Goodwill as Constitutionally Protected Property: High Court Case of Bia Tosha Distributors v Kenya Breweries, EABL, Diageo

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“I am acutely aware of the far reaching consequences of my conclusive finding that purely constitutional issues and questions have been borne out of a hitherto commercial relationship and hence the court’s jurisdiction rather than agreed mode of dispute resolution. I however do not for a moment view it that the framers of our Constitution intended the rights and obligations defined in our common law, in this regard, the right to freedom of contract, to be the only ones to continue to govern  interpersonal relationships.” – Onguto, J at paragraph 101 of the ruling.

A recent well-reasoned ruling by the High Court in the case of Bia Tosha Distributors Limited v Kenya Breweries Limited & 3 others [2016] eKLR  tackled the complex question of horizontal application of the Constitution to private commercial disputes governed by contracts with private dispute resolution mechanisms. More interestingly, the court had to consider whether the amount of Kshs. 33,930,000/= paid by the Petitioner to acquire a ‘goodwill’ over certain distribution routes or areas of the Respondents’ products can be defined as ‘property’ held by the Petitioner and as such protected under Article 40 of the Constitution.

Many readers will recall the story of how former EABL employee Peter Burugu built a multi-billion beer distribution empire – which happens to be the Petitioner in the present case. In short, for any local readers who have consumed any EABL products, chances are high are that your favourite drink was delivered to your watering hole courtesy of Peter Burugu whose distributorship territory covers Namanga, Bissil, Kajiado, Kitengela, Athi River, Industrial Area, South B, Nairobi West, Kenyatta, Langata, Rongai, Kiserian, Magadi, Upperhill, Ngong Road, Hurlingham, Kawangware, Satellite, Dagoretti and beyond.

The size of the Petitioner’s territory grew with each distributorship agreement as its commercial relationship with the beer maker Respondents blossomed. In consideration for the offer of distributorship territory, the Petitioner had paid to-date a total sum of Kshs. 33,930,000/= to the Respondents termed by the latter as “goodwill/ commitment fees”. Soon after the Petitioner noted that some of the distribution areas earlier allocated were repossessed by the Respondents. This led to a demand for refund of the goodwill earlier paid. The Petitioner insisted that it was be entitled to a refund of the goodwill paid or to recoup the goodwill if for any reason any of the areas they paid the goodwill was taken away. It is the refusal by the Respondents to refund the Petitioner the paid goodwill coupled with the repossession by the Respondents of the various distributorship areas which prompted the present Petition.

Aside from challenging the court’s jurisdiction, the Respondents’ argued that the Petitioners cannot claim any refund of the goodwill paid as all the agreements under which the payments were made expressly provided that the amounts would be non-refundable. The Respondents however admitted that the non-refundable commitment fees paid by the Petitioner aggregated Kshs. 33,930,000/= but added that the Petitioner by agreement was barred from claiming any refund. The Respondents further contended that the Petitioner had not acquired any exclusive rights to the routes or areas for which the Petitioner paid the goodwill amount.

On the question of jurisdiction, the court held in principle that where a dispute or claim is laid out as a constitutional issue then the High Court must deal with the dispute. In support of this decision, the court cited the Supreme Court decision in Communications Commission of Kenya & 5 Others v Royal Media Services Ltd & 5 Others (discussed previously here) to the effect that in appropriate cases notwithstanding the principle of constitutional avoidance and settled dispute resolution forums, the court may, depending on how a dispute is framed, still decline to send the parties to another forum. According to the court, it all depends on how the issue is laid before the court – and in the present case the court found for the Petitioner and stated thus:

“The question for the court at the hearing of the Petition will be whether what has been identified as constituting proprietary interest is “property“ within the provisions of Article 40 and whether the same has been arbitrarily expropriated or whether  the expropriation is, if at all, justified. That is the core question in this Petition and it is a purely a question of constitutional interpretation and determination, in my view.”

On the question of goodwill, the court stated as follows:

“I understand ‘goodwill’ generally to mean an intangible and assumed asset or right that assists in generating sales revenue in a business (…) As value can be placed on goodwill as a proprietary interest, I am prepared to find on a prima facie basis that goodwill once paid for and acquired is ‘property’ and is protected under Article 40 of the Constitution. In these respects, therefore, I find that the Petitioner is entitled to state that it acquired a proprietary interest for what he paid for and when the Respondents state that the amount paid  could not be refunded it could only be because the proprietary interest in the form of goodwill was also transferred or assigned upon and receipt of the payment to the Petitioner.”

In light of the above, the court found that the Petitioner had established a prima facie case with a likelihood of  success, when it states that it acquired goodwill for value and which the Respondents have arbitrarily taken away without any compensation. In addition, the court was satisfied that the Petition may be rendered nugatory if the stated territory is disturbed before the ultimate determination of the Petition. As a result, the court issued a conservatory order preserving the Petitioner’s Bia Tosha territory exclusively to the Petitioner under the area of operation arrangement obtaining as at 2nd February 2006.

 

 

 

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