Overview:
The Uganda High Court has reaffirmed the doctrine of privity of contract, ruling that third parties cannot claim directly from professional indemnity insurance policies. Read how this landmark judgment between Sanlam and Finance Trust Bank affects legal standing in negligence cases.
The High Court has reaffirmed that third parties cannot directly claim from professional indemnity insurance policies, emphasizing the legal principle of privity of contract.
The ruling centered on whether a party who is not a signatory to an insurance contract can enforce its terms. The court held that insurance policies are designed to protect the purchaser, not third parties affected by the purchaser’s mistakes.
Under the doctrine of privity, only parties to a contract can take legal action to enforce it. While Uganda’s Contracts Act allows for exceptions—such as when a contract expressly grants a benefit to a third party—the court found no such provision in the policy between Sanlam and Katuramu & Co.
The court applied the Latin maxim pacta tertiis nec nocent nec prosunt, which establishes that agreements neither harm nor benefit those who are not parties to them. Even though Finance Trust Bank suffered a financial loss, the court ruled it had no standing to enforce the contract.
The judgment also distinguished between the right to complain to a regulator and the right to enforce a contract. While the bank had filed a complaint with the Insurance Regulatory Authority’s Complaints Bureau, the court emphasized that this procedural right does not create a direct claim for payment under the policy.
From an economic perspective, the court noted that allowing anyone who suffers a loss to claim payment would create unpredictable liabilities for insurers. This would likely lead to higher premiums, potentially making insurance unaffordable for professionals.
The court further clarified that regulatory guidelines cannot override national law. While the Insurance Appeals Tribunal relied on guidelines allowing third-party complaints, the High Court ruled that only Parliament can change the law of privity.
Regarding the nature of the case, the High Court noted that on a second appeal, it can only consider questions of law rather than disputes over facts. Consequently, the court struck out points regarding the accuracy of valuations and focused on the interpretation of the Insurance Act and the Contracts Act.
In a litigation analysis, Alex Ahimbisibwe Kabayo, a partner at SM & Co. Advocates, along with legal assistants Brian Osenda Kalagala and Ian Ssezibwa, said the judgment provides essential clarity. They noted that even when a third party suffers a loss due to negligence, the right to enforce an insurance policy remains solely with the insured professional.