It is common for distributorship and similar agreements to require various types of exclusivity from the distributor. For example, in exchange for the principal granting exclusivity of territory to the distributor, it is common for the agreement to provide that the distributor will grant exclusivity of product to the principal. This means that the distributor will not deal in or supply products that compete with the principal’s product/s, and perhaps for good measure that the distributor will not manufacture any products that could compete with the principal’s product/s. This article will look at distributorship agreement and the cartel conduct provisions.
Legality of Cartel Conduct
The problem with these types of provisions is that unless they are carefully assessed they run the risk of falling foul of the cartel conduct provisions of the Competition and Consumer Act 2010 (Cth) which are serious criminal offences attracting fines and potential prison terms for the companies and senior management involved if found guilty of offending them. In short, the cartel conduct provisions provide that a contract, arrangement or understanding between two parties that are or are likely to be in competition with each other that have:
- the purpose or effect of price fixing;
- the purpose of restricting output;
- the purpose of market sharing; or
- the purpose of bid rigging; and
- do not have the benefit of an exemption constitute illegal cartel conduct.
It is important to note that the arrangement does not have to be in writing and can be a mere “understanding” and also that two parties that do not at first glance appear to be in competition with each other can be held to be so for these provisions. For example, in recent cases, ANZ and Flight Centre have been held to be potential competitors for the purpose of these provisions, even though they were not current competitors. The exemptions include related bodies corporate, some joint ventures and mergers and acquisitions, but the most relevant to these agreements is section 47 – exclusive dealing.
Effect on Competition
The exclusive dealing prohibitions in section 47 are mainly subject to an adverse effect on competition test, so if the restraints fall within one or more of the categories of that section and are not likely to have an adverse effect on competition in the relevant market, this takes the provisions out of the cartel conduct area.
The classic case of exclusive territory and exclusive products mentioned above are two categories of section 47. This is expressed in the section broadly as the acquisition on the condition that supplier will not supply to others (in the territory) and supply on the condition that the acquirer will not acquire from competitors (who supply the same products).
There may be a case for ensuring that these types of provisions mirror the statutory language to make it clear the section applies to them. It is important to note that one of the restraints mentioned above – agreement not to manufacture the goods – is not covered by section 47 – so it is probably better to eliminate this from the agreement/understanding. As far as the other restraints are concerned, massaging the language is not enough.
Assessing the Market
You need to decide whether, in the structure of the particular market, the restraint has the purpose or has, will be likely to have an adverse effect on competition. 90% of the time the competitive structure of the market will mean that there will be no adverse effect on competition in what is being proposed. However, if your main motivation for doing this is to cause your competitors grief, then this will need to be looked at very closely by way of a market analysis.
In this exercise often the relevant market is defined very narrowly. For example, the market is the market for ski boots, or the market for legal services to SMEs, rather than being defined as the market for ski equipment, or for legal services. This is deliberate as if the restraint is not likely to be anticompetitive in a narrow market then, of course, it is even less likely to be so in a more broadly defined market.
Assuming you have been through the analysis it may sometimes be a good idea to set out the commercial purpose of the restraints in the documents themselves, but it is more important that the legitimate objective appears from the paper trail of emails, etc. leading up to the document itself. It is imperative that this background is scrutinised and if necessary statements made in it be explained, and that it frames overall the commercial imperatives regarding legitimate objectives.
LegalVision’s contract lawyers can assist you in navigating through this minefield and ensuring that you do not end up on the wrong side of the law, as well as helping you with the rest of your distributorship terms and conditions. Questions? Call us on 1300 544 755.