{UAH} WHO IS FOOLING WHO? Inside Uganda Railways’ fraud tainted USD3 million insurance claim and the insurance industry’s judicial quest for regulator’s neutrality
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The dispute stems from a 1st July 2016 to 30th June 2017 performance bond worth USD3,000,000 the three companies made to Rift Valley Railways (RVR), then a concessionaire of URC's assets. The bond was co-insured between Old Mutual Insurance Uganda Ltd (40 per cent); Sanlam General Insurance Uganda Ltd (30 per cent) and Britam Insurance Uganda Ltd (30 per cent).
It shall be remembered that URC entered into a concession agreement with Rift Valley Railways Uganda Ltd (RVRU) allowing the latter to run the operations of URC for twenty-five years effective 1st November 2006. As a condition, RVR had to provide a performance bond from reputable insurers for a total of USD 3,000,000 throughout the concession agreement. The three insurance firms jointly issued a conditional performance bond undertaking to guarantee the obligations of RVRU for an aggregate amount not exceeding USD 3,000,000 payable in respect of a default made by RVRU occurring within the period when the performance bond is valid.
The Government of Uganda would later terminate the RVRU contract around August 2017 over what it said was a failure to maintain assets, payment of 11 per cent concession fees and providing the audited accounts of 2014/2015 amongst others. However, RVR vehemently insisted that they had performed to the expectations of the government and therefore advised the insurers not to pay URC the insured amount. In fact, RVR dragged the government of Uganda to court for unfair contract termination.
On the 28th of August 2017, the government of Uganda, through the Ministry of Finance wrote to UAP Old Mutual, the lead insurer claiming a number of defaults on the part of RVR that it said, had led to the termination of the concession agreement between URC and RVR.
M/S Katende, Ssempebwa & Co. Advocates on behalf of the insurance companies Severally on 23rd August 2017; 10th October 2017 and on 7th December 2017 wrote to the Ministry of Finance reiterating that the insurer's obligation if any to pay on any performance bond had not arisen as the pre-requisite for calling the said performance bond had not been met. They also reminded the government that the bond that was issued by the companies was a conditional bond that had terms that must be fulfilled. Such terms included particularizing the details of the breach and which losses, if any, had to have fallen within the period of the bond i.e., 1st July 2016 to 30th June 2017. Specifically, on 5th September 2017, UAP, on behalf of the coinsurers wrote to URC, requesting them to particularize the elements of default as was required by conditions in the performance bond. The dispute went into a lull leading the insurance companies to believe the issue had been resolved.
Uganda Railways resurrects USD 3 million claim
Two years later, in October 2019, URC filed a complaint against the three insurance firms before the IRA demanding a payment of USD 3,000,000 performance bond on grounds that RVRU had defaulted on its obligations. The insurance firms reiterated to IRA, that the bond documents presented by the URC was not the same as the one signed by the insurance companies and secondly that RVRU had confirmed that there were no sums owed by it to the URC and as such the URC had no basis to make a call on the performance bond.
They also told the regulator that in any case, both performance bonds- the one they had signed and that the questionable one that was in the possession of URC, provided that any dispute between the parties should be resolved by arbitration and therefore the IRA had no jurisdiction to adjudicate this dispute and could only refer the dispute to arbitration as the parties had provided for in their agreement.
IRA disregarded the companies' arguments and ruled in favour of URC and in a letter, reference No. IRAB/COMP.121/10/19 dated 11th February 2021 ordered UAP Old Mutual, Britam and Sanlam to pay Uganda Railways Corporation (URC) Ltd USD3,000,000 in 30 days.
Riled by IRA's ruling, the three companies, on 25th Feb 2021 dragged both IRA and URC to the High Court saying that IRA's decision was beyond its legal powers since it disregarded the arbitration clause in the agreement and the principles of a fair hearing.
In the High Court of Uganda, [Civil Division] Miscellaneous Cause NO. 70 of 2021— UAP Old Mutual Insurance Uganda Ltd; Sanlam General Insurance Uganda Ltd and Britam Insurance Uganda Ltd applied for a judicial review of IRA's position and asked the court to declare that IRA had exceeded its authority in issuing the decision in IRAB/COMP.121/10/19.
"This matter should have been referred to arbitration in accordance with the terms of the performance bond signed by the three insurance firms," the firms argued.
They also asked the court to dismiss the performance bond presented by URC as false and forged and instead reinstate the performance bond in possession by the insurance companies as being the legitimate one. They also prayed for a court declaration that the IRA exercised its authority wrongfully and acted contrary to the rules of fairness, fair hearing, and natural justice during the conduct of the dispute proceedings and the process of arriving at its findings and issuing of its ruling.
Some of the new locomotives imported into the country by RVR at the time it run the Uganda Railways concession. The insurance companies' argue that URC's claim has no legitimacy since the RVR insists it performed on all its obligations and the absence of a binding arbitration between URC and RVR to determine if at all there was breach of contract, makes URC's claim premature. They, therefore, prayed for a permanent injunction restraining IRA and URC from enforcing and executing the ruling as well as barring IRA from further adjudicating this dispute.
"The three insurance firms did not sign the performance bond, the URC was seeking to rely upon and that they were willing to provide evidence and witnesses for proof," the companies argued in their affidavits filed in court.
"Furthermore, without prejudice, under the Applicant's performance bond, the URC could only make a claim after exhausting all remedies to recover any monies owed to the URC from RVR and after terminating the concession agreement the URC had entered into with the RVR," they further argued.
"In clear violation of the law, the IRA acted ultra vires its powers and ruled that it had jurisdiction to hear and determine this dispute despite the clear agreement by all parties to refer the dispute to arbitration by a mutually agreed arbitrator. That in clear violation of the tenets of a fair hearing and natural justice, the IRA determined that the performance bond presented by the URC was genuinely relying on the alleged email communication that the three insurance firms had never seen and never given an opportunity to rebut," the insurance firms further argued.
The companies also told the court that M/S Claim Care Ltd, a company appointed by IRA to determine the alleged liability of RVR to the URC did not consult RVR concerning any of the liability claims that the URC alleged were owed to it, which made the report incomplete and unreliable.
Lawyers, Sim Katende of M/S Katende, Ssempebwa & Co. Advocates represented the insurance companies, while Dr. Byamugisha Joseph together with Counsel Kwikiriza Benson of IRA represented the Authority. Counsel Mwasame Nicolas appeared for the URC.
Court nullifies IRA's ruling on the dispute
Four preliminary objections by IRA and URC lawyers that the matter was incompetently before court, were all dismissed by Hon. Justice Esta Nambayo who went on to rule that "It was, therefore, not right and proper for the URC to file their complaint with the IRA instead of referring the matter for arbitration as provided under the performance bond."
"In as long as the arbitration clause is in force, the parties cannot just push aside the arbitration clause in preference for other dispute resolution mechanisms without justification. Therefore, the IRA had no mandate to adjudicate the complaint that was filed before it by the URC. The matter should have been referred for arbitration. Therefore, I find that by hearing the matter, the IRA acted outside its jurisdiction," Justice Nambayo ruled.
The IRA Chief Executive Officer, Alhaj Kaddunabbi Ibrahim Lubega. The regulator insists they are not meddling into the judicial process but doing their regulatory function. An order for Certiorari be and is hereby issued quashing the decision of the IRA in IRAB/COMP.121/10/19," the court ruled adding: "A declaration be and is hereby made that the IRA exceeded its authority in issuing the decision in IRAB/COMP.121/10/19." Uganda Railways Corporation (URC) Ltd -v- UAP Old Mutual Insurance Uganda, Britam Insurance Uganda Ltd and Sanlam General Insurance Uganda, as the matter should have been referred to Arbitration in accordance with the terms of the performance Bond signed by the parties."
Court further issued a permanent injunction against both IRA and URC from enforcing and executing the ruling passed by the IRA.
"A permanent injunction be and is hereby issued restraining the IRA from further adjudicating the dispute between the URC and the three insurance firms," court further ruled on 13th August 2021.
IRA and URC were also ordered to pay the costs of the suit.
Pay or pay— IRA disobeys court order, goes for vengeful retaliatory regulatory threats against the three insurance firms
Despite being ordered off the matter, this website has learnt that instead of appealing the court ruling as should be the case, IRA has instead resorted to selective regulatory arm-twisting against the three insurance companies, all to get them to pay the USD3,000,000 even before the full arbitration and judicial process can be exhausted.
In a classic case of being the prosecutor and judge of its case, on 2nd September 2021 the IRA Chief Executive Officer, Alhaj Kaddunabbi Ibrahim Lubega wrote to Ms. Grace Akullo, the Director, Criminal Investigations & Intelligence Directorate (CIID) asking her to investigate the three insurance companies. No mention was made of URC or their insurance agents, who too could have had a hand in the forging of the second document, especially that it was not signed by the two insurance companies.
While fraud, conspiracy to defraud, uttering false documents, forgery of a policy of insurance and causing financial loss, are crimes under The Penal Code Act CAP. 120, IRA's letter to police (Ref No. IRA/UP/09/20/04) instead of letting police investigate the matter, IRA seems to have already concluded on who the guilty party was.
"This, therefore, serves to request your office to investigate the above matter including the Directors and staff of the insurance companies that were signatory to the Performance Bond, or participated in its underwriting and to do all such things necessary to cause the arrest, charge and prosecution of the perpetrators of the fraud and other criminal acts," IRA's Alhaj Kaddunabbi wrote to CIID's Akullo.
Perhaps, IRA ought to have written to the police much earlier before arriving at the ill-fated unilateral decision to order the three insurance companies to pay the contested fee. IRA's letter, now coming after court had ordered it off the matter appears to be in contempt of court at the least and any findings therefrom, risk being challenged and or dismissed by the court.
Uganda Insurers Association enters the matter, urges IRA on objectivity and impartiality
But as if this is not enough, and even before the CIID commences investigations and later alone pronounces itself on the matter, this website has learnt from a Uganda Insurance Association (UIA) letter to IRA that on the very same day IRA wrote to police to commence investigations, it also wrote to selected insurance companies threatening to cancel and or vary their insurance licenses if they in 6 working days did not provide evidence that the performance bonds issued by them since 2005 had been approved by IRA in line with Section 65 of the Insurance Act 2017 (Act).
These details are contained in UIA's 8th September 2021 letter to IRA, by Paul Kavuma, the UIA Chief Executive Officer to IRA's Alhaj Kaddunabbi Ibrahim Lubega.
"In our Executive Committee meeting of this week, we were presented with a brief and copies of your letters dated 2nd September 2021 to three of our members [UAP Old Mutual, Sanlam and Britam] requiring them to produce evidence of IRA approval for all the Performance Bonds they have issued since 2005 by 10th of September 2021 otherwise your office would vary their licenses and subject them to punitive action," UIA's Kavuma wrote.
Mr. Kavuma said that the industry's position on the matter was that the continued inspection and licensing without rejecting any of their documents, was tantamount to the approval of their documentation as well. Kavuma also said that by IRA writing to specific companies and not the entire industry, risked sending wrong messages to the sector.
"For fairness and avoiding appearing selective, the IRA would invariably have to subject all members to this audit since it is likely that there are members who most certainly issued similar bonds that would be a matter of contention for all intents and purposes," UIA's Paul Kavuma implored IRA.
"The implications to vary the members' licenses or a complete ban from issuance of performance bonds is bound to have far-reaching effects both to our much cherished and nurtured public confidence but most importantly the economic implications it will have. The performance bonds are much sought after in preference to financial guarantees because of their nature and flexibility and we are confident that the existing regulatory framework that continues to govern them is still robust. We can also vouch for the respective insurers underwriting ethos that are upheld with utmost consciousness of the risks abound and risk management alike. It is, therefore, our kind request that this sanction is immediately stayed and examined critically in light thereof given the sensitivity it poses to our own sector and the entire services and financial industries alike," Paul Kavuma added.
We have also learnt from UIA's letter that on 2nd September 2021, IRA also directed all insurance companies to retrospectively amend the dispute resolution clauses in all insurance policies and health management contracts with effect from 1st July 2021 something that had sent shivers down the industry's spine.
"In light of the foregoing, it is our hope that our request to have dialogue meets your consideration, the objectives are to appreciate the gist of the matter in the letters and most importantly see that we can harmonize with the best possible resolute both to our mutual interests and benefits as an industry and of course with your stewardship," the UIA Chief Executive concluded.
IRA received the letter on 09th September 2021 and is yet to respond.
Insurance Regulatory Authority responds
In a written response to this website, IRA said that it is not true that IRA has not appealed.
"IRA through its lawyers on 26th August filed in court, a notice of appeal and requested for certified copies of proceedings in accordance with court processes for appeal. We intend to follow up the appeal up to its logical conclusion," wrote IRA's spokesperson, SamPaul Nakhaima.
Asked why they are continuing their involvement with the dispute, yet they have been ordered off the matter, IRA insists that "the position of the law is that ongoing civil matters are not a limitation to criminal proceedings."
"IRA has written to the CIID to investigate the matter so that comprehensive investigations on matters of fraud, conspiracy to defraud, uttering false documents, forgery of a policy of insurance and causing financial loss which are criminal matters are looked into," IRA told this website.
IRA also insists that Section 11 and 12 of the Insurance Act 2017 empowers the IRA as the Insurance Regulator to protect policyholders, establish standards and ensure compliance with the Act among others.
"We are performing our functions by establishing standards and ensuring compliance with the Act, which must be at all times," said IRA.
We shall abide by the court ruling; insurance firms stick to their guns
When contacted for a comment, the Britam Marketing Manager, Humphrey Lutakome, declined to make a substantive comment on the case referring us to the court ruling on the matter.
"Without prejudice, we cannot comment on this matter as it is still before the courts of law. We refer you to the attached court ruling instead," he told this reporter on email.
Gary Corbit, the Chief Executive Officer, Sanlam General Insurance said: "The best way to resolve the matter is as directed by the High Court. Specifically, if the respondents (IRA and URC) believe that their case has sufficient merit to warrant an appeal against the High Court ruling, they may proceed as they wish."
Caroline Owomuhangi the UAP Old Mutual General Insurance Marketing Manager also told this reporter that her company would abide by the court's judgement.
UIA's Chief Executive Officer, Paul Kavuma, has written to IRA requesting for an amicable resolution to the impasse. "The matter went through the court process and the High Court ruled that the case should go for arbitration. "This judgement is public information and can be easily accessed. As this is an ongoing case, we are not at liberty to comment further at this stage. As such, we request you to allow the process to run its course and come to a close," she said in an emailed response.
Asked about the subsequent pressing by IRA on the matter, she said: "We remain guided by the court's outcome, and should we consider otherwise, we will provide a statement in collaboration with the other applicants in the case."
Regarding IRA's threats over varying their licenses to stop them from issuing performance bonds, Ms Owomugisha said: "UAP Old Mutual is licensed to underwrite bond business and was licensed for the period in question in line with the laws of Uganda and all regulatory requirements."
Mr. Corbit too reiterated that as per The Insurance Act 2017, both the form and text of Sanlam's performance bonds were approved by the regulator.
"Every Insurance Bond has specific wording, many specified by the financing institution, but all requiring technical analysis to ensure that the Insurance Company is adequately protected. Having been inspected by the IRA in or around 2018, all our text and formats of all our policies were presumably part of that inspection. The Insurance Act 2017 requires that as neither the text nor format of our policies were rejected, we can treat them as approved," said Corbit.
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