FACTS OF THE CASE 

Maxam Ltd entered into a distributorship agreement with Heineken East Africa (EA) and Heineken International B.V. (BV) on May 21, 2013. The agreement provided Maxam with the exclusive rights to distribute Heineken products in Kenya. On January 27, 2016, Heineken issued a notice of termination, citing the agreement’s expiration. Maxam contested the termination, arguing that it had a legitimate expectation of automatic renewal based on past business practices and ongoing negotiations. Heineken continued to supply Maxam until August 28, 2017, when the supply was completely stopped. Maxam claimed that Heineken’s actions caused significant business losses and sought special damages amounting to Kshs 1,799,978,868. The trial court ruled in favor of Maxam, awarding the claimed damages, which led Heineken to appeal the decision to the Court of Appeal.

Here are the 14 legal principles the Court of Appeal of Kenya clarified in the decision, which every lawyer must know;

1.      Usage of 'Without Prejudice'

The phrase 'without prejudice' has multiple usages. Besides facilitating the settlement of disputes by enabling open communication, it is also used when parties do not intend to give up any rights. Such communications are not to be used in civil proceedings.

2.      Legal Effect of 'Without Prejudice'

The basic legal effect of 'without prejudice' communication is that statements made within it, in the context of an existing dispute, cannot be used as evidence against the interests of the relevant party. This rule, codified in section 23(1) of the Evidence Act, is based on the express or implied agreement of the parties that such communications should not be admissible in evidence if negotiations fail and a contested hearing ensues.

3.      Exceptions to 'Without Prejudice'

The contents of 'without prejudice' communications are only admissible in certain exceptional circumstances. This includes situations where there has been a binding agreement between the parties arising out of the communication or for the purpose of deciding whether such an agreement has been reached. The fact that such communications have taken place is admissible to show that negotiations occurred, but their content remains inadmissible.

4.      Legitimate vs. Reasonable Expectations

The doctrine of legitimate expectation does not apply to contractual relationships. Instead, the doctrine of reasonable expectations is relevant, which involves an objectively justified belief in the likelihood of some future event or entitlement. However, this cannot be construed without first establishing a contractual relationship between the parties.

5.      Termination Notices in Contracts

If a contract requires notice for termination, such notice must be clear, sufficiently detailed, and unambiguous to be valid. The terms of the contract must expressly or impliedly state that the right of termination is to be exercised only upon notice given to the other party.

6.      Unpleaded Issues

Courts should only determine issues raised before them through pleadings. However, if parties present evidence and address unpleaded issues during the trial, and it appears these issues have been left for the court's decision, the court can validly determine these unpleaded issues.

7.      Stamp Duty Compliance

Non-compliance with the Stamp Duty Act is not fatal to the enforcement of an agreement. Courts are required under section 19 (3) (a) (b) and (c) to either assess the stamp duty themselves and direct its payment or impound the agreement and direct it to the stamp duty collector for assessment and payment demand.

8.      Exclusivity and Anti-Competition

Exclusivity in contracts does not automatically invite a prohibition. Most anti-competition/anti-trust statutes mirror section 21 of the Competition Act. Exclusive vertical and horizontal terms are generally presumed to import anti-competitive considerations, but additional qualifications are necessary for absolute prohibition to arise.

9.      Multiple Exclusive Distributorships

There is no prohibition against a distributor maintaining more than one exclusive territorial distributorship. A distributorship agreement that restricts dealing with competing products or produces such an outcome is considered a per se prohibited practice if the distributor predominantly distributes for one manufacturer, which is presumed anti-competitive.

10.  Competition Authority and Damages

Conduct that lessens competition can be investigated by the Competition Authority, which can impose penalties. Additionally, affected parties can sue for damages separately, simultaneously, or subsequently. They are entitled to "gains-based" reliefs in addition to "loss-based" reliefs, shifting the focus from victims to perpetrators.

11.  Respect for Distribution Agreements

Courts generally respect the express terms of distribution agreements. If a supplier terminates the agreement in breach of its terms, the distributor can claim damages for losses caused by the unlawful termination or breach.

12.  Goodwill Protection

Once vested, goodwill cannot be extinguished even if the agreement expires. It retains its separate character as an enforceable property right and cannot be unilaterally annulled.

13.  Loss of Business and Profits

The loss of business and expected profits can be established based on reasonable estimations. The standard of proof requires evidence from which the existence of damage can be reasonably inferred, and which provides adequate data for calculating the amount.

14.  Account of Profits in Exclusive Agreements

Exclusive distribution agreements qualify as "exceptional cases" that invite the relief of "account of profits." This remedy balances the rights of the parties by requiring the brewer/manufacturer to account to the distributor for the benefits received during the life of the distributorship agreement.