The Court of Appeal has upheld the award of Sh 1.7 billion to Maxam Limited by Heineken East Africa and Heineken BV for unlawful contract termination.
Justices Pauline Nyamweya, Abida Ali-Aroni and John Mativo upheld the award by the High Court to Maxam Ltd of special damages for loss of business to be paid by Heineken E.A and Heineken B.V.
“We affirm and uphold the award by the High Court to Maxam Ltd of special damages for loss of business of Sh 1,799,978,868.00 to be paid by Heineken E.A and Heineken B.V, arising from their repudiatory breach of the Kenya Distribution Agreement,” the judges ruled.
The three judge bench also upheld the declaration issued by the High Court that the Notice of Termination dated 27th January 2016 from Heineken E.A to Maxam was unlawful, irregular, unprocedural and therefore null and void.
Heineken had appealed the decision of the High Court on grounds that the award of damages was excessive, against the weight of evidence submitted.
It was their submission that the learned judge erred in law and in fact by holding that the respondent had a legitimate expectation that the Distribution Agreement would not be terminated.
They also submitted, among other grounds, that the Judge erred in law and in fact by issuing orders affecting the third parties who are not parties to the suit.
Maxam Ltd was appointed by Heineken E.A on 1st May 2013 as the exclusive beer distributor in Kenya for a period of three years with an option to extend distributorship for a one-year term.
Through lawyer Philip Nyachoti, Maxam submitted that it was also prohibited from dealing with any competing beer brands during the life of the Distributorship Agreement.
The termination
The court heard that the said business relationships proceeded as set out in the respective agreements until 27th January 2016, when Heineken International B.V, on behalf of Heineken East Africa Import Company Limited and on “a without prejudice” basis wrote a letter to Maxam Ltd terminating the agreement.
According to the said letter, the termination was to take effect from 1st May 2016 which was to be the third anniversary of the effective date.
Heineken had also appointed one of Maxam’s sub-distributors to be the main distributor of its products in Kenya.
Maxam Ltd justified the award by proving that it had incurred costs from expanding their business in order to discharge its obligations under the Distributorship Agreement.
It was Maxam’s submission that the termination notice was illegal, unprocedurally issued, invalid, null and void.
Nyachoti told the court that the three months termination notice under the Kenyan Distribution Agreement was not available to Heineken E. A and Heineken B.V. since no legally binding notice has been issued as required by law and the subject agreement.
In addition, Maxam claimed that following its appointment as the exclusive distributor of the products of Heineken E.A, it embarked on setting up elaborate infrastructure so as to fulfil and/or discharge its obligations under the agreement, and particularised the financial investments it had made in its plaint.
“In addition, it contracted third parties including landlords in respect of warehouses, sub-distributors for the products, and hiring of lorries for the delivery and transport of the products,” Nyachoti added.
The court heard that as a result, the market for Heineken products in Kenya expanded and grew significantly leading to the profitability of the business for both parties.
Maxam Ltd tabulated the evaluation of their business as at the date of filing the suit using various valuation methods, and claimed that the average valuation from the said methods was Sh 1,799,978,868.
On their part, Heineken claimed that Maxam Ltd was aware, at the time of contracting, of the investment it would have to make to fulfil its part of the bargain of the contract and the commercial risks of its contractual obligations, and having considered the risk and benefits, willingly entering into the Kenya Distribution Agreement notwithstanding the termination clause.
Heineken denied that Maxam stood to lose business and profits as tabulated in its plaint, and averred that the sums claimed were not supported by true facts nor were they a true reflection of its financial affairs or business.
In addition, the applicants claimed that the astronomical amounts claimed appeared to be purely speculative and designed to unlawfully fetter Heineken E.A’s right to terminate the commercial relationship.
However, the Appellate Court found that Maxam Ltd created substantial goodwill for the Heineken E.A and Heineken B.V which established reasonable expectations of compensation.
“Goodwill, once vested, cannot be extinguished even if the agreement has an expiry term, and retains its separate character as an enforceable property right. Put differently, once goodwill legally vested, it could not be unilaterally annulled,” the judges ruled.
The court further ordered Heineken E.A and Heineken B.V to pay Maxam Ltd the costs of the trial in the High Court and of the consolidated appeals.
