Distribution agreement is not a concept that is well-developed in Russia. There is not an established court guidance on most of the terms and conditions a reasonable non-Russian supplier seeks to include into the distribution agreement. It is common practice that a non-Russian investor is seeking to (i) fix the sale price and (ii) include territorial and customer restrictions in a distribution agreement with its Russian partner (which is not within its group). The Russian laws and court practice are not favorable to such terms and conditions.
1. Fixing the sale price
Fixing the sale price at which the distributor is required to distribute products is prohibited by Russian antitrust law. However, Russian antitrust law explicitly allows the supplier to specify the maximum sale price for products, which could be a feasible solution.
2. Territorial and customer restrictions
Including territorial and customer restrictions in a distribution agreement is subject to a number of legal considerations.
(1) Russian antitrust law allows the inclusion of territorial and customer restrictions in a distribution agreement if the agreement is: (i) a "vertical" agreement between non-competitors; and (ii) each of the parties to the agreement does not hold more than a 20% share of any Russian product market. Please note that the Russian antitrust law has been recently amended and, accordingly, currently there is very limited guidance on the implementation of Russian antitrust law provisions applicable to distribution agreements.
(i) Vertical agreement between non-competitors
Based on the existing practice of Russian antitrust authorities (the "FAS"), if the supplier sells a product to the distributor and does not sell it to customers in the same market within which the distributor operates, the supplier and the distributor will not be regarded as competitors.
However, there exists some uncertainty as to the definition of the "same market". In circumstances where the distributor's sales are limited to a certain region of the Russian Federation, it is unclear whether the term "same market" covers the whole territory of the Russian Federation or the region where the distributor operates. Having said that, the most recent approach taken by the FAS (which should be regarded as a guidance and not as an established practice) supports the latter view. If you are not proposing to sell to customers in the Russian Federation, clearly the vertical agreement test should be satisfied.
(ii) 20% or less market share
Firstly, this equally applies to the supplier and the distributor. Therefore, if either party to a distribution agreement holds more than a 20% share of any Russian product market, the incorporation of any territorial and customer restrictions into the distribution agreement is prohibited.
Secondly, the 20% test is not limited only to the product which is the subject matter of the distribution agreement and applies to any product market in which the parties to the distribution agreement operate. For example, if the supplier holds more than a 20% share in the fruit market, but less than 20% in the market of hygiene materials, it may not include any territorial and customer restrictions in a distribution agreement relating to the distribution of hygiene materials.
Accordingly, if the parties to a distribution agreement are not competitors and do not hold more than a 20% share in any of the Russian product markets, there is a good chance that the FAS will not challenge any territorial and customer restrictions in the distribution agreement.
(2) One of the aims of Russian antitrust law is to prevent a supplier from carrying out anti-competitive actions across a network. It is not rare to see that a supplier with a wide network of distributors serves letters upon prospective customers notifying them of territorial and customer restrictions, and requiring the customers to purchase products only from a certain distributor. Such practice is a breach of the Russian antitrust law. Accordingly, the supplier should not adopt any such practice.
(3) According to the Russian law, agency agreements are prohibited from containing territorial and customer restrictions. Based on the established Russian court practice, distribution agreements are treated as complex agreements with elements of both an agency agreement and a sale and purchase agreement. Accordingly, the prohibition on territorial and customer restrictions may be applicable to distribution agreements and, thus, prevent effective enforcement of respective provisions in Russia.
In order to mitigate the risk of applying agency agreement rules to the distribution agreement it is advisable to reflect in the contemplated draft distribution agreements the following points:
- the distribution agreement shall specifically provide that it is not an agency agreement and that the distributor does not act as an agent of the supplier;
- the agreement shall not contain any provisions pursuant to which the supplier rewards the distributor for the sale of a certain volume of goods and the supplier's ability to audit the sales of the distributor;
- the agreement shall be governed by non-Russian law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.