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Direct distribution

Ownership structures

May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?

A foreign company can conduct business in the United Kingdom without setting up a legal entity, thus avoiding most UK company law requirements. If setting up a permanent place of business in the UK to directly carry out business, it must register as a branch office of an overseas company and register its constitution together with a statement of the power of its directors to bind the company.

Another option is to incorporate a subsidiary company in the United Kingdom. The principal advantage over a branch office is that, because UK courts assiduously enforce the doctrine of corporate personality, the main overseas business can, in most cases, be shielded from the risks incurred by the UK business.

May a foreign supplier be a partial owner with a local company of the importer of its products?

Yes, there are currently few restrictions on foreign ownership of UK companies. After Brexit, freedom of establishment for EU companies may fall away, so companies should review the impact on their structure. In certain limited situations in regulated industries such as financial services, the controllers of a company must be approved by the regulator. The UK government may also seek to intervene if a business is in a sensitive defence sector. However, there are new regulations which have increased the level of scrutiny of certain types of foreign investments (see question 4).

What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?

Several forms of corporate vehicle can be registered in the UK that are suitable for an importer owned by a foreign supplier. Which is most suitable will depend on a range of factors largely to do with the requirements of the markets the entity serves, as well as the tax treatment of the entity in the UK and foreign jurisdiction. These include a UK limited company, a UK branch and partnerships (limited liability partnerships, limited partnerships and general partnerships).

The method of formation will depend on the type of entity. See above for branches and UK establishments (see question 1). Limited liability companies and limited liability partnerships must be incorporated and registered with Companies House. Limited partnerships are generally set up by contract and must be registered at Companies House. General partnerships are created by agreement or simply by entering into a relationship in common with a view to profit (there need not be an underlying written contract for a partnership to be created). The primary statutory legislation that applies is the Companies Act 2006, the Limited Liability Partnership Act 2000, the Limited Partnership Act 1907 and the Partnership Act 1890 respectively.

Restrictions

Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?

No single piece of legislation regulates foreign investment in the United Kingdom. There is no general requirement for foreign investment in the UK to be registered. The Industry Act 1975, section 13, allows the government to intervene in relation to a change of control of ‘an important manufacturing undertaking’ contrary to the interests of the UK. This does not appear to have been acted upon to date. As a result of the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (Turnover Test Order 2018), which came into effect from 11 June 2018, the UK’s merger control system has been tightened to allow increased scrutiny of the national security implications of particular investments. This Order applies to investments in the defence, dual use, quantum tech and CPU sectors, and reduces the threshold for triggering a relevant merger situation (and may result in an investigation by the UK Competition and Markets Authority) in respect of smaller companies than usual. Additionally, the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (Supply Test Order 2018), which also came into effect from 11 June 2018, provides that the acquisition of a company in one of the above sectors (with a 25 per cent share of supply of goods or services in the UK pre-merger) will also trigger a relevant merger situation. The European Union is also consulting on proposals on foreign investment screening but these are unlikely to be in force before the UK exits the EU, likely to be after March 2019, subject to a transitional period likely to last until the end of 2020. The UK government is also intending to introduce a further national security vetting arrangement to protect the security of certain infrastructure where there are certain triggering events.

Equity interests

May the foreign supplier own an equity interest in the local entity that distributes its products?

Yes, subject to the usual competition law concerns.

Tax considerations

What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?

The UK tax system broadly applies equally to foreign suppliers and UK suppliers operating in the United Kingdom. Profits from a UK limited company and a UK branch of a foreign supplier forming a UK permanent establishment are taxed similarly, and will generally be liable to UK corporation tax. Partnerships (including LLPs) carrying on business in the UK will generally be tax transparent, meaning that the partners will be taxed on their own share of the profits. Often the tax treatment of the UK entity in the relevant foreign jurisdiction, and whether tax transparency is desirable, will influence the more suitable entity in each case.

The UK tax considerations depend on the activities carried on in the UK. If the entity employs individuals then it is likely that it will be obliged to deduct income tax and employees’ national insurance contributions from payments made under the UK’s pay-as-you-earn system, and remit the tax deducted together with employer’s national insurance contributions (another form of tax) to HM Revenue & Customs. Furthermore, the business should consider whether it is obliged, or whether it may be desirable, to register (and account) for value added tax, and whether it is required to account for customs duties.

The UK tax system typically requires resident companies to withhold tax in relation to the payment of interest or royalties to non-resident recipients (corporate or individuals) at a rate of 20 per cent. However, the UK is party to a large number of double tax treaties with other countries which remove or reduce the withholding tax rate for payments to recipients in the relevant jurisdiction.

Local distributors and commercial agents

Distribution structures

What distribution structures are available to a supplier?

Any number of structures can be chosen depending on commercial, market and tax considerations. Normally, some form of market representative, whether employed or otherwise contracted, would be sensible. An agent with varying levels of authority or indeed a stockholding distributor with obligations to expand sales might be attractive. Depending on the strength of the marketing format, franchising could be an attractive option to expand. Supply chain efficiency and relationships down the chain will dictate what is the most appropriate model to pursue. Typically, from a legal and commercial perspective, the following are common relationship characteristics:

  • exclusive: appointment of one distributor for the territory or a particular customer group and the supplier is prevented from appointing another distributor or selling into the territory or customer group directly;
  • sole: appointment of one distributor for the territory or customer group and the supplier is prevented from appointing another distributor for the territory or customer group but the supplier retains the right to sell into the territory;
  • non-exclusive: no restrictions on the supplier allocating distribution rights to more than one party for a particular territory or customer group or supplying directly; and
  • selective: only approved dealers are entitled to handle and resell the goods, and restraints can, in certain circumstances, be imposed on other resellers. Any distributor fulfilling a set of objective, transparent and non-discriminatory criteria, normally based on quality, is admitted to the distribution network. Selective distribution is typically used for high-end or prestige goods.

In contrast, a commercial agent or sales representative is an agent of the seller. The agent acts on behalf of the principal under power of attorney and does not have a direct contract for supply with the customer and will normally not bear any financial risk. An agent enters into the supply agreements in the name and for the benefit of the foreign supplier and receives a commission (typically a percentage of the price) as payment. Using an agent has the advantage that the supplier can set the price at which the products are sold to the customer. This is not permitted with a distributor. The main disadvantage of using an agent is that they are entitled to statutory compensation upon termination. An agent’s activities can be limited to introducing customers and contracts to the principal (marketing agent) or they can be sales agents, where the agent has authority to conclude contracts with customers on behalf of their principal. As with distribution agreements, agency agreements can be exclusive, sole or non-exclusive.

The supplier may opt for a franchising format for distribution of goods and services under the franchisor’s business model and brand with associated know-how or methods. There is no UK regulation of franchising and so general law and legal principles apply. The British Franchise Association requires its members to abide by the European Code for Franchising but compliance cannot be guaranteed.

Legislation and regulators

What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?

There are no specific UK laws relating to distribution that govern the relationship between a supplier and its distributor. Common law principles of contract will apply to any agreement between the parties, as will certain general statutory provisions in regulated sectors such as financial services.

There are specific rules governing agency relationships where an agent is a ‘commercial agent’ as defined in the Commercial Agents (Council Directive) Regulations 1993 as amended (Agency Regulations). Those Regulations are based on EU law but they are expected to remain post Brexit. The Regulations apply where an agent is a self-employed intermediary who has the authority to negotiate the sale or purchase of goods on behalf of or in the name of a principal, regardless of whether the agent and supplier have a written agreement. Computer software amounts to ‘goods’ for the purposes of the Regulations (Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587 (QB); Official Transcript; QBD (Merc) (London); 1 July 2016). There are certain exclusions from the Agency Regulations such as where the agent is involved in the sale and purchase of services rather than goods, or where the agent operates on commodity exchanges or markets (W Nagel (A Firm) v Pluczenik Diamond Co NV [2017] EWHC 2104 (Comm), 11 August 2017). The scope and application of these agency rules differ a little between member states of the European Economic Area (EEA), as does the approach of their respective courts.

General statutory rules that may be relevant to both distribution and agency relationships include (but are not limited to):

  • Competition law - (i) Chapter I of the Competition Act 1998, which follows European competition rules on vertical distribution agreements, and (ii) Chapter II of the Competition Act 1998, which prohibits the abuse of a dominant position. These rules impose limits on the restrictions that a supplier can impose on a distributor or agent or vice versa.
  • The Bribery Act 2010 - under section 7 of that Act, a commercial organisation will be guilty of an offence if a person associated with it bribes or attempts to bribe another person for the commercial organisation’s commercial advantage. A person is ‘associated’ with a commercial organisation for these purposes if that person performs services on behalf of the commercial organisation, including agents and, potentially, distributors performing services on behalf of the supplier. The European Court of Justice (ECJ) has, in another context, ruled that a distributor provides services for its supplier (Corman-Collins SA v La Maison du Whisky SA (C-9/12)). See question 35. The same would apply to an agent.
  • The Modern Slavery Act 2015 - in force since October 2015, this legislation requires certain commercial organisations to publish a slavery and human trafficking statement every financial year outlining the steps taken to ensure that slavery and human trafficking are not taking place in the business or anywhere in its supply chains. Organisations are caught if they carry on business (or part of a business) in the UK and have turnover above £36 million. While the statutory obligation is easily satisfied - publish a statement as to what the entity has done - it is increasingly a requirement of retailers and others demanding a system of compliance and verification that no slavery or exploitation is in a supplier’s supply chain.
  • The Unfair Contract Terms Act 1977 (UCTA) - the UCTA applies in B2B contracts mainly to unfair terms that have the effect of restricting or excluding a party’s liability. Certain contracts, such as international supply contracts, are excluded from the application of the UCTA.
  • The Data Protection Act 2018, the General Data Protection Regulation (Regulation (EU) 2016/679) (GDPR) and Privacy and Electronic Communication Regulations - these have an impact on the relationship between the parties as to how they may share and deal with customer and end-user data. The effects of this are further discussed in question 29.
  • The Reporting on Payment Practices and Performance Regulations 2017 - these require large companies and large LLPs which exceed certain size criteria to report on a half-yearly basis on their payment practices, policies and performance for financial years beginning on or after 6 April 2017.

There is no government agency that specifically regulates the relationship between distributors or agents and suppliers. In practice, there are several agencies with which a supplier or distributor may have to deal.

The Competition and Markets Authority (CMA) is the primary competition authority in the UK and is responsible for ensuring that businesses comply with the competition laws. Sectoral regulators, such as the Financial Conduct Authority in the financial services sector, have certain competition powers exercised concurrently with the CMA.

Other bodies, such as Trading Standards, the Advertising Standards Authority, the Food Standards Agency and HM Revenue and Customs may also be relevant. There might also be other sector-specific agencies (eg, in the pharmaceutical sector, the Medical and Healthcare Products Regulatory Agency) that also have a bearing on distribution relationships.

In terms of supply to major supermarkets, the Groceries Code Adjudicator administers a code, the Groceries Supply Code of Practice (GSCOP), governing the relationship between the largest UK supermarkets and their direct suppliers to reduce or eliminate unfair or unreasonable treatment. This deals with behaviour that transfers undue risk to suppliers such as direct or indirect delays to payment, changes in supply terms, charging for prime positioning or increased shelf space unless connected with promotions and a number of other practices found to be unfair. Its remit is limited to direct suppliers to supermarkets and not to the indirect supplier.

Contract termination

Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?

No, if the provisions on termination without cause are clear and unambiguous, the UK courts will uphold freedom of contract. It should be borne in mind that there are three legal jurisdictions in the UK. England and Wales is the largest jurisdiction and most contracts are under English law and subject to the English court system. The Scottish courts are largely independent and, while commercial law is often identical or similar, there are some differences. The courts in Northern Ireland apply very similar legal principles to those in England and Wales.

Where the agreement makes no specific provision for termination without cause or there is no written agreement in place, it can be terminated provided reasonable notice has been given to the other party. What constitutes reasonable notice is assessed at the time of breach, taking into account various factors. The key is the impact on the party to whom notice is given. The courts have considered this issue on numerous occasions and the following are the sorts of factors which they have taken into account:

  • the formality of relationship;
  • the availability of an alternative supplier;
  • the state of affairs at termination (eg, promotion spend);
  • the time required to wind down the business;
  • the percentage of turnover the contract represents;
  • market practice for termination in the relevant industry;
  • the notice period specified for termination for cause;
  • the likelihood of redundancies occurring;
  • the potentially damaging effect of rapid termination; and
  • the length of the parties’ relationship (although frequently this is not a relevant factor).

One of the most important factors which the courts will take into account is the percentage of the supplier’s turnover that the contract represents. If this is a high percentage, it follows that a longer notice period may be required.

It is important that a party serving notice gives some consideration to the sort of issues and factors listed above, as this will help to demonstrate that it has been reasonable in serving notice. In one case, the courts suggested that nine months would be a reasonable notice period in a case where the relationship lasted two-and-a-half years, the distributor had invested heavily and it would take time to find an alternative brand to represent. In contrast to certain other types of contracts, the court suggested that a longer period of notice may be due in the early years of a distribution relationship given the heavy investment in those years by the distributor and where the return is obtained only once the customer base is established (Jackson Distribution Limited v Tum Yeto Inc [2009] EWHC 982 (QB)). (See also Hamsard 3147 Limited (trading as ‘Mini Mode Childrenswear’) v JS Childrenswear Limited (In Liquidation) and Boots UK Limited [2013] EWHC 3251 (Pat).) The ‘correct’ period of notice, however, depends very much on the facts of each case.

Where a supplier decides not to renew a contract, it will expire at the end of the relevant term. If performance of both parties continues beyond the end of the contractual term, a contract by conduct will be formed, which is terminable on reasonable notice.

Grocery retailers governed by the GSCOP - currently the 10 largest grocery retailers in the UK based on turnover above £1 billion - are also specifically required to give reasonable notice if they intend to cease to purchase groceries for resale from a supplier or significantly to reduce the volume of purchases made from that supplier. The definition of supplier for the purposes of GSCOP includes any person carrying on (or actively seeking to carry on) a business in the direct supply to any retailer of groceries for resale in the United Kingdom.

In an agency relationship where the Agency Regulations apply, minimum notice periods must be given by a principal to terminate an agent’s contract. This is linked to the length of the relationship until termination. The minimum notice period is one month in the first year of the relationship, two months in the second year and three months in the third year and any subsequent years. It is open to the parties to agree longer periods.

A principal is entitled to decide not to extend or renew an agency that has been concluded for a fixed period or that is due to terminate at the end of its term.

Recent case law has suggested that there may be an implied term in certain categories of contract that parties to a contract must act in good faith when terminating a contract (see question 33).

Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?

Distribution

If termination complies with the express terms of the agreement (eg, the agreement provides for termination without cause on notice), no mandatory compensation or indemnity will be payable unless provided for in the agreement. The other party will have no other remedy for termination of the agreement in these circumstances.

If the agreement is silent on the circumstances in which the agreement can be terminated, common law implies that the agreement can be terminated only upon reasonable notice (see question 9) or in cases of repudiatory breach.

If the agreement is terminated in breach of the express or implied terms of the agreement or, in the absence of written notice provisions, reasonable notice of termination is not given, no mandatory compensation or indemnity is payable but the distributor may be entitled to damages for breach of contract. Where Scots law applies, the courts may prefer to enforce performance if not validly terminated.

Agency

In an agency relationship to which the Agency Regulations apply, the Agency Regulations provide that an agent is entitled to compensation or an indemnity for termination in certain circumstances. This is in addition to damages for breach of contract. Where a UK law applies, the parties can make an express choice in their agreement for either indemnity or compensation to apply. If an indemnity is not expressly provided for, the default concept applicable will be compensation - UK law defaults to compensation in the absence of a choice of indemnity or indeed in the absence of any choice at all. In Shearman v Hunter Boot [2014] EWHC 47 (QB), it was held that a clause that provided the agent was entitled to either compensation or indemnity, whichever concept produced the lower sum, was invalid. The agent was held to be entitled to compensation. In a subsequent case, a similar provision in an agreement that provided for indemnity, but compensation if cheaper, was allowed to be excised as unenforceable, leaving indemnity as the available award (Brand Studio Ltd v St John Knits, Inc [2015] EWHC 3134 (QB)). In Hunter Boot, the principal failed to argue that the clause should be severed, so as to leave the indemnity provision intact.

It is not possible for the parties to exclude the right to indemnity or compensation in the contract. Indemnity is capped (at one year’s commission) and is due only to the extent that the agent has brought in new customers or significantly increased the principal’s business with existing customers and substantial benefits continue to be derived by the principal from those customers. Compensation is calculated to be equivalent to the value of the agency business, including goodwill, at termination (Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Limited [2007] UKHL 32). This is based on the legal assumption there is a ‘hypothetical purchaser’ of the agency.

The Court of Appeal decision in Warren (T/A On-Line Cartons and Print) v Drukkerij Flach BV [2014] EWCA Civ 993, provided further guidance on what the valuer should assume when valuing the agency business. The principal terminated the agency agreement and a dispute arose about how much compensation was due to the agent under Regulation 17. At first instance, the judge assumed, first, that there was a hypothetical purchaser who was able to purchase the agency business. This assumption was correct and followed the rule in Lonsdale. However, the judge also assumed that the hypothetical purchaser would have been prepared to pay an actual price for the business and noted that his function was to determine that price. That part of the judgment was overruled by the Court of Appeal; it was quite possible that a hypothetical purchaser would not have been prepared to pay any price for the agency business, for example, where an agency business was terminally in decline. Where a supplier terminates a successful and profitable agency business compensation figures can be substantial. Legal advice should be taken before taking this step.

The right to compensation or indemnity will be lost when the principal terminates with cause in circumstances where immediate termination would be justified or where the agent terminates the agreement (unless the agent does so in circumstances attributable to the principal (unreasonable conduct) or where it is unreasonable to require the agent to continue the agency owing to infirmity, age or illness).

Grounds that would justify immediate termination by the principal are likely to be similar to fundamental or material breach of contract but the English court has held that gross personal abuse of the worst kind in two telephone calls was enough (Stephen Gledhill v Bentley Designs (UK) Ltd [2010] EWHC 1965 (QB)). In another case, publication of disparaging remarks by an agent and its employees of its principal (meaning its poor services) was not grounds to justify immediate termination and denied compensation. The breach was not a breach of condition (ie, in English law a term of the contract serious enough to justify repudiation of the contract) (Crocs Europe BV v Craig Lee Anderson t/a Spectram Agencies [2012] EWCA Civ 1400).

Transfer of rights or ownership

Will your jurisdiction enforce a distribution contract provision prohibiting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?

Parties are generally free to contract on the terms as they wish. The UK courts are likely to enforce a clause prohibiting the transfer of the distribution rights to the supplier’s products to a third party. What is more commonplace, however, is that such a transfer would be subject to the supplier’s consent.

A provision prohibiting a change in ownership of the distributor or the transfer of its business to a third party is less common. A more common approach is for the supplier to have a termination right in the event of a change of control or transfer of business of the distributor that it does not consent to.

Regulation of the distribution relationship

Confidentiality agreements

Are there limitations on the extent to which your jurisdiction will enforce confidentiality provisions in distribution agreements?

Confidentiality clauses in distribution and agency agreements are common and will generally be enforceable. However, it is sensible to restrict such clauses to what is reasonably required to protect confidential information, having regard to the geographical and product scope of the distribution agreement and duration. Depending on how they are drafted, confidentiality provisions have the potential to restrict competition contrary to article 101(1) of the Treaty on the Functioning of the European Union (TFEU) or Chapter 1 of the Competition Act 1998. This would render such clauses void and unenforceable unless an exemption is available under the Vertical Restraints Block Exemption Regulation (VRBE) (ie, the supplier and the distributor each have a market share below 30 per cent on any of the relevant markets affected by the agreement).

For example, Jones v Ricoh UK Limited [2010] EWHC 1743 (Ch) concerned a confidentiality agreement put in place between CMP (Jones) and Ricoh. CMP helped corporate customers purchase their photocopying and other requirements and CMP did not want Ricoh to cut them out by forging a direct relationship with the clients (which it needed to disclose to Ricoh during the course of their trading relationship). The agreement restricted Ricoh from using this customer information to trade directly with them. The clause prevented Ricoh and its 150 group companies from making or accepting any approach to or from any contact with any client of CMP, any governmental body or regulatory or other authority or any other person who to Ricoh’s knowledge ‘has any prospective connection’ with CMP. When Ricoh had bid for a contract with one of CMP’s clients, successfully, CMP sued Ricoh for breaching the confidentiality agreement.

The court held that the wide scope of the clause breached article 101 TFEU as it had both an anticompetitive object and effect. It went further than was necessary to protect CMP’s confidential information. The clause had a very broad reach, was unlimited in place, of uncertain and extensive ambit in time, and applied to dealings by Ricoh and its associated companies that were not only plausible, but very likely to occur. Where any confidential information was still with Ricoh, it prevented 150 of its group companies from making approaches. Although CMP argued that the clause benefited from an exemption under the VRBE, the court found that, for the purposes of the confidentiality agreement, the parties were not acting at different levels of trade (a prerequisite for the application of the VRBE).

Confidentiality agreements or clauses between undertakings clearly operating at different levels of trade, such as suppliers, distributors or agents, are likely to have a greater chance of benefiting from the exemption available under the VRBE.

Competing products

Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?

This is an issue governed by principles of EU competition law and likely to be similar in all states within the European Union and EEA. Post Brexit, UK law may begin to diverge. Non-compete obligations are dealt with under the VRBE and to the extent they comply with its conditions, will be enforceable.

For the purposes of the VRBE, a ‘non-compete obligation’ includes any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or resell goods or services; as well as any direct or indirect obligation on the buyer to purchase from the supplier or someone designated by the supplier more than 80 per cent of the buyer’s total requirements of that product or its substitutes. To benefit from the protection of the VRBE and ensure enforceability, the non-compete should not exceed five years’ duration or be indefinite (an obligation that is automatically renewable is regarded as indefinite). A longer duration is permissible only where the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties. In those circumstances, the duration of the non-compete should not exceed the period of occupancy of the premises by the distributor. The exemption cannot be relied upon to exempt an agreement between competing undertakings, unless one of them has turnover below €100m except where the appointment is non-reciprocal and the supplier Is both a manufacturer and a supplier of goods but the buyer is only a supplier, not a manufacturer or where the supplier provides services at several levels of trade and the buyer is at the retail level and is not a competing undertaking at the level at which it purchases.

A post-term non-compete obligation will not benefit from the VRBE unless:

  • it is limited to goods or services that compete with the contract goods or services;
  • it is limited to the premises and land from which the buyer has operated during the contract period;
  • it is indispensable to protect know-how transferred by the supplier to the buyer; and
  • it is limited to a period of one year after termination of the agreement.

This is without prejudice to the possibility of imposing a post-termination restriction which is unlimited time on the use and disclosure of know-how which has not entered the public domain.

Restrictions in agreements that are de minimis or essential for the protection of the reputation and identity of the brand or network are not caught.

In selective distribution, resellers can be prohibited from selling competing products in general, as long as the duration of that obligation is not capable of exceeding five years and the obligation is not targeted so as to exclude ‘particular competing suppliers’.

Clauses that are not automatically given protection and enforceability by the VRBE would have to be individually assessed under article 101(3) TFEU to determine whether on their facts they merit being exempted and unenforceable (and therefore their position is much more uncertain).

In an agency relationship, preventing an agent from acting for a competing principal is commonly dealt with in the agreement but, if not, it may be implied either from correspondence or from the agent’s obligation to act ‘dutifully and in good faith’ under Regulation 3 of the Agency Regulations, and in accordance with the other general fiduciary responsibilities of an agent at common law. However, that will be affected by knowledge and delay or acquiescence on the part of the principal. In Rossetti Marketing v Diamond Sofa Co Limited [2012] EWCA Civ 1021, the court initially ruled that the fact the agent had an agency selling competing goods was not a fundamental breach of contract so the agent was still entitled to compensation when the principal terminated that agency. The judge noted that the principal had known for some time that the agent had a competing agency selling sofas for a competing brand.

The principal appealed this to the Court of Appeal, which looked more closely at exactly what the principal knew about the agent’s other agency and when. It came to the opposite conclusion, ruling that the principal had not initially understood that the agent would be selling goods that were directly competing with his own. Therefore, the principal could not be held to have consented and selling directly competing goods was, in this instance, held to be a fundamental breach of contract.

Principals should bear in mind that requiring an agent to take on a product that competes or conflicts with other products handled for other principals may entitle the agent to terminate and claim compensation or indemnity. Restrictions on agents selling competing products may also infringe competition law in certain circumstances if the non-compete obligations have significant foreclosure effects on a relevant market.

After termination of an agreement to which the Commercial Agents (Council Directive) Regulations 1993 apply, a restraint can be imposed on an agent handling competing products but subject to a maximum of two years.

Prices

May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?

Distribution

In distribution arrangements, competition law requires that a supplier does not dictate the prices at which its distribution partner resells its products, whether directly or indirectly (known as resale price maintenance or RPM). RPM is classified as a hardcore infringement and, as such, it is irrelevant that the parties have low market shares or are otherwise insignificant in market terms.

Online markets and competition (and other issues for consumers) are a major area of focus for the UK CMA and, in particular, tackling RPM and online minimum advertised pricing restraints that create price floors. It is difficult (though conceivably possible) to justify these practices on efficiency grounds (eg, to prevent free riding, improve customer service or protect brand image) under article 101 TFEU.

Recommended or maximum sales prices (but not minimum prices) are acceptable but should be analysed carefully to ensure they do not, in effect, constitute indirect resale price maintenance. Other forms of indirect resale price maintenance include:

  • fixing maximum discounts from prescribed prices;
  • making supplier rebates and reimbursement of promotional costs subject to downstream pricing level;
  • linking price to competitors’ resale prices; and
  • threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations.

A ban on supplying discounting outlets would be regarded as interference in pricing policy except where the ban was imposed in the context of protecting the allure and prestigious image of a brand or mark in a selective distribution system (which bestows on the goods an aura of luxury) and the discounting involved a breach of a trademark licence (Copad SA v Christian Dior, Case C-59/08). Suppliers operating selective distribution systems may also be able to restrict authorised retailers from using third party online marketplaces (see question 19).

The VRBE Guidelines of the European Commission suggest an efficiency defence is available in the following very limited circumstances in relation to RPM that is used:

  • during the introductory period of expanding demand;
  • for a coordinated short-term low-price campaign (two to six weeks) in a franchise system; or
  • in relation to complex or experience products, the extra margin would allow distributors to provide additional pre-sales services where free-riding is a problem.

There has been an upturn in enforcement of RPM at UK and EU level in recent years.

In 2013, the CMA issued infringement decisions against mobility scooter suppliers for bans imposed on online sales and online advertising of prices below a recommended resale price even where actual prices in the showroom were unrestrained. Such a practice reduces transparency and increases search costs. The fact that these restraints were imposed in the sale of mobility scooters for less mobile individuals heightened their impact - web searches being all the more important for those who would find it challenging to visit bricks and mortar outlets. In May 2017, the CMA imposed substantial fines on suppliers in the light fittings sectors, finding that they had illegally engaged in online resale price maintenance with some of their retailers in specifying the minimum prices that the retailers could advertise for sales of the suppliers’ products over the internet (see question 15).

In a first for UK competition enforcement, in 2016, the CMA also fined a supplier of posters, Trod Limited, for agreeing with a competing supplier that they would not undercut each other on Amazon Marketplace. Automated pricing software was used to implement this agreement.

The European Commission issued fines exceeding €111 million (in July 2018) to four consumer electronics manufacturers for restricting their online retailers from setting their own retail prices These restrictions were enforced by way of threats or sanctions, such as blocking of supplies. Pricing algorithms were used that automatically adapted retail prices to those of competitors, and sophisticated monitoring tools allowed the manufacturers to effectively track resale price setting in the distribution network and to intervene swiftly in case of price decreases. The European Commission opened an investigation following its e-commerce sector inquiry. RPM remains an enforcement focus for the European Commission.

Agency

In agency relationships, the principal can retain complete control over the price at which its agent resells its products provided the agency relationship is regarded as ‘genuine agency’. The determining factor is the financial or commercial risk borne by the agent in relation to the contract activities: those directly related to the contracts entered into by the agent for the principal; and those associated with investment for entry to the market - usually ‘sunk’ costs. When the agent bears no such risks, or insignificant risks, its activities are not economically distinct from the principal’s, and article 101 TFEU does not apply. If an agency agreement lies outside article 101 TFEU, all clauses that are an inherent part of the agency agreement are free from scrutiny. The principal may legitimately restrict the customers to whom, or the territory in which, the agent sells the goods, and also dictate the price and conditions for sale through the agent. If an agent cannot be regarded as a ‘genuine agent’, it must be permitted to use its commission to offer discounts to customers. It is often unclear whether platforms or online portals should be regarded as true agents. Agency agreements have been considered in a number of cases involving digital platforms, but the authorities have shied away from concluding on the issue.

May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?

A supplier is entitled to suggest resale prices (commonly referred to as recommended resale prices or RRPs) but should avoid applying any incentives or pressure to abide by those RRPs as this would be likely to be viewed as indirect RPM. The UK’s competition authority has taken action against agreements not to advertise discounted prices.

The CMA fined a supplier of light fittings (National Lighting Company Group) for a minimum advertised pricing policy that restricted the price at which retailers could sell the supplier’s products online. In the CMA’s view, these arrangements restricted the retailers’ ability to sell their products online at independently determined prices, reducing price competition between competing retailers and contributing to keeping prices artificially high.

The CMA has previously concluded that the application of a minimum advertised price (MAP) policy genuinely restricted in practice the ability of resellers to determine their online sales prices at a price below the MAP, and therefore amounted to RPM in respect of online sales of the product (see, for example, commercial catering equipment sector: investigation into anticompetitive practices). The European Commission would likely adopt similar reasoning and consider minimum advertised pricing policies as an indirect means of RPM that do not benefit from the VRBE.

Unilateral minimum retail pricing policies are not accepted. Announcing a minimum resale price and refusing to supply those distributors that did not observe it (as per the US Colgate doctrine) would probably be regarded as indirect RPM and involving consensus or acquiescence.

There are other ways in which a supplier can attempt to influence pricing, which fall short of RPM. For example, it can oblige distributors to follow its instructions with regard to advertising, provided that those instructions do not seek to regulate the advertising of prices or conditions of sale. This does not prevent a supplier from encouraging the distributor to achieve optimum brand positioning, provided there are no incentives offered or pressure applied to price at, or above, a notified recommended resale price.

A supplier may set a maximum resale price provided it does not, in effect, mean a fixed resale price.

May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?

The prevalence of retail most-favoured-nation (MFN) clauses in the context of online platforms such as online travel agents, price comparison websites (PCWs) and online marketplaces, such as Amazon marketplace, iBookstore, Booking.com, Expedia and so on, has been highlighted by recent competition investigations across the European Union. When adopted by such platforms in their agreements with the providers or sellers seeking to reach consumers through the platforms, MFN clauses can ensure that the provider or seller does not charge a higher price on their platform than it does when selling directly, on another platform or via another channel.

In the UK, the competition authorities considered online hotel booking sites and their restraint on a hotel group offering room-only rates at prices lower than the rates offered by the price comparison sites. Initially, the UK authorities accepted commitments from the hotel group, IHG, from Booking.com and Expedia that allowed this hotel group to offer discounts to a closed group of members. This was successfully challenged by a metasearch site, Skyscanner Ltd, on process grounds and eventually the competition authority closed the file without determining whether the MFN was lawful.

In its investigation into the UK private motor insurance sector, the CMA drew a distinction between the use of what it termed narrow and wide MFNs in agreements between private motor insurance providers and PCWs. Although it recognised that MFNs on PCWs may result in efficiencies (such as reducing search costs for customers), the CMA concluded that widely drafted MFNs were not necessary to achieve those benefits. Therefore, it found that narrow MFNs, which require that the price on the insurer’s own website is no cheaper than that offered to the PCW, were acceptable. Wide MFNs, which ensure the price offered to the PCW is no higher than the price offered directly or via any other channel, were prohibited by means of an order applicable in respect of significant PCWs (the Private Motor Insurance Market Investigation Order 2015).

However, there is still much uncertainty with different approaches being taken in EU jurisdictions. The German competition authorities came down against narrow MFNs in the Booking.com case, whereas other national competition authorities have accepted commitments permitting narrow MFNs. Elsewhere in Europe, notably France, Italy, Austria and Switzerland, moves were made in 2017 to legislate to ban price parity clauses.

In 2016, the CMA sent a questionnaire to a large sample of hotels in the UK as part of a joint monitoring project, in partnership with the European Commission and nine other competition agencies in the EU. This project is looking at how changes to hotel room pricing terms, and other recent developments, have affected the market, in particular, whether the Europe-wide removal by online travel agents Expedia and Booking.com of certain ‘rate parity’ or ‘most-favoured-nation’ clauses in their standard contracts with hotels in July 2015 has affected the market. The European Commission and 10 national competition authorities published a report in 2017 on the use of such price parity clauses in the hotel booking sector which indicated that the improvements made by online travel agents ‘go in the right direction’. The CMA subsequently announced in October 2017 that it was opening an investigation under its consumer law powers into hotel booking websites to determine whether consumers were able to get the best deal. It launched enforcement action in June 2018 to ensure booking sites complied with the law.

The CMA also looked at MFNs in the context of online auction services in 2017 that concluded after the CMA accepted undertakings from ATG Media, the market leader in online bidding services, to stop restricting customers from using rival platforms (ie, a wide MFN).

In January 2017, Amazon responded to European Commission concerns about parity clauses contained in contracts between Amazon and e-book publishers that required those publishers to inform Amazon about more favourable or alternative terms offered to Amazon’s competitors and offer Amazon similar terms and conditions. Amazon agreed to scrap these clauses for a period of five years from August 2017.

In September 2017, the CMA opened an investigation into MFN clauses in ComparetheMarket’s contracts with home insurers. In November 2018, it provisionally found that these clauses are in breach of UK and EU competition law as they prevented home insurance providers from offering lower prices elsewhere.

Another common form of pricing clause found in commercial agreements is the ‘price matching’ or ‘English’ clause. In such a clause, the supplier promises to (or is given the right to) match the lowest price offered to the distributor by any other supplier. This may be of benefit to the distributor by guaranteeing that it receives the best price available, but can potentially result in de facto exclusivity in favour of the supplier (see Rangers Football Club and Sports Direct (SDI Retail Services Ltd v Rangers Football Club Ltd [2018] EWHC 2772 (24 October 2018)).

In contrast to the complex retail MFNs that are widely under investigation, MFNs in distribution agreements may not always be problematic. They are particularly likely to raise competition concerns where the customer benefiting from the clause is dominant and the effect of the clause is to reduce the incentive of the supplier to offer other customers discounts, thereby aligning prices at a higher level than would otherwise be the case. This may not be very likely in most distribution scenarios and, in the absence of other restrictive effects, narrow MFNs may be enforceable. Each case should be assessed on the facts.

Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?

On 3 December 2018, new rules came into force in the European Union and in the UK to prohibit the practice known as ‘geo-blocking’. Geo-blocking affects sales made online: as soon as the credit card details reveal the location of the customer, the customer is directed to a local website that may charge higher prices. The new rules, set out in Regulation (EU) 2018/302 and the UK Geo-Blocking (Enforcement) Regulations 2018, identify three situations where geo-blocking is not justified:

  • the sale of goods without physical delivery - if a Belgian customer wishes to buy a refrigerator and finds the best deal on a German website, the customer will be entitled to order the product and collect it at the trader’s premises or organise delivery himself to his home;
  • the sale of electronically supplied services - if a Bulgarian consumer wishes to buy hosting services for their website from a Spanish company, they will now have access to the service, can register and buy this service without having to pay additional fees compared to a Spanish consumer; and
  • the sale of services provided in a specific physical location - an Italian family can buy a trip directly to an amusement park in France without being redirected to an Italian website.

However, suppliers are free to choose not to supply cross-border customers and need not harmonise their prices with those in other jurisdictions.

At the wholesale level, EU and UK competition law would step in where a supplier’s discrimination in price is designed to penalise the independent resellers: for low resale prices; for selling into a territory of another dealer (except where a geographical restraint is permissible); or for selling over the internet. Pricing to discourage any of these activities would also be caught. Price discrimination devised to restrict where buyers can resell the products will also infringe article 101 TFEU. This typically involves ‘dual pricing policies’, which offer discounts for products that are resold only locally or charge a premium price for products intended for export. Dual pricing will rarely be regarded as unilateral conduct. Rather, such policies are the result of vertical agreements between the supplier and distributor that have as their object or effect the restriction of intra-brand competition contrary to article 101(1) TFEU. In the GlaxoSmithKline (GSK) case, the ECJ concluded that, for an agreement to exist, it is sufficient for the parties to show a joint intention to conduct themselves on the market in a specific way. Signing the sales conditions (which contained dual pricing) and returning them to GSK indicated GSK’s and the wholesalers’ joint intention to adhere to the conduct and limit parallel trade. In the GSK case, the ECJ agreed that the dual pricing practised by GSK in Spain to deter (or make more expensive) purchases destined for export was an infringement of article 101 but did require that the Commission should not have refused to consider efficiency arguments before assessing them.

European Commission guidance provides that a dual-pricing agreement between a supplier and an independent distributor may fulfil the conditions of article 101(3) TFEU in some limited circumstances. For example, where offline sales include installation by the distributor but online sales do not, the latter may lead to more customer complaints and warranty claims and may therefore justify different pricing on- and offline.

Discriminatory pricing that places a trading partner at a competitive disadvantage by dominant companies (including discrimination based on nationality or location) for customers who are equivalent is prohibited unless the difference in treatment can be objectively justified (eg, by genuine cost savings or market conditions). The competitive disadvantage must be shown to distort competition for the discriminatory pricing practice to be unlawful (see the judgment of the ECJ in Case C-525/16, MEO - Serviços de Comunicações e Multimédia SA dated 19 April 2018). A dominant company is permitted to set different prices between various member states where there are already distinct geographical markets and the differences relate to the variations in the conditions of marketing and competition.

Geographic and customer restrictions

May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?

Generally, buyers (and their customers) should, in principle, be free to resell within the EEA without restraint. Restricting sales by the buyer outside specified territories or specified customers is a serious restriction permissible only under certain conditions, whether imposed directly (by contract) or indirectly (eg, by an incentive scheme). Schemes designed to monitor the destination of goods (eg, differentiating serial numbers) may be regarded as illegally facilitating market partitioning. The European Commission is currently investigating video game publishers and tour operators for restrictions in agreements with online distributors that they suspect discriminate between customers based on where they live (‘geoblocking’) and lead to partitioning of markets (see question 17).

However, there are some limited exceptions that allow market partitioning to some degree.

Exclusive distribution rights

A supplier may legally prevent a buyer from selling actively to customer groups or territories reserved exclusively for the supplier or to another buyer. ‘Active sales’ means actively approaching individual customers by, for instance, sending unsolicited emails or advertisements on the internet that are specifically targeted at customers in that territory. The supplier must not restrict a buyer’s ability to make passive sales into reserved areas (ie, sales in response to unsolicited demand).

Consequently, other than the limited circumstances below, suppliers cannot offer distributors within the EEA absolute territorial protection from parallel imports from other EEA territories even where they have an exclusive distribution network.

Territories or customer groups that are not allocated exclusively (ie, non-exclusive appointments or customers or territories reserved to supplier non-exclusively) cannot be protected either from active or passive sales.

However, restrictions on all sales, even passive sales, are acceptable in some exceptional cases, such as where they are necessary to create a new product market or to introduce an existing product on a new market. Even restraints on parallel imports will be acceptable for two years, insofar as intended to protect a distributor in a new geographical market.

Online sales

May a supplier restrict or prohibit e-commerce sales by its distribution partners?

Suppliers should not impose an outright ban on internet selling by their distributors. This is regarded as a serious infringement of EU and, accordingly, UK competition law. In August 2017, the CMA fined Ping Europe Limited (Ping) for banning two of its retailers from selling online. Sales via the internet are generally viewed as passive (which cannot be restricted), except where adverts or marketing efforts are specifically aimed at customers in other territories. The ECJ has confirmed that internet sales must also be permitted by authorised distributors appointed in a selective distribution network (Case C-439/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi). This means that online sales cannot be subject to geographical restrictions. The payment of ‘invasion fees’ would likely be considered as an indirect means of restricting internet sales, unless fees are in some way justified, for example, to cover the cost of repairs or servicing.

The ECJ has made an important distinction between an outright ban on internet sales by authorised distributors and the prevention of the discernible use of third-party platforms or marketplaces such as eBay and Amazon. In a case involving a reference from the German courts for a preliminary ruling, Coty Germany GmbH v Parfumerie Akzente GmbH, Case-230/16, the ECJ held that restrictions on third-party platforms are justified by the legitimate objective of preserving the quality and luxury image of the goods in question. This is subject to the proviso that the third-party platforms are subject to objective, qualitative criteria, which do not go beyond what is necessary to preserve the quality of the goods, and such criteria must be applied uniformly, and not in a discriminatory manner, to all potential platforms. It may be permissible to prevent online sales to protect brand image more generally in respect of non-luxury products, but this has not yet been tested. This type of restriction does not prevent distributors selling the goods online via their own websites or via third-party platforms that are not ‘discernible’ to the consumer.

There is a suggestion that any distribution system that qualifies under the VRBE could also have a platform ban, as such a ban is not a restriction of passive sales or a customer restriction.

There have been no EU cases on restriction on the use of price comparison websites by distributors, but it is possible that these may not be looked upon as favourably. In the Coty case, the court found the fact that authorised distributors could still advertise on price comparison websites to be a persuasive factor, suggesting that such a restriction may not be treated in the same way as a platform ban. Such websites are important in driving traffic to distributors’ own websites. The German Supreme Court has ruled that Asics cannot impose a general ban on dealers using price comparison websites in the absence of any qualitative conditions. The Court did not consider running shoes to be luxury goods.

In December 2018, the EC fined Guess for imposing various restrictions on retailers in its selective distribution network:

  • a ban on retailers using Guess brand names and trademarks in online search advertising;
  • a requirement for retailers to obtain specific authorisation from Guess to make online sales (even though the retailers had already met the requirements for admission to Guess’s selective distribution network);
  • a ban on retailers selling to consumers located outside the retailers’ allocated territories;
  • restrictions on cross-selling between authorised wholesalers and retailers; and
  • restrictions on the prices at which retailers could sell Guess products.

The EC found that these restrictions prevented retailers from advertising and selling Guess products cross-border, leading to artificially high retail prices in some member states. In addition to breaching competition law, some of these restrictions also breached Regulation (EU) 2018/302 and the UK Geo-Blocking (Enforcement) Regulations 2018 (see question 17 and 20). The EC’s full infringement decision is expected to be made available in early 2019.

Refusal to deal

Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?

Provided a supplier is not dominant, it can unilaterally refuse to deal with particular customers without breaching competition law.

A supplier can restrict a distributor’s appointment to supplying a particular customer group, thereby preventing active sales by that distributor to other customers, provided those other customers are exclusively allocated to another distributor or reserved by the supplier. However, a distributor should not be prevented from making passive sales to customers outside its exclusive customer group or territory. The EC was investigating publishers of video games for ‘geoblocking’ (ie, preventing online customers in certain countries from benefiting from cheaper prices in neighbouring countries (see question 17). In particular, it looked at whether agreements with online distributors prevent consumers from buying (or distributors from selling) activation codes in eastern Europe, where they are cheaper, for use in Western markets.

However, under the new Regulation (EU) 2018/302 and the UK Geo-Blocking (Enforcement) Regulations 2018, the provision of (non-audiovisual) copyright protected content services (such as e-books, on-line music, software and videogames) is not subject to the Regulation’s prohibition of applying different general conditions of access for reasons related to a customer’s nationality, residence or establishment, including by refusing to provide such services to customers from other member states. These services do still remain subject to the Regulation’s prohibition to block or limit access to online interfaces on the basis of the nationality, residence or establishment of the customer. Where cross-border provision of these services takes place, the trader is prevented from discriminating the electronic payment means on the basis of the customer’s ‘nationality’.

A supplier can also prevent a distributor from selling to consumers, thereby keeping the wholesale and retail level of trade separate. However, it cannot otherwise agree with a distributor that it should not deal with particular customers. There are ‘soft measures’ that can be taken by suppliers to highlight to distributors the benefits of focusing on their allocated customers or territory. Such measures should not amount to an agreement, however, and distributors should not be penalised for doing so. Seemingly unilateral acts can be viewed as consensual. Where the supplier has established a selective distribution system or network it can prevent its distributors or dealers selling to resellers that are not approved members of that network.

Competition concerns

Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?

It is highly unlikely that entering into a distribution agreement in itself would amount to a merger that could be subject to the merger control provisions of the Enterprise Act 2002 as amended by the Enterprise and Regulatory Reform Act 2013. There would have to be circumstances where a business obtains in relation to another:

  • a controlling interest (de jure or legal control);
  • de facto control (control of commercial policy); and
  • material influence (ability materially to influence commercial policy).

The lowest threshold of material influence can be established through a range of factors, most obviously voting rights where shares above 15 per cent can be held to give material influence (and, in some cases, the authorities have required divestment to well below 10 per cent in order to remove influence judged to be otherwise undesirable under relevant criteria). This assessment of influence may also occur where the minority shareholder is accorded special voting rights or veto rights, board representation or there is financial interdependence.

Acquiring rights of distribution in itself is unlikely to constitute a merger but where an entity, rights, a brand name, assets and contracts are acquired that may constitute the transfer of a business. The distribution rights may, however, be a factor taken into account in the assessment of influence. A good example in the United Kingdom was Heineken’s acquisition of control over two Diageo subsidiaries:

The CMA considers that Heineken has already, on 7 October 2015, acquired legal control over D&G which owned the Target Brands and material influence over the Target Brands in Great Britain. This acquisition of material influence is further supported by the Manufacturing, Bottling, Selling, Distribution, and Marketing Agreement that is currently in place between D&G (now controlled by Heineken) and Diageo GB. However, with the transfer of the licence and distribution rights of the Target Brands to Heineken, Heineken will acquire a higher level of control (legal control) over these brands.

The merger control authority in the UK is the CMA and it has set out a range of relevant factors:

The transfer of customer records is likely to be important in assessing whether an enterprise has been transferred.

  • The application of the TUPE regulations would be regarded as a strong factor in favour of a finding that the business transferred constitutes an enterprise.
  • The CMA would normally (although not inevitably) expect a transfer of an enterprise to be accompanied by some consideration for the goodwill obtained by the purchaser. The presence of a price premium being paid over the value of the land and assets being transferred would be indicative of goodwill being transferred.

4.9 Outsourcing arrangements involving ongoing supply arrangements will not generally result in enterprises ceasing to be distinct, but may do so where, for example, they involve the permanent (or long-term) transfer of assets, rights and/or employees to the outsourcing service supplier and where those may be used to supply services other than to the original owner/employer. The CMA will assess whether, overall, the assets, rights and employees transferred to the outsourcing service supplier are such as to constitute an enterprise under the principles set out above.

Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2)

The assessment of the merger, assuming it constitutes a ‘merger’ under the UK regime, will ultimately be whether the transaction is found to result, or is expected to result, in a substantial lessening of competition in the UK. In the distribution context, the issue will often be whether there is foreclosure of a supplier or of a distributor. Not every transaction that is a merger is examined; there is no obligation to pre-notify, although, where the authorities have jurisdiction, it may be sensible to do so. The authorities have no jurisdiction to look at a merger unless as a result of the transaction the merged entity’s share of supply or purchases, of goods or services of a particular description in the UK or a substantial part of the UK, exceed 25 per cent, or such a share of supply (not to be confused with market share) is increased. If the target acquired has a turnover of at least £70 million in the UK, the authorities also have jurisdiction irrespective of the share of supply.

As a result of the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (Turnover Test Order 2018), which came into effect from 11 June 2018, investments in the defence, dual use, quantum tech and CPU sectors are subject to a reduced threshold of £1 million for triggering a relevant merger situation (which may result in an investigation by the UK CMA). Additionally, the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (Supply Test Order 2018), which also came into effect from 11 June 2018, provides that the acquisition of a company in one of the above sectors (with a 25 per cent share of supply of goods or services in the UK pre-merger) will also trigger a relevant merger situation.

Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?

Market studies

The UK competition authority, the CMA, has powers to intervene and conduct studies of particular markets and this could impact on distributor supplier relationships. An example is the investigation of the market for aggregates, cement and ready mixed concrete, which resulted in divestment orders and a ban on supplies issuing generic price announcement letters. The CMA has also investigated the role of digital comparison tools across a range of product and service markets and has identified concerns about lack of transparency over whether suppliers can influence how products are presented on such tools as well as potential competition concerns about whether certain clauses in contracts between suppliers and providers of tools could limit price competition or innovation, or restrict market entry. A report published in 2017 set out a number of recommendations for online comparison tools, including clearly displaying product and price information, and informing users on how their personal data will be used. This also triggered an investigation into a particular price comparison website’s contracts with home insurers to determine whether they were pushing up the prices for consumers (see question 16).

Court actions under competition law

Parties can bring actions of various kinds for breaches of competition law. Those that have suffered loss as a result of a breach of competition law will have a claim in damages. Such claims can be stand-alone claims (where the claimant needs to prove the breach of competition law, causation and loss) or ‘follow-on’ actions (where the claimant can rely upon a decision of a competition authority finding that a party has breached competition law as proof of that breach). In a follow-on action, the claimant must, therefore, prove only causation and loss.

In the distribution context, a distributor may be able to claim damages if, for example, the supplier has been engaged in price-fixing with other suppliers and the prices paid by the distributor are higher than they might otherwise have been, but the distributor would have to show it did not pass on any overcharge. Suppliers or distributors may face claims for damages for abuse of a dominant position. Labinvesta raised proceedings in November and December 2016 against a supplier of consumables used in medical treatment and its subsidiary distributors, alleging that the defendants had unlawfully refused to supply products to Labinvesta for onward distribution in Belarus (CAT Case No. 1273/5/7/16). This case has now been withdrawn.

Similarly, a party may be able to claim damages even if it is a party to an agreement that is anticompetitive provided the party seeking to claim damages was in a weaker position than the other party in the negotiation of the contract such that it was not genuinely free to choose the terms of the contract (Courage v Crehan [2002] QB 507).

Damages in the UK are generally compensatory. Punitive damages are not available in the UK for breach of contract.

More commonly in distribution disputes, parties can use competition law to defend court action if, for example, the clauses being sued upon are unenforceable because they restrict competition.

However, in the case of James McCabe v Scottish Courage [2006] EWHC 538 (Comm), regarding the severability of an exclusivity provision that was potentially anticompetitive, the court held an exclusivity provision (which was unlawful) could not be severed from the agreement as to do so would damage the fundamental nature of the agreement between the parties and that the clause was instrumental in inducing the supplier to enter into the contract in the first place. If the clause is unlawful and is key to the agreement, the whole agreement is unenforceable.

Parties can bring an action in the Competition Appeal Tribunal (CAT) or the High Court for damages or for injunctions. The CAT obtained additional powers in respect of stand-alone damages claims for competition law breach and for injunctions as a result of the Consumer Rights Act 2015 from 1 October 2015. Its jurisdiction to issue injunctions does not extend to Scotland. It also introduced an opt-out collective claim procedure to operate alongside an opt-in procedure. The first opt-out collective claim was raised as a ‘follow-on’ action for damages arising from the OFT Mobility Scooters decision that found a manufacturer of mobility scooters guilty of prohibiting online advertising of prices below the manufacturer’s recommended retail prices (Dorothy Gibson v Pride Mobility Products Ltd, CAT Case No. 1257/7/7/16). This was subsequently abandoned after the CAT ordered that the scope of the claimants’ arguments be narrowed to reflect only the loss that they themselves suffered and that more economic data should be provided to support their claim. A second-class action was dismissed by the CAT in July 2017. A former financial services ombudsman sought damages on behalf of millions of consumers on the basis of a 2007 European Commission decision that said that MasterCard had been charging customers anticompetitive card fees for 18 years (Walter Hugh Merricks v Mastercard and others, CAT Case No. 1266/7/7/16) but was unsuccessful in convincing the Tribunal that he could quantify the loss suffered by each member of the class or prove the harm he alleged occurred. Permission from both the Administrative Court of the High Court and the Court of Appeal to challenge the ruling has been granted.

The Consumer Rights Act (CRA) 2015 introduced a ‘fast-track’ procedure, intended to make it quicker and cheaper to obtain a remedy for harm suffered as the result of anticompetitive behaviour, with limited exposure to costs risk. Though intended to make it easier for individuals and small and medium-sized entities, it is not restricted to them. To be suitable for the ‘fast-track’, a case must be brought to trial within no more than six months of allocation and, in general, the trial must take no longer than three days. Therefore, it was thought that use of the ‘fast track’ might be restricted to straightforward cases involving few parties and not requiring significant disclosure or extensive expert evidence. The procedure has proved popular, particularly in cases involving an alleged abuse of a dominant position. One such case proceeded to trial (Socrates Training Limited v The Law Society of England and Wales, CAT [2017] CAT 10), with others settling. Although the ‘fast track’ might have been thought suitable only for cases in which the relief sought is limited to a finding of infringement and the grant of an injunction (eg, to restrain further infringement, to require a resumption of supplies or to grant access to an ‘essential facility’), most cases have also involved a claim for damages. In 2016, a claim for damages that followed from the European Commission’s Polyurethane Foam decision was refused allocation to the fast track as it raised complex issues that could not be dealt with in three days (Breasley Pillows Limited and Others v Vita Cellular Foams (UK) Limited and Others [2016] CAT 8).

Parallel imports

Are there ways in which a distributor or agent can prevent parallel or ‘grey market’ imports into its territory of the supplier’s products?

Some limited protection from active sales efforts that constitute parallel imports is obtained by appointing distributors exclusively for particular territories and seeking to prevent active sales between those territories. It may also be helpful to keep the wholesale and retail level of the market separate. However, the concept of passive sales in the EEA means that no system is watertight against passive sales; it is difficult to take action against parallel imports without there being some element of risk or uncertainty.

Another option, where appropriate and justified by the nature of the products, is to set up an EEA-wide selective distribution system. Although sales between authorised distributors across borders cannot be prevented in such systems, sales to unauthorised distributors can be. However, all authorised distributors must be able to make active and passive sales to consumers (including over the internet), subject to the supplier being able to require that sales are made from a particular location, so again, parallel sales cannot be ruled out. As discussed in question 19, online sales via third-party platforms can lawfully be prevented to protect the luxury image of the goods that are subject to a selective distribution system (Coty Germany GmbH v Parfümerie Akzente GmbH (Case C-230/16)). It may be permissible to prevent online sales to protect brand image more generally, but this has not yet been tested. Outright bans on selling online are not permissible.

Certain steps can, however, be taken to educate the distributor on the problems of parallel imports; that does not amount to an agreement not to make passive sales across borders. However, care should be taken with this approach as it can easily stray into an agreement to prevent passive sales:

  • clear communication about the brand standards that are expected is important, including clear, objective and consistent quality standards for websites and shops;
  • it could be made clear to the distributor that the supplier will not increase its marketing support should sales be boosted by orders from outside of their channel or territory;
  • it could be agreed with the distributor that the resource involved in selling into the approved channel is maintained at all times (ie, is not reduced as a result of making passive sales outside the territory);
  • the supplier could require that the distributor explains in marketing materials the benefits of buying locally from that distributor; and
  • the supplier is permitted to discuss the effect that parallel trade has on margins with a distributor, provided it does not penalise the distributor for selling outside its territory or channel.

UK (and EU) trademark legislation allows trademark proprietors to object to the importation of products from outside the EEA into the UK or EEA if they have not consented to these goods being sold in the EEA.

Proprietors can also object to the importation of genuine products originally authorised by them for sale elsewhere in the EEA, if there are legitimate reasons for the proprietor to oppose further dealings in the goods. Legitimate reasons include: where the condition of the goods has changed; where the goods have been repackaged in breach of conditions set out in case law; and where luxury goods have been resold outside the proprietor’s selective distribution network.

The case law suggests that proprietors can object to sales by the distributor to resellers outside the selective distribution network if they can show that further sale by the resellers, for example, to non-authorised discount stores, will seriously damage the reputation of the trademark (Copad v Christian Dior, Case-59/08).

Advertising

What restrictions exist on the ability of a supplier or distributor to advertise and market the products it sells? May a supplier pass all or part of its cost of advertising on to its distribution partners or share in its cost of advertising?

UK legislation and industry codes of practice regulate the advertising and marketing of products. These are standard rules, not specific to distribution arrangements. The rules apply when marketing to businesses and consumers. The rules aim to ensure that all advertising is legal, decent and not misleading. Industry-specific rules also apply in areas such as pharmaceuticals and food and drink.

Other than as set out above, parties to a distribution contract are generally free to agree terms relating to advertising. Further, suppliers can retain complete control over all marketing. However, more typical advertising provisions in distribution agreements include:

  • making the distributor responsible for advertising in its territory, and the associated costs;
  • setting a minimum annual expenditure on advertising (often a percentage of turnover);
  • using only materials provided by or approved by the supplier; and limiting a distributor’s freedom to actively advertise in territories other than its own (see question 18).

As advertising will require use of the intellectual property rights of the supplier, distribution agreements typically include an express licence of those rights, and express terms requiring the supplier’s prior consent before advertising material is made public. It is also typical to require distributors to adhere to instructions issued by a supplier regarding all advertising materials and to assign all goodwill in the use of the supplier’s branding to the supplier.

Intellectual property

How may a supplier safeguard its intellectual property from infringement by its distribution partners and by third parties? Are technology-transfer agreements common?

Suppliers would typically seek to safeguard their intellectual property rights (IPR) from infringement by distribution partners through the express terms and protections which would be set out in the distribution agreement. Some of the typical provisions used to protect IPR from such infringement include:

  • obligations on the distributor to refrain from doing anything that may infringe or devalue the IPR in question;
  • prohibitions on distributors applying for a registered trademark that is identical, or similar to, the supplier’s;
  • prohibitions on distributors registering domain names that incorporate the supplier’s trademarks or using a company or trade name that is identical or similar to the supplier’s;
  • prohibitions on distributors selling competing products although the term of such clauses must be less than five years to benefit from EU competition law exemptions (see question 13);
  • requirements for distributors to seek the prior consent of the supplier before producing advertising material incorporating the supplier’s IPR;
  • obligations on distributors regarding the transfer and use of confidential information and trade secrets; and
  • assignments of goodwill generated by the distributor using the supplier’s branding to the supplier.

It is also common for suppliers to include terms in a distribution agreement to help protect against third-party infringement. Some typical provisions include requiring a distributor to notify the supplier of any third-party IPR that is, or that may be, infringing the supplier’s IPR and cooperate in any IPR infringement proceedings against third parties.

Although it is common for distribution agreements to contain licence terms for branding, it is less common for patents. If patents are relevant, the parties would typically enter a separate patent licence agreement. The Technology Transfer Block Exemption Regulation 2014 (TTBER) exempts such agreements from assessment under competition law subject to fulfilling certain criteria, including market-share thresholds. Such agreements would typically include provisions allowing the supplier to terminate the contract if the distributor challenges its IPR. However, including this term in a non-exclusive licence would remove the benefit of TTBER and expose the agreement to assessment under competition law.

Consumer protection

What consumer protection laws are relevant to a supplier or distributor?

There is a wide range of consumer protection laws that are relevant to business to consumer sales. These are summarised very briefly below:

  • The Consumer Rights Act - the CRA 2015 applies to contracts entered into on or after 1 October 2015. The CRA consolidated the previously fragmented approach to UK consumer law and reformed many aspects of consumer law in the UK. The CRA sets out statutory rights and tiered remedies for consumer contracts for goods and services, and introduces a new category of contract for the supply of digital content. The law on unfair contract terms in consumer contracts has been reformed by the CRA and private actions for breach of competition law have been introduced. The powers of enforcement authorities under some consumer protection legislation are also reformed.
  • The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 - these implement most of the Consumer Rights Directive (2011/83/EU). They provide a range of consumer rights in relation to contracts for goods or services (but do not apply either in part or in their entirety to certain types of contract). These rights include the provision of certain information to consumers, a right for consumers to cancel certain contracts within 14 days after the contract was entered into; and rights for consumers to receive a refund and information on certain other prescribed aspects of a contract.
  • The Consumer Protection from Unfair Trading Regulations 2008 - these prohibit consumer sales practices that are misleading by action or omission or are otherwise unfair or are aggressive. In 2014 they were amended to introduce a new direct civil right of redress by consumers against traders who conduct misleading or aggressive practices.
  • The Electronic Commerce (EC Directive) Regulations 2002 - these place requirements on information service providers about how contracts concluded through electronic means will be made.
  • Provision of Services Regulations 2009 - these require that the service provider must (i) provide consumers with certain information about itself; (ii) deal with customer complaints promptly; and (iii) not discriminate against consumers in the provision of services on the basis of place of residence (unless such different treatment can be objectively justified).

Contracts entered into with consumers before 1 October 2015 may require consideration of legislation that is no longer in force or that no longer governs business-to-consumer arrangements, including:

  • the Sale of Goods Act 1979 (SGA);
  • the Supply of Goods and Services Act 1982 (SGSA;
  • the Unfair Terms in Consumer Contracts Regulations 1999;
  • the Unfair Contract Terms Act 1977; and
  • the Consumer Protection (Distance Selling) Regulations 2000.

Product recalls

Briefly describe any legal requirements regarding recalls of distributed products. May the distribution agreement delineate which party is responsible for carrying out and absorbing the cost of a recall?

The General Product Safety Directive 2001/95/EC (implemented in the UK by the General Product Safety Regulations 2005) requires products placed on the market to be safe. Where a product presents risks to safety, recall will be a last resort where other measures would not prevent the risks involved. Product recall can be undertaken voluntarily or at the request of a relevant authority (which in the UK are the trading standards department of local authorities). Distributors are expected to cooperate with the manufacturer to avoid risks or implement a recall if this is deemed necessary. A distributor is capable of having the same obligations as the producer of the product it is handling. For example, a distributor (and producer) is obliged, where it discovers a product it has placed on the market is unsafe, to notify the local authorities and provide information on the action they plan to take. A distributor is under an obligation to act with due care to ensure products supplied are safe.

The parties are free to agree which party is responsible for carrying out and absorbing the cost of a product recall. However, a manufacturer cannot contract out of liability to a consumer that has suffered harm as a result of an unsafe product.

Warranties

To what extent may a supplier limit the warranties it provides to its distribution partners and to what extent can both limit the warranties provided to their downstream customers?

A business cannot exclude or limit liability for its own fraud. The extent to which warranties and liabilities can be excluded or limited differs in some aspects between B2B contracts and consumer contracts.

Business-to-business

  • The UCTA provides that a business cannot exclude liability for death or personal injury as a result of negligence;
  • the Consumer Protection Act 1987 prevents a business from limiting or excluding liability for death, personal injury or loss of or damage to property caused by defective products; and
  • the SGA implies a number of warranties in contracts for the sale of goods (and this area has been consolidated to a large extent by the CRA in respect of terms implied into consumer contracts); including good title to sell the goods and that the goods are as described, of satisfactory quality and fit for purpose, and conform to any sample provided in terms of quality. Suppliers can expressly exclude the implied terms in relation to the quality of the goods, subject to the reasonableness requirement under the UCTA. However, the implied term as to good title and no encumbrances cannot be excluded.

Otherwise, a party is free to limit liability for loss or damage caused by negligence, subject to a test of reasonableness under the UCTA. What is reasonable is a question for the courts. The onus to prove a clause is reasonable is on the party wishing to rely on it. The courts, when applying the reasonableness test, take account of the circumstances in which the parties entered into the Agreement, including:

  • the relative bargaining positions of the parties;
  • whether the customer received an inducement to agree to the term; and
  • whether the customer knew or ought reasonably to have known of the existence and extent of the term.

Liability for certain acts or omissions not involving negligence but that relate to breach or non-performance of contract or performance different from that reasonably expected, will be subject to the UCTA only when found in written standard terms of business. Such exclusions or limitations of liability will be subject to the reasonableness test. There is no statutory definition of ‘written standard terms of business’. UCTA does not apply to contracts that have been individually negotiated, or that a party sometimes uses and sometimes does not, but only to terms which are not negotiated and are habitually used by the party relying on them.

Further, the recent case of Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] suggests that where the party seeking to rely on a limitation of liability clause offers the other party an alternative (eg, an option of insurance to enable them to accept a wider scope of liability), the limitation clause is more likely to be reasonable.

Terms that exclude or restrict liability for misrepresentation are subject to the Misrepresentation Act 1967 and the UCTA reasonableness test. Language that provides that no warranties have been made or relied on (frequently included as part of entire agreement clauses) is also likely to be subject to the UCTA. In IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm), the court noted that whether a clause amounts to an exclusion clause is a ‘question of substance, not form’. Cremdean Properties Ltd v Nash [1977] EGLR 80 provides authority for the principle that a party cannot, by a carefully chosen form of wording, circumvent the legislative controls on exclusion of liability for misrepresentation.

The Court of Appeal has now confirmed in the recent case of First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA 1396 that a non-reliance statement is always potentially an exclusion of liability for misrepresentation. They expanded to say that when faced with a non-reliance statement, there are two relevant questions of fact:

  • Does the non-reliance statement have the effect of excluding or limiting the alleged representor’s liability for misrepresentation, or the remedies available to the alleged representee for misrepresentation?
  • If so, does the exclusion or limitation pass the UCTA reasonableness test?

Consumer contracts

The CRA provides that a business cannot exclude liability for death or personal injury as a result of negligence. None of the terms implied by the CRA, including those relating to the quality of the goods digital content or services or both, can be excluded. Exclusions and limitations of liability (including for breaches not involving negligence) in consumer contracts are subject to the reasonableness test under the CRA. This test may be difficult to satisfy in consumer contracts, particularly if there is a blanket exclusion.

Data transfers

Are there restrictions on the exchange of information between a supplier and its distribution partners about the customers and end users of their products? Who owns such information and what data protection or privacy regulations are applicable?

The legal regulation of distributors sharing customer data with suppliers and to organisations dealing with personal data, which in this context is likely to include customer data is set out in the Data Protection Act 2018 and the General Data Protection Regulation (Regulation (EU) 2016/679) (GDPR). The legislation is not specific to distribution arrangements and applies to the UK and all the member states from 25 May 2018. The GDPR is likely to cease to be of effect if the UK exits the EU on 29 March 2019 but the Data Protection Act 2018 will remain part of UK law and it is expected that the GDPR will be incorporated into the UK law to sit alongside the Data Protection Act 2018.

Under the current legislation, individuals must be informed about the data that is being collected about them, how this data will be used and the details of the parties collecting and using the data. The party that determines how the data shall be processed is deemed to be the data controller of that data (ie, a person who decides ‘why’ and ‘how’ that data will be processed). It is the data controller who is responsible for complying with the applicable law. UK privacy regulations also impose limits on the use of individuals’ data for marketing. Failure to comply with the data protection and privacy rules has the potential to lead to significant fines. However, these are typically reserved for only the most serious breaches.

If a supplier imposes an obligation on a distributor to share end customer data within the distribution agreement, supplementary obligations should be included requiring the distributor to present appropriate privacy notices to end customers and, where necessary, to obtain the necessary consents from the end customers to facilitate both the sharing with the supplier, and the supplier’s subsequent use of the data.

Transfers of personal data outside the EEA must comply with a range of requirements. Transfers outside the EEA are permitted where the individual has consented to the transfer or the transfer is necessary for the performance of the contract with the individual. Transfers outside the EEA are also permitted if the country to which the personal data is transferred has been approved as offering an adequate level of protection. The European Commission maintains a list of approved countries (which does not include the United States).

If no finding of adequacy has been made in respect of a country outside the EEA, a business can transfer data internationally within its corporate group subject to Binding Corporate Rules provided they are specifically recognised by an EU data protection authority, including the UK Information Commissioner’s office, or by including the European Commission-approved model contract clauses.

The European Commission also adopted the EU-US Privacy Shield on 12 July 2016 to facilitate transfers to the United States. The arrangement provides stronger obligations on companies in the United States to protect the personal data of Europeans and stronger monitoring and enforcement by the US Department of Commerce and Federal Trade Commission, including through increased cooperation with European Data Protection Authorities. The arrangement includes commitments by the United States that possibilities under US law for public authorities to access personal data transferred under the Privacy Shield will be subject to clear conditions, limitations and oversight, preventing generalised access. Businesses transferring personal data are advised to rely on European Commission-approved model contract clauses or Binding Corporate Rules.

Finally, transfer of personal data outside the European Union is also permitted where the individual has explicitly consented to the transfer or the transfer is necessary for the performance of the contract with the individual.

The adoption of the Data Protection Act 2018 and the GDPR brought about:

  • a single legal framework that applies in each individual EU member state as well as the UK. This has resulted in a more consistent approach to data protection compliance across Europe;
  • more onerous obligations regarding obtaining consent from individuals. Consent to processing must involve a clear affirmative action and must be ‘freely given, specific, informed and unambiguous’ under the GDPR and, where special category is involved, consent must also be explicit;
  • direct statutory obligations on processors, as well as controllers;
  • greater regulation of the transfer and processing of personal data outside the European Union (in certain circumstances);
  • significant increases in potential fines for controllers. Certain breaches could incur a fine of €20 million or up to 4 per cent of the controller’s total global annual turnover; and
  • more onerous obligations in respect of accountability for both controllers and processors, including a requirement to maintain records of personal data being processed (and to make these available to the supervisory authority on request).

If not already done, urgent steps should be taken now to ensure that the exchange of customer data will comply with the GDPR. Distribution agreements now typically contain fuller data-protection clauses or include a data-protection schedule that will set out more stringent measures that parties will need to adhere to in relation to processing customer data.

The European Commission also adopted the EU-US Privacy Shield on 12 July 2016 to facilitate transfers to the United States. The arrangement provides stronger obligations on companies in the United States to protect the personal data of Europeans and stronger monitoring and enforcement by the US Department of Commerce and Federal Trade Commission, including through increased cooperation with European Data Protection Authorities. The arrangement includes commitments by the United States that possibilities under US law for public authorities to access personal data transferred under the Privacy Shield will be subject to clear conditions, limitations and oversight, preventing generalised access. Businesses transferring personal data are advised to rely on European Commission-approved model contract clauses or Binding Corporate Rules.

Any sharing of data between a data controller and another party should be in writing and comply with Data Protection Legislation. Data sharing should take place subject to contractual obligations to ensure personal data are kept secure and processed only in line with data protection principles.

Employment issues

May a supplier approve or reject the individuals who manage the distribution partner’s business, or terminate the relationship if not satisfied with the management?

The courts will be reluctant to intervene when the parties have agreed clear and unambiguous provisions to govern their contractual relationship. Therefore, in principle, the supplier is entitled to insist on a contractual right to object to the management of the distributor. A termination right for the supplier in the event of dissatisfaction with the distributor’s management is, however, a wide and subjective provision, so could be the subject of dispute before the courts. Targeting individuals whose employment may be jeopardised is not without risk. Care should be taken as regards the criteria for objecting, especially where it does not have a link with economic performance: a claim of discrimination on, among others, race, creed, sexual orientation, gender, disability or age would be a serious issue.

Are there circumstances under which a distributor or agent would be treated as an employee of the supplier, and what are the consequences of such treatment? How can a supplier protect against responsibility for potential violations of labour and employment laws by its distribution partners?

There is a risk that a distributor or agent could be treated as an employee of the supplier. This will be determined by the nature of the relationship in practice. The degree of mutuality of obligation, the control exercised by the supplier over the distributor or agent and whether work has to be performed personally by the distributor or agent are the principal determining factors. Additionally, where a distributor or agent is a company, their employees and employment liabilities could be transferred to the supplier where, after the termination of the distribution or agency agreement, the supplier proposes to bring the distribution or agency services in-house (see Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)).

If it is determined that a distributor or agent is an employee of the supplier, the supplier is liable as the employer for the entire employment. If an employee of a distributor or agent becomes an employee of the supplier through TUPE, their normal terms and conditions of employment will apply post-transfer, their continuous service will be unbroken and the supplier will inherit all employment liabilities. For example, if the distributor or agent provided sick pay benefit over and above the statutory regime, the supplier would be contractually obliged to provide the same benefit post-transfer, even if none of its own employees is so entitled. All the usual UK employment rights would also apply to these employees, including holiday pay, national minimum wage, statutory sick pay, maternity, paternity, parental and adoption rights (including statutory payments), statutory notice, auto-enrolment in a pension scheme and, after two years’ continuous service, a right not to be unfairly dismissed and a right to a statutory payment if made redundant.

To protect itself, a supplier would generally ask the distributor or agent to indemnify them against any employment liability as part of the distribution or agency agreement. This would include a clause splitting employment liabilities between the parties according to whether they arose before or after the transfer date. Indemnities in respect of the application of TUPE are usually very detailed and are a point for negotiation between contracting parties.

Commission payments

Is the payment of commission to a commercial agent regulated?

Yes. The Agency Regulations prescribe for the circumstances in which an agent will be entitled to the payment of commission (Agency Regulations 7-9):

7.-(1) A commercial agent shall be entitled to commission on commercial transactions concluded during the period covered by the agency contract-

(a) where the transaction has been concluded as a result of his action; or

(b) where the transaction is concluded with a third party whom he has previously acquired as a customer for transactions of the same kind.

(2) A commercial agent shall also be entitled to commission on transactions concluded during the period covered by the agency contract where he has an exclusive right to a specific geographical area or to a specific group of customers and where the transaction has been entered into with a customer belonging to that area or group.

Broadly, the agent is entitled to ‘reasonable remuneration taking into account all aspects of the transaction’. This includes commission on transactions concluded during the term of the agency relationship arising in whole or in part as a result of the agent’s actions; and transactions concluded after termination of the agency relationship that are ‘mainly attributable’ to the agent and are concluded within a ‘reasonable period’ after the agency contract terminated. ‘Mainly attributable’ requires a causal link between the agent’s activities and the contract being concluded and is not thought to be different from effective cause (PJ Pipe &Valve co Ltd v Audco India Ltd, [2005] EWHC 1904 (QB)). What is a reasonable period after termination will vary according to the facts and context but, in one case, nine months after termination was a reasonable period.

In Georgios Kontogeorgos v Kartonpak AE (Case C-104/95 [1997] 1 CMLR 1093), the Court of Justice held that a commercial agent who is in charge of a particular area has a right to commission even if the contracts are concluded without the agent’s intervention (eg, the principal concludes the contracts directly). The same would apply in respect of orders from a group of customers for whom the agent was responsible. However, it is clear that the agent is not entitled to commission when it is a third party selling into the exclusive territory or customer group rather than the principal (Case C-19/07 Heirs of Paul Chevassus-Marche v Groupe Danone).

The timing of when commission becomes due and when payment of commission should be made is also covered by the Agency Regulations (Regulation 10).

Recently, the ECJ has confirmed that commercial agents will be entitled to indemnity or compensation even where termination occurs during a contractual trial period (Conseils et mise en relations (CMR) SARL v Demueures terre et tradition SARL (C-645/16) EU:C:2018:262).

Good faith and fair dealing

What good faith and fair dealing requirements apply to distribution relationships?

Contract law does not recognise a general implied duty to perform contracts in good faith. This differs from the situation in many other countries, including France and Germany, which recognise some form of implied term that in agreeing and performing contracts the parties should act in good faith.

However, the courts are willing to give effect to express obligations to act in good faith in a wider range of commercial contracts and, in some instances, have shown that they are prepared to imply a duty of good faith. The meaning and effect of good faith are likely to vary considerably depending on the context. Broadly, a good faith requirement involves acting with honesty, genuineness and integrity.

The case of Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) is significant as the High Court implied a duty of good faith to a distribution agreement. The claimant, Yam Seng, entered into a distribution agreement with the defendant, ITC, pursuant to which ITC granted Yam Seng the exclusive rights to distribute certain fragrances bearing the brand name ‘Manchester United’ in specified territories in the Middle East, Asia, Africa and Australasia. The contract period initially ran from 12 May 2009 until 30 April 2010, but was later extended until 31 December 2011. The judge determined that ITC was in breach of certain express terms of the contract. The judge found that one breach was repudiatory, but also went on to consider whether a duty of good faith was to be implied into the contract.

The court suggested that in some B2B contracts, good faith should be implied into the contract between two businesses, especially where the type of contract, such as a distribution agreement, involves one or both parties having to expend considerable time, effort and money in preparing to put the contract into practice. The judge explained the importance of good faith and fair dealing in ‘relational contracts’ such as joint venture agreements, franchise agreements and long-term agreements.

However, UK courts are still generally reluctant to imply terms into contracts. In lkerler Otomotiv Sanayai VE v Perkins Engines Company Ltd [2017] EWCA Civ 183, a distributor argued that its supplier owed it an implied duty of good faith as regards the supplier’s ability to terminate. The Court of Appeal rejected any such argument. The general principle for this decision is that termination is absolute contractual right, not a discretion that must be exercised fairly (Monde Petroleum v Westernzagros Ltd [2018] EWCA Civ 25). The test for implying a duty of good faith into a contract is the same as for implying any term, being that, only if, without such an implied term, the contract would lack commercial common sense should the duty be implied (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72 and Monde Petroleum v Westernzagros). In Astor Management AG v Atalaya Mining Plc [2017] EWHC 425 (Comm), the court summarised that the position on the duty of good faith (where it exists) reflects the expectation that a contracting party:

  • will act honestly towards the other party; and
  • will not conduct itself in a way that is calculated to frustrate the purpose of the contract or which would be regarded as commercially unacceptable by reasonable and honest people.

There is also a general principle, now established in English law, that, in exercising a contractual discretion, a party must act in good faith and not arbitrarily or capriciously (British Telecommunications plc v Telefónica O2 UK Ltd [2014] UKSC 42). The purpose of the duty is to prevent abuse of a party’s role as decision maker. Therefore, it won’t apply to the exercise of an absolute contractual right (such as a termination right) nor a clause which calls for the objective assessment of a matter. In a distribution context, the supplier may be required to act in good faith (most likely meaning ‘rationally’ but subject to the exact wording of the contract) if it has a right that allows it to unilaterally adjust the commission due to its distributor.

The relationship of agent and principal includes a fiduciary duty at common law in favour of the principal specifically to avoid a conflict with the agent’s main interests and not to profit from its position at the expense of its principal.

The Commercial Agents Regulations state that a commercial agent must look after the interests of his principal and act dutifully and in good faith (Regulation 3(1)). Likewise, a principal has an obligation of good faith towards his agent (Regulation 4(1)).

Registration of agreements

Are there laws requiring that distribution agreements or intellectual property licence agreements be registered with or approved by any government agency?

No. However, it is considered best practice to register any agreement that includes a licence of a patent, registered trademark or registered design with the UK Intellectual Property Office.

Although it is not common practice, the parties to a distribution agreement that includes a licence of registered trademarks, registered designs or patents, may consider detailing this licence in a separate document annexed to the main distribution agreement. The benefit of this approach is that the licence can then be registered separately from the main distribution agreement, therefore protecting the commercial terms from potential public disclosure.

The benefits of registering licences include:

  • if the IPR are later sold to a third-party purchaser, they are sold subject to the burden of the registered licence. This means even where the third-party purchaser was unaware of the licence, they are required to honour it going forward;
  • similarly, if the owner of the IPR attempts to grant an exclusive licence that would conflict with the pre-existing registered licence, the original licensee’s position is protected and their licence stands;
  • in respect of licences of registered trademarks (common in distribution arrangements to allow the distributor to carry out advertising), unless the licence states otherwise, registration grants the distributor the right to call upon the supplier to take action to prevent others from infringing the trademark, and the right to bring infringement proceedings if the supplier fails to do so. If the licence is exclusive, the licensee may be entitled to bring proceedings in its own name; and
  • in respect of licences of patents (in the unusual scenario where a patent is licensed to a distributor), if the distributor is an exclusive licensee then it will be entitled to bring infringement proceedings in its own name.

It should be noted that the registration of the IP licence will be primarily for the benefit of the distributor or licensee, rather than the supplier or licensor.

Finally, failure to register a registered trademark licence or patent licence within six months may affect the amount of damages that can be recovered by the distributor in a court action for infringement.

Anti-corruption rules

To what extent are anti-bribery or anti-corruption laws applicable to relationships between suppliers and their distribution partners?

The UK’s Bribery Act 2010 very much applies to the relationship between suppliers and distributors. A distributor may offer or give a bribe in order to win orders or retain business. If it does so with the connivance or knowledge of the manufacturer, supplier or brand owner then both will have committed an offence.

In addition, a distributor, as with local consultants, agents, licensees or joint venture partners can be regarded as associated persons in relation to a manufacturer or supplier; they perform services for or on behalf of the supplier. Under the Bribery Act 2010, even where a supplier has no knowledge or indication that an associated person has offered or given a bribe, the supplier may commit the offence under section 7 of the Act of failure to prevent bribery where the offer was intended to obtain or retain business for or on behalf of the supplier. If it can demonstrate that the offence took place despite all its measures taken to prevent bribery by associated persons and that those measures are viewed as adequate then it will have a defence. Such measures will include taking all reasonable diligence commensurate with the geographical or sector risk or other risk factors (such as links the agent or distributor may have with public officials or with private buyers).

Therefore, when appointing a distributor, a supplier should undertake some diligence on the risks of bribery. It should ascertain whether the distributor or agent has any history of involvement or accusations of involvement in such activities; likewise it should determine whether the distributor or agent has an anti-bribery policy of any worth. It should make clear, in writing preferably, that avoiding bribery including facilitation payments is an essential policy with which compliance is required. The scope of the UK Bribery Act (extending to bribery of private persons, not solely public officials and covering facilitation payments). The need to avoid lavish entertainment of relevant decision makers should be made clear. The supplier should also contractually require compliance with all bribery laws and seek to be indemnified for losses it might incur should there be bribery proceedings or investigations. It is also possible that a supplier might bribe a customer or an official where that brings or retains business for the distributor or agent. It is not likely that the supplier would be an associated person as it does not normally perform services on behalf of the distributor or agent. Therefore, assuming the distributor or agent is not conniving with the supplier in respect of the bribery, it is not likely to incur liability. Nevertheless, it would be advisable for a distributor or agent to require contractually that the supplier comply with anti-bribery laws and indemnify against the costs of any investigation and loss of business.

The UK Supreme Court confirmed that where an agent accepts a bribe or secret commission in breach of his or her fiduciary duty, it is considered the property of his or her principal who may then reclaim the wrongfully received benefit (FHR European Ventures LLP & Ors v Cedar Capital Partners LLC [2014] UKSC 45).

Prohibited and mandatory contractual provisions

Are there any other restrictions on provisions in distribution contracts or limitations on their enforceability? Are there any mandatory provisions? Are there any provisions that local law will deem included even if absent?

Contracts may include implied contractual terms that have not been expressly agreed between the parties but are deemed to be incorporated into the contract by a court as a result of: usage or custom; the previous course of dealings of the parties; the intentions of the parties; common law; and legislation. These rules are not specific to distribution contracts.

Examples of the legislation most relevant to distribution agreements and that imply contractual terms and that have been discussed in this chapter include the SGA, SGSA, Misrepresentation Act 1967, UCTA and Consumer Rights Act 2015.

Others include:

  • the Late Payment of Commercial Debts (Interest) Act 1998 - assesses and implies terms relating to payment, including the level of interest that shall be payable on outstanding amounts due under a contract unless the contract specifies otherwise; and
  • the Contracts (Rights of Third Parties) Act 1999 - allows a third party to enforce a contract term where the contract specifically provides for this; or a term confers a benefit on a third party and the contract does not preclude the third party from enforcing this term. This legislation does not apply to the whole of the UK. However, other jurisdictions have laws with comparable effect and so the position is similar throughout the UK.

Common law will also be relevant to distribution agreements. Particularly pertinent may be provisions relating to termination. Notwithstanding that a contract may have detailed provisions for termination, a party will always have a concurrent common law right to terminate a contract where there has been a sufficiently serious breach of the contract.

The courts can also determine a clause to be unenforceable under the common law rule against penalties. The modern test was set by the Supreme Court in the case of Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67. The court must first determine whether the clause in question is a primary obligation or a secondary obligation, as the rule does not apply to primary obligations - this a question of substance and not form. Where a clause provides an amount of damages to be paid on breach, the clause will be penal where there is an extravagant disproportion between that sum and the highest level of damages that could possibly arise from the breach. In other cases, where the provision for breach is measured against the interest protected by the contract, the court then assesses whether the remedy is exorbitant or unconscionable. Other relevant factors to the broader assessment include a comparison with damages, whether the parties are advised by lawyers and the extent of negotiations and sophistication of parties.

Governing law and choice of forum

Choice of law

Are there restrictions on the parties’ contractual choice of a country’s law to govern a distribution contract?

There are no restrictions in the UK on the parties’ contractual choice of governing law. It is important to establish which law will apply to a contract before the parties enter into any binding agreement and the best way of doing so is to agree at the outset.

A governing law clause allows the parties to specify which law will be used to interpret a contract and deal with any disputes that arise under that contract. The choice of governing law should be considered before a contract is drafted. A lawyer qualified in the relevant jurisdiction will need to advise on how the chosen governing law will apply to the contract. In the absence of an express choice of governing law then, in the event of a dispute, a court will decide which law to apply in accordance with the relevant conflict of laws principles in that jurisdiction.

The Rome Convention

The Rome Convention on the Law Applicable to Contractual Obligations (Rome Convention) governs contracts entered into before 17 December 2009. The Rome Convention sets out the rules for determining the law that should be applied by courts when resolving contractual disputes, but it does not apply to non-contractual obligations. It came into force in 1991.

The Rome Convention applies to any contract where there is no express choice of law. There are special provisions relating to employment and consumer contracts; it does not apply to certain disputes including those involving wills and trusts, property rights related to family relationships, arbitration agreements and disputes governed by company law.

Under the Rome Convention, in the absence of agreement, the contract will be governed by the law of the country with which it is most closely connected. It will be assumed that this is the country where the party that has to perform the main obligations of the contract is normally resident.

The European Union resolved that the Rome Convention needed to be updated and that its status should change from being a multilateral inter-governmental agreement to a Regulation, EC Regulation 593/2008 (Rome I), which applies directly in the laws of the EU Member States and is directly enforceable. Rome I applies to ‘contractual obligations in civil and commercial matters’. The term ‘contractual obligation’ is not defined, and care must be taken about whether a claim is one made in tort (to which Rome II, EC Regulation 864/2007, may apply) or one made in contract. Some claims that are regarded as torts in English law may be regarded as contract claims for the purpose of the two regulations. Contracts entered into on or after 17 December 2009 are therefore governed by Rome I, or the Rome Regulation on the law applicable to contractual obligations. Rome I covers much of the same ground as the Rome Convention and the basic rule has been preserved and firmed up - in the absence of agreement, the applicable law will be the law of the place where the party that has to perform the main obligations of the contract is normally resident. That is now a fixed rule rather than a presumption.

The most important changes brought about by Rome I are as follows.

Specific contract types, such as those dealing with sale of goods, services, franchise arrangements and distribution agreements are addressed. If the contract in question is not one of these, then the governing law will be determined according to ‘where the party required to effect the characteristic performance of the contract has his habitual reference’, unless it is clear from the circumstances of the case that the law of another country should apply.

In consumer contracts, although the agreement can stipulate which law applies, that cannot invalidate the application of any mandatory rules of law that would otherwise apply to protect the consumer. National courts have some flexibility to decide whether to apply the ‘overriding mandatory rules’ of another country ‘where the obligations arising out of the contract have to be or have been performed’, even where the parties have selected another law.

For Rome I to apply, the parties do not need to have an EU connection - all that is required is that the case is raised in a relevant court that raises a choice of law issue in subject matter that falls within the Regulation. The law agreed as the applicable law of the contract does not have to be the law of an EU member state. In non-contractual obligation situations, the general rule in Rome II is that the law of the country in which the damage occurred will be the governing law.

Matters that are expressly excluded from Rome I include revenue, customs and administrative matters; arbitration agreements and agreements on choice of court; issues governed by company law - for example, registration, legal capacity, internal organisation, winding-up or personal liability; obligations arising out of dealings before the contract was finalised.

Choice of a foreign non-EU law will not necessarily prevent the application of mandatory rules of law; a choice of US law will not prevent the application of the Commercial Agency laws protecting agents. In Ingmar v Eaton Leonard Technologies [2000] ECR I-9305, the agent was active in the United Kingdom, but the parties had chosen California law to govern the contract. The ECJ held that the mandatory provisions of EU law that are given effect by the UK Commercial Agency Regulations could not be evaded ‘by the simple expedient of a choice-of-law clause’. In Accentuate v Asigra [2013] EWHC 889 (QB), the English court held it had jurisdiction to hear a claim for compensation under the Agency Regulations, even though the relevant agreement was subject to a choice of Canadian law and arbitration and the Canadian arbitral tribunal had already ruled against the claim.

The UK leaving the European Union may have a significant impact in this area. In the absence of agreement with the EU, there is likely to be uncertainty and significant scope for disputes. However, the choice of English law is likely to be still be upheld by courts in the UK and across the EU post-Brexit. In the EU, the Rome Convention which gives effect to the parties’ choice, will continue to apply. Moreover, in March 2018, agreement between the UK government and the EU was reached that most EU law (including the Rome Convention) will continue to apply to the UK during the post-Brexit transition period (30 March 2019 to 31 December 2020).

Choice of forum

Are there restrictions on the parties’ contractual choice of courts or arbitration tribunals, whether within or outside your jurisdiction, to resolve contractual disputes?

There are no restrictions in the UK on the parties’ choice of courts, nor on the choice of arbitration tribunals to resolve contractual disputes except in relation to certain disputes over which certain states may have exclusive jurisdiction such as land, or the constitution of corporate bodies. In the absence of express choice, jurisdiction will be determined either by common law rules or by the European regime that was established to regulate jurisdiction and enforcement of judgments in Europe. As regards disputes subject to the European regime, jurisdiction is governed by the Brussels Regulation (EU) 1215/2012 (known as the Recast Brussels Regulation), which applies to proceedings instituted on or after 10 January 2015 (with the exception of articles 75 and 76, which have applied since 10 January 2014).

If the parties have agreed that the courts of one or more Member States have jurisdiction in relation to a dispute, then the Recast Brussels Regulation recognises that agreement and the agreed courts will have jurisdiction. That jurisdiction will be exclusive ‘unless the parties have agreed otherwise’ (article 25(1)). This provision applies regardless of where the parties are domiciled and applies even where none of the parties is domiciled in the European Union. So, if two parties domiciled in the United States and China agree that the English courts will have jurisdiction, that will be recognised.

That aside, the default rule is that defendants should be sued in the courts of their domicile (article 4). An exception is that a defendant domiciled in a member state may be sued in another member state:

  • in matters relating to a contract, in the courts for the place of performance of the obligation in question; and
  • for the purposes of this provision in the sale of goods, the place in a member state where, under the contract, the goods were delivered or should have been delivered and in the case of the provision of services, the place in a member state, where, under the contract, the services were provided or should have been provided (article 7).

In most cases, the place where the services are provided by the distributor will be where the distributor can sue or be sued under a distribution agreement.

In an agency contract, it is the agent who provides the services under the contract. Under the Commercial Agency Directive, a commercial agent has authority to negotiate the sale or purchase of goods on behalf of the principal and, where appropriate, conclude such transactions on behalf of and in the name of that principal. Therefore, the ‘place of performance’ under article 5 must mean the place of the main provision of those services by the agent. Agents may provide services in several member states. To determine where to sue, a principal should consult the provisions of the agreement; what does it say about where the services are to be provided? If the contract does not help, then the relevant place is where the agent has actually carried out most of his or her contractual activities, assuming the place where the services are mainly carried out is not contrary to the intentions of the parties. If that does not assist then the place should be identified by reference to where the agent is domiciled.

Jurisdiction may be affected by the Hague Convention on Choice of Court Agreements (Hague Convention), which came into force on 1 October 2015 in all EU member states (except Denmark) and Mexico (and Singapore on 1 October 2016). The Hague Convention contains rules regarding the validity and effect of jurisdiction agreements, and the subsequent recognition and enforcement of a judgment given by a court of a contracting state designated in an agreement. It gives effect to an exclusive choice of a court in the contracting state. In essence, the chosen court is obliged to hear the case and any other court must refuse to hear the case. The judgment of the chosen court will be recognised and enforced in other states. The Convention applies to international cases (article 1); a case is international unless the parties are resident in the same contracting state and the relationship of the parties and all other elements relevant to the dispute, regardless of the location of the chosen court, are connected only with that state (article 1(2)).

Although the United States has signed the Hague Convention, this expresses, in principle, only its intention to become a party. It has not yet taken steps to make itself bound.

The common law rules will apply where the European regime does not and where the Hague Convention does not. The common law rules are based on either service of process (either within or outside the jurisdiction) and submission to the jurisdiction by the defendant.

Parties should take advice from counsel in other jurisdictions to ensure that if proceedings are issued in the courts of that jurisdiction, the foreign court will enforce the jurisdiction clause and either stay proceedings in favour of the UK courts (either Scotland or England and Wales, as applicable), or accept jurisdiction as required. An arbitrator purportedly appointed in Scotland or England automatically has the power to rule on challenges in their jurisdiction.

Practical considerations such as ease of enforcement of any award by an arbitrator will impact upon the choice of arbitration tribunal.

Dispute resolution procedures

What courts, procedures and remedies are available to suppliers and distribution partners to resolve disputes? Are foreign businesses restricted in their ability to make use of these courts and procedures? Can they expect fair treatment? To what extent can a litigant require disclosure of documents or testimony from an adverse party? What are the advantages and disadvantages to a foreign business of resolving disputes in your country’s courts?

There are different courts and procedures in the United Kingdom, depending on whether the action is raised in the courts of Scotland or the courts of England and Wales.

Courts

Generally, disputes before the courts of England and Wales are allocated between the county court (claims up to £100,000) and the High Court (claims of more than £100,000).

In Scotland, civil cases can be heard in the applicable Sheriff court (the equivalent of the English county court) or the Court of Session. The Sheriff courts have exclusive jurisdiction over cases with a value up to £100,000.

Procedures

The procedure before the county courts and the High Court in England and Wales is set out in the Civil Procedure Rules 1998 (CPR) as amended from time to time, and supplemented by court-issued guidance.

The procedure before the Court of Session and Sheriff courts in Scotland is set out in the Rules of the Court of Session 1994 (as amended) and the Sheriff Court Ordinary Cause Rules 1993 (as amended) respectively.

Remedies

The remedies most likely to be sought in respect of distribution agreements in the UK are damages (ie, compensation for breach of contract), and specific implement, specific performance or an injunction (ie, an order compelling a party to comply with its contractual obligations or to prevent a party from carrying out some action). There is no substantial difference in the remedies available in Scotland and England and Wales. However, in Scotland, the innocent party has the option, in addition to the option of accepting there has been a breach and suing for damages, to require implementation of the contract.

Fair treatment

There are no restrictions on foreign businesses using the courts or procedures of Scotland or England and Wales as long as they have jurisdiction. Foreign businesses can expect to be treated fairly and equally. That said, a foreign company may be ordered by an English court to provide security for costs or by a Scottish court to find security for expenses, also known as caution (ie, consign a specified sum with the court pending the outcome of the action). However, such orders are granted relatively rarely.

Disclosure

In England and Wales, parties to proceedings are obliged to disclose at a relatively early stage in the proceedings the documents on which they rely; documents that adversely affect their case; documents that adversely affect another party’s case; and the documents that support another party’s case, subject to certain exceptions, including the rules on privilege (CPR 31.6). It is also possible for a party to require disclosure of specific documents before proceedings are commenced in certain circumstances. Litigants can request that the court issue a witness summons against an adverse party or third party requiring that witness to attend at court to give evidence or produce documents to the court under CPR 34.2.

In Scotland, there is no obligation of such upfront disclosure as in England and Wales. A party can seek to recover documents by means of a commission and diligence. The court must be persuaded that the documents are relevant to the case and will only grant an order for recovery for specific documents. A party to litigation can seek to recover documentation from an opponent prior to the commencement of an action by seeking an order under section 1 of the Administration of Justice (Scotland) Act 1972. A party to litigation cannot be compelled to provide a witness statement. However, commercial procedures typically require parties to lodge formal witness statements with the court in advance of a proof (hearing on evidence).

Advantages and disadvantages of resolving disputes

The English court system is generally held in high regard internationally due to the independence and impartiality of its judges, the quality of their decision-making and the transparency of the court’s procedure. Many foreign companies opt for the jurisdiction of England and Wales for that reason.

Alternative dispute resolution

Will an agreement to mediate or arbitrate disputes be enforced in your jurisdiction? Are there any limitations on the terms of an agreement to arbitrate? What are the advantages and disadvantages for a foreign business of resolving disputes by arbitration in a dispute with a business partner in your country?

Agreements to mediate will be enforceable in the English and Scottish courts, assuming a bona fide contract has been formed that is subject to the jurisdiction of that court.

An agreement to arbitrate disputes will usually be enforced in England and Wales and recognised under the Arbitration Act 1996. There are requirements for validity such as having been made in writing and relating to a subject matter capable of settlement by arbitration. In addition, there are mandatory provisions that will apply to all arbitrations in England falling within its scope (eg, the provisions of the English Limitation Act 1980). Beyond this, the English regime is permissive and does not contain restrictions on the location or language of the arbitration.

Similarly, there are mandatory rules relating to arbitrations initiated in Scotland. The advantages of resolving disputes by way of arbitration as opposed to through the courts are that arbitration is likely to be quicker and parties will have more say in who is appointed to preside over the dispute resolution process (eg, an arbitrator with specialist experience in the subject matter of the dispute). In England and Wales, the Arbitration Act 1996 confers upon the English courts powers to make orders in support of arbitral proceedings, such as freezing injunctions or orders for the preservation of documents, for example. London is widely recognised as one of the world’s leading international arbitration centres. Numerous arbitral bodies have offices in the city and there is substantial specialist arbitration expertise throughout the legal marketplace. The UK is party to numerous international conventions, such as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to facilitate recognition and enforcement of awards made by arbitral tribunals in this jurisdiction. The main disadvantage of resolving disputes by way of arbitration is the limited right of appeal. In addition, while resolving a dispute by arbitration can be quicker, parties will be expected to meet the arbitrator’s costs and, as such, it is not necessarily cheaper.