TOP K’LA LAWYER TELLS WHY BORROWERS CAN’T LEGALLY HIDE BEHIND COVID NOT TO MAKE LOAN REPAYMENTS
By Mulengera Reporters
Following WHO’s March declaration of COVID-19 to be a world pandemic, many Ugandans with outstanding bank loan obligations have been trying to dodge legal responsibility to their lenders under the false hope that Coronavirus constitutes what lawyers call “Force Majeure.” FM, as legal brains call it, in this case would imply that the parties’ contractual obligations can’t be met because of the unforeseen devastating and constraining consequences COVID has had on businesses leaving many of them struggling & fighting to survive.
But in his latest media briefing, aimed at guiding debate on this issue, celebrated city lawyer Sam Mayanja (who is also an authority on banking matters) says there is no way any of the defaulting bank borrowers can legally refer to FM as justification to escape consequences of defaulting on monthly loan repayment obligations. Mayanja, who is also a part time University law don, says that unfortunately in the Ugandan banking practice we have no such express FM clauses in loan contracts between banks and borrowers.
Instead Mayanja says what is rampant is something called “material adverse effect” clauses which permit the lending banks to demand 100% recovery or payment of the entire pending loan obligation in case a borrower breaches his or her loan obligations in any way. “This [material adverse effect] clause still does not waive performance of a borrower’s loan obligation but rather allows the bank discretion to identify what a material change is, in light of financial conditions resulting in adverse business operations of the borrower. This [material adverse change clause] too does not cover occurrences like the COVID pandemic as one of the unforeseen events within the context of the loan agreement.”
But going forward, Mayanja suggests that all this ambiguity notwithstanding, Banks should act humanely (like Amelia Kyambadde has suggested) and enact prudent recovery programs that ensure a win-win situation between them and borrowers since there is no winner in the COVID situation so far. That much as Corona isn’t a risk they could have anticipated; banks should work towards ensuring their customers overcome collapse and remain in business because they (banks) need them the way they (businesses) need them too. That it’s in the interest of both lenders and borrowers that none of the businesses with pending loan obligations defaults.
Mayanja urges thus; “Banks must take bold steps to revisit all loan repayment contracts and defer demand for early repayment, halt additional fines for late repayments and waive penalty interest in the event of default or arrears on any installment.” They also need to “vigorously articulate their approach to risk in the Covid-19 era and boldly find bankable solutions.” Mayanja adds that there are many useful lessons that both borrowers and institutional lenders must learn from the COVID pandemic that could potentially lead to better bank-customer relations in future. For instance, Mayanja argues that the COVID crisis is an opportunity for banks to develop some guidelines and regulations regarding pandemics and how they can diminish the parties’ respective loan contractual obligations in case of an outbreak. This deepened understanding would be good for the future of the banking practice.
Mayanja also rightly defines FM (in the lay man’s language) as an unforeseen occurrence that terminates the contractual obligations of parties to the contract because neither of them has control over them nor ever anticipated such. And if such an event persisted to the end of the contract period, the contract is considered terminated.
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