Distribution Agreements and Competition Law
A distribution agreement between a manufacturer and a distributor is assessed in Georgia within the framework of the Law on Competition. In the law's terminology, an agreement between parties operating at different levels of the production or distribution chain, concerning the conditions of purchase or sale of goods or services, is a vertical agreement. This classification determines which requirements apply to your contract and how safe its individual clauses are.
The law distinguishes horizontal and vertical agreements: the former are concluded between economic agents operating at the same level of the production or distribution chain, the latter between agents at different levels. The definition of the relevant market is likewise broad — it may cover the whole territory of Georgia, a part of it, or the Georgian territory together with a part of another country — so defining the market correctly is the first step in assessing any agreement.
Prohibited Clauses in Distribution Relationships
The law prohibits agreements whose purpose or effect is the restriction, prevention or suppression of competition on the relevant market. The prohibited categories concern both horizontal and vertical relationships and include the direct or indirect fixing of purchase or selling prices or other trading conditions, as well as limitations on production, markets, technological development or investments.
It is likewise prohibited to allocate markets or sources of supply by customer, territorial or other criteria; to apply different conditions to identical transactions for particular trading partners, thereby placing them at a competitive disadvantage; and to impose supplementary obligations that have no commercial connection to the subject matter of the transaction. The consequence is severe: such agreements are void unless an exception established by the law applies, which means that an offending clause may ultimately be unenforceable in court.
Market Share Thresholds and Exceptions
For vertical agreements the law retains a significant mitigating rule: the prohibition does not apply where each party's market share on the relevant market does not exceed 15 percent. For horizontal agreements the approach is stricter — the exception is oriented towards the parties' combined share of 10 percent, while mixed agreements, combining features of both, are assessed against a 10 percent threshold for each party.
These share thresholds, however, do not extend to the gravest violations: in cases of price fixing and market allocation the exception does not apply at all. Put differently, a small market share does not rescue a contract that shares prices or markets between competitors — such clauses always carry risk, whatever the parties' shares.