Drugs firms battle over distribution deal

By Wahome Thuku

Surgilinks Limited is a Kenyan distributor of medical supplies. Since March 2009, it had been in business with an international pharmaceuticals firm, Adcock Ingram East Africa, to distribute their products in Kenya until early 2012 when things went haywire.

A dispute arose over the payments of Sh87.8 million to Adcock Ingram East Africa by Surgilinks. Adcock took the matter to the High Court in Nairobi saying Surgilinks had failed to pay for supplies, some dating back to July 2010. In the meantime, they decided to remove their products from the premises of Surgilinks.

Surgilinks filed an application for injunction to stop the company from removing its stock. They disputed the Sh87.8 million claim but admitted that the outstanding amount due and payable to Adcock Ingram East Africa was about Sh65 million.

But underneath the payments dispute was another set of issues. Surgilinks claimed Adcock Ingram East Africa was taking away the stock worth Sh22 million as a hit back because they (Surgilinks) had decided not to renew the agreement, which was to expire on February 29, 2012. Apparently, Surgilinks had hit a jackpot by winning a tender to supply drugs to the Government worth Sh427 million.

In their response to the application, Adcock Ingram accused Surgilinks of having bribed their way to win the Government contract.

Adcock Ingram East Africa’s regional manager Anthony Kenyatta had even written to the Kenya Medical Supplies Agency on February 22, complaining that there were irregularities in awarding the tender to Surgilinks. The letter was produced in court.

Corruption claims

Mr Kenyatta claimed they had reasons to believe that Surgilinks had engaged in bid-rigging and had bribed to influence the outcome of the procurement process in their favour.

Justice Daniel Musinga of the High Court declined to issue that injunction because Surgilinks was indebted to Adcock Ingram East Africa as admitted. He held that a party seeking equity relief had to approach the court with clean hands.

Musinga, however, ruled that the bribery allegation, which was a very serious charge, would be dealt with when determining the main suit. That left Adcock Ingram East Africa free to take away their stock.

On May 3, 2012, Surgilinks filed another application, this time seeking an order that the court proceedings be suspended and the matter referred to an arbitrator as provided under Section Six of the Arbitration Act, 1995 and rule two of the Arbitration Rules, 1997.

In an affidavit, Surgilinks director Deepak Kothari told the court that on March 1, 2009, or thereabout, his firm and Adcock Ingram East Africa entered into an agreement for the distribution of the latter’s products in Kenya.

It provided that any differences which would arise in the life of the agreement would be freely discussed between the parties and solved amicably failing which the parties would refer them to arbitration.

Mr Kothari said representatives of the two companies met on March 23, 2012, in an effort to resolve a dispute that had arisen but were unable to agree and, therefore, the next logical step was to refer the matter to arbitration in accordance with the agreement.

Instead, Adcock Ingram moved to court on April 25, 2012, and sought a mandatory injunction to compel Surgilinks to pay the money owed within 15 days. In their application, Kothari argued that the move to file the suit was bad in law and the court had no jurisdiction in a matter reserved for arbitration.

Adcock Ingram East Africa filed their grounds of opposition saying Surgilinks had breached its obligations under the distributorship agreement by failing to pay the amount, which had already risen to Sh90.8 million.

Surgilinks had acknowledged the debt. The only amount in dispute and which then was the subject to negotiation and arbitration was Sh6.4 million which was less than 10 per cent of the total debt.

Adcock Ingram East Africa argued that it would be against public policy for a matter to be referred to arbitration when there was no dispute as to the amount due or a partly admitted liability.

The ruling

“It would be unconstitutional and abuse of the court process for a party to be burdened with astronomical costs and delay in being asked to refer a matter to arbitration when there is no dispute or there has been admission of liability,” the company’s lawyer argued.

Further, they submitted that there was no dispute that Surgilinks were entitled to a commission for the distribution hence that was not an issue to be taken to arbitration.

They said they were willing to go for arbitration on the disputed Sh6.4 million on condition that the evidence supporting that dispute was made clear to the court.

Once more, Justice Musinga had an easy time dealing with this application for arbitration.

It was not in dispute that the agreement contained an arbitration clause 16.3, which required that any dispute or differences that could not be resolved amicably ought to be referred to an arbitrator.

“I would agree with the defendant that it is an abuse of court process for parties to refer their disputes to court if the agreement that gives rise to the proceedings contains an arbitration clause,” Musinga ruled. “However, if a certain portion of a claim is not in dispute, it is improper to refer the entire claim to arbitration. Before a court can order parties to go to arbitration it has to be satisfied that there is indeed a dispute over the claim in issue.”

Musinga noted that Adcock Ingram East Africa had tabulated the money owed to them up to June 1, 2012, which was Sh97,361,371.48 out of which Surgilinks’ commission was Sh23,756,642.50.

“The defendant has not shown why it has refused to make payment of the undisputed amount which is not less that Sh65 million expressly admitted. It would, therefore, be unreasonable to refer the entire claim to arbitration,” the judge concluded.

On June 18, he ordered Surgilinks to pay Adcock Ingram East Africa Sh65 million forthwith. He then ordered that court proceedings over the contentious amount be suspended and the claim be referred to arbitration. Surgilinks was also ordered to pay for the costs of the application for arbitration.