The two words that cost Heineken Sh1.8bn in row with tycoon

Heineken case

Photograph of two men toasting with two bottles of Heineken beer. Heineken has moved to the Supreme Court seeking a stay of a decision granting Ngugi Kiuna more than Sh1.7 billion.

Photo credit: Shutterstock

A misunderstanding over two words, ‘without prejudice’, contained in a letter sent to tycoon Ngugi Kiuna by Heineken seven years ago cancelling a distributorship contract has cost the Dutch beer maker Sh1.8 billion.

Court of Appeal judges ruled last week that the letter addressed to Maxam Ltd was not legally binding and that the contract between Heineken and Mr Kiuna’s firm was not terminated lawfully by the time Heineken engaged other distributors.

The distributor sought damages for loss of business, amounting to Sh1.799 billion, among other damages.

The term ‘without prejudice’ means without loss of any rights: in a way that does not harm or cancel the legal rights or privileges of a party.

The ambiguity created by the letter because the two words, the judges found, cannot therefore be taken to mean a lawful or valid notice of termination under the agreement signed by the parties.

“Our finding and conclusion therefore, is that the letter and Notice of Termination dated 27th January 2016 which was issued by Heineken E.A and Heineken B.V on a ‘without prejudice’ basis was inadmissible as evidence of any negotiations, acceptance or admission on the part of Maxam Limited as regards termination of the contract, just as it was not evidence of any negotiations and admission as regards payment of compensation on their part,” Justices Pauline Nyamweya, Abida Ali-Aroni and John Mativo said.

Mr Kiuna, a former chairman of BOC Kenya, is among the largest shareholders in Maxam. He also previously sat on the board of Proctor & Allan and Transcentury Kenya, where he has a stake.

Maxam and its sister companies-Uganda’s Modern Lane Ltd and Tanzania’s Olepasu Ltd- sued Heineken East Africa Import Company Ltd and Heineken International B.V., seeking damages for the cancellation of the contracts entered between the parties in May 2013.

At the time the contracts were terminated, Maxam stated that it had made substantial financial investments that were likely to be wasted once they were kicked out of business.

Maxam argued it had already negotiated and entered into binding agreements with third parties to secure warehousing, delivery and logistics that had greatly expanded the market and increased profitability for the Heineken brand.

Through lawyer Philip Nyachoti, the distributor accused the beer maker and its affiliates of unilaterally cancelling the deals on flimsy, selfish and malicious grounds.

Mr Nyachoti argued that the termination was meant to frustrate and deny the firm income and allow newcomers to infiltrate the business at lesser financial terms.

Maxam submitted that it had created substantial goodwill for Heineken E.A and Heineken B.V, which established reasonable expectations of compensation.

Mr Kiuna maintained that the termination notice was invalid because the beer maker did not act within the provisions of the law and in accordance with clause 18 of the agreement as no reason was given for termination of the agreement.

He said the letter was headed “without prejudice” and therefore did not bear any binding legal obligation and did not result in termination of the subsisting agreement of May 21, 2013 or at all.

By refusing to supply Maxam with their products, notwithstanding the subsistence of the agreement, Heineken breached clause 26 of the agreement by constructively terminating the agreement through deliberate actions.

Further, the beer maker went ahead and appointed third-party distributors, a move that pushed Maxam out of business.

Heineken sought to justify its decision to cancel the distributorship contracts with the three firms operating across East Africa on the basis that it intended to attract more suppliers to expand its business.

Heineken submitted that it had no obligation when terminating the agreement to negotiate the terms of the termination with Maxam, to compensate it following the termination, or to give any reasons for the termination.

The beer maker said the termination was valid so long as the notice was issued within three months after the expiry of three years from the date of signing of the agreement.

Heineken said the termination notice was rightfully issued and Maxam was legally represented during the extensive negotiations before the termination and that Mr Kiuna was fully aware that the contract would be cancelled upon the expiry of the three years.

The judges disagreed saying if there were doubts, conflicts, or differing interpretations about the “without prejudice” notice of termination, the letter should have been corrected.

“In this regard, Heineken E.A and Heineken B.V had the opportunity to, and the option of issuing two notices to ensure that there was no misunderstanding regarding which portion of the ‘without prejudice’ considerations applied to which market,” the judges said.

The court said the submission by Heineken that there was no “doubt” as to which portion of the business was covered by the “without prejudice” segment of the letter was not sufficient to remove the ambiguity.

The judges said clauses 17 and 18 of the agreement (on termination) would only have become operational if there was a valid notice of termination given.

In a win for Heineken, the court lifted an order blocking the Dutch beer maker from appointing other distributors.

The judges also quashed an order that the pricing models imposed on Maxam before consultation or express consent were exploitative, oppressive and unfair.

The court also set aside an order directing Heineken to take accounts in respect of loss of profits occasioned to Maxam because of the reduced volumes of sales as well as reduced profit margins from September 2017 until the date of the judgment of the High Court, as well as special damages for loss of profits of about Sh16.7 million.

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