Russian Federation: Distribution Contract Under Russian Law: Antitrust Restrictions

Last Updated: 28 September 2015
Article by Yana Dianova

Russian civil law does not specifically provide such type of agreement such as a distribution contract. The contract, however, has become widely used in commercial practice as an instrument for regulating relations between producers/wholesale suppliers of goods and wholesale purchasers under the general principle of freedom of contract enshrined in Article 421 of the Civil Code of the Russian Federation (hereinafter - the 'Civil Code').

Under a distribution contract, the distributor undertakes to purchase goods from the supplier and to arrange marketing, promotion and distribution of them within a particular territory (which is the principal obligation of a distributor under the international standards, in particular, the ICC Model Distributorship Contract. Sole Importer-Distributor. Publication No. 518, 1996; the ICC Model Distributorship Contract. Sole Importer-Distributor. Publication No. 646E), while the supplier undertakes not to supply the goods for sale to this territory on its own or through third parties, including not to sell the goods to third parties for distribution in the territory.

Thus, a distribution contract can be referred to the contracts of a mixed nature, i.e. contracts incorporating features of different contracts specified by the Civil Code such as sale-and-purchase agreement, supply agreement, transportation contract, agency contract, franchise agreement.

Depending on the rights and obligations specified in the distribution contract the court when considering disputes arising therefrom may qualify the contract as:

  1. a contract for organisation of relationships on products supply with the consumers search service (Decision of the Praesidium of the Highest Arbitration Court (the HAC), dated 18 May 1999, No. 7073/98 on the case No. A40-9311/98-55-54);
  2. an agency agreement (Decision of the North Caucasus FAC, dated 19 April 2005, No. F08-1395/2005);
  3. a combined supply and agency agreement (Decision of the Povolzhsky FAC, dated 25 January 2005, No. А55-6685/2004-42);
  4. a mixed contract incorporating elements of a supply agreement and service agreement, while not meeting the criteria of an agency agreement (Decision of the Ural FAC, dated 17 October 2002, on the case No. F09-2547/02-GC);
  5. a contract governed by Chapter 30 of the Civil Code regarding a sale-and-purchase agreement (Decision of the Ural FAC, dated 2 May 2006, No. F09-3252/06-C3 in the case No. A50-19308/2005).

Based on Article 429.1 of the Civil Code, as effective from 1 June 2015, a distribution contract may be also structured as a framework agreement providing for general terms and conditions of binding relations between the parties which can be specified in supplement agreements, purchase orders or otherwise.

In addition to the complex nature of the parties' obligations, a specific feature of a distribution contract is its long term - from one year and more.

Given this specific nature of the relations between the manufacturer/supplier and distributor, when the latter is not just an ordinary reseller of goods but is also granted with the right to use trademarks, trade names and/or other brand identity for promotion purposes, and in some cases represents a supplier to third parties, including ultimate purchasers, and also based on the position held by a party to the distribution contract at the corresponding commodity market, there is usually a need to provide in the contract for certain restrictions on the distributor and/or supplier.

In this case the parties to a distribution contract need to understand what conditions can be included so that in the event of any dispute such conditions are not deemed unenforceable by courts due to the fact that they violate imperative provisions of Russian laws. Moreover, this will allow to the parties to avoid liability including significant 'turnover-based' fines for violations of prohibitions and restrictions of antitrust laws.

Under the Federal Law No. 135-FZ dated 26 July 2006 'On Protection of Competition' (hereinafter - the 'Competition Law') a distribution contract is a vertical' agreement, i.e. an agreement between the seller and the purchaser of goods and as a general rule may not include conditions (Article 11.2 of the Competition Law) which:

  1. result or may result in fixing of the goods resale price – except for the case when a seller establishes a maximum resale price for the purchaser (since such a condition is deemed established for the benefit of ultimate consumers);
  2. provide for the obligation of the purchaser not to sell the goods of the seller's competitor. However, this restriction does not apply when under the contract the purchaser is granted to the right to sell the goods under the trademark or other brand identity of the seller or manufacturer (such agreements include not only license agreements but also dealer standards and dealer agreements under which the dealer has the right to use the trade name of a legal entity - see the decision of the Moscow district Federal arbitration court (FAC) dated 29 April 2014 on the case No. A40-79104/12).

Under Article 12 of the Competition Law, the above restrictions do not apply to:

  1. 'vertical' agreements made in writing (except for those concluded between financial institutions), which are franchise agreements that meet the requirements of the Chapter 54 of the Civil Code; and
  2. 'vertical' agreements between entities where the share of any party at any commodity market does not exceed 20%.

A commodity market is the area of circulation of the goods (including goods of foreign origin) non-replaceable with another product or of substitute goods within the boundaries of which (including geographic) the purchaser may buy goods based on economic, technical or other opportunities or advisability while the opportunity or advisability is not available beyond the boundaries of such an area.

Geographical and product boundaries of the commodity market, as well as the shares of the parties to the contract are determined by the Federal Antimonopoly Service of the Russian Federation (FAS Russia) in accordance with the Procedure for analysing of the state of competition on the commodity market (approved by the Order of FAS Russia No. 220 dated 28 April 2010).

If the supplier and distributor are competitors, i.e. they sell goods at the same commodity market, a distribution contract between them also may not contain provisions which lead or may lead to:

  1. establishment or maintenance of prices (tariffs), discounts, markups (surcharges) and(or) margins;
  2. increase, decrease or maintenance of prices at tenders;
  3. division of the commodity market by the territorial principle, volume of sales or purchase of goods, assortment of goods for sale, or composition of sellers or purchasers (customers);
  4. reduction in or termination of goods production;
  5. refusal from entering into agreements with certain sellers or purchasers (customers).

Such agreements are deemed cartels and prohibited per se under Article 11.1 of the Competition Law, that is, FAS of Russia needs only to prove the fact of entering into an agreement without proving that the agreement leads or may lead to the restriction of competition as well as the fact of the agreement performance by the parties (Decision of the HAC Praesidium No. 9966/10 dated 21 December 2010).

Thereat, one also needs to take into account the following positions of Russian law enforcement bodies:

  • a manufacturer engaged in the sale of its own products and distributor engaged in the sale of the same products are not deemed competitors (Decision of the HAC Praesidium No. 5-15/1-2 dated 23 May 2012);
  • the sale of similar goods at the same market is a sufficient ground to deem the relevant entities competitors (Decision of FAS of Russia dated 31 May 2012 on the case No. 111/132-11 on violation of the antitrust laws. However, if the direct supplies were ad hoc, the FAS Russia does not consider the supplier and distributor as competitors).

A distribution contract (except for the contract being deemed a cartel) may be deemed valid under Article 13 of the Competition Law provided that:

  1. it does not create an opportunity for certain persons to eliminate competition at the relevant market;
  2. it does not provide for restrictions on the parties or third parties which do not meet the objectives of the contract; and
  3. it results or may result in:

    • improvement of production, sale of goods or facilitation of technical and economic progress, or increase the competitiveness of Russian products at the global market;
    • the purchaser's benefits commensurate to benefits obtained by business entities as a result of actions (omission), agreements and concerted acts, transactions

The criteria to be met by a distribution contract to be deemed valid under the Article 13 are established by the Decision of the Government of the Russian Federation No. 583 dated 16 July 2009 (as effective until 1 July 2019).

  1. a seller sells the goods to two or more purchasers and holds the market share of the goods at least 35%, or sells the goods under the agreement to a sole purchaser whose market share is less than 35%;
  2. the purchaser and seller do not compete with each other or compete in the commodity market where the purchaser purchases the goods for resale thereof;
  3. the purchaser does not produce goods being substitute in respect to the goods constituting the subject of the agreement.

Even if the abovementioned criteria are met a distribution contract may not provide for, inter alia:

  1. refusal by the purchaser to sell the goods within the territory stipulated by the contract and(or) to a certain category of consumers, except for the ban to the purchaser (save for the retailers) to advertise and sell goods in the territory which is an exclusive under the agreement between the seller and another purchaser, as well as in the territory where under the contract the goods are sold by the seller;
  2. restriction of the seller's right to sell to retail customers the goods being spare parts or components of goods manufactured by the purchaser and which meet the requirements of the technical regulations, as well as to sell the goods to special repair or maintenance companies;
  3. ban on the purchaser to produce, purchase and(or) sell goods being substitute with respect to the goods which it purchases or may purchase under the contract (hereinafter - the 'substitute goods'), except when such conditions are established for a period no more than 3 years after the date of the contract (provided that the purchaser is not a retail company, and previous agreements between the purchaser and seller did not provide for such conditions);
  4. ban to sell the substitute goods on a land plot and(or) in premises transferred to the purchaser by the seller on any legal basis.

FAS of Russia while considering cases on violation of antitrust laws by entering into agreements restricting competition must establish the following circumstances (in accordance with p. 7 of the Decision of the HAC Plenum No. 30 dated 30 June 2008 and the arbitration practice, in particular, Decision of the Moscow district Arbitration Court dated 19 November 2014 on the case No. A40-75519/13-152-731)):

  • fact of entering into a prohibited 'vertical' agreement and participating of the parties therein;
  • absence of grounds for the recognition of the 'vertical' agreement as valid in accordance with Article 12 or Article 13 of the Competition Law; and
  • impact of the 'vertical' agreement on restriction of competition at the relevant commodity market.

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Yana Dianova
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