The High Court has taken a firm stance against the exploitative practices of foreign companies in Uganda by ordering the Ministry of Water and Environment to withhold payment of Shs 21.2 billion to Inyatsi Construction Ltd, a company based in Eswatini.

The court’s decision comes after a legal dispute between Inyatsi and its Ugandan subcontractor, Plinth Consultancy Services, over the construction of the Kabuyanda earth dam in Isingiro district.

In a landmark ruling, High Court Judge Harriet Grace Magala restrained Inyatsi Construction Ltd from accessing a bank guarantee related to the dam project and further ordered the company to provide security for costs amounting to Shs 5 billion within 30 days.

The ruling also froze the company’s accounts, a move aimed at securing potential arbitration outcomes. The frozen accounts are in Absa Bank (6007716778, 6007716816 and 6007538608).

The conflict began in May 2023 when Inyatsi subcontracted Plinth to carry out Shs 60 billion worth of work on the dam project, which is financed by the World Bank. However, the partnership soured by October 2023, leading to the termination of the subcontract by Inyatsi over disagreements on the project’s direction.

In response, Plinth threatened legal action for breach of contract, prompting Inyatsi to seek arbitration through the International Chamber of Commerce (ICC). However, just as the arbitration process was about to commence, Inyatsi unexpectedly withdrew, leading Plinth to turn to the Ugandan courts for protection.

The court had to determine whether a valid arbitration agreement existed between the parties. In its ruling, the court found that although Plinth’s agreement was with Inyatsi Construction (U) Ltd, a subsidiary, the parent company, Inyatsi Construction Ltd, was also liable due to its significant involvement in the project.

“To my mind, an arbitration agreement was reached by the parties. I therefore find that there was consent between the parties to subject their dispute to arbitration before the ICC,” reads the judgment.

The court recognized that Inyatsi Construction Ltd was registered in Uganda as a foreign entity and incorporated in Eswatini but held no assets in Uganda, raising concerns about the company’s willingness to satisfy any arbitration award.

“Arbitration without probity is an exception to the doctrine of probity to contract in only arbitration matters. This doctrine will be possible in circumstances like agency relationships, group of companies’ relationships and notation,” ruled court.

Judge Magala highlighted that while courts typically do not intervene in arbitration matters, the unique circumstances of this case warranted action.

The ruling also emphasized that subcontractors can pursue legal action against the foreign parent company if it is proven that the local subsidiary acted as its agent, setting a significant precedent for future disputes involving foreign contractors.

“I am inclined to issue an order for security for the costs. Alternatively, an order be issued to attach a lien and/or freeze the outstanding contractual sum owing to the Inyatsi Construction Ltd from the Ministry of Water and Environment in respect of the construction works pending determination of the Arbitration claim…a lien be issued over the accounts and/or money belonging to Inyatsi Construction Ltd held in Absa bank as security for the award and costs pending the determination of the arbitration claim.

The Kabuyanda Dam project is a crucial initiative aimed at improving agriculture and water supply in the region, benefiting over 32,000 smallholder farmers.

The ongoing legal battle, however, underscores the challenges faced by Ugandan subcontractors in dealing with foreign companies that often dominate large-scale projects but fail to honour their contractual obligations.

This case sheds light on the broader issue of how foreign contractors can undermine local businesses by subcontracting work at lower costs while maintaining control over payments. The court’s ruling may serve as a warning to other foreign firms operating in Uganda, signalling that exploitative practices will face legal scrutiny and enforcement.

As the arbitration proceedings continue, the outcome could have lasting implications for the relationship between foreign contractors and local subcontractors in Uganda’s construction industry.