Legal Watch – Vol 1: Court of Appeal Upholds Goodwill as a Quantifiable Business Asset

Civil Appeal No. 004 of 2023; Gregory Gidagui Mafabi t/a Salvation Distributors & Salvation Distributors Ltd vs Nile Breweries Ltd.

Overview

The concept of goodwill has been applied mainly in the field of intellectual property law, particularly in trademarks and passing off actions. For example, in Britania Allied Industries Ltd vs Aya Biscuits (U) Ltd HCT -00-cc-cs-024-2009, it was held that goodwill is the attractive force attached to the name, get up or logo which brings in customers and that the owner of good will has a property right that can be protected by an action in passing off.

However, in the above-mentioned landmark case argued by our Senior Partner Charles K. Nsubuga, the Court of Appeal moved beyond the narrow intellectual property lens and provided a more expansive treatment of goodwill as a commercial and economic resource built over time through investment, customer relations and market development, capable of valuation and compensation.

This case arose from the unlawful termination of a distributorship agreement between the Appellants and the Respondent, represented by Kampala Associated Advocates. The Court upheld liability for breach of contract and significantly revised the award for loss of goodwill, thereby firmly entrenching “goodwill”, in Uganda commercial jurisprudence.

Background

The distributorship agreements between the Appellants and the Respondent granting exclusive rights to distribute the Respondent’s products in the areas of Kyengera, Kayabwe and Maddu, started in 1999. Over a period of 20 years, the Appellants invested heavily in infrastructure, logistics, and market development, including constructing a new warehouse at Kayabwe at the Respondent’s request.

In 2018, the Respondent terminated the agreement on grounds that the Appellants had failed to adopt a Distribution Management System (DMS). The Appellants filed a suit inter alia for breach of contract based on the Respondent’s unilateral decision to change the terms of the agreement, failure to train the Plaintiff’s staff, terminating the contract without a three months’ notice and/or reasonable grounds.

The High court found the Respondent to be in breach as it had unilaterally, unreasonably and unlawfully terminated the agreement. Court awarded the Appellants UGX, 108,264,000 as general damages and UGX, 100,000,000 for loss of goodwill and trade assets used for the construction of the warehouse.

Court Of Appeal

The Appellant raised several grounds on appeal inter alia that the award of UGX. 100m as goodwill was too low and that the judgment of UGX 1,075,760,038/= for the Respondent on the counterclaim, was entered without proof and proper evaluation of evidence.

In allowing the Appeal, Court adopted the definition of goodwill from IRC vs Muller & Co’s Margarine Ltd [1901] AC 217 at 223 which was described as; “the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in customers”.

The Court also adopted a six-step approach to valuing goodwill from the Canadian Institute of Chartered Accountants which included;

1. examining the earnings records;
2. adjusting past earnings to arrive at future maintainable profits;
3. determining the appropriate rate of return that should be realized on an investment in the particular type of business;
4. determining total value by capitalizing the earnings as adjusted by the rate of interest;
5. valuing tangible and intangible assets other than goodwill, and then
6. calculating the difference between the value of the assets and the capitalized earnings.

Court further provided that the computation of damages for the loss of goodwill is an accounting and financial valuation exercise requiring expert evidence. In this case, the Appellants had adduced evidence of a chartered certified Accountant who had treated the business as a going concern and projected future cash flows for a 20-year period.

The Court found that there was no rational basis for the award of UGX 100m by the trial court, given the nature of the business, the new investment at Kayabwe, the earnings record of the Appellant for the almost twenty years and other factors considered by the expert witness in the valuation report.

That the unlawful termination of the agreement deprived the Appellants of the returns of their market development efforts built for close to twenty years in the same territory. The customer base and business attraction nurtured for that period was to be reaped by the Respondent’s chosen alternative to the Appellant’s which could only be atoned for with adequate compensation.

The Court therefore considered five years of projected business continuity as reasonable period for determining the lost goodwill and accordingly awarded UGX. 1,117,687,085/= against the Respondent.

With regard to the award of special damages of UGX 1,075,760,038/= upon the Respondent’s counterclaim, the Court faulted the trial Judge for awarding that sum without the requisite proof.

Key Insights

A business is comprised of tangible and intangible assets. The tangible assets include equipment, property and inventory while intangible assets include the reputation attached to the business (the goodwill).

A proper legal claim for business loss should therefore include both tangible and intangible assets.

This case review was prepared by:

• Fred Muwema – fmuwema@madvocates.com
• Martha Butungi Buragwa – Research Assistant

This publication has been prepared as general information on matters which it concerns, and does not constitute professional advice.

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