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The distribution agreement through the prism of the competition

Antonia Peeva
Antonia Peeva

It is widespread as a legal means of regulating relations between traders

The market plays an important role in regulating the production, exchange, distribution and consumption of goods and services. The practice shows that it is not enough consumers to be only provided with an opportunity to receive satisfying their needs products and services, but it is necessary these products and services to be available in adequate quantities and quality on an accessible location and at a convenient time. These aspects, namely, define the distribution as an opportunity, through which, on the one hand, individuals and groups of people receive what they need, and, on the other, producers realize the results of their activity.

The distribution agreements are inherently a tool by which one party (producer, supplier) uses the skills, effort and network of the other party (distributor) for realization of the products and/or services on the market. The distribution agreement is widespread as a legal mean of regulating relations between traders in the real economic relations, as the distributor sells at their own name and for their own account, reselling the goods, purchased from the producer, and receiving commercial gain, but the legal regulation of this type of agreements in Bulgaria is limited.

The parties are free to negotiate the terms of the distribution agreements, provided they do not conflict with the general provisions of the law. Due to the similarity of the distribution agreement with the buy-sale agreement and the commercial agency agreement, thereto shall apply the rules, established for these institutes, but at the same time introduced are some additional elements, for example relating to the granting of exclusive or non-exclusive right of the distributor to sell the goods of the producer, obligation of the distributor to organize and maintain service for the goods, establishing a common pricing policy and others. Namely because of the specific activity of producers and distributors and public relations that govern these agreements, it is necessary to take into account the norms, relating to the requirement for no limiting and distorting competition.

In terms of competition law, the distribution agreement falls within the scope of the so-called vertical agreements. These are buy-sell agreements of goods or services, which are concluded between undertakings, operating at different levels of the market.

Usually, the vertical agreements, where the undertakings only define the price and the quantity of the product, subject to buy-sell, do not restrict competition. Moreover, under Regulation (EU) №330/2010 of the Commission certain vertical agreements may lead to increase the economic efficiency by facilitating better coordination between the participating undertakings. They can lead to cost reduction and optimization of sales and investments.

In many cases, the parties to such contracts negotiate certain restrictions, such as an obligation of the distributor not to buy goods from a competing brand, an obligation for the producer to sell their products only to a particular distributor, an obligation of the producer not to sell to another distributor in a specific territory, defining of a selling price, prohibition of sale to end customers outside the region of the distributor and others.

The agreements, defining directly trade restrictive conditions, are prohibited under the Bulgarian legislation.

According to the Law on protection of competition all types of agreements between undertakings, which have as their purpose prevention, restriction or distortion of the competition in the market, are prohibited, such as: (i) directly or indirectly defining of prices or any other trading conditions; (ii) allocation of markets or sources of supply; (iii) limiting or controlling the production, trade, technical development or investments; (iv) applying different conditions for the same type of agreements in respect of certain partners, thereby placing them at a disadvantage as competitors; (v) making the conclusion of contracts subject to acceptance by the other party of supplementary obligations or concluding additional agreements, which, by their nature or according to the usual commercial usage are not connected with the subject of the main agreement or with its implementation.

These agreements are void and do not lead to any legal effect. The purpose of the introduced prohibition is to guarantee that any undertaking, involved or potentially involved in the market, will have the ability to independently choose its trading practices (including the relations with its customers and suppliers).

According to the constant practice of the Commission for protection of competition (CPC), in order a violation of the general prohibition to be established, the cumulative presence of the following elements is necessary: 1. a participant on the respective market that possesses the characteristics of an independent “undertaking”. The distributor, participant in a specific agreement, is an independent economically principal, if they undertake the financial and commercial risk, arising from the agreement, and their behavior on the marked does not characterize it as part of the undertaking producer. 2. existence of an agreement between undertakings. It can be formal informal, preliminary or framework agreements and others. 3. the agreement has to be likely to cause certain anti-competitive effect, expressed in purpose or result prevention, restriction or distortion of the competition. In its practice the CPC points that the establishment of an anti-competitive purpose of a specific agreement does not refer to the subjective intention of the parties, but to the creation of an objective possibility in the particular economical context, in which the agreement will have effect, to lead to violation of the competition on the relevant market. With other words, the existence of an anti-competitive purpose is sufficient to prove the committed violation of the general prohibition, without any need of proving an anti-competitive result.

In the practice, the direct or indirect determination of prices is seen as limitation of the competition by purpose. In the vertical agreement the determining of prices can be made by agreement of the parties to fix resale prices, at which the distributor to provide certain goods and services on the market, depriving in this was the possibility to freely and independently determining of prices of the products for their customers under the effect of the natural market forces and pressure from their competitors. In a number of contracts are formulated specific obligations on distributors to comply with the so-called recommended resale prices. The created obligations in this way for adherence of the resale price, combined with the possibility to sanction the violation of this obligation leads to the conclusion that in practice counterparties agree to fix resale prices. Thus achieves control on pricing on the entire chain of realization of the product from the supplier level to end customer, whose purpose is to achieve a certain final price in the retail network.

In a number of standard contracts between suppliers and distributors the specific area, in which the distributor performs the activity, is identified. The CPC believes that it creates prerequisites for limiting distributors, depriving them of incentives to optimize the distribution in direction of expanding the territory of activity. However, when the established territorial scope of the distribution agreements is not related to market partitioning by territorial principle or by customer group there is no anti-competitive effect.

The article has been published in Bulgarian, in Capital Daily.