By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Budweiser’s parent should have given BISX-listed Commonwealth Brewery more than one year’s notice warning when it terminated their distribution agreement and forced the Supreme Court into “uncharted territory”.

Justice Indra Charles, in a May 19, 2022, verdict revealed that the dispute involving Anheuser-Busch and its Caribbean affiliate on one side, and the Kalik manufacturer on the other, raised “a novel point of law in The Bahamas” after they were unable to make a clean break following the end of their 40-year tie-up.

The two parties instead managed to brew up a bitter battle in which Commonwealth Brewery, and its Burns House affiliate, argued that they should have been given no less than three-and-a-half years’ notice that Anheuser-Busch and Cerveceria Nacional Dominicana (CND) planned to terminate their long-standing agreement. 

The Budweiser parent, though, countered that four months’ notice was reasonable and counter-claimed that Commonwealth Brewery had failed to pay it almost $600,000 for product supplied during the three-month period between June 7 and September 9, 2015, just prior to the agreement’s termination. The Bahamian brewer has accepted that this sum is due and owing subject to being set-off against its own claim if successful.

Justice Charles, while declining to grant the three-and-a-half years’ notice claimed by the vertically-integrated BISX-listed brewer, wholesaler and retailer, nevertheless ruled that Anheuser-Busch should have given 15 months’ warning - a period that is more than four times’ longer than the three-and-a-half months received. The 15 months, though, is equivalent to just 36 percent of the notice period claimed by Commonwealth Brewery.

However, the damages awarded to the Bahamian brewer will be 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. The notice period damages have yet to be determined, and will be decided at a future hearing.

Justice Charles, in her verdict, noted that the distribution deal between Anheuser-Busch and Burns House - first inked in 1975 - was 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.

All went well for four decades. However, Hans Neven, Commonwealth Brewery’s then-managing director and the company’s sales director alleged that 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 distribution agreement. 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, making for three-and-a-half months.

“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,” Justice Charles wrote.

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”.

At trial, Marcio Juliano, CND’s general-director, “stated that the main reason why Anheuser-Busch terminated the distribution agreement was inadequate support for the brands and they could grow more with the other distributors. He agreed that Burns House bore 50 percent of the marketing costs for the Anheuser-Busch brands in The Bahamas”.

Mr Juliano, though, was unable to say whether Burns House had dedicated a brand manager and 12 employees to service its brands. Justice Charles found he “flip-flopped” on the reasons for the termination, arguing that Anheuser-Busch and its brands “could have a better position in the Bahamian market if Burns House was paying more attention to their brand. He said that market share and performance were the principal reasons for terminating the distribution agreement”.

Jurgen Mulder, Commonwealth Brewery’s present managing director, said Anheuser-Busch’s brands accounted for 15 percent of total beer sales prior to the agreement’s termination, reaching $7.2m in 2013 and $8.5m in 2012. And, to back-up the financial impact from the Anheuser-Busch loss, the BISX-listed producer produced an analysis by Simon Townend, the KPMG Advisory Services accountant and partner.

He estimated that the Anheuser-Busch departure caused a $2.338m average gross margin loss per year for Commonwealth Brewery/Burns House, totalling $7.015m over the three-year period it was likely to take the group to replace the lost revenues.

“According to him, if Burns House were never able to replace the lost business, then based on a perpetuity approach, the potential value of lost business for Burns House is estimated in excess of $20m. To place this in context, the market capitalisation of Burns House as at 30 November, 2015, was approximately $230m,” Justice Charles noted.

Referring to cross-examination of Mr Townend by Anheuser-Busch’s attorneys, she added: “He said that, in 2015, the Anheuser-Busch product portfolio account accounted for a little below 10 percent of Burns House’s overall revenue. Under further cross-examination, Mr Townend was referred to the 2019 annual report.

“He acknowledged that there was a slight dip of about 4.7 percent in revenue between 2015 and 2016 but, for the following years, 2016 to 2017, there was an increase in the overall revenues and profitability between those two years. However, according to Mr Townend, you also have to look at the flip side. If Burns House had not lost the distribution agreement, instead of being $133m in 2017, the revenues might have been $8-$9m more which is the issue that you have with the impact of the loss of a contract.”

Summing up, Justice Charles said she “preferred” Mr Townend’s evidence although rejecting the notion it would take Burns House three years to replace the lost Anheuser-Busch revenue. She ultimately found that 15 months, and not three-and-a-half months, was a “reasonable” notice period to terminate the distribution agreement.