Owing to the developments particularly in the telecommunication technologies and transport since last century, more products are being demanded by customers in other countries than their place of manufacture. As a result of these developments, a large number of companies have been making investments with the purpose of marketing, promotion and sales of their products throughout the World, which leads to a complex supply chain in the modern commercial life.
In this sense, distribution agreements have emerged as an important factor of this chain, in order to meet the needs of suppliers, manufacturers and customers all at once.
How to define a "Distribution Agreement"?
Distribution agreement is a contract where the manufacturer undertakes the supply of its products to the distributor on the purpose of their sale, promotion and marketing in a certain region, whereas the distributor assumes to promote, sell and take measures to increase the sales amount in the designated territory, with the opportunity to obtain revenue over the sale and purchase prices, in its own name and for its own account..
Distribution agreements are not clearly defined and regulated in the Turkish legislation as a specific type of agreement. Though it has several characteristics of sale agreements, it is differed from sale agreements, given that the distribution relation includes different components of various agreement types. Hence, such agreement may be categorized as "sui generis" agreements.
Here, we should also compare the terms of "Agency" and "Distributorship" under Turkish laws. Turkish Commercial Code identifies an "Agent" as "a person who, without the title of commercial representative, commercial agent, sales officer or employee, is contracted to intermediate or enter into agreements on behalf of an enterprise in a specific place or territory, on a continuous basis." The difference between an agent and a distributor is that the distributor buys, markets and undertakes the risk of the product however the agent only acts as the intermediary and realizes the sales on behalf and for the account of its supplier.
Components of Distribution Agreements
Distribution agreements usually include the following features;
- Continuity: The obligations of distributor such as marketing, sale, promotion of products and the manufacturer's liabilities of product supply, providing know-how and training etc. are generally set forth for a certain period to be carried out on a continuous basis.
- Validity for a certain region: The distribution agreements are mostly executed for a certain country or region. It is essential to clearly stipulate the cities, countries or regions comprised by the agreement one by one.
- Distributor acts on its own behalf: Distributor sells the products on its own behalf, accordingly any profit, loss or commercial risk shall belong to the distributor. Distributor does not depend on the manufacturer in their commercial relation; it is neither an agent nor a representative of the manufacturer.
- Marketing, promotion and sale of the products: According to the distribution agreements, distributor is obligated to promote and take necessary measures in order to protect the reputation of products.
Exclusivity Principle and Distribution Agreements under Turkish Competition Laws
Distribution agreements can be examined from different angles, also with regard to the exclusivity right of distributor.
Exclusivity principle can be defined as the restriction of one or both of the parties' right to agree with others for the same product line, in the same region. Such restriction has been handled by Competition Laws in Turkey in line with the EU regulations, as it may inhibit the competition in the related market.
Exclusive distributor carries out duties of the distributor's nearly as a monopoly, within an assigned territory. Exclusive distributor may seem to be similar to the "Agent" explained above, but the major difference between the two is that the distributor acts only on its own behalf and for its account and also bears the risk of the product.
Principally, the agreements which restrict or avoid the competition in a product or service market have been interdicted in Turkish legislation, mainly under the Law on the Protection of Competition numbered 4054. 4th article of such law titled "Agreements, Concerted Practices and Decisions Limiting Competition" reads as follows;
Such cases are, in particular, as follows:
a)Fixing the purchase or sale price of goods or services, elements such as cost and profit which form the price, and any terms of purchase or sale,
b) Dividing the markets for goods or services, and sharing or controlling all kinds of market resources or elements,
c) Controlling the amount of supply or demand in relation to goods or services, or determining them outside the market,
d) Impeding and restricting the activities of competing undertakings, or excluding firms operating in the market by boycotts or other behaviour, or preventing potential new entrants to the market,
e) Except for exclusive dealership; applying different terms to persons with equal status for equal rights, obligations and acts,
f) Contrary to the nature of the agreement or commercial practices, obliging to purchase other goods or services together with a good or service, or tying a good or service demanded by purchasers acting as intermediary undertakings to the condition of displaying another good or service by the purchaser, or putting forward terms as to the resupply of a good or service supplied.
In cases where the existence of an agreement cannot be proved, the similarity of the price changes in the market or the balance of demand and supply or the operational areas of undertakings with the markets where competition is prevented, distorted or restricted, constitutes a presumption that the undertakings are engaged in concerted practice.
Each of the parties may relieve itself from the responsibility by proving not to engage in concerted practice, provided that it is based on economic and rational facts."
This provision applies to "horizontal" and "vertical agreements". Vertical agreements are the agreements executed between enterprises at different levels of the production chain relating to the conditions under which the parties may purchase, sell or resell goods or services. Distribution agreements fall within this scope.
An exemption system is also introduced with respect hereof, where agreements will not be subject to the Article 4 prohibition, to the extent they fulfill certain conditions. The legal regulation pertaining to such system is the "Block Exemption Communiqué on Vertical Agreements" numbered 2002/2 (which was amended by the subsequent communiqués afterwards).
The exemption granted by this Communiqué applies in the event that the market share of the supplier in the relevant market does not exceed 40%. Calculation of the market share ratio is described as below in Article 6/A, in terms of the implementation of such Communiqué;
b) Market share includes all goods and services provided to the affiliated distributers for purposes of sale.
c) If the market share is not over 40% at the beginning but rises above the threshold later on up to 45%, the exemption shall continue to apply for the two years following the year in which the market share threshold was first exceeded.
d) If the market share is not over 40% at the beginning but rises later on up to 45%, the exemption shall continue to apply throughout the year following the year in which the market share threshold was first exceeded.
e) The rights provided by subparagraphs (c) and (d) may not be combined in a way to cause the period to exceed two calendar years.
On the other hand, below circumstances listed in Article 4 of the Communiqué fall out of the exemption scope, as being subject to the prohibition of the Competition Law;
b) Restrictions on regions or customers where or to whom the goods or services shall be sold by the purchaser, other than the following cases;
1) Provided that it does not cover the sales to be made by customers of the purchaser, restriction by the provider, of active sales to an exclusive region or exclusive group of customers assigned to it or to a purchaser,
2) Restriction of sales of the purchaser operating at the wholesaler level in relation to end users,
3) Restriction of the performance of sale by the members of a selective distribution system to unauthorized distributors,
4) In case there exist parts supplied with a view to combining them, restriction of the purchaser's selling them to competitors of the provider who holds the position of a producer.
c) In the selective distribution system, restriction of active or passive sales to end users, to be performed by the system members operating at the retail level, provided that the right is reserved as to the prohibition for a system member against operating in a place where he is not authorized.
d) In the selective distribution system, prevention of purchase and sale between the system members themselves.
e) In case there exist goods formed by combining parts, prohibition for the provider against selling such parts as spare parts to end users, or repairers not authorized by the purchaser for the maintenance or repair of goods, in agreements between the provider who sells such parts and the purchaser who combines them.
Which Essential Points should be considered in Distribution Agreements?
Some specific agreements such as agency and commission are defined under Turkish Code of Obligations and/or Commercial Code however distribution agreements are not subject to a statutory regulation in Turkey. Accordingly, there is no written rule as to the governing provisions such as termination and conclusions thereof. Thus, general principles dominating Turkish legal system such as the freedom of contract, reasonableness and fairness which apply to the performance and conclusion of all agreements shall also be essential here.
As in all agreement types, parties shall consider the general contents of a contract such as the requirement of written form, determination of products and prices. Apart from basic terms, the exclusivity principle, distribution territory, governing law and venue shall be significant.
Finally, parties shall take all required measures and consider all essential points in order to prevent eventual risks which may arise from international or local distributorship such as financial crisis and force majeure.
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.