Court Delivers Landmark Decision on Exclusive Distribution Agreements, Clarifying The Legal Framework for Commercial Contracts : Translink Limited vs Chemi & Cotex Industries Limited (Tanzania)
- Waboga David
- Jun 26, 2024
- 9 min read
Overview
The Plaintiff claimed that the 1st and 3rd Defendants engaged in deceptive practices by spying on the Plaintiff’s business under the guise of cooperation. The 3rd Defendant, pretending to be a support member, collected and misused the Plaintiff’s trade secrets and market information for the Defendants' benefit, thus breaching confidentiality. The actions of the 3rd Defendant implied an agent-principal relationship with the 1st Defendant, making the 1st Defendant vicariously liable. Furthermore, the 1st Defendant wrongfully terminated the distributorship agreement, causing the Plaintiff significant financial and reputational damage. Consequently, the Plaintiff sought declarations of breach, compensation for losses, refund of money owed, specific performance, general and specific damages, and costs of the suit. The court ruled on a distribution agreement case between the Plaintiff and 1st Defendant for Whitedent oral care products. The court defined agency and distribution, citing Halsbury's Laws of England and Thomson Reuters' publication, and found the 3rd Defendant acted as the 1st Defendant's agent, making the 1st Defendant liable for the 3rd Defendant's wrongful acts. The court determined the agreement was a distributorship, not agency, and considered the termination of the distributorship agreement and the contested unlawful termination by the 1st Defendant. This case sets a legal precedent for future disputes involving agency, distribution agreements, and breach of confidentiality, providing a reference point for courts and legal practitioners to follow. Brief Facts The Plaintiff sued the 1st Defendant, a Ugandan company, its subsidiary the 2nd Defendant, and the 3rd Defendant, the Country Manager of the 2nd Defendant, for breaching their contract and Agency Distributorship Agreement, and infringing on the Plaintiff's proprietary data and trade secrets.
The Plaintiff is sought legal declarations of breach and infringement, as well as orders for special, general, and aggravated damages, interest, and costs of the suit.
The suit aimed to hold the Defendants accountable for their actions and provide remedies for the harm caused to the Plaintiff's business and reputation.
Issues
Whether the plaint discloses a cause of action against the 3rd Defendant?
Whether the 1st Defendant's termination of the distributorship arrangement between it, and the Plaintiff in relation to the "Whitedent” brand of oral care products was lawful?
Whether the Plaintiff contributed to the brand equity by payment or otherwise?
Whether the Defendants' obtained "trade secrets" from the Plaintiff leading up to, and prior to the termination of the distributorship arrangement. If so,
whether the Defendants infringed on the Plaintiff’s trade secrets, and or proprietary data?
What remedies are available to the parties?
Legal Representation
The Plaintiff was represented by Counsel Ben Kisiki of M/S Atigo & Co. Advocates
jointly with Dr. Anthony C.K Kakooza of M/S Byenkya, Kihika & Co. Advocates while Counsel Masembe Kanyerezi jointly appeared with Counsel Eriya Mikka of MMAKS Advocates for the Defendants.
Before: Lady Justice Susan Abinyo
Opinion of the court
The court considered the plaint and submissions from both parties to determine if a cause of action was disclosed by the Plaintiff. The court relied on established principles to determine if a cause of action exists, including whether the Plaintiff had a right, whether that right was violated, and whether the Defendant is liable.
The court examined the plaint and its annexures, assuming all allegations of fact to be true, and focused on paragraph 8 of the plaint, which alleged that the 1st and 3rd Defendants spied on the Plaintiff's business, collected trade secrets, and used them for their benefit.
Definition of an Agency
The court considered the definition of agency and the relationship between the 3rd Defendant and the 1st Defendant, finding an implied agent-principal relationship between them. The court applied principles of vicarious liability and employment law to determine the liability of the 1st Defendant for the actions of the 3rd Defendant.
That the principle of vicarious liability operates in agent/principal relationships on the notion that it is common to regard control by the Principal as a defining characteristic of agency.
The said notion has obvious relevance in employment law, where it is an identifying characteristic of employment relationship, and hence to the vicarious liability of an employer for an employee however, it plays a more limited role in agency.
Citing esteemed legal texts, the judge clarified that
It’s a well-established principle that where an agent, makes a contract on behalf of the Principal, the contract is that of the Principal, not that of the agent, and prima facie at common law the only person who can sue or be sued is the Principal.
Based on these findings, the court determined that a cause of action was disclosed by the Plaintiff, and the case may proceed to the next stage.
The court disagreed with the Plaintiff's submission that the 3rd Defendant is liable as an agent and employee under the Contracts Act and Employment Act.
That sections 118 and 119(b) of the Contracts Act, No. 7 of 2010, establishes principal-agency relationship, and that for this reason, the 1st and 2nd Defendants' are the principal's of the 3rd Defendant (their employee), and that he is jointly, and severally, liable with his principals under his employment contract of service, which makes the 3rd Defendant liable in his own right as an agent of the 1st , and2nd Defendants within the meaning of section 2 of the Employment Act.
The court found that the Plaintiff failed to establish a cause of action against the 3rd Defendant.
Whether the 1st Defendant's termination of the distributorship arrangement between it, and the Plaintiff in relation to the "Whitedent” brand of oral care products was lawful?
The learned judge determined that the terms of "agent" and "principal" are defined under section 118, part X of the Contracts Act No. 7 of 2010.
An agent is a person employed by a principal to act on their behalf, while a principal employs an agent for such purposes.
In this case, PW1, the Plaintiff’s Sales Director, noticed the Whitedent Brand of oral care products in South Africa in 2012 and aimed to distribute them in Uganda and Rwanda.
Upon contacting the 1st Defendant, the Plaintiff was asked for proprietary market information. Despite having no formal written contract, a distributorship agreement was implied through their communications and transactions from 2012 to 2017.
Who is a distributor The court observed that
A distributor can be described as a person or an entity, who or which buys goods on his own account and resells them to several outlets. His profit arises from the difference between the buying price of the goods and the entire resale price. There are two sets of invoices, one covering the sale and one covering the resale.
Generally, a distributor operates at his own risk and in his own name. An agent, on the hand, is an intermediary who procures business for another enterprise and who acts for the account of that enterprise. Usually, the agent receives a percentage commission as compensation. The invoice covering the sale of the product is established not by the agent but by the supplier and sent to the customer
PW2, the Country Sales Manager, testified about working with the 3rd Defendant, who sought sensitive information under the pretense of cooperation. The 1st Defendant’s employee, DW2, gathered market intelligence during a trip with PW2, focusing on top-performing customers and logistics.
The Plaintiff's former Managing Director, PW3, provided background on their longstanding family business in Uganda, which resumed operations in 1991. The Defendants claimed they decided to terminate the arrangement due to the Plaintiff's poor performance and formally communicated this in early 2017. The Plaintiff disputed the termination, arguing the 1st Defendant had appointed them as an agent and that they had significantly invested in building the Whitedent brand in Uganda.
The court noted the absence of a clear legal framework for distributor agreements in Uganda and relied on common law principles.
It is notable that there is no legal framework in Uganda on distributor agreements however, subject to the Constitution, and this Act, this Court is enjoined to apply common law principles in so far as the written law does not extend or apply. (See section 14 (2) (b) (i) of the Judicature Act, Cap 13)
Justice Susan Abinyo further referenced renowned legal texts stating that,
In renowned Thomson Reuters’ Publication “Practical Law UK, Distribution Agreements: Overview by Alex Nourry, and Dan Harrison, Clifford Chance LLP (2023), the note examined inter alia the relationship between a manufacturer or supplier and its distributor, and explored the principal differences between the various types of distribution agreements. A comparison between agency, and distribution was stated as follows:
Agent promotes contract between Principal, and Customer
That
Essentially, an agent is appointed by the principal to negotiate and possibly conclude contracts with customers on the principal’s behalf. Agents are paid commission on the sales they make, usually on a percentage basis.
The only contract for sale of the products is made between the principal and the customer. The agent generally has no contractual liability to the customer.
Emails between the parties were considered valid documentary evidence.
Persuaded by the case of Dian GF International Ltd vs. Damco Logistics Uganda Limited & a Third Party, HCCS No. 161 of 2020, where Justice Madrama held that the best evidence rule requires presenting the best available evidence, particularly the original document in the case of documentary evidence.
For electronic evidence, such as emails, this rule is adapted. A computer printout, if it accurately reflects the data, is considered an "original."
To admit emails as evidence, the proponent must demonstrate the emails' origin and integrity, proving that the content is complete, accurate, and free from error or fabrication.
Additionally, it must be shown that the hard copy of the email evidence matches the electronic version
The court concluded that the two-month termination notice given by the 1st Defendant was insufficient and that six months would have been reasonable, given the nature of the transaction and the trust involved.
Thus, the court found the termination notice insufficient and the termination manner unfair to the Plaintiff.
Whether the Plaintiff contributed to the brand equity by payment or otherwise?
The learned justice of the Commercial Court noted the absence of written law on distribution agreements in Uganda, relying on Thomson Reuters' publication to clarify the differences between various types of distribution agreements, such as exclusive, non-exclusive, sole, and selective.
The Court determined that there was an exclusive distribution arrangement between the Plaintiff and the 1st Defendant, as the Plaintiff had the exclusive right to distribute the Whitedent brand of oral care products until the alleged termination.
The role of the distributor, typically involving buying goods from suppliers and reselling them, was discussed, emphasizing that the title and risk of the products passed from the Plaintiff to the customers.
The Plaintiff's efforts to build a positive brand equity for Whitedent were recognized as inseparable from the brand itself. The Court acknowledged that the Plaintiff's efforts led to the Whitedent brand winning awards in Uganda, demonstrating the value of their investment in building brand equity.
The Court dismissed the Defendants' claim that the Plaintiff was also contracted to coordinate advertising and marketing.
It found that the only contractually agreed remuneration was a markup of 25% to 30% applied to the Plaintiff's distributorship role. Thus, the issue was resolved in favor of the Plaintiff.
Whether the Defendants' obtained "trade secrets" from the Plaintiff leading up to, and prior to the termination of the distributorship arrangement. If so, whether the Defendants infringed on the Plaintiff’s trade secrets, and or proprietary data?
The learned justice of the Commercial Court provided a detailed analysis on trade secrets and confidentiality. Trade secrets, as defined by the Trade Secrets Protection Act, 2009, include information such as formulas, methods, and processes that have economic value from not being generally known and are subject to efforts to maintain secrecy. Unauthorized acquisition, use, or disclosure of such information is deemed unfair practice under the TRIPS Agreement.
To claim a breach of confidential information, three elements must be proven: the information must be confidential and commercially valuable, it must have been shared under an obligation of confidence, and there must be unauthorized use causing detriment. The court cited various cases and legal doctrines to support these principles.
In this case, the Plaintiff's evidence showed that they informed the Defendants that the information shared was confidential. This included a customer list developed over 28 years, which was unique and kept confidential until the Defendants unlawfully obtained and used it.
The court found that the Defendants’ arguments that the customer list was not a trade secret because it was included in monthly reports and publicly accessible were unconvincing.
The Plaintiff's efforts in building brand equity for the Whitedent brand, which won awards, were recognized. The court held that the new distribution arrangement between the 1st Defendant and the 2nd Defendant, which used the Plaintiff's confidential information, was an unfair practice and a violation of trade secret protection.
The Plaintiff's evidence was unchallenged by the Defendants, leading the court to conclude that the Defendants infringed on the Plaintiff’s trade secrets and proprietary data.
On unchallenged evidence.
The court held that
It’s trite law that where it is apparent from the record that the adverse party did not challenge the essential, and material evidence of the Plaintiff’s case in cross examination, this would lead to the inference that the Plaintiff’s evidence was accepted by the adverse party. (See Habre International Co. Ltd Vs Ebrahim Alarakia Kassam & Others, SCCA No. 4 of 1999), cited by Counsel for the Plaintiff
What remedies are available to the parties?
The court dismissed the suit against the 3rd Defendant but found in favor of the Plaintiff against the 1st and 2nd Defendants on issues (2), (3), and (4).
The Plaintiff had pleaded and proved special damages, including various costs related to business operations and losses, amounting to USD 18,053,972.39. The court awarded this amount, finding the Plaintiff had met the evidential burden.
Additionally, the court found the Plaintiff was entitled to aggravated damages due to the 1st Defendant's arrogant contract termination without proper notice, awarding USD 150,000. General damages of USD 53,000 were awarded for the Plaintiff's loss of proprietary business data and inconvenience.
The Plaintiff was also awarded costs of the suit, and the court set interest rates at 24% on special damages and 12% on aggravated and general damages.
The final judgment included declarations of breach and infringement by the 1st and 2nd Defendants and awarded the Plaintiff a total of USD 18,256,972.39 plus interest and costs.
Summarised
by Waboga David
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