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New Rules for Suppliers and Distributors Proposed - What's Included?

on Thursday, 24 June 2021.

When parties enter into commercial agreements, there are sometimes restrictions that may be considered anti-competitive - anything from exclusive supplies or purchases, to territorial or customer restrictions, information sharing or price discussions.

If agreements are contrary to competition law, parties can be fined up to 10% of global turnover, the agreement could be void, third parties may sue, and the parties may suffer bad PR and disruption. In some cases, directors may be disqualified or jailed.

There are some agreements, however, that are considered benign, so even though on their face they may contain anti-competitive provisions, they are exempt - either through an individual assessment, or due to a block exemption that applies to a number of agreements in that class. 

What Does Current UK Competition Law Include?

The UK and EU competition law regimes are very similar. When the UK left the EU, a considerable amount of EU-derived laws and regulations were retained in UK law. That included the EU's Vertical Agreements Block Exemption Regulation (the VABE Regulation), which exempts agreements between contracting parties at different levels of supply, such as manufacturer and distributor. The VABE Regulation allows certain anti-competitive provisions such as exclusivity in certain circumstances including if the parties do not exceed certain market share thresholds. However, some "hardcore" provisions would always be contrary to competition law - for example, an agreement between a supplier and the buyer which agrees an actual or minimum price that the buyer must sell at, or an agreement that stops the buyer from actively trying to sell into a territory reserved to someone else. 

Coronavirus Legal Advice

The VABE Regulation expires on 31 May 2022. At that point, the European Commission will look to replace the VABE Regulation for application in the EU. Meanwhile, the UK's Competition and Markets Authority (CMA) will be looking to do the same for application to the UK. On 17 June, the CMA announced a consultation on what to replace the VABE Regulation with.

What Is the CMA's Position?

The CMA proposes that the VABE Regulation is replaced with a UK Vertical Agreements Block Exemption Order (UK VABEO), tailored to the needs of businesses operating in the UK and UK consumers.  

Overall, the CMA believes that most of the existing VABE Regulation should be preserved and works well, particularly as this would keep the UK aligned to the EU and reduce compliance costs.  The CMA makes the following comments, including around possible areas for change:

  • The hardcore restrictions generally work well, and the territorial and customer restrictions should remain even though they were driven by the EU wanting to enable trade across borders within the EU.  They still have a place in the UK given the different conditions around the country including with Northern Ireland.  The CMA would like to clarify the boundary between active sales (which can be restricted in certain circumstances) and passive sales (which cannot be restricted).
  • Most favoured nation clauses should become a hardcore restriction, ie a contractual term that prohibits the offering of same or better terms through other channels.

As developments are happening at great pace, particularly with rapid growth in online sales, Brexit and the impact of COVID-19, the CMA will review the UK VABEO after quite a short time and the proposition is that the new one will need to be considered and renewed again in six years.

As the European Commission has done in the past, the CMA would provide accompanying draft guidance to accompany the UK VABEO, including covering agency agreements, considerations relating to environmental sustainability and resale price maintenance. 

What Next?

The consultation is open until 22 July 2021. If you want to have your say, please provide your responses by then. The consultation can be found here.

If you would like to discuss the impact of restrictions and the impact of competition law issues in your commercial contracts, please contact Paul Gershlick in our Commercial Contracts team on 07795 570072, or complete the form below.

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