When a distribution agreement may be unenforceable?
Distribution agreements generally are not governed by any special distribution legislation but rather general contractual principles. Thus, parties to a distribution agreement should have a wide freedom of contract. However, one should be aware that this freedom of contract is limited to a certain extent by the competition legislation.
Distribution relationship. By concluding a distribution agreement, the distributor assumes the obligation to purchase goods from a supplier in his own name and account and to resell goods to end users or other distributors. The distributor, thus, acts on his own risk when purchasing and selling goods.
For the purposes of protecting the distributor's investment, the parties often enter into exclusive distribution arrangements where the supplier takes an obligation to sell goods only to one distributor acting in a certain defined geographic area or with a certain customer group. Usually the supplier may not himself sell goods in the exclusive territory of the distributor or to such customers that belong to the exclusive customer group of the distributor.
When concluding a distribution agreement providing for certain competition limitations, which is always the case in an exclusive distribution agreement, the parties should bear in mind that such limitations are permissible only as far as they are not prohibited by competition laws. Below some of the most relevant restrictions are outlined.
Territory. Generally a distributor may be restricted validly from active sales in the exclusive territory or to the exclusive customer group reserved to the supplier or allocated by the supplier to another distributor. In comparison, a restriction limiting passive sales 's i.e., sales in response of unsolicited orders, including general advertising 's is considered to fall within anti-competitive practices and cannot be agreed upon between the parties.
The following illustrates active selling 's e.g., a distributor targets marketing campaigns or opens branches for the sale of goods in an area that is reserved for the supplier or is an exclusive territory of another distributor appointed by the supplier. Passive selling would be when a customer who is located outside the distributor's territory contacts the distributor on its own initiative for the purpose of purchasing goods.
Noncompetition. The supplier may not impose on the distributor any direct or indirect noncompetition obligation, the duration of which is indefinite or exceeds five years. Also, usually, the supplier may not impose any direct or indirect obligation causing the distributor, after termination of the distribution agreement, not to manufacture, purchase, sell or resell goods or services.
Pricing. The supplier is strictly prohibited from imposing on the distributor a fixed or minimum resaleprice. Nevertheless, the parties may be free to agree on a maximum or recommended resaleprice, provided that this does not amount to actual resale price maintenance.
Market power. The competition regulations are not applied to such contracting parties whose position and influence on the relevant market are not significant. On the other hand, and this is very important to know, contracting parties having a significant market power (more than 30 percent of the relevant market) may be generally restricted from entering into any exclusive distribution arrangements at all.
Conclusion. In general, the Latvian competition law has been harmonized with the European Union's law. Nevertheless, it should be noted that as of May 1, 2004, EU competition regulations have become directly applicable legislation in Latvia. Thus, the parties to a distribution agreement shall be aware of both the national and the EU regime. As the competition laws are quite complex in their nature, it is advisable to negotiate and draft distribution agreements with assistance of appropriate professional help.
