Kenya: Heineken to pay Kenyan distributor Sh 1.7b after Supreme Court loss

The Supreme Court has dealt Dutch beer maker a major blow after throwing out its case challenging Sh1.7 billion award to a Kenya distributor, The Standard reported on October 18.

A five judge bench composed of Chief Justice Martha Koome, her deputy Philomena Mwilu, and Justices Mohammed Ibrahim, Smokin Wanjala and Njoki Ndung’u unanimously agreed that the apex court had no powers to entertain Heineken Limited’s case against Maxam Limited.

According to them, there was no constitutional issue to interpret in the case as it was clear that Heineken had breached its contract with Maxam.

They agreed with Maxam’s lawyer Phillip Nyachoti that although the case surrounded a breach of rights to distribute Heineken’s products in the country, it was purely a commercial one.

The bench headed by Justice Koome struck out Heineken’s case and ordered that it should be refunded Sh6000 which it had deposited as security.

“It is clear that whereas there was mention of constitutional provisions by the High Court and the Court of Appeal, the material question before the two superior courts was on the validity of the termination notice issued to the second respondent. In arriving at its final orders, the two courts examined the Distribution Agreement, in the grant of the orders sought. Its final determination was therefore not pegged on and indeed had nothing to do with the interpretation or application of the Constitution,” the bench ruled on Friday.

Heineken moved to the Supreme Court after the Court of Appeal and the High Court found that it had illegally terminated a contract to distribute its products in Kenya.

In the meantime, Equity Bank gave a guarantee that it would pay the money, meaning since the highest court in the land has thrown out the case, Maxam can now demand its pound of flesh.

In its case filed by senior lawyer Fred Ngatia, Heineken iinsisted that it was justified to cancel Maxam’s deal.

According to the firm, the High Court intervened and Maxam continued selling its products.

“It is noteworthy that since termination did not take place, the second respondent continued to earn profits for the period of one year and three months,” claimed Heineken’s Legal Director for Africa and Middle East Kevin Santry.

At the Court of Appeal, Justices Pauline Nyamweya, Abida Ali-Aroni and John. Mativo dismissed Heineken’s appeal and ordered the firm to should 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 recoup its expenditure and goodwill.

“Once goodwill legally vested, it could not be unilaterally annulled. In our view given the loss and damage arising from the circumstances of the breach by Heineken E.A 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 Limited (Heineken EA) wrote to Maxam appointing 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 Limited, which is Maxam’s subsidiary to distribute Heineken Lager in Uganda from February 1 the same year. This was to await 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.

The three companies challenged the move before the High Court.

However, the central to the case was Maxam.

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 the Maxam’s sub-distributors as exclusive distributor.

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

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

He 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 E.A had committed that it would issue Maxam with a three months termination notice in the event it wanted to end the relationship with Maxam.

The lawyer also said that Heineken E.A and Heineken B.V. never explained to his clients why they had decided to terminate the agreement.

Nyachoti said that by time Heineken B.V. was terminating Maxam’s contract, the Kenyan firm’s value was Sh 1.7 billion and it stood to lose the value of its business if the termination was allowed without compensation.

He 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 Sh 1.7 billion bill in addition to cost of the case.

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 defense, 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.

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