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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Cape Wine Industries v Kenyan Spirits
Mohamed Ali Chicktay
General Information
Cape Wine Industries Pty. Ltd. (“CWI”) is a family-owned wine farm in the heart of Stellenbosch in South Africa. The business has been owned by the De Jage family for 150 years and its owner, Pat De Jage, takes pride in the quality of its wine and personally ensures that customers are satisfied with the product.
Kenyan Spirits and Manufacturers Pty. Ltd. (“KSM”) is a liquor wholesaler and distributor in Nairobi. It has packaged and wholesaled beer in Kenya and the rest of East Africa for the past 10 years. Having achieved success in the beer industry, KSM now wishes to expand into the wine business and package and distribute wine to its customer base in East Africa. Eight months ago KSM purchased 4,000 litres of wine from CWI. Within two months all the wine was sold to clients in East Africa. KSM received excellent reviews for the new product and its clients in East Africa doubled their orders. KSM thus ordered a further 10,000 litres of wine from CWI. 2,000 litres were delivered, but due to a dispute about the quality of this consignment a further 8,000 litres were not delivered to CWI.
When the first 2,000 litres arrived in barrels in Nairobi the wine was bottled and packaged and sent directly to KSM’s clients. Within a month Ugandan Breweries (“UB”), who had purchased 1,000 bottles from KSM, complained that the quality of the wine had deteriorated. A similar complaint was received from Rwandan Liquor Stores (“RLS”). Both UB and RLS were happy with the first order of wine that they had received previously, but unhappy with the quality of the wine received in the second consignment. They indicated that the wine no longer had the same sweet taste and was more pungent. Sal Bosek, Director of KSM, lodged a telephone complaint to Pat De Jage. Pat did not take the complaint lightly. Pat had worked in the business for the past 45 years and had never received a complaint before. Pat informed Sal that CWI would not take responsibility for the poor quality since Pat had tested the wine and had approved the quality, and perhaps the problem had occurred when Kenyan Spirits had bottled the wine. Sal informed Pat that by the Sales Agreement CWI was bound to provide KSM with good quality wine or face economic consequences for breach of contract. Pat was insulted by Sal’s threat and slammed the phone down.
Sometime later, Sal sent a letter to CWI requesting payment of US$170,000 by way of damages for breach of contract. Pat, offended by the letter, responded by sending a letter to KSM indicating that CWI refused to pay any money to KSM and would no longer do business with KSM. Pat indicated further that in future CWI would trade directly in East Africa since KSM was in breach of its Sales Agreement with CWI.
The Sales Agreement between KSM and CWI includes the following:
KSM instituted legal action against CWI. The counsel for Cape Wine Industry suggested to the judge to set up a mediation under the ICC Mediation Rules. The offer was made to Kenyan Spirits’ lawyer who accepted on behalf of his/her client. The mediation will be attended by Pat, Sal and their lawyers. Sal and Pat have full settlement authority.
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Confidential Information for Cape Wine Industries
Requesting Party
You are the Managing Director of Cape Wine Industries Pty. Ltd. You have been in the wine business for the past 45 years. CWI has sold wine throughout Europe and the United States with great success, but now wine sales within these markets have slowed. In order to increase CWI’s market base, you decided to expand your business into East Africa. You believed that this was an untouched market you could enter before your competitors. You established contact and contracted with Kenyan Spirits (KSM).
Four barrels were sent to KSM and sold within two months. You were delighted the wine was favourably received by the East African market. KSM ordered a further 10,000 litres. Since you were going to be on leave in October, you agreed to send two barrels of wine. This would be followed by eight more barrels, to be sent to KSM a few months later.
You were alarmed when you received a telephone call from Sal Bosek complaining that the quality of your wine was poor. You were taken aback by the tone of Sal Bosek’s voice. You have never felt so insulted in your 45 years of business and put the phone down. You were further alarmed when you received a letter from KSM requesting US$170,000 compensation. This far exceeds the value of the wine that had been sent. You have always assured your clients that the quality of your wine is of the highest standard. In October you took leave and had checked 80% of barrels that were sold to your international clients. The remaining 20% was checked by your daughter, Sam De Jage, who has six months’ experience in the wine industry. The 2,000 litres shipment for KSM may have been sent from this batch of wine checked by Sam. However, you will not admit liability. If word gets out that the quality of your wine had deteriorated, it would damage your business. Perhaps the wine was contaminated when it was bottled in Kenya?
In response to the letter received from KSM you sent an angry letter indicating that you denied liability and would not pay US$170,000 and that CWI would be selling its wine directly to the East African market. Since then, you have realized that CWI still needs KSM as a distributor. KSM already has a well-established clientele in East Africa and has an excellent reputation. However, you do not feel that you should pay KSM US$170,000. This far exceeds by far the value of the two barrels (2,000 litres) sent to KSM, with each litre costing US$10. You do not know how KSM came up with this figure. You also feel that KSM does not have a case against you, since the time for making a claim has expired. Your Sales Agreement states that each party will have one month from the date of the dispute to institute legal action. The dispute arose when Sal Bosek informed you of the complaint by telephone. KSM only instituted legal action more than one month after that phone call.
You have been in the wine business for 45 years. You are a person of integrity and want to maintain your relationship with your customers. You were deeply insulted and feel that an apology is essential if you are to continue your business together.
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Confidential Information for Kenyan Spirits
Responding Party
You are the Managing Director of Kenyan Spirits and Manufacturers Pty Ltd (KSM). You started the business 10 years ago and it has grown exponentially. Since you have had major success in the beer industry you wanted to expand your business into the wine industry. A couple of years ago you met Pat De Jage, the Managing Director of Cape Wine Industries Pty. Ltd. (CWI). The two of you agreed that CWI would sell wine to KSM in barrels. Four barrels were sent to KSM. KSM bottled the wine and the bottles were sold within two months. You were delighted that the wine was favourably received by the East African market and ordered a further 10,000 litres. You were surprised when Pat informed you that CWI could only send two barrels and a further eight some months later.
When the two barrels arrived you bottled them and sent the bottles immediately to your East African clients. You received a complaint from Ugandan Breweries (UB). The wine was not as sweet as the wine that they had received in their first order. A similar complaint was received from Rwandan Liquor Stores (RLS). You decided to discuss this with Pat. You knew that Pat was a person of integrity and felt that the problem would be resolved promptly. You called Pat personally. Instead of dealing with the problem Pat was rude to you and slammed down the phone. Your next step was to send a letter to CWI. In the letter you requested compensation of US$170,000 for the loss that KSM suffered. While the two barrels (2,000 litres) only cost US$20,000, the reputation of KSM had suffered immensely, and you would need a further US$50,000 – US$100,000 to restore KSM’s image. You had also spent US$25,000 in shipping costs. You had to pay for the shipping of the two barrels from South Africa. You also had to pay for deliveries to your clients in East Africa. To resend two barrels would cost a further US$25,000.
CWI responded in writing, stating that CWI would not pay KSM US$170,000 and that CWI would be selling its wine directly to the East African market.
You were shocked. You had hoped that Pat would realize the harm that CWI had caused KSM and that CWI would compensate KSM for its losses. You did not expect CWI to pay the full US$170,000, but you wanted some acknowledgment for the harm caused. You also feel that CWI is fully to blame. KSM’s bottling is secure and you have not had any problems in this regard. The bottling machine has recently been overhauled and is working fine. You do not believe that this could have contaminated the wine, but of course you cannot be absolutely sure. Perhaps the wine was contaminated before it left the CWI winery?
You do not want to lose CWI as a supplier. CWI has a good reputation and its wine is highly regarded. But you feel that CWI is acting in breach of its contractual obligations. The Sales Agreement indicates that CWI will provide wine exclusively to KSM for 10 years and will not sell any of its products directly to anyone else in East Africa. You believe that you had instituted action against CWI within the required time period. The Sales Agreement states that each party will have only one month from the date of the dispute to take legal action. According to you the dispute arose when you notified CWI in writing and KSM responded in writing, and thus legal action was taken less than one month after the dispute arose.
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Colin J Wall
Case Analysis
This is a relatively straightforward dispute involving a wine producer in South Africa and a wine distributor in Kenya. The second batch of wine was not up to standard and was said to have been contaminated. The parties could spend a lot of time and effort in trying to find out how and why the wine got contaminated. KSM has assumed that this happened in the winery, whereas CWI has assumed that it happened when the wine was bottled. Given the distance between South Africa and Kenya, the wine could well have been contaminated en route.
No one knows the answer to this question and a good mediator will ask the parties to set this issue to one side or, if both parties really feel that it is essential to obtain an answer, suggest that they jointly appoint an independent expert to investigate. In this regard, ICC has Expertise Rules and is able to source competent experts. That would involve postponing the mediation until the expert’s report was produced. Many mediations involve reports from experts, but few from truly independent experts. In this case the parties have decided to mediate without knowing why the wine was contaminated and thus it is essential that they do not spend time trying to solve a problem which cannot be answered in the mediation.
What is essential is for the mediator to listen to each party’s opening statements and allow the other party to comment, to establish exactly how each party now feels, given the acrimonious telephone exchanges and subsequent correspondence. This might obviate Pat’s demand for an apology. The mediator should then try to get the parties to focus on the wider business issues. CWI really needs KSM to distribute its wine in East Africa through its network of established clients and KSM realizes that CWI is a good producer of wine and that it needs CWI in order to diversify its current business away from beer. A good mediator would seek to normalise the emotional reactions of each party and try to get them to feel how they would have reacted had their roles been reversed.
Another problem, which could be put to one side, is whether KSM’s claim was brought in time. Was the trigger for the dispute the telephone conversation between Pat and Sal, as contended by Pat’s lawyer, or was it the written complaint issued sometime later, as contended by KSM. This is again another question which cannot be answered in the mediation and it is to some extent irrelevant as the parties have agreed to mediate this dispute and not engage in litigation.
One of the difficulties in settlement in the case is the monetary demand made by KSM, which is to a large extent inflated. The contaminated wine only cost US$20,000, so how is it possible for KSM to claim US$170,000? The mediator or Pat should ask for a breakdown of these alleged losses. A sum between US$50,000 and US$100,000 has been included by KSM as a loss relating to goodwill and reputation without any real backup. A mediated solution to this problem, where CWI provides good quality wines, which KSM then distribute to their clients, would go a long way to dealing with this alleged loss and to reducing the financial claims to something more reasonable, upon which the parties could settle.
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Greg Bond
Commentary for Training
What to Talk about First?
This mediation is based on a fairly simple conflict over quality in a sales contract, with one party claiming damages on the basis of a breach due to non-conformity. The claim is disputed on two counts. First legally, as the opinions as to the timeliness of the claim differ in that one party’s lawyer will argue that the claim was brought too late and will be inadmissible, while the other will argue that it is valid. Secondly, the parties have not yet been able to identify where the quality problem originates — with the producer of the wine in South Africa or with the bottler in Kenya. If they wished to pursue the arguments, considerable time and money would need to be invested in discovery and investigating the cause of the quality fault. This all makes mediation a viable dispute resolution option.
For mediation training, it can be assumed that the parties’ lawyers are aware of the reasons why mediation is preferable. It might be worth the mediator attempting to work with the lawyers to calmly reinforce the message, as the case notes suggest that the two company directors are angry and upset. Their previous communication has impulsive elements to it — they may well have quickly jumped to conclusions in seeing the fault with the other side, rather than calmly reviewing the situation. Their unfortunate phone call certainly bears the hallmarks of a somewhat hasty reaction on both sides and it was followed by further escalation of the conflict. The mediator might offer to discuss the phone call and the effects it has had, so each party can get this off his or her chest.
Then a mediation process here can follow a straightforward path from agenda setting to interests to options. The agenda will not be too complex, but will as always raise the question of what to talk about first. Perhaps the most difficult issue will be the sum of damages claimed, which will seem to Cape Wine to be inordinately high — at US$170,000 for an unusable consignment of wine that was invoiced at US$20,000. How can this problem be managed in mediation? The mediator can ask the parties exactly this question: what can you do about the disputed claim for damages? Depending on how far the parties have established mutual understanding or even a will to cooperate on a future contract which is in their interests, the answers may vary. One option would be to somehow split the difference, another to look at standard practice, another to identify at least some of the real costs (such as the claim for transportation costs, which can be clearly documented), and another to look at alternative forms of compensation factored into a future deal. The discussion on damages is likely to be easier if the parties can somehow link it with a future deal. In terms of agenda setting, it might therefore be best for the parties to state their claims and counterclaims on this, and then for the mediator to suggest postponing detailed discussion to a later point during the mediation.
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