By NEIL HARTNELL
Tribune Business Editor
Commonwealth Brewery yesterday suffered a reversal as the Court of Appeal sided with Budweiser’s global parent in the dispute over the termination of their 40-year Bahamian distribution deal.
Sir Michael Barnett, the Court of Appeal’s president, in a unanimous verdict backed by his two fellow judges overturned last year’s Supreme Court ruling which found that Anheuser-Busch International should have given the BISX-listed brewer some 15 months’ warning of its plans to end their relationship.
The Court of Appeal, finding that the two sides’ distribution deal was “informal” because it had never been put in writing, ruled that the three-and-a-half months notice provided by Budweiser’s parent during the 2015 second half was more than sufficient notice to the vertically-integrated Bahamian brewer, distributor and liquor retailer.
Of then-justice Indra Charles’ ruling, Sir Michael found that a 15-month notice “is a long period and well outside the range of reasonableness”. He thus not only slashed the required notice by almost 80 percent but also, in overturning the Supreme Court verdict, rejected the damages awarded to Commonwealth Brewery.
These were to have been offset against the $598,512 owed to Budweiser’s parent for the 74 invoices submitted during the final three months before the distribution deal was switched to Commonwealth Brewery’s great rival, the Bahamian Brewery and Beverage Company, producer of Sands Beer. The notice period damages were not, though, determined, with the issue set down for a future hearing.
That hearing may now not be necessary following the Court of Appeal’s verdict. The distribution deal between Anheuser-Busch and Burns House, Commonwealth Brewery’s predecessor, was first agreed in 1975 but never put in writing, although it was informally agreed that the latter would have exclusive distribution rights for Budweiser and the other brands in The Bahamas.
Both parties were to contribute an equal 50 percent share of the annual marketing budget for the Anheuser-Busch brands, with Burns House also obligated to “research” the so-called ‘grey market’ or “parallel imports” of the former’s products that were entering the Bahamian market illegally.
Burns House provided a guarantee, or $250,000 letter of credit, to Anheuser-Busch that was renewed annually. “The parties worked well together for over 40 years. Burns House always met its obligations under the distribution agreement. This is supported by the fact that Anheuser-Busch never had to utilise the letter of credit,” then-justice Charles wrote in her earlier verdict,
“Burns House allocated specific human resources to Anheuser-Busch’s brands for the purpose of the distribution agreement. This included a senior brand manager exclusively for Anheuser-Busch brands and about three to four employees who were dedicated to the Anheuser-Busch brands.”
But Commonwealth Brewery’s then-managing director, Hans Neven, and the company’s sales director alleged they were effectively ambushed, and blindsided, at an August 4, 2015, Miami meeting with Anheuser-Busch’s regional director where both the latter’s internal and external attorneys were present.
This was when Budweiser’s parent served notice of the plan to terminate the two sides’ distribution agreement by October 31, 2015. Lennox Paton, the Bahamian attorneys for Anheuser-Busch, confirmed the move in a subsequent August 12, 2015, letter to Commonwealth Brewery and Burns House. The initial three months’ notice was extended to December 1, 2015, making for three-and-a-half months.
“In the letter written by Lennox Paton on behalf of the plaintiffs, the plaintiffs stressed that the decision to terminate the distribution agreement had nothing to do with the performance of Burns House as a distributor and wished to thank Burns House for its efforts during the years,” then-justice Charles wrote.
“The plaintiffs [Anheuser-Busch] ceased the supply of beverage products on September 15, 2015, despite giving three-and-a-half months’ termination notice. This was in response to the failure of Burns House to pay 74 unpaid invoices for beverage shipments supplied during the period June 7, 2015, to September 9, 2015. To date, Burns House has not paid the invoices.”
Burns House argued then that the notice period was too short and threatened legal action for breach of contract, while Budweiser’s parent “asserted that their decision to terminate the distribution agreement with Burns House was a business decision which they were entitled to make so long as notice of the termination was given. No wrongdoing on the part of Burns House was alleged”.
Commonwealth Brewery, as successor to Burns House, argued that the notice period should have been three-and-a-half years. Anheuser-Busch initiated legal action for breach of contract damages, and the unpaid $598,512 invoices, while the BISX-listed brewer claimed loss and damages consisting of $145,202 in marketing expenses and $2.3m in lost profits.
Budweiser’s parent, in its appeal, argued that the competition posed by Commonwealth Brewery justified the short three-and-a-half month notice period. Besides the BISX-listed brewer being 75 percent by Heineken, one of its biggest global rivals, it added that its brands only accounted for 10 percent of its former Bahamian partner’s sales and could be easily replaced.
“Commonwealth Brewery also sold its Heineken and other comparable products, and could easily replace Anheuser-Busch brands with its own, and in fact did so. Anheuser-Busch brands accounted for only 10 percent of sales for Commonwealth Brewery,” the Budweiser and Michelob owner added.
“As there had been no recent capital investments for the relationship, and as the annual marketing expenditure was of little relevance (and was insignificant compared to profit), this would not imply a long notice period.
“As Heineken, one of the main global competitors of Anheuser-Busch, ultimately owned Commonwealth Brewery, it was unreasonable to suggest that Commonwealth Brewery would use its best endeavours to promote Anheuser-Busch’s products over its own for an extended period of notice, knowing that it would need to promote its own products over Anheuser-Busch products as soon as the distribution relationship had ended.”
Sir Michael, identifying that the critical issue to be determined was whether the three-and-a-half months’ notice was reasonable, said the two parties’ agreement “was never ‘formal’” in contrast to Justice Charles’ findings. “It was informal and never reduced to writing,” he added.
“The judge does not refer to the fact that there was no prohibition against Commonwealth Brewery selling its own products in competition to that of the appellant, or to the obligation by the respondent to use its best efforts to promote the appellant’s products during the term of the agreement including the notice of termination period.....
“In the present case, the appellant’s business was less than 15 percent of the respondent’s [Commonwealth Brewery] business, and it was not required to lay off staff or make any significant adjustment to its business as a result of the termination,” Sir Michael added.
“Indeed, in this case, the judge accepted the evidence of the respondent’s general manager that ‘the separation nets more benefits than drawbacks, as it clears the way for us to truly promote the value of our brand without competing against ourselves with the brewer of Budweiser beers’. This is indicative that a short period of notice would be reasonable.”
Also finding that improvements to a pre-existing warehouse’s refrigeration were for Commonwealth Brewery’s, rather than Anheuser-Busch’s benefit, Sir Michael concluded: “In my judgment 15 months is a long period and well outside the range of reasonable notice. It is not a short period.
“In making that determination I am influenced by the fact that the relationship was informal. The respondent was able to sell products that were in competition to the appellant, [and] the respondent was not required to make and did not make any significant expenditure after the initial period of the distribution agreement as a result of the agreement.
“It would be unreasonable to expect the respondent to discharge its duty to promote the appellant’s products during a long period of notice and, in particular, for 15 months after it has received notice of the termination. The three and one-half [months] was within the range of reasonableness and, in my judgment, the appellant was not in breach of the distribution agreement.”