1. Do OTC derivatives transactions face an enforceability problem (e.g. due to anti-wagering provisions etc. under local law)?

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1 ENSafrica Advocates 4th Floor Rwenzori Towers Plot 6 Nakasero Road Kampala Uganda P O Box Kampala Uganda tel infokla@ensafrica.com International Swaps & Derivatives Association 10 East 53 rd Street, 9 th floor New York, our ref your ref 24 th July 2018 date Attn.: Dr. Peter M Werner By pwerner@isda.org Dear Sir, INFORMAL COUNTRY UPDATE: UGANDA You have requested for our advice to certain queries relating to the local law treatment of certain aspects of the documentation prepared by ISDA in relation to derivatives. This letter is provided on an informal basis for information purposes only and should not be construed as formal legal advice or as being exhaustive and it should not be relied upon by any person. Enforceability 1. Do OTC derivatives transactions face an enforceability problem (e.g. due to anti-wagering provisions etc. under local law)? 1.1. Our responses to this query relate to OTC derivatives transactions that are documented under the 2002 ISDA Master Agreement (the ISDA Agreement ). Examples of such transactions include interest rate and currency swaps, interest rate caps, swap options, commodity price swaps, equity swaps, credit derivatives, and other financial derivative products The sale or purchase of OTC derivatives is currently not subject to any specific legislation in Uganda. To the best of our knowledge, these transactions have not been tested by the Ugandan Courts. Such transactions should, however, be valid and enforceable as a matter of contract provided they satisfy the requirements of a valid contract under Ugandan law. The Contracts, Act 2010 (the Contracts Act ) recognizes as a valid contract, any agreement made with the free consent of the parties with capacity to contract, for a lawful consideration and with a lawful object with the intention to be legally bound. registration number partners: Phillip Karugaba Bernard Katureebe Alexander Kibandama Rachel Musoke Donald Nyakairu Rehema Nakirya Ssemyalo Ronald Tusingwire

2 It is unlikely, that the OTC derivatives transactions may not be enforceable due to antiwagering provisions under local law. Under the Contracts Act, an agreement made by way of unlicensed wager, that is, to pay money or other consideration on the occurrence of an uncertain event is void. A wager is defined under the Lotteries and Gaming Act, 2016 as a sum of money or representative of value that is risked on an occurrence for which the outcome is uncertain. In our view, the nature of the transactions under the ISDA Agreement are quite specific and the payment obligations under the ISDA Agreement are upon the occurrence of specified events Also, under the Lotteries and Gaming Act, 2016 gaming is defined as the playing of a game of chance for winnings in money or money s worth and for the avoidance of doubt, includes gambling. The Lotteries and Gaming Act, 2016 is intended to regulate the conduct of lotteries, gaming, betting and casinos. Derivatives transactions do not therefore fall under the scope of the Lotteries and Gaming Act, Are there provisions (of a statutory, customary, common law etc. nature) in local law that provide for the enforceability of close-out netting both pre and post insolvency? Is close-out netting defined in addition to set-off under local law? Does local law allow netting in accordance with the terms of the underlying contract (e.g. the ISDA Master Agreement; sample attached)? In the absence of close out provisions, are you aware of any current efforts to pass primary legislation in this regard? 2.1. Netting and similar concepts other than set-off are currently not recognized as distinct concepts under the laws of Uganda. We are also not aware of any Court judgment in Uganda that has considered the enforceability of these arrangements Contractually, netting and close-out provisions should be enforceable by a local court if they are triggered by a non-insolvency event. Certain limitations may apply to the exercise of such a right during insolvency as noted below However, the concept of set-off (both contractual and insolvency) is recognized. The Insolvency Act, 2011 (the Insolvency Act ) provides that where there have been mutual credits, mutual debts or other mutual dealings between a company or an individual and a person who, but for the operation of this section, would seek to have a claim admitted: (a) an account shall be taken of what is due from the one party to the other in respect of those credits, debts or dealings; (b) an amount due from one party shall be set off against any amount due from the other party; and (c) only the balance of the account may be claimed in liquidation or bankruptcy or is payable to the company or the bankrupt s estate. A person shall not be entitled, under this provision, to claim the benefit of any set-off against the property of a debtor in any case where the person is reasonably expected to have foreseen that the debtor would be likely to be unable to pay his or her debts at the time of giving credit to the debtor We understand that netting and similar arrangements may differ from set-off in certain respects in other jurisdictions. However, a Ugandan Court (in the absence of distinct rules

3 governing netting and related arrangements under Ugandan law) is likely to treat the two concepts in the same manner and is more likely to apply similar rules As set-off is, subject to certain conditions as provided for in the Insolvency Act, valid and enforceable under Ugandan law even in an insolvency context, the netting provisions in the ISDA Master Agreement should be enforceable However, there is a risk of claw-back if close-out netting occurs within six (6) to twelve (12) months of the insolvency. The Insolvency Act grants a liquidator the option to void certain transactions as set out below: Voidable transaction: the Insolvency Act provides that a transaction involving a transfer of property by a company to another person is voidable at the option of the liquidator if it is made on account of an antecedent debt, at a time when the company was unable to pay its due debts, and within the year preceding the commencement of the liquidation. The transaction is also voidable where it enabled that person to receive more towards the satisfaction of the debt than the person would otherwise have received or be likely to receive in the liquidation or bankruptcy, unless the debt was incurred in the ordinary course of the company s business and the transfer was made not later than forty five (45) working days after the debt was made. A transaction made within six (6) months preceding the commencement of the liquidation is, unless the contrary is proved, presumed to have been made at a time when the company was unable to pay its due debts and on account of a debt not incurred in the ordinary course of business. This provision may capture a contractual transfer or close-out netting occurring within a year prior to insolvency proceedings Undervalue transaction: A transaction at an undervalue is voidable at the option of the liquidator where the transaction was entered into within twelve (12) months preceding the commencement of the liquidation and the value of the consideration received by the company is significantly less than the value of the consideration provided by the company. This provision could endanger swap payments or close-out netting occurring within a year prior to insolvency proceedings Save as stated in paragraph below, we are not aware of any current efforts to pass primary legislation in this regard.

4 4 Scope 3. If there are netting provisions under local law, do they apply to all types of counterparties, e.g. financial institutions, corporates (commodity trading firms, utilities, manufacturers etc.), SPV, public law entities (municipalities, central bank, development banks etc.)? 3.1. Corporate entities The concepts of set-off outlined above apply to corporates (commodity trading firms, utilities, manufacturers etc) Financial institutions The Financial Institutions Act, 2004 (the FIA ) regulates financial institutions. The Financial Institutions Act does not provide for set-off in the event of the insolvency of a financial institution. Our interpretation of this is that set-offs are not permitted in the event of the insolvency of a financial institution There is a risk of claw-back of any transfer of an asset of a financial institution within six (6) months of insolvency proceedings. Under the FIA, if the Bank of Uganda (BOU) takes over or closes a financial institution any transfer of any asset of the financial institution made six (6) months before the takeover by BOU of the management, with intent to effect a preference or at less than the appraised book value is void. Therefore the sale or resale, in terms of a repo, of a security at less than appraised book value would render the GMRA void if the selling party is taken over or closed within six (6) months of such sale We understand that there have been engagements between stakeholders and BOU on the risks posed by the above provisions. BOU proposes draft regulations, the Financial Institutions (Appraised Book Value) Regulations, 2018 primarily to define the phrase appraised book value and hence to enable the application of the FIA provision. Where it is determined in accordance with the definition that a sale or repurchase of securities has been done at or above the appraised book value, such a transaction would be safe from claw back Absent a statutory definition of appraised book value, a court would have to find other sources to interpret the phrase. This could be from case law or similar laws from other commonwealth jurisdictions. Such guidance would only be persuasive to the Uganda court. There would therefore be uncertainty as to how the FIA provision applies 3.3. Public law entities Public law entities are governed by specific statutes as to their establishment, mandate and conduct of business. Generally, these statutes do not provide for set-off in the event of the

5 5 insolvency of a public entity. For example, the central bank is established under the Constitution and then operationalized by the Bank of Uganda Act, (Cap 51) (the BoU Act ). The BoU Act does not contain provisions on the liquidation of the Bank of Uganda. However, given that it is established by the Constitution, it can only be dissolved by an amendment of the Constitution. The amendment Act would specify how the assets and liabilities of the Bank of Uganda would be dealt with once it is dissolved. The BoU Act does not contain provisions on set-off. 4. Is the scope of eligible transactions restricted in any way, e.g. to certain products (rates, currencies, equities, credit etc.). What about commodity products (gas, coal, oil, metals, agricultural etc.) and new products (emissions allowances, freight rates, weather variables etc.)? Is there a different treatment for financially settled transactions as opposed to physically settled ones (i.e. where the underlying product is delivered)? 4.1. As stated in paragraph 1, the sale or purchase of derivatives is currently not subject to any specific legislation in Uganda. There is no law defining the scope of eligible transactions. There is no law on the treatment of financially settled transactions as opposed to physically settled ones Generally, dealings in these kinds of transactions should be valid and enforceable as a matter of contract provided the transaction satisfies the requirements of a valid contract under Ugandan law. Foreign law 5. Are there any issues with foreign law governed contracts (mainly English and New York law) when used for cross-border transactions into your jurisdiction? For example, some countries may restrict the use of foreign law and language documents when it comes to contracting with local public law or state entities. There are no issues with foreign law governed contracts when used for cross-border transactions in Uganda. There are no legal restrictions on the use of foreign law and language documents when it comes to contracting with public law or state entities. However, in practice, there is an increasing use of local law to govern contracts where the Government of Uganda is a party. 6. Are financial collateral arrangements governed by foreign law recognized under local law? In particular, would title transfer and security interest arrangements (under English and New York law) be enforceable (e.g. ISDA credit support documentation)? Please also note any issues in relation to the collection of collateral and permissibility of such an arrangement in respect of derivative transactions under a standard form of ISDA credit support annex. [Optional additional analysis: Would this apply to both local collateral and to offshore collateral? Are there any transfer restrictions of local currency or foreign (like USD) or other forms of collateral

6 (like securities, bonds or shares) out of the country; may the counterparty hold these in an account outside of the country?] Title transfer arrangements Generally, contracts governed by foreign law are recognised under Ugandan law. However, there is no specific law in Uganda governing whether title transfer arrangements under the ISDA credit support documentation (English law) would be enforceable. This issue would be determined by Ugandan Courts in their discretion in the event of a dispute regarding characterization of the transactions Absent any local authority on the matter, the transaction would be considered in the context of Ugandan contract law. English common law on the recharacterization of contracts would be persuasive to the Uganda courts. The position under English law is that the courts will look to the express terms of the contract and the intentions of the parties, and a re-characterization is seldom done. The absolute transfer of the securities and the buyers rights to deal with such securities are inconsistent with the nature of a secured loan. A number of English Court decisions (such as Re: George Inglefield (1933) Ch 1, Welsh Development Agency v Export Finance Co. Ltd (1992) BC 270 and Orion Finance Limited v Crown Financial Management Ltd (1996) BCLC 78) have indicated that English Courts are generally reluctant to re-characterize a transaction expressed as a sale as a different form of transaction except where the transaction is on the face of it, a sham. We believe that these cases would have considerable persuasive value if a Ugandan Court were required to form a view on whether or not the repurchase transaction amounts to a true sale and repurchase transaction or a secured loan transaction We recognize that, as stated in the above English Court decisions, it would be open to a Ugandan Court as a matter of contractual interpretation to ignore the label given by the parties to a transaction or to decline taking into account the absence of an express reference in the GMRA that the arrangements therein constitute the grant of a security interest and instead consider the actual intention of the parties as reflected in the substance or underlying character of the transactions themselves Security interest arrangements As a matter of contract, the security interest arrangements should be valid and enforceable provided they satisfy the requirements of a valid contract under Ugandan law.

7 There is an additional requirement for enforceability in the event the security interest is granted by a Ugandan counterparty. The security interest must be registered in accordance with the Companies Act. Under the Companies Act, every charge created by a company registered in Uganda, so far as any security on the company s property or undertaking is conferred by it, is void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced are delivered to the Companies Registry for registration within forty two days after the date of its creation. 7. Is there any observation on the local regime for foreign (e.g. English, New York) judgments and foreign arbitral awards? 7.1. Foreign (English, New York) judgements The Courts of Uganda will uphold judgments made in the following jurisdictions: judgments made in England and the Republic of Ireland; judgments of a court of those countries that accord reciprocal treatment to judgments given in Uganda; judgments made in Kenya, Malawi, Tanzania; and judgments by the Courts of the Commonwealth countries Judgments by New York Courts are not enforceable in Uganda The recognition of a judgment made by English Courts is pursuant to the Reciprocal Enforcement of Judgments Act, (Cap 21). This Act provides for enforcement in Uganda of judgments made in, inter alia, the United Kingdom. A final judgment rendered by the English Courts (a Decision ) will be given effect and enforced in the courts of Uganda without further review of the merits provided that: the Decision from England has been registered at the High Court of Uganda within twelve (12) months of the date of the Decision, or such longer period as may be allowed by the Court to have the Decision registered in the Court; the original court making the Decision acted with jurisdiction; in respect of proceedings taken in the superior court in England, the High Court of Uganda is satisfied that papers relating to such

8 8 proceedings have been served on the defendant or its appointed agent for service in conformity with English law; in respect of proceedings taken in the superior court of England, the High Court of Uganda is satisfied that the defendant, being a person who was neither carrying on business nor ordinarily resident in England, voluntarily appeared or otherwise submitted or agreed to submit to the jurisdiction of the English courts; the High Court of Uganda is satisfied that no appeal is pending or that the defendant does not intend to file an appeal against the Decision; the Decision is not contrary to the public policy of Uganda; and 7.2. Foreign arbitral awards the Decision has not been obtained by fraud. The Arbitration and Conciliation Act, (Cap 4) recognizes and makes provision for enforcement of arbitral awards made in pursuance of an arbitration agreement in the territory of a State which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and a State which is party to the Convention on the Settlement of Investment Disputes (ICSID Convention). Upon registration with the High Court of Uganda, a New York Convention award or ICSID award is enforceable in the same manner as if it were a decree of the High Court itself. Other 8. Does local law/language standard documentation (sometimes referred to as local ISDA agreement ) exist or do market participants use bespoke documentation for domestic transactions (as opposed to cross-border transactions)? Does a local repo document or GMRA (which is the global MA for securities repurchase agreements) annex exist? We are not aware of a specific local ISDA agreement currently used by market participants in Uganda. We have in the past advised market participants on related matters based on ISDA standard documentation, including the ISDA Master Agreement, GMRA and Credit Support Annex. 9. Are there any efforts underway to enact legislation on bank resolution? We are not aware of any efforts to enact legislation on bank resolution. 10. Any other issues under local law (e.g. conflict of law rules; jurisdiction issues (e.g. arbitration recommended)? None.

9 9 Yours faithfully, ENSafrica Advocates