 2010 does not take into consideration situations of inequality of
power between the parties.351 Contract law determines arrangements that seek to balance the
interests of the contracting parties based on the presumption that they are equal in power.352 In
situations of a serious power disparity between the parties, these laws do not provide any
particular protection for the weaker party. The bank customer relationship is characterized by a
huge inequality of power, and therefore the Contract Act, 2010 is not an appropriate tool for the
regulation of this contractual relationship.353

5.7.1.2. Legislating Bank and Customer relationship in the area of unconscionability

Legislation is the strongest and broadest weapon in the arsenal of any government for the
regulation of general trading activities of corporations and Banks. Legislation can among other
things regulate a wide range of activities relating to provision of financial products as well as the
provision of advice above financial products. Legislation also prohibits misleading and deceptive
conduct and unconscionable conduct in relation to financial services provided to certain
customers.354 In the area of unconscionability, there should be recent legislative enactments in the
area of contracts and banking, to give important statutory force to the common law provisions.
For instance to;

a) Clarify the application of the common law to certain areas;

b) Bring the matter within the legislation which would ensure compliance within those
areas;

350 Ibid
351 Ibid
352 F. Daniel & N. Cohen, “Contracts”, (1991), at pages 59-128.
353 Ibid
354 See, Cardozo, “Shaping Law and Legal Values”, the nature of judicial process, (1921),

Newhaven, Yale University Press, at pp. 104-5.

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 c) Ensure that the remedies like injunctions and other orders are available for infringements
of the unconscionability provisions but not damages.

This statutory adoption of the common law principles would incorporate further developments in
this area, and may lead to a somewhat wider effect. The suggested legislation should include
unconscionable conduct within its ambit, widens the potential for commercial plaintiffs to bring
an action under the suggested act for unconscionable conduct to protect consumers, be extended
to undue influence and allows the court to consider range of factors which go beyond the narrow
view of unconscionable conduct as found in Blomley v. Ryan and Commercial Bank of Australia
Ltd v. Amadio.355

5.7.1.3. Transformation of the old rules of contract law

Uganda is a common law country and is still in the good old days of “caveat emptor”, which
suggests that a party to a contract could look after their own interests, but had no obligation to
the other party beyond the duty not to actively mislead the other party. That “consideration” must
be present but that it did not need to be “adequate” consideration.356 That “intention” to contract
was to be determined “objectively.”357 Those obligations did not arise until the “meeting of
minds” had occurred, whereby the parties became contractually bound to each other.358 And of
course, “privity of contract” meant that only those who were party to the contract could be
obligated by it, or obtains rights in respect of it.359

However, this should be very far removed from the “rules” of contract law as stated in the
previous paragraphs. Indeed, unconscionability should not in fact be part of contract law at all
like the law of negligence; it should be a new area of “obligations”. The idea of

355 Ibid
356 See, Benjamin, “Benjamin’s Sale of Goods” (4th edn (Guest, AG. Ed), Sweet & Maxwell-
London 1994).
357 Ibid
358 Steyn in the Case of Mannai Investment Co. v Eagle Star Life Assurance [1997] A.C. 749, HL

(as reported in Contract Law; Cases and Materials at page 334) when he said; “that a
Commercial Construction is more likely to give effect to the intention of the parties. Words are
therefore interpreted in the way in which a reasonable Commercial person would construe
them”.
359 See, F. Cheshire and Furmstons, “Law of Contract” (12th edn, Butterworths 1991).

93
unconscionability to derive new legal rights in the absence of a pre-existing legal relationship (as
no contract was ever formally concluded). The element which both attracts the jurisdiction of the
court and shapes the remedy is unconscionable conduct on the part of the person bound by the
equity, the courts should go no further than is necessary to prevent unconscionable conduct. A
definitive definition cannot be given of unconscionable conduct.360

5.7.1.4. Broadening of the common law principle to avoid discriminatory categories

At common law, the old rules of the contract were “for example, gender bias” where women
were automatically regarded as suffering from some “disability”. Clearly this is unacceptable.
The principle involved here should be more broadly expressed to encompass all people who are
involved in relationships of dependency.361 It is not necessary for them to decide whether same
sex relationships and de facto relationships are intended to be also covered by this principle. All
should be so covered by the principle. Some discriminatory aspects of that kind should be
removed, and that the concepts of the law should be re-stated in more general terms.362

5.7.1.5. Inclusion of Unconscionable Conduct in the Financial Institutions Act, 2016

The unconscionable conduct was not included in the Financial Institutions Act, 2016. The
legislators left "unconscionable conduct" unmentioned in the said Act.363 Unconscionable
dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit
of, dealing with a person under a special disability in circumstances where it is not consistent
with equity or good conscience that he should do so.364 The adverse circumstances which may

360 See, the case of Tonto Home Loans Australia Pty Ltd (2011) 15 BPR 29, 699; [2011]
NSWCA 389. His honour summarized the relevant Law as follows; “that the concept of
Unconscionable in this context is wider than the general Law and the provisions are intended to
build on and not be constrained by cases at General Law and equity… it is neither possible nor
desirable to provide a comprehensive definition. That a finding requires an examination of all
the circumstances”. (Per, Batharst, and Campbell).
361 See, Janson v Janson [2007] NSWSC 1344.
362 For example see, how it is provided under the Code of Banking Practice June, 2011, Section 3

(3.1), that the bank will, not unfairly discriminate against a customer on the grounds of marital
status, gender, age or race in providing a customer with banking services.
363 See, the examination of the word, ‘Unconscionable’ in Butterworths Australian Legal

Dictionary (1997).
364 See, Atkins v National Australia Bank (1994) 34 NSWLR 155.

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constitute a special disability for the purposes of the principle relating to relief against
unconscionable dealing may take a wide variety of forms and are not susceptible to being
comprehensively catalogues, the common characteristic of such adverse circumstances seems to
be they have the effect of placing one party at a serious disadvantage vis-a-vis the other.365

5.7.2. Institutional framework of the banking sector

5.7.2.1. Need to Emphasize Independent professional legal Advice

In the banking arena, while not as frequently encountered as in the consumer arena, there is
overlap between inequality of bargaining power, undue influence and lack of independent advice
and this is seen most clearly with regard to contracts of guarantee and surety ship. Two issues are
raised in such contracts: whether there is understanding of the state of the business or persons
being guaranteed and whether there is understanding of the effect of the guarantee on the
property of the third party. While the fact of lack of independent advice may be indicia of
unconscionable conduct, it is hardly proof nor does it necessarily mean that the resulting
transaction is either unfair or unconscionable. But given the cases which point to lack of
independent advice as a factor, advising the guarantor to obtain advice is one of the simplest
protective devices against a charge of unconscionable conduct, when issues of both capacity and
contractual terms, are raised. If the advice has been obtained then the defendant may be able to
resist claims of harsh or unfair terms or that they have taken advantage of the lack of
knowledge/business acumen of the other party. For this reason a requirement that independent
advice be obtained is typically found in the Mortgage Act and the Regulations made there
under.366

365 See, the case of Commonwealth v Verwayen (1990) 170 CLR, at 441.
366 See, generally the Mortgage Act, 2009.
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5.7.2.2. Credit provider’s responsibilities

Credit provider must take reasonable steps to ensure that the surety has entered into obligation
freely, and in knowledge of the true facts.367 The credit provider must avoid being fixed with
“constructive notice” of any defect.368 To avoid this, the credit provider should:

a) Warn the surety of the amount of the potential liability;

b) Warn the surety of the risks involved to the surety’s interests;
c) Advise the surety to take independent legal [financial?] advice 369 – this should be done at
a meeting at which the principal debtor is not present;370
d) Ensure that independent financial advice is taken, where influence is probable and the
risks are large.371 Only if this is done will the credit provider be safe; and
e) Where a credit provider knows or ought to know of relationship involving emotional
dependence on the part of a surety to the debtor, or where the surety reposes trust and
confidence in the debtor, if the surety obligation has been procured by undue influence,
misrepresentation or other legal wrong, then the surety obligation will not be
enforceable.372

5.7.2.3. Need to Create the Trade Practices Commission

There is need to create a trade Practices Commission in Uganda. Currently in Uganda,
supervision is done by the Central Bank 373 but an independent trade practices Commission is
necessary to strengthen the supervision. There are factors which the Proposed Commission

367 The Code of Banking Practice, Section 3 (3.1) provides that, the bank will provide a customer
with effective and adequate disclosure of information, including the terms and conditions of
products and services.
368 See, Turner v Dunne [1996] QCA 272 at 4-5.
369 See, The Code of Banking Practice June, 2011, Section 3.2.
370 B. Dee, ‘Unconscionable Conduct in Business Transactions’ (1998), Director Liaison,

Australian Competition and Consumer Commission, Property Council of Australia Shopping

Centre Conference, Sydney.
371 See, Garcia v National Australia Bank (1998) 194 CLR 395, 135 ALR 614.
372 C. Stewart, “Unconscionable Transactions, Undue Influence and Constructive Trusts”.
373 See, The Financial Institutions Act of 2004 which was amended by the Financial Institutions

Amendment Act 2016, Section 79.

96
should consider in determining when it will intervene;374 an apparent blatant disregard for the
law; that the conduct involved significant public detriment; that successful enforcement would
have a significant deterrent or educational effect; or that an important new issue is involved, e.g.
one arising from economic or technological change.375 It is submitted that with regard to
unconscionable conduct in the banking arena, the greatest potential for intervention is likely to
come from the educational factor. "The public detriment" is not likely to be a major factor in this
area except in the wider public policy sense.376

5.7.2.4. Judicial Intervention in Unconscionable Bargains

In appropriate circumstances, where , in respect of money lent, having regard to the risk and all
circumstances, the cost of the loan is excessive and that the transactions is harsh and
unconscionable, the court should , re-open the transaction and take an account between the
creditor and the debtor, order the creditor to repay any such excess if the same has been paid or
allowed on account by the debtor or set aside either wholly or in part or revise or alter any
security , order the creditor to indemnify the debtor.377

5.7.2.5. Supervision
The Bank of Uganda (Central Bank) should issue guidelines in the area of Unconscionable
Conduct in Banking and identify market practices, presence of negotiation, purpose of conduct
and prior dealings between parties as relevant considerations in determining whether a party had
acted unconscionably.378 Supervision and monitoring will go a long way in addressing the
problem of unconscionable conduct in the banking sector. Whilst "standard form contracts" are
often beneficial in minimizing the amount of time spent in negotiating and may produce greater
certainty, they may provide little or no scope for negotiation on important matters. Use of 'take it

374 See, the guidelines entitled, “Unconscionable Conduct in Commercial dealing”, issued in
October 1993 by the Trade Practices Commission.
375 Ibid
376 Ibid
377 See, K. John, “The case against Unconscionable Conduct”, International Real Estate Society

Conference, Kuala Lumpur, 26- 30 January 1999, at p. 6; also see, L. Wilson, “Trade Practices-
Unconscionable Conduct”, Property Council of Australia, Shopping Centre Conference, 18 May
1998, Sydney.
378 Ibid

97
or leave it' contracts whether standard form or not may lead to unconscionable conduct if, in the
particular circumstances, pressure is brought to bear or unfair advantage is taken; the terms of the
contract are onerous and the onerous nature is disguised by using fine print, unnecessarily
difficult language, or deceptive layout; and the weaker party is asked to sign the contract without
being given an opportunity to consider or to object to such terms, or is given a summary
explanation which does not mention them. The Central Bank should therefore supervise
Commercial Banks in this aspect.379

5.7.3. Bank and customer relationship

5.7.3.1. Customers, should fully understand all the Terms of the Transaction
Problems can arise where the documentation is complex and patently not understood by the party
required to sign. Although there may be an assumption that people in business do have the
necessary understanding, this assumption is open to challenge where there is an obvious lack of
understanding such as might come about where English is not the first language or the person in
business lacks education. Where there are unusual features in the transaction the duty to disclose
or explain arises and failure to disclose may result in a finding of misrepresentation.380 Unless
the financial institution takes unfair advantage of the lack of understanding there would be no
unconscionable conduct. When one intends to obtain a banking service from any bank, one
should read the terms and conditions for the services before he/she signs the contract.381 He/she
will then know what to expect from the bank and what the bank expects from him/her before
becoming bound by the contract. One can ask questions about any of the terms and conditions
that he/she does not understand to avoid misunderstandings during the course of the contract.382

379 See, The Financial Institutions Act of 2004 which was amended by the Financial Institutions
Act 2016, Section 79.
380 It is the provision of the Code of Banking Practice, that the customer is entitled by the bank to

provide him with information in a plain and understandable language format.

381 See, The Code of Banking Practice June 2011 Section 3.2, where it provides that it is the

responsibility of the customer to the bank, for the customer to read and understand the terms and
conditions.
382 Ibid

98
5.7.3.2. Customers should negotiate the outcome they want
In some of the more recent cases on unconscionability, we certainly have to question the
appropriateness of language, which refers to the so called stronger and vulnerable parties. If the
apparently stronger party has to act “responsibly” in the interests of the vulnerable party, then
how is this to be accomplished? Business people have continued to hold to a traditional view.
This is to the effect that you do not have a contract until you have a contract. This suggests that,
one party can impose contractual like obligations upon another unwilling party or at least shift
part of his risk onto them unless they act in some unspecified manner to prevent someone from
doing so. This not only offends the traditional rules by which commercial agreements have been
established, but also offends against common sense.383

5.7.3.3. Customers Should Read carefully the Agreements they Sign

Problems can arise where the documentation is complex and patently not understood by the party
required to sign. Although there may be an assumption that people in business do have the
necessary understanding, this assumption is open to challenge where there is an obvious lack of
understanding such as might come about where English is not the first language or the person in
business lacks education. Where there are unusual features in the transaction the duty to disclose
or explain arises and failure to disclose may result in a finding of misrepresentation. Unless the
financial institution takes unfair advantage of the lack of understanding there would be no
unconscionable conduct. Customers should not therefore sign any agreements without reading
them carefully.384

5.7.3.4. How to avoid engaging in unconscionable conduct

The following practical tips may assist businesses to avoid engaging in unconscionable
conduct;385

383 Ibid
384 Ibid
385 Available at www.mybusiness.com.au/.../new- laws-around-unconscionable-conduct-7, New

laws around Unconscionable Conduct-7 tips for…, a victim of unconscionable conduct. Need not
be at any special disadvantage…a written sales manual to train them on how to avoid
unconscionable conduct…Feb 21, 2012. Accessed on 20 th November 2015 at 09:15pm.
99
The banks should not exploit the other party when negotiating the terms of an agreement or
contract, they should take care to be reasonable when exercising their rights under a contract;
they should consider the characteristics and vulnerabilities of their customers. For example, use
plain English when dealing with customers from a non-English speaking background; and Banks
should make sure that their contracts are thorough, easy to understand, not too lengthy and do not
include harsh, unfair or oppressive terms; they should ensure that they have clearly disclosed
important or unusual terms or conditions of an agreement; ensure that customers understand the
terms of any agreement associated with the transaction and give them the opportunity to consider
the offer properly. If the contract is long, banks may decide to provide a summary of the key
terms; and

Furthermore, always banks should observe any cooling-off periods that may apply or consider
offering a cooling-off period; give customers the opportunity to seek advice about the contract
before they sign it, if things go wrong, be open to resolving complaints; and Banks should not
reward their customers for unfair, pressure-based selling, the amendments to the Financial
Institutions Act, 2016 should serve the banking sector well as they create more avenues for the
sector to offer more financial products to customers. The amendments also serve to broaden the
scope of the banking sector as a whole and this is good for the industry’s financial inclusion
efforts as it helps to address the challenge of access to formal financial services.

100
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