Top court orders Heineken to deposit Sh250m in contract breach award row

Court Gavel. [File, Standard]

Beer maker Heineken has been ordered to deposit Sh250 million in favour of Kenyan distributor Maxam Ltd in a row over a Sh1.7 billion award for breach of rights to distribute its products in the country.

In a second-round battle before the Court of Appeal, Justices Joel Ngugi, Nduma Nderi, and Sila Munyao ordered the beer company to provide the money as a bank guarantee within 30 days; failure to which the court’s shield against the implementation of the High Court Judge Wayua Monga’re’s orders lapsing.

“We cannot ignore the first respondent’s legitimate entitlement to enjoy the fruits of its judgment. The justice of the case, therefore, lies, not in granting an unconditional stay, but in fashioning an order that strikes a fair balance between the competing interests of the parties,” the bench headed by Justice Ngugi ruled.

Justice Mong’are allowed Maxam to go after Heineken for interest and taxation for the cost incurred to prosecute the case.

Aggrieved, it moved to the Court of Appeal a second time, claiming that Maxam was no longer in operation and it would be impossible to recoup the money if handed to the firm.

Initially, the Court of Appeal had affirmed a High Court’s order for Heineken to pay Maxam Ltd for illegally terminating a contract to distribute its products in Kenya.

Justices Pauline Nyamweya, Abida Ali-Aroni and John Mativo dismissed Heineken’s appeal and ordered the firm to bear the cost of the case.

They were of the view that the amount awarded by the High Court was reasonable as it would enable the distributor to recoup its expenditure and goodwill.

“Once goodwill is legally vested, it could be unilaterally annulled. In our view, given the loss and damage arising from the circumstances of the breach by Heineken EA and Heineken B.V, the projection of profits by PW2 for the period 2017 to 2021 was reasonable and adequate to enable Maxam Ltd to recoup its expenditure and goodwill,” the bench headed by Justice Nyamweya ruled.

On May 21, 2013, Heineken East Africa Import Company Ltd (Heineken EA) wrote to Maxam, appointing it the only distributor of its products.

Two months earlier, on February 28, 2013, Heineken International B.V, on behalf of Heineken EA, appointed Modern Lane Ltd, Maxam’s subsidiary, to distribute Heineken Lager in Uganda from February 1 of the same year.

This was to await the preparation of a formal distribution contract. Heineken Brouwerijen B.V wrote a letter to Olepasu Tanzania Ltd, confirming that it would be the importer in Tanzania from April 2013.

Nearly four years into the respective contracts, on January 27, 2016, Heineken B.V wrote to Maxam terminating its deal from May 1, 2016. This, according to Heineken B.V was also supposed to affect Modern Lane and Olepasu.

Termination notice

The three companies challenged the move before the High Court. However, the central to the case was Maxam.

Before the High Court, Maxam argued that the termination was unprocedural and illegal. He observed that Heineken tried to shield itself from litigation by indicating that the termination was ‘without prejudice.’

It was of the view that Heineken B.V could not terminate Maxam’s contract as it was not in the picture.

Instead, the lawyer argued that Heineken EA had committed to issuing Maxam with a three-month termination notice in the event it wanted to end the relationship with Maxam.

The distributor also said that Heineken EA and Heineken B.V. never explained to their clients why they had decided to terminate the agreement.

It said that by the time Heineken B.V. was terminating Maxam’s contract, the Kenyan firm’s value was Sh1.7 billion, and it stood to lose the value of its business if the termination was allowed without compensation.

At the High Court, Heineken E. A and Heineken B.V were ordered not to terminate Maxam’s distribution rights. The orders were issued by Justice Eric Ogola.

However, the two defied the court order by appointing one of Maxam’s sub-distributors as the exclusive distributor.

Justice Joseph Onguto extended the orders barring Heineken from terminating the contract. However, Maxam told the court that Heineken went to the extent of directly selling to the market in a bid to circumvent the orders

On the flip side, Maxam argued that Heineken E.A and Heineken B.V went ahead to increase Maxam’s buying price of Heineken products while reducing the recommended selling price.  It stated that his client was knocked out of business and distributorship, even with court orders in place.

After hearing rival submissions, High Court Judge James Makau found that Heineken E.A and Heineken B.V had constructively kicked out the local distributor in 2016 and proceeded to appoint other distributors.  He also found that it had lowered the price of its beer to the newcomers while upholding high rates for Maxam. Justice Makau slapped Heineken E.A and Heineken B.V with a Sh1.7 billion bill in addition to the cost of the case.

Aggrieved, the two international firms moved to the Court of Appeal, arguing that Justice Makau erred by holding that Maxam had a legitimate expectation that its 2013 contract would not be terminated.

Heineken E.A and Heineken B.V claimed that the judge did not factor in its evidence showing that it had every right to terminate the contract.

On the other hand, Maxam argued that by allowing the beer maker to terminate its contracts, the move affected other companies from whom they had leased warehouse agreements, hired lorries for transportation, and sub-distributors to move the imported products.

Heineken had appointed Jeyfine Wines Company Ltd and went ahead to appoint Maxam’s sub-contractors as sub-distributors.

The firm had roped in Mega Wines and Spirits, Chandarana Supermarket, Majid Al Futtaim Hypermarkets Ltd, Inscor Kenya Ltd, Quickmart Ltd, TOTS liquor store, Montys Kenya Ltd, Karen Provision Stores, and JDs Ltd as sub-distributors.

Warehouse facilities

In their arguments, Heineken E.A and Heineken B.V. denied that Maxam Ltd stood to lose business and profits. They claimed that Maxam Ltd deliberately foiled the growth of sales for Heineken lager beer in Kenya to enable it to continue enjoying warehouse facilities being paid for by Heineken E.A.

Heineken E.A also averred that Maxam Ltd was in breach of clause 26 of the Kenya distribution agreement by failing to engage its representatives in amicable dispute resolution, deciding to move to Court, which was the last resort.

It asserted that Justice Ogola should not have reinstated an illegal contract. Maxam, however, argued that Justice Makau independently considered the case and found that there was no reason for terminating its relationship with Maxam.

He asserted that there was no evidence from the Dutch brewer’s board sanctioning the termination of the contract.

“The appellants are notable international companies and expect that any decisions made on their respective business dealings are properly documented by way of board resolutions or any such documentation. However, none of those documents was exhibited to justify the issuance of the termination notice by the second appellant on behalf of the first appellant,” argued Maxam.

It asserted that Maxam had legitimate expectations that it would continue with its contract until the end. Heineken’s deal with Kenya’s Maxam was to see the distributor move beer for the Dutch brewer from May 2013 to May 2016, after which the contract would be renewed on a yearly basis.

The court heard that Maxam, Uganda’s Modern Lane Ltd, and Tanzania’s Olepasu Ltd boosted Heineken’s turnover to Sh1.8 billion in 2015, up from Sh1.3 billion.

In its defence, Heineken East Africa General Manager Ache Unigwe said the deals struck with the firm allowed Heineken to end the agreements without having to explain why and that it would be considered if they applied for the new deal.

Heineken E.A claimed that it was to pay each distributor Sh51 million in compensation in the event it terminates their contract.